Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

 

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

 

**For the transition period from          to         **

 

**Commissionfile number: 001-32971**

 

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**Fox Chase Bancorp, Inc.**

(Exact name ofregistrant as specified in its charter)

 

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

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

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

 

**(215)682-7400**

(Registrant’stelephone number, including area code)

 

**N/A**

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

 

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

 

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

 

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

 

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

 

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

 

As of July 31,2009, there were 13,740,170 shares of the registrant’s common stockoutstanding.

 

 

 

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Table ofContents

 

**FOX CHASE BANCORP, INC.**

 

**Table ofContents**

 
| ** **                              | ** **                                                                                                         | **Page  No.** |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------------------|---------------|
| **Part I.  Financial Information** | ** **                                                                                                         |
|                                    |                                                                                                               |          |
| Item 1.                                 | Financial Statements                                                                                               | 3             |
|                                    |                                                                                                               |          |
|                                    | Consolidated  Statements of Condition at June 30, 2009 (unaudited) and  December 31, 2008                | 3             |
|                                    |                                                                                                               |          |
|                                    | Consolidated  Statements of Operations for the Three and Six Months Ended June 30,  2009 and 2008 (unaudited) | 4             |
|                                    |                                                                                                               |          |
|                                    | Consolidated  Statements of Changes in Equity for the Six Months Ended June 30, 2009  (unaudited)             | 5             |
|                                    |                                                                                                               |          |
|                                    | Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008  (unaudited)           | 6             |
|                                    |                                                                                                               |          |
|                                    | Notes to Unaudited Consolidated Financial Statements                                                               | 7             |
|                                    |                                                                                                               |          |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        | 24            |
|                                    |                                                                                                               |          |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                                        | 35            |
|                                    |                                                                                                               |          |
| Item 4.                                 | Controls and  Procedures                                                                                           | 35            |
|                                    |                                                                                                               |          |
| **Part II.  Other Information**    | ** **                                                                                                         |
|                                    |                                                                                                               |          |
| Item 1.                                 | Legal Proceedings                                                                                                  | 35            |
|                                    |                                                                                                               |          |
| Item 1A.                           | Risk Factors                                                                                                       | 35            |
|                                    |                                                                                                               |          |
| Item 2.                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                                       | 36            |
|                                    |                                                                                                               |          |
| Item 3.                                 | Defaults  Upon Senior Securities                                                                                   | 36            |
|                                    |                                                                                                               |          |
| Item 4.                                 | Submission  of Matters to a Vote of Security Holders                                                               | 37            |
|                                    |                                                                                                               |          |
| Item 5.                                 | Other Information                                                                                                  | 37            |
|                                    |                                                                                                               |          |
| Item 6.                                 | Exhibits                                                                                                           | 37            |
|                                    |                                                                                                               |          |
| **Signatures**                          |                                                                                                               |
|                                         |                                                                                                                    |               |  |

 

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Table of Contents

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

** **

**FOX CHASE BANCORP, INC**

**ConsolidatedStatements of Condition**

**(InThousands, Except Share Data)**

 
| ** **                                                                                                                                                                                                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                               | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                                                                               | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                                               | ** ** | ** **        | ** ** | ** **            | ** ** |
| Cash  and due from banks                                                                                                                                                                                                                 |       | $                 | 520        |                  | $          | 642 |   |
| Interest-earning  demand deposits in other banks                                                                                                                                                                                         |       | 72,819            |       | 3,302                 |       |
| Money  market funds                                                                                                                                                                                                                      |       | 31,916            |       | —                |       |
| Total  cash and cash equivalents                                                                                                                                                                                                         |       | 105,255           |       | 3,944                 |       |
| Investment  securities available-for-sale                                                                                                                                                                                                |       | 37,272            |       | 25,041                |       |
| Mortgage  related securities available-for-sale                                                                                                                                                                                          |       | 357,894           |       | 269,682               |       |
| Loans,  net of allowance for loan losses of $7,071at June 30, 2009 and $6,260 at  December 31, 2008                                                                                                                            |       | 624,564           |       | 588,975               |       |
| Loans  held for sale                                                                                                                                                                                                                     |       | 168               |       | —                |       |
| Federal  Home Loan Bank stock, at cost                                                                                                                                                                                                   |       | 9,778             |       | 9,707                 |       |
| Bank-owned  life insurance                                                                                                                                                                                                               |       | 12,435            |       | 12,214                |       |
| Premises  and equipment                                                                                                                                                                                                                  |       | 11,390            |       | 11,748                |       |
| Real  estate held for investment                                                                                                                                                                                                         |       | 1,957             |       | 1,957                 |       |
| Accrued  interest receivable                                                                                                                                                                                                             |       | 4,359             |       | 3,721                 |       |
| Mortgage  servicing rights                                                                                                                                                                                                               |       | 793               |       | 827                   |       |
| Deferred  tax asset, net                                                                                                                                                                                                                 |       | 30                |       | 1,869                 |       |
| Other  assets                                                                                                                                                                                                                            |       | 3,736             |       | 1,585                 |       |
| **Total Assets**                                                                                                                                                                                                                         |       | $                 | 1,169,631  |                  | $          | 931,270 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| **LIABILITIES**                                                                                                                                                                                                                          | ** ** | ** **        | ** ** | ** **            | ** ** |
| Deposits                                                                                                                                                                                                                                 |       | $                 | 844,737    |                  | $          | 608,472 |   |
| Federal  Home Loan Bank advances                                                                                                                                                                                                         |       | 144,290           |       | 146,379               |       |
| Other  borrowed funds                                                                                                                                                                                                                    |       | 50,000            |       | 50,000                |       |
| Advances  from borrowers for taxes and insurance                                                                                                                                                                                         |       | 2,878             |       | 2,589                 |       |
| Accrued  interest payable                                                                                                                                                                                                                |       | 762               |       | 727                   |       |
| Accrued  expenses and other liabilities                                                                                                                                                                                                  |       | 2,453             |       | 1,883                 |       |
| **Total Liabilities**                                                                                                                                                                                                                    |       | 1,045,120         |       | 810,050               |       |
| **STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| Preferred  stock ($.01 par value; 1,000,000 shares authorized,none issued and  outstanding at June 30, 2009 andDecember 31, 2009)                                                                                              |       | —            |       | —                |       |
| Common  stock ($.01 par value; 35,000,000 shares authorized,14,679,750 shares  issued and 13,799,970 shares outstanding at June 30, 2009 and 14,679,750  shares issued and 14,066,559shares outstanding at December 31,  2008) |       | 147               |       | 147                   |       |
| Additional  paid-in capital                                                                                                                                                                                                              |       | 64,008            |       | 63,516                |       |
| Treasury  stock (at cost, 879,780 shares at June 30, 2009 and 613,191 shares  at December 31, 2008)                                                                                                                       |       | (9,929            | )          | (7,293                | )          |
| Common  stock acquired by benefit plans                                                                                                                                                                                                  |       | (7,582            | )          | (7,819                | )          |
| Retained  earnings                                                                                                                                                                                                                       |       | 73,557            |       | 72,664                |       |
| Accumulated  other comprehensive income, net                                                                                                                                                                                             |       | 4,310             |       | 5                     |       |
| **Total Stockholders’ Equity**                                                                                                                                                                                                      |       | 124,511           |       | 121,220               |       |
| **Total Liabilities and Stockholders’ Equity**                                                                                                                                                                                      |       | $                 | 1,169,631  |                  | $          | 931,270 |   |

 

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

 

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**FOXCHASE BANCORP, INC**

**ConsolidatedStatements of Operations**

**(Unaudited)**

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

 
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                     | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                                     | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| **INTEREST INCOME**                                                            |       |                   |       |                 |       |   |   |   |   |
| Interest and fees on loans                                                     |       | $                      | 8,758      |                 | $          | 7,181 |   | $ | 17,135 |   | $ | 14,309 |   |
| Interest on money market funds                                                 |       | 122                    |       | 246                  |       | 160 |   | 521 |   |
| Interest on mortgage related securities  available-for-sale                    |       | 3,505                  |       | 3,206                |       | 6,760 |   | 6,110 |   |
| Interest on investment securities  available-for-sale                          |       |                   |       |                 |       |   |   |   |   |
| Taxable                                                                        |       | 261                    |       | 104                  |       | 385 |   | 755 |   |
| Nontaxable                                                                     |       | 140                    |       | 155                  |       | 283 |   | 323 |   |
| Dividend income                                                                |       | —                 |       | 66                   |       | 1 |   | 124 |   |
| Other interest income                                                          |       | 135                    |       | 37                   |       | 136 |   | 107 |   |
| **Total Interest Income**                                                      |       | 12,921                 |       | 10,995               |       | 24,860 |   | 22,249 |   |
| **INTEREST EXPENSE**                                                           |       |                   |       |                 |       |   |   |   |   |
| Deposits                                                                       |       | 5,719                  |       | 4,552                |       | 10,098 |   | 9,659 |   |
| Federal Home Loan Bank advances                                                |       | 1,329                  |       | 1,120                |       | 2,659 |   | 2,150 |   |
| Other borrowed funds                                                           |       | 432                    |       | 182                  |       | 861 |   | 364 |   |
| **Total Interest Expense**                                                     |       | 7,480                  |       | 5,854                |       | 13,618 |   | 12,173 |   |
| **Net Interest Income**                                                        |       | 5,441                  |       | 5,141                |       | 11,242 |   | 10,076 |   |
| Provision for loan losses                                                      |       | 567                    |       | 225                  |       | 962 |   | 400 |   |
| **Net Interest Income after  Provision for Loan Losses**                       |       | 4,874                  |       | 4,916                |       | 10,280 |   | 9,676 |   |
| **NONINTEREST INCOME**                                                         |       |                   |       |                 |       |   |   |   |   |
| Service charges and other fee income                                           |       | 310                    |       | 224                  |       | 480 |   | 415 |   |
| Net gain on sale of loans                                                      |       | —                 |       | 1                    |       | 3 |   | 4 |   |
| Income on bank-owned life insurance                                            |       | 112                    |       | 113                  |       | 221 |   | 224 |   |
| Other                                                                          |       | 146                    |       | 17                   |       | 211 |   | 35 |   |
|                                                                           |       |                   |       |                 |       |   |   |   |   |
| Total other-than-temporary impairment loss                                     |       | (605                   | )          | —               |       | (605 | ) | — |   |
| Less: Portion of loss recognized in other  comprehensive income (before taxes) |       | 448                    |       | —               |       | 448 |   | — |   |
| Net other-than-temporary impairment loss                                       |       | (157                   | )          | —               |       | (157 | ) | — |   |
| Gains on sale of investment securities                                         |       | 588                    |       | 48                   |       | 588 |   | 118 |   |
| Net investment securities gains                                                |       | 431                    |       | 48                   |       | 431 |   | 118 |   |
|                                                                           |       |                   |       |                 |       |   |   |   |   |
| **Total Noninterest Income**                                                   |       | 999                    |       | 403                  |       | 1,346 |   | 796 |   |
| **NONINTEREST EXPENSE**                                                        |       |                   |       |                 |       |   |   |   |   |
| Salaries, benefits and other compensation                                      |       | 2,915                  |       | 3,064                |       | 5,765 |   | 5,862 |   |
| Occupancy expense                                                              |       | 438                    |       | 468                  |       | 933 |   | 954 |   |
| Furniture and equipment expense                                                |       | 180                    |       | 227                  |       | 401 |   | 443 |   |
| Data processing costs                                                          |       | 377                    |       | 409                  |       | 762 |   | 802 |   |
| Professional fees                                                              |       | 298                    |       | 265                  |       | 564 |   | 578 |   |
| Marketing expense                                                              |       | 86                     |       | 125                  |       | 170 |   | 220 |   |
| FDIC premiums                                                                  |       | 831                    |       | 25                   |       | 1,072 |   | 55 |   |
| Other                                                                          |       | 367                    |       | 373                  |       | 776 |   | 764 |   |
| **Total Noninterest Expense**                                                  |       | 5,492                  |       | 4,956                |       | 10,443 |   | 9,678 |   |
| **Income Before Income Taxes**                                                 |       | 381                    |       | 363                  |       | 1,183 |   | 794 |   |
| Income tax provision                                                           |       | 83                     |       | 59                   |       | 284 |   | 145 |   |
| **Net Income**                                                                 |       | $                      | 298        |                 | $          | 304 |   | $ | 899 |   | $ | 649 |   |
| Earnings per share:                                                            |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                          |       | $                      | 0.02       |                 | $          | 0.02 |   | $ | 0.07 |   | $ | 0.05 |   |
| Diluted                                                                        |       | $                      | 0.02       |                 | $          | 0.02 |   | $ | 0.07 |   | $ | 0.05 |   |

 

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

 

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Table ofContents

 

**FOXCHASE BANCORP, INC**

**ConsolidatedStatements of Changes in Equity**

**SixMonths Ended June 30, 2009**

** (In Thousands, Unaudited)**

*** ***
| ** **                                    | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Common**         | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|--------------------|------------|--------------|------------|-------------------|------------|------------|------------|
| ** **                                    | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **Stock**          | ** ** | ** **   | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Common** | ** ** | **Paid in**    | ** ** | **Treasury** | ** ** | **Acquired by**    | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Total**  | ** ** |
| ** **                                    | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Stock**    | ** ** | **Benefit  Plans** | ** ** | **Earnings** | ** ** | **Income,  net**  | ** ** | **Equity** | ** ** |
|                                          |       |       |       |           |       |         |       |               |       |         |       |              |       |       |       |
| **BALANCE - DECEMBER 31, 2008**               |       | $          | 147        |           | $          | 63,516       |       | $                  | (7,293     | )            | $          | (7,819            | )          | $          | 72,664     |   | $ | 5 |   | $ | 121,220 |   |
| Purchase of treasury stock, net               |       |       |       |           |       | (2,636       | )          |               |       |         |       |              |       | (2,636     | )          |
| Stock based compensation expense              |       |       |       | 486            |       |         |       |               |       |         |       |              |       | 486        |       |
| Issuance of stock for vested equityawards     |       |       |       | (39            | )          |         |       | 45                 |       | (6           | )          |              |       | —     |       |
| Unallocated ESOP shares committedto employees |       |       |       | (5             | )          |         |       | 192                |       |         |       |              |       | 187        |       |
| Shares allocated in long-termincentive plan   |       |       |       | 50             |       |         |       |               |       |         |       |              |       | 50         |       |
| Net income                                    |       |       |       |           |       |         |       |               |       | 899          |       |              |       | 899        |       |
| Other comprehensive income                    |       |       |       |           |       |         |       |               |       |         |       | 4,305             |       | 4,305      |       |
|                                          |       |       |       |           |       |         |       |               |       |         |       |              |       |       |       |
| **BALANCE - JUNE 30, 2009**                   |       | $          | 147        |           | $          | 64,008       |       | $                  | (9,929     | )            | $          | (7,582            | )          | $          | 73,557     |   | $ | 4,310 |   | $ | 124,511 |   |

 

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

 

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**FOXCHASE BANCORP, INC**

**ConsolidatedStatements of Cash Flows**

**(InThousands)**

 
| ** **                                                                             | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                             | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| ** **                                                                             | ** ** | **(Unaudited)**                    | ** ** |
| **Cash Flows From Operating  Activities**                                              |       |                               |       |   |   |
| Net income                                                                             |       | $                                  | 899        |   | $ | 649 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:     | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Provision for loan losses                                                              |       | 962                                |       | 400 |   |
| Depreciation                                                                           |       | 447                                |       | 493 |   |
| Net amortization of securities premiums and  discounts                                 |       | 1,108                              |       | 508 |   |
| Benefit for deferred income taxes                                                      |       | (453                               | )          | (292 | ) |
| Shares committed to be released to the ESOP                                            |       | 187                                |       | 220 |   |
| Shares earned in the long-term incentive plan                                          |       | 50                                 |       | 52 |   |
| Stock based compensation expense                                                       |       | 486                                |       | 434 |   |
| Pension plan settlement                                                                |       | —                             |       | 137 |   |
| Origination of loans held for sale                                                     |       | (585                               | )          | (2,447 | ) |
| Proceeds from sales of loans held for sale                                             |       | 416                                |       | 2,450 |   |
| Net gain on sales of loans and loans held for sale                                     |       | (3                                 | )          | (4 | ) |
| Net gain on sales of securities                                                        |       | (588                               | )          | (118 | ) |
| Other-than-temporary impairment loss                                                   |       | 157                                |       | — |   |
| Earnings on investment in bank-owned life insurance                                    |       | (221                               | )          | (224 | ) |
| Decrease in mortgage servicing rights                                                  |       | 34                                 |       | 63 |   |
| Increase in accrued interest receivable and other  assets                              |       | (780                               | )          | (393 | ) |
| Increase in accrued interest payable, accrued  expenses and other liabilities          |       | 605                                |       | 671 |   |
| **Net Cash Provided by Operating  Activities**                                         |       | 2,721                              |       | 2,599 |   |
| **Cash Flows from Investing  Activities**                                              |       |                               |       |   |   |
| Equity investment in unconsolidated entity                                             |       | (630                               | )          | — |   |
| Investment securities - available for sale:                                            | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Purchases                                                                              |       | (19,184                            | )          | (17,128 | ) |
| Proceeds from sales                                                                    |       | —                             |       | 72,398 |   |
| Proceeds from maturities, calls and principal  repayments                              |       | 8,330                              |       | 11,180 |   |
| Mortgage related securities — available for sale:                                 | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Purchases                                                                              |       | (149,849                           | )          | (108,495 | ) |
| Proceeds from sales                                                                    |       | 20,218                             |       | 22,051 |   |
| Proceeds from maturities, calls and principal  repayments                              |       | 44,587                             |       | 37,825 |   |
| Net increase in loans                                                                  |       | (36,426                            | )          | (74,273 | ) |
| Purchases of loan participations                                                       |       | (125                               | )          | (4,220 | ) |
| Net increase in Federal Home Loan Bank stock                                           |       | (71                                | )          | (2,192 | ) |
| Increase in other investments                                                          |       | —                             |       | (83 | ) |
| Purchases of premises and equipment                                                    |       | (89                                | )          | (110 | ) |
| Proceeds from sales of premises and equipment and  assets acquired through foreclosure |       | —                             |       | 9 |   |
| **Net Cash Used by Investing  Activities**                                             |       | (133,239                           | )          | (63,038 | ) |
| **Cash Flows from Financing  Activities**                                              |       |                               |       |   |   |
| Net increase (decrease) in deposits                                                    |       | 236,265                            |       | (2,327 | ) |
| Increase in advances from borrowers for taxes and  insurance                           |       | 289                                |       | 772 |   |
| Federal Home Loan Bank advances                                                        |       | —                             |       | 41,500 |   |
| Principal payments on Federal Home Loan Bank  advances                                 |       | (2,089                             | )          | (1,588 | ) |
| Purchase of treasury stock                                                             |       | (2,636                             | )          | (1,532 | ) |
| **Net Cash Provided by Financing Activities**                                          |       | 231,829                            |       | 36,825 |   |
| **Net (Decrease) Increase in Cash  and Cash Equivalents**                              |       | 101,311                            |       | (23,614 | ) |
| **Cash and Cash Equivalents –  Beginning**                                        |       | 3,944                              |       | 31,275 |   |
| **Cash and Cash Equivalents – Ending**                                            |       | $                                  | 105,255    |   | $ | 7,661 |   |
| **Supplemental disclosure of cash  flow Information**                                  |       |                               |       |   |   |
| Interest paid                                                                          |       | $                                  | 13,583     |   | $ | 12,120 |   |
| Income taxes paid                                                                      |       | $                                  | 1,078      |   | $ | 584 |   |

 

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

 

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**FOXCHASE BANCORP, INC**

**Notes tothe Unaudited Consolidated Financial Statements**

** **

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

 

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

 

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

 

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

 

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

 

The consolidatedfinancial statements include the accounts of the Bancorp and the Bank. The Bank’soperations include the accounts of its wholly owned subsidiaries, Fox ChaseFinancial, Inc. and Fox Chase Service Corporation.  Fox Chase Financial, Inc. is a Delawarechartered investment holding company and its sole purpose is to manage and holdinvestment securities.  Fox Chase ServiceCorporation is Pennsylvania chartered company and its sole purpose is tofacilitate the Bank’s investment in Philadelphia Mortgage Advisors (“PMA”).  The consolidated financial statements do notinclude 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.

 

During 2009 and 2008, theBank engaged in certain business activities with PMA.  These activities included providing awarehouse line of credit to PMA, as well as acquiring residential mortgage andhome equity loans from PMA. The Bank recorded interest income from PMA on thewarehouse line of $100,000 and $35,000 for the six months ended June 30,2009 and 2008, respectively, as well as loan satisfaction fees, which arerecorded in service charges and other fee income, from PMA of $31,000 and$6,000 for the six months ended June 30, 2009 and 2008, respectively.  In addition, the Bank acquired total loansfrom PMA of $26 million and $44 million for the six months ended June 30,2009 and 2008, respectively, which includes the cost of the loans.

 

Realestate held for investment represents undeveloped land located in Absecon, NewJersey. This property is under an option to be sold no later than 2010, subjectto certain conditions being met including zoning and land use approvals.

 

The Company followsaccounting principles and reporting practices that are in compliance with U.S.generally accepted accounting principles (“GAAP”). The preparation of thefinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclose contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.  Materialestimates that are particularly susceptible to significant change in the nearterm relate to the determination of the allowance for loan losses, thevaluation and realizability of deferred tax assets and the evaluation ofother-than-temporary impairment and valuation of investment securities.

 

7

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

 

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

 

**Per ShareInformation**

** **

**The Company follows the provisions of SFAS No. 128, “EarningsPer Share.”  Basic earnings per shareexcludes dilution and is computed by dividing income available to commonstockholders by the weighted-average common shares outstanding during theperiod.  Diluted earnings per share takesinto account the potential dilution that could occur if securities or othercontracts to issue common stock were exercised and converted into commonstock.  Unallocated shares in the ESOPand shares purchased to fund the Bancorp’s 2007 Equity Incentive Plan are notincluded in either basic or diluted earnings per share.  Unvested shares in the Bancorp’s long-termincentive plan are not included in basic earnings per share.**

** **

**The following table presents the reconciliation of the numeratorsand denominators of the basic and diluted earnings per share computations(unaudited).**

** **
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                  | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                                  | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                        |       |                   |       |                 |       |   |   |   |   |
| Net  income                                                                 |       | $                      | 298,000    |                 | $          | 304,000 |   | $ | 899,000 |   | $ | 649,000 |   |
|                                                                        |       |                   |       |                 |       |   |   |   |   |
| Weighted-average  common shares outstanding (1)                             |       | 13,910,246             |       | 14,290,310           |       | 13,965,550 |   | 14,317,294 |   |
| Average  common stock acquired by stock benefit plans:                      |       |                   |       |                 |       |   |   |   |   |
| Unvested  shares – long-term incentive plan                            |       | (16,743                | )          | (25,114              | )          | (16,743 | ) | (25,114 | ) |
| ESOP  shares unallocated                                                    |       | (447,464               | )          | (485,827             | )          | (452,232 | ) | (490,622 | ) |
| Shares  purchased by trust                                                  |       | (243,863               | )          | (287,500             | )          | (245,030 | ) | (287,500 | ) |
| Weighted-average  common shares usedto calculate basic earnings per share   |       | 13,202,176             |       | 13,491,869           |       | 13,251,545 |   | 13,514,058 |   |
| Dilutive  effect of:                                                        |       |                   |       |                 |       |   |   |   |   |
| Unvested  shares – long-term incentive plans                           |       | 16,743                 |       | 25,114               |       | 16,743 |   | 25,114 |   |
| Restricted  stock awards                                                    |       | 3,292                  |       | 22,169               |       | 3,280 |   | 13,793 |   |
| Weighted-average  common shares usedto calculate diluted earnings per share |       | 13,222,211             |       | 13,539,152           |       | 13,271,568 |   | 13,552,965 |   |
|                                                                        |       |                   |       |                 |       |   |   |   |   |
| Earnings  per share-basic                                                   |       | $                      | 0.02       |                 | $          | 0.02 |   | $ | 0.07 |   | $ | 0.05 |   |
| Earnings  per share-diluted                                                 |       | $                      | 0.02       |                 | $          | 0.02 |   | $ | 0.07 |   | $ | 0.05 |   |
|                                                                        |       |                   |       |                 |       |   |   |   |   |
| Outstanding  common stock equivalents having no dilutive effect             |       | 884,310                |       | 813,231              |       | 884,322 |   | 821,607 |   |

 

----

(1) Excludestreasury stock.

 

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

 

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

** **
| ** **                                            | ** ** | **June 30, 2009 (Unaudited)** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | ** **                         | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Amortized**                      | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                            | ** ** | **Cost**                           | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| ** **                                            | ** ** | ** **                         | ** ** | **(In Thousands)** | ** ** | ** ** | ** ** |
|                                                  |       |                               |       |   |   |   |   |   |   |
| Obligations  of U.S. government agencies              |       | $                                  | 310        |   | $ | 2 |   | $ | — |   | $ | 312 |   |
| State  and political subdivisions                     |       | 11,365                             |       | 41 |   | (190 | ) | 11,216 |   |
| Corporate  securities                                 |       | 25,237                             |       | 645 |   | (138 | ) | 25,744 |   |
|                                                  |       | 36,912                             |       | 688 |   | (328 | ) | 37,272 |   |
|                                                  |       |                               |       |   |   |   |   |   |   |
| Private  label residential mortgage related security  |       | 667                                |       | — |   | (448 | ) | 219 |   |
| Private  label commercial mortgage related securities |       | 18,270                             |       | 194 |   | (1,120 | ) | 17,344 |   |
| Agency  residential mortgage related securities       |       | 332,729                            |       | 7,883 |   | (281 | ) | 340,331 |   |
| Total  mortgage related securities                    |       | 351,666                            |       | 8,077 |   | (1,849 | ) | 357,894 |   |
|                                                  |       |                               |       |   |   |   |   |   |   |
| **Total securities**                                  |       | $                                  | 388,578    |   | $ | 8,765 |   | $ | (2,177 | ) | $ | 395,166 |   |

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

 

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

 

Thefollowing tables show gross unrealized losses and fair value of securities,aggregated by security category and length of time that individual securitieshave been in a continuous unrealized loss position, at June 30, 2009 and December 31,2008:

 
| ** **                                            | ** ** | **June 30, 2009 (Unaudited)** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | **Less than 12 Months**            | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **Fair**                           | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                                            | ** ** | **Value**                          | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| ** **                                            | ** ** | ** **                         | ** ** | ** ** | ** ** | **(In Thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                  |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| State and political subdivisions                      |       | $                                  | 4,616      |   | $ | (107 | ) | $ | 773 |   | $ | (83 | ) | $ | 5,389 |   | $ | (190 | ) |
| Corporate securities                                  |       | 5,635                              |       | (29 | ) | 2,763 |   | (109 | ) | 8,398 |   | (138 | ) |
|                                                  |       | 10,251                             |       | (136 | ) | 3,536 |   | (192 | ) | 13,787 |   | (328 | ) |
| ** **                                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Private label residential mortgage related security   |       | —                             |       | — |   | 219 |   | (448 | ) | 219 |   | (448 | ) |
| Private label commercial mortgage related  securities |       | —                             |       | — |   | 8,918 |   | (1,120 | ) | 8,918 |   | (1,120 | ) |
| Agency residential mortgage related securities        |       | 32,603                             |       | (281 | ) | — |   | — |   | 32,603 |   | (281 | ) |
| Total mortgage related securities                     |       | 32,603                             |       | (281 | ) | 9,137 |   | (1,568 | ) | 41,740 |   | (1,849 | ) |
|                                                  |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| **Total securities**                                  |       | $                                  | 42,854     |   | $ | (417 | ) | $ | 12,673 |   | $ | (1,760 | ) | $ | 55,527 |   | $ | (2,177 | ) |
|                                                       |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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

 

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

 

InApril 2009, the Financial Accounting Standards Board (FASB) issuedStaff Position No. 115-2 and 124-2, “Recognition and Presentation ofOther-than-Temporary Impairments” (FSP FAS 115-2). FSP FAS 115-2 amendsother-than-temporary impairment guidance for debt securities and expandsdisclosure requirements for other-than-temporarily impaired debt and equitysecurities. FSP FAS 115-2 requires companies to record other-than-temporaryimpairment charges, through earnings, if they have the intent to sell, or willmore likely than not be required to sell, an impaired debt security before arecovery of its amortized cost basis. In addition, FSP FAS 115-2 requirescompanies to record other-than-temporary impairment charges through earningsfor the amount of credit losses, regardless of the intent or requirement tosell. Credit loss is measured as the difference between the present value of animpaired debt security’s cash flows and its amortized cost basis. Non-creditrelated write-downs to fair value must be recorded as decreases to accumulatedother comprehensive income as long as a company has no intent or requirement tosell an impaired security before a recovery of amortized cost basis. Finally, FSP FAS115-2 requires companies to record all previously recorded non-credit relatedother-than-temporary impairment charges for debt securities as cumulativeeffect adjustments to retained earnings as of the beginning of the period ofadoption. FSP FAS 115-2 is effective for interim and annual reporting periodsending after June 15, 2009.  TheCompany adopted the statement for the period ended June 30, 2009.  Since the Company did not have anyother-than-temporary impairment as of March 31, 2009, no cumulative effectadjustments were required at adoption. See below discussion regarding the other-than-temporary creditimpairment of the private label residential mortgage related security recordedat June 30, 2009.

 

The Company had one private label residential mortgagerelated security and six commercial mortgage related securities at June 30,2009.  The Company evaluates currentcharacteristics of each of its private label securities such as delinquency andforeclosure levels, credit enhancement, projected losses and coverage, on aquarterly basis. It is possible that the underlying collateral of thesesecurities will perform worse than current expectations, which may lead toadverse changes in cash flows on these securities and potential futureother-than-temporary impairment losses. Events that may trigger materialdeclines in fair values for these securities in the future would include butare not limited to deterioration of credit metrics, significantly higher levelsof default and severity of loss on the underlying collateral, deterioratingcredit enhancement and loss coverage ratios, or further illiquidity.

 

The private label residential mortgage related security hadan amortized cost, prior to the identified credit related impairment, of$824,000 at June 30, 2009 and $889,000 at December 31, 2008.  Fair value for this security was $219,000 at June 30,2009 and $269,000 at December 31, 2008. During the six months ended June 30, 2009, delinquency levels forthe security’s underlying collateral increased to 20.2% from 13.8% at December 31,2008, principal payment rate slowed to an annualized rate of 14.1% from 16.1%in 2008, and the security was downgraded from AAA to BB+.  As a result of these negative trends,management’s analysis indicated that the security had $157,000 ofother-than-temporary credit impairment at June 30, 2009.  In accordance with FSP FAS 115-2, this amountof credit related impairment is recorded as a charge through earnings,regardless of the intent or requirement to sell a security.   As of June 30, 2009, afterother-than-temporary impairment charges, the private label residential mortgagerelated security had an amortized cost of $667,000, a fair value of $219,000with a remaining unrealized loss of $448,000. The remaining unrealized loss is not considered other-than-temporary asmanagement does not have the intention or requirement to sell this security.

 

The commercial mortgage related securities each have a creditrating of AAA and an amortized cost of $18.3 million and $10.0 million at June 30,2009 and December 31, 2008, respectively. The securities had a grossunrealized loss of $1.2 million and $2.7 million at June 30, 2009 and December 31,2008, respectively. Management believes the impairment on these securities istemporary based on the cash flows, credit rating, credit enhancement, structureof the underlying securities and management does not have the intention orrequirement to sell the securities.

 

The following schedule provides a summary of the component ofnet gains on sale of investment securities in the Company’s ConsolidatedStatement of Operations:

 
| ** **                                           | ** ** | ** **   | ** ** | ** **          | ** ** | **Other-than-** | ** ** | ** **    | ** ** |
|------------------------------------------------------|------------|--------------|------------|---------------------|------------|-----------------|------------|---------------|------------|
| ** **                                           | ** ** | **Gross**    | ** ** | **Gross**           | ** ** | **temporary**   | ** ** | ** **    | ** ** |
| ** **                                           | ** ** | **Realized** | ** ** | **Realized**        | ** ** | **Impairment**  | ** ** | **Net Gains** | ** ** |
| ** **                                           | ** ** | **Gains**    | ** ** | **Losses**          | ** ** | **Losses**      | ** ** | **(Losses)**  | ** ** |
| ** **                                           | ** ** | ** **   | ** ** | **(in  thousands)** | ** ** | ** **      | ** ** |
| Three  and six months ended June 30, 2009:      |       |         |       |                |       |            |       |          |       |
| Private  label residential mortgage related security |       | $            | 588        |                | $          | —          |       | $             | (157       | ) | $ | 431 |   |
|                                                 |       |         |       |                |       |            |       |          |       |
| Total                                                |       | $            | 588        |                | $          | —          |       | $             | (157       | ) | $ | 431 |   |

 

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**NOTE 2****-****INVESTMENT ANDMORTGAGE RELATED SECURITIES (CONTINUED)**

 

Additionally, management evaluates all othernon-private label investment securities for other-than-temporary impairment ona quarterly basis, and more frequently when economic or market concernswarrant. Management does not believe that any individual unrealized lossrepresented an other-than-temporary impairment at June 30, 2009.Management believes the  temporaryimpairment on the securities classified as (a) state and politicalsubdivisions and (b) corporate securities is directly related to thevolatility, absence of liquidity in the fixed income markets and changes inmarket interest rates.  Finally, thetemporary impairment on the agency residential mortgage related securities isdirectly related to changes in market interest rates.

 

Of the 36 securities with a temporary impairment at June 30,2009, 24 have a rating of AAA.  Thesecurities rated less than AAA are four corporate debt securities have a ratingof A2 or higher, and eight state or political subdivision securities have arating of Baa1 or higher.

 

Securities that have been impaired greater than twelvemonths are primarily the private label residential mortgage related securityand three private label commercial mortgage related securities, which wereidentified and discussed in detail in the preceding paragraphs. The remainingsecurities impaired greater than twelve months are (a) state and politicalsubdivisions and (b) corporate securities, the impairment of which wasdeemed temporary due to positive factors supporting the recoverability of thesesecurities, and the Company does not have the intention to sell the securities.Positive factors considered include timely principal payments and the financialhealth of the issuer.

 

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

 
| ** **                             | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **Amortized**          | ** ** | **Fair**                   | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                             | ** ** | **Cost**               | ** ** | **Value**                  | ** ** | **Cost** | ** ** | **Value** | ** ** |
| ** **                             | ** ** | **(In  Thousands)**    | ** ** | **(In  Thousands)**        | ** ** |
|                                   |       |                   |       |                       |       |   |   |   |   |
| Due in one year or less                |       | $                      | 9,721      |                       | $          | 9,845 |   | $ | 6,913 |   | $ | 6,776 |   |
| Due after one year through five years  |       | 17,312                 |       | 17,707                     |       | 5,782 |   | 5,376 |   |
| Due after five years through ten years |       | 4,830                  |       | 4,850                      |       | 7,551 |   | 7,543 |   |
| Due after ten years                    |       | 5,049                  |       | 4,870                      |       | 5,557 |   | 5,346 |   |
|                                   |       | $                      | 36,912     |                       | $          | 37,272 |   | $ | 25,803 |   | $ | 25,041 |   |

 

Securities with a carrying value of $3.7 million and$4.3 million at June 30, 2009 and December 31, 2008, respectively,were pledged to secure public deposits and for other purposes as required orpermitted by law.

 

Securities with a carrying value of $65.0 million and$60.0 million at June 30, 2009 and December 31, 2008, respectively,were pledged as collateral for $50 million in borrowed funds. See Note 6.

 

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**NOTE 3 - LOANS**

 

Thecomposition of net loans at June 30, 2009, and December 31, 2008 isprovided below (in thousands).

 
| ** **                          | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| Real estate loans:                  |       |                    |       |                        |       |
| One-to four-family                  |       | $                       | 264,695    |                        | $          | 260,833 |   |
| Multi-family and commercial         |       | 199,204                 |       | 155,564                     |       |
| Construction                        |       | 50,200                  |       | 65,002                      |       |
|                                |       | 514,099                 |       | 481,399                     |       |
| Consumer loans:                     |       |                    |       |                        |       |
| Home equity                         |       | 56,689                  |       | 63,987                      |       |
| Automobile                          |       | 161                     |       | 262                         |       |
| Lines of credit                     |       | 13,722                  |       | 11,486                      |       |
| Other                               |       | 3,208                   |       | 351                         |       |
|                                |       | 73,780                  |       | 76,086                      |       |
| Commercial loans                    |       | 43,412                  |       | 37,371                      |       |
| **Total Loans**                     |       | 631,291                 |       | 594,856                     |       |
| Deferred loan origination fees, net |       | 344                     |       | 379                         |       |
| Allowance for loan losses           |       | (7,071                  | )          | (6,260                      | )          |
| **Net Loans**                       |       | $                       | 624,564    |                        | $          | 588,975 |   |

 

Thefollowing table presents changes in the allowance for loan losses (inthousands):
| ** **                | ** ** | **Six Months**    | ** ** | **Year**              | ** ** |
|---------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                | ** ** | **Ended**         | ** ** | **Ended**             | ** ** |
| ** **                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| ** **                | ** ** | **2009**          | ** ** | **2008**              | ** ** | **2008** | ** ** |
| ** **                | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
|                      |       |              |       |                  |       |   |   |
| Balance, beginning        |       | $                 | 6,260      |                  | $          | 3,376 |   | $ | 3,376 |   |
| Provision for loan losses |       | 962               |       | 400                   |       | 2,900 |   |
| Loans charged off         |       | (151              | )          | (18                   | )          | (19 | ) |
| Recoveries                |       | —            |       | 2                     |       | 3 |   |
| Balance,  ending          |       | $                 | 7,071      |                  | $          | 3,760 |   | $ | 6,260 |   |

 

Asof June 30, 2009, the Bank had one interest rate swap agreement that wasentered into during the quarter ended June 30, 2007.  The Bank had entered into a 15-year fixedrate commercial loan and the Bank’s risk management objective was to lock inthe fair value of the loan.  The Bank metthis objective by entering into a swap agreement to exchange fixed rate cashflows for variable rate cash flows. The swap is a fair-value hedge and thevalue of the swap is recorded as an adjustment to other assets in the Company’sStatements of Condition. The Bank has not entered into a swap since the June 2007quarter and currently does not consider itself to be an active participant inthe swap market.

 

Asof June 30, 2009 and December 31, 2008, the Bank’s one swap agreementhad a notional amount of $1.2 million, which was earning interest at7.43%.  The Company is receiving avariable rate payment of three-month LIBOR plus 2.24% and is paying a fixedrate payment of 7.43%. The swap matures in April 2022 and had a fair valueloss position of $141,000 and $236,000 at June 30, 2009 and December 31,2008, respectively.

 

Theloan is contractually current and the critical terms of the loan and the swapare a mirror image except that the loan includes a default interest rateclause.  Accordingly, the Company hasdetermined the fair value of the gain position of the loan is equal to themarket value loss position of the swap as of December 31, 2008 and June 30,2009, respectively.

 

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**NOTE 4 – MORTGAGE SERVICINGACTIVITY**

 

Loansserviced for others are not included in the accompanying consolidatedstatements of condition. The unpaid principal balances of these loans were$97.5 million and $111.1 million at June 30, 2009 and 2008, respectively,and $109.6 million at December 31, 2008.

 

Thefollowing summarizes mortgage servicing rights for the six months ended June 30,2009 and 2008 and the year ended December 31, 2008 (in thousands):

 
| ** **                            | ** ** | **Six Months********Ended********June 30,** | ** ** | **Year********Ended  December 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                            | ** ** | **2009**                                         | ** ** | **2008**                                 | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **(Unaudited)**                                  | ** ** | ** **                               | ** ** |
| Balance, beginning                    |       | $                                                | 827        |                                     | $          | 1,066 |   | $ | 1,066 |   |
| Mortgage servicing rights capitalized |       | —                                           |       | —                                   |       | — |   |
| Mortgage servicing rights amortized   |       | (109                                             | )          | (63                                      | )          | (106 | ) |
| Change in valuation allowance         |       | 75                                               |       | —                                   |       | (133 | ) |
| Balance, ending                       |       | $                                                | 793        |                                     | $          | 1,003 |   | $ | 827 |   |

 

AtJune 30, 2009, June 30, 2008 and December 31, 2008, the fairvalue of the mortgage servicing rights (“MSRs”) was $817,000 (unaudited), $1.2million (unaudited) and $836,000, respectively. The fair value at these dateswas determined using a third-party valuation model that calculates the presentvalue of estimated future servicing income. The model incorporates assumptionsthat market participants use in estimating future net servicing income,including estimates of prepayment speeds and discount rates. Mortgage loanprepayment speed is the annual rate at which borrowers are forecasted to repaytheir mortgage loan principal and is based on historical experience and currentinterest rates. The discount rate used to determine the present value of futurenet servicing income - another key assumption in the model - is the requiredrate of return the market would expect for an asset with similar risk. Bothassumptions can, and generally will, change quarterly valuations as marketconditions and interest rates change.

 

During2008, the Bank recorded a total valuation allowance of $133,000 on its MSRs,which was due to a significant decrease in interest rates for residentialmortgages during the year resulting in assumed higher mortgageprepayments.  This valuation allowancewas increased by $24,000 to $157,000 during the first quarter of 2009.  In the second quarter of 2009, the valuationallowance was decreased by $99,000 to $58,000 as a result of assumed slowerprepayment speeds as of June 30, 2009. The amount of the valuation adjustment is recorded as an adjustment toservice charges and other fee income in the Company’s consolidated statement ofoperations.

 

**NOTE 5 - DEPOSITS**

 

Depositsand their respective weighted average interest rate at June 30, 2009 and December 31,2008 consist of the following (dollars in thousands):

 
| ** **                           | ** ** | **June 30, 2009**                | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | **Weighted  Average  Interest  Rate** | ** ** | **Amount**                 | ** ** | **Weighted  Average  Interest  Rate** | ** ** | **Amount** | ** ** |
| ** **                           | ** ** | **(Unaudited)**                       | ** ** | ** **                 | ** ** | ** ** | ** ** |
|                                 |       |                                  |       |                       |       |   |   |   |   |
| Non-interest bearing demand accounts |       | —                                | %          | $                          | 47,300     |   | — | % | $ | 46,716 |   |
| NOW accounts                         |       | 0.92                                  |       | 37,913                     |       | 1.13 |   | 35,330 |   |
| Money market accounts                |       | 1.97                                  |       | 159,065                    |       | 2.01 |   | 101,295 |   |
| Savings and club accounts            |       | 0.15                                  |       | 51,481                     |       | 0.25 |   | 51,196 |   |
| Certificates of deposit              |       | 3.56                                  |       | 548,978                    |       | 3.96 |   | 373,935 |   |
|                                 |       |                                  |       |                       |       |   |   |   |   |
|                                 |       | 2.74                                  | %          | $                          | 844,737    |   | 2.86 | % | $ | 608,472 |   |

 

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**NOTE 6 – BORROWINGS**

 

Pursuantto collateral agreements with the Federal Home Loan Bank of Pittsburgh (the “FHLB”),advances are secured by qualifying first mortgage loans, qualifyingfixed-income securities, FHLB stock and an interest-bearing demand depositaccount with the FHLB. As of June 30, 2009, the Bank has $177.0 million inqualifying collateral pledged against its advances.

 
| **Maturity Date**  | ** ** | **Interest Rate** | ** ** | **Strike Rate** | ** ** | **Call Date**       | ** ** | **Amount**         | ** ** |
|--------------------|------------|-------------------|------------|-----------------|------------|---------------------|------------|--------------------|------------|
| ** **         | ** ** | ** **        | ** ** | ** **      | ** ** | ** **          | ** ** | **(in thousands)** | ** ** |
|               |       |              |       |            |       |                |       |               |       |
| December 2009 |       | 2.26              | %          |            |       |                |       | $                  | 5,000      |   |
| February 2010 |       | 2.84              | %          |            |       |                |       | 10,000             |       |
| August 2011   |       | 4.89              | %          | 7.50            | %          | August 2009    |       | 20,000             |       |
| August 2011   |       | 4.87              | %          | 7.50            | %          | August 2009    |       | 10,000             |       |
| July 2013     |       | 4.10              | %          |            |       |                |       | 9,785              |       |
| December 2013 |       | 2.80              | %          |            |       | December 2010  |       | 5,000              |       |
| January 2015  |       | 3.49              | %          |            |       |                |       | 24,505             |       |
| December 2015 |       | 3.06              | %          |            |       | December 2011  |       | 5,000              |       |
| November 2017 |       | 3.62              | %          |            |       | November 2010  |       | 15,000             |       |
| November 2017 |       | 3.87              | %          |            |       | November 2011  |       | 15,000             |       |
| December 2017 |       | 2.83              | %          |            |       | September 2009 |       | 20,000             |       |
| December 2018 |       | 3.15              | %          |            |       | December 2012  |       | 5,000              |       |
|               |       |              |       |            |       |                |       |               |       |
|               |       |              |       |            |       |                |       | $                  | 144,290    |   |

 

Forthe borrowings that contractually mature in August 2011, if three-monthLIBOR is greater than or equal to the Strike Rate, the FHLB can notify the Bankof its intention to convert the borrowing to an adjustable-rate advance equalto three-month LIBOR (0.60% at June 30, 2009) plus .2175% on a quarterlybasis. If converted, 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 December 2013 may be called by theFHLB on the call date disclosed in the above table. If the borrowing is called,the Bank has the option to either pay off the borrowing without penalty or theborrowing’s fixed rate resets to a variable rate of three-month LIBOR plus1.04%. Subsequent to the call date, the borrowings are callable by the FHLBquarterly.  Accordingly, the contractualmaturities above may differ from actual maturities.

 

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

 

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

 

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

 

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**NOTE 6 – BORROWINGS****(CONTINUED)**

 

The borrowing that contractually matures in December 2018may be called by the FHLB on the call date disclosed in the above table. If theborrowing is called, the Bank has the option to either pay off the borrowingwithout penalty or the borrowing’s fixed rate resets to a variable rate ofthree-month LIBOR plus 1.14%. Subsequent to the call date, the borrowings arecallable by the FHLB quarterly. Accordingly, the contractual maturities above may differ from actualmaturities.

 

TheBank has a maximum borrowing capacity with the FHLB of approximately $532.3million at March 31, 2009, the latest date for which information isavailable.

 

Asa member of the FHLB, the Bank is required to acquire and hold shares ofcapital stock in the FHLB in an amount of at least equal to 4.75% of itsadvances from the FHLB, plus 0.75% of the unused borrowing capacity.  The Bank was in compliance with thisrequirement with a stock investment in the FHLB of $9.8 million at June 30,2009.

 

DuringDecember 2008, the FHLB announced that it does not intend to pay adividend on its common stock for the foreseeable future.  Additionally, the FHLB indicated it would notredeem any common stock associated with member advance repayments and that itmay increase its individual member stock investment requirements. The FHLB ispermitted to increase the amount of capital stock required to be owned by anFHLB member to 6.00% of a member’s advances, plus 1.50% of the unused borrowingcapacity.  As of June 30, 2009, theCompany’s maximum stock obligation was $14.5 million.

 

**Other Borrowed Funds**

 

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

 

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

 

Mortgagebacked securities with a fair value of $65.0 million at June 30, 2009 werepledged as collateral for these other borrowed funds.

 

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**NOTE 7 – STOCK BASED COMPENSATION**

 

Duringthe six months ended June 30, 2009, the Company recorded $486,000 of stockbased compensation expense in connection with the 2007 Equity Incentive Plan,comprised of stock option expense of $209,000 and restricted stock expense of$277,000.

 

Thefollowing is a summary of the Company’s stock option activity and relatedinformation for the 2007 Equity Incentive Plan for the six months ended June 30,2009:

 
| ** **                            | ** ** | ** **    | ** ** | **Weighted** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|
| ** **                            | ** ** | **Number of** | ** ** | **Average**  | ** ** |
| ** **                            | ** ** | **Stock**     | ** ** | **Exercise** | ** ** |
| ** **                            | ** ** | **Options**   | ** ** | **Price**    | ** ** |
|                                  |       |          |       |         |       |
| Outstanding at December 31, 2008 |       | 615,200       |       | $            | 12.22      |   |
| Granted                               |       | 80,359        |       | 8.79         |       |
| Exercised                             |       | —        |       | —       |       |
| Forfeited                             |       | —        |       | —       |       |
| Outstanding at June 30, 2009     |       | 695,559       |       | $            | 11.83      |   |
| Exercisable  at June 30, 2009    |       | 123,040       |       | $            | 12.22      |   |

 

Thefollowing is a summary of the Company’s unvested options as of June 30,2009 and changes therein during the six months then ended:

 
| ** **                         | ** ** | ** **    | ** ** | **Weighted**   | ** ** |
|------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                         | ** ** | **Number of** | ** ** | **Average**    | ** ** |
| ** **                         | ** ** | **Stock**     | ** ** | **Grant Date** | ** ** |
| ** **                         | ** ** | **Options**   | ** ** | **Fair Value** | ** ** |
|                               |       |          |       |           |       |
| Unvested at December 31, 2008 |       | 512,140       |       | $              | 3.28       |   |
| Granted                            |       | 80,359        |       | 2.39           |       |
| Exercised                          |       | —        |       | —         |       |
| Vested                             |       | (19,980       | )          | 2.78           |       |
| Forfeited                          |       | —        |       | —         |       |
| Unvested  at June 30, 2009    |       | 572,519       |       | $              | 3.17       |   |

 

Expectedfuture expense relating to the 572,519 non-vested options outstanding as of June 30,2009 is $1.5 million over a weighted average period of 3.4 years.

 

Duringthe six months ended June 30, 2009, the Company determined the fair valueof the options granted was $2.39.  Thisvalue was based on the following assumptions:

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

 

Thefollowing is a summary of the status of the Company’s restricted stock as of June 30,2009 and changes therein during the six months then ended:

 
| ** **                         | ** ** | ** **     | ** ** | **Weighted**   | ** ** |
|------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                         | ** ** | **Number of**  | ** ** | **Average**    | ** ** |
| ** **                         | ** ** | **Restricted** | ** ** | **Grant Date** | ** ** |
| ** **                         | ** ** | **Shares**     | ** ** | **Fair Value** | ** ** |
| Unvested at December 31, 2008 |       | 179,580        |       | $              | 12.29      |   |
| Granted                            |       | 15,883         |       | 9.40           |       |
| Vested                             |       | (3,420         | )          | 11.42          |       |
| Forfeited                          |       | —         |       | —         |       |
| Unvested  at June 30, 2009    |       | 192,043        |       | $              | 12.06      |   |

 

Expectedfuture compensation expense relating to the 192,043 restricted shares at June 30,2009 is $1.9 million over a weighted average period of 3.3 years.

 

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**NOTE 8 – FAIR VALUE**

 

SFASNo. 157, “Fair Value Measurement” defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements.  This statement applies under other accountingpronouncements that require or permit fair value measurements.

 

Thestandard describes three levels of inputs that may be used to measure fair value:

 

Level1 – Inputs are quoted prices (unadjusted) in active markets for identicalassets or liabilities that are accessible at the measurement date.

 

Level2  – Inputs are other than quoted pricesincluded within Level 1 that are observable for the asset or liability, eitherdirectly or indirectly, such as quoted prices for similar assets orliabilities; quoted prices in markets that are not active; or other inputs thatare observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities.

 

Level3 – Valuations are observed from unobservable inputs that are supported bylittle or no market activity and that are significant to the fair value of theassets or liabilities.

 

TheCompany classified three types of financial instruments as Level 3 as of June 30,2009. The first instrument is a private label residential mortgage relatedsecurity, the fair value of which, unlike U.S. agency mortgage relatedsecurities, is more difficult to determine because it is not actively traded insecurities markets.  The secondinstruments are private label commercial mortgage backed securities (“CMBS”),the fair value of which is also more difficult to determine because they arenot actively traded in securities markets. The third instrument is a loan, which was recorded at fair value whenthe Company adopted SFAS No. 159, since lending credit risk is not anobservable input for this individual commercial loan (see Note 3).

 

Asdiscussed in Note 2, the Company recorded an other-than-temporary creditimpairment charge of $157,000 as of June 30, 2009.   The remaining unrealized loss, after theimpairment charge, in the private label CMO was $448,000 at June 30, 2009compared to $620,000 at December 31, 2008. The unrealized loss in the private label CMBS portfolio was $1.1 millionat June 30, 2009 compared to $2.7 million at December 31, 2008. Theunrealized gain on the loan was $141,000 at June 30, 2009 compared to anunrealized gain of $236,000 at December 31, 2008.

 

Thefollowing table, which sets forth the Company’s fair value measurements at June 30,2009, includes (1) investment securities and mortgage related securitiesavailable-for-sale; (2) the two financial instruments recorded at fairvalue in conjunction with the Company’s adoption of SFAS No. 159 in thefirst quarter of 2008 and (3) tranches of MSRs recorded at fair value.

 
| ** **                                            | ** ** | **Fair Value Measurements at Reporting Date  Using** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                            | ** ** | ** **                                           | ** ** | **Quoted Prices in** | ** ** | **Significant** | ** ** | **Significant** | ** ** |
| ** **                                            | ** ** | ** **                                           | ** ** | **Active Markets** | ** ** | **Other** | ** ** | **Other** | ** ** |
| ** **                                            | ** ** | ** **                                           | ** ** | **for Identical** | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                                            | ** ** | **As of**                                            | ** ** | **Assets** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **Description**                                       | ** ** | **June 30, 2009**                               | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| ** **                                            | ** ** | **(In Thousands)**                                   | ** ** |
| Obligations of U.S. government agencies               |       | $                                                    | 312        |   | $ | — |   | $ | 312 |   | $ | — |   |
| State and political subdivisions                      |       | 11,216                                               |       | — |   | 11,216 |   | — |   |
| Corporate securities                                  |       | 25,744                                               |       | — |   | 25,744 |   | — |   |
| Private label residential mortgage related  security  |       | 219                                                  |       | — |   | — |   | 219 |   |
| Private label commercial mortgage related  securities |       | 17,344                                               |       | — |   | — |   | 17,344 |   |
| Agency residential mortgage related securities        |       | 340,331                                              |       | — |   | 340,331 |   | — |   |
| Loans (1)                                             |       | 1,307                                                |       | — |   | — |   | 1,307 |   |
| Mortgage servicing rights                             |       | 326                                                  |       | — |   | 326 |   | — |   |
| Other assets – swap contract (1)                 |       | (141                                                 | )          | — |   | (141 | ) | — |   |
| Total                                                 |       | $                                                    | 396,658    |   | $ | — |   | $ | 377,788 |   | $ | 18,870 |   |

 

----

(1)          Such assets recorded at fair value in conjunctionwith adoption of SFAS No. 159.

 

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**NOTE 8****–****FAIR VALUE (CONTINUED)**

 

Thefollowing table includes a roll forward of the Significant Other UnobservableInputs (Level 3) for the period of January 1, 2009 to June 30, 2009.

 
| ** **                                     | ** ** | **Private Label** | ** ** | **Private Label** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|-------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **Residential**   | ** ** | **Commercial**    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Mortgage**      | ** ** | **Mortgage**      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Security**      | ** ** | **Securities**    | ** ** | **Loans**  | ** ** | **Total**  | ** ** |
|                                           |       |              |       |              |       |       |       |       |       |
| Beginning balance, January 1, 2009        |       | $                 | 269        |              | $          | 7,304      |       | $          | 1,425      |   | $ | 8,998 |   |
| Purchases                                      |       | —            |       | 8,213             |       | —     |       | 8,213      |       |
| Payments received                              |       | (65               | )          | (18               | )          | (23        | )          | (106       | )          |
| Discount accretion/(Premium amortization), net |       | —            |       | 26                |       | —     |       | 26         |       |
| Increase/(decrease) in value                   |       | 15                |       | 1,819             |       | (95        | )          | 1,739      |       |
|                                           |       |              |       |              |       |       |       |       |       |
| Ending balance, June 30, 2009             |       | $                 | 219        |              | $          | 17,344     |       | $          | 1,307      |   | $ | 18,870 |   |

 

TheCompany utilizes an external third-party pricing service to perform evaluationson its investment portfolio on at least a quarterly basis.  The Company receives one value for eachsecurity and has made no adjustments to the values obtained from the pricingservice at June 30, 2009.  TheCompany will continue to evaluate the appropriateness of the identified Level1, 2 or 3 classifications on a recurring basis.

 

**FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

The following disclosures and schedules are disclosed in conjunctionwith the Company’s adoption of FSP FAS 107-1 and APB 28-1 “Interim Disclosuresabout Fair Value of Financial Instruments” (See Note 10 — AccountingPronouncements for further discussion) for the quarter ended June 30,2009.

 

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

 

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

 

**Cash and Cash Equivalents**

 

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

 

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

 

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

 

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**NOTE 8 –FAIR VALUE (CONTINUED)**

 

**Loans Held for Sale**

 

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

 

**Loans Receivable**

** **

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

 

**Federal Home Loan Bank Stock**

** **

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

** **

**Mortgage Servicing Rights**

** **

The fair value of mortgage servicing rights is basedon third party estimates of value when available or the present value ofexpected future cash flows when not available.

 

**Accrued Interest Receivable and Accrued Interest Payable**

** **

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

 

**Deposit Liabilities**

** **

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

 

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

** **

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

 

**Off-Balance Sheet Financial Instruments**

** **

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

 

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**NOTE 8 – FAIR VALUE (CONTINUED)**

 

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

 
| ** **                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **                                            | ** ** | ** **        | ** ** | **Estimated**         | ** ** | ** ** | ** ** | **Estimated** | ** ** |
| ** **                                            | ** ** | **Carrying**      | ** ** | **Fair**              | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                            | ** ** | **Amount**        | ** ** | **Value**             | ** ** | **Amount** | ** ** | **Value** | ** ** |
| Financial assets:                                     |       |              |       |                  |       |   |   |   |   |
| Cash and cash equivalents                             |       | $                 | 105,255    |                  | $          | 105,255 |   | $ | 3,944 |   | $ | 3,944 |   |
| Investment securities available-for-sale              |       | 37,272            |       | 37,272                |       | 25,041 |   | 25,041 |   |
| Private label residential mortgage related  security  |       | 219               |       | 219                   |       | 269 |   | 269 |   |
| Private label commercial mortgage related  securities |       | 17,344            |       | 17,344                |       | 7,304 |   | 7,304 |   |
| Agency residential mortgage related securities        |       | 340,331           |       | 340,331               |       | 262,109 |   | 262,109 |   |
| Loans receivable, net                                 |       | 624,564           |       | 624,030               |       | 588,975 |   | 588,416 |   |
| Loans held for sale                                   |       | 168               |       | 168                   |       | — |   | — |   |
| Mortgage servicing rights                             |       | 793               |       | 817                   |       | 827 |   | 836 |   |
| Federal Home Loan Bank stock                          |       | 9,778             |       | 9,778                 |       | 9,707 |   | 9,707 |   |
| Accrued interest receivable                           |       | 4,359             |       | 4,359                 |       | 3,721 |   | 3,721 |   |
|                                                  |       |              |       |                  |       |   |   |   |   |
| Financial liabilities:                                |       |              |       |                  |       |   |   |   |   |
| Savings and club accounts                             |       | 51,481            |       | 51,481                |       | 51,196 |   | 51,196 |   |
| Demand, NOW and money market deposits                 |       | 244,278           |       | 244,278               |       | 183,341 |   | 183,341 |   |
| Certificates of deposit                               |       | 548,978           |       | 558,397               |       | 373,935 |   | 378,961 |   |
| Federal Home Loan Bank advances                       |       | 144,290           |       | 150,391               |       | 146,379 |   | 134,585 |   |
| Other borrowed funds                                  |       | 50,000            |       | 47,081                |       | 50,000 |   | 47,631 |   |
| Accrued interest payable                              |       | 762               |       | 762                   |       | 727 |   | 727 |   |
|                                                  |       |              |       |                  |       |   |   |   |   |
| Off-balance sheet instruments                         |       | —            |       | 790                   |       | — |   | 688 |   |
|                                                       |            |                   |            |                       |            |  |  |  |  |  |  |  |  |

 

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**NOTE 9 - COMPREHENSIVE INCOME**

 

Comprehensiveincome for the three and six months ended June 30, 2009, and 2008 is asfollows (in thousands):

 
| ** **                                                                                                                                                                                                                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                                                                                   | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                                                                                                                                                                                                                   | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                                                                                                                                                                                   | ** ** | **(Unaudited)**        | ** ** |
|                                                                                                                                                                                                                                                         |       |                   |       |                 |       |   |   |   |   |
| Net income                                                                                                                                                                                                                                                   |       | $                      | 298        |                 | $          | 304 |   | $ | 899 |   | $ | 649 |   |
|                                                                                                                                                                                                                                                         |       |                   |       |                 |       |   |   |   |   |
| Other comprehensive income (loss):                                                                                                                                                                                                                           |       |                   |       |                 |       |   |   |   |   |
|                                                                                                                                                                                                                                                         |       |                   |       |                 |       |   |   |   |   |
| Unrealized holding gains (losses) arising during  the period, net of tax expense (benefit) (three months ended June 30,  2009 and 2008, $1,220 and $(1,044) and for six months ended June 30,  2009 and 2008 $2,587 and $(675), respectively)      |       | 2,292                  |       | (1,889               | )          | 4,878 |   | (1,138 | ) |
|                                                                                                                                                                                                                                                         |       |                   |       |                 |       |   |   |   |   |
| Non-credit related unrealized loss on  other-than-temporary impaired securities (net of taxes of $(152) for three  and six months ended June 30, 2009)                                                                                                  |       | (296                   | )          | —               |       | (296 | ) | — |   |
|                                                                                                                                                                                                                                                         |       |                   |       |                 |       |   |   |   |   |
| Less: Reclassification adjustment for net  investment securities gains included in net income, net of taxes (three  months ended June 30, 2009 and 2008, $147 and $16 and for six months  ended June 30, 2009 and 2008 $143 and $40, respectively) |       | 284                    |       | 32                   |       | 277 |   | 78 |   |
|                                                                                                                                                                                                                                                         |       |                   |       |                 |       |   |   |   |   |
| Plus: Amortization of pension actuarial loss, net  of taxes of $1 and $2 for the three and six months ended June 30, 2008,  respectively                                                                                                                |       | —                 |       | 2                    |       | — |   | 4 |   |
|                                                                                                                                                                                                                                                         |       |                   |       |                 |       |   |   |   |   |
| Reversal of actuarial losses from pension plan  settlement, net of taxes of $45 for the three and six months ended  June 30, 2008                                                                                                                       |       | —                 |       | 87                   |       | — |   | 87 |   |
|                                                                                                                                                                                                                                                         |       |                   |       |                 |       |   |   |   |   |
| Other comprehensive income (loss)                                                                                                                                                                                                                            |       | 1,712                  |       | (1,832               | )          | 4,305 |   | (1,125 | ) |
|                                                                                                                                                                                                                                                         |       |                   |       |                 |       |   |   |   |   |
| Comprehensive income (loss)                                                                                                                                                                                                                                  |       | $                      | 2,010      |                 | $          | (1,528 | ) | $ | 5,204 |   | $ | (476 | ) |

 

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**NOTE 10 – ACCOUNTING PRONOUNCEMENTS**

 

In May 2009, theFASB issued SFAS No. 165 “Subsequent Events” (SFAS No. 165).  SFAS No. 165 establishes generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued.  The statement sets forth (1) theperiod after the balance sheet date during which management of a reportingentity should evaluate events or transactions that may occur for potentialrecognition or disclosure in the financial statements; (2) thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements and (3) thedisclosure that an entity should make about events or transactions thatoccurred after the balance sheet date. SFAS No. 165 is effective for fiscal years and interim periodsending after June 15, 2009, and shall be applied prospectively.  The Company adopted this statement as of June 30,2009 and such adoption did not have an impact on the results of operations orfinancial position.  The Company hasevaluated subsequent events through August 6, 2009.

 

In April 2009, theFASB issued FSP FAS 107-1 and APB 28-1 “Interim Disclosures about Fair Value ofFinancial Instruments.”  FSP FAS 107-1amends SFAS No. 107, “Disclosures about Fair Value of FinancialInstruments”, to require disclosures about fair value of financial instrumentsfor interim reporting periods of publicly traded companies as well as in annualfinancial statements.  All publiclytraded companies are required to include disclosures about the fair value ofits financial instruments whenever it issues summarized financial informationfor interim reporting periods.  FAS 107-1is effective for interim reporting periods ending after June 15,2009.  The Company adopted this statementas June 30, 2009 and has made the required disclosures in Note 8 of this Form 10-Q.

 

In April 2009, theFASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation ofOther-Than-Temporary Impairments.”  FSPFAS 115-2 and FAS 124-2 amend the other-than-temporary impairment guidance fordebt securities.  FSP FAS 115-2 and FAS124-2 is effective for interim and annual reporting periods ending after June 15,2009, with early adoption permitted for periods ending after March 15,2009.  As discussed in Note 2, theCompany adopted this statement as of June 30, 2009.  Since the Company has not had anyother-than-temporary impairment as of March 31, 2009, no cumulative-effectadjustments were required to be recorded at adoption.

 

In April 2009, theFASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions that are not Orderly.” FSP FAS 157-4 provides additional guidance for estimating fair value inaccordance with FASB No. 157, “Fair Value Measurements”, when the volumeand level of activity for the asset or liability have significantlydecreased.  FSP FAS 157-4 is effectivefor interim and annual reporting periods ending after June 15, 2009, andshall be applied prospectively.   TheCompany adopted this statement as of June 30, 2009 and such adoption didnot have an impact on the results of operations or financial position.

 

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

 

**FutureAdoption of New Accounting Standards**

 

In June 2009, theFASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets,an Amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 166 amends thederecognition guidance in Statement 140 and eliminates the concept ofqualifying special-purpose entities (“QSPEs”). SFAS 166 is effective for fiscalyears and interim periods beginning after November 15, 2009. Earlyadoption of SFAS 166 is prohibited. The Company will adopt SFAS 166 on January 1,2010 and has not yet determined the effect of the adoption on its consolidatedfinancial statements.

 

In June 2009, theFASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”(“SFAS 167”) which amends the consolidation guidance applicable to variableinterest entities (“VIE”s). An entity would consolidate a VIE, as the primarybeneficiary, when the entity has both of the following characteristics: (a) thepower to direct the activities of a VIE that most significantly impact theentity’s economic performance and (b) the obligation to absorb losses ofthe entity that could potentially be significant to the VIE or the right toreceive benefits from the entity that could potentially be significant to theVIE.

 

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**NOTE 10 –ACCOUNTING PRONOUNCEMENTS (CONTINUED)**

 

Ongoing reassessment ofwhether an enterprise is the primary beneficiary of a VIE is required. SFAS 167amends interpretation 46(R) to eliminate the quantitative approachpreviously required for determining the primary beneficiary of a VIE. ThisStatement is effective for fiscal years and interim periods beginning after November 15,2009. The Company will adopt SFAS 167 on January 1, 2010 and has not yetdetermined the effect of the adoption on its consolidated financial statements.

 

In June 2009, theFASB issued SFAS No. 168, “TheFASB Accounting Standards Codificationand the Hierarchy of Generally AcceptedAccounting Principles” (“SFAS 168”). This standard identifies the sources ofaccounting principles and the framework for selecting the principles used inthe preparation of financial statements that are presented in conformity withU.S. GAAP. The Statement establishes the***FASB AccountingStandards Codification*(“Codification”) as the single source of authoritativeaccounting principles recognized by the FASB in the preparation of financialstatements in conformity with U.S. GAAP. Codification does not create newaccounting and reporting guidance rather it reorganizes U.S. GAAPpronouncements into approximately 90 topics within a consistent structure. Allguidance contained in the Codification carries an equal level of authority.Relevant portions of authoritative content, issued by the SEC, for SECregistrants, have been included in the Codification. After the effective dateof this Statement, all nongrandfathered, non-SEC accounting literature notincluded in the Codification is superseded and deemed nonauthoritative. ThisStatement is effective for financial statements issued for interim and annualperiods ending after September 15, 2009. The Company will adopt SFAS 168on September 30, 2009 and will update all disclosures to referenceCodification in its September 30, 2009 quarterly report.

 

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

 

**Forward-Looking Statements**

 

This quarterly reportcontains forward-looking statements that are based on assumptions and maydescribe future plans, strategies and expectations of the Company. Theseforward-looking statements are generally identified by use of the words “believe,”“expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions.The Company’s ability to predict results or the actual effect of future plansor strategies is inherently uncertain. Factors which could have a materialadverse effect on the operations of the Company and its subsidiary include, butare not limited to, changes in interest rates, national and regional economicconditions, legislative and regulatory changes, monetary and fiscal policies ofthe U.S. government, including policies of the U.S. Treasury and the FederalReserve Board, the quality and composition of the loan or investmentportfolios, demand for loan products, deposit flows, competition, demand forfinancial services in the Company’s market area, changes in real estate marketvalues in the Company’s market area, changes in relevant accounting principlesand guidelines and the inability of third party service providers to performtheir functions.  Additional factors thatmay affect our results are discussed in the section titled “Risk Factors” inthe Company’s Annual Report on Form 10-K, as filed with the Securities andExchange Commission on March 12, 2009, and its other Securities andExchange Commission reports.

 

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

 

**Critical Accounting Policies**

 

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

 

***Allowance for Loan Losses.*** The allowance for loan losses ismaintained at a level representing management’s best estimate of known 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: probability ofdefault, loss exposure at default; the amount and timing of future cash flowson impacted loans; value of collateral; and determination of loss factors to beapplied to the various elements of the portfolio. All of these estimates aresusceptible to significant change. Management reviews the level of theallowance on a quarterly basis and establishes the provision for loan lossesbased upon an evaluation of the size and composition of the portfolio, lossexperience in particular segments of the portfolio, trends and absolute levelsof classified and criticized loans, trends and absolute levels in delinquent loans,trends in risk ratings, actual charge-offs, trends in industry charge-offs byparticular segments and changes in local and national economic and businessconditions.  Although we believe that weuse the best information available to establish the 

 

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allowance for loanlosses, future adjustments to the allowance may be necessary if economicconditions differ substantially from the assumptions used in making theevaluation. Further, current economic conditions have increased the uncertaintyinherent in these estimates and assumptions. In addition, the Office of Thrift Supervision, as an integral part ofits examination process, periodically reviews our allowance for loan losses.Such agency may require us to recognize adjustments to the allowance based onits judgments about information available to it at the time of its examination.A large loss could deplete the allowance and require increased provisions toreplenish the allowance, which would negatively affect earnings.

 

***Valuation and Other-Than-Temporary Impairment of InvestmentSecurities***.Statement of Financial AccountingStandards No. 115, “Accounting for Certain Investments in Debt and EquitySecurities,” and FASB Staff Position FAS 115-1 and 124-1 “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments,”require companies to perform periodic reviews of individual securities in theirinvestment portfolios to determine whether a decline in the value of a securityis other-than-temporary. A review of other-than-temporary impairment requirescompanies to make certain judgments regarding the nature of the decline, itseffect on the financial statements and the probability, extent and timing of avaluation recovery and the company’s intent to sell the security or if it ismore likely than not that the security will be required to be sold beforerecovery of its amortized cost. Pursuant to these requirements, we assessvaluation declines to determine the extent to which such changes areattributable to (1) fundamental factors specific to the issuer, such asfinancial condition, business prospects or other factors, or (2) market-relatedfactors, such as required market yields, interest rates or equity marketdeclines. If the decline in the market value of a security is determined to beother-than-temporary, we reduce the book value of such security to its currentmarket value, recognizing the decline as a realized loss on the incomestatement.  The Company recorded another-than-temporary credit impairment charge of $157,000 during the secondquarter of 2009.  See Note 2 to theconsolidated financial statements for a schedule that shows gross unrealizedlosses, fair value of securities as well as the impairment loss andother-than-temporary impairment write down, aggregated by security category andlength of time that individual securities have been in a continuous realizedloss position at June 30, 2009 and December 31, 2008, and Note 8 fordiscussion related to the determination of fair value.

 

***Deferred Income Taxes.*** We use theasset and liability method of accounting for income taxes as prescribed inStatement of Financial Accounting Standards No. 109, “Accounting forIncome Taxes.” Under this method, deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Weexercise significant judgment in evaluating the amount and timing ofrecognition of the resulting tax liabilities and assets. These judgmentsrequire us to make projections of future taxable income. The judgments andestimates we make in determining our deferred tax assets, which are inherentlysubjective, are reviewed on a continual basis as regulatory and businessfactors change. Any reduction in estimated future taxable income may require usto record a valuation allowance against our deferred tax assets. Specifically,the Company had a charitable contribution carryover of $769,000 as of June 30,2009, resulting in a deferred tax asset of $261,000.  The charitable contribution carryover was$999,000, with a resulting deferred tax asset of $340,000 as of December 31,2008.  Utilization of this carryover islimited to 10% of taxable income on an annual basis. Such carryover will expireon December 31, 2011, if not utilized. If the Company is unable togenerate sufficient taxable income to utilize this carryover it may require usto record a valuation allowance against this deferred tax asset.  Any valuation allowance would result inadditional income tax expense in the period, which would negatively affectearnings.

 

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

 

Total assets increased$238.4 million, or 25.6%, to $1.17 billion at June 30, 2009, compared to$931.3 million at December 31, 2008.  Cash and cash equivalents increased $101.3 millionfrom December 31, 2008 to June 30, 2009 as excess funds from depositinflows were invested in interest-earning demand deposits in other banks and inmoney market funds.  Loans increased$35.6 million from December 31, 2008 to June 30, 2009. Commercial andcommercial real estate loans increased $49.7 million as we continue ourstrategic initiative to increase our commercial loan portfolio, whilecommercial construction loans decreased by $14.8 million as we de-emphasizedconstruction lending during the quarter. Additionally, our one- to four-familyreal estate loans increased $3.9 million offset by a $2.3 million decrease inconsumer loans.  The modest increase inone-to four-family real estate loans was due to increased originations throughour correspondent relationships, while the decrease in consumer loans was dueto the Company’s decision to de-emphasize these types of loans in the currenteconomic environment.  Mortgage relatedsecurities available-for-sale increased $88.2 million, primarily due to anincrease in agency residential mortgage related securities.  Investment related securities available forsale increased $12.2 million, primarily due to an increase in corporatesecurities.  All of the increases inassets were directly funded by the increase in deposits.

 

Depositsincreased $236.2 million, or 38.8%, from $608.5 at December 31, 2008 to$844.7 million at June 30, 2009. Money market accounts increased $57.8million, or 57.0%, and certificates of deposits increased $175.0 million, or46.8%, from December 31, 2008 to June 30, 2009.  During March 2009, the Bank offeredattractive rates on selected money market and 

 

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certificateof deposit products to increase its market share in the Philadelphia,Pennsylvania market area resulting in approximately 6,500 new deposit accountsrepresenting greater than $200 million in deposits, of which approximately 50%were new deposit customers.   In additionto the deposits obtained during the first quarter, the Bank continued toincrease deposits during the second quarter of 2009 as it maintainedcompetitively high rates on money market and certificate of deposit accountsduring the period.  The Company intendsto invest these funds in loans to qualified businesses and consumers.

 

Stockholders’ equityincreased $3.3 million to $124.5 million at June 30, 2009 compared to$121.2 million at December 31, 2008 primarily due to unrealized gains, netof taxes, on the investment portfolio of $4.3 million and net income of$899,000 offset by the repurchase of 266,589 shares of common stock at a costof $2.6 million.

 

**Comparison of Operating Results for the Three and Six MonthsEnded June 30, 2009 and 2008**

 

***General.***Net income decreased $6,000, or 2.0%, to $298,000 forthe three months ended June 30, 2009 compared to $304,000 for the threemonths ended June 30, 2008, primarily due to a $536,000 increase innoninterest expense, a $342,000 increase in the provision for loan losses and a$24,000 increase in tax expense, offset by a $300,000 increase in net interestincome and a $596,000 increase in other noninterest income.  Noninterest expense for the three monthsended June 30, 2009 included a special assessment by the Federal DepositInsurance Corporation of $536,000 as well as a $270,000 increase related to thecurrent year assessment compared to the same quarter in the prior year.  Noninterest expense for the three monthsended June 30, 2008 included an expense of $244,000 associated with finaldistributions from the Company’s terminated pension plan in the second quarterof 2008.  The increase in noninterestincome was primarily related to the gain on sale of securities of $588,000 inthe second quarter of 2009 offset by an other-than-temporary impairment lossrecognized on a private label residential mortgage related security in theamount of $157,000.  The Bank alsoreduced the valuation allowance on the mortgage servicing rights in the amountof $99,000 during the three months ended June 30, 2009.

 

Net income increased$250,000, or 38.5%, to $899,000 for the six months ended June 30, 2009compared to $649,000 for the six months ended June 30, 2008, primarily dueto an increase in net interest income of $1.2 million and an increase of $550,000in noninterest income offset by an increase in noninterest expense of $765,000,an increase in the provision for loan losses of $562,000 and an increase in taxexpense of  $139,000. The increase innoninterest income of $550,000 was primarily the result of a gain on the saleof securities of $588,000 in the second quarter of 2009 offset by another-than-temporary impairment loss recognized on a private label residentialmortgage related security in the amount of $157,000.  The Bank also had a net reduction in thevaluation allowance on the mortgage servicing rights in the amount of $75,000.The increase in noninterest expense of $765,000 included a special assessmentby the Federal Deposit Insurance Corporation of $536,000 for the six monthsended June 30, 2009 as well as a $481,000 increase related to the currentyear assessment compared to the same period in the prior year.  Noninterest expense for the six months ended June 30,2008 included an expense of $297,000 associated with final distributions fromthe Company’s terminated pension plan in the second quarter of 2008.

 

***Net Interest Income*****.**Net interest income increased $300,000, or 5.8%, to$5.4 million for the three months ended June 30, 2009 compared the sameperiod in 2008 primarily due to an increase in total interest income of  $1.9 million offset by a $1.6 millionincrease in total interest expense. The increase in total interest income wasprimarily due to an increase in average total interest earning assets of $294.8million, offset by a decrease in the average yield on interest-earning assetsfrom 5.34% to 4.60%. The increase in average balances of interest-earningassets was primarily due to: (1) an increase in the average balance ofloans of $139.0 million year over year primarily related to the Company’s focuson increasing its levels of commercial lending; (2) an increase in theaverage balance of mortgage related securities of $82.3 million year over yearand (3) an increase in the average balance of money market funds of $33.6million and interest-earning demand deposits of $30.0 million year over year,both a result of excess funds from deposit inflows.  The decrease in yield on interest-earningassets was primarily due to a reduction in overall interest rates from 2008 to2009 as well as a slight mix shift from higher yielding loans to interestearning deposits and money market funds.

 

The increase in netinterest expense was primarily due to an increase in the average balances ofinterest-bearing liabilities of $289.7 million offset by a decrease in theaverage cost on interest bearing-liabilities from 3.45% to 3.08%.  The increase in the average balance ofinterest-bearing liabilities was primarily due to an increase in the averagebalance of interest-bearing deposits of $233.8 million, an increase in theaverage balance of other borrowed funds of $30.0 million as well as an increase of $25.9 million in the averagebalance of Federal Home Loan Bank advances. The increase in the average balance of interest-bearing deposits wasprimarily the result of the previously discussed promotion offered by the Bankin the first quarter of 2009 as well as maintaining competitively high rates onmoney market accountsthroughout the second quarter. The decrease in average cost on interestbearing-liabilities was primarily due to reduction in overall interest ratesfrom 2008 to 2009.

 

Net interest incomeincreased $1.2 million, or 11.6%, to $11.2 million for the six months ended June 30,2009 compared to the same period in 2008 primarily due to an increase in totalinterest income of  $2.6 million offsetby a $1.4 million increase in total interest expense. The increase in totalinterest income was primarily due to an increase in average total interestearning assets of $204.4 million, offset by a decrease in the average yield oninterest-earning assets from 5.41% to 4.83%. The increase in average 

 

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balances of interest-earningassets was primarily due to: (1) an increase in the average balance ofloans of $140.5 million year over year primarily related to the Company’s focuson increasing its levels of commercial lending; (2) an increase in theaverage balance of mortgage related securities of $57.1 million year over yearand (3) an increase in the average balance of interest-earning demanddeposits of $14.3 million and money market funds of $10.9 million year overyear, both a result of excess funds from deposit inflows. The decrease in yieldon interest-earning assets was primarily due to a reduction in overall interestrates from 2008 to 2009 as well as a slight shift from higher yielding loans tointerest earning deposits and money markets funds.

 

The increase in netinterest expense was primarily due to an increase in the average balances ofinterest-bearing liabilities of $200.7 million offset by a decrease in theaverage cost on interest bearing-liabilities from 3.59% to 3.11%.  The increase in the average balance ofinterest-bearing liabilities was primarily due to an increase in the averagebalance of interest-bearing deposits of $137.9 million, an increase in theaverage balance of Federal Home Loan Bank advances of $32.2 million as well asan increase of $30.5 million in the average balance of other borrowedfunds.  The increase in the averagebalance of interest-bearing deposits was primarily the result of the promotionoffered by the Bank in the first quarter of 2009 as well as maintaining competitively highrates on money market accounts throughout the second quarter. The decrease inaverage cost on interest bearing-liabilities was primarily due to reduction inoverall interest rates from 2008 to 2009.

 

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

 

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|--------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|------------|------------|-------------|------------|---------------|------------|------------|------------|-------------|------------|---------------|------------|------------|------------|-------------|------------|---------------|------------|------------|------------|--------|--------|--------|--------|
| ** **                                                               | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
| ** **                                                               | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009**   | ** ** | **2008**    | ** ** |
| ** **                                                               | ** ** | ** **                            | ** ** | **Interest**                        | ** ** | ** ** | ** ** | ** **  | ** ** | **Interest**  | ** ** | ** ** | ** ** | ** **  | ** ** | **Interest**  | ** ** | ** ** | ** ** | ** **  | ** ** | **Interest**  | ** ** | ** ** | ** ** |
| ** **                                                               | ** ** | **Average**                           | ** ** | **and**                             | ** ** | **Yield/** | ** ** | **Average** | ** ** | **and**       | ** ** | **Yield/** | ** ** | **Average** | ** ** | **and**       | ** ** | **Yield/** | ** ** | **Average** | ** ** | **and**       | ** ** | **Yield/** | ** ** |
| ** **                                                               | ** ** | **Balance**                           | ** ** | **Dividends**                       | ** ** | **Cost**   | ** ** | **Balance** | ** ** | **Dividends** | ** ** | **Cost**   | ** ** | **Balance** | ** ** | **Dividends** | ** ** | **Cost**   | ** ** | **Balance** | ** ** | **Dividends** | ** ** | **Cost**   | ** ** |
| ** **                                                               | ** ** | **(Dollars  in thousands)**           | ** ** | **(Dollars  in thousands)**         | ** ** |
| Assets:                                                                  |       |                                  |       |                                |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |
| Interest-earning assets:                                                 |       |                                  |       |                                |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |
| Interest-earning demand deposits                                         |       | $                                     | 38,200     |                                | $          | 135        |       | 1.41        | %          | $             | 8,159      |       | $          | 37          |       | 1.82          | %          | $          | 25,028     |        | $          | 136           |       | 1.09       | %          | $      | 10,709 |   | $      | 107 |   | 2.02 | % |
| Money market funds                                                       |       | 68,233                                |       | 122                                 |       | 0.72       | %          | 34,628      |       | 246           |       | 2.85       | %          | 43,208      |       | 160           |       | 0.75       | %          | 32,271      |       | 521           |       | 3.25       | %          |
| Mortgage-related securities                                              |       | 343,755                               |       | 3,505                               |       | 4.08       | %          | 261,416     |       | 3,206         |       | 4.91       | %          | 306,639     |       | 6,760         |       | 4.41       | %          | 249,528     |       | 6,110         |       | 4.90       | %          |
| Taxable securities                                                       |       | 31,910                                |       | 261                                 |       | 3.27       | %          | 16,633      |       | 170           |       | 4.10       | %          | 26,865      |       | 386           |       | 2.88       | %          | 39,925      |       | 879           |       | 4.40       | %          |
| Nontaxable securities                                                    |       | 13,183                                |       | 140                                 |       | 4.25       | %          | 15,613      |       | 155           |       | 3.96       | %          | 13,860      |       | 283           |       | 4.08       | %          | 16,281      |       | 323           |       | 3.96       | %          |
| Loans (1):                                                               |       |                                  |       |                                |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |
| Residential loans                                                        |       | 266,852                               |       | 3,695                               |       | 5.54       | %          | 229,129     |       | 3,245         |       | 5.67       | %          | 264,309     |       | 7,428         |       | 5.62       | %          | 223,286     |       | 6,313         |       | 5.65       | %          |
| Commercial loans                                                         |       | 282,722                               |       | 4,004                               |       | 5.60       | %          | 180,250     |       | 2,850         |       | 6.25       | %          | 273,038     |       | 7,598         |       | 5.53       | %          | 171,478     |       | 5,760         |       | 6.64       | %          |
| Consumer loans                                                           |       | 74,922                                |       | 1,059                               |       | 5.66       | %          | 76,107      |       | 1,086         |       | 5.71       | %          | 75,119      |       | 2,109         |       | 5.62       | %          | 77,193      |       | 2,236         |       | 5.79       | %          |
| Total Loans                                                              |       | 624,496                               |       | 8,758                               |       | 5.58       | %          | 485,486     |       | 7,181         |       | 5.89       | %          | 612,466     |       | 17,135        |       | 5.58       | %          | 471,957     |       | 14,309        |       | 6.04       | %          |
| Allowance for loan losses                                                |       | (6,704                                | )          |                                |       |       |       | (3,614      | )          |          |       |       |       | (6,530      | )          |          |       |       |       | (3,517      | )          |          |       |       |       |
| Net loans                                                                |       | 617,792                               |       | 8,758                               |       |       |       | 481,872     |       | 7,181         |       |       |       | 605,936     |       | 17,135        |       |       |       | 468,440     |       | 14,309        |       |       |       |
| Total interest-earning assets                                            |       | 1,113,073                             |       | 12,921                              |       | 4.60       | %          | 818,321     |       | 10,995        |       | 5.34       | %          | 1,021,536   |       | 24,860        |       | 4.83       | %          | 817,154     |       | 22,249        |       | 5.41       | %          |
| Noninterest-earning assets                                               |       | 37,500                                |       |                                |       |       |       | 37,153      |       |          |       |       |       | 36,883      |       |          |       |       |       | 36,820      |       |          |       |       |       |
| Total assets                                                             |       | $                                     | 1,150,573  |                                |       |       |       |        | $          | 855,474       |       |       |       |        |       | $             | 1,058,419  |       |       |        |       |          | $          | 853,974    |       |   |   |   |   |
| Liabilities and equity:                                                  |       |                                  |       |                                |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |
| Interest-bearing liabilities:                                            |       |                                  |       |                                |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |
| NOW and money market deposit accounts                                    |       | $                                     | 176,115    |                                | 850        |       | 1.94       | %           | $          | 98,524        |       | 452        |       | 1.84        | %          | $             | 158,421    |       | 1,479      |        | 1.88       | %             | $          | 96,347     |       | 990    |   | 2.07   | %      |
| Savings accounts                                                         |       | 51,340                                |       | 19                                  |       | 0.15       | %          | 53,291      |       | 35            |       | 0.26       | %          | 51,792      |       | 51            |       | 0.20       | %          | 53,464      |       | 93            |       | 0.35       | %          |
| Certificates of deposit                                                  |       | 547,791                               |       | 4,850                               |       | 3.55       | %          | 389,671     |       | 4,065         |       | 4.20       | %          | 473,745     |       | 8,568         |       | 3.65       | %          | 396,240     |       | 8,576         |       | 4.35       | %          |
| Total interest-bearing deposits                                          |       | 775,246                               |       | 5,719                               |       | 2.96       | %          | 541,486     |       | 4,552         |       | 3.38       | %          | 683,958     |       | 10,098        |       | 2.98       | %          | 546,051     |       | 9,659         |       | 3.56       | %          |
| FHLB advances                                                            |       | 144,945                               |       | 1,329                               |       | 3.42       | %          | 119,038     |       | 1,120         |       | 3.72       | %          | 145,734     |       | 2,659         |       | 3.39       | %          | 113,488     |       | 2,150         |       | 3.75       | %          |
| Other borrowed funds                                                     |       | 50,000                                |       | 432                                 |       | 3.63       | %          | 20,000      |       | 182           |       | 3.60       | %          | 50,497      |       | 861           |       | 3.63       | %          | 20,000      |       | 364           |       | 3.60       | %          |
| Total borrowings                                                         |       | 194,945                               |       | 1,761                               |       | 3.57       | %          | 139,038     |       | 1,302         |       | 3.71       | %          | 196,231     |       | 3,520         |       | 3.57       | %          | 133,488     |       | 2,514         |       | 3.73       | %          |
| Total interest-bearing liabilities                                       |       | 970,191                               |       | 7,480                               |       | 3.08       | %          | 680,524     |       | 5,854         |       | 3.45       | %          | 880,189     |       | 13,618        |       | 3.11       | %          | 679,539     |       | 12,173        |       | 3.59       | %          |
| Noninterest-bearing deposits                                             |       | 47,588                                |       |                                |       |       |       | 46,339      |       |          |       |       |       | 47,269      |       |          |       |       |       | 45,378      |       |          |       |       |       |
| Other noninterest-bearing liabilities                                    |       | 8,547                                 |       |                                |       |       |       | 6,003       |       |          |       |       |       | 7,683       |       |          |       |       |       | 6,209       |       |          |       |       |       |
| Total liabilities                                                        |       | 1,026,326                             |       |                                |       |       |       | 732,866     |       |          |       |       |       | 935,141     |       |          |       |       |       | 731,126     |       |          |       |       |       |
| Retained earnings                                                        |       | 121,042                               |       |                                |       |       |       | 121,958     |       |          |       |       |       | 121,203     |       |          |       |       |       | 121,884     |       |          |       |       |       |
| Accumulated comprehensive income                                         |       | 3,205                                 |       |                                |       |       |       | 650         |       |          |       |       |       | 2,075       |       |          |       |       |       | 964         |       |          |       |       |       |
| Total stockholder’s equity                                          |       | 124,247                               |       |                                |       |       |       | 122,608     |       |          |       |       |       | 123,278     |       |          |       |       |       | 122,848     |       |          |       |       |       |
| Total liabilities and stockholders’ equity                          |       | $                                     | 1,150,573  |                                |       |       |       |        | $          | 855,474       |       |       |       |        |       | $             | 1,058,419  |       |       |        |       |          | $          | 853,974    |       |   |   |   |   |
|                                                                     |       |                                  |       |                                |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |        |       |          |       |       |       |
| Net interest income                                                      |       |                                  |       | $                                   | 5,441      |       |       |        |       |          | $          | 5,141      |       |        |       |          |       | $          | 11,242     |        |       |          |       |       | $          | 10,076 |   |   |   |
| Interest rate spread                                                     |       |                                  |       |                                |       | 1.52       | %          |        |       |          |       | 1.89       | %          |        |       |          |       | 1.70       | %          |        |       |          |       | 1.82       | %          |
| Net interest margin                                                      |       |                                  |       |                                |       | 1.93       | %          |        |       |          |       | 2.48       | %          |        |       |          |       | 2.17       | %          |        |       |          |       | 2.43       | %          |
| Average interest-earning assets to average interest-bearing  liabilities |       |                                  |       |                                |       | 114.73     | %          |        |       |          |       | 120.25     | %          |        |       |          |       | 116.06     | %          |        |       |          |       | 120.25     | %          |

 

----

(1) Nonperforming loans are included inaverage balance computations

 

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***Rate/Volume Analysis*****.**  The followingtable sets forth the effects of changing rates and volumes on our net interestincome.  The rate column shows theeffects attributable to changes in rate (changes in rate multiplied by currentvolume).  The volume column shows theeffects attributable to changes in volume (changes in volume multiplied byprior rate).  The net column representsthe sum of the prior columns.  For purposesof this table, changes attributable to changes in both rate and volume thatcannot be segregated have been allocated proportionally based on the changesdue to rate and the changes due to volume.

 
| ** **                          | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**   | ** ** |
|-------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **June 30, 2009**  | ** ** | **June 30, 2009** | ** ** |
| ** **                          | ** ** | **Compared to**         | ** ** | **Compared to**        | ** ** |
| ** **                          | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**   | ** ** |
| ** **                          | ** ** | **June 30, 2008**  | ** ** | **June 30, 2008** | ** ** |
| ** **                          | ** ** | **Increase (Decrease)** | ** ** | ** **             | ** ** | **Increase (Decrease)** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Due to**              | ** ** | ** **             | ** ** | **Due to** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Rate**                | ** ** | **Volume**             | ** ** | **Net** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Net** | ** ** |
|                                |       |                    |       |                   |       |   |   |   |   |   |   |   |   |
| Interest  and dividend income:      |       |                    |       |                   |       |   |   |   |   |   |   |   |   |
| Interest-earning  demand deposits   |       | (39                     | )          | 137                    |       | 98 |   | (116 | ) | 145 |   | 29 |   |
| Money  market funds                 |       | (362                    | )          | 238                    |       | (124 | ) | (537 | ) | 176 |   | (361 | ) |
| Mortgage  related securities        |       | (712                    | )          | 1,011                  |       | 299 |   | (749 | ) | 1,399 |   | 650 |   |
| Taxable  securities                 |       | (66                     | )          | 157                    |       | 91 |   | (205 | ) | (288 | ) | (493 | ) |
| Nontaxable  securities              |       | 9                       |       | (24                    | )          | (15 | ) | 8 |   | (48 | ) | (40 | ) |
| Loans:                              |       |                    |       |                   |       | — |   |   |   |   |   | — |   |
| Residential  loans                  |       | (85                     | )          | 535                    |       | 450 |   | (45 | ) | 1,160 |   | 1,115 |   |
| Commercial  loans                   |       | (465                    | )          | 1,619                  |       | 1,154 |   | (1,573 | ) | 3,411 |   | 1,838 |   |
| Consumer  loans                     |       | (10                     | )          | (17                    | )          | (27 | ) | (67 | ) | (60 | ) | (127 | ) |
| Total  loans                        |       | (560                    | )          | 2,137                  |       | 1,577 |   | (1,685 | ) | 4,511 |   | 2,826 |   |
| Total  interest-earning assets      |       | (1,730                  | )          | 3,656                  |       | 1,926 |   | (3,284 | ) | 5,895 |   | 2,611 |   |
|                                |       |                    |       |                   |       |   |   |   |   |   |   |   |   |
| Interest  Expense:                  |       |                    |       |                   |       |   |   |   |   |   |   |   |   |
| NOW  and money market deposits      |       | 43                      |       | 355                    |       | 398 |   | (148 | ) | 637 |   | 489 |   |
| Savings  accounts                   |       | (14                     | )          | (2                     | )          | (16 | ) | (39 | ) | (3 | ) | (42 | ) |
| Certificates  of deposit            |       | (866                    | )          | 1,651                  |       | 785 |   | (1,687 | ) | 1,679 |   | (8 | ) |
| Total  interest-bearing deposits    |       | (837                    | )          | 2,004                  |       | 1,167 |   | (1,874 | ) | 2,313 |   | 439 |   |
|                                |       |                    |       |                   |       |   |   |   |   |   |   |   |   |
| FHLB  advances                      |       | (35                     | )          | 244                    |       | 209 |   | (102 | ) | 611 |   | 509 |   |
| Other  borrowed funds               |       | (23                     | )          | 273                    |       | 250 |   | (58 | ) | 555 |   | 497 |   |
| Total  borrowings                   |       | (58                     | )          | 517                    |       | 459 |   | (160 | ) | 1,166 |   | 1,006 |   |
| Total  interest-bearing liabilities |       | (895                    | )          | 2,521                  |       | 1,626 |   | (2,034 | ) | 3,479 |   | 1,445 |   |
|                                |       |                    |       |                   |       |   |   |   |   |   |   |   |   |
| Net  change in net interest income  |       | (835                    | )          | 1,135                  |       | 300 |   | (1,250 | ) | 2,416 |   | 1,166 |   |

 

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***Provision for Loan Losses*****.** The Company recorded a provision forloan losses of $567,000 and $962,000 for the three and six months ended June 30,2009, respectively compared to $225,000 and $400,000 for the three and sixmonths ended June 30, 2008, respectively. The increase in the provision reflected loan growth, primarily incommercial categories, and the increase in nonperforming, delinquent andinternally classified loans in both the residential and commercial loanportfolios.

 

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,**   | ** ** | **At December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **2009**                    | ** ** | **2008**                      | ** ** |
|                                        |       | **(Dollars  in thousands)** |       |
|                                        |       |                        |       |                          |       |
| Nonaccrual  loans:                          |       |                        |       |                          |       |
| One-  to four-family                        |       | $                           | 1,901      |                          | $          | 1,503 |   |
| Multi-family  and commercial real estate    |       | 1,775                       |       | 685                           |       |
| Construction                                |       | 3,861                       |       | 3,495                         |       |
| Consumer                                    |       | 176                         |       | 167                           |       |
| Total                                       |       | 7,713                       |       | 5,850                         |       |
|                                        |       |                        |       |                          |       |
| Accruing  loans past due 90 days or more    |       | —                      |       | —                        |       |
| Real  estate owned                          |       | —                      |       | —                        |       |
| Total  nonperforming assets                 |       | $                           | 7,713      |                          | $          | 5,850 |   |
| Total  nonperforming loans to total loans   |       | 1.22                        | %          | 0.98                          | %          |
| Total  nonperforming loans to total assets  |       | 0.66                        |       | 0.63                          |       |
| Total  nonperforming assets to total assets |       | 0.66                        |       | 0.63                          |       |

 

The increase innonaccrual loans of $1.9 million to $7.7 million at June 30, 2009 from$5.9 million at December 31, 2008 was primarily the result of threecommercial real estate loans totaling an aggregate $1.1 million and onecommercial construction loan totalling $325,000 being placed on non-accrualstatus during the six months ended June 30, 2009. Each of these loans issecured by commercial real estate in the southern New Jersey area.  In addition, one- to four-family nonaccrualloans increased by $398,000 primarily due to one additional loan being placedon nonaccrual in the amount of $457,000 partially offset by a charge off of$91,000. Consumer nonaccrual loans increased by $9,000 due to one additional$69,000 loan placed on nonaccrual partially offset by a charge off of $60,000.  The two previously described charge-offs  relate to two loans to one borrower securedby a residential property in the southern New Jersey area.

 

At June 30, 2009,the largest nonaccrual loan was a $3.5 million construction loan collateralizedby a residential housing development located in southern  New Jersey.

 

Impaired loans requiringan allowance for loan losses increased $1.3 million to $7.7 million at June 30,2009 compared to $6.4 million at December 31, 2008.  The related allowance for loan lossesassociated with these loans was $1.1 million at June 30, 2009 compared to$1.0 million at December 31, 2008. The increase was primarily due to classifying three new commercial loansas impaired in the amount of $912,000 plus $398,000 in new one- to four-familyloans as impaired, offset by a $145,000 charge-off related to two loans to oneborrower.  All impaired loans are alsoclassified as nonperforming at June 30, 2009 and are discussed in thepreceeding paragraphs.

 

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

 
| ** **                              | ** ** | **At June 30, 2009** | ** ** | **At December 31,  2008** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **30-59**                 | ** ** | **60-89**                      | ** ** | **30-59** | ** ** | **60-89** | ** ** |
| ** **                              | ** ** | **Days**                  | ** ** | **Days**                       | ** ** | **Days** | ** ** | **Days** | ** ** |
| ** **                              | ** ** | **Past  Due**             | ** ** | **Past  Due**                  | ** ** | **Past  Due** | ** ** | **Past  Due** | ** ** |
| ** **                              | ** ** | **(In thousands)**        | ** ** |
|                                    |       |                      |       |                           |       |   |   |   |   |
| Multi-family and commercial real estate |       | $                         | 896        |                           | $          | — |   | $ | 766 |   | $ | 337 |   |
| One- to four-family real estate         |       | 5,161                     |       | 701                            |       | 104 |   | 92 |   |
| Consumer:                               |       |                      |       |                           |       |   |   |   |   |
| Home equity loans and lines of credit   |       | 171                       |       | 114                            |       | 63 |   | 83 |   |
| Automobile                              |       | 10                        |       | 1                              |       | — |   | — |   |
| Total                                   |       | $                         | 6,238      |                           | $          | 816 |   | $ | 933 |   | $ | 512 |   |

 

Total delinquent loansincreased to $7.1 million at June 30, 2009 as compared to $1.4 million at December 31,2008.  The increase was primarily due toincreases in the one-to four-family real estate loan portfolio.  There are a total of 16 delinquent loans, thelargest being a $4.3 million loan secured by a residential home located incentral New Jersey.

 

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

 
| ** **                                                                     | ** ** | **Three  Months**           | ** ** | ** ** | ** ** | ** **        | ** ** | **Six  Months**          | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------|------------|------------|------------|-------------------|------------|--------------------------|------------|------------|------------|------------|------------|
| ** **                                                                     | ** ** | **Ended  June 30,**    | ** ** | ** ** | ** ** | ** **        | ** ** | **Ended  June 30,** | ** ** | ** ** | ** ** | **%**      | ** ** |
| ** **                                                                     | ** ** | **2009**                    | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **%  Change**            | ** ** | **2009**   | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **Change** | ** ** |
| ** **                                                                     | ** ** | **(Dollars  in thousands)** | ** ** |
|                                                                           | ** ** | ** **                  | ** ** | ** ** | ** ** | ** **        | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  charges and other fee income                                          |       | $                           | 310        |       | $          | 224               |       | $                        | 86         |       | 38.4       | %          | $          | 480 |   | $ | 415 |   | $ | 65 |   | 15.7 | % |
| Net  gain on sale of loans                                                     |       | —                      |       | 1          |       | (1                | )          | (100.0                   | )%         | 3          |       | 4          |       | (1 | ) | (25.0 | )% |
| Income  on bank-owned life insurance                                           |       | 112                         |       | 113        |       | (1                | )          | (0.9                     | )%         | 221        |       | 224        |       | (3 | ) | (1.3 | )% |
| Other                                                                          |       | 146                         |       | 17         |       | 129               |       | 758.8                    | %          | 211        |       | 35         |       | 176 |   | 502.9 | % |
|                                                                           |       |                        |       |       |       |              |       |                     |       |       |       |       |       |   |   |   |   |
| Total  other-than-temporary impairment loss                                    |       | (605                        | )          | —     |       | (605              | )          | (100.0                   | )%         | (605       | )          | —     |       | (605 | ) | (100.0 | )% |
|                                                                           |       |                        |       |       |       |              |       |                     |       |       |       |       |       |   |   |   |   |
| Less:  Portion of loss recognized in other comprehensive income (before taxes) |       | 448                         |       | —     |       | 448               |       | 100.0                    | %          | 448        |       | —     |       | 448 |   | 100.0 | % |
| Net  other-than-temporary impairment loss                                      |       | (157                        | )          | —     |       | (157              | )          | (100.0                   | )%         | (157       | )          | —     |       | (157 | ) | (100.0 | )% |
| Net  gains on sale of investment securities                                    |       | 588                         |       | 48         |       | 540               |       | 1125.0                   | %          | 588        |       | 118        |       | 470 |   | 398.3 | % |
| Net  investment securities gains                                               |       | 431                         |       | 48         |       | 383               |       | 797.9                    | %          | 431        |       | 118        |       | 313 |   | 265.3 | % |
|                                                                           |       |                        |       |       |       |              |       |                     |       |       |       |       |       |   |   |   |   |
| **Total Noninterest Income**                                                   |       | $                           | 999        |       | $          | 403               |       | $                        | 596        |       | 147.9      | %          | $          | 1,346 |   | $ | 796 |   | $ | 550 |   | 69.1 | % |

 

Noninterest incomeincreased $596,000, or 147.9%, during the three months ended June 30, 2009compared to the same period in 2008.  Netinvestment securities gains increased $383,000 during the second quarter of2009 as the Bank recognized a gain of $588,000 on the sale of securities offsetby an other-than-temporary credit impairment loss recognized on a private labelresidential mortgage related security in the amount of $157,000.  Net investment security gains totaled $48,000during the three months ended June 30, 2008.  Service charges and other fee incomeincreased by $86,000 primarily as a result of the Bank reducing the valuationallowance on its mortgage servicing rights by $99,000.  Other income increased $129,000 during thethree-month period as a result of the Bank recording earnings of $125,000 onits investment in Philadelphia Mortgage Advisors, Inc., which was causedby a higher volume of residential loan refinancings during the quarter due tohistorically low level of long term interest rates.

 

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Noninterest incomeincreased $550,000, or 69.1%, during the six months ended June 30, 2009compared to the same period in 2008.  Netinvestment securities gains increased $313,000 as the Bank recognized a gain of$588,000 on the sale of securities in the second quarter of 2009 offset by another-than-temporary credit impairment loss recognized on a private labelresidential mortgage related security in the amount of $157,000.  Net investment securities gains totaled$118,000 during the six months ended June 30, 2008.  Service charges and other fee incomeincreased by $65,000 primarily as a result of the Bank reducing the valuationallowance on its mortgage servicing rights by $75,000.  Other income increased $176,000 during thesix-month period as a result of the Bank recording earnings of $173,000 on itsinvestment in Philadelphia Mortgage Advisors, Inc., which was caused by ahigher volume of residential loan refinancings during the quarter due tohistorically low level of long term interest rates.

*** ***

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

 
| ** **                                 | ** ** | **Three Months**           | ** ** | ** ** | ** ** | ** **        | ** ** | **Six Months**          | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|------------|------------|-------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | **Ended June 30,**    | ** ** | ** ** | ** ** | **%**             | ** ** | **Ended June 30,** | ** ** | ** ** | ** ** | **%**      | ** ** |
| ** **                                 | ** ** | **2009**                   | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **Change**              | ** ** | **2009**   | ** ** | **2008**   | ** ** | **$ Change** | ** ** | **Change** | ** ** |
| ** **                                 | ** ** | **(Dollars in thousands)** | ** ** |
|                                       | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries,  benefits and other compensation |       | $                          | 2,915      |       | $          | 3,064             |       | $                       | (149       | )          | (4.9       | )%         | $          | 5,765 |   | $ | 5,862 |   | $ | (97 | ) | (1.7 | )% |
| Occupancy  expense                         |       | 438                        |       | 468        |       | (30               | )          | (6.4                    | )%         | 933        |       | 954        |       | (21 | ) | (2.2 | )% |
| Furniture  and equipment expense           |       | 180                        |       | 227        |       | (47               | )          | (20.7                   | )%         | 401        |       | 443        |       | (42 | ) | (9.5 | )% |
| Data  processing costs                     |       | 377                        |       | 409        |       | (32               | )          | (7.8                    | )%         | 762        |       | 802        |       | (40 | ) | (5.0 | )% |
| Professional  fees                         |       | 298                        |       | 265        |       | 33                |       | 12.5                    | %          | 564        |       | 578        |       | (14 | ) | (2.4 | )% |
| Marketing  expense                         |       | 86                         |       | 125        |       | (39               | )          | (31.2                   | )%         | 170        |       | 220        |       | (50 | ) | (22.7 | )% |
| FDIC  premiums                             |       | 831                        |       | 25         |       | 806               |       | 3224.0                  | %          | 1,072      |       | 55         |       | 1,017 |   | 1849.1 | % |
| Other                                      |       | 367                        |       | 373        |       | (6                | )          | (1.6                    | )%         | 776        |       | 764        |       | 12 |   | 1.6 | % |
| Total                                      |       | $                          | 5,492      |       | $          | 4,956             |       | $                       | 536        |       | 10.8       | %          | $          | 10,443 |   | $ | 9,678 |   | $ | 765 |   | 7.9 | % |

 

Noninterest expenseincreased by $536,000, or 10.8%, and $765,000, or 7.9%, during the three andsix months ended June 30, 2009, respectively, compared to the same periodsin 2008.  The increase in both the threeand six months included an FDIC special assessment of $536,000 incurred in thesecond quarter of 2009.  In addition,both the three and six months ended June 30, 2008 included an expense of$244,000 and $297,000, respectively, associated with final distributions fromthe Company’s terminated pension plan in the second quarter of 2008.

 

The largest changes forthe three-month period ended June 30, 2009 were (1) an increase inFDIC premiums of $806,000, primarily due to (a) the special assessmentmentioned above, (b) an increase in the average deposit balances, (c) the FDICinsurance assessment rate increased eight basis points to thirteen basis pointsat June 30, 2009 and (d) the Bank’s FDIC insurance credit from the prioryear was fully utilized during the fourth quarter of 2008 and (2) adecrease in salaries and benefits expense of $149,000 primarily due to the$244,000 of expense in the three month period ended June 30, 2008associated with final distributions from the Company’s terminated pension planoffset by normal increases in salaries. Additional changes in noninterest expense included a reduction offurniture and equipment expense of $47,000, primarily as a result of certainfixed assets becoming fully depreciated in 2009, and a reduction of marketingexpense of $39,000 due to reduced promotional offers and advertising performedduring 2009.

 

The largest changes forthe six month period were (1) an increase in FDIC premiums of $1.0million, primarily due to (a) the special assessment mentioned above, (b) an increase in the averagedeposit balances, (c) the FDIC insurance assessment rate increased by eightbasis points to thirteen basis points during the six months ended June 30,2009 and (d) the Bank’s FDIC insurance credit from the prior year was fullyutilized during the fourth quarter of 2008 and (2) a decrease in salariesand benefits expense of $97,000 primarily due to the $297,000 of expense in thesix month period ended June 30, 2008 associated with final distributionsfrom the Company’s terminated pension plan offset by normal increases insalaries.  Additional changes innoninterest expense included a reduction of marketing expense of $50,000 due toreduced promotional offers and advertising performed during 2009 and areduction of furniture and equipment expense of $42,000 primarily as a resultof certain fixed assets becoming fully depreciated in 2009.

 

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***Income Taxes*****.**The income tax provision for the three and six monthsended June 30, 2009 was $83,000 and $284,000, respectively, compared to$59,000 and $145,000 for the three and six months ended June 30, 2008,respectively.   The Company’s effectiveincome tax rate was 21.8% and 24.0% for the three and six months ended June 30,2009, respectively, compared to 16.3% and 18.3% for the three and six monthsended June 30, 2008, respectively. These rates reflect the Company’s levels of tax-exempt income for bothperiods relative to the overall level of taxable income.

** **

**Liquidityand Capital Management**

 

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

 

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

 
| ** **                              | ** ** | ** **         | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------|------------|--------------------|------------|----------------------------|------------|
| ** **                              | ** ** | ** **         | ** ** | ** **                 | ** ** | **One to** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | ** **         | ** ** | **Less Than**              | ** ** | **Three** | ** ** | **Three to** | ** ** | **More Than** | ** ** |
| **Contractual Obligations**             | ** ** | **Total**          | ** ** | **One Year**               | ** ** | **Years** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** |
| ** **                              | ** ** | **(In thousands)** | ** ** |
|                                    |       |               |       |                       |       |   |   |   |   |   |   |
| **At June 30, 2009**               |       |               |       |                       |       |   |   |   |   |   |   |
| Operating  lease obligations (1)        |       | $                  | 1,453      |                       | $          | 490 |   | $ | 923 |   | $ | 40 |   | $ | — |   |
| FHLB  advances and other borrowings (2) |       | 222,627            |       | 16,126                     |       | 50,485 |   | 31,820 |   | 124,196 |   |
| Other  long-term obligations (3)        |       | 6,554              |       | 1,618                      |       | 2,955 |   | 1,981 |   | — |   |
| Total                                   |       | $                  | 230,634    |                       | $          | 18,234 |   | $ | 54,363 |   | $ | 33,841 |   | $ | 124,196 |   |
|                                    |       |               |       |                       |       |   |   |   |   |   |   |
| **At December 31, 2008**           |       |               |       |                       |       |   |   |   |   |   |   |
| Operating  lease obligations (1)        |       | $                  | 1,702      |                       | $          | 498 |   | $ | 929 |   | $ | 275 |   | $ | — |   |
| FHLB  advances and other borrowings (2) |       | 238,197            |       | 16,260                     |       | 61,237 |   | 32,221 |   | 128,479 |   |
| Other  long-term obligations (3)        |       | 7,443              |       | 1,651                      |       | 3,131 |   | 2,661 |   | — |   |
| Total                                   |       | $                  | 247,342    |                       | $          | 18,409 |   | $ | 65,297 |   | $ | 35,157 |   | $ | 128,479 |   |

 

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

(2)          Includesprincipal and projected interest payments.

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

 

We regularly adjust ourinvestments in liquid assets based upon our assessment of: (1) expectedloan demands; (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.At June 30, 2009, cash and cash equivalents totaled $105.3 million.Securities classified as available-for-sale, which provide additional sourcesof liquidity, totaled $395.2 million at June 30, 2009. In addition, at March 31,2009, the latest date available, we had the ability to borrow a total ofapproximately $532.3 million from the FHLB. On June 30, 2009, we had$144.3 million of borrowings outstanding with the FHLB as well as $50.0 millionof borrowings outstanding with another financial institution.

 

At June 30, 2009, wehad $105.4 million in loan commitments outstanding, which consisted of $10.7million of mortgage loan commitments, $21.1 million in unused home equity linesof credit, $5.2 million in consumer loans, $68.3 million in commercial loancommitments and $50,000 in standby letters of credit. Certificates of depositdue within one year of June 30, 2009 totaled $222.6 million, or 40.6% oftotal certificates of deposit, at June 30, 2009.  The percentage of certificates of deposit duewithin one year declined to 40.6% from 53.5% at December 31, 2008 as aresult of the Company’s certificate of deposit promotion which attracted agreater portion of certificates of deposit with a term of eighteen months orlonger. If

 

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these maturing depositsdo not remain with us, we will be required to seek other sources of funds,including other certificates of deposit and borrowings. Depending on marketconditions, we may be required to pay higher rates on such deposits or otherborrowings than we currently pay on the certificates of deposit due on orbefore June 30, 2010. We believe, however, based on past experience, thata significant portion of these certificates of deposit will remain with us. Wehave the ability to attract and retain deposits by adjusting the interest ratesoffered.

 

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

 

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

 
| ** **                                           | ** ** | **Six Months Ended  June 30,********2009** | ** ** | **Year Ended  December 31,  2008** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------|------------|
| Investing  activities:                               |       |                                                      |       |                                    |       |
| Loan  originations                                   |       | $                                                         | (94,428    | )                                       | $          | (207,687 | ) |
| Other  decreases in loans                            |       | 58,002                                                    |       | 82,182                                  |       |
| Purchase  of loan participations                     |       | (125                                                      | )          | (19,335                                 | )          |
| Security  purchases                                  |       | (169,033                                                  | )          | (163,303                                | )          |
| Security  sales                                      |       | 20,218                                                    |       | 94,449                                  |       |
| Security  maturities, calls and principal repayments |       | 52,917                                                    |       | 68,893                                  |       |
| Financing  activities:                               |       |                                                      |       |                                    |       |
| Increase  in deposits                                |       | 236,265                                                   |       | 22,912                                  |       |
| (Decrease)  increase in FHLB advances                |       | (2,089                                                    | )          | 66,379                                  |       |
| Increase  in other borrowings                        |       | —                                                    |       | 30,000                                  |       |
| Purchase  of treasury stock                          |       | (2,636                                                    | )          | (3,369                                  | )          |
|                                                      |            |                                                           |            |                                         |            |  |  |

 

The Bancorp is a separateentity and apart from the Bank and must provide for its own liquidity. Inaddition to its operating expenses, the Bancorp is responsible for the paymentof declared dividends to stockholders, of which through June 30, 2009 nodividends have been paid. At times, the Bancorp has repurchased its commonstock. As of June 30, 2009, the Bancorp had $13.4 million in cash and cashequivalents.  Substantially all of theBancorp’s cash and cash equivalents was obtained from proceeds it retained fromits initial public offering in 2006.  TheBancorp can receive dividends from the Bank. Payment of such dividends to the Bancorp by the Bank is limited underfederal law. The amount that can be paid in any calendar year, without priorapproval from the regulatory agency, cannot exceed the net profits (as defined)for the year plus the preceding two calendar years. The Bancorp believes thatsuch restriction will not have an impact on the Bancorp’s ability to meet itsongoing cash obligations.

 

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

 

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

 
| ** **                                          | ** ** | **Ratio** | ** ** | **Minimum  to be Well  Capitalized** | ** ** |
|-----------------------------------------------------|------------|-----------|------------|--------------------------------------|------------|
| **June 30, 2009:**                             |       |      |       |                                 |       |
| Total  risk-based capital (to risk-weighted assets) |       | 16.80     | %          | >10.0                             | %          |
| Tier  1 capital (to risk-weighted assets)           |       | 15.81     | %          | >  6.0                       | %          |
| Tier  1 capital (to adjusted assets)                |       | 8.71      | %          | >  5.0                       | %          |
|                                                |       |      |       |                                 |       |
| **December 31, 2008:**                         |       |      |       |                                 |       |
| Total  risk-based capital (to risk-weighted assets) |       | 19.25     | %          | >10.0                             | %          |
| Tier  1 capital (to risk-weighted assets)           |       | 18.11     | %          | >  6.0                       | %          |
| Tier  1 capital (to adjusted assets)                |       | 10.70     | %          | >  5.0                       | %          |

 

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Total stockholders’equity to total assets was 10.6% at June 30, 2009, 13.0% at December 31,2008 and 14.2% at June 30, 2008.  Asa result of Fox Chase Bancorp’s initial public offering in 2006, the Companyhas significant capital. The Company’s financial condition and results ofoperations have been enhanced by the capital from the offering, resulting inincreased net interest-earning assets. However, the large increase in equity resulting from the capital raisedin the offering has had an adverse impact on our return on equity.  The Company may use capital management toolssuch as cash dividends and share repurchases as well as improving operatingincome to increase its return on equity.

 

**Off-BalanceSheet Arrangements**

 

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

 

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

 

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

 

At June 30, 2009,there has not been any material change to the market risk disclosure from thatcontained in the Company’s Annual Report on Form 10-K for the year ended December 31,2008.

 

**Item 4. Controls and Procedures**

 

TheCompany’s management, including the Company’s principal executive officer andprincipal financial officer, have evaluated the effectiveness of the Company’s “disclosurecontrols and procedures,” as such term is defined in Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Basedupon their evaluation, the principal executive officer and principal financialofficer concluded that, as of the end of the period covered by this report, theCompany’s disclosure controls and procedures were effective for the purpose ofensuring that the information required to be disclosed in the reports that theCompany files or submits under the Exchange Act with the Securities andExchange Commission (the “SEC”): (1) is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms, and (2) is accumulated and communicated to the Company’smanagement, including its principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure.  In addition, no change in the Company’sinternal control over financial reporting occurred during the quarter ended June 30,2009 that has materially affected, or isreasonably likely to materially effect, Company’s internal control overfinancial reporting.

 

**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

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

 

**Item 1A. Risk Factors**

 

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2008, which could materially affect ourbusiness, financial condition or future results.  As of June 30, 2009, the risk factors ofthe Company have not changed materially from those reported in the Company’sAnnual Report on Form 10-K.  Therisks described in our Annual Report on Form 10-K are not the only risksthat we face.  Additional risks anduncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financialcondition and/or operating results.

 

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

 
| ** **                  | ** ** | ** **    | ** ** | ** **     | ** ** | **Total Number**       | ** ** | ** **                | ** ** |
|-----------------------------|------------|---------------|------------|----------------|------------|------------------------|------------|---------------------------|------------|
| ** **                  | ** ** | ** **    | ** ** | ** **     | ** ** | **of Shares**          | ** ** | ** **                | ** ** |
| ** **                  | ** ** | ** **    | ** ** | ** **     | ** ** | **Purchased**          | ** ** | **Maximum**               | ** ** |
| ** **                  | ** ** | **Total**     | ** ** | ** **     | ** ** | **as Part of**    | ** ** | **Number of Shares**      | ** ** |
| ** **                  | ** ** | **Number of** | ** ** | **Average**    | ** ** | **Publicly**           | ** ** | **that May Yet be**  | ** ** |
| ** **                  | ** ** | **Shares**    | ** ** | **Price Paid** | ** ** | **Announced Plans or** | ** ** | **Purchased Under**       | ** ** |
| **Period**                  | ** ** | **Purchased** | ** ** | **Per Share**  | ** ** | **Programs**           | ** ** | **the Plans or Programs** | ** ** |
|                        |       |          |       |           |       |                   |       |                      |       |
| April 1,  2009 through |       |          |       |           |       |                   |       |                      |       |
| April 30,  2009        |       | 19,850        |       | $              | 9.64       |                   | 19,850     |                      | 258,920    |   |
|                        |       |          |       |           |       |                   |       |                      |       |
| May 1,  2009 through   |       |          |       |           |       |                   |       |                      |       |
| May 31,  2009          |       | 84,000        |       | $              | 9.77       |                   | 84,000     |                      | 501,920    |   |
|                        |       |          |       |           |       |                   |       |                      |       |
| June 1,  2009 through  |       |          |       |           |       |                   |       |                      |       |
| June 30,  2009         |       | 73,700        |       | $              | 10.35      |                   | 73,700     |                      | 428,220    |   |
|                        |       |          |       |           |       |                   |       |                      |       |
| Total                       |       | 177,550       |       | $              | 9.99       |                   | 177,550    |                      |       |   |

 

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(1) On July 31, 2008, the Company announced that the Board of Directorsapproved the repurchase of up to 327,000 shares of the Company’s common stock(the “July 2008 program”).  Duringthe first six months of 2009, the Company repurchased 225,780 shares as part ofthe July 2008 program and 101,220 shares remain to be purchased under the July 2008program as of June 30, 2009.  On May 21,2009, the Company announced that the Board of Directors approved the repurchaseof up to an additional 327,000 shares of the Company’s common stock.  These repurchase programs will continue untilthey are completed or terminated by the Board of Directors.

 

**Item 3. Defaults upon SeniorSecurities**

 

Not applicable.

 

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

 

At the Company’s AnnualMeeting of Stockholders (the “Meeting”) held on May 21, 2009, all thenominees for director proposed by the Company were elected. The votes cast foreach nominee were as follows:

 
| ** **        | ** ** | **For**    | ** ** | **Withhold** | ** ** | ** ** | ** ** |
|-------------------|------------|------------|------------|--------------|------------|------------|------------|
|              |       |       |       |         |       |       |       |
| Roger  H. Ballou  |       | 13,188,972 |       | 364,491      |       |       |       |
|              |       |       |       |         |       |       |       |
| Richard  E. Bauer |       | 13,204,409 |       | 349,054      |       |       |       |
|              |       |       |       |         |       |       |       |
| Peter  A. Sears   |       | 12,589,925 |       | 963,538      |       |       |       |

 

Also at the Meeting, thestockholders ratified the appointment of KPMG, LLP as the independentregistered public accounting firm for fiscal year ending December 31,2009. The votes cast were as follows:

 
| ** ** | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|------------|------------|-------------|------------|-------------|------------|
|       |       |       |       |        |       |        |       |
|       |       | 13,488,191 |       | 43,727      |       | 21,545      |       |

 

**Item 5. Other Information**

 

Not applicable.

 

**Item 6. Exhibits**

 
| 3.1    |   | Charter  of Fox Chase Bancorp, Inc. (1)                                            |
|--------|--------|-----------------------------------------------------------------------------------------|
| 3.2    |   | Bylaws  of Fox Chase Bancorp, Inc. (2)                                             |
| 4.1    |   | Stock  Certificate of Fox Chase Bancorp, Inc. (1)                                  |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer            |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer            |
| 32.0   |   | Section 1350  Certification of Chief Executive Officer and Chief Financial Officer |
|   |   |                                                                                    |

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|   |   | (1)          Incorporated by reference to this document  from the exhibits to the Company’s Registration Statement on Form S-1  (File No. 333-134160), as amended, initially filed with the Securities  and Exchange Commission on May 16, 2006. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                              |
|   |   | (2)          Incorporated by reference to this document  from the exhibits to the Company’s Quarterly Report on Form 10-Q filed  with the Securities and Exchange Commission on May 9, 2008.                                                          |

 

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**SIGNATURES**

 

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

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

 

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