Table of Contents

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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

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**FORM 10-Q**

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| **(Mark One)**                                          |
|---------------------------------------------------------|
| **x**                                                   | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                              | ** ** | ** ** |
| **For the quarterly period ended  March 31, 2009** |
| ** **                                              | ** ** | ** ** |
| **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**

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**Fox Chase Bancorp, Inc.**

(Exact name ofregistrant as specified in its charter)

 

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

** **

**(215)682-7400**

(Registrant’stelephone number, including area code)

** **

**N/A**

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

** **

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

 

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

 

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

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

 

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

 

As of May 1,2009, there were 13,956,170 shares of the registrant’s common stockoutstanding.

 

 

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Table of Contents

 

**FOXCHASE BANCORP, INC.**

** **

**Table ofContents**

 
| ** **                              | ** **                                                                                                      | **Page  No.** |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------------------|---------------|
| **Part I.  Financial Information** |
|                                    |                                                                                                            |          |
| Item 1.                                 | Financial Statements                                                                                            | 3             |
|                                    |                                                                                                            |          |
|                                    | Consolidated  Statements of Condition at March 31, 2009 (unaudited) and  December 31, 2008            | 3             |
|                                    |                                                                                                            |          |
|                                    | Consolidated  Statements of Operations for the Three Months Ended March 31, 2009 and  2008 (unaudited)     | 4             |
|                                    |                                                                                                            |          |
|                                    | Consolidated  Statements of Changes in Equity for the Three Months Ended March 31,  2009  (unaudited) | 5             |
|                                    |                                                                                                            |          |
|                                    | Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2009 and  2008 (unaudited)     | 6             |
|                                    |                                                                                                            |          |
|                                    | Notes to Unaudited Consolidated Financial Statements                                                            | 7             |
|                                    |                                                                                                            |          |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                     | 18            |
|                                    |                                                                                                            |          |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                                     | 27            |
|                                    |                                                                                                            |          |
| 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                                                    | 28            |
|                                    |                                                                                                            |          |
| 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**                          |                                                                                                            |

 

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**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

** **

**FOX CHASE BANCORP, INC**

**ConsolidatedStatements of Condition**

**(InThousands, Except Share Data)**

** **
| ** **                                                                                                                                                                                                                                 | ** ** | **March 31,** | ** **      | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-----------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                 | ** ** | **2009**           | ** **      | **2008**              | ** ** |
| ** **                                                                                                                                                                                                                                 | ** ** | **(unaudited)**    | ** **      | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                                                 | ** ** | ** **         | ** **      | ** **            | ** ** |
|                                                                                                                                                                                                                                       |       |               |            |                  |       |
| Cash and due from banks                                                                                                                                                                                                                    |       | $                  |  375       |                  | $          |  642 |   |
| Interest-earning demand deposits in other banks                                                                                                                                                                                            |       | 31,722             |            | 3,302                 |       |
| Money market funds                                                                                                                                                                                                                         |       | 103,000            |            | —                |       |
| Total cash and cash equivalents                                                                                                                                                                                                            |       | 135,097            |            | 3,944                 |       |
| Investment securities available-for-sale                                                                                                                                                                                                   |       | 31,657             |            | 25,041                |       |
| Mortgage related securities available-for-sale                                                                                                                                                                                             |       | 307,669            |            | 269,682               |       |
| Loans, net of allowance for loan losses of $6,510 at March 31,  2009 and $6,260 at December 31, 2008                                                                                                                             |       | 616,291            |            | 588,975               |       |
| Federal Home Loan Bank stock, at cost                                                                                                                                                                                                      |       | 9,707              |            | 9,707                 |       |
| Bank-owned life insurance                                                                                                                                                                                                                  |       | 12,323             |            | 12,214                |       |
| Premises and equipment                                                                                                                                                                                                                     |       | 13,540             |            | 13,705                |       |
| Accrued interest receivable                                                                                                                                                                                                                |       | 3,907              |            | 3,721                 |       |
| Mortgage servicing rights                                                                                                                                                                                                                  |       | 756                |            | 827                   |       |
| Deferred tax asset, net                                                                                                                                                                                                                    |       | 719                |            | 1,869                 |       |
| Other assets                                                                                                                                                                                                                               |       | 2,830              |            | 1,585                 |       |
| **Total Assets**                                                                                                                                                                                                                           |       | $                  |  1,134,496 |                  | $          |  931,270 |   |
|                                                                                                                                                                                                                                       |       |               |            |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                              | ** ** | ** **         | ** **      | ** **            | ** ** |
|                                                                                                                                                                                                                                       |       |               |            |                  |       |
| **LIABILITIES**                                                                                                                                                                                                                            | ** ** | ** **         | ** **      | ** **            | ** ** |
|                                                                                                                                                                                                                                       |       |               |            |                  |       |
| Deposits                                                                                                                                                                                                                                   |       | $                  |  810,095   |                  | $          |  608,472 |   |
| Federal Home Loan Bank advances                                                                                                                                                                                                            |       | 145,339            |            | 146,379               |       |
| Other borrowed funds                                                                                                                                                                                                                       |       | 50,000             |            | 50,000                |       |
| Advances from borrowers for taxes and insurance                                                                                                                                                                                            |       | 2,427              |            | 2,589                 |       |
| Accrued interest payable                                                                                                                                                                                                                   |       | 733                |            | 727                   |       |
| Accrued expenses and other liabilities                                                                                                                                                                                                     |       | 1,982              |            | 1,883                 |       |
| **Total Liabilities**                                                                                                                                                                                                                      |       | 1,010,576          |            | 810,050               |       |
|                                                                                                                                                                                                                                       |       |               |            |                  |       |
| **STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                              | ** ** | ** **         | ** **      | ** **            | ** ** |
|                                                                                                                                                                                                                                       |       |               |            |                  |       |
| Preferred stock ($.01 par value; 1,000,000 shares authorized, none  issued and outstanding at March 31, 2009 and December 31, 2008)                                                                                              |       | —             |            | —                |       |
| Common stock ($.01 par value; 35,000,000 shares authorized, 14,679,750  shares issued and 13,977,520 shares outstanding at March 31, 2009 and  14,679,750 shares issued and 14,066,559 shares outstanding at  December 31, 2008) |       | 147                |            | 147                   |       |
| Additional paid-in capital                                                                                                                                                                                                                 |       | 63,758             |            | 63,516                |       |
| Treasury stock (at cost, 702,230 shares at March 31, 2009 and 613,191  shares at December 31, 2008)                                                                                                                              |       | (8,149             | )               | (7,293                | )          |
| Common stock acquired by benefit plans                                                                                                                                                                                                     |       | (7,695             | )               | (7,819                | )          |
| Retained earnings                                                                                                                                                                                                                          |       | 73,261             |            | 72,664                |       |
| Accumulated other comprehensive income, net                                                                                                                                                                                                |       | 2,598              |            | 5                     |       |
| **Total Stockholders’ Equity**                                                                                                                                                                                                        |       | 123,920            |            | 121,220               |       |
|                                                                                                                                                                                                                                       |       |               |            |                  |       |
| **Total Liabilities and Stockholders’ Equity**                                                                                                                                                                                        |       | $                  |  1,134,496 |                  | $          |  931,270 |   |

*** ***

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

 

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**FOXCHASE BANCORP, INC**

**ConsolidatedStatements of Operations**

**(Unaudited)**

** (In Thousands, Except Per Share Data)**

 
| ** **                                                 | ** ** | **Three Months Ended** | ** **  |
|------------------------------------------------------------|------------|------------------------|-------------|
| ** **                                                 | ** ** | **March 31,**     | ** **  |
| ** **                                                 | ** ** | **2009**               | ** **  | **2008** | ** ** |
|                                                       |       |                   |        |   |   |
| **INTEREST INCOME**                                        |       |                   |        |   |   |
| Interest and fees on loans                                 |       | $                      |  8,377 |   | $ |  7,128 |   |
| Interest on money market funds                             |       | 38                     |        | 275 |   |
| Interest on mortgage related securities available-for-sale |       | 3,255                  |        | 2,904 |   |
| Interest on investment securities available-for-sale       |       |                   |        |   |   |
| Taxable                                                    |       | 124                    |        | 651 |   |
| Nontaxable                                                 |       | 143                    |        | 168 |   |
| Dividend income                                            |       | 1                      |        | 58 |   |
| Other interest income                                      |       | 1                      |        | 70 |   |
| **Total Interest Income**                                  |       | 11,939                 |        | 11,254 |   |
|                                                       |       |                   |        |   |   |
| **INTEREST EXPENSE**                                       |       |                   |        |   |   |
| Deposits                                                   |       | 4,379                  |        | 5,107 |   |
| Federal Home Loan Bank advances                            |       | 1,330                  |        | 1,030 |   |
| Other borrowed funds                                       |       | 429                    |        | 182 |   |
| **Total Interest Expense**                                 |       | 6,138                  |        | 6,319 |   |
| **Net Interest Income**                                    |       | 5,801                  |        | 4,935 |   |
| Provision for loan losses                                  |       | 395                    |        | 175 |   |
| **Net Interest Income after Provision for Loan  Losses**   |       | 5,406                  |        | 4,760 |   |
|                                                       |       |                   |        |   |   |
| **NONINTEREST INCOME**                                     |       |                   |        |   |   |
| Service charges and other fee income                       |       | 170                    |        | 191 |   |
| Net gain on sale of:                                       |       |                   |        |   |   |
| Securities available-for-sale                              |       | —                 |        | 70 |   |
| Loans                                                      |       | 3                      |        | 3 |   |
| Income on bank-owned life insurance                        |       | 109                    |        | 111 |   |
| Other                                                      |       | 65                     |        | 18 |   |
| **Total Noninterest Income**                               |       | 347                    |        | 393 |   |
|                                                       |       |                   |        |   |   |
| **NONINTEREST EXPENSE**                                    |       |                   |        |   |   |
| Salaries, benefits and other compensation                  |       | 2,850                  |        | 2,798 |   |
| Occupancy expense                                          |       | 495                    |        | 486 |   |
| Furniture and equipment expense                            |       | 221                    |        | 216 |   |
| Data processing costs                                      |       | 385                    |        | 393 |   |
| Professional fees                                          |       | 266                    |        | 313 |   |
| Marketing expense                                          |       | 84                     |        | 95 |   |
| FDIC premiums                                              |       | 241                    |        | 30 |   |
| Other                                                      |       | 409                    |        | 391 |   |
| **Total Noninterest Expense**                              |       | 4,951                  |        | 4,722 |   |
| **Income Before Income Taxes**                             |       | 802                    |        | 431 |   |
| Income tax provision                                       |       | 201                    |        | 86 |   |
| **Net Income**                                             |       | $                      |  601   |   | $ |  345 |   |
| Earnings per shares:                                       |       |                   |        |   |   |
| Basic                                                      |       | $                      |  0.05  |   | $ |  0.03 |   |
| Diluted                                                    |       | $                      |  0.05  |   | $ |  0.03 |   |

 

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

 

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**FOXCHASE BANCORP, INC**

**ConsolidatedStatements of Changes in Equity**

**ThreeMonths Ended March 31, 2009**

**(InThousands, Unaudited)**

*** ***
| ** **                                     | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Common**        | ** **   | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** **   |
|------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|--------------|--------------|------------|-------------------|------------|------------|--------------|
| ** **                                     | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **Stock**         | ** **   | ** **   | ** ** | **Other**         | ** ** | ** ** | ** **   |
| ** **                                     | ** ** | **Common** | ** ** | **Paid in**    | ** ** | **Treasury** | ** ** | **Acquired by**   | ** **   | **Retained** | ** ** | **Comprehensive** | ** ** | **Total**  | ** **   |
| ** **                                     | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Stock**    | ** ** | **Benefit Plans** | ** **   | **Earnings** | ** ** | **Income, net**   | ** ** | **Equity** | ** **   |
|                                           |       |       |       |           |       |         |       |              |         |         |       |              |       |       |         |
| **BALANCE - DECEMBER 31, 2008**                |       | $          | 147        |           | $          | 63,516       |       | $                 | (7,293       | )            | $          | (7,819            | )          | $          | 72,664       |   | $ | 5 |   | $ | 121,220 |   |
| Purchase of treasury stock, net                |       |       |       |           |       | (856         | )          |              |         |         |       |              |       | (856       | )            |
| Stock based compensation expense               |       |       |       | 243            |       |         |       |              |         |         |       |              |       | 243        |         |
| Issuance of stock for vested equity awards     |       |       |       | (24            | )          |         |       | 28                |         | (4           | )          |              |       | —     |         |
| Unallocated ESOP shares committed to employees |       |       |       | (3             | )          |         |       | 96                |         |         |       |              |       | 93         |         |
| Shares allocated in long-term incentive plan   |       |       |       | 26             |       |         |       |              |         |         |       |              |       | 26         |         |
| Net income                                     |       |       |       |           |       |         |       |              |         | 601          |       |              |       | 601        |         |
| Other comprehensive income                     |       |       |       |           |       |         |       |              |         |         |       | 2,593             |       | 2,593      |         |
|                                           |       |       |       |           |       |         |       |              |         |         |       |              |       |       |         |
| **BALANCE - MARCH 31, 2009**              |       | $          |  147  |           | $          |  63,758 |       | $                 |  (8,149 | )            | $          |  (7,695      | )          | $          |  73,261 |   | $ |  2,598 |   | $ |  123,920 |   |

*** ***

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

 

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**FOXCHASE BANCORP, INC**

**ConsolidatedStatements of Cash Flows**

**(InThousands)**

 
| ** **                                                                               | ** ** | **Three Months Ended March 31,** | ** **    |
|------------------------------------------------------------------------------------------|------------|---------------------------------------|---------------|
| ** **                                                                               | ** ** | **2009**                              | ** **    | **2008** | ** ** |
| ** **                                                                               | ** ** | **(Unaudited)**                       | ** **    |
| **Cash Flows From Operating Activities**                                                 |       |                                  |          |   |   |
| Net income                                                                               |       | $                                     |  601     |   | $ |  345 |   |
| Adjustments to reconcile net income to net cash provided by operating activities:        | ** ** | ** **                            | ** **    | ** ** | ** ** |
| Provision for loan losses                                                                |       | 395                                   |          | 175 |   |
| Depreciation                                                                             |       | 238                                   |          | 247 |   |
| Net amortization of securities premiums and discounts                                    |       | 297                                   |          | 253 |   |
| Provision for deferred income taxes                                                      |       | (221                                  | )             | (80 | ) |
| Shares committed to be released to the ESOP                                              |       | 93                                    |          | 107 |   |
| Shares earned in the long-term incentive plan                                            |       | 26                                    |          | 26 |   |
| Stock based compensation expense                                                         |       | 243                                   |          | 208 |   |
| Origination of loans held for sale                                                       |       | (417                                  | )             | (497 | ) |
| Proceeds from sales of loans held for sale                                               |       | 416                                   |          | 502 |   |
| Net gain on sales of securities                                                          |       | —                                |          | (70 | ) |
| Net gain on sales of loans and loans held for sale                                       |       | (3                                    | )             | (3 | ) |
| Earnings on investment in bank-owned life insurance                                      |       | (109                                  | )             | (111 | ) |
| Decrease in mortgage servicing rights                                                    |       | 71                                    |          | 34 |   |
| Increase in accrued interest receivable and other assets                                 |       | (264                                  | )             | (286 | ) |
| Increase (decrease) in accrued interest payable, accrued expenses and  other liabilities |       | 105                                   |          | (33 | ) |
| **Net Cash Provided by Operating Activities**                                            |       | 1,471                                 |          | 817 |   |
|                                                                                     |       |                                  |          |   |   |
| **Cash Flows from Investing Activities**                                                 |       |                                  |          |   |   |
| Equity investment in unconsolidated entity                                               |       | (630                                  | )             | **—** | ** ** |
| Investment securities - available for sale:                                              | ** ** | ** **                            | ** **    | ** ** | ** ** |
| Purchases                                                                                |       | (6,781                                | )             | (12,360 | ) |
| Proceeds from sales                                                                      |       | —                                |          | 72,398 |   |
| Proceeds from maturities, calls and principal repayments                                 |       | 505                                   |          | 10,265 |   |
| Mortgage related securities – available for sale:                                   | ** ** | ** **                            | ** **    | ** ** | ** ** |
| Purchases                                                                                |       | (49,444                               | )             | (93,883 | ) |
| Proceeds from sale                                                                       |       | —                                |          | 18,653 |   |
| Proceeds from maturities, calls and principal repayments                                 |       | 14,251                                |          | 17,447 |   |
| Net increase in loans                                                                    |       | (27,613                               | )             | (7,629 | ) |
| Purchases of loan participations                                                         |       | (98                                   | )             | (3,975 | ) |
| Proceeds from sales of loans                                                             |       | —                                |          | — |   |
| Net increase in Federal Home Loan Bank stock                                             |       | —                                |          | (1,746 | ) |
| Purchases of premises and equipment                                                      |       | (73                                   | )             | (34 | ) |
| **Net Cash Used by Investing Activities**                                                |       | (69,883                               | )             | (864 | ) |
|                                                                                     |       |                                  |          |   |   |
| **Cash Flows from Financing Activities**                                                 |       |                                  |          |   |   |
| Net increase in deposits                                                                 |       | 201,623                               |          | 12,422 |   |
| Decrease in advances from borrowers for taxes and insurance                              |       | (162                                  | )             | (297 | ) |
| Federal Home Loan Bank advances                                                          |       | —                                |          | 40,000 |   |
| Principal payments on Federal Home Loan Bank advances                                    |       | (1,040                                | )             | (632 | ) |
| Purchase of treasury stock                                                               |       | (856                                  | )             | (352 | ) |
| **Net Cash Provided by Financing Activities**                                            |       | 199,565                               |          | 51,141 |   |
| **Net Increase in Cash and Cash Equivalents**                                            |       | 131,153                               |          | 51,094 |   |
| **Cash and Cash Equivalents – Beginning**                                           |       | 3,944                                 |          | 31,275 |   |
| **Cash and Cash Equivalents – Ending**                                              |       | $                                     |  135,097 |   | $ |  82,369 |   |
| **Supplemental disclosure of cash flow Information**                                     |       |                                  |          |   |   |
| Interest paid                                                                            |       | $                                     |  6,132   |   | $ |  6,244 |   |
| Income taxes paid                                                                        |       | $                                     |  501     |   | $ |  283 |   |

* *

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

 

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** **

**FOXCHASE BANCORP, INC**

**Notes tothe Unaudited Consolidated Financial Statements**

** **

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

** **

FoxChase Bancorp, Inc. (the “Bancorp”) was organized on September 29,2006 under the laws of the United States for the purpose of being a holdingcompany for Fox Chase Bank (the “Bank”), a stock savings bank also organizedunder the laws of the United States.  On September 29,2006, the Bancorp completed its initial public offering in which it sold6,395,835 shares, or 43.57% of its outstanding common stock to the public,including 575,446 shares purchased by the Fox Chase Bank Employee StockOwnership Plan (the “ESOP”).  An additional8,148,915 shares, or 55.51% of the Bancorp’s outstanding stock, were issued toFox Chase MHC, the Bancorp’s federally chartered mutual holding company.Additionally, the Bancorp contributed $150,000 in cash and issued 135,000shares, or 0.92% of its outstanding common stock, to the Fox Chase BankCharitable Foundation.

 

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

 

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

 

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

 

The consolidatedfinancial statements include the accounts of the Bancorp and the Bank. The Bank’soperations include the accounts of its wholly owned subsidiaries, Fox ChaseFinancial, Inc. and Fox Chase Service Corporation.  Fox Chase Financial, Inc. is a Delawarechartered investment holding company and its sole purpose is to manage and holdinvestment securities.  Fox Chase ServiceCorporation is Pennsylvania chartered company and its sole purpose is tofacilitate the Company’s investment in Philadelphia Mortgage Advisors.     The consolidated financial statements donot include the transactions and balances of Fox Chase MHC.  All material inter-company transactions andbalances have been eliminated in consolidation. Prior period amounts arereclassified, when necessary, to conform with the current year’s presentation.

 

The Company followsaccounting principles and reporting practices that are in compliance with U.S.generally accepted accounting principles (“GAAP”). The preparation of thefinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclose contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from those estimates. Material estimates that are particularly susceptible to significantchange in the near term relate to the determination of the allowance for loanlosses, the valuation and realizability of deferred tax assets and theevaluation of other-than-temporary impairment and valuation of investmentsecurities.

 

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

 

7

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**Per ShareInformation**

** **

**The Company follows the provisions of SFAS No. 128, “EarningsPer Share.”  Basic earnings per shareexcludes dilution and is computed by dividing income available to commonstockholders by the weighted-average common shares outstanding during theperiod.  Diluted earnings per share takesinto account the potential dilution that could occur if securities or othercontracts to issue common stock were exercised and converted into commonstock.  Unallocated shares in the Bank’semployee stock ownership plan (“ESOP”) and shares purchased to fund the Bancorp’s2007 Equity Incentive Plan are not included in either basic or diluted earningsper share.  Unvested shares in theBancorp’s long-term incentive plan are not included in basic earnings pershare.**

** **

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

** **
| ** **                                                                   | ** ** | **Three Months Ended** | ** **    |
|------------------------------------------------------------------------------|------------|------------------------|---------------|
| ** **                                                                   | ** ** | **March 31,**     | ** **    |
| ** **                                                                   | ** ** | **2009**               | ** **    | **2008** | ** ** |
| Net income                                                                   |       | $                      |  601,000 |   | $ |  345,000 |   |
|                                                                         |       |                   |          |   |   |
| Weighted-average common shares outstanding (1)                               |       | 14,021,468             |          | 14,344,277 |   |
| Average common stock acquired by stock benefit plans:                        |       |                   |          |   |   |
| Unvested shares – long-term incentive plan                              |       | (16,743                | )             | (25,114 | ) |
| ESOP shares unallocated                                                      |       | (457,054               | )             | (495,418 | ) |
| Shares purchased by trust                                                    |       | (246,209               | )             | (287,500 | ) |
|                                                                         |       |                   |          |   |   |
| Weighted-average common shares used to calculate basic earnings per  share   |       | 13,301,462             |          | 13,536,245 |   |
|                                                                         |       |                   |          |   |   |
| Dilutive effect of:                                                          |       |                   |          |   |   |
| Unvested shares – long-term incentive plan                              |       | 16,743                 |          | 25,114 |   |
| Restricted stock awards                                                      |       | 1,576                  |          | 4 |   |
|                                                                         |       |                   |          |   |   |
| Weighted-average common shares used to calculate diluted earnings per  share |       | 13,319,781             |          | 13,561,363 |   |
|                                                                         |       |                   |          |   |   |
| Earnings per share-basic                                                     |       | $                      |  0.05    |   | $ |  0.03 |   |
| Earnings per share-diluted                                                   |       | $                      |  0.05    |   | $ |  0.03 |   |
|                                                                         |       |                   |          |   |   |

 
| Outstanding common stock equivalents having no dilutive effect |   | 879,643 |   | 806,196 |   |
|----------------------------------------------------------------|--------|---------|--------|---------|--------|

 

----

(1) Excludes treasury stock

 

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

** **

The amortizedcost and fair value of securities available-for-sale as of March 31, 2009and December 31, 2008 are summarized as follows:

** **
| ** **                                           | ** ** | **March 31, 2009 (Unaudited)** | ** **    |
|------------------------------------------------------|------------|-------------------------------------|---------------|
| ** **                                           | ** ** | ** **                          | ** **    | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Amortized**                       | ** **    | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                           | ** ** | **Cost**                            | ** **    | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                                           | ** ** | **(In Thousands)**                  | ** **    |
|                                                 |       |                                |          |   |   |   |   |   |   |
| Obligations of U.S. government agencies              |       | $                                   |  313     |   | $ |  — |   | $ |  — |   | $ |  313 |   |
| State and political subdivisions                     |       | 14,176                              |          | 123 |   | (92 | ) | 14,207 |   |
| Corporate securities                                 |       | 17,661                              |          | 20 |   | (544 | ) | 17,137 |   |
|                                                 |       | 32,150                              |          | 143 |   | (636 | ) | 31,657 |   |
|                                                 |       |                                |          |   |   |   |   |   |   |
| Private label residential mortgage related security  |       | 866                                 |          | — |   | (634 | ) | 232 |   |
| Private label commercial mortgage related securities |       | 13,989                              |          | 29 |   | (2,084 | ) | 11,934 |   |
| Agency residential mortgage related securities       |       | 288,365                             |          | 7,288 |   | (150 | ) | 295,503 |   |
| Total mortgage related securities                    |       | 303,220                             |          | 7,317 |   | (2,868 | ) | 307,669 |   |
|                                                 |       |                                |          |   |   |   |   |   |   |
| **Total securities**                                 |       | $                                   |  335,370 |   | $ |  7,460 |   | $ |  (3,504 | ) | $ |  339,326 |   |

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

 

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**NOTE 2 - INVESTMENT AND MORTGAGE RELATED SECURITIES (CONTINUED)**

** **

Thefollowing tables show gross unrealized losses and fair value of securities,aggregated by security category and length of time that individual securitieshave been in a continuous unrealized loss position, at March 31, 2009 and December 31,2008:

 
| ** **                                           | ** ** | **March 31, 2009 (Unaudited)** | ** **    |
|------------------------------------------------------|------------|-------------------------------------|---------------|
| ** **                                           | ** ** | **Less than 12 Months**             | ** **    | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **Fair**                            | ** **    | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                                           | ** ** | **Value**                           | ** **    | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| ** **                                           | ** ** | **(In Thousands)**                  | ** **    |
| ** **                                           | ** ** | ** **                          | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| State and political subdivisions                     |       | $                                   |  3,096   |   | $ |  (92 | ) | $ |  — |   | $ |  — |   | $ |  3,096 |   | $ |  (92 | ) |
| Corporate securities                                 |       | 15,755                              |          | (544 | ) | — |   | — |   | 15,755 |   | (544 | ) |
|                                                 |       | 18,851                              |          | (636 | ) |   |   | — |   | 18,851 |   | (636 | ) |
|                                                 |       |                                |          |   |   |   |   |   |   |   |   |   |   |
| Private label residential mortgage related security  |       | —                              |          | — |   | 232 |   | (634 | ) | 232 |   | (634 | ) |
| Private label commercial mortgage related securities |       | 2,378                               |          | (61 | ) | 8,021 |   | (2,023 | ) | 10,399 |   | (2,084 | ) |
| Agency residential mortgage related securities       |       | 45,420                              |          | (144 | ) | 705 |   | (6 | ) | 46,125 |   | (150 | ) |
| Total mortgage related securities                    |       | 47,798                              |          | (205 | ) | 8,958 |   | (2,663 | ) | 56,756 |   | (2,868 | ) |
|                                                 |       |                                |          |   |   |   |   |   |   |   |   |   |   |
| **Total securities**                                 |       | $                                   |   66,649 |   | $ |   (841 | ) | $ |    8,958 |   | $ |  (2,663 | ) | $ |   75,607 |   | $ |   (3,504 | ) |

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

 

TheCompany evaluates current characteristics of each of its private labelsecurities such as delinquency and foreclosure levels, credit enhancement,projected losses and coverage on a quarterly basis. It is possible that theunderlying collateral of these securities will perform worse than current expectations,which may lead to adverse changes in cash flows on these securities andpotential future other-than-temporary impairment losses. Events that maytrigger material declines in fair values for these securities in the futurewould include but are not limited to deterioration of credit metrics,significantly higher levels of default and severity of loss on the underlyingcollateral, deteriorating credit enhancement and loss coverage ratios, orfurther illiquidity.

 

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**NOTE 2 - INVESTMENT AND MORTGAGE RELATEDSECURITIES (CONTINUED)**

 

The Company had one private label residential mortgagerelated security and five commercial mortgage related securities at March 31,2009. The private label mortgage related security has a credit rating of AAAand its amortized cost was $866,000 and $889,000 at March 31, 2009 and December 31,2008, respectively. This security has an unrealized loss of $634,000 and$620,000 as of March 31, 2009 and December 31, 2008, respectively.Delinquency levels on the underlying collateral in this security increased to17.4% at March 31, 2009 compared to 13.8% at December 31, 2008 and7.6% at March 31, 2008. Accordingly, management’s expectations for creditlosses on this security have increased since December 31, 2008.  However, management believes the level ofcredit enhancement supporting this security is adequate to absorb management’sprojected losses and, therefore, the unrealized loss on this security continuesto be temporary at March 31, 2009 given management’s ability and intent tohold to recovery.

 

The commercial mortgage related securities each have a creditrating of AAA and an amortized cost of $12.5 million and $10.0 million at March 31,2009 and December 31, 2008, respectively. The securities had a combinedunrealized loss of $2.1 million and a combined unrealized loss of $2.7 millionat March 31, 2009 and December 31, 2008, respectively. Managementbelieves the impairment on these securities is temporary based on the cashflows, credit rating, credit enhancement, structure of the underlyingsecurities and management’s ability and intent to hold to recovery.

 

**NOTE 3 - LOANS**

** **

The composition of netloans at March 31, 2009, and December 31, 2008 is provided below (inthousands).

 
| ** **                          | ** ** | **March 31,  2009** | ** **    | **December 31,  2008** | ** ** |
|-------------------------------------|------------|--------------------------|---------------|-----------------------------|------------|
| ** **                          | ** ** | **(Unaudited)**          | ** **    | ** **                  | ** ** |
| Real estate loans:                  |       |                     |          |                        |       |
| One-to four-family                  |       | $                        |  269,005 |                        | $          |  260,833 |   |
| Multi-family and commercial         |       | 174,603                  |          | 155,564                     |       |
| Construction                        |       | 65,339                   |          | 65,002                      |       |
|                                |       | 508,947                  |          | 481,399                     |       |
| Consumer loans:                     |       |                     |          |                        |       |
| Home equity                         |       | 60,249                   |          | 63,987                      |       |
| Automobile                          |       | 205                      |          | 262                         |       |
| Lines of credit                     |       | 12,922                   |          | 11,486                      |       |
| Other                               |       | 272                      |          | 351                         |       |
|                                |       | 73,648                   |          | 76,086                      |       |
| Commercial loans                    |       | 39,681                   |          | 37,371                      |       |
| **Total Loans**                     |       | 622,276                  |          | 594,856                     |       |
| Deferred loan origination fees, net |       | 525                      |          | 379                         |       |
| Allowance for loan losses           |       | (6,510                   | )             | (6,260                      | )          |
| **Net Loans**                       |       | $                        |  616,291 |                        | $          |  588,975 |   |

 

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

 
| ** **                | ** ** | **Three Months**   | ** **  | **Year**              | ** ** |
|---------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                | ** ** | **Ended**          | ** **  | **Ended**             | ** ** |
| ** **                | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
| ** **                | ** ** | **2009**           | ** **  | **2008**              | ** ** | **2008** | ** ** |
| ** **                | ** ** | **(Unaudited)**    | ** **  | ** **            | ** ** |
| Balance, beginning        |       | $                  |  6,260 |                  | $          |  3,376 |   | $ |  3,376 |   |
| Provision for loan losses |       | 395                |        | 175                   |       | 2,900 |   |
| Loans charged off         |       | (145               | )           | (12                   | )          | (19 | ) |
| Recoveries                |       | —             |        | 1                     |       | 3 |   |
| Balance, ending           |       | $                  |  6,510 |                  | $          |  3,540 |   | $ |  6,260 |   |

 

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**NOTE 3 —LOANS (CONTINUED)**

 

As of March 31,2009, the Bank had one interest rate swap agreement that was entered intoduring the quarter ended June 30, 2007. The Bank had entered into a 15-year fixed rate commercial loan and theBank’s risk management objective was to lock in the fair value of theloan.  The Bank met this objective byentering into a swap agreement to exchange fixed rate cash flows for variablerate cash flows. The swap is a fair-value hedge and the value of the swap isrecorded as an adjustment to other assets in the Company’s Statements ofCondition. The Bank has not entered into a swap since the June 2007quarter and currently does not consider itself to be an active participant inthe swap market.

 

As of March 31, 2009and December 31, 2008, the Bank’s one swap agreement had a notional amountof $1.2 million, which was earning interest at 7.43%.  The Company is receiving a variable ratepayment of three-month LIBOR plus 2.24% and is paying a fixed rate payment of7.43%. The swap matures in April 2022 and had a market value loss positionof $215,000 and $236,000 at March 31, 2009 and December 31, 2008,respectively.

 

The loan is contractuallycurrent and the critical terms of the loan and the swap are a mirror imageexcept that the loan includes a default interest rate clause.  Accordingly, the Company has determined themarket value of the gain position of the loan is equal to the market value lossposition of the swap as of both December 31, 2008 and March 31, 2009.

 

**NOTE 4 — MORTGAGE SERVICING ACTIVITY**

** **

Loans serviced for othersare not included in the accompanying consolidated statements of condition. Theunpaid principal balances of these loans were $104.4 million and $114.3 millionat March 31, 2009 and 2008, respectively, and $109.6 million at December 31,2008.

 

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

 
| ** **                            | ** ** | **Three Months  Ended  March 31,** | ** ** | **Year  Ended  December 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **2009**                                | ** ** | **2008**                           | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **(Unaudited)**                         | ** ** | ** **                         | ** ** |
| Balance, beginning                    |       | $                                       |  827  |                               | $          |  1,066 |   | $ |  1,066 |   |
| Mortgage servicing rights capitalized |       | —                                  |       | —                             |       | — |   |
| Mortgage servicing rights amortized   |       | (47                                     | )          | (34                                | )          | (106 | ) |
| Valuation allowance                   |       | (24                                     | )          | —                             |       | (133 | ) |
| Balance, ending                       |       | $                                       |  756  |                               | $          |  1,032 |   | $ |  827 |   |

 

At March 31, 2009, March 31,2008 and December 31, 2008, the fair value of the mortgage servicingrights (“MSRs”) was $775,000 (unaudited), $1.2 million (unaudited) and$836,000, respectively. The fair value at these dates was determined using athird-party valuation model that calculates the present value of estimatedfuture servicing income. The model incorporates assumptions that marketparticipants use in estimating future net servicing income, including estimatesof prepayment speeds and discount rates. Mortgage loan prepayment speed is theannual rate at which borrowers are forecasted to repay their mortgage loanprincipal and is based on historical experience and current interest rates. Thediscount rate used to determine the present value of future net servicingincome - another key assumption in the model - is the required rate of returnthe market would expect for an asset with similar risk. Both assumptions can,and generally will, change quarterly valuations as market conditions andinterest rates change.

 

During 2008, the Bankrecorded a total valuation allowance of $133,000 on its MSRs, which was due toa significant decrease in interest rates for residential mortgages during theyear resulting in assumed higher mortgage prepayments.  This valuation allowance was increased by$24,000 to $157,000 during the first quarter of 2009.

 

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** **

**NOTE 5 - DEPOSITS**

 

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

 
| ** **                           | ** ** | **March 31, 2009**            | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | **Weighted Average Interest Rate** | ** ** | **Amount**                 | ** ** | **Weighted Average Interest Rate** | ** ** | **Amount** | ** ** |
| ** **                           | ** ** | **(Unaudited)**                    | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Non-interest bearing demand accounts |       | —                             | %          | $                          | 46,094     |   | — | % | $ | 46,716 |   |
| NOW accounts                         |       | 1.12                               |       | 35,827                     |       | 1.13 |   | 35,330 |   |
| Money market accounts                |       | 2.31                               |       | 126,492                    |       | 2.01 |   | 101,295 |   |
| Savings and club accounts            |       | 0.25                               |       | 51,045                     |       | 0.25 |   | 51,196 |   |
| Certificates of deposit              |       | 3.71                               |       | 550,637                    |       | 3.96 |   | 373,935 |   |
|                                 |       | 2.95                               | %          | $                          | 810,095    |   | 2.86 | % | $ | 608,472 |   |

 

**NOTE 6 — BORROWINGS**

 

Pursuantto collateral agreements with the Federal Home Loan Bank of Pittsburgh (the “FHLB”),advances are secured by qualifying first mortgage loans, qualifyingfixed-income securities, FHLB stock and an interest-bearing demand depositaccount with the FHLB. As of March 31, 2009, the Bank has $177.5 millionin qualifying collateral pledged against its advances.

 
| **Maturity Date**  | ** ** | **Interest Rate** | ** ** | **Strike Rate** | ** ** | **Call Date**      | ** ** | **Amount**         | ** **    |
|--------------------|------------|-------------------|------------|-----------------|------------|--------------------|------------|--------------------|---------------|
| ** **         | ** ** | ** **        | ** ** | ** **      | ** ** | ** **         | ** ** | **(in thousands)** | ** **    |
|               |       |              |       |            |       |               |       |               |          |
| December 2009 |       | 2.26              | %          |            |       |               |       | $                  | 5,000         |   |
| February 2010 |       | 2.84              | %          |            |       |               |       | 10,000             |          |
| August 2011   |       | 4.89              | %          | 7.50            | %          | May 2009      |       | 20,000             |          |
| August 2011   |       | 4.87              | %          | 7.50            | %          | May 2009      |       | 10,000             |          |
| July 2013     |       | 4.10              | %          |            |       |               |       | 9,845              |          |
| December 2013 |       | 2.80              | %          |            |       | December 2010 |       | 5,000              |          |
| January 2015  |       | 3.49              | %          |            |       |               |       | 25,494             |          |
| December 2015 |       | 3.06              | %          |            |       | December 2011 |       | 5,000              |          |
| November 2017 |       | 3.62              | %          |            |       | November 2010 |       | 15,000             |          |
| November 2017 |       | 3.87              | %          |            |       | November 2011 |       | 15,000             |          |
| December 2017 |       | 2.83              | %          |            |       | June 2009     |       | 20,000             |          |
| December 2018 |       | 3.15              | %          |            |       | December 2012 |       | 5,000              |          |
|               |       |              |       |            |       |               |       |               |          |
|               |       |              |       |            |       |               |       | $                  |  145,339 |   |

 

Forthe borrowings that contractually mature in August 2011, if three-monthLIBOR is greater than or equal to the Strike Rate, the FHLB can notify the Bankof its intention to convert the borrowing to an adjustable-rate advance equalto three-month LIBOR (1.19% at March 31, 2009) plus .2175% on a quarterlybasis. The Bank has the option to repay these advances at each of the optiondates without penalty. Accordingly, the contractual maturities above may differfrom actual maturities.

 

Theborrowing that contractually matures in December 2013 may be called by theFHLB on the call date disclosed in the above table. If the borrowing is called,the Bank has the option to either pay off the borrowing without penalty or theborrowing’s fixed rate resets to a variable rate of three-month LIBOR plus1.04%. Subsequent to the call date, the borrowings are callable by the FHLBquarterly.  Accordingly, the contractualmaturities above may differ from actual maturities.

 

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**NOTE 6 — BORROWINGS****(CONTINUED)**

 

Theborrowing that contractually matures in December 2015 may be called by theFHLB on the call date disclosed in the above table. If the borrowing is called,the Bank has the option to either pay off the borrowing without penalty or theborrowing’s fixed rate resets to a variable rate of three-month LIBOR plus1.12%. Subsequent to the call date, the borrowings are callable by the FHLBquarterly.  Accordingly, the contractualmaturities above may differ from actual maturities.

 

Theborrowings that contractually mature in November 2017 may be called by theFHLB on the call dates disclosed in the above table. If the borrowing iscalled, the Bank has the option to either pay off the borrowing without penaltyor the borrowing’s fixed rate resets to a variable rate of three-month LIBORplus .10%. Subsequent to the call date, the borrowings are callable by the FHLBquarterly.  Accordingly, the contractualmaturities above may differ from actual maturities.

 

Theborrowing that contractually matures in December 2017 may be called by theFHLB on the call date disclosed in the above table. If the borrowing is called,the Bank has the option to either pay off the borrowing without penalty or theborrowing’s fixed rate resets to a variable rate of three-month LIBOR plus..11%.  Subsequent to the call date, theborrowing is callable by the FHLB quarterly. Accordingly, the contractual maturities above may differ from actualmaturities.

 

Theborrowing that contractually matures in December 2018 may be called by theFHLB on the call date disclosed in the above table. If the borrowing is called,the Bank has the option to either pay off the borrowing without penalty or theborrowing’s fixed rate resets to a variable rate of three-month LIBOR plus1.14%. Subsequent to the call date, the borrowings are callable by the FHLBquarterly.  Accordingly, the contractualmaturities above may differ from actual maturities.

 

TheBank has a maximum borrowing capacity with the FHLB of approximately $479.3million at December 31, 2008, the latest date for which information isavailable.

 

Asa member of the FHLB, the Bank is required to acquire and hold shares ofcapital stock in the FHLB in an amount of at least equal to 4.75% of itsadvances from the FHLB, plus 0.75% of the unused borrowing capacity.  The Bank was in compliance with thisrequirement with a stock investment in the FHLB of $9.7 million at March 31,2009.

 

DuringDecember 2008, the FHLB announced that it does not intend to pay adividend on its common stock for the foreseeable future.  Additionally, the FHLB indicated it would notredeem any common stock associated with member advance repayments and that it mayincrease its individual member stock investment requirements. The FHLB ispermitted to increase the amount of capital stock required to be owned by anFHLB member to 6.00% of a member’s advances, plus 1.50% of the unused borrowingcapacity.  As of March 31, 2009 theCompany’s maximum stock obligation was $13.7 million.

 

**Other Borrowed Funds**

 

Otherborrowed funds obtained from large commercial banks totaled $50.0 million at March 31,2009.  These borrowings contractuallymature with dates ranging from November 2014 thru November 2018 andmay be called by the lender based on the underlying agreements.  Subsequent to the call date, these borrowingsare callable by the lender quarterly. Accordingly, the contractual maturitiesabove may differ from actual maturities.

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

 

Mortgage backedsecurities with a fair value of $64.0 million at March 31, 2009 werepledged as collateral for these other borrowed funds.

 

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**NOTE 7 —STOCK BASED COMPENSATION**

 

During the three monthsended March 31, 2009, the Company recorded $243,000 of stock basedcompensation expense in connection with the 2007 Equity Incentive Plan,comprised of stock option expense of $107,000 and restricted stock expense of$136,000.

 

The following is asummary of the Company’s stock option activity and related information for the2007 Equity Incentive Plan for the three months ended March 31, 2009:

 
| ** **                            | ** ** | ** **    | ** ** | **Weighted** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|
| ** **                            | ** ** | **Number of** | ** ** | **Average**  | ** ** |
|                                  |       | **Stock**     |       | **Exercise** |       |
| ** **                            | ** ** | **Options**   |       | **Price**    |       |
|                                  |       |          |       |         |       |
| Outstanding at December 31, 2008 |       | 615,200       |       | $            | 12.22      |   |
| Granted                               |       | 80,359        |       | 8.79         |       |
| Exercised                             |       | —        |       | —       |       |
| Forfeited                             |       | —        |       | —       |       |
| Outstanding at March 31, 2009    |       | 695,559       |       | $            | 11.83      |   |
| Exercisable at March 31, 2009    |       | 117,440       |       | $            | 12.26      |   |

 

The following is asummary of the Company’s unvested options as of March 31, 2009 and changestherein during the three months then ended:

 
| ** **                         | ** ** | ** **    | ** ** | **Weighted**    | ** ** |
|------------------------------------|------------|---------------|------------|-----------------|------------|
| ** **                         | ** ** | **Number of** | ** ** | **Average**     | ** ** |
| ** **                         | ** ** | **Stock**     |       | **Grant  Date** |       |
| ** **                         | ** ** | **Options**   |       | **Fair  Value** |       |
|                               |       |          |       |            |       |
| Unvested at December 31, 2008 |       | 512,140       |       | $               | 3.28       |   |
| Granted                            |       | 80,359        |       | 2.39            |       |
| Exercised                          |       | —        |       | —          |       |
| Vested                             |       | (14,380       | )          | 2.73            |       |
| Forfeited                          |       | —        |       | —          |       |
| Unvested at March 31, 2009    |       | 578,119       |       | $               | 3.17       |   |

 

Expected future expenserelating to the 578,119 non-vested options outstanding as of March 31,2009 is $1.6 million over a weighted average period of 3.7 years.

 

During the three monthsended March 31, 2009, the Company determined the fair value of the optionsgranted was $2.39.  This value was basedon the following assumptions:

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

 

The following is asummary of the status of the Company’s restricted stock as of March 31,2009 and changes therein during the three months then ended:

 
| ** **                         | ** ** | ** **     | ** ** | **Weighted**    | ** ** |
|------------------------------------|------------|----------------|------------|-----------------|------------|
| ** **                         | ** ** | **Number of**  | ** ** | **Average**     | ** ** |
| ** **                         | ** ** | **Restricted** |       | **Grant  Date** |       |
| ** **                         | ** ** | **Shares**     |       | **Fair  Value** |       |
| Unvested at December 31, 2008 |       | 179,580        |       | $               | 12.29      |   |
| Granted                            |       | 8,200          |       | 8.79            |       |
| Vested                             |       | (2,120         | )          | 11.39           |       |
| Forfeited                          |       | —         |       | —          |       |
| Unvested at March 31, 2009    |       | 185,660        |       | $               | 12.15      |   |

 

Expected futurecompensation expense relating to the 185,660 restricted shares at March 31,2009 is $1.9 million over a weighted average period of 3.5 years.

 

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**NOTE 8 — FAIR VALUE**

 

SFAS No. 157, “FairValue Measurement” defines fair value, establishes a framework for measuringfair value in generally accepted accounting principles and expands disclosuresabout fair value measurements.  Thisstatement applies under other accounting pronouncements that require or permitfair value measurements.

 

The standard describesthree levels of inputs that may be used to measure fair value:

 

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

 

Level 2  — Inputs are other than quoted pricesincluded within Level 1 that are observable for the asset or liability, eitherdirectly or indirectly, such as quoted prices for similar assets orliabilities; quoted prices in markets that are not active; or other inputs thatare observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities.

 

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

 

The Company classifiedthree types of financial instruments as Level 3 as of March 31, 2009. Thefirst instrument is a private label collateralized mortgage obligation (“CMO”),the fair value of which, unlike U.S. agency mortgage related securities, ismore difficult to determine because they are not actively traded in securitiesmarkets.  The second instrument is itsprivate label commercial mortgage backed securities (“CMBS”), the fair value ofwhich is also more difficult to determine because they are not actively tradedin securities markets.  The thirdinstrument is a loan, which was recorded at fair value when the Company adoptedSFAS No. 159, since lending credit risk is not an observable input forthis individual commercial loan (see Note 3). The unrealized loss in the private label CMO was $634,000 at March 31,2009 compared to $620,000 at December 31, 2008.  The unrealized loss in the private label CMBSportfolio was $2.1 million at March 31, 2009 compared to $2.7 million at December 31,2008. The unrealized gain on the loan was $215,000 at March 31, 2009compared to an unrealized gain of $236,000 at December 31, 2008.

 

The following table,which sets forth the Company’s fair value measurements at March 31, 2009,includes (1) investment securities and mortgage related securitiesavailable-for-sale; (2) the two financial instruments recorded at fairvalue in conjunction with the Company’s adoption of SFAS No. 159 in thefirst quarter of 2008 and (3) tranches of MSRs recorded at fair value.

 
| ** **                                           | ** ** | ** **              | ** ** | **Fair Value Measurements at Reporting Date Using** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | ** **              | ** ** | **Quoted Prices in**                                | ** ** | **Significant** | ** ** | **Significant** | ** ** |
| ** **                                           | ** ** | ** **              | ** ** | **Active Markets**                                  | ** ** | **Other** | ** ** | **Other** | ** ** |
| ** **                                           | ** ** | ** **              | ** ** | **for Identical**                                   | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                                           | ** ** | **As of**               | ** ** | **Assets**                                          | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **Description**                                      | ** ** | **March 31, 2009** | ** ** | **(Level 1)**                                       | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| ** **                                           | ** ** | **(In Thousands)**      | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Obligations of U.S. government agencies              |       | $                       | 313        |                                                | $          | — |   | $ | 313 |   | $ | — |   |
| State and political subdivisions                     |       | 14,207                  |       | —                                              |       | 14,207 |   | — |   |
| Corporate securities                                 |       | 17,137                  |       | —                                              |       | 17,137 |   | — |   |
| Private label residential mortgage related security  |       | 232                     |       | —                                              |       | — |   | 232 |   |
| Private label commercial mortgage related securities |       | 11,934                  |       | —                                              |       | — |   | 11,934 |   |
| Agency residential mortgage related securities       |       | 295,503                 |       | —                                              |       | 295,503 |   | — |   |
| Loans (1)                                            |       | 1,390                   |       | —                                              |       | — |   | 1,390 |   |
| Mortgage servicing rights                            |       | 675                     |       | —                                              |       | 675 |   | — |   |
| Other assets — swap contract (1)                |       | (215                    | )          | —                                              |       | (215 | ) | — |   |
| Total                                                |       | $                       | 341,176    |                                                | $          | — |   | $ | 327,620 |   | $ | 13,556 |   |

 

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(1)          Such assets recorded at fair value in conjunction withadoption of SFAS No. 159.

 

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**NOTE 8 —FAIR VALUE (CONTINUED)**

 

The following tableincludes a roll forward of the Significant Other Unobservable Inputs (Level 3)for the period of January 1, 2009 to March 31, 2009.

 
| ** **                              | ** ** | **Private Label** | ** ** | **Private Label** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | **Residential**   | ** ** | **Commercial**    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Mortgage**      | ** ** | **Mortgage**      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Security**      | ** ** | **Securities**    | ** ** | **Loans**  | ** ** | **Total**  | ** ** |
|                                    |       |              |       |              |       |       |       |       |       |
| Beginning balance, January 1, 2009 |       | $                 | 269        |              | $          | 7,304      |       | $          | 1,425      |   | $ | 8,998 |   |
| Purchases of securities                 |       | —            |       | 3,945             |       |       |       | 3,945      |       |
| Payments received                       |       | (23               | )          | —            |       | (14        | )          | (37        | )          |
| Premium amortization                    |       | —            |       | (5                | )          | —     |       | (5         | )          |
| Increase/(decrease) in value            |       | (14               | )          | 690               |       | (21        | )          | 655        |       |
| Reclassification to Level 3             |       | —            |       | —            |       | —     |       | —     |       |
|                                    |       |              |       |              |       |       |       |       |       |
| Ending balance, March 31, 2009     |       | $                 | 232        |              | $          | 11,934     |       | $          | 1,390      |   | $ | 13,556 |   |

 

The Company utilizes anexternal third-party pricing service to perform evaluations on its investmentportfolio on at least a quarterly basis. The Company made no adjustments to the values obtained from the pricing serviceat March 31, 2009.  The Company willcontinue to evaluate the appropriateness of the identified Level 1, 2 or 3classifications on a recurring basis.

 

**NOTE 9 - COMPREHENSIVE INCOME**

 

Comprehensive income forthe three months ended March 31, 2009, and 2008 is as follows (inthousands):

 
| ** **                                                                                                                                                            | ** ** | **Three Months  Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2009**                                | ** ** | **2008** | ** ** |
| ** **                                                                                                                                                            | ** ** | **(Unaudited)**                         | ** ** |
| Net income                                                                                                                                                            |       | $                                       | 601        |   | $ | 345 |   |
|                                                                                                                                                                  |       |                                    |       |   |   |
| Other comprehensive income:                                                                                                                                           |       |                                    |       |   |   |
| Unrealized holding gains arising during the period, net of tax  expense ($1,371 and $369 for the three months ended March 31, 2009 and  2008, respectively)      |       | 2,593                                   |       | 751 |   |
| Less: Reclassification adjustment for gains included in net income,  net of taxes ($0 and $24 for the three months ended March 31, 2009 and  2008, respectively) |       | —                                  |       | 46 |   |
| Plus: Amortization of pension actuarial loss                                                                                                                          |       | —                                  |       | 2 |   |
| Other comprehensive income                                                                                                                                            |       | 2,593                                   |       | 707 |   |
| Comprehensive income                                                                                                                                                  |       | $                                       | 3,194      |   | $ | 1,052 |   |

 

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**NOTE 10 — ACCOUNTING PRONOUNCEMENTS**

 

In April 2009, theFASB issued FSP FAS 107-1 and APB 28-1 “Interim Disclosures about Fair Value ofFinancial Instruments.”  FSP FAS 107-1amends SFAS No. 107,”Disclosures about Fair Value of Financial Instruments”,to require disclosures about fair value of financial instruments for interimreporting periods of publicly traded companies as well as in annual financialstatements.  All publicly tradedcompanies are required to include disclosures about the fair value of itsfinancial instruments whenever it issues summarized financial information forinterim reporting periods.  FAS 107-1 iseffective for interim reporting periods ending after June 15, 2009, withearly adoption permitted for periods ending after March 15, 2009.  An entity may early adopt this statement onlyif it also elects to early adopt FAS 157-4, “Determining Fair Value When theVolume and Level of Activity for the Asset and Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly”, and FAS 115-2 andFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”,which are both discussed in the next two paragraphs. The Company did not earlyadopt this statement as of March 31, 2009 and does not believe theadoption of this statement will have a material effect on its results ofoperations or financial position, if any. The Company will make the required disclosures in the second quarter2009 Form 10-Q.

 

In April 2009, theFASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation ofOther-Than-Temporary Impairments.”  FSPFAS 115-2 and FAS 124-2 amend the other-than-temporary impairment guidance fordebt securities.  FSP FAS 115-2 and 124-2is effective for interim and annual reporting periods ending after June 15,2009, with early adoption permitted for periods ending after March 15,2009.  If any entity elects to earlyadopt FSP FAS 157-4, the entity must also early adopt FSP FAS 115-2 and FAS124-2.   The Company did not early adoptthis statement as of March 31, 2009. Since the Company has not had any other-than-temporary impairment as of March 31,2009, no cumulative-effect adjustments will be required to be recorded atadoption.

 

In April 2009, theFASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions that are not Orderly.” This FSP provides additional guidance for estimating fair value inaccordance with FASB No. 157, “Fair Value Measurements”, when the volumeand level of activity for the asset or liability have significantlydecreased.  FSP FAS 157-4 is effectivefor interim and annual reporting periods ending after June 15, 2009, andshall be applied prospectively.  Earlyadoption is permitted for periods ending after March 15, 2009.  If a reporting entity elects to early adopteither FSP FAS 115-2 and FAS 124-2 or FSP FAS 107-1 and APB 28-1, the reportingentity must also early adopt this FSP. The Company did not early adopt thisstatement as of March 31, 2009 and is currently evaluating the impact theFSP will have on the results of operations or financial position, if any.

 

In March 2008, theFASB issued SFAS No. 161 “Disclosures about Derivative Instruments andHedging Activities — an amendment of FASB Statement No. 133” (SFAS No. 161).  SFAS No. 161 changes the disclosurerequirements for derivative instruments and hedging activities.  Entities are required to provide enhanceddisclosures about (a) how and why an entity uses derivative instruments, (b) howderivative instruments and related hedged items are accounted for underStatement 133 and its related interpretations, and (c) how derivativeinstruments and related hedged items affect an entity’s financial position,financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued forfiscal years and interim periods beginning after November 15, 2008, withearly application encouraged. The Company adopted this statement in the firstquarter of 2009.  The additionaldisclosure required regarding the Bank’s one interest rate swap agreement hasbeen provided in Note 3 — Loans.

 

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

 

**Forward-Looking Statements**

 

This quarterly reportcontains forward-looking statements that are based on assumptions and maydescribe future plans, strategies and expectations of the Company. Theseforward-looking statements are generally identified by use of the words “believe,”“expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions.The Company’s ability to predict results or the actual effect of future plansor strategies is inherently uncertain. Factors which could have a material adverseeffect on the operations of the Company and its subsidiary include, but are notlimited to, changes in interest rates, national and regional economicconditions, legislative and regulatory changes, monetary and fiscal policies ofthe U.S. government, including policies of the U.S. Treasury and the FederalReserve Board, the quality and composition of the loan or investmentportfolios, demand for loan products, deposit flows, competition, demand forfinancial services in the Company’s market area, changes in real estate marketvalues in the Company’s market area, changes in relevant accounting principlesand guidelines and the inability of third party service providers to performtheir functions.  Additional factors thatmay affect our results are discussed in the section titled “Risk Factors” inthe Company’s Annual Report on Form 10-K, as filed with the Securities andExchange Commission on March 12, 2009, and its other Securities andExchange Commission reports.

 

These risks anduncertainties should be considered in evaluating forward-looking statements andundue reliance should not be placed on such statements. Except as required byapplicable law or regulation, the Company does not undertake, and specifically 

 

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disclaims any obligation,to release 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.

 

**Critical Accounting Policies**

 

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

 

***Allowance for Loan Losses.*** The allowance for loan losses ismaintained at a level representing management’s best estimate of known andinherent losses in the loan portfolio, based on management’s evaluation of theportfolio’s collectibility. The allowance is established through the provisionfor loan losses, which is charged against income. Determining the amount of theallowance for loan losses necessarily involves a high degree of judgment. Amongthe material estimates required to establish the allowance are: loss exposureat default; the amount and timing of future cash flows on impacted loans; valueof collateral; and determination of loss factors to be applied to the variouselements of the portfolio. All of these estimates are susceptible tosignificant change. Management reviews the level of the allowance on aquarterly basis and establishes the provision for loan losses based upon anevaluation of the size and composition of the portfolio, loss experience in particularsegments of the portfolio, trends and absolute levels of classified andcriticized loans, trends and absolute levels in delinquent loans, trends inrisk ratings, actual charge-offs, trends in industry charge-offs by particularsegments and changes in local and national economic and businessconditions.  Although we believe that weuse the best information available to establish the allowance for loan losses,future adjustments to the allowance may be necessary if economic conditionsdiffer substantially from the assumptions used in making the evaluation.Further, current economic conditions have increased the uncertainty inherent inthese estimates and assumptions.  Inaddition, the Office of Thrift Supervision, as an integral part of itsexamination process, periodically reviews our allowance for loan losses. Suchagency may require us to recognize adjustments to the allowance based on itsjudgments about information available to it at the time of its examination. Alarge loss could deplete the allowance and require increased provisions toreplenish the allowance, which would negatively affect earnings.

 

***Valuation and Other-Than-Temporary Impairment of InvestmentSecurities***.Statement of Financial AccountingStandards No. 115, “Accounting for Certain Investments in Debt and EquitySecurities,” and FASB Staff Position FAS 115-1 and 124-1 “The Meaning of OtherThan Temporary Impairment and Its Application to Certain Investments,” requirecompanies to perform periodic reviews of individual securities in theirinvestment portfolios to determine whether a decline in the value of a securityis other than temporary. A review of other-than-temporary impairment requirescompanies to make certain judgments regarding the nature of the decline, itseffect on the financial statements and the probability, extent and timing of avaluation recovery and the company’s intent and ability to hold the security.Pursuant to these requirements, we assess valuation declines to determine theextent to which such changes are attributable to (1) fundamental factorsspecific to the issuer, such as financial condition, business prospects orother factors, or (2) market-related factors, such as required marketyields, interest rates or equity market declines. If the decline in the marketvalue of a security is determined to be other than temporary, we reduce thebook value of such security to its current market value, recognizing thedecline as a realized loss on the income statement.  The Company did not have anyother-than-temporary impairment charges during the first quarter of 2009 andmanagement does not believe that any individual unrealized loss represents another-than-temporary impairment at March 31, 2009.  See Note 2 to the consolidated financialstatements for a schedule that shows gross unrealized losses and fair value ofsecurities, aggregated by security category and length of time that individualsecurities have been in a continuous realized loss position at March 31,2009 and December 31, 2008 and Note 8 for discussion related to thedetermination of fair value.

 

***Deferred Income Taxes.*** We use theasset 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. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Weexercise significant judgment in evaluating the amount and timing of recognitionof the resulting tax liabilities and assets. These judgments require us to makeprojections of future taxable income. The judgments and estimates we make indetermining our deferred tax assets, which are inherently subjective, arereviewed on a continual basis as regulatory and business factors change. Anyreduction in estimated future taxable income may require us to record avaluation allowance against our deferred tax assets. Specifically, the Companyhad a charitable contribution carryover of $861,000 as of March 31, 2009,resulting in a deferred tax asset of $293,000. Utilization of this carryover is limited to 10% of taxable income on anannual basis. Such carryover will expire on December 31, 2011, if notutilized. If the Company is unable to generate sufficient taxable income toutilize this carryover it may require us to record a valuation allowanceagainst this deferred tax asset.  Anyvaluation allowance would result in additional income tax expense in the period,which would negatively affect earnings.

 

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**Comparison of Financial Conditionat March 31, 2009 and December 31, 2008**

 

Totalassets increased $203.2 million, or 21.8%, to $1.11 billion at March 31,2009, compared to $931.3 million at December 31, 2008.  Cashand cash equivalents increased $131.2 million from December 31, 2008 to March 31,2009 as excess funds from deposit inflows were invested in money marketfunds.  Loans increased $27.3 millionfrom December 31, 2008 to March 31, 2009. Approximately $21.3 millionof this increase was in commercial and commercial real estate loans as wecontinue our strategic initiative to increase our commercial loan portfolio.Additionally, $8.2 million of this increase was in one- to four-family realestate loans as we were able to grow this portfolio, within our geographicregion, through our correspondent relationships. The increase in the realestate and commercial loans was offset by a decrease of $2.4 million in consumerloans as the Company has elected to de-emphasize these types of loans in thecurrent economic environment.  Mortgagerelated securities available for sale increased $38.0 million, primarily due toan increase in agency residential mortgage related securities, and investmentrelated securities available for sale increased $6.6 million, primarily due toan increase in corporate securities.  Allof the increases in assets were directly funded by the increase in depositaccounts in the first quarter of 2009.

 

Depositsincreased $201.6 million, or 33.1%, from $608.5 at December 31, 2008 to$810.1 million at March 31, 2009. Money market accounts increased $25.2million, or 24.9%, and certificates of deposits increased $176.7 million, or47.3%, from December 31, 2008 to March 31, 2009.  During March, the Bank offered attractiverates on selected money market and certificate of deposit products to increaseits market share in the Philadelphia, Pennsylvania market area resulting inapproximately 6,500 new deposit accounts representing greater than $200 millionin deposits, of which approximately 50% were new deposit customers.  The Company intends to invest these funds inloans to qualified business and consumers.

 

Stockholders’equity increased $2.7 million to $123.9 million at March 31, 2009 comparedto $121.2 million at December 31, 2008 primarily due to unrealized gains,net of taxes, on the investment portfolio of $2.6 million and net income of$601,000 offset by the repurchase of 89,039 shares of common stock at a cost of$856,000.

 

**Comparison of Operating Results forthe Three Months Ended March 31, 2009 and 2008**

 

***General.***Net income increased $256,000, or 74.2%, to$601,000 for the three months ended March 31, 2009 compared to $345,000for the three months ended March 31, 2008, primarily due to a $866,000increase in net interest income offset by an increase in the provision for loanlosses of $220,000, a decrease in other noninterest income of $46,000, anincrease in noninterest expense of $229,000, and an increase in tax expense of $115,000.

 

***Net Interest Income*****.**Net interest income increased $866,000, or17.5%, to $5.8 million for the three months ended March 31, 2009 comparedthe same period in 2008.  The increase innet interest income was due to an increase in total interest income of  $685,000 and a $181,000 decrease in totalinterest expense. The increase in total interest income was primarily due to anincrease in the average balances on earning assets of $114.0 million offset bya decrease in the average yield on interest-earning assets from 5.48% to5.10%.  The increase in average balancesof interest-earning assets was primarily due to: (1) an increase in theaverage balance of loans of $142.0 million year over year primarily related tothe implementation of the Company’s focus on increasing its levels ofcommercial lending; and (2) an increase in the average balance of mortgagerelated securities of $31.9 million year over year offset by (1) adecrease of $41.4 million in average taxable securities and (2) a decreaseof $11.7 million in the average balance of money market funds.  The decrease in net interest expense wasprimarily due to a decrease in the average cost on interest bearing-liabilitiesfrom 3.73% to 3.14% partially offset by an increase in the average balances oninterest-bearing liabilities of $111.6 million. The increase in the average balance of interest-bearing liabilities wasprimarily due to an increase in the average balance of FHLB advances and otherborrowed funds of  $69.6 million as wellas an increase of $42.1 million in total interest-bearing deposits.

 

TheCompany intends to maintain a significant portion of the first quarter increasein deposits in short-term money market funds, which it anticipates will have anegative impact on net interest income, until such funds are deployed intohigher-yielding loans.

 

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Thefollowing table summarizes average balances and average yields and costs ofinterest-earning assets and interest-bearing liabilities for the three monthsended March 31, 2009 and 2008. Yields are not presented on atax-equivalent basis. Any adjustments necessary to present yields on atax-equivalent basis are insignificant.

 
| ** **                                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                               | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| ** **                                                               | ** ** | ** **                       | ** ** | **Interest** | ** ** | ** ** | ** ** | ** ** | ** ** | **Interest** | ** ** | ** ** | ** ** |
| ** **                                                               | ** ** | **Average**                      | ** ** | **and** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **and** | ** ** | **Yield/** | ** ** |
| ** **                                                               | ** ** | **Balance**                      | ** ** | **Dividends** | ** ** | **Cost** | ** ** | **Balance** | ** ** | **Dividends** | ** ** | **Cost** | ** ** |
| ** **                                                               | ** ** | **(Dollars in thousands)**       | ** ** |
| **Assets:**                                                              |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                                 |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earning demand deposits                                         |       | $                                | 11,855     |   | $ | 1 |   | 0.04 | % | $ | 13,259 |   | $ | 70 |   | 2.11 | % |
| Money market funds                                                       |       | 18,183                           |       | 38 |   | 0.84 |   | 29,915 |   | 275 |   | 3.70 |   |
| Mortgage-related securities                                              |       | 269,523                          |       | 3,255 |   | 4.83 |   | 237,640 |   | 2,904 |   | 4.89 |   |
| Taxable securities                                                       |       | 21,820                           |       | 125 |   | 2.29 |   | 63,217 |   | 709 |   | 4.48 |   |
| Nontaxable securities                                                    |       | 14,538                           |       | 143 |   | 3.93 |   | 16,950 |   | 168 |   | 3.96 |   |
| Loans:                                                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Residential loans                                                        |       | 261,767                          |       | 3,733 |   | 5.70 |   | 217,444 |   | 3,068 |   | 5.64 |   |
| Commercial loans                                                         |       | 263,353                          |       | 3,594 |   | 5.46 |   | 162,706 |   | 2,910 |   | 7.08 |   |
| Consumer loans                                                           |       | 75,317                           |       | 1,050 |   | 5.58 |   | 78,278 |   | 1,150 |   | 5.88 |   |
| Total loans                                                              |       | 600,437                          |       | 8,377 |   | 5.58 |   | 458,428 |   | 7,128 |   | 6.19 |   |
| Allowance for loan losses                                                |       | (6,356                           | )          | — |   | — |   | (3,420 | ) | — |   | — |   |
| Net loans                                                                |       | 594,081                          |       | 8,377 |   | — |   | 455,008 |   | 7,128 |   | — |   |
| Total interest-earning assets                                            |       | 930,000                          |       | 11,939 |   | 5.10 |   | 815,989 |   | 11,254 |   | 5.48 |   |
| Noninterest-earning assets                                               |       | 36,266                           |       |   |   |   |   | 36,485 |   |   |   |   |   |
| Total assets                                                             |       | $                                | 966,266    |   |   |   |   |   | $ | 852,474 |   |   |   |   |   |
|                                                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and equity:**                                              | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-bearing liabilities:                                            |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| NOW and money market deposit accounts                                    |       | $                                | 140,727    |   | 629 |   | 1.81 |   | $ | 94,169 |   | 538 |   | 2.30 |   |
| Savings accounts                                                         |       | 52,244                           |       | 32 |   | 0.25 |   | 53,637 |   | 58 |   | 0.43 |   |
| Certificates of deposit                                                  |       | 399,700                          |       | 3,718 |   | 3.77 |   | 402,810 |   | 4,511 |   | 4.50 |   |
| Total interest-bearing deposits                                          |       | 592,671                          |       | 4,379 |   | 3.00 |   | 550,616 |   | 5,107 |   | 3.73 |   |
|                                                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| FHLB advances                                                            |       | 146,524                          |       | 1,330 |   | 3.63 |   | 107,938 |   | 1,030 |   | 3.78 |   |
| Other borrowed funds                                                     |       | 50,993                           |       | 429 |   | 3.36 |   | 20,000 |   | 182 |   | 3.60 |   |
| Total borrowings                                                         |       | 197,517                          |       | 1,759 |   | 3.56 |   | 127,938 |   | 1,212 |   | 3.75 |   |
| Total interest-bearing liabilities                                       |       | 790,188                          |       | 6,138 |   | 3.14 |   | 678,554 |   | 6,319 |   | 3.73 |   |
| Noninterest-bearing deposits                                             |       | 46,950                           |       |   |   |   |   | 44,417 |   |   |   |   |   |
| Other non-interest bearing liabilities                                   |       | 6,820                            |       |   |   |   |   | 6,416 |   |   |   |   |   |
| Total liabilities                                                        |       | 843,958                          |       |   |   |   |   | 729,387 |   |   |   |   |   |
| Retained earnings                                                        |       | 121,364                          |       |   |   |   |   | 121,810 |   |   |   |   |   |
| Accumulated comprehensive income                                         |       | 944                              |       |   |   |   |   | 1,277 |   |   |   |   |   |
| Total stockholders’ equity                                          |       | $                                | 122,308    |   |   |   |   |   | $ | 123,087 |   |   |   |   |   |
|                                                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity                          |       | $                                | 966,266    |   |   |   |   |   | $ | 852,474 |   |   |   |   |   |
| Net interest income                                                      |       |                             |       | $ | 5,801 |   |   |   |   |   | $ | 4,935 |   |   |   |
| Interest rate spread                                                     |       |                             |       |   |   | 1.96 | % |   |   |   |   | 1.75 | % |
| Net interest margin                                                      |       |                             |       |   |   | 2.45 | % |   |   |   |   | 2.39 | % |
| Average interest-earning assets to average  interest-bearing liabilities |       |                             |       |   |   | 117.69 | % |   |   |   |   | 120.25 | % |

 

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(1)                       Nonperforming loans are included in averagebalance computations

 

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

 
| ** **                         | ** ** | **Three Months Ended**  | ** ** |
|------------------------------------|------------|-------------------------|------------|
| ** **                         | ** ** | **March 31, 2009** | ** ** |
| ** **                         | ** ** | **Compared to**         | ** ** |
| ** **                         | ** ** | **Three Months Ended**  | ** ** |
| ** **                         | ** ** | **March 31, 2008** | ** ** |
| ** **                         | ** ** | **Increase (Decrease)** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Due to**              | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Rate**                | ** ** | **Volume** | ** ** | **Net** | ** ** |
| ** **                         | ** ** | **(In Thousands)**      | ** ** |
| Interest and dividend income:      |       |                    |       |   |   |   |   |
| Interest-earning demand deposits   |       | $                       | (61        | ) | $ | (8 | ) | $ | (69 | ) |
| Money market funds                 |       | (129                    | )          | (108 | ) | (237 | ) |
| Mortgage related securities        |       | (38                     | )          | 389 |   | 351 |   |
| Taxable securities                 |       | (120                    | )          | (464 | ) | (584 | ) |
| Nontaxable securities              |       | (1                      | )          | (24 | ) | (25 | ) |
| Loans:                             |       |                    |       |   |   | — |   |
| Residential loans                  |       | 40                      |       | 625 |   | 665 |   |
| Commercial loans                   |       | (1,116                  | )          | 1,800 |   | 684 |   |
| Consumer loans                     |       | (57                     | )          | (43 | ) | (100 | ) |
| Total loans                        |       | (1,133                  | )          | 2,382 |   | 1,249 |   |
| Total interest-earning assets      |       | $                       | (1,482     | ) | $ | 2,167 |   | $ | 685 |   |
|                               |       |                    |       |   |   |   |   |
| Interest expense:                  |       |                    |       |   |   |   |   |
| NOW and money market deposits      |       | $                       | (175       | ) | $ | 266 |   | $ | 91 |   |
| Savings accounts                   |       | (25                     | )          | (1 | ) | (26 | ) |
| Certificates of deposit            |       | (758                    | )          | (35 | ) | (793 | ) |
| Total interest-bearing deposits    |       | (958                    | )          | 230 |   | (728 | ) |
|                               |       |                    |       |   |   |   |   |
| FHLB advances                      |       | (68                     | )          | 368 |   | 300 |   |
| Other borrowed funds               |       | (35                     | )          | 282 |   | 247 |   |
| Total interest-bearing liabilities |       | (1,061                  | )          | 880 |   | (181 | ) |
|                               |       |                    |       |   |   |   |   |
| Net change in net interest income  |       | $                       | (421       | ) | $ | 1,287 |   | $ | 866 |   |

 

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***Provision for Loan Losses*****.** The Bank recorded a provision for loanlosses of $395,000 for the three months ended March 31, 2009 compared to$175,000 for the three months ending March 31, 2008.  The increase in the provision was a result ofcontinued loan growth, primarily in commercial loans, a $685,000, or 11.7%,increase in nonperforming assets and a $133,000 increase in charge-offs.

 

Thefollowing table provides information with respect to the Bank’s nonperformingassets at the dates indicated. There were no troubled debt restructurings as ofthe dates presented.

 
| ** **                                                             | ** ** | **At March 31,** | ** ** | **At December 31,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                                             | ** ** | **2009**                   | ** ** | **2008**                      | ** ** |
| ** **                                                             | ** ** | **(Dollars in thousands)** | ** ** |
| Nonaccrual  loans:                                                     |       |                       |       |                          |       |
| One- to four-family                                                    |       | $                          | 1,445      |                          | $          | 1,503 |   |
| Multi-family and commercial real estate                                |       | 1,539                      |       | 685                           |       |
| Construction                                                           |       | 3,509                      |       | 3,495                         |       |
| Consumer                                                               |       | 42                         |       | 167                           |       |
|                                                                   |       |                       |       |                          |       |
| Total                                                                  |       | 6,535                      |       | 5,850                         |       |
| Accruing loans past due 90 days or more:                               |       |                       |       |                          |       |
| One- to four-family                                                    |       | —                     |       | —                        |       |
|                                                                   |       |                       |       |                          |       |
| Total                                                                  |       | —                     |       | —                        |       |
| Total of nonaccrual loans and accruing  loans 90 days or more past due |       | $                          | 6,535      |                          | $          | 5,850 |   |
|                                                                   |       |                       |       |                          |       |
| Real estate owned                                                      |       | —                     |       | —                        |       |
|                                                                   |       |                       |       |                          |       |
| Total nonperforming assets                                             |       | $                          | 6,535      |                          | $          | 5,850 |   |
|                                                                   |       |                       |       |                          |       |
| Total nonperforming loans to total loans                               |       | 1.05                       | %          | 0.98                          | %          |
| Total nonperforming loans to total assets                              |       | 0.58                       |       | 0.63                          |       |
| Total nonperforming assets to total assets                             |       | 0.58                       |       | 0.63                          |       |

 

Theincrease in nonaccrual loans of $685,000 to $6.5 million at March 31, 2009from $5.9 million at December 31, 2008 was primarily the result of a twocommercial real estate loans in the amount of $516,000 and $338,000,respectively, being placed on nonaccrual during the quarter.  These loans are secured by commercial realestate in the southern New Jersey area. The Bank currently believes theborrowers have adequate collateral to pay the loans upon liquidation.  This increase was offset by a $145,000charge-off related to two loans to one borrower secured by a residentialproperty in the southern New Jersey area.

 

Theincrease in the recorded investment in impaired loans requiring an allowancefor loan losses of $169,000 to $6.5 million at March 31, 2009 from $6.4million at December 31, 2008 was primarily due to classifying one new loanas impaired in the amount of $338,000, offset by a $145,000 charge-off relatedto two loans to one borrower.  Both loansare discussed in the prior paragraph.

 

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***Noninterest Income*****.**The following table summarizes other incomefor the three months ended March 31, 2009, and 2008.

 
| ** **                           | ** ** | **Three Months**           | ** ** | ** ** | ** ** | ** **        | ** ** |
|--------------------------------------|------------|----------------------------|------------|------------|------------|-------------------|------------|
| ** **                           | ** ** | **Ended March 31,**   | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                           | ** ** | **2009**                   | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                           | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Service charges and other fee income |       | $                          | 170        |       | $          | 191               |       | $ | (21 | ) | (11.0 | )% |
| Net gain on sale of:                 |       |                       |       |       |       |              |       |   |   |
| Securities available-for-sale        |       | —                     |       | 70         |       | (70               | )          | (100.0 | )% |
| Loans                                |       | 3                          |       | 3          |       | —            |       | — |   |
| Income on bank-owned life insurance  |       | 109                        |       | 111        |       | (2                | )          | (1.8 | )% |
| Other                                |       | 65                         |       | 18         |       | 47                |       | 261.1 | % |
| Total                                |       | $                          | 347        |       | $          | 393               |       | $ | (46 | ) | (11.7 | )% |

 

Servicecharges and other fee income decreased by $21,000 primarily as a result of theBank recording a valuation allowance of $24,000 on its mortgage servicingrights.  This was due to significantdecreases in interest rates for residential mortgages, resulting in assumedhigher mortgage prepayments.  Gain onsale of investment securities decreased $70,000 during the first quarter of2009, as the Company sold no securities in 2009 compared to $91.1 million inthe first quarter of 2008.  Thesedecreases were offset by an increase in other income of $47,000 primarily as aresult of an increase of $48,000 of income earned on the Bank’s investment inPhiladelphia Mortgage Advisors, Inc.

 

***Noninterest Expense*****.** The following table summarizes noninterestexpense for the three months ended March 31, 2009 and 2008.

 
| ** **                                | ** ** | **Three Months**           | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------------|------------|----------------------------|------------|------------|------------|-------------------|------------|
| ** **                                | ** ** | **Ended March 31,**   | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                                | ** ** | **2009**                   | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                                | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Salaries, benefits and other compensation |       | $                          | 2,850      |       | $          | 2,798             |       | $ | 52 |   | 1.9 | % |
| Occupancy expense                         |       | 495                        |       | 486        |       | 9                 |       | 1.9 | % |
| Furniture and equipment expense           |       | 221                        |       | 216        |       | 5                 |       | 2.3 | % |
| Data processing costs                     |       | 385                        |       | 393        |       | (8                | )          | (2.0 | )% |
| Professional fees                         |       | 266                        |       | 313        |       | (47               | )          | (15.0 | )% |
| Marketing expense                         |       | 84                         |       | 95         |       | (11               | )          | (11.6 | )% |
| FDIC premiums                             |       | 241                        |       | 30         |       | 211               |       | 703.3 | % |
| Other                                     |       | 409                        |       | 391        |       | 18                |       | 4.6 | % |
| Total                                     |       | $                          | 4,951      |       | $          | 4,722             |       | $ | 229 |   | 4.8 | % |

 

Theincrease in noninterest expense was primarily a result of an increase in FDICinsurance premiums of $211,000, due to the increased assessment for the threemonths ended March 31, 2009 by seven basis points to twelve basis pointsand that the Bank’s FDIC insurance credit was fully utilized during the fourthquarter of 2008.  A special insurancepremium assessment has been proposed by the FDIC, which will substantiallyincrease the FDIC insurance premiums in the second quarter of 2009.  In addition, salaries, benefits and othercompensation increased $52,000, or 1.9%. These increases were offset by a decrease of $47,000 in professionalfees primarily due to a reduction in consulting fees.

 

***Income Taxes*****.**The income tax provision for the three monthsended March 31, 2009 was $201,000 compared to $86,000 for the three monthsended March 31, 2008.   The Company’seffective income tax rate was 25.1% and 20.0% for the three-month periods endedMarch 31, 2009 and 2008, respectively. These rates reflect the Company’s levels of tax-exempt income for bothperiods relative to the overall level of taxable income.

 

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**Liquidity and Capital Management**

 

***Liquidity Management.*** Liquidity is the ability to meet current andfuture financial obligations of a short-term nature. Our primary sources offunds consist of deposit inflows, loan repayments, securities repayments,maturities and sales. While maturities and scheduled amortization of loans andsecurities are predictable sources of funds, deposit flows and loans andsecurities prepayments are greatly influenced by general interest rates,economic conditions and competition.

 

The following table presents certain of our contractual obligations asof March 31, 2009 and December 31, 2008.

 
| ** **                             | ** ** | ** **         | ** ** | **Payments Due by period** | ** ** |
|----------------------------------------|------------|--------------------|------------|----------------------------|------------|
| ** **                             | ** ** | ** **         | ** ** | **Less than**              | ** ** | **One to** | ** ** | **Three to** | ** ** | **More Than** | ** ** |
| **Contractual Obligations**            | ** ** | **Total**          | ** ** | **One Year**               | ** ** | **Three Years** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** |
| ** **                             | ** ** | **(In thousands)** | ** ** |
|                                   |       |               |       |                       |       |   |   |   |   |   |   |
| **At  March 31, 2009**            |       |               |       |                       |       |   |   |   |   |   |   |
| Operating lease obligations (1)        |       | $                  | 1,575      |                       | $          | 496 |   | $ | 921 |   | $ | 158 |   | $ | — |   |
| FHLB advances and other borrowings (2) |       | 225,440            |       | 16,226                     |       | 50,856 |   | 32,015 |   | 126,343 |   |
| Other long-term obligations (3)        |       | 7,101              |       | 1,653                      |       | 3,086 |   | 2,362 |   | — |   |
| Total                                  |       | $                  | 234,116    |                       | $          | 18,375 |   | $ | 54,863 |   | $ | 34,535 |   | $ | 126,343 |   |
|                                   |       |               |       |                       |       |   |   |   |   |   |   |
| **At December 31, 2008**          |       |               |       |                       |       |   |   |   |   |   |   |
| Operating lease obligations (1)        |       | $                  | 1,702      |                       | $          | 498 |   | $ | 929 |   | $ | 275 |   | $ | — |   |
| FHLB advances and other borrowings (2) |       | 238,197            |       | 16,260                     |       | 61,237 |   | 32,221 |   | 128,479 |   |
| Other long-term obligations (3)        |       | 7,443              |       | 1,651                      |       | 3,131 |   | 2,661 |   | — |   |
| Total                                  |       | $                  | 247,342    |                       | $          | 18,409 |   | $ | 65,297 |   | $ | 35,157 |   | $ | 128,479 |   |

 

----

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

(2)          Includes principal and projected interestpayments.

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

 

Weregularly adjust our investments in liquid assets based upon our assessment of:(1) expected loan demands; (2) expected deposit flows; (3) yieldsavailable on interest-earning deposits and securities; and (4) theobjectives of our asset/liability management policy. We use a variety ofmeasures to assess our liquidity needs, which are provided to ourAsset/Liability Management Committee on a regular basis.

 

Ourmost liquid assets are cash and cash equivalents. The levels of these assetsdepend on our operating, financing, lending and investing activities during anygiven period. At March 31, 2009, cash and cash equivalents totaled $135.1million. Securities classified as available-for-sale, which provide additionalsources of liquidity, totaled $339.3 million at March 31, 2009. Inaddition, at December 31, 2008, the latest date available, we had theability to borrow a total of approximately $479.3 million from the FHLB. On March 31,2009, we had $145.3 million of borrowings outstanding with the FHLB as wellas  $50.0 million of borrowingsoutstanding with another financial institution. The significant increase in cash and cash equivalents of $131.2 millionfrom December 31, 2008 to March 31, 2009 was a result of the increasein deposits during the quarter.

 

AtMarch 31, 2009, we had $101.5 million in loan commitments outstanding,which consisted of $3.8 million of mortgage loan commitments, $21.3 million inunused home equity lines of credit, $7.2 million in consumer loans, $69.2million in commercial loan commitments and $16,000 in standby letters ofcredit. Certificates of deposit due within one year of March 31, 2009totaled $228.4 million, or 41.5% of total certificates of deposit, at March 31,2009.  The percentage of certificates ofdeposit due within one year declined to 41.5% from 53.5% at December 31,2008 as a result of the Company’s certificate of deposit promotion whichattracted a greater portion of certificates of deposit with a term of eighteenmonths or longer. We believe, in general, the relatively large percentage ofcertificates of deposit that mature within one year reflects customers’hesitancy to invest their funds for long periods in the current interest rateenvironment. If these maturing deposits do not remain with us, we will be requiredto seek other sources of funds, including other certificates of deposit andborrowings. Depending on market conditions, we may be required to pay higherrates on such deposits or other borrowings than we currently pay on thecertificates of deposit due on or before March 31, 2010. 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.

 

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

 

Thefollowing table presents our primary investing and financing activities duringthe periods indicated and does not include loans originated and held for sale.

 
| ** **                                           | ** ** | **Three Months Ended  March 31,  2009** | ** ** | **Year Ended  December 31,  2008** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------|------------|
| Investing activities:                                |       |                                                   |       |                                    |       |
| Loan originations                                    |       | $                                                      | (45,228    | )                                       | $          | (207,687 | ) |
| Other decreases in loans                             |       | 17,615                                                 |       | 82,182                                  |       |
| Purchase of loan participations                      |       | (98                                                    | )          | (19,335                                 | )          |
| Security purchases                                   |       | (56,225                                                | )          | (163,303                                | )          |
| Security sales                                       |       | —                                                 |       | 94,449                                  |       |
| Security maturities, calls and principal  repayments |       | 14,756                                                 |       | 68,893                                  |       |
| Financing activities:                                |       |                                                   |       |                                    |       |
| Increase in deposits                                 |       | 201,623                                                |       | 22,912                                  |       |
| (Decrease) increase in FHLB advances                 |       | (1,040                                                 | )          | 66,379                                  |       |
| Increase in other borrowings                         |       | —                                                 |       | 30,000                                  |       |
| Purchase of treasury stock                           |       | (856                                                   | )          | (3,369                                  | )          |
|                                                      |            |                                                        |            |                                         |            |  |  |

 

***Capital Management.*** The Bank is subject to various regulatory capitalrequirements administered by the Office of Thrift Supervision, including arisk-based capital measure. The risk-based capital guidelines include both adefinition of capital and a framework for calculating risk-weighted assets byassigning balance sheet assets and off-balance sheet items to broad riskcategories. At March 31, 2009, the Bank exceeded all of regulatory capitalrequirements and was considered a “well capitalized” institution underregulatory guidelines.

 

Thefollowing table presents the Bank’s capital ratios and the minimum capitalrequirements to be considered “well capitalized” by the OTS as of March 31,2009 and December 31, 2008:

 
| ** **                                          | ** ** | **Ratio** | ** ** | **Minimum  to be Well  Capitalized** | ** ** |
|-----------------------------------------------------|------------|-----------|------------|--------------------------------------|------------|
| **March 31, 2009:**                            |       |      |       |                                 |       |
| Total risk-based capital (to risk-weighted  assets) |       | 17.35     | %          | 310.0                           | %          |
| Tier 1 capital (to risk-weighted assets)            |       | 16.40     | %          | 3  6.0                          | %          |
| Tier 1 capital (to adjusted assets)                 |       | 8.91      | %          | 3  5.0                          | %          |
|                                                |       |      |       |                                 |       |
| **December 31, 2008:**                         |       |      |       |                                 |       |
| Total risk-based capital (to risk-weighted  assets) |       | 19.25     | %          | 310.0                           | %          |
| Tier 1 capital (to risk-weighted assets)            |       | 18.11     | %          | 3  6.0                          | %          |
| Tier 1 capital (to adjusted assets)                 |       | 10.70     | %          | 3  5.0                          | %          |

 

Totalstockholders’ equity to total assets was 10.92% at March 31, 2009, 13.02%at December 31, 2008 and 14.26% at March 31, 2008.  As a result of Fox Chase Bancorp’s initialpublic offering in 2006, the Company has significant capital. The Company’sfinancial condition and results of operations have been enhanced by the capitalfrom the offering, resulting in increased net interest-earning assets.  However, the large increase in equityresulting from the capital raised in the offering has had an adverse impact onour return on equity.  The Company mayuse capital management tools such as cash dividends and share repurchases aswell as improving operating income to increase its return on equity.

 

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**Off-Balance Sheet Arrangements**

 

Inthe normal course of operations, we engage in a variety of financialtransactions that, in accordance with U.S. generally accepted accountingprinciples, are not recorded in our financial statements. These transactionsinvolve, to varying degrees, elements of credit, interest rate and liquidityrisk. Such transactions are used primarily to manage customers’ requests forfunding and take the form of loan commitments, letters of credit and lines ofcredit.

 

Forthe period ended March 31, 2009, we did not engage in any off-balancesheet transactions reasonably likely to have a material effect on our financialcondition, results of operations or cash flows.

 

**Item 3.Quantitative and Qualitative Disclosures About Market Risk.**

 

AtMarch 31, 2009, there has not been any material change to the market riskdisclosure from that contained in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

**Item 4.Controls and Procedures**

 

TheCompany’s management, including the Company’s principal executive officer andprincipal financial officer, have evaluated the effectiveness of the Company’s “disclosurecontrols and procedures,” as such term is defined in Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”).Based upon their evaluation, the principal executive officer and principalfinancial officer concluded that, as of the end of the period covered by thisreport, the Company’s disclosure controls and procedures were effective for thepurpose of ensuring that the information required to be disclosed in thereports that the Company files or submits under the Exchange Act with theSecurities and Exchange Commission (the “SEC”): (1) is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and (2) is accumulated and communicated to theCompany’s management, including its principal executive and principal financialofficers, as appropriate to allow timely decisions regarding requireddisclosure.  In addition, no change inthe Company’s internal control over financial reporting occurred during thequarter ended March 31, 2009 that has materially affected, or isreasonably likely to materially effect, Company’s internal control overfinancial reporting.

 

**PART II.OTHER INFORMATION**

 

**Item 1.Legal Proceedings**

 

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

 

**Item 1A.Risk Factors**

 

Asof March 31, 2009, the risk factors of the Company have not changedmaterially from those reported in the Company’s Annual Report on Form 10-K.  In addition to the other information setforth in this report, you should carefully consider the factors discussed in Part I,“Item 1A. Risk Factors” in our Annual Report on Form 10-K for the yearended December 31, 2008, which could materially affect our business,financial condition or future results. The risks described in our Annual Report on Form 10-K are not theonly risks that we face.  Additionalrisks and uncertainties not currently known to us or that we currently deem tobe immaterial also may materially adversely affect our business, financialcondition and/or operating results.

 

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

 
| **Period**                                              | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price Paid  Per Share** | ** ** | **Total Number  of Shares  Purchased  as Part of  Publicly  Announced Plans  or  Programs** | ** ** | **Maximum  Number of Shares  that May Yet be  Purchased Under  the Plans or Programs** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
|                                                    |       |                                    |       |                               |       |                                                                                             |       |                                                                                        |       |
| January 1, 2009 through  January 31, 2009 (1) |       | 32,600                                  |       | $                                  | 10.45      |                                                                                             | 32,600     |                                                                                        | 335,209    |   |
|                                                    |       |                                    |       |                               |       |                                                                                             |       |                                                                                        |       |
| February 1, 2009 through  February 28, 2009   |       | 18,309                                  |       | $                                  | 9.61       |                                                                                             | 18,309     |                                                                                        | 316,900    |   |
|                                                    |       |                                    |       |                               |       |                                                                                             |       |                                                                                        |       |
| March 1, 2009 through March 31,  2009         |       | 38,130                                  |       | $                                  | 8.84       |                                                                                             | 38,130     |                                                                                        | 278,770    |   |
| Total                                                   |       | 89,039                                  |       | $                                  | 9.59       |                                                                                             | 89,039     |                                                                                        |       |   |

 

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(1) On February 7, 2008, the Company announced that the Board of Directors hadapproved a stock repurchase program authorizing the Company to repurchase upto  327,000 shares of the Company’scommon stock (the “February 2008 program”). The February 2008 programwas completed during the first quarter of 2009.  On July 31, 2008, the Company announcedthat the Board of Directors approved the repurchase of up to an additional327,000 shares of the Company’s common stock (the “July 2008 program”).During the first quarter of 2009, the Company repurchased 48,230 shares as partof the July 2008 program.  Thisrepurchase program will continue until it is completed or terminated by theBoard of Directors.

 

**Item 3.Defaults upon Senior Securities**

 

Notapplicable.

 

**Item 4.Submission of Matters to a Vote of Security Holders**

 

Notapplicable.

 

**Item 5.Other Information**

 

Notapplicable.

 

**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)                                  |
| 31.1 |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer            |
| 31.2 |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer            |
| 32.0 |   | Section 1350  Certification of Chief Executive Officer and Chief Financial Officer |

 

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

 

(2)           Incorporated by reference to this document from the exhibits to the Company’sQuarterly Report on Form 10-Q filed with the Securities and ExchangeCommission on May 9, 2008.

 

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**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: May 8, 2009 | By:                     | /s/ Thomas M. Petro |
|                    |                    | Thomas M. Petro |
|                    |                    | President and Chief  Executive Officer |
|                    |                    | (principal executive  officer) |
|                    |                    |   |
| Dated: May 8, 2009 | By:                     | /s/ Roger S. Deacon |
|                    |                    | Roger S. Deacon |
|                    |                    | Chief Financial Officer |
|                    |                    | (principal financial  officer) |

 

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