Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

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**FORM 10-Q**

 

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| **(Mark  One)**                                             |
|-------------------------------------------------------------|
|                                                        |   |
| **x**                                                       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                        |   |
| **For  the quarterly period ended September 30, 2009** |
|                                                        |   |
| **OR**                                                      |
|                                                        |   |
| **o**                                                       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

** **

**For thetransition period from             to             **

 

**Commissionfile number: 001-32971**

 

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**Fox ChaseBancorp, Inc.**

(Exact name ofregistrant as specified in its charter)

 

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| **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)                            |

 

**(215)682-7400**

(Registrant’stelephone number, including area code)

 

**N/A**

(Former name, formeraddress and former fiscal year, if changed since last report)

 

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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes  x   No  o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405of this chapter) during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files).  Yes  o   No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definition of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check one):

 

| Large Accelerated Filer o                     |   | Accelerated Filer x         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-Accelerated Filer o                       |   | Smaller Reporting Company o |
| (Do not check if a smaller reporting company) |   |                        |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes  o  No  x

 

As of October 30,2009, there were 13,667,687 shares of the registrant’s common stockoutstanding.

 

 

 

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Table of Contents

 

**FOXCHASE BANCORP, INC.**

 

**Tableof Contents**

 
| ** **                              | ** **                                                                                                              | **Page  No.** |
|-----------------------------------------|-------------------------------------------------------------------------------------------------------------------------|---------------|
| **Part I.  Financial Information** | ** **                                                                                                              |
|                                    |                                                                                                                    |          |
| Item 1.                                 | Financial Statements                                                                                                    | 3             |
|                                    |                                                                                                                    |          |
|                                    | Consolidated Statements of Condition at  September 30, 2009 (unaudited) and December 31, 2008                 | 3             |
|                                    |                                                                                                                    |          |
|                                    | Consolidated Statements of Operations for the Three  and Nine Months Ended September 30, 2009 and 2008 (unaudited) | 4             |
|                                    |                                                                                                                    |          |
|                                    | Consolidated Statements of Changes in Equity for the  Nine Months Ended September 30, 2009 (unaudited)             | 5             |
|                                    |                                                                                                                    |          |
|                                    | Consolidated Statements of Cash Flows for the Nine  Months Ended September 30, 2009 and 2008 (unaudited)           | 6             |
|                                    |                                                                                                                    |          |
|                                    | Notes to Unaudited Consolidated Financial Statements                                                                    | 7             |
|                                    |                                                                                                                    |          |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             | 25            |
|                                    |                                                                                                                    |          |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                                             | 36            |
|                                    |                                                                                                                    |          |
| Item 4.                                 | Controls and  Procedures                                                                                                | 36            |
|                                    |                                                                                                                    |          |
| **Part II.  Other Information**    | ** **                                                                                                              |
|                                    |                                                                                                                    |          |
| Item 1.                                 | Legal Proceedings                                                                                                       | 37            |
|                                    |                                                                                                                    |          |
| Item 1A.                           | Risk Factors                                                                                                            | 37            |
|                                    |                                                                                                                    |          |
| Item 2.                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                                            | 37            |
|                                    |                                                                                                                    |          |
| Item 3.                                 | Defaults Upon  Senior Securities                                                                                        | 38            |
|                                    |                                                                                                                    |          |
| Item 4.                                 | Submission of  Matters to a Vote of Security Holders                                                                    | 38            |
|                                    |                                                                                                                    |          |
| Item 5.                                 | Other Information                                                                                                       | 38            |
|                                    |                                                                                                                    |          |
| Item 6.                                 | Exhibits                                                                                                                | 38            |
|                                    |                                                                                                                    |          |
| **Signatures**                          |                                                                                                                    |          |

 

2

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Table of Contents

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**FOX CHASE BANCORP, INC**

**ConsolidatedStatements of Condition**

**(InThousands, Except Share Data)**

 
| ** **                                                                                                                                                                                                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                    | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                                                                                    | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                                                    | ** ** | ** **             | ** ** | ** **            | ** ** |
| Cash  and due from banks                                                                                                                                                                                                                      |       | $                      | 241        |                  | $          | 642 |   |
| Interest-earning  demand deposits in other banks                                                                                                                                                                                              |       | 57,933                 |       | 3,302                 |       |
| Total  cash and cash equivalents                                                                                                                                                                                                              |       | 58,174                 |       | 3,944                 |       |
| Investment  securities available-for-sale                                                                                                                                                                                                     |       | 27,235                 |       | 25,041                |       |
| Mortgage  related securities available-for-sale                                                                                                                                                                                               |       | 415,029                |       | 269,682               |       |
| Loans,  net of allowance for loan losses of $8,489at September 30, 2009 and $6,260  at December 31, 2008                                                                                                                            |       | 636,749                |       | 588,975               |       |
| Loans  held for sale                                                                                                                                                                                                                          |       | 167                    |       | —                |       |
| Federal  Home Loan Bank stock, at cost                                                                                                                                                                                                        |       | 10,435                 |       | 9,707                 |       |
| Bank-owned  life insurance                                                                                                                                                                                                                    |       | 12,551                 |       | 12,214                |       |
| Premises  and equipment                                                                                                                                                                                                                       |       | 11,311                 |       | 11,748                |       |
| Real  estate held for investment                                                                                                                                                                                                              |       | 1,880                  |       | 1,957                 |       |
| Accrued  interest receivable                                                                                                                                                                                                                  |       | 4,583                  |       | 3,721                 |       |
| Mortgage  servicing rights                                                                                                                                                                                                                    |       | 735                    |       | 827                   |       |
| Deferred  tax asset, net                                                                                                                                                                                                                      |       | —                 |       | 1,869                 |       |
| Other  assets                                                                                                                                                                                                                                 |       | 7,399                  |       | 1,585                 |       |
| **Total Assets**                                                                                                                                                                                                                              |       | $                      | 1,186,248  |                  | $          | 931,270 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                 |       |                   |       |                  |       |
| **LIABILITIES**                                                                                                                                                                                                                               |       |                   |       |                  |       |
| Deposits                                                                                                                                                                                                                                      |       | $                      | 860,529    |                  | $          | 608,472 |   |
| Federal  Home Loan Bank advances                                                                                                                                                                                                              |       | 143,232                |       | 146,379               |       |
| Other  borrowed funds                                                                                                                                                                                                                         |       | 50,000                 |       | 50,000                |       |
| Advances  from borrowers for taxes and insurance                                                                                                                                                                                              |       | 1,221                  |       | 2,589                 |       |
| Accrued  interest payable                                                                                                                                                                                                                     |       | 759                    |       | 727                   |       |
| Deferred  tax liability, net                                                                                                                                                                                                                  |       | 1,187                  |       | —                |       |
| Accrued  expenses and other liabilities                                                                                                                                                                                                       |       | 2,385                  |       | 1,883                 |       |
| **Total Liabilities**                                                                                                                                                                                                                         |       | 1,059,313              |       | 810,050               |       |
| **STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Preferred  stock ($.01 par value; 1,000,000 shares authorized, none issued and  outstanding at September 30, 2009 and December 31, 2008)                                                                                            |       | —                 |       | —                |       |
| Common  stock ($.01 par value; 35,000,000 shares authorized,14,679,750 shares issued and 13,679,287  shares outstanding at September 30, 2009 and 14,679,750 shares issued  and 14,066,559 shares outstanding at December 31, 2008) |       | 147                    |       | 147                   |       |
| Additional  paid-in capital                                                                                                                                                                                                                   |       | 63,765                 |       | 63,516                |       |
| Treasury  stock (at cost, 1,000,463 shares at September 30, 2009 and613,191 shares at December 31,  2008)                                                                                                                           |       | (11,112                | )          | (7,293                | )          |
| Common  stock acquired by benefit plans                                                                                                                                                                                                       |       | (6,957                 | )          | (7,819                | )          |
| Retained  earnings                                                                                                                                                                                                                            |       | 74,044                 |       | 72,664                |       |
| Accumulated  other comprehensive income, net                                                                                                                                                                                                  |       | 7,048                  |       | 5                     |       |
| **Total Stockholders’ Equity**                                                                                                                                                                                                           |       | 126,935                |       | 121,220               |       |
| **Total Liabilities and Stockholders’ Equity**                                                                                                                                                                                           |       | $                      | 1,186,248  |                  | $          | 931,270 |   |

 

***See accompanying notes to the unauditedconsolidated financial statements.***

 

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**FOXCHASE BANCORP, INC**

**ConsolidatedStatements of Operations**

**(Unaudited)**

**(InThousands, Except Per Share Data)**

** **
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                     | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                     | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| **INTEREST INCOME**                                                            |       |                   |       |                   |       |   |   |   |   |
| Interest and fees on loans                                                     |       | $                      | 8,698      |                   | $          | 8,106 |   | $ | 25,833 |   | $ | 22,415 |   |
| Interest on money market funds                                                 |       | 23                     |       | —                 |       | 183 |   | 521 |   |
| Interest on mortgage related securities  available-for-sale                    |       | 3,975                  |       | 3,138                  |       | 10,735 |   | 9,248 |   |
| Interest on investment securities  available-for-sale                          |       |                   |       |                   |       |   |   |   |   |
| Taxable                                                                        |       | 238                    |       | 121                    |       | 623 |   | 876 |   |
| Nontaxable                                                                     |       | 107                    |       | 146                    |       | 390 |   | 469 |   |
| Dividend income                                                                |       | —                 |       | 69                     |       | 1 |   | 193 |   |
| Other interest income                                                          |       | 290                    |       | 17                     |       | 426 |   | 124 |   |
| **Total Interest Income**                                                      |       | 13,331                 |       | 11,597                 |       | 38,191 |   | 33,846 |   |
| **INTEREST EXPENSE**                                                           |       |                   |       |                   |       |   |   |   |   |
| Deposits                                                                       |       | 5,478                  |       | 4,345                  |       | 15,576 |   | 14,004 |   |
| Federal Home Loan Bank advances                                                |       | 1,333                  |       | 1,230                  |       | 3,992 |   | 3,380 |   |
| Other borrowed funds                                                           |       | 437                    |       | 203                    |       | 1,298 |   | 567 |   |
| **Total Interest Expense**                                                     |       | 7,248                  |       | 5,778                  |       | 20,866 |   | 17,951 |   |
| **Net Interest Income**                                                        |       | 6,083                  |       | 5,819                  |       | 17,325 |   | 15,895 |   |
| Provision for loan losses                                                      |       | 1,450                  |       | 500                    |       | 2,412 |   | 900 |   |
| **Net Interest Income after  Provision for Loan Losses**                       |       | 4,633                  |       | 5,319                  |       | 14,913 |   | 14,995 |   |
| **NONINTEREST INCOME**                                                         |       |                   |       |                   |       |   |   |   |   |
| Service charges and other fee income                                           |       | 192                    |       | 218                    |       | 672 |   | 633 |   |
| Net gain on sale of loans                                                      |       | —                 |       | 6                      |       | 3 |   | 10 |   |
| Income on bank-owned life insurance                                            |       | 115                    |       | 114                    |       | 336 |   | 338 |   |
| Other                                                                          |       | 58                     |       | 21                     |       | 269 |   | 56 |   |
|                                                                           |       |                   |       |                   |       |   |   |   |   |
| Total other-than-temporary impairment loss                                     |       | —                 |       | —                 |       | (605 | ) | — |   |
| Less: Portion of loss recognized in other  comprehensive income (before taxes) |       | —                 |       | —                 |       | 448 |   | — |   |
| Net other-than-temporary impairment loss                                       |       | —                 |       | —                 |       | (157 | ) | — |   |
| Net gains on sale of investment securities                                     |       | 958                    |       | —                 |       | 1,546 |   | 118 |   |
| Net investment securities gains                                                |       | 958                    |       | —                 |       | 1,389 |   | 118 |   |
|                                                                           |       |                   |       |                   |       |   |   |   |   |
| **Total Noninterest Income**                                                   |       | 1,323                  |       | 359                    |       | 2,669 |   | 1,155 |   |
| **NONINTEREST EXPENSE**                                                        |       |                   |       |                   |       |   |   |   |   |
| Salaries, benefits and other compensation                                      |       | 3,198                  |       | 2,928                  |       | 8,963 |   | 8,790 |   |
| Occupancy expense                                                              |       | 441                    |       | 458                    |       | 1,374 |   | 1,412 |   |
| Furniture and equipment expense                                                |       | 170                    |       | 226                    |       | 571 |   | 669 |   |
| Data processing costs                                                          |       | 384                    |       | 402                    |       | 1,146 |   | 1,204 |   |
| Professional fees                                                              |       | 267                    |       | 285                    |       | 831 |   | 863 |   |
| Marketing expense                                                              |       | 72                     |       | 117                    |       | 242 |   | 337 |   |
| FDIC premiums                                                                  |       | 343                    |       | 26                     |       | 1,415 |   | 81 |   |
| Other                                                                          |       | 379                    |       | 347                    |       | 1,155 |   | 1,111 |   |
| **Total Noninterest Expense**                                                  |       | 5,254                  |       | 4,789                  |       | 15,697 |   | 14,467 |   |
| **Income Before Income Taxes**                                                 |       | 702                    |       | 889                    |       | 1,885 |   | 1,683 |   |
| Income tax provision                                                           |       | 189                    |       | 230                    |       | 473 |   | 375 |   |
| **Net Income**                                                                 |       | $                      | 513        |                   | $          | 659 |   | $ | 1,412 |   | $ | 1,308 |   |
| Earnings per share:                                                            |       |                   |       |                   |       |   |   |   |   |
| Basic                                                                          |       | $                      | 0.04       |                   | $          | 0.05 |   | $ | 0.11 |   | $ | 0.10 |   |
| Diluted                                                                        |       | $                      | 0.04       |                   | $          | 0.05 |   | $ | 0.11 |   | $ | 0.10 |   |

 

***See accompanying notes to the unaudited consolidatedfinancial statements******.***

 

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**FOXCHASE BANCORP, INC**

**ConsolidatedStatements of Changes in Equity**

**Ninemonths ended September 30, 2009**

**(InThousands, Unaudited)**

 
| ** **                                     | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Common**        | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **Stock**         | ** ** | ** **   | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Common** | ** ** | **Paid in**    | ** ** | **Treasury** | ** ** | **Acquired by**   | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Total**  | ** ** |
| ** **                                     | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Stock**    | ** ** | **Benefit Plans** | ** ** | **Earnings** | ** ** | **Income, net**   | ** ** | **Equity** | ** ** |
|                                           |       |       |       |           |       |         |       |              |       |         |       |              |       |       |       |
| **BALANCE - DECEMBER 31, 2008**                |       | $          | 147        |           | $          | 63,516       |       | $                 | (7,293     | )            | $          | (7,819            | )          | $          | 72,664     |   | $ | 5 |   | $ | 121,220 |   |
| Purchase  of treasury stock, net               |       |       |       |           |       | (3,819       | )          |              |       |         |       |              |       | (3,819     | )          |
| Stock  based compensation expense              |       |       |       | 731            |       |         |       |              |       |         |       |              |       | 731        |       |
| Issuance  of stock for vested equityawards     |       |       |       | (542           | )          |         |       | 574               |       | (32          | )          |              |       | —     |       |
| Unallocated  ESOP shares committedto employees |       |       |       | (7             | )          |         |       | 288               |       |         |       |              |       | 281        |       |
| Shares  allocated in long-termincentive plan   |       |       |       | 67             |       |         |       |              |       |         |       |              |       | 67         |       |
| Net  income                                    |       |       |       |           |       |         |       |              |       | 1,412        |       |              |       | 1,412      |       |
| Other  comprehensive income                    |       |       |       |           |       |         |       |              |       |         |       | 7,043             |       | 7,043      |       |
|                                           |       |       |       |           |       |         |       |              |       |         |       |              |       |       |       |
| **BALANCE - SEPTEMBER 30, 2009**               |       | $          | 147        |           | $          | 63,765       |       | $                 | (11,112    | )            | $          | (6,957            | )          | $          | 74,044     |   | $ | 7,048 |   | $ | 126,935 |   |

 

***See accompanying notes to the unaudited consolidatedfinancial statements*****.**

 

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**FOXCHASE BANCORP, INC**

**ConsolidatedStatements of Cash Flows**

**(InThousands)**

 
| ** **                                                                             | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                             | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| ** **                                                                             | ** ** | **(Unaudited)**                          | ** ** |
| **Cash Flows From Operating  Activities**                                              |       |                                     |       |   |   |
| Net income                                                                             |       | $                                        | 1,412      |   | $ | 1,308 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:     | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Provision for loan losses                                                              |       | 2,412                                    |       | 900 |   |
| Depreciation                                                                           |       | 642                                      |       | 736 |   |
| Net amortization of securities premiums and  discounts                                 |       | 1,952                                    |       | 656 |   |
| Benefit for deferred income taxes                                                      |       | (766                                     | )          | (397 | ) |
| Stock benefit plans                                                                    |       | 1,079                                    |       | 1,121 |   |
| Pension plan settlement                                                                |       | —                                   |       | 137 |   |
| Origination of loans held for sale                                                     |       | (585                                     | )          | (3,197 | ) |
| Proceeds from sales of loans held for sale                                             |       | 416                                      |       | 3,193 |   |
| Net gain on sales of loans and loans held for sale                                     |       | (3                                       | )          | (10 | ) |
| Net gain on sales of securities                                                        |       | (1,546                                   | )          | (118 | ) |
| Other-than-temporary impairment loss                                                   |       | 157                                      |       | — |   |
| Earnings on investment in bank-owned life insurance                                    |       | (336                                     | )          | (338 | ) |
| Decrease in mortgage servicing rights                                                  |       | 92                                       |       | 111 |   |
| Increase in accrued interest receivable and other  assets                              |       | (1,957                                   | )          | (454 | ) |
| Increase in accrued interest payable, accrued  expensesand other  liabilities          |       | 534                                      |       | 2,241 |   |
| **Net Cash Provided by Operating  Activities**                                         |       | 3,503                                    |       | 5,889 |   |
| **Cash Flows from Investing  Activities**                                              |       |                                     |       |   |   |
| Equity investment in unconsolidated entity                                             |       | (630                                     | )          | — |   |
| Investment securities - available for sale:                                            | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Purchases                                                                              |       | (19,184                                  | )          | (17,128 | ) |
| Proceeds from sales                                                                    |       | 6,373                                    |       | 72,398 |   |
| Proceeds from maturities, calls and principal  repayments                              |       | 9,705                                    |       | 11,495 |   |
| Mortgage related securities – available for sale:                                 | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Purchases                                                                              |       | (254,251                                 | )          | (108,495 | ) |
| Proceeds from sales                                                                    |       | 41,487                                   |       | 22,051 |   |
| Proceeds from maturities, calls and principal  repayments                              |       | 74,545                                   |       | 48,525 |   |
| Net increase in loans                                                                  |       | (50,058                                  | )          | (107,449 | ) |
| Purchases of loan participations                                                       |       | (127                                     | )          | (19,254 | ) |
| Net increase in Federal Home Loan Bank stock                                           |       | (728                                     | )          | (3,086 | ) |
| Increase in other investments                                                          |       | —                                   |       | (83 | ) |
| Deposit on real estate held for investment                                             |       | 77                                       |       | — |   |
| Purchases of premises and equipment                                                    |       | (205                                     | )          | (201 | ) |
| Proceeds from sales of premises and equipment and  assetsacquired  through foreclosure |       | —                                   |       | 10 |   |
| **Net Cash Used by Investing  Activities**                                             |       | (192,996                                 | )          | (101,217 | ) |
| **Cash Flows from Financing  Activities**                                              |       |                                     |       |   |   |
| Net increase in deposits                                                               |       | 252,057                                  |       | 7,838 |   |
| Decrease in advances from borrowers for taxes and  insurance                           |       | (1,368                                   | )          | (692 | ) |
| Federal Home Loan Bank advances                                                        |       | —                                   |       | 76,770 |   |
| Principal payments on Federal Home Loan Bank  advances                                 |       | (3,147                                   | )          | (25,710 | ) |
| Other borrowings                                                                       |       | —                                   |       | 15,000 |   |
| Purchase of treasury stock                                                             |       | (3,819                                   | )          | (2,671 | ) |
| **Net Cash Provided by Financing  Activities**                                         |       | 243,723                                  |       | 70,535 |   |
| **Net Increase (Decrease) in Cash  and Cash Equivalents**                              |       | 54,230                                   |       | (24,793 | ) |
| **Cash and Cash Equivalents –  Beginning**                                        |       | 3,944                                    |       | 31,275 |   |
| **Cash and Cash Equivalents – Ending**                                            |       | $                                        | 58,174     |   | $ | 6,482 |   |
| **Supplemental Disclosure of Cash  Flow Information**                                  |       |                                     |       |   |   |
| Interest paid                                                                          |       | $                                        | 20,834     |   | $ | 17,804 |   |
| Income taxes paid                                                                      |       | $                                        | 1,379      |   | $ | 836 |   |

 

***See accompanying notes to the unaudited consolidatedfinancial statements.***

 

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**FOXCHASE BANCORP, INC**

**Notes tothe Unaudited Consolidated Financial Statements**

 

**NOTE 1 -PRINCIPLES OF CONSOLIDATION AND PRESENTATION**

 

FoxChase Bancorp, Inc. (the “Bancorp”) was organized on September 29,2006 under the laws of the United States for the purpose of being a holdingcompany for Fox Chase Bank (the “Bank”), a stock savings bank also organizedunder the laws of the United States.  On September 29,2006, the Bancorp 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”).  An additional8,148,915 shares, or 55.51% of the Bancorp’s outstanding stock, were issued toFox Chase MHC, the Bancorp’s federally chartered mutual holding company.Additionally, the Bancorp contributed $150,000 in cash and issued 135,000shares, or 0.92% of its outstanding common stock, to the Fox Chase BankCharitable Foundation.

 

TheBancorp’s primary business has been that of holding the common stock of theBank and making a loan to the ESOP.   TheBancorp is authorized to pursue other business activities permissible by lawsand regulations for other savings and loan holding companies.

 

TheBancorp and the Bank (collectively referred to as the “Company”) provide a widevariety of financial products and services to individuals and businessesthrough the Bank’s eleven branches in Philadelphia, Richboro, Willow Grove,Warminster, Lahaska, Hatboro, Media and West Chester, Pennsylvania, and OceanCity, Marmora and Egg Harbor Township, New Jersey.  In February 2009, the Bank increased itsownership in Philadelphia Mortgage Advisors, Inc. (“PMA”), a licensedmortgage banker located in Blue Bell, Pennsylvania and Ocean City, New Jersey,from 20% to approximately 45%.  Theoperations of the Company are managed as a single business segment.  The Company competes with other financialinstitutions and other companies that provide financial services.

 

TheCompany is subject to regulations of certain federal banking agencies.  These regulations can and do changesignificantly from period to period.  TheCompany also undergoes periodic examinations by the Office of ThriftSupervision which may subject them to further changes with respect to assetvaluations, amounts of required loan loss allowances and operating restrictionsresulting from the regulator’s judgments based on information available to themat the time of their examinations.

 

The consolidatedfinancial statements include the accounts of the Bancorp and the Bank. The Bank’soperations include the accounts of its wholly owned subsidiaries, Fox ChaseFinancial, Inc. and Fox Chase Service Corporation.  Fox Chase Financial, Inc. is a Delawarechartered investment holding company and its sole purpose is to manage and holdinvestment securities.  Fox Chase ServiceCorporation is a Pennsylvania chartered company and its sole purpose is tofacilitate the Bank’s investment in PMA. The consolidated financial statements do not include the transactionsand balances of Fox Chase MHC.  Allmaterial inter-company transactions and balances have been eliminated inconsolidation. Prior period amounts are reclassified, when necessary, toconform with the current year’s presentation.

 

During 2009 and 2008, theBank engaged in certain business activities with PMA.  These activities included providing awarehouse line of credit to PMA, as well as acquiring residential mortgage andhome equity loans from PMA. The Bank recorded interest income from PMA on thewarehouse line of $143,000 and $80,000 for the nine months ended September 30,2009 and 2008, respectively, as well as loan satisfaction fees, which arerecorded in service charges and other fee income, from PMA of $44,000 and$16,000 for the nine months ended September 30, 2009 and 2008,respectively.  In addition, the Bankacquired total loans from PMA of $39.5 million and $60.8 million for the ninemonths ended September 30, 2009 and 2008, respectively, which includes thecost of the loans.

 

Real estate held forinvestment represents undeveloped land located in Absecon, New Jersey.  This property is under an option to be soldin 2010, subject to certain conditions being met including zoning and land useapprovals.

 

The Company followsaccounting principles and reporting practices that 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 disclose contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from those estimates. Material estimates that are particularly susceptible to significantchange in the near term relate to the determination of the allowance for loanlosses, the valuation and realizability of deferred tax assets and theevaluation of other-than-temporary impairment and valuation of investmentsecurities.

 

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These interim financialstatements do not contain all necessary disclosures required by GAAP forcomplete financial statements and therefore should be read in conjunction withthe audited financial statements and the notes thereto included in Fox ChaseBancorp, Inc.’s Annual Report on Form 10-K,as filed with the Securities and Exchange Commission on March 12,2009.   These financial statementsinclude all normal and recurring adjustments which management believes werenecessary in order to conform to GAAP. The results for the nine months ended September 30, 2009 are notnecessarily indicative of the results that may be expected for the year ending December 31,2009.

 

In connection with thepreparation of these financial statements, the Company has evaluated events andtransactions through November 6, 2009, which is the date these financialstatements were issued.

 

**Per ShareInformation**

** **

**Basicearnings per share excludes dilution and is computed by dividing incomeavailable to common stockholders by the weighted-average common sharesoutstanding during the period.  Dilutedearnings per share takes into account the potential dilution that could occurif securities or other contracts to issue common stock were exercised andconverted into common stock.  Unallocatedshares in the ESOP and shares purchased to fund the Bancorp’s 2007 EquityIncentive Plan are not included in either basic or diluted earnings pershare.  Unvested shares in the Bancorp’slong-term incentive plan are not included in basic earnings per share.**

** **

**The following table presents the reconciliation of thenumerators and denominators of the basic and diluted earnings per sharecomputations (unaudited).**

** **
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                  | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                        |       |                   |       |                   |       |   |   |   |   |
| Net  income                                                                 |       | $                      | 513,000    |                   | $          | 659,000 |   | $ | 1,412,000 |   | $ | 1,308,000 |   |
|                                                                        |       |                   |       |                   |       |   |   |   |   |
| Weighted-average  common shares outstanding (1)                             |       | 13,724,077             |       | 14,191,655             |       | 13,884,174 |   | 14,275,109 |   |
| Average  common stock acquired by stock benefit plans:                      |       |                   |       |                   |       |   |   |   |   |
| Unvested  shares – long-term incentive plan                            |       | (16,743                | )          | (25,114                | )          | (16,743 | ) | (25,114 | ) |
| ESOP  shares unallocated                                                    |       | (437,909               | )          | (476,272               | )          | (447,405 | ) | (485,804 | ) |
| Shares  purchased by trust                                                  |       | (229,774               | )          | (274,254               | )          | (239,888 | ) | (283,053 | ) |
| Weighted-average  common shares usedto calculate basic earnings per share   |       | 13,039,651             |       | 13,416,015             |       | 13,180,138 |   | 13,481,138 |   |
| Dilutive  effect of:                                                        |       |                   |       |                   |       |   |   |   |   |
| Unvested  shares – long-term incentive plans                           |       | 16,743                 |       | 25,114                 |       | 16,743 |   | 25,114 |   |
| Restricted  stock awards                                                    |       | 1,695                  |       | 1,712                  |       | 4,167 |   | 6,934 |   |
| Weighted-average  common shares usedto calculate diluted earnings per share |       | 13,058,089             |       | 13,442,841             |       | 13,201,048 |   | 13,513,186 |   |
|                                                                        |       |                   |       |                   |       |   |   |   |   |
| Earnings  per share-basic                                                   |       | $                      | 0.04       |                   | $          | 0.05 |   | $ | 0.11 |   | $ | 0.10 |   |
| Earnings  per share-diluted                                                 |       | $                      | 0.04       |                   | $          | 0.05 |   | $ | 0.11 |   | $ | 0.10 |   |
|                                                                        |       |                   |       |                   |       |   |   |   |   |
| Outstanding  common stock equivalents having no dilutive effect             |       | 792,373                |       | 793,068                |       | 789,901 |   | 787,846 |   |

 

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(1) Excludestreasury stock.

 

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**NOTE 2 - INVESTMENT AND MORTGAGE RELATED SECURITIES**

 

Theamortized cost and fair value of securities available-for-sale as of September 30,2009 and December 31, 2008 are summarized as follows:

** **
| ** **                                            | ** ** | **September 30, 2009 (Unaudited)** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                            | ** ** | ** **                              | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Amortized**                           | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                            | ** ** | **Cost**                                | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                                            | ** ** | **(In Thousands)**                      | ** ** |
|                                                  |       |                                    |       |   |   |   |   |   |   |
| Obligations  of U.S. government agencies              |       | $                                       | 307        |   | $ | 2 |   | $ | — |   | $ | 309 |   |
| State  and political subdivisions                     |       | 9,993                                   |       | 178 |   | (26 | ) | 10,145 |   |
| Corporate  securities                                 |       | 16,509                                  |       | 298 |   | (26 | ) | 16,781 |   |
|                                                  |       | 26,809                                  |       | 478 |   | (52 | ) | 27,235 |   |
|                                                  |       |                                    |       |   |   |   |   |   |   |
| Private  label residential mortgage related security  |       | 648                                     |       | — |   | (434 | ) | 214 |   |
| Private  label commercial mortgage related securities |       | 18,296                                  |       | 301 |   | (425 | ) | 18,172 |   |
| Agency  residential mortgage related securities       |       | 385,656                                 |       | 11,153 |   | (166 | ) | 396,643 |   |
| Total  mortgage related securities                    |       | 404,600                                 |       | 11,454 |   | (1,025 | ) | 415,029 |   |
|                                                  |       |                                    |       |   |   |   |   |   |   |
| **Total securities**                                  |       | $                                       | 431,409    |   | $ | 11,932 |   | $ | (1,077 | ) | $ | 442,264 |   |

 
| ** **                                            | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | ** **                 | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Amortized**              | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                            | ** ** | **Cost**                   | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                                            | ** ** | **(In Thousands)**         | ** ** |
|                                                  |       |                       |       |   |   |   |   |   |   |
| State  and political subdivisions                     |       | $                          | 14,679     |   | $ | 35 |   | $ | (251 | ) | $ | 14,463 |   |
| Corporate  securities                                 |       | 11,124                     |       | 4 |   | (550 | ) | 10,578 |   |
|                                                  |       | 25,803                     |       | 39 |   | (801 | ) | 25,041 |   |
|                                                  |       |                       |       |   |   |   |   |   |   |
| Private  label residential mortgage related security  |       | 889                        |       | — |   | (620 | ) | 269 |   |
| Private  label commercial mortgage related securities |       | 10,049                     |       | — |   | (2,745 | ) | 7,304 |   |
| Agency  residential mortgage related securities       |       | 257,990                    |       | 4,442 |   | (323 | ) | 262,109 |   |
| Total  mortgage related securities                    |       | 268,928                    |       | 4,442 |   | (3,688 | ) | 269,682 |   |
|                                                  |       |                       |       |   |   |   |   |   |   |
| **Total securities**                                  |       | $                          | 294,731    |   | $ | 4,481 |   | $ | (4,489 | ) | $ | 294,723 |   |

 

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The following tables showgross unrealized losses and fair value of securities, aggregated by securitycategory and length of time that individual securities have been in a continuousunrealized loss position, at September 30, 2009 and December 31,2008:

 
| ** **                                            | ** ** | **September 30, 2009 (Unaudited)** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                            | ** ** | **Less than 12 Months**                 | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **Fair**                                | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                                            | ** ** | **Value**                               | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| ** **                                            | ** ** | **(In Thousands)**                      | ** ** |
|                                                  |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| State and political subdivisions                      |       | $                                       | —     |   | $ | — |   | $ | 830 |   | $ | (26 | ) | $ | 830 |   | $ | (26 | ) |
| Corporate securities                                  |       | 2,313                                   |       | (26 | ) | — |   | — |   | 2,313 |   | (26 | ) |
|                                                  |       | 2,313                                   |       | (26 | ) | 830 |   | (26 | ) | 3,143 |   | (52 | ) |
| ** **                                            | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Private label residential mortgage related security   |       | —                                  |       | — |   | 214 |   | (434 | ) | 214 |   | (434 | ) |
| Private label commercial mortgage related  securities |       | —                                  |       | — |   | 9,609 |   | (425 | ) | 9,609 |   | (425 | ) |
| Agency residential mortgage related securities        |       | 16,680                                  |       | (166 | ) | — |   | — |   | 16,680 |   | (166 | ) |
| Total mortgage related securities                     |       | 16,680                                  |       | (166 | ) | 9,823 |   | (859 | ) | 26,503 |   | (1,025 | ) |
|                                                  |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| **Total securities**                                  |       | $                                       | 18,993     |   | $ | (192 | ) | $ | 10,653 |   | $ | (885 | ) | $ | 29,646 |   | $ | (1,077 | ) |

 
| ** **                                            | ** ** | **December 31, 2008**   | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **Less than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **Fair**                | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                                            | ** ** | **Value**               | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| ** **                                            | ** ** | **(In Thousands)**      | ** ** |
|                                                  |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| State and political subdivisions                      |       | $                       | 8,645      |   | $ | (251 | ) | $ | — |   | $ | — |   | $ | 8,645 |   | $ | (251 | ) |
| Corporate securities                                  |       | 9,214                   |       | (550 | ) | — |   | — |   | 9,214 |   | (550 | ) |
|                                                  |       | 17,859                  |       | (801 | ) | — |   | — |   | 17,859 |   | (801 | ) |
|                                                  |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Private label residential mortgage related security   |       | 269                     |       | (620 | ) | — |   | — |   | 269 |   | (620 | ) |
| Private label commercial mortgage related  securities |       | 7,304                   |       | (2,745 | ) | — |   | — |   | 7,304 |   | (2,745 | ) |
| Agency residential mortgage related securities        |       | 16,217                  |       | (301 | ) | 717 |   | (22 | ) | 16,934 |   | (323 | ) |
| Total mortgage related securities                     |       | 23,790                  |       | (3,666 | ) | 717 |   | (22 | ) | 24,507 |   | (3,688 | ) |
|                                                  |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| **Total securities**                                  |       | $                       | 41,649     |   | $ | (4,467 | ) | $ | 717 |   | $ | (22 | ) | $ | 42,366 |   | $ | (4,489 | ) |

 

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In the second quarter of2009, the Company implemented new financial reporting guidance that changed theprocess for recognizing other-than-temporary impairment for debt securitiesand expanded disclosure requirements for other-than-temporarily impaired debtand equity securities.  Under the newguidance, companies are required to record other-than-temporary impairmentcharges, through earnings, if they have the intent to sell, or will more likelythan not be required to sell, an impaired debt security before a recovery ofits amortized cost basis. In addition, companies are required to recordother-than-temporary impairment charges through earnings for the amount ofcredit losses, regardless of the intent or requirement to sell. Credit loss ismeasured as the difference between the present value of an impaired debtsecurity’s cash flows and its amortized cost basis. Non-credit relatedwrite-downs to fair value must be recorded as decreases to accumulated othercomprehensive income as long as a company has no intent or requirement to sellan impaired security before a recovery of amortized cost basis. Finally, companies were required torecord all previously recorded non-credit related other-than-temporaryimpairment charges for debt securities as cumulative effect adjustments toretained earnings as of the beginning of the period of adoption.  Since the Company did not have any other-than-temporaryimpairment as of March 31, 2009, no cumulative effect adjustments wererequired at adoption.  See belowdiscussion regarding the other-than-temporary credit impairment of the privatelabel residential mortgage related security recorded at June 30,2009.   There was no additionalother-than-temporary credit impairment charge on this investment in the thirdquarter of 2009.

 

The private label residential mortgage related security hadan amortized cost, prior to the identified credit related impairment, of$805,000 at September 30, 2009 and $889,000 at December 31,2008.  Fair value for this security was$214,000 at September 30, 2009 and $269,000 at December 31,2008.  During the nine months ended September 30,2009, delinquency levels for the security’s underlying collateral increased to20.1% from 13.8% at December 31, 2008, principal payment rate slowed to anannualized rate of 13.0% from 16.1% in 2008, and the security was downgradedfrom AAA to BB+.  As a result of thesenegative trends, management’s analysis indicated that the security had $157,000of other-than-temporary credit impairment at June 30, 2009.  This amount of credit related impairment isrecorded as a charge through earnings, regardless of the intent or requirementto sell the security.   As of September 30,2009, no additional other-than-temporary credit impairment was recorded.  As of September 30, 2009, afterother-than-temporary impairment charges, the private label residential mortgagerelated security had an amortized cost of $648,000 and a fair value of $214,000,resulting in a remaining unrealized loss of $434,000.  The remaining unrealized loss is notconsidered other-than-temporary as management does not have the intention orrequirement to sell this security.

 

The Company had one private label residential mortgagerelated security and three commercial mortgage related securities in anunrealized loss position at September 30, 2009.  The Company evaluates current characteristicsof each of its private label securities such as delinquency and foreclosure levels,credit enhancement, projected losses and coverage, on a quarterly basis. It ispossible that the underlying collateral of these securities will perform worsethan current expectations, which may lead to adverse changes in cash flows onthese securities and potential future other-than-temporary impairment losses.Events that may trigger material declines in fair values for these securitiesin the future would include but are not limited to deterioration of creditmetrics, significantly higher levels of default and severity of loss on theunderlying collateral, deteriorating credit enhancement and loss coverageratios, or further illiquidity.

 

Five of the commercial mortgage related securities each havea credit rating of AAA and one has a rating of BBB.  The securities have a gross amortized cost of$18.3 million and $10.0 million at September 30, 2009 and December 31,2008, respectively. Three of the securities had a gross unrealized loss of$425,000 and  $2.7 million at September 30,2009 and December 31, 2008, respectively. Management believes theimpairment on these securities is temporary based on the cash flows, creditrating, credit enhancement and structure of the underlying securities andmanagement does not have the intention or requirement to sell the securities.

 

Additionally, management evaluates all othernon-private label investment securities for other-than-temporary impairment ona quarterly basis, and more frequently when economic or market concernswarrant. Management does not believe that any individual unrealized lossrepresented an other-than-temporary impairment at September 30, 2009.Management believes the temporary impairment on the securities classified as (a) stateand political subdivisions and (b) corporate securities is directlyrelated to the volatility, absence of liquidity in the fixed income marketsand/or changes in market interest rates. Finally, the temporary impairment on the agency residential mortgagerelated securities is directly related to changes in market interest rates.

 

Of the 15 securities with atemporary impairment at September 30, 2009, nine have a rating ofAAA.  The securities rated less than AAAare: (1) one corporate debt security with a fair value of $2.3 millionhaving a rating of A3, (2) two state or political subdivision securitieswith a total fair value of $830,000, which do not have a rating, (3) twoprivate label collateralized mortgage obligations with a total fair value of $853,000 have a rating of BB+ orno rating, and (4) one private commercial mortgage related security with a fair value of $3.8 million has a rating of BBB.

 

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Securities that have been impaired greater than twelvemonths are the private label residential mortgage related security and threeprivate label commercial mortgage related securities, which were identified anddiscussed in detail in the preceding paragraphs. The remaining securitiesimpaired greater than twelve months are state and political subdivisions, theimpairment of which was deemed temporary due to positive factors supporting therecoverability of these securities, and the Company does not have the intentionto sell the securities. Positive factors considered include timely principalpayments and the financial health of the issuer.

 

The following schedule provides a summary of the componentsof net gains on sale of investment securities in the Company’s Consolidated Statementof Operations:

 
| ** **                                            | ** ** | ** **          | ** ** | ** **   | ** ** | **Other-than-** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|---------------------|------------|--------------|------------|-----------------|------------|---------------|------------|
| ** **                                            | ** ** | **Gross**           | ** ** | **Gross**    | ** ** | **Temporary**   | ** ** | ** **    | ** ** |
| ** **                                            | ** ** | **Realized**        | ** ** | **Realized** | ** ** | **Impairment**  | ** ** | **Net Gains** | ** ** |
| ** **                                            | ** ** | **Gains**           | ** ** | **Losses**   | ** ** | **Losses**      | ** ** | **(Losses)**  | ** ** |
| ** **                                            | ** ** | **(in  thousands)** | ** ** |
|                                                  |       |                |       |         |       |            |       |          |       |
| Three  Months Ended September 30, 2009:          |       |                |       |         |       |            |       |          |       |
| Obligations  of U.S. government agencies              |       | $                   | —     |         | $          | —          |       | $             | —     |   | $ | — |   |
| State  and political subdivisions                     |       | —              |       | —       |       | —          |       | —        |       |
| Corporate  securities                                 |       | 608                 |       | —       |       | —          |       | 608           |       |
|                                                  |       | 608                 |       | —       |       | —          |       | 608           |       |
|                                                  |       |                |       |         |       |            |       |          |       |
| Private  label residential mortgage related security  |       | —              |       | —       |       | —          |       | —        |       |
| Private  label commercial mortgage related securities |       | —              |       | —       |       | —          |       | —        |       |
| Agency  residential mortgage related securities       |       | 350                 |       | —       |       | —          |       | 350           |       |
| Total  mortgage related securities                    |       | 350                 |       | —       |       | —          |       | 350           |       |
|                                                  |       |                |       |         |       |            |       |          |       |
| **Total securities**                                  |       | $                   | 958        |         | $          | —          |       | $             | —     |   | $ | 958 |   |

 
| ** **                                            | ** ** | ** **          | ** ** | ** **   | ** ** | **Other-than-** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|---------------------|------------|--------------|------------|-----------------|------------|---------------|------------|
| ** **                                            | ** ** | **Gross**           | ** ** | **Gross**    | ** ** | **Temporary**   | ** ** | ** **    | ** ** |
| ** **                                            | ** ** | **Realized**        | ** ** | **Realized** | ** ** | **Impairment**  | ** ** | **Net Gains** | ** ** |
| ** **                                            | ** ** | **Gains**           | ** ** | **Losses**   | ** ** | **Losses**      | ** ** | **(Losses)**  | ** ** |
| ** **                                            | ** ** | **(in  thousands)** | ** ** |
| Nine  Months Ended September 30, 2009:           |       |                |       |         |       |            |       |          |       |
|                                                  |       |                |       |         |       |            |       |          |       |
| Obligations  of U.S. government agencies              |       | $                   | —     |         | $          | —          |       | $             | —     |   | $ | — |   |
| State  and political subdivisions                     |       | —              |       | —       |       | —          |       | —        |       |
| Corporate  securities                                 |       | 608                 |       | —       |       | —          |       | 608           |       |
|                                                  |       | 608                 |       | —       |       | —          |       | 608           |       |
|                                                  |       |                |       |         |       |            |       |          |       |
| Private  label residential mortgage related security  |       | —              |       | —       |       | (157            | )          | (157          | )          |
| Private  label commercial mortgage related securities |       | —              |       | —       |       | —          |       | —        |       |
| Agency  residential mortgage related securities       |       | 938                 |       | —       |       | —          |       | 938           |       |
| Total  mortgage related securities                    |       | 938                 |       | —       |       | (157            | )          | 781           |       |
|                                                  |       |                |       |         |       |            |       |          |       |
| **Total securities**                                  |       | $                   | 1,546      |         | $          | —          |       | $             | (157       | ) | $ | 1,389 |   |

 

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Theamortized cost and estimated fair value of investment securitiesavailable-for-sale at September 30, 2009 and December 31, 2008 bycontractual maturity are as follows (excluding mortgage related securities):

 
| ** **                              | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **Amortized**               | ** ** | **Fair**                   | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                              | ** ** | **Cost**                    | ** ** | **Value**                  | ** ** | **Cost** | ** ** | **Value** | ** ** |
| ** **                              | ** ** | **(In  Thousands)**         | ** ** | **(In  Thousands)**        | ** ** |
|                                    |       |                        |       |                       |       |   |   |   |   |
| Due  in one year or less                |       | $                           | 9,776      |                       | $          | 9,920 |   | $ | 6,913 |   | $ | 6,776 |   |
| Due  after one year through five years  |       | 8,340                       |       | 8,481                      |       | 5,782 |   | 5,376 |   |
| Due  after five years through ten years |       | 4,241                       |       | 4,302                      |       | 7,551 |   | 7,543 |   |
| Due  after ten years                    |       | 4,452                       |       | 4,532                      |       | 5,557 |   | 5,346 |   |
|                                    |       | $                           | 26,809     |                       | $          | 27,235 |   | $ | 25,803 |   | $ | 25,041 |   |

 

Securities with a carrying value of $3.4 million and$4.3 million at September 30, 2009 and December 31, 2008,respectively, were pledged to secure public deposits and for other purposes asrequired or permitted by law.

 

Securities with a carrying value of $60.0 million bothat September 30, 2009 and December 31, 2008, respectively, werepledged as collateral for $50.0 million in borrowed funds.   See Note 6.

 

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**NOTE 3 - LOANS**

 

The composition of netloans at September 30, 2009, and December 31, 2008 is provided below(in thousands).

 
| ** **                           | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| Real  estate loans:                  |       |                         |       |                        |       |
| One-to  four-family                  |       | 268,640                      |       | $                           | 260,833    |   |
| Multi-family  and commercial         |       | 206,756                      |       | 155,564                     |       |
| Construction                         |       | 51,785                       |       | 65,002                      |       |
|                                 |       | 527,181                      |       | 481,399                     |       |
| Consumer  loans:                     |       |                         |       |                        |       |
| Home  equity                         |       | 53,933                       |       | 63,987                      |       |
| Automobile                           |       | 133                          |       | 262                         |       |
| Lines  of credit                     |       | 14,338                       |       | 11,486                      |       |
| Other                                |       | 4,458                        |       | 351                         |       |
|                                 |       | 72,862                       |       | 76,086                      |       |
| Commercial  loans                    |       | 44,813                       |       | 37,371                      |       |
| **Total Loans**                      |       | 644,856                      |       | 594,856                     |       |
| Deferred  loan origination fees, net |       | 382                          |       | 379                         |       |
| Allowance  for loan losses           |       | (8,489                       | )          | (6,260                      | )          |
| **Net Loans**                        |       | 636,749                      |       | $                           | 588,975    |   |

 

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

 
| ** **                | ** ** | **Nine Months**        | ** ** | **Year**              | ** ** |
|---------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **Ended**              | ** ** | **Ended**             | ** ** |
| ** **                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2008** | ** ** |
| ** **                | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
|                      |       |                   |       |                  |       |   |   |
| Balance, beginning        |       | $                      | 6,260      |                  | $          | 3,376 |   | $ | 3,376 |   |
| Provision for loan losses |       | 2,412                  |       | 900                   |       | 2,900 |   |
| Loans charged off         |       | (183                   | )          | (18                   | )          | (19 | ) |
| Recoveries                |       | —                 |       | 3                     |       | 3 |   |
|                      |       |                   |       |                  |       |   |   |
| Balance, ending           |       | $                      | 8,489      |                  | $          | 4,261 |   | $ | 6,260 |   |

 

As of September 30,2009, the Bank had one interest rate swap agreement that was entered intoduring the quarter ended June 30, 2007. The Bank had entered into a 15-year fixed rate commercial loan and theBank’s risk management objective was to lock in the fair value of theloan.  The Bank met this objective byentering into a swap agreement to exchange fixed rate cash flows for variablerate cash flows. The fair value of the swap is recorded in other assets in theCompany’s consolidated statements of condition. The Bank has not entered into aswap since the June 2007 quarter and currently does not consider itself tobe an active participant in the swap market.

 

As of September 30,2009 and December 31, 2008, the Bank’s swap agreement had a notionalamount of $1.2 million.  The Company isreceiving a variable rate payment of three-month LIBOR plus 2.24% and is payinga fixed rate payment of 7.43%. The swap matures in April 2022 and had a fairvalue loss position of $161,000 and $236,000 at September 30, 2009 and December 31,2008, respectively.

 

The Bank carries the loanat fair value.  The loan is contractuallycurrent and the critical terms of the loan and the swap are a mirror image exceptthat the loan includes a default interest rate clause.  Accordingly, the Company has determined thefair value of the gain position of the loan approximates the fair value lossposition of the swap as of September 30, 2009 and December 31, 2008,respectively.

 

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**NOTE 4 — MORTGAGE SERVICING ACTIVITY**

 

Loans serviced for othersare not included in the accompanying consolidated statements of condition. Theunpaid principal balances of these loans were $93.0 million and $110.9 millionat September 30, 2009 and 2008, respectively, and $109.6 million at December 31,2008.

 

The following summarizesmortgage servicing rights for the nine months ended September 30, 2009 and2008 and the year ended December 31, 2008 (in thousands):

 
| ** **                             | ** ** | **Nine Months  Ended  September 30,** | ** ** | **Year  Ended  December 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|------------------------------------|------------|
| ** **                             | ** ** | **2009**                                   | ** ** | **2008**                           | ** ** | **2008** | ** ** |
| ** **                             | ** ** | **(Unaudited)**                            | ** ** | ** **                         | ** ** |
| Balance,  beginning                    |       | $                                          | 827        |                               | $          | 1,066 |   | $ | 1,066 |   |
| Mortgage  servicing rights capitalized |       | —                                     |       | —                             |       | — |   |
| Mortgage  servicing rights amortized   |       | (149                                       | )          | (80                                | )          | (106 | ) |
| Change  in valuation allowance         |       | 57                                         |       | (31                                | )          | (133 | ) |
| Balance,  ending                       |       | $                                          | 735        |                               | $          | 955 |   | $ | 827 |   |

 

At September 30,2009, September 30, 2008 and December 31, 2008, the fair value of themortgage servicing rights (“MSRs”) was $754,000 (unaudited), $1.0 million(unaudited) and $836,000, respectively. The fair value at these dates wasdetermined using a third-party valuation model that calculates the presentvalue of estimated future servicing income. The model incorporates assumptionsthat market participants use in estimating future net servicing income,including estimates of prepayment speeds and discount rates. Mortgage loanprepayment speed is the annual rate at which borrowers are forecasted to repaytheir mortgage loan principal and is based on historical experience and currentinterest rates. The discount rate used to determine the present value of futurenet servicing income is the required rate of return the market would expect foran asset with similar risk. Both assumptions can, and generally will, changequarterly valuations as market conditions and interest rates change.

 

During 2008, the Bankrecorded a total valuation allowance of $133,000 on its MSRs, which was due toa significant decrease in interest rates for residential mortgages during theyear resulting in assumed higher mortgage prepayments.  This valuation allowance was decreased by$57,000 during the nine months ended September 30, 2009.  The amount of the valuation adjustment isrecorded as an adjustment to service charges and other fee income in theCompany’s consolidated statement of operations.

 

**NOTE 5 -DEPOSITS**

 

Deposits and theirrespective weighted average interest rate at September 30, 2009 and December 31,2008 consist of the following (dollars in thousands):

 
| ** **                            | ** ** | **September 30, 2009**           | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | **Weighted  Average  Interest  Rate** | ** ** | **Amount**                 | ** ** | **Weighted  Average  Interest  Rate** | ** ** | **Amount** | ** ** |
| ** **                            | ** ** | **(Unaudited)**                       | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Non-interest  bearing demand accounts |       | —                                | %          | $                          | 53,640     |   | — | % | $ | 46,716 |   |
| NOW  accounts                         |       | 0.78                                  |       | 39,609                     |       | 1.13 |   | 35,330 |   |
| Money  market accounts                |       | 1.38                                  |       | 177,194                    |       | 2.01 |   | 101,295 |   |
| Savings  and club accounts            |       | 0.15                                  |       | 50,172                     |       | 0.25 |   | 51,196 |   |
| Certificates  of deposit              |       | 3.40                                  |       | 539,914                    |       | 3.96 |   | 373,935 |   |
|                                  |       |                                  |       |                       |       |   |   |   |   |
|                                  |       | 2.46                                  | %          | $                          | 860,529    |   | 2.86 | % | $ | 608,472 |   |

 

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**NOTE 6 — BORROWINGS**

 

Pursuantto collateral agreements with the Federal Home Loan Bank of Pittsburgh (the “FHLB”),advances are secured by qualifying first mortgage loans, qualifyingfixed-income securities, FHLB stock and an interest-bearing demand depositaccount with the FHLB. As of September 30, 2009, the Bank has $214.8million in qualifying collateral pledged against its advances.

 
| **Maturity Date**  | ** ** | **Amount**         | ** ** | **Interest Rate** | ** ** | **Strike Rate** | ** ** | **Call Date**      | ** ** | **Rate if Called** | ** ** |
|--------------------|------------|--------------------|------------|-------------------|------------|-----------------|------------|--------------------|------------|--------------------|------------|
| ** **         | ** ** | **(in thousands)** | ** ** | ** **        | ** ** | ** **      | ** ** | ** **         | ** ** | ** **         | ** ** |
|               |       |               |       |              |       |            |       |               |       |               |       |
| December 2009 |       | $                  | 5,000      |              | 2.26       | %               |       |               |       |               |       |   |
| February 2010 |       | 10,000             |       | 2.84              | %          |            |       |               |       |               |       |
| August 2011   |       | 20,000             |       | 4.89              | %          | 7.50            | %          | November 2009 |       | LIBOR+ .2175%      |       |
| August 2011   |       | 10,000             |       | 4.87              | %          | 7.50            | %          | November 2009 |       | LIBOR+ .2175%      |       |
| July 2013     |       | 9,725              |       | 4.10              | %          |            |       |               |       |               |       |
| December 2013 |       | 5,000              |       | 2.80              | %          |            |       | December 2010 |       | LIBOR+ 1.04%       |       |
| January 2015  |       | 23,507             |       | 3.49              | %          |            |       |               |       |               |       |
| December 2015 |       | 5,000              |       | 3.06              | %          |            |       | December 2011 |       | LIBOR+ 1.12%       |       |
| November 2017 |       | 15,000             |       | 3.62              | %          |            |       | November 2010 |       | LIBOR+ 0.10%       |       |
| November 2017 |       | 15,000             |       | 3.87              | %          |            |       | November 2011 |       | LIBOR+ 0.10%       |       |
| December 2017 |       | 20,000             |       | 2.83              | %          |            |       | December 2009 |       | LIBOR+ 0.11%       |       |
| December 2018 |       | 5,000              |       | 3.15              | %          |            |       | December 2012 |       | LIBOR+ 1.14%       |       |
|               |       |               |       |              |       |            |       |               |       |               |       |
|               |       | $                  | 143,232    |              |       |            |       |               |       |               |       |   |

 

Forthe two borrowings which have a “Strike Rate” disclosed in the above table, ifthree-month LIBOR is greater than or equal to the Strike Rate, the FHLB cannotify the Bank of its intention to convert the borrowing to an adjustable-rateadvance equal to three-month LIBOR (0.29% at September 30, 2009) plus..2175% on a quarterly basis. If converted, the Bank has the option to repaythese advances at each of the option dates without penalty. Accordingly, thecontractual maturities above may differ from actual maturities.

 

Forthe borrowings which have “Call Dates” disclosed in the above table, if theborrowing is called, the Bank has the option to either pay off the borrowingwithout penalty or the borrowing’s fixed rate resets to a variable LIBOR basedrate, as noted in the above table. Subsequent to the call date, the borrowings are callable by the FHLBquarterly.  Accordingly, the contractualmaturities above may differ from actual maturities.

 

The Bank has a maximum borrowing capacity with theFHLB of approximately $327.4 million at June 30, 2009, the latest date forwhich information is available.

 

Asa member of the FHLB, the Bank is required to acquire and hold shares ofcapital stock in the FHLB in an amount that is at least equal to 4.75% of itsadvances from the FHLB, plus 0.75% of the unused borrowing capacity.  The Bank was in compliance with thisrequirement with a stock investment in the FHLB of $10.4 million at September 30,2009.

 

DuringDecember 2008, the FHLB announced that it does not intend to pay adividend on its common stock for the foreseeable future.  No dividend has been paid for the nine monthsended September 30, 2009. Additionally, the FHLB indicated it would not redeem any common stockassociated with member advance repayments and that it may increase itsindividual member stock investment requirements. The FHLB is permitted toincrease the amount of capital stock required to be owned by an FHLB member to6.00% of a member’s advances, plus 1.50% of the unused borrowing capacity.  As of September 30, 2009, the Company’smaximum stock obligation was $11.4 million.

 

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**Other Borrowed Funds**

 

Otherborrowed funds obtained from large commercial banks totaled $50.0 million at September 30,2009.  These borrowings contractuallymature with dates ranging from November 2014 through November 2018and may be called by the lender based on the underlying agreements.  Subsequent to the call date, these borrowingsare callable by the lender quarterly. Accordingly, the contractual maturitiesabove may differ from actual maturities.

** **
| **Maturity** | ** **          | **Interest** | ** ** | ** **    | ** **          | ** **         | ** ** |
|--------------|---------------------|--------------|------------|---------------|---------------------|--------------------|------------|
| **Date**     | ** **          | **Rate**     | ** ** | **Call Date** | ** **          | **Amount**         | ** ** |
| ** **   | ** **          | ** **   | ** ** | ** **    | ** **          | **(in thousands)** | ** ** |
|         | November 2014  |         | 3.60       | %             | November 2009  |               | $          | 20,000 |   |
|         | September 2018 |         | 3.40       | %             | September 2012 |               | 10,000     |   |
|         | September 2018 |         | 3.20       | %             | September 2012 |               | 5,000      |   |
|         | October 2018   |         | 3.15       | %             | October 2011   |               | 5,000      |   |
|         | October 2018   |         | 3.27       | %             | October 2011   |               | 5,000      |   |
|         | November 2018  |         | 3.37       | %             | November 2013  |               | 5,000      |   |
|         |                |         |       |          |                |               | $          | 50,000 |   |

 

Mortgagebacked securities with a fair value of $60.0 million at September 30, 2009were pledged as collateral for these other borrowed funds.

 

**NOTE 7 —STOCK BASED COMPENSATION**

 

During the nine monthsended September 30, 2009, the Company recorded $731,000 of stock basedcompensation expense in connection with the 2007 Equity Incentive Plan,comprised of stock option expense of $315,000 and restricted stock expense of$416,000.

 

The following is asummary of the Company’s stock option activity and related information for the2007 Equity Incentive Plan for the nine months ended September 30, 2009:

 
| ** **                              | ** ** | ** **    | ** ** | **Weighted** | ** ** |
|-----------------------------------------|------------|---------------|------------|--------------|------------|
| ** **                              | ** ** | **Number of** | ** ** | **Average**  | ** ** |
| ** **                              | ** ** | **Stock**     | ** ** | **Exercise** | ** ** |
| ** **                              | ** ** | **Options**   | ** ** | **Price**    | ** ** |
|                                    |       |          |       |         |       |
| Outstanding  at December 31, 2008  |       | 615,200       |       | $            | 12.22      |   |
| Granted                                 |       | 80,359        |       | 8.79         |       |
| Exercised                               |       | —        |       | —       |       |
| Forfeited                               |       | (40,254       | )          | 12.38        |       |
| Outstanding  at September 30, 2009 |       | 655,305       |       | $            | 11.79      |   |
| Exercisable at  September 30, 2009 |       | 226,100       |       | $            | 12.30      |   |

 

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The following is asummary of the Company’s unvested options as of September 30, 2009 andchanges therein during the nine months then ended:

 
| ** **                           | ** ** | ** **    | ** ** | **Weighted**   | ** ** |
|--------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                           | ** ** | **Number of** | ** ** | **Average**    | ** ** |
| ** **                           | ** ** | **Stock**     | ** ** | **Grant Date** | ** ** |
| ** **                           | ** ** | **Options**   | ** ** | **Fair Value** | ** ** |
|                                 |       |          |       |           |       |
| Unvested  at December 31, 2008  |       | 512,140       |       | $              | 3.28       |   |
| Granted                              |       | 80,359        |       | 2.39           |       |
| Exercised                            |       | —        |       | —         |       |
| Vested                               |       | (123,040      | )          | 3.30           |       |
| Forfeited                            |       | (40,254       | )          | 3.25           |       |
| Unvested at  September 30, 2009 |       | 429,205       |       | $              | 3.11       |   |

 

Expected future expenserelating to the 429,205 non-vested options outstanding as of September 30,2009 is $1.3 million over a weighted average period of 3.2 years.

 

During the nine monthsended September 30, 2009, the Company determined the fair value of theoptions granted in 2009 was $2.39.  Thisvalue was based on the following assumptions:

 
| Expected  dividend yield       |   | 1.90  | %      |
|--------------------------------|--------|-------|--------|
| Expected  volatility           |   | 30.00 | %      |
| Risk  —free interest rate |   | 2.33  | %      |
| Expected option life in  years |   | 6.50  |   |

 

The following is asummary of the status of the Company’s restricted stock as of September 30,2009 and changes therein during the nine months then ended:

 
| ** **                           | ** ** | ** **     | ** ** | **Weighted**   | ** ** |
|--------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                           | ** ** | **Number of**  | ** ** | **Average**    | ** ** |
| ** **                           | ** ** | **Restricted** | ** ** | **Grant Date** | ** ** |
| ** **                           | ** ** | **Shares**     | ** ** | **Fair Value** | ** ** |
|                                 |       |           |       |           |       |
| Unvested  at December 31, 2008  |       | 179,580        |       | $              | 12.29      |   |
| Granted                              |       | 15,883         |       | 9.40           |       |
| Vested                               |       | (44,040        | )          | 12.31          |       |
| Forfeited                            |       | (12,660        | )          | 12.38          |       |
| Unvested at  September 30, 2009 |       | 138,763        |       | $              | 11.95      |   |

 

Expected futurecompensation expense relating to the 138,763 restricted shares at September 30,2009 is $1.6 million over a weighted average period of 3.1 years.

 

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**NOTE 8 — FAIR VALUE**

 

The Company determinesthe fair value of investments using three levels of input as defined by relatedaccounting pronouncements:

 

Level 1 - Inputs arequoted prices (unadjusted) in active markets for identical assets orliabilities that are accessible at the measurement date.

 

Level 2 - Inputs areother than quoted prices included within Level 1 that are observable for theasset or liability, either directly or indirectly, such as quoted prices forsimilar assets or liabilities; quoted prices in markets that are not active; orother inputs that are observable or can be corroborated by observable marketdata for substantially the full term of the assets or liabilities.

 

Level 3 – Valuations areobserved from unobservable inputs that are supported by little or no marketactivity and that are significant to the fair value of the assets orliabilities.

 

The Company classifiedthree types of financial instruments as Level 3 as of September 30, 2009.The first instrument is a private label residential mortgage related security,the fair value of which, unlike U.S. agency mortgage related securities, ismore difficult to determine because it is not actively traded in securitiesmarkets.  The second type of instrumentis private label commercial mortgage backed securities (“CMBS”), the fair valueof which is also more difficult to determine because they are not activelytraded in securities markets.  The thirdinstrument is a loan, since lending credit risk is not an observable input forthis individual commercial loan (see Note 3).

 

As discussed in Note 2,the Company recorded an other-than-temporary credit impairment charge of$157,000 at June 30, 2009. No incremental other-than-temporary creditimpairment was recorded at September 30, 2009. The remaining unrealizedloss, after the impairment charge, in the private label collateralized mortgageobligation was $434,000 at September 30, 2009 compared to an unrealizedloss of $620,000 at December 31, 2008. The unrealized loss in the private label commercial mortgage relatedsecurities portfolio was $425,000 at September 30, 2009 compared to $2.7million at December 31, 2008. The unrealized gain on the loan was $161,000at September 30, 2009 compared to an unrealized gain of $236,000 at December 31,2008.

 

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The following table,which sets forth the Company’s fair value measurements at September 30,2009, includes (1) investment securities and mortgage related securitiesavailable-for-sale; (2) the two financial instruments, associated with theinterest rate swap agreement as discussed in Note 3 and (3) tranches ofMSRs recorded at fair value.

 
| ** **                                            | ** ** | ** **                  | ** ** | **Fair Value Measurements at Reporting Date  Using** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|------------------------------------------------------|------------|
| ** **                                            | ** ** | ** **                  | ** ** | **Quoted Prices in**                                 | ** ** | **Significant** | ** ** | **Significant** | ** ** |
| ** **                                            | ** ** | ** **                  | ** ** | **Active Markets**                                   | ** ** | **Other** | ** ** | **Other** | ** ** |
| ** **                                            | ** ** | ** **                  | ** ** | **for Identical**                                    | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                                            | ** ** | **As of**                   | ** ** | **Assets**                                           | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **Description**                                       | ** ** | **September 30, 2009** | ** ** | **(Level 1)**                                        | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| ** **                                            | ** ** | **(In Thousands)**          | ** ** |
| Obligations  of U.S. government agencies              |       | $                           | 309        |                                                 | $          | — |   | $ | 309 |   | $ | — |   |
| State  and political subdivisions                     |       | 10,145                      |       | —                                               |       | 10,145 |   | — |   |
| Corporate  securities                                 |       | 16,781                      |       | —                                               |       | 16,781 |   | — |   |
| Private  label residential mortgage related security  |       | 214                         |       | —                                               |       | — |   | 214 |   |
| Private  label commercial mortgage related securities |       | 18,172                      |       | —                                               |       | — |   | 18,172 |   |
| Agency  residential mortgage related securities       |       | 396,643                     |       | —                                               |       | 396,643 |   | — |   |
| Loan  (1)                                             |       | 1,309                       |       | —                                               |       | — |   | 1,309 |   |
| Mortgage  servicing rights                            |       | 670                         |       | —                                               |       | 670 |   | — |   |
| Other  assets — swap contract (1)                |       | (161                        | )          | —                                               |       | (161 | ) | — |   |
| Total                                                 |       | $                           | 444,082    |                                                 | $          | — |   | $ | 424,387 |   | $ | 19,695 |   |

 

----

(1)          Such assets recorded at fair value as furtherdescribed in Note 3.

 

The following tableincludes a roll forward of the financial instruments with Significant OtherUnobservable Inputs (Level 3) for the period of January 1, 2009 to September 30,2009.

 
| ** **                               | ** ** | **Private Label** | ** ** | **Private Label** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|-------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                               | ** ** | **Residential**   | ** ** | **Commercial**    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Mortgage**      | ** ** | **Mortgage**      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Security**      | ** ** | **Securities**    | ** ** | **Loan**   | ** ** | **Total**  | ** ** |
|                                     |       |              |       |              |       |       |       |       |       |
| Beginning  balance, January 1, 2009 |       | $                 | 269        |              | $          | 7,304      |       | $          | 1,425      |   | $ | 8,998 |   |
| Purchases                                |       | —            |       | 8,213             |       | —     |       | 8,213      |       |
| Payments  received                       |       | (84               | )          | (42               | )          | (41        | )          | (167       | )          |
| Premium  amortization                    |       | —            |       | 76                |       | —     |       | 76         |       |
| Increase/(decrease)  in value            |       | 29                |       | 2,621             |       | (75        | )          | 2,575      |       |
| Reclassification  to Level 3             |       | —            |       | —            |       | —     |       | —     |       |
|                                     |       |              |       |              |       |       |       |       |       |
| Ending  balance, September 30, 2009 |       | $                 | 214        |              | $          | 18,172     |       | $          | 1,309      |   | $ | 19,695 |   |

 

The Company utilizes anexternal third-party pricing service to perform evaluations on its investmentportfolio on at least a quarterly basis. The Company receives one value for each security and has made no adjustmentsto the values obtained from the pricing service at September 30,2009.  The Company will continue toevaluate the appropriateness of the identified Level 1, 2 or 3 classificationson a recurring basis.

 

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**FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

Thefollowing schedules and disclosures are presented in conjunction with theCompany’s adoption of guidance on Interim Disclosures about Fair Value ofFinancial Instruments for the quarter ended September 30, 2009.

 

Management uses its best judgment in estimating thefair value of the Company’s financial instruments; however, there are inherentweaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair valueestimates herein are not necessarily indicative of the amounts the Companycould have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have beenmeasured as of their respective period ends, and have not been reevaluated orupdated for purposes of these consolidated financial statements subsequent tothose respective dates.  As such, theestimated fair values of these financial instruments subsequent to therespective reporting dates may be different than the amounts reported at eachperiod-end.

 

The following information should not be interpreted asan estimate of the fair value of the entire Company since a fair valuecalculation is only provided for a limited portion of the Company’s assets andliabilities.  Due to a wide range ofvaluation techniques and the degree of subjectivity used in making theestimates, comparisons between the Company’s disclosures and those of othercompanies may not be meaningful.  Thefollowing methods and assumptions were used to estimate the fair values of theCompany’s financial instruments at September 30, 2009 and December 31,2008. There has been no significant change in methodology for estimating fairvalue of the Company’s financial instruments since December 31, 2008.

 

**Cash and Cash Equivalents**

** **

The carrying amounts of cash and cash equivalentsapproximate their fair value.

 

**Investment and Mortgage Related Securities —Available-for-Sale**

** **

Fair values for investments securities and mortgagerelated securities available-for-sale are obtained from a third party pricingservice and are based on quoted market prices, where available.  If quoted market prices are not available, fairvalues are based on quoted market prices of comparable securities. If quotedmarket prices are not available for comparable securities, fair value is basedon quoted bids for the security or comparable securities.

 

**Loans Held for Sale**

** **

The fair values of mortgage loans originated andintended for sale in the secondary market are based on current quoted marketprices.

 

**Loans Receivable, Net**

** **

For variable-rate loans that reprice frequently andthat entail no significant changes in credit risk, fair values are based oncarrying values.  The fair value of fixedrate and other loans are estimated using discounted cash flow analyses atinterest rates currently offered for loans with similar terms to borrowers ofsimilar credit quality.

 

**Federal Home Loan Bank Stock**

** **

**The fair valueof the Federal Home Loan Bank stock is estimated to be the carrying amount.**

** **

**Mortgage Servicing Rights**

** **

The fair value of mortgage servicing rights is basedon third party estimates of value when available.

 

**Accrued Interest Receivable and Accrued Interest Payable**

** **

The carrying amount of accrued interest receivable andaccrued interest payable approximates fair value.

 

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**Deposit Liabilities**

** **

Fair values for demand deposits (including NOWaccounts), savings and club accounts and money market deposits are, bydefinition, equal to the amount payable on demand at the reporting date.  Fair values of fixed-maturity certificates ofdeposit are estimated using a discounted cash flow calculation that appliesinterest rates currently being offered on similar instruments with similarmaturities.

 

**Federal Home Loan Bank Advances and Other Borrowed Funds**

** **

Fair value of Federal Home Loan Bank advances andother borrowed funds are estimated using discounted cash flow analyses, basedon rates currently available to the Bank for advances with similar terms andremaining maturities.

 

**Off-Balance Sheet Financial Instruments**

** **

Fair value of commitments to extend credit areestimated using the fees currently charged to enter into similar agreements,taking into account market interest rates, the remaining terms and presentcredit worthiness of the counterparties.

 

The estimated fair values of the Company’s financialinstruments at September 30, 2009 and December 31, 2008 were asfollows (in thousands):

 
| ** **                                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                                            | ** ** | ** **             | ** ** | **Estimated**         | ** ** | ** ** | ** ** | **Estimated** | ** ** |
| ** **                                            | ** ** | **Carrying**           | ** ** | **Fair**              | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                            | ** ** | **Amount**             | ** ** | **Value**             | ** ** | **Amount** | ** ** | **Value** | ** ** |
| Financial  assets:                                    |       |                   |       |                  |       |   |   |   |   |
| Cash  and cash equivalents                            |       | $                      | 58,174     |                  | $          | 58,174 |   | $ | 3,944 |   | $ | 3,944 |   |
| Investment  securities available-for-sale             |       | 27,235                 |       | 27,235                |       | 25,041 |   | 25,041 |   |
| Private  label residential mortgage related security  |       | 214                    |       | 214                   |       | 269 |   | 269 |   |
| Private  label commercial mortgage related securities |       | 18,172                 |       | 18,172                |       | 7,304 |   | 7,304 |   |
| Agency  residential mortgage related securities       |       | 396,643                |       | 396,643               |       | 262,109 |   | 262,109 |   |
| Loans  receivable, net                                |       | 636,749                |       | 631,994               |       | 588,975 |   | 588,416 |   |
| Loans  held for sale                                  |       | 167                    |       | 167                   |       | — |   | — |   |
| Federal  Home Loan Bank stock                         |       | 10,435                 |       | 10,435                |       | 9,707 |   | 9,707 |   |
| Mortgage  servicing rights                            |       | 735                    |       | 754                   |       | 827 |   | 836 |   |
| Accrued  interest receivable                          |       | 4,583                  |       | 4,583                 |       | 3,721 |   | 3,721 |   |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| Financial  liabilities:                               |       |                   |       |                  |       |   |   |   |   |
| Savings  and club accounts                            |       | 50,172                 |       | 50,172                |       | 51,196 |   | 51,196 |   |
| Demand,  NOW and money market deposits                |       | 270,443                |       | 270,443               |       | 183,341 |   | 183,341 |   |
| Certificates  of deposit                              |       | 539,914                |       | 549,111               |       | 373,935 |   | 378,961 |   |
| Federal  Home Loan Bank advances                      |       | 143,232                |       | 150,504               |       | 146,379 |   | 134,585 |   |
| Other  borrowed funds                                 |       | 50,000                 |       | 48,350                |       | 50,000 |   | 47,631 |   |
| Accrued  interest payable                             |       | 759                    |       | 759                   |       | 727 |   | 727 |   |
|                                                  |       |                   |       |                  |       |   |   |   |   |
| Off-balance  sheet instruments                        |       | —                 |       | 1,056                 |       | — |   | 688 |   |
|                                                       |            |                        |            |                       |            |  |  |  |  |  |  |  |  |

 

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**NOTE 9 - COMPREHENSIVE INCOME**

 

Comprehensive income forthe three and nine months ended September 30, 2009, and 2008 is as follows(in thousands):

 
| ** **                                                                                                                                                                                                                                                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                 | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                                                                                                                                                                                                                 | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                                                                                                                                                                                                                 | ** ** | **(Unaudited)**        | ** ** |
|                                                                                                                                                                                                                                                                                       |       |                   |       |                   |       |   |   |   |   |
| Net  income                                                                                                                                                                                                                                                                                |       | $                      | 513        |                   | $          | 659 |   | $ | 1,412 |   | $ | 1,308 |   |
|                                                                                                                                                                                                                                                                                       |       |                   |       |                   |       |   |   |   |   |
| Other  comprehensive income (loss):                                                                                                                                                                                                                                                        |       |                   |       |                   |       |   |   |   |   |
|                                                                                                                                                                                                                                                                                       |       |                   |       |                   |       |   |   |   |   |
| Unrealized holding gains (losses) arising during  the period, net of tax (benefit) (for three months ended September 30,  2009 and 2008, $1,585 and $(209), respectively, and for nine months ended  September 30, 2009 and 2008, $4,172 and $(884), respectively)               |       | 2,844                  |       | (322                   | )          | 7,722 |   | (1,460 | ) |
|                                                                                                                                                                                                                                                                                       |       |                   |       |                   |       |   |   |   |   |
| Non-credit related unrealized loss on other-than  temporary impaired securities (net of tax benefit of $(152) for nine months  ended September 30, 2009)                                                                                                                              |       | —                 |       | —                 |       | (296 | ) | — |   |
|                                                                                                                                                                                                                                                                                       |       |                   |       |                   |       |   |   |   |   |
| Less: Reclassification adjustment for net  investment securities gains included in net income, net of taxes (for three  months ended September 30, 2009 and 2008, $55 and $0, respectively, and  for nine months ended September 30, 2009 and 2008, $197 and $40,  respectively) |       | 106                    |       | —                 |       | 383 |   | 78 |   |
|                                                                                                                                                                                                                                                                                       |       |                   |       |                   |       |   |   |   |   |
| Plus:  Amortization of pension actuarial loss, net of taxes of $2 for the nine  months ended September 30, 2008, respectively                                                                                                                                                         |       | —                 |       | —                 |       | — |   | 4 |   |
|                                                                                                                                                                                                                                                                                       |       |                   |       |                   |       |   |   |   |   |
| Reversal  of actuarial losses from pension plan settlement, net of taxes of $45 for the  nine months ended September 30, 2008                                                                                                                                                         |       | —                 |       | —                 |       | — |   | 87 |   |
|                                                                                                                                                                                                                                                                                       |       |                   |       |                   |       |   |   |   |   |
| Other  comprehensive income (loss)                                                                                                                                                                                                                                                         |       | 2,738                  |       | (322                   | )          | 7,043 |   | (1,447 | ) |
|                                                                                                                                                                                                                                                                                       |       |                   |       |                   |       |   |   |   |   |
| Comprehensive  income (loss)                                                                                                                                                                                                                                                               |       | $                      | 3,251      |                   | $          | 337 |   | $ | 8,455 |   | $ | (139 | ) |

 

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**NOTE 10 — ACCOUNTING PRONOUNCEMENTS**

 

In June 2009, theFASB issued guidance that establishes the *FASBAccounting Standards Codification*TM (the “Codification” or “ASC”) as the source ofauthoritative U.S. generally accepted accounting principles (“U.S. GAAP”)recognized by the FASB for nongovernmental entities. Rules andinterpretive releases of the Securities and Exchange Commission (“SEC”) underauthority of federal securities laws are also included in the Codification assources of authoritative U.S. GAAP for SEC registrants. SFAS No. 168 andthe Codification are effective for financial statements issued for interim andannual periods ending after September 15, 2009.  TheCodification supersedes all existing non-SEC accounting and reportingstandards. Following Statement 168, instead of issuing new standards in theform of Statements, FASB Staff Positions, or Emerging Issues Task ForceAbstracts, the FASB issues Accounting Standards Updates, which serves only to: (a) updatethe Codification; (b) provide background information about the guidance;and (c) provide the bases for conclusions on the change(s) in theCodification. The Company started following the guidelines in the Codificationon July 1, 2009.

 

In May 2009, theFASB issued guidance (ASC 855) that establishes general standards of accountingfor and disclosure of events that occur after the balance sheet date but beforefinancial statements are issued or are available to be issued.  The statement sets forth (1) the periodafter the balance sheet date during which management of a reporting entityshould evaluate events or transactions that may occur for potential recognitionor disclosure in the financial statements; (2) the circumstances underwhich an entity should recognize events or transactions occurring after thebalance sheet date in its financial statements and (3) the disclosure thatan entity should make about events or transactions that occurred after thebalance sheet date.  ASC 855 is effectivefor fiscal years and interim periods ending after June 15, 2009, and shallbe applied prospectively.  The Companyadopted this guidance as of June 30, 2009 and such adoption did not havean impact on the results of operations or financial position.  The Company has evaluated subsequent eventsthrough November 6, 2009.

 

In April 2009, theFASB issued guidance (ASC 825-10-50) to require disclosures about fair value offinancial instruments for interim reporting periods of publicly tradedcompanies as well as in annual financial statements.  All publicly traded companies are required toinclude disclosures about the fair value of its financial instruments wheneverit issues summarized financial information for interim reporting periods.  ASC 825-10-50 is effective for interimreporting periods ending after June 15, 2009.  The Company adopted this guidance as June 30,2009 and has made the required disclosures in Note 8 of this Form 10-Q.

 

In April 2009, theFASB issued guidance (ASC 320-10-35) to amend the other-than-temporaryimpairment guidance for debt securities. ASC 320-10-35 is effective for interim and annual reporting periodsending after June 15, 2009, with early adoption permitted for periodsending after March 15, 2009.  Asdiscussed in Note 2, the Company adopted this guidance as of June 30,2009.  Since the Company has not had anyother-than-temporary impairment as of March 31, 2009, no cumulative-effectadjustments were required to be recorded at adoption.

 

In April 2009, theFASB issued guidance (ASC 320-10-35-15A) to provide additional guidance forestimating fair value, when the volume and level of activity for the asset orliability have significantly decreased. ASC 320-10-35-15A is effective for interim and annual reporting periodsending after June 15, 2009, and shall be applied prospectively.   The Company adopted this guidance as of June 30,2009 and such adoption did not have an impact on the results of operations orfinancial position.

 

In March 2008, theFASB issued guidance (ASC 815), which changes the disclosure requirements forderivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) howand why an entity uses derivative instruments, (b) how derivativeinstruments and related hedged items are accounted for, and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows.  ASC 815 is effective for financial statementsissued for fiscal years and interim periods beginning after November 15,2008, with early application encouraged. The Company adopted this guidance inthe first quarter of 2009.  Theadditional disclosure required regarding the Bank’s one interest rate swapagreement has been provided in Note 3 — Loans.

 

In June 2009, theFASB issued guidance (ASC 860), which amends the derecognition guidance andeliminates the concept of qualifying special-purpose entities (“QSPEs”). ASC860 is effective for fiscal years and interim periods beginning after November 15,2009. Early adoption is prohibited. The Company will adopt this guidance on January 1,2010 and has not yet determined the effect of the adoption on its consolidatedfinancial statements.

 

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In June 2009, theFASB issued guidance (ASC 810), which amends the consolidation guidanceapplicable to variable interest entities (“VIEs”). An entity would consolidatea VIE, as the primary beneficiary, when the entity has both of the followingcharacteristics: (a) the power to direct the activities of a VIE that mostsignificantly impact the entity’s economic performance and (b) theobligation to absorb losses of the entity that could potentially be significantto the VIE or the right to receive benefits from the entity that couldpotentially be significant to the VIE.

 

Ongoing reassessment ofwhether an enterprise is the primary beneficiary of a VIE is required. ASC 810amends the guidance to eliminate the quantitative approach previously requiredfor determining the primary beneficiary of a VIE. ASC 810 is effective forfiscal years and interim periods beginning after November 15, 2009. TheCompany will adopt this guidance on January 1, 2010 and has not yetdetermined the effect of the adoption on its consolidated financial statements.

 

**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**Forward-Looking Statements**

 

This quarterly reportcontains forward-looking statements that are based on assumptions and maydescribe future plans, strategies and expectations of the Company. Theseforward-looking statements are generally identified by use of the words “believe,”“expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions.The Company’s ability to predict results or the actual effect of future plansor strategies is inherently uncertain. Factors which could have a materialadverse effect on the operations of the Company 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 the Company’s market area, changes in real estate marketvalues in the Company’s market area, changes in relevant accounting principlesand guidelines and the inability of third party service providers to performtheir functions.  Additional factors thatmay affect our results are discussed in the section titled “Risk Factors” inthe Company’s Annual Report on Form 10-K, as filed with the Securities andExchange Commission on March 12, 2009, and its other Securities andExchange Commission reports.

 

These risks anduncertainties should be considered in evaluating forward-looking statements andundue reliance should not be placed on such statements. Except as required byapplicable law or regulation, the Company does not undertake, and specificallydisclaims any obligation, to release publicly the result of any revisions thatmay be made to any forward-looking statements to reflect events orcircumstances after the date of the statements or to reflect the occurrence ofanticipated or unanticipated events.

 

**Critical Accounting Policies**

 

We consider accounting policies involving significant judgments andassumptions by management that have, or could have, a material impact on thecarrying value of certain assets or on income to be critical accountingpolicies. We consider the following to be our critical accounting policies:allowance for loan losses, valuation and other-than-temporary impairment ofsecurities, and deferred income taxes.

 

***Allowance for Loan Losses.*** The allowance for loan losses ismaintained at a level representing management’s best estimate of known and inherentlosses in the loan portfolio, based on management’s evaluation of the portfolio’scollectibility. The allowance is established through the provision for loanlosses, which is charged against income. Determining the amount of theallowance for loan losses necessarily involves a high degree of judgment. Amongthe material estimates required to establish the allowance are: probability ofdefault, loss exposure at default; the amount and timing of future cash flowson impacted loans; value of collateral; and determination of loss factors to beapplied to the various elements of the portfolio. All of these estimates aresusceptible 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 size and composition of the portfolio, lossexperience in particular segments of the portfolio, trends and absolute levelsof nonperforming loans, trends and absolute levels of classified and criticizedloans, trends and absolute levels in delinquent loans, trends in risk ratings,actual charge-offs, trends in industry charge-offs by particular segments andchanges in local and national economic and business conditions.  Although we believe that we use the bestinformation available to establish the allowance for loan losses, futureadjustments to the allowance may be necessary if economic conditions differsubstantially from the assumptions used in making the evaluation. Further,current economic conditions have increased the uncertainty inherent in theseestimates and assumptions.  In addition,the Office of Thrift Supervision, as an integral part of its examinationprocess, periodically reviews our allowance for loan losses. Such agency mayrequire us to recognize adjustments to the allowance based on its judgmentsabout information available to it at the time of its examination. A large losscould deplete the allowance and require increased provisions to replenish theallowance, which would negatively affect earnings.

 

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***Valuation and Other-Than-Temporary Impairment of InvestmentSecurities***.Financial reporting guidance requirescompanies 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 to sell the security or if it ismore likely than not that the security will be required to be sold beforerecovery of its amortized cost. Pursuant to these requirements, we assessvaluation declines to determine the extent to which such changes areattributable to (1) fundamental factors specific to the issuer, such asfinancial condition, business prospects or other factors, or (2) market-relatedfactors, such as required market yields, interest rates or equity marketdeclines. If the decline in the market value of a security is determined to beother-than-temporary, the security is written down by the amount of thedetermined credit loss, recognizing the decline as a realized loss on theincome statement.  The Company recordedan other-than-temporary credit impairment charge of $157,000 during the secondquarter of 2009.  There was no additionalother-than-temporary credit impairment charge on this investment in the thirdquarter of 2009.  See Note 2 to theconsolidated financial statements for a schedule that shows gross unrealizedlosses, fair value of securities as well as the impairment loss andother-than-temporary impairment write down, aggregated by security category andlength of time that individual securities have been in a continuous unrealizedloss position at September 30, 2009 and December 31, 2008, and Note 8for a discussion related to the determination of fair value.

 

***Deferred Income Taxes.*** We use theasset and liability method of accounting for income.  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. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. We exercise significant judgment in evaluating the amountand timing of recognition of the resulting tax liabilities and assets. Thesejudgments require us to make projections of future taxable income. Thejudgments and estimates we make in determining our deferred tax assets, whichare inherently subjective, are reviewed on a continual basis as regulatory andbusiness factors change. Any reduction in estimated future taxable income mayrequire us to record a valuation allowance against our deferred tax assets.Specifically, the Company had a charitable contribution carryover of $599,000as of September 30, 2009, resulting in a deferred tax asset of$204,000.  The charitable contributioncarryover was $999,000, with a resulting deferred tax asset of $340,000 as of December 31,2008.  Utilization of this carryover islimited to 10% of taxable income on an annual basis. Such carryover will expireon December 31, 2011, if not utilized. If the Company is unable togenerate sufficient taxable income to utilize this carryover it may require usto record a valuation allowance against this deferred tax asset.  Any valuation allowance would result in additionalincome tax expense in the period, which would negatively affect earnings.

 

**Comparison of Financial Condition at September 30, 2009and December 31, 2008**

 

Total assets increased$255.0 million, or 27.4%, to $1.19 billion at September 30, 2009, comparedto $931.3 million at December 31, 2008.  Cash and cash equivalents increased $54.2 million fromDecember 31, 2008 to September 30, 2009 as excess funds from depositinflows were invested in interest-earning demand deposits in other banks.  Loans increased $47.8 million from December 31,2008 to September 30, 2009. Commercial and commercial real estate loansincreased $58.6 million as we continue our strategic initiative to increase ourcommercial loan portfolio, while commercial construction loans decreased by$13.2 million as we de-emphasized construction lending during the past twoquarters. Additionally, our one- to four-family real estate loans increased$7.8 million offset by a $3.2 million decrease in consumer loans.  The modest increase in one-to four-familyreal estate loans was due to increased originations through our correspondentrelationships, while the decrease in consumer loans was due to the Company’sdecision to de-emphasize these types of loans as a result of the currenteconomic environment.  Mortgage relatedsecurities available-for-sale increased $145.3 million, primarily due to anincrease in agency residential mortgage related securities.  Investment related securities available forsale increased $2.2 million, primarily due to an increase in corporatesecurities, offset by a decrease in securities of state and politicalsubdivisions.  All of the increases inassets were directly funded by the increase in deposits.

 

Depositsincreased $252.0 million, or 41.4%, from $608.5 at December 31, 2008 to$860.5 million at September 30, 2009. Certificates of deposits increased$166.0 million, or 44.4%, and money market accounts increased $75.9 million, or74.9% from December 31, 2008 to September 30, 2009.  During March 2009, the Bank offeredattractive rates on selected money market and certificate of deposit productsto increase its market share resulting in approximately 6,500 new depositaccounts representing greater than $200 million in deposits, of whichapproximately 50% were new customers.  In addition to the deposits obtained during the first quarter, the Bankcontinued to increase deposits during the second and third quarters of 2009 asit maintained competitive rates on money market and certificate of depositaccounts during these periods.  TheCompany has gradually reduced interest rates on deposits during the thirdquarter of 2009.  The Company continuesto invest these funds in loans to qualified businesses and consumers.

 

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Stockholders’ equityincreased $5.7 million to $126.9 million at September 30, 2009 compared to$121.2 million at December 31, 2008 primarily due to unrealized gains, netof taxes, on the investment portfolio of $7.0 million and net income of $1.4million offset by the repurchase of 387,272 shares of common stock at a cost of$3.8 million.

 

**Comparison of Operating Results for the Three and Nine MonthsEnded September 30, 2009 and 2008**

 

***General.***Net incomedecreased $146,000, or 22.2%, to $513,000 for the three months ended September 30,2009, compared to $659,000 for the three months ended September 30,2008.  The decrease in net income wasprimarily the result of an increase in the loan loss provision of $950,000 andan increase of $465,000 in noninterest expense, offset by an increase in netinterest income of $264,000, an increase in noninterest income of $964,000 anda decrease in income taxes of $41,000.  Noninterest expense for the three monthsended September 30, 2009 included a $317,000 increase in the FederalDeposit Insurance Corporation premiums related to the current year assessmentcompared to the same quarter in the prior year. The increase in noninterest income was primarily related to the gain onsale of securities of $958,000 in the third quarter of 2009.

 

Netincome increased $104,000, or 8.0%, to $1.4 million for the nine months ended September 30,2009 from $1.3 million for the nine months ended September 30, 2008, primarily due to an increase in netinterest income of $1.4 million and an increase in noninterest income of $1.5million, offset by an increase in the provision for loan losses of $1.5million, an increase in noninterest expense of $1.2 million, and an increase inincome tax expense of $98,000. The increase in noninterest income of $1.5million was primarily the result of gains on the sales of securities of $1.5million offset by an other-than-temporary impairment loss recognized on aprivate label residential mortgage related security in the amount of $157,000during the second quarter of 2009.  TheBank also had a net reduction in the valuation allowance on the mortgageservicing rights in the amount of $57,000. The increase in noninterest expenseof $1.2 million includes an increase of $1.3 million in Federal DepositInsurance Corporation premiums which is due to (1) a special assessment of$536,000 during the second quarter of 2009, (2) the Bank’s prior creditbeing fully utilized in the fourth quarter of 2008 resulting in an increasedcost of $222,000 in 2009 and (3) increases associated with higher depositpremium rates and higher average deposit balances.  Noninterest expense for the nine months endedSeptember 30, 2008 included an expense of $297,000 associated with finaldistributions from the Company’s terminated pension plan in the second quarterof 2008.

 

***Net Interest Income*****.**Net interest incomeincreased $264,000, or 4.5%, during the three months ended September 30,2009, compared to the same period in 2008 primarily due to an increase in totalinterest income of $1.7 million offset by a $1.5 million increase in totalinterest expense.  The increase in total interest income wasprimarily due to an increase in average total interest earning assets of $327.0million, offset by a decrease in the average yield on interest-earning assetsfrom 5.54% to 4.56%. The increase in average balances of interest-earningassets was primarily due to: (1) an increase in the average balance ofloans of $83.1 million year over year primarily related to the Company’s focuson increasing its levels of commercial lending; (2) an increase in theaverage balance of mortgage related securities of $144.2 million year over yearand (3) an increase in the average balance of interest-earning demanddeposits of $68.3 million and money market funds of $23.8 million year overyear, both a result of excess funds from deposit inflows.  The decrease in yield on interest-earningassets was primarily due to a reduction in overall interest rates from 2008 to2009 as well as a mix shift from higher-yielding loans to lower-yieldingmortgage-related securities, interest earning deposits and money market funds.

 

The increase in totalinterest expense was primarily due to an increase in the average balances ofinterest-bearing liabilities of $313.3 million offset by a decrease in theaverage cost on interest bearing-liabilities from 3.31% to 2.85%.  The increase in the average balance ofinterest-bearing liabilities was primarily due to an increase in the averagebalance of interest-bearing deposits of $271.1 million, an increase in theaverage balance of other borrowed funds of $27.9 million as well as an increase of $14.3 million in the averagebalance of Federal Home Loan Bank advances. The increase in the average balance of interest-bearing deposits wasprimarily the result of the previously discussed promotion offered by the Bankin the first quarter of 2009 as well as maintaining competitively high rates onmoney market accountsthroughout the second and third quarters of 2009. The decrease in average coston interest bearing-liabilities was primarily due to reduction in overallinterest rates from 2008 to 2009.

 

Net interest incomeincreased $1.4 million, or 9.0%, to $17.3 million for the nine months ended September 30,2009 compared to the same period in 2008 primarily due to an increase in totalinterest income of  $4.3 million offsetby a $2.9 million increase in total interest expense. The increase in totalinterest income was primarily due to an increase in average total interestearning assets of $245.3 million, offset by a decrease in the average yield oninterest-earning assets from 5.45% to 4.73%. The increase in average balances of interest-earning assets wasprimarily due to: (1) an increase in the average balance of loans of$121.4 million year over year primarily related to the Company’s focus onincreasing its levels of commercial lending; (2) an increase in theaverage balance of mortgage related securities of $86.1 million year over yearand (3) an increase in the average balance of interest-earning demanddeposits of $32.3 million and money market funds of $15.2 million year overyear, both a result of excess funds from deposit inflows. The decrease in yieldon interest-earning assets was primarily due to a reduction in overall

 

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interest rates from 2008to 2009, as well as a shift from higher-yielding loans to lower-yieldingmortgage-related securities, interest earning deposits and money markets funds.

 

The increase in netinterest expense was primarily due to an increase in the average balances ofinterest-bearing liabilities of $238.2 million offset by a decrease in theaverage cost on interest bearing-liabilities from 3.50% to 3.02%.  The increase in the average balance ofinterest-bearing liabilities was primarily due to an increase in the averagebalance of interest-bearing deposits of $182.3 million, an increase in theaverage balance of other borrowed funds of $29.6 million as well as an increasein the average balance of Federal Home Loan Bank advances of $26.3.  The increase in the average balance ofinterest-bearing deposits was primarily the result of the previously discussedpromotion offered by the Bank in the first quarter of 2009, as well asmaintaining competitively high rates on money market accounts throughout the second and third quartersof 2009. The decrease in average cost on interest bearing-liabilities wasprimarily due to reduction in overall interest rates from 2008 to 2009.

 

The following tablesummarizes average balances and average yields and costs of interest-earningassets and interest-bearing liabilities for the three and nine months ended September 30,2009 and 2008. Yields are not presented on a tax-equivalent basis. Anyadjustments necessary to present yields on a tax-equivalent basis areinsignificant.

 

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|------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|------------|------------|-------------|------------|---------------|------------|------------|------------|-------------|------------|---------------|------------|------------|------------|-------------|------------|---------------|------------|------------|------------|
| ** **                                                             | ** ** | **Three  Months Ended September 30,** | ** ** | **Nine  Months Ended September 30,** | ** ** |
| ** **                                                             | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009**   | ** ** | **2008**    | ** ** |
| ** **                                                             | ** ** | ** **                                 | ** ** | **Interest**                              | ** ** | ** ** | ** ** | ** **  | ** ** | **Interest**  | ** ** | ** ** | ** ** | ** **  | ** ** | **Interest**  | ** ** | ** ** | ** ** | ** **  | ** ** | **Interest**  | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **Average**                                | ** ** | **and**                                   | ** ** | **Yield/** | ** ** | **Average** | ** ** | **and**       | ** ** | **Yield/** | ** ** | **Average** | ** ** | **and**       | ** ** | **Yield/** | ** ** | **Average** | ** ** | **and**       | ** ** | **Yield/** | ** ** |
| ** **                                                             | ** ** | **Balance**                                | ** ** | **Dividends**                             | ** ** | **Cost**   | ** ** | **Balance** | ** ** | **Dividends** | ** ** | **Cost**   | ** ** | **Balance** | ** ** | **Dividends** | ** ** | **Cost**   | ** ** | **Balance** | ** ** | **Dividends** | ** ** | **Cost**   | ** ** |
| ** **                                                             | ** ** | **(Dollars  in thousands)**                | ** ** | **(Dollars  in thousands)**               | ** ** |
| Assets:                                                                |       |                                       |       |                                      |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |
| Interest-earning assets:                                               |       |                                       |       |                                      |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |
| Interest-earning demand deposits                                       |       | $                                          | 76,140     |                                      | $          | 290        |       | 1.51        | %          | $             | 7,830      |       | $          | 17          |       | 0.84          | %          | $          | 42,065     |        | $          | 426           |       | 1.35       | %          | $ | 9,749 |   | $ | 124 |   | 1.70 | % |
| Money market funds                                                     |       | 23,842                                     |       | 23                                        |       | 0.39       | %          | 2           |       | —        |       | 2.42       | %          | 36,753      |       | 183           |       | 0.67       | %          | 21,515      |       | 521           |       | 3.23       | %          |
| Mortgage-related securities                                            |       | 389,715                                    |       | 3,975                                     |       | 4.08       | %          | 245,497     |       | 3,138         |       | 5.11       | %          | 334,331     |       | 10,735        |       | 4.28       | %          | 248,184     |       | 9,248         |       | 4.97       | %          |
| Taxable securities                                                     |       | 32,865                                     |       | 238                                       |       | 2.89       | %          | 18,474      |       | 190           |       | 4.12       | %          | 28,865      |       | 624           |       | 2.88       | %          | 32,775      |       | 1,069         |       | 4.35       | %          |
| Nontaxable securities                                                  |       | 11,028                                     |       | 107                                       |       | 3.87       | %          | 14,558      |       | 146           |       | 4.02       | %          | 12,916      |       | 390           |       | 4.02       | %          | 15,707      |       | 469           |       | 3.98       | %          |
| Loans (1):                                                             |       |                                       |       |                                      |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |
| Residential loans                                                      |       | 267,347                                    |       | 3,515                                     |       | 5.26       | %          | 248,333     |       | 3,525         |       | 5.68       | %          | 265,322     |       | 10,942        |       | 5.50       | %          | 231,635     |       | 9,838         |       | 5.66       | %          |
| Commercial loans                                                       |       | 288,626                                    |       | 4,129                                     |       | 5.60       | %          | 221,723     |       | 3,494         |       | 6.17       | %          | 278,234     |       | 11,727        |       | 5.56       | %          | 188,227     |       | 9,254         |       | 6.46       | %          |
| Consumer loans                                                         |       | 72,850                                     |       | 1,054                                     |       | 5.79       | %          | 75,634      |       | 1,087         |       | 5.75       | %          | 74,363      |       | 3,164         |       | 5.67       | %          | 76,673      |       | 3,323         |       | 5.78       | %          |
| Total Loans                                                            |       | 628,823                                    |       | 8,698                                     |       | 5.48       | %          | 545,690     |       | 8,106         |       | 5.89       | %          | 617,919     |       | 25,833        |       | 5.55       | %          | 496,535     |       | 22,415        |       | 5.98       | %          |
| Allowance for loan losses                                              |       | (7,255                                     | )          |                                      |       |       |       | (3,895      | )          |          |       |       |       | (6,772      | )          |          |       |       |       | (3,643      | )          |          |       |       |       |
| Net loans                                                              |       | 621,568                                    |       | 8,698                                     |       |       |       | 541,795     |       | 8,106         |       |       |       | 611,147     |       | 25,833        |       |       |       | 492,892     |       | 22,415        |       |       |       |
| Total interest-earning assets                                          |       | 1,155,158                                  |       | 13,331                                    |       | 4.56       | %          | 828,156     |       | 11,597        |       | 5.54       | %          | 1,066,077   |       | 38,191        |       | 4.73       | %          | 820,822     |       | 33,846        |       | 5.45       | %          |
| Noninterest-earning assets                                             |       | 38,723                                     |       |                                      |       |       |       | 36,101      |       |          |       |       |       | 37,496      |       |          |       |       |       | 36,579      |       |          |       |       |       |
| Total assets                                                           |       | $                                          | 1,193,881  |                                      |       |       |       |        | $          | 864,257       |       |       |       |        |       | $             | 1,103,573  |       |       |        |       |          | $          | 857,401    |       |   |   |   |   |
| Liabilities and equity:                                                |       |                                       |       |                                      |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |
| Interest-bearing liabilities:                                          |       |                                       |       |                                      |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |
| NOW and money market deposit accounts                                  |       | $                                          | 214,489    |                                      | 778        |       | 1.44       | %           | $          | 113,013       |       | 581        |       | 2.04        | %          | $             | 177,110    |       | 2,257      |        | 1.70       | %             | $          | 101,902    |       | 1,571 |   | 2.06 | % |
| Savings accounts                                                       |       | 50,769                                     |       | 19                                        |       | 0.15       | %          | 52,910      |       | 33            |       | 0.25       | %          | 51,451      |       | 70            |       | 0.18       | %          | 53,279      |       | 126           |       | 0.32       | %          |
| Certificates of deposit                                                |       | 545,680                                    |       | 4,681                                     |       | 3.40       | %          | 373,883     |       | 3,731         |       | 3.97       | %          | 497,724     |       | 13,249        |       | 3.56       | %          | 388,788     |       | 12,307        |       | 4.23       | %          |
| Total interest-bearing deposits                                        |       | 810,938                                    |       | 5,478                                     |       | 2.68       | %          | 539,806     |       | 4,345         |       | 3.20       | %          | 726,285     |       | 15,576        |       | 2.87       | %          | 543,969     |       | 14,004        |       | 3.44       | %          |
| FHLB advances                                                          |       | 143,886                                    |       | 1,333                                     |       | 3.63       | %          | 129,554     |       | 1,230         |       | 3.72       | %          | 145,118     |       | 3,992         |       | 3.63       | %          | 118,843     |       | 3,380         |       | 3.74       | %          |
| Other borrowed funds                                                   |       | 50,142                                     |       | 437                                       |       | 3.41       | %          | 22,278      |       | 203           |       | 3.57       | %          | 50,378      |       | 1,298         |       | 3.40       | %          | 20,759      |       | 567           |       | 3.59       | %          |
| Total borrowings                                                       |       | 194,028                                    |       | 1,770                                     |       | 3.57       | %          | 151,832     |       | 1,433         |       | 3.69       | %          | 195,496     |       | 5,290         |       | 3.57       | %          | 139,602     |       | 3,947         |       | 3.72       | %          |
| Total interest-bearing liabilities                                     |       | 1,004,966                                  |       | 7,248                                     |       | 2.85       | %          | 691,638     |       | 5,778         |       | 3.31       | %          | 921,781     |       | 20,866        |       | 3.02       | %          | 683,571     |       | 17,951        |       | 3.50       | %          |
| Noninterest-bearing deposits                                           |       | 53,054                                     |       |                                      |       |       |       | 47,439      |       |          |       |       |       | 49,197      |       |          |       |       |       | 46,065      |       |          |       |       |       |
| Other noninterest-bearing liabilities                                  |       | 10,195                                     |       |                                      |       |       |       | 4,336       |       |          |       |       |       | 8,521       |       |          |       |       |       | 5,586       |       |          |       |       |       |
| Total liabilities                                                      |       | 1,068,215                                  |       |                                      |       |       |       | 743,413     |       |          |       |       |       | 979,499     |       |          |       |       |       | 735,222     |       |          |       |       |       |
| Retained earnings                                                      |       | 119,959                                    |       |                                      |       |       |       | 121,738     |       |          |       |       |       | 120,788     |       |          |       |       |       | 121,835     |       |          |       |       |       |
| Accumulated comprehensive income                                       |       | 5,707                                      |       |                                      |       |       |       | (894        | )          |          |       |       |       | 3,286       |       |          |       |       |       | 344         |       |          |       |       |       |
| Total stockholder’s equity                                        |       | 125,666                                    |       |                                      |       |       |       | 120,844     |       |          |       |       |       | 124,074     |       |          |       |       |       | 122,179     |       |          |       |       |       |
| Total liabilities and stockholders’ equity                        |       | $                                          | 1,193,881  |                                      |       |       |       |        | $          | 864,257       |       |       |       |        |       | $             | 1,103,573  |       |       |        |       |          | $          | 857,401    |       |   |   |   |   |
|                                                                   |       |                                       |       |                                      |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |
| Net interest income                                                    |       |                                       |       | $                                         | 6,083      |       |       |        |       |          | $          | 5,819      |       |        |       |          |       | $          | 17,325     |        |       |          |       |       | $          | 15,895 |   |   |   |
| Interest rate spread                                                   |       |                                       |       |                                      |       | 1.71       | %          |        |       |          |       | 2.23       | %          |        |       |          |       | 1.71       | %          |        |       |          |       | 1.95       | %          |
| Net interest margin                                                    |       |                                       |       |                                      |       | 2.09       | %          |        |       |          |       | 2.79       | %          |        |       |          |       | 2.14       | %          |        |       |          |       | 2.55       | %          |
| Average interest-earning assets to averageinterest-bearing liabilities |       |                                       |       |                                      |       | 114.95     | %          |        |       |          |       | 119.74     | %          |        |       |          |       | 115.65     | %          |        |       |          |       | 120.08     | %          |

 

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(1) Nonperformingloans are included in average balance computations

 

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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.  For purposesof this table, changes attributable to changes in both rate and volume thatcannot be segregated have been allocated proportionally based on the changesdue to rate and the changes due to volume.

 
| ** **                          | ** ** | **Three Months Ended  September 30, 2009  Compared to  Three Months Ended  September 30, 2008** | ** ** | **Nine Months Ended  September 30, 2009  Compared to  Nine Months Ended  September 30, 2008** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Increase (Decrease)**                                                                                   | ** ** | ** **                                                                                              | ** ** | **Increase (Decrease)** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Due to**                                                                                                | ** ** | ** **                                                                                              | ** ** | **Due to** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Rate**                                                                                                  | ** ** | **Volume**                                                                                              | ** ** | **Net** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Net** | ** ** |
|                                |       |                                                                                                      |       |                                                                                                    |       |   |   |   |   |   |   |   |   |
| Interest  and dividend income:      |       |                                                                                                      |       |                                                                                                    |       |   |   |   |   |   |   |   |   |
| Interest-earning  demand deposits   |       | $                                                                                                         | 130        |                                                                                                    | $          | 143 |   | $ | 273 |   | $ | (110 | ) | $ | 412 |   | $ | 302 |   |
| Money  market funds                 |       | (121                                                                                                      | )          | 144                                                                                                     |       | 23 |   | (706 | ) | 368 |   | (338 | ) |
| Mortgage  related securities        |       | (1,006                                                                                                    | )          | 1,843                                                                                                   |       | 837 |   | (1,723 | ) | 3,210 |   | 1,487 |   |
| Taxable  securities                 |       | (101                                                                                                      | )          | 149                                                                                                     |       | 48 |   | (318 | ) | (127 | ) | (445 | ) |
| Nontaxable  securities              |       | (4                                                                                                        | )          | (35                                                                                                     | )          | (39 | ) | 4 |   | (83 | ) | (79 | ) |
| Loans:                              |       |                                                                                                      |       |                                                                                                    |       |   |   |   |   |   |   |   |   |
| Residential  loans                  |       | (280                                                                                                      | )          | 270                                                                                                     |       | (10 | ) | (326 | ) | 1,430 |   | 1,104 |   |
| Commercial  loans                   |       | (420                                                                                                      | )          | 1,055                                                                                                   |       | 635 |   | (1,952 | ) | 4,425 |   | 2,473 |   |
| Consumer  loans                     |       | 7                                                                                                         |       | (40                                                                                                     | )          | (33 | ) | (60 | ) | (99 | ) | (159 | ) |
| Total  loans                        |       | (693                                                                                                      | )          | 1,285                                                                                                   |       | 592 |   | (2,338 | ) | 5,756 |   | 3,418 |   |
| Total  interest-earning assets      |       | (1,795                                                                                                    | )          | 3,529                                                                                                   |       | 1,734 |   | (5,191 | ) | 9,536 |   | 4,345 |   |
|                                |       |                                                                                                      |       |                                                                                                    |       |   |   |   |   |   |   |   |   |
| Interest  Expense:                  |       |                                                                                                      |       |                                                                                                    |       |   |   |   |   |   |   |   |   |
| NOW  and money market deposits      |       | (325                                                                                                      | )          | 522                                                                                                     |       | 197 |   | (473 | ) | 1,159 |   | 686 |   |
| Savings  accounts                   |       | (13                                                                                                       | )          | (1                                                                                                      | )          | (14 | ) | (51 | ) | (5 | ) | (56 | ) |
| Certificates  of deposit            |       | (763                                                                                                      | )          | 1,713                                                                                                   |       | 950 |   | (2,507 | ) | 3,449 |   | 942 |   |
| Total  interest-bearing deposits    |       | (1,101                                                                                                    | )          | 2,234                                                                                                   |       | 1,133 |   | (3,031 | ) | 4,603 |   | 1,572 |   |
|                                |       |                                                                                                      |       |                                                                                                    |       |   |   |   |   |   |   |   |   |
| FHLB  advances                      |       | (33                                                                                                       | )          | 136                                                                                                     |       | 103 |   | (135 | ) | 747 |   | 612 |   |
| Other  borrowed funds               |       | (20                                                                                                       | )          | 254                                                                                                     |       | 234 |   | (78 | ) | 809 |   | 731 |   |
| Total  borrowings                   |       | (53                                                                                                       | )          | 390                                                                                                     |       | 337 |   | (213 | ) | 1,556 |   | 1,343 |   |
| Total  interest-bearing liabilities |       | (1,154                                                                                                    | )          | 2,624                                                                                                   |       | 1,470 |   | (3,244 | ) | 6,159 |   | 2,915 |   |
|                                |       |                                                                                                      |       |                                                                                                    |       |   |   |   |   |   |   |   |   |
| Net  change in net interest income  |       | $                                                                                                         | (641       | )                                                                                                       | $          | 905 |   | $ | 264 |   | $ | (1,947 | ) | $ | 3,377 |   | $ | 1,430 |   |

 

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***Provision for Loan Losses*****.** The Company recorded a provision forloan losses of $1.5 million and $2.4 million for the three and nine monthsended September 30, 2009, respectively, compared to $500,000 and $900,000for the three and nine months ended September 30, 2008, respectively.  The increase in the provision reflected loangrowth, primarily in commercial categories, and an increase in nonperforming,delinquent and internally classified loans in both the residential andcommercial loan portfolios.

 

The following table providesinformation with respect to the Bank’s nonperforming assets at the datesindicated.

 
| ** **                                  | ** ** | **At September 30,** | ** ** | **At December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **2009**                       | ** ** | **2008**                      | ** ** |
| ** **                                  | ** ** | **(Dollars  in thousands)**    | ** ** |
|                                        |       |                           |       |                          |       |
| Nonaccrual  loans:                          |       |                           |       |                          |       |
| One-  to four-family                        |       | $                              | 6,474      |                          | $          | 1,503 |   |
| Multi-family  and commercial real estate    |       | 1,773                          |       | 685                           |       |
| Construction                                |       | 7,220                          |       | 3,495                         |       |
| Consumer                                    |       | 349                            |       | 167                           |       |
|                                        |       |                           |       |                          |       |
| Total                                       |       | 15,816                         |       | 5,850                         |       |
|                                        |       |                           |       |                          |       |
| Accruing  loans past due 90 days or more    |       | 400                            |       | —                        |       |
|                                        |       |                           |       |                          |       |
| Real  estate owned                          |       | —                         |       | —                        |       |
|                                        |       |                           |       |                          |       |
| Total  nonperforming assets                 |       | $                              | 16,216     |                          | $          | 5,850 |   |
|                                        |       |                           |       |                          |       |
| Total  nonperforming loans to total loans   |       | 2.51                           | %          | 0.98                          | %          |
| Total  nonperforming loans to total assets  |       | 1.37                           |       | 0.63                          |       |
| Total  nonperforming assets to total assets |       | 1.37                           |       | 0.63                          |       |

 

Nonperforming assetsincreased a total of $10.3 million to $16.2 million at September 30, 2009from $5.9 million at December 31, 2008. This increase was primarily aresult of the following groups of loans being placed on nonaccrual during thenine months ended September 30, 2009: (1) three commercialconstruction loans, primarily related to residential housing developments,totaling $4.0 million, (2) three commercial real estate loans totaling$1.1 million and (3) one- to four-family loans increasing by $5.0 million,primarily due to one loan totaling $4.3 million.

 

At September 30,2009, there were a total of four commercial construction loans totaling $7.2million on nonaccrual status.  Thelargest nonaccrual construction loan is a $3.2 million loan collateralized by aresidential housing development located in Atlantic County, New Jersey.  The other three nonaccrual construction loanstotal $4.0 million and are collateralized by a condominium project located inPhiladelphia County, Pennsylvania; a residential development located in MontgomeryCounty, Pennsylvania; and a single house located in Ocean County, New Jersey.

 

At September 30,2009, there were four multi-family and commercial real estate loans totaling$1.8 million on nonaccrual status. The largest single loan totaling $516,000 issecured by a commercial business located in Ocean City, New Jersey.

 

At September 30,2009, there were ten one- to four-family loans totaling $6.5 million onnonaccrual status at September 30, 2009 compared to eight one-tofour-family loans totaling $1.5 million on nonaccrual status at December 31,2008. The largest nonaccrual one- to four-family loan was the previouslymentioned $4.3 million loan which is secured by a residential home located inSomerset County, New Jersey.  Of theremaining nine one- to four-family loans on nonaccrual status at September 30,2009, five are located in Atlantic County, New Jersey, three in Bucks County,Pennsylvania and one in Philadelphia County, Pennsylvania.

 

Impaired loans requiringan allowance for loan losses increased $9.8 million to $16.2 million at September 30,2009 compared to $6.4 million at December 31, 2008.  The related allowance for loan lossesassociated with these loans was $1.9 million at September 30, 2009compared to $1.0 million at December 31, 2008.  The increase is consistent with thepreviously described increase in the levels of nonaccrual loans.

 

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Thefollowing table provides information about delinquencies in our loan portfolioat the dates indicated.

 
| ** **                               | ** ** | **At  September 30, 2009** | ** ** | **At December 31, 2008** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **30-59**                       | ** ** | **60-89**                     | ** ** | **30-59** | ** ** | **60-89** | ** ** |
| ** **                               | ** ** | **Days**                        | ** ** | **Days**                      | ** ** | **Days** | ** ** | **Days** | ** ** |
| ** **                               | ** ** | **Past Due**                    | ** ** | **Past  Due**                 | ** ** | **Past  Due** | ** ** | **Past  Due** | ** ** |
| ** **                               | ** ** | **(In  thousands)**             | ** ** |
|                                     |       |                            |       |                          |       |   |   |   |   |
| Multi-family  and commercial real estate |       | $                               | 8,567      |                          | $          | 41 |   | $ | 766 |   | $ | 337 |   |
| Construction                             |       | —                          |       | 1,035                         |       | — |   | — |   |
| One-  to four-family real estate         |       | 601                             |       | 598                           |       | 104 |   | 92 |   |
| Consumer:                                |       |                            |       |                          |       |   |   |   |   |
| Home  equity loans and lines of credit   |       | 402                             |       | 31                            |       | 63 |   | 83 |   |
| Automobile                               |       | 8                               |       | —                        |       | — |   | — |   |
| Total                                    |       | $                               | 9,578      |                          | $          | 1,705 |   | $ | 933 |   | $ | 512 |   |

 

Total delinquent loansincreased to $11.3 million at September 30, 2009 as compared to $1.4million at December 31, 2008.  Theincrease was primarily due to three commercial real estate loans totaling $8.6million being delinquent at September 30, 2009.  At September 30, 2009, there were atotal of 17 delinquent loans, the largest being a $5.5 million loan secured bya commercial self-storage facility in central New Jersey.

 

The Bank’s loan portfoliohas many loans where the loan is collateralized by either residential homes,residential developments or commercial real estate.  Continued declines in real estate values andhome sales, and an increase in the financial stress on borrowers from anuncertain economic environment, including rising unemployment, could have anadverse effect on our borrowers or their customers, which could adverselyimpact the repayment of individual loans in the loan portfolio.

 

***Noninterest Income*****.**The following table summarizes noninterest income forthe three and nine months ended September 30, 2009 and 2008.

 
| ** **                                                                    | ** ** | **Three  Months  Ended September 30,** | ** ** | **Nine  Months  Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                    | ** ** | **2009**                                    | ** ** | **2008**                                   | ** ** | **$ Change** | ** ** | **%  Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
| ** **                                                                    | ** ** | **(Dollars  in thousands)**                 | ** ** |
| ** **                                                                    | ** ** | ** **                                  | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  charges and other fee income                                         |       | $                                           | 192        |                                       | $          | 218 |   | $ | (26 | ) | (11.9 | )% | $ | 672 |   | $ | 633 |   | $ | 39 |   | 6.2 | % |
| Net  gain (loss) on sale of loans                                             |       | —                                      |       | 6                                          |       | (6 | ) | (100.0 | )% | 3 |   | 10 |   | (7 | ) | (70.0 | )% |
| Income  on bank-owned life insurance                                          |       | 115                                         |       | 114                                        |       | 1 |   | 0.9 | % | 336 |   | 338 |   | (2 | ) | (0.6 | )% |
| Other                                                                         |       | 58                                          |       | 21                                         |       | 37 |   | 176.2 | % | 269 |   | 56 |   | 213 |   | 380.4 | % |
|                                                                          |       |                                        |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  other than temporary impairment loss                                   |       | —                                      |       | —                                     |       | — |   | 0.0 | % | (605 | ) | — |   | (605 | ) | (100.0 | )% |
| Less:  Portion of loss recognized in othercomprehensive income (before taxes) |       | —                                      |       | —                                     |       | — |   | 0.0 | % | 448 |   | — |   | 448 |   | 100.0 | % |
| Net  other-than-temporary impairment loss                                     |       | —                                      |       | —                                     |       | — |   | 0.0 | % | (157 | ) | — |   | (157 | ) | (100.0 | )% |
| Net  gains on sale of investment securities                                   |       | 958                                         |       | —                                     |       | 958 |   | 100.0 | % | 1,546 |   | 118 |   | 1,428 |   | 1210.2 | % |
| Net  investment securities gains                                              |       | 958                                         |       | —                                     |       | 958 |   | 100.0 | % | 1,389 |   | 118 |   | 1,271 |   | 1077.1 | % |
|                                                                          |       |                                        |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Noninterest Income**                                                  |       | $                                           | 1,323      |                                       | $          | 359 |   | $ | 964 |   | 268.5 | % | $ | 2,669 |   | $ | 1,155 |   | $ | 1,514 |   | 131.1 | % |

 

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Noninterest incomeincreased $964,000, or 268.5%, during the three months ended September 30,2009 compared to the same period in 2008. Net investment securities gains increased $958,000 during the thirdquarter of 2009 due to the sale of $30.8 million of corporate and agencyresidential mortgage related securities. Service charges and other fee income decreased $26,000 primarily as aresult of a $20,000 decrease in loan servicing income, including the previouslydiscussed valuation allowance on mortgage servicing rights, compared to thethree months ended September 30, 2008. Other income increased $37,000during the three months ended September 30, 2009 compared to the sameperiod in 2008 as the Bank recorded an increase of $36,000 on its investment inPhiladelphia Mortgage Advisors, Inc.

 

Noninterest incomeincreased $1.5 million, or 131.1%, during the nine months ended September 30,2009 compared to the same period in 2008. Net investment securities gains increased $1.3 million as the Bank recognizeda gain of $1.5 million on the sale of $50.9 million of corporate and agencyresidential mortgage related securities offset by an other-than-temporarycredit impairment loss recognized on a private label residential mortgagerelated security in the amount of $157,000 during the second quarter of2009.  Service charges and other feeincome increased by $39,000 primarily as a result of (1) loan satisfactionfee income from Philadelphia Mortgage Advisors, Inc. increasing $26,000 to$44,000 for the nine months ended September 30, 2009 as compared to$18,000 for the nine months ended September 30, 2008; (2) a $2,000decrease in loan servicing income, including a change in valuation allowance onmortgage servicing rights, compared to the nine months ended September 30,2008 and (3) an increase of $11,000 in deposit fee income. Other incomeincreased $213,000 during the nine-month period as the Bank recorded anincrease of income of $210,000 on its investment in Philadelphia MortgageAdvisors, Inc., primarily due to a higher volume of mortgage bankingactivity and sales during the nine months ended September 30, 2009.

 

***Noninterest Expense*****.** The following table summarizes noninterest expensefor the three and nine months ended September 30, 2009 and 2008.

 
| ** **                                 | ** ** | **Three  Months  Ended September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** | **Nine  Months  Ended September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|------------|------------|-------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | **2009**                                    | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **%  Change**                              | ** ** | **2009**   | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
| ** **                                 | ** ** | **(Dollars  in thousands)**                 | ** ** |
| ** **                                 | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** **        | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries,  benefits and other compensation |       | $                                           | 3,198      |       | $          | 2,928             |       | $                                          | 270        |       | 9.2        | %          | $          | 8,963 |   | $ | 8,790 |   | $ | 173 |   | 2.0 | % |
| Occupancy  expense                         |       | 441                                         |       | 458        |       | (17               | )          | (3.7                                       | )%         | 1,374      |       | 1,412      |       | (38 | ) | (2.7 | )% |
| Furniture  and equipment expense           |       | 170                                         |       | 226        |       | (56               | )          | (24.8                                      | )%         | 571        |       | 669        |       | (98 | ) | (14.6 | )% |
| Data  processing costs                     |       | 384                                         |       | 402        |       | (18               | )          | (4.5                                       | )%         | 1,146      |       | 1,204      |       | (58 | ) | (4.8 | )% |
| Professional  fees                         |       | 267                                         |       | 285        |       | (18               | )          | (6.3                                       | )%         | 831        |       | 863        |       | (32 | ) | (3.7 | )% |
| Marketing  expense                         |       | 72                                          |       | 117        |       | (45               | )          | (38.5                                      | )%         | 242        |       | 337        |       | (95 | ) | (28.2 | )% |
| FDIC  premiums                             |       | 343                                         |       | 26         |       | 317               |       | 1219.2                                     | %          | 1,415      |       | 81         |       | 1,334 |   | 1646.9 | % |
| Other                                      |       | 379                                         |       | 347        |       | 32                |       | 9.2                                        | %          | 1,155      |       | 1,111      |       | 44 |   | 4.0 | % |
| Total                                      |       | $                                           | 5,254      |       | $          | 4,789             |       | $                                          | 465        |       | 9.7        | %          | $          | 15,697 |   | $ | 14,467 |   | $ | 1,230 |   | 8.5 | % |

 

Noninterest expenseincreased by $465,000, or 9.7%, and $1.2 million, or 8.5%, during the three andnine months ended September 30, 2009, respectively, compared to the sameperiods in 2008.  The largest changes forthe three-month period ended September 30, 2009 were an increase in (1) FDICpremiums of $317,000, primarily due to (a) the FDIC insurance assessmentrate increasing, on average, by nine basis points from five basis points duringthe three months ended September 30, 2008 to fourteen basis points duringthe three months ended September 30, 2009, (b) an increase in the average deposit balances, and (c) theBank’s FDIC insurance credit from the prior year being fully utilized duringthe fourth quarter of 2008 and (2) salaries and benefits expense of$270,000 primarily related to the hiring of a new middle market lending team inthe second quarter of 2009 and due to severance accruals in the amount of$185,000 recorded during the quarter ended September 30, 2009.  These increases were offset by a reduction offurniture and equipment expense of $56,000, primarily as a result of certainfixed assets becoming fully depreciated in 2009, and a reduction of marketingexpense of $45,000 due to reduced promotional offers and advertising performedduring 2009.

 

The largest changes forthe nine month period were and increase in (1) FDIC premiums of $1.3million, primarily due to (a) an FDIC special assessment of $536,000, (b) theaverage FDIC insurance assessment rate increased by eight basis points tothirteen basis points during the nine months ended September 30, 2009 fromfive basis points during the nine months ended September 30, 2008, (c) anincrease in the average deposit balances and (d) the Bank’s FDIC insurancecredit from the prior year was fully utilized during the fourth quarter of 2008and (2) salaries and benefits expense of $173,000 primarily related to thehiring of a new middle market lending team in the second quarter of 2009,  severance accruals in the amount of $185,000 

 

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recorded during thequarter ended September 30, 2009 and normal increases in salaries offsetby $297,000 of expense in the nine-month period ended September 30, 2008associated with final distributions from the Company’s terminated pensionplan.  Additional changes in noninterestexpense included a reduction of furniture and equipment expense of $98,000primarily as a result of certain fixed assets becoming fully depreciated in2009 and a reduction of marketing expense of $95,000 due to reduced promotionaloffers and advertising performed during 2009.

 

***Income Taxes*****.**The income tax provision for the three and nine monthsended September 30, 2009 was $189,000 and $473,000, respectively, comparedto $230,000 and $375,000 for the three and nine months ended September 30,2008, respectively.   The Company’seffective income tax rate was 26.9% and 25.1% for the three and nine monthsended September 30, 2009, respectively, compared to 25.9% and 22.3% forthe three and nine months ended September 30, 2008, respectively.  These rates reflect the Company’s levels oftax-exempt income for both periods relative to the overall level of taxableincome.

 

**Liquidityand Capital Management**

 

***Liquidity Management.*** Liquidity is the ability to meet current and futurefinancial obligations of a short-term nature. Our primary sources of fundsconsist of deposit inflows, loan repayments, securities repayments, maturitiesand sales and funds available from the FHLB. While maturities and scheduledamortization of loans and securities are predictable sources of funds, depositflows and loans and securities sales and prepayments are greatly influenced bygeneral interest rates, economic conditions and competition.

 

The followingtable presents certain of our contractual obligations as of September 30,2009 and December 31, 2008.

 
| ** **                              | ** ** | ** **         | ** **    | **Payments Due by Period** | ** ** |
|-----------------------------------------|------------|--------------------|---------------|----------------------------|------------|
| ** **                              | ** ** | ** **         | ** **    | ** **                 | ** ** | **One to** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | ** **         | ** **    | **Less Than**              | ** ** | **Three** | ** ** | **Three to** | ** ** | **More Than** | ** ** |
| **Contractual Obligations**             | ** ** | **Total**          | ** **    | **One Year**               | ** ** | **Years** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** |
| ** **                              | ** ** | **(In thousands)** | ** **    |
|                                    |       |               |          |                       |       |   |   |   |   |   |   |
| **At September 30, 2009**          |       |               |          |                       |       |   |   |   |   |   |   |
| Operating  lease obligations (1)        |       | $                  |  1,329   |                       | $          |  480 |   | $ |  849 |   | $ |  — |   | $ |  — |   |
| FHLB  advances and other borrowings (2) |       | 229,758            |          | 25,984                     |       | 50,111 |   | 31,624 |   | 122,039 |   |
| Other  long-term obligations (3)        |       | 6,349              |          | 1,656                      |       | 2,986 |   | 1,707 |   | — |   |
| Total                                   |       | $                  |  237,436 |                       | $          |  28,120 |   | $ |  53,946 |   | $ |  33,331 |   | $ |  122,039 |   |
|                                    |       |               |          |                       |       |   |   |   |   |   |   |
| **At December 31, 2008**           |       |               |          |                       |       |   |   |   |   |   |   |
| Operating  lease obligations (1)        |       | $                  |  1,702   |                       | $          |  498 |   | $ |  929 |   | $ |  275 |   | $ |  — |   |
| FHLB  advances and other borrowings (2) |       | 238,197            |          | 16,260                     |       | 61,237 |   | 32,221 |   | 128,479 |   |
| Other  long-term obligations (3)        |       | 7,443              |          | 1,651                      |       | 3,131 |   | 2,661 |   | — |   |
| Total                                   |       | $                  |  247,342 |                       | $          |  18,409 |   | $ |  65,297 |   | $ |  35,157 |   | $ |  128,479 |   |

 

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(1)   Represents lease obligations for operations center,one loan production office and equipment.

(2)   Includes principal and projected interest payments.

(3)   Represents obligations to the Company’s third partydata processing provider and other vendors.

 

We regularly adjust ourinvestments in liquid assets based upon our assessment of: (1) expectedloan demands; (2) expected deposit flows; (3) maturities of FHLBadvances and other borrowings; (4) yields available on interest-earningdeposits and securities; and (5) the objectives of our asset/liabilitymanagement policy. We use a variety of measures to assess our liquidity needs,which are provided to our Asset/Liability Management Committee on a regularbasis.

 

Our most liquid assetsare cash and cash equivalents. The levels of these assets depend on ouroperating, financing, lending and investing activities during any given period.At September 30, 2009, cash and cash equivalents totaled $58.2 million.Securities classified as available-for-sale, which provide additional sourcesof liquidity, totaled $442.3 million at September 30, 2009. In addition,at June 30, 2009, the latest date available, we had the ability to borrowa total of approximately $327.4 

 

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million from the FHLB. OnSeptember 30, 2009, we had $143.2 million of borrowings outstanding withthe FHLB as well as $50.0 million of borrowings outstanding with anotherfinancial institution.

 

At September 30,2009, we had $140.7 million in loan commitments outstanding, which consisted of$5.1 million of mortgage loan commitments, $21.7 million in unused home equitylines of credit, $2.4 million in consumer loans, $111.5 million in commercialloan commitments and $50,000 in standby letters of credit. Certificates ofdeposit due within one year of September 30, 2009 totaled $353.3 million,or 65.4% of total certificates of deposit, at September 30, 2009, anincrease from   53.5% at December 31,2008 as a result of the Company’s first quarter 2009 certificate of depositpromotion, which attracted a greater portion of certificates of deposit with aterm of eighteen months or longer, which are now maturing in less than twelvemonths.  As a result, we haveapproximately $128 million of certificates of deposit maturing in the quarterended September 30, 2010. If these maturing deposits do not remain withus, we will be required to seek other sources of funds, including othercertificates of deposit and borrowings. Depending on market conditions, we maybe required to pay higher rates on such deposits or other borrowings than wecurrently pay on the certificates of deposit due on or before September 30,2010. Historically, the Bank has had a significant portion of maturedcertificates of deposit remain with the Bank. Given the sizeable portion of certificates of deposits maturing in one quarter,the Bank intends to proactively communicate with customers and possibly adjustinterest rates above current offered rates to help retain deposits from itsfirst quarter 2009 certificate of deposit program. Additionally, we have theability to attract and retain all types of deposits by adjusting the interestrates offered.

 

Our primary investingactivities are the origination of loans and the purchase and sale ofsecurities. Our primary financing activities consist of activity in depositaccounts, FHLB advances and other borrowed funds.  Deposit flows are affected by the overalllevel of interest rates, the interest rates and products offered by us and ourlocal competitors and other factors. We generally manage the pricing of ourdeposits to be competitive and to increase core deposit relationships.Occasionally, we offer promotional rates on certain deposit products to attractdeposits.

 

The following tablepresents our primary investing and financing activities during the periodsindicated and does not include loans originated and held for sale.

 
| ** **                                           | ** ** | **Nine Months Ended  September 30,********2009** | ** ** | **Year Ended  December 31,  2008** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------|------------|
| Investing  activities:                               |       |                                                  |       |                                    |       |
| Loan  originations                                   |       | $                                                     | (151,474   | )                                       | $          | (207,687 | ) |
| Other  decreases in loans                            |       | 101,416                                               |       | 82,182                                  |       |
| Purchase  of loan participations                     |       | (127                                                  | )          | (19,335                                 | )          |
| Security  purchases                                  |       | (273,435                                              | )          | (163,303                                | )          |
| Security  sales                                      |       | 47,860                                                |       | 94,449                                  |       |
| Security  maturities, calls and principal repayments |       | 84,250                                                |       | 68,893                                  |       |
| Financing  activities:                               |       |                                                  |       |                                    |       |
| Increase  in deposits                                |       | 252,057                                               |       | 22,912                                  |       |
| (Decrease)  increase in FHLB advances                |       | (3,147                                                | )          | 66,379                                  |       |
| Increase  in other borrowings                        |       | —                                                |       | 30,000                                  |       |
| Purchase  of treasury stock                          |       | (3,819                                                | )          | (3,369                                  | )          |
|                                                      |            |                                                       |            |                                         |            |  |  |

 

The Bancorp is a separate entityand apart from the Bank and must provide for its own liquidity. As of September 30,2009, the Bancorp had $12.4 million in cash and cash equivalents.   In addition to its operating expenses, theBancorp may utilize its cash position for the payment of dividends tostockholders or through the repurchase of its common stock.  Through September 30, 2009 no dividendshave been paid. Substantially all of the Bancorp’s cash and cash equivalentswas obtained from proceeds it retained from its initial public offering in2006.  The Bancorp can receive dividendsfrom the Bank.  Payment of such dividendsto the Bancorp by the Bank is limited under federal law. The amount that can bepaid in any calendar year, without prior regulatory approval, cannot exceed theretained net earnings (as defined) for the year plus the preceding two calendaryears. The Bancorp believes that such restriction will not have an impact onthe Bancorp’s ability to meet its ongoing cash obligations.

 

***Capital Management.*** The Bank is subject to various regulatory capitalrequirements administered by the Office of Thrift Supervision, including arisk-based capital measure. The risk-based capital guidelines include both adefinition of capital and a framework for calculating risk-weighted assets byassigning balance sheet assets and off-balance sheet items to broad riskcategories. At September 30, 2009, the Bank exceeded all of regulatorycapital requirements and was considered a “well capitalized” institution underregulatory guidelines.

 

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The following tablepresents the Bank’s capital ratios and the minimum capital requirements to beconsidered ‘‘well capitalized” by the OTS as of September 30, 2009 and December 31,2008:

 
| ** **                                          | ** ** | **Ratio** | ** ** | **Minimum  to be Well  Capitalized** | ** ** |
|-----------------------------------------------------|------------|-----------|------------|--------------------------------------|------------|
| **September 30, 2009:**                        |       |      |       |                                 |       |
| Total  risk-based capital (to risk-weighted assets) |       | 16.53     | %          | >10.0                             | %          |
| Tier  1 capital (to risk-weighted assets)           |       | 15.39     | %          | >  6.0                       | %          |
| Tier  1 capital (to adjusted assets)                |       | 8.63      | %          | >  5.0                       | %          |
|                                                |       |      |       |                                 |       |
| **December 31, 2008:**                         |       |      |       |                                 |       |
| Total  risk-based capital (to risk-weighted assets) |       | 19.25     | %          | >10.0                             | %          |
| Tier  1 capital (to risk-weighted assets)           |       | 18.11     | %          | >  6.0                       | %          |
| Tier  1 capital (to adjusted assets)                |       | 10.70     | %          | >  5.0                       | %          |

 

Total stockholders’equity to total assets was 10.7% at September 30, 2009, 13.0% at December 31,2008 and 13.6% at September 30, 2008. .. The Company’s financial condition and results of operations have beenenhanced by the capital from the initial public offering in 2006, resulting inincreased net interest-earning assets. However, the large increase in equity resulting from the capital raisedin the offering has had an adverse impact on our return on equity.  The Company may use capital management toolssuch as cash dividends and share repurchases as well as improving operatingincome to increase its return on equity.

 

**Off-BalanceSheet Arrangements**

 

In the normal course ofoperations, we engage in a variety of financial transactions that, inaccordance with US generally accepted accounting principles, are not recordedin our financial statements. These transactions involve, to varying degrees,elements of credit, interest rate and liquidity risk. Such transactions areused primarily to manage customers’ requests for funding and take the form ofloan commitments, letters of credit and lines of credit.

 

For the period ended September 30,2009, we did not engage in any off-balance sheet transactions reasonably likelyto have a material effect on our financial condition, results of operations orcash flows.

 

**Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk.**

 

At September 30,2009, there has not been any material change to the market risk disclosure fromthat contained in the Company’s Annual Report on Form 10-K for the yearended December 31, 2008.

 

**Item 4. Controls and Procedures**

 

TheCompany’s management, including the Company’s principal executive officer andprincipal financial officer, have evaluated the effectiveness of the Company’s “disclosurecontrols and 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.  In addition, no change inthe Company’s internal control over financial reporting occurred during thequarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially effect,Company’s internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

Periodically, there havebeen various claims and lawsuits against us, such as claims to enforce liens,condemnation proceedings on properties in which we hold security interests,claims involving the making and servicing of real property loans and otherissues incident to our business.  We arenot a party to any pending legal proceedings that we believe would have amaterial adverse effect on our financial condition, results of operations orcash flows.

 

**Item 1A. Risk Factors**

 

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2008, which could materially affect ourbusiness, financial condition or future results.  As of September 30, 2009, the riskfactors of the Company have not changed materially from those reported in theCompany’s Annual Report on Form 10-K. The risks described in our Annual Report on Form 10-K are not theonly risks that we face.  Additionalrisks and uncertainties not currently known to us or that we currently deem tobe immaterial also may materially adversely affect our business, financialcondition and/or operating results.

 

**Item 2. Unregistered Sales of Equity Securities and Useof Proceeds**

 
| ** **                                             | ** ** | ** **    | ** ** | ** **     | ** ** | **Total Number**       | ** ** | ** **                | ** ** |
|--------------------------------------------------------|------------|---------------|------------|----------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                             | ** ** | ** **    | ** ** | ** **     | ** ** | **of Shares**          | ** ** | ** **                | ** ** |
| ** **                                             | ** ** | ** **    | ** ** | ** **     | ** ** | **Purchased**          | ** ** | **Maximum**               | ** ** |
| ** **                                             | ** ** | **Total**     | ** ** | ** **     | ** ** | **as Part of**    | ** ** | **Number of Shares**      | ** ** |
| ** **                                             | ** ** | **Number of** | ** ** | **Average**    | ** ** | **Publicly**           | ** ** | **that May Yet be**  | ** ** |
| ** **                                             | ** ** | **Shares**    | ** ** | **Price Paid** | ** ** | **Announced Plans or** | ** ** | **Purchased Under**       | ** ** |
| **Period**                                             | ** ** | **Purchased** | ** ** | **Per Share**  | ** ** | **Programs (1)**       | ** ** | **the Plans or Programs** | ** ** |
|                                                   |       |          |       |           |       |                   |       |                      |       |
| July 1,  2009 throughJuly 31, 2009           |       | 59,800        |       | $              | 9.91       |                   | 59,800     |                      | 368,420    |   |
|                                                   |       |          |       |           |       |                   |       |                      |       |
| August 1,  2009 throughAugust 31, 2009       |       | 42,700        |       | $              | 9.67       |                   | 42,700     |                      | 325,720    |   |
|                                                   |       |          |       |           |       |                   |       |                      |       |
| September 1,  2009 throughSeptember 30, 2009 |       | 18,183        |       | $              | 9.54       |                   | 18,183     |                      | 307,537    |   |
|                                                   |       |          |       |           |       |                   |       |                      |       |
| Total                                                  |       | 120,683       |       | $              | 9.77       |                   | 120,683    |                      |       |   |

 

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(1) On July 31, 2008, the Company announced that the Board of Directorsapproved the repurchase of up to 327,000 shares of the Company’s common stock(the “July 2008 program”).  On August 24,2009, the Company completed the repurchase of all shares approved in the July 2008program.  On May 21, 2009, theCompany announced that the Board of Directors approved the repurchase of up toan additional 327,000 shares of the Company’s common stock.  During the third quarter of 2009, the Companyrepurchased 19,463 shares as part of the May 2009 program and 307,537shares remain to be purchased under the May 2009 program as of September 30,2009.  This repurchase program willcontinue until it is completed or terminated by the Board of Directors.

 

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**Item 3. Defaults upon Senior Securities**

 

Not applicable.

 

**Item 4. Submission of Matters to a Vote of SecurityHolders**

 

None

 

**Item 5. Other Information**

 

Not applicable.

 

**Item 6. Exhibits**

 
| 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 |   | Employment Agreement  between Michael Fitzgerald, Fox Chase Bancorp, Inc. and Fox Chase Bank |
| 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                      |
| 32.0 |   | Section 1350  Certification of Chief Executive Officer and Chief Financial Officer           |

 

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|   |   | (1)    | Incorporated  by reference to this document from the exhibits 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 to this document from the exhibits to the Company’s Quarterly  Report on Form 10-Q filed with the Securities and Exchange Commission on  May 9, 2008.                                                         |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                          | FOX CHASE BANCORP, INC. |
|-------------------------------|-------------------------|
|                          |                    |   |
| Dated: November 6,  2009 | By:                     | /s/ Thomas M. Petro |
|                          |                    | Thomas M. Petro |
|                          |                    | President and Chief  Executive Officer |
|                          |                    | (principal executive  officer) |
|                          |                    |   |
| Dated: November 6,  2009 | By:                     | /s/ Roger S. Deacon |
|                          |                    | Roger S. Deacon |
|                          |                    | Chief Financial Officer |
|                          |                    | (principal financial  officer) |

 

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