Table of Contents

** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

 

**x****                      ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

** **

**For the quarterly period ended June 30,2008**

 

**OR**

 

**o****                         ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition period from             to            **

 

**Commissionfile number: 001-32971**

 

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**Fox ChaseBancorp, Inc.**

(Exactname of registrant as specified in its charter)

 

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

incorporation  or organization) |       | (I.R.S.  Employer

Identification  No.) |
|                                                                   |       |                                    |
| **4390  Davisville Road, Hatboro, Pennsylvania**                       | ** ** | **19040**                               |
| (Address of principal executive offices)                               |       | (Zip Code)                              |

 

**(215)682-7400**

(Registrant’stelephone number, including area code)

 

**N/A**

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

 

Large Accelerated Filer o    Accelerated Filer x

Non-Accelerated Filer o      SmallerReporting Company o

(Do not check if asmaller 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

 

Asof August 1, 2008, there were 14,223,850 shares of the registrant’s commonstock outstanding.

 

 

 

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Table of Contents

 

**FOX CHASE BANCORP, INC.**

 

**Table ofContents**

 
| ** **                              | ** ** | ** **                                                                                                               | ** ** | **Page**

**No.** |
|-----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| **Part I.  Financial Information** | ** ** | ** **                                                                                                               |
| ** **                              | ** ** | ** **                                                                                                               |
| Item 1.                                 |       | Financial Statements                                                                                                     |       | 3                 |
|                                    |       |                                                                                                                     |       |              |
|                                    |       | Consolidated Statements of  Condition at June 30, 2008 (unaudited) and December 31, 2007                       |       | 3                 |
|                                    |       |                                                                                                                     |       |              |
|                                    |       | Consolidated Statements of  Operations for the Three and Six Months Ended June 30, 2008 and 2007  (unaudited)       |       | 4                 |
|                                    |       |                                                                                                                     |       |              |
|                                    |       | Consolidated Statement of  Changes in Stockholders’ Equity for the Six Months Ended June 30, 2008  (unaudited) |       | 5                 |
|                                    |       |                                                                                                                     |       |              |
|                                    |       | Consolidated Statements of  Cash Flows for the Six Months Ended June 30, 2008 and 2007 (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                                                              |       | 28                |
|                                    |       |                                                                                                                     |       |              |
| Item 4.                                 |       | Controls and  Procedures                                                                                                 |       | 28                |
|                                    |       |                                                                                                                     |       |              |
| **Part II.  Other Information**    | ** ** |
| ** **                              | ** ** | ** **                                                                                                               | ** ** | ** **        |
| Item 1.                                 |       | Legal Proceedings                                                                                                        |       | 28                |
|                                    |       |                                                                                                                     |       |              |
| Item 1A.                           |       | Risk Factors                                                                                                             |       | 28                |
|                                    |       |                                                                                                                     |       |              |
| Item 2.                                 |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                             |       | 28                |
|                                    |       |                                                                                                                     |       |              |
| Item 3.                                 |       | Defaults  Upon Senior Securities                                                                                         |       | 29                |
|                                    |       |                                                                                                                     |       |              |
| Item 4.                                 |       | Submission  of Matters to a Vote of Security Holders                                                                     |       | 29                |
|                                    |       |                                                                                                                     |       |              |
| Item 5.                                 |       | Other Information                                                                                                        |       | 29                |
|                                    |       |                                                                                                                     |       |              |
| Item 6.                                 |       | Exhibits                                                                                                                 |       | 29                |
|                                    |       |                                                                                                                     |       |              |
| **Signatures**                          |       |                                                                                                                     |
|                                         |            |                                                                                                                          |            |                   |  |  |

 

2

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Table of Contents

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**FOX CHASEBANCORP, INC**

**ConsolidatedStatements of Condition**

**(InThousands, Except Share Data)**
| ** **                                                                                                                                                                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                            | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                                                            | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
|                                                                                                                                                                                                  |       |              |       |                  |       |
| **ASSETS**                                                                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| Cash and due  from banks                                                                                                                                                                              |       | $                 | 1,929      |                  | $          | 3,307 |   |
| Interest-earning  demand deposits in other banks                                                                                                                                                      |       | 5,732             |       | 7,968                 |       |
| Money market  funds                                                                                                                                                                                   |       | —            |       | 20,000                |       |
| Total cash and  cash equivalents                                                                                                                                                                      |       | 7,661             |       | 31,275                |       |
| Investment  securities available-for-sale                                                                                                                                                             |       | 24,391            |       | 91,159                |       |
| Mortgage related  securities available-for-sale                                                                                                                                                       |       | 251,367           |       | 205,145               |       |
| Loans, net of  allowance for loan losses of $3,760 and $3,376 at June 30, 2008 and  December 31, 2007, respectively                                                                         |       | 525,128           |       | 447,035               |       |
| Federal Home  Loan Bank stock, at cost                                                                                                                                                                |       | 8,067             |       | 5,875                 |       |
| Bank-owned life  insurance                                                                                                                                                                            |       | 11,986            |       | 11,762                |       |
| Premises and  equipment                                                                                                                                                                               |       | 14,074            |       | 14,466                |       |
| Accrued interest  receivable                                                                                                                                                                          |       | 3,298             |       | 3,360                 |       |
| Mortgage  servicing rights                                                                                                                                                                            |       | 1,003             |       | 1,066                 |       |
| Deferred tax  asset, net                                                                                                                                                                              |       | 1,327             |       | 410                   |       |
| Other assets                                                                                                                                                                                          |       | 2,340             |       | 1,366                 |       |
| **Total  Assets**                                                                                                                                                                                     |       | $                 | 850,642    |                  | $          | 812,919 |   |
| ** **                                                                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                        | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| **LIABILITIES**                                                                                                                                                                                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| Deposits                                                                                                                                                                                              |       | $                 | 583,233    |                  | $          | 585,560 |   |
| Federal Home  Loan Bank advances                                                                                                                                                                      |       | 119,912           |       | 80,000                |       |
| Other borrowed  funds                                                                                                                                                                                 |       | 20,000            |       | 20,000                |       |
| Advances from  borrowers for taxes and insurance                                                                                                                                                      |       | 3,146             |       | 2,374                 |       |
| Accrued interest  payable                                                                                                                                                                             |       | 557               |       | 504                   |       |
| Accrued expenses  and other liabilities                                                                                                                                                               |       | 2,725             |       | 2,110                 |       |
| **Total  Liabilities**                                                                                                                                                                                |       | 729,573           |       | 690,548               |       |
| ** **                                                                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| **STOCKHOLDERS’  EQUITY**                                                                                                                                                                        | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| Preferred stock  ($.01 par value; 1,000,000 shares authorized, none issued and outstanding at  June 30, 2008 or December 31, 2007)                                                          |       | —            |       | —                |       |
| Common stock  ($.01 par value; 35,000,000 shares authorized, 14,679,750 shares issued;  14,223,850 and 14,352,750 shares outstanding at June 30, 2008 and  December 31, 2007, respectively) |       | 147               |       | 147                   |       |
| Additional  paid-in capital                                                                                                                                                                           |       | 63,423            |       | 62,909                |       |
| Treasury stock  (at cost, 455,900 and 327,000 shares at June 30, 2008 and  December 31, 2007, respectively)                                                                                 |       | (5,456            | )          | (3,924                | )          |
| Common stock  acquired by benefit plans                                                                                                                                                               |       | (8,540            | )          | (8,732                | )          |
| Retained  earnings                                                                                                                                                                                    |       | 72,124            |       | 71,475                |       |
| Accumulated  other comprehensive income (loss), net                                                                                                                                                   |       | (629              | )          | 496                   |       |
| **Total  Stockholders’ Equity**                                                                                                                                                                  |       | 121,069           |       | 122,371               |       |
| ** **                                                                                                                                                                                            |       |              |       |                  |       |
| **Total  Liabilities and Stockholders’ Equity**                                                                                                                                                  |       | $                 | 850,642    |                  | $          | 812,919 |   |

** **

***See accompanying notes to theunaudited consolidated financial statements.***

 

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**FOX CHASEBANCORP, INC**

**ConsolidatedStatements of Operations**

**(Unaudited)**

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

 
| ** **                                               | ** ** | **Three Months Ended **

**June 30,** | ** ** | **Six Months Ended **

**June 30,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                               | ** ** | **2008**                                                  | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| **INTEREST INCOME**                                      | ** ** | ** **                                                | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and  fees on loans                              |       | $                                                         | 7,181      |                                                    | $          | 6,044 |   | $ | 14,309 |   | $ | 11,592 |   |
| Interest on  money market funds                          |       | 246                                                       |       | —                                                  |       | 521 |   | — |   |
| Interest on  mortgage related securities                 |       | 3,206                                                     |       | 1,712                                                   |       | 6,110 |   | 3,530 |   |
| Interest on  investment securities available-for-sale:   |       |                                                      |       |                                                    |       |   |   |   |   |
| Taxable                                                  |       | 104                                                       |       | 455                                                     |       | 755 |   | 908 |   |
| Non-taxable                                              |       | 155                                                       |       | 259                                                     |       | 323 |   | 504 |   |
| Dividend income                                          |       | 66                                                        |       | 62                                                      |       | 124 |   | 128 |   |
| Other interest  income                                   |       | 37                                                        |       | 1,494                                                   |       | 107 |   | 2,951 |   |
| **Total  Interest Income**                               |       | 10,995                                                    |       | 10,026                                                  |       | 22,249 |   | 19,613 |   |
|                                                     |       |                                                      |       |                                                    |       |   |   |   |   |
| **INTEREST  EXPENSE**                                    |       |                                                      |       |                                                    |       |   |   |   |   |
| Deposits                                                 |       | 4,552                                                     |       | 5,143                                                   |       | 9,659 |   | 10,013 |   |
| Federal Home  Loan Bank advances                         |       | 1,120                                                     |       | 370                                                     |       | 2,150 |   | 736 |   |
| Other borrowed  funds                                    |       | 182                                                       |       | —                                                  |       | 364 |   | — |   |
| **Total  Interest Expense**                              |       | 5,854                                                     |       | 5,513                                                   |       | 12,173 |   | 10,749 |   |
|                                                     |       |                                                      |       |                                                    |       |   |   |   |   |
| **Net  Interest Income**                                 |       | 5,141                                                     |       | 4,513                                                   |       | 10,076 |   | 8,864 |   |
| Provision for  loan losses                               |       | 225                                                       |       | 75                                                      |       | 400 |   | 75 |   |
| **Net  Interest Income after Provision for Loan Losses** |       | 4,916                                                     |       | 4,438                                                   |       | 9,676 |   | 8,789 |   |
|                                                     |       |                                                      |       |                                                    |       |   |   |   |   |
| **NONINTEREST  INCOME**                                  |       |                                                      |       |                                                    |       |   |   |   |   |
| Service charges  and other fee income                    |       | 224                                                       |       | 208                                                     |       | 415 |   | 424 |   |
| Net gain on sale  of:                                    |       |                                                      |       |                                                    |       |   |   |   |   |
| Loans                                                    |       | 1                                                         |       | 16                                                      |       | 4 |   | 73 |   |
| Fixed assets                                             |       | —                                                    |       | 874                                                     |       | — |   | 874 |   |
| Securities  available-for-sale                           |       | 48                                                        |       | —                                                  |       | 118 |   | — |   |
| Income on  bank-owned life insurance                     |       | 113                                                       |       | 109                                                     |       | 224 |   | 216 |   |
| Other                                                    |       | 17                                                        |       | 51                                                      |       | 35 |   | 107 |   |
| **Total  Noninterest Income**                            |       | 403                                                       |       | 1,258                                                   |       | 796 |   | 1,694 |   |
|                                                     |       |                                                      |       |                                                    |       |   |   |   |   |
| **NONINTEREST  EXPENSE**                                 |       |                                                      |       |                                                    |       |   |   |   |   |
| Salaries,  benefits and other compensation               |       | 3,064                                                     |       | 2,252                                                   |       | 5,862 |   | 4,669 |   |
| Occupancy  expense                                       |       | 468                                                       |       | 480                                                     |       | 954 |   | 879 |   |
| Furniture and  equipment expense                         |       | 227                                                       |       | 250                                                     |       | 443 |   | 482 |   |
| Data processing  costs                                   |       | 409                                                       |       | 388                                                     |       | 802 |   | 761 |   |
| Professional  fees                                       |       | 265                                                       |       | 512                                                     |       | 578 |   | 985 |   |
| Marketing  expense                                       |       | 125                                                       |       | 176                                                     |       | 220 |   | 297 |   |
| FDIC premiums                                            |       | 25                                                        |       | 22                                                      |       | 55 |   | 42 |   |
| Other                                                    |       | 373                                                       |       | 467                                                     |       | 764 |   | 889 |   |
| **Total  Noninterest Expense**                           |       | 4,956                                                     |       | 4,547                                                   |       | 9,678 |   | 9,004 |   |
| **Income  Before Income Taxes**                          |       | 363                                                       |       | 1,149                                                   |       | 794 |   | 1,479 |   |
| Income tax  provision                                    |       | 59                                                        |       | 297                                                     |       | 145 |   | 334 |   |
| **Net  Income**                                          |       | $                                                         | 304        |                                                    | $          | 852 |   | $ | 649 |   | $ | 1,145 |   |
| ** **                                               |       |                                                      |       |                                                    |       |   |   |   |   |
| Earnings per share:                                      |       |                                                      |       |                                                    |       |   |   |   |   |
| Basic                                                    |       | $                                                         | 0.02       |                                                    | $          | 0.06 |   | $ | 0.05 |   | $ | 0.08 |   |
| Diluted                                                  |       | $                                                         | 0.02       |                                                    | $          | 0.06 |   | $ | 0.05 |   | $ | 0.08 |   |

 

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

 

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**FOX CHASEBANCORP, INC**

**ConsolidatedStatement of Changes in Stockholders’ Equity**

**Six MonthsEnded June 30, 2008**

** (In Thousands, Unaudited)**

 
| ** **                                      | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Common**             | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **        | ** ** |
|-------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|------------------------|------------|--------------|------------|-------------------|------------|-------------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Stock**              | ** ** | ** **   | ** ** | **Other**         | ** ** | **Total**         | ** ** |
| ** **                                      | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **Acquired**           | ** ** | ** **   | ** ** | **Comprehensive** | ** ** | **Stock-**        | ** ** |
| ** **                                      | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Treasury** | ** ** | **by**                 | ** ** | **Retained** | ** ** | **Income,**       | ** ** | **holders’** | ** ** |
| ** **                                      | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Stock**    | ** ** | **Benefit Plans** | ** ** | **Earnings** | ** ** | **Net**           | ** ** | **Equity**        | ** ** |
| **BALANCE  - DECEMBER 31, 2007**                |       | $          | 147        |           | $          | 62,909       |       | $                      | (3,924     | )            | $          | (8,732            | )          | $                 | 71,475     |   | $ | 496 |   | $ | 122,371 |   |
| Purchase of  treasury stock                     |       |       |       |           |       | (1,532       | )          |                   |       |         |       |              |       | (1,532            | )          |
| Stock based  compensation expense               |       |       |       | 434            |       |         |       |                   |       |         |       |              |       | 434               |       |
| Unallocated ESOP  shares committed to employees |       |       |       | 28             |       |         |       | 192                    |       |         |       |              |       | 220               |       |
| Shares allocated  in long-term incentive plan   |       |       |       | 52             |       |         |       |                   |       |         |       |              |       | 52                |       |
| Net income                                      |       |       |       |           |       |         |       |                   |       | 649          |       |              |       | 649               |       |
| Other  comprehensive income                     |       |       |       |           |       |         |       |                   |       |         |       | (1,125            | )          | (1,125            | )          |
| **BALANCE  – JUNE 30, 2008**               |       | $          | 147        |           | $          | 63,423       |       | $                      | (5,456     | )            | $          | (8,540            | )          | $                 | 72,124     |   | $ | (629 | ) | $ | 121,069 |   |

 

***See accompanying notes to theunaudited consolidated financial statements*****.**

 

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**FOX CHASE BANCORP, INC**

**ConsolidatedStatements of Cash Flows**

**(InThousands)**

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**              | ** ** |
| ** **                                                                         | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited)**                | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                          |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 649        |   | $ | 1,145 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                           |       |   |   |
| Provision for  loan losses                                                         |       | 400                            |       | 75 |   |
| Depreciation                                                                       |       | 493                            |       | 527 |   |
| Net amortization  of securities premiums and discounts                             |       | 508                            |       | 136 |   |
| (Benefit)  provision for deferred income taxes                                     |       | (292                           | )          | 224 |   |
| Shares committed  to be released to the ESOP                                       |       | 220                            |       | 263 |   |
| Shares earned in  the long-term incentive plan                                     |       | 52                             |       | 72 |   |
| Stock based  compensation                                                          |       | 434                            |       |   |   |
| Pension plan  settlement                                                           |       | 137                            |       | — |   |
| Origination of  loans held for sale                                                |       | (2,447                         | )          | (6,112 | ) |
| Proceeds from  sale of loans held for sale                                         |       | 2,450                          |       | 7,331 |   |
| Net realized  gain on sale of fixed assets                                         |       | —                         |       | (874 | ) |
| Net gain on  sales of loans and loans held for sale                                |       | (4                             | )          | (73 | ) |
| Net gain on  sales of securities available-for-sale                                |       | (118                           | )          | — |   |
| Earnings on  investment in bank-owned life insurance                               |       | (224                           | )          | (216 | ) |
| Decrease in  mortgage servicing rights                                             |       | 63                             |       | 62 |   |
| (Increase)  decrease in accrued interest and dividends receivable and other assets |       | (393                           | )          | 498 |   |
| Increase in  accrued interest payable, accrued expenses and other liabilities      |       | 671                            |       | 401 |   |
| **Net  Cash Provided by Operating Activities**                                     |       | 2,599                          |       | 3,459 |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                          |       |                           |       |   |   |
| Investment  securities available-for-sale:                                         |       |                           |       |   |   |
| Purchases                                                                          |       | (17,128                        | )          | (15,089 | ) |
| Proceeds from  sales                                                               |       | 72,398                         |       | — |   |
| Proceeds from  maturities, calls and principal repayments                          |       | 11,180                         |       | 23,717 |   |
| Mortgage related  securities available-for-sale:                                   |       |                           |       |   |   |
| Purchases                                                                          |       | (108,495                       | )          | — |   |
| Proceeds from  sales                                                               |       | 22,051                         |       | — |   |
| Proceeds from  maturities, calls and principal repayments                          |       | 37,825                         |       | 25,305 |   |
| Net increase in  loans                                                             |       | (74,273                        | )          | (28,456 | ) |
| Purchase of loan  participations                                                   |       | (4,220                         | )          | (22,828 | ) |
| Net (increase)  decrease in Federal Home Loan Bank stock                           |       | (2,192                         | )          | 407 |   |
| Increase in  other investments                                                     |       | (83                            | )          | — |   |
| Purchase of  premises and equipment                                                |       | (110                           | )          | (1,872 | ) |
| Proceeds from  sales of premises and equipment                                     |       | 9                              |       | 1,728 |   |
| **Net  Cash Used in Investing Activities**                                         |       | (63,038                        | )          | (17,088 | ) |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                          |       |                           |       |   |   |
| Net (decrease)  increase in deposits                                               |       | (2,327                         | )          | 1,369 |   |
| Increase in  advances from borrowers for taxes and insurance                       |       | 772                            |       | 664 |   |
| Purchase of  treasury stock                                                        |       | (1,532                         | )          | — |   |
| Principal  payments on Federal Home Loan Bank advances                             |       | (1,588                         | )          | — |   |
| Federal Home  Loan Bank advances                                                   |       | 41,500                         |       | — |   |
| **Net  Cash Provided by Financing Activities**                                     |       | 36,825                         |       | 2,033 |   |
| **Net  Decrease in Cash and Cash Equivalents**                                     |       | (23,614                        | )          | (11,596 | ) |
| **CASH  AND CASH EQUIVALENTS - BEGINNING**                                         |       | 31,275                         |       | 134,441 |   |
| **CASH  AND CASH EQUIVALENTS - ENDING**                                            |       | $                              | 7,661      |   | $ | 122,845 |   |
|                                                                               |       |                           |       |   |   |
| **SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION**                              |       |                           |       |   |   |
| Interest paid                                                                      |       | $                              | 12,120     |   | $ | 10,754 |   |
| Income taxes  paid                                                                 |       | $                              | 584        |   | $ | 19 |   |

 

***See accompanying notes to theunaudited consolidated financial statements.***

 

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**FOX CHASE BANCORP, INC**

**Notes to the Unaudited ConsolidatedFinancial 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 to be a holding company for Fox ChaseBank (the “Bank”), a stock savings bank also organized under the laws of theUnited States.  On September 29,2006, the 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”).  Anadditional 8,148,915 shares, or 55.51% of the Bancorp’s outstanding stock, wereissued to Fox Chase MHC, the Bancorp’s federally chartered mutual holdingcompany. Net proceeds of the offering totaled $56.6 million.  Additionally, the Bancorp contributed$150,000 in cash and issued 135,000 shares, or 0.92% of its outstanding commonstock, to the Fox Chase Bank Charitable Foundation.

 

TheBancorp’s primary business has been that of holding the common stock of theBank and making a loan to the ESOP.   FoxChase Bancorp, Inc. is authorized to pursue other business activitiespermissible by laws and regulations for other savings and loan holdingcompanies.

 

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.  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 loss allowances and operating restrictions resulting from theregulators’ judgments based on information available to them at the time oftheir examinations.

 

Theconsolidated financial statements include the accounts of the Bancorp and itswholly owned subsidiary, the Bank. The Bank’s operations include the accountsof its wholly owned subsidiary, Fox Chase Financial, Inc.  Fox Chase Financial, Inc. is a Delawarechartered investment holding company and its sole purpose is to manage and holdinvestment securities.  The financialstatements do not 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.

 

TheCompany follows accounting principles and reporting practices which are incompliance with U.S. generally accepted accounting principles (“GAAP”). Thepreparation of the financial statements in conformity with GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.  Material estimates that are particularlysusceptible to significant change in the near term relate to the determinationof the allowance for loan losses, the valuation and realizability of deferredtax assets and the evaluation of other than temporary impairment of investmentsecurities.  These interim financialstatements do not contain all necessary disclosures required by GAAP forcomplete financial statements and therefore should be read in conjunction with theaudited financial statements and the notes thereto included in Fox ChaseBancorp, Inc.’s Annual Report on Form 10-K,filed with the Securities and Exchange Commission on March 14,2008.   These financial statementsinclude all normal and recurring adjustments which management believes werenecessary in order to conform to GAAP. The results for the six months ended June 30, 2008 are notnecessarily indicative of the results that may be expected for the year ending December 31,2008.

 

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** **

**PerShare Information**

** **

**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.**

** **

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

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                         | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| Net Income                                                                         |       | $                                | 304,000    |                           | $          | 852,000 |   | $ | 649,000 |   | $ | 1,145,000 |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| Weighted-average  common shares outstanding (1)                                    |       | 14,290,310                       |       | 14,679,750                     |       | 14,317,294 |   | 14,679,750 |   |
| Average common  stock acquired by stock benefit plans:                             |       |                             |       |                           |       |   |   |   |   |
| Unvested shares  - long-term incentive plan                                        |       | (25,114                          | )          | (38,867                        | )          | (25,114 | ) | (38,867 | ) |
| ESOP shares  unallocated                                                           |       | (485,827                         | )          | (524,190                       | )          | (490,622 | ) | (528,958 | ) |
| Shares purchased  by trust                                                         |       | (287,500                         | )          | —                         |       | (287,500 | ) | — |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| Weighted-average  common shares used to calculate basic earnings per share         |       | 13,491,869                       |       | 14,116,693                     |       | 13,514,058 |   | 14,111,925 |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| Dilutive effect:                                                                   |       |                             |       |                           |       |   |   |   |   |
| Unvested shares  - long-term incentive plans                                       |       | 25,114                           |       | 38,867                         |       | 25,114 |   | 38,867 |   |
| Restricted stock  awards                                                           |       | 22,169                           |       | —                         |       | 13,793 |   | — |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| Weighted-average  common stock shares used to calculate diluted earnings per share |       | 13,539,152                       |       | 14,155,560                     |       | 13,552,965 |   | 14,150,792 |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| Earnings per  share - basic                                                        |       | $                                | 0.02       |                           | $          | 0.06 |   | $ | 0.05 |   | $ | 0.08 |   |
| Earnings per  share - diluted                                                      |       | $                                | 0.02       |                           | $          | 0.06 |   | $ | 0.05 |   | $ | 0.08 |   |
|                                                                               |       |                             |       |                           |       |   |   |   |   |
| Outstanding  anti-dilutive common stock equivalents                                |       | 813,231                          |       | —                         |       | 821,607 |   | — |   |

 

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(1) Excludes treasury stock.

 

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**NOTE2 - INVESTMENT AND MORTGAGE RELATED SECURITIES**

 

The amortized cost and fair value of securitiesavailable-for-sale as of June 30, 2008 and December 31, 2007 aresummarized as follows:

 
| ** **                        | ** ** | **June 30, 2008 (Unaudited)** | ** ** |
|-----------------------------------|------------|----------------------------------------------|------------|
| ** **                        | ** ** | **Amortized **

**Cost**                | ** ** | **Gross **

**Unrealized **

**Gains** | ** ** | **Gross **

**Unrealized **

**Losses** | ** ** | **Fair **

**Value** | ** ** |
|                              |       | **(In Thousands)**                      |       |
|                              |       | ** **                                   |       |
| State and  political subdivisions |       | $                                            | 14,989     |   | $ | 34 |   | $ | (194 | ) | $ | 14,829 |   |
| Corporate  securities             |       | 9,653                                        |       | 19 |   | (110 | ) | 9,562 |   |
|                              |       | 24,642                                       |       | 53 |   | (304 | ) | 24,391 |   |
|                              |       |                                         |       |   |   |   |   |   |   |
| Mortgage related  securities      |       | 252,086                                      |       | 1,140 |   | (1,859 | ) | 251,367 |   |
|                              |       |                                         |       |   |   |   |   |   |   |
| **Total  securities**             |       | $                                            | 276,728    |   | $ | 1,193 |   | $ | (2,163 | ) | $ | 275,758 |   |

 
| ** **                               | ** ** | **December 31, 2007**         | ** ** |
|------------------------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **Amortized **

**Cost** | ** ** | **Gross **

**Unrealized **

**Gains** | ** ** | **Gross **

**Unrealized **

**Losses** | ** ** | **Fair **

**Value** | ** ** |
|                                     |       | **(In Thousands)**       |       |
|                                     |       | ** **                    |       |
| Obligations of  U.S. government agencies |       | $                             | 10,000     |   | $ | 16 |   | $ | — |   | $ | 10,016 |   |
| State and  political subdivisions        |       | 81,019                        |       | 126 |   | (2 | ) | 81,143 |   |
|                                     |       | 91,019                        |       | 142 |   | (2 | ) | 91,159 |   |
|                                     |       |                          |       |   |   |   |   |   |   |
| Mortgage related  securities             |       | 204,362                       |       | 1,078 |   | (295 | ) | 205,145 |   |
|                                     |       |                          |       |   |   |   |   |   |   |
| **Total  securities**                    |       | $                             | 295,381    |   | $ | 1,220 |   | $ | (297 | ) | $ | 296,304 |   |

 

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**NOTE2 - INVESTMENT AND MORTGAGE RELATED SECURITIES (CONTINUED)**

 

The following tables show gross unrealized losses and fair value ofsecurities, aggregated by security category and length of time that individualsecurities have been in a continuous unrealized loss position, at June 30,2008 and December 31, 2007:

 
| ** **                        | ** ** | **June 30, 2008 (Unaudited)** | ** ** |
|-----------------------------------|------------|----------------------------------------------|------------|
| ** **                        | ** ** | **Less than 12 Months**       | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                        | ** ** | **Fair **

**Value**                    | ** ** | **Unrealized **

**Losses** | ** ** | **Fair **

**Value** | ** ** | **Unrealized **

**Losses** | ** ** | **Fair **

**Value** | ** ** | **Unrealized **

**Losses** | ** ** |
| ** **                        | ** ** | **(In Thousands)**                      | ** ** |
| ** **                        | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| State and  political subdivisions |       | $                                            | 8,059      |   | $ | (194 | ) | $ | — |   | $ | — |   | $ | 8,059 |   | $ | (194 | ) |
| Corporate  securities             |       | 7,589                                        |       | (110 | ) | — |   | — |   | 7,589 |   | (110 | ) |
| Mortgage related  securities      |       | 118,127                                      |       | (1,844 | ) | 766 |   | (15 | ) | 118,893 |   | (1,859 | ) |
|                              |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| **Total  securities**             |       | $                                            | 133,775    |   | $ | (2,148 | ) | $ | 766 |   | $ | (15 | ) | $ | 134,541 |   | $ | (2,163 | ) |

 
| ** **                        | ** ** | **December 31, 2007**                  | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **Less than 12 Months** | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                        | ** ** | **Fair **

**Value**              | ** ** | **Unrealized **

**Losses** | ** ** | **Fair **

**Value** | ** ** | **Unrealized **

**Losses** | ** ** | **Fair **

**Value** | ** ** | **Unrealized **

**Losses** | ** ** |
| ** **                        | ** ** | **(In Thousands)**                | ** ** |
| ** **                        | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| State and  political subdivisions |       | $                                      | 597        |   | $ | (1 | ) | $ | 672 |   | $ | (1 | ) | $ | 1,269 |   | $ | (2 | ) |
| Mortgage related  securities      |       | 32,627                                 |       | (78 | ) | 25,977 |   | (217 | ) | 58,604 |   | (295 | ) |
| ** **                        |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| **Total  securities**             |       | $                                      | 33,224     |   | $ | (79 | ) | $ | 26,649 |   | $ | (218 | ) | $ | 59,873 |   | $ | (297 | ) |

 

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**NOTE 3 -LOANS**

 

The composition of netloans at June 30, 2008, and December 31, 2007 is provided below (inthousands).

 
| ** **                                   | ** ** | **June 30, **

**2008** | ** ** | **December 31, **

**2007** | ** ** |
|----------------------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | **(Unaudited)**                   | ** ** | ** **                            | ** ** |
| Real estate  loans:                          |       |                              |       |                                  |       |
| One-to  four-family                          |       | $                                 | 239,888    |                                  | $          | 215,817 |   |
| Multi-family and  commercial                 |       | 117,037                           |       | 76,287                                |       |
| Construction                                 |       | 55,707                            |       | 46,471                                |       |
|                                         |       | 412,632                           |       | 338,575                               |       |
|                                         |       |                              |       |                                  |       |
| Consumer loans:                              |       |                              |       |                                  |       |
| Home equity                                  |       | 64,765                            |       | 68,431                                |       |
| Automobile                                   |       | 372                               |       | 565                                   |       |
| Home equity  lines of credit                 |       | 9,621                             |       | 9,642                                 |       |
| Other                                        |       | 134                               |       | 106                                   |       |
|                                         |       | 74,892                            |       | 78,744                                |       |
| Commercial loans                             |       | 41,285                            |       | 33,356                                |       |
| **Total  Loans**                             |       | 528,809                           |       | 450,675                               |       |
| Deferred loan  origination costs (fees), net |       | 79                                |       | (264                                  | )          |
| Allowance for  loan losses                   |       | (3,760                            | )          | (3,376                                | )          |
| **Net  Loans**                               |       | $                                 | 525,128    |                                  | $          | 447,035 |   |

 

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

 
| ** **                 | ** ** | **Six Months** | ** ** | **Year**              | ** ** |
|----------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **Ended**           | ** ** | **Ended**             | ** ** |
| ** **                 | ** ** | **June 30,**   | ** ** | **December 31,** | ** ** |
| ** **                 | ** ** | **2008**            | ** ** | **2007**              | ** ** | **2007** | ** ** |
|                       |       | **(Unaudited)**     |       |                  |       |
|                       |       |                |       |                  |       |   |   |
| Balance,  beginning        |       | $                   | 3,376      |                  | $          | 2,949 |   | $ | 2,949 |   |
| Provision for  loan losses |       | 400                 |       | 75                    |       | 425 |   |
| Loans charged  off         |       | (18                 | )          | (1                    | )          | (2 | ) |
| Recoveries                 |       | 2                   |       | 2                     |       | 4 |   |
|                       |       |                |       |                  |       |   |   |
| Balance, ending            |       | $                   | 3,760      |                  | $          | 3,025 |   | $ | 3,376 |   |

 

Asof June 30, 2008 and December 31, 2007, the Bank had one interestrate swap in the notional amount of $1.2 million to hedge a 15-year fixed rateloan, which was earning interest at 7.43%. The Company is receiving a variable rate payment of three-month LIBORplus 2.24% and is paying a fixed rate payment of 7.43%. The swap matures in April 2022and had a market value loss position of $62,000 and $60,000 at June 30,2008 and December 31, 2007, respectively.

 

EffectiveJanuary 1, 2008, the Company adopted SFAS No. 159, “The Fair ValueOption for Financial Assets and Liabilities - Including an Amendment of FASBStatement No. 115” (SFAS No. 159) which is further discussed in Note10.  In conjunction with the adoption ofSFAS No. 159, the Company identified two financial instruments to bedesignated for fair value reporting.  Theidentified instruments are this loan and the related swap discussed in thepreceding paragraph.

 

Asthe loan is contractually current, the Company has determined the market valueof the gain position of the loan is equal to the market value loss position ofthe swap as of both December 31, 2007 and June 30, 2008.  Accordingly, adopting SFAS No. 159 forthese two financial instruments has no impact on the Company’s beginning ofperiod retained earnings or the income statement for the six months ended June 30,2008.

 

TheCompany elected to adopt SFAS No. 159 for these two financial instrumentsas they represent the financial instruments associated with the Company’s onlyswap agreement.  The critical terms ofthe loan and the swap are a mirror image, except the loan includes a defaultinterest rate clause.

 

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**NOTE4 – MORTGAGE SERVICING ACTIVITY**

 

Loans serviced for othersare not included in the accompanying consolidated statements of condition. Theunpaid principal balances of these loans were $111.1 million and $123.5 millionat June 30, 2008 and 2007, respectively, and $118.1 million at December 31,2007.

 

The following summarizesmortgage servicing rights for the six months ended June 30, 2008 and 2007and the year ended December 31, 2007 (in thousands):

 
| ** **                             | ** ** | **Six Months **

**Ended **

**June 30,** | ** ** | **Year **

**Ended **

**December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                                      | ** ** | **2007**                                               | ** ** | **2007** | ** ** |
| ** **                             | ** ** | **(Unaudited)**                                               | ** ** | ** **                                             | ** ** |
| Balance,  beginning                    |       | $                                                             | 1,066      |                                                   | $          | 1,177 |   | $ | 1,177 |   |
| Mortgage  servicing rights capitalized |       | —                                                        |       | 2                                                      |       | 1 |   |
| Mortgage  servicing rights amortized   |       | (63                                                           | )          | (64                                                    | )          | (112 | ) |
| Balance, ending                        |       | $                                                             | 1,003      |                                                   | $          | 1,115 |   | $ | 1,066 |   |

 

At June 30, 2008, June 30,2007 and December 31, 2007, the fair value of the mortgage servicingrights (“MSRs”) was $1.2 million (unaudited), $1.4 million (unaudited) and $1.3million, 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, discount rates and current market conditions. Mortgageloan prepayment speed is the annual rate at which borrowers are forecasted torepay their mortgage loan principal and is based on historical experience. Thediscount rate used to determine the present value of future net servicingincome - another key assumption - is the required rate of return the marketwould expect for an asset with similar risk. Both assumptions can, andgenerally will, change quarterly valuations as market conditions and interestrates change.

 

**NOTE5 - DEPOSITS**

 

Deposits and theirrespective weighted average interest rate at June 30, 2008 and December 31,2007 consist of the following (dollars in thousands):

 
| ** **                            | ** ** | **June 30, 2008**                     | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **Weighted **

**Average **

**Rate** | ** ** | **Amount**                      | ** ** | **Weighted **

**Average **

**Rate** | ** ** | **Amount** | ** ** |
| ** **                            | ** ** | **(Unaudited)**                                 | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Non-interest  bearing demand accounts |       | —                                          |       | $                               | 48,734     |   | — |   | $ | 43,462 |   |
| NOW accounts                          |       | 1.14                                            | %          | 37,316                          |       | 1.70 | % | 39,299 |   |
| Money market  accounts                |       | 2.16                                            |       | 62,711                          |       | 3.13 |   | 50,568 |   |
| Savings and club  accounts            |       | 0.25                                            |       | 54,102                          |       | 0.65 |   | 54,019 |   |
| Certificates of  deposit              |       | 4.16                                            |       | 380,370                         |       | 4.71 |   | 398,212 |   |
| Total Deposits                        |       | 3.04                                            | %          | $                               | 583,233    |   | 3.64 | % | $ | 585,560 |   |

 

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**NOTE6 – BORROWINGS**

 

**Federal Home Loan Bank Advances**

 

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 June 30, 2008, the Bank had $137.8 million inqualifying collateral pledged against its advances.

 
| **Maturity Date**         | ** ** | **Interest Rate** | ** ** | **Strike Rate** | ** ** | **Call Date**  | ** ** | **Amount**              | ** ** |
|--------------------------------|------------|------------------------|------------|----------------------|------------|---------------------|------------|-------------------------|------------|
| ** **                     | ** ** | ** **             | ** ** | ** **           | ** ** | ** **          | ** ** | **(in thousands)** | ** ** |
| ** **                     | ** ** | ** **             | ** ** | ** **           | ** ** | ** **          | ** ** | ** **              | ** ** |
| February 2010             |       | 2.84                   | %          | —               |       |                |       | $                       | 10,000     |   |
| August 2011               |       | 4.89                   | %          | 7.50                 | %          |                |       | 20,000                  |       |
| August 2011               |       | 4.87                   | %          | 7.50                 | %          |                |       | 10,000                  |       |
| January 2015              |       | 3.49                   | %          | —               |       |                |       | 28,412                  |       |
| November 2017             |       | 3.62                   | %          |                 |       | November 2010  |       | 15,000                  |       |
| November 2017             |       | 3.87                   | %          |                 |       | November 2011  |       | 15,000                  |       |
| December 2017             |       | 2.83                   | %          |                 |       | September 2008 |       | 20,000                  |       |
| Term advances                  |       |                   |       |                 |       |                |       | $                       | 118,412    |   |
|                           |       |                   |       |                 |       |                |       |                    |       |
| Collateralized  line of credit |       |                   |       |                 |       |                |       | 1,500                   |       |
| Total advances                 |       |                   |       |                 |       |                |       | $                       | 119,912    |   |
|                                |            |                        |            |                      |            |                     |            |                         |            |  |  |

 

Forthe borrowings that contractually mature in August 2011, if three-monthLIBOR is greater than or equal to the Strike Rate, as defined, the FHLB cannotify the Bank of its intention to convert the borrowing to an adjustable-rateadvance equal to three-month LIBOR (2.78% at June 30, 2008) plus .2175% ona quarterly basis. The Bank has the option to repay these advances at each ofthe option dates without penalty. Accordingly, the contractual maturities abovemay differ from actual maturities.

 

Theborrowing that contractually matures in January 2015 represents aseven-year amortizing borrowing and has equal monthly payments of $403,000.

 

Theborrowings that contractually mature in November 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 pay off the borrowing without penalty.  If the Bank fails to do so, the borrowing’sfixed rate will reset to a variable rate of three-month LIBOR plus .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 pay off the borrowing without penalty.  If the Bank fails to do so, the borrowing’sfixed rate will reset to a variable rate of three-month LIBOR plus .11%.  Subsequent to the call date, the borrowing iscallable by the FHLB quarterly. Accordingly, the contractual maturities above may differ from actualmaturities.

 

Asof June 30, 2008, the Bank had $50.0 million in borrowing capacity under acollateralized line of credit with the FHLB secured by qualifying firstmortgage loans, qualifying fixed-income securities, FHLB stock and aninterest-bearing demand deposit account with the FHLB.   As of June 30, 2008, there was $1.5million borrowed on the line at a rate of 2.43%.

 

TheBank had a maximum borrowing capacity with the FHLB of approximately $485.2million at March 31, 2008, the latest date for which information isavailable.

 

**Other Borrowed Funds**

 

Otherborrowed funds of $20.0 million carry an interest rate of 3.60%, contractuallymature in November 2014 and may be called by the lender in November 2009.  Subsequent to the call date, the borrowing iscallable by the lender quarterly. Accordingly, the contractual maturities abovemay differ from actual maturities. Mortgage backed securities with a carrying value of $23.1 million at June 30,2008 were pledged as collateral for these other borrowed funds.

 

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**NOTE 7 – EMPLOYEEBENEFITS**

** **

**Defined Benefit Plan**

 

TheBank previously maintained a qualified non-contributory defined benefitretirement plan covering all employees meeting certain eligibilityrequirements.    The benefits were based on each employee’syears of service and the average of the highest three or five consecutiveannual salaries.  The Bank amended theplan and froze the benefits for current participants in the plan as of January 1,2006.  In October 2006, the Bankresolved to settle the obligations to the plan participants by terminating theplan, after obtaining required approvals. In the second quarter of 2008, the Bank received a determination letterfrom the IRS approving the settlement of its plan obligations.  As of June 30, 2008, all planobligations were settled.

 

Thefollowing tables provide a roll forward of the changes in benefit obligationsand plan assets for the most recent year and the current six months ended June 30,2008:

 
| ** **                                       | ** ** | **June 30,**

**2008** | ** ** | **December 31,**

**2007** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **(In Thousands)**     | ** ** |
| **Change in benefit obligation:** |       |                        |       |                            |       |
| ** **                                       |       |                        |       |                            |       |
| Net benefit  obligation at beginning of year     |       | $                           | 2,643      |                            | $          | 2,389 |   |
| Interest cost                                    |       | 67                          |       | 120                             |       |
| Actuarial loss                                   |       | 160                         |       | 134                             |       |
| Benefits paid                                    |       | (2,870                      | )          | —                          |       |
| Net benefit obligation  at end of year           |       | $                           | —     |                            | $          | 2,643 |   |

 

 
| ** **                                      | ** ** | **June 30,**

**2008** | ** ** | **December 31,**

**2007** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **(In Thousands)**     | ** ** |
| **Change in plan  assets:**                     | ** ** | ** **                  | ** ** |
|                                            |       |                        |       |                            |       |
| Fair value of  plan assets at beginning of year |       | $                           | 2,407      |                            | $          | 2,302 |   |
| Actual return on  plan assets                   |       | 31                          |       | 105                             |       |
| Employer contributions                          |       | 432                         |       | —                          |       |
| Benefits paid                                   |       | (2,870)                     |       | —                          |       |
| Fair value of  plan assets at end of year       |       | $                           | —     |                            | $          | 2,407 |   |

 

Thefollowing table sets forth the components of the defined benefit plan costs forthe periods presented:

 
| ** **                                                                                | ** ** | **Six Months** | ** ** | **Year**              | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                                                                | ** ** | **Ended**           | ** ** | **Ended**             | ** ** |
| ** **                                                                                | ** ** | **June 30,**   | ** ** | **December 31,** | ** ** |
| ** **                                                                                | ** ** | **2008**            | ** ** | **2007**              | ** ** |
| ** **                                                                                | ** ** | **(In Thousands)**  | ** ** |
|                                                                                      |       |                |       |                  |       |
| Service cost                                                                              |       | $                   | —     |                  | $          | — |   |
| Interest cost                                                                             |       | 67                  |       | 120                   |       |
| Return on plan  assets                                                                    |       | (31                 | )          | (105                  | )          |
| Amortization of  unrecognized net actuarial loss                                          |       | 160                 |       | 143                   |       |
| Settlement loss                                                                           |       | 137                 |       | —                |       |
| Net periodic  benefit costs reported in salaries, benefits and other compensation expense |       | $                   | 333        |                  | $          | 158 |   |

 

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**NOTE 8 – STOCK BASED COMPENSATION**

 

During the six monthsended June 30, 2008, the Company recorded $434,000 of stock basedcompensation expense in connection with the 2007 Equity Incentive Plan,comprised of stock option expense of $183,000 and restricted stock expense of$251,000.  The Company anticipates thatthe 287,500 shares purchased by a trust during 2007 will fund amounts earnedunder the restricted stock awards.

 

The following is asummary of the Company’s stock option activity and related information for the2007 Equity Incentive Plan for the six months ended June 30, 2008:

 
| ** **                             | ** ** | ** **         | ** ** | **Weighted** | ** ** |
|----------------------------------------|------------|--------------------|------------|--------------|------------|
| ** **                             | ** ** | **Number of** | ** ** | **Average**  | ** ** |
| ** **                             | ** ** | **Stock**          | ** ** | **Exercise** | ** ** |
| ** **                             | ** ** | **Options**        | ** ** | **Price**    | ** ** |
|                                   |       |               |       |         |       |
| Outstanding at  December 31, 2007 |       | 518,800            |       | $            | 12.38      |   |
| Granted                                |       | 101,400            |       | 11.42        |       |
| Exercised                              |       | —             |       | —       |       |
| Forfeited                              |       | (5,000             | )          | 12.09        |       |
| Outstanding at  June 30, 2008     |       | 615,200            |       | $            | 12.22      |   |
| Exercisable at  June 30, 2008     |       | —             |       | —       |       |

 

The following is asummary of the Company’s unvested options as of June 30, 2008 and changestherein during the six months then ended:

 
| ** **                          | ** ** | ** **         | ** ** | **Weighted**        | ** ** |
|-------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                          | ** ** | **Number of** | ** ** | **Average**         | ** ** |
| ** **                          | ** ** | **Stock**          | ** ** | **Grant Date** | ** ** |
| ** **                          | ** ** | **Options**        | ** ** | **Fair Value** | ** ** |
|                                |       |               |       |                |       |
| Unvested at  December 31, 2007 |       | 518,800            |       | $                   | 3.40       |   |
| Granted                             |       | 101,400            |       | 2.78                |       |
| Exercised                           |       | —             |       | —              |       |
| Forfeited                           |       | (5,000             | )          | 3.20                |       |
| Unvested at  June 30, 2008     |       | 615,200            |       | $                   | 3.30       |   |

 

Expected future expenserelating to the 615,200 non-vested options outstanding as of June 30, 2008is $1.6 million over a weighted average period of 4.3 years.

 

The following is asummary of the status of the Company’s restricted stock as of June 30,2008 and changes therein during the six months then ended:

 
| ** **                          | ** ** | ** **         | ** ** | **Weighted**        | ** ** |
|-------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                          | ** ** | **Number of** | ** ** | **Average**         | ** ** |
| ** **                          | ** ** | **Restricted**     | ** ** | **Grant Date** | ** ** |
| ** **                          | ** ** | **Shares**         | ** ** | **Fair Value** | ** ** |
|                                |       |               |       |                |       |
| Unvested at  December 31, 2007 |       | 203,400            |       | $                   | 12.38      |   |
| Granted                             |       | 17,100             |       | 11.42               |       |
| Vested                              |       | —             |       | —              |       |
| Forfeited                           |       | (300               | )          | 12.38               |       |
| Unvested at  June 30, 2008     |       | 220,200            |       | $                   | 12.31      |   |

 

Expected futurecompensation expense relating to the 220,200 restricted shares at June 30,2008 is $2.1 million over a weighted average period of 4.3 years.

 

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**NOTE9 - COMPREHENSIVE INCOME**

 

Comprehensive income forthe three and six months ended June 30, 2008, and 2007 is as follows (inthousands):

 
| ** **                                                                                                                                                                                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                                                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                                                                                                                                              | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                                                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Net income                                                                                                                                                                                                                              |       | $                                | 304        |                           | $          | 852 |   | $ | 649 |   | $ | 1,145 |   |
|                                                                                                                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Other  comprehensive income:                                                                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| Unrealized  holding losses arising during the period, net of tax (benefit) (three months  ended June 30, 2008 and 2007, $(1,044) and $(479) and for six months  ended June 30, 2008 and 2007 $(675) and $(232), respectively) |       | (1,889                           | )          | (840                           | )          | (1,138 | ) | (371 | ) |
|                                                                                                                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Less: Reclassification  adjustment for gains included in net income, net of taxes (three months ended  June 30, 2008 and 2007, $(16) and $0 and for six months ended  June 30, 2008 and 2007 $(40) and $0, respectively)      |       | 32                               |       | —                         |       | 78 |   | — |   |
|                                                                                                                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Plus:  Amortization of pension actuarial loss                                                                                                                                                                                           |       | 2                                |       | 3                              |       | 4 |   | 3 |   |
| Pension plan  settlement                                                                                                                                                                                                                |       | 87                               |       | —                         |       | 87 |   | — |   |
|                                                                                                                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Other  comprehensive income                                                                                                                                                                                                             |       | (1,832                           | )          | (837                           | )          | (1,125 | ) | (368 | ) |
|                                                                                                                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Comprehensive  income (loss)                                                                                                                                                                                                            |       | $                                | (1,528     | )                              | $          | 15 |   | $ | (476 | ) | $ | 777 |   |

 

**NOTE10 – ACCOUNTING PRONOUNCEMENTS ADOPTED IN SIX MONTHS ENDED JUNE 30, 2008**

 

**Statementof Financial Accounting Standards No. 159**

** **

**In February 2007, the FASB issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities—Including anAmendment of FASB Statement No. 115” (SFAS No. 159). SFAS No. 159permits entities to choose to measure many financial instruments and certainother items at fair value and amends SFAS No. 115 to, among other things,require certain disclosures for amounts for which the fair value option isapplied.  This Statement is effective asof the entity’s first fiscal year that begins after November 15,2007.  Effective January 1, 2008,the Company adopted SFAS No. 159 for two financial instruments, which areidentified and discussed in Note 3 to these consolidated financial statements.**

** **

# **Statementof Financial Accounting Standards No. 157**

# ** **

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurement” (SFAS No. 157).  This statement defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair valuemeasurements.  This statement appliesunder other accounting pronouncements that require or permit fair valuemeasurements.   SFAS No. 157 becameeffective for the Company on January 1, 2008, including interim periods.

 

SFAS No. 157describes three 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 areother than quoted prices included within Level 1 that are observable for theasset or liability, either directly or indirectly, such as quoted prices forsimilar assets or liabilities; quoted prices in markets that are not active; orother inputs that are observable or can be corroborated by observable marketdata for substantially the full term of the assets or liabilities.

 

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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 classifiedtwo financial instruments as Level 3 as of June 30, 2008. The firstinstrument is a private label collateralized mortgage obligation (“CMO”), thefair value of which, unlike U.S. agency mortgage related securities, is moredifficult to determine because they are not actively traded in securitiesmarkets.  The second instrument is aloan, which was recorded at fair value when the Company adopted SFAS No. 159,since lending credit risk is not an observable input for this individualcommercial loan.  The unrealized loss inthe private label CMO was $80,000 at June 30, 2008 compared to anunrealized loss of $27,000 at January 1, 2008.  The unrealized gain on the loan was $62,000at June 30, 2008 compared to an unrealized gain of $60,000 at January 1,2008.

 

The following table ofthe Company’s fair value measurements at June 30, 2008 includes (1) investmentsecurities and mortgage related securities available-for-sale; and (2) thetwo financial instruments recorded at fair value in conjunction with theCompany’s adoption of SFAS No. 159 in the first quarter of 2008:

 
| ** **                             | ** ** | ** **              | ** ** | **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**                        | ** ** | **6/30/2008**           | ** ** | **(Level 1)**                                                                | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| ** **                             | ** ** | ** **              | ** ** | ** **                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                   |       | **(In Thousands)** |       |
| State and  Political Subdivisions      |       | $                       | 14,829     |                                                                              | $          | — |   | $ | 14,829 |   | — |   |
| Corporate  Securities                  |       | 9,562                   |       | —                                                                            |       | 9,562 |   | — |   |
| Mortgage Related  Securities           |       | 251,367                 |       | —                                                                            |       | 250,467 |   | $ | 900 |   |
| Loans (1)                              |       | 1,280                   |       | —                                                                            |       | — |   | 1,280 |   |
| Other Assets –  Swap Contract (1) |       | (62                     | )          | —                                                                            |       | (62 | ) | — |   |
| Total                                  |       | $                       | 276,976    |                                                                              | $          | — |   | $ | 274,796 |   | $ | 2,180 |   |

 

----

(1) Suchassets are recorded at fair value in conjunction with adoption of SFAS No. 159.

 

The Company utilizes anexternal third-party pricing service to perform evaluations on its investmentportfolio on at least a quarterly basis. The Company will be evaluating the appropriateness of the identifiedLevel 1, 2 or 3 classifications on a recurring basis. The Company has alsoadopted FASB Staff Position No. 157-2, which allowed it to defer theeffective date of SFAS No. 157 for certain nonfinancial assets andliabilities until January 1, 2009.

 

**EmergingIssues Task Force Issue No. 06-4**

** **

In Emerging Issues TaskForce (“EITF”) Issue No. 06-4 “Accounting for Deferred Compensation andPostretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements”, the EITF concluded that an endorsement split dollar lifeinsurance policy does not effectively settle an employer’s obligation toprovide the post retirement benefit that the policy was designed toprovide.  Therefore, some current expenserecognition may need to be made for any endorsement split dollar plans withpost retirement benefits.

 

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

 

The accrual for the liabilitywould be calculated in one of two ways:

 

·                  the actuarial present value of the futuredeath benefit or

·                  the cost of insurance of the policyduring the postretirement period.

 

**Compliancewith this EITF must be applied to fiscal years beginning after December 15,2007 (January 1, 2008 for calendar year entities).  It can be made through a cumulative–effectadjustment to retained earnings in the year of adoption or as a change inaccounting principles through retrospective application to all prior periods.  As required, the Company adopted this EITF inthe first quarter of 2008. This did not have a material impact to the Company’sresults of operations or financial position, accordingly no cumulative effectadjustment was made.**

** **

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**NOTE** 11 – OTHERACCOUNTING PRONOUNCMENTS

** **

InMarch 2008, the FASB issued SFAS No. 161 “Disclosures aboutDerivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133”(SFAS No. 161).  SFAS No. 161changes the disclosure requirements for derivative instruments and hedgingactivities.  Entities are required toprovide enhanced disclosures about (a) how and why an entity usesderivative instruments, (b) how derivative instruments and related hedgeditems are accounted for under Statement 133 and its related interpretations,and (c) how derivative instruments and related hedged items affect anentity’s financial position, financial performance, and cash flows.  SFAS No. 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008, with early application encouraged. The Company is evaluating thisstatement and has not yet determined the impact of its requireddisclosures.  The Company does not intendto early adopt this statement.

 

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

 

**Forward-LookingStatements**

 

This quarterly reportcontains forward-looking statements that are based on assumptions and maydescribe future plans, strategies and expectations of the Company. Theseforward-looking statements are generally identified by use of the words “believe,”“expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions.The Company’s ability to predict results or the actual effect of future plansor strategies is inherently uncertain. Factors which could have a materialadverse effect on the operations of the Company and its subsidiary include, butare not limited to, changes in interest rates, national and regional economicconditions, legislative and regulatory changes, monetary and fiscal policies ofthe U.S. government, including policies of the U.S. Treasury and the FederalReserve Board, the quality and composition of the loan or investmentportfolios, demand for loan products, deposit flows, competition, demand forfinancial services in the Company’s market area, changes in real estate marketvalues in the Company’s market area, changes in relevant accounting principlesand guidelines and the inability of third party service providers to performtheir functions.  Additional factors thatmay affect our results are discussed in the section titled “Risk Factors” inthe Company’s Annual Report on Form 10-K, filed with the Securities andExchange Commission on March 14, 2008, and its other Securities andExchange Commission reports.

 

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

 

**CriticalAccounting Policies**

 

We consider accounting policies involving significantjudgments and assumptions by management that have, or could have, a materialimpact on the carrying value of certain assets or on income to be criticalaccounting policies. We consider the following to be our critical accountingpolicies: allowance for loan losses, deferred income taxes, andother-than-temporary impairment of securities.

 

***Allowance for Loan Losses.*** The allowance for loan losses ismaintained at a level representing management’s best estimate of known andinherent losses in the loan portfolio, based on management’s evaluation of theportfolio’s collectibility. The allowance is established through the provisionfor loan losses, which is charged 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 inparticular segments of the portfolio, trends and absolute levels of classifiedand criticized loans, trends and absolute levels in delinquent loans, trends inrisk ratings, trends in industry charge-offs by particular segments and changesin existing general economic and business conditions affecting our lendingareas and the national economy.  Althoughwe believe that we use the best information available to establish theallowance for loan losses, future adjustments to the allowance may be necessaryif economic conditions differ substantially from the assumptions used in makingthe evaluation. In addition, the Office of Thrift Supervision, as an integralpart of its examination process, periodically reviews our allowance for loanlosses. Such agency may require us to recognize adjustments to the allowancebased on its judgments about information available to it at the time of itsexamination. A large loss could deplete the allowance and require increasedprovisions to replenish the allowance, which would negatively affect earnings.

 

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During the three monthsended June 30, 2008, management refined its methodology for determiningits loss factors for new commercial loans originated in 2008.  Under this methodology, management reviewsand provides a loss factor for each individual new loan relationship.  Generally, management believes the risk ofdefault on recently underwritten loans is relatively low at the time oforigination. This is supported by the concept that the fair value of the loanat inception approximates its book value. However, based on its industry experience, management believes thedefault risk on loans is initially low, increases with time, at some pointmoderating.  These 2008 loans will bereviewed on a quarterly basis, and loss reserve factors adjusted commensuratewith assessed changes in the loans’ risk.

 

***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. If current available information raises doubt as tothe realization of the deferred tax assets, a valuation allowance isestablished. Deferred tax assets and liabilities are measured using enacted taxrates expected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. We exercise significantjudgment in evaluating the amount and timing of recognition of the resultingtax liabilities and assets. These judgments require us to make projections offuture taxable income. The judgments and estimates we make in determining ourdeferred tax assets, which are inherently subjective, are reviewed on acontinual basis as regulatory and business factors change. Any reduction inestimated future taxable income may require us to record a valuation allowanceagainst our deferred tax assets. The Company had a charitable contributioncarryover of $1.3 million as of June 30, 2008, resulting in a deferred taxasset of $440,000.  Utilization of thiscarryover is limited to 10% of taxable income on an annual basis. Such carryoverwill expire on December 31, 2011, if not utilized. If the Company isunable to generate sufficient taxable income to utilize this carryover it mayrequire us to record a valuation allowance against this deferred taxasset.  Any valuation allowance wouldresult in additional income tax expense in the period, which would negativelyaffect earnings.

 

***Other-Than-Temporary Impairment ofInvestment Securities***. Statement of Financial Accounting StandardsNo. 115, “Accounting for Certain Investments in Debt and EquitySecurities,” and FASB Staff Position FAS 115-1 and 124-1 “The Meaning of OtherThan Temporary Impairment and Its Application to Certain Investments,” requirecompanies to perform periodic reviews of individual securities in theirinvestment portfolios to determine whether a decline in the value of a securityis other than temporary. A review of other-than-temporary impairment requirescompanies to make certain judgments regarding the nature of the decline, itseffect on the financial statements and the probability, extent and timing of avaluation recovery and the company’s intent and ability to hold the security.Pursuant to these requirements, we assess valuation declines to determine theextent to which such changes are attributable to (1) fundamental factorsspecific to the issuer, such as financial condition, business prospects orother factors, or (2) market-related factors, such as interest rates orequity market declines. If the decline in the market value of a security isdetermined to be other than temporary, we reduce the book value of suchsecurity to its current market value, recognizing the decline as a realizedloss on the income statement.

 

**Comparisonof Financial Condition at June 30, 2008 and December 31, 2007**

 

Total assets increased $37.7million, or 4.6%, to $850.6 million at June 30, 2008, compared to $812.9million at December 31, 2007.  Loansincreased $78.1 million from December 31, 2007 to June 30, 2008.Approximately $57.9 million of this increase was in commercial, commercial realestate and construction loans as we continue our strategic initiative toincrease our commercial loan portfolio. Additionally, $24.1 million of thisincrease was in one-to-four family real estate loans as we were able to growthis portfolio, within our geographic region, through our correspondentrelationships. The growth in loans was primarily funded through the liquidationof $60.0 million in short-term auction-rate bonds, which accounted for themajority of the $66.8 million decrease in investment securities available forsale, and liquidation of $20.0 million of money market funds. These sources offunds were used to support loan growth as well as to improve yields byinvesting these lower-yielding funds into higher-yielding loans. Federal HomeLoan Bank advances increased approximately $39.9 million, which funded amajority of the $46.2 million increase in mortgage-related securities due to aleverage strategy implemented during the first quarter of 2008.

 

Deposits decreased $2.4million, or 0.4%, from $585.6 at December 31, 2007 to $583.2 million at June 30,2008 as the Bank is located in a highly competitive deposit market. Coredeposits, defined as non-interest and interest bearing checking accounts, moneymarket accounts and savings accounts, increased $15.5 million, or 8.3%, from$187.3 million at December 31, 2007 to $202.9 million at June 30,2008 as the Bank (1) increased commercial business checking accountsthrough the efforts of its commercial lending and cash management teams and (2) increasedmoney market accounts through promotional activities.

 

Stockholders’equity decreased $1.3 million to $121.1 million at June 30, 2008 comparedto $122.4 million at December 31, 2007 primarily due to unrealized losseson the investment portfolio and the repurchase of 128,900 shares of commonstock at a cost of $1.5 million, offset by net income of $649,000.

 

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**Comparisonof Operating Results for the Three and Six Months Ended June 30, 2008 and2007**

 

***General.***Net income decreased $548,000, or 64.3%, to $304,000for the three months ended June 30, 2008 compared to $852,000 for the three monthsended June 30, 2007, primarily due to a $855,000 decrease in noninterestincome, an increase in noninterest expense of $409,000 and an increase in theprovision for loan losses of $150,000, offset by an increase in net interestincome of $628,000 and a decrease in tax expense of  $238,000. The decrease in noninterest income of $855,000 was primarily the resultof a gain of $874,000 (after tax $577,000) related to the sale of the Bank’sformer operations center in the second quarter of 2007.  The increase in noninterest expense of$409,000 includes an expense of $244,000 (after tax $161,000) associated withfinal distributions from the Company’s terminated pension plan in the secondquarter of 2008.

 

Net income decreased$496,000, or 43.3%, to $649,000 for the six months ended June 30,2008 compared to $1.1million for the six months ended June 30, 2007, primarily due to a$898,000 decrease in noninterest income, an increase in noninterest expense of$674,000 and an increase in the provision for loan losses of $325,000, offsetby an increase in net interest income of $1.2 million and a decrease in taxexpense of  $189,000. The decrease innoninterest income of $898,000 was primarily the result of a gain of $874,000(after tax $577,000) related to the sale of the Bank’s former operations centerin the second quarter of 2007.  Theincrease in noninterest expense of $674,000 includes an expense of $297,000(after tax $196,000) associated with final distributions from the Company’sterminated pension plan in the second quarter of 2008.

 

***Net Interest Income*****.**Net interest income increased $628,000, or 13.9%, to$5.1 million for the three months ended June 30, 2008 compared the sameperiod in 2007 primarily due to an increase in average total interest earningassets of $103.7 million, offset by a decrease in the average yield oninterest-earning assets from 5.58% to 5.34%. The increase in average balancesof interest-earning assets was primarily due to: (1) an increase in theaverage balance of loans of $94.5 million year over year primarily related tothe implementation of the Company’s focus on increasing its levels ofcommercial lending; (2) an increase in the average balance of mortgage relatedsecurities of $120.9 million year over year primarily due to leveragestrategies implemented in the fourth quarter of 2007 and first quarter of 2008,offset by a decrease of $72.2 million in average interest-earning demanddeposits and money market funds, which were utilized to fund loan growth.  These changes were offset by an increase inaverage balances on interest-bearing liabilities of $106.2 million offset by adecrease in the average cost on interest-bearing liabilities from 3.85% to3.45%.  The increase in the averagebalance of interest-bearing liabilities was primarily due to an increase in theaverage balance of FHLB advances and other borrowed funds of  $109.0 million, which were used to fund theleverage strategies.

 

Net interest incomeincreased $1.2 million, or 13.7%, to $10.1 million for the six months ended June 30,2008 compared to the same period in 2007 primarily due to an increase inaverage total interest earning assets of $105.7 million, offset by a decreasein the average yield on interest-earning assets from 5.51% to 5.41%.  The increase in average balances ofinterest-earning assets was primarily due to: (1) an increase in theaverage balance of loans of $89.8 million year over year primarily related tothe implementation of the Company’s focus on increasing its levels ofcommercial lending; (2) an increase in the average balance of mortgage relatedsecurities of $103.0 million year over year primarily due to the leveragestrategies implemented in the fourth quarter of 2007 and first quarter of 2008,offset by a decrease of $71.4 million in average interest-earning demand depositsand money market funds which were utilized to fund loan growth. These changeswere offset by an increase in average balances on interest-bearing liabilitiesof $105.5 million offset by a decline in the average cost on interest-bearingliabilities from 3.77% to 3.59%. The increase in the average balance ofinterest-bearing liabilities was primarily due to an increase in the averagebalance of FHLB advances and other borrowed funds of  $103.5 million, which were used to fund theleverage strategies.

 

Thefollowing table summarizes average balances and average yields and costs ofinterest-earning assets and interest-bearing liabilities for the three and sixmonths ended June 30, 2008 and 2007. Yields are not presented on atax-equivalent basis. Any adjustments necessary to present yields on atax-equivalent basis are insignificant.

 

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| ** **                                                               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                               | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                               | ** ** | ** **                                          | ** ** | **Interest**                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Interest** | ** ** | ** ** | ** ** | ** ** | ** ** | **Interest** | ** ** | ** ** | ** ** | ** ** | ** ** | **Interest** | ** ** | ** ** | ** ** |
| ** **                                                               | ** ** | **Average**                                         | ** ** | **and**                                           | ** ** | **Yield/** | ** ** | **Average** | ** ** | **and** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **and** | ** ** | **Yield/** | ** ** | **Average** | ** ** | **and** | ** ** | **Yield/** | ** ** |
| ** **                                                               | ** ** | **Balance**                                         | ** ** | **Dividends**                                     | ** ** | **Cost** | ** ** | **Balance** | ** ** | **Dividends** | ** ** | **Cost** | ** ** | **Balance** | ** ** | **Dividends** | ** ** | **Cost** | ** ** | **Balance** | ** ** | **Dividends** | ** ** | **Cost** | ** ** |
| ** **                                                               | ** ** | **(Dollars in thousands)**                | ** ** | **(Dollars in thousands)**                        | ** ** |
| Assets:                                                                  |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                                                |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning  demand deposits                                        |       | $                                                   | 8,159      |                                              | $          | 37 |   | 1.82 | % | $ | 114,954 |   | $ | 1,494 |   | 5.20 | % | $ | 10,709 |   | $ | 107 |   | 2.02 | % | $ | 114,379 |   | $ | 2,951 |   | 5.16 | % |
| Money market  funds                                                      |       | 34,628                                              |       | 246                                               |       | 2.85 | % | — |   | — |   | 0.00 | % | 32,271 |   | 521 |   | 3.25 | % | — |   | — |   | 0.00 | % |
| Mortgage-related  securities                                             |       | 261,416                                             |       | 3,206                                             |       | 4.91 | % | 140,471 |   | 1,712 |   | 4.87 | % | 249,528 |   | 6,110 |   | 4.90 | % | 146,510 |   | 3,530 |   | 4.82 | % |
| Taxable  securities                                                      |       | 16,633                                              |       | 170                                               |       | 4.10 | % | 42,884 |   | 517 |   | 4.82 | % | 39,925 |   | 879 |   | 4.40 | % | 45,171 |   | 1,036 |   | 4.59 | % |
| Nontaxable  securities                                                   |       | 15,613                                              |       | 155                                               |       | 3.96 | % | 28,400 |   | 259 |   | 3.65 | % | 16,281 |   | 323 |   | 3.96 | % | 26,272 |   | 504 |   | 3.84 | % |
| Loans:                                                                   |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential  loans                                                       |       | 229,129                                             |       | 3,245                                             |       | 5.67 | % | 206,676 |   | 2,943 |   | 5.70 | % | 223,286 |   | 6,313 |   | 5.65 | % | 207,449 |   | 5,864 |   | 5.65 | % |
| Commercial loans                                                         |       | 180,250                                             |       | 2,850                                             |       | 6.25 | % | 103,245 |   | 1,924 |   | 7.37 | % | 171,478 |   | 5,760 |   | 6.64 | % | 92,224 |   | 3,343 |   | 7.21 | % |
| Consumer loans                                                           |       | 76,107                                              |       | 1,086                                             |       | 5.71 | % | 81,016 |   | 1,177 |   | 5.81 | % | 77,193 |   | 2,236 |   | 5.79 | % | 82,438 |   | 2,385 |   | 5.79 | % |
| Total Loans                                                              |       | 485,486                                             |       | 7,181                                             |       | 5.89 | % | 390,937 |   | 6,044 |   | 6.16 | % | 471,957 |   | 14,309 |   | 6.04 | % | 382,111 |   | 11,592 |   | 6.06 | % |
| Allowance for  loan losses                                               |       | (3,614                                              | )          |                                              |       |   |   | (2,976 | ) |   |   |   |   | (3,517 | ) |   |   |   |   | (2,973 | ) |   |   |   |   |
| Net loans                                                                |       | 481,872                                             |       | 7,181                                             |       |   |   | 387,961 |   | 6,044 |   |   |   | 468,440 |   | 14,309 |   |   |   | 379,138 |   | 11,592 |   |   |   |
| Total  interest-earning assets                                           |       | 818,321                                             |       | 10,995                                            |       | 5.34 | % | 714,670 |   | 10,026 |   | 5.58 | % | 817,154 |   | 22,249 |   | 5.41 | % | 711,470 |   | 19,613 |   | 5.51 | % |
| Noninterest-earning  assets                                              |       | 37,153                                              |       |                                              |       |   |   | 36,126 |   |   |   |   |   | 36,820 |   |   |   |   |   | 36,129 |   |   |   |   |   |
| Total assets                                                             |       | $                                                   | 855,474    |                                              |       |   |   |   | $ | 750,796 |   |   |   |   |   | $ | 853,974 |   |   |   |   |   | $ | 747,599 |   |   |   |   |   |
|                                                                     |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities and  equity:                                                 |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                           |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW and money  market deposit accounts                                   |       | $                                                   | 98,524     |                                              | 452        |   | 1.84 | % | $ | 77,971 |   | 481 |   | 2.48 | % | $ | 96,347 |   | 990 |   | 2.07 | % | $ | 77,041 |   | 876 |   | 2.29 | % |
| Savings accounts                                                         |       | 53,291                                              |       | 35                                                |       | 0.26 | % | 60,934 |   | 112 |   | 0.73 | % | 53,464 |   | 93 |   | 0.35 | % | 62,038 |   | 226 |   | 0.73 | % |
| Certificates of  deposit                                                 |       | 389,671                                             |       | 4,065                                             |       | 4.20 | % | 405,425 |   | 4,550 |   | 4.50 | % | 396,240 |   | 8,576 |   | 4.35 | % | 404,953 |   | 8,911 |   | 4.44 | % |
| Total  interest-bearing deposits                                         |       | 541,486                                             |       | 4,552                                             |       | 3.38 | % | 544,330 |   | 5,143 |   | 3.79 | % | 546,051 |   | 9,659 |   | 3.56 | % | 544,032 |   | 10,013 |   | 3.71 | % |
| FHLB advances                                                            |       | 119,038                                             |       | 1,120                                             |       | 3.72 | % | 30,000 |   | 370 |   | 4.88 | % | 113,488 |   | 2,150 |   | 3.75 | % | 30,000 |   | 736 |   | 4.88 | % |
| Other borrowed  funds                                                    |       | 20,000                                              |       | 182                                               |       | 3.60 | % | — |   | — |   | 0.00 | % | 20,000 |   | 364 |   | 3.60 | % | — |   | — |   | 0.00 | % |
| Total borrowings                                                         |       | 139,038                                             |       | 1,302                                             |       | 3.71 | % | 30,000 |   | 370 |   | 4.88 | % | 133,488 |   | 2,514 |   | 3.73 | % | 30,000 |   | 736 |   | 4.88 | % |
| Total  interest-bearing liabilities                                      |       | 680,524                                             |       | 5,854                                             |       | 3.45 | % | 574,330 |   | 5,513 |   | 3.85 | % | 679,539 |   | 12,173 |   | 3.59 | % | 574,032 |   | 10,749 |   | 3.77 | % |
| Noninterest-bearing  deposits                                            |       | 46,339                                              |       |                                              |       |   |   | 44,992 |   |   |   |   |   | 45,378 |   |   |   |   |   | 42,444 |   |   |   |   |   |
| Other  noninterest-bearing liabilities                                   |       | 6,003                                               |       |                                              |       |   |   | 4,967 |   |   |   |   |   | 6,209 |   |   |   |   |   | 5,331 |   |   |   |   |   |
| Total  liabilities                                                       |       | 732,866                                             |       |                                              |       |   |   | 624,289 |   |   |   |   |   | 731,126 |   |   |   |   |   | 621,807 |   |   |   |   |   |
| Retained  earnings                                                       |       | 121,958                                             |       |                                              |       |   |   | 127,220 |   |   |   |   |   | 121,884 |   |   |   |   |   | 126,650 |   |   |   |   |   |
| Accumulated  comprehensive income                                        |       | 650                                                 |       |                                              |       |   |   | (713 | ) |   |   |   |   | 964 |   |   |   |   |   | (858 | ) |   |   |   |   |
| Total  stockholder’s equity                                         |       | 122,608                                             |       |                                              |       |   |   | 126,507 |   |   |   |   |   | 122,848 |   |   |   |   |   | 125,792 |   |   |   |   |   |
| Total  liabilities and stockholders’ equity                         |       | $                                                   | 855,474    |                                              |       |   |   |   | $ | 750,796 |   |   |   |   |   | $ | 853,974 |   |   |   |   |   | $ | 747,599 |   |   |   |   |   |
| Net interest  income                                                     |       |                                                |       | $                                                 | 5,141      |   |   |   |   |   | $ | 4,513 |   |   |   |   |   | $ | 10,076 |   |   |   |   |   | $ | 8,864 |   |   |   |
| Interest rate  spread                                                    |       |                                                |       |                                              |       | 1.89 | % |   |   |   |   | 1.73 | % |   |   |   |   | 1.82 | % |   |   |   |   | 1.74 | % |
| Net interest  margin                                                     |       |                                                |       |                                              |       | 2.48 | % |   |   |   |   | 2.50 | % |   |   |   |   | 2.43 | % |   |   |   |   | 2.45 | % |
| Average  interest-earning assets to average interest-bearing liabilities |       |                                                |       |                                              |       | 120.25 | % |   |   |   |   | 122.44 | % |   |   |   |   | 120.25 | % |   |   |   |   | 123.94 | % |

 

----

(1)        Nonperforming loans are included in averagebalance computations

 

21

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** **

***Rate/Volume Analysis*****.** The following table sets forth the effects ofchanging rates and volumes on our net interest income. The rate column showsthe effects attributable to changes in rate (changes in rate multiplied bycurrent volume). The volume column shows the effects attributable to changes involume (changes in volume multiplied by prior rate). The net column representsthe sum of the prior columns. For purposes of this table, changes attributableto changes in both rate and volume that cannot be segregated have beenallocated proportionally based on the changes due to rate and the changes dueto volume.

 
| ** **                          | ** ** | **Three Months Ended  June 30, 2008  Compared to  Three Months Ended June 30, 2007** | ** ** | **Six Months Ended  June 30, 2008  Compared to  Six Months Ended June 30, 2007** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Increase (Decrease)  Due to**                                                                                              | ** ** | ** **                                                                                                                         | ** ** | **Increase (Decrease)  Due to** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Rate**                                                                                                                               | ** ** | **Volume**                                                                                                                         | ** ** | **Net** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Net** | ** ** |
|                                |       |                                                                                                                                   |       |                                                                                                                               |       |   |   |   |   |   |   |   |   |
| Interest and  dividend income:      |       |                                                                                                                                   |       |                                                                                                                               |       |   |   |   |   |   |   |   |   |
| Interest-earning  demand deposits   |       | $                                                                                                                                      | (69        | )                                                                                                                                  | $          | (1,388 | ) | $ | (1,457 | ) | $ | (170 | ) | $ | (2,674 | ) | $ | (2,844 | ) |
| Money market  funds                 |       | 246                                                                                                                                    |       | —                                                                                                                             |       | 246 |   | 521 |   | — |   | 521 |   |
| Mortgage related  securities        |       | 20                                                                                                                                     |       | 1,474                                                                                                                              |       | 1,494 |   | 98 |   | 2,482 |   | 2,580 |   |
| Taxable securities                  |       | (31                                                                                                                                    | )          | (316                                                                                                                               | )          | (347 | ) | (37 | ) | (120 | ) | (157 | ) |
| Nontaxable  securities              |       | 13                                                                                                                                     |       | (117                                                                                                                               | )          | (104 | ) | 11 |   | (192 | ) | (181 | ) |
| Loans:                              |       |                                                                                                                                   |       |                                                                                                                               |       |   |   |   |   |   |   |   |   |
| Residential  loans                  |       | (18                                                                                                                                    | )          | 320                                                                                                                                |       | 302 |   | 1 |   | 448 |   | 449 |   |
| Commercial and  construction loans  |       | (509                                                                                                                                   | )          | 1,435                                                                                                                              |       | 926 |   | (490 | ) | 2,907 |   | 2,417 |   |
| Consumer loans                      |       | (20                                                                                                                                    | )          | (71                                                                                                                                | )          | (91 | ) | 3 |   | (152 | ) | (149 | ) |
| Total loans                         |       | (547                                                                                                                                   | )          | 1,684                                                                                                                              |       | 1,137 |   | (486 | ) | 3,203 |   | 2,717 |   |
| Total  interest-earning assets      |       | (368                                                                                                                                   | )          | 1,337                                                                                                                              |       | 969 |   | (63 | ) | 2,699 |   | 2,636 |   |
|                                |       |                                                                                                                                   |       |                                                                                                                               |       |   |   |   |   |   |   |   |   |
| Interest  expense:                  |       |                                                                                                                                   |       |                                                                                                                               |       |   |   |   |   |   |   |   |   |
| NOW and money  market deposits      |       | (156                                                                                                                                   | )          | 127                                                                                                                                |       | (29 | ) | (112 | ) | 226 |   | 114 |   |
| Savings accounts                    |       | (63                                                                                                                                    | )          | (14                                                                                                                                | )          | (77 | ) | (103 | ) | (30 | ) | (133 | ) |
| Certificates of  deposit            |       | (308                                                                                                                                   | )          | (177                                                                                                                               | )          | (485 | ) | (191 | ) | (144 | ) | (335 | ) |
| Total  interest-bearing deposits    |       | (527                                                                                                                                   | )          | (64                                                                                                                                | )          | (591 | ) | (406 | ) | 52 |   | (354 | ) |
|                                |       |                                                                                                                                   |       |                                                                                                                               |       |   |   |   |   |   |   |   |   |
| FHLB advances                       |       | (349                                                                                                                                   | )          | 1,099                                                                                                                              |       | 750 |   | (650 | ) | 2,064 |   | 1,414 |   |
| Other borrowings                    |       | 182                                                                                                                                    |       | —                                                                                                                             |       | 182 |   | 364 |   | — |   | 364 |   |
| Total borrowings                    |       | (167                                                                                                                                   | )          | 1,099                                                                                                                              |       | 932 |   | (286 | ) | 2,064 |   | 1,778 |   |
| Total  interest-bearing liabilities |       | (694                                                                                                                                   | )          | 1,035                                                                                                                              |       | 341 |   | (692 | ) | 2,116 |   | 1,424 |   |
| Net change in  net interest income  |       | $                                                                                                                                      | 326        |                                                                                                                               | $          | 302 |   | $ | 628 |   | $ | 629 |   | $ | 583 |   | $ | 1,212 |   |
|                                     |            |                                                                                                                                        |            |                                                                                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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***Provision for Loan Losses*****.** The Company recorded a provision forloan losses of $225,000 and $400,000 for the three and six months ended June 30,2008 compared to $75,000 for both the three and six months ended June 30,2007. The increase in the provision reflected loan growth, primarily in thecommercial categories, an increase in nonperforming and classified loans andthe change in the allowance methodology discussed previously.

 

The following tableprovides information with respect to the Bank’s nonperforming assets at thedates indicated. There were no troubled debt restructurings as of the datespresented.

 
| ** **                                                             | ** ** | **At June 30,  2008**      | ** ** | **At December  31, 2007** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                             | ** ** | **(Dollars in thousands)** | ** ** |
| Nonaccrual  loans:                                                     |       |                                 |       |                                |       |
| One- to  four-family                                                   |       | $                                    | 939        |                                | $          | 155 |   |
| Consumer                                                               |       | 54                                   |       | —                              |       |
| Multi-family and  commercial real estate                               |       | 467                                  |       | 105                                 |       |
| Total                                                                  |       | 1,460                                |       | 260                                 |       |
| Accruing loans  past due 90 days or more:                              |       |                                 |       |                                |       |
| One- to  four-family                                                   |       | —                               |       | 559                                 |       |
| Total                                                                  |       | —                               |       | 559                                 |       |
| Total of  nonaccrual loans and accruing loans 90 days or more past due |       | $                                    | 1,460      |                                | $          | 819 |   |
| Real estate  owned                                                     |       | —                               |       | —                              |       |
| Total  nonperforming assets                                            |       | $                                    | 1,460      |                                | $          | 819 |   |
| Total  nonperforming loans to total loans                              |       | 0.28                                 | %          | 0.18                                | %          |
| Total  nonperforming loans to total assets                             |       | 0.17                                 |       | 0.10                                |       |
| Total  nonperforming assets to total assets                            |       | 0.17                                 |       | 0.10                                |       |
| Allowance for  loan losses to nonperforming loans                      |       | 258                                  | %          | 412                                 | %          |

 

The increase innonaccrual loans to $1.5 million at June 30, 2008 from $260,000 at December 31,2007 was primarily a result of a $505,000 residential mortgage and a $54,000home equity loan to one borrower, both of which were placed on non accrualduring the three month period ended March 31, 2008. The loans werepreviously included in the 90 days past due and still accruing category as of December 31,2007. The loans are secured by a residential property in southern New Jersey. Inaddition, two other residential loans and one additional commercial loantotaling $641,000 were placed on nonaccrual status during the three monthsended June 30, 2008. These loans placed on nonaccrual during the threemonths ended June 30, 2008 are secured by real estate properties locatedin southern New Jersey.

 

23

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Table of Contents

 

***Noninterest Income*****.**The following table summarizes noninterest income forthe three months ended June 30, 2008, and 2007.

 
| ** **                            | ** ** | **Three Months**                | ** ** | ** ** | ** ** | ** ** | ** **       | **Six Months**          | ** **        | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------------|------------------------------|-------------------|------------|------------|------------|------------|
| ** **                            | ** ** | **Ended June 30,**         | ** ** | ** ** | ** ** | ** ** | ** **       | **Ended June 30,** | ** **        | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **2008**                             | ** ** | **2007**   | ** ** | **$**      | ** Change** | ** **                   | **% Change** | ** ** | **2008**   | ** ** | **2007**   | ** ** | **$** | ** Change** | ** ** | **% Change** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** **       | ** **                   | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service charges  and other fee income |       | $                                    | 224        |       | $          | 208        |             | $                            | 16                |       | 7.7        | %          | $          | 415 |   | $ | 424 |   | $ | (9 | ) | (2.1 | )% |
| Net gain on sale  of:                 |       |                                 |       |       |       |       |             |                         |              |       |       |       |       |   |   |   |   |
| Loans                                 |       | 1                                    |       | 16         |       | (15        | )                | (93.8                        | )                 | 4          |       | 73         |       | (69 | ) | (94.5 | ) |
| Fixed assets                          |       | —                               |       | 874        |       | (874       | )                | (100.0                       | )                 | —     |       | 874        |       | (874 | ) | (100.0 | ) |
| Securities  available-for-sale        |       | 48                                   |       | —     |       | 48         |             | 100.0                        |              | 118        |       | —     |       | 118 |   | 100.0 |   |
| Income on  bank-owned life insurance  |       | 113                                  |       | 109        |       | 4          |             | 3.7                          |              | 224        |       | 216        |       | 8 |   | 3.7 |   |
| Other                                 |       | 17                                   |       | 51         |       | (34        | )                | (66.7                        | )                 | 35         |       | 107        |       | (72 | ) | (67.3 | ) |
|                                  |       |                                 |       |       |       |       |             |                         |              |       |       |       |       |   |   |   |   |
| Total                                 |       | $                                    | 403        |       | $          | 1,258      |             | $                            | (855              | )          | (68.0      | )          | $          | 796 |   | $ | 1,694 |   | $ | (898 | ) | (53.0 | ) |

 

Noninterest incomedecreased $855,000, or 68.0%, and $898,000, or 53.0%, during the three and sixmonths ended June 30, 2008, respectively, compared to the same periods in2007. As previously discussed, the decrease in both the three and six monthsended June 30, 2008 was primarily a result of the Bank recognizing apre-tax gain of $874,000 on the sale of its former operations center in thesecond quarter of 2007.

 

For the three monthsended June 30, 2008, gain on sale of loans decreased $15,000 compared tothe same period in 2007 as the Company discontinued selling residentialmortgage loans during the second quarter of 2007. Gain on sale of investmentsecurities increased $48,000 during the three months ended June 30, 2008as the Company took advantage of the steepening yield curve to liquidatecertain securities at a gain and reinvest the proceeds in higher-yieldingsecurities. Other income decreased $34,000 during the three-month period as aresult of the Bank receiving a reduced rate on the funds held at a third partycheck processor.

 

For the six months ended June 30,2008, gain on sale of loans decreased $69,000 compared to the same period in2007 as the Company discontinued selling residential mortgage loans during thesecond quarter of 2007. Gain on sale of investment securities increased$118,000 during the six months ended June 30, 2008 as the Company tookadvantage of the steepening yield curve to liquidate certain securities at again and reinvest the proceeds in higher-yielding securities. Other incomedecreased $72,000 during the six-month period as a result of the Bank receivinga reduced rate on the funds held at a third party check processor.

 

***Noninterest Expense*****.** The following table summarizes noninterest expensefor the three months ended June 30, 2008 and 2007.

 
| ** **                                 | ** ** | **Three Months**                | ** ** | ** ** | ** ** | ** **        | ** ** | **Six Months**          | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|------------|------------|-------------------|------------|------------------------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | **Ended June 30,**         | ** ** | ** ** | ** ** | ** **        | ** ** | **Ended June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **2008**                             | ** ** | **2007**   | ** ** | **$ Change** | ** ** | **% Change**            | ** ** | **2008**   | ** ** | **2007**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                 | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                                 | ** ** | ** **                           | ** ** | ** ** | ** ** | ** **        | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries,  benefits and other compensation |       | $                                    | 3,064      |       | $          | 2,252             |       | $                            | 812        |       | 36.1       | %          | $          | 5,862 |   | $ | 4,669 |   | $ | 1,193 |   | 25.6 | % |
| Occupancy expense                          |       | 468                                  |       | 480        |       | (12               | )          | (2.5                         | )          | 954        |       | 879        |       | 75 |   | 8.5 |   |
| Furniture and  equipment expense           |       | 227                                  |       | 250        |       | (23               | )          | (9.2                         | )          | 443        |       | 482        |       | (39 | ) | (8.1 | ) |
| Data processing  costs                     |       | 409                                  |       | 388        |       | 21                |       | 5.4                          |       | 802        |       | 761        |       | 41 |   | 5.4 |   |
| Professional  fees                         |       | 265                                  |       | 512        |       | (247              | )          | (48.2                        | )          | 578        |       | 985        |       | (407 | ) | (41.3 | ) |
| Marketing  expense                         |       | 125                                  |       | 176        |       | (51               | )          | (29.0                        | )          | 220        |       | 297        |       | (77 | ) | (25.9 | ) |
| FDIC premiums                              |       | 25                                   |       | 22         |       | 3                 |       | 13.6                         |       | 55         |       | 42         |       | 13 |   | 31.0 |   |
| Other                                      |       | 373                                  |       | 467        |       | (94               | )          | (20.1                        | )          | 764        |       | 889        |       | (125 | ) | (14.1 | ) |
| Total                                      |       | $                                    | 4,956      |       | $          | 4,547             |       | $                            | 409        |       | 9.0        |       | $          | 9,678 |   | $ | 9,004 |   | $ | 674 |   | 7.5 |   |

 

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Noninterestexpense increased by $409,000, or 9.0%, and by $674,000, or 7.5%, during thethree and six months ended June 30, 2008, respectively, compared to thesame periods in 2007. Aspreviously discussed, the increase in both the three and six months ended June 30,2008 included an expense of $244,000 and $297,000, respectively, associatedwith final distributions from the Company’s terminated pension plan in thesecond quarter of 2008.

 

Thelargest changes for the three month period were (1) an increase insalaries and benefits expense of $812,000 primarily due to the $244,000 ofexpense associated with final distributions from the Company’s terminatedpension plan, $225,000 related to equity awards granted under the 2007 EquityIncentive Plan, costs associated with the opening of the Bank’s West Chester,Pennsylvania branch in October 2007 and annual merit increases and (2) anincrease in data processing costs of $21,000 due to contractual annual feeincreases. These increased costs were offset by a decrease in professional feesof $247,000 primarily due to a decrease in consulting fees in connection withthe Company’s first year of becoming Sarbanes- Oxley compliant in 2007. Additionaldecreases in noninterest expense included a reduction of marketing expense of$51,000 due to reduced promotional offers and advertising performed during 2008and a reduction of other noninterest expense of $94,000 as the Companycontinued its disciplined focus on managing its other expenses.

 

Thelargest changes for the six month period were (1) an increase in salariesand benefits expense of $1.2 million primarily due to the $297,000 of expenseassociated with final distributions from the Company’s terminated pension plan,$434,000 related to equity awards granted under the 2007 Equity Incentive Plan,costs associated with the opening of the Bank’s West Chester, Pennsylvaniabranch in October 2007 and annual merit increases and (2) an increasein occupancy expense of $75,000 primarily due to higher costs associated withthe Company’s move to a leased operations center during the second quarter of2007 and the new West Chester branch. These increased costs were offset by adecrease in professional fees of $407,000 primarily due to legal fees paid inthe first quarter of 2007 in relation to the litigation with the Bank’s formerChief Executive Officer, which was settled in the fourth quarter of 2007, and adecrease in consulting fees in connection with the Company’s first year ofbecoming Sarbanes-Oxley compliant in 2007. Additional decreases in noninterestexpense included a reduction of marketing expense of $77,000 due to reducedpromotional offers and advertising performed during 2008 and a reduction ofother noninterest expense of $125,000 as the Company continued its disciplinedfocus on managing its other expenses.

 

The FDIC depositinsurance premium increased $3,000 and $13,000 for the three and six monthperiods ended June 30, 2008.  The relatively low expense was theresult of the utilization of the one-time assessment credit that was providedto eligible insured depository institutions under the Federal Deposit Insurancereform Act of 2005. ************As of June 30, 2008, the remaining balance ofthe one-time credit was approximately $80,000. Management anticipates that thiscredit will be fully utilized in the fourth quarter of 2008.****

 

***Income Taxes*****.**The income tax provision for the three and six monthsended June 30, 2008 was $59,000 and $145,000 compared to $297,000 and$334,000 for the three and six months ended June 30, 2007, respectively.          The Company’s effectiveincome tax rate was 16.3% and 18.3% for the three and six-month periods ended June 30,2008, respectively compared to 25.8% and 22.6% for the same periods in 2007,respectively. These rates reflect the Company’s levels of tax-exempt income forboth periods relative to the overall level of taxable income. The lowereffective tax rate for the three and six month periods ended June 30, 2008was due to non-taxable income having a larger impact on the effective tax ratedue to a decrease in pre-tax income compared to the same periods in 2007.

 

**Liquidityand Capital Management**

 

***Liquidity Management.*** Liquidity is the ability to meet current and futurefinancial obligations of a short-term nature. Our primary sources of fundsconsist of deposit inflows, loan and securities repayments, maturities and sales.While maturities and scheduled amortization of loans and securities arepredictable sources of funds, deposit flows and loans and securitiesprepayments are greatly influenced by general interest rates, economicconditions and competition.

 

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The following table presents certain of our contractual obligations asof June 30, 2008 and December 31, 2007.

 
| ** **                              | ** ** | ** **              | ** ** | **Payments Due by period** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**        | ** ** | **Total**               | ** ** | **Less than  One Year**         | ** ** | **One to  Three Years** | ** ** | **Three to  Five Years** | ** ** | **More Than  Five Years** | ** ** |
| ** **                              | ** ** | **(In thousands)** | ** ** |
|                                    |       |                    |       |                                      |       |   |   |   |   |   |   |
| **At  June 30, 2008**              |       |                    |       |                                      |       |   |   |   |   |   |   |
| Operating lease  obligations (1)        |       | $                       | 1,902      |                                      | $          | 491 |   | $ | 904 |   | $ | 507 |   | $ | — |   |
| FHLB advances  and other borrowings (2) |       | 169,289                 |       | 10,553                                    |       | 27,700 |   | 44,794 |   | 86,242 |   |
| Other long-term  obligations (3)        |       | 2,681                   |       | 1,824                                     |       | 857 |   | — |   | — |   |
| Total                                   |       | $                       | 173,872    |                                      | $          | 12,868 |   | $ | 29,461 |   | $ | 45,301 |   | $ | 86,242 |   |
|                                    |       |                    |       |                                      |       |   |   |   |   |   |   |
| **At  December 31, 2007**          |       |                    |       |                                      |       |   |   |   |   |   |   |
| Operating lease  obligations (1)        |       | $                       | 2,192      |                                      | $          | 494 |   | $ | 963 |   | $ | 735 |   | $ | — |   |
| FHLB advances  and other borrowings (2) |       | 127,460                 |       | 3,939                                     |       | 7,859 |   | 35,861 |   | 79,801 |   |
| Other long-term  obligations (3)        |       | 3,481                   |       | 1,910                                     |       | 1,571 |   | — |   | — |   |
| Total                                   |       | $                       | 133,133    |                                      | $          | 6,343 |   | $ | 10,393 |   | $ | 36,596 |   | $ | 79,801 |   |

 

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

(2)          Includes principal and projected interestpayments.

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

 

We regularly adjust ourinvestments in liquid assets based upon our assessment of: (1) expectedloan demand; (2) expected deposit flows; (3) yields available oninterest-earning deposits and securities; and (4) the objectives of ourasset/liability management policy. We use a variety of measures to assess ourliquidity needs, which are provided to our Asset/Liability Management Committeeon a regular basis.

 

Our most liquid assetsare cash and cash equivalents. The levels of these assets depend on ouroperating, financing, lending and investing activities during any given period.During the three months ended June 30, 2008, cash and cash equivalents werereduced to $7.7 million at June 30, 2008 from $82.4 million at March 31,2008. This reduction occurred as the company’s cash and cash equivalents wereprimarily utilized to fund the $66.7 million in loan growth during the samethree month period. Securities classified as available-for-sale, which provideadditional sources of liquidity, totaled $275.8 million at June 30, 2008.In addition, at March 31, 2008, the latest date available, we had theability to borrow a total of approximately $485.2 million from the FHLB. On June 30,2008, we had $119.9 million of borrowings outstanding with the FHLB as well as$20.0 million of borrowings outstanding with another financial institution.

 

At June 30, 2008, wehad $113.7 million in loan commitments outstanding, which consisted of $8.7million of mortgage loan commitments, $20.9 million in unused home equity linesof credit, $2.9 million in consumer loans, $80.5 million in commercial loancommitments and $749,000 in standby letters of credit. Certificates of depositdue within one year of June 30, 2008 totaled $232.0 million, or 61.0%, oftotal certificates of deposit at June 30, 2008. We believe the largepercentage of certificates of deposit that mature within one year reflectscustomers’ hesitancy to invest their funds for long periods in the currentinterest rate environment. If these maturing deposits do not remain with us, wewill be required to seek other sources of funds, including other certificatesof deposit and borrowings. Depending on market conditions, we may be required topay higher rates on such deposits or other borrowings than we currently pay onthe certificates of deposit due on or before June 30, 2009. We believe,however, based on past experience, that a significant portion of thesecertificates of deposit will remain with us. We have the ability to attract andretain deposits by adjusting the interest rates offered.

 

Our primary investingactivities are the origination and sale of loans and the purchase and sale ofsecurities. Our primary financing activities consist of activity in depositaccounts, FHLB advances and other borrowed funds. Deposit flows are affected bythe overall level of interest rates, the interest rates and products offered byus and our local competitors and other factors. We generally manage the pricingof our deposits to be competitive and to increase core deposit relationships.Occasionally, we offer promotional rates on certain products to attractdeposits.

 

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

 

 
| ** **                                           | ** ** | **Six Months Ended  June 30,  2008** | ** ** | **Year Ended  December 31,  2007** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------|------------|
| Investing  activities:                               |       |                                                |       |                                         |       |
| Loan  originations                                   |       | $                                                   | (115,790   | )                                            | $          | (193,870 | ) |
| Other decreases  in loans                            |       | 41,517                                              |       | 134,091                                      |       |
| Purchase of loan  participations                     |       | (4,220                                              | )          | (32,064                                      | )          |
| Security  purchases                                  |       | (125,623                                            | )          | (187,984                                     | )          |
| Security sales                                       |       | 94,449                                              |       | 36,268                                       |       |
| Security  maturities, calls and principal repayments |       | 49,005                                              |       | 86,128                                       |       |
| Financing  activities:                               |       |                                                |       |                                         |       |
| Decrease in  deposits                                |       | (2,327                                              | )          | (10,974                                      | )          |
| Increase in FHLB  advances, net                      |       | 39,912                                              |       | 50,000                                       |       |
| Increase in  other borrowings                        |       | —                                              |       | 20,000                                       |       |
| Purchase of  treasury stock                          |       | (1,532                                              | )          | (3,924                                       | )          |
|                                                      |            |                                                     |            |                                              |            |  |  |

 

***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 June 30, 2008, the Bank exceeded all of its regulatorycapital requirements and was considered a “well capitalized” institution underregulatory guidelines.

 

The following tablepresents the Bank’s capital ratios and the minimum capital requirements to beconsidered ‘‘wellcapitalized” by the OTS as of June 30, 2008 and December 31,2007:

 
| ** **                                          | ** ** | **Ratio** | ** ** | **Minimum  to be Well  Capitalized** | ** ** |
|-----------------------------------------------------|------------|-----------|------------|------------------------------------------------|------------|
| **June 30,  2008:**                            |       |      |       |                                           |       |
| Total risk-based  capital (to risk-weighted assets) |       | 20.77     | %          | > 10.0                                      | %          |
| Tier 1 capital  (to risk-weighted assets)           |       | 20.01     | %          | >  6.0                                 | %          |
| Tier 1 capital  (to adjusted assets)                |       | 11.63     | %          | >  5.0                                 | %          |
|                                                |       |      |       |                                           |       |
| **December 31,  2007:**                        |       |      |       |                                           |       |
| Total risk-based  capital (to risk-weighted assets) |       | 22.54     | %          | >10.0                                       | %          |
| Tier 1 capital  (to risk-weighted assets)           |       | 21.78     | %          | >  6.0                                 | %          |
| Tier 1 capital  (to adjusted assets)                |       | 12.03     | %          | >  5.0                                 | %          |

 

The capital from theCompany’s initial public offering significantly increased our liquidity andcapital resources. Over time, this initial level of liquidity has been reducedas net proceeds from the stock offering has been used for general corporatepurposes, including the funding of lending activities. The Company’s financialcondition and results of operations have been enhanced by the capital from theoffering, resulting in increased net interest-earning assets. However, thelarge increase in equity resulting from the capital raised in the offering hashad an adverse impact on our return on equity. The Company may use capitalmanagement tools such as cash dividends and share repurchases as well asimprove operating income to increase its return on equity.

 

**Off-BalanceSheet Arrangements**

 

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

 

For the period ended June 30,2008, we did not engage in any off-balance sheet transactions reasonably likelyto have a material effect on our financial condition, results of operations orcash flows.

 

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**Item 3. Quantitative andQualitative Disclosures About Market Risk.**

 

There has not been anymaterial change to the market risk disclosure from that contained in theCompany’s Annual Report on Form 10-K for the year ended December 31,2007.

 

**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 in the Company’s internal control overfinancial reporting occurred during the quarter ended June 30, 2008 thathas materially affected, or is reasonably likely to materially effect, Company’sinternal control over financial 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 legalproceedings that we believe would have a material adverse effect on ourfinancial condition, results of operations or cash flows.

 

**Item 1A. Risk Factors**

 

As of June 30, 2008,the risk factors of the Company have not changed materially from those reportedin the Company’s Annual Report on Form 10-K. In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2007, which could materially affect ourbusiness, financial condition or future results. The risks described in ourAnnual Report on Form 10-K are not the only risks that we face. Additionalrisks and uncertainties not currently known to us or that we currently deem tobe immaterial also may materially adversely affect our business, financialcondition and/or operating results.

 

**Item 2. Unregistered Sales ofEquity 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** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|
|                                            |       |                                         |       |                                         |       |                                                                                                                 |       |                                                                                                                            |       |
| April 1,  2008 through April 30, 2009 |       | —                                       |       | —                                       |       | —                                                                                                               |       | —                                                                                                                          |       |
|                                            |       |                                         |       |                                         |       |                                                                                                                 |       |                                                                                                                            |       |
| May 1, 2008  through May 31, 2008     |       | 46,200                                       |       | $                                            | 12.01      |                                                                                                                 | 46,200     |                                                                                                                            | 249,600    |   |
|                                            |       |                                         |       |                                         |       |                                                                                                                 |       |                                                                                                                            |       |
| June 1,  2008 through June 30, 2008   |       | 51,500                                       |       | $                                            | 12.14      |                                                                                                                 | 51,500     |                                                                                                                            | 198,100    |   |
| Total                                           |       | 97,700                                       |       | $                                            | 12.08      |                                                                                                                 | 97,700     |                                                                                                                            |       |   |

 

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# **(1)  On February 7, 2008,the Company announced that the Board of Directors had approved a stockrepurchase program authorizing the Company to repurchase up to 327,000 sharesof the Company’s common stock (the “February 2008 program”). On July 31,2008, the Company announced that the Board of Directors approved the repurchaseof up to an additional 327,000 shares of the Company’s common stock (the “July 2008program”). These repurchase programs will continue until they are completed orterminated by the Board of Directors.**

# ** **

**Item 3. Defaults upon SeniorSecurities**

 

Not applicable.

 

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

 

Atthe Company’s Annual Meeting of Stockholders (the “Meeting”) held on May 22,2008, all the nominees for director proposed by the Company were elected. Thevotes cast for each nominee were as follows:

 
| ** **            | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|-----------------------|------------|------------|------------|--------------|------------|
|                  |       |       |       |         |       |
| Thomas M. Petro       |       | 13,292,928 |       | 145,677      |       |
|                  |       |       |       |         |       |
| Todd S. Benning       |       | 13,300,412 |       | 138,193      |       |
|                  |       |       |       |         |       |
| RoseAnn B.  Rosenthal |       | 13,281,168 |       | 157,437      |       |

 

Alsoat the Meeting, the stockholders ratified the appointment of KPMG, LLP as theindependent registered public accounting firm for fiscal year ending December 31,2008. The votes cast were as follows:

 
| ** ** | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|------------|------------|-------------|------------|-------------|------------|
|       |       |       |       |        |       |        |       |
|       |       | 13,341,241 |       | 71,820      |       | 25,544      |       |

** **

**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 byreference to this document from the exhibits to the Company’s RegistrationStatement on Form S-1 (File No. 333-134160), as amended, initiallyfiled with the Securities and Exchange Commission on May 16, 2006.

 

(2)           Incorporated by reference to this document from the exhibits to theCompany’s Quarterly Report on Form 10-Q filed with the Securities andExchnage Commission on May 9, 2008.

 

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**SIGNATURES**

 

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

 
|                       | FOX CHASE BANCORP, INC. |
|----------------------------|-------------------------|
|                       |                    |   |
| Dated: August 8, 2008 | By:                     | /s/ Thomas M.  Petro |
|                       |                    | Thomas M. Petro |
|                       |                    | President and Chief  Executive Officer |
|                       |                    | (principal executive  officer) |
|                       |                    |   |
| Dated: August 8, 2008 | By:                     | /s/ Roger S.  Deacon |
|                       |                    | Roger S. Deacon |
|                       |                    | Chief Financial Officer |
|                       |                    | (principal accounting  and financial officer) |

 

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