** **

** **

**UNITED STATES**

###### **SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(MarkOne)**

 

| **x** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------------|

 

**              For the fiscal year ended December 31,2007**

**OR**

 

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**     For the transition period from                          to**

 

**Commission File Number:****001-32971**

 

**FOX CHASE BANCORP, INC.**

(Exact name of registrant as specified in its charter)

 

| **United  States**                                                | ** ** | **33-1145559**                        |
|-------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of

incorporation or  organization) | ** ** | (I.R.S. Employer  Identification No.) |
| ** **                                                        | ** ** | ** **                            |
| **4390  Davisville Road, Hatboro, Pennsylvania**                  | ** ** | **19040**                             |
| (Address of  principal executive offices)                         | ** ** | (Zip Code)                            |

 

                                                                                                                        Registrant’s telephone number, includingarea code:  **(215)682-7400**

 

                                                                                                                        Securities registered pursuant to Section 12(b) ofthe Act:

 

| **Title of  each class**                 | ** ** | **Name of  each exchange on which registered** |
|------------------------------------------|------------|------------------------------------------------|
| Common Stock,  par value $0.01 per share |       | Nasdaq Stock  Market, LLC                      |

 

Securitiesregistered pursuant to Section 12(g) of the Act: ** None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.

Yes  o   No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.Yes o   No x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x   No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definition of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check one):

 

Large AcceleratedFiler o     Accelerated Filer x

Non-Accelerated Filer o     SmallerReporting Company o

(Do not check if asmaller reporting company)

 

Indicate by check markwhether the registrant is a shell company (as defined by Rule 12b-2 of theExchange Act).  Yes o   No x

 

The aggregate market value of the voting andnon-voting common equity held by nonaffiliates as of June 30, 2007 wasapproximately $85.7 million.

 

The number of shares outstanding of the registrant’scommon stock as of March 10, 2008 was 14,323,150.

 

# **DOCUMENTSINCORPORATED BY REFERENCE**

# **Portions of the Proxy Statement for the 2008 AnnualMeeting of Stockholders are incorporated by reference in Part III of this Form 10-K.**

# ** **

# ** **

# ****

# ** **

# **INDEX**

 
| ** ** |                                                                                                                | **Page** |
|------------|---------------------------------------------------------------------------------------------------------------------|----------|
|       |                                                                                                                |     |
|       | **Part I**                                                                                                     |     |
|       |                                                                                                                |     |
| Item 1.    | Business                                                                                                            | 1        |
| Item 1A.   | Risk Factors                                                                                                        | 17       |
| Item 1B.   | Unresolved Staff  Comments                                                                                          | 21       |
| Item 2.    | Properties                                                                                                          | 22       |
| Item 3.    | Legal Proceedings                                                                                                   | 23       |
| Item 4.    | Submission of  Matters to a Vote of Security Holders                                                                | 23       |
|       |                                                                                                                |     |
|       | **Part II**                                                                                                    |     |
|       |                                                                                                                |     |
| Item 5.    | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 23       |
| Item 6.    | Selected Financial  Data                                                                                            | 26       |
| Item 7.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operation                          | 28       |
| Item 7A.   | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 56       |
| Item 8.    | Financial  Statements and Supplementary Data                                                                        | 56       |
| Item 9.    | Changes in and  Disagreements With Accountants on Accounting and Financial Disclosure                               | 56       |
| Item 9A.   | Controls and Procedures                                                                                             | 56       |
| Item 9B.   | Other Information                                                                                                   | 56       |
|       |                                                                                                                |     |
|       | **Part III**                                                                                                   |     |
|       |                                                                                                                |     |
| Item 10.   | Directors,  Executive Officers and Corporate Governance                                                             | 57       |
| Item 11.   | Executive  Compensation                                                                                             | 57       |
| Item 12.   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 58       |
| Item 13.   | Certain  Relationships, Related Transactions and Director Independence                                              | 58       |
| Item 14.   | Principal  Accountant Fees and Services                                                                             | 59       |
|       |                                                                                                                |     |
|       | **Part IV**                                                                                                    |     |
|       |                                                                                                                |     |
| Item 15.   | Exhibits and  Financial Statement Schedules                                                                         | 59       |
|       |                                                                                                                |     |
| SIGNATURES | S-1                                                                                                                 |

 

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                                                *This annual report containsforward-looking statements that are based on assumptions and may describefuture plans, strategies and expectations of Fox Chase Bancorp, Inc.  These forward-looking statements aregenerally identified by use of the words “believe,” “expect,” “intend,” “anticipate,”“estimate,” “project” or similar expressions. Fox Chase Bancorp, Inc.’sability to predict results or the actual effect of future plans or strategiesis inherently uncertain. Factors which could have a material adverse effect onthe operations of Fox Chase Bancorp, Inc. and its subsidiary include, butare not limited to, changes in interest rates, national and regional economicconditions, legislative and regulatory changes, monetary and fiscal policies ofthe U.S. government, including policies of the U.S. Treasury and the FederalReserve Board, the quality and composition of the loan or investmentportfolios, demand for loan products, deposit flows, competition, demand forfinancial services in Fox Chase Bancorp, Inc.’s market area, changes inreal estate market values in Fox Chase Bancorp, Inc.’s market area,changes in relevant accounting principles and guidelines and inability of thirdparty service providers to perform. Additional factors that may affect ourresults are discussed in Item 1A to this annual report titled “Risk Factors”below.*

 

*Theserisks and uncertainties should be considered in evaluating forward-lookingstatements and undue reliance should not be placed on such statements. Exceptas required by applicable law or regulation, Fox Chase Bancorp, Inc. doesnot undertake, and specifically disclaims any obligation, to release publiclythe result of any revisions that may be made to any forward-looking statementsto reflect events or circumstances after the date of the statements or toreflect the occurrence of anticipated or unanticipated events.*

 

*                                               **Unless the context indicatesotherwise, all references in this annual report to “Company,” “we,” “us” and “our”refer to Fox Chase Bancorp, Inc. and its subsidiaries.*

 

**PART I**

 

**Item 1.****                        ****BUSINESS**

 

**General**

 

                                                Fox Chase Bancorp, Inc. (“Bancorp”) was organized on September 29,2006 under the laws of the United States to be a holding company for Fox ChaseBank (the “Bank”), a stock savings bank also organized under the laws of theUnited States.  On September 29,2006, the Company completed its initial public offering in which it sold6,395,835 shares, or 43.57%, of its outstanding common stock to the public,including 575,446 shares purchased by the Fox Chase Bank Employee StockOwnership Plan (the “ESOP”).  Anadditional 8,148,915 shares, or 55.51% of the Company’s outstanding stock, wereissued to Fox Chase MHC, the Company’s federal chartered mutual holdingcompany.  Additionally, the Bancorpcontributed $150,000 in cash and issued 135,000 shares, or 0.92% of itsoutstanding common stock, to the Fox Chase Bank Charitable Foundation.

 

                                                Fox Chase Bancorp’s business activitiesare the ownership of Fox Chase Bank’s capital stock and the management of theoffering proceeds it retained.  Fox ChaseBancorp does not own or lease any property. Instead, it uses the premises, equipment and other property of Fox ChaseBank.  Accordingly, the information setforth in this annual report, including the Consolidated Financial Statementsand related financial data, relates primarily to Fox Chase Bank.  Fox Chase Bancorp is subject to theregulation of the Office of Thrift Supervision.

 

                                                On September 29, 2006, Fox ChaseBank converted from the mutual to the mutual holding company form oforganization.  Fox Chase Bank operates asa community-oriented financial institution offering traditional financialservices to consumers and businesses in its market areas.  Fox Chase Bank attracts deposits from thegeneral public and uses those funds to originate one- to four-family realestate, multi-family and commercial real estate, construction, commercial andconsumer loans, which Fox Chase Bank generally holds for investment.  Fox Chase Bank also maintains an investmentportfolio.  Fox Chase Bank is regulatedby the Office of Thrift Supervision and its deposits are insured under theDeposit Insurance Fund administered by the Federal Deposit Insurance Corporation.  Fox Chase Bank is also a member of theFederal Home Loan Bank of Pittsburgh.

 

                                                Fox Chase Bank’s website address is www.foxchasebank.com.  Information on our website should not beconsidered a part of this Report.

 

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**MarketAreas**

 

                                                We are headquartered in Hatboro,Pennsylvania, which is approximately fifteen miles north of Center City,Philadelphia.  We maintain two offices inMontgomery County, Pennsylvania, one office in each of Philadelphia andDelaware Counties, Pennsylvania and three offices in Bucks County,Pennsylvania.  All seven of these branchoffices are in the Philadelphia-Camden-Wilmington metropolitan statisticalarea.  In 2000, we also opened twooffices in the southern New Jersey shore area, one in Atlantic County and onein Cape May County, New Jersey and in March 2006, we opened a second branch office in Cape May County,New Jersey.   In September 2007, weopened a branch office in Chester County, Pennsylvania and moved one of ourloan production offices to this branch.

 

                                                ***PhiladelphiaMarket Area.***  The economy of our Philadelphia market areais predominated by the service sector. According to published statistics, the population of the five-countyarea served by our branches totaled 3.9 million in 2006.  The economy in the Philadelphia market areahas grown in recent years due to the presence of a highly-educated workforceand the diversity of the local economy as traditional employers in the manufacturingand financial services industry have been bolstered by growth in the lifesciences and health care industries as well as the information technology andcommunication sectors.  The medianhousehold and per capita income in Bucks, Chester, Delaware and MontgomeryCounties significantly exceeds the comparable figures for Pennsylvania as awhole, while the median household and per capita income in Philadelphia Countytrailed the comparable figures for Pennsylvania.

 

                                                ***NewJersey Market Area.***** The economy ofAtlantic County is dominated by the service sector, of which the gamingindustry in nearby Atlantic City is the primary employer.  The economy of Cape May County isprimarily geared toward tourism. According to published statistics, Atlantic County’s population in 2006was approximately 272,000 persons and Cape May County’s population wasapproximately 98,000.  The economy inAtlantic County has been strong in recent years as new and expanding casinos inAtlantic City along with new retail centers and entertainment venues have ledto job growth and an increase in housing development.  Cape May County has also benefited fromthe growth in and around Atlantic City, as many residents commute to that areafor employment.  Although the economy inthis market area has been strong in recent years, median household and percapita income in Atlantic and Cape May Counties are lower than thecomparable figures for New Jersey as a whole. In addition, median household income in Atlantic County was below thenational average in 2005.  We attribute thisto several factors.  First, there hasbeen an influx of retirees with limited incomes but moderate to substantialwealth. Additionally, since this market is located outside of a majormetropolitan area, average income levels are negatively affected by the smallportion of high-paying, white-collar jobs. In this market area, lower paying service jobs provide a larger portionof overall employment.

 

**Competition**

 

                                                We face significant competition for theattraction of deposits and origination of loans.  Our most direct competition for deposits hashistorically come from the numerous financial institutions operating in ourmarket areas and, to a lesser extent, from other financial service companiessuch as brokerage firms, credit unions and insurance companies.  We also face competition for investors’ fundsfrom money market funds, mutual funds and other corporate and governmentsecurities.  At June 30, 2007, whichis the most recent date for which data is available from the Federal DepositInsurance Corporation, we held approximately 0.22% of the deposits in thePhiladelphia-Camden-Wilmington metropolitan statistical area, which was the 41st largest market share out of the 163 financialinstitutions with offices in that metropolitan statistical area.  In addition, banks such as Bank of America,Wachovia Bank, Sovereign Bank, Citizens Bank of PA and Commerce Bank alsooperate in our market areas.  Theseinstitutions are significantly larger than us and, therefore, have significantlygreater resources.

 

                                                Our competition for loans comes primarilyfrom financial institutions in our market areas, and, to a lesser extent, fromother financial service providers such as mortgage companies and mortgagebrokers.  Competition for loans alsocomes from the increasing number of non-depository financial service companiesentering the mortgage and commercial lending markets such as insurancecompanies, securities companies and specialty finance companies.

 

                                                We expect competition to increase in thefuture as a result of legislative, regulatory and technological changes and thecontinuing trend of consolidation in the financial services industry.  Technological advances, for example, havelowered the barriers to market entry, allowed banks and other lenders to expandtheir geographic 

 

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reach by providingservices over the Internet and made it possible for non-depository institutionsto offer products and services that traditionally have been provided bybanks.  Changes in federal law permitaffiliation among banks, securities firms and insurance companies, whichpromotes a competitive environment in the financial services industry.  Competition for deposits and the originationof loans could limit our future growth.

 

**LendingActivities**

 

                                                ***General.*** We generally originate loans primarily for investment purposes.  The largest segments of our loan portfolioare one- to four-family residential real estate loans, multi-family andcommercial real estate loans, construction loans, commercial and consumerloans.  Historically, we originated verylittle multi-family and commercial real estate loans, construction loans orcommercial loans.  However, in 2003,then-current management determined to emphasize multi-family and commercialreal estate lending and construction lending, primarily in the southern NewJersey shore area where it had opened branch offices.  Then-current management did not have a highlevel of expertise in these types of lending, were relatively unfamiliar withthe market area, and did not obtain the proper documentation on these types ofloans, accordingly many of these loans were criticized or classified inaccordance with regulatory guidelines. In 2005, new management ceased originating these loans and madesignificant efforts to reduce the levels of these types of loans made by formermanagement from the portfolio.  In 2005and 2006, we hired senior management and lenders with significant commerciallending experience and adopted new commercial credit policies.  Since that time, we have been originating andservicing a growing number of multi-family and commercial real estate andconstruction loans to individuals and businesses.  Such loans are generally located in ourprimary market areas in the Mid-Atlantic region of the U.S.

 

                                                ***One-to Four-Family Residential Real Estate Loans*****.** The largest segment of our loan portfolio continues to be mortgageloans, which enable borrowers to purchase or refinance existing homes, most ofwhich are owner occupied.  We offerfixed-rate and adjustable-rate loans****withterms up to 30 years.  Borrower demandfor adjustable-rate loans versus fixed-rate loans is a function of the level ofinterest rates, the expectations of changes in the level of interest rates, andthe difference between the interest rates and loan fees offered for fixed-ratemortgage loans and the initial period interest rates and loan fees foradjustable-rate loans.  The relativeamount of fixed-rate mortgage loans and adjustable-rate mortgage loans that canbe originated at any time is largely determined by the demand for each in acompetitive environment.  The loan fees,interest rates and other provisions of mortgage loans are determined by us onthe basis of our own pricing criteria and competitive market conditions.  Most of our loan originations result fromrelationships with existing or past customers, members of our local communityand referrals from realtors, attorneys and builders. During 2007, the Bank alsobegan originating loans referred by a mortgage broker in which the Bank has a20% investment.  The ability to purchaseloans through such correspondents allows the Bank to continue to offer one-tofour-family mortgage loans to a growing and diverse set of customers throughadditional distribution channels in a cost-effective manner.

 

                                                While one- to four-family residentialreal estate loans are normally originated with terms of up to 30 years, suchloans typically remain outstanding for substantially shorter periods becauseborrowers often prepay their loans in full upon sale of the property pledged assecurity or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors,the level of purchase and sale activity in the real estate market, prevailinginterest rates and the interest rates payable on outstanding loans.

 

                                                Interest rates and payments on ouradjustable-rate mortgage loans generally adjust annually after an initial fixedperiod of one, three or five years. Interest rates and payments on these adjustable-rate loans generally arebased on the one-year constant maturity Treasury index.  The maximum amount by which the interest ratemay be increased is generally two percentage points per adjustment period witha lifetime interest rate cap of six percentage points over the initial interestrate of the loan.

 

                                                We generally do not make conventionalloans with loan-to-value ratios exceeding 95% at the time the loan isoriginated.  At December 31, 2007,$2.9 million, or 1.4%, of our residential loans, had a loan-to-value ratioexceeding 90% of the loan.  Privatemortgage insurance is generally required for all mortgage loans withloan-to-value ratios in excess of 80%. We require properties securing mortgage loans to be appraised by aBoard-approved independent appraiser.  Wegenerally require title insurance on all first mortgage loans.  Borrowers must obtain hazard insurance, andflood insurance for loans on properties located in a flood zone, before closingthe loan.

 

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                                                In an effort to provide financing forlow- and moderate-income and first-time buyers, we offer a special homebuyersprogram.  We offer residential mortgageloans through this program to qualified individuals and originate the loansusing reduced interest rates, fees and loan conditions.

 

                                                ***Multi-Familyand Commercial Real Estate Loans*****.**  We offerfixed-rate and adjustable-rate mortgage loans secured by multi-family andcommercial real estate to individuals and small businesses in our primarymarket areas.  Our multi-family andcommercial real estate loans are generally secured by condominiums, apartmentbuildings and mixed-use properties with residential units, as well as officeand retail space.  We intend to increasethis segment of our loan portfolio.

 

                                                These loans are typically repaid or theterm extended before maturity, in which case a new rate is negotiated to meetmarket conditions and an extension of the loan is executed for a new term witha new amortization schedule.  Weoriginate multi-family and commercial real estate loans with terms up to 20years.  Interest rates and payments onour adjustable-rate loans generally are based on the prime interest rate,although our policies permit interest rates to be based on the ConstantMaturity Treasury Index, LIBOR or the federal funds rate.  Loans are secured by first mortgages thatgenerally do not exceed 80% of the property’s appraised value.  We require all properties securingmulti-family and commercial real estate loans to be appraised by aBoard-approved independent licensed appraiser. Multi-family and commercial real estate loans also are generallysupported by personal guarantees.

 

                                                At December 31, 2007, the largestoutstanding multi-family or commercial real estate loan had an outstandingbalance of $9.9 million and was secured by a hotel in the southern New Jerseyshore area.  This loan was performing inaccordance with its contractual terms at December 31, 2007.

 

                                                ***ConstructionLoans.***  We originate fixed-rate and adjustable-rateloans to individuals, builders and developers to finance the construction ofresidential dwellings.  ** **We also makeconstruction loans for commercial development projects, including apartmentbuildings, restaurants, shopping centers and other owner-occupied propertiesused for businesses.  Our constructionloans generally provide for the payment or reserving of interest only duringthe construction phase, which is usually six to twelve months for residentialproperties and eighteen months or more for commercial properties.  At the end of the construction phase, theloan is typically repaid with the proceeds from sales of individual residentialunits or is converted to a permanent mortgage loan.  Loans generally can be made with a maximumloan-to-value ratio of 80% on residential construction and 65% on commercialconstruction at the time the loan is originated.  Before making a commitment to fund aconstruction loan, we require an appraisal of the property by an independentlicensed appraiser.  We also generallyrequire an inspection of the property before disbursement of funds during theterm of the construction loan.

 

                                                We also originate loans secured byundeveloped land and developed land.  Theterms and rates of our land loans are the same as our multi-family andcommercial real estate loans.  Loanssecured by undeveloped land or improved lots generally involve greater risksthan residential mortgage lending because land loans are more difficult toevaluate.  If the estimate of valueproves to be inaccurate, in the event of default and foreclosure, we may beconfronted with a property the value of which is insufficient to assure fullrepayment.  Loan amounts generally do notexceed 65% (50% for undeveloped land) of the lesser of the appraised value orthe purchase price.

 

                                                At December 31, 2007, our largestresidential construction loan was an age-restricted residential community beingdeveloped near Dover, Delaware, to which the Bank has committed $7.7 million,of which $4.0 million was outstanding. At December 31, 2007, our largest outstanding commercialconstruction loan was for $7.5 million, of which $3.7 million wasoutstanding.  This participation loan issecured by land and improvements to develop a shopping center in Bucks County,Pennsylvania.  Both of these loans wereperforming in accordance with their terms at December 31, 2007.

 

***                                               ******CommercialLoans.***  We also offer commercial business loans toprofessionals, sole proprietorships and small businesses in our marketarea.  The Bank also occasionallypurchases loan participations from other institutions to utilize excess capitaland liquidity when we believe that such investments will provide an appropriatereturn. The maximum amount of our commercial loans is limited by ourin-house-loans-to one borrower limit.  Weintend to grow this segment of our loan portfolio.

 

                                                We offer secured commercial term loans,which have a maturity of greater than one year and the payment of which isdependent on future earnings.  The termfor repayment of the loan will normally be limited to the lesser 

 

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of the expected usefullife of the asset being financed or a fixed amount of time, generally less thanseven years.  We also offer revolvinglines of credit secured by business assets other than real estate, such asbusiness equipment, inventory and accounts receivable, letters of credit anddemand loans.  We originate these loanson both a fixed-rate and adjustable-rate basis with terms up to 20 years.  Adjustable-rate loans are based on the primerate, although our policies permit interest rates to be based on the ConstantMaturity Treasury Index, LIBOR or the federal funds rate and adjust eithermonthly or annually.  Where the borroweris a corporation, partnership or other entity, we generally require significantequity holders to be co-borrowers and in cases where they are not co-borrowers,we generally require personal guarantees from significant equity holders.

 

                                                We also originate commercial lines ofcredit to finance the working capital needs of businesses to be repaid byseasonal cash flows or to provide a period of time during which the businesscan borrow funds for planned equipment purchases.  Commercial lines of credit can be fixed-rateor adjustable-rate loans.  Commerciallines of credit secured by commercial real estate generally have a term of lessthan seven years.

 

                                                When making commercial business loans, weconsider the financial statements and/or tax returns of the borrower, theborrower’s payment history of both corporate and personal debt, the debtservice capabilities of the borrower, the projected cash flows of the business,the viability of the industry in which the customer operates, the value of thecollateral and our assessment of management’s ability.  Commercial business loans are generallysecured by a variety of collateral, primarily accounts receivable, inventoryand equipment, and are generally supported by personal guarantees.  Depending on the collateral used to securethe loans, commercial loans are made in amounts of up to 80% of the value ofthe collateral securing the loan (90% for established borrowers pledging newequipment).  We generally do not makeunsecured commercial loans.

 

                                                ***ConsumerLoans*****.**  We offer a variety of consumer loans,including home equity loans and lines of credit, loans secured by certificateof deposits (share loans), automobile loans and unsecured overdraft lines ofcredit.

 

                                                The procedures for underwriting consumerloans include an assessment of the applicant’s payment history on other debtsand ability to meet existing obligations and payments on the proposedloan.  Although the applicant’screditworthiness is a primary consideration, the underwriting process alsoincludes a comparison of the value of the collateral, if any, to the proposedloan amount.

 

                                                We generally offer fixed-rate home equityloans with a maximum combined loan-to-value ratio of 90% and adjustable-ratelines of credit with a maximum combined loan-to-value ratio of 80%.  Home equity lines of credit haveadjustable-rates of interest that are based on the prime interest rate.  Home equity lines of credit generally requirethat only interest be paid on a monthly basis and have terms up to 20years.  Interest rates on these linestypically adjust monthly.  We offerfixed-rate and adjustable-rate home equity loans.  Home equity loans have terms that range fromone to 15 years.  We hold a first orsecond mortgage position on most of the homes that secure our home equity loansand home equity lines of credit.

 

                                                We also provide a consumer loan productunder which we will originate a fixed-rate or adjustable-rate loan on anowner-occupied one- to four-family residence, with a loan-to-value ratio of 80%of the secured property.  We will thenoriginate a home equity loan with a loan-to-value ratio of either 10% or 15% ofthe secured property.  The remaining 10%or 5% must be paid in cash by the borrower. This product, sometimes referred to as combination financing or apiggyback loan, eliminates the need for private mortgage insurance.  However, to obtain this product, the borrowermust meet our underwriting criteria with respect to the one- to four-familyresidential real estate loan and home equity loan.  During 2007, we adopted more conservativeunderwriting criteria for such loans to address the current credit conditions.

 

                                                We offer loans secured by new and usedautomobiles.  These loans have fixedinterest rates and generally have terms up to six years.  We will generally offer automobile loans witha maximum loan-to-value ratio of 90% of the purchase price of the vehicle.

 

                                                We also offer unsecured overdraft linesof credit to our retail customers for overdraft protection.  These lines range between $500 and $7,500 andthe rate and amounts are offered to customers in relation to their individualcredit score.  At December 31, 2007we had 241 such loans totaling $121,000.

 

                                                We offer consumer loans secured bycertificates of deposit held at Fox Chase Bank with fixed interest rates andterms up to five years.  We will offersuch loans up to 90% of the principal balance of the certificate of deposit. 

 

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For more information onour loan commitments, see Item 7, *“Management’sDiscussion and Analysis of Financial Condition and Results of Operations—RiskManagement—Liquidity Management.”*

 

**LoanUnderwriting Risks**

 

                                                ***Adjustable-RateLoans*****. **While we anticipate that adjustable-rateloans will better offset the adverse effects of an increase in interest ratesas compared to fixed-rate mortgages, the increased mortgage payments requiredof adjustable-rate loan borrowers in a rising interest rate environment couldcause an increase in delinquencies and defaults.  The marketability of the underlying propertyalso may be adversely affected in a high interest rate environment.  In addition, although adjustable-ratemortgage loans help make our loan portfolio more responsive to changes ininterest rates, the extent of this interest sensitivity is limited by theannual and lifetime interest rate adjustment limits.

 

                                                ***Multi-Familyand Commercial Real Estate Loans.**** *Loanssecured by multi-family and commercial real estate generally have largerbalances and involve a greater degree of risk than one- to four-familyresidential mortgage loans.  Of primaryconcern in multi-family and commercial real estate lending is the borrower’screditworthiness and the feasibility and cash flow potential of theproject.  Payments on loans secured byincome properties often depend on successful operation and management of theproperties.  As a result, repayment ofsuch loans may be subject to a greater extent than residential real estateloans to adverse conditions in the real estate market or the economy. Tomonitor cash flows on income properties, we generally require borrowers andloan guarantors to provide annual financial statements and/or tax returns.  In reaching a decision on whether to make amulti-family or commercial real estate loan, we consider the net operatingincome of the property, the borrower’s expertise, credit history andprofitability and the value of the underlying property.  We have generally required that theproperties securing these real estate loans have debt service coverage ratios(the ratio of earnings before debt service to debt service) of at least1.20x.  Environmental surveys andinspections are obtained when circumstances suggest the possibility of thepresence of hazardous materials. Further, in connection with our ongoing monitoring of the loan, wetypically will review the property at least once each year.

 

                                                ***ConstructionLoans*****. **Construction financing is generallyconsidered to involve a higher degree of risk of loss than long-term financingon improved, occupied real estate.  Riskof loss on a construction loan depends largely upon the accuracy of the initialestimate of the property’s value at completion of construction and theestimated cost (including interest) of construction.  During the construction phase, a number offactors could result in delays and cost overruns.  If the estimate of construction costs provesto be inaccurate, we may be required to advance funds beyond the amountoriginally committed to permit completion of the building.  If the estimate of value proves to beinaccurate, we may be confronted, at or before the maturity of the loan, with abuilding having a value which is insufficient to assure full repayment.  If we are forced to foreclose on a buildingbefore or at completion due to a default, there can be no assurance that wewill be able to recover all of the unpaid balance of, and accrued interest on,the loan as well as related foreclosure and holding costs.

 

                                                ***CommercialLoans*****. **Unlike residential mortgage loans, whichgenerally are made on the basis of the borrower’s ability to make repaymentfrom his or her employment or other income, and which are secured by realproperty the value of which tends to be more easily ascertainable, commercialloans are of higher risk and typically are made on the basis of the borrower’sability to make repayment from the cash flow of the borrower’s business.  As a result, the availability of funds forthe repayment of commercial loans may depend substantially on the success ofthe business itself.  Further, anycollateral securing such loans may depreciate over time, may be difficult toappraise and may fluctuate in value.

 

                                                ***ConsumerLoans*****. **Consumer loans may entail greater riskthan residential mortgage loans do, particularly in the case of consumer loansthat are unsecured or secured by assets that depreciate rapidly.  In such cases, repossessed collateral for adefaulted consumer loan may not provide an adequate source of repayment for theoutstanding loan and the remaining deficiency often does not warrant furthersubstantial collection efforts against the borrower.  In addition, consumer loan collections dependon the borrower’s continuing financial stability, and therefore are more likelyto be adversely affected by job loss, divorce, illness or personalbankruptcy.  Furthermore, the applicationof various federal and state laws, including bankruptcy and insolvency laws,may limit the amount that can be recovered on such loans.

 

                                                ***LoanOriginations, Sales and Participations*****.** Loanoriginations come from a number of sources. The primary source of loan originations are existing customers, walk-intraffic, advertising, referrals from customers and 

 

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loans originated by ourcommercial relationship managers.  Weadvertise in newspapers that are widely circulated throughout our marketarea.  Accordingly, when our rates arecompetitive, we attract loans throughout our market areas. During 2007, theBank also began originating loans referred by a mortgage broker in which theBank has a 20% investment.

 

                                                At December 31, 2007, we were aparticipating lender on five loans totaling $9.6 million, which are secured bycommercial real estate, lease payments and the assets of the businesses.  These loans are being serviced by the leadlender.  We expect to continue topurchase participation interests, primarily in commercial and industrial loans,construction loans and commercial real estate loans.  On these participation interests, wegenerally perform our own underwriting analysis before purchasing such loansand therefore believe there would be no greater risk of default on theseobligations.  However, in a purchasedparticipation loan, we would not service the loan and thus are subject to thepolicies and practices of the lead lender with regard to monitoring delinquencies,pursuing collections and instituting foreclosure proceedings.  In assessing whether to participate, we wouldrequire review of all of the documentation relating to any loan in which weparticipate, including any annual financial statements provided by aborrower.  Additionally, we would requireperiodic updates on the loan from the lead lender.

 

From time to time we willalso sell participation interests in loans where we are the lead lender andservicer.  At December 31, 2007, wewere the lead lender on loans totaling $19.8 million, of which the Bank owned$9.5 million and serviced $10.3 million for other banks. We expect in thefuture that we will continue to sell participation interests to local financialinstitutions, primarily with respect to construction and commercial real estateloans that approach or exceed our lending limits or loans that are outside ofour immediate market areas.

 

                                                ***LoanApproval Procedures and Authority*****.** Our lendingactivities follow written, non-discriminatory, underwriting standards and loanorigination procedures established by our board of directors andmanagement.  The board has grantedauthority to approve residential and consumer loans up to $300,000 to theAssistant Manager of the Consumer Lending Department and up to $450,000 to theVice President of Residential Mortgage and the Vice President of ConsumerLending.  The board has grantedindividual authority to approve commercial loans up to $1.5 million to theChief Executive Officer, the Chief Financial Officer, the Chief LendingOfficer, the Chief Credit Officer and the Chief Risk Manager.  Commercial loans between $1.5 million and$2.75 million can be approved based on dual authority from the previouslymentioned “C” level officers. Loans in excess of $2.75 million up to $4.5million require the approval by the Officers Loan Committee, consisting of thePresident and Chief Executive Officer, the Chief Financial Officer, the ChiefCredit Officer and the Chief Lending Officer and other experienced lenders andofficers as appointed by the Board from time to time.  Loans or groups of loans with exposuresbetween $4.5 million and $10.0 million require the approval of the ExecutiveOfficers Loan Committee, consisting of the President and Chief ExecutiveOfficer, the Chief Financial Officer, the Chief Lending Officer and the ChiefCredit Officer.  Loans greater than $10.0million are required to be approved by the Risk Management Committee of theBoard of Directors.

 

                                                ***Loansto One Borrower*****.**  The maximumamount we may lend to one borrower and the borrower’s related entitiesgenerally is limited, by regulation, to 15% of our stated capital andreserves.  At December 31, 2007, ourgeneral regulatory limit on loans to one borrower was approximately $15.0million.  At that date, our largestlending relationship was a $9.9 million loan secured by a hotel in the southernNew Jersey shore area.  This loan wasperforming according to its terms at December 31, 2007.  At December 31, 2007, our second largestlending relationship consisted of four loans to one borrower with commitmentstotaling $9.6 million, of which $7.1 million were outstanding, which weresecured by commercial office buildings in southeastern Pennsylvania.

 

                                                ***LoanCommitments*****.**  We issue commitments for fixed- andadjustable-rate mortgage loans conditioned upon the occurrence of certainevents.  Commitments to originatemortgage loans are legally binding agreements to lend to our customers.  Generally, our mortgage loan commitmentsexpire after 30 days.

 

**InvestmentActivities**

 

                                                The Board of Directors reviews and approvesour investment policy annually.  The RiskManagement Committee of the Board of Directors is responsible for establishingpolicies for conducting investment activities, including the establishment ofrisk limits.  The Risk ManagementCommittee of the Board of Directors reviews investment transactions on amonthly basis and monitors the composition and performance of the investmentportfolio on a quarterly basis.  TheBoard has directed the Chief Financial Officer to implement the investmentpolicy.

 

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                The investment portfolio is primarily viewed as asource of liquidity.  The investmentportfolio management policy is designed to:

 

1.                                       absorbfunds when loan demand and deposit outflows are low and infuse funds into loanswhen loan demand is high and to fund deposit outflows;

 

2.                                       generatea favorable return on investments;

 

3.                                       provideincome consistent with our liquidity and safety requirements, while providing asuitable balance of quality and diversification to our balance sheet;

 

4.                                       havecollateral available for pledging requirements; and

 

5.                                       providea medium for the implementation of certain interest rate risk managementmeasures intended to establish and maintain an appropriate balance between thesensitivity to changes in interest rates.

 

                We have authority to invest invarious types of liquid assets, including U.S. Treasury obligations, securitiesof various federal and state agencies and municipal governments, mortgage andasset-backed securities, corporate debt instruments, trust preferred securitiesand certificates of deposit of federally insured institutions.  Within certain regulatory limits, we also mayinvest a percentage of our capital in mutual funds.  We also are required to maintain aninvestment in Federal Home Loan Bank of Pittsburgh stock.

 

                At December 31, 2007, ourinvestment portfolio totaled $296.3 million and consisted primarily ofmortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae andsecurities of state and municipal governments. At December 31, 2007 and 2006, we held $1.2 million and $1.7million, respectively, in private issued mortgage-backed securities.  Private issued mortgage-backed securities are“whole loan collateralized mortgage securities” that are formed from jumbomortgages that have all the same characteristics of conforming mortgages,except for their size, issued by agency guarantors.  To make up for the lack of an agencyguarantor, whole loans are structured with subordinated tranches designed toachieve a triple A rating by a major rating service.  The investor pays a lower price for thesecurity but receives a higher yield.  Wehave been continuously monitoring private issued mortgage-backed securitiesgiven the current credit cycle to manage the current risks associated withthese types of securities.

 

**DepositActivities and Other Sources of Funds**

 

                ***General*.** Deposits, other borrowings and loan repayments are the major sources ofour funds for lending and other investment purposes.  Loan repayments are a relatively stablesource of funds, while deposit inflows and outflows and loan prepayments aresignificantly influenced by general interest rates and money market conditions.

 

                ***Deposit Accounts*.**  Substantially all of our depositors areresidents of the Commonwealth of Pennsylvania or the State of New Jersey.  We attract deposits in our market areathrough advertising and through the offering of a broad selection of depositinstruments, including noninterest-bearing demand accounts (such as checkingaccounts), interest-bearing accounts (such as NOW and money market accounts),regular savings accounts and certificates of deposit.  At December 31, 2007, we did not utilizebrokered deposits.   However, ourliquidity policy provides for the use of brokered deposits as an alternativesource of funds.  Deposit account termsvary according to the minimum balance required, the time periods the funds mustremain on deposit and the interest rate, among other factors.  In determining the terms of our depositaccounts, we consider the rates offered by our competition, our liquidityneeds, profitability to us, matching deposit and loan products and customerpreferences and concerns.  We generallyreview our deposit mix and pricing bi-weekly. Historically, our strategy was to offer competitive rates and to be themarket leader for rates on certain deposit products.  Our current strategy is to offer competitiverates and to be in the middle to upper end of the market for rates on a varietyof retail and business deposit products.

 

                We also offer a variety of depositaccounts designed for the businesses operating in our market area.  Our business banking deposit products includea commercial checking account and a checking account specifically designed forsmall businesses.  We also offer remotecapture products for business customers to meet their online 

 

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bankingneeds.  Additionally, we offer sweepaccounts and money market accounts for businesses.  We are seeking to increase our commercialdeposits through the offering of these products.

 

***Borrowings.*** In recent years, we have not relied upon advancesfrom the Federal Home Loan Bank of Pittsburgh to supplement our supply oflendable funds or to meet deposit withdrawal requirements.  The $30.0 million of Federal Home Loan Bankadvances outstanding at December 31, 2006 were borrowed in 2001.  During the fourth quarter 2007, as the yieldcurve steepened, we implemented a leverage strategy to purchase $50.0 millionin mortgage related securities, which were funded by $30.0 million in FederalHome Loan Bank advances and $20.0 million of collateralized borrowings.  Furthermore, we borrowed an additional $20.0million from the FHLB during the fourth quarter of 2007 to take advantage ofthe decrease in cost of funds in the wholesale funding market.  In the future, we may rely more heavily onwholesale funding in addition to retail funds to leverage the balance sheet andaccelerate growth.  However, due to thepotential volatility of wholesale funding, we have developed ratios and limitsto measure our reliance on wholesale funding.

 

                        The Federal Home LoanBank functions as a central reserve bank providing credit for its memberfinancial institutions.  As a member, weare required to own capital stock in the Federal Home Loan Bank and areauthorized to apply for advances on the security of such stock and certain ofour whole first mortgage loans and other assets (principally mortgage relatedsecurities which are obligations of, or guaranteed by, the United States),provided certain standards related to creditworthiness have been met.  Advances are made under several differentprograms, each having its own interest rate and range of maturities.  Depending on the program, limitations on theamount of advances are based either on a fixed percentage of an institution’snet worth or on the Federal Home Loan Bank’s assessment of the institution’screditworthiness.

 

**Personnel**

 

                As of December 31, 2007, wehad 128 full-time employees and 25 part-time employees. We believe our relationshipwith our employees is good.

 

**Subsidiaries**

 

                Fox Chase Bank’s only activesubsidiary is Fox Chase Financial, Inc., which was formed in February 1999.As a Delaware-chartered corporation investment company, Fox Chase Financial’spurpose is to manage and hold investment securities.

 

**REGULATIONAND SUPERVISION**

 

**General**

 

                Fox Chase Bancorp, as afederally chartered corporation, is subject to reporting to and regulation bythe Office of Thrift Supervision.  FoxChase Bancorp also is subject to the rules and regulations of theSecurities and Exchange Commission under the federal securities laws.  Fox Chase Bank is subject to extensiveregulation, examination and supervision by the Office of Thrift Supervision, asits primary federal regulator, and the Federal Deposit Insurance Corporation,as its deposits insurer.  Fox Chase Bankis a member of the Federal Home Loan Bank System and its deposit accounts areinsured up to applicable limits by the Deposit Insurance Fund managed by theFederal Deposit Insurance Corporation. Fox Chase Bank must file reports withthe Office of Thrift Supervision and the Federal Deposit Insurance Corporationconcerning its activities and financial condition in addition to obtainingregulatory approvals prior to entering into certain transactions such asmergers with, or acquisitions of, other financial institutions.  The Office of Thrift Supervision and/or theFederal Deposit Insurance Corporation conduct periodic examinations to test FoxChase Bank’s safety and soundness and compliance with various regulatoryrequirements.  This regulation andsupervision establishes a comprehensive framework of activities in which aninstitution can engage and is intended primarily for the protection of the insurancefund and depositors.  As a federal mutualholding company, Fox Chase MHC is also required by federal law to report to,and otherwise comply with the rules and regulations of, the Office ofThrift Supervision.  The regulatorystructure also gives the regulatory authorities extensive discretion inconnection with their supervisory and enforcement activities and examinationpolicies, including policies with respect to the classification of assets andthe establishment of adequate loan loss reserves for regulatory purposes.  Any change in such policies, whether by theOffice of Thrift Supervision, the Federal Deposit Insurance Corporation orCongress, could have a material adverse impact on Fox Chase Bancorp, Fox ChaseMHC and Fox Chase Bank and their operations.

 

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                Certain of the regulatoryrequirements that are applicable to Fox Chase Bank, Fox Chase Bancorp and FoxChase MHC are described below or elsewhere in this document.  The description of statutory provisions andregulations applicable to savings institutions and their holding companies setforth below and elsewhere in this document does not purport to be a completedescription of such statutes and regulations and their effects on Fox ChaseBank, Fox Chase Bancorp and Fox Chase MHC and is qualified in its entirety byreference to the actual statutes and regulations.

 

**Regulationof Federal Savings Associations**

 

***                BusinessActivities. ***Federal law and regulations govern theactivities of federal savings banks, such as Fox Chase Bank.  These laws and regulations delineate thenature and extent of the activities in which federal savings banks mayengage.  In particular, certain lendingauthority for federal savings banks, *e.g.*,commercial, non-residential real property loans and consumer loans, is limitedto a specified percentage of the institution’s capital or assets.

 

                ***Capital Requirements.*** The Office of Thrift Supervision’s capitalregulations require federal savings institutions to meet three minimum capitalstandards:  a 1.5% tangible capital tototal assets ratio, a 4% leverage ratio (3% for institutions receiving thehighest rating on the CAMELS examination rating system) and an 8% risk-basedcapital ratio.  In addition, the promptcorrective action standards discussed below also establish, in effect, aminimum 2% tangible capital standard, a 4% leverage ratio (3% for institutionsreceiving the highest rating on the CAMELS system) and, together with therisk-based capital standard itself, a 4% Tier 1 risk-based capital standard.  The Office of Thrift Supervision regulationsalso require that, in meeting the tangible, leverage and risk-based capitalstandards, institutions must generally deduct investments in and loans tosubsidiaries engaged in activities that are not permissible for a nationalbank.

 

                The risk-based capital standardrequires federal savings institutions to maintain Tier 1 (core) and totalcapital (which is defined as core capital and supplementary capital) torisk-weighted assets of at least 4% and 8%, respectively.  In determining the amount of risk-weightedassets, all assets, including certain off-balance sheet assets, recourseobligations, residual interests and direct credit substitutes, are multipliedby a risk-weight factor of 0% to 100%, assigned by the Office of ThriftSupervision capital regulation based on the risks believed inherent in the typeof asset.  Core (Tier 1) capital isgenerally defined as common stockholders’ equity (including retained earnings),certain noncumulative perpetual preferred stock and related surplus andminority interests in equity accounts of consolidated subsidiaries lessintangibles other than certain mortgage servicing rights and credit cardrelationships.  The components ofsupplementary (Tier 2) capital currently include cumulative preferred stock,long-term perpetual preferred stock, mandatory convertible securities,subordinated debt and intermediate preferred stock, the allowance for loan andlease losses limited to a maximum of 1.25% of risk-weighted assets and up to45% of unrealized gains on available-for-sale equity securities with readilydeterminable fair market values. Overall, the amount of supplementary capital included as part of totalcapital cannot exceed 100% of core capital.

 

                The Office of Thrift Supervisionalso has authority to establish individual minimum capital requirements inappropriate cases upon a determination that an institution’s capital level isor may become inadequate in light of the particular circumstances.  At December 31, 2007, Fox Chase Bank meteach of these capital requirements.

 

***                PromptCorrective Regulatory Action. ***The Office of Thrift Supervision isrequired to take certain supervisory actions against undercapitalizedinstitutions, the severity of which depends upon the institution’s degree ofundercapitalization.  Generally, asavings institution that has a ratio of total capital to risk weighted assetsof less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets ofless than 4% or a ratio of core capital to total assets of less than 4% (3% orless for institutions with the highest examination rating) is considered to be “undercapitalized.”  A savings institution that has a totalrisk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3%or a leverage ratio that is less than 3% is considered to be “significantlyundercapitalized” and a savings institution that has a tangible capital toassets ratio equal to or less than 2% is deemed to be “criticallyundercapitalized.”  Subject to a narrowexception, the Office of Thrift Supervision is required to appoint a receiveror conservator within specified time frames for an institution that is “criticallyundercapitalized.”  The regulation alsoprovides that a capital restoration plan must be filed with the Office of ThriftSupervision within 45 days of the date a savings institution is deemed to havereceived notice that it is “undercapitalized,” “significantly undercapitalized”or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holdingcompany in an amount of up to the lessor of 5% of the savings institution’stotal assets when it was deemed 

 

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to beundercapitalized or the amount necessary to achieve compliance with applicablecapital regulations.  In addition,numerous mandatory supervisory actions become immediately applicable to anundercapitalized institution, including, but not limited to, increasedmonitoring by regulators and restrictions on growth, capital distributions andexpansion.  The Office of ThriftSupervision could also take any one of a number of discretionary supervisoryactions, including the issuance of a capital directive and the replacement ofsenior executive officers and directors. “Significantly undercapitalized” and “critically undercapitalized”institutions are subject to more extensive mandatory regulatory actions.

 

                ***Loans to One Borrower. ***Federal law provides that savings institutions aregenerally subject to the limits on loans to one borrower applicable to nationalbanks.  Subject to certain exceptions,savings institution may not make a loan or extend credit to a single or relatedgroup of borrowers in excess of 15% of its unimpaired capital and surplus.  An additional amount may be lent, equal to 10%of unimpaired capital and surplus, if secured by specified readily-marketablecollateral.

 

                ***Standards for Safety and Soundness. ***The federal banking agencieshave adopted Interagency Guidelines prescribing Standards for Safety andSoundness.  The guidelines set forth thesafety and soundness standards that the federal banking agencies use toidentify and address problems at insured depository institutions before capitalbecomes impaired.  If the Office ofThrift Supervision determines that a savings institution fails to meet anystandard prescribed by the guidelines, the Office of Thrift Supervision mayrequire the institution to submit an acceptable plan to achieve compliance withthe standard.

 

                ***Limitation on Capital Distributions. ***Office of Thrift Supervisionregulations impose limitations upon all capital distributions by a savingsinstitution, including cash dividends, payments to repurchase its shares andpayments to stockholders of another institution in a cash-out merger.  Under the regulations, the prior approval ofthe Office of Thrift Supervision is required before any capital distribution ifthe institution does not meet the criteria for “expedited treatment” ofapplications under Office of Thrift Supervision regulations (*i.e.*, generally, examination and CommunityReinvestment Act ratings in the two top categories), the total capitaldistributions for the calendar year exceed net income for that year plus theamount of retained net income for the preceding two years, the institutionwould be undercapitalized following the distribution or the distribution wouldotherwise be contrary to a statute, regulation or agreement with the Office ofThrift Supervision.  If an application isnot required, the institution must still provide prior notice to the Office ofThrift Supervision of the capital distribution if, like Fox Chase Bank, it is asubsidiary of a holding company.  If FoxChase Bank’s capital were ever to fall below its regulatory requirements or theOffice of Thrift Supervision notified it that it was in need of increasedsupervision, Fox Chase Bank’s ability to make capital distributions could berestricted.  In addition, the Office ofThrift Supervision could prohibit a proposed capital distribution by anyinstitution, which would otherwise be permitted by the regulation, if theOffice of Thrift Supervision determines that such distribution would constitutean unsafe or unsound practice.

 

                ***Qualified Thrift Lender Test. ***Federal law requires savingsinstitutions to meet a qualified thrift lender test.  Under the test, a savings institution isrequired to either qualify as a “domestic building and loan association” underthe Internal Revenue Code or maintain at least 65% of its “portfolio assets”(total assets less: (i) specified liquid assets up to 20% of total assets;(ii) intangibles, including goodwill; and (iii) the value of propertyused to conduct business) in certain “qualified thrift investments” (primarilyresidential mortgages and related investments, including certainmortgage-backed securities) in at least 9 months out of each 12-monthperiod.  Legislation has expanded theextent to which education loans, credit card loans and small business loans maybe considered “qualified thrift investments.”

 

                A savings institution that failsthe qualified thrift lender test is subject to certain operating restrictionsand may be required to convert to a bank charter.  As of December 31, 2007, Fox Chase Bankmaintained 84.3% of its portfolio assets in qualified thrift investments and,therefore, met the qualified thrift lender test.

 

                ***Transactionswith Related Parties.***  Fox Chase Bank’s authority to engage intransactions with “affiliates” (*e.g.,* anyentity that controls or is under common control with an institution, includingFox Chase MHC and Fox Chase Bancorp and its non-savings institutionsubsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individualaffiliate is limited to 10% of the capital and surplus of the savingsinstitution.  The aggregate amount ofcovered transactions with all affiliates is limited to 20% of the savingsinstitution’s capital and surplus. Certain transactions with affiliates are required to be secured bycollateral in an amount and of a type specified in federal law.  The purchase of low quality assets fromaffiliates is generally 

 

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prohibited.  Transactions with affiliates must be on termsand under circumstances that are at least as favorable to the institution asthose prevailing at the time for comparable transactions with non-affiliatedcompanies.  In addition, savingsinstitutions are prohibited from lending to any affiliate that is engaged inactivities that are not permissible for bank holding companies and no savings institutionmay purchase the securities of any affiliate other than a subsidiary.

 

                The Sarbanes-Oxley Act of 2002generally prohibits loans by Fox Chase Bancorp to its executive officers anddirectors.  However, the Sarbanes-OxleyAct contains a specific exemption from such prohibition for loans by Fox ChaseBank to its executive officers and directors in compliance with federal bankinglaws.  Under such laws, Fox Chase Bank’sauthority to extend credit to executive officers, directors and 10%shareholders (“insiders”), as well as entities such persons control, islimited.  The law limits both theindividual and aggregate amount of loans Fox Chase Bank may make to insidersbased, in part, on Fox Chase Bank’s capital position and requires certain boardapproval procedures to be followed.  Suchloans are required to be made on terms substantially the same as those offeredto unaffiliated individuals and not involve more than the normal risk ofrepayment.  There is an exception forloans made pursuant to a benefit or compensation program that is widelyavailable to all employees of the institution and does not give preference toinsiders over other employees.

 

                ***Enforcement. ***TheOffice of Thrift Supervision has primary enforcement responsibility overfederal savings institutions and has the authority to bring actions against theinstitution and all institution-affiliated parties, including stockholders, andany attorneys, appraisers and accountants who knowingly or recklesslyparticipate in wrongful action likely to have an adverse effect on an insuredinstitution.  Formal enforcement actionmay range from the issuance of a capital directive or cease and desist order toremoval of officers and/or directors to institution of receivership,conservatorship or termination of deposit insurance.  Civil penalties cover a wide range ofviolations and can amount to $25,000 per day, or even $1 million per day inespecially egregious cases.  The FederalDeposit Insurance Corporation has authority to recommend to the Director of theOffice of Thrift Supervision that enforcement action be taken with respect to aparticular savings institution.  Ifaction is not taken by the Director, the Federal Deposit Insurance Corporationhas authority to take such action under certain circumstances.  Federal law also establishes criminalpenalties for certain violations.

 

                ***Assessments. ***Federalsavings banks are required to pay assessments to the Office of ThriftSupervision to fund the agency’s operations. The general assessments, paid on a semi-annual basis, are based upon thesavings institution’s (including consolidated subsidiaries) total assets,condition and complexity of portfolio. The Office of Thrift Supervision assessments paid by the Company for theyear ended December 31, 2007 totaled $178,000.

 

***Insurance of Deposit Accounts.***  Fox Chase Bank’s deposits are insured up to applicable limits by theDeposit Insurance Fund of the Federal Deposit Insurance Corporation.  The Deposit Insurance Fund is the successorto the Bank Insurance Fund and the Savings Association Insurance Fund, whichwere merged in 2006.  The Federal DepositInsurance Corporation recently amended its risk-based assessment system for2007 to implement authority granted by the Federal Deposit Insurance Reform Actof 2005 (the “Reform Act”).  Under therevised system, insured institutions are assigned to one of four riskcategories based on supervisory evaluations, regulatory capital levels andcertain other factors.  An institution’sassessment rate depends upon the category to which it is assigned.  Risk category I, which contains the leastrisky depository institutions, is expected to include more than 90% of allinstitutions.  Unlike the othercategories, Risk Category I contains further risk differentiation based on theFederal Deposit Insurance Corporation’s analysis of financial ratios,examination component ratings and other information.  Assessment rates are determined by theFederal Deposit Insurance Corporation and currently range from five to sevenbasis points for the healthiest institutions (Risk Category I) to 43 basispoints of assessable deposits for the riskiest (Risk Category IV).  The Federal Deposit Insurance Corporation mayadjust rates uniformly from one quarter to the next, except that no single adjustmentcan exceed three basis points.

 

                The Reform Act also provided for a one-time creditfor eligible institutions based on their assessment base as of December 31,1996.  Subject to certain limitationswith respect to institutions that are exhibiting weaknesses, credits can beused to offset assessments until exhausted. As of December 31, 2007, Fox Chase Bank’s remaining balance of theone-time credit was approximately $220,000. We anticipate that this credit will be fully utilized by the thirdquarter of 2008.  The Reform Act alsoprovided for the possibility that the Federal Deposit Insurance Corporation maypay dividends to insured institutions once the Deposit Insurance Fund reserveratio equals or exceeds 1.35% of estimated insured deposits.

 

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                In addition to the assessment for deposit insurance,institutions are required to make payments on bonds issued in the late 1980s bythe Financing Corporation to recapitalize a predecessor deposit insurance fund.  This payment is established quarterly andduring the calendar year ended December 31, 2007 averaged 1.14 basispoints of assessable deposits.

 

                The Reform Act provided the Federal Deposit InsuranceCorporation with authority to adjust the Deposit Insurance Fund ratio toinsured deposits within a range of 1.15% and 1.50%, in contrast to the priorstatutorily fixed ratio of 1.25%.  Theratio, which is viewed by the Federal Deposit Insurance Corporation as the levelthat the fund should achieve, was established by the agency at 1.25% for 2007.

 

                The Federal Deposit Insurance Corporation hasauthority to increase insurance assessments. A significant increase in insurance premiums would likely have anadverse effect on our operating expenses and results of operations.  Management cannot predict what insuranceassessment rates will be in the future.

 

                Insurance of deposits may be terminated by theFederal Deposit Insurance Corporation upon a finding that the institution hasengaged in unsafe or unsound practices, is in an unsafe or unsound condition tocontinue operations or has violated any applicable law, regulation, rule, orderor condition imposed by the Federal Deposit Insurance Corporation or the Officeof Thrift Supervision.  The management ofFox Chase Bank does not know of any practice, condition or violation that mightlead to termination of deposit insurance.

 

***                FederalHome Loan Bank System. ***Fox Chase Bank is a member of the FederalHome Loan Bank System, which consists of 12 regional Federal Home LoanBanks.  The Federal Home Loan Bankprovides a central credit facility primarily for member institutions.  Fox Chase Bank, as a member of the FederalHome Loan Bank of Pittsburgh, is required to acquire and hold shares of capitalstock in that Federal Home Loan Bank. Fox Chase Bank was in compliance with this requirement with aninvestment in Federal Home Loan Bank stock at December 31, 2007 of $5.9million.

 

                The Federal Home Loan Banks wererequired to provide funds for the resolution of insolvent thrifts in the late1980s and are required to contribute funds for affordable housingprograms.  These requirements couldreduce the amount of dividends that the Federal Home Loan Banks pay to theirmembers and could also result in the Federal Home Loan Banks imposing a higherrate of interest on advances to their members. If dividends were reduced, or interest on future Federal Home Loan Bankadvances increased, our net interest income would likely also be reduced.

 

                ***Federal Reserve System. ***The Federal Reserve Boardregulations require savings institutions to maintain noninterest-earningreserves against their transaction accounts (primarily Negotiable Order ofWithdrawal (NOW) and regular checking accounts).  The regulations generally provide thatreserves be maintained against aggregate transaction accounts as follows:  a 3% reserve ratio is assessed on nettransaction accounts up to and including $45.8 million; a 10% reserve ratio isapplied above $45.8 million.  The first$8.5 million of otherwise reservable balances are exempted from the reserverequirements.  The amounts are adjustedannually.  Fox Chase Bank complies withthe foregoing requirements.

 

**HoldingCompany Regulation**

 

***                General. ***Fox Chase Bancorp and Fox Chase MHC are savings andloan holding companies within the meaning of federal law.  As such, they are registered with the Officeof Thrift Supervision and are subject to Office of Thrift Supervisionregulations, examinations, supervision and reporting requirements.  In addition, the Office of Thrift Supervisionhas enforcement authority over Fox Chase Bancorp and Fox Chase MHC and theirnon-savings institution subsidiaries. Among other things, this authority permits the Office of ThriftSupervision to restrict or prohibit activities that are determined to be aserious risk to Fox Chase Bank.

 

*                **Activities****Restrictions Applicable to Mutual HoldingCompanies. ***Pursuant to federal law and Office ofThrift Supervision regulations, a mutual holding company, such as Fox ChaseMHC, may engage in the following activities: (i) investing in the stock of a savings association; (ii) acquiringa mutual association through the merger of such association into a savingsassociation subsidiary of such holding company or an interim savingsassociation subsidiary of such holding company; (iii) merging with oracquiring another holding company, one of whose subsidiaries is a savingsassociation; (iv) investing in a corporation, the capital stock of whichis available for purchase by a savings association under federal law or underthe law of any state where the subsidiary savings 

 

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association orassociations share their home offices; (v) furnishing or performingmanagement services for a savings association subsidiary of such company; (vi) holding,managing or liquidating assets owned or acquired from a savings subsidiary ofsuch company; (vii) holding or managing properties used or occupied by asavings association subsidiary of such company properties used or occupied by asavings association subsidiary of such company; (viii) acting as trusteeunder deeds of trust; (ix) any other activity (A) that the FederalReserve Board, by regulation, has determined to be permissible for bank holdingcompanies under Section 4(c) of the Bank Holding Company Act, unlessthe Office of Thrift Supervision, by regulation, prohibits or limits any suchactivity for savings and loan holding companies or (B) in which multiplesavings and loan holding companies were authorized (by regulation) to directlyengage on March 5, 1987; and (x) purchasing, holding, or disposing ofstock acquired in connection with a qualified stock issuance if the purchase ofsuch stock by such savings and loan holding company is approved by the Officeof Thrift Supervision.

 

                The Gramm-Leach Bliley Act of 1999 was designed tomodernize the regulation of the financial services industry by expanding theability of bank holding companies to affiliate with other types of financialservices companies such as insurance companies and investment bankingcompanies.  The legislation also expandedthe activities permitted for mutual savings and loan holding companies to alsoinclude any activity permitted a “financial holding company” under thelegislation, including a broad array of insurance and securities activities.

 

                Federal law prohibits a savings and loan holdingcompany, including a federal mutual holding company, from, directly orindirectly or through one or more subsidiaries, acquiring more than 5% of thevoting stock of another savings institution, or holding company thereof,without prior written approval of the Office of Thrift Supervision.  Federal law also prohibits a savings and loanholding company from acquiring or retaining, with certain exceptions, more than5% of a non-subsidiary holding company or savings association.  A savings and loan holding company is alsoprohibited from acquiring more than 5% of a company engaged in activities otherthan those authorized by federal law; or acquiring or retaining control of adepository institution that is not insured by the Federal Deposit InsuranceCorporation.   In evaluating applicationsby holding companies to acquire savings institutions, the Office of ThriftSupervision must consider the financial and managerial resources and futureprospects of the company and institution involved, the effect of theacquisition on the risk to the insurance funds, the convenience and needs ofthe community and competitive factors.

 

                The Office of Thrift Supervisionis prohibited from approving any acquisition that would result in a multiplesavings and loan holding company controlling savings institutions in more thanone state, except:  (i) the approvalof interstate supervisory acquisitions by savings and loan holding companies,and (ii) the acquisition of a savings association in another state if thelaws of the state of the target savings institution specifically permit suchacquisitions.  The states vary in theextent to which they permit interstate savings and loan holding companyacquisitions.

 

                If the savings institutionsubsidiary of a savings and loan holding company fails to meet the qualifiedthrift lender test set forth in federal law, the holding company must registerwith the Federal Reserve Board as a bank holding company within one year of thesavings institution’s failure to so qualify.

 

                Although savings and loanholding companies are not currently subject to regulatory capital requirementsor specific restrictions on the payment of dividends or other capital distributions,federal regulations do prescribe such restrictions on subsidiary savingsinstitutions.  Fox Chase Bank must notifythe Office of Thrift Supervision 30 days before declaring any dividend.  In addition, the financial impact of aholding company on its subsidiary institution is a matter that is evaluated bythe Office of Thrift Supervision and the agency has authority to ordercessation of activities or divestiture of subsidiaries deemed to pose a threatto the safety and soundness of the institution.

 

                ***Stock Holding Company Subsidiary Regulation. ***The Office of ThriftSupervision has adopted regulations governing the two-tier mutual holdingcompany form of organization and subsidiary stock holding companies that arecontrolled by mutual holding companies. Fox Chase Bancorp is the stock holding company subsidiary of Fox ChaseMHC.  Fox Chase Bancorp is permitted toengage in activities that are permitted for Fox Chase MHC subject to the samerestrictions and conditions.  Finally,the Office of Thrift Supervision regulations maintain that the stock holdingcompany subsidiary must be federally chartered for supervisory reasons.

 

                ***Waivers of Dividends by Fox Chase MHC. ***Office of Thrift Supervisionregulations require Fox Chase MHC to notify the Office of Thrift Supervision ifit proposes to waive receipt of dividends from Fox Chase 

 

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Bancorp.  The Office of Thrift Supervision reviewsdividend waiver notices on a case-by-case basis, and, in general, does notobject to any such waiver if:  (i) thewaiver would not be detrimental to the safe and sound operation of the savingsinstitution; and (ii) the mutual holding company’s board of directorsdetermines that such waiver is consistent with such directors’ fiduciary dutiesto the mutual holding company’s members.

 

**                *Conversionof Fox Chase MHC to Stock Form. ***Office of Thrift Supervision regulationspermit Fox Chase MHC to convert from the mutual form of organization to thecapital stock form of organization. There can be no assurance when, if ever, aconversion transaction will occur, and the Board of Directors has no currentintention or plan to undertake a conversion transaction.  In a conversion transaction, a new holdingcompany would be formed as the successor to Fox Chase Bancorp, Fox Chase MHC’scorporate existence would end, and certain depositors of Fox Chase Bank wouldreceive the right to subscribe for additional shares of the new holdingcompany.  In a conversion transaction,each share of common stock held by stockholders other than Fox Chase MHC wouldbe automatically converted into a number of shares of common stock of the newholding company based on an exchange ratio determined at the time of conversionthat ensures that stockholders other than Fox Chase MHC own the same percentageof common stock in the new holding company as they owned in Fox Chase Bancorpimmediately before conversion.  The totalnumber of shares held by stockholders other than Fox Chase MHC after aconversion transaction would be increased by any purchases by such stockholdersin the stock offering conducted as part of the conversion transaction.

 

***                Acquisitionof Control. ***Under the federal Change in Bank ControlAct, a notice must be submitted to the Office of Thrift Supervision if anyperson (including a company), or group acting in concert, seeks to acquire “control”of a savings and loan holding company or savings institution.  Under certain circumstances, a change incontrol may occur, and prior notice is required, upon the acquisition of 10% ormore of the outstanding voting stock of the savings and loan holding company orsavings institutions unless the Office of Thrift Supervision has found that theacquisition will not result in a change in control of the company.  Under the Change in Bank Control Act, theOffice of Thrift Supervision has 60 days from the filing of a complete noticeto act, taking into consideration certain factors, including the financial andmanagerial resources of the acquirer and the anti-trust effects of theacquisition.  Any company that soacquires control would then be subject to regulation as a savings and loanholding company.

 

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# **EXECUTIVE OFFICERS OF THE REGISTRANT**

# ** **

                TheBoard of Directors annually elects the executive officers of Fox Chase MHC, FoxChase Bancorp and Fox Chase Bank, who serve at the Board’s discretion.  Our executive officers are:

 
| **Name**              | ** ** | **Position**                                                                                                                                                      |
|-----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Thomas M. Petro       |       | President and  Chief Executive Officer of Fox Chase Bancorp, Inc., Fox Chase MHC and  Fox Chase Bank                                                         |
|                  |       |                                                                                                                                                              |
| Jerry D. Holbrook     |       | Chief Financial  Officer and Secretary of Fox Chase Bancorp, Inc. and Fox Chase MHC;  Executive Vice President and Chief Financial Officer of Fox Chase Bank |
|                  |       |                                                                                                                                                              |
| Roger S. Deacon       |       | Executive Vice  President and Chief Accounting Officer of Fox Chase Bancorp, Inc., Fox  Chase MHC and Fox Chase Bank                                         |
|                  |       |                                                                                                                                                              |
| Keiron G. Lynch       |       | Executive Vice  President and Chief Administrative Officer of Fox Chase Bank                                                                                      |
|                  |       |                                                                                                                                                              |
| David C. Kowalek      |       | Executive Vice  President and Chief Credit Officer of Fox Chase Bank                                                                                              |
|                  |       |                                                                                                                                                              |
| James V. Schermerhorn |       | Executive Vice  President and Chief Lending Officer of Fox Chase Bank                                                                                             |
|                  |       |                                                                                                                                                              |
| Richard J. Fuchs      |       | Executive Vice  President and Chief Deposit Officer of Fox Chase Bank                                                                                             |

 

                Below is information regarding our executive officerswho are not also directors.  Unlessotherwise stated, each executive officer has held his or her current positionfor at least the last five years.  Agespresented are as of December 31, 2007.

 

                *Jerry D. Holbrook,*CMA, has served as Executive Vice President and Chief FinancialOfficer since 2005. From 2003 to 2005, Mr. Holbrook was Executive VicePresident, Chief Financial Officer and Corporate Secretary for NortheastPennsylvania Financial Corp. and its principal subsidiary First Federal Bank, apublic thrift institution. Previously, Mr. Holbrook served as ChiefFinancial Officer for E-Duction, Inc., a financial services start-up.Previously, he was Senior Vice President of Finance at First USA Bank (now partof J.P. Morgan Chase) where he managed the asset/liability management committeeand was responsible for securitization planning and debt issuances for a $70billion credit card portfolio. He began his banking career with WSFS FinancialCorp. where he served as Senior Vice President and Controller. Mr. Holbrookholds a B.S. in Accounting from the University of Kentucky. Age 52.

 

                    *Roger S. Deacon*, CPA, has served as Executive Vice President and Chief Accounting Officer since July 2007.   From 2005 to 2007, Mr. Deacon was Senior Vice President and Chief Financial Officer for NOVA Financial Holdings, Inc., a privately held bank holding company, and its principal subsidiary NOVA Savings Bank.   From January 2001 to September 2005, Mr. Deacon served as Chief Financial Officer for I4 Commerce, a privately held financial services company that provides services through its Bill Me Later product. Previously, he was Senior Vice President of Finance at First USA Bank (now part of J.P. Morgan Chase) where he was responsible for all financial planning for its credit card business, which grew from $2 billion to $70 billion in managed assets. He began his career with Price Waterhouse, where he served as an Audit Manager in their Financial Services Practice Group. Mr. Deacon holds a B.S. in Business Administration from Bucknell University, majoring in Accounting with a concentration in Finance. Age 44.

 

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*KeironG. Lynch*, CTP,has served as Executive Vice President and Chief Administrative Officer since2005. From 1999 to 2005, Mr. Lynch was Vice President of Global VisaCommerce Product Development for Visa International. Previously, he wasDirector of Delivery for The Source(2) Group, LLC, a joint venture betweenMellon Bank and MCI Systemhouse that provided outsourced accounts payable andaccounts receivables services to companies nationwide. Mr. Lynch held anumber of leadership positions with Mellon Bank over 17 years culminating asVice President and Director of New Product Development for Mellon Bank’s GlobalCash Management division. Mr. Lynch holds a B.A. in Economics from DukeUniversity. Age 50.

 

*DavidC. Kowalek* hasserved as Executive Vice President and Chief Credit Officer since 2005. From2004 to 2005, Mr. Kowalek was Senior Vice President and Chief CreditOfficer for First Federal Bank, a public thrift institution. From 1987 to 2004,Mr. Kowalek held various credit and lending leadership positions withWachovia Bank and predecessor financial institutions culminating as Senior LoanOfficer responsible for a multi-state region in the mid-Atlantic area. He beganhis career at Chase Manhattan Bank. Mr. Kowalek holds an MBA from AdelphiUniversity and a B.S. in Economics and Mathematics from Wilkes University. Age54.

 

*JamesV. Schermerhorn*has served as Executive Vice President and Chief Lending Officer since 2005.From 2004 to 2005, Mr. Schermerhorn was Managing Director of PennMezzanine Fund in King of Prussia, Pennsylvania. From 2003 to 2004, he wasRegional Vice President for Patriot Bank. Previously he was Executive VicePresident and Chief Lending Officer for Republic First Bank. Mr. Schermerhornheld a number of leadership positions with Mellon Bank over 29 years includingManaging Director of National Business Banking and Regional Middle MarketLending Manager for Mellon East. He began his career with Girard Bank. Mr. Schermerhornholds a B.A. in Economics and Accounting from Muhlenberg College and is agraduate of the Stonier Graduate School of Banking. Age 64.

 

*RichardJ. Fuchs* hasserved as Executive Vice President and Chief Deposit Officer since April 2006.Mr. Fuchs joined Fox Chase Bank after 30 years with The Bryn Mawr TrustCompany in Bryn Mawr, Pennsylvania where he was Senior Vice President of theCommunity Banking Division and from 2000 to 2005 also served as the Presidentand CEO of The Bryn Mawr Brokerage Company. Mr. Fuchs attended VillanovaUniversity where he majored in Civil Engineering and is a graduate of theStonier Graduate School of Banking. Age 58.

 

**ITEM 1A.               RISK FACTORS**

 

**If ourallowance for loan losses is insufficient to absorb losses in our loanportfolio, our earnings could decrease.**

 

At December 31,2007, our allowance for loan losses totaled $3.4 million, which represented0.75% of total loans, 412.21% of nonperforming loans and 152.97% of classifiedassets. We make various assumptions and judgments about the collectibility ofour loan portfolio, including the creditworthiness of our borrowers and thevalue of real estate and other assets serving as collateral for the repaymentof many of our loans.  In determining theamount of the allowance for loan losses, we review our loans and our loss anddelinquency experience, classified asset experience, industry delinquency andloss trends and regional and national economic conditions. If our assumptionsare incorrect, our allowance for loan losses may not be sufficient to coverlosses inherent in our loan portfolio, resulting in additions to ourallowance.  Material additions to ourallowance could materially decrease our net income.

 

Our regulators, as anintegral part of their examination process, periodically review our allowancefor loan losses and may require us to increase our allowance for loan losses byrecognizing additional provisions for loan losses charged to expense, or todecrease our allowance for loan losses by recognizing loan charge-offs, net ofrecoveries. Any such additional provisions for loan losses or charge-offs, asrequired by these regulatory agencies, could have a material adverse effect onour financial condition and results of operations.

 

**Ourrecent emphasis on multi-family and commercial real estate, commercial andconstruction lending may expose us to increased lending risks.**

 

At December 31,2007, $156.1 million, or 34.6%, of our loan portfolio consisted of multi-familyand commercial real estate, commercial and construction loans. We have recentlybegun to emphasize these types of lending and in 2006 hired a highlyexperienced team of commercial lending and credit and risk managementprofessionals to accelerate this initiative. These types of loans generallyexpose a lender to greater risk of non-

 

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payment and loss thanone- to four-family residential mortgage loans because repayment of the loans oftendepends on the successful operation of the property and the income stream ofthe borrowers. Such loans typically involve larger loan balances to singleborrowers or groups of related borrowers compared to one- to four-familyresidential mortgage loans. In addition, since such loans generally entailgreater credit risk than one- to four-family residential mortgage loans, we mayneed to increase our allowance for loan losses in the future to account for thelikely increase in probable incurred credit losses associated with the growthof such loans. Also, many of our multi-family and commercial real estate andland borrowers have more than one loan outstanding with us. Consequently, anadverse development with respect to one loan or one credit relationship canexpose us to a significantly greater risk of loss compared to an adversedevelopment with respect to a one- to four-family residential mortgage loan.

 

Moreover, we recentlybegan our initiative to originate commercial business loans. At December 31,2007, we had 50 commercial loans totaling $33.4 million in our portfolio.  Accordingly, much of our commercial loanportfolio is unseasoned and our limited experience in originating these typesof loans does not provide us with a significant payment history pattern withwhich to judge future collectibility. These loans will also not have beensubjected to unfavorable economic conditions. As a result, it may be difficultto predict the future performance of this part of our loan portfolio. Theseloans may have delinquency or charge-off levels above our historicalexperience, which could adversely affect our future performance. Further,commercial loans generally have larger balances and involve a greater risk thanone- to four-family residential mortgage loans. Accordingly, if we make anyerrors in judgment in the collectibility of our commercial loans, any resultingcharge-offs may be larger on a per loan basis than those incurred with ourresidential mortgage loan or consumer loan portfolios.

 

**Ourbusiness strategy, which includes asset growth, was recently initiated and hasnot yet had the time to be proven successful. Further, if we fail to grow orfail to manage our growth effectively, our financial condition and results ofoperations could be negatively affected.**

 

In June 2005, asrequired by the Cease and Desist Order issued by the Office of ThriftSupervision, we adopted a new three-year business strategy. Our strategyinvolves asset and liability growth, specifically in originatingcommercial-type loans and attracting favorably priced deposits, whilemaintaining strong asset quality. Achieving our growth targets requires us toattract customers that currently bank at other financial institutions in ourmarket, thereby increasing our share of the market. Our ability to successfullygrow will also depend on a variety of factors, including the market penetrationof our new commercial lenders, continued favorable market conditions, thecontinued availability of desirable business opportunities and the competitiveresponses from other financial institutions in our market areas. While webelieve we have the management resources and internal systems in place tosuccessfully manage our future growth, there can be no assurance growthopportunities will be available or that we will be successful in implementingour business strategies.  Further, itwill take time to implement our business strategy, especially for ourcommercial lenders to originate enough loans and business deposits to generatethe revenue needed to offset the associated expenses, including salaries andthe occupancy expense related to the new branches and loan production offices.We expect that it may take a significant period of time before we can achievethe intended results of our new business strategy. During the period while thebusiness plan is being implemented, our operating results may be negativelyimpacted. Further, there can be no assurance that our new strategic plan, evenif successfully implemented, will ultimately produce positive results.

 

**Ourdecrease in deposits may cause us to rely more heavily on wholesale fundingsources, which could increase our expenses and adversely affect our operatingmargins and profitability.**

 

Historically, weattempted to be the market leader in rates on longer-term money market accountsand certificates of deposit. However, in 2005, the new management, inconnection with the planned reductions in the balance sheet, offeredless-than-market rates as it attempted to allow the longer-term money marketaccounts and certificates of deposit to run-off, thereby shortening theduration of its liabilities. While deposit rates were raised to be competitivein the market in November 2005, deposits have continued to decrease.Deposits were $585.6 million at December 31, 2007 compared to $596.5million at December 31, 2006. While we believe that branch expansion andour emphasis on building transaction accounts will increase deposits, there canbe no guarantee if and when this will occur. Further, the considerable competitionfor deposits in our market makes it more difficult for us to obtain reasonablypriced deposits.

 

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If we are not able toincrease deposits, we will have to rely more heavily on wholesale sources tofund our asset growth than we have in the past, which historically are moreexpensive than retail sources of funding. If we are required to rely more heavilyon more expensive funding sources to support future growth, our revenues maynot increase proportionately to cover our costs. In this case, our operatingmargins and profitability would be adversely affected.

 

**Changesin interest rates could have a material adverse effect on our operations.**

 

The operations offinancial institutions such as ours are dependent to a large extent on netinterest income, which is the difference between the interest income earned oninterest-earning assets such as loans and investment securities and theinterest expense paid on interest-bearing liabilities such as deposits andborrowings.  Changes in the general level of interest rates canaffect our net interest income by affecting the difference between the weightedaverage yield earned on our interest-earning assets and the weighted averagerate paid on our interest-bearing liabilities, or interest rate spread, and theaverage life of our interest-earning assets and interest-bearingliabilities.  Changes in interest rates also can affect: (1) ourability to originate loans; (2) the value of our interest-earning assetsand our ability to realize gains from the sale of such assets; (3) ourability to obtain and retain deposits in competition with other availableinvestment alternatives; and (4) the ability of our borrowers to repayadjustable or variable rate loans. Interest rates are highly sensitive tomany factors, including government monetary policies, domestic andinternational economic and political conditions and other factors beyond ourcontrol.  Although we believe that the estimated maturities of ourinterest-earning assets currently are well balanced in relation to theestimated maturities of our interest-bearing liabilities, there can be noassurance that our profitability would not be adversely affected during anyperiod of changes in interest rates.

 

**If we donot achieve profitability on our new branches and loan production offices, thenew offices may reduce our earnings.**

 

We opened our Marmora,New Jersey branch office and two new loan production offices (with depositauthority) in the Philadelphia metropolitan area in 2006, one of which waslater closed when we opened our West Chester, Pennsylvania branch in 2007.  Numerous factors contribute to theperformance of a new branch or loan production facility, such as our ability toselect a suitable location, competition, our ability to hire and retainqualified personnel, and the effectiveness of our marketing strategy. It takestime for a new branch to generate significant deposits and loan volume tooffset expenses, some of which, like salaries and occupancy expense, arerelatively fixed costs.  Additionally,there can be no assurance that any of these new offices will ever becomeprofitable.  During the period of timebefore a branch office or loan production facility can become profitable,operating an office will negatively impact our net income.

 

**Weoperate in a highly regulated environment and we may be adversely affected bychanges in laws and regulations.**

 

Fox Chase MHC, Fox ChaseBancorp and Fox Chase Bank are subject to extensive regulation, supervision andexamination by the Office of Thrift Supervision and Fox Chase Bank is alsosubject to regulation and supervision by the Federal Deposit InsuranceCorporation, as insurer of its deposits. Such regulation and supervision governs the activities in which aninstitution and its holding company may engage, and are intended primarily forthe protection of the insurance fund and the depositors and borrowers of Fox ChaseBank rather than for holders of Fox Chase Bancorp common stock. Regulatoryauthorities have extensive discretion in their supervisory and enforcementactivities, including the imposition of restrictions on our operations, theclassification of our assets and determination of the level of our allowancefor loan losses. Any change in such regulation and oversight, whether in theform of regulatory policy, regulations, legislation or supervisory action, mayhave a material impact on our operations.

 

**A downturnin the local economy or a decline in real estate values could reduce ourprofits.**

 

Nearly all of our loansare secured by real estate or made to businesses in the Philadelphiametropolitan or Southern New Jersey market areas. As a result of this concentration,a downturn in the local economies in these areas could cause significantincreases in nonperforming loans, which would reduce our profits. In recentyears there has been a significant increase in real estate values in our marketareas. As a result of rising home prices, our loans have been wellcollateralized. A decline in real estate values could cause some of ourmortgage loans to become inadequately collateralized, which would expose us toa greater risk of loss.

 

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**Strongcompetition within our market areas could reduce our profits.**

 

We face intensecompetition in making loans, attracting deposits and attracting and retainingkey employees and relationship managers. In particular, several financialinstitutions have recently opened new offices or branches and numerous de novofinancial institutions have recently been formed in thePhiladelphia-Camden-Wilmington metropolitan statistical area. This competitionhas made it more difficult for us to make new loans and at times has forced usto offer higher deposit rates. It has also made it more difficult and costly toattract and hire employees with the level of expertise we require to implementour strategic plan. Price competition for loans and deposits might result in usearning less on our loans and paying more on our deposits, which would reducenet interest income. Also, additional compensation expense increasesnoninterest expense, reducing net income. Competition also makes it more difficultto grow loans and deposits. As of June 30, 2007, the most recent date forwhich information is available, we held 0.22% of the deposits inPhiladelphia-Camden-Wilmington metropolitan statistical area. Some of theinstitutions with which we compete have substantially greater resources andlending limits than we have and may offer services that we do not provide. Weexpect competition to increase in the future as a result of legislative,regulatory and technological changes and the continuing trend of consolidationin the financial services industry. Our profitability depends upon ourcontinued ability to compete successfully in our market areas.

 

**Our lowreturn on equity may negatively affect our stock price.**

 

Net income divided byaverage equity, known as “return on equity,” is a ratio many investors use tocompare the performance of a financial institution to its peers. Our return onequity was reduced due to the large amount of capital that we raised in our2006 stock offering and to expenses we are incurring in pursuing our growthstrategies, the costs of being a public company and added expenses associatedwith our employee stock ownership and equity incentive plans. Until we canincrease our net interest income and noninterest income, we expect our returnon equity to be below the median return on equity of 4.19% for the trailingtwelve months for all publicly traded thrifts, which may negatively affect thevalue of our common stock.  For thetwelve months ended December 31, 2007, our return on equity was 1.54%.

 

**Expensesfrom operating as a public company and from equity-based benefit plans willcontinue to adversely affect our profitability.**

 

Our noninterest expensesare impacted as a result of the financial, accounting, legal and various otheradditional expenses associated with operating as a public company.  We also recognize additional annual employeecompensation and benefit expenses stemming from the shares that are purchasedor granted to employees and executives under the employee stock ownership andequity incentive plans.  These additionalexpenses adversely affect our profitability. We recognize expenses for our employee stock ownership plan when sharesare committed to be released to participants’ accounts. We recognizecompensation expense for restricted stock awards and stock options over thevesting period of awards made to recipients.

 

**FoxChase MHC’s majority control of our common stock will enable it to exercisevoting control over most matters put to a vote of stockholders and will preventstockholders from forcing a sale or a second-step conversion transaction youmay find advantageous.**

 

Fox Chase MHC ownsa majority of Fox Chase Bancorp’s common stock and, through its board ofdirectors, is able to exercise voting control over most matters put to a voteof stockholders. The same directors and officers who will manage Fox ChaseBancorp and Fox Chase Bank will also manage Fox Chase MHC. As a federallychartered mutual holding company, the board of directors of Fox Chase MHC mustensure that the interests of depositors of Fox Chase Bank are represented andconsidered in matters put to a vote of stockholders of Fox Chase Bancorp.However, you should be aware that the votes cast by Fox Chase MHC may not be inyour personal best interests as a stockholder. For example, Fox Chase MHC mayexercise its voting control to defeat a stockholder nominee for election to theboard of directors of Fox Chase Bancorp. Moreover, Fox Chase MHC’s ability toelect the board of directors of Fox Chase Bancorp restricts the ability of theminority stockholders of Fox Chase Bancorp to effect a change of control ofmanagement.  In addition, stockholderswill not be able to force a merger or second-step conversion transaction withoutthe consent of Fox Chase MHC as such transactions also require the approval ofat least two-thirds of all outstanding voting stock, which can only be achievedif Fox Chase MHC voted to approve such transactions. Some stockholders maydesire a sale or merger transaction, since stockholders typically receive apremium for their shares, or a second-step conversion transaction, since fully 

 

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converted institutionstend to trade at higher multiples than mutual holding companies. Stockholderscould, however, prevent a second step conversion or the implementation ofequity incentive plans as current Office of Thrift Supervision regulations andpolicies require the approval of such matters by the stockholders other thanFox Chase MHC.

 

**Officeof Thrift Supervision policy on remutualization transactions could prohibitacquisition of Fox Chase Bancorp, which may adversely affect our stock price.**

 

Current Office of ThriftSupervision regulations permit a mutual holding company to be acquired by amutual institution in a remutualization transaction. The possibility of aremutualization transaction has recently resulted in a degree of takeoverspeculation for mutual holding companies that is reflected in the per shareprice of mutual holding companies’ common stock. However, the Office of ThriftSupervision has issued a policy statement indicating that it viewsremutualization transactions as raising significant issues concerning disparatetreatment of minority stockholders and mutual members of the target entity andraising issues concerning the effect on the mutual members of the acquiringentity. Under certain circumstances, the Office of Thrift Supervision intendsto give these issues special scrutiny and reject applications providing for theremutualization of a mutual holding company unless the applicant can clearlydemonstrate that the Office of Thrift Supervision’s concerns are not warrantedin the particular case. Should the Office of Thrift Supervision prohibit orotherwise restrict these transactions in the future, our per share stock pricemay be adversely affected.

 

**ITEM 1B.****                                           ****UNRESOLVED STAFF COMMENTS**

 

**               **None.

 

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** **

**ITEM 2.****                                                    ****PROPERTIES**

 

                We conduct our business through our main office andbranch offices.  The following table setsforth certain information relating to these facilities as of December 31,2007.

 
| **Location**                                             | ** ** | **Year  Opened** | ** ** | **Owned/  Leased** | ** ** | **Date of Lease  Expiration** | ** ** | **Net Book Value********as of****December 31, 2007** | ** ** |
|----------------------------------------------------------|------------|------------------|------------|--------------------|------------|-------------------------------|------------|-----------------------------------------------------------|------------|
|                                                     | ** ** | ** **       |       |               |       |                          |       | **(In  thousands)**                                       |       |
| **Main Office:**                                         |       |             |       |               |       |                          |       |                                                      |       |
| ** **                                               |       |             |       |               |       |                          |       |                                                      |       |
| 4390 Davisville Road  Hatboro, Pennsylvania              |       | 1996             |       | Owned              |       | —                        |       | $                                                         | 2,170      |   |
|                                                     |       |             |       |               |       |                          |       |                                                      |       |
| **Branch Offices:**                                      |       |             |       |               |       |                          |       |                                                      |       |
| ** **                                               |       |             |       |               |       |                          |       |                                                      |       |
| 401 Rhawn Street  Philadelphia, Pennsylvania             |       | 1956             |       | Owned              |       | —                        |       | 625                                                       |       |
|                                                     |       |             |       |               |       |                          |       |                                                      |       |
| 815 Bustleton Pike  Richboro, Pennsylvania               |       | 1985             |       | Owned              |       | —                        |       | 505                                                       |       |
|                                                     |       |             |       |               |       |                          |       |                                                      |       |
| 1 Fitzwatertown Road  Willow Grove, Pennsylvania         |       | 1995             |       | Owned              |       | —                        |       | 410                                                       |       |
|                                                     |       |             |       |               |       |                          |       |                                                      |       |
| 1041 York Road  Warminster, Pennsylvania                 |       | 2000             |       | Owned              |       | —                        |       | 854                                                       |       |
|                                                     |       |             |       |               |       |                          |       |                                                      |       |
| 921 West Avenue  Ocean City, New Jersey                  |       | 2000             |       | Owned              |       | —                        |       | 496                                                       |       |
|                                                     |       |             |       |               |       |                          |       |                                                      |       |
| 6059 Black Horse Pike  Egg Harbor Township, New Jersey   |       | 2000             |       | Owned              |       | —                        |       | 884                                                       |       |
|                                                     |       |             |       |               |       |                          |       |                                                      |       |
| 5871 Lower York Road  Lahaska, Pennsylvania              |       | 2004             |       | Owned              |       | —                        |       | 1,461                                                     |       |
|                                                     |       |             |       |               |       |                          |       |                                                      |       |
| 8 U.S. Route 9 South  Marmora, New Jersey                |       | 2006             |       | Owned              |       | —                        |       | 1,625                                                     |       |
|                                                     |       |             |       |               |       |                          |       |                                                      |       |
| 210 West State Street (1)  Media, Pennsylvania           |       | 2006             |       | Leased             |       | 2009                          |       | 26                                                        |       |
|                                                     |       |             |       |               |       |                          |       |                                                      |       |
| 137 North High Street  West Chester, Pennsylvania        |       | 2007             |       | Owned              |       | —                        |       | 1,822                                                     |       |
|                                                     |       |             |       |               |       |                          |       |                                                      |       |
| **Administrative Offices:**                              |       |             |       |               |       |                          |       |                                                      |       |
|                                                     |       |             |       |               |       |                          |       |                                                      |       |
| 510 East Township Line Road (2)  Blue Bell, Pennsylvania |       | 2007             |       | Leased             |       | 2012                          |       | 112                                                       |       |
|                                                     |       |             |       |               |       |                          |       |                                                      |       |
| **Other Properties:**                                    |       |             |       |               |       |                          |       |                                                      |       |
|                                                     |       |             |       |               |       |                          |       |                                                      |       |
| 811 Bustleton Pike (3)  Richboro, Pennsylvania           |       | —           |       | Owned              |       | —                        |       | 44                                                        |       |
|                                                     |       |             |       |               |       |                          |       |                                                      |       |
| Absecon, New Jersey (4)                                  |       | —           |       | Owned              |       | —                        |       | 1,957                                                     |       |
|                                                          |            |                  |            |                    |            |                               |            |                                                           |            |  |

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(1)                We have an option to renew this lease for twoadditional one-year periods beginning April 2008.  During January 2008, we exercised thefirst option and extended the lease for an additional one year period to April 2009.

 

(2)                This property houses administrative, operational andinformation technology personnel.  Wehave an option to renew the lease for one additional five-year period.

 

(3)     This property includes a residence with twoapartments, which are leased to individuals.

 

(4)                This property is undeveloped land that may bedeveloped for a future branch.

 

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** **

**ITEM 3.**                                                     LEGALPROCEEDINGS

** **

Periodically,there have been various claims and lawsuits against us, such as claims toenforce liens, condemnation proceedings on properties in which we hold securityinterests, claims involving the making and servicing of real property loans andother issues incident to our business. We are not a party to any pending legal proceedings that we believewould have a material adverse effect on our financial condition, results ofoperations or cash flows.

 

On April 28, 2006, Gregory S. Cipa, theformer President and Chief Executive Officer of Fox Chase Bank, filed acomplaint against Fox Chase Bank in the Civil Division of the Court of CommonPleas of Bucks County, Pennsylvania.  In May 2006,Fox Chase Bank moved the case to federal court, answered the complaint andfiled a counterclaim. Mr. Cipa sought monetary damages in excess of$900,000 and the payment of litigation costs in connection with allegationsthat the Bank failed to pay Mr. Cipa certain employment benefits that heclaimed to have earned while serving as President and Chief Executive Officerof the Bank.  In December 2007, theBank settled this litigation by paying Mr. Cipa and his legal counsel$150,000.

 

**ITEM 4.****                                                    ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

                None.

 

# **PART II**

# ** **

**ITEM 5.****                                                    ****MARKET FOR REGISTRANT’S COMMONEQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

**Marketfor Common Equity and Related Stockholder Matters**

 

                The Company’s common stock islisted on the Nasdaq Stock Market (“Nasdaq”) under the trading symbol “FXCB.”  The following table sets forth the quarterlyhigh and low sales prices of Fox Chase Bancorp’s common stock from October 2,2006, the first day of trading of the common stock, through December 31,2007, as reported by Nasdaq.  The Companyhas not paid any dividends to its stockholders to date.  See Item 1, *“Business—Regulationand Supervision—Regulation of Federal Savings Associations— Limitation onCapital Distributions” and note 11 in* the notes to the consolidatedfinancial statements for more information relating to restrictions ondividends.  As of March 10, 2008,the Company had approximately 1,010 holders of record of common stock.

 

| **2007:**      | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
|           |       |     |       |    |       |
| First Quarter  |       | $        | 14.32      |    | $          | 13.05 |   |
| Second Quarter |       | $        | 14.07      |    | $          | 13.03 |   |
| Third Quarter  |       | $        | 13.74      |    | $          | 10.36 |   |
| Fourth Quarter |       | $        | 13.15      |    | $          | 10.90 |   |

 

| **2006:**      | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
|           |       |     |       |    |       |
| First Quarter  |       | N/A      |       | N/A     |       |
| Second Quarter |       | N/A      |       | N/A     |       |
| Third Quarter  |       | N/A      |       | N/A     |       |
| Fourth Quarter |       | $        | 13.85      |    | $          | 12.75 |   |
|                |            |          |            |         |            |  |  |

 

23

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**StockPerformance Graph**

 

                The following graph compares thecumulative total return of the Company common stock with the cumulative totalreturn of the SNL Mid-Atlantic Thrift Index and the Index for the Nasdaq StockMarket (U.S. Companies, all SIC).  Thegraph assumes that $100 was invested on October 2, 2006, the first day oftrading of the common stock.  Cumulativetotal return assumes reinvestment of all dividends.

 

 
| ** **                         | ** ** | **Period Ending** | ** ** |
|------------------------------------|------------|-------------------|------------|
| **Index**                          | ** ** | **10/02/06**      | ** ** | **12/31/06** | ** ** | **03/31/07** | ** ** | **06/30/07** | ** ** | **09/30/07** | ** ** | **12/31/07** | ** ** |
| Fox Chase Bancorp, Inc. (MHC) |       | $                 | 100.00     |   | $ | 104.25 |   | $ | 104.09 |   | $ | 104.25 |   | $ | 102.24 |   | $ | 88.03 |   |
| NASDAQ Composite                   |       | 100.00            |       | 107.94 |   | 108.22 |   | 116.34 |   | 120.73 |   | 118.53 |   |
| SNL Mid-Atlantic Thrift Index      |       | 100.00            |       | 107.97 |   | 106.42 |   | 97.59 |   | 100.56 |   | 88.89 |   |
|                                    |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

24

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**Purchasesof Equity Securities**

 

           The following table provides certaininformation with regard to shares repurchased by the Company in the fourthquarter of 2007.

 
| **Period**                                           | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price Paid  Per Share** | ** ** | **Total Number  of Shares  Purchased  as Part of  Publicly  Announced Plans  or  Programs** | ** ** | **Maximum  Number of Shares  that May Yet be  Purchased Under  the Plans or  Programs** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
|                                                 |       |                                    |       |                               |       |                                                                                             |       |                                                                                         |       |
| October 1, 2007 through October 31, 2007   |       | —                                  |       | —                             |       | —                                                                                           |       | —                                                                                       |       |
|                                                 |       |                                    |       |                               |       |                                                                                             |       |                                                                                         |       |
| November 1, 2007 through November 30, 2007 |       | —                                  |       | —                             |       | —                                                                                           |       | —                                                                                       |       |
|                                                 |       |                                    |       |                               |       |                                                                                             |       |                                                                                         |       |
| December 1, 2007 through December 31, 2007 |       | 327,000                                 |       | $                                  | 12.00      |                                                                                             | 327,000    |                                                                                         | —     |   |
|                                                 |       |                                    |       |                               |       |                                                                                             |       |                                                                                         |       |
| Total (1)                                            |       | 327,000                                 |       | $                                  | 12.00      |                                                                                             | 327,000    |                                                                                         | —     |   |

----

(1)  On November 30, 2007, the Company announced a stockrepurchase program under which the Company may repurchase up to 327,000 sharesof its common stock.  On December 12,2007, the Company announced that it had purchased all of the shares under thatprogram.

 

25

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**ITEM 6.****                                                    ****SELECTED FINANCIAL DATA**

 
| ** **                      | ** ** | **At December 31,** | ** ** |
|---------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **2007**                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(In thousands)**       | ** ** |
| **Financial Condition Data:**   |       |                     |       |   |   |   |   |   |   |   |   |
| Total assets                    |       | $                        | 812,919    |   | $ | 756,985 |   | $ | 781,291 |   | $ | 899,805 |   | $ | 821,118 |   |
| Cash and cash equivalents       |       | 31,275                   |       | 134,441 |   | 46,086 |   | 43,722 |   | 32,022 |   |
| Interest-earning time deposits  |       | —                   |       | — |   | 600 |   | 3,174 |   | 4,392 |   |
| Securities available-for-sale   |       | 296,304                  |       | 228,432 |   | 329,504 |   | 330,199 |   | 335,388 |   |
| Loans receivable, net           |       | 447,035                  |       | 355,617 |   | 366,393 |   | 482,606 |   | 414,438 |   |
| Loans held for sale             |       | —                   |       | 1,194 |   | 357 |   | — |   | — |   |
| Deposits                        |       | 585,560                  |       | 596,534 |   | 682,307 |   | 805,250 |   | 723,838 |   |
| Federal Home Loan Bank advances |       | 80,000                   |       | 30,000 |   | 30,000 |   | 30,000 |   | 30,000 |   |
| Other borrowed funds            |       | 20,000                   |       | — |   | — |   | — |   | — |   |
| Total stockholders’ equity |       | 122,371                  |       | 125,645 |   | 63,521 |   | 59,190 |   | 62,331 |   |
|                                 |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                    | ** ** | **For the  Year Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                    | ** ** | **(In  thousands)**                       | ** ** |
| **Operating Data:**                                           |       |                                      |       |   |   |   |   |   |   |   |   |
| Interest income                                               |       | $                                         | 41,057     |   | $ | 37,177 |   | $ | 37,601 |   | $ | 37,566 |   | $ | 35,533 |   |
| Interest expense                                              |       | 22,250                                    |       | 20,459 |   | 20,697 |   | 19,693 |   | 20,662 |   |
| Net interest income                                           |       | 18,807                                    |       | 16,718 |   | 16,904 |   | 17,873 |   | 14,871 |   |
| Provision (credit) for loan losses                            |       | 425                                       |       | (5,394 | ) | (6,025 | ) | 12,282 |   | 30 |   |
| Net interest  income after provision (credit) for loan losses |       | 18,382                                    |       | 22,112 |   | 22,929 |   | 5,591 |   | 14,841 |   |
| Noninterest income                                            |       | 2,696                                     |       | 2,073 |   | 1,214 |   | 2,279 |   | 3,405 |   |
| Noninterest expenses                                          |       | 18,688                                    |       | 19,867 |   | 15,208 |   | 11,353 |   | 10,958 |   |
| Income (loss) before income taxes                             |       | 2,390                                     |       | 4,318 |   | 8,935 |   | (3,483 | ) | 7,288 |   |
| Income tax provision (benefit)                                |       | 460                                       |       | 684 |   | 2,975 |   | (1,595 | ) | 2,497 |   |
| Net income (loss) (1)(2)                                      |       | $                                         | 1,930      |   | $ | 3,634 |   | $ | 5,960 |   | $ | (1,888 | ) | $ | 4,791 |   |
| Earnings per share (1)(2)                                     |       | $                                         | 0.14       |   | $ | 0.14 |   | — |   | — |   | — |   |

----

(1)                                  On September 29, 2006, Fox ChaseBancorp, Inc. completed its initial public offering of common stock.Earnings per share information for 2006 is only for September 29, 2006through December 31, 2007 due to the Bank’s reorganization into the mutualholding company form and the Company’s related initial public offering.  Basic and diluted earnings per share are thesame for 2007 and 2006.

 

(2)                                  Net income and the efficiency ratio for2006 reflect a charge of $1.5 million for the contribution to the Fox ChaseBank Charitable Foundation done in connection with our initial public offering.

 

26

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| ** **                                                                                                 | ** ** | **At or for the Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2007**                                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Performance Ratios:**                                                                                    |       |                                           |       |   |   |   |   |   |   |   |   |
| Return on average assets                                                                                   |       | 0.26                                           | %          | 0.49 | % | 0.71 | % | (0.21 | )% | 0.59 | % |
| Return on average equity                                                                                   |       | 1.54                                           |       | 4.59 |   | 9.50 |   | (2.82 | ) | 7.64 |   |
| Interest rate spread (1)                                                                                   |       | 1.85                                           |       | 1.90 |   | 1.78 |   | 1.92 |   | 1.61 |   |
| Net interest margin (2)                                                                                    |       | 2.60                                           |       | 2.33 |   | 2.05 |   | 2.11 |   | 1.87 |   |
| Noninterest expense to average assets                                                                      |       | 2.48                                           |       | 2.66 |   | 1.80 |   | 1.29 |   | 1.34 |   |
| Efficiency ratio (3)                                                                                       |       | 91.77                                          |       | 105.78 |   | 79.70 |   | 56.34 |   | 59.96 |   |
| Average  interest-earning assets to average interest-bearing liabilities                                   |       | 123.69                                         |       | 113.46 |   | 109.08 |   | 107.69 |   | 109.68 |   |
| Average equity to average assets                                                                           |       | 16.66                                          |       | 10.58 |   | 7.44 |   | 7.59 |   | 7.67 |   |
| ** **                                                                                                 | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Capital Ratios (4):**                                                                                    |       |                                           |       |   |   |   |   |   |   |   |   |
| Tier 1 capital (to adjusted assets)                                                                        |       | 12.03                                          |       | 12.49 |   | 8.40 |   | 6.66 |   | 7.54 |   |
| Tier 1 capital (to risk-weighted assets)                                                                   |       | 21.78                                          |       | 26.79 |   | 17.76 |   | 12.92 |   | 15.76 |   |
| Total risk-based capital (to risk-weighted assets)                                                         |       | 22.54                                          |       | 27.62 |   | 19.02 |   | 14.17 |   | 16.29 |   |
| ** **                                                                                                 | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Asset Quality Ratios:**                                                                                  |       |                                           |       |   |   |   |   |   |   |   |   |
| Nonperforming loans as a percent of total loans                                                            |       | 0.18                                           |       | 0.90 |   | 1.36 |   | 0.29 |   | 0.32 |   |
| Allowance for loan losses as a percent of total  loans                                                     |       | 0.75                                           |       | 0.82 |   | 2.22 |   | 2.89 |   | 0.50 |   |
| Allowance for  loan losses as a percent of nonperforming loans and accruingloans 90 days or  more past due |       | 412.21                                         |       | 91.44 |   | 163.90 |   | 997.99 |   | 159.29 |   |
| Net charge-offs  (recoveries) to average outstanding loans during the period                               |       | —                                         |       | — |   | — |   | — |   | — |   |
|                                                                                                       |       |                                           |       |   |   |   |   |   |   |   |   |
| **Other Data:**                                                                                            | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number of:                                                                                                 |       |                                           |       |   |   |   |   |   |   |   |   |
| Deposit accounts                                                                                           |       | 52,817                                         |       | 55,957 |   | 61,349 |   | 66,800 |   | 65,796 |   |
| Offices                                                                                                    |       | 11                                             |       | 11 |   | 8 |   | 8 |   | 7 |   |

----

(1)                                  Represents the difference between theweighted average yield on average interest-earning assets and the weightedaverage cost of interest-bearing liabilities.

 

(2)                                  Represents net interest income as apercent of average interest-earning assets.

 

(3)                                  Represents noninterest expense divided bythe sum of net interest income and noninterest income, excluding gains orlosses on the sale of securities, premises and equipment and assets acquiredthrough foreclosure.  For 2006 reflects acharge of $1.5 million for the contribution to the Fox Chase Bank CharitableFoundation done in connection with our initial public offering.

 

(4)                                  Ratios are for Fox Chase Bank.

 

27

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** **

**ITEM 7.****                                                    ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND**

**RESULTSOF OPERATION**

 

**Overview**

 

     The following describes various componentsthat affect our results of operations.

 

***Income.***Our primary source of pre-tax income is net interestincome. Net interest income is the difference between interest income, which isthe income that we earn on our loans, securities and interest-earning depositsat other banks, and interest expense, which is the interest that we pay on ourdeposits, Federal Home Loan Bank borrowings and other collateralizedborrowings. To a much lesser extent, we also recognize pre-tax income fromservice charges on deposit accounts and loans, from the increase in cashsurrender value of our bank-owned life insurance and from the sale of loans,securities and other assets, as applicable.

 

***Provision for Loan Losses.*** The allowance for loan losses ismaintained at a level representing management’s best estimate of known andinherent losses in the loan portfolio, based upon management’s evaluation ofthe portfolio’s collectibility. The allowance is established through theprovision for loan losses, which is charged against income. Charge-offs, ifany, are charged to the allowance. Subsequent recoveries, if any, are creditedto the allowance. Management estimates the allowance balance required usingloss experience in particular segments of the portfolio, trends and absolutelevels of classified and criticized loans, trends and absolute levels indelinquent loans, trends in risk ratings, trends in industry charge-offs byparticular segments and changes in existing general economic and businessconditions affecting our lending areas and the national economy.  Allocation of the allowance may be made forspecific loans, but the entire allowance is available for any loan that, inmanagement’s judgment, should be charged off.

 

***Expenses.*** The noninterest expenses we incur in operating ourbusiness consist of salaries, benefits and other compensation expenses,occupancy and equipment expenses, data processing costs, professional fees,marketing expenses, Federal Deposit Insurance Corporation premiums and variousother miscellaneous expenses.

 

Salaries, benefits andother compensation consists primarily of salaries and wages paid to ouremployees, payroll taxes, expenses for health insurance, retirement plans,director and committee fees and other employee benefits, including employer 401(k) plancontributions, employee stock ownership plan allocations and equity incentiveawards, such as stock options and shares of restricted stock.  Our equity incentive plan was approved bystockholders and implemented in 2007.

 

Occupancy expenses, whichare the fixed and variable costs of buildings such as depreciation charges,maintenance, real estate taxes and costs of utilities. Depreciation of premisesis computed using the straight-line method based on the useful lives of therelated assets, which range from ten to 39 years for buildings and premises.Leasehold improvements are amortized over the shorter of the useful life of theasset or the term of the lease.

 

Furniture and equipmentexpenses, which are the fixed and variable costs of furniture and equipment,consist primarily of depreciation charges, furniture and equipment expenses andmaintenance. Depreciation of equipment is computed using the straight-linemethod based on the useful lives of the related assets, which range from threeto seven years for furniture, fixtures and equipment.

 

Data processing costsinclude fees paid to our third-party data processing service and ATM expense.

 

Professional fees includefees paid to our independent auditors, our attorneys and consultants whoassisted with implementation of Sarbanes-Oxley controls and procedures in 2007and to other professionals that we used to assist us with our interest raterisk management, reviews of our loan portfolio and costs associated with beinga public company.

 

Marketing expensesinclude expenses for advertisements, promotions and premium items and publicrelations expenses.

 

Federal Deposit InsuranceCorporation premiums are payments we make to the Federal Deposit InsuranceCorporation for insurance of our deposit accounts.

 

28

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Other expenses includeexpenses for supplies, telephone and postage, contributions and donations,regulatory assessments, insurance premiums and other fees and expenses.

 

**OperatingStrategy**

 

***Operating Strategy from 2003 to 2005.*** Historically, we originated primarily one- to four-family residentialreal estate loans, which were generally funded by higher-priced term maturitydeposits. In 2003, then-current management determined to emphasize multi-familyand commercial real estate lending and construction lending, primarily in thesouthern New Jersey shore area where it had opened branch offices. Thisinitiative led to a significant increase in loans from $414.4 million at December 31,2003 to $482.6 million at December 31, 2004. Also, we continued to offerhigher rates on our deposits to fund the loan growth. As a result, depositsincreased from $723.8 million at December 31, 2003 to $805.3 million at December 31,2004. However, when these loans were originated, they were not properlyunderwritten. Also, loan settlements were not typically attended by anyonerepresenting us. As a result, there were instances where the requirements ofthe loan commitment, including additional required collateral, were notobtained. Further, construction loan disbursements were made without adequatecontrols. Additionally, the former management of Fox Chase Bank failed to adopta risk rating system and update its allowance for loan losses policy to accountfor the new types of loans that were being originated. Further, managementfailed to properly review and classify the new types of loans. This type oflending and the absence of adequate underwriting, credit and collectionpolicies and internal controls contributed to the issuance by the Office ofThrift Supervision of a Cease and Desist Order on June 6, 2005.Additionally, it caused criticized and classified assets to increase from$775,000 at December 31, 2003 to $90.7 million at December 31, 2004.While Fox Chase Bank did not incur any losses on these loans during the sameperiod, it did record a $12.3 million provision for loan losses in 2004, whichcontributed to a net loss of $1.9 million in 2004.

 

***Operating Strategy During Pendency of Cease and Desist Order.*** On June 6, 2005, we consented tothe issuance of an Order to Cease and Desist by the Office of ThriftSupervision. In addition to citing numerous violations, the Cease and DesistOrder required us to discontinue a number of practices, and specificallyordered us to take certain actions. We were ordered to:

 
|   | · |   | discontinue originating  certain types of loans;                                                                                                                                                                                                                                                                                |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · |   | restrict our asset  growth to an amount not to exceed net interest credited on deposit  liabilities;                                                                                                                                                                                                                            |
|   | · |   | hire a new chief  executive officer;                                                                                                                                                                                                                                                                                            |
|   | · |   | improve our board’s  oversight over lending and risk exposure, including assessing our capital  position and exposure to higher-risk loans;                                                                                                                                                                                |
|   | · |   | develop a new business plan with the goal to  transition our operations into activities that (1) entail less risk;  (2) provide more stable and sustainable sources of core income; and  (3) are supported by capital level commensurate with the risks of our  operations and composition of our balance sheet; |
|   | · |   | improve our loan  underwriting and appraisal policies, loans-to-one borrower compliance and  internal asset review procedures;                                                                                                                                                                                                  |
|   | · |   | enhance our credit  administration, board management and governance; and                                                                                                                                                                                                                                                        |
|   | · |   | review and analyze our  loan portfolio and, as appropriate, review our allowance for loan losses.                                                                                                                                                                                                                               |

 

Following the issuance ofthe Cease and Desist Order, most of our senior management and Board ofDirectors were replaced. The new management team and board launched initiativesto collect loans at the New Jersey shore area, gather sufficient borrowerinformation to properly document existing loans when possible, assign properrisk grades to loans following newly implemented credit risk assessmentpolicies, establish and maintain well documented estimates for the allowancefor loan losses, and establish appropriate underwriting, credit administration,and prudent credit risk management policies and procedures. As a result ofthese actions and continued favorable economic conditions, criticized andclassified assets were reduced from $90.7 million at December 31, 2004 to$2.2 million at December 31, 2007. As a result of these actions and thereduction in criticized and classified assets, the allowance for loan losseswas reduced, which resulted in the $6.0 million and $5.4 million credit to theprovision for loan losses during 2005 and 2006, respectively.

 

Additionally, initiativeswere undertaken to strengthen the system of internal controls, improve policiesand procedures and upgrade the quality and experience of management in allareas of the Company. Also, to comply with the Order, we improved our Board’soversight over lending and risk exposure, developed a new business plan,improved our loan underwriting and appraisal policies, loans-to-one borrowercompliance and internal asset review procedures, enhanced our creditadministration and Board management and governance. In addition, we reviewed 

 

29

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and analyzed our loanportfolio and, as appropriate, reviewed our allowance for loan losses. As aresult of these efforts, effective June 28, 2006, the Order to Cease andDesist was terminated.

 

As a result of the Ceaseand Desist Order and the prohibition on growing our asset size and specificallyfrom originating various types of loans and from loan sales of one to-four-family residential loans, which was done to manage interest rate risk, ourloan portfolio and asset size decreased. As a result, our funding needsdecreased, so we offered lower rates on our longer-term money market accountsand certificates of deposit to shorten the duration of our liabilities anddecrease our deposits.

 

***Current Operating Strategy.***  The newmanagement and board reassessed our strategic direction and our opportunitiesfor profitability. The determination was made to capitalize on our 140-yeartradition of strong personalized customer service, which we believedistinguishes us from the large regional banks that operate in our market area.At the same time, the decision was made to differentiate ourselves from manysmall community banks in our market by leveraging the strong commercial andbusiness expertise of our new management team and focusing on businesses in ourmarket area. Further, we believe that our capital, which was significantlyincreased through the stock offering, allows us to make loans of a size notpermitted by many of the de novo financial institutions in our market area, whoare restrained by smaller capital levels and smaller loans to one borrowerlimits. Thus, as discussed in more detail below, we intend to continue toexpand our product offerings, diversify our lending operations and expand ourfootprint and market presence in the metropolitan Philadelphia area and in thesouthern New Jersey shore area in an attempt to increase assets, whilemaintaining sound asset quality and enhancing profitability.

 

Historically, weattempted to be the market leader in rates on longer-term money market accountsand certificates of deposit. However, in 2005, the new management, inconnection with the planned reductions in the levels of assets, offered lowerdeposit rates as it attempted to allow longer-term money market accounts andcertificates of deposit to decrease, thereby shortening the duration ofliabilities. While deposit rates were raised to be competitive in the marketsince late 2005, deposits have continued to decrease. Deposits were $585.6million at December 31, 2007 compared to $596.5 million at December 31,2006. We believe that branch expansion and our emphasis on building transactionaccounts, both more fully described below, will increase deposits. However, theconsiderable competition for deposits in our market will also make it moredifficult for us to obtain reasonably priced deposits. To the extent that ourretail funding sources do not provide for adequate funding, we will rely moreheavily on wholesale funding in addition to retail funds to leverage thebalance sheet and accelerate growth.

 

Our mission is to becomethe leading relationship-based business and consumer bank in our market areasby delivering financial products and services tailored to our clients’ needs.We plan to continue our strategy of:

 
|   | · |   | pursuing opportunities  to increase commercial lending in our primary market area;                                                       |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                     |
|   | · |   | building profitable  business and consumer relationships with an emphasis on growing transaction  deposit accounts and deposit balances; |
|   |   |   |                                                                                                                                     |
|   | · |   | increasing income by  expanding our product offerings and continuing to emphasize customer service;  and                                 |
|   |   |   |                                                                                                                                     |
|   | · |   | expanding our footprint  and market presence through opening additional branch offices.                                                  |

 

***Pursuing opportunities to increase commercial lending in ourprimary market area***

 

At December 31,2007, $109.6 million, or 24.3%, of our loan portfolio consisted of multi-familyand commercial real estate loans and commercial business loans.  We intend to emphasize these types of lendingand in 2006 hired a highly experienced team of commercial lending and commercialcredit and risk management professionals to accelerate this initiative. We mayhire additional commercial lenders and cash management professionals in thefuture to increase this type of lending. Loans secured by multi-family and commercial real estate and businessassets are generally larger and involve a greater degree of risk than one-tofour-family residential mortgage loans. Consequently, multi-family andcommercial real estate and commercial business loans typically have higheryields, which increase our net interest margin and net interest spread. Inaddition, these loans are beneficial for interest rate risk management becausethey typically have shorter terms and adjustable interest rates. There are manymulti-family and commercial real estate properties and commercial businesseslocated in our market area, and with the additional capital raised in theoffering we may pursue the larger lending relationships associated 

 

30

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with these opportunities,while continuing to originate any such loans in accordance with what we believeare our conservative underwriting guidelines.

 

Commercial lendinggenerally exposes a lender to greater risk of non-payment and loss than one- tofour-family residential mortgage loans. To mitigate against the potential forthis loss, in the past year, we have added significant commercial creditexpertise through the hiring of our chief credit officer, chief administrativeofficer, chief lending officer and a credit risk manager. Additionally, we havecreated and revamped where necessary, our commercial lending credit-relatedpolicies and procedures. For a discussion of the risks related to ourcommercial loan portfolio, see Item 1, “*Business—LoanUnderwriting Risks.*”

 

***Building profitable business and consumer relationships withan emphasis on growing transaction deposit accounts and deposit balances***

 

We believe a solidbanking relationship is best expressed in the form of the primary transactionaccount. For consumers, this is the household checking account from which theypay their bills. For businesses, it is one or more operating accounts andrelated cash management services. The primary transaction account isdistinguished from other financial services in that it has no maturity orpayoff. We intend to focus our resources on growing profitable business andconsumer relationships built upon the primary transaction account. This isbecoming increasingly difficult. More competitors recognize the value of theprimary consumer and business transaction account and more automated paymentlinks in the form of direct debits and direct deposits make it increasinglyinconvenient to switch from one bank to another. Yet there remain opportunitiesto attract clients through exceptional service and convenience.

 

There are many factorsthat affect the profitability of client relationships, some of which are beyondour control. We use a number of business disciplines to promote profitablerelationships that include who we target to become clients, how we price ourproducts and services, how we underwrite and administer loans, how we identify,measure, monitor and manage risk, how we deploy our capital and how we manageand control costs. These measures combine to promote profitable relationships.

 

***Increasing income by expanding our product offerings andcontinuing to emphasize customer service***

 

We are striving to becomea full-service financial services company offering our customers a broad rangeof loan and deposit products. On the lending side, we have a broad offering ofcommercial loan products, including unsecured lines of credit, letters ofcredit, commercial mortgage loans, revolving credit facilities and commercialconstruction loans. On the deposit side, we expanded our deposit products andservices, including offering on-line bill payment and a suite of cashmanagement products and custodial services.

 

***Expanding our footprint and market presence through openingadditional branch offices***

 

In 2006, we opened a newoffice in Marmora, New Jersey.  Inaddition, we opened loan production offices (with deposit authority) in Extonand Media, Pennsylvania during 2006. The Exton loan production office wasconsolidated into our West Chester, Pennsylvania branch office when that officeopened in September 2007. Additionally, we are considering building a branch office on land we ownin Absecon, New Jersey.  We also willconsider expansion in and around our current market area in future years,whether through de novo branching or acquisition. However, we have not enteredinto any binding commitments regarding such expansion plans. The new brancheshave been, and are expected to continue to be, funded by cash generated by ourbusiness. Consequently, we do not expect to borrow funds for these expansion projects.

 

**CriticalAccounting Policies**

 

We consider accountingpolicies involving significant judgments and assumptions by management thathave, or could have, a material impact on the carrying value of certain assetsor on income to be critical accounting policies. We consider the following tobe our critical accounting policies: allowance for loan losses, deferred incometaxes and other-than-temporary impairment of securities.

 

***Allowance for Loan Losses.*** The allowance for loan losses ismaintained at a level representing management’s best estimate of known andinherent losses in the loan portfolio, based on management’s evaluation of theportfolio’s collectibility. The allowance is established through the provisionfor loan losses, which is charged 

 

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against income.Determining the amount of the allowance for loan losses necessarily involves ahigh degree of judgment. Among the material estimates required to establish theallowance are: loss exposure at default; the amount and timing of future cashflows on impacted loans; value of collateral; and determination of loss factorsto be applied to the various elements of the portfolio. All of these estimatesare susceptible to significant change. Management reviews the level of theallowance on a quarterly basis and establishes the provision for loan lossesbased upon an evaluation of the portfolio, loss experience in particularsegments of the portfolio, trends and absolute levels of classified andcriticized loans, trends and absolute levels in delinquent loans, trends inrisk ratings, trends in industry charge-offs by particular segments and changesin existing general economic and business conditions affecting our lendingareas and the national economy.  Althoughwe believe that we use the best information available to establish theallowance for loan losses, future adjustments to the allowance may be necessaryif economic conditions differ substantially from the assumptions used in makingthe evaluation. In addition, the Office of Thrift Supervision, as an integralpart of its examination process, periodically reviews our allowance for loanlosses. Such agency may require us to recognize adjustments to the allowancebased on its judgments about information available to it at the time of itsexamination. A large loss could deplete the allowance and require increasedprovisions to replenish the allowance, which would negatively affect earnings.For additional discussion, see *“—RiskManagement—Analysis and Determination of the Allowance for Loan Losses”*below and note 1 of the notes to the consolidated financial statements includedin this annual report.

 

***Deferred Income Taxes.*** We use the asset and liability method of accountingfor income taxes as prescribed in Statement of Financial Accounting Standards No. 109,“Accounting for Income Taxes.” Under this method, deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. If current availableinformation raises doubt as to the realization of the deferred tax assets, avaluation allowance is established. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled. We exercise significant judgment in evaluating the amount and timingof recognition of the resulting tax liabilities and assets. These judgmentsrequire us to make projections of future taxable income. The judgments andestimates we make in determining our deferred tax assets, which are inherentlysubjective, are reviewed on a continual basis as regulatory and businessfactors change. Any reduction in estimated future taxable income may require usto record a valuation allowance against our deferred tax assets. Specifically,the Company had a charitable contribution carryover of $1,422,000 as of December 31,2007, resulting in a deferred tax asset of $483,000.  Utilization of this carryover is limited to10% of taxable income on an annual basis. Such carryover will expire on December 31,2011, if not utilized. If the Company is unable to generate sufficient taxableincome to utilize this carryover it may require us to record a valuationallowance against this deferred tax asset. Any valuation allowance would result in additional income tax expense inthe period, which would negatively affect earnings.

 

***Other-Than-Temporary Impairment of Securities***. Statement of Financial AccountingStandards No. 115, “Accounting for Certain Investments in Debt and EquitySecurities,” and FASB Staff Position FAS 115-1 and 124-1 “The Meaning of OtherThan Temporary Impairment and Its Application to Certain Investments,” requirecompanies to perform periodic reviews of individual securities in theirinvestment portfolios to determine whether a decline in the value of a securityis other than temporary. A review of other-than-temporary impairment requirescompanies to make certain judgments regarding the nature of the decline, itseffect on the financial statements and the probability, extent and timing of avaluation recovery and the company’s intent and ability to hold the security.Pursuant to these requirements, we assess valuation declines to determine theextent to which such changes are attributable to (1) fundamental factorsspecific to the issuer, such as financial condition, business prospects orother factors, or (2) market-related factors, such as interest rates orequity market declines. If the decline in the market value of a security isdetermined to be other than temporary, we reduce the book value of suchsecurity to its current market value, recognizing the decline as a realizedloss on the income statement.

 

**BalanceSheet Analysis**

 

***Loans.***  During 2007,we originated one-to four-family residential loans, multi-family and commercialreal estate loans, construction loans, commercial loans and consumer loans.

 

The largest segment ofour loan portfolio is one- to four-family residential loans. At December 31,2007, these loans totaled $215.8 million, or 47.9% of total loans, compared to$209.5 million, or 58.3% of total loans, at December 31, 2006.  At December 31, 2005, these loanstotaled $228.5 million, or 60.9% of total loans.  The 

 

32

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increase of $6.3 million,or 3.0%, in 2007 was primarily a result of the Company’s decision to stopselling such loans beginning in the second quarter of 2007.  The decrease in 2006 reflected the sale of$20.9 million in longer-term fixed- rate one-to four-family residential loansin the secondary market, to manage interest rate risk.

 

Multi-family andcommercial real estate loans and commercial business loans totaled $109.6million and represented 24.3% of total loans at December 31, 2007 comparedto $52.9 million, or 14.7% of total loans, at December 31, 2006. Theseloans totaled $33.1 million, or 8.8% of total loans, at December 31, 2005.The increases reflect the success of the new team of commercial lenders thatwere hired during 2006 and the opening of new offices in 2006 and 2007.  As a result of the new commercial lendingteam hired in 2006, the Bank expects to continue to increase these loanportfolios in the future.

 

Construction loanstotaled $46.5 million, or 10.3% of total loans, at December 31, 2007compared to $11.6 million, or 3.2% of total loans, at December 31,2006.  These loans totaled $31.0 million,or 8.3% of total loans, at December 31, 2005.  The increase in 2007 reflects the hiring of anew team of acquisition, development and construction lenders during 2006.

 

Consumer loans totaled$78.7 million, or 17.5% of total loans, at December 31, 2007 compared to$85.1 million, or 23.8% of total loans, at December 31, 2006. These loanstotaled $82.7 million, or 22.0% of total loans, at December 31, 2005. Thedecrease of $6.4 million during 2007 was primarily a result of the Bankreducing its promotional efforts surrounding consumer loans in 2007 to focus onits commercial loan portfolio.  Growth in2006 was due to the promotion of a fixed-rate home equity loan product, offsetby reductions in variable-rate home equity lines of credit.

 

33

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The following table setsforth the composition of our loan portfolio at the dates indicated.

** **
| ** **                           | ** ** | **At  December 31,**   | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **2007**                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                           | ** ** | **Amount**                  | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                           | ** ** | **(Dollars  in thousands)** | ** ** |
| Real estate loans:                   |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One-to  four-family                  |       | $                           | 215,817    |   | 47.9 | % | $ | 209,463 |   | 58.3 | % | $ | 228,476 |   | 60.9 | % | $ | 250,015 |   | 50.1 | % | $ | 262,753 |   | 62.7 | % |
| Multi-family and  commercial         |       | 76,287                      |       | 16.9 |   | 44,681 |   | 12.4 |   | 32,923 |   | 8.8 |   | 85,585 |   | 17.2 |   | 57,495 |   | 13.7 |   |
| Construction                         |       | 46,471                      |       | 10.3 |   | 11,568 |   | 3.2 |   | 31,015 |   | 8.3 |   | 92,210 |   | 18.5 |   | 46,850 |   | 11.2 |   |
| Total real estate  loans             |       | 338,575                     |       | 75.1 |   | 265,712 |   | 73.9 |   | 292,414 |   | 78.0 |   | 427,810 |   | 85.8 |   | 367,098 |   | 87.6 |   |
| Consumer loans:                      |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Home equity loans                    |       | 68,431                      |       | 15.2 |   | 73,456 |   | 20.5 |   | 65,003 |   | 17.3 |   | 49,154 |   | 9.9 |   | 36,065 |   | 8.6 |   |
| Automobile                           |       | 565                         |       | 0.1 |   | 1,030 |   | 0.3 |   | 1,280 |   | 0.3 |   | 1,872 |   | 0.4 |   | 1,439 |   | 0.4 |   |
| Home equity lines  of credit         |       | 9,642                       |       | 2.1 |   | 10,468 |   | 2.9 |   | 16,269 |   | 4.3 |   | 18,249 |   | 3.6 |   | 13,947 |   | 3.3 |   |
| Other                                |       | 106                         |       | 0.1 |   | 148 |   | 0.1 |   | 188 |   | 0.1 |   | 1,305 |   | 0.3 |   | 438 |   | 0.1 |   |
| Total consumer  loans                |       | 78,744                      |       | 17.5 |   | 85,102 |   | 23.8 |   | 82,740 |   | 22.0 |   | 70,580 |   | 14.2 |   | 51,889 |   | 12.4 |   |
| Commercial                           |       | 33,356                      |       | 7.4 |   | 8,194 |   | 2.3 |   | 175 |   | — |   | 175 |   | — |   | 175 |   | — |   |
| Total loans                          |       | 450,675                     |       | 100.0 | % | 359,008 |   | 100.0 | % | 375,329 |   | 100.0 | % | 498,565 |   | 100.0 | % | 419,162 |   | 100.0 | % |
| Less:                                |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred loan  origination fees, net |       | (264                        | )          |   |   | (442 | ) |   |   | (587 | ) |   |   | (1,568 | ) |   |   | (2,615 | ) |   |   |
| Allowance for  loan losses           |       | (3,376                      | )          |   |   | (2,949 | ) |   |   | (8,349 | ) |   |   | (14,391 | ) |   |   | (2,109 | ) |   |   |
| Total loans, net                     |       | $                           | 447,035    |   |   |   | $ | 355,617 |   |   |   | $ | 366,393 |   |   |   | $ | 482,606 |   |   |   | $ | 414,438 |   |   |   |

 

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**LoanMaturity**

 

The following tables setforth certain information at December 31, 2007 regarding scheduledcontractual maturities during the periods indicated. The tables do not includeany estimate of prepayments which significantly shorten the average life of allloans and may cause our actual repayment experience to differ from that shownbelow. Demand loans having no stated schedule of repayments and no statedmaturity are reported as due in one year or less. The amounts shown belowexclude deferred loan fees.

 
| ** **                           | ** ** | **At  December 31, 2007**   | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **One- to  Four-  Family Loans** | ** ** | **Multi-family  and  Commercial  Real Estate  Loans** | ** ** | **Construction  Loans** | ** ** | **Consumer  Loans** | ** ** | **Commercial  Loans** | ** ** | **Total  Loans** | ** ** |
|                                 | ** ** | **(In  thousands)**              |       |
| Amounts due in:                      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| One year or less                     |       | $                                | 364        |   | $ | 10,395 |   | $ | 37,480 |   | $ | 1,052 |   | $ | 10,393 |   | $ | 59,684 |   |
| More than one  year to two years     |       | 480                              |       | 300 |   | 8,991 |   | 1,425 |   | 207 |   | 11,403 |   |
| More than two  years to three years  |       | 164                              |       | 180 |   | — |   | 4,195 |   | 936 |   | 5,475 |   |
| More than three  years to five years |       | 1,519                            |       | 30,526 |   | — |   | 7,842 |   | 10,215 |   | 50,102 |   |
| More than five  years to ten years   |       | 24,544                           |       | 9,640 |   | — |   | 18,235 |   | 11,605 |   | 64,024 |   |
| More than ten  years to fifteenyears |       | 63,448                           |       | 8,992 |   | — |   | 33,210 |   | — |   | 105,650 |   |
| More than  fifteen years             |       | 125,298                          |       | 16,254 |   | — |   | 12,785 |   | — |   | 154,337 |   |
| Total                                |       | $                                | 215,817    |   | $ | 76,287 |   | $ | 46,471 |   | $ | 78,744 |   | $ | 33,356 |   | $ | 450,675 |   |
|                                      |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following table setsforth the dollar amount of all scheduled maturities of loans at December 31,2007 that are due after December 31, 2008 and have either fixed interestrates or adjustable interest rates. The amounts shown below exclude unearnedinterest on consumer loans and deferred loan fees.

** **

| ** **                   | ** ** | **Fixed  Rates**    | ** ** | **Floating  or  Adjustable Rates** | ** ** | **Total** | ** ** |
|------------------------------|------------|---------------------|------------|------------------------------------|------------|-----------|------------|
|                         | ** ** | **(In  thousands)** | ** ** |
| Real estate loans:           |       |                |       |                               |       |      |       |
| One- to  four-family         |       | $                   | 192,672    |                               | $          | 22,781    |       | $ | 215,453 |   |
| Multi-family and  commercial |       | 58,823              |       | 7,069                              |       | 65,892    |       |
| Construction                 |       | 8,991               |       | —                             |       | 8,991     |       |
| Consumer loans               |       | 68,193              |       | 9,499                              |       | 77,692    |       |
| Commercial loans             |       | 22,862              |       | 101                                |       | 22,963    |       |
| Total                        |       | $                   | 351,541    |                               | $          | 39,450    |       | $ | 390,991 |   |

 

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***Securities.*** Our securities portfolio consists primarily of stateand municipal securities, U.S. government agency bonds and mortgage-relatedsecurities. Securities increased $67.9 million, or 29.7%, in the year ended December 31,2007 primarily as a result of the Bank purchasing $188.0 million in securitiesthroughout the year.  Such purchases,which were part of our leverage strategy, were primarily comprised of purchasesof mortgage-related securities totaling $91.7 million and purchases of stateand political subdivisions totaling $81.1 million.  These purchases were offset by maturities,calls and principal repayments of $86.1 million and the sale of $36.3 millionin available-for-sale securities during 2007. In 2006, our securities decreased $101.0 million primarily due tomaturities, calls and principal repayments of $145.5 million and the sale of a$17.2 million investment in a mutual fund, offset by purchases of $60.3million. The 2006 purchases consisted of government agency bonds,mortgage-related securities and municipal bonds with an average duration of3.25 years.  We recorded a $394,000 losson the mutual fund during 2005 upon our determination that the mutual fund wasother-than-temporarily impaired. We recorded an additional loss of $17,000 onthe date of sale in March 2006.

 

The following table setsforth the amortized cost and fair values of our securities portfolio at thedates indicated. All of our securities were classified as available-for-sale atthe dates indicated.

** **
| ** **                              | ** ** | **At December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|
| ** **                              | ** ** | **2007**                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **Amortized  Cost**      | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| ** **                              | ** ** | **(In thousands)**       | ** ** |
| Obligations of U.S. government agencies |       | $                        | 10,000     |   | $ | 10,016 |   | $ | 42,344 |   | $ | 41,878 |   | $ | 99,602 |   | $ | 98,308 |   |
| State and political subdivisions        |       | 81,019                   |       | 81,143 |   | 24,126 |   | 24,219 |   | 18,863 |   | 18,808 |   |
| Mortgage-related securities             |       | 204,362                  |       | 205,145 |   | 159,369 |   | 158,320 |   | 189,698 |   | 187,721 |   |
| Corporate debt securities               |       | —                   |       | — |   | 4,017 |   | 4,015 |   | 7,926 |   | 7,603 |   |
| Mutual funds                            |       | —                   |       | — |   | — |   | — |   | 17,064 |   | 17,064 |   |
| Total                                   |       | $                        | 295,381    |   | $ | 296,304 |   | $ | 229,856 |   | $ | 228,432 |   | $ | 333,153 |   | $ | 329,504 |   |
|                                         |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

At December 31,2007, obligations of U.S. government agencies include investments in debt ofthe FHLB and are not backed by the full faith and credit of the U.S.government.

 

At December 31,2007, we had no investments in a single company or entity (other than state orU.S. Government-sponsored entity securities) that had an aggregate book valuein excess of 10% of our equity at December 31, 2007.

 

At December 31,2007, investments in state and political subdivisions included $60.0 million ofPennsylvania Higher Education Assistance auction rate bonds.  These bonds are subject to a new auctionevery 28 days, had a weighted average rate of 6.28% at December 31, 2007,have a 40 year life and a contractual maturity of 2046 and 2047.

 

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The following table setsforth the stated maturities and weighted average yields of investmentsecurities at December 31, 2007. Weighted average yields on tax-exemptsecurities are not presented on a tax equivalent basis, as the amount would beimmaterial. Certain mortgage-related securities have adjustable interest ratesand will reprice annually within the various maturity ranges. These repricingschedules are not reflected in the table below.

** **
| ** **                               | ** ** | **One Year  or Less**       | ** ** | **More  than One Year  to Five Years** | ** ** | **More  than Five Years  to Ten Years** | ** ** | **More  than Ten  Years**     | ** ** | **Total**           | ** ** |
|------------------------------------------|------------|-----------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|-------------------------------|------------|---------------------|------------|
| ** **                               | ** ** | **Carrying  Value**         | ** ** | **Weighted  Average  Yield**           | ** ** | **Carrying  Value**                     | ** ** | **Weighted  Average   Yield** | ** ** | **Carrying  Value** | ** ** | **Weighted  Average   Yield** | ** ** | **Carrying  Value** | ** ** | **Weighted  Average   Yield** | ** ** | **Carrying  Value** | ** ** | **Weighted  Average Yield** | ** ** |
| ** **                               | ** ** | **(Dollars  in thousands)** | ** ** |
| Obligations of  U.S. government agencies | ** ** | $                           | —     | ** **                             | ** ** | ** **                              | $          | —                        | ** ** | ** **          | ** ** | $ | 10,000 | ** ** | 4.89 | % | $ | — | ** ** | ** ** | ** ** | $ | 10,000 | ** ** | 4.89 | ** ** |
| State and  political subdivisions        | ** ** | —                      | ** ** | ** **                             | ** ** | —                                  | ** ** | ** **                    | ** ** | 11,017              | ** ** | 5.57 |   | 70,002 | ** ** | 6.25 | % | 81,019 | ** ** | 6.16 | ** ** |
| Mortgage-related  securities             | ** ** | 11,162                      | ** ** | 3.94                                   | %          | 23,044                                  | ** ** | 4.57                          | %          | 9,185               | ** ** | 4.67 |   | 160,971 | ** ** | 5.55 |   | 204,362 | ** ** | 5.31 | ** ** |
| Total                                    | ** ** | $                           | 11,162     | ** **                             | ** ** | ** **                              | $          | 23,044                        | ** ** | ** **          | ** ** | $ | 30,202 | ** ** |   |   | $ | 230,973 | ** ** | ** ** | ** ** | $ | 295,381 | ** ** | ** ** | ** ** |

 

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*** ***

***Deposits*****.**  Our primarysource of funds is our deposit accounts, which are comprised ofnoninterest-bearing demand accounts, interest-bearing NOW accounts, moneymarket accounts, savings accounts and certificates of deposit. These depositsare provided primarily by individuals and business within our marketareas.  Deposits decreased $11.0 million,or 1.8%, for the year ended December 31, 2007 primarily as a result ofdecreases in NOW accounts of $11.4 million, savings accounts of $10.3 millionand certificates of deposit of $12.1 million, offset by an increase in moneymarket accounts of $20.8 million and noninterest-bearing demand accounts of$2.0 million.  The increase in moneymarket accounts and the decrease in NOW accounts was a result of a successful promotionof the Bank’s money market tiered-rate product, which resulted in a certainlevel of NOW accounts being transferred to money market accounts.  The increase in noninterest-bearing demandaccounts was a result of continued efforts to increase commercial depositrelationships.  The reduction in savingsaccounts and certificates of deposit were primarily a result of the highlycompetitive deposit market in which the Bank operates which, when combined withthe flat yield curve for the majority of 2008, has created a difficult climatefor gathering deposits in a cost effective manner.

 

During 2006, our depositsdecreased by $85.8 million, or 12.6%, primarily as a result of decreases in NOWaccounts, certificates of deposit and savings accounts.  In each case, the decrease was due to thehigh level of competition and the nature of the single-relationship we havewith our depositors.  Additionally, thedecrease in NOW accounts was also attributable to the decrease in constructionloans.  We require that our constructionloan borrowers maintain a compensating balance, in the form of a NOW account,with us.  As these loans were paid off orrefinanced at other institutions the borrowers withdrew their compensatingbalance.

 

The following table setsforth the balances of our deposit products at the dates indicated.

** **

| ** **                           | ** ** | **At December 31,** | ** ** |
|--------------------------------------|------------|--------------------------|------------|
| ** **                           | ** ** | **2007**                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(In thousands)**       | ** ** |
|                                 |       |                     |       |   |   |   |   |
| Noninterest-bearing demand  accounts | ** ** | $                        | 43,462     |   | $ | 41,429 |   | $ | 37,876 |   |
| NOW accounts                         | ** ** | 39,299                   |       | 50,717 |   | 87,072 |   |
| Money market accounts                | ** ** | 50,568                   |       | 29,770 |   | 27,975 |   |
| Savings accounts                     | ** ** | 54,019                   |       | 64,338 |   | 80,098 |   |
| Certificates of deposit              | ** ** | 398,212                  |       | 410,280 |   | 449,286 |   |
| Total                                |       | $                        | 585,560    |   | $ | 596,534 |   | $ | 682,307 |   |

 

The following tableindicates the amount of jumbo certificates of deposit by time remaining untilmaturity at December 31, 2007. Jumbo certificates of deposit require minimum deposits of $100,000.  We did not have any brokered deposits as of December 31,2007.

** **

| **Maturity Period at  December 31, 2007** | ** ** | **Jumbo  Certificates  of Deposits** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                     | ** ** | **(In thousands)**                   | ** ** |
| Three months or less                           |       | $                                    | 12,387     |   |
| Over three through six months                  |       | 12,155                               |       |
| Over six through twelve months                 |       | 15,237                               |       |
| Over twelve months                             |       | 37,485                               |       |
| Total                                          |       | $                                    | 77,264     |   |

 

 

38

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The following table setsforth the time deposits classified by rates at the dates indicated.

** **

| ** **          | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------|------------|-----------------------------------|------------|
| ** **          | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **          | ** ** | **(In thousands)**                | ** ** |
|                |       |                              |       |   |   |   |   |
| 0.00 — 1.00%   |       | $                                 | —     |   | $ | — |   | $ | — |   |
| 1.01 — 2.00%   |       | —                            |       | — |   | 77 |   |
| 2.01 — 3.00%   |       | 136                               |       | 8,028 |   | 144,197 |   |
| 3.01 — 4.00%   |       | 83,262                            |       | 160,416 |   | 210,739 |   |
| 4.01 — 5.00%   |       | 235,086                           |       | 176,206 |   | 57,573 |   |
| 5.01 — 6.00%   |       | 62,478                            |       | 45,852 |   | 16,332 |   |
| 6.01 — greater |       | 17,250                            |       | 19,778 |   | 20,368 |   |
| Total               |       | $                                 | 398,212    |   | $ | 410,280 |   | $ | 449,286 |   |

 

The following table setsforth the amount and maturities of time deposits classified by rates at December 31,2007.

** **
| ** **          | ** ** | **Amount Due**                | ** ** | ** **                                        | ** ** | ** **                                           | ** ** |
|---------------------|------------|-------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **          | ** ** | **Less Than********One Year** | ** ** | **More Than********One Year to********Two Years** | ** ** | **More Than********Two Years to********Three Years** | ** ** | **More Than   Three Years** | ** ** | **Total** | ** ** | **Percent of   Total Time   Deposit   Accounts** | ** ** |
| ** **          | ** ** | **(Dollars in thousands)**    | ** ** |
| 0.00 — 1.00%   |       | $                             | —     |                                              | $          | —                                               |       | $ | — |   | $ | — |   | $ | — |   | — | % |
| 1.01 — 2.00%   |       | —                        |       | —                                            |       | —                                               |       | — |   | — |   | — |   |
| 2.01 — 3.00%   |       | 61                            |       | —                                            |       | —                                               |       | 75 |   | 136 |   | — |   |
| 3.01 — 4.00%   |       | 54,356                        |       | 19,736                                            |       | 5,943                                                |       | 3,227 |   | 83,262 |   | 20.9 |   |
| 4.01 — 5.00%   |       | 166,207                       |       | 46,458                                            |       | 6,699                                                |       | 15,722 |   | 235,086 |   | 59.1 |   |
| 5.01 — 6.00%   |       | 22,548                        |       | 14,054                                            |       | 6,931                                                |       | 18,945 |   | 62,478 |   | 15.7 |   |
| 6.01 — greater |       | 847                           |       | 5,339                                             |       | 11,064                                               |       | — |   | 17,250 |   | 4.3 |   |
| Total               |       | $                             | 244,019    |                                              | $          | 85,587                                               |       | $ | 30,637 |   | $ | 37,969 |   | $ | 398,212 |   | 100.0 | % |

 

The following table setsforth time deposit activity for the periods indicated.

** **

| ** **                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **(In thousands)**               | ** ** |
|                               |       |                             |       |   |   |   |   |
| Beginning balance                  |       | $                                | 410,280    |   | $ | 449,286 |   | $ | 506,783 |   |
| Decrease before interest  credited |       | (30,172                          | )          | (55,740 | ) | (73,870 | ) |
| Interest credited                  |       | 18,104                           |       | 16,734 |   | 16,373 |   |
| Net decrease in time  deposits     |       | (12,068                          | )          | (39,006 | ) | (57,497 | ) |
| Ending balance                     |       | $                                | 398,212    |   | $ | 410,280 |   | $ | 449,286 |   |

 

 

39

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***Borrowings*****. **We utilizeborrowings from the Federal Home Loan Bank of Pittsburgh and one other largecommercial bank to supplement our supply of funds for loans and investments.The $30.0 million of Federal Home Loan Bank advances outstanding at December 31,2006 and 2005 were borrowed in 2001. During the fourth quarter of 2007, as the yield curve steepened, weimplemented a $50.0 million leverage strategy, which was funded by $30.0million in Federal Home Loan Bank advances and $20.0 million of collateralizedborrowings from a large commercial bank.  Finally, we borrowed an additional $20.0 million from the FHLB duringthe fourth quarter of 2007 to take advantage of the decrease in cost of fundsin the wholesale funding market.

** **

| ** **                                                                 | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                 | ** ** | **(Dollars in thousands)**        | ** ** |
|                                                                       |       |                              |       |   |   |   |   |
| Maximum amount of advances outstanding at any month  end during the period |       | $                                 | 100,000    |   | $ | 30,000 |   | $ | 30,000 |   |
| Average advances outstanding  during the period                            |       | 36,644                            |       | 30,000 |   | 30,000 |   |
| Weighted average interest  rate during the period                          |       | 4.64                              | %          | 4.88 | % | 4.88 | % |
| Balance outstanding at end  of period                                      |       | $                                 | 100,000    |   | $ | 30,000 |   | $ | 30,000 |   |
| Weighted average interest  rate at end of period                           |       | 3.87                              | %          | 4.88 | % | 4.88 | % |

 

**Resultsof Operations for the Years Ended December 31, 2007, 2006 and 2005**

 

***Overview.***

** **

| ** **                        | ** ** | **Years Ended  December 31,** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|
| ** **                        | ** ** | **2007**                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                        | ** ** | **(Dollars in thousands)**         | ** ** |
|                              |       |                               |       |   |   |   |   |
| Net income                        |       | $                                  | 1,930      |   | $ | 3,634 |   | $ | 5,960 |   |
| Return on average assets          |       | 0.26                               | %          | 0.49 | % | 0.71 | % |
| Return on average equity          |       | 1.54                               |       | 4.59 |   | 9.50 |   |
| Average equity to average  assets |       | 16.66                              |       | 10.58 |   | 7.44 |   |
|                                   |            |                                    |            |  |  |  |  |  |  |  |

 

***2007 vs. 2006.*** Net income decreased $1.7 million for 2007 compared to 2006.  The 2007 results included a gain on the saleof the Bank’s operations center of $577,000, net of taxes. The 2006 earningsincluded a credit to the provision for loan losses of $5.4 million and a $1.5million contribution to the Fox Chase Bank Charitable Foundation.  These two items, net of taxes, increasedearnings by approximately $2.6 million during 2006.

 

***2006 vs. 2005.*** Net income decreased $2.3 million for 2006 compared to 2005 primarilydue to an increase in noninterest expense of $4.7 million, primarily driven bya $1.8 million increase in salaries, benefits and other compensation as well asa $1.5 million contribution to the Fox Chase Charitable Foundation, offset byan increase in noninterest income and decrease in income tax expense.

 

***Net Interest Income.***

 

***2007 vs. 2006*****.** Net interest income increased $2.1 million, or 12.5%, for 2007.  The net interest margin was 2.60% for 2007compared to 2.33% for 2006.  Theimprovements in net interest income and the net interest margin in 2007 reflectthe Bank’s increase in higher-yielding commercial, commercial real estate andconstruction loans funded with the proceeds from liquidating lower-yieldingsecurities, an increase in the volume of loans and interest-earning demanddeposits generated by the proceeds received in the Company’s initial publicoffering and an increase in noninterest-bearing deposits.  Offsetting these improvements were highercosts associated with retail certificates of deposit and money market accountsduring 2007 due primarily to strong retail deposit pricing competition.

 

 

40

----

 

Total interest incomeincreased $3.9 million, or 10.4%, to $41.1 million for 2007, due to a $3.6million increase in interest and fees on loans, an increase of $1.6 million inother interest income, offset by a decrease of $1.4 million in interest anddividend income on investment securities.

 

Total interest expenseincreased $1.8 million, or 8.8%, to $22.3 million for 2007, due primarily to a$1.6 million increase in interest expense on deposits.  The increased deposits expense was due to anincrease in the average rate paid on deposits of 60 basis points, resulting ina $2.9 million increase in interest expense, offset by a reduction of interestexpense on deposits of $1.4 million due to a $52.9 million decrease in theaverage balance of deposits.  Interest expense on Federal Home Loan Bankadvances increased $157,000 as a result of the additional advances associatedwith the Company’s $50.0 million leverage strategy executed in the fourthquarter of 2007.

 

                ***2006vs. 2005*****.**  Net interest income decreased by $186,000, or1.1%, to $16.7 million in 2006.  Totalinterest income decreased $424,000, or 1.1%, to $37.2 million for 2006, due toa decrease of $4.0 million in interest and fees on loans, offset by a $2.4million increase in interest income on mortgage-related securities and a $1.2million increase in other interest income. The increase in other interest income was primarily the result of theproceeds from the Company’s stock offering being invested in short-termovernight deposits.  Interest income onloans decreased $4.0 million, or 15.5%, to $21.7 million between the periodsdue to a decrease of $95.7 million in the average outstanding balance of loans,offset by a 40 basis point increase in the average yield due primarily tohigher market interest rates.  Interestand dividend income on securities and overnight investments increased $3.6million, or 29.9% to $12.9 million between the periods primarily due to a 128basis point increase in the yield on mortgage-related securities and theinvestment of the proceeds from the Bank’s conversion to apublic entity.

 

                Total interest expense decreased$238,000, or 1.1%, to $20.5 million for 2006, due primarily to a $117.2 milliondecrease in the average balance of deposits which resulted in a reduction ofinterest expense of $2.7 million, offset by an increase in the average ratepaid on deposits of 49 basis points, resulting in a $2.5 millionincrease in interest expense.

 

 

41

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                ***AverageBalances and Yields.**** *The following table presentsinformation regarding average balances of assets and liabilities, the totaldollar amounts of interest income and dividends from average interest-earningassets, the total dollar amounts of interest expense on averageinterest-bearing liabilities, and the resulting annualized average yields andcosts.  The yields and costs for theperiods indicated are derived by dividing income or expense by the averagebalances of assets or liabilities, respectively, for the periodspresented.  For purposes of this table,average balances have been calculated using month-end balances, and nonaccrualloans are included in average balances. Management does not believe that the use of month-end balances insteadof daily average balances has caused any material differences in theinformation presented.  Loan fees areincluded in interest income on loans and are insignificant.  Yields are not presented on a tax-equivalentbasis.  Any adjustments necessary topresent yields on a tax-equivalent basis are insignificant.

 
| ** **                                                              | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                              | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                              | ** ** | **Average  Balance**              | ** ** | **Interest********and********Dividends** | ** ** | **Yield/********Cost** | ** ** | **Average   Balance** | ** ** | **Interest********and   Dividends** | ** ** | **Yield/********Cost** | ** ** | **Average  Balance** | ** ** | **Interest********and   Dividends** | ** ** | **Yield/********Cost** | ** ** |
| ** **                                                              | ** ** | **(Dollars in thousands)**        | ** ** |
|                                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Assets:**                                                             | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-earning assets:                                                |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning demand deposits                                        |       | $                                 | 81,864     |   | $ | 4,167 |   | 5.09 | % | $ | 49,182 |   | $ | 2,573 |   | 5.23 | % | $ | 43,973 |   | $ | 1,549 |   | 3.53 | % |
| Money market funds                                                      |       | 806                               |       | 40 |   | 4.96 |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Mortgage-related securities                                             |       | 147,978                           |       | 7,329 |   | 4.95 |   | 184,558 |   | 8,035 |   | 4.35 |   | 183,931 |   | 5,641 |   | 3.07 |   |
| Taxable securities                                                      |       | 61,530                            |       | 3,236 |   | 5.26 |   | 100,271 |   | 3,893 |   | 3.88 |   | 120,732 |   | 3,935 |   | 3.26 |   |
| Nontaxable securities                                                   |       | 24,023                            |       | 924 |   | 3.85 |   | 23,427 |   | 934 |   | 3.99 |   | 20,298 |   | 754 |   | 3.71 |   |
| Loans:                                                                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential loans                                                       |       | 208,828                           |       | 11,791 |   | 5.65 |   | 218,397 |   | 12,134 |   | 5.56 |   | 255,958 |   | 14,781 |   | 5.77 |   |
| Commercial loans                                                        |       | 113,822                           |       | 8,800 |   | 7.63 |   | 56,863 |   | 4,808 |   | 8.34 |   | 121,208 |   | 6,860 |   | 5.58 |   |
| Consumer loans                                                          |       | 81,467                            |       | 4,770 |   | 5.86 |   | 84,704 |   | 4,800 |   | 5.67 |   | 78,545 |   | 4,081 |   | 5.20 |   |
| Total loans                                                             |       | 404,117                           |       | 25,361 |   | 6.25 |   | 359,964 |   | 21,742 |   | 6.04 |   | 455,711 |   | 25,722 |   | 5.64 |   |
| Allowance for loan losses                                               |       | (3,056                            | )          | — |   | — |   | (7,057 | ) | — |   | — |   | (13,849 | ) | — |   | — |   |
| Net loans                                                               |       | 401,061                           |       | 25,361 |   | — |   | 352,907 |   | 21,742 |   | — |   | 441,862 |   | 25,722 |   | — |   |
| Total interest-earning assets                                           |       | 717,262                           |       | 41,057 |   | 5.68 |   | 710,345 |   | 37,177 |   | 5.17 |   | 810,796 |   | 37,601 |   | 4.56 |   |
|                                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-earning assets                                              |       | 36,172                            |       |   |   |   |   | 37,461 |   |   |   |   |   | 30,765 |   |   |   |   |   |
| Total assets                                                            |       | $                                 | 753,434    |   |   |   |   |   | $ | 747,806 |   |   |   |   |   | $ | 841,561 |   |   |   |   |   |
|                                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and equity:**                                             | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-bearing liabilities:                                           |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW and money market depositaccounts                                    |       | $                                 | 81,943     |   | 1,997 |   | 2.44 |   | $ | 90,129 |   | 1,683 |   | 1.87 |   | $ | 137,370 |   | 2,091 |   | 1.52 |   |
| Savings accounts                                                        |       | 59,160                            |       | 424 |   | 0.72 |   | 75,212 |   | 557 |   | 0.74 |   | 88,501 |   | 748 |   | 0.85 |   |
| Certificates of deposit                                                 |       | 402,120                           |       | 18,105 |   | 4.50 |   | 430,736 |   | 16,734 |   | 3.88 |   | 487,401 |   | 16,373 |   | 3.36 |   |
| Total interest-bearing deposits                                         |       | 543,223                           |       | 20,526 |   | 3.78 |   | 596,077 |   | 18,974 |   | 3.18 |   | 713,272 |   | 19,212 |   | 2.69 |   |
|                                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FHLB advances                                                           |       | 34,422                            |       | 1,642 |   | 4.70 |   | 30,000 |   | 1,485 |   | 4.88 |   | 30,000 |   | 1,485 |   | 4.88 |   |
| Other borrowed funds                                                    |       | 2,222                             |       | 82 |   | 3.62 |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Total borrowings                                                        |       | 36,644                            |       | 1,724 |   | 4.64 |   | 30,000 |   | 1,845 |   | 4.88 |   | 30,000 |   | 1,485 |   | 4.88 |   |
|                                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities                                      |       | 579,867                           |       | 22,250 |   | 3.83 |   | 626,077 |   | 20,459 |   | 3.27 |   | 743,272 |   | 20,697 |   | 2.78 |   |
|                                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing deposits                                            |       | 43,036                            |       |   |   |   |   | 36,245 |   |   |   |   |   | 33,054 |   |   |   |   |   |
| Other noninterest-bearing liabilities                                   |       | 4,983                             |       |   |   |   |   | 6,342 |   |   |   |   |   | 2,507 |   |   |   |   |   |
| Total liabilities                                                       |       | 627,886                           |       |   |   |   |   | 668,664 |   |   |   |   |   | 778,833 |   |   |   |   |   |
|                                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Retained earnings                                                       |       | 126,257                           |       |   |   |   |   | 80,183 |   |   |   |   |   | 64,565 |   |   |   |   |   |
| Accumulated comprehensive loss                                          |       | (709                              | )          |   |   |   |   | (1,041 | ) |   |   |   |   | (1,837 | ) |   |   |   |   |
| Total equity                                                            |       | $                                 | 125,548    |   |   |   |   |   | $ | 79,142 |   |   |   |   |   | $ | 62,728 |   |   |   |   |   |
|                                                                    |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and equity                                            |       | $                                 | 753,434    |   |   |   |   |   | $ | 747,806 |   |   |   |   |   | $ | 841,561 |   |   |   |   |   |
| Net interest income                                                     |       |                              |       | $ | 18,807 |   |   |   |   |   | $ | 16,718 |   |   |   |   |   | $ | 16,904 |   |   |   |
| Interest rate spread                                                    |       |                              |       |   |   | 1.85 | % |   |   |   |   | 1.90 | % |   |   |   |   | 1.78 | % |
| Net interest margin                                                     |       |                              |       |   |   | 2.60 | % |   |   |   |   | 2.33 | % |   |   |   |   | 2.05 | % |
| Average interest-earning assets toaverage  interest-bearing liabilities |       |                              |       |   |   | 123.69 | % |   |   |   |   | 113.46 | % |   |   |   |   | 109.08 | % |

 

 

42

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***Rate/Volume Analysis*****.**  The followingtable sets forth the effects of changing rates and volumes on our net interestincome.  The rate column shows theeffects attributable to changes in rate (changes in rate multiplied by currentvolume).  The volume column shows theeffects attributable to changes in volume (changes in volume multiplied byprior rate).  The net column representsthe sum of the prior columns.  Forpurposes of this table, changes attributable to changes in both rate and volumethat cannot be segregated have been allocated proportionally based on thechanges due to rate and the changes due to volume.

** **
| ** **                          | ** ** | **Year Ended  December 31, 2007  Compared to  Year Ended December 31, 2006** | ** ** | **Year Ended  December 31, 2006  Compared to  Year Ended December 31, 2005** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Increase (Decrease)  Due to**                                                        | ** ** | **Increase (Decrease)  Due to**                                                        | ** ** |
| ** **                          | ** ** | **Rate**                                                                               | ** ** | **Volume**                                                                             | ** ** | **Net** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Net** | ** ** |
| ** **                          | ** ** | **(In Thousands)**                                                                     | ** ** |
| Interest and dividend income:       |       |                                                                                   |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Interest-earning  demand deposits   |       | $                                                                                      | (116       | )                                                                                      | $          | 1,710 |   | $ | 1,594 |   | $ | 839 |   | $ | 185 |   | $ | 1,024 |   |
| Loans:                              |       |                                                                                   |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Residential  loans                  |       | 189                                                                                    |       | (532                                                                                   | )          | (343 | ) | (478 | ) | (2,169 | ) | (2,647 | ) |
| Commercial loans                    |       | (824                                                                                   | )          | 4,816                                                                                  |       | 3,992 |   | 1,589 |   | (3,642 | ) | (2,053 | ) |
| Consumer loans                      |       | 153                                                                                    |       | (183                                                                                   | )          | (30 | ) | 400 |   | 320 |   | 720 |   |
| Total loans                         |       | (482                                                                                   | )          | 4,101                                                                                  |       | 3,619 |   | 1,511 |   | (5,491 | ) | (3,980 | ) |
| Money market  funds                 |       | —                                                                                 |       | 40                                                                                     |       | 40 |   | — |   | — |   | — |   |
| Mortgage-related  securities        |       | 887                                                                                    |       | (1,593                                                                                 | )          | (706 | ) | 2,375 |   | 19 |   | 2,394 |   |
| Taxable  securities                 |       | 856                                                                                    |       | (1,513                                                                                 | )          | (657 | ) | 625 |   | (667 | ) | (42 | ) |
| Nontaxable  securities              |       | (34                                                                                    | )          | 24                                                                                     |       | (10 | ) | 64 |   | 116 |   | 180 |   |
| Total interest-earning  assets      |       | 1,111                                                                                  |       | 2,769                                                                                  |       | 3,880 |   | 5,414 |   | (5,838 | ) | (424 | ) |
|                                |       |                                                                                   |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Interest expense:                   |       |                                                                                   |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| NOW and money  market deposits      |       | 467                                                                                    |       | (153                                                                                   | )          | 314 |   | 311 |   | (719 | ) | (408 | ) |
| Savings accounts                    |       | (14                                                                                    | )          | (119                                                                                   | )          | (133 | ) | (78 | ) | (112 | ) | (191 | ) |
| Certificates of  deposit            |       | 2,482                                                                                  |       | (1,111                                                                                 | )          | 1,371 |   | 2,264 |   | (1,904 | ) | 361 |   |
| Total  interest-bearing deposits    |       | 2,935                                                                                  |       | (1,383                                                                                 | )          | 1,552 |   | 2,497 |   | (2,735 | ) | (238 | ) |
|                                |       |                                                                                   |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| FHLB advances                       |       | (62                                                                                    | )          | 219                                                                                    |       | 157 |   | — |   | — |   | — |   |
| Other borrowed funds                |       | —                                                                                 |       | 82                                                                                     |       | 82 |   | — |   | — |   | — |   |
| Total  interest-bearing liabilities |       | 2,873                                                                                  |       | (1,082                                                                                 | )          | 1,791 |   | 2,497 |   | (2,735 | ) | (238 | ) |
| Net change in interest income       |       | $                                                                                      | (1,762     | )                                                                                      | $          | 3,851 |   | $ | 2,089 |   | $ | 2,917 |   | $ | (3,103 | ) | $ | (186 | ) |

 

***Provision for Loan Losses.***

 

***2007 vs. 2006. ***The Company recorded a provision for loan losses of$425,000 in 2007 compared to a credit to the provision for loan losses of $5.4million in 2006.  The provision for loanlosses reflects continued growth in the loan portfolio during 2007 and a shiftin the mix of the loan portfolio to more commercial-type loans, which typicallyhave higher levels of risk, offset by decreases in nonperforming and classifiedassets and the absence of any net charge-offs in 2007.

 

***2006 vs. 2005. ***We had a credit to the provision for loanlosses of $5.4 million in 2006 compared to a credit of $6.0 million in2005.  The 2006 credit to the provisionreflected: (1) continued reductions in the levels of criticized andclassified loans from $34.7 million at December 31, 2005 to $5.0 millionat December 31, 2006 which included the collection of one of the Bank’ssignificant nonperforming loans totaling $2.5 million; (2) the absence ofany material charge-offs in 2006; and (3) a $16.3 million, or 4.3%,decrease in the size of the loan portfolio, including a $19.4 million, or62.7%, decrease in the construction portfolio, which carries higher risk ofdefault than one-to four family residential real estate loans.

 

 

43

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An analysis of thechanges in the allowance for loan losses is presented under “*—Risk Management—Analysis and Determination of theAllowance for Loan Losses*.”

 

***Noninterest Income.***  The followingtable shows the components of noninterest income for the years ended 2007, 2006and 2005.

** **
| ** **                           | ** ** | **Years Ended December 31,** | ** ** | **% Change** | ** ** | **% Change** | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|--------------|------------|--------------|------------|
| ** **                           | ** ** | **2007**                          | ** ** | **2006**     | ** ** | **2005**     | ** ** | **2007/2006** | ** ** | **2006/2005** | ** ** |
| ** **                           | ** ** | **(In thousands)**                | ** ** | ** **   | ** ** | ** **   | ** ** |
|                                 |       |                              |       |         |       |         |       |   |   |   |   |
| Service charges and other fee income |       | $                                 | 842        |         | $          | 1,138        |       | $ | 882 |   | (26.0 | )% | 29.0 | % |
| Net gain (loss) on sale of:          |       |                              |       |         |       |         |       |   |   |   |   |
| Securities  available for sale       |       | 169                               |       | (17          | )          | (809         | )          | 1,094.1 |   | 97.9 |   |
| Loans                                |       | 78                                |       | 199          |       | 567          |       | (60.8 | ) | (64.9 | ) |
| Assets acquired  through foreclosure |       | —                            |       | 85           |       | 6            |       | (100.0 | ) | 1,316.7 |   |
| Premises and  equipment              |       | 970                               |       | (59          | )          | (161         | )          | 1,744.1 |   | 63.4 |   |
| Income on bank-owned life insurance  |       | 438                               |       | 427          |       | 448          |       | 2.6 |   | (4.7 | ) |
| Other                                |       | 199                               |       | 300          |       | 281          |       | 33.7 |   | 6.8 |   |
| Total                                |       | $                                 | 2,696      |         | $          | 2,073        |       | $ | 1,214 |   | 30.1 | % | 70.8 | % |

 

***2007 vs. 2006*****.**   Noninterestincome increased $623,000 for 2007.  Theincrease for the twelve months ended December 2007 was primarily due to an$875,000 gain on sale of the Bank’s operations center in the second quarter of2007 and a $97,000 gain on sale of land during the fourth quarter of 2007. TheCompany also recorded gains on the sale of investment securities of $169,000 in2007 compared to a loss on the sale of investment securities of $17,000 for2006.  Gains on sales of loans decreasedby $121,000 in 2007, primarily as a result of the Company’s decision to stopselling such loans beginning in the second quarter of 2007.  These gains were offset by a reduction inservice charges and other fee income of $296,000 between comparabletwelve-month periods as 2006 included a significant level of past due loan feesfrom nonperforming loans were collected during that year.

 

                ***2006vs. 2005*.**   Noninterestincome increased primarily due to a $917,000 loss on sale and impairment ofsecurities that was recorded in 2005 reflecting the sale of lower-yieldingadjustable-rate perpetual preferred stock of Freddie Mac in an effort toreposition the securities portfolio towards higher-yielding investments.  The impairment loss in 2005 was the result ofthe determination by management that an investment in a mutual fund was otherthan temporarily impaired.  This mutualfund investment was sold in March 2006. An additional loss of $17,000 was recorded at the sale date.  Also, service charges and other fee incomeincreased due to increased loan servicing fee income associated with asignificant level of past due loan fees from nonperforming loans that werecollected during 2006 as compared to 2005. These increases were offset by decreases in the gain on the sale ofmortgage-related securities and the gain on sale of loans.  The decrease in the gain on the sale of loanswas due to approximately $24.9 million loans being sold in the year ended December 31,2006 compared to approximately $83.3 million loans being sold in 2005.

 

 

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*** ***

***                NoninterestExpense.***  The following table shows the components ofnoninterest expense and the percentage changes for the years ended 2007, 2006and 2005.

** **
| ** **                                | ** ** | **Years Ended December 31,** | ** ** | **% Change** | ** ** | **% Change** | ** ** |
|-------------------------------------------|------------|-----------------------------------|------------|--------------|------------|--------------|------------|
| ** **                                | ** ** | **2007**                          | ** ** | **2006**     | ** ** | **2005**     | ** ** | **2007/2006** | ** ** | **2006/2005** | ** ** |
| ** **                                | ** ** | **(In thousands)**                | ** ** | ** **   | ** ** | ** **   | ** ** |
|                                      |       |                              |       |         |       |         |       |   |   |   |   |
| Salaries, benefits and other compensation |       | $                                 | 9,949      |         | $          | 9,194        |       | $ | 7,442 |   | 8.2 | % | 23.5 | % |
| Occupancy expense                         |       | 1,828                             |       | 1,496        |       | 1,812        |       | 22.2 |   | (17.4 | ) |
| Furniture and equipment expense           |       | 940                               |       | 1,060        |       | 826          |       | (11.3 | ) | 28.3 |   |
| Data processing costs                     |       | 1,537                             |       | 1,514        |       | 1,452        |       | 1.5 |   | 4.3 |   |
| Professional fees                         |       | 1,846                             |       | 1,781        |       | 1,127        |       | 3.6 |   | 58.0 |   |
| Marketing expense                         |       | 645                               |       | 621          |       | 373          |       | 3.9 |   | 66.5 |   |
| FDIC premiums                             |       | 84                                |       | 796          |       | 765          |       | 89.4 |   | 4.1 |   |
| Contribution to charitable foundation     |       | —                            |       | 1,500        |       | —       |       | (100.0 | ) | 100.0 |   |
| Other                                     |       | 1,859                             |       | 1,905        |       | 1,411        |       | (2.4 | ) | 35.0 |   |
| Total                                     |       | $                                 | 18,688     |         | $          | 19,867       |       | $ | 15,208 |   | (5.9 | )% | 30.6 | % |

 

                ***2007 vs. 2006.***  In 2007, noninterest expense decreased $1.2million, or 5.9%.  Salaries and benefitcosts increased $755,000, primarily as a result of (1) a full year of expenseassociated with the hiring of a team of experienced commercial lenders andcommercial credit staff in the spring of 2006, (2) four months ofexpenses, or $271,000, associated with the awards granted under the Company’s2007 Equity Incentive Plan and (3) personnel expense associated with theBank opening its eleventh full-service branch in West Chester, Pennsylvania in September 2007.  Occupancy expense increased $332,000 duringthe twelve months ended December 31, 2007, primarily as a result of theCompany moving its operations center to a new location in the second quarter of2007 and the opening of the Bank’s West Chester branch.  Furniture and equipment expense decreased$120,000 primarily a result of an increase in 2006 expense associated withadjustments made to certain assets useful lives. Professional fees increased by$65,000 primarily as a result of incremental costs associated with our firstyear implementation of Sarbanes-Oxley controls and procedures, partially offsetby lower legal costs associated with strategic initiatives performed in 2006.The remainder of the decrease in noninterest expense for the year wasattributable to the $1.5 million contribution to the Fox Chase Bank CharitableFoundation in the third quarter of 2006 and a decrease of $712,000 in FDICinsurance premiums due to the lifting of the Bank’s Cease and Desist order bythe Office of Thrift Supervision on June 28, 2006.

 

                ***2006vs. 2005***.  In 2006,noninterest expense increased due to a $1.5 million contribution to the Fox ChaseCharitable Foundation, which was established and funded in connection with theBank’s mutual holding company reorganization. The increase was also due toincreases in salaries, benefits and other compensation, furniture and equipmentexpense, professional fees, marketing expenses and other operating expenses.The increased salaries, benefits and other compensation reflected the hiring ofnineteen commercial lending and commercial credit and risk managementprofessionals since 2005 and the additional staff hired in connection with theopening of our Marmora branch office in March 2006. The Company alsorecorded compensation expense of $512,000 in the fourth quarter of 2006 relatedto the first year’s allocation from the Fox Chase Bank Employee Stock OwnershipPlan.  Furniture and equipment expensesincreased $234,000 due to an increase in depreciation related expense forcertain assets whose depreciable lives were corrected in 2006, and to a lesserextent due to the opening of the new Marmora branch office and two new loanproduction offices.  Professional feesincreased $654,000 due to the hiring of consulting firms to assist with theimplementation of internal policies and procedures related to theSarbanes-Oxley Act as well as fees related to various strategicconsiderations.   Other expenses for 2006also included an adjustment of $232,000 related to errors in prior periods inthe procedures for closing and reconciling transactions in our automated tellermachine system.  Such errors werediscovered in 2006 and an analysis of the materiality of this adjustment, alongwith the depreciation adjustment, was completed and management concluded thatthese items were not material to any of the historical periods presentedherein.

 

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**                *IncomeTaxes.***

 

                ***2007vs. 2006.***Incometax expense for 2007 was $460,000 compared to $684,000 for 2006. The decreasein 2007 was primarily due to a $1.9 million decrease in pre-tax income.  The effective tax rate for 2007and 2006 was 19.2% and 15.8%, respectively.  The effective tax rate in 2007 was lower then the statutory federal taxrate of 34.0% primarily due to the Company having tax-exempt interest income of$924,000 and tax-exempt bank-owned life insurance income of $438,000.  The twelve-month period ended December 31,2006 included the Company reversing a valuation allowance of $312,000 that ithad established in prior periods for possible non-realizable deferred tax assetbenefits associated with certain capital loss carryforwards.

 

***2006 vs. 2005.***  Income taxexpense for 2006 was $684,000 compared to $3.0 million for 2005.  The decrease in 2006 was primarily due to a$4.6 million decrease in pre-tax net income. The effective tax rate for 2006 and 2005 was 15.8% and 33.3%, respectively.  The effective tax rate in 2006 was lower thanthe statutory federal tax rate of 34.0% primarily due to (1) the Companyhaving tax-exempt interest income of $934,000 and bank owned life insuranceincome of $427,000 and (2) the Company reversing a valuation allowance of$312,000 it had established in 2005 for possible non-realizable deferred taxasset benefits associated with certain capital loss carryforwards.  The Bank entered into an agreement to sell oneof its office facilities in the fourth quarter of 2006, which was consummatedduring the second quarter of 2007, and resulted in sufficient capital gainincome to utilize such capital loss carryforwards.

 

**RiskManagement**

 

                ***Overview.***  Managing risk is an essential part ofsuccessfully managing a financial institution. Our most prominent riskexposures are credit risk, interest rate risk and market risk. Credit risk isthe risk of not collecting the interest and/or the principal balance of a loanor investment when it is due. Interest rate risk is the potential reduction ofnet interest income as a result of changes in interest rates. Market riskarises from fluctuations in interest rates that may result in changes in thevalues of financial instruments, such as available-for-sale securities, thatare accounted for on a mark-to-market basis. Other risks that we face areoperational risks, liquidity risks and reputation risk. Operational risksinclude risks related to fraud, regulatory compliance, processing errors,technology and disaster recovery. Liquidity risk is the possible inability to fund obligations todepositors, lenders or borrowers due to unforeseen circumstances.  Reputation risk is the risk that negative publicityor press, whether true or not, could cause a decline in our customer base orrevenue.

 

                ***Credit Risk Management.***  Our strategy for credit risk managementfocuses on having well-defined credit policies and uniform underwritingcriteria and providing prompt attention to potential problem loans.  Historically, this strategy also emphasizesthe origination of one- to four-family mortgage loans, which typically havelower default rates than other types of loans and are secured by collateralthat generally tends to appreciate in value.

 

                When a borrower fails to make a required loanpayment, we take a number of steps to attempt to have the borrower cure thedelinquency and restore the loan to current status. When the loan becomes 15days past due, a late notice is generated and sent to the borrower.  A second notice is sent and phone calls aremade ten days later. If payment is not received by the 30th day ofdelinquency, a further notification is sent to the borrower.  If payment is not received by the 45th day ofdelinquency for a loan on a Pennsylvania property or the 60th day of delinquencyfor a loan on a New Jersey property, a notice is sent to the borrower advisingthem that they have a specified period of time to cure their default beforelegal action begins.  If no successfulworkout can be achieved, after a loan becomes 90 days delinquent, we typicallycommence foreclosure or other legal proceedings. If a foreclosure action isinstituted and the loan is not brought current, paid in full, or refinancedbefore the foreclosure sale, the real property securing the loan generally issold at foreclosure. We also may consider loan workout arrangements withcertain borrowers under certain circumstances.

 

                Management reportsto the Board of Directors or a committee of the Board monthly regarding theamount of loans delinquent more than 30 days, all loans in foreclosure and allforeclosed and repossessed property that we own.

 

                ***Analysisof Nonperforming and Classified Assets.***  We consider repossessed assets and loans thatare 90 days or more past due to be nonperforming assets. Loans are generallyplaced on nonaccrual status when they 

 

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become 90 days delinquentat which time the accrual of interest ceases and any previously recordedinterest is reversed and recorded as a reduction of loan interest and feeincome. Typically, payments received on a nonaccrual loan are applied to theoutstanding principal and interest as determined at the time of collection ofthe loan.

 

                Real estate that we acquire as a result offoreclosure or by deed-in-lieu of foreclosure is classified as foreclosedassets until it is sold. When property is acquired, it is initially recorded atthe lower of its cost or market value, less estimate selling expenses. Holdingcosts and declines in fair value after acquisition of the property result incharges against income.

 

                Thefollowing table provides information with respect to our nonperforming assetsat the dates indicated.  We did not haveany troubled debt restructurings at the dates presented.

** **
| ** **                                                                             | ** ** | **At December 31,**   | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                             | ** ** | **2007**                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                             | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| Nonaccrual loans:                                                                      |       |                       |       |   |   |   |   |   |   |   |   |
| One- to  four-family                                                                   |       | $                          | 155        |   | $ | 284 |   | $ | 548 |   | $ | 1,442 |   | $ | 1,324 |   |
| Multi-family and  commercial real estate                                               |       | 105                        |       | — |   | 2,972 |   | — |   | — |   |
| Total                                                                                  |       | 260                        |       | 284 |   | 3,520 |   | 1,442 |   | 1,324 |   |
|                                                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| Accruing loans past due 90 days or more:                                               |       |                       |       |   |   |   |   |   |   |   |   |
| One- to  four-family                                                                   |       | 559                        |       | — |   | — |   | — |   | — |   |
| Multi-family and  commercial real estate                                               |       | —                     |       | 2,941 |   | 1,574 |   | — |   | — |   |
| Total                                                                                  |       | 559                        |       | 2,941 |   | 1,574 |   | — |   | — |   |
| Total of  nonaccrual loans and accruing loans 90 days or more past due                 |       | $                          | 819        |   | $ | 3,225 |   | $ | 5,094 |   | $ | 1,442 |   | $ | 1,324 |   |
|                                                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| Real estate owned                                                                      |       | —                     |       | — |   | 107 |   | — |   | — |   |
| Total  nonperforming assets                                                            |       | $                          | 819        |   | $ | 3,225 |   | $ | 5,201 |   | $ | 1,442 |   | $ | 1,324 |   |
|                                                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| Total  nonperforming loans and accruing loans past due 90 days or more to total  loans |       | 0.18                       | %          | 0.90 | % | 1.36 | % | 0.29 | % | 0.32 | % |
| Total nonperforming loans to total assets                                              |       | 0.10                       |       | 0.43 |   | 0.65 |   | 0.16 |   | 0.16 |   |
| Total nonperforming assets to total assets                                             |       | 0.10                       |       | 0.43 |   | 0.67 |   | 0.16 |   | 0.16 |   |

 

At December 31,2007, accruing loans past due 90 days or more consisted of a $505,000residential mortgage loan and a $54,000 home equity loan to one borrower.  The loans are secured by a residentialproperty in the southern New Jersey shore area.

 

At December 31,2006, accruing loans past due 90 days or more consisted of one multi-family andcommercial real estate loan that was past its contractual maturity.  The loan was secured by a beachfrontundeveloped parcel of land in the southern New Jersey shore area.  The loan was paid off during the fourthquarter of 2007.

 

                Interest income that would have been recorded for theyear ended December 31, 2007 had nonaccruing loans been current accordingto their original terms was approximately $13,000.  Interest income recorded for the year ended December 31,2007 was $9,000.

 

                Federal regulations require us to review and classifyour assets on a regular basis. In addition, the Office of Thrift Supervisionhas the authority to identify problem assets and, if appropriate, require themto be classified. There are three classifications for problem assets:substandard, doubtful and loss. “Substandard assets” must have one or moredefined weaknesses and are characterized by the distinct possibility that wewill sustain some loss if the deficiencies are not corrected. “Doubtful assets”have the weaknesses of substandard assets with the additional 

 

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characteristic that theweaknesses make collection or liquidation in full on the basis of currentlyexisting facts, conditions and values questionable, and there is a highpossibility of loss. An asset classified “loss” is considered uncollectible andof such little value that continuance as an asset of the institution is notwarranted. The regulations also provide for a “special mention” category,described as assets which do not currently expose us to a sufficient degree ofrisk to warrant classification but do possess credit deficiencies or potentialweaknesses deserving our close attention. When we classify a loan as substandard or doubtful, we generallyestablish a specific allowance for loan losses for that loan.  If we classify an asset as loss, we allocatean amount equal to 100% of the portion of the asset classified loss.

 

                The following table shows the aggregateamounts of our criticized and classified assets at the dates indicated.

 

| ** **                             | ** ** | **At December 31,** |
|----------------------------------------|------------|--------------------------|
| ** **                             | ** ** | **2007**                 | ** ** | **2006** | ** ** | **2005** |
| ** **                             | ** ** | **(In thousands)**       |
|                                   |       |                     |   |   |   |   |
| Special mention assets                 |       | $                        | 1,648 |   | $ | 3,225 |   | $ | 19,529 |
| Substandard assets                     |       | 559                      |   | 5,764 |   | 17,610 |
| Doubtful assets                        |       | —                   |   | — |   | 3,720 |
| Total criticized and classified assets |       | $                        | 2,207 |   | $ | 8,989 |   | $ | 40,859 |

 

The decreases in classified assets in 2007 relates to successfulliquidation, without any loss, of the $5.8 million of assets classified assubstandard at December 31, 2006. Additionally, an asset classified asspecial mention at December 31, 2006 in the amount of $2.9 million paidoff during 2007.

 

At December 31, 2007, the Bank had two loans classified assubstandard, one residential mortgage totaling $505,000 combined with a $54,000home equity loan, both to one borrower, which the Bank recorded a specificreserve of $109,000 at December 31, 2007. Special mention assets included $1.1 million of commercial real estateloans, $500,000 of residential mortgage loans and one $44,000 home equityloan.  The commercial real estate loansrepresent two separate borrowing relationships which the Bank believes theborrowers have adequate collateral to pay the loans upon liquidation. Theresidential mortgage loans are to four different borrowers. The Bank believesthe borrowers have adequate collateral to pay the loans upon liquidation.

 

At December 31, 2006, substandard assets included two residentialloans to the same borrower totaling $1.7 million and two sub-investment gradecorporate bonds totaling $4.0 million which matured in January and February 2007.  The substandard loans consisted of tworesidential loans, the larger of which is financing on a four-unit apartmentthat the borrower is seeking to convert to separate condominium units andsell.  The borrower was current on allamounts due at December 31, 2006, but did not have sufficient liquidity topay the loan if the units were not sold within a short timeframe.   Special mention assets included one loantotaling $2.9 million, which was secured by a beachfront undeveloped parcel ofland in the southern New Jersey shore area. The loan was paid off during the fourth quarter of 2007.

 

                The decreases in classifiedassets in 2006 reflected increased collection efforts as well as the Bankrequiring certain high-risk construction loans in our New Jersey market area tobe rescinded or refinanced with other financial institutions.  During 2006, the Bank collected all of itssignificant nonperforming commercial and construction loans by establishingworkout strategies that allowed the borrowers sufficient time to resolve theirbusiness difficulties and/or sell the collateral and repay the Bank.  The decrease in classified assets alsoincluded the maturity of $2.1 million of sub-investment grade corporate bondsduring 2006.  Additionally, certainborrowers were removed from classified status due to improvements indocumentation on their loans or in the credit profile of the borrower.

 

                Other than as disclosed in the above tables, thereare no other loans at December 31, 2007 that management has serious doubtsabout the ability of the borrowers to comply with the present loan repaymentterms.

 

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                ***Delinquencies*. **The following table provides informationabout delinquencies in our loan portfolio at the dates indicated.

** **
| ** **                               | ** ** | **At December 31,**  |
|------------------------------------------|------------|---------------------------|
| ** **                               | ** ** | **2007**                  | ** ** | **2006** | ** ** | **2005** |
| ** **                               | ** ** | **30-59  Days  Past Due** | ** ** | **60-89  Days  Past Due** | ** ** | **30-59  Days  Past Due** | ** ** | **60-89  Days  Past Due** | ** ** | **30-59  Days  Past Due** | ** ** | **60-89  Days  Past Due** |
| ** **                               | ** ** | **(In thousands)**        |
| Commercial:                              |       |                      |   |   |   |   |   |   |   |   |   |   |
| Multi-family and  commercial real estate |       | $                         | 953 |   | $ | 146 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |
| Residential real estate:                 |       |                      |   |   |   |   |   |   |   |   |   |   |
| One- to  four-family                     |       | 231                       |   | 15 |   | 191 |   | — |   | — |   | — |
| Construction                             |       | —                    |   | — |   | — |   | — |   | — |   | 1,653 |
| Consumer:                                |       |                      |   |   |   |   |   |   |   |   |   |   |
| Home equity loans  and lines of credit   |       | —                    |   | 53 |   | 23 |   | 24 |   | — |   | 21 |
| Automobile                               |       | —                    |   | 2 |   | — |   | — |   | — |   | 2 |
| Total                                    |       | $                         | 1,184 |   | $ | 216 |   | $ | 214 |   | $ | 24 |   | $ | — |   | $ | 1,676 |

 

                The increase in delinquent loansis primarily due to two commercial real estate loans which total $953,000 whichare either in the process of collection or the Bank believes the borrowers haveadequate collateral to pay the loans.

 

***Analysis and Determination of the Allowance for Loan Losses*****.**

 

                ***HistoricalPractice.***  Before 2003, wetypically originated loans secured by residential real estate.  In such periods, home equity loans and linesof credit were evaluated for loan losses in the same manner as one-tofour-family loans because they were all collateralized by residential realestate.  In 2003, then-current managementdetermined to emphasize multi-family and commercial real estate lending andconstruction lending, primarily in the southern New Jersey shore area where ithad recently opened new branch offices. However, when doing so, management failed to adopt a risk rating systemand update its allowance for loan losses policy to account for the new types ofloans that were being originated. Consequently, management failed to properly review and classify the newtypes of loans that were being originated. Management’s failure to implement and apply the risk ratingdocumentation and, thus, its failure to adequately support its allowance forloan losses were deemed to be a material weakness in connection with the auditof our 2004 financial statements. Further, such weakness was cited by the regulators as one of the reasonsleading to the issuance of the Cease and Desist Order in June 2005.

 

                ***CurrentPractice.***  In 2005, newmanagement reviewed the existing policy on allowance for loan losses andupdated it to ensure compliance with U.S. generally accepted accountingprinciples and with all regulatory guidance. Additionally, three independent loan consultants were engaged toseparately review the loan portfolio and the classification of assets and toassist with establishing proper risk-weighting of loans.  A description of the revised procedures fordetermining the allowance for loan losses is contained below.

 

                The allowance for loan losses is maintained at alevel representing management’s best estimate of known and inherent losses inthe loan portfolio, based upon management’s evaluation of the portfolio’scollectibility. We evaluate the need to establish allowances against losses onloans on a quarterly basis. When changes in the allowance are necessary, anadjustment is made.  The adjustments tothe allowance are made by management and presented to the Audit Committee ofthe Board of Directors.

 

                Our methodology for assessing the appropriateness ofthe allowance for loan losses consists of a specific allowance on identifiedproblem loans and a general valuation allowance on the remainder of the loanportfolio. Although we determine the amount of each element of the allowanceseparately, the entire allowance for loan losses is available for the losses onentire portfolio.

 

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                *Specific Allowance Required for Identified ProblemLoans.*  We establish anallowance on certain identified problem loans, including all classified loans,based on such factors as: (1) the strength of the customer’s personal orbusiness cash flows and personal guarantees; (2) the availability of othersources of repayment; (3) the amount due or past due; (4) the typeand value of collateral; (5) the strength of our collateral position; (6) theestimated cost to sell the collateral; and (7) the borrower’s effort tocure the delinquency.

 

                *General ValuationAllowance on the Remainder of the Loan Portfolio.*  We establish a general allowance for loansthat are not classified to recognize the inherent losses associated withlending activities. This general valuation allowance is determined bysegregating the loans by loan category and assigning percentages to eachcategory. The percentages are adjusted for significant factors that, inmanagement’s judgment, affect the collectibility of the portfolio as of theevaluation date. These significant factors may include loss experience inparticular segments of the portfolio, trends and absolute levels of classifiedand criticized loans, trends and absolute levels in delinquent loans, trends inrisk ratings, trends in industry charge-offs by particular segments and changesin existing general economic and business conditions affecting our lendingareas and the national economy.  Theseloss factors are subject to ongoing evaluation to ensure their relevance in thecurrent economic environment. We perform this systematic analysis of theallowance on a quarterly basis.

 

                We also identifyloans that may need to be charged off as a loss by reviewing all delinquentloans, classified and criticized loans and other loans that management may haveconcerns about collectibility.  Forindividually reviewed loans, the borrower’s inability to make payments underthe terms of the loan or a shortfall in collateral value could result in anincrease in the allowance for loan losses.

 

At December 31, 2007our allowance for loan losses represented 0.75% of total loans and 412.2% ofnonperforming loans.  At December 31,2007 the allowance for loan losses was $3.4 million, of which $109,000 wasspecific reserves for identified loans and $3.3 million was a general valuationallowance for the loan portfolio.  Theallowance for loan losses at December 31, 2007 represents application ofloan loss policies, which comply with U.S. generally accepted accountingprinciples and all regulatory guidance. The allowance for loan losses is impacted by the previously discussedlevels of specific and general required valuation allowances.  As such reserve levels change, managementwill increase or decrease the allowance for loan losses as required to maintainadequate levels of reserves for losses inherent in its loan portfolio.

 

                At December 31, 2006 our allowance for loanlosses represented 0.82% of total loans and 91.4% of nonperforming loans.  At December 31, 2006, the allowance forloan losses was $2.9 million, all of which was a general valuation allowancefor the loan portfolio.  The allowancefor loan losses at December 31, 2006 reflects the separate review of theloan portfolio, the classification of assets and assistance with establishingproper risk-weighting of loans by independent loan review consultant during2006.

 

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                The following table sets forth the breakdown of theallowance for loan losses by loan category at the dates indicated.  The attribution in the table of all of theallowance for loan losses to one-to four-family real estate loans before 2005reflects former management’s:  (1) decisionto evaluate loan losses for home equity loans and lines of credit in the samemanner as one-to four-family loans because they were all collateralized byresidential real estate; and (2) failure to adopt a risk rating system andupdate its allowance for loan losses analysis to account for the increase inmulti-family and commercial real estate and construction loans that wereoriginated in 2003 and 2004.  See *“—Analysis and Determination of the Allowance forLoan Losses — Historical Practice.”*

 
| ** **                       | ** **   | **At December 31,**   | ** **   |
|----------------------------------|--------------|----------------------------|--------------|
| ** **                       | ** **   | **2007**                   | ** **   | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                       | ** **   | **Amount**                 | ** **   | **% of  Loans in  Category  to Total  Loans** | ** ** | **Amount** | ** ** | **% of  Loans in  Category  to Total  Loans** | ** ** | **Amount** | ** ** | **% of  Loans in  Category  to Total  Loans** | ** ** | **Amount** | ** ** | **% of  Loans in  Category  to Total  Loans** | ** ** | **Amount** | ** ** | **% of  Loans in  Category  to Total  Loans** | ** ** |
| ** **                       | *** *** | **(Dollars in Thousands)** | *** *** |
| Real estate loans:               |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One- to  four-family             |         | $                          | 405          |   | 47.9 | % | $ | 798 |   | 58.3 | % | $ | 607 |   | 60.9 | % | $ | 14,391 |   | 50.1 | % | $ | 2,109 |   | 62.7 | % |
| Multi-family and  commercial     |         | 1,245                      |         | 16.9 |   | 784 |   | 12.4 |   | 2,544 |   | 8.8 |   | — |   | 17.2 |   | — |   | 13.7 |   |
| Construction                     |         | 872                        |         | 10.3 |   | 318 |   | 3.2 |   | 4,640 |   | 8.3 |   | — |   | 18.5 |   | — |   | 11.2 |   |
| Consumer loans:                  |         |                       |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Home equity  loans               |         | 329                        |         | 15.2 |   | 257 |   | 20.5 |   | 316 |   | 17.3 |   | — |   | 9.9 |   | — |   | 8.6 |   |
| Automobile                       |         | 18                         |         | 0.1 |   | 37 |   | 0.3 |   | 46 |   | 0.3 |   | — |   | 0.4 |   | — |   | 0.4 |   |
| Lines of credit                  |         | 5                          |         | 2.1 |   | 38 |   | 2.9 |   | — |   | 4.3 |   | — |   | 3.6 |   | — |   | 3.3 |   |
| Other                            |         | 11                         |         | 0.1 |   | 3 |   | 0.1 |   | — |   | 0.1 |   | — |   | 0.3 |   | — |   | 0.1 |   |
| Commercial                       |         | 486                        |         | 7.4 |   | 446 |   | 2.3 |   | 18 |   | — |   | — |   | — |   | — |   | — |   |
| Unallocated                      |         | 5                          |         | — |   | 268 |   | — |   | 178 |   | — |   | — |   | — |   | — |   | — |   |
| Total allowance  for loan losses |         | $                          | 3,376        |   | 100.0 | % | $ | 2,949 |   | 100.0 | % | $ | 8,349 |   | 100.0 | % | $ | 14,391 |   | 100.0 | % | $ | 2,109 |   | 100.0 | % |

 

51

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Although we believe thatwe use the best information available to establish the allowance for loanlosses, future adjustments to the allowance for loan losses may be necessaryand our results of operations could be adversely affected if circumstances differsubstantially from the assumptions used in making the determinations.Furthermore, while we believe we have established our allowance for loan lossesin conformity with U.S. generally accepted accounting principles, there can beno assurance that the Office of Thrift Supervision, in reviewing our loanportfolio, will not request us to increase our allowance for loan losses.  The Office of Thrift Supervision may requireus to increase our allowance for loan losses based on judgments different fromours.  In addition, because future eventsaffecting borrowers and collateral cannot be predicted with certainty, therecan be no assurance that increases will not be necessary should the quality ofany loans deteriorate as a result of the factors discussed above. Any materialincrease in the allowance for loan losses may adversely affect our financialcondition and results of operations.

 

***Analysis of Loan Loss Experience.*** The following table sets forth an analysis of the allowance for loanlosses for the periods indicated.

** **
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                         | ** ** | **(Dollars in thousands)**       | ** ** |
|                                                                               |       |                             |       |   |   |   |   |   |   |   |   |
| Allowance at beginning of period                                                   |       | $                                | 2,949      |   | $ | 8,349 |   | $ | 14,391 |   | $ | 2,109 |   | $ | 2,082 |   |
| Charge-offs:                                                                       |       |                             |       |   |   |   |   |   |   |   |   |
| Consumer                                                                           |       | 2                                |       | 8 |   | 17 |   | — |   | 3 |   |
| Total charge-offs                                                                  |       | 2                                |       | 8 |   | 17 |   | — |   | 3 |   |
|                                                                               |       |                             |       |   |   |   |   |   |   |   |   |
| Recoveries                                                                         |       | 4                                |       | 2 |   | — |   | — |   | — |   |
| Net charge offs (recoveries)                                                       |       | (2                               | )          | 6 |   | 17 |   | — |   | 3 |   |
| Provision (credit) for loan losses                                                 |       | 425                              |       | (5,394 | ) | (6,025 | ) | 12,282 |   | 30 |   |
| Allowance at end  of period                                                        |       | $                                | 3,376      |   | $ | 2,949 |   | $ | 8,349 |   | $ | 14,391 |   | $ | 2,109 |   |
|                                                                               |       |                             |       |   |   |   |   |   |   |   |   |
| Allowance for  loan losses to nonperforming loans and troubled debt restructurings |       | 412.2                            | %          | 91.4 | % | 163.9 | % | 998.0 | % | 159.3 | % |
| Allowance for  loan losses to total loans at the end of the period                 |       | 0.75                             |       | 0.82 |   | 2.22 |   | 2.89 |   | 0.50 |   |
| Net charge-offs  (recoveries) to average loans outstanding during the period       |       | —                           |       | — |   | — |   | — |   | — |   |

 

***Interest Rate Risk Management.***  Wemanage the interest rate sensitivity of our interest-bearing liabilities andinterest-earning assets in an effort to minimize the adverse effects of changesin the interest rate environment. Deposit accounts typically react more quicklyto changes in market interest rates than mortgage loans because of the shortermaturities of deposits. As a result, sharp increases in interest rates mayadversely affect our earnings while decreases in interest rates maybeneficially affect our earnings. To reduce the potential volatility of ourearnings, we have sought to improve the match between asset and liabilitymaturities and rates, while maintaining an acceptable interest rate spread. Ourstrategy for managing interest rate risk generally involves emphasizing theorigination of shorter-term adjustable-rate loans, which we maintain in ourportfolio, and investing in securities with that have adjustable-rates orshorter terms. We currently do not participate in systemic hedging programs,interest rate swaps or other activities involving the use of derivativefinancial instruments, except that as of December 31, 2007, the Bank hadone interest rate swap in the notional amount of $1.2 million to hedge a15-year fixed rate loan which was earning interest at 7.43%.  The Bank is receiving a variable rate paymentof three-month LIBOR plus 2.24% and will pay fixed rate payments of 7.43%. Theswap matures in April 2022 and had a market value loss position of $60,000at December 31, 2007.

 

52

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We have a Risk ManagementCommittee, which together with an Asset/Liability Management Committee,communicates, coordinates and controls all aspects involving asset/liabilitymanagement. The committee establishes and monitors the volume, maturities,pricing and mix of assets and funding sources with the objective of managingassets and funding sources to provide results that are consistent withliquidity, growth, risk limits and profitability goals.

 

Our goal is to manageasset and liability positions to moderate the effects of interest ratefluctuations on net interest income and net income.

 

***Net Portfolio Value Analysis.***  Weuse a net portfolio value analysis prepared by the Office of Thrift Supervisionand an internally prepared model to review our level of interest raterisk.  Such analyses measure interestrate risk by computing changes in net portfolio value of our cash flows fromassets, liabilities and off-balance sheet items in the event of a range ofassumed changes in market interest rates. Net portfolio value represents themarket value of portfolio equity and is equal to the market value of assetsminus the market value of liabilities, with adjustments made for off-balancesheet items. These analyses assess the risk of loss in market risk-sensitiveinstruments in the event of a sudden and sustained 100 to 300 basis pointincrease or 100 and 200 basis point decrease in market interest rates with noeffect given to any steps that we might take to counter the effect of thatinterest rate movement. Because of the low level of market interest rates,these analyses are not performed for decreases of more than 200 basis points.  The internal model differs from that preparedby the Office of Thrift Supervision as it assumes:  (1) slower prepayments for fixed-rateone- to four-family loans; and (2) a longer duration for transactionaccounts.  Notwithstanding the differentassumptions, the two models do not produce materially different results.

 

The followingtable, which is based on information that we provide to the Office of ThriftSupervision, presents the change in our net portfolio value at December 31,2007 that would occur in the event of an immediate change in interest ratesbased on Office of Thrift Supervision assumptions, with no effect given to anysteps that we might take to counteract that change.

 
| **Basis Point (“bp”)** | ** ** | **Net Portfolio Value**    | ** ** | **Net Portfolio Value as % of Portfolio Value of Assets** | ** ** |
|----------------------------------|------------|----------------------------|------------|-----------------------------------------------------------|------------|
| **Change in Rates**              | ** ** | **Amount**                 | ** ** | **Change**                                                | ** ** | **% Change** | ** ** | **NPV Ratio** | ** ** | **Change (bp)** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)** | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
|                             |       |                       |       |                                                      |       |   |   |   |   |   |   |
| 300                              |       | $                          | 86,100     |                                                      | (25,532    | ) | (23 | )% | 11.86 | % | (278 | ) |
| 200                              |       | 95,704                     |       | (15,927                                                   | )          | (14 | ) | 12.96 |   | (168 | ) |
| 100                              |       | 104,081                    |       | (7,551                                                    | )          | (7 | ) | 13.86 |   | (77 | ) |
| 0                                |       | 111,631                    |       |                                                      |       |   |   | 14.63 |   |   |   |
| (100)                            |       | 115,203                    |       | 3,572                                                     |       | 3 |   | 14.93 |   | 30 |   |
| (200)                            |       | 115,555                    |       | 3,924                                                     |       | 4 |   | 14.87 |   | 23 |   |
|                                  |            |                            |            |                                                           |            |  |  |  |  |  |  |  |

 

The decrease in our netportfolio value shown in the preceding table that would occur upon an increasein prevailing market interest rates and the increase in our net portfolio valuethat would occur upon a decrease in market rates reflects: (1) that asubstantial portion of our loan portfolio is fixed-rate residential loans; and (2) theshorter duration of deposits, which reprice more frequently in response tochanges in market interest rates.

 

The Office of ThriftSupervision uses various assumptions in assessing interest rate risk. Theseassumptions relate to interest rates, loan prepayment rates, deposit decayrates and the market values of certain assets under differing interest ratescenarios, among others. As with any method of measuring interest rate risk,certain shortcomings are inherent in the methods of analyses presented in theforegoing tables. For example, although certain assets and liabilities may havesimilar maturities or periods to repricing, they may react in different degreesto changes in market interest rates. Also, the interest rates on certain typesof assets and liabilities may fluctuate in advance of changes in marketinterest rates, while interest rates on other types may lag behind changes inmarket rates. Additionally, certain assets, such as adjustable-rate mortgageloans, have features that restrict changes in interest rates on a short-termbasis and over the life of the asset. Further, in the event of a change ininterest rates, expected rates of prepayments on loans and early withdrawalsfrom certificates could deviate significantly from those assumed in calculatingthe table. Prepayment rates can have a significant impact on interestincome.  Because of the large percentageof loans and mortgage-backed securities we hold, rising or falling interestrates have a 

 

53

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significant impact on theprepayment speeds of our earning assets that in turn affect the ratesensitivity position. When interest rates rise, prepayments tend to slow. Wheninterest rates fall, prepayments tend to rise. Our asset sensitivity would bereduced if prepayments slow and vice versa. While we believe these assumptionsto be reasonable, there can be no assurance that assumed prepayment rates willapproximate actual future mortgage-backed security and loan repayment activity.

 

***Liquidity Management*****.**  Liquidity isthe ability to meet current and future financial obligations of a short-termnature. Our primary sources of funds consist of deposit inflows, loanrepayments and maturities and sales of securities. While maturities andscheduled amortization of loans and securities are predictable sources offunds, deposit flows and loan prepayments are greatly influenced by generalinterest rates, economic conditions and competition.

 

We regularly adjust ourinvestments in liquid assets based upon our assessment of:  (1) expected loan demands; (2) expecteddeposit flows; (3) yields available on interest-earning deposits andsecurities; and (4) the objectives of our asset/liability managementpolicy.  We use a variety of measures toassess our liquidity needs, which are provided to our Asset/Liability ManagementCommittee on a regular basis.  Our policyis to maintain net liquidity of at least 50% of our funding obligations overthe next month.  Additionally, our policyis to maintain an amount of cash and short-term marketable securities equal toat least 15% of net deposits and liabilities that will mature in one year orless.

 

Our most liquid assets are cash and cash equivalents. The levels ofthese assets depend on our operating, financing, lending and investingactivities during any given period. Cash and cash equivalents totaled $31.3million at December 31, 2007. Securities classified as available-for-sale,which provide additional sources of liquidity, totaled $296.3 million at December 31,2007.  In addition, at December 31,2007, we had the ability to borrow a total of approximately $435.9 million fromthe Federal Home Loan Bank of Pittsburgh, of which we had $80.0 millionoutstanding.

 

At December 31,2007, we had $89.8 million in loan commitments outstanding which consisted of$1.7 million of mortgage loan commitments, $22.8 million in home equity andconsumer commitments, $63.8 million in commercial commitments and $1.5 millionstandby letters of credit.  Certificatesof deposit due within one year of December 31, 2007 totaled $244.0million, representing 61.3% of certificates of deposit at December 31,2007.  We believe the large percentage ofcertificates of deposit that mature within one year reflects customers’hesitancy to invest their funds for long periods in the current low interestrate environment. If these maturing deposits do not remain with us, we will berequired to seek other sources of funds, including other certificates ofdeposit and borrowings. Depending on market conditions, we may be required topay higher rates on such deposits or other borrowings than we currently pay onthe certificates of deposit due on or before December 31, 2007. Webelieve, however, based on past experience, that a significant portion of ourcertificates of deposit will remain with us. We have the ability to attract andretain deposits by adjusting the interest rates offered.

 

The followingtable presents certain of our contractual obligations as of December 31,2007.

** **
| ** **                             | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------|------------|----------------------------|------------|
| **Contractual Obligations**            | ** ** | **Total**                  | ** ** | **Less Than One Year** | ** ** | **One to  Three Years** | ** ** | **Three to Five Years** | ** ** | **More Than Five Years** | ** ** |
| ** **                             | ** ** | **(Dollars in thousands)** | ** ** |
|                                   |       |                       |       |   |   |   |   |   |   |   |   |
| Operating lease obligations (1)        |       | $                          | 2,192      |   | $ | 494 |   | $ | 963 |   | $ | 735 |   | $ | — |   |
| FHLB advances and other borrowings (2) |       | 127,460                    |       | 3,939 |   | 7,859 |   | 35,861 |   | 79,801 |   |
| Other long-term obligations (3)        |       | 3,481                      |       | 1,910 |   | 1,571 |   | — |   | — |   |
| Total                                  |       | $                          | 133,133    |   | $ | 6,343 |   | $ | 10,393 |   | $ | 36,596 |   | $ | 79,801 |   |

 

----

(1)          Representslease obligations for operations center, one commercial loan production officeand equipment.

 

(2)          Includesprincipal and projected interest payments.

 

(3)          Representsobligations to the Company’s third party data processing providers and othervendors.

 

54

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Our primary investingactivities are the origination and sale of loans and the purchase and sale ofsecurities. Our primary financing activities consist of activity in depositaccounts, borrowed funds and in 2006 the issuance of common stock. Depositflows are affected by the overall levels of interest rates, the interest ratesand products offered by us and our local competitors and other factors. Wegenerally manage the pricing of our deposits to be competitive and to increasecore deposit relationships. Occasionally, we offer promotional rates on certaindeposit products to attract deposits.

 

The following tablepresents our primary investing and financing activities during the periodsindicated.

 

| ** **                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                             | ** ** | **(In thousands)**               | ** ** |
| Investing  activities:                                 |       |                             |       |   |   |
| Loan  originations                                     |       | $                                | (193,870   | ) | $ | (125,303 | ) |
| Other decreases  in loans                              |       | 134,091                          |       | 137,512 |   |
| Loan sales                                             |       | —                           |       | 4,000 |   |
| Purchase of loan  participations                       |       | (32,064                          | )          | — |   |
| Security  purchases                                    |       | (187,984                         | )          | (60,207 | ) |
| Security sales                                         |       | 36,268                           |       | 17,205 |   |
| Security  maturities, calls and principal repayments   |       | 86,128                           |       | 145,471 |   |
| Financing  activities:                                 |       |                             |       |   |   |
| Decreases in  deposits                                 |       | (10,974                          | )          | (85,773 | ) |
| Increase in FHLB  advances                             |       | 50,000                           |       | — |   |
| Increase in  other borrowings                          |       | 20,000                           |       | — |   |
| Proceeds from  stock issuance, net of conversion costs |       | —                           |       | 62,348 |   |
|                                                        |            |                                  |            |  |  |  |  |

 

***Capital Management.***  We have managedour capital to maintain strong protection for depositors and creditors. We aresubject to various regulatory capital requirements administered by the Officeof Thrift Supervision, including a risk-based capital measure. The risk-basedcapital guidelines include both a definition of capital and a framework forcalculating risk-weighted assets by assigning balance sheet assets andoff-balance sheet items to broad risk categories. At December 31, 2007, weexceeded all of our regulatory capital requirements.  We are considered “well capitalized” underregulatory guidelines.  See *“Regulation and Supervision—Regulation of FederalSavings Associations—Capital Requirements,”*and*“—Regulatory Capital Compliance”*and the notes to the consolidated financial statements included in this Report.

 

We also will manage our capital for maximum stockholder benefit. Thecapital from the offering significantly increased our liquidity and capitalresources. Over time, the initial level of liquidity will continue to bereduced as net proceeds from the stock offering are used for general corporatepurposes, including the funding of lending activities. Our financial conditionand results of operations have been enhanced by the capital from the offering,resulting in increased net interest-earning assets and net income. However, thelarge increase in equity resulting from the capital raised in the offering has,and for some period of time, will have an adverse impact on our return onequity. In the future, we may use capital management tools such as additionalcommon stock repurchases and cash dividends.

 

***Off-Balance Sheet Arrangements.*** In the normal course of operations, we engage in a variety of financialtransactions that, in accordance with U.S. generally accepted accounting principles,are not recorded in our financial statements. These transactions involve, tovarying degrees, elements of credit, interest rate and liquidity risk. Suchtransactions are used primarily to manage customers’ requests for funding andtake the form of loan commitments, letters of credit and lines of credit. Forinformation about our loan commitments and unused lines of credit, see note 10of the notes to the consolidated financial statements. We currently have onehedge of a fixed-rate fifteen year $1.2 million loan, which provides for theBank to receive variable rate funds and pay fixed rate funds. We currently haveno additional plans to engage in hedging activities in the future.

 

For the years ended December 31,2007 and 2006, we engaged in no off-balance sheet transactions reasonablylikely to have a material effect on our financial condition, results ofoperations or cash flows.

 

55

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**Impact of Recent AccountingPronouncements**

 

                  The information required bythis item is included in Note 17 to the consolidated financial statementsbeginning onpage F-1.

 

**Effectof Inflation and Changing Prices**

 

                  The financial statements andrelated financial data presented in this prospectus have been prepared inaccordance with U.S. generally accepted accounting principles, which requirethe measurement of financial condition and operating results in terms ofhistorical dollars without considering the change in the relative purchasingpower of money over time due to inflation. The primary impact of inflation onour operations is reflected in increased operating costs. Unlike mostindustrial companies, virtually all the assets and liabilities of a financialinstitution are monetary in nature. As a result, interest rates generally havea more significant impact on a financial institution’s performance than dogeneral levels of inflation. Interest rates do not necessarily move in the samedirection or to the same extent as the prices of goods and services.

 
| **ITEM 7A.** | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK** |
|--------------|-----------------------------------------------------------------|

 

                The information required by thisitem is incorporated herein by reference to Item 7,  “*Management’s Discussionand Analysis of Financial Condition and Results of Operation — Interest RateRisk Management*.”

 
| **ITEM 8.** | **FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA** |
|-------------|-------------------------------------------------|

 

**               **Information required by this item is included hereinbeginning on page F-1.

 
| **ITEM 9.** | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|-------------------------------------------------------------------------------------------|

** **

                None.

 
| **ITEM 9A.** | **CONTROLS AND PROCEDURES** |
|--------------|-----------------------------|

** **

                The Company’s management,including the Company’s principal executive officer and principal financialofficer, have evaluated the effectiveness of the Company’s “disclosure controlsand procedures,” as such term is defined in Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”).Based upon their evaluation, the principal executive officer and principalfinancial officer concluded that, as of the end of the period covered by thisreport, the Company’s disclosure controls and procedures were effective for thepurpose of ensuring that the information required to be disclosed in thereports that the Company files or submits under the Exchange Act with theSecurities and Exchange Commission (the “SEC”): (1) is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and (2) is accumulated and communicated to theCompany’s management, including its principal executive and principal financialofficers, as appropriate to allow timely decisions regarding requireddisclosure.

 

                No change in the Company’sinternal control over financial reporting occurred during the quarter ended December 31,2007 that has materially affected, or is reasonably likely to affect, theCompany’s internal control over financial reporting.

 

                Management’s report on internalcontrols over financial reporting and KPMG LLP’s attestation report onmanagement’s assessment of the Company’s internal control on financialreporting are contained in “Item 8 — Financial Statements and SupplementaryData” in this Annual Report on Form 10-K.

 
| **ITEM 9B.** | **OTHER INFORMATION** |
|--------------|-----------------------|

** **

                None.

 

56

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# ** **

# **PART III**

# ** **

**ITEM 10.****                                             ****DIRECTORS, EXECUTIVE OFFICERS ANDCORPORATE GOVERNANCE**

 

**Directors**

 

                For information relating to thedirectors of Fox Chase Bancorp, the section captioned “*Items to be Voted on by Stockholders — Item 1 —Election of Directors*” in Fox Chase Bancorp’s Proxy Statement forthe 2008 Annual Meeting of Stockholders is incorporated by reference.

 

**ExecutiveOfficers**

 

                For information relating toofficers of Fox Chase Bancorp, see Part I, Item 1, *“Business — Executive Officers of the Registrant”*to this Annual Report on Form 10-K.

 

**Compliancewith Section 16(a) of the Exchange Act**

 

                For information regardingcompliance with Section 16(a) of the Exchange Act, the cover page tothis Annual Report on Form 10-K and the section captioned *“Other Information Relating to Directors and Executive Officers - Section 16(a) BeneficialOwnership Reporting Compliance”* in Fox Chase Bancorp’s ProxyStatement for the 2008 Annual Meeting of Stockholders are incorporated byreference.

 

**Disclosureof Code of Ethics**

 

**               **For information concerning Fox Chase Bancorp’s code ofethics, the information contained under the section captioned *“Corporate Governance - Code of Ethics and Business Conduct”*in Fox Chase Bancorp’s Proxy Statement for the 2008 Annual Meeting of Stockholdersis incorporated by reference.  A copy ofthe code of ethics and business conduct is available to stockholders on theGovernance Documents portion of the Investors Relations section on Fox ChaseBancorp’s website at www.foxchasebank.com.

 

**CorporateGovernance**

 

                For information regarding theaudit committee and its composition and the audit committee financial expert,the section captioned *“Corporate Governance —Committees of the Board of Directors — Audit Committee”* in Fox ChaseBancorp’s Proxy Statement for the 2008 Annual Meeting of Stockholders isincorporated by reference.

 

**ITEM 11.               EXECUTIVE COMPENSATION**

 

**ExecutiveCompensation**

 

                For information regardingexecutive compensation, the sections captioned *“CompensationDiscussion and Analysis,” “Executive Compensation”*and*“Director Compensation”* in Fox Chase Bancorp’s ProxyStatement for the 2008 Annual Meeting of Stockholders are incorporated byreference.

 

**CorporateGovernance**

 

                For information regarding thecompensation committee report, the section captioned *“Report ofthe Compensation Committee”* in Fox Chase Bancorp’s Proxy Statementfor the 2008 Annual Meeting of Stockholders is incorporated by reference.

 

57

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**ITEM 12.****                                             ****SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS**

 

(a)                                  Security Ownership of Certain BeneficialOwners Information required by this item is incorporated herein by reference tothe section captioned *“Stock Ownership”*in Fox Chase Bancorp’s Proxy Statement for the 2008 Annual Meeting ofStockholders.

 

(b)                                 Security Ownership of ManagementInformation required by this item is incorporated herein by reference to thesection captioned *“Stock Ownership”* in Fox ChaseBancorp’s Proxy Statement for the 2008 Annual Meeting of Stockholders.

 

(c)                                  Changes inControl

 

Management of Fox Chase Bancorp knows of no arrangements, including anypledge by any person or securities of Fox Chase Bancorp, the operation of whichmay at a subsequent date result in a change in control of the registrant.

 

(d)                                 Equity Compensation Plan Information

 

                The following table sets forthinformation about the Company common stock that may be issued upon the exerciseof stock options, warrants and rights under all of the Company’s equitycompensation plans as of December 31, 2007.

 
| **Plan category**                                           | ** ** | **(a)  Number of securities  to be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **(b)  Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **(c)  Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding securities reflected in column (a))** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| Equity compensation plans approved by security  holders     |       | 518,800                                                                                                 |       | $                                                                                       | 12.38      |                                                                                                                                                     | 200,507 |
| Equity compensation plans not approved by security  holders |       | —                                                                                                  |       | —                                                                                  |       |                                                                                                                                                     |
| Total                                                       |       | 518,800                                                                                                 |       | 12.38                                                                                   |       | 200,507                                                                                                                                                  |
|                                                             |            |                                                                                                         |            |                                                                                         |            |                                                                                                                                                          |  |

 

**ITEM 13.****                                             ****CERTAIN RELATIONSHIPS, RELATEDTRANSACTIONS AND DIRECTOR INDEPENDENCE**

 

**CertainRelationships and Related Transactions**

 

                For information regardingcertain relationships and related transactions, the sections captioned “*Other Information Relating to Directors and ExecutiveOfficers — Policies and Procedures for Approval of Related Persons Transactions*”and *“Transactions with Management”* in FoxChase Bancorp’s Proxy Statement for the 2008 Annual Meeting of Stockholders isincorporated by reference.

 

58

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**CorporateGovernance**

 

                For information regardingdirector independence, the section captioned *“CorporateGovernance — Director Independence”* in Fox Chase Bancorp’s ProxyStatement for the 2008 Annual Meeting of Stockholders is incorporated byreference.

 

**ITEM 14.               PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

                For information regarding theprincipal accountant fees and expenses the section captioned *“Items to Be Voted on By Stockholders — Item 2 - Ratification ofIndependent Registered Public Accounting Firm”* in Fox Chase Bancorp’sProxy Statement for the 2008 Annual Meeting of Stockholders is incorporated byreference.

 

# **PART IV**

# ** **

**ITEM 15.****                                             ****EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

 

                                                (1)           Thefinancial statements required in response to this item are incorporated byreference from Item 8 of this Report.

 

(2)                                  All financial statement schedules areomitted because they are not required or applicable, or the requiredinformation is shown in the consolidated financial statements or the notesthereto.

 

(3)                                  Exhibits

 
| **No.** | ** ** | **Description**                                                                                             |
|---------|------------|-------------------------------------------------------------------------------------------------------------|
|    |       |                                                                                                        |
| 3.1     |       | Charter of Fox Chase  Bancorp, Inc. (1)                                                                |
| 3.2     |       | Bylaws of Fox Chase  Bancorp, Inc. (2)                                                                 |
| 4.1     |       | Stock Certificate of  Fox Chase Bancorp, Inc. (1)                                                      |
| 10.1    |       | *Form of Fox Chase  Bank Employee Stock Ownership Plan and Trust Agreement (1)                         |
| 10.2    |       | *Fox Chase Bank  401(k) Profit-Sharing Plan and Trust (1)                                              |
| 10.3    |       | *Employment Agreement between Thomas M. Petro, Fox  Chase Bancorp, Inc. and Fox Chase Bank (3)         |
| 10.4    |       | *Employment Agreement between Jerry D. Holbrook, Fox  Chase Bancorp, Inc. and Fox Chase Bank (3)       |
| 10.5    |       | *Employment Agreement between Keiron G. Lynch, Fox  Chase Bancorp, Inc. and Fox Chase Bank (3)         |
| 10.6    |       | *Employment Agreement between David C. Kowalek, Fox  Chase Bancorp, Inc. and Fox Chase Bank (3)        |
| 10.7    |       | *Employment Agreement between James V. Schermerhorn,  Fox Chase Bancorp, Inc. and Fox Chase Bank (3)   |
| 10.8    |       | *Change of Control Agreement between Richard J.  Fuchs, Fox Chase Bancorp, Inc. and Fox Chase Bank (3) |
| 10.9    |       | *Retention Incentive Agreement between James V.  Schermerhorn, Fox Chase Bank (4)                           |
| 10.10   |       | *Fox Chase Bank  Executive Long-Term Incentive Plan (1)                                                     |
| 10.11   |       | *Fox Chase Bank  Employee Severance Compensation Plan, as amended and restated (1)                          |
| 10.12   |       | *Fox Chase  Bancorp, Inc. 2007 Equity Incentive Plan (5)                                               |
| 10.13   |       | *Change  of Control Agreement between Roger S. Deacon, Fox Chase Bancorp, Inc.  and Fox Chase Bank (6) |
| 21.0    |       | List of Subsidiaries                                                                                        |
| 23.1    |       | Consent of KPMG LLP                                                                                         |
| 31.1    |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer                                |
| 31.2    |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer                                |

 

59

----

|   |   |                                                                         |
|--------|--------|------------------------------------------------------------------------------|
| 32.0   |   | Section 1350  Certification of Chief Executive Officer, Chief Financial |
|   |   | Officer and Chief  Accounting Officer                                        |

----

*                 Management contract or compensatory plan, contract orarrangement.

 

(1)          Incorporated by reference in this document to theexhibits to the Company’s Registration Statement on Form S-1 (File No. 333-134160),as amended, initially filed with the Securities and Exchange Commission on May 16,2006.

(2)          Incorporated by reference into this document to theexhibit to the Company’s Current Report on Form 8-K filed with theSecurities and Exchange Commission on October 24, 2007.

(3)          Incorporated by reference in this document to theCompany’s Quarterly Report on Form 10-Q for the quarter ended September 30,2006 (File No. 001-32971).

(4)          Incorporated by reference in this document to theexhibit to the Company’s Quarterly Report on Form 10-Q for the quarterended September 30, 2007 (File No. 001-32971).

(5)          Incorporated by reference in this document to theappendix to the Company’s Definitive Proxy Statement filed with the Securitiesand Exchange Commission on April 12, 2007.

(6)          Incorporated by reference into this document to theexhibit to the Company’s Quarterly Report on Form 10-Q for the quarterended June 30, 2007 (File No. 001-32971).

 

60

----

 

 

**Index toConsolidated Financial Statements of Fox Chase Bancorp, Inc.**

 
| ** **                                                                                               | **Page** |
|----------------------------------------------------------------------------------------------------------|----------|
|                                                                                                     |     |
| Management's Report on  Internal Control Over Financial Reporting                                        | F-1      |
|                                                                                                     |     |
| Reports of Independent  Registered Public Accounting Firm                                                | F-2      |
|                                                                                                     |     |
| Consolidated  Statements of Condition as of December 31, 2007 and 2006                              | F-4      |
|                                                                                                     |     |
| Consolidated  Statements of Operations for the Years Ended December 31, 2007, 2006 and  2005        | F-5      |
|                                                                                                     |     |
| Consolidated  Statements of Changes in Equity for the Years Ended December 31, 2007,  2006 and 2005 | F-6      |
|                                                                                                     |     |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and  2005        | F-7      |
|                                                                                                     |     |
| Notes to  Consolidated Financial Statements                                                              | F-8      |

 

*******

 

----

 

***FOX CHASE BANCORP, INC.***

 

**Management’s Report onInternal Control Over Financial Reporting**

 

The management of Fox ChaseBancorp, Inc. (the “Company”) is responsible for establishing andmaintaining adequate internal control over financial reporting.  The internal control process has beendesigned under our supervision to provide reasonable assurance regarding thereliability of financial reporting and the preparation of the Company’sfinancial statements for external reporting purposes in accordance with U.S.generally accepted accounting principles.

 

Management conducted anassessment of the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2007, utilizing the frameworkestablished in Internal Control — Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO).  Based on this assessment, management hasdetermined that the Company’s internal control over financial reporting as of December 31,2007 is effective.

 

Our internal control overfinancial reporting includes policies and procedures that pertain to themaintenance of records that accurately and fairly reflect, in reasonabledetail, transactions and dispositions of assets; and provide reasonableassurances that:  (1) transactionsare recorded as necessary to permit preparation of financial statements inaccordance with U.S. generally accepted accounting principles; (2) receiptsand expenditures are being made only in accordance with authorizations ofmanagement and the directors of the Company; and (3) unauthorizedacquisition, use, or disposition of the Company’s assets that could have amaterial effect on the Company’s financial statements are prevented or timelydetected.

 

All internal controlsystems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined tobe effective can provide only reasonable assurance with respect to financialstatement preparation and presentation. Also, projections of any evaluation of effectiveness to future periodsare subject to the risk that controls may become inadequate because of changesin conditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

 

KPMG LLP, an independentregistered public accounting firm, has audited the Company’s consolidatedfinancial statements as of and for the year ended December 31, 2007, andthe effectiveness of the Company’s internal control over financial reporting asof December 31, 2007, as stated in their reports, which are includedherein.

 

 
| /s/ Thomas M. Petro                    |   |
|----------------------------------------|--------|
| Thomas  M. Petro                       |   |
| President  and Chief Executive Officer |   |
|                                   |   |
| /s/ Jerry D. Holbrook                  |   |
| Jerry  D. Holbrook                     |   |
| Chief  Financial Officer and Secretary |   |

 

 

March 12, 2008

 

F-1

----

 

Report of IndependentRegistered Public Accounting Firm

 

The Board of Directorsand Stockholders

Fox Chase Bancorp, Inc.:

 

We have audited theaccompanying consolidatedstatements of condition of Fox Chase Bancorp, Inc. and subsidiary (theCompany) as of December 31, 2007 and 2006, and the related consolidated statements ofoperations, changes in equity, and cash flows for each of the years in thethree-year period ended December 31, 2007. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements basedon our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Fox Chase Bancorp, Inc. and subsidiary as of December 31,2007 and 2006, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2007, inconformity with U.S. generally accepted accounting principles.

 

As discussed in Note 1 tothe consolidated financial statements, the Company adopted Statement ofFinancial Accounting Standards No. 158, “Employers’ Accounting for DefinedBenefit Pensions and Other Post Retirement Plans,” effective December 31,2006.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the Company’s internal control over financial reporting as of December 31,2007, based on**criteria established in*Internal Control - Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO),and our report dated March 12, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internalcontrol over financial reporting.

 

(signed)KPMG LLP

Philadelphia,Pennsylvania

March 12, 2008

 

F-2

----

 

# **Report of Independent Registered Public AccountingFirm**

 

The Board of Directorsand Stockholders

Fox Chase Bancorp, Inc.:

 

We have audited theinternal control over financial reporting of Fox Chase Bancorp, Inc. andsubsidiary (the Company) as of December 31, 2007, based on criteria established in *Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO)*.*The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying *Management’s Report on Internal Control Over Financial Reporting*.Our responsibility is to express an opinion on the Company’s internal controlover financial reporting based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on theassessed risk. Our audit also included performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Fox ChaseBancorp, Inc. and subsidiary maintained, in all material respects,effective internal control over financial reporting as of December 31,2007, based on criteriaestablished in *Internal Control - IntegratedFramework* issued by the COSO.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated statementsof condition of the Company as of December 31, 2007 and 2006, and therelated consolidated statementsof operations, changes in equity, and cash flows for each of the years in thethree-year period ended December 31, 2007, and our report dated March 12, 2008**expressed an unqualified opinion on those consolidated financial statements*.*

 

(signed) KPMG LLP

 

Philadelphia,Pennsylvania

March 12,2008

 

F-3

----

 

 

**CONSOLIDATEDSTATEMENTS OF CONDITION****(IN THOUSANDS, EXCEPT SHARE DATA)**

** **
|                                                                                                                                                                                                                        | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
|                                                                                                                                                                                                                        | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **ASSETS**                                                                                                                                                                                                                  | ** ** | ** **            | ** ** | ** ** | ** ** |
|                                                                                                                                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Cash and due  from banks                                                                                                                                                                                                    |       | $                     | 3,307      |   | $ | 3,295 |   |
| Interest-earning  demand deposits in other banks                                                                                                                                                                            |       | 7,968                 |       | 131,146 |   |
| Money market  funds                                                                                                                                                                                                         |       | 20,000                |       | — |   |
| Total cash and  cash equivalents                                                                                                                                                                                            |       | 31,275                |       | 134,441 |   |
| Investment  securities available-for-sale                                                                                                                                                                                   |       | 91,159                |       | 70,112 |   |
| Mortgage related  securities available-for-sale                                                                                                                                                                             |       | 205,145               |       | 158,320 |   |
| Loans held for  sale                                                                                                                                                                                                        |       | —                |       | 1,194 |   |
| Loans, net of  allowance for loan losses of $3,376 at December 31, 2007 and $2,949 at  December 31, 2006                                                                                                          |       | 447,035               |       | 355,617 |   |
| Federal Home  Loan Bank stock, at cost                                                                                                                                                                                      |       | 5,875                 |       | 4,422 |   |
| Bank-owned life  insurance                                                                                                                                                                                                  |       | 11,762                |       | 11,324 |   |
| Premises and  equipment                                                                                                                                                                                                     |       | 14,466                |       | 14,287 |   |
| Accrued interest  receivable                                                                                                                                                                                                |       | 3,360                 |       | 3,397 |   |
| Mortgage  servicing rights                                                                                                                                                                                                  |       | 1,066                 |       | 1,177 |   |
| Deferred tax  asset, net                                                                                                                                                                                                    |       | 410                   |       | 1,087 |   |
| Other assets                                                                                                                                                                                                                |       | 1,366                 |       | 1,607 |   |
| **Total  Assets**                                                                                                                                                                                                           | ** ** | $                     | 812,919    |   | $ | 756,985 | ** ** |
|                                                                                                                                                                                                                        |       |                  |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                               | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                                                                  | ** ** | ** **            | ** ** | ** ** | ** ** |
| **LIABILITIES**                                                                                                                                                                                                             | ** ** | ** **            | ** ** | ** ** | ** ** |
|                                                                                                                                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Deposits                                                                                                                                                                                                                    |       | $                     | 585,560    |   | $ | 596,534 |   |
| Federal Home  Loan Bank advances                                                                                                                                                                                            |       | 80,000                |       | 30,000 |   |
| Other borrowed  funds                                                                                                                                                                                                       |       | 20,000                |       | — |   |
| Advances from  borrowers for taxes and insurance                                                                                                                                                                            |       | 2,374                 |       | 2,262 |   |
| Accrued interest  payable                                                                                                                                                                                                   |       | 504                   |       | 298 |   |
| Accrued expenses  and other liabilities                                                                                                                                                                                     |       | 2,110                 |       | 2,246 |   |
| **Total  Liabilities**                                                                                                                                                                                                      | ** ** | 690,548               |       | 631,340 | ** ** |
|                                                                                                                                                                                                                        |       |                  |       |   |   |
| **STOCKHOLDERS’ EQUITY**                                                                                                                                                                                               | ** ** | ** **            | ** ** | ** ** | ** ** |
|                                                                                                                                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Preferred stock  ($.01 par value; 1,000,000 shares authorized, none issued and outstanding at  December 31, 2007 and December 31, 2006)                                                                           |       | —                |       | — |   |
| Common stock  ($.01 par value; 35,000,000 shares authorized, 14,679,750 shares issued and  14,352,750 shares outstanding at December 31, 2007 and 14,679,750 shares  issued and outstanding at December 31, 2006) |       | 147                   |       | 147 |   |
| Additional  paid-in capital                                                                                                                                                                                                 |       | 62,909                |       | 62,365 |   |
| Treasury stock  (at cost, 327,000 shares at December 31, 2007; none at December 31,  2006)                                                                                                                        |       | (3,924                | )          | — |   |
| Common stock  acquired by benefit plans                                                                                                                                                                                     |       | (8,732                | )          | (5,371 | ) |
| Retained  earnings                                                                                                                                                                                                          |       | 71,475                |       | 69,545 |   |
| Accumulated  other comprehensive income (loss), net                                                                                                                                                                         |       | 496                   |       | (1,041 | ) |
| **Total  Stockholders’ Equity**                                                                                                                                                                                        | ** ** | 122,371               |       | 125,645 | ** ** |
| ** **                                                                                                                                                                                                                  | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Total  Liabilities and Stockholders’ Equity**                                                                                                                                                                        | ** ** | $                     | 812,919    |   | $ | 756,985 | ** ** |

 

*The accompanying notes are an integral part ofthese consolidated financial statements.*

** **

 

F-4

----

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS(IN THOUSANDS, EXCEPT PER SHARE DATA)**

 
| ** **                                                        | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                        | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| **INTEREST INCOME**                                               | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and  fees on loans                                       |       | $                                 | 25,361     |   | $ | 21,742 |   | $ | 25,722 |   |
| Interest on  money market funds                                   |       | 40                                |       | — |   | — |   |
| Interest on  mortgage related securities                          |       | 7,329                             |       | 8,035 |   | 5,641 |   |
| Interest on  investment securities available-for-sale             |       |                              |       |   |   |   |   |
| Taxable                                                           |       | 2,987                             |       | 3,523 |   | 3,061 |   |
| Nontaxable                                                        |       | 924                               |       | 934 |   | 754 |   |
| Dividend income                                                   |       | 249                               |       | 370 |   | 874 |   |
| Other interest  income                                            |       | 4,167                             |       | 2,573 |   | 1,549 |   |
| **Total  Interest Income**                                        |       | 41,057                            |       | 37,177 |   | 37,601 |   |
| **INTEREST EXPENSE**                                              | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                                          |       | 20,526                            |       | 18,974 |   | 19,212 |   |
| Federal Home  Loan Bank advances                                  |       | 1,642                             |       | 1,485 |   | 1,485 |   |
| Other borrowed  funds                                             |       | 82                                |       | — |   | — |   |
| **Total  Interest Expense**                                       |       | 22,250                            |       | 20,459 |   | 20,697 |   |
| **Net  Interest Income**                                          |       | 18,807                            |       | 16,718 |   | 16,904 |   |
| Provision (credit) for loan losses                                |       | 425                               |       | (5,394 | ) | (6,025 | ) |
| **Net  Interest Income after Provision (Credit) for loan losses** | ** ** | 18,382                            | ** ** | 22,112 | ** ** | 22,929 | ** ** |
| **NONINTEREST INCOME**                                            | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service charges  and other fee income                             |       | 842                               |       | 1,138 |   | 882 |   |
| Net gain (loss)  on sale of:                                      |       |                              |       |   |   |   |   |
| Securities  available for sale                                    |       | 169                               |       | (17 | ) | (809 | ) |
| Loans                                                             |       | 78                                |       | 199 |   | 567 |   |
| Assets acquired  through foreclosure                              |       | —                            |       | 85 |   | 6 |   |
| Premises and  equipment                                           |       | 970                               |       | (59 | ) | (161 | ) |
| Income on  bank-owned life insurance                              |       | 438                               |       | 427 |   | 448 |   |
| Other                                                             |       | 199                               |       | 300 |   | 281 |   |
| **Total  Noninterest Income**                                     |       | 2,696                             |       | 2,073 |   | 1,214 |   |
| **NONINTEREST EXPENSE**                                           | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries,  benefits and other compensation                        |       | 9,949                             |       | 9,194 |   | 7,442 |   |
| Occupancy  expense                                                |       | 1,828                             |       | 1,496 |   | 1,812 |   |
| Furniture and  equipment expense                                  |       | 940                               |       | 1,060 |   | 826 |   |
| Data processing  costs                                            |       | 1,537                             |       | 1,514 |   | 1,452 |   |
| Professional  fees                                                |       | 1,846                             |       | 1,781 |   | 1,127 |   |
| Marketing  expense                                                |       | 645                               |       | 621 |   | 373 |   |
| FDIC premiums                                                     |       | 84                                |       | 796 |   | 765 |   |
| Contribution to  charitable foundation                            |       | —                            |       | 1,500 |   | — |   |
| Other                                                             |       | 1,859                             |       | 1,905 |   | 1,411 |   |
| **Total  Noninterest Expense**                                    |       | 18,688                            |       | 19,867 |   | 15,208 |   |
| **Income  Before Income Taxes**                                   |       | 2,390                             |       | 4,318 |   | 8,935 |   |
| Income tax provision                                              |       | 460                               |       | 684 |   | 2,975 |   |
| **Net  Income**                                                   |       | $                                 | 1,930      |   | $ | 3,634 |   | $ | 5,960 |   |
| Earnings per share (1):                                           |       |                              |       |   |   |   |   |
| Basic                                                             |       | $                                 | 0.14       |   | $ | 0.14 |   | — |   |
| Diluted                                                           |       | $                                 | 0.14       |   | $ | 0.14 |   | — |   |

----

(1)          Due to the timing of the Bank’sreorganization into the mutual holding company form and the completion of theCompany’s initial public offering on September 29, 2006, earnings pershare information for the year ended December 31, 2006 is only for September 29,2006 through December 31, 2006.

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

F-5

----

 

** **

**CONSOLIDATEDSTATEMENTS OF CHANGES IN EQUITY (IN THOUSANDS)**

**For theYears Ended December 31, 2007, 2006 and 2005**

 
| ** **                                                                                                                                                                       | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Common**         | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|--------------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                                                                                                       | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Stock**          | ** ** | ** **   | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                       | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **Acquired**       | ** ** | ** **   | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                       | ** ** | **Common** | ** ** | **Paid in**    | ** ** | **Treasury** | ** ** | **by**             | ** ** | **Retained** | ** ** | **Income/**       | ** ** | **Total**  | ** ** |
| ** **                                                                                                                                                                       | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Stock**    | ** ** | **Benefit  Plans** | ** ** | **Earnings** | ** ** | **(Loss)**        | ** ** | **Equity** | ** ** |
| **BALANCE — JANUARY 1, 2005**                                                                                                                                               |       | $          | —     |           | $          | —       |       | $                  | —     |         | $          | —            |       | $          | 59,951     |   | $ | (761 | ) | $ | 59,190 |   |
| Net  income                                                                                                                                                                      |       |       |       |           |       |         |       |               |       | 5,960        |       |              |       | 5,960      |       |
| Other  comprehensive loss                                                                                                                                                        |       |       |       |           |       |         |       |               |       |         |       | (1,629            | )          | (1,629     | )          |
| **BALANCE - DECEMBER 31, 2005**                                                                                                                                                  |       | $          | —     |           | $          | —       |       | $                  | —     |         | $          | —            |       | $          | 65,911     |   | $ | (2,390 | ) | $ | 63,521 |   |
| Sale  of 6,395,835 shares of common stock in initial public offering, issuance of  8,148,915 to the mutual holding company and issuance of 135,000 to the  charitable foundation |       | 147        |       | 62,201         |       |         |       |               |       |         |       |              |       | 62,348     |       |
| Common  stock acquired by ESOP                                                                                                                                                   |       |       |       |           |       |         |       | (5,755             | )          |         |       |              |       | (5,755     | )          |
| Unallocated  ESOP shares committed to employees                                                                                                                                  |       |       |       | 128            |       |         |       | 384                |       |         |       |              |       | 512        |       |
| Shares  allocated in long-term incentive plan                                                                                                                                    |       |       |       | 36             |       |         |       |               |       |         |       |              |       | 36         |       |
| Adjustment  to initially apply SFAS No. 158, net of tax                                                                                                                     |       |       |       |           |       |         |       |               |       |         |       | (98               | )          | (98        | )          |
| Net  income                                                                                                                                                                      |       |       |       |           |       |         |       |               |       | 3,634        |       |              |       | 3,634      |       |
| Other  comprehensive income                                                                                                                                                      |       |       |       |           |       |         |       |               |       |         |       | 1,447             |       | 1,447      |       |
| **BALANCE - DECEMBER 31, 2006**                                                                                                                                                  |       | $          | 147        |           | $          | 62,365       |       | $                  | —     |         | $          | (5,371            | )          | $          | 69,545     |   | $ | (1,041 | ) | $ | 125,645 |   |
| Purchase  of treasury stock, net                                                                                                                                                 |       |       |       |           |       | (3,924       | )          |               |       |         |       |              |       | (3,924     | )          |
| Purchase  common stock held in trust                                                                                                                                             |       |       |       |           |       |         |       | (3,745             | )          |         |       |              |       | (3,745     | )          |
| Restricted  stock expense                                                                                                                                                        |       |       |       | 271            |       |         |       |               |       |         |       |              |       | 271        |       |
| Unallocated  ESOP shares committed to employees                                                                                                                                  |       |       |       | 114            |       |         |       | 384                |       |         |       |              |       | 498        |       |
| Shares  allocated in long-term incentive plan                                                                                                                                    |       |       |       | 159            |       |         |       |               |       |         |       |              |       | 159        |       |
| Net  income                                                                                                                                                                      |       |       |       |           |       |         |       |               |       | 1,930        |       |              |       | 1,930      |       |
| Other  comprehensive income                                                                                                                                                      |       |       |       |           |       |         |       |               |       |         |       | 1,537             |       | 1,537      |       |
| **BALANCE - DECEMBER 31, 2007**                                                                                                                                                  |       | $          | 147        |           | $          | 62,909       |       | $                  | (3,924     | )            | $          | (8,732            | )          | $          | 71,475     |   | $ | 496 |   | $ | 122,371 |   |

** **

*The accompanying notes are anintegral part of these consolidated financial statements.*

 

 

F-6

----

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS(IN THOUSANDS)**

 
|                                                                                           | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
|                                                                                           | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                           | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                      | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                     |       | $                                 | 1,930      |   | $ | 3,634 |   | $ | 5,960 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:             | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision  (credit) for loan losses                                                            |       | 425                               |       | (5,394 | ) | (6,025 | ) |
| Depreciation                                                                                   |       | 1,024                             |       | 1,229 |   | 1,193 |   |
| Net amortization  of securities premiums and discounts                                         |       | 231                               |       | 809 |   | 1,895 |   |
| (Benefit)  provision for deferred income taxes                                                 |       | (141                              | )          | 997 |   | 2,025 |   |
| Shares committed  to be released to the ESOP                                                   |       | 498                               |       | 512 |   | — |   |
| Shares earned in  the long-term incentive plan                                                 |       | 159                               |       | 36 |   | — |   |
| Stock based  compensation expense                                                              |       | 271                               |       | — |   | — |   |
| Origination of  loans held for sale                                                            |       | (6,764                            | )          | (21,774 | ) | (357 | ) |
| Proceeds from  sales of loans held for sale                                                    |       | 7,988                             |       | 20,914 |   | — |   |
| Net realized  (gains) losses on sales of assets acquired through foreclosure and fixed  assets |       | (970                              | )          | (26 | ) | 155 |   |
| Net realized  gain on sales of mortgage related securities                                     |       | —                            |       | — |   | (108 | ) |
| Net (gain) loss  on sales and impairment of securities                                         |       | (169                              | )          | 17 |   | 917 |   |
| Net gain on  sales of loans and loans held for sale                                            |       | (78                               | )          | (199 | ) | (567 | ) |
| Earnings on  investment in bank-owned life insurance                                           |       | (438                              | )          | (427 | ) | (448 | ) |
| Decrease  (increase) in mortgage servicing rights                                              |       | 111                               |       | (9 | ) | (531 | ) |
| Decrease  (increase) in accrued interest receivable and other assets                           |       | 626                               |       | 250 |   | (991 | ) |
| Increase  (decrease) in accrued interest payable, accrued expenses and other  liabilities      |       | 79                                |       | (565 | ) | 3,555 |   |
| **Net  Cash Provided by Operating Activities**                                                 |       | 4,782                             |       | 4 |   | 6,673 |   |
|                                                                                           | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                      |       |                              |       |   |   |   |   |
| Net maturities  of interest-earning time deposits in other banks                               |       | —                            |       | 600 |   | 2,574 |   |
| Equity  investment in unconsolidated entity                                                    |       | (300                              | )          | — |   | — |   |
| Investment  securities - available for sale:                                                   |       |                              |       |   |   |   |   |
| Purchases                                                                                      |       | (96,264                           | )          | (28,418 | ) | (17,231 | ) |
| Proceeds from  sales                                                                           |       | 36,268                            |       | 17,205 |   | 17,409 |   |
| Proceeds from  maturities, calls and principal repayments                                      |       | 39,677                            |       | 84,075 |   | 1,063 |   |
| Mortgage related  securities — available for sale:                                        |       |                              |       |   |   |   |   |
| Purchases                                                                                      |       | (91,720                           | )          | (31,789 | ) | (92,637 | ) |
| Proceeds from  sale                                                                            |       | —                            |       | — |   | 9,976 |   |
| Proceeds from  maturities, calls and principal repayments                                      |       | 46,451                            |       | 61,396 |   | 74,918 |   |
| Net (increase)  decrease in loans                                                              |       | (59,779                           | )          | 12,209 |   | 38,920 |   |
| Purchases of  loan participations                                                              |       | (32,064                           | )          | — |   | — |   |
| Proceeds from  sales of loans                                                                  |       | —                            |       | 4,000 |   | 83,784 |   |
| Net (increase)  decrease in Federal Home Loan Bank stock                                       |       | (1,453                            | )          | (276 | ) | 1,355 |   |
| Purchases of  premises and equipment                                                           |       | (2,609                            | )          | (1,422 | ) | (904 | ) |
| Proceeds from  sales of fixed assets and assets acquired through foreclosure                   |       | 2,376                             |       | 192 |   | — |   |
| **Net  Cash (Used) Provided by Investing Activities**                                          |       | (159,417                          | )          | 117,772 |   | 119,227 |   |
|                                                                                           |       |                              |       |   |   |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                      |       |                              |       |   |   |   |   |
| Net decrease in  deposits                                                                      |       | (10,974                           | )          | (85,773 | ) | (122,943 | ) |
| Increase  (decrease) in advances from borrowers for taxes and insurance                        |       | 112                               |       | (241 | ) | (593 | ) |
| Increase in FHLB  advances                                                                     |       | 50,000                            |       | — |   | — |   |
| Increase in  other borrowings                                                                  |       | 20,000                            |       | — |   | — |   |
| Proceeds from  stock issuance, net of conversion costs                                         |       | —                            |       | 62,348 |   | — |   |
| Acquisition of  stock for ESOP plan                                                            |       | —                            |       | (5,755 | ) | — |   |
| Acquisition of  stock for equity incentive plan                                                |       | (3,745                            | )          | — |   | — |   |
| Purchase of  treasury stock                                                                    |       | (3,924                            | )          | — |   | — |   |
| **Net  Cash Provided (Used) by Financing Activities**                                          |       | 51,469                            |       | (29,421 | ) | (123,536 | ) |
|                                                                                           | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  (Decrease) Increase in Cash and Cash Equivalents**                                      |       | (103,166                          | )          | 88,355 |   | 2,364 |   |
| **CASH  AND CASH EQUIVALENTS — BEGINNING**                                                |       | 134,441                           |       | 46,086 |   | 43,722 |   |
|                                                                                           |       |                              |       |   |   |   |   |
| **CASH  AND CASH EQUIVALENTS — ENDING**                                                   |       | $                                 | 31,275     |   | $ | 134,441 |   | $ | 46,086 |   |
| **SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION**                                          | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest paid                                                                                  | ** ** | $                                 | 22,287     |   | $ | 20,363 |   | $ | 20,737 |   |
| Income taxes  paid                                                                             | ** ** | $                                 | 319        |   | $ | 487 |   | $ | 1,441 |   |
| Transfers of  loans to assets acquired through foreclosure                                     | ** ** | $                                 | —     |   | $ | — |   | $ | 107 |   |

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

 

 

F-7

----

*** ***

***FOXCHASE BANCORP, INC.***

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

** **

**Business**

** **

Fox Chase Bancorp, Inc.(the “Bancorp”) was organized on September 29, 2006 under the laws of theUnited States for the purpose of being a holding company for Fox Chase Bank(the “Bank”), a stock savings bank also organized under the laws of the UnitedStates.  On September 29, 2006, theBancorp completed its initial public offering in which it sold 6,395,835shares, or 43.57%, of its outstanding common stock to the public, including575,446 shares purchased by the Fox Chase Bank Employee Stock Ownership Plan(the “ESOP”).  An additional 8,148,915shares, or 55.51% of the Bancorp’s outstanding stock, were issued to Fox ChaseMHC, the Bancorp’s federally chartered mutual holding company. Net proceeds ofthe offering totaled $56.6 million. Additionally, the Bancorp contributed $150,000 in cash and issued135,000 shares, or 0.92% of its outstanding common stock, to the Fox Chase BankCharitable Foundation.

 

The Bancorp’s primarybusiness has been that of holding the common stock of the Bank and making aloan to the ESOP.   Fox Chase Bancorp, Inc.is authorized to pursue other business activities permissible by laws andregulations for other savings and loan holding companies.

 

The Bancorp and the Bank(collectively referred to as the “Company”) provides a wide variety offinancial products and services to individuals and businesses through the Bank’seleven branches in Philadelphia, Richboro, Willow Grove, Warminster, Lahaska,Hatboro, Media and West Chester, Pennsylvania, and Ocean City, Marmora and EggHarbor Township, New Jersey.  Theoperations of the Company are managed as a single business segment.  The Company competes with other financialinstitutions and other companies that provide financial services.

 

The Company is subject toregulations of certain federal banking agencies.  These regulations can and do changesignificantly from period to period.  TheCompany also undergoes periodic examinations by regulatory agencies which maysubject them to further changes with respect to asset valuations, amounts ofrequired loss allowances and operating restrictions resulting from theregulators’ judgments based on information available to them at the time oftheir examinations.

 

**Principles ofConsolidation and Presentation**

** **

The consolidatedfinancial statements include the accounts of both the Bancorp and the Bank. TheBank’s operations include the accounts of its wholly owned subsidiary, FoxChase Financial, Inc.  Fox ChaseFinancial, Inc. is a Delaware chartered investment holding company whosesole purpose is to manage and hold investment securities.  The consolidated financial statements includethe Bancorp beginning on September 29, 2006.  The consolidated financial statements andrelated notes include only the activity and balances of the Bank and itssubsidiary through September 29, 2006. The financial statements do not include the transactions and balances ofFox Chase MHC.  All materialinter-company transactions and balances have been eliminated in consolidation.Prior period amounts are reclassified, when necessary, to conform with thecurrent year’s presentation.

 

The Company followsaccounting principles and reporting practices which are in compliance with U.S.generally accepted accounting principles (“GAAP”). The preparation of thefinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates. Material estimates that are particularly

 

F-8

----

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

** **

 

susceptible tosignificant change in the near term relate to the determination of theallowance for loan losses, the valuation and realizability of deferred taxassets, the valuation of mortgage servicing rights and the evaluation of otherthan temporary impairment of investments.

 

**Risk andUncertainties**

** **

In the normal course ofits business, the Company encounters two significant types of risk: economicrisk and regulatory risk.  There arethree main components of economic risk: interest rate risk, credit risk andmarket risk.  The Company is subject tointerest rate risk to the degree that its interest-bearing liabilities matureor reprice at different speeds, or on a different basis from itsinterest-earning assets.  The Company’sprimary credit risk is the risk of defaults in the Company’s loan portfoliothat result from borrowers’ inability or unwillingness to make contractuallyrequired payments.  The Company’s lendingactivities are concentrated in Southeastern Pennsylvania and Southern NewJersey.  The ability of the Company’sborrowers to repay amounts owed is dependent on several factors, including theeconomic conditions in the borrowers’ geographic regions and the borrowers’financial conditions.   Market riskreflects changes in the value of the collateral underlying loans, the valuationof real estate held by the Company, and the valuation of loans held for sale,securities, mortgage servicing assets and other investments.

 

The Company is subject tothe regulations of various government agencies. These regulations do change significantly from period to period.  The Company also undergoes periodicexaminations by regulatory agencies that may subject them to further changeswith respect to asset valuations, amounts required for the allowance for loanlosses and operating restrictions resulting from the regulators’ judgment basedon information available to them at the time of their examination.

 

**Cash and CashEquivalents**

** **

For purposes of reportingcash flows, cash and cash equivalents include cash and due from banks,interest-earning demand deposits in other banks and money market funds.  At times, such balances exceed the FDIClimits.

 

**Investment andMortgage Related Securities**

** **

The Company accounts forits investment securities in accordance with Statement of Financial AccountingStandards (SFAS) No. 115, “Accounting for Certain Investments in Debt andEquity Securities.”  This standardrequires, among other things, that debt and equity securities are classifiedinto three categories and accounted for as follows:

 

·                  Debt securities with the positive intention to hold tomaturity are classified as “held-to-maturity” and reported at amortized cost.

 

·                  Debt and equity securities purchased with theintention of selling them in the near future are classified as “trading securities”and are reported at fair value, with unrealized gains and losses included inearnings.

 

·                  Debt and equity securities not classified in either ofthe above categories are classified as “available-for-sale securities” andreported at fair value, with unrealized gains and losses excluded from earningsand reported, net of tax, as increases or decreases in other comprehensiveincome, a separate component of stockholders’ equity.  Securities classified

 

F-9

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

 

as available-for-sale arethose securities that the Company intends to hold for an indefinite period oftime but not necessarily to maturity. Any decision to sell a security classified as available-for-sale wouldbe based on various factors, including significant movement in interest rates,changes in maturity or mix of the Company’s assets and liabilities, liquidityneeds, regulatory capital considerations and other similar factors.

 

Management determines theappropriate classification of debt securities at the time of purchase andre-evaluates such designation as of each balance sheet date.

 

Purchase premiums anddiscounts are recognized in interest income using the interest method over theterms of the securities. Because of the volatility of the financial markets inwhich securities are traded, there is the risk that any future fair value couldbe significantly less than that recorded or disclosed in the accompanyingfinancial statements.  Declines in thefair value of available-for-sale securities below their cost that are deemed tobe other than temporary are reflected in earnings as realized losses.  In estimating other-than-temporary impairmentlosses, management considers (1) the length of time and the extent towhich the fair value has been less than cost, (2) the financial conditionand near-term prospects of the issuer and (3) the intent and ability ofthe Company to retain its investment in the issuer for a period of timesufficient to allow for any anticipated recovery in fair value.  Gains and losses on the sale of securitiesare recorded on the trade date and are determined using the specific identificationmethod.

 

Federal law requires amember institution of the Federal Home Loan Bank System to hold stock of itsdistrict Federal Home Loan Bank according to a predetermined formula.  This stock is carried at cost.

 

**Loans Held forSale**

** **

The Company originatesmortgage loans for investment and for sale. At origination, a mortgage loan is identified as either for sale or forinvestment.  Mortgage loans originatedand intended for sale in the secondary market are carried at the lower ofaggregate cost or estimated fair value. Net unrealized losses are recognized by charges to operations.  Cash payments and cash receipts resultingfrom acquisitions and sales of loans are classified as operating cash flows ifthose loans are acquired specifically for resale and are carried at fair valueor the lower of cost or fair value. Cash receipts resulting from sales of loansthat were not specifically acquired for resale are classified as investing cashinflows regardless of a change in the purpose for holding those loans.

 

**MortgageServicing Rights**

 

Upon the sale of aresidential mortgage loan where the Company retains servicing rights, amortgage servicing right is recorded. GAAP requires that mortgage servicingrights on these loans be amortized into income over the estimated life of theloans sold using the interest method. Such assets are subject to a disaggregated impairment test at the end ofeach reporting period, based on the predominant risk characteristics of theunderlying loans.

 

**Loans, LoanOrigination Fees and Uncollected Interest**

** **

Loans are recorded atcost, net of unearned discounts, deferred fees and allowances.  Discounts or premiums on purchased loans areamortized using the interest method over the remaining contractual life of theportfolio, adjusted for actual prepayments. Loan origination fees and certain direct origination costs are deferredand amortized using the interest method over the contractual life as an

 

F-10

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

 

adjustment to yield onthe loans.  Interest income is accrued onthe unpaid principal balance.  Fromtime-to-time, the Company sells certain loans for liquidity purposes or to manageinterest rate risk.

 

The accrual of interestis generally discontinued when the contractual payment of principal or interesthas become 90 days past due or management has serious doubts about furthercollectibility of principal or interest, even though the loan is currentlyperforming.  A loan that is more than 90days past due may remain on accrual status if it is in the process ofcollection and is either guaranteed or well secured.  When a loan is placed on nonaccrual status,unpaid interest income is reversed and the amortization of net deferred loanfees is suspended. Interest received on nonaccrual loans generally is eitherapplied against principal or reported as interest income, according tomanagement’s judgment as to the ultimate collectibility of principal.  Generally, loans are restored to accrualstatus when the obligation is brought current, has performed in accordance withthe contractual terms for a reasonable period of time and the ultimatecollectibility of the total contractual principal and interest is no longer indoubt.

 

**Allowance for LoanLosses**

** **

The allowance for loanlosses is adjusted through increases or reductions in the provisions for loanlosses charged against or credited to income. Loans deemed to be uncollectible are charged against the allowance for loanlosses, and subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loanlosses is maintained at a level representing management’s best estimate ofknown and inherent losses in the portfolio, based upon management’s evaluation ofthe portfolio’s collectibility. Management’s evaluation is based upon an analysis of the loan portfolio,loss experience in particular segments of the portfolio, trends and absolutelevels of classified and criticized loans, trends and absolute levels indelinquent loans, trends in risk ratings, trends in industry charge-offs byparticular segments and changes in existing general economic and businessconditions affecting our lending areas and the national economy. Whilemanagement uses the best information available to make its evaluations, suchevaluations are highly subjective, and future adjustments to the allowance maybe necessary if conditions differ substantially from the assumptions used inmaking the evaluations.  In addition,various regulatory agencies periodically review the Company’s allowance forloan losses.  Such agencies may requirethe Company to recognize adjustments to the allowance, based on their judgmentsat the time of their examination.

 

Loans are deemed impairedwhen, based on current information and events, it is probable that the Companywill be unable to collect all proceeds due according to the contractual termsof the loan agreement.  Factorsconsidered by management in determining impairment include payment status,collateral value and the probability of collecting scheduled principal andinterest payments when due.  For purposesof applying measurement criteria for impaired loans, the Company generallyexcludes large groups of smaller homogenous loans, primarily consisting ofresidential real estate and consumer loans, as well as commercial loans withbalances of less than $100,000.

 

Impairment is measured ona loan by loan basis for commercial loans by either the present value ofexpected future cash flows discounted at the loan’s effective interest rate,the loan’s obtainable market price or the fair value of the collateral if theloan is collateral dependent.

 

F-11

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 1 - SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

** **

**Assets AcquiredThrough Foreclosure**

** **

Real estate and otherrepossessed collateral acquired through a foreclosure or by a deed-in-lieu offoreclosure are classified as assets acquired through foreclosure.  Assets acquired through foreclosure arecarried at the lower of cost or fair value, net of estimated sellingcosts.  Costs related to the developmentor improvement of a foreclosed property are capitalized; holding costs arecharged to expense as incurred. The Company had no such assets as of December 31,2007 and 2006.

 

**Bank-Owned LifeInsurance**

** **

The Company has investedin bank-owned life insurance (“BOLI”). BOLI involves the purchasing of life insurance by the Company on achosen group of employees and directors. The Company is the owner and beneficiary of the policies.  This life insurance investment is carried atthe cash surrender value of the underlying policies.  Income from the increase in cash surrendervalue of the policies is included in noninterest income in the consolidatedstatements of operations.

 

**Premises andEquipment**

** **

Premises and equipmentare carried at cost less accumulated depreciation.  Depreciation is computed on the straight-linemethod over the assets’ estimated useful lives or, for leasehold improvements,over the life of the related lease if less than the estimated useful life ofthe asset. The estimated useful life is generally 10-39 years for buildings and3-7 years for furniture and equipment. When assets are retired, or otherwisedisposed of, the cost and related accumulated depreciation are removed from theaccounts.  The cost of maintenance andrepairs is charged to expense when incurred and renewals and improvements arecapitalized. Rental concessions on leased properties are recognized over thelife of the lease.

 

**Transfers ofFinancial Assets**

** **

Transfers of financialassets are accounted for as sales when control over the assets has beensurrendered.  Control over transferredassets is deemed to be surrendered when (1) the assets have been isolatedfrom the Company, (2) the transferee obtains the right (free of conditionsthat constrain it from taking advantage of that right) to pledge or exchangethe transferred assets and (3) the Company does not maintain effectivecontrol over the transferred assets through an agreement to repurchase thembefore maturity.

 

**Income Taxes**

** **

The Company accounts forincome taxes under the asset/liability method. Deferred tax assets are recognized for deductible temporary differencesand deferred tax liabilities are recognized for taxable temporarydifferences.  Temporary differences arethe differences between the reported amounts of assets and liabilities andtheir tax bases.  Deferred tax assets arereduced by a valuation allowance when, in the opinion of management, it is morelikely than not that some portion of the deferred tax assets will not berealized.  Deferred tax assets andliabilities are adjusted for the effects of changes in tax laws and rates onthe date of enactment. The Company files a consolidated federal income taxreturn and individual state and local income tax returns.

 

F-12

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

 

On January 1, 2007,the Company adopted Financial Interpretation No. 48 (FIN 48), “Accountingfor Uncertainty in Income Taxes — an Interpretation of SFAS Statement No. 109”.  FIN 48 requires the Company recognize a taxposition if it is more likely than not that the tax position will be sustainedupon examination, including resolution of any related appeals or litigationprocesses, based on the technical merits of the position.  If the tax position meets the more-likely-than-notrecognition threshold, the position is measured to determine the amount of thebenefit to recognize and is measured at the largest amount of benefit that isgreater than 50% likely of being realized upon settlement. The Company has nomaterial tax exposure matters that are accrued as of December 31,2007.   The Company’s policy is toaccount for interest as a component of interest expense and penalties as acomponent of other expense.   The Companyadopted this statement in 2007 and there was no effect on its results ofoperations or financial position.

 

**Marketing andAdvertising**

** **

The Company expensesmarketing and advertising costs as incurred.

 

**Off-Balance SheetFinancial Instruments**

** **

In the ordinary course of business, the Company hasentered into off-balance sheet financial instruments consisting of commitmentsto extend credit.  Such financialinstruments are recorded in the balance sheet when they are funded.  The Company uses the same credit policies inmaking commitments and conditional obligations as it does for on-balance sheetfinancial instruments.

 

**Pension Plan**

** **

**                       **SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans,” becameeffective as of December 31, 2006, and requires recognition of an asset orliability in the statement of condition reflecting the funded status of thePension Plan with current year changes in the funded status recognized in othercomprehensive income (loss), net.  SFAS No. 158did not change the existing criteria for measurement of periodic benefit costs,plan assets or benefit obligations.

** **

The following tablesummarizes the incremental effects of the initial adoption of SFAS No. 158on our Statement of Condition at December 31, 2006 (dollars in thousands).

 
| ** **                                      | ** ** | **Before**             | ** ** | ** **             | ** ** | **After**           | ** ** |
|-------------------------------------------------|------------|------------------------|------------|------------------------|------------|---------------------|------------|
| ** **                                      | ** ** | **Application  of**    | ** ** | **SFAS  No. 158** | ** ** | **Application**     |       |
| ** **                                      | ** ** | **SFAS  No. 158** | ** ** | **Adjustments**        | ** ** | **of SFAS  No.158** |       |
|                                            |       |                   |       |                   |       |                |       |
| Other assets                                    |       | $                      | 1,668      |                   | $          | (61                 | )          | $ | 1,607 |   |
| Total assets                                    |       | 756,996                |       | (11                    | )          | 756,985             |       |
| Deferred tax asset                              |       | 1,037                  |       | 50                     |       | 1,087               |       |
| Accrued expenses and other liabilities          |       | 2,159                  |       | 87                     |       | 2,246               |       |
| Total liabilities                               |       | 631,253                |       | 87                     |       | 631,340             |       |
| Accumulated other comprehensive loss            |       | (943                   | )          | (98                    | )          | (1,041              | )          |
| Total stockholders’ equity                 |       | 125,743                |       | (98                    | )          | 125,645             |       |
| Total liabilities and stockholders’ equity |       | 756,996                |       | (11                    | )          | 756,985             |       |
|                                                 |            |                        |            |                        |            |                     |            |  |  |  |

 

See Note 9 forfurther details on the Bank’s pension plan.

*** ***

***F-13***

----

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 1 - SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

** **

**Employee StockOwnership Plan**

** **

The ESOP is accounted forin accordance with the provisions of Statement of Position No. 93-6, “EmployerAccounting for Employee Stock Ownership Plans.” The funds borrowed by the ESOP from the Bancorp to purchase shares ofcommon stock in the Company’s initial public offering are being repaid from theBank’s contributions over a period of 15 years. The Bancorp’s common stock not yet allocated to participants is recordedas a reduction of stockholder’s equity at cost. The Bancorp’s loan to the ESOP and the ESOP’s note payable are notreflected in the consolidated statements of condition.

 

Compensation expense forthe ESOP is based on the average market price of the Company’s stock and isrecognized as shares are committed to be released to participants. The notereceivable and related interest income are included in the parent companyfinancial statements presented in Note 18.

 

**Stock BasedCompensation**

** **

On December 16,2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R,“Share-Based Payment,” which replaced SFAS No. 123, “Accounting forStock-Based Compensation” and superseded APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” SFAS No. 123R requires that allshare-based payments to directors and employees, including grants of stockoptions and restricted stock awards, be recognized as compensation costs in thefinancial statements based on their fair values. The effective date of thisstatement for the Company was January 1, 2006.  We adopted this standard as required, in theaccounting for the Long-Term Incentive Plan in 2006, which includes unvestedshares (See Note 9). Employee stock options and restricted stock issued in 2007under the 2007 Equity Incentive Plan are being accounted for under SFAS No. 123R.See Note 10 for further details on the 2007 Equity Incentive Plan.

 

**Per ShareInformation**

 

The Company follows theprovisions of SFAS No. 128, “Earnings Per Share.”  Basic earnings per share exclude dilution andis computed by dividing income available to common stockholders by theweighted-average common shares outstanding during the period.  Diluted earnings per share takes into accountthe potential dilution that could occur if securities or other contracts toissue common stock were exercised and converted into common stock.  Unallocated shares in the ESOP (See Note 9)and shares purchased to fund the 2007 Equity Incentive Plan (See Note 13) arenot included in either Basic or Diluted earnings per share.  Earnings per share are not presented for 2005since the Company did not complete its initial public offering until September 29,2006.

 

Earnings per share (“EPS”),basic and diluted, were $0.14 for each of the years ended December 31,2007 and 2006.  Due to the timing of theBank’s reorganization into a mutual holding company form and the completion ofthe Company’s initial public offering on September 29, 2006, earnings pershare information for the year ended December 31, 2006 is only from September 29,2006 through December 31, 2006.

 

F-14

----

*** ***

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

 

The following tablepresents the reconciliation of the numerators and denominators of the basic anddiluted EPS computations.

 

| ** **                                                                                               | ** ** | **Year  Ended**       | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                               | ** ** | **December 31,** | ** ** |
| ** **                                                                                               | ** ** | **2007**              | ** ** | **2006** |   |
|                                                                                                     |       |                  |       |   |   |
| Net income (for  2006, includes only the period from September 29, 2006 to  December 31, 2006) |       | $                     | 1,930,000  |   | $ | 2,015,000 |   |
|                                                                                                     |       |                  |       |   |   |
| Weighted-average common shares outstanding                                                               |       | 14,657,315            |       | 14,679,750 |   |
| Average common stock acquired by stock benefit  plans:                                                   |       |                  |       |   |   |
| Unvested shares  — long-term incentive plan                                                         |       | (38,161               | )          | (36,381 | ) |
| ESOP shares  unallocated                                                                                 |       | (519,311              | )          | (562,522 | ) |
| Shares purchased  by trust                                                                               |       | (71,042               | )          | — |   |
|                                                                                                     |       |                  |       |   |   |
| Weighted-average common shares used to calculate  basic earnings per share                               |       | 14,028,801            |       | 14,080,847 |   |
|                                                                                                     |       |                  |       |   |   |
| Dilutive effect of:                                                                                      |       |                  |       |   |   |
| Unvested shares  — long-term incentive plan                                                         |       | 38,161                |       | 36,381 |   |
| Restricted stock  awards                                                                                 |       | 1,858                 |       | — |   |
|                                                                                                     |       |                  |       |   |   |
| Weighted-average common shares used to calculate  diluted earnings per share                             |       | 14,068,820            |       | 14,117,228 |   |
|                                                                                                     |       |                  |       |   |   |
| Earnings per share-basic                                                                                 |       | $                     | 0.14       |   | $ | 0.14 |   |
| Earnings per share-diluted                                                                               |       | $                     | 0.14       |   | $ | 0.14 |   |
|                                                                                                     |       |                  |       |   |   |
| Outstanding common stock equivalents having no  dilutive effect                                          |       | 720,342               |       | — |   |

 

F-15

----

 

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**NOTE 2 - ADJUSTMENTS OFACCOUNTING ERRORS IN 2006**

 

During 2006, managementidentified and corrected certain accounting errors that occurred in prioryears.  Management evaluated thequantitative and qualitative impact of the corrections, individually and in theaggregate, on previously reported periods, in the results of operations in 2006and on reporting earnings trends.  Basedupon this evaluation, management concluded that such errors were not materialto the Company’s consolidated financial statements taken as a whole.  The adjustments, amounting to $313,000($207,000 after tax), increased expenses by $337,000 and increased other incomeby $24,000 in 2006.  Additionally, theCompany reduced its tax contingency reserve and expense by $105,000 in 2006after reevaluating the Company’s tax position.

 

**NOTE 3 - INVESTMENT AND MORTGAGERELATED SECURITIES**

 

The amortized cost andfair value of securities available-for-sale as of December 31, 2007 and2006 are summarized as follows:

 
| ** **                              | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **Amortized  Cost**        | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
| ** **                              | ** ** | **(In Thousands)**         | ** ** |
|                                    |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Obligations of U.S. government agencies |       | $                          | 10,000     |   | $ | 16 |   | $ | — |   | $ | 10,016 |   |
| State and political subdivisions        |       | 81,019                     |       | 126 |   | (2 | ) | 81,143 |   |
|                                    |       | 91,019                     |       | 142 |   | (2 | ) | 91,159 |   |
|                                    |       |                       |       |   |   |   |   |   |   |
| Mortgage related securities             |       | 204,362                    |       | 1,078 |   | (295 | ) | 205,145 |   |
|                                    |       |                       |       |   |   |   |   |   |   |
| **Total securities**                    |       | $                          | 295,381    |   | $ | 1,220 |   | $ | (297 | ) | $ | 296,304 |   |
|                                    |       | ** **                 |       |   |   |   |   |   |   |
|                                    |       | **December 31, 2006** |       |
|                                    |       | **Amortized  Cost**        |       | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair  Value** |   |
|                                    |       | **(In Thousands)**         |       |
|                                    |       |                       |       |   |   |   |   |   |   |
| Obligations of U.S. government agencies |       | $                          | 42,344     |   | $ | 4 |   | $ | (470 | ) | $ | 41,878 |   |
| State and political subdivisions        |       | 24,126                     |       | 141 |   | (48 | ) | 24,219 |   |
| Corporate debt securities               |       | 4,017                      |       | — |   | (2 | ) | 4,015 |   |
|                                    |       | 70,487                     |       | 145 |   | (520 | ) | 70,112 |   |
|                                    |       |                       |       |   |   |   |   |   |   |
| Mortgage related securities             |       | 159,369                    |       | 299 |   | (1,348 | ) | 158,320 |   |
|                                    |       |                       |       |   |   |   |   |   |   |
| **Total securities**                    |       | $                          | 229,856    |   | $ | 444 |   | $ | (1,868 | ) | $ | 228,432 |   |

 

F-16

----

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**NOTE 3 -INVESTMENT AND MORTGAGE RELATED SECURITIES (CONTINUED)**

 

Obligations of U.S. government agencies include $10.0 million ofinvestments in debt of the FHLB at December 31, 2007 that are not backedby the full faith and credit of the U.S. government.

 

Investments of state andpolitical subdivisions include $60.0 million of Pennsylvania Higher EducationAssistance Agency auction rate bonds at December 31, 2007.  These bonds are subject to a new auction on a28-day basis, had a weighted average rate of 6.28% at December 31, 2007,have a 40 year life and a contractual maturity of 2046 and 2047.

 

Thefollowing tables show gross unrealized losses and fair value of securities,aggregated by security category and length of time that individual securitieshave been in a continuous unrealized loss position, at December 31, 2007and 2006:

 
| ** **                              | ** ** | **December 31, 2007**  | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **Less than 12 Months**     | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **Fair  Value**             | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| ** **                              | ** ** | **(In Thousands)**          | ** ** |
| ** **                              | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| State and political subdivisions        |       | $                           | 597        |   | $ | (1 | ) | $ | 672 |   | $ | (1 | ) | $ | 1,269 |   | $ | (2 | ) |
| Mortgage related securities             |       | 32,627                      |       | (78 | ) | 25,977 |   | (217 | ) | 58,604 |   | (295 | ) |
| ** **                              | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total  securities**                   |       | $                           | 33,224     |   | $ | (79 | ) | $ | 26,649 |   | $ | (218 | ) | $ | 59,873 |   | $ | (297 | ) |
| ** **                              | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **December 31,  2006** | ** ** |
| ** **                              | ** ** | **Less  than 12 Months**    | ** ** | **12  Months or More** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **Fair  Value**             | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| ** **                              | ** ** | **(In  Thousands)**         | ** ** |
| ** **                              | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Obligations of U.S. government agencies |       | $                           | 9,265      |   | $ | (19 | ) | $ | 29,614 |   | $ | (451 | ) | $ | 38,879 |   | $ | (470 | ) |
| State and political subdivisions        |       | 2,632                       |       | (8 | ) | 2,708 |   | (40 | ) | 5,340 |   | (48 | ) |
| Corporate debt securities               |       | —                      |       | — |   | 4,015 |   | (2 | ) | 4,015 |   | (2 | ) |
| Mortgage related securities             |       | 52,588                      |       | (249 | ) | 69,023 |   | (1,099 | ) | 121,611 |   | (1,348 | ) |
|                                    |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| **Total  securities**                   |       | $                           | 64,485     |   | $ | (276 | ) | $ | 105,360 |   | $ | (1,592 | ) | $ | 169,845 |   | $ | (1,868 | ) |

 

F-17

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 3 -INVESTMENT AND MORTGAGE RELATED SECURITIES (CONTINUED)**

 

Management evaluatessecurities for other-than-temporary impairment on a quarterly basis, and morefrequently when economic or market concerns warrant. Management does notbelieve that any individual unrealized loss represents an other-than-temporaryimpairment at December 31, 2007. The temporary impairment on all otherinvestments is directly related to changes in market interest rates. Ingeneral, as interest rates rise, the fair value of fixed-rate securities willdecrease and, as interest rates fall, the fair value of fixed-rate securitieswill increase. Of the 40 securities with a temporary impairment at December 31,2007, all have a credit rating of AAA. These individual impairments are deemedtemporary based on the direct relationship to movements in interest rates, aswell as the relatively short duration of the investments and their high creditquality, and the Company’s ability and intent to hold these investments torecovery. Securities that have been impaired greater than twelve months includeprimarily mortgage-related securities. The decline in fair value of thesesecurities was deemed temporary due to positive factors supporting therecoverability of these securities and the Company’s ability and intent to holdthese investments to recovery. Positive factors considered include timelyprincipal payments and the financial health of the issuer.

 

Additionally, the Companyhad one private issue residential mortgage-related security at December 31,2007. This security has a credit rating of AAA and its balance was $1.2 millionand $1.7 million at December 31, 2007 and 2006, respectively. Thissecurity has an unrealized gain of $27,000 and $5,000 as of December 31,2007 and 2006, respectively.

 

Theamortized cost and estimated fair value of investment securitiesavailable-for-sale at December 31, 2007 by contractual maturity are asfollows:

 
| ** **                             | ** ** | **December 31, 2007** | ** ** |
|----------------------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **Amortized  Cost**        | ** ** | **Fair  Value** | ** ** |
| ** **                             | ** ** | **(In Thousands)**         | ** ** |
| ** **                             | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Due in one year or less                |       | $                          | —     |   | $ | — |   |
| Due after one year through five years  |       | —                     |       | — |   |
| Due after five years through ten years |       | 21,017                     |       | 21,085 |   |
| Due after ten years                    |       | 70,002                     |       | 70,074 |   |
|                                   |       | $                          | 91,019     |   | $ | 91,159 |   |

 

Gross gains of $169,000,$0 and $226,000 and gross losses of $0, $17,000 and $641,000 were realized onsales of securities during the years ended December 31, 2007, 2006 and2005, respectively.  The Company alsoincurred a $394,000 impairment loss related to a mutual fund investment duringthe year ended December 31, 2005.

 

Securities with acarrying value of $5.0 million and $4.9 million at December 31, 2007 and2006, respectively, were pledged to secure public deposits and for otherpurposes as required or permitted by law.

 

Securities with acarrying value of $22.3 million at December 31, 2007 were pledged ascollateral for $20 million in borrowed funds; See Note 8.

 

F-18

----

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 4 -LOANS**

 

The composition of netloans at December 31, 2007 and 2006 is provided below (in thousands).

 

| ** **                          | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Real estate loans:                  |       |                  |       |   |   |
| One-to-four  family                 |       | $                     | 215,817    |   | $ | 209,463 |   |
| Multi-family and  commercial        |       | 76,287                |       | 44,681 |   |
| Construction                        |       | 46,471                |       | 11,568 |   |
|                                |       |                  |       |   |   |
|                                |       | 338,575               |       | 265,712 |   |
|                                |       |                  |       |   |   |
| Consumer loans:                     |       |                  |       |   |   |
| Home equity                         |       | 68,431                |       | 73,456 |   |
| Automobile                          |       | 565                   |       | 1,030 |   |
| Home equity  lines of credit        |       | 9,642                 |       | 10,468 |   |
| Other                               |       | 106                   |       | 148 |   |
|                                |       |                  |       |   |   |
|                                |       | 78,744                |       | 85,102 |   |
|                                |       |                  |       |   |   |
| Commercial loans                    |       | 33,356                |       | 8,194 |   |
|                                |       |                  |       |   |   |
| **Total  loans**                    |       | 450,675               |       | 359,008 |   |
|                                |       |                  |       |   |   |
| Deferred loan origination fees, net |       | (264                  | )          | (442 | ) |
| Allowance for loan losses           |       | (3,376                | )          | (2,949 | ) |
|                                |       |                  |       |   |   |
| **Net  loans**                      |       | $                     | 447,035    |   | $ | 355,617 |   |

 

The Company hadapproximately $30.8 million and $18.7 million of commercial mortgage andconstruction loans concentrated in the Southern New Jersey shore area at December 31,2007 and 2006, respectively.  Other thanthe commercial mortgage and construction loans in Southern New Jersey, amajority of the Company’s loans are in the geographic areas near the Company’sbranches in Southeastern Pennsylvania and New Jersey.

 

The Company reclassified $21,000 and $3,000 of deposit accounts thatwere overdrawn to other consumer loans as of December 31, 2007 and 2006,respectively.

 

F-19

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE4 - LOANS (CONTINUED)**

 

The following tablepresents changes in the allowance for loan losses (in thousands):

 

| ** **                          | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|
| ** **                          | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance, beginning                  |       | $                                 | 2,949      |   | $ | 8,349 |   | $ | 14,391 |   |
| Provision  (credit) for loan losses |       | 425                               |       | (5,394 | ) | (6,025 | ) |
| Loans charged  off                  |       | (2                                | )          | (8 | ) | (17 | ) |
| Recoveries                          |       | 4                                 |       | 2 |   | — |   |
|                                |       |                              |       |   |   |   |   |
| Balance, ending                     | ** ** | $                                 | 3,376      |   | $ | 2,949 |   | $ | 8,349 |   |

 

The recorded investmentin impaired loans requiring an allowance for loan losses was $559,000 at December 31,2007 and $0 at December 31, 2006. The related allowance for loan losses associated with these loans was$109,000 at December 31, 2007 and $0 at December 31, 2006.  For the years ended December 31, 2007,2006 and 2005, the average recorded investment in these impaired loans was$47,000, $2,548,000 and $4,479,000, respectively.  The interest income recognized on theseimpaired loans was $30,000, $631,000 and $142,000 for the years ended December 31,2007, 2006 and 2005, respectively.

 

Loans on which theaccrual of interest has been discontinued amounted to $260,000 at December 31,2007 and $284,000 at December 31, 2006. If interest on such loans had beenrecorded in accordance with contractual terms, interest income would haveincreased by $13,000, $10,000 and $200,000 in 2007, 2006 and 2005,respectively. There were two loans totaling $559,000 and one loan totaling$2,941,000 past due 90 days or more and still accruing interest at December 31,2007 and December 31, 2006.  Therewere no loans classified as troubled debt restructurings as of December 31,2007 and 2006.

 

As of December 31,2007, the Bank had one interest rate swap in the notional amount of $1.2million to hedge a 15-year fixed rate loan, which was earning interest at7.43%.  The Company is receiving avariable rate payment of three-month LIBOR plus 2.24% and will pay fixed ratepayments of 7.43%. The swap matures in April 2022 and had a market valueloss position of $60,000 at December 31, 2007.   

 

F-20

----

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 5 - MORTGAGE SERVICINGACTIVITY**

 

Loans serviced for othersare not included in the accompanying consolidated statements of condition.  The unpaid principal balances of these loanswere $118,080,000 at December 31, 2007, $130,294,000 at December 31,2006, and $136,584,000 at December 31, 2005.  The Company received fees, net ofamortization, from the servicing of loans of $210,000, $249,000 and $89,000during 2007, 2006 and 2005, respectively.

 

The following summarizesmortgage-servicing rights for the years ended December 31, 2007, 2006 and2005 (in thousands):

 

| ** **                             | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                   |       |                              |       |   |   |   |   |
| Balance, beginning                     |       | $                                 | 1,177      |   | $ | 1,168 |   | $ | 637 |   |
| Mortgage  servicing rights capitalized |       | 1                                 |       | 140 |   | 643 |   |
| Mortgage  servicing rights amortized   |       | (112                              | )          | (131 | ) | (112 | ) |
|                                   |       |                              |       |   |   |   |   |
| Balance, ending                        |       | $                                 | 1,066      |   | $ | 1,177 |   | $ | 1,168 |   |

 

The estimatedamortization expense of amortizing mortgage servicing rights for each of thefive succeeding fiscal years after December 31, 2007 is as follows (inthousands):

 

| 2008       |   | $    | (177   | ) |
|------------|--------|------|--------|---|
| 2009       |   | (156 | )      |
| 2010       |   | (132 | )      |
| 2011       |   | (111 | )      |
| 2012       |   | (93  | )      |
| Thereafter |   | (397 | )      |
| Total      |   | $    | (1,066 | ) |

 

As of December 31,2007 and 2006, the fair value of the mortgage servicing rights (“MSRs”) was$1,258,000 and $1,623,000, respectively. The fair value of the MSRs for these periods was determined using athird-party valuation model that calculates the present value of estimatedfuture servicing income. The model incorporates assumptions that marketparticipants use in estimating future net servicing income, including estimatesof prepayment speeds and discount rates. Mortgage loan prepayment speed is the annual rate at which borrowers areforecasted to repay their mortgage loan principal and is based on historicalexperience. The discount rate used to determine the present value of future netservicing income - another key assumption in the model - is the required rateof return the market would expect for an asset with similar risk. Bothassumptions can, and generally will, change quarterly valuations as marketconditions and interest rates change.

 

F-21

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE6 - PREMISES AND EQUIPMENT**

** **

The components ofpremises and equipment at December 31, 2007 and 2006 were as follows (inthousands):

 

| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                              |       |                  |       |   |   |
| Land                              |       | $                     | 5,164      |   | $ | 5,903 |   |
| Buildings                         |       | 13,257                |       | 12,083 |   |
| Leasehold improvements            |       | 164                   |       | 40 |   |
| Furniture, fixtures and equipment |       | 4,774                 |       | 4,849 |   |
|                              |       | 23,359                |       | 22,875 |   |
| Less: accumulated depreciation    |       | (8,893                | )          | (8,588 | ) |
| Premises and Equipment, net       |       | $                     | 14,466     |   | $ | 14,287 |   |

 

During 2007, theCompany sold its operations center premises and recorded a pre-tax gain of$874,000.

 

Land at December 31,2007 includes an investment in a property in Absecon, New Jersey that theCompany is considering developing into a future branch.  Land at December 31, 2006 also includeda second property that the Company had planned to develop for a future branch.During 2007, the Company sold the second property for a pre-tax gain of$96,000.

 

As of December 31,2007, the Company leased space for an operations center in Blue Bell,Pennsylvania, a branch location in Media, Pennsylvania and certain officeequipment. The leases are accounted for as operating leases.  The Blue Bell lease expires in July 2012and, upon expiration, the Company has the option to extend the lease for anadditional five year period at the then prevailing market rate.  Thefollowing rental expenses were included in the Company’s financial statements(in thousands):

 

| ** **      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------|------------|----------|------------|----------|------------|----------|------------|
| Office rent     |       | $        | 401        |     | $          | 96       |       | $ | — |   |
| Equipment lease |       | 23       |       | 12       |       | —   |       |
|            |       | $        | 424        |     | $          | 108      |       | $ | — |   |

 

The followingtable shows the minimum future rental payments under non-cancelable leases forproperty and equipment at December 31, 2007 (in thousands):

 

| 2008 |   | $   | 494    |   |
|------|--------|-----|--------|--------|
| 2009 |   | 496 |   |
| 2010 |   | 467 |   |
| 2011 |   | 460 |   |
| 2012 |   | 275 |   |

 

F-22

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 7 –DEPOSITS**

 

The weighted averageinterest rate and balance of deposits at December 31, 2007 and 2006consist of the following (dollars in thousands):

 

| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **Weighted**          | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Average**           | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Interest Rate**     | ** ** | **Amount** | ** ** | **Interest Rate** | ** ** | **Amount** | ** ** |
|                                 |       |                  |       |   |   |   |   |   |   |
| Non-interest bearing demand accounts |       | —                | %          | $ | 43,462 |   | — | % | $ | 41,429 |   |
| NOW accounts                         |       | 1.70                  |       | 39,299 |   | 1.80 |   | 50,717 |   |
| Money market accounts                |       | 3.13                  |       | 50,568 |   | 3.21 |   | 29,770 |   |
| Savings and club accounts            |       | 0.65                  |       | 54,019 |   | 0.74 |   | 64,338 |   |
| Certificates of deposit              |       | 4.71                  |       | 398,212 |   | 4.43 |   | 410,280 |   |
|                                 |       | 3.64                  | %          | $ | 585,560 |   | 3.44 | % | $ | 596,534 |   |

 

The scheduled maturitiesof certificates of deposit for periods subsequent to December 31, 2007 areas follows (in thousands):

 

| ** ** | ** ** | **December 31,** |
|------------|------------|-----------------------|
| ** ** | ** ** | **2007**              |
|       |       |                  |
| 2008       |       | $                     | 244,019 |
| 2009       |       | 85,587                |
| 2010       |       | 30,637                |
| 2011       |       | 21,739                |
| 2012       |       | 1,684                 |
| Thereafter |       | 14,546                |
|       |       |                  |
| ** ** |       | $                     | 398,212 |

 

A summary of interestexpense on deposits for the years ended December 31, 2007, 2006 and 2005is as follows (in thousands):

 

| ** **                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |     |       |
| NOW accounts              |       | $        | 732        |     | $          | 1,104    |       | $ | 1,826 |   |
| Money market accounts     |       | 1,266    |       | 579      |       | 265      |       |
| Savings and club accounts |       | 424      |       | 557      |       | 748      |       |
| Certificates of deposit   |       | 18,104   |       | 16,734   |       | 16,373   |       |
|                      |       |     |       |     |       |     |       |
| ** **                |       | $        | 20,526     |     | $          | 18,974   |       | $ | 19,212 |   |

 

 

F-23

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 7 –DEPOSITS (CONTINUED)**

 

The aggregate amount ofcertificates of deposit with a minimum denomination of $100,000 was $77,264,000and $73,945,000 at December 31, 2007 and 2006, respectively.  In general, deposits in excess of $100,000are not insured by the Federal Deposit Insurance Corporation. Deposits forcertain retirement accounts are insured for up to $250,000.

 

**NOTE8**– BORROWINGS

** **

The following is asummary of borrowed funds by type:

 

| ** **           | ** ** | ** **                 | ** ** | ** **   | ** ** | **Maximum**     | ** ** | ** **      | ** ** | ** **     | ** ** |
|----------------------|------------|----------------------------|------------|--------------|------------|-----------------|------------|-----------------|------------|----------------|------------|
| ** **           | ** ** | ** **                 | ** ** | ** **   | ** ** | **Amount**      | ** ** | ** **      | ** ** | **Weighted**   | ** ** |
| ** **           | ** ** | ** **                 | ** ** | ** **   | ** ** | **Outstanding** | ** ** | **Average**     | ** ** | **Average**    | ** ** |
| ** **           | ** ** | ** **                 | ** ** | **Weighted** | ** ** | **at Month**    | ** ** | **Amount**      | ** ** | **Interest**   | ** ** |
| ** **           | ** ** | **Balance**                | ** ** | **Average**  | ** ** | **End**         | ** ** | **Outstanding** | ** ** | **Rate**       | ** ** |
| ** **           | ** ** | **at End of**              | ** ** | **Interest** | ** ** | **During the**  | ** ** | **During the**  | ** ** | **During the** | ** ** |
| ** **           | ** ** | **Year**                   | ** ** | **Rate**     | ** ** | **Year**        | ** ** | **Year**        | ** ** | **Year**       | ** ** |
| ** **           | ** ** | **(Dollars in thousands)** | ** ** |
| 2007                 |       |                       |       |         |       |            |       |            |       |           |       |
| FHLB advances        |       | $                          | 80,000     |         | 3.94       | %               | $          | 80,000          |       | $              | 34,422     |   | 4.70 | % |
| Other borrowed funds |       | 20,000                     |       | 3.60         |       | 20,000          |       | 2,222           |       | 3.62           | %          |
|                 |       |                       |       |         |       |            |       |            |       |           |       |
| 2006                 |       |                       |       |         |       |            |       |            |       |           |       |
| FHLB advances        |       | $                          | 30,000     |         | 4.88       | %               | $          | 30,000          |       | $              | 30,000     |   | 4.88 | % |

 

**FederalHome Loan Bank Advances**

 

Advances from the FHLB ofPittsburgh with rates ranging from 2.83% to 4.89% are due as follows:

 

| ** ** | ** ** | ** **                 | ** ** | **Weighted** | ** ** |
|------------|------------|----------------------------|------------|--------------|------------|
| ** ** | ** ** | ** **                 | ** ** | **Average**  | ** ** |
| ** ** | ** ** | **Amount**                 | ** ** | **Rate**     | ** ** |
| ** ** | ** ** | **(Dollars in Thousands)** | ** ** |
|       |       |                       |       |         |       |
| 2008       |       | $                          | —     |         | —     | % |
| 2009       |       | —                     |       | —       | %          |
| 2010       |       | —                     |       | —       | %          |
| 2011       |       | 30,000                     |       | 4.88         | %          |
| 2012-2017  |       | 50,000                     |       | 3.38         | %          |
|       |       | $                          | 80,000     |         |       |   |

 

Pursuant to collateralagreements with the FHLB, advances are secured by qualifying first mortgageloans, qualifying fixed-income securities, FHLB stock and an interest-bearingdemand deposit account with the FHLB. As of December 31, 2007, the Bankhas $92.0 million in qualifying collateral pledged against its advances.

 

 

F-24

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE8**– BORROWINGS (CONTINUED)

 

| **Maturity Date**  | ** ** | **Interest Rate** | ** ** | **Strike Rate** | ** ** | **Call Date**      | ** ** | **Amount**         |
|--------------------|------------|-------------------|------------|-----------------|------------|--------------------|------------|--------------------|
| ** **         | ** ** | ** **        | ** ** | ** **      | ** ** | ** **         | ** ** | **(in thousands)** |
| ** **         | ** ** | ** **        | ** ** | ** **      | ** ** | ** **         | ** ** | ** **         |
| August 2011   |       | 4.89              | %          | 7.50            | %          |               |       | $                  | 20,000 |
| August 2011   |       | 4.87              | %          | 7.50            | %          |               |       | 10,000             |
| November 2017 |       | 3.62              | %          |            |       | November 2010 |       | 15,000             |
| November 2017 |       | 3.87              | %          |            |       | November 2011 |       | 15,000             |
| December 2017 |       | 2.83              | %          |            |       | March 2008    |       | 20,000             |
|               |       |              |       |            |       |               |       | $                  | 80,000 |

 

For the borrowings thatcontractually mature in August 2011, if three-month LIBOR is greater thanor equal to the Strike Rate, the FHLB can notify the Bank of its intention toconvert the borrowing to an adjustable-rate advance equal to three-month LIBOR(4.70% at December 31, 2007) plus .2175% on a quarterly basis. The Bankhas the option to repay these advances at each of the option dates withoutpenalty. Accordingly, the contractual maturities above may differ from actualmaturities.

 

The borrowings thatcontractually mature in November 2017 may be called by the FHLB on thecall date disclosed in the above table. If the borrowing is called, the Bankhas the option to either pay off the borrowing without penalty or the borrowing’sfixed rate resets to a variable rate of three-month LIBOR plus .10%. Subsequentto the call date, the borrowings are callable by the FHLB quarterly.  Accordingly, the contractual maturities abovemay differ from actual maturities.

 

The borrowing thatcontractually matures in December 2017 may be called by the FHLB on thecall date disclosed in the above table. If the borrowing is called, the Bankhas the option to either pay off the borrowing without penalty or the borrowing’sfixed rate resets to a variable rate of three-month LIBOR plus .11%.  Subsequent to the call date, the borrowing iscallable by the FHLB quarterly. Accordingly, the contractual maturities above may differ from actualmaturities.

 

The Bank has a maximumborrowing capacity with the Federal Home Loan Bank of approximately $435.9million at September 30, 2007, the latest date for which information isavailable.

 

As a member of the FHLBof Pittsburgh, the Bank is required to acquire and hold shares of capital stockin the FHLB of Pittsburgh in an amount of at least equal to 4.65% of itsadvances from the FHLB of Pittsburgh, plus 0.65% of the unused borrowingcapacity.  The Bank was in compliancewith this requirement with a stock investment in the FHLB of Pittsburgh of $5.9million at December 31, 2007.

 

**OtherBorrowed Funds**

 

Other borrowed funds of$20.0 million contractually mature in November 2014 and may be called bythe lender in November 2009. Subsequent to the call date, the borrowing is callable by the lenderquarterly. Accordingly, the contractual maturities above may differ from actualmaturities.

 

Mortgage backedsecurities with a carrying value of $22.3 million at December 31, 2007were pledged as collateral for these other borrowed funds.

** **

 

F-25

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE9**– EMPLOYEE BENEFITS

** **

**DefinedBenefit Plan**

 

The Bank has a qualifiednon-contributory defined benefit retirement plan covering all employees meetingcertain eligibility requirements.  Theassets of the Bank’s defined benefit plan are held by a trustee and invested inmutual funds and cash equivalents.  Forthe years ended December 31, 2007, 2006 and 2005, the composition of thefunds was 0%, 33.0% and 96.1%, respectively, in mutual funds and 100.0%, 67.0%and 3.9%, respectively, in cash.  Certaincash equivalents are held in deposit accounts at the Bank.  The investment strategy of the Plan is tomaintain an adequate return while meeting the liquidity needs of the Plan.  The benefits are based on each employee’syears of service and the average of the highest three or five consecutiveannual salaries.  An employee becomes fullyvested upon completion of five years of qualifying service.  It has been the Bank’s policy to fund themaximum amount that can be deducted for federal income tax purposes eachyear.   The Bank amended the plan andfroze the benefits for current participants in the plan as of January 1,2006.  In October 2006, the Bankresolved to settle the obligations to the plan participants in 2007 byterminating the plan, after obtaining required approvals.  The Bank is presently awaiting adetermination letter from the IRS before settling its plan obligations.

 

Effective December 31,2006, the Bank adopted SFAS Statement No. 158, “Employers’ Accounting forDefined Benefit Pensions and Other Post Retirement Plans.”

 

The following tablesprovide a roll forward of the changes in benefit obligations and plan assetsfor the most recent two years:

 

|                                           | ** ** | **2007**            | ** ** | **2006**   | ** ** |
|------------------------------------------------|------------|---------------------|------------|------------|------------|
|                                           | ** ** | **(In Thousands)**  | ** ** |
| **Change in benefit obligation:**              | ** ** | ** **          | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | ** **          | ** ** | ** ** | ** ** |
| Net benefit obligation at beginning of year    |       | $                   | 2,389      |       | $          | 2,195 |   |
| Interest cost                                  |       | 120                 |       | 121        |       |
| Actuarial loss                                 |       | 134                 |       | 197        |       |
| Benefits paid                                  |       | —              |       | (124       | )          |
| Net benefit obligation at end of year          |       | $                   | 2,643      |       | $          | 2,389 |   |
|                                           |       |                |       |       |       |
|                                           | ** ** | **2007**            | ** ** | **2006**   | ** ** |
|                                           | ** ** | **(In  Thousands)** | ** ** |
| **Change in plan assets:**                     | ** ** | ** **          | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | ** **          | ** ** | ** ** | ** ** |
| Fair value of plan assets at beginning of year |       | $                   | 2,302      |       | $          | 1,934 |   |
| Actual return on plan assets                   |       | 105                 |       | 204        |       |
| Employer contributions                         |       | —              |       | 288        |       |
| Benefits paid                                  |       | —              |       | (124       | )          |
| Fair value of plan assets at end of year       |       | $                   | 2,407      |       | $          | 2,302 |   |

 

 

F-26

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE9**– EMPLOYEE BENEFITS (CONTINUED)

 

The fair value of plan assets included deposits held at the Bank of$407,000 and $395,000 at December 31, 2007 and 2006, respectively.

 

The following tableprovides a reconciliation of benefit obligations, plan assets and funded statusof the plans:

 

| ** **                                                 | ** ** | **2007**           | ** ** | **2006** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                                 | ** ** | **(In Thousands)** | ** ** |
| ** **                                                 | ** ** | ** **         | ** ** |
| Fair value of plan assets end of year                      |       | $                  | 2,407      |     | $          | 2,302 |   |
| Net benefit obligation at end of year                      |       | 2,643              |       | 2,389    |       |
|                                                       |       |               |       |     |       |
| Funded Status  (plan assets less plan obligations)         |       | $                  | (236       | )        | $          | (87 | ) |
| Net amount  recognized in the statement of condition       |       | $                  | (236       | )        | $          | (87 | ) |
| Amounts recognized in stockholders’ equity:           |       |               |       |     |       |
| Net actuarial  loss                                        |       | $                  | (139       | )        | $          | (148 | ) |
| Deferred tax  asset                                        |       | 47                 |       | 50       |       |
| Amount recognized in accumulated other comprehensive  loss |       | $                  | (92        | )        | $          | (98 | ) |

 

Thefollowing is a summary of significant actuarial assumptions (weighted averagebasis) at December 31, 2007, 2006 and 2005:

 

| ** **                                       | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                             |       |     |       |     |       |     |       |
| Discount rate                                    |       | 5.00     | %          | 5.00     | %          | 5.50     | %          |
| Expected long-term rate of return on plan assets |       | 5.25     |       | 5.25     |       | 8.00     |       |
| Rate of compensation increase                    |       | —   |       | —   |       | 5.00     |       |

 

TheBank determined the long-term rate of return on plan assets based on currentand expected asset allocations as well as historical returns and current marketconditions.  The discount rate assumptionswere based on the short-term plan cash outflows expected to occur when the planliquidates in 2008.

 

The following table setsforth the components of the defined benefit plan costs for the years presented:

 

| ** **                                                                                          | ** ** | **2007**           | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                                                                          | ** ** | **(In Thousands)** | ** ** |
| ** **                                                                                          | ** ** | ** **         | ** ** |
| Service cost                                                                                        |       | $                  | —     |     | $          | —   |       | $ | 300 |   |
| Interest cost                                                                                       |       | 120                |       | 121      |       | 131      |       |
| Return on plan assets                                                                               |       | (105               | )          | (204     | )          | (110     | )          |
| Amortization of unrecognized net actuarial loss                                                     |       | 143                |       | 49       |       | 3        |       |
| Curtailment loss                                                                                    |       | —             |       | —   |       | 375      |       |
| Net periodic  benefit costs (income) reported in salaries, benefits and other compensation  expense |       | $                  | 158        |     | $          | (34      | )          | $ | 699 |   |

 

 

F-27

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE9**– EMPLOYEE BENEFITS (CONTINUED)

 

**401(k) Plan**

 

The Bank also has a 401(k) retirementplan covering all employees meeting certain eligibility requirements.  Employees may contribute a percentage oftheir salary to the Plan each year, subject to limitations which are set bylaw.  The Bank matches a portion of eachemployee contribution and also may make discretionary contributions, based onthe Bank’s performance.  The Bankprovides a matching contribution equivalent to 33% of the first 6% of thecontribution made by an employee.  TheBank’s matching contribution rate changed as of January 1, 2006 from 25%to 33%.  The Bank’s contributions to theplan on behalf of its employees resulted in an expenditure of $83,000, $94,000and $27,000 for the years ended December 31, 2007, 2006 and 2005,respectively.

 

**EmployeeStock Ownership Plan**

 

The ESOP is atax-qualified plan designed to invest primarily in the Bancorp’s common stockthat provides employees meeting certain eligibility requirements with theopportunity to receive a funded retirement benefit, based primarily on thevalue of the Bancorp’s common stock.  TheESOP purchased 575,446 shares of common stock in the Bancorp’s minority stockoffering at a price of $10.00 per share with the proceeds of a loan from theBancorp to the ESOP.  The outstandingloan principal balance at December 31, 2007 and 2006 was $5,019,000 and$5,232,000, respectively.

 

Shares of the Bancorp’scommon stock pledged as collateral for the loan are released from the pledgefor allocation to Plan participants as loan payments are made.  The Bank releases shares annually based uponthe ratio that the current principal and interest payment bears to the currentand remaining scheduled future principal and interest payments.  Dividends declared on common stock held bythe ESOP and not allocated to the account of a participant can be used to repaythe loan.

 

At December 31,2007, there were a total 76,726 shares, 38,363 shares in both 2007 and 2006,allocated and committed to be released. ESOP shares that were unallocated atthat date totaled 498,720 and had a fair market value of $5,685,000.  ESOP compensation expense for the years endedDecember 31, 2007 and 2006 was $498,000 and $512,000, respectively,representing the average fair market value of shares allocated or committed tobe released during the year.

 

# **Long-Term Incentive Plan**

# ** **

TheBank maintains the Fox Chase Bank Executive Long-Term Incentive Plan (the “IncentivePlan”) to retain and attract key officers who contribute to the financial andbusiness success of the Bank.  On anannual basis, the Board of Directors considers granting a long-term incentiveaward for the President and Chief Executive Officer of the Bank and thePresident and Chief Executive Officer recommends the incentive award amountsfor each eligible employee. Substantially all of the awards vest over a five-year period with 60% ofthe award vesting on the third anniversary of the plan year to which the awardwas granted, 80% on the fourth anniversary and 100% on the fifth anniversary,unless otherwise determined by the Board of Directors on date of grant.  All plan assets are invested in Bancorpcommon stock.  The Incentive Plan becameeffective January 1, 2006.  During2007 and 2006, the Bank recorded compensation expense of $159,000 and $144,000,respectively, for the Incentive Plan. Remaining unvested compensation, which is invested in Bancorp commonstock, is $312,000 at December 31, 2007. Such amounts will be ratably recognized as compensation expense over theremaining vesting periods.

 

 

F-28

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 10 – STOCK BASED COMPENSATION**

 

At the Bancorp’s annualmeeting of stockholders on May 22, 2007, stockholders approved the FoxChase Bancorp, Inc. 2007 Equity Incentive Plan (the “Plan”).  The Plan provides for a total of 1,007,030shares of common stock for issuance upon the grant or exercise of awards.  Of the shares available under the Plan,719,307 may be issued in connection with the exercise of stock options and 287,723may be issued as restricted stock.  ThePlan allows for the granting of non-statutory stock options (“NSOs”), incentivestock options and restricted stock. Options are granted at no less than thefair value of the Bancorp’s common stock on the date of the grant.

 

On August 31, 2007,certain officers, employees and outside directors were granted an aggregate of521,800 NSOs and 203,900 shares of restricted stock.  Additionally, the Company granted anadditional 1,000 shares to an officer in November 2007.  In accordance with SFAS No. 123R, “Share-BasedPayments,” the Company began to expense the fair value of all share-basedcompensation grants over the requisite service periods.

 

In September 2007,the Bancorp’s Board of Directors approved the funding of a trust that purchased287,500 shares of Bancorp’s common stock, or approximately 1.96% of the Bancorp’soutstanding common stock, to fund restricted stock awards under the Plan.  The 287,500 shares were purchased by thetrust at a weighted average cost of $13.02 per share.

 

In accordance withSecurities Exchange Commission Staff Accounting Bulletin (“SAB”) No. 107,the Company classifies share-based compensation for employees and outsidedirectors within “Salaries, benefits and other compensation” in theConsolidated Statements of Operations to correspond with the same line item ascompensation paid. Additionally, SFAS No. 123R requires the Company toreport (1) the expense associated with the grants as an adjustment tooperating cash flows and (2) any benefits of realized tax deductions in excessof previously recognized tax benefits on compensation expense as a financingcash flow.  There were no such excess taxbenefits in 2007.

 

Stock options vest over afive-year service period and expire ten years after grant date.  The Company recognizes compensation expensefor the fair values of stock options using the straight-line method over therequisite service period for the entire award.

 

Restricted shares vestover a five-year service period.  Theproduct of the number of shares granted and the grant date market price of theCompany’s common stock determine the fair value of restricted shares under theCompany’s restricted stock plan.  TheCompany recognizes compensation expense for the fair value of restricted shareson a straight-line basis over the requisite service period for the entireaward.

 

During the year ended December 31,2007, the Company recorded $271,000 of stock based compensation expense,comprised of stock option expense of $111,000 and restricted stock expense of$160,000.

 

 

F-29

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 10 – STOCK BASED COMPENSATION (Continued)**

 

The following is asummary of the Bancorp’s stock option activity and related information for the2007 Equity Incentive plan for the year ended December 31, 2007:

 
| ** **                            | ** ** | ** **    | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **    |
|---------------------------------------|------------|---------------|------------|--------------|------------|-----------------|------------|---------------|
| ** **                            | ** ** | ** **    | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **    |
| ** **                            | ** ** | **Number of** | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate** |
| ** **                            | ** ** | **Stock**     | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic** |
| ** **                            | ** ** | **Options**   | ** ** | **Price**    | ** ** | **Life**        | ** ** | **Value**     |
|                                  |       |          |       |         |       |            |       |          |
| Outstanding at December 31, 2006 |       | —        |       | $            | —     |            |       |          |   |
| Granted                               |       | 522,800       |       | 12.38        |       |            |       |          |
| Exercised                             |       | —        |       | —       |       |            |       |          |
| Forfeited                             |       | (4,000        | )          | 12.38        |       |            |       |          |
| Outstanding at December 31, 2007 |       | 518,800       |       | $            | 12.38      |            | 9.7 years  |          | $ | — |
| Exercisable at December 31, 2007 |       | —        |       | —       |       | —          |       | —        |

 

Management estimated thefair values of all option grants using the Black-Scholes option-pricingmodel.  Since there is limited historicalinformation on the volatility of the Bancorp’s stock, management considered theaverage volatilities of comparable public companies over a period equal to theexpected life of the options in determining the expected volatility rate usedin the estimation of fair value. Management estimated the expected life of the options using thesimplified method allowed under SAB No. 107.  The risk-free rate was determined utilizingthe Treasury yield for the expected life of the option contract.

 

The fair value of thestock option grants was estimated with the following weighted averageassumptions:

 

| ** **                    | ** ** | **2007**     | ** ** |
|-------------------------------|------------|--------------|------------|
| Expected dividend yield       |       | 1.90         | %          |
| Expected volatility           |       | 25.00        | %          |
| Risk-free interest rate       |       | 4.13% - 4.33 | %          |
| Expected option life in years |       | 6.50         |       |

 

The following is asummary of the Bancorp’s unvested options as of December 31, 2007 andchanges therein during the twelve months then ended:

 

| ** **                         | ** ** | **Weighted**  | ** ** | ** **     | ** ** |
|------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                         | ** ** | **Number of** | ** ** | **Average**    | ** ** |
| ** **                         | ** ** | **Stock**     | ** ** | **Grant Date** | ** ** |
| ** **                         | ** ** | **Options**   | ** ** | **Fair Value** | ** ** |
|                               |       |          |       |           |       |
| Unvested at December 31, 2006 |       | —        |       | $              | —     |   |
| Granted                            |       | 522,800       |       | 3.40           |       |
| Exercised                          |       | —        |       | —         |       |
| Forfeited                          |       | (4,000        | )          | $              | 3.40       |   |
| Unvested at December 31, 2007 |       | 518,800       |       | $              | 3.40       |   |

 

 

F-30

----

** **

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 10 – STOCK BASED COMPENSATION (CONTINUED)**

 

Expected future expenserelating to the 518,800 non-vested options outstanding as of December 31,2007 is $1.6 million over a weighted average period of 4.7 years.

 

The following is asummary of the status of the Bancorp’s restricted stock as of December 31,2007 and changes therein during the year then ended:

 

| ** **                         | ** ** | ** **     | ** ** | **Weighted**   | ** ** |
|------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                         | ** ** | **Number of**  | ** ** | **Average**    | ** ** |
| ** **                         | ** ** | **Restricted** | ** ** | **Grant Date** | ** ** |
| ** **                         | ** ** | **Shares**     | ** ** | **Fair Value** | ** ** |
| Unvested at December 31, 2006 |       | —         |       | $              | —     |   |
| Granted                            |       | 203,900        |       | 12.38          |       |
| Vested                             |       | —         |       | —         |       |
| Forfeited                          |       | (500           | )          | $              | 12.38      |   |
| Unvested at December 31, 2007 |       | 203,400        |       | $              | 12.38      |   |

 

Expected futurecompensation expense relating to the 203,400 restricted shares at December 31,2007 is $2.2 million over a weighted average period of 4.7 years.

 

**NOTE 11 – INCOME TAXES**

 

The components of incometax expense (benefit) for the years ended December 31, 2007, 2006 and 2005are as follows (in thousands):

 

| ** **     | ** ** | **December 31,** | ** ** |
|----------------|------------|-----------------------|------------|
| ** **     | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Federal:       |       |                  |       |   |   |   |   |
| Current        |       | $                     | 596        |   | $ | (313 | ) | $ | 950 |   |
| Deferred       |       | (141                  | )          | 997 |   | 2,025 |   |
|           |       | 455                   |       | 684 |   | 2,975 |   |
|           |       |                  |       |   |   |   |   |
| State, current |       | 5                     |       | — |   | — |   |
|           |       | $                     | 460        |   | $ | 684 |   | $ | 2,975 |   |

 

 

F-31

----

 

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 11 –INCOME TAXES (CONTINUED)**

 

The provision (benefit)for income taxes differs from the statutory rate of 34% due to the following(in thousands):

 
| ** **                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                        |       |                  |       |   |   |   |   |
| Federal income tax at statutory rate of 34% |       | $                     | 813        |   | $ | 1,468 |   | $ | 3,038 |   |
| Tax exempt interest, net                    |       | (265                  | )          | (272 | ) | (222 | ) |
| Bank-owned life insurance                   |       | (149                  | )          | (145 | ) | (152 | ) |
| ESOP compensation expense                   |       | 39                    |       | 44 |   | — |   |
| Other, net                                  |       | 17                    |       | (99 | ) | (1 | ) |
| State taxes                                 |       | (43                   | )          | (58 | ) | (22 | ) |
| Increase (decrease) in valuation allowance  |       | 48                    |       | (254 | ) | 334 |   |
|                                        |       |                  |       |   |   |   |   |
| **Total  provision**                        | ** ** | $                     | 460        |   | $ | 684 |   | $ | 2,975 |   |
|                                        |       |                  |       |   |   |   |   |
| **Effective  tax rate**                     | ** ** | 19.25                 | %          | 15.84 | % | 33.30 | % |

 

 

F-32

----

 

*** ***

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 11 – INCOME TAXES(CONTINUED)**

 

The net deferred taxasset consisted of the following components as of December 31, 2007 and2006 (in thousands):

 
| ** **                                            | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Deferred tax assets:                                  |       |                  |       |   |   |
| Allowance for  loan losses                            |       | $                     | 1,148      |   | $ | 1,003 |   |
| Loan origination  fees                                |       | —                |       | 88 |   |
| Nonaccrual  interest                                  |       | 6                     |       | 7 |   |
| Unrealized  losses on securities available-for-sale   |       | —                |       | 482 |   |
| Accrued  compensation                                 |       | 119                   |       | 49 |   |
| Organizational  costs                                 |       | 2                     |       | 3 |   |
| Equity incentive  plans                               |       | 92                    |       | — |   |
| Accrued expenses                                      |       | 56                    |       | 32 |   |
| Deferred lease  liability                             |       | 39                    |       | — |   |
| Unfunded pension  obligation — SFAS No. 158 |       | 47                    |       | 50 |   |
| Charitable  contribution carryover                    |       | 483                   |       | 535 |   |
| State net  operating loss carryforward                |       | 676                   |       | 628 |   |
| Capital loss  carryover                               |       | —                |       | 318 |   |
|                                                  |       | 2,668                 |       | 3,195 |   |
| Valuation allowance                                   |       | (676                  | )          | (628 | ) |
|                                                  |       | 1,992                 |       | 2,567 |   |
| Deferred tax liabilities:                             |       |                  |       |   |   |
| Prepaid expense  deduction                            |       | 174                   |       | 197 |   |
| Mortgage  servicing rights                            |       | 363                   |       | 400 |   |
| Loan origination  costs                               |       | 142                   |       | 148 |   |
| Depreciation of  premises and equipment               |       | 570                   |       | 735 |   |
| Unrealized gains  on securities available-for-sale    |       | 333                   |       | — |   |
|                                                  |       | 1,582                 |       | 1,480 |   |
|                                                  |       |                  |       |   |   |
| **Net  Deferred Tax Asset**                           |       | $                     | 410        |   | $ | 1,087 |   |

 

Based on the Company’shistory of prior earnings and its expectation of future taxable income,management anticipates that it is more likely than not that the above deferredtax assets, except the state net operating loss carryforward, will be realized.

 

Retained earnings include$5,986,000 at December 31, 2007, 2006 and 2005, for which no provision forfederal income tax has been made. This amount represents deductions for baddebt reserves for tax purposes, which were only allowed to savings institutionsthat met certain criteria prescribed by the Internal Revenue Code of 1986, asamended. The Small Business Job Protection Act of 1996 (the “Act”) eliminatedthe special bad debt deduction granted solely to thrifts. Under the terms ofthe Act, there would be no recapture of the pre-1988 (base year) reserves.However, these pre-1988 reserves would be subject to recapture under the rules ofthe Internal Revenue Code if the Company pays a cash dividend in excess ofearnings and profits, or liquidates.

 

 

F-33

----

 

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 11 – INCOME TAXES(CONTINUED)**

 

As of December 31,2007 and 2006, the Company had approximately $0 and $935,000 of capital losscarryforwards for federal income tax purposes, respectively, resulting in adeferred tax asset of $0 and $318,000, respectively, at those dates.

 

The Company had acharitable contribution carryover of $1,422,000 as of December 31, 2007,resulting in a deferred tax asset of $483,000. Utilization of this carryover islimited to 10% of taxable income on an annual basis. Such carryover will expireon December 31, 2011, if not utilized.

 

Approximately $676,000 ofgross deferred tax assets were related to state tax net operating losses at December 31,2007. The Company has assessed a valuation allowance of $676,000 on this entiredeferred tax asset due to an expectation of such net operating losses expiringbefore being utilized. The Company has $9,589,000 of state net operating losseswhich will begin to expire in 2008 if not utilized.

 

Effective January 1,2007,the Companyadopted FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty inIncome Taxes, an interpretation of FASB Statement No. 109.”  As of January 1,2007 and December 31, 2007,the Company had no material unrecognized tax benefitsor accrued interest and penalties.  The Company’s policy is toaccount for interest as a component of interest expense and penalties as acomponent of other expense. Federal and state tax years 2004 through 2007 were open for examinationas of December 31, 2007.

 

**NOTE 12****–****COMMITMENTS ANDCONTINGENCIES**

 

**LendingOperations**

 

The Company is a party tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of its customers. These financialinstruments include commitments to extend credit. Those instruments involve, tovarying degrees, elements of credit risk in excess of the amount recognized onthe statements of financial condition.

 

The Company’s exposure tocredit loss in the event of nonperformance by the other party to the financialinstrument for commitments to extend credit is represented by the contractualamount of those instruments. The Company uses the same credit policies inmaking commitments and conditional obligations as it does for on-balance sheetinstruments.

 

 

F-34

----

** **

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 12****–****COMMITMENTS ANDCONTINGENCIES (CONTINUED)**

 

A summary of the Company’sfinancial instrument commitments at December 31, 2007 and 2006 is asfollows (in thousands):

 

| ** **                                 | ** ** | **December 31,** |
|--------------------------------------------|------------|-----------------------|
| ** **                                 | ** ** | **2007**              | ** ** | **2006** |
|                                       |       |                  |   |   |
| Commitments to grant loans                 |       | $                     | 52,107 |   | $ | 40,134 |
| Unfunded commitments under lines of credit |       | 36,232                |   | 29,232 |
| Standby letters of credit                  |       | 1,489                 |   | 112 |
|                                       |       |                  |   |   |
|                                       |       | $                     | 89,828 |   | $ | 69,478 |

 

Commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract. Since many of the commitments areexpected to expire without being drawn upon, the total commitment amounts donot necessarily represent future cash requirements. Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee. The Company evaluates each customer’s credit worthiness on acase-by-case basis. The amount of collateral obtained, if deemed necessary bythe Company upon extension of credit, is based on management’s creditevaluation. Collateral held varies, but includes principally residential orcommercial real estate. Fixed rate commitments to grant loans were $7,884,000and $4,346,000 as of December 31, 2007 and December 31, 2006,respectively. The interest rates on these fixed rate loans ranged from 5.875%to 9.44% as of December 31, 2007 and 5.875% to 7.85% as of December 31,2006.

 

# **Legal Proceedings**

# ** **

The Company isperiodically subject to various pending and threatened legal actions whichinvolve claims for monetary relief. Based upon information presently availableto the Company, it is the Company’s opinion that any legal and financialresponsibility arising from such claims will not have a material adverse effecton the Company’s results of operations.

 

# **Data Processing**

# ** **

The Company has enteredinto contracts with third-party providers to manage the Company’s networkoperations, data processing and other related services. The projected amount ofthe Company’s future minimum payments contractually due after December 31,2007 is as follows (in thousands):

 

| 2008 |   | $      | 1,791 |
|------|--------|--------|-------|
| 2009 |   | 1,531  |
| 2010 |   | 3      |
| 2011 |   | — |
| 2012 |   | — |

 

 

F-35

----

 

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE13**– STOCKHOLDERS’ EQUITY

** **

TheBank is subject to various regulatory capital requirements administered byfederal banking agencies.  The Bancorp, as a savings and loan holding company, is not subject toseparate capital requirements.  Failureto meet minimum capital requirements can initiate certain mandatory andpossibly additional discretionary actions by regulators that, if undertaken,could have a direct material effect on the Bank’s consolidated financialstatements. Under capital adequacy guidelines and the regulatory framework forprompt corrective action, the Bank must meet specific capital guidelines thatinvolve quantitative measures of the Bank’s assets, liabilities and certainoff-balance sheet items as calculated under regulatory accounting practices. TheBank’s capital amounts and classification are also subject to qualitativejudgments by the regulators about components, risk weightings and otherfactors.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Bank tomaintain minimum amounts and ratios (set forth below) of total and Tier 1capital (as defined in the regulations) to risk-weighted assets, and ofTier 1 capital to total assets, as defined. Management believes, as of December 31,2007, that the Bank meets all capital adequacy requirements to which it wassubject.

 

 

F-36

----

 

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE13**– STOCKHOLDERS’ EQUITY (CONTINUED)

** **

As of December 31,2007, the Bank is categorized as well capitalized under the regulatoryframework for prompt corrective action. There are no conditions or events since that notification thatmanagement believes have changed the Bank’s category.

 

The Bank’s actual capitalamounts and ratios at December 31, 2007 and 2006 and the minimum amountsand ratios required for capital adequacy purposes and to be well capitalizedunder the prompt corrective action provisions are as follows:

 
| ** **                                           | ** ** | **Actual**                     | ** ** | **For Capital Adequacy Purposes** | ** ** | **To be Well Capitalized under Prompt Corrective Action Provisions** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **Amount**                     | ** ** | **Ratio**                         | ** ** | **Amount**                                                           | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                                           | ** ** | **(****Dollars in Thousands)** | ** ** |
| **December 31,  2007**                          | ** ** | ** **                     | ** ** | ** **                        | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total risk-based  capital (to risk- weighted assets) |       | $                              | 101,010    |                              | 22.54      | %                                                                    | $          | 335,858 |   | 38.0 | % | $ | 344,823 |   | 310.0 | % |
| Tier 1 capital  (to risk-weighted assets)            |       | 97,634                         |       | 21.78                             |       | 317,929                                                         |       | 34.0 |   | 326,894 |   | 3  6.0 |   |
| Tier 1 capital  (to adjusted assets)                 |       | 97,634                         |       | 12.03                             |       | 332,472                                                         |       | 34.0 |   | 340,590 |   | 3  5.0 |   |
| ** **                                           | ** ** | ** **                     | ** ** | ** **                        | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **December 31,  2006:**                         | ** ** | ** **                     | ** ** | ** **                        | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total risk-based  capital (to risk- weighted assets) |       | $                              | 97,701     |                              | 27.62      | %                                                                    | $          | 328,297 |   | 38.0 | % | $ | 335,371 |   | 310.0 | % |
| Tier 1 capital  (to risk-weighted assets)            |       | 94,751                         |       | 26.79                             |       | 314,148                                                         |       | 34.0 |   | 321,222 |   | 3  6.0 |   |
| Tier 1 capital  (to adjusted assets)                 |       | 94,751                         |       | 12.49                             |       | 330,343                                                         |       | 34.0 |   | 337,929 |   | 3  5.0 |   |

 

The Company’s ability topay dividends is limited by statutory and regulatory requirements.  The Company may not declare nor pay dividendson its stock if such declaration or payment would violate statutory orregulatory requirements.  During 2007,the Bancorp purchased 287,500 shares of common stock to fund its equityincentive plan for $3.7 million which was recorded as common stock acquired bystock benefit plans on the Bancorp’s statements of condition.  Additionally, the Bancorp repurchased 327,000shares of common stock in 2007 in conjunction with a stock repurchase programfor $3.9 million, which was recorded at treasury stock, at cost, on the Company’sstatements of condition.

 

**During2005, the Bank’s primary regulator, the Office of Thrift Supervision (the “OTS”),determined the Bank was in “troubled condition” and issued a Cease and DesistOrder (the “Order”) instructing the Bank to discontinue the origination ofcertain types of loans until further notice, among other restrictions.  On June 28, 2006, the OTS terminated theOrder, and also noted that the Bank is no longer deemed to be in a “troubledcondition.”**

** **

F-37

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE14**– FAIR VALUE OF FINANCIAL INSTRUMENTS

** **

Management uses its bestjudgment in estimating the fair value of the Company’s financial instruments;however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financialinstruments, the fair value estimates herein are not necessarily indicative ofthe amounts the Company could have realized in a sales transaction on the datesindicated.  The estimated fair valueamounts have been measured as of their respective year ends, and have not beenreevaluated or updated for purposes of these consolidated financial statementssubsequent to those respective dates.  Assuch, the estimated fair values of these financial instruments subsequent tothe respective reporting dates may be different than the amounts reported ateach year-end.

 

The following informationshould not be interpreted as an estimate of the fair value of the entireCompany since a fair value calculation is only provided for a limited portionof the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree ofsubjectivity used in making the estimates, comparisons between the Company’sdisclosures and those of other companies may not be meaningful.  The following methods and assumptions wereused to estimate the fair values of the Company’s financial instruments at December 31,2007 and 2006:

 

**Cash and CashEquivalents**

** **

The carrying amounts ofcash and cash equivalents approximate their fair value.

 

**Investment andMortgage Related Securities — Available-for-Sale**

** **

Fair values forinvestments securities and mortgage-related securities available-for-sale arebased on quoted market prices, where available. If quoted market prices are not available, fair values are based onquoted market prices of comparable securities.

 

**Loans Held forSale**

** **

The fair values ofmortgage loans originated and intended for sale in the secondary market arebased on current quoted market prices.

 

**Loans Receivable**

** **

For variable-rate loansthat reprice frequently and that entail no significant changes in credit risk,fair values are based on carrying values. The fair value of fixed rate and other loans are estimated using discountedcash flow analyses at interest rates currently offered for loans with similarterms to borrowers of similar credit quality.

 

**Federal Home LoanBank Stock**

** **

Thefair value of the Federal Home Loan Bank stock is the carrying amount.

** **

**Mortgage ServicingRights**

 

The fair value ofmortgage servicing rights is based on third party estimates of value whenavailable or the present value of expected future cash flows when notavailable.

 

**Accrued InterestReceivable and Accrued Interest Payable**

** **

The carrying amount ofaccrued interest receivable and accrued interest payable approximates fairvalue.

 

F-38

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 14**– FAIR VALUE OF FINANCIAL INSTRUMENTS(CONTINUED)

** **

**DepositLiabilities**

** **

Fair values for demanddeposits (including NOW accounts), savings and club accounts and money marketdeposits are, by definition, equal to the amount payable on demand at thereporting date.  Fair values of fixed-maturitycertificates of deposit are estimated using a discounted cash flow calculationthat applies interest rates currently being offered on similar instruments withsimilar maturities.

 

**Federal Home LoanBank Advances and Other Borrowed Funds**

** **

Fair value of FederalHome Loan Bank advances and other borrowed funds are estimated using discountedcash flow analyses, based on rates currently available to the Bank for advanceswith similar terms and remaining maturities.

 

**Off-Balance SheetFinancial Instruments**

** **

Fair value of commitmentsto extend credit are estimated using the fees currently charged to enter intosimilar agreements, taking into account market interest rates, the remainingterms and present credit worthiness of the counterparties.

 

F-39

----

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 14 – FAIR VALUE OF FINANCIALINSTRUMENTS (CONTINUED)**

 

The estimated fair valuesof the Company’s financial instruments at December 31, 2007 and 2006 wereas follows (in thousands):

 
| ** **                                     | ** ** | **December 31** | ** ** |
|------------------------------------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **2007**             | ** ** | **2006** | ** ** |
| ** **                                     | ** ** | **Carrying  Amount** | ** ** | **Estimated Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Estimated Fair  Value** | ** ** |
|                                           |       |                 |       |   |   |   |   |   |   |
| Financial  assets:                             |       |                 |       |   |   |   |   |   |   |
| Cash and cash  equivalents                     |       | $                    | 31,275     |   | $ | 31,275 |   | $ | 134,441 |   | $ | 134,441 |   |
| Investment  securities available-for-sale      |       | 91,159               |       | 91,159 |   | 70,112 |   | 70,112 |   |
| Mortgage related  securitiesavailable-for-sale |       | 205,145              |       | 205,145 |   | 158,320 |   | 158,320 |   |
| Loans  receivable, net                         |       | 447,035              |       | 443,599 |   | 355,617 |   | 350,430 |   |
| Loans held for  sale                           |       | —               |       | — |   | 1,194 |   | 1,194 |   |
| Mortgage  servicing rights                     |       | 1,066                |       | 1,258 |   | 1,177 |   | 1,623 |   |
| Federal Home  Loan Bank stock                  |       | 5,875                |       | 5,875 |   | 4,422 |   | 4,422 |   |
| Accrued interest  receivable                   |       | 3,360                |       | 3,360 |   | 3,397 |   | 3,397 |   |
|                                           |       |                 |       |   |   |   |   |   |   |
| Financial  liabilities:                        |       |                 |       |   |   |   |   |   |   |
| Savings and club  accounts                     |       | 54,019               |       | 54,019 |   | 64,338 |   | 64,338 |   |
| Demand, NOW and  money market Deposits         |       | 133,329              |       | 133,329 |   | 121,916 |   | 121,916 |   |
| Certificates of  deposit                       |       | 398,212              |       | 401,446 |   | 410,280 |   | 410,942 |   |
| Federal Home  Loan Bank advances               |       | 80,000               |       | 81,837 |   | 30,000 |   | 29,933 |   |
| Other borrowed  funds                          |       | 20,000               |       | 18,792 |   | — |   | — |   |
| Accrued interest  payable                      |       | 504                  |       | 504 |   | 298 |   | 298 |   |
|                                           |       |                 |       |   |   |   |   |   |   |
| Off-balance  sheet instruments                 |       | —               |       | 674 |   | — |   | 521 |   |
|                                                |            |                      |            |  |  |  |  |  |  |  |  |  |  |

 

F-40

----

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 15 – COMPREHENSIVE INCOME**

 

Comprehensive income forthe years ended December 31, 2007, 2006 and 2005 is as follows (inthousands):

 
|                                                                                                                                     |   |       |       | **December 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|-----------------------|------------|
|                                                                                                                                     |   | ** ** | ** ** | **2007**              | ** ** | **2006** |   | **2005** |   |
|                                                                                                                                     |   | ** ** | ** ** | ** **            | ** ** | ** ** |   | ** ** |   |
| Net income                                                                                                                               |   |       |       | $                     | 1,930      |   | $ | 3,634 |   | $ | 5,960 |   |
|                                                                                                                                     |   |       |       |                  |       |   |   |   |   |   |   |   |
| Other  comprehensive income (loss)                                                                                                       |   |       |       |                  |       |   |   |   |   |
|                                                                                                                                     |   |       |       |                  |       |   |   |   |   |
| Unrealized  holding gains (losses) arising during the period, net of taxes (2007 —$860,  2006- $777, 2005 — $(1,114))          |   | 1,616      |       | 1,447                 |       | (2,163 | ) |
|                                                                                                                                     |   |       |       |                  |       |   |   |   |   |
| Less:  Reclassification adjustment for gains (losses) included in net income, net of  taxes (2007 - $44, 2006 - $0, 2005 - $ (275)) |   | 86         |       | —                |       | (534 | ) |
|                                                                                                                                     |   |       |       |                  |       |   |   |   |   |
| Plus:  Amortization of pension actuarial loss, net of taxes                                                                              |   |       |       | 7                     |       | — |   | — |   |
|                                                                                                                                     |   |       |       |                  |       |   |   |   |   |
| Other  comprehensive income (loss)                                                                                                       |   |       |       | 1,537                 |       | 1,447 |   | (1,629 | ) |
|                                                                                                                                     |   |       |       |                  |       |   |   |   |   |
| Comprehensive  income                                                                                                                    |   |       |       | $                     | 3,467      |   | $ | 5,081 |   | $ | 4,331 |   |

 

**NOTE 16 – RELATED PARTY TRANSACTIONS**

 

The Company may from timeto time enter into transactions with its directors, officers andemployees.  Such transactions are made inthe ordinary course of business on substantially the same terms and conditions,including interest rates and collateral, as those prevailing at the same timefor comparable transactions with other customers, and do not, in the opinion ofmanagement, involve more than the normal credit risk or present otherunfavorable features.

 

An analysis of theactivity of loans to directors and executive officers as of December 31,2007 and 2006 is as follows (in thousands):

 
|                                       |   |   |   |   |   | **December 31,** |       |
|--------------------------------------------|--------|--------|--------|--------|--------|-----------------------|------------|
|                                       |   |   |   |   |   | **2007**              | ** ** | **2006** |   |
| Beginning balance                          |   |   |   |   |   | $                     | —     | ** ** | $ | 5,277 |   |
| New loans and line of credit advances      |   |   |   |   |   | —                | ** ** | — |   |
| Repayments                                 |   |   |   |   |   | —                | ** ** | — |   |
| Change in directors and executive officers |   |   |   |   |   | —                | ** ** | (5,277 | ) |
|                                       |   |   |   |   |   |                  | ** ** |   |   |
| Ending balance                             |   |   |   |   |   | $                     | —     | ** ** | $ | — |   |

 

F-41

----

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 17 –****IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS**

 

In March 2006,the FASB issued SFAS No. 156, “Accounting for Servicing of FinancialAssets, an amendment of SFAS No. 140.” SFAS No. 156 amends SFAS No. 140 with respect to theaccounting for separately recognized servicing assets and servicing liabilitiesby requiring an entity to recognize a servicing asset or liability each time itundertakes an obligation to service a financial asset by entering into aservicing contract; requires all separately recognized servicing assets andliabilities to be initially measured at fair value, if practical; and permitsan entity to choose either of the following methods by which it willsubsequently measure each class of separately recognized servicing assets andliabilities:

 

*                                               *1.                                 *Amortization method* - Amortize the servicing assets orliabilities in proportion to and over the period of estimated net servicingincome or loss and assess servicing assets and liabilities for impairment or anincrease in obligation based on the fair value at each reporting period.

 

                                                2.                                 *Fair value measurementmethod*- Measureservicing assets or liabilities at fair value at each reporting date and reportchanges in fair value in earnings in the period in which the change occurs.

 

SFAS No. 156is effective for fiscal years beginning after September 15, 2006.  The Company adopted this statement in 2007and there was no effect on its results of operations or financial position asthe Company was already utilizing the amortization method.

 

In June 2006,FASB issued Financial Interpretation No. 48 (FIN 48), Accounting forUncertainty in Income Taxes — an interpretation of SFAS Statement No. 109.FIN 48 provides guidance on financial statement recognition and measurement ofa tax position taken or expected to be taken in a tax return. According to theInterpretation, a tax position is recognized if it is more likely than not thatthe tax position will be sustained upon examination, including resolution ofany related appeals or litigation processes, based on the technical merits ofthe position. If the tax position meets the more-likely-than-not recognitionthreshold, the position is measured to determine the amount of benefit torecognize and should be measured at the largest amount of benefit that isgreater than 50% likely of being realized upon ultimate settlement. FIN 48 alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition. The Company’s policyis to account for interest as a component of interest expense and penalties asa component of other expense. The provisions of FIN 48 are effective for fiscalyears beginning after December 15, 2006. The Company adopted this statement in 2007 and there was no effect onits results of operations or financial position, if any.

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurement”.  This statement defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value measurements.  This statement applies under other accountingpronouncements that require or permit fair value measurements, the Board havingpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute. Accordingly, this statement does not require any new fair valuemeasurements.  SFAS No. 157 iseffective for fiscal years beginning after November 15, 2007.  Earlier adoption is encouraged, provided thatthe reporting entity has not yet issued financial statements for that fiscalyear, including financial statements for an interim period within that fiscalyear.  The Company intends to adopt thisstatement in 2008 and does not believe it will have a material impact on itsresults of operations or financial position, if any.

 

F-42

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 17 –****IMPACT OF RECENT ACCOUNTINGPRONOUNCEMENTS (CONTINUED)**

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities—Including an Amendment of FASB Statement No. 115(SFAS 159).” SFAS 159 permits entities to choose to measure many financialinstruments and certain other items at fair value and amends SFAS 115 to, amongother things, require certain disclosures for amounts for which the fair valueoption is applied.  Additionally, thisStatement provides that an entity may reclassify held-to-maturity andavailable-for-sale securities to the trading account when the fair value optionis elected for such securities, without calling into question the intent tohold other securities to maturity in the future.  This Statement is effective as of thebeginning of an entity’s first fiscal year that begins after November 15,2007.

 

Early adoption is permittedas of the beginning of a fiscal year that begins on or before November 15,2007, provided the entity also elects to apply the provisions of SFAS 157.  The Company has determined that it will adoptthis statement effective January 1, 2008 for selected financialinstruments and does not believe it will have a material effect on its resultsof operations or financial position.

 

In December 2007,the FASB issued SFAS No. 160 “Noncontrolling Interests in ConsolidatedFinancial Statements (SFAS 160).  SFAS 160will require noncontrolling interests (previously referred to as minorityinterests) to be treated as a separate component of equity, not as a liabilityor other item outside of permanent equity. The statement applies to the accounting for noncontrolling interests andtransactions with noncontolling interest holders in consolidated financialstatements.  SFAS 160 is effective forperiods beginning on or after December 15, 2008, with earlier applicationprohibited.  The Company does not believethis statement will have a material effect on its results of operations orfinancial position, if any.

 

The FASB approved theEmerging Issues Task Force (“EITF”) Issue No. 06-4, “Accounting forDeferred Compensation and Postretirement Benefit Aspects of Endorsement Split-DollarLife Insurance Arrangements.”  In thisissue, the EITF concluded that an endorsement split-dollar life insurancepolicy does not effectively settle an employer’s obligation to provide the postretirement benefit that the policy was designed to provide.

 

This guidance applies toall post retirement endorsement split-dollar arrangements.  This will not impact split dollar plans thatonly provide pre-retirement death benefits.

 

The accrual for theliability would be calculated in one of two ways:

 

·                  the actuarial present value of the future deathbenefit; or

·                  the cost of insurance of the policy during thepost-retirement period.

 

Compliance with this EITFmust be applied to fiscal years beginning after December 15, 2007 (January 1,2008 for calendar year entities).  It canbe made through a cumulative—effect adjustment to retained earnings in the yearof adoption or as a change in accounting principles through retrospectiveapplication to all prior periods. The Company intends to adopt this EITF in2008, has evaluated the impact of this EITF and determined that it will not bematerial to the Company’s results of operations or financial position.

 

F-43

----

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 17 –****IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)**

 

At its September 2006meeting, the EITF reached a final consensus on Issue 06-05, “**Accounting for Purchasesof Life Insurance — Determining the Amount That Could be Realized in Accordancewith FASB Technical Bulletin No. 85-4***.*” Issue 06-05 concludes that indetermining the amount that could be realized under an insurance contractaccounted for under FASB Technical Bulletin No. 85-4, “**Accounting for Purchasesof Life Insurance***,*”the policyholder should (1) consider any additional amounts included inthe contractual terms of the policy; and (2) assume the surrender value ona individual-life by individual-life policy basis.  Issue 06-05 should be adopted througheither (1) a change in accounting principle through a cumulative-effectadjustment to retained earnings as of the beginning of the year of adoption or (2) achange in accounting principle through retrospective application to all priorperiods. Issue 06-05 is effective for fiscal years beginning after December 15,2006. The Company adopted this EITF in 2007 and it did not have a materialeffect on the Company’s financial position or results of operations.

 

****NOTE 18******–******PARENT COMPANYONLY FINANCIAL STATEMENTS****

 

****The following condensed financialstatements for Fox Chase Bancorp, Inc. (parent company only) reflect theinvestment in its wholly owned subsidiary, Fox Chase Bank, using the equitymethod of accounting. ****Due to the timing of the Bank’s reorganizationinto the mutual holding company form and the completion of the Bancorp’sinitial public offering on September 29, 2006, the results for 2006include the operations for Fox Chase Bancorp, Inc. from that date.

 

****CONDENSED BALANCESHEET****

 

| **** ****                                     | **** **** | ****December 31,**** | ** **     |
|----------------------------------------------------|----------------|---------------------------|----------------|
| **** ****                                     | **** **** | ****2007****              | **** **** | ****2006**** |   |
| ** **                                         | ** **     | **(In  Thousands)**       | ** **     |
| **ASSETS**                                         | ** **     | ** **                |           |   |   |
| Cash and due  from banks                           |           | $                         | 30             |   | $ | 32 |   |
| Interest-bearing  deposits with banks              |           | 19,099                    |           | 26,283 |   |
| Total cash and  cash equivalents                   |           | 19,129                    |           | 26,315 |   |
| Investment in  subsidiary                          |           | 98,129                    |           | 93,808 |   |
| Deferred tax  asset                                |           | 510                       |           | 510 |   |
| ESOP loan                                          |           | 5,019                     |           | 5,232 |   |
|                                               |           |                      |           |   |   |
| **Total  Assets**                                  |           | $                         | 122,787        |   | $ | 125,865 |   |
|                                               |           |                      |           |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**      |           |                      |           |   |   |
| Due to  subsidiary                                 |           | 97                        |           | 152 |   |
| Other  liabilities                                 |           | 319                       |           | 68 |   |
| **Total  Liabilities**                             |           | 416                       |           | 220 |   |
|                                               |           |                      |           |   |   |
| **Stockholders’  Equity**                     |           | 122,371                   |           | 125,645 |   |
|                                               |           |                      |           |   |   |
| **Total  Liability and Stockholders’ Equity** |           | $                         | 122,787        |   | $ | 125,865 |   |

 

F-44

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

****NOTE 18******–******PARENT COMPANYONLY FINANCIAL STATEMENTS (CONTINUED)****

 

**CONDENSEDSTATEMENTS OF OPERATIONS**

 

| ** **                                                                                                     | ** ** | **For the Years Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                     | ** ** | **December 31,**   | ** ** |
| ** **                                                                                                     | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                                                                                                     | ** ** | **(In Thousands)**      | ** ** |
| **INCOME**                                                                                                     |       |                    |       |   |   |
| Interest on  deposits with banks                                                                               |       | $                       | 986        |   | $ | 105 |   |
| Interest on ESOP  loan                                                                                         |       | 432                     |       | 121 |   |
| Gain on sale of  stock                                                                                         |       | 18                      |       | — |   |
| Other income                                                                                                   |       | 1                       |       | — |   |
|                                                                                                           |       |                    |       |   |   |
| **Total  Income**                                                                                              |       | 1,437                   |       | 226 |   |
|                                                                                                           |       |                    |       |   |   |
| **EXPENSES**                                                                                                   | ** ** | ** **              | ** ** | ** ** | ** ** |
| Contribution to  charitable foundation                                                                         |       | —                  |       | 1,500 |   |
| Other expenses                                                                                                 |       | 1,318                   |       | 273 |   |
|                                                                                                           |       |                    |       |   |   |
| **Total  Expenses**                                                                                            |       | 1,318                   |       | 1,773 |   |
|                                                                                                           |       |                    |       |   |   |
| **Income  (loss) before income tax expense (benefit) and equity in undistributed net  earnings of subsidiary** |       | 119                     |       | (1,547 | ) |
|                                                                                                           |       |                    |       |   |   |
| Income tax  expense (benefit)                                                                                  |       | 45                      |       | (529 | ) |
| **Income  (loss) before equity in undistributed net earnings of subsidiary**                                   |       | 74                      |       | (1,018 | ) |
|                                                                                                           |       |                    |       |   |   |
| Equity in  undistributed net earnings of subsidiary                                                            |       | 1,856                   |       | 4,652 |   |
|                                                                                                           |       |                    |       |   |   |
| **Net  Income**                                                                                                |       | $                       | 1,930      |   | $ | 3,634 |   |

 

F-45

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**** ****

****NOTE 18******–******PARENT COMPANYONLY FINANCIAL STATEMENTS (CONTINUED)****

 

**CONDENSED STATEMENTS OF CASHFLOWS**

 
| ** **                                                                         | ** ** | **For the years ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                         | ** ** | **December 31,**   | ** ** |
| ** **                                                                         | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | **(In Thousands)**      | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                           | ** ** | ** **              | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                       | 1,930      |   | $ | 3,634 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |                    |       |   |   |
| Equity in undistributed earnings of subsidiary                                     |       | (1,856                  | )          | (4,652 | ) |
| Net realized gain on sale of securities                                            |       | (18                     | )          | — |   |
| Contribution to charitable foundation                                              |       | —                  |       | 1,349 |   |
| Deferred income taxes                                                              |       | —                  |       | (510 | ) |
| Increase in other liabilities                                                      |       | 196                     |       | 220 |   |
| **Net  Cash Provided by Operating Activities**                                     |       | 252                     |       | 41 |   |
|                                                                               |       |                    |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                           | ** ** | ** **              | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| Investment securities, available for sale:                                         |       |                    |       |   |   |
| Purchases                                                                          |       | (89                     | )          | — |   |
| Proceeds from  sales                                                               |       | 107                     |       | — |   |
| Issuance of ESOP loan                                                              |       | —                  |       | (5,755 | ) |
| Loan payment received on ESOP loan                                                 |       | 213                     |       | 523 |   |
| Capital contribution to subsidiary                                                 |       | —                  |       | (30,000 | ) |
| **Net  Cash Provided (Used) by Investing Activities**                              |       | 231                     |       | (35,232 | ) |
|                                                                               |       |                    |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                           | ** ** | ** **              | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| Common stock issued in conversion                                                  |       | —                  |       | 147 |   |
| Repurchase of treasury shares                                                      |       | (3,924                  | )          | — |   |
| Acquisition of stock to fund equity incentive plan                                 |       | (3,745                  | )          | — |   |
| Proceeds from stock offering, net                                                  |       | —                  |       | 61,359 |   |
| **Net  Cash (Used) Provided by Financing Activities**                              |       | $                       | (7,669     | ) | $ | 61,506 |   |
|                                                                               |       |                    |       |   |   |
| **Net  (Decrease) Increase in Cash and Cash Equivalents**                          |       | (7,186                  | )          | 26,315 |   |
|                                                                               |       |                    |       |   |   |
| **Cash and Cash Equivalents - Beginning**                                          |       | 26,315                  |       | — |   |
|                                                                               |       |                    |       |   |   |
| **Cash and Cash Equivalents - Ending**                                             |       | $                       | 19,129     |   | $ | 26,315 |   |

 

F-46

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

****NOTE 19******–******QUARTERLY FINANCIAL DATA (UNAUDITED)****

 

The following represents summarized quarterly financial data of FoxChase Bancorp, Inc, which, in the opinion of management, reflects alladjustments (comprising only normal recurring accruals, except as indicated inNote 2) necessary for a fair presentation.

 
| **Three Months Ended**                            | ** ** | **12/31/07**                              | ** ** | **9/30/07** | ** ** | **6/30/07** | ** ** | **3/31/07** | ** ** | **12/31/06** | ** ** | **9/30/06** | ** ** | **6/30/06** | ** ** | **3/31/06** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|--------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                        | ** ** | **(In Thousands, except per share data)** | ** ** |
|                                              |       |                                      |       |        |       |        |       |        |       |         |       |        |       |        |       |        |       |
| Interest income                                   |       | $                                         | 10,851     |        | $          | 10,593      |       | $           | 10,026     |         | $          | 9,587       |       | $           | 10,181     |        | $          | 9,106 |   | $ | 9,007 |   | $ | 8,883 |   |
| Interest expense                                  |       | 5,817                                     |       | 5,684       |       | 5,513       |       | 5,236       |       | 5,321        |       | 5,228       |       | 5,059       |       | 4,851       |       |
| Net interest  income                              |       | 5,034                                     |       | 4,909       |       | 4,513       |       | 4,351       |       | 4,860        |       | 3,878       |       | 3,948       |       | 4,032       |       |
| Provision  (credit) for loan losses               |       | 225                                       |       | 125         |       | 75          |       | —      |       | (2,233       | )          | (2,778      | )          | (383        | )          | —      |       |
| Net interest  income after credit for loan losses |       | 4,809                                     |       | 4,784       |       | 4,438       |       | 4,351       |       | 7,093        |       | 6,656       |       | 4,331       |       | 4,032       |       |
|                                              |       |                                      |       |        |       |        |       |        |       |         |       |        |       |        |       |        |       |
| Noninterest  income                               |       | 620                                       |       | 387         |       | 1,253       |       | 436         |       | 621          |       | 436         |       | 588         |       | 428         |       |
| Noninterest  expense                              |       | 5,063                                     |       | 4,626       |       | 4,542       |       | 4,457       |       | 5,289        |       | 5,706       |       | 4,686       |       | 4,186       |       |
| Income before  taxes                              |       | 366                                       |       | 545         |       | 1,149       |       | 330         |       | 2,425        |       | 1,386       |       | 233         |       | 274         |       |
| Income tax  provision (benefit)                   |       | 36                                        |       | 90          |       | 297         |       | 37          |       | 410          |       | 365         |       | (97         | )          | 6           |       |
| Net income                                        |       | $                                         | 330        |        | $          | 455         |       | $           | 852        |         | $          | 293         |       | $           | 2,015      |        | $          | 1,021 |   | $ | 330 |   | $ | 268 |   |
|                                              |       |                                      |       |        |       |        |       |        |       |         |       |        |       |        |       |        |       |
| Per Common Share  Data (1)                        |       |                                      |       |        |       |        |       |        |       |         |       |        |       |        |       |        |       |
| Weighted average  common shares — basic      |       | 13,777,040                                |       | 14,116,856  |       | 14,116,693  |       | 14,107,103  |       | 14,080,564   |       | —      |       | —      |       | —      |       |
|                                              |       |                                      |       |        |       |        |       |        |       |         |       |        |       |        |       |        |       |
| Weighted average  common shares — diluted    |       | 13,814,595                                |       | 14,155,596  |       | 14,155,560  |       | 14,145,970  |       | 14,117,509   |       | —      |       | —      |       | —      |       |
|                                              |       |                                      |       |        |       |        |       |        |       |         |       |        |       |        |       |        |       |
| Net income per  share — basic                |       | $                                         | 0.02       |        | $          | 0.03        |       | $           | 0.06       |         | $          | 0.02        |       | $           | 0.14       |        | —     |   | — |   | — |   |
| Net income per  share — diluted              |       | $                                         | 0.02       |        | $          | 0.03        |       | $           | 0.06       |         | $          | 0.02        |       | $           | 0.14       |        | —     |   | — |   | — |   |

----

(1)Dueto the timing of the Bank’s reorganization into the mutual holding company formand the completion of the Bancorp’s initial public offering on September 29,2006, earnings per share for the three months ended September 30, 2006, June 30,2006 and March 31, 2006 are not considered meaningful or are notapplicable.

 

F-47

----

 

** **

** **

**SIGNATURES**

 

                Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                      | FOX CHASE BANCORP, INC. |
|---------------------------|-------------------------|
|                      |
| Date: March 14, 2008 |                    | By:  | /s/ Thomas M. Petro |   |
|                      |                    |   | Thomas M. Petro |   |
|                      |                    |   | President and Chief Executive Officer |   |
|                           |                         |  |  |  |  |

 

                Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 

| **Name**                          | ** ** | **Title**                           | ** ** | **Date**            |
|-----------------------------------|------------|-------------------------------------|------------|---------------------|
|                              |       |                                |       |                |
| /s/ Thomas M. Petro               |       | President, Chief  Executive Officer |       | March 14, 2008 |
| Thomas M. Petro                   |       | and Director                        |       |                |
|                              |       | (principal executive  officer)      |       |                |
|                              |       |                                |       |                |
| /s/ Jerry D. Holbrook             |       | Chief Financial Officer  and        |       | March 14, 2008 |
| Jerry D. Holbrook                 |       | Secretary                           |       |                |
|                              |       | (principal financial  officer)      |       |                |
|                              |       |                                |       |                |
| /s/ Roger S. Deacon               |       | Chief Accounting  Officer           |       | March 14, 2008 |
| Roger S. Deacon                   |       | (principal accounting  officer)     |       |                |
|                              |       |                                |       |                |
| /s/ Roger H. Ballou               |       | Director                            |       | March 14, 2008 |
| Roger H. Ballou                   |       |                                |       |                |
|                              |       |                                |       |                |
| /s/ Richard E. Bauer              |       | Director                            |       | March 14, 2008 |
| Richard E. Bauer                  |       |                                |       |                |
|                              |       |                                |       |                |
| /s/ Todd S. Benning               |       | Director                            |       | March 14, 2008 |
| Todd S. Benning                   |       |                                |       |                |
|                              |       |                                |       |                |
| /s/ Richard M.  Eisenstaedt       |       | Director                            |       | March 14, 2008 |
| Richard M. Eisenstaedt            |       |                                |       |                |
|                              |       |                                |       |                |
| /s/ Anthony A.  Nichols, Sr. |       | Director                            |       | March 14, 2008 |
| Anthony A.  Nichols, Sr.     |       |                                |       |                |
|                              |       |                                |       |                |
| /s/ Peter A. Sears                |       | Director                            |       | March 14, 2008 |
| Peter A. Sears                    |       |                                |       |                |

 

 

S-1

----