**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

----

**FORM 10-Q**

----

 

**(MarkOne)**
| **x**                                                  | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                         |
|--------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                             | ** **                                                                                                                                           |
| **For  the quarterly period ended September 30, 2007** |
| ** **                                             |
| **OR**                                                 |
| ** **                                             |
| **o**                                                  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES**                                                                             |
| **EXCHANGE ACT OF 1934**                               |
| ** **                                             | ** **                                                                                                                                           |
| ** **                                             | **For  the transition period from                     to** |

 

**Commissionfile number: 001-32971**

----

**FoxChase Bancorp, Inc.**

(Exact name of registrant as specified in itscharter)

----

 

| **United  States**                               | **33-1145559**      |
|--------------------------------------------------|---------------------|
| (State or other jurisdiction of                  | (I.R.S. Employer    |
| incorporation or organization)              | Identification No.) |
|                                             |                |
| **4390  Davisville Road, Hatboro, Pennsylvania** | **19040**           |
| (Address of principal executive offices)         | (Zip Code)          |

**(215)682-7400**

(Registrant’s telephone number, including areacode)

**N/A**

(Former name, former address and former fiscalyear, if changed since last report)

----

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.

 

| Large  accelerated filer    o | Accelerated  filer    o | Non-accelerated  filer    x |
|---------------------------------------------------|---------------------------------------------|-------------------------------------------------|

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  o    No  x

As of November 9, 2007, there were 14,679,750 sharesof the registrant’s common stock outstanding.

 

 

----

 

**FOXCHASE BANCORP, INC.**

**Table ofContents**

 
|                               |   |                                                                                                               | ** ** | **Page**   |
|------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------|------------|------------|
|                               |   |                                                                                                               | ** ** | **No.**    |
| **Part  I. Financial Information** |   |
| ** **                         |
| Item  1.                           |   | Financial  Statements                                                                                              | ** ** | 3          |
|                               |   |                                                                                                               | ** ** | ** ** |
|                               |   | Consolidated Statements of Condition at September 30,  2007 (unaudited) and December 31, 2006                      | ** ** | 3          |
|                               |   |                                                                                                               | ** ** |       |
|                               |   | Consolidated Statements of Operations for the Three  and Nine Months Ended September 30, 2007 and 2006 (unaudited) | ** ** | 4          |
|                               |   |                                                                                                               |       |       |
|                               |   | Consolidated Statement of Changes in Equity for the  Nine Months Ended September 30, 2007 (unaudited)              |       | 5          |
|                               |   |                                                                                                               |       |       |
|                               |   | Consolidated Statements of Cash Flows for the Nine  Months Ended September 30, 2007 and 2006 (unaudited)           |       | 6          |
|                               |   |                                                                                                               |       |       |
|                               |   | Notes to the Unaudited Consolidated Financial  Statements                                                          |       | 7          |
|                               |   |                                                                                                               |       |       |
| Item 2.                            |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |       | 17         |
|                               |   |                                                                                                               |       |       |
| Item 3.                            |   | Quantitative and Qualitative Disclosures About Market  Risk                                                        |       | 26         |
|                               |   |                                                                                                               |       |       |
| Item 4.                            |   | Controls and Procedures                                                                                            |       | 27         |
|                               |   |                                                                                                               |       |       |
| **Part  II. Other Information**    |
| ** **                         |
| Item  1.                           |   | Legal  Proceedings                                                                                                 |       | 27         |
|                               |   |                                                                                                               |       |       |
| Item 1A.                      |   | Risk  Factors                                                                                                      |       | 27         |
|                               |   |                                                                                                               |       |       |
| Item 2.                            |   | Unregistered Sales of Equity Securities and Use of  Proceeds                                                       |       | 27         |
|                               |   |                                                                                                               |       |       |
| Item 3.                            |   | Defaults Upon Senior Securities                                                                                    |       | 28         |
|                               |   |                                                                                                               |       |       |
| Item 4.                            |   | Submission of Matters to a Vote of Security Holders                                                                |       | 28         |
|                               |   |                                                                                                               |       |       |
| Item  5.                           |   | Other  Information                                                                                                 |       | 28         |
|                               |   |                                                                                                               |       |       |
| Item 6.                            |   | Exhibits                                                                                                           |       | 28         |
|                               |   |                                                                                                               |       |       |
| **Signatures**                     |

 

2

----

 

**PARTI. FINANCIAL INFORMATION**

**Item 1.Financial Statements**

** **

**FOXCHASE BANCORP, INC.**

**Consolidated Statements of Condition**

**(InThousands, Except Share Data)**

 
| ** **                                                                                                                                          | ** ** | **September  30,** | ** ** | **December  31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                                                          | ** ** | **2007**           | ** ** | **2006**          | ** ** |
| ** **                                                                                                                                          | ** ** | **(Unaudited)**    | ** ** | ** **        | ** ** |
| **ASSETS**                                                                                                                                          | ** ** | ** **         | ** ** | ** **        | ** ** |
| ** **                                                                                                                                          | ** ** | ** **         | ** ** | ** **        | ** ** |
| Cash and due  from banks                                                                                                                            |       | $                  | 2,483      |              | $          | 3,295 | ** ** |
| Interest-earning  demand deposits in other banks                                                                                                    |       | 31,537             |       | 131,146           | ** ** |
| Total cash and  cash equivalents                                                                                                                    |       | 34,020             |       | 134,441           |       |
| Investment  securities available-for-sale                                                                                                           |       | 118,525            |       | 70,112            | ** ** |
| Mortgage related  securities available-for-sale                                                                                                     |       | 133,665            |       | 158,320           | ** ** |
| Loans held for  sale                                                                                                                                |       | —             |       | 1,194             | ** ** |
| Loans, net of  allowance for loan losses of $3,150 at September 30, 2007 and $2,949 at  December 31, 2006                                           |       | 422,418            |       | 355,617           |       |
| Federal Home  Loan Bank stock, at cost                                                                                                              |       | 3,972              |       | 4,422             | ** ** |
| Bank-owned life  insurance                                                                                                                          |       | 11,651             |       | 11,324            | ** ** |
| Premises and  equipment                                                                                                                             |       | 14,866             |       | 14,287            | ** ** |
| Accrued interest  and dividends receivable                                                                                                          |       | 3,025              |       | 3,397             | ** ** |
| Mortgage  servicing rights                                                                                                                          |       | 1,087              |       | 1,177             | ** ** |
| Deferred tax  asset, net                                                                                                                            |       | 617                |       | 1,087             | ** ** |
| Other assets                                                                                                                                        |       | 1,515              |       | 1,607             | ** ** |
| ** **                                                                                                                                          | ** ** | ** **         | ** ** | ** **        | ** ** |
| **Total  Assets**                                                                                                                                   | ** ** | $                  | 745,361    |              | $          | 756,985 |   |
|                                                                                                                                                |       |               |       |              |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                      | ** ** | ** **         | ** ** | ** **        | ** ** |
| ** **                                                                                                                                          | ** ** | ** **         | ** ** | ** **        | ** ** |
| **LIABILITIES**                                                                                                                                     | ** ** | ** **         | ** ** | ** **        | ** ** |
| ** **                                                                                                                                          | ** ** | ** **         | ** ** | ** **        | ** ** |
| Deposits                                                                                                                                            |       | $                  | 584,594    |              | $          | 596,534 | ** ** |
| Federal Home  Loan Bank advances                                                                                                                    |       | 30,000             |       | 30,000            | ** ** |
| Advances from  borrowers for taxes and insurance                                                                                                    |       | 1,273              |       | 2,262             | ** ** |
| Accrued interest  payable                                                                                                                           |       | 327                |       | 298               | ** ** |
| Accrued expenses  and other liabilities                                                                                                             |       | 2,092              |       | 2,246             | ** ** |
| ** **                                                                                                                                          | ** ** | ** **         | ** ** | ** **        | ** ** |
| **Total Liabilities**                                                                                                                               | ** ** | 618,286            |       | 631,340           |       |
| ** **                                                                                                                                          | ** ** | ** **         | ** ** | ** **        | ** ** |
| **STOCKHOLDERS’  EQUITY**                                                                                                                      | ** ** | ** **         | ** ** | ** **        | ** ** |
|                                                                                                                                                | ** ** | ** **         | ** ** | ** **        | ** ** |
| Preferred stock  ($.01 par value; 1,000,000 shares authorized, none issued and outstanding at  September 30, 2007 or December 31, 2006)             |       | —             |       | —            |       |
| Common stock  ($.01 par value; 35,000,000 shares authorized, 14,679,750 shares issued and  outstanding at September 30, 2007 and December 31, 2006) |       | 147                |       | 147               |       |
| Additional  paid-in capital                                                                                                                         |       | 62,650             |       | 62,365            |       |
| Common stock  acquired by stock benefit plans                                                                                                       |       | (6,457             | )          | (5,371            | )          |
| Retained  earnings                                                                                                                                  |       | 71,145             |       | 69,545            |       |
| Accumulated  other comprehensive loss, net                                                                                                          |       | (410               | )          | (1,041            | )          |
| ** **                                                                                                                                          | ** ** | ** **         | ** ** | ** **        |       |
| **Total  Stockholders’ Equity**                                                                                                                | ** ** | 127,075            |       | 125,645           |       |
| ** **                                                                                                                                          | ** ** | ** **         | ** ** | ** **        | ** ** |
| **Total  Liabilities and Stockholders’ Equity**                                                                                                | ** ** | $                  | 745,361    |              | $          | 756,985 |   |

 

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

 

3

----

 

**FOX CHASE BANCORP, INC.Consolidated Statements of Operations(Unaudited)(In Thousands, Except Per Share Data)**

 
| ** **                                                                                                                                                                                                                                                                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                             | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                                                                                                                                                                                                                                                                                             | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| **INTEREST  INCOME**                                                                                                                                                                                                                                                                                   | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and  fees on loans                                                                                                                                                                                                                                                                            |       | $                      | 6,746      |                  | $          | 5,248 |   | $ | 18,338 |   | $ | 15,916 |   |
| Interest on  mortgage related securities available-for-sale                                                                                                                                                                                                                                            |       | 1,657                  |       | 2,047                 |       | 5,187 |   | 6,081 |   |
| Interest on  investment securities available-for-sale:                                                                                                                                                                                                                                                 |       |                   |       |                  |       |   |   |   |   |
| Taxable                                                                                                                                                                                                                                                                                                |       | 905                    |       | 953                   |       | 1,813 |   | 2,913 |   |
| Non-taxable                                                                                                                                                                                                                                                                                            |       | 205                    |       | 245                   |       | 709 |   | 690 |   |
| Dividend income                                                                                                                                                                                                                                                                                        |       | 61                     |       | 61                    |       | 189 |   | 312 |   |
| Other interest  income                                                                                                                                                                                                                                                                                 |       | 1,019                  |       | 552                   |       | 3,970 |   | 1,085 |   |
| **Total  Interest Income**                                                                                                                                                                                                                                                                             |       | 10,593                 |       | 9,106                 |       | 30,206 |   | 26,997 |   |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |   |   |   |   |
| **INTEREST  EXPENSE**                                                                                                                                                                                                                                                                                  | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                                                                                                                                                                                                                                                                               |       | 5,309                  |       | 4,850                 |       | 15,322 |   | 14,028 |   |
| Federal Home  Loan Bank advances                                                                                                                                                                                                                                                                       |       | 375                    |       | 378                   |       | 1,111 |   | 1,111 |   |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |   |   |   |   |
| **Total  Interest Expense**                                                                                                                                                                                                                                                                            |       | 5,684                  |       | 5,228                 |       | 16,433 |   | 15,139 |   |
| ** **                                                                                                                                                                                                                                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  Interest Income**                                                                                                                                                                                                                                                                               |       | 4,909                  |       | 3,878                 |       | 13,773 |   | 11,858 |   |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |   |   |   |   |
| Provision  (Credit) for loan losses                                                                                                                                                                                                                                                                    |       | 125                    |       | (2,778                | )          | 200 |   | (3,161 | ) |
| **Net  Interest Income after Provision (Credit) for Loan Losses**                                                                                                                                                                                                                                      |       | 4,784                  |       | 6,656                 |       | 13,573 |   | 15,019 |   |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |   |   |   |   |
| **NONINTEREST  INCOME**                                                                                                                                                                                                                                                                                |       |                   |       |                  |       |   |   |   |   |
| Service charges  and other fee income                                                                                                                                                                                                                                                                  |       | 204                    |       | 203                   |       | 623 |   | 731 |   |
| Net gain (loss)  on sale of:                                                                                                                                                                                                                                                                           |       |                   |       |                  |       |   |   |   |   |
| Loans                                                                                                                                                                                                                                                                                                  |       | —                 |       | 69                    |       | 73 |   | 103 |   |
| Assets acquired  through foreclosure                                                                                                                                                                                                                                                                   |       | —                 |       | —                |       | — |   | 85 |   |
| Fixed assets                                                                                                                                                                                                                                                                                           |       | —                 |       | (5                    | )          | 874 |   | (6 | ) |
| Securities                                                                                                                                                                                                                                                                                             |       | 19                     |       | —                |       | 19 |   | (18 | ) |
| Income on  bank-owned life insurance                                                                                                                                                                                                                                                                   |       | 111                    |       | 108                   |       | 327 |   | 318 |   |
| Other                                                                                                                                                                                                                                                                                                  |       | 53                     |       | 61                    |       | 160 |   | 238 |   |
| **Total  Noninterest Income**                                                                                                                                                                                                                                                                          |       | 387                    |       | 436                   |       | 2,076 |   | 1,451 |   |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |   |   |   |   |
| **NONINTEREST  EXPENSE**                                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries,  benefits and other compensation                                                                                                                                                                                                                                                             |       | 2,485                  |       | 2,206                 |       | 7,154 |   | 6,535 |   |
| Occupancy  expense                                                                                                                                                                                                                                                                                     |       | 475                    |       | 379                   |       | 1,354 |   | 1,115 |   |
| Furniture and  equipment expense                                                                                                                                                                                                                                                                       |       | 230                    |       | 236                   |       | 712 |   | 644 |   |
| Data processing  costs                                                                                                                                                                                                                                                                                 |       | 388                    |       | 374                   |       | 1,149 |   | 1,090 |   |
| Professional  fees                                                                                                                                                                                                                                                                                     |       | 460                    |       | 326                   |       | 1,445 |   | 1,094 |   |
| Marketing  expense                                                                                                                                                                                                                                                                                     |       | 152                    |       | 199                   |       | 449 |   | 440 |   |
| FDIC premiums                                                                                                                                                                                                                                                                                          |       | 20                     |       | 71                    |       | 62 |   | 725 |   |
| Contribution to  charitable foundation                                                                                                                                                                                                                                                                 |       | —                 |       | 1,500                 |       | — |   | 1,500 |   |
| Other                                                                                                                                                                                                                                                                                                  |       | 416                    |       | 415                   |       | 1,300 |   | 1,434 |   |
| **Total  Noninterest Expense**                                                                                                                                                                                                                                                                         |       | 4,626                  |       | 5,706                 |       | 13,625 |   | 14,577 |   |
| **Income  Before Income Taxes**                                                                                                                                                                                                                                                                        |       | 545                    |       | 1,386                 |       | 2,024 |   | 1,893 |   |
| Income tax  provision                                                                                                                                                                                                                                                                                  |       | 90                     |       | 365                   |       | 424 |   | 273 |   |
| **Net  Income**                                                                                                                                                                                                                                                                                        |       | $                      | 455        |                  | $          | 1,021 |   | $ | 1,600 |   | $ | 1,620 |   |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |   |   |   |   |
| Earnings per share(1):                                                                                                                                                                                                                                                                                 |       |                   |       |                  |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                                                                                  |       | $                      | 0.03       |                  | n/a        |   | $ | 0.11 |   | n/a |   |
| Diluted                                                                                                                                                                                                                                                                                                |       | $                      | 0.03       |                  | n/a        |   | $ | 0.11 |   | n/a |   |
|                                                                                                                                                                                                                                                                                                        |
| (1)Due to the  timing of Fox Chase Bank’s reorganization into the mutual holding company  form and the completion of the Company’s initial public offering on September  29, 2006, earnings per share information for the three and nine months ended  September 30, 2006 is not applicable. |

 

***See accompanyingnotes to the unaudited consolidated financial statements.***

 

4

----

 

**FOX CHASE BANCORP, INC.Consolidated Statement of Changes in EquityNine Months Ended September 30, 2007(Unaudited)(In Thousands)**

 
| ** **                                                                      | ** ** | ** ** | ** ** | ** **     | ** ** | **Common**         | ** ** | ** **   | ** ** | ** **        | ** ** | ** **             | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------------|------------|--------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                      | ** ** | ** ** | ** ** | ** **     | ** ** | **Stock**          | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **             | ** ** |
| ** **                                                                      | ** ** | ** ** | ** ** | **Additional** | ** ** | **Acquired**       | ** ** | ** **   | ** ** | **Other**         | ** ** | **Total**              | ** ** |
| ** **                                                                      | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **by Stock**       | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                                                                      | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Benefit  Plans** | ** ** | **Earnings** | ** ** | **Loss,  Net**    | ** ** | **Equity**             | ** ** |
| **BALANCE  – DECEMBER 31, 2006**                                           |       | $          | 147        |           | $          | 62,365             |       | $            | (5,371     | )                 | $          | 69,545                 |       | $ | (1,041 | ) | $ | 125,645 |   |
| Unallocated ESOP  shares committed to employees                                 |       | —     |       | 93             |       | 288                |       | —       |       | —            |       | 381                    |       |
| Shares allocated  in long-term incentive plan                                   |       | —     |       | 124            |       | —             |       | —       |       | —            |       | 124                    |       |
| Stock purchased  by Trust to fund Equity Incentive Plan                         |       | —     |       | —         |       | (1,374             | )          | —       |       | —            |       | (1,374                 | )          |
| Net income                                                                      |       | —     |       | —         |       | —             |       | 1,600        |       | —            |       | 1,600                  |       |
| Compensation cost  for stock options and stock awards                           |       | —     |       | 68             |       | —             |       | —       |       | —            |       | 68                     |       |
| Amortization of  pension actuarial loss, net of taxes                           |       | —     |       | —         |       | —             |       | —       |       | 5                 |       | 5                      |       |
| Net change in  unrealized losses on securities available-for-sale, net of taxes |       | —     |       | —         |       | —             |       | —       |       | 626               |       | 626                    |       |
| **BALANCE  – SEPTEMBER 30, 2007**                                          |       | $          | 147        |           | $          | 62,650             |       | $            | (6,457     | )                 | $          | 71,145                 |       | $ | (410 | ) | $ | 127,075 |   |

 

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

 

5

----

 

**FOX CHASEBANCORP, INC.Consolidated Statements of Cash Flows(Unaudited)(In Thousands)**

 
| ** **                                                                                                             | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                             | ** ** | **September 30,**     | ** ** |
| ** **                                                                                                             | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                                                              | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                                                                                             | ** ** | ** **            | ** ** | ** ** | ** ** |
| Net income                                                                                                             |       | $                     | 1,600      |   | $ | 1,620 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                                     |       | ** **            | ** ** | ** ** | ** ** |
| Provision  (credit) for loan losses                                                                                    |       | 200                   |       | (3,161 | ) |
| Depreciation                                                                                                           |       | 770                   |       | 781 |   |
| Net amortization  of securities premiums and discounts                                                                 |       | 165                   |       | 678 |   |
| Provision for  deferred income taxes                                                                                   |       | 150                   |       | 547 |   |
| Shares committed  to be released to the ESOP                                                                           |       | 381                   |       | — |   |
| Shares earned in  the long-term incentive plan                                                                         |       | 124                   |       | — |   |
| Compensation  cost for stock options and stock awards                                                                  |       | 68                    |       | — |   |
| Originations of  loans held for sale                                                                                   |       | (6,112                | )          | (15,170 | ) |
| Proceeds from  sale of loans held for sale                                                                             |       | 7,331                 |       | 14,059 |   |
| Net realized  gains on sales of fixed assets and assets acquired through foreclosure                                   |       | (874                  | )          | (79 | ) |
| Net (gains)  losses on sales of securities                                                                             |       | (19                   | )          | 18 |   |
| Net gain on  sales of loans and loans held for sale                                                                    |       | (73                   | )          | (103 | ) |
| Earnings on  investment in bank-owned life insurance                                                                   |       | (327                  | )          | (318 | ) |
| Decrease  (increase) in mortgage servicing rights                                                                      |       | 90                    |       | (14 | ) |
| Decrease in  accrued interest and dividends receivable and other assets                                                |       | 812                   |       | 851 |   |
| (Decrease)  increase in accrued interest payable, accrued expenses and other liabilities                               |       | (119                  | )          | 5,207 |   |
| **Net  Cash Provided by Operating Activities**                                                                         | ** ** | 4,167                 |       | 4,916 |   |
| ** **                                                                                                             | ** ** | ** **            | ** ** | ** ** | ** ** |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                                                              | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                                                                                             | ** ** | ** **            | ** ** | ** ** | ** ** |
| Net maturities  of interest-earning time deposits in other banks                                                       |       | —                |       | 600 |   |
| Equity  investment in unaffiliated entity                                                                              |       | (300                  | )          | — |   |
| Investment  securities available-for-sale:                                                                             |       | ** **            | ** ** | ** ** | ** ** |
| Purchases                                                                                                              |       | (76,264               | )          | (28,418 | ) |
| Proceeds from  sales                                                                                                   |       | 108                   | ** ** | 17,205 | ** ** |
| Proceeds from  maturities, calls and principal repayments                                                              |       | 28,182                |       | 66,300 |   |
| Mortgage related  securities available-for-sale:                                                                       |       | ** **            | ** ** | ** ** | ** ** |
| Purchases                                                                                                              |       | (11,149               | )          | (31,789 | ) |
| Proceeds from  maturities, calls and principal repayments                                                              |       | 36,164                |       | 47,746 |   |
| Net (increase)  decrease in loans                                                                                      |       | (39,387               | )          | 13,624 |   |
| Purchase of loan  participations                                                                                       |       | (27,614               | )          | — |   |
| Proceeds from  sale of participation interests in loans                                                                |       | —                |       | 4,000 |   |
| Net decrease  (increase) in Federal Home Loan Bank stock                                                               |       | 450                   |       | (428 | ) |
| Purchases of  premises and equipment                                                                                   |       | (2,207                | )          | (1,382 | ) |
| Proceeds from  sales of premises and equipment                                                                         |       | 1,732                 |       | — |   |
| Proceeds from  sale of assets acquired through foreclosure                                                             |       | —                |       | 192 |   |
| **Net  Cash Provided by (Used in) Investing Activities**                                                               |       | (90,285               | )          | 87,650 | ** ** |
| ** **                                                                                                             | ** ** | ** **            | ** ** | ** ** | ** ** |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                                              | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                                                                                             | ** ** | ** **            | ** ** | ** ** | ** ** |
| Net decrease in  deposits                                                                                              |       | (11,940               | )          | (77,398 | ) |
| Decrease in  advances from borrowers for taxes and insurance                                                           |       | (989                  | )          | (1,231 | ) |
| Proceeds from  stock issuance, net of conversion costs and acquisition of stock for deferred  compensation plan trusts |       | —                |       | 62,382 |   |
| Acquisition of  stock for ESOP                                                                                         |       | —                |       | (5,755 | ) |
| Acquisition of  stock to fund equity incentive plan                                                                    |       | (1,374                | )          | — |   |
| **Net  Cash Used in Financing Activities**                                                                             |       | (14,303               | )          | (22,002 | ) |
| ** **                                                                                                             | ** ** | ** **            |       | ** ** |   |
| **Net  Increase (Decrease) in Cash and Cash Equivalents**                                                              |       | (100,421              | )          | 70,564 |   |
| ** **                                                                                                             | ** ** | ** **            |       | ** ** |   |
| **Cash  and Cash Equivalents – Beginning**                                                                        |       | 134,441               |       | 46,086 |   |
| ** **                                                                                                             | ** ** | ** **            |       | ** ** |   |
| **Cash  and Cash Equivalents – Ending**                                                                           |       | $                     | 34,020     |   | $ | 116,650 |   |
| **SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION**                                                                  | ** ** | ** **            |       | ** ** |   |
| Interest paid                                                                                                          |       | $                     | 16,805     |   | $ | 15,144 |   |
| Income taxes  paid                                                                                                     |       | $                     | 19         |   | $ | 507 |   |

***See accompanyingnotes to the unaudited consolidated financial statements.***

 

6

----

 

**FOX CHASE BANCORP, INC**

**Notes tothe Unaudited Consolidated Financial Statements**

** **

**NOTE 1 - PRINCIPLES OFCONSOLIDATION AND PRESENTATION**

Fox Chase Bancorp, Inc. (the “Company”)was organized on September 29, 2006 under the laws of the United States to bethe holding company for Fox Chase Bank (the “Bank”), a stock savings bank alsoorganized under the laws of the United States. On September 29, 2006, the Company completed its initial public offeringin which it sold 6,395,835 shares, or 43.57%, of its outstanding common stockto the public, including 575,446 shares purchased by the Fox Chase BankEmployee Stock Ownership Plan (the “ESOP”). An additional 8,148,915 shares, or 55.51% of the Company’s outstandingstock, were issued to Fox Chase MHC, the Company’s federally chartered mutualholding company. Net proceeds of the offering totaled $56.6 million.  Additionally, the Company contributed$150,000 in cash and issued 135,000 shares, or 0.92% of its outstanding common stock,to the Fox Chase Bank Charitable Foundation. During the third quarter 2007, the Company established a trust (“Trust”)for the purpose of purchasing common stock to fund its 2007 Equity IncentivePlan.

The Company’s primary business isholding the common stock of the Bank and making a loan to the ESOP to fund itspurchase of common stock.  Fox ChaseBancorp, Inc. is authorized to pursue other business activities permissible bylaws and regulations for other savings and loan holding companies.

The Company provides a wide varietyof financial products and services to individuals and businesses through itseleven branches in Philadelphia, Richboro, Willow Grove, Warminster, Lahaska,Hatboro, Media and West Chester, Pennsylvania, and Ocean City, Marmora and EggHarbor Township, New Jersey.  Theoperations of the Company are managed as a single business segment.  The Company competes with other financialinstitutions and other companies that provide financial services.

The Company and Bank are subject toregulations of certain federal banking agencies.  These regulations can and do changesignificantly from period to period.  TheCompany and Bank also undergo periodic examinations by regulatory agencieswhich may subject it to further changes with respect to asset valuations,amounts of required loss allowances and operating restrictions resulting fromthe regulators’ judgments based on information available to them at the time oftheir examinations.

The consolidated financial statements include theaccounts of the Company and its wholly owned subsidiary, the Bank. The Bank’soperations include the accounts of its wholly owned subsidiary, Fox ChaseFinancial, Inc.  Fox Chase Financial,Inc. is a Delaware chartered investment holding company established to manageand hold investment securities.  Theconsolidated financial statements include the Company beginning on September29, 2006.  The consolidated financialstatements and related notes include only the activity and balances of the Bankand its subsidiary through September 29, 2006. The financial statements do not include the transactions and balances of Fox ChaseMHC.  All material inter-companytransactions and balances have been eliminated in consolidation. Prior periodamounts are reclassified, when necessary, to conform with the current year’spresentation. The statement of cash flows for the nine months ended September30, 2006 has been revised to reflect the correction of certain immaterialerrors identified by the Company.

The Company followsaccounting principles and reporting practices which are in compliance with U.S.generally accepted accounting principles (“GAAP”). The preparation of thefinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Actualresults could 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 of investments.  These financial statements do not contain allnecessary disclosures required by GAAP and therefore should be read inconjunction with the audited financial statements and the notes theretoincluded in Fox Chase Bancorp, Inc.’sAnnual Report on Form 10-K for the year ended December 31, 2006, filed with theSecurities and Exchange Commission on March 29, 2007.   These financial statements include allnormal and recurring adjustments which management believes were necessary inorder to conform to GAAP.  The resultsfor the nine months ended September 30, 2007 are not necessarily indicative ofthe results that may be expected for the year ending December 31, 2007.

 

7

----

 

**Per Share Information**

** **

**TheCompany follows the provisions of SFAS No. 128, “Earnings Per Share.”  Basic earnings per share exclude dilution andare computed by dividing income available to common stockholders by theweighted-average common shares outstanding during the period.  Diluted earnings per share take into accountthe potential dilution that could occur if securities or other contracts toissue common stock were exercised and converted into common stock.**

** **

**Earningsper share (“EPS”), basic and diluted, were $0.03 and $0.11 for the three and ninemonths ended September 30, 2007, respectively. Earnings per share were not calculated for the three and nine monthsended September 30, 2006 since the Company did not complete its initial publicoffering until September 29, 2006.**

** **

**Thefollowing table presents the reconciliation of the numerators and denominatorsof the basic and diluted EPS computations.**

** **

** **
| ** **                                             | ** ** | ** ** | ** ** | **Three Months**       | ** ** | **Nine Months**        | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | ** ** | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                                             | ** ** | ** ** | ** ** | **September 30, 2007** | ** ** | **September 30, 2007** | ** ** |
| Net income                                             |       |       |       | $                      | 455,000    |                   | $          | 1,600,000 |   |
|                                                   |       |       |       |                   |       |                   |       |
| Weighted-average  common shares outstanding            |       |       |       | 14,679,750             |       | 14,679,750             |       |
| Average common  stock acquired by stock benefit plans: |       |       |       |                   |       |                   |       |
| Unvested shares  — long-term incentive plan       |       |       |       | (38,362                | )          | (38,697                | )          |
| ESOP shares  unallocated, net                          |       |       |       | (514,635               | )          | (524,131               | )          |
| Shares purchased  for employee benefit plans           |       |       |       | (9,897                 | )          | (3,335                 | )          |
|                                                   |       |       |       |                   |       |                   |       |
| Weighted-average  common shares used                   |       |       |       |                   |       |                   |       |
| to calculate  basic earnings per share                 |       |       |       | 14,116,856             |       | 14,113,587             |       |
|                                                   |       |       |       |                   |       |                   |       |
| Dilutive effect  of:                                   |       |       |       |                   |       |                   |       |
| Shares in long-term  incentive plan                    |       |       |       | 38,362                 |       | 38,697                 |       |
| Restricted stock  awards                               |       |       |       | 378                    |       | 125                    |       |
|                                                   |       |       |       |                   |       |                   |       |
| Weighted-average  common shares used                   |       |       |       |                   |       |                   |       |
| to calculate  diluted earnings per share (1)           |       |       |       | 14,155,596             |       | 14,152,409             |       |
|                                                   |       |       |       |                   |       |                   |       |
| Earnings per  share-basic                              |       |       |       | $                      | 0.03       |                   | $          | 0.11 |   |
| Earnings per  share-diluted                            |       |       |       | $                      | 0.03       |                   | $          | 0.11 |   |

----

(1)Diluted earnings per share include the dilutive effect of the Company’sweighted-average stock options/awards outstanding using the Treasury StockMethod.  The Company had 521,800anti-dilutive common stock options outstanding as of September 30, 2007.  These options are not included in thecalculation of diluted earnings per share for the periods presented.

 

8

----

 

**NOTE2 - INVESTMENT AND MORTGAGE RELATED SECURITIES**

 

The amortized cost and fair value of securitiesavailable-for-sale as of September 30, 2007 and December 31, 2006 aresummarized as follows:

 

 

 
| ** **                               | ** ** | **September 30, 2007(Unaudited)** | ** ** |
|------------------------------------------|------------|-----------------------------------|------------|
| ** **                               | ** ** | ** **                        | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Amortized**                     | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                               | ** ** | **Cost**                          | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                               | ** ** | **(In  Thousands )**              | ** ** |
| Obligations of  U.S. government agencies |       | $                                 | 40,317     |   | $ | 145 |   | $ | (96 | ) | $ | 40,366 |   |
| State and  political subdivisions        |       | 78,202                            |       | 66 |   | (109 | ) | 78,159 |   |
|                                     |       | 118,519                           |       | 211 |   | (205 | ) | 118,525 |   |
|                                     |       |                              |       |   |   |   |   |   |   |
| Mortgage related  securities             |       | 134,151                           |       | 343 |   | (829 | ) | 133,665 |   |
|                                     |       |                              |       |   |   |   |   |   |   |
| **Total  securities**                    |       | $                                 | 252,670    |   | $ | 554 |   | $ | (1,034 | ) | $ | 252,190 |   |

 

 

 

 
| ** **                               | ** ** | **December  31, 2006** | ** ** |
|------------------------------------------|------------|------------------------|------------|
| ** **                               | ** ** | ** **             | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Amortized**          | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                               | ** ** | **Cost**               | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                               | ** ** | **(In  Thousands )**   | ** ** |
| Obligations of  U.S. government agencies |       | $                      | 42,344     |   | $ | 4 |   | $ | (470 | ) | $ | 41,878 |   |
| State and  political subdivisions        |       | 24,126                 |       | 141 |   | (48 | ) | 24,219 |   |
| Corporate debt  securities               |       | 4,017                  |       | — |   | (2 | ) | 4,015 |   |
|                                     |       | 70,487                 |       | 145 |   | (520 | ) | 70,112 |   |
|                                     |       |                   |       |   |   |   |   |   |   |
| Mortgage related  securities             |       | 159,369                |       | 299 |   | (1,348 | ) | 158,320 |   |
|                                     |       |                   |       |   |   |   |   |   |   |
| **Total  securities**                    |       | $                      | 229,856    |   | $ | 444 |   | $ | (1,868 | ) | $ | 228,432 |   |

 

9

----

 

The following tables show grossunrealized losses and fair value of securities, aggregated by security categoryand length of time that individual securities have been in a continuousunrealized loss position, at September 30, 2007 and December 31, 2006:

 

 

 
| ** **                               | ** ** | **September  30, 2007 (Unaudited)** | ** ** |
|------------------------------------------|------------|-------------------------------------|------------|
| ** **                               | ** ** | **Less  than 12 Months**            | ** ** | **12  Months or More** | ** ** | **Total** | ** ** |
| ** **                               | ** ** | **Fair**                            | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                               | ** ** | **Value**                           | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| ** **                               | ** ** | **(In  Thousands )**                | ** ** |
| Obligations of  U.S. government agencies |       | $                                   | —     |   | $ | — |   | $ | 12,904 |   | $ | (96 | ) | $ | 12,904 |   | $ | (96 | ) |
| State and  political subdivisions        |       | 8,255                               |       | (67 | ) | 2,708 |   | (42 | ) | 10,963 |   | (109 | ) |
| Mortgage related  securities             |       | 32,656                              |       | (206 | ) | 45,971 |   | (623 | ) | 78,627 |   | (829 | ) |
| ** **                               | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total  securities**                    |       | $                                   | 40,911     |   | $ | (273 | ) | $ | 61,583 |   | $ | (761 | ) | $ | 102,494 |   | $ | (1,034 | ) |

 

 

 

 
| ** **                               | ** ** | **December  31, 2006**   | ** ** |
|------------------------------------------|------------|--------------------------|------------|
| ** **                               | ** ** | **Less  than 12 Months** | ** ** | **12  Months or More** | ** ** | **Total** | ** ** |
| ** **                               | ** ** | **Fair**                 | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                               | ** ** | **Value**                | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| ** **                               | ** ** | **(In  Thousands)**      | ** ** |
| Obligations of  U.S. government agencies |       | $                        | 9,265      |   | $ | (19 | ) | $ | 29,614 |   | $ | (451 | ) | $ | 38,879 |   | $ | (470 | ) |
| State and  political subdivisions        |       | 2,632                    |       | (8 | ) | 2,708 |   | (40 | ) | 5,340 |   | (48 | ) |
| Corporate debt  securities               |       | —                   |       | — |   | 4,015 |   | (2 | ) | 4,015 |   | (2 | ) |
| Mortgage related  securities             |       | 52,588                   |       | (249 | ) | 69,023 |   | (1,099 | ) | 121,611 |   | (1,348 | ) |
|                                     |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| **Total  securities**                    |       | $                        | 64,485     |   | $ | (276 | ) | $ | 105,360 |   | $ | (1,592 | ) | $ | 169,845 |   | $ | (1,868 | ) |

 

10

----

 

**NOTE 3 - LOANS**

The composition of net loans at September 30, 2007 andDecember 31, 2006 is provided below (in thousands).

 
| ** **                           | ** ** | ** **              | ** ** | ** **                  | ** ** |
|--------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|                                 | ** ** | **(Unaudited)**         |       |                        |       |
| Real estate  loans:                  |       |                    |       |                        |       |
| One-to  four-family                  |       | $                       | 211,734    |                        | $          | 209,463 |   |
| Multi-family and  commercial         |       | 64,894                  |       | 41,720                      |       |
| Construction                         |       | 36,498                  |       | 11,568                      |       |
|                                 |       | 313,126                 |       | 262,751                     |       |
| Consumer loans:                      |       |                    |       |                        |       |
| Home equity                          |       | 71,070                  |       | 73,456                      |       |
| Automobile                           |       | 653                     |       | 1,030                       |       |
| Lines of credit                      |       | 9,426                   |       | 10,468                      |       |
| Other                                |       | 129                     |       | 148                         |       |
|                                 |       | 81,278                  |       | 85,102                      |       |
| Commercial loans                     |       | 31,527                  |       | 11,155                      |       |
|                                 |       |                    |       |                        |       |
| **Total  Loans**                     |       | 425,931                 |       | 359,008                     |       |
|                                 |       |                    |       |                        |       |
| Unearned loan  origination fees, net |       | (363                    | )          | (442                        | )          |
| Allowance for  loan losses           |       | (3,150                  | )          | (2,949                      | )          |
|                                 |       |                    |       |                        |       |
| **Net  Loans**                       |       | $                       | 422,418    |                        | $          | 355,617 |   |
|                                 |       |                    |       |                        |       |

 

 

The following table presents changes in the allowancefor loan losses (in thousands):

 
| ** **                          | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **Nine Months  Ended  September 30,** | ** ** | **Year  Ended  December 31,** | ** ** |
| ** **                          | ** ** | **2007**                              | ** ** | **2006**                           | ** ** | **2006**   | ** ** |
|                                | ** ** | **(Unaudited)**                       |       |                               |       |
| Allowance at  beginning of period   |       | $                                     | 2,949      |                               | $          | 8,349      |       | $ | 8,349 |   |
| Provision  (Credit) for loan losses |       | 200                                   |       | (3,161                             | )          | (5,394     | )          |
| Loans charged  off                  |       | (2                                    | )          | (7                                 | )          | (8         | )          |
| Recoveries                          |       | 3                                     |       | 1                                  |       | 2          |       |
|                                |       |                                  |       |                               |       |       |       |
| Allowance at end  of period         |       | $                                     | 3,150      |                               | $          | 5,182      |       | $ | 2,949 |   |
|                                |       |                                  |       |                               |       |       |       |

 

11

----

 

**NOTE4 — MORTGAGE SERVICING ACTIVITY**

Loans serviced for others are not included in theaccompanying consolidated statements of condition. The unpaid principalbalances of these loans were $120,441,000 and $133,797,000 at September 30,2007 and 2006, respectively, and $130,294,000 at December 31, 2006.

The following summarizes mortgage servicing rights forthe nine months ended September 30, 2007 and 2006 and the year endedDecember 31, 2006 (in thousands):

 
| ** **                             | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|------------|------------|
| ** **                             | ** ** | **Nine Months  Ended  September 30,** | ** ** | **Years  Ended  December 31,** | ** ** |
| ** **                             | ** ** | **2007**                              | ** ** | **2006**                            | ** ** | **2006**   | ** ** |
|                                   | ** ** | **(Unaudited)**                       |       |                                |       |
| Balance,  beginning                    |       | $                                     | 1,177      |                                | $          | 1,168      |       | $ | 1,168 |   |
| Mortgage  servicing rights capitalized |       | 1                                     |       | 112                                 |       | 178        |       |
| Mortgage  servicing rights amortized   |       | (91                                   | )          | (98                                 | )          | (169       | )          |
|                                   |       |                                  |       |                                |       |       |       |
| Balance, ending                        |       | $                                     | 1,087      |                                | $          | 1,182      |       | $ | 1,177 |   |
|                                   |       |                                  |       |                                |       |       |       |

For the periods ended September 30, 2007, September30, 2006 and December 31, 2006, the fair value of the mortgage servicingrights (“MSRs”) was $1,341,000 (unaudited), $1,487,000 (unaudited) and$1,623,000, respectively. The fair value of the MSRs for these periods was determinedusing a third-party valuation model that calculates the present value ofestimated future servicing income. The model incorporates assumptions thatmarket participants use in estimating future net servicing income, includingestimates of prepayment speeds and discount rates. Mortgage loan prepaymentspeed is the annual rate at which borrowers are forecasted to repay theirmortgage loan principal and is based on historical experience. The discountrate used to determine the present value of future net servicing income -another key assumption in the model - is the required rate of return the marketwould expect for an asset with similar risk. Both assumptions can, andgenerally will, change quarterly valuations as market conditions and interest rateschange.

 

**NOTE5 - DEPOSITS**

Deposits and their respective weighted averageinterest rate at September 30, 2007 and December 31, 2006 consist of thefollowing (dollars in thousands):

 
| ** **                            | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **                  | ** ** | ** ** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|----------------------------|------------|-----------------------------|------------|------------|------------|
| ** **                            | ** ** | **September 30, 2007**      | ** ** | **December 31, 2006** | ** ** |
| ** **                            | ** ** | **Weighted  Average  Rate** | ** ** | **Amount**                 | ** ** | **Weighted  Average  Rate** | ** ** | **Amount** | ** ** |
|                                  | ** ** | **(Unaudited)**             |       |                       |       |                        |       |
| Non-interest  bearing demand accounts |       | —                      | %          | $                          | 43,900     |                        | —     | %          | $          | 41,429 |   |
| NOW accounts                          |       | 1.74                        |       | 38,360                     |       | 1.80                        |       | 50,717     |       |
| Money market  accounts                |       | 3.81                        |       | 49,830                     |       | 3.92                        |       | 29,770     |       |
| Savings and club  accounts            |       | 0.74                        |       | 55,344                     |       | 0.74                        |       | 64,338     |       |
| Certificates of  deposit              |       | 4.70                        |       | 397,160                    |       | 4.43                        |       | 410,280    |       |
|                                  |       |                        |       |                       |       |                        |       |       |       |
|                                  |       | 3.70                        | %          | $                          | 584,594    |                        | 3.47       | %          | $          | 596,534 |   |

 

12

----

 

**NOTE6 — FEDERAL HOME LOAN BANK ADVANCES**

 

Pursuant to collateral agreements with the Federal Home LoanBank of Pittsburgh (the “FHLB”), advances are secured by qualifying firstmortgage loans, qualifying fixed-income securities, FHLB stock and aninterest-bearing demand deposit account with the FHLB. As of September 30,2007, the Bank has $34,500,000 in qualifying collateral pledged against itsadvances.
| **Maturity Date** | ** ** | **Interest Rate** | ** ** | **Strike Rate** | ** ** | **Amount**         |
|-------------------|------------|-------------------|------------|-----------------|------------|--------------------|
| ** **        | ** ** | ** **        | ** ** | ** **      | ** ** | **(in thousands)** |
| August 2011       |       | 4.89              | %          | 7.50            | %          | $                  | 20,000 |
| August 2011       |       | 4.87              | %          | 7.50            | %          | 10,000             |
|              |       |              |       |            |       | $                  | 30,000 |

 

If the Comparative Rate Index (three-month LIBOR) is greaterthan or equal to the Strike Rate fifteen calendar days prior to the nextpossible conversion date, which occurs on a quarterly basis through maturity,the FHLB has the option to convert the advances to an adjustable rate equal tothree-month LIBOR (5.23% at September 30, 2007) plus .2175%.  Notification of such conversion by the FHLBmust be ten calendar days prior to conversion date. The Bank has the option torepay these advances at each conversion date without penalty. Accordingly, thecontractual maturities above may differ from actual maturities.

The Bank had a maximum borrowing capacity with the FHLB ofapproximately $411.5 million at June 30, 2007, the latest date available.

**NOTE 7 —EQUITY INCENTIVE PLAN**

 

At the Company’s annual meeting of stockholders heldon May 22, 2007, stockholders approved the Fox Chase Bancorp, Inc. 2007 EquityIncentive Plan (the “Plan”).  The Planprovides for a total of 1,007,030 shares of common stock for issuance upon thegrant or exercise of awards.  Of theshares available under the Plan, 719,307 may be issued in connection with theexercise of stock options and 287,723 may be issued as restricted stock.  The Plan allows for the granting of non-statutorystock options (“NSO’s”), incentive stock options and restricted stock. Optionsare granted at no less than the fair value of the Company’s common stock on thedate of the grant.

 

On August 31, 2007, certain officers, employees andoutside directors were granted in aggregate 521,800 NSO’s and 203,900 shares ofrestricted stock.  In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-BasedPayment,” the Company began to expense the fair value of all share-based compensationgrants over the requisite service periods.

 

In September 2007, the Company announced that itsBoard of Directors approved the funding of a trust that will purchase up to287,500 shares, or approximately 1.96%, of the Company’s outstanding commonstock to fund restricted stock awards under the Plan.  As of September 30, 2007, 105,500 shares hadbeen purchased by the trust at an average cost of $13.03 per share.  The remaining 182,000 were purchased by thetrust during October 2007.  The weightedaverage cost per share for all 287,500 shares purchased was $13.02.

 

In accordance with Securities Exchange CommissionStaff Accounting Bulletin (“SAB”) No. 107, the Company classifies share-basedcompensation for employees and outside directors within “Salaries, benefits andother compensation” in the consolidated statements of operations to correspondwith the same line item as compensation paid. Additionally, SFAS No. 123Rrequires the Company to report (1) the expense associated with the grants as anadjustment to operating cash flows and (2) any benefits of realized taxdeductions in excess of previously recognized tax benefits on compensationexpense as a financing cash flow.

 

Stock options vest over a five-year service period andexpire ten years after grant date. Management recognizes compensation expense for the fair values of theseawards, which have graded vesting, on a straight-line basis over the requisiteservice period of the awards.

 

Restricted shares vest over a five-year serviceperiod.  The product of the number ofshares granted and the grant date market price of the Company’s common stockdetermine the fair value of restricted shares under the Company’s restrictedstock plan.  Management recognizescompensation expense for the fair value of restricted shares on a straight-linebasis over the requisite service period for the entire award.

 

13

----

 

During the three and nine months ended September 30,2007, the Company recorded $68,000 of share-based compensation expense,comprised of stock option expense of $28,000 and restricted stock expense of$40,000.  The Company estimates it willrecord an additional $203,000 of share-based compensation expense during thefourth quarter of 2007.

 

The following is a summary of the Company’s stockoption activity and related information for its option plan for the nine monthsended September 30, 2007:

 
| ** **                         | ** ** | ** **    | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **    | ** ** |
|------------------------------------|------------|---------------|------------|--------------|------------|-----------------|------------|---------------|------------|
| ** **                         | ** ** | ** **    | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                         | ** ** | **Number of** | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                         | ** ** | **Stock**     | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| ** **                         | ** ** | **Options**   | ** ** | **Price**    | ** ** | **Life**        | ** ** | **Value**     | ** ** |
|                               |       |          |       |         |       |            |       |          |       |
| Outstanding at  December 31, 2006  |       | —        |       | $            | —     |            |       |          |       |   |
| Granted                            |       | 521,800       |       | 12.38        |       |            |       |          |       |
| Exercised                          |       | —        |       | —       |       |            |       |          |       |
| Forfeited                          |       | —        |       | —       |       |            |       |          |       |
| Outstanding at  September 30, 2007 |       | 521,800       |       | $            | 12.38      |            | 9.9 years  |          | $          | 448,748 |   |
| Exercisable at  September 30, 2007 |       | —        |       | —       |       | N/A             |       | N/A           |       |
|                                    |            |               |            |              |            |                 |            |               |            |  |  |

 

Management estimated the fair values of all optiongrants using the Black-Scholes option-pricing model.  Since there is limited historical informationon the volatility of the Company’s stock, management considered the averagevolatilities of comparable issuers over a period equal to the expected life ofthe options in determining the expected volatility rate used in the estimationof fair value.  Management estimated theexpected life of the options using the simplified method allowed under SAB No.107.  The risk-free rate was determinedutilizing the Treasury yield for the expected life of the option contract.

 

The fair value of the stock option grants wasestimated on the date of the grant using the Black-Scholes option-pricing modelwith the following weighted average assumptions:

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

 

 

The following is a summary of the Company’s unvestedoptions as of September 30, 2007 and changes therein during the nine monthsthen ended:

 
| ** **                      | ** ** | ** **    | ** ** | **Weighted**   | ** ** |
|---------------------------------|------------|---------------|------------|----------------|------------|
| ** **                      | ** ** | **Number of** | ** ** | **Average**    | ** ** |
| ** **                      | ** ** | **Stock**     | ** ** | **Grant Date** | ** ** |
| ** **                      | ** ** | **Options**   | ** ** | **Fair Value** | ** ** |
|                            |       |          |       |           |       |
| Unvested at  December 31, 2006  |       | —        |       | $              | —     |   |
| Granted                         |       | 521,800       |       | 3.40           |       |
| Exercised                       |       | —        |       | —         |       |
| Forfeited                       |       | —        |       | —         |       |
| Unvested at  September 30, 2007 |       | 521,800       |       | $              | 3.40       |   |

 

 

Expected future expense relating to the 521,800non-vested options outstanding as of September 30, 2007 is $1.6 million over aweighted average period of 4.9 years.

 

14

----

 

 

The following is a summary of the status of theCompany’s restricted stock as of September 30, 2007 and changes therein duringthe nine months then ended:
| ** **                      | ** ** | ** **     | ** ** | **Weighted**   | ** ** |
|---------------------------------|------------|----------------|------------|----------------|------------|
| ** **                      | ** ** | **Number of**  | ** ** | **Average**    | ** ** |
| ** **                      | ** ** | **Restricted** | ** ** | **Grant Date** | ** ** |
| ** **                      | ** ** | **Stock**      | ** ** | **Fair Value** | ** ** |
| Unvested at December  31, 2006  |       | —         |       | $              | —     |   |
| Granted                         |       | 203,900        |       | 12.38          |       |
| Vested                          |       | —         |       | —         |       |
| Forfeited                       |       | —         |       | —         |       |
| Unvested at  September 30, 2007 |       | 203,900        |       | $              | 12.38      |   |

 

Expected future compensation expense relating to the203,900 restricted shares at September 30, 2007 is $2.4 million over a weightedaverage period of 4.9 years.

 

Since all grants of options and restricted stockoccurred during the 3rd quarter 2007, the equity awards activity forthe three months ended September 30, 2007 is the same as for the nine monthsended September 30, 2007.

 

**NOTE8 - COMPREHENSIVE INCOME**

 

Comprehensiveincome for the three and nine months ended September 30, 2007 and 2006 is asfollows (in thousands):

 
| ** **                                            | ** ** | **Three Months**  | ** ** | **Nine Months**   | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                            | ** ** | **Ended**         | ** ** | **Ended**         | ** ** |
| ** **                                            | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                            | ** ** | **2007**          | ** ** | **2006**          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                  |       |              |       |              |       |   |   |   |   |
| Net income                                            |       | $                 | 455        |              | $          | 1,021 |   | $ | 1,600 |   | $ | 1,620 |   |
| Other  comprehensive income:                          |       |              |       |              |       |   |   |   |   |
| Net unrealized  holding gains arising during the      |       |              |       |              |       |   |   |   |   |
| period, net of  tax benefit (three and nine           |       |              |       |              |       |   |   |   |   |
| months ended  September 30, 2007 and 2006             |       |              |       |              |       |   |   |   |   |
| of $548, $318,  $1,253 and $535, respectively)        |       | 998               |       | 2,432             |       | 626 |   | 1,038 |   |
|                                                  |       |              |       |              |       |   |   |   |   |
| Less:  Reclassification adjustment for gains and      |       |              |       |              |       |   |   |   |   |
| losses included  in net income, net of taxes          |       |              |       |              |       |   |   |   |   |
| (three and nine  months September 30, 2007            |       |              |       |              |       |   |   |   |   |
| and 2006 of $0,  $0, $0 and $(6), respectively)       |       | 1                 |       | —            |       | — |   | (12 | ) |
|                                                  |       |              |       |              |       |   |   |   |   |
| Amortization of  pension actuarial loss, net of taxes |       | 2                 |       | —            |       | 5 |   | — |   |
|                                                  |       |              |       |              |       |   |   |   |   |
| Other  comprehensive income                           |       | 999               |       | 2,432             |       | 631 |   | 1,050 |   |
|                                                  |       |              |       |              |       |   |   |   |   |
| Comprehensive  income                                 |       | $                 | 1,454      |              | $          | 3,453 |   | $ | 2,231 |   | $ | 2,670 |   |

 

**NOTE 9 —RECENT ACCOUNTING PRONOUNCEMENTS**

** **

**In June2006, FASB issued Financial Interpretation No. 48 (“FIN 48”), “Accounting forUncertainty in Income Taxes” — an interpretation of SFAS Statement No. 109. FIN48 provides guidance on financial statement recognition and measurement of atax position taken or expected to be taken in a tax return. According to FIN48, a tax position is recognized if it is more likely than not that the taxposition will be sustained upon examination, including resolution of anyrelated appeals or litigation processes, based on the technical merits of theposition. If the tax position meets this more-likely-than-not recognition threshold,the position is measured to determine the amount of benefit to recognize andshould be measured at the largest amount of benefit that is greater than 50%likely of being realized upon ultimate settlement. FIN 48 also**providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure and transition. The provisions of FIN 48 areeffective for fiscal years beginning after December 15, 2006.  Effective January 1, 2007, the Companyadopted FIN 48.  As of January 1, 2007,the Company had no material unrecognized tax benefits or accrued interest andpenalties.  The Company’s policy is toaccount for interest as a component of interest expense and penalties as acomponent of other expense.  Federal andstate tax years 2003 through 2006 were open for examination as of January 1,2007.

** **

**15**

----

 

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements”.  This statementdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements.  This statementapplies under other accounting pronouncements that require or permit fair valuemeasurements, the Board having previously concluded in those accountingpronouncements that fair value is the relevant measurement attribute.  Accordingly, this statement does not requireany new fair value measurements.  SFASNo. 157 is effective for fiscal years beginning after November 15, 2007.  The Company is evaluating this statement andhas not yet determined the impact on its results of operations or financialposition, if any.   The Company hasdetermined that it will not early adopt this statement.

 

At its September 2006 meeting, the FASB approved the Emerging IssuesTask Force (“EITF”) Issue No. 06-4 “Accounting for Deferred Compensation andPostretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements.”  In this issue, the EITFconcluded that an endorsement split dollar life insurance policy does noteffectively settle an employer’s obligation to provide the post retirementbenefit that the policy was designed to provide.  Therefore, some current expense recognitionmay need to be made for any endorsement split dollar plans with post retirementbenefits.

 

This guidance applies to all post retirement endorsement split dollararrangements.  This will not impact splitdollar plans that only provide pre-retirement death benefits.

 

The accrual forthe liability would be calculated in one of two ways:

 

•                  the actuarial present value of the future death benefit or

•                  the cost of insurance of the policy during the postretirement period.

 

**Compliance with EITF Issue No. 06-4must be applied to fiscal years beginning after December 15, 2007 (January 1,2008 for calendar year entities).  It canbe made through a cumulative-effect adjustment to retained earnings in the yearof adoption or as a change in accounting principles through retrospectiveapplication to all prior periods.  TheCompany has not determined if this Statement will have a material impact on itsconsolidated financial statements upon adoption.**

** **

At its September 2006 meeting, the EITF reached a final consensus onIssue 06-05, “**Accountingfor Purchases of Life Insurance — Determining the Amount That Could be Realizedin Accordance with FASB Technical Bulletin No. 85-4***.*” Issue 06-05 concludes that indetermining the amount that could be realized under an insurance contractaccounted for under FASB Technical Bulletin No. 85-4, “Accounting forPurchases of Life Insurance,” the policyholder should (1) consider anyadditional amounts included in the contractual terms of the policy; (2) assumethe surrender value on a individual-life by individual-life policybasis; and (3) not discount the cash surrender value component of the amountthat could be realized when contractual restrictions on the ability tosurrender a policy exist. Issue 06-05 should be adopted through either(1) a change in accounting principle through a cumulative-effectadjustment to retained earnings as of the beginning of the year of adoption or(2) a change in accounting principle through retrospective application to allprior periods. Issue 06-05 is effective for fiscal years beginning afterDecember 15, 2006. The application of Issue 06-05 did not have a materialeffect on the Company’s financial position or results of operations.

** **

**InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities—Including an Amendment of FASBStatement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measuremany financial instruments and certain other items at fair value as ofspecified dates and amends SFAS 115 to, among other things, require certaindisclosures for amounts for which the fair value option is applied.  Additionally, this Statement provides that anentity may reclassify held-to-maturity and available-for-sale securities to thetrading account when the fair value option is elected for such securities,without calling into question the intent to hold other securities to maturityin the future.  This Statement iseffective as of the beginning of an entity’s first fiscal year that beginsafter November 15, 2007. Early adoption is permitted as of the beginning of afiscal year that begins on or before November 15, 2007, provided the entityalso elects to apply the provisions of SFAS 157.  The Company is reviewing the impact of SFASNo. 159 and the impact, if any, on its consolidated financial statements.   The Company has determined that it will notearly adopt this statement.**

** **

**16**

----

** **

**NOTE10- LEGAL PROCEEDINGS**

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

On April 28, 2006, Gregory S. Cipa, the formerPresident and Chief Executive Officer of Fox Chase Bank, filed a complaintagainst Fox Chase Bank in the Civil Division of the Court of Common Pleas ofBucks County, Pennsylvania.  In May 2006,Fox Chase Bank moved the case to federal court, answered the complaint andfiled a counterclaim. In November 2006, Mr. Cipa amended his complaint toallege that Fox Chase Bank breached its contract with him and violated itsstate statutory obligations by failing to pay Mr. Cipa certain employmentbenefits which he claims to have earned while serving as the President andChief Executive Officer of Fox Chase Bank. Mr. Cipa seeks monetary damages in excess of $900,000 and thepayment of litigation costs.  The partiescompleted discovery and filed motions for summary judgment in March 2007.  On September 20, 2007, the judge denied allmotions and summary judgments and scheduled a status hearing.  At the status hearing, the judge scheduledsettlement discussions and ordered that the trial be scheduled for January 17,2008.  Fox Chase Bank believes thisaction is without merit and intends to vigorously pursue its defenses.

**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

**Forward-LookingStatements**

This quarterly report contains forward-lookingstatements that are based on assumptions and may describe future plans,strategies and expectations of the Company. These forward-looking statementsare generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,”“estimate,” “project” or similar expressions. The Company’s ability to predictresults or the actual effect of future plans or strategies is inherentlyuncertain. Factors which could have a material adverse effect on the operationsof the Company and its subsidiary include, but are not limited to, changes ininterest rates, national and regional economic conditions, legislative andregulatory changes, monetary and fiscal policies of the U.S. government,including policies of the U.S. Treasury and the Federal Reserve Board, thequality and composition of the loan or investment portfolios, demand for loanproducts, deposit flows, competition, demand for financial services in theCompany’s market area, changes in real estate market values in the Company’smarket area, changes in relevant accounting principles and guidelines and theinability of third party service providers to perform their functions.  Additional factors that may affect ourresults are discussed in the section titled “Risk Factors” in the Company’sAnnual Report on Form 10-K filed with the Securities and Exchange Commission onMarch 29, 2007 and in its other Securities and Exchange Commission reports.

 

These risks and uncertainties should be considered inevaluating forward-looking statements and undue reliance should not be placedon such statements. Except as required by applicable law or regulation, theCompany does not undertake, and specifically disclaims any obligation, torelease publicly the result of any revisions that may be made to anyforward-looking statements to reflect events or circumstances after the date ofthe statements or to reflect the occurrence of anticipated or unanticipatedevents.

**CriticalAccounting Policies**

 

We consideraccounting policies involving significant judgments and assumptions bymanagement that have, or could have, a material impact on the carrying value ofcertain assets or on income to be critical accounting policies. We consider thefollowing to be our critical accounting policies: allowance for loan losses,deferred income taxes, and other-than-temporary impairment of securities.

 

***Allowance for LoanLosses.*** Theallowance for loan losses is maintained at a level representing management’sbest estimate of known and inherent losses in the loan portfolio, based onmanagement’s evaluation of the portfolio’s collectibility. The allowance isestablished through the provision for loan losses, which is charged againstincome. Determining the amount of the allowance for loan losses necessarilyinvolves a high degree of judgment. Among the material estimates required toestablish the allowance are: loss exposure at default; the amount and timing offuture cash flows on impacted loans; value of collateral; and determination ofloss factors to be applied to the various elements of the portfolio. All ofthese estimates are susceptible to significant change. Management reviews thelevel of the allowance on a quarterly basis and establishes the provision forloan losses based upon an evaluation of the portfolio, past loss experience,current economic conditions and other relevant factors related to thecollectibility of the loan portfolio. 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. 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 loss coulddeplete the allowance and require increased provisions to replenish theallowance, which would negatively affect earnings.

 

17

----

 

***Deferred IncomeTaxes.*** We usethe asset and liability method of accounting for income taxes as prescribed inStatement of Financial Accounting Standards No. 109, “Accounting forIncome Taxes.” Under this method, deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases. If current available information raises doubt as tothe realization of the deferred tax assets, a valuation allowance isestablished. Deferred tax assets and liabilities are measured using enacted taxrates expected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. We exercise significantjudgment in evaluating the amount and timing of recognition of the resultingtax liabilities and assets. These judgments require us to make projections offuture taxable income. The judgments and estimates we make in determining ourdeferred tax assets, which are inherently subjective, are reviewed on acontinual basis as regulatory and business factors change. Any reduction inestimated future taxable income may require us to record a valuation allowanceagainst our deferred tax assets. A valuation allowance would result inadditional income tax expense in the period, which would negatively affectearnings.

***Other-Than-Temporary Impairment of Securities***. Statement ofFinancial Accounting Standards No. 115, “Accounting for CertainInvestments in Debt and Equity Securities,” and FASB Staff Position FAS 115-1and124-1 “The Meaning of Other Than Temporary Impairment and Its Application toCertain Investments,” require companies to perform periodic reviews ofindividual securities in their investment portfolios to determine whether adecline in the value of a security is other than temporary. A review ofother-than-temporary impairment requires companies to make certain judgmentsregarding the nature of the decline, its effect on the financial statements andthe probability, extent and timing of a valuation recovery and the company’sintent and ability to hold the security. Pursuant to these requirements, weassess valuation 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-related factors, such as interest rates or equity marketdeclines. If the decline in the market value of a security is determined to beother than temporary, we reduce the book value of such security to its currentmarket value, recognizing the decline as a realized loss on the incomestatement.

**Comparisonof Financial Condition at September 30, 2007 and December 31, 2006**

 

Total assetsdecreased $11.6 million, or 1.5%, to $745.4 million at September 30, 2007,compared to $757.0 million at December 31, 2006.  The reduction in assets was comprised of adecrease of $100.4 million in cash and cash equivalents and a decrease of $24.7million in mortgage related securities. Offsetting these decreases was a $66.8million increase in loans, driven primarily by a $68.5 million increase incommercial, commercial real estate and construction loans, and a $48.4 millionincrease in investment securities available-for-sale, as the Company purchased$56.2 million of liquid Pennsylvania Higher Education Assistance Agency  bonds during the quarter.  The pricing for these bonds resets monthlyand such bonds had a weighted average rate of 6.12% at September 30, 2007.  The decrease in cash and cash equivalents andmortgage related securities for the nine months ended September 30, 2007 isconsistent with the Bank’s strategy of utilizing excess cash and funds from theliquidation of lower yielding mortgage-backed investment securities to fundcommercial, commercial real estate and construction loan growth.

Deposits decreased $11.9 million, or 2.0%, from$596.5 million at December 31, 2006 to $584.6 million at September 30,2007.   The decrease was primarily the result of decreases inNOW accounts of $12.4 million, savings and club accounts of $9.0 million andcertificates of deposit of $13.1 million offset by an increase in money marketaccounts of $20.1 million and non-interest bearing demand accounts of $2.5million.  The increase in money marketaccounts was a result of a successful promotion of the Bank’s money markettiered rate product, which resulted in a certain level of NOW accounts totransfer to money market accounts.  Theincrease in noninterest bearing demand accounts was a result of continuedefforts to increase commercial deposit relationships. The reduction incertificates of deposit was primarily a result of the highly competitivedeposit market in which the Bank operates which, when combined with the flatyield curve, has created a difficult climate for gathering deposits costeffectively.

Stockholders’ equity increased $1.5 million to$127.1 million at September 30, 2007 compared to $125.6 million at December 31,2006 primarily due to net income of $1.6 million and improvement in unrealizedloss on securities available-for-sale of $626,000 offset by purchases totaling$1.4 million made by the trust established to fund restricted stock awardsunder the Company’s 2007 Equity Incentive Plan.

**Comparisonof Operating Results for the Three and Nine Months Ended September 30, 2007 and2006**

 

***General. ***Net income decreased $566,000, or 55.4%, to $455,000for the three months ended September 30, 2007 compared to $1.0 million for thethree months ended September 30, 2006. The decrease in net income was primarily the result of an increase inloan loss provision of $2.9 million as the Company credited the provision forloan losses by $2.8 million during three months ended September 30, 2006.Offsetting this increase in loan loss provision was an increase in net interestincome of $1.0 million and a decrease in noninterest expense of $1.1 million,which was primarily the result of a $1.5 million contribution to the Fox ChaseBank Charitable Foundation during the three months ended September 30, 2006.

 

Net income decreased $20,000, or 1.2%, for the nine months endedSeptember 30, 2007 compared to the nine months ended September 30, 2006. Thedecrease in net income was primarily the result of an increase in loan lossprovision of $3.4 million as 

 

18

----

 

the Company credited the provision for loan losses by $3.2 millionduring nine months ended September 30, 2007. Offsetting this increase in loanloss provision was an increase in net interest income of $1.9 million, anincrease in noninterest income of $625,000, which includes a gain of $874,000related to the sale of the Bank’s operations center, and a decrease innoninterest expense of $952,000, which was primarily the result of a $1.5million contribution to the Fox Chase Bank Charitable Foundation during thenine months ended September 30, 2006.

***Net Interest Income*****.**Net interest income increased $1.0million, or 26.6%, to $4.9 million for the three months ended September 30,2007 compared to the same period in 2006 primarily due to an increase inaverage earning assets of $23.6 million, an increase in the average yield onearning assets from 5.20% to 5.85% as well as a decrease in the average balanceof interest-bearing liabilities of $49.9 million.  These changes were offset by an increase inthe average rate on interest-bearing liabilities from 3.34% to 3.90%. Theincrease in the average balance of earning assets was primarily due toincreases in the Bank’s average loan portfolio of $61.3 million and an increasein the volume of interest-earning demand deposits generated by proceedsreceived in the Company’s initial public offering, offset by decreases in theaverage balance of the mortgage-backed and investment securities portfolios.The increase in the average yield on earning assets was primarily due to thegeneral increase in market interest rates from 2004 through 2006 and thechanging mix of the loan portfolio as yields on loans increased from 5.89% to6.41%, the yield on mortgage-related securities increased from 4.57% to 5.02%and yield on taxable securities increased from 4.08% to 5.59%. The decrease inthe average balance of interest bearing liabilities was primarily due todecreases in deposit accounts.  Theincrease in the average rate on interest-bearing liabilities was primarily dueto the cost of certificates of deposit, which increased 52 basis points from4.04% to 4.56% and a 105 basis point increase in NOW and money market accountsfrom 1.61% to 2.66%.

Netinterest income increased $1.9 million, or 16.1%, to $13.8 million for the ninemonths ended September 30, 2007 compared to the same period in 2006 primarilydue to an increase in the average yield on earning assets from 5.03% to 5.64%,an increase in average earning assets of $5.6 million and a decrease in the averagebalance of interest-bearing liabilities of $65.4 million.  These changes were offset by an increase inthe average yield on interest-bearing liabilities from 3.16% to 3.82%. Theincrease in the average yield on earnings assets was primarily due to thegeneral increase in market interest rates from 2004 through 2006 and thechanging mix of the loan portfolio as the yields on loans increased from 5.87%to 6.18%, the yield on mortgage-related securities increased from 4.25% to4.88% and the yield on interest-earning demand deposits increased from 5.13% to5.18%.  The increase in the averagebalance of earning assets was primarily due to increases in the Bank’s averageloan portfolio of $32.8 million and an increase in the volume ofinterest-earning demand deposits generated by proceeds received in the Company’sinitial public offering, offset by decreases in the average balance of themortgage-backed and investment securities portfolios.  The decrease in the average balance ofinterest-bearing liabilities was primarily due to decreases in depositaccounts.  The increase in the averagerate on interest-bearing liabilities was primarily due to the cost ofcertificates of deposit, which increased 65 basis points from 3.83% to 4.48%and a 93 basis point increase in NOW and money market accounts from 1.50% to2.43%.

The following table summarizes average balances and average yields andcosts of interest-earning assets and interest-bearing liabilities for the threeand nine months ended September 30, 2007 and 2006. Yields are not presented ona tax-equivalent basis. Any adjustments necessary to present yields on atax-equivalent basis are insignificant.

 

19

----

 
| ** **                                                               | ** ** | **Three  Months Ended September 30,** | ** ** | **Nine  Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                               | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                               | ** ** | **Average  Balance**                  | ** ** | **Interest  and  Dividends**         | ** ** | **Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest  and  Dividends** | ** ** | **Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest  and  Dividends** | ** ** | **Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest  and  Dividends** | ** ** | **Yield/  Cost** | ** ** |
| ** **                                                               | ** ** | **(Dollars  in thousands)**           | ** ** |
| Assets:                                                                  |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  demand deposits                                        |       | 78,458                                |       | 1,019                                |       | 5.15 | % | $ | 40,947 |   | $ | 552 |   | 5.39 | % | 102,405 |   | 3,970 |   | 5.18 | % | $ | 28,214 |   | $ | 1,085 |   | 5.13 | % |
| Mortgage related  securities                                             |       | 132,015                               |       | 1,657                                |       | 5.02 | % | 179,195 |   | 2,047 |   | 4.57 | % | 141,678 |   | 5,187 |   | 4.88 | % | 190,726 |   | 6,081 |   | 4.25 | % |
| Taxable  securities                                                      |       | 69,138                                |       | 966                                  |       | 5.59 | % | 99,489 |   | 1,014 |   | 4.08 | % | 53,160 |   | 2,002 |   | 5.02 | % | 112,349 |   | 3,225 |   | 3.83 | % |
| Nontaxable  securities                                                   |       | 22,094                                |       | 205                                  |       | 3.70 | % | 24,600 |   | 245 |   | 3.98 | % | 24,879 |   | 709 |   | 3.80 | % | 23,188 |   | 690 |   | 3.97 | % |
| Loans (1):                                                               |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential loans                                                        |       | 208,215                               |       | 2,992                                |       | 5.75 | % | 214,845 |   | 3,007 |   | 5.60 | % | 207,704 |   | 8,855 |   | 5.68 | % | 220,422 |   | 9,213 |   | 5.57 | % |
| Commercial and  construction loans                                       |       | 128,976                               |       | 2,558                                |       | 7.76 | % | 54,893 |   | 995 |   | 7.09 | % | 104,475 |   | 5,901 |   | 7.45 | % | 56,685 |   | 3,153 |   | 7.33 | % |
| Consumer loans                                                           |       | 80,626                                |       | 1,196                                |       | 5.94 | % | 86,814 |   | 1,246 |   | 5.74 | % | 81,834 |   | 3,582 |   | 5.84 | % | 84,145 |   | 3,550 |   | 5.63 | % |
| Total loans                                                              |       | 417,817                               |       | 6,746                                |       | 6.41 | % | 356,552 |   | 5,248 |   | 5.89 | % | 394,013 |   | 18,338 |   | 6.18 | % | 361,252 |   | 15,916 |   | 5.87 | % |
| Allowance for  loan losses                                               |       | (3,076                                | )          |                                 |       |   |   | (7,932 | ) |   |   |   |   | (3,007 | ) |   |   |   |   | (8,209 | ) |   |   |   |   |
| Net loans                                                                |       | 414,741                               |       |                                 |       |   |   | 348,620 |   |   |   |   |   | 391,006 |   |   |   |   |   | 353,043 |   |   |   |   |   |
| Total  interest-earning assets                                           |       | 716,446                               |       | 10,593                               |       | 5.85 | % | 692,851 |   | 9,106 |   | 5.20 | % | 713,128 |   | 30,206 |   | 5.64 | % | 707,520 |   | 26,997 |   | 5.03 | % |
| Noninterest-earning  assets                                              |       | 36,256                                |       |                                 |       |   |   | 38,540 |   |   |   |   |   | 36,172 |   |   |   |   |   | 38,400 |   |   |   |   |   |
| Total assets                                                             |       | 752,702                               |       |                                 |       |   |   | $ | 731,391 |   |   |   |   |   | 749,300 |   |   |   |   |   | $ | 745,920 |   |   |   |   |   |
|                                                                     |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities and  equity:                                                 |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                           |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW and money  market deposit accounts                                   |       | 86,108                                |       | 577                                  |       | 2.66 | % | $ | 82,168 |   | 329 |   | 1.61 | % | 80,063 |   | 1,453 |   | 2.43 | % | $ | 95,931 |   | 1,078 |   | 1.50 | % |
| Savings and club  accounts                                               |       | 58,268                                |       | 108                                  |       | 0.73 | % | 83,537 |   | 171 |   | 0.82 | % | 60,781 |   | 334 |   | 0.73 | % | 78,511 |   | 459 |   | 0.78 | % |
| Certificates of  deposit                                                 |       | 402,748                               |       | 4,624                                |       | 4.56 | % | 431,343 |   | 4,350 |   | 4.04 | % | 404,218 |   | 13,535 |   | 4.48 | % | 436,068 |   | 12,491 |   | 3.83 | % |
| Total  interest-bearing deposits                                         |       | 547,124                               |       | 5,309                                |       | 3.85 | % | 597,048 |   | 4,850 |   | 3.26 | % | 545,062 |   | 15,322 |   | 3.76 | % | 610,510 |   | 14,028 |   | 3.07 | % |
| FHLB advances                                                            |       | 30,000                                |       | 375                                  |       | 4.88 | % | 30,000 |   | 378 |   | 4.93 | % | 30,000 |   | 1,111 |   | 4.88 | % | 30,000 |   | 1,111 |   | 4.88 | % |
| Total  interest-bearing liabilities                                      |       | 577,124                               |       | 5,684                                |       | 3.90 | % | 627,048 |   | 5,228 |   | 3.34 | % | 575,062 |   | 16,433 |   | 3.82 | % | 640,510 |   | 15,139 |   | 3.16 | % |
| Noninterest-bearing  deposits                                            |       | 44,848                                |       |                                 |       |   |   | 37,773 |   |   |   |   |   | 43,245 |   |   |   |   |   | 35,316 |   |   |   |   |   |
| Other  noninterest-bearing liabilities                                   |       | 4,121                                 |       |                                 |       |   |   | 1,598 |   |   |   |   |   | 4,929 |   |   |   |   |   | 6,095 |   |   |   |   |   |
| Total liabilities                                                        |       | 626,093                               |       |                                 |       |   |   | 666,419 |   |   |   |   |   | 623,236 |   |   |   |   |   | 681,921 |   |   |   |   |   |
|                                                                     |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Retained earnings                                                        |       | 127,680                               |       |                                 |       |   |   | 67,421 |   |   |   |   |   | 126,993 |   |   |   |   |   | 66,505 |   |   |   |   |   |
| Accumulated  comprehensive loss                                          |       | (1,071                                | )          |                                 |       |   |   | (2,449 | ) |   |   |   |   | (929 | ) |   |   |   |   | (2,506 | ) |   |   |   |   |
| Total equity                                                             |       | 126,609                               |       |                                 |       |   |   | $ | 64,972 |   |   |   |   |   | 126,064 |   |   |   |   |   | $ | 63,999 |   |   |   |   |   |
| Total liabilities  and equity                                            |       | 752,702                               |       |                                 |       |   |   | $ | 731,391 |   |   |   |   |   | 749,300 |   |   |   |   |   | $ | 745,920 |   |   |   |   |   |
| Net interest income                                                      |       |                                  |       | 4,909                                |       |   |   |   |   | $ | 3,878 |   |   |   |   |   | 13,773 |   |   |   |   |   | $ | 11,858 |   |   |   |
| Interest rate spread                                                     |       |                                  |       |                                 |       | 1.95 | % |   |   |   |   | 1.85 | % |   |   |   |   | 1.82 | % |   |   |   |   | 1.87 | % |
| Net interest margin                                                      |       |                                  |       |                                 |       | 2.72 | % |   |   |   |   | 2.21 | % |   |   |   |   | 2.55 | % |   |   |   |   | 2.21 | % |
| Average interest-earning assets to average  interest-bearing liabilities |       |                                  |       |                                 |       | 124.14 | % |   |   |   |   | 110.49 | % |   |   |   |   | 124.01 | % |   |   |   |   | 110.46 | % |

----

(1)                       Nonperforming loans are included inaverage balance computations

 

20

----

 

***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 priorvolume).  The volume column shows theeffects attributable to changes in volume (changes in volume multiplied byprior rate).  The net column representsthe sum of the columns.  For purposes ofthis table, changes attributable to changes in both rate and volume that cannotbe segregated have been allocated proportionally based on the changes due torate and the changes due to volume.

** **
| ** **                          | ** ** | **Three Months Ended  September 30, 2007  Compared to  Three Months Ended  September 30, 2006** | ** ** | **Nine Months Ended  September 30, 2007  Compared to  Nine Months Ended  September 30, 2006** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Increase (Decrease)  Due to**                                                                 | ** ** | ** **                                                                                    | ** ** | **Increase (Decrease)  Due to** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Rate**                                                                                        | ** ** | **Volume**                                                                                    | ** ** | **Net** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Net** | ** ** |
|                                |       |                                                                                            |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Interest and  dividend income:      |       |                                                                                            |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Interest-earning  demand deposits   |       | $                                                                                               | (39        | )                                                                                             | $          | 506 |   | $ | 467 |   | $ | 32 |   | $ | 2,853 |   | $ | 2,885 |   |
| Mortgage related  securities        |       | 149                                                                                             |       | (539                                                                                          | )          | (390 | ) | 670 |   | (1,564 | ) | (894 | ) |
| Taxable  securities                 |       | 261                                                                                             |       | (309                                                                                          | )          | (48 | ) | 476 |   | (1,699 | ) | (1,223 | ) |
| Nontaxable  securities              |       | (16                                                                                             | )          | (24                                                                                           | )          | (40 | ) | (32 | ) | 51 |   | 19 |   |
| Loans:                              |       |                                                                                            |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Residential  loans                  |       | 78                                                                                              |       | (93                                                                                           | )          | (15 | ) | 174 |   | (532 | ) | (358 | ) |
| Commercial and  construction loans  |       | 220                                                                                             |       | 1,343                                                                                         |       | 1,563 |   | 90 |   | 2,658 |   | 2,748 |   |
| Consumer loans                      |       | 40                                                                                              |       | (90                                                                                           | )          | (50 | ) | 129 |   | (97 | ) | 32 |   |
| Total loans                         |       | 338                                                                                             |       | 1,160                                                                                         |       | 1,498 |   | 393 |   | 2,029 |   | 2,422 |   |
| Total  interest-earning assets      |       | 693                                                                                             |       | 794                                                                                           |       | 1,487 |   | 1,539 |   | 1,670 |   | 3,209 |   |
|                                |       |                                                                                            |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Interest  expense:                  |       |                                                                                            |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| NOW and money  market deposits      |       | 232                                                                                             |       | 16                                                                                            |       | 248 |   | 553 |   | (178 | ) | 375 |   |
| Savings accounts                    |       | (11                                                                                             | )          | (52                                                                                           | )          | (63 | ) | (21 | ) | (104 | ) | (125 | ) |
| Certificates of  deposit            |       | 563                                                                                             |       | (289                                                                                          | )          | 274 |   | 1,956 |   | (912 | ) | 1,044 |   |
| Total interest-bearing  deposits    |       | 784                                                                                             |       | (325                                                                                          | )          | 459 |   | 2,488 |   | (1,194 | ) | 1,294 |   |
|                                |       |                                                                                            |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| FHLB advances                       |       | (3                                                                                              | )          | —                                                                                        |       | (3 | ) | — |   | — |   | — |   |
| Total  interest-bearing liabilities |       | 781                                                                                             |       | (325                                                                                          | )          | 456 |   | 2,488 |   | (1,194 | ) | 1,294 |   |
| Net change in  net interest income  |       | $                                                                                               | (88        | )                                                                                             | $          | 1,119 |   | $ | 1,031 |   | $ | (949 | ) | $ | 2,864 |   | $ | 1,915 |   |

 

21

----

 

***Provision for Loan Losses*.**  The provision for loan losses was $125,000and $200,000 for the three and nine months ended September 30, 2007,respectively, reflecting continued growth in the loan portfolio and a shift inthe mix of the loan portfolio to commercial-type loans, which typically havehigher levels of risk. The Company recorded a credit to the provision for loanlosses of $2.8 million and $3.2 million for the three and nine months endedSeptember 30, 2006, respectively, which was a result of: (1) a reduction incriticized and classified assets, (2) a decrease in the size of the loanportfolio and (3) the absence of charge-offs in the portfolio during thatperiod.

 

The following table provides information with respectto the Bank’s nonperforming assets at the dates indicated.   There were no troubled debt restructuringsas of the dates presented below.

 
| ** **                                                             | ** ** | **September 30,**          | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------|------------|------------------|------------|
| ** **                                                             | ** ** | **2007**                   | ** ** | **2006**         | ** ** |
| ** **                                                             | ** ** | **(Dollars in thousands)** | ** ** |
| Nonaccrual  loans:                                                     |       |                       |       |             |       |
| One-to  four-family                                                    |       | $                          | 111        |             | $          | 284 |   |
| Consumer                                                               |       | 44                         |       | —           |       |
| Multi-family and  commercial real estate                               |       | 366                        |       | —           |       |
| Total                                                                  |       | 521                        |       | 284              |       |
|                                                                   |       |                       |       |             |       |
| Accruing loans  past due 90 days or more:                              |       |                       |       |             |       |
| Multi-family and  commercial real estate                               |       | —                     |       | 2,941            |       |
| Total                                                                  |       | —                     |       | 2,941            |       |
| Total of  nonaccrual loans and accruing loans 90 days or more past due |       | $                          | 521        |             | $          | 3,225 |   |
|                                                                   |       |                       |       |             |       |
| Real estate  owned                                                     |       | —                     |       | —           |       |
| Total  nonperforming assets                                            |       | $                          | 521        |             | $          | 3,225 |   |
|                                                                   |       |                       |       |             |       |
| Total  nonperforming loans to total loans                              |       | 0.12                       | %          | 0.09             | %          |
| Total  nonperforming loans to total assets                             |       | 0.07                       | %          | 0.43             | %          |
|                                                                   |       |                       |       |             |       |
| Total  nonperforming assets to total assets                            |       | 0.07                       | %          | 0.43             | %          |

 

Nonperformingassets totaled $521,000, or 0.07% of total assets, at September 30, 2007 comparedto $3.2 million, or 0.43% of total assets, at December 31, 2006.  During the three months ended December 31,2006, a loan totaling $2.9 million went past its contractual maturity and wasincluded in the accruing loans past due 90 days or more category ofnonperforming assets.  The Bank extendedthe maturity on this loan in the first quarter of 2007 and  removed it from the total nonperformingassets, accounting for a majority of the $2.7 million decrease in nonperformingassets.  The property collateralizingthis loan is under an agreement of sale and expected to be sold during thequarter ended December 31, 2007.

Onecommercial loan secured by real estate and business assets totaling $366,000 isincluded in nonperforming loans since the loan became 90 days past due inSeptember 2007.  The business isexperiencing difficulties and the borrower is working to resolve thedelinquency.

 

22

----

 

***Noninterest Income*****.**The following table summarizes noninterest income forthe three and nine months ended September 30, 2007 and 2006.

 
| ** **                            | ** ** | **Three Months**           | ** ** | ** ** | ** ** | **Nine Months**         | ** ** | ** ** | ** ** |
|---------------------------------------|------------|----------------------------|------------|------------|------------|-------------------------|------------|------------|------------|
| ** **                            | ** ** | **Ended September 30,**    | ** ** | ** ** | ** ** | **Ended September 30,** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **2007**                   | ** ** | **2006**   | ** ** | **% Change**            | ** ** | **2007**   | ** ** | **2006** | ** ** | **% Change** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                            | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service charges  and other fee income |       | $                          | 204        |       | $          | 203                     |       | 0.5        | %          | $ | 623 |   | $ | 731 |   | (14.8 | )% |
| Net gain (loss)  on sale of:          |       |                       |       |       |       |                    |       |       |       |   |   |   |   |
| Loans                                 |       | —                     |       | 69         |       | (100.0                  | )          | 73         |       | 103 |   | (29.1 | ) |
| Assets acquired  through foreclosure  |       | —                     |       | —     |       | —                  |       | —     |       | 85 |   | (100.0 | ) |
| Fixed assets                          |       | —                     |       | (5         | )          | 100.0                   |       | 874        |       | (6 | ) | * |   |
| Securities                            |       | 19                         |       | —     |       | 100.0                   |       | 19         |       | (18 | ) | * |   |
| Income on  bank-owned life insurance  |       | 111                        |       | 108        |       | 2.8                     |       | 327        |       | 318 |   | 2.8 |   |
| Other                                 |       | 53                         |       | 61         |       | (13.1                   | )          | 160        |       | 238 |   | (32.8 | ) |
|                                  |       |                       |       |       |       |                    |       |       |       |   |   |   |   |
| Total                                 |       | $                          | 387        |       | $          | 436                     |       | (11.2      | )%         | $ | 2,076 |   | $ | 1,451 |   | 43.1 | % |

 

Noninterest income decreased$49,000, or 11.2%, and increased $625,000, or 43.1%, during the three and ninemonths ended September 30, 2007, respectively, compared to the same periods in2006.  The decrease for the three monthsended September 30, 2007 was primarily a result of the Bank’s decision todiscontinue selling residential mortgage loans, which gains represented $69,000of noninterest income in the three months ended September 30, 2006. Theincrease in the nine months ended September 30, 2007 was a result of the Bankrecognizing a pre-tax gain of $874,000 on the sale of its operations center inthe second quarter of 2007. This gain was offset by a reduction in servicecharges and other fee income of $108,000 between comparable nine-month periods,as the Bank modified its fee policies related to customer deposit accounts, anda decrease in other non-interest income of $78,000.

***Noninterest Expense*****.** The following table summarizesnoninterest expense for the three and nine months ended September 30, 2007 and2006.

 
| ** **                                 | ** ** | **Three Months  Ended September 30,** | ** ** | ** ** | ** ** | **Nine Months  Ended September 30,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|------------|------------|-------------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2007**                                   | ** ** | **2006**   | ** ** | **% Change**                         | ** ** | **2007**   | ** ** | **2006** | ** ** | **% Change** | ** ** |
| ** **                                 | ** ** | **(Dollars in thousands)**                 | ** ** |
| Salaries,  benefits and other compensation |       | $                                          | 2,485      |       | $          | 2,206                                     |       | 12.6       | %          | 7,154 |   | 6,535 |   | 9.5 | % |
| Occupancy  expense                         |       | 475                                        |       | 379        |       | 25.3                                      |       | 1,354      |       | 1,115 |   | 21.4 |   |
| Furniture and  equipment expense           |       | 230                                        |       | 236        |       | (2.5                                      | )          | 712        |       | 644 |   | 10.6 |   |
| Data processing  costs                     |       | 388                                        |       | 374        |       | 3.7                                       |       | 1,149      |       | 1,090 |   | 5.4 |   |
| Professional  fees                         |       | 460                                        |       | 326        |       | 41.1                                      |       | 1,445      |       | 1,094 |   | 32.1 |   |
| Marketing  expense                         |       | 152                                        |       | 199        |       | (23.6                                     | )          | 449        |       | 440 |   | 2.1 |   |
| FDIC premiums                              |       | 20                                         |       | 71         |       | (71.8                                     | )          | 62         |       | 725 |   | (91.4 | ) |
| Contribution to  charitable foundation     |       | —                                     |       | 1,500      |       | (100.0                                    | )          | —     |       | 1,500 |   | (100.0 | ) |
| Other                                      |       | 416                                        |       | 415        |       | 0.2                                       |       | 1,300      |       | 1,434 |   | (9.3 | ) |
|                                       |       |                                       |       |       |       |                                      |       |       |       |   |   |   |   |
| Total                                      |       | $                                          | 4,626      |       | $          | 5,706                                     |       | (18.9      | )%         | 13,625 |   | 14,577 |   | (6.5 | )% |

 

 

Noninterest expense decreased by $1.1 million, or 18.9%, and by$952,000, or 6.5%, during the three and nine months ended September 30, 2007,respectively, compared to the same periods in 2006.  As previously noted, the comparable 2006periods included the contribution expense of $1.5 million to the Fox Chase BankCharitable Foundation.  Excluding thatcontribution, the largest change for the periods presented was an increase insalaries and benefits expense of $279,000, or 12.6%, and $619,000, or 9.5%,respectively for the three and nine months ended September 30, 2007.  The increase in the three months endedSeptember 30, 2007 was primarily due to an expense of $68,000 associated withthe issuance of awards pursuant to the Company’s 2007 Equity Incentive Plan onAugust 31, 2007, the adoption of an Employee Stock Ownership Plan (“ESOP”) inSeptember 2006 and general compensation increases. The increase in the ninemonths ended September 30, 2007 was primarily due to the hiring of a team ofexperienced commercial lenders and commercial credit staff in the spring of2006 and the adoption of the ESOP in September 2006.  The increase in noninterest expense was alsodue to: (1) an increase in professional fees of $134,000 and $351,000,respectively, for the three and nine months ended September 30, 2007 which wereprimarily associated with being a public entity, including compliance with theSarbanes-Oxley Act, and exploring

 

23

----

 

strategic initiatives, and (2) an increase in occupancy costs of$96,000 and $239,000, respectively for the three and nine months endedSeptember 30, 2007 related to the opening of the Bank’s Marmora, New Jerseybranch office in March 2006, the opening of two loan production offices inMedia and Exton, Pennsylvania in the second quarter of 2006, and costsassociated with the Company’s newly leased operations center in the secondquarter of 2007. The Exton loan production office relocated to the Bank’s new branchlocation in West Chester, Pennsylvania during September 2007.

 

The increased costs were offset by a decrease in Federal DepositInsurance Corporation insurance premiums of $51,000 and $663,000 for the threeand nine months ended September 30, 2007, respectively, primarily due to thelifting of the Bank’s OTS-imposed Cease and Desist Order on June 28, 2006, aswell as a decrease in other expense for the nine-month periods associated witha $232,000 charge taken during the second quarter 2006 related to a write-offof an error for reconciling transactions in our automated teller machinessystem. 

***Income Taxes*****.**The income tax provision for the threeand nine months ended September 30, 2007 was $90,000 and $424,000,respectively, compared to $365,000 and $273,000 for the three and nine monthsended September 30, 2006, respectively. The Company’s effectiveincome tax rate was 16.5% and 26.3% for the three-month periods ended September30, 2007 and 2006, respectively.  Theeffective tax rate is lower for the three months ended September 30, 2007 as aresult of the Company’s tax-exempt income being a higher proportion of pre-taxincome than for the same period in 2006. The Company’s effective income tax rate was 20.9% and 14.4% for the ninemonths ended September 30, 2007 and 2006, respectively.  The effective tax rate is higher for the ninemonths ended September 30, 2007, as the Company recorded a tax benefit in thenine months ended September 30, 2006 when it reduced its tax contingencyreserve by $75,000 due to reevaluation of its tax position.

**Liquidityand Capital Management**

 

***LiquidityManagement.***Liquidity is the ability to meet current and future financial obligations of ashort-term nature. Our primary sources of funds consist of deposit inflows,loan repayments, maturities and sales of securities and proceeds from the stockoffering. While maturities and scheduled amortization of loans and securitiesare predictable sources of funds, deposit flows and loan prepayments aregreatly influenced by general interest rates, economic conditions andcompetition.

 

The followingtable presents certain of our contractual obligations as of September 30, 2007and December 31, 2006.

 
| ** **                       | ** ** | ** ** | ** ** | **Payments Due by period** | ** ** |
|----------------------------------|------------|------------|------------|----------------------------|------------|
| **Contractual Obligations**      | ** ** | **Total**  | ** ** | **Less than  One Year**    | ** ** | **One to  Three Years** | ** ** | **Three to  Five Years** | ** ** | **More Than  Five Years** | ** ** |
| ** **                       | ** ** | ** ** | ** ** | **(In thousands)**         | ** ** | ** ** | ** ** |
|                             |       |       |       |                       |       |   |   |   |   |   |   |
| **At  September 30, 2007**       |       |       |       |                       |       |   |   |   |   |   |   |
| Operating lease  obligations (1) |       | $          | 2,213      |                       | $          | 470 |   | $ | 895 |   | $ | 848 |   | $ | — |   |
| FHLB advances  (2)               |       | 35,807     |       | 1,491                      |       | 2,976 |   | 31,340 |   | — |   |
| Other long-term  obligations (3) |       | 3,885      |       | 1,886                      |       | 1,999 |   | — |   | — |   |
| Total                            |       | $          | 41,905     |                       | $          | 3,847 |   | $ | 5,870 |   | $ | 32,188 |   | $ | — |   |
|                             |       |       |       |                       |       |   |   |   |   |   |   |
| **At  December 31, 2006**        |       |       |       |                       |       |   |   |   |   |   |   |
| Operating lease  obligations (1) |       | $          | 158        |                       | $          | 120 |   | $ | 38 |   | $ | — |   | $ | — |   |
| FHLB advances  (2)               |       | 36,922     |       | 1,487                      |       | 2,979 |   | 32,456 |   | — |   |
| Other long-term  obligations (3) |       | 4,995      |       | 1,754                      |       | 3,238 |   | 3 |   | — |   |
| Total                            |       | $          | 42,075     |                       | $          | 3,361 |   | $ | 6,255 |   | $ | 32,459 |   | $ | — |   |

----

 

(1) Representslease obligations for commercial loan processing offices and the Bank’soperations center.

(2) Representsobligation owed to FHLB and includes anticipated payments of principal andinterest.

(3) Representsobligations to the Company’s third party data processing provider.

We regularly adjust our investments in liquid assetsbased upon our assessment of: (1) expected loan demands; (2) expecteddeposit flows; (3) yields available on interest-earning deposits andsecurities; and (4) the objectives of our asset/liability managementpolicy. We use a variety of measures to assess our liquidity needs, which areprovided to our Asset/Liability Management and Pricing Committees on a regularbasis. Our policy is to maintain net liquidity of at least 50% of our fundingobligations over the next month. Additionally, our policy is to maintain anamount of cash and short-term marketable securities equal to at least 15% ofnet deposits and liabilities that will mature in one year or less.

 

24

----

 

Our most liquid assetsare cash and cash equivalents. The levels of these assets depend on ouroperating, financing and investing activities during any given period. AtSeptember 30, 2007, cash and cash equivalents totaled $34.0 million. Securitiesclassified as available-for-sale, which provide additional sources ofliquidity, totaled $252.2 million at September 30, 2007. In addition, at June30, 2007, the latest date available, we had the ability to borrow a total ofapproximately $411.4 million from the Federal Home Loan Bank of Pittsburgh. OnSeptember 30, 2007, we had $30.0 million of borrowings outstanding.

At September 30, 2007, we had $80.1 million in loancommitments outstanding, which consisted of $2.2 million of mortgage loancommitments, $20.9 million in unused home equity lines of credit, $1.9 millionin consumer loan commitments or lines of credit, $55.1 million in commercialloan commitments and $586,000 in stand-by letters of credit. Certificates ofdeposit due within one year of September 30, 2007 totaled $223.8 million, or56.3%, of total certificates of deposit. We believe the large percentage ofcertificates of deposit that mature within one year reflects customers’hesitancy to invest their funds for long periods in the current low interestrate environment. If these maturing deposits do not remain with us, we will berequired to seek other sources of funds, including other certificates ofdeposit and borrowings. Depending on market conditions, we may be required topay higher rates on such deposits or other borrowings than we currently pay onthe certificates of deposit due on or before September 30, 2007. We believe,however, based on past experience that a significant portion of thesecertificates of deposit will remain with us. We have the ability to attract andretain deposits by adjusting the interest rates offered.

 

Our primary investing activities are the originationof loans and the purchase of securities. Our primary financing activitiesconsist of activity in deposit accounts. Deposit flows are affected by theoverall level of interest rates, the interest rates and products offered by usand our local competitors and other factors. We generally manage the pricing ofour deposits to be competitive and to increase core deposit relationships.Occasionally, we offer promotional rates on certain deposit products to attractdeposits.

The following table presents our primary investing andfinancing activities during the periods indicated and does not include loansoriginated and held for sale.

 
| ** **                                             | ** ** | **Nine Months Ended  September 30,  2007** | ** ** | **Year Ended  December 31,  2006** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------|------------|
| Investing  activities:                                 |       |                                                 |       |                               |       |
| Loan  originations                                     |       | $                                                    | (90,300    | )                                  | $          | (120,515 | ) |
| Other decreases  in loans                              |       | 50,913                                               |       | 137,512                            |       |
| Loan sales                                             |       | —                                               |       | 4,000                              |       |
| Loan  participation purchases                          |       | (27,614                                              | )          | (4,788                             | )          |
| Security purchases                                     |       | (87,413                                              | )          | (60,207                            | )          |
| Security sales                                         |       | 108                                                  |       | 17,205                             |       |
| Security  maturities, calls and principal repayments   |       | 64,346                                               |       | 145,471                            |       |
| Financing  activities:                                 |       |                                                 |       |                               |       |
| Decrease in  deposits                                  |       | (11,940                                              | )          | (85,773                            | )          |
| Proceeds from  stock issuance, net of conversion costs |       | —                                               |       | 62,348                             |       |
| Acquisition of  stock to fund equity incentive plan    |       | (1,374                                               | )          | —                             |       |
|                                                        |            |                                                      |            |                                    |            |  |  |

 

***Capital Management.*** The Bank is subject to variousregulatory capital requirements administered by the Office of ThriftSupervision, including a risk-based capital measure. The risk-based capitalguidelines include both a definition of capital and a framework for calculatingrisk-weighted assets by assigning balance sheet assets and off-balance sheetitems to broad risk categories. At September 30, 2007, the Bank exceeded all ofregulatory capital requirements and was considered a “well capitalized”institution under regulatory guidelines.

 

25

----

 

The following table presents the Bank’s capital ratiosand the minimum capital requirements to be considered “well capitalized” by theOTS as of September 30, 2007 and December 31, 2006:

 
| ** **                                          | ** ** | **Ratio** | ** ** | **Minimum  to be Well  Capitalized** | ** ** |
|-----------------------------------------------------|------------|-----------|------------|--------------------------------------|------------|
| **September  30, 2007:**                            |       |      |       |                                 |       |
| Tier 1 capital  (to adjusted assets)                |       | 12.98     | %          | ≥   5.0         | %          |
| Tier 1 capital  (to risk-weighted assets)           |       | 23.30     | %          | ≥   6.0         | %          |
| Total risk-based  capital (to risk-weighted assets) |       | 24.06     | %          | ≥ 10.0                    | %          |
|                                                |       |      |       |                                 |       |
| **December  31, 2006:**                             |       |      |       |                                 |       |
| Tier 1 capital  (to adjusted assets)                |       | 12.49     | %          | ≥   5.0         | %          |
| Tier 1 capital  (to risk-weighted assets)           |       | 26.79     | %          | ≥   6.0         | %          |
| Total risk-based  capital (to risk-weighted assets) |       | 27.62     | %          | ≥ 10.0                    | %          |

As aresult of Fox Chase Bancorp’s initial public stock offering, the Bank’s capitalwas increased by $30.0 million in September 2006. The remaining proceeds of theoffering were retained by Fox Chase Bancorp to be used for general corporatepurposes.   The capital ratios abovereflect this infusion of capital.

The capital from the offering significantly increasedour liquidity and capital resources. Over time, this initial level of liquidity will be reduced as netproceeds from the stock offering are used for general corporate purposes,including the funding of lending activities. The Company’s financial condition and results of operations have beenenhanced by the capital from the offering, resulting in increased netinterest-earning assets.  However, thelarge increase in equity resulting from the capital raised in the offering hashad an adverse impact on our return on equity. The Company may use capital management tools such as cash dividends andshare repurchases.

 

The Company received stockholder approval for itslong-term equity incentive plan at its annual meeting of stockholders held onMay 22, 2007. On August 31, 2007, certain officers, employees and outsidedirectors were granted in aggregate 521,800 non-statutory stock options and203,900 shares of restricted stock.

DuringSeptember 2007, the Company established a trust to purchase up to 287,500shares of common stock in the open market to fund restricted stock awards underthe Company’s equity incentive plan.  The287,500 shares were purchased by the trust at an average price of $13.02between September 14, 2007 and October 12, 2007.

**Off-Balance Sheet Arrangements**

In the normal course of operations, we engage in avariety of financial transactions that, in accordance with U.S. generallyaccepted accounting principles, are not recorded in our financial statements.These transactions involve, to varying degrees, elements of credit, interest rateand liquidity risk. Such transactions are used primarily to manage customers’requests for funding and take the form of loan commitments, letters of creditand lines of credit.

As of  September30, 2007, the Company had an interest rate swap with a notional amount of $1.2million. The Company is receiving variable rate payments of three-month Liborplus 2.24% and paying fixed-rate payments of 7.43%.  The swap matures on March 31, 2022.  The hedged item is a commercial real estateloan, which has a fixed payment rate of 7.43% and matures on the same date. Theswap had a fair value loss position of $13,000 at September 30, 2007.

For the nine months ended September 30, 2007, with theexception of the aforementioned commitments and swap arrangements, the Companydid not engage in any additional off-balance sheet transactions reasonablylikely to have a material effect on the Company’s financial condition, resultsof operation or cash flows.

 

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

There has not been any material change to the marketrisk disclosure from that contained in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2006.

 

26

----

 

**Item 4.Controls and Procedures**

The Company’s management, including the Company’sprincipal executive officer and principal financial officer, have evaluated theeffectiveness of the Company’s “disclosure controls and procedures,” as suchterm is defined in Rule 13a-15(e) promulgated under the Securities Exchange Actof 1934, as amended (the “Exchange Act”).

During the three monthsended September 30, 2007, the Company discovered an accounting error, as acomputer program did not respond as anticipated, when changes as to the methodof interest accrual was entered on certain loans.  To ensure that such error does not occur inthe future, the Company has added another step to its controls and proceduresprocess.  Based on this review andchange, management believes that its controls and procedures are effective. Theresult of the error was that $64,000 of additional interest income that shouldhave been recorded in the three months ended March 31, 2007 ($42,000 after-tax)was recorded in the three months ended September 30, 2007.  The Company has determined that the amountinvolved was immaterial to the related periods.

Accordingly and based upon their evaluation, theprincipal executive officer and principal financial officer concluded that, asof the end of the period covered by this report, the Company’s disclosurecontrols and procedures were effective for the purpose of ensuring that theinformation required to be disclosed in the reports that the Company files orsubmits under the Exchange Act with the Securities and Exchange Commission (the“SEC”) (1) is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms, and (2) is accumulated andcommunicated to the Company’s management, including its principal executive andprincipal financial officers, as appropriate to allow timely decisionsregarding required disclosure. In addition, based on that evaluation, no changein the Company’s internal control over financial reporting occurred during thequarter ended September 30, 2007 that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

 

**PART II. OTHER INFORMATION**

**Item 1.Legal Proceedings**

Periodically, there have been various claims andlawsuits against us, such as claims to enforce liens, condemnation proceedingson properties in which we hold security interests, claims involving the makingand servicing of real property loans and other issues incident to ourbusiness.  We are not a party to anypending legal proceedings that we believe would have a material adverse effecton our financial condition, results of operations or cash flows.

On April 28, 2006, Gregory S. Cipa, the formerPresident and Chief Executive Officer of Fox Chase Bank, filed a complaintagainst Fox Chase Bank in the Civil Division of the Court of Common Pleas ofBucks County, Pennsylvania.  In May 2006,Fox Chase Bank moved the case to federal court, answered the complaint andfiled a counterclaim. In November 2006, Mr. Cipa amended his complaint toallege that Fox Chase Bank breached its contract with him and violated itsstate statutory obligations by failing to pay Mr. Cipa certain employmentbenefits which he claims to have earned while serving as the President andChief Executive Officer of Fox Chase Bank. Mr. Cipa seeks monetary damages in excess of $900,000 and thepayment of litigation costs.  The partiescompleted discovery and filed motions for summary judgment in March 2007.  On September 20, 2007, the judge denied allmotions and summary judgments and scheduled a status hearing.  At the status hearing, the judge scheduledsettlement discussions and ordered that the trial be scheduled for January 17,2008.  Fox Chase Bank believes thisaction is without merit and intends to vigorously pursue its defenses.

**Item 1A.Risk Factors**

 

In addition to the other information set forth in this report, youshould carefully consider the factors discussed in Part I, “Item 1A. RiskFactors” in our Annual Report on Form 10-K for the year ended December 31, 2006,which could materially affect our business, financial condition or futureresults. As of September 30, 2007, the risk factors of the Company have notchanged materially from those reported in the Company’s Annual Report on Form10-K.  However, the risks described inour Annual Report on Form 10-K are not the only risks that we face.  Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and/or operatingresults.

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

 

None.

 

27

----

 

**Item 3. Defaults upon Senior Securities**

 

Not applicable.

**Item 4. Submission of Matters toa Vote of Security Holders**

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 |   | Retention Incentive Agreement by and between Fox  Chase Bank and James V. Schermerhorn |
| 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     |

----

| (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  Form 8-K as filed with the Securities and Exchange Commission on October 24,  2007.                                                                                                  |

 

28

----

 

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|                     | FOX CHASE BANCORP, INC. |
|--------------------------|-------------------------|
|                     |                    |   |
| Dated:  November 9, 2007 | By:                     | /s/ Thomas M. Petro |
|                     |                    | Thomas M. Petro |
|                     |                    | President and Chief Executive Officer |
|                     |                    | (principal executive officer) |
|                     |                    |   |
| Dated:  November 9, 2007 | By:                     | /s/ Jerry D. Holbrook |
|                     |                    | Jerry D. Holbrook |
|                     |                    | Chief Financial Officer and Secretary |
|                     |                    | (principal financial officer) |

 

 

----