**United
      States**


**Securities
      and Exchange Commission**


**Washington,
      D.C. 20549**





**FORM**  **10-KSB**





**x**
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**





For
      the
      fiscal year ended December 31, 2007





**o**
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**





For
      the
      transition period from _________ to __________





Commission
      File Number: 0-52267




**POLONIA
        BANCORP**
 (Name
        of
        small business issuer in its charter)


**United
                  States**
              
              **41-2224099**(State
                  or other jurisdiction of
              
              (I.R.S.
                  Employer Identification No.)incorporation
                  or organization)**3993
                  Huntingdon Pike, 3****rd****Floor,****Huntingdon
                  Valley, Pennsylvania**
              
              **19006**(Address
                  of principal executive offices)
              
              (Zip
                  Code)





Issuer’s
      telephone number: (215) 938-8800


Securities
      registered under Section 12(b) of the Exchange Act: None


Securities
      registered under Section 12(g) of the Exchange Act:





**Common
      Stock, par value $0.01 per
      share**


(Title
      of
      class)





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes x No
o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of the registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of the Form 10-KSB or any
      amendment to this Form 10-KSB. **** x





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





The
      issuer recorded revenues of $11,057,812 for its most recent fiscal
      year.





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates at March 17, 2008 was $12.4 million, based upon the closing
      price
      of $10.00 as quoted on the OTC Electronic Bulletin Board for March 17,
      2008. **** Solely
      for purposes of this calculation, the shares held by Polonia MHC and the
      directors and executive officers of the issuer are deemed to be held by
      affiliates.





As
      of
      March 17, 2008, the issuer had 3,306,250 shares of common stock
      outstanding.





Portions
      of the Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders are
      incorporated by reference in Part III of this Form 10-K.





Transitional
      Small Business Disclosure Format (check one): Yes o No x







**INDEX**


**Page**PART
                    IItem
                    1.
                Description
                    of Business
                2Item
                    2.
                Description
                    of Property
                16Item
                    3.
                Legal
                    Proceedings
                17Item
                    4.
                Submission
                    of Matters to a Vote of Security Holders
                17PART
                    IIItem
                    5.
                Market
                    for Common Equity, Related Stockholder Matters and Small Business
Issuer
                    Purchases of Equity Securities
                17Item
                    6.
                Management’s
                    Discussion and Analysis or Plan of Operation
                18Item
                    7.
                Financial
                    Statements
                37Item
                    8.
                Changes
                    In and Disagreements With Accountants on Accounting and Financial
                    Disclosure
                38Item
                    8A(T).
                Controls
                    and Procedures
                38Item
                    8B.
                Other
                    Information
                38PART
                    IIIItem
                    9.
                Directors,
                    Executive Officers, Promoters, Control Persons and Corporate
                    Governance;
                    Compliance with Section 16(a) of the Exchange Act
                39Item
                    10.
                Executive
                    Compensation
                39Item
                    11.
                Security
                    Ownership of Certain Beneficial Owners and Management and Related
                    Stockholder Matters
                39Item
                    12.
                Certain
                    Relationships and Related Transactions, and Director
                    Independence
                40Item
                    13.
                Exhibits
                40Item
                    14.
                Principal
                    Accountant Fees and Services
                41**SIGNATURES**


i


*This
      report contains certain “forward-looking statements” within the meaning of the
      federal securities laws that are based on assumptions and may describe future
      plans, strategies and expectations of Polonia Bancorp (the “Company”), Polonia
      MHC and Polonia Bank (the “Bank”). These forward-looking statements are
      generally identified by terms such as “expects,” “believes,” “anticipates,”
“intends,” “estimates,” “projects” and similar expressions.*





*Management’s
      ability to predict results or the actual effect of future plans or strategies
      is
      inherently uncertain. Factors which could have a material adverse effect on
      the
      operations of Polonia Bancorp and its subsidiaries include, but are not limited
      to, the following: interest rate trends; the general economic climate in the
      market area in which we operate, as well as nationwide; our ability to control
      costs and expenses; competitive products and pricing; loan delinquency rates
      and
      changes in federal and state legislation and regulation. These risks and
      uncertainties should be considered in evaluating the forward-looking statements
      and undue reliance should not be placed on such statements. We assume no
      obligation to update any forward-looking statements.*





**PART
      I**





**ITEM
      1.**  **DESCRIPTION
      OF BUSINESS**





**General**




Polonia
      Bancorp was organized as a federal corporation at the direction of Polonia
      Bank
      (the “Bank”), in connection with the reorganization of the Bank from the mutual
      form of organization to the mutual holding company form of organization. The
      reorganization was completed on January 11, 2007. In the reorganization and
      related minority stock offering, Polonia Bancorp sold 1,487,813 shares of its
      common stock to the public and issued 1,818,437 shares of its common stock
      to
      Polonia MHC, the mutual holding company of the Bank. In addition, a contribution
      of $100,000 was made to capitalize Polonia MHC. Costs incurred in connection
      with the common stock offering of $1,043,000 were recorded as a reduction of
      the
      proceeds from the offering. Net proceeds from the common stock offering amounted
      to approximately $13,835,000.





As
      a
      result of the reorganization, Polonia Bancorp’s business activities are the
      ownership of the outstanding capital stock of Polonia Bank and management of
      the
      investment of offering proceeds retained from the reorganization. Currently,
      Polonia Bancorp neither owns nor leases any property, but instead uses the
      premises, equipment and other property of Polonia Bank and pays appropriate
      rental fees, as required by applicable law and regulations. In the future,
      Polonia Bancorp may acquire or organize other operating subsidiaries; however,
      there are no current plans, arrangements, or understandings, written or oral,
      to
      do so.





Polonia
      Bank was originally chartered in 1923 as a federally chartered savings and
      loan
      association under the name “Polonia Federal Savings and Loan Association.” In
      1996, Polonia Federal Savings and Loan Association changed its name to Polonia
      Bank.





The
      Company is headquartered in Huntingdon Valley and operates as a
      community-oriented financial institution dedicated to serving the financial
      services needs of consumers and businesses within our market areas. The Bank
      is
      engaged primarily in the business of attracting deposits from the general public
      and using such funds to originate one-to four-family real estate and to a much
      lesser extent, multi-family and nonresidential real estate loans and home equity
      and consumer loans which we primarily hold for investment.





The
      Federal Deposit Insurance Corporation (the “FDIC”), through the Deposit
      Insurance Fund, insures the Bank’s deposit accounts up to the applicable legal
      limits. The Bank is a member of the Federal Home Loan Bank (“FHLB”)
      System.





**Market
      Areas**





We
      are
      headquartered in Huntingdon Valley, Pennsylvania, which is located in the
      northwest suburban area of metropolitan Philadelphia and is situated between
      Montgomery and Bucks Counties. In addition to our main office, we operate from
      four additional locations in Philadelphia County. Our four branch offices are
      located within the city of Philadelphia. We generate deposits through our five
      offices and conduct lending activities throughout the Greater Philadelphia
      metropolitan area, as well as in southeastern Pennsylvania and southern New
      Jersey. The Philadelphia metropolitan area is the fourth largest in the United
      States (based on United States Census data for 2004) with an estimated
      population of 5.7 million. The city of Philadelphia is the fifth most
      populous city in the United States and the largest in population and area in the
      Commonwealth of Pennsylvania.





2


The
      Greater Philadelphia metropolitan area’s economy is heavily based upon
      manufacturing, refining, food and financial services. The city is home to many
      Fortune 500 companies, including cable television and internet provider Comcast;
      insurance companies CIGNA and Lincoln Financial Group; energy company Sunoco;
      food services company Aramark; paper and packaging company Crown Holdings
      Incorporated; diversified producer Rohm and Haas Company; the pharmaceutical
      company Glaxo SmithKline; the helicopter division of Boeing Co.; and automotive
      parts retailer Pep Boys. The city is also home to many universities and
      colleges.




**Competition**





We
      face
      significant competition for the attraction of deposits and origination of loans.
      Our most direct competition for deposits has historically come from the several
      financial institutions operating in our market areas and, to a lesser extent,
      from other financial service companies such as brokerage firms, credit unions
      and insurance companies. We also face competition for investors’ funds from
      money market funds, mutual funds and other corporate and government securities.
      At June 30, 2007, which is the most recent date for which data is available
      from
      the FDIC, we held less than 1% of the deposits in the Philadelphia metropolitan
      area. In addition, banks owned by large bank holding companies such as PNC
      Financial Services Group, Inc., Wachovia Corporation, Commerce Bancorp, Inc.
      and
      Citizens Financial Group, Inc. also operate in our market areas. These
      institutions are significantly larger than us and, therefore, have significantly
      greater resources.





Our
      competition for loans comes primarily from financial institutions in our market
      areas, and, to a lesser extent, from other financial service providers such
      as
      mortgage companies and mortgage brokers. Competition for loans also comes from
      the increasing number of non-depository financial service companies entering
      the
      mortgage market such as insurance companies, securities companies and specialty
      finance companies.




We
      expect
      competition to remain intense in the future as a result of legislative,
      regulatory and technological changes and the continuing trend of consolidation
      in the financial services industry. Technological advances, for example, have
      lowered the barriers to market entry, allowed banks and other lenders to expand
      their geographic reach by providing services over the Internet and made it
      possible for non-depository institutions to offer products and services that
      traditionally have been provided by banks. Changes in federal law permit
      affiliation among banks, securities firms and insurance companies, which
      promotes a competitive environment in the financial services industry.
      Competition for deposits and the origination of loans could limit our future
      growth.





**Lending
      Activities**




***General.*** Our loan
      portfolio consists primarily of one- to four-family residential real estate
      loans. To a much lesser extent, our loan portfolio includes multi-family and
      nonresidential real estate loans, home equity loans and consumer loans. We
      originate loans primarily for investment purposes. Currently, we only offer
      fixed-rate mortgage products. **** In
      2007
      we began to offer home equity lines of credit and will begin to offer adjustable
      rate mortgage products in the near future.





***One-
      to Four-Family Residential Real Estate Loans.*** Our
      primary lending activity is the origination of mortgage loans to enable
      borrowers to purchase or refinance existing homes. We offer fixed-rate mortgage
      loans with terms up to 30 years. The loan fees, interest rates and other
      provisions of mortgage loans are determined by us on the basis of our own
      pricing criteria and competitive market conditions.





While
      one- to four-family residential real estate loans are normally originated with
      up to 30-year terms, such loans typically remain outstanding for substantially
      shorter periods because borrowers often prepay their loans in full upon sale
      of
      the property pledged as security or upon refinancing the original loan.
      Therefore, average loan maturity is a function of, among other factors, the
      level of purchase and sale activity in the real estate market, prevailing
      interest rates and the interest rates payable on outstanding loans.





3


We
      generally do not make conventional loans with loan-to-value ratios exceeding
      95%
      at the time the loan is originated. Conventional loans with loan-to-value ratios
      in excess of 80% generally require private mortgage insurance or additional
      collateral. We require all properties securing mortgage loans to be appraised
      by
      a board-approved independent appraiser. We generally require title insurance
      on
      all first mortgage loans. All borrowers must obtain hazard insurance, and flood
      insurance is required for loans on properties located in a flood zone, before
      closing the loan.





***Multi-Family
      and Nonresidential Real Estate Loans.*** On a
      limited basis, we offer fixed-rate mortgage loans secured by multi-family and
      nonresidential real estate. Our multi-family and nonresidential real estate
      loans are generally secured by apartment buildings, small office buildings
      and
      owner-occupied properties. In addition to originating these loans, we also
      participate in loans with other financial institutions located primarily in
      the
      Commonwealth of Pennsylvania. Such participations include adjustable-rate
      mortgage loans originated by other institutions.





We
      originate fixed-rate multi-family and nonresidential real estate loans with
      terms up to 30 years. These loans are secured by first mortgages, and amounts
      generally do not exceed 80% of the property’s appraised value at the time the
      loan is originated.





***Home
      Equity Loans and Lines of Credit.*** We
      currently offer home equity loans with fixed interest rates for terms up to
      15
      years and maximum combined loan to value ratios of 80%. During 2007, we began
      to
      offer home equity lines of credit with a maximum loan to value ratio of 80%.
      We
      intend to begin offering loans with adjustable interest rates tied to a market
      index in our market area during 2008.




***Consumer
      Loans.*** We
      currently offer consumer loans in the form of education loans and, to a much
      lesser extent, loans secured by savings accounts or time deposits and secured
      personal loans.





The
      procedures for underwriting consumer loans include an assessment of the
      applicant’s payment history on other debts and ability to meet existing
      obligations and payments on the proposed loan. Although the applicant’s
      creditworthiness is a primary consideration, the underwriting process also
      includes a comparison of the value of the collateral, if any, to the proposed
      loan amount.





We
      offer
      education loans under the Federal Family Education Loan Program. Interest on
      these loans is an annual variable rate which currently may not exceed 9.0%.
      Such
      loans have terms of at least 10 years but no more than 15 years to repay their
      loans. An extended repayment plan is available in some circumstances. Those
      loans are insured against default by the Pennsylvania Higher Education
      Assistance Agency.





We
      offer
      consumer loans secured by deposit accounts with fixed interest rates and terms
      up to five years.





**Loan
      Underwriting Risks**




***Multi-Family
      and Nonresidential Real Estate Loans*** **.**  Loans
      secured by multi-family and nonresidential real estate generally have larger
      balances and involve a greater degree of risk than one- to four-family
      residential mortgage loans. Of primary concern in multi-family and
      nonresidential real estate lending is the borrower’s creditworthiness and the
      feasibility and cash flow potential of the project. Payments on loans secured
      by
      income properties often depend on successful operation and management of the
      properties. As a result, repayment of such loans may be subject to a greater
      extent than residential real estate loans to adverse conditions in the real
      estate market or the economy. To monitor cash flows on income properties, we
      generally require borrowers and loan guarantors, if any, to provide annual
      financial statements on multi-family and nonresidential real estate loans.
      In
      reaching a decision on whether to make a multi-family and nonresidential real
      estate loan, we consider the net operating income of the property, the
      borrower’s expertise, credit history and profitability and the value of the
      underlying property. We have generally required that the properties securing
      these real estate loans have debt service coverage ratios (the ratio of earnings
      before debt service to debt service) of at least 1.25x. Environmental surveys
      are obtained when circumstances suggest the possibility of the presence of
      hazardous materials.




4




We
      underwrite all loan participations to our own underwriting standards. In
      addition, we also consider the financial strength and reputation of the lead
      lender. To monitor cash flows on loan participations, we require the lead lender
      to provide annual financial statements for the borrower. We also conduct an
      annual internal loan review for all loan participations.




***Loan
      Originations, Purchases and Sales*** ***.*** Loan
      originations come from a number of sources. The primary sources of loan
      originations are existing customers, walk-in traffic, advertising and referrals
      from customers. We advertise in newspapers that are widely circulated in
      Montgomery, Bucks and Philadelphia Counties. Accordingly, when our rates are
      competitive, we attract loans from throughout Montgomery, Bucks and Philadelphia
      Counties. We occasionally purchase loans and participation interests in loans.
      We generally originate loans for portfolio and infrequently sell loans.




***Loan
      Approval Procedures and Authority*** ***.*** Our
      lending activities follow written, non-discriminatory, underwriting standards
      and loan origination procedures established by our board of directors and
      management. A loan committee consisting of officers of Polonia Bank has
      authority to approve all conforming one- to four-family loans and education
      loans. Designated loan officers have the authority to approve savings account
      loans. All other loans, generally consisting of non-conforming one- to
      four-family loans, jumbo loans, commercial real estate and employee loans must
      be approved by the board of directors.




***Loans
      to One Borrower.*** The
      maximum amount that we may lend to one borrower and the borrower’s related
      entities generally is limited, by regulation, to 15% of our stated capital
      and
      reserves. At December 31, 2007, our general regulatory limit on loans to one
      borrower was $3.1 million. At that date, our largest lending relationship was
      $2.0 million and was secured by one multi-family property and one one-to-four
      family property. These loans were performing in accordance with their original
      terms at December 31, 2007.




***Loan
      Commitments*** ***.*** We issue
      commitments for fixed-rate mortgage loans conditioned upon the occurrence of
      certain events. Commitments to originate mortgage loans are legally binding
      agreements to lend to our customers. Generally, our mortgage loan commitments
      expire after 60 days.




**Investment
      Activities**




We
      have
      legal authority to invest in various types of liquid assets, including U.S.
      Treasury obligations, securities of various federal agencies and municipal
      governments, mortgage-backed securities, deposits at the Federal Home Loan
      Bank
      (“FHLB”) of Pittsburgh and time deposits of federally insured institutions.
      Within certain regulatory limits, we also may invest a portion of our assets
      in
      mutual funds. We also are required to maintain an investment in FHLB of
      Pittsburgh stock. While we have the authority under applicable law to invest
      in
      derivative securities, our investment policy does not permit this investment.
      We
      had no investments in derivative securities at December 31, 2007.





At
      December 31, 2007, our investment portfolio totaled $45.9 million and consisted
      primarily of U.S. Government sponsored entity securities and mortgage-backed
      securities.




Our
      investment objectives are to provide and maintain liquidity, to establish an
      acceptable level of interest rate and credit risk, to provide an alternate
      source of low-risk investments when demand for loans is weak and to generate
      a
      favorable return. Our board of directors has the overall responsibility for
      the
      investment portfolio, including approval of our investment policy and
      appointment of the Asset/Liability and Investment Committee. Individual
      investment transactions are reviewed and ratified by our board of directors
      monthly.




**Deposit
      Activities and Other Sources of Funds**




***General.*** Deposits, borrowings and loan repayments are the major sources of our funds
      for
      lending and other investment purposes. Loan repayments are a relatively stable
      source of funds, while deposit inflows and outflows and loan prepayments are
      significantly influenced by general interest rates and money market conditions.





5


***Deposit
      Accounts.***  Substantially
      all of our depositors are residents of the Commonwealth of Pennsylvania.
      Deposits are attracted, by advertising and through our website, from within
      our
      market areas through the offering of a broad selection of deposit instruments,
      including non-interest-bearing demand accounts (such as checking accounts),
      interest-bearing accounts (such as NOW and money market accounts), regular
      savings accounts and time deposits. Generally, we do not utilize brokered funds.
      Deposit account terms vary according to the minimum balance required, the time
      periods the funds must remain on deposit and the interest rate, among other
      factors. In determining the terms of our deposit accounts, we consider the
      rates
      offered by our competition, our liquidity needs, profitability to us, matching
      deposit and loan products and customer preferences and concerns. We generally
      review our deposit mix and pricing weekly. Our current strategy is to offer
      competitive rates and to be in the middle to high-end of the market for rates
      on
      all types of deposit products.





***Borrowings.*** ****** We
      utilize advances from the FHLB of Pittsburgh to supplement our supply of funds
      for lending and investment. The FHLB functions as a central reserve bank
      providing credit for its member financial institutions. As a member, we are
      required to own capital stock in the FHLB and are authorized to apply for
      advances on the security of such stock and certain of our whole first mortgage
      loans and other assets (principally securities which are obligations of, or
      guaranteed by, the United States), provided certain standards related to
      creditworthiness have been met. Advances are made under several different
      programs, each having its own interest rate and range of maturities. Depending
      on the program, limitations on the amount of advances are based either on a
      fixed percentage of an institution’s net worth or on the FHLB’s assessment of
      the institution’s creditworthiness.





**Personnel**





As
      of
      December 31, 2007, we had 38 full-time employees and 5 part-time employees,
      none
      of whom is represented by a collective bargaining unit. We believe our
      relationship with our employees is good.





**Subsidiaries**





Polonia
      Bank has two wholly-owned subsidiaries, Polonia Bank Mutual Holding Company
      (“PBMHC”), a Delaware corporation, and Community Abstract Agency LLC, a
      Pennsylvania limited liability company. PBMHC was formed in 1997 to hold certain
      assets and conduct certain investment activities of Polonia Bank. Community
      Abstract Agency LLC was formed in 1999 to provide title insurance
      services.





**Risk
      Factors**





**We
      had operating losses during our last three full fiscal years. Continued losses
      will have an adverse impact on our stock price.**





We
      had
      net operating losses of $326,000, $219,000 and $651,000 for the years ended
      December 31, 2007, 2006 and 2005, respectively. The primary reasons for the
      operating losses in 2007 were the result of additional expenses related to
      operating as a public company. The primary reasons for the operating losses
      in
      2006 and 2005 were non-recurring transactions related to the restructuring
      of
      our investment portfolio which commenced in 2005 and due to the recognition
      of
      an other-than-temporary impairment related to the market value of mutual fund
      securities. Additionally, our net income was adversely affected by a $251,000
      prepayment penalty incurred in connection with the prepayment of an $11.0
      million, 5.59% Federal Home Loan Bank advance in 2005. We incurred non-recurring
      restructuring charges of $0, $167,000 and $640,000 for the years ended December
      31, 2007, 2006 and 2005, respectively. For the year ended December 31, 2007,
      our
      return on average assets was negative 0.17%.





**A
      downturn in the local economy or a decline in real estate values could hurt
      our
      earnings.**





Nearly
      all of our real estate loans are secured by real estate in the Philadelphia
      metropolitan area. As a result of this concentration, a downturn in the local
      economy could cause significant increases in nonperforming loans, which would
      hurt our earnings. In recent years, there has been a significant increase in
      real estate values in our market area. As a result of rising home prices, our
      loans have been well-collateralized. A decline in real estate values could
      cause
      some of our mortgage loans to become inadequately collateralized, which would
      expose us to a greater risk of loss. For a discussion of our market areas,
      see
“ *Our
      Business—Market Areas* .”





6




**Fluctuations
      in interest rates may hurt our earnings and asset value.**





Short-term
      market interest rates (which we use as a guide to price our deposits) have
      recently risen from historically low levels and have repriced upwards faster
      than longer-term market interest rates (which we use as a guide to price our
      longer-term loans) have not. This “flattening” of the market yield curve has had
      a negative impact on our interest rate spread and net interest margin and,
      if
      rates on our deposits and borrowings continue to reprice upwards faster than
      the
      rates on our long-term loans and investments, we will continue to experience
      compression of our interest rate spread and net interest margin, which would
      have a negative effect on our profitability. During the year ended December
      31,
      2007, our net interest spread and net interest margin were 2.19% and 2.53%,
      respectively, compared to 2.67% and 2.78% during the same period in 2006.





Changes
      in interest rates also affect the value of our interest-earning assets, and
      in
      particular our securities portfolio. Generally, the value of fixed-rate
      securities fluctuates inversely with changes in interest rates. Unrealized
      gains
      and losses on securities available for sale are reported as a separate component
      of equity, net of tax. Decreases in the fair value of securities available
      for
      sale resulting from increases in interest rates could have an adverse effect
      on
      stockholders’ equity. Based on information we provide to the OTS, assuming 100,
      200 and 300 basis point increases in interest rates, our net portfolio value
      would experience declines of 16.0%, 35.0% and 53.0%, respectively, at December
      31, 2007. For further discussion of how changes in interest rates could impact
      us, see “ *Management’s
      Discussion and Analysis of Results of Operations and Financial Condition—Risk
      Management—Interest Rate Risk Management* .”





**Our
      cost of operations is high relative to our assets. Our failure to maintain
      or
      reduce our operating expenses could hurt our profits.** ****





Our
      operating expenses, which consist primarily of salaries and employee benefits,
      occupancy, furniture and equipment expense, professional fees and data
      processing expense, totaled $5.9 million and $5.4 million for the years ended
      December 31, 2007 and 2006, respectively. Our ratio of non-interest expense
      to
      average total assets was 2.99% and 3.17% for the years ended December 31, 2007
      and 2006, respectively. Our efficiency ratio totaled 108.45% for 2007 compared
      to 107.26% for 2006. The increase in expenses during 2007 was primarily due
      to
      higher professional fees associated with operating as a public company. The
      failure to reduce our expenses could hurt our profits.





**A
      significant percentage of our assets are invested in securities which typically
      have a lower yield than our loan portfolio.**





Our
      results of operations are substantially dependent on our net interest income,
      which is the difference between the interest income earned on our
      interest-earning assets and the interest expense paid on our interest-bearing
      liabilities. At December 31, 2007, 22.9% of our assets were invested in
      investment and mortgage-backed securities. These investments yield substantially
      less than the loans we hold in our portfolio. While we have recently
      restructured our investment portfolio to increase our investment in higher
      yielding securities and, depending on market conditions, intend to invest a
      greater proportion of our assets in loans with the goal of increasing our net
      interest income, there can be no assurance that we will be able to increase
      the
      origination or purchase of loans acceptable to us or that we will be able to
      successfully implement this strategy.





**Strong
      competition within our market areas could hurt our profits and slow
      growth.**





We
      face
      intense competition both in making loans and attracting deposits. This
      competition has made it more difficult for us to make new loans and at times
      has
      forced us to offer higher deposit rates. Price competition for loans and
      deposits might result in us earning less on our loans and paying more on our
      deposits, which would reduce net interest income. Competition also makes it
      more
      difficult to grow loans and deposits. As of December 31, 2007, we held less
      than 1.0 % of the deposits in the Philadelphia metropolitan area. Competition
      also makes it more difficult to hire and retain experienced employees. Some
      of
      the institutions with which we compete have substantially greater resources
      and
      lending limits than we have and may offer services that we do not provide.
      We
      expect competition to increase in the future as a result of legislative,
      regulatory and technological changes and the continuing trend of consolidation
      in the financial services industry. Our profitability depends upon our continued
      ability to compete successfully in our market areas. For more information about
      our market areas and the competition we face, see *“Our
      Business—Market Areas”* and *“Our
      Business—Competition.”*





7




**We
      operate in a highly regulated environment and we may be adversely affected
      by
      changes in laws and regulations.**





We
      are
      subject to extensive regulation, supervision and examination by the OTS, our
      primary federal regulator, and by the FDIC, as insurer of our deposits. Polonia
      MHC, Polonia Bancorp and Polonia Bank are all subject to regulation and
      supervision by the OTS. Such regulation and supervision governs the activities
      in which an institution and its holding company may engage, and are intended
      primarily for the protection of the insurance fund and the depositors and
      borrowers of Polonia Bank rather than for holders of Polonia Bancorp common
      stock. Regulatory authorities have extensive discretion in their supervisory
      and
      enforcement activities, including the imposition of restrictions on our
      operations, the classification of our assets and determination of the level
      of
      our allowance for loan losses. Any change in such regulation and oversight,
      whether in the form of regulatory policy, regulations, legislation or
      supervisory action, may have a material impact on our operations.





**Our
      low return on equity may negatively impact the value of our common
      stock.**





Return
      on
      equity, which equals net income divided by average equity, is a ratio used
      by
      many investors to compare the performance of a particular company with other
      companies. For the year ended December 31, 2007, our annualized return on equity
      was negative 1.37%. Over time, we intend to use the net proceeds from our recent
      stock offering to increase earnings per share and book value per share, without
      assuming undue risk, with the goal of achieving a return on equity that is
      competitive with other publicly held subsidiaries of mutual holding companies.
      This goal could take a number of years to achieve, and we cannot assure you
      that
      it will be attained. Consequently, you should not expect a competitive return
      on
      equity in the near future. Failure to achieve a competitive return on equity
      might make an investment in our common stock unattractive to some investors
      and
      might cause our common stock to trade at lower prices than comparable companies
      with higher returns on equity.





**Polonia
      MHC’s majority control of our common stock will enable it to exercise voting
      control over most matters put to a vote of stockholders and will prevent
      stockholders from forcing a sale or a second-step conversion transaction you
      may
      find advantageous.**





Polonia
      MHC owns a majority of Polonia Bancorp’s common stock and, through its board of
      directors, is able to exercise voting control over most matters put to a vote
      of
      stockholders. The same directors and officers who manage Polonia Bancorp and
      Polonia Bank also manage Polonia MHC. As a federally chartered mutual holding
      company, the board of directors of Polonia MHC must ensure that the interests
      of
      depositors of Polonia Bank are represented and considered in matters put to
      a
      vote of stockholders of Polonia Bancorp. Therefore, the votes cast by Polonia
      MHC may not be in your personal best interests as a stockholder. For example,
      Polonia MHC may exercise its voting control to defeat a stockholder nominee
      for
      election to the board of directors of Polonia Bancorp. In addition, stockholders
      will not be able to force a merger or second-step conversion transaction without
      the consent of Polonia MHC since such transactions also require, under federal
      corporate law, the approval of at least two-thirds of all outstanding voting
      stock which can only be achieved if Polonia MHC voted to approve such
      transactions. Some stockholders may desire a sale or merger transaction, since
      stockholders typically receive a premium for their shares, or a second-step
      conversion transaction, since, on a fully converted basis most full stock
      institutions tend to trade at higher multiples than mutual holding companies.
      Stockholders could, however, prevent a second step conversion or the
      implementation of equity incentive plans as under current Office of Thrift
      Supervision regulations and policies, such matters also require the separate
      approval of the stockholders other than Polonia MHC.





**Office
      of Thrift Supervision policy on remutualization transactions could prohibit
      acquisition of Polonia Bancorp, which may adversely affect our stock
      price.**





Current
      Office of Thrift Supervision regulations permit a mutual holding company to
      be
      acquired by a mutual institution in a remutualization transaction. The
      possibility of a remutualization transaction has resulted in a degree of
      takeover speculation for mutual holding companies that is reflected in the
      per
      share price of mutual holding companies’ common stock. However, the Office of
      Thrift Supervision has issued a policy statement indicating that it views
      remutualization transactions as raising significant issues concerning disparate
      treatment of minority stockholders and mutual members of the target entity
      and
      raising issues concerning the effect on the mutual members of the acquiring
      entity. Under certain circumstances, the Office of Thrift Supervision intends
      to
      give these issues special scrutiny and reject applications providing for the
      remutualization of a mutual holding company unless the applicant can clearly
      demonstrate that the Office of Thrift Supervision’s concerns are not warranted
      in the particular case. Should the Office of Thrift Supervision prohibit or
      otherwise restrict these transactions in the future, our per share stock price
      may be adversely affected. In addition, Office of Thrift Supervision regulations
      prohibit, for three years following completion of the offering, the acquisition
      of more than 10% of any class of equity security issued by us without the prior
      approval of the Office of Thrift Supervision.





8




**Office
      of Thrift Supervision regulations and anti-takeover provisions in our charter
      restrict the accumulation of our common stock, which may adversely affect our
      stock price.**





Office
      of
      Thrift Supervision regulations provide that for a period of three years
      following the date of the completion of the reorganization, no person, acting
      alone, together with associates or in a group of persons acting in concert,
      will
      directly or indirectly offer to acquire or acquire the beneficial ownership
      of
      more than 10% of our common stock without the prior written approval of the
      Office of Thrift Supervision. In addition, Polonia Bancorp’s charter provides
      that, for a period of five years from the date of the reorganization, no person,
      other than Polonia MHC, may acquire directly or indirectly the beneficial
      ownership of more than 10% of any class of any equity security of Polonia
      Bancorp. In the event a person acquires shares in violation of this charter
      provision, all shares beneficially owned by such person in excess of 10% will
      be
      considered “excess shares” and will not be counted as shares entitled to vote or
      counted as voting shares in connection with any matters submitted to the
      stockholders for a vote. These factors make it more difficult and less
      attractive for stockholders to acquire a significant amount of our common stock,
      which may adversely affect our stock price.




**Regulation
      and Supervision**


**General**





As
      a
      federal mutual holding company, Polonia MHC is required by federal law to report
      to, and otherwise comply with the rules and regulations of, the OTS. Polonia
      Bancorp as a federally chartered corporation, is also subject to reporting
      to
      and regulation by the OTS. Polonia Bank, as an insured federal savings
      association, is subject to extensive regulation, examination and supervision
      by
      the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer.
      Polonia Bank is a member of the FHLB System and, with respect to deposit
      insurance, of the Deposit Insurance Fund managed by the FDIC. Polonia Bank
      must
      file reports with the OTS and the FDIC concerning its activities and financial
      condition in addition to obtaining regulatory approvals prior to entering into
      certain transactions such as mergers with, or acquisitions of, other savings
      associations. The OTS and/or the FDIC conduct periodic examinations to test
      the
      Bank’s safety and soundness and compliance with various regulatory requirements.
      This regulation and supervision establishes a comprehensive framework of
      activities in which an institution can engage and is intended primarily for
      the
      protection of the insurance fund and depositors. The regulatory structure also
      gives the regulatory authorities extensive discretion in connection with their
      supervisory and enforcement activities and examination policies, including
      policies with respect to the classification of assets and the establishment
      of
      adequate loan loss reserves for regulatory purposes. Any change in such
      regulatory requirements and policies, whether by the OTS, the FDIC or Congress,
      could have a material adverse impact on Polonia MHC, Polonia Bancorp and Polonia
      Bank and their operations. Certain regulatory requirements applicable to Polonia
      MHC, Polonia Bancorp and Polonia Bank are referred to below or elsewhere herein.
      The description of statutory provisions and regulations applicable to savings
      associations and their holding companies set forth below and elsewhere in this
      document does not purport to be a complete description of such statutes and
      regulations and their effects on Polonia MHC, Polonia Bancorp and Polonia Bank
      and is qualified in its entirety by reference to the actual statutes and
      regulations.





**Holding
      Company Regulation**





***General.*** Polonia
      MHC and Polonia Bancorp are savings and loan holding companies within the
      meaning of federal law. As such, Polonia MHC and Polonia Bancorp are registered
      with the OTS and are subject to OTS regulations, examinations, supervision
      and
      reporting requirements. In addition, the OTS has enforcement authority over
      Polonia MHC and Polonia Bancorp and their non-savings association subsidiaries.
      Among other things, this authority permits the OTS to restrict or prohibit
      activities that are determined to be a serious risk to Polonia Bank.





9


***Activities
      Restrictions Applicable to Mutual Holding Companies.*** Pursuant
      to federal law and OTS regulations, a mutual holding company, such as Polonia
      MHC, may engage in the following activities: (i) investing in the stock of
      a
      savings association; (ii) acquiring a mutual association through the merger
      of
      such association into a savings association subsidiary of such holding company
      or an interim savings association subsidiary of such holding company; (iii)
      merging with or acquiring another holding company, one of whose subsidiaries
      is
      a savings association; (iv) investing in a corporation, the capital stock of
      which is available for purchase by a savings association under federal law
      or
      under the law of any state where the subsidiary savings association or
      associations share their home offices; (v) furnishing or performing management
      services for a savings association subsidiary of such company; (vi) holding,
      managing or liquidating assets owned or acquired from a savings subsidiary
      of
      such company; (vii) holding or managing properties used or occupied by a savings
      association subsidiary of such company properties used or occupied by a savings
      association subsidiary of such company; (viii) acting as trustee under deeds
      of
      trust; (ix) any other activity (A) that the Federal Reserve Board, by
      regulation, has determined to be permissible for bank holding companies under
      Section 4(c) of the Bank Holding Company Act, unless the OTS, by regulation,
      prohibits or limits any such activity for savings and loan holding companies;
      or
      (B) in which multiple savings and loan holding companies were authorized (by
      regulation) to directly engage on March 5, 1987; and (x) purchasing, holding,
      or
      disposing of stock acquired in connection with a qualified stock issuance if
      the
      purchase of such stock by such savings and loan holding company is approved
      by
      the OTS.





The
      Gramm-Leach Bliley Act of 1999 was designed to modernize the regulation of
      the
      financial services industry by expanding the ability of bank holding companies
      to affiliate with other types of financial services companies such as insurance
      companies and investment banking companies. The legislation also expanded the
      activities permitted for mutual savings and loan holding companies to also
      include any activity permitted a “financial holding company” under the
      legislation, including a broad array of insurance and securities
      activities.





Federal
      law prohibits a savings and loan holding company, including a federal mutual
      holding company, from, directly or indirectly or through one or more
      subsidiaries, acquiring more than 5% of the voting stock of another savings
      association, or savings and loan holding company thereof, without prior written
      approval of the OTS from acquiring or retaining, with certain exceptions, more
      than 5% of a non-subsidiary holding company or savings association. A savings
      and loan holding company is also prohibited from acquiring more than 5% of
      a
      company engaged in activities other than those authorized by federal law or
      acquiring or retaining control of a depository institution that is not insured
      by the FDIC. In evaluating applications by holding companies to acquire savings
      associations, the OTS must consider the financial and managerial resources
      and
      future prospects of the company and institution involved, the effect of the
      acquisition on the risk to the insurance funds, the convenience and needs of
      the
      community and competitive factors.





The
      OTS
      is prohibited from approving any acquisition that would result in a multiple
      savings and loan holding company controlling savings associations in more than
      one state, except: (i) the approval of interstate supervisory acquisitions
      by savings and loan holding companies; and (ii) the acquisition of a
      savings association in another state if the laws of the state of the target
      savings association specifically permit such acquisitions. The states vary
      in
      the extent to which they permit interstate savings and loan holding company
      acquisitions.





Although
      savings and loan holding companies are not currently subject to regulatory
      capital requirements or specific restrictions on the payment of dividends or
      other capital distributions, federal regulations do prescribe such restrictions
      on subsidiary savings associations. Polonia Bank must notify the OTS 30 days
      before declaring any dividend and comply with the additional restrictions
      described below. In addition, the financial impact of a holding company on
      its
      subsidiary institution is a matter that is evaluated by the OTS and the agency
      has authority to order cessation of activities or divestiture of subsidiaries
      deemed to pose a threat to the safety and soundness of the
      institution.





***Stock
      Holding Company Subsidiary Regulation.*** The OTS
      has adopted regulations governing the two-tier mutual holding company form
      of
      organization and mid-tier stock holding companies that are controlled by mutual
      holding companies. We have adopted this form of organization, where Polonia
      Bancorp is the stock holding company subsidiary of Polonia MHC. Under the rules,
      Polonia Bancorp holds all the shares of Polonia Bank and issues the majority
      of
      its own shares to Polonia MHC. In addition, Polonia Bancorp is permitted to
      engage in activities that are permitted for Polonia MHC subject to the same
      terms and conditions. Finally, OTS regulations specify that Polonia Bancorp
      must
      be federally chartered for supervisory reasons.





10


***Waivers
      of Dividends.*** OTS
      regulations require mutual holding companies to notify the agency if they
      propose to waive receipt of dividends from their stock holding company
      subsidiary. The OTS reviews dividend waiver notices on a case-by-case basis
      and,
      in general, does not object to a waiver if: (i) the waiver would not be
      detrimental to the safe and sound operation of the savings association; and
      (ii)
      the mutual holding company’s board of directors determines that their waiver is
      consistent with such directors’ fiduciary duties to the mutual holding company’s
      members. We anticipate that Polonia MHC will waive dividends that Polonia
      Bancorp may pay, if any.





***Conversion
      to Stock Form.*** ** OTS
      regulations permit Polonia MHC to convert from the mutual form of organization
      to the capital stock form of organization. There can be no assurance when,
      if
      ever, a conversion transaction will occur and the Board of Directors has no
      present intention or plan to undertake a conversion transaction. In a conversion
      transaction, a new holding company would be formed as the successor to Polonia
      Bancorp, Polonia MHC’s corporate existence would end and certain depositors in
      Polonia Bank would receive a right to subscribe for shares of a new holding
      company. In a conversion transaction, each share of common stock held by
      stockholders other than Polonia MHC would be automatically converted into a
      number of shares of common stock of the new holding company based on an exchange
      ratio designed to ensure that stockholders other than Polonia MHC own the same
      percentage of common stock in the new holding company as they owned in Polonia
      Bancorp immediately before conversion. The total number of shares held by
      stockholders other than Polonia MHC after a conversion transaction would be
      increased by any purchases by such stockholders in the stock offering conducted
      as part of the conversion transaction.





***Acquisition
      of the Company.*** **** Under
      the
      Federal Change in Control Act, a notice must be submitted to the OTS if any
      person (including a company), or group acting in concert, seeks to acquire
      direct or indirect “control” of a savings and loan holding company or savings
      association. Under certain circumstances, a change of control may occur, and
      prior notice is required, upon the acquisition of 10% or more of the outstanding
      voting stock of the company or institution, unless the OTS has found that the
      acquisition will not result in a change of control of the Company. Under the
      Change in Control Act, the OTS generally has 60 days from the filing of a
      complete notice to act, taking into consideration certain factors, including
      the
      financial and managerial resources of the acquirer and the anti-trust effects
      of
      the acquisition. Any company that acquires control would then be subject to
      regulation as a savings and loan holding company.





**Federal
      Savings Association Regulation**





***Business
      Activities.*** The
      activities of federal savings banks are governed by federal law and regulations.
      Those laws and regulations delineate the nature and extent of the business
      activities in which federal savings bank may engage. In particular, certain
      lending authority for federal savings banks, *e.g.* ,
      commercial, non-residential real property loans and consumer loans, is limited
      to a specified percentage of the institution’s capital or assets.





***Capital
      Requirements.*** The OTS
      capital regulations require savings associations to meet three minimum capital
      standards: a 1.5% tangible capital to total assets ratio; a 4% Tier 1 capital
      to
      total assets leverage ratio (3% for institutions receiving the highest rating
      on
      the CAMELS examination rating system); and an 8% risk-based capital ratio.
      In
      addition, the prompt corrective action standards discussed below also establish,
      in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3%
      for
      institutions receiving the highest rating on the CAMELS system) and, together
      with the risk-based capital standard itself, a 4% Tier 1 risk-based capital
      standard. The OTS regulations also require that, in meeting the tangible,
      leverage and risk-based capital standards, institutions must generally deduct
      investments in and loans to subsidiaries engaged in activities as principal
      that
      are not permissible for a national bank.





The
      risk-based capital standard for savings associations requires the maintenance
      of
      Tier 1 (core) and total capital (which is defined as core capital and
      supplementary capital, less certain specified deductions from total capital
      such
      as reciprocal holdings of depository institution capital, instruments and equity
      investments) to risk-weighted assets of at least 4% and 8%, respectively. In
      determining the amount of risk-weighted assets, all assets, including certain
      off-balance sheet activities, recourse obligations, residual interests and
      direct credit substitutes, are multiplied by a risk-weight factor of 0% to
      100%,
      assigned by the OTS capital regulation based on the risks believed inherent
      in
      the type of asset. Core (Tier 1) capital is generally defined as common
      stockholders’ equity (including retained earnings), certain non-cumulative
      perpetual preferred stock and related surplus, and minority interests in equity
      accounts of consolidated subsidiaries less intangibles other than certain
      mortgage servicing rights and credit card relationships. The components of
      supplementary capital (Tier 2 capital) currently include cumulative preferred
      stock, long-term perpetual preferred stock, mandatory convertible securities,
      subordinated debt and intermediate preferred stock, the allowance for loan
      and
      lease losses, limited to a maximum of 1.25% of risk-weighted assets, and up
      to
      45% of unrealized gains on available-for-sale equity securities with readily
      determinable fair market values. Overall, the amount of supplementary capital
      included as part of total capital cannot exceed 100% of core
      capital.





11


The
      OTS
      also has authority to establish individual minimum capital requirements in
      appropriate cases upon a determination that an institution’s capital level is or
      may become inadequate in light of the particular circumstances. At December
      31,
      2007, Polonia Bank met each of its capital requirements.





The
      following table presents Polonia Bank’s capital position at December 31, 2007.





**Capital****Actual**
            
            **Required**
            
            **Excess****(Dollars
                in thousands)**Tangible
            
            $
            20,139
            
            $
            4,016
            
            $
            16,123Tier
                1/Leverage
            
            
            20,139
            
            
            8,031
            
            
            12,108Tier
                1/Risk-based
            
            
            20,139
            
            
            3,856
            
            
            16,283Total/Risk-based
            
            
            20,870
            
            
            7,711
            
            
            13,159





***Prompt
      Corrective Regulatory Action.*** ** The OTS
      is required to take certain supervisory actions against undercapitalized
      institutions, the severity of which depends upon the institution’s degree of
      undercapitalization. Generally, a savings association that has a ratio of total
      capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core)
      capital to risk-weighted assets of less than 4% or a ratio of core capital
      to
      total assets of less than 4% (3% or less for institutions with the highest
      examination rating) is considered to be “undercapitalized.” A savings
      association that has a total risk-based capital ratio less than 6%, a Tier
      1
      capital ratio of less than 3% or a leverage ratio that is less than 3% is
      considered to be “significantly undercapitalized” and a savings association that
      has a tangible capital to assets ratio equal to or less than 2% is deemed to
      be
“critically undercapitalized.” Subject to a narrow exception, the OTS is
      required to appoint a receiver or conservator within specified time frames
      for
      an institution that is “critically undercapitalized.” The regulation also
      provides that a capital restoration plan must be filed with the OTS within
      45
      days of the date a savings association is deemed to have received notice that
      it
      is “undercapitalized,” “significantly undercapitalized” or “critically
      undercapitalized.” Compliance with the plan must be guaranteed by any parent
      holding company in an amount of up to the lesser of 5% of the savings
      association’s total assets when it was deemed to be undercapitalized or the
      amount necessary to achieve compliance with applicable capital regulations.
      In
      addition, numerous mandatory supervisory actions become immediately applicable
      to an undercapitalized institution, including, but not limited to, increased
      monitoring by regulators and restrictions on growth, capital distributions
      and
      expansion. The OTS could also take any one of a number of discretionary
      supervisory actions, including the issuance of a capital directive and the
      replacement of senior executive officers and directors. Significantly and
      undercapitalized institutions are subject to additional mandatory and
      discretionary restrictions.





***Insurance
      of Deposit Accounts.***  Polonia
      Bank’s deposits are insured up to applicable limits by the Deposit Insurance
      Fund of the FDIC. The Deposit Insurance Fund is the successor to the Bank
      Insurance Fund and the Savings Association Insurance Fund, which were merged
      in
      2006. The FDIC recently amended its risk-based assessment system for 2007 to
      implement authority granted by the Federal Deposit Insurance Reform Act of
      2005
      (“Reform Act”). Under the revised system, insured institutions are assigned to
      one of four risk categories based on supervisory evaluations, regulatory capital
      levels and certain other factors. An institution’s assessment rate depends upon
      the category to which it is assigned. Risk category I, which contains the least
      risky depository institutions, is expected to include more than 90% of all
      institutions. Unlike the other categories, Risk Category I contains further
      risk
      differentiation based on the FDIC’s analysis of financial ratios, examination
      component ratings and other information. Assessment rates are determined by
      the
      FDIC and currently range from five to seven basis points for the healthiest
      institutions (Risk Category I) to 43 basis points of assessable deposits for
      the
      riskiest (Risk Category IV). The FDIC may adjust rates uniformly from one
      quarter to the next, except that no single adjustment can exceed three basis
      points. No institution may pay a dividend if in default of its FDIC
      assessment.





12


The
      Reform Act also provided for a one-time credit for eligible institutions based
      on their assessment base as of December 31, 1996. Subject to certain
      limitations, credits could be used beginning in 2007 to offset assessments
      until
      exhausted. The Bank’s one-time credit approximated $143,000. The Reform Act also
      provided for the possibility that the FDIC may pay dividends to insured
      institutions once the Deposit Insurance fund reserve ratio equals or exceeds
      1.35% of estimated insured deposits.





In
      addition to the assessment for deposit insurance, institutions are required
      to
      make payments on bonds issued in the late 1980s by the Financing Corporation
      to
      recapitalize a predecessor deposit insurance fund. That payment is established
      quarterly and during the calendar year ending December 31, 2007 averaged 1.18
      basis points of assessable deposits.





The
      Reform Act provided the FDIC with authority to adjust the Deposit Insurance
      Fund
      ratio to insured deposits within a range of 1.15% and 1.50%, in contrast to
      the
      prior statutorily fixed ratio of 1.25%. The ratio, which is viewed by the FDIC
      as the level that the fund should achieve, was established by the agency at
      1.25% for 2008, which is unchanged from 2007.





The
      FDIC
      has authority to increase insurance assessments. A significant increase in
      insurance premiums would likely have an adverse effect on the operating expenses
      and results of operations of Polonia Bank. Management cannot predict what
      insurance assessment rates will be in the future.





Insurance
      of deposits may be terminated by the FDIC upon a finding that the institution
      has engaged in unsafe or unsound practices, is in an unsafe or unsound condition
      to continue operations or has violated any applicable law, regulation, rule,
      order or condition imposed by the FDIC or the OTS. The management of Polonia
      Bank does not know of any practice, condition or violation that might lead
      to
      termination of deposit insurance.





***Loans
      to One Borrower.*** Federal
      law provides that savings associations are generally subject to the limits
      on
      loans to one borrower applicable to national banks. Generally, subject to
      certain exceptions, a savings association may not make a loan or extend credit
      to a single or related group of borrowers in excess of 15% of its unimpaired
      capital and surplus. An additional amount may be lent, equal to 10% of
      unimpaired capital and surplus, if secured by specified readily-marketable
      collateral.





***QTL
      Test.*** Federal
      law requires savings associations to meet a qualified thrift lender test. Under
      the test, a savings association is required to either qualify as a “domestic
      building and loan association” under the Internal Revenue Code or maintain at
      least 65% of its “portfolio assets” (total assets less: (i) specified liquid
      assets up to 20% of total assets; (ii) intangibles, including goodwill; and
      (iii) the value of property used to conduct business) in certain “qualified
      thrift investments” (primarily residential mortgages and related investments,
      including certain mortgage-backed securities but also defined to include
      education, credit card and small business loans) in at least 9 months out of
      each 12 month period. Recent legislation has expanded the extent to which
      education loans, credit card loans and small business loans may be considered
      “qualified thrift investments.”





A
      savings
      association that fails the qualified thrift lender test is subject to certain
      operating restrictions and may be required to convert to a bank charter. As
      of
      December 31, 2007, Polonia Bank maintained 90.7% of its portfolio assets in
      qualified thrift investments and, therefore, met the qualified thrift lender
      test.





***Limitation
      on Capital Distributions.*** OTS
      regulations impose limitations upon all capital distributions by a savings
      association, including cash dividends, payments to repurchase its shares and
      payments to shareholders of another institution in a cash-out merger. Under
      the
      regulations, an application to and prior approval of the OTS is required prior
      to any capital distribution if the institution does not meet the criteria for
      “expedited treatment” of applications under OTS regulations ( *i.e.* ,
      generally, examination and Community Reinvestment Act ratings in the two top
      categories), the total capital distributions for the calendar year exceed net
      income for that year plus the amount of retained net income for the preceding
      two years, the institution would be undercapitalized following the distribution
      or the distribution would otherwise be contrary to a statute, regulation or
      agreement with the OTS. If an application is not required, the institution
      must
      still provide prior notice to the OTS of the capital distribution if, like
      Polonia Bank, it is a subsidiary of a holding company. In the event Polonia
      Bank’s capital fell below its regulatory requirements or the OTS notified it
      that it was in need of increased supervision, Polonia Bank’s ability to make
      capital distributions could be restricted. In addition, the OTS could prohibit
      a
      proposed capital distribution by any institution, which would otherwise be
      permitted by the regulation, if the OTS determines that such distribution would
      constitute an unsafe or unsound practice.





13


***Standards
      for Safety and Soundness.*** The
      federal banking agencies have adopted Interagency Guidelines prescribing
      Standards for Safety and Soundness in various areas such as internal controls
      and information systems, internal audit, loan documentation and credit
      underwriting, interest rate exposure, asset growth and quality, earnings and
      compensation, fees and benefits. The guidelines set forth the safety and
      soundness standards that the federal banking agencies use to identify and
      address problems at insured depository institutions before capital becomes
      impaired. If the OTS determines that a savings association fails to meet any
      standard prescribed by the guidelines, the OTS may require the institution
      to
      submit an acceptable plan to achieve compliance with the standard.





***Transactions
      with Related Parties.*** The
      Bank’s authority to engage in transactions with “affiliates” ( *e.g* .,
      any
      entity that controls or is under common control with an institution, including
      Polonia MHC, Polonia Bancorp and their other subsidiaries) is limited by federal
      law. The aggregate amount of covered transactions with any individual affiliate
      is limited to 10% of the capital and surplus of the savings association. The
      aggregate amount of covered transactions with all affiliates is limited to
      20%
      of the savings association’s capital and surplus. Certain transactions with
      affiliates are required to be secured by collateral in an amount and of a type
      specified by federal law. The purchase of low quality assets from affiliates
      is
      generally prohibited. The transactions with affiliates must be on terms and
      under circumstances that are at least as favorable to the institution as those
      prevailing at the time for comparable transactions with non-affiliated
      companies. In addition, savings associations are prohibited from lending to
      any
      affiliate that is engaged in activities that are not permissible for bank
      holding companies and no savings association may purchase the securities of
      any
      affiliate other than a subsidiary.





The
      Sarbanes-Oxley Act of 2002 generally prohibits loans by a company to its
      executive officers and directors. However, the law contains a specific exception
      for loans by a depository institution like Polonia Bank to its executive
      officers and directors in compliance with federal banking laws. Under such
      laws,
      Polonia Bank’s authority to extend credit to executive officers, directors and
      10% shareholders (“insiders”), as well as entities such persons control, is
      limited. The laws limit both the individual and aggregate amount of loans that
      Polonia Bank may make to insiders based, in part, on Polonia Bank’s capital
      level and requires that certain board approval procedures be followed. Such
      loans are required to be made on terms substantially the same as those offered
      to unaffiliated individuals and not involve more than the normal risk of
      repayment. There is an exception for loans made pursuant to a benefit or
      compensation program that is widely available to all employees of the
      institution and does not give preference to insiders over other employees.
      Loans
      to executive officers are subject to additional restrictions based on the type
      of loan involved.





***Enforcement.*** **** The OTS
      has primary enforcement responsibility over savings associations and has the
      authority to bring actions against the institution and all
      institution-affiliated parties, including stockholders, and any attorneys,
      appraisers and accountants who knowingly or recklessly participate in wrongful
      action likely to have an adverse effect on an insured institution. Formal
      enforcement action may range from the issuance of a capital directive or cease
      and desist order to removal of officers and/or directors to institution of
      receivership, conservatorship or termination of deposit insurance. Civil
      penalties cover a wide range of violations and can amount to $25,000 per day,
      or
      even $1 million per day in especially egregious cases. The FDIC has the
      authority to recommend to the Director of the OTS that enforcement action to
      be
      taken with respect to a particular savings association. If action is not taken
      by the Director, the FDIC has authority to take such action under certain
      circumstances. Federal law also establishes criminal penalties for certain
      violations.





***Assessments.*** **** Savings
      associations are required to pay assessments to the OTS to fund the agency’s
      operations. The general assessments, paid on a semi-annual basis, are computed
      based upon the savings association’s (including consolidated subsidiaries) total
      assets, condition and complexity of portfolio. The OTS assessments paid by
      the
      Bank for the fiscal year ended December 31, 2007 totaled $76,000.





14




**Federal
      Home Loan Bank System**





Polonia
      Bank is a member of the FHLB System, which consists of 12 regional FHLBs. The
      FHLB provides a central credit facility primarily for member institutions.
      Polonia Bank, as a member of the FHLB, is required to acquire and hold shares
      of
      capital stock in that FHLB. Polonia Bank was in compliance with this requirement
      with an investment in FHLB stock at December 31, 2007 of $1.3 million.





The
      FHLBs
      are required to provide funds for the resolution of insolvent thrifts in the
      late 1980s and to contribute funds for affordable housing programs. These
      requirements could reduce the amount of dividends that the FHLBs pay to their
      members and could also result in the FHLBs imposing a higher rate of interest
      on
      advances to their members. If dividends were reduced, or interest on future
      FHLB
      advances increased, Polonia Bank’s net interest income would likely also be
      reduced.





**Federal
      Reserve System**





The
      Federal Reserve Board regulations require savings associations to maintain
      non-interest earning reserves against their transaction accounts (primarily
      Negotiable Order of Withdrawal (NOW) and regular checking accounts). The
      regulations generally provide that reserves be maintained against aggregate
      transaction accounts as follows: a 3% reserve ratio is assessed on net
      transaction accounts up to and including $43.9 million; a 10% reserve ratio
      is
      applied above $43.9 million. The first $9.3 million of otherwise reservable
      balances (subject to adjustments by the Federal Reserve Board) are exempted
      from
      the reserve requirements. The amounts are adjusted annually. Polonia Bank
      complies with the foregoing requirements.





**Federal
      and State Taxation**





**Federal
      Income Taxation**





***General.*** ****** We
      report
      our income on a fiscal year basis using the accrual method of accounting. The
      federal income tax laws apply to us in the same manner as to other corporations
      with some exceptions, including our reserve for bad debts discussed below.
      The
      following discussion of tax matters is intended only as a summary and does
      not
      purport to be a comprehensive description of the tax rules applicable to us.
      For
      its 2007 year, Polonia Bancorp’s maximum federal income tax rate was 34%.





***Bad
      Debt Reserves.*** ****** For
      fiscal years beginning before June 30, 1996, thrift institutions that qualified
      under certain definitional tests and other conditions of the Internal Revenue
      Code were permitted to use certain favorable provisions to calculate their
      deductions from taxable income for annual additions to their bad debt reserve.
      A
      reserve could be established for bad debts on qualifying real property loans,
      generally secured by interests in real property improved or to be improved,
      under the percentage of taxable income method or the experience method. The
      reserve for nonqualifying loans was computed using the experience method.
      Federal legislation enacted in 1996 repealed the reserve method of accounting
      for bad debts and the percentage of taxable income method for tax years
      beginning after 1995 and require savings institutions to recapture or take
      into
      income certain portions of their accumulated bad debt reserves. Approximately
      $1.4 million of our accumulated bad debt reserves would not be recaptured into
      taxable income unless Polonia Bank makes a “non-dividend distribution” to
      Polonia Bancorp as described below.




***Distributions*** ***.*** If
      Polonia Bank makes “non-dividend distributions” to Polonia Bancorp, the
      distributions will be considered to have been made from Polonia Bank’s
      unrecaptured tax bad debt reserves, including the balance of its reserves as
      of
      December 31, 1987, to the extent of the “non-dividend distributions,” and then
      from Polonia Bank’s supplemental reserve for losses on loans, to the extent of
      those reserves, and an amount based on the amount distributed, but not more
      than
      the amount of those reserves, will be included in Polonia Bank’s taxable income.
      Non-dividend distributions include distributions in excess of Polonia Bank’s
      current and accumulated earnings and profits, as calculated for federal income
      tax purposes, distributions in redemption of stock and distributions in partial
      or complete liquidation. Dividends paid out of Polonia Bank’s current or
      accumulated earnings and profits will not be so included in Polonia Bank’s
      taxable income.




15


The
      amount of additional taxable income triggered by a non-dividend is an amount
      that, when reduced by the tax attributable to the income, is equal to the amount
      of the distribution. Therefore, if Polonia Bank makes a non-dividend
      distribution to Polonia Bancorp, approximately one and one-half times the amount
      of the distribution not in excess of the amount of the reserves would be
      includable in income for federal income tax purposes, assuming a 34% federal
      corporate income tax rate. Polonia Bank does not intend to pay dividends that
      would result in a recapture of any portion of its bad debt
      reserves.





**State
      Taxation**





***Pennsylvania
      Taxation.*** Polonia
      Bancorp is subject to the Pennsylvania Corporate Net Income Tax, Capital Stock
      and Franchise Tax. The Corporation Net Income Tax rate for 2008 is 9.9% and
      is
      imposed on unconsolidated taxable income for federal purposes with certain
      adjustments. In general, the Capital Stock and Franchise Tax is a property
      tax
      imposed on a corporation’s capital stock value at a statutorily defined rate,
      such value being determined in accordance with a fixed formula based upon
      average net income and net worth. Polonia Bank is subject to tax under the
      Pennsylvania Mutual Thrift Institutions Tax Act, as amended to include thrift
      institutions having capital stock. Pursuant to the Mutual Thrift Institutions
      Tax, the tax rate is 11.5%. The Mutual Thrift Institutions Tax exempts Polonia
      Bank from other taxes imposed by the Commonwealth of Pennsylvania for state
      income tax purposes and from all local taxation imposed by political
      subdivisions, except taxes on real estate and real estate transfers. The Mutual
      Thrift Institutions Tax is a tax upon net earnings, determined in accordance
      with generally accepted accounting principles with certain adjustments. The
      Mutual Thrift Institutions Tax, in computing income according to generally
      accepted accounting principles, allows for the deduction of interest earned
      on
      state and federal obligations, while disallowing a percentage of a thrift’s
      interest expense deduction in the proportion of interest income on those
      securities to the overall interest income of Polonia Bank. Net operating losses,
      if any, thereafter can be carried forward three years for Mutual Thrift
      Institutions Tax purposes.





**ITEM
              2.**
            **DESCRIPTION
                OF PROPERTY**





We
      conduct our business through our main office and branch offices. The following
      table sets forth certain information relating to these facilities as of December
      31, 2007.





**Location**
            
            **Original YearLeased orAcquired**
            
            **Leased,Licensed orOwned**
            
            **Net Book Value of Property orLeaseholdImprovements atDecember 31, 2007****(In thousands)****Main/Executive
                Office:**3993
                Huntingdon Pike
              Huntingdon
                Valley, Pennsylvania 19006
            
            
            1996
            
            
            Owned
            
            $
            2,476**Branch
                Offices:**2646
                East Allegheny Avenue
              Philadelphia,
                Pennsylvania 19134
            
            
            1970
            
            
            Owned
            
            $
            1,3972133
                Spring Garden Street
              Philadelphia,
                Pennsylvania 19130
            
            
            1979
            
            
            Owned
            
            $
            3162628
                Orthodox Street
              Philadelphia,
                Pennsylvania 19137
            
            
            1999
            
            
            Owned
            
            $
            1268000
                Frankford Avenue
              Philadelphia,
                Pennsylvania 19136
            
            
            1992
            
            
            Owned
            
            $
            428




16




**ITEM
              3.**
            **LEGAL
                PROCEEDINGS**





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





**ITEM
              4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS**





Not
      Applicable.





**PART
      II**





**ITEM
              5.**
            **MARKET
                FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
                ISSUER
                PURCHASES OF EQUITY
                SECURITIES**





The
      common stock of Polonia Bancorp is traded on the OTC Electronic Bulletin Board
      under the symbol “PBCP.OB.” The Company completed its initial public offering on
      January 11, 2007 and commenced trading on January 16, 2007. Because the
      Company’s stock did not begin trading until after the end of the fiscal year,
      there is no information for high and low sale prices for the year ended December
      31, 2006.





**High**
            
            **Low**2007:First
                Quarter
            
            $
            10.25
            
            $
            9.75Second
                Quarter
            
            
            10.05
            
            
            9.55Third
                Quarter
            
            
            10.20
            
            
            8.85Fourth
                Quarter
            
            
            9.98
            
            
            8.05





As
      of
      March 17, 2008 there were approximately 207 holders of record of the Company’s
      common stock.





The
      effective date of the Registration Statement on Form SB-2 (File No. 333-135643)
      was November 13, 2006. The offering was consummated on January 11, 2007 with
      the
      sale of 1,487,813 securities registered pursuant to the Registration Statement.
      Sandler O’Neill & Partners, L.P. acted as marketing agent for the offering.
      The class of securities registered was common stock, par value $0.01 per share.
      The aggregate amount of such securities registered and sold was 1,487,813 shares
      for aggregate offering proceeds of $14.9 million. The expenses incurred to
      date in connection with the stock offering are $1.0 million, including expenses
      paid to and for underwriters of $233,000, attorney and accounting fees of
      $472,000 and other expenses of $295,000. The net proceeds resulting from the
      offering after deducting expenses were $13.8 million. The net proceeds have
      been
      invested in loans and cash and cash equivalents.





Polonia
      Bancorp is not subject to OTS regulatory restrictions on the payment of
      dividends. However, Polonia Bancorp’s ability to pay dividends may depend, in
      part, upon its receipt of dividends from Polonia Bank because Polonia Bancorp
      has no source of income other than earnings from the investment of the net
      proceeds from the offering that it retained. Payment of cash dividends on
      capital stock by a savings institution is limited by OTS regulations. Polonia
      Bank may not make a distribution that would constitute a return of capital
      during the three-year term of the business plan submitted in connection with
      its
      reorganization. No insured depository institution may make a capital
      distribution if, after making the distribution, the institution would be
      undercapitalized. Based on the results of fiscal 2005, 2006 and 2007, Polonia
      Bank would not be permitted to dividend funds to Polonia Bancorp without OTS
      approval.





As
      of
      December 31, 2007, Polonia Bancorp satisfied all prescribed capital
      requirements. Future dividend payments will depend on the Company’s
      profitability, approval by its Board of Directors and prevailing OTS
      regulations. To date, we have not declared any cash dividends.




17




**ITEM
              6.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION**





Because
      Polonia Bancorp was not yet formed at December 31, 2006, this discussion
      and analysis reflects the financial statements and other statistical data of
      the
      Bank as well as the Company.





**Overview**





***Income*** **.** **** Our
      primary source of pre-tax income is net interest income. Net interest income
      is
      the difference between interest income, which is the income that we earn on
      our
      loans and securities, and interest expense, which is the interest that we pay
      on
      our deposits and FHLB borrowings. Other significant sources of pre-tax income
      are service charges on deposit accounts and other loan fees (including loan
      brokerage fees and late charges). In addition, we recognize income or losses
      from the sale of investments in years that we have such sales.





***Allowance
      for Loan Losses*** **.**  The
      allowance for loan losses is a valuation allowance for probable incurred credit
      losses. Loan losses are charged against the allowance when management believes
      the uncollectibility of a loan balance is confirmed. Subsequent recoveries,
      if
      any, are credited to the allowance. Management estimates the allowance balance
      required using past loan loss experience, the nature and value of the portfolio,
      information about specific borrower situations, and estimated collateral values,
      economic conditions, and other factors. Allocation of the allowance may be
      made
      for specific loans, but the entire allowance is available for any loan that,
      in
      management’s judgment, should be charged off.





***Expenses.***  The
      non-interest expenses we incur in operating our business consist of salaries
      and
      employee benefits expenses, occupancy and equipment expenses, marketing expenses
      and various other miscellaneous expenses.





Salaries
      and employee benefits consist primarily of: salaries and wages paid to our
      employees; payroll taxes; and expenses for health insurance and other employee
      benefits. We have incurred additional annual employee compensation expenses
      in
      fiscal 2007 stemming from the adoption of an equity incentive plan. ****





Occupancy
      and equipment expenses, which are the fixed and variable costs of buildings
      and
      equipment, consist primarily of depreciation charges, furniture and equipment
      expenses, maintenance, real estate taxes and costs of utilities. Depreciation
      of
      premises and equipment is computed using the straight-line method based on
      the
      useful lives of the related assets, which range from three to 40 years.





Marketing
      expenses include expenses for advertisements, promotions, third-party marketing
      services and premium items.





Regulatory
      fees and deposit insurance premiums are primarily payments we make to the FDIC
      for insurance of our deposit accounts.





Other
      expenses include expenses for supplies, telephone and postage, data processing,
      contributions and donations, director and committee fees, insurance and surety
      bond premiums and other fees and expenses.





**Critical
      Accounting Policies**





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





***Allowance
      for Loan Losses*** **.**  The
      allowance for loan losses is the amount estimated by management as necessary
      to
      cover probable incurred credit losses in the loan portfolio at the statement
      of
      financial condition date. The allowance is established through the provision
      for
      loan losses, which is charged to income. Determining the amount of the allowance
      for loan losses necessarily involves a high degree of judgment. Among the
      material estimates required to establish the allowance are: loss exposure at
      default; the amount and timing of future cash flows on impacted loans; the
      value
      of collateral; and the determination of loss factors to be applied to the
      various elements of the portfolio. All of these estimates are susceptible to
      significant change. Management reviews the level of the allowance on a quarterly
      basis and establishes the provision for loan losses based upon an evaluation
      of
      the portfolio, past loss experience, current economic conditions and other
      factors related to the collectibility of the loan portfolio. Although we believe
      that we use the best information available to establish the allowance for loan
      losses, future adjustments to the allowance may be necessary if economic
      conditions differ substantially from the assumptions used in making the
      evaluation. In addition, the Office of Thrift Supervision, as an integral part
      of its examination process, periodically reviews our allowance for loan losses.
      Such agency may require us to recognize adjustments to the allowance based
      on
      its judgments about information available to it at the time of its examination.
      A large loss could deplete the allowance and require increased provisions to
      replenish the allowance, which would negatively affect earnings. For additional
      discussion, see note 4 of the notes to the consolidated financial
      statements included in this annual report on Form 10-KSB.





18


***Deferred
      Income Taxes.*** We use
      the asset and liability method of accounting for income taxes as prescribed
      in
      Statement of Financial Accounting Standards No. 109, “Accounting for Income
      Taxes.” Under this method, deferred tax assets and liabilities are recognized
      for the future tax consequences attributable to differences between the
      financial statement carrying amounts of existing assets and liabilities and
      their respective tax bases. If current available information raises doubt as
      to
      the realization of the deferred tax assets, a valuation allowance is
      established. Deferred tax assets and liabilities are measured using enacted
      tax
      rates expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. We exercise significant
      judgment in evaluating the amount and timing of recognition of the resulting
      tax
      liabilities and assets. These judgments require us to make projections of future
      taxable income. The judgments and estimates we make in determining our deferred
      tax assets, which are inherently subjective, are reviewed on a continual basis
      as regulatory and business factors change. Any reduction in estimated future
      taxable income may require us to record a valuation allowance against our
      deferred tax assets. A valuation allowance would result in additional income
      tax
      expense in the period, which would negatively affect earnings.





***Other-Than-Temporary
      Impairment of Securities.*** Statement of Financial Accounting Standards No. 115, “Accounting for Certain
      Investments in Debt and Equity Securities,” FASB Staff Position (FSP) 115-1 “The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Benefits,” and Staff Accounting Bulletin 59, “Noncurrent Marketable Equity
      Securities,” require companies to perform periodic reviews of individual
      securities in their investment portfolios to determine whether a decline in
      the
      value of a security is other than temporary. A review of other-than-temporary
      impairment requires companies to make certain judgments regarding the
      materiality of the decline, its effect on the financial statements and the
      probability, extent and timing of a valuation recovery and the company’s intent
      and ability to hold the security. Pursuant to these requirements, we assess
      valuation declines to determine the extent to which such changes are
      attributable to (1) fundamental factors specific to the issuer, such as
      financial condition, business prospects or other factors or (2) market-related
      factors, such
      as
      interest rates or equity market declines. Declines in the fair value of
      securities below their costs that are deemed to be other than temporary are
      recorded in earnings as realized losses.




19


**Selected
      Financial Data**





The
      following tables set forth selected financial and other data of the Company
      and,
      where indicated, the Bank for the periods and at the dates indicated.





**2007**
            
            **2006**
            
            **2005****(Dollars
                in thousands, except per share data)****Financial
                Condition Data:**Total
                assets
            
            $
            200,597
            
            $
            203,374
            
            $
            173,580Securities
                available-for-sale
            
            
            45,885
            
            
            45,681
            
            
            58,308Loans
                receivable, net
            
            
            137,280
            
            
            111,923
            
            
            96,905Cash
                and cash equivalents
            
            
            3,826
            
            
            31,866
            
            
            3,766Deposits
            
            
            163,217
            
            
            157,722
            
            
            142,007FHLB
                advances short-term
            
            
            6,000
            
            
            -
            
            
            3,500FHLB
                advances long-term
            
            
            4,098
            
            
            6,245
            
            
            13,409Stockholders’
                equity
            
            
            23,994
            
            
            11,777
            
            
            12,028Book
                value per common share
            
            
            7.26
            
            
            N/A
            
            
            N/A**Operating
                Data:**Interest
                income
            
            $
            10,297
            
            $
            8,590
            
            $
            8,229Interest
                expense
            
            
            5,639
            
            
            4,240
            
            
            3,480Net
                interest income
            
            
            4,658
            
            
            4,350
            
            
            4,749Provision
                for loan losses
            
            
            31
            
            
            58
            
            
            -Net
                interest income after provisionfor
                loan losses
            
            
            4,627
            
            
            4,292
            
            
            4,749Non-interest
                income (loss)
            
            
            760
            
            
            650
            
            
            (53
            )Non-interest
                expense
            
            
            5,878
            
            
            5,363
            
            
            5,487Loss
                before income taxes
            
            
            (491
            )
            
            (421
            )
            
            (791
            )Provision
                for income taxes
            
            
            (165
            )
            
            (202
            )
            
            (140
            )Net
                loss
            
            $
            (326
            )
            $
            (219
            )
            $
            (651
            )Basic
                and diluted earnings per share
            
            
            (0.10
            )
            
            N/A
            
            
            N/A**Performance
                Ratios:**Return
                on average assets
            
            
            (0.17
            )%
            
            (0.13
            )%
            
            (0.38
            )%Return
                on average equity
            
            
            (1.37
            )
            
            (1.87
            )
            
            (4.98
            )Interest
                rate spread(1)
            
            
            2.19
            
            
            2.67
            
            
            2.93Net
                interest margin(2)
            
            
            2.53
            
            
            2.78
            
            
            2.99Noninterest
                expense to average assets
            
            
            2.99
            
            
            3.17
            
            
            3.17Efficiency
                ratio(3)
            
            
            108.45
            
            
            107.26
            
            
            116.84Average
                interest-earning assets to average interest-bearing
                liabilities
            
            
            111.23
            
            
            104.04
            
            
            102.84Average
                equity to average assets
            
            
            12.10
            
            
            6.91
            
            
            7.56**Capital
                Ratios (4):**Tangible
                capital
            
            
            10.03
            
            
            5.91
            
            
            7.04Core
                capital
            
            
            10.03
            
            
            5.91
            
            
            7.04Total
                risk-based capital
            
            
            21.65
            
            
            14.49
            
            
            16.38




20




**2007**
            
            **2006**
            
            **2005****(Dollars
                in thousands)****Asset
                Quality Ratios:**Allowance
                for loan losses as a percent of total loans
            
            
            0.53
            %
            
            0.62
            %
            
            0.67
            %Allowance
                for loan losses as a percent of nonperforming loans
            
            
            338.43
            
            
            253.65
            
            
            229.23Net
                charge-offs (recoveries) to average outstanding loans during the
                period
            
            
            (0.01
            )
            
            0.01
            
            
            0.04Non-performing
                loans as a percent of total loans
            
            
            0.16
            
            
            0.24
            
            
            0.29**Other
                Data:**Number
                of:****Real
                estate loans outstanding
            
            
            1,020
            
            
            939
            
            
            928****Deposit
                accounts
            
            
            9,863
            
            
            10,942
            
            
            11,429****Full-service
                offices
            
            
            5
            
            
            5
            
            
            5


_________________________________


(1)
            Represents
                the difference between the weighted average yield on average
                interest-earning assets and the weighted average cost of interest-bearing
                liabilities.


(2)
            Represents
                net interest income as a percent of average interest-earning
                assets.


(3)
            Represents
                noninterest expense divided by the sum of net interest income and
                noninterest income.


(4)
            Ratios
                are for Polonia Bank.





**Balance
      Sheet Analysis**





***Loans.*** ** Our
      primary lending activity is the origination of loans secured by real estate.
      We
      primarily originate one- to four-family residential loans. To a much lesser
      extent, we originate multi-family and nonresidential real estate loans and
      home
      equity and consumer loans. At December 31, 2007, our ratio of loans to total
      assets was 68.4%.





The
      largest segment of our loan portfolio is one-to four-family residential loans.
      At December 31, 2007, these loans totaled $120.8 million and represented 87.4%
      of total loans, compared to $100.2 million, or 88.8% of total loans, at December
      31, 2006. The size of our one- to four-family residential loan portfolio
      increased during the year ended December 31, 2007 due primarily to an
      increase in the amount of originations throughout our lending territory.





Home
      equity loans totaled $4.3 million and represented 3.1% of total loans at
      December 31, 2007, compared to $4.2 million, or 3.8% of total loans at December
      31, 2006. Home equity loans increased $100,000 or 2.4% during the year ended
      December 31, 2007. Home equity lines of credit totaled $980,000 and represented
      0.7% of total loans at December 31, 2007.





Multi-family
      and commercial real estate loans totaled $9.8 million and represented 7.1%
      of
      total loans at December 31, 2007, compared to $5.2 million, or 4.6% of total
      loans, at December 31, 2006. Multi-family and commercial real estate loans
      increased $4.6 million, or 88.5%, during the year ended December 31, 2007.
      The
      increase in loans in 2007 was due to new loan participations.





Consumer
      loans totaled $2.3 million and represented 1.6% of total loans at December
      31,
      2007 compared to $2.2 million, or 1.9% of total loans at December 31, 2006.
      Consumer loans increased $100,000 or, 4.5%, during the year ended December
      31,
      2007.




21


The
      following table sets forth the composition of our loan portfolio at the dates
      indicated.





**At
                December 31,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent****(Dollars
                in thousands)**Real
                estate loans:One-
                to four-family
            
            $
            120,774
            
            
            87.42
            %
            $
            100,152
            
            
            88.84
            %
            $
            88,873
            
            
            90.96
            %
            $
            87,653
            
            
            89.99
            %
            $
            88,037
            
            
            88.64
            %Multi-family
                and commercial real estate
            
            
            9,803
            
            
            7.09
            
            
            5,212
            
            
            4.62
            
            
            3,563
            
            
            3.65
            
            
            3,611
            
            
            3.71
            
            
            4,328
            
            
            4.36Home
                equity loans and lines of credit
            
            
            5,323
            
            
            3.85
            
            
            5,209
            
            
            4.62
            
            
            2,558
            
            
            2.61
            
            
            2,705
            
            
            2.78
            
            
            3,338
            
            
            3.36Total
                real estate loans
            
            $
            135,900
            
            
            98.36
            
            $
            110,573
            
            
            98.08
            
            $
            94,994
            
            
            97.22
            
            $
            93,969
            
            
            96.48
            
            $
            95,703
            
            
            96.36Consumer:Education
            
            $
            2,170
            
            
            1.57
            
            $
            2,137
            
            
            1.90
            
            $
            2,679
            
            
            2.74
            
            $
            3,117
            
            
            3.19
            
            $
            3,173
            
            
            3.19Loans
                on savings accounts
            
            
            85
            
            
            0.06
            
            
            27
            
            
            0.02
            
            
            38
            
            
            0.04
            
            
            154
            
            
            0.16
            
            
            184
            
            
            0.18Other
            
            
            5
            
            
            0.01
            
            
            1
            
            
            -
            
            
            2
            
            
            -
            
            
            162
            
            
            0.17
            
            
            265
            
            
            0.27Total
                consumer loans
            
            
            2,260
            
            
            1.64
            
            
            2,165
            
            
            1.90
            
            
            2,719
            
            
            2.78
            
            
            3,433
            
            
            3.52
            
            
            3,622
            
            
            3.64Total
                loans
            
            
            138,160
            
            
            100.00
            %
            
            112,738
            
            
            100.00
            %
            
            97,713
            
            
            100.00
            %
            
            97,402
            
            
            100.00
            %
            
            99,325
            
            
            100.00
            %Discount
                on loans purchased
            
            
            149
            
            
            
            
            
            120
            
            
            
            
            
            157
            
            
            
            
            
            254
            
            
            
            
            
            258Allowance
                for loan losses
            
            
            731
            
            
            
            
            
            695
            
            
            
            
            
            651
            
            
            
            
            
            692
            
            
            
            
            
            736Loans,
                net
            
            $
            137,280
            
            
            
            
            $
            111,923
            
            
            
            
            $
            96,905
            
            
            
            
            $
            96,456
            
            
            
            
            $
            98,331





The
      following table sets forth certain information at December 31, 2007 regarding
      the dollar amount of loan principal repayments becoming due during the periods
      indicated. The table does not include any estimate of prepayments, which
      significantly shorten the average life of all loans and may cause our actual
      repayment experience to differ from that shown below. Demand loans having no
      stated schedule of repayments and no stated maturity are reported as due in
      one
      year or less.





**One- to Four- Family Real Estate
                Loans**
            
            **Multi-Family andCommercial Real
                Estate Loans**
            
            **Home Equity**
              **Loans and Lines of Credit**
            
            **Consumer**
              **Loans**
            
            **Total**
              **Loans****(Dollars
                in thousands)**Amounts
                due in:One
                year or less
            
            $
            18
            
            $
            3
            
            $
            3
            
            $
            710
            
            $
            734More
                than one to five years
            
            
            989
            
            
            2,391
            
            
            358
            
            
            856
            
            
            4,594More
                than five years
            
            
            119,767
            
            
            7,409
            
            
            4,962
            
            
            694
            
            
            132,832Total
            
            $
            120,774
            
            $
            9,803
            
            $
            5,323
            
            $
            2,260
            
            $
            138,160




22


The
      following table sets forth the dollar amount of all loans at December 31, 2007
      that are due after December 31, 2008. All loans have fixed interest
      rates.





**Total****(Dollars in thousands)**Real
                estate loans:One-
                to four-family
            
            $
            120,756Multi-family
                and commercial real estate
            
            
            9,800Home
                equity loans and lines of credit
            
            
            5,320Consumer
                loans
            
            
            1,550Total
            
            $
            137,426





The
      following table shows loan origination, participation and purchase activity
      during the periods indicated.





**December
                31,**
              **2007**
            
            **December
                31,**
              **2006**
            
            **December
                31,**
              **2005****(Dollars
                in thousands)**Total
                loans at beginning of period
            
            $
            112,738
            
            $
            97,713
            
            $
            97,402Loans
                originated:Real
                estate loans:One-
                to four-family
            
            
            30,470
            
            
            21,947
            
            
            13,346Multi-family
                and commercial real estate
            
            
            3,441
            
            
            1,606
            
            
            338Home
                equity loans and lines of credit
            
            
            1,036
            
            
            3,537
            
            
            878Consumer
            
            
            548
            
            
            477
            
            
            691Total
                loans originated
            
            
            35,495
            
            
            27,567
            
            
            15,253Loans
                purchased
            
            
            3,855
            
            
            3,581
            
            
            1,778Deduct:Real
                estate loan principal repayments
            
            
            (13,928
            )
            
            (16,123
            )
            
            (16,720
            )Net
                loan activity
            
            
            25,422
            
            
            15,025
            
            
            311Total
                loans at end of period
            
            $
            138,160
            
            $
            112,738
            
            $
            97,713




***Securities.*** **** Our
      securities portfolio consists primarily of U.S. Government-sponsored entity
      securities and mortgage-backed securities. The weighted average rate of our
      securities portfolio was 5.30% as of December 31, 2007 as compared to 5.21%
      as of December 31, 2006 and the weighted average maturity was 5 years and
      14 years as of December 31, 2007 and 2006, respectively. In April 2006, we
      sold
      our entire portfolio of $17.1 million of mutual funds which had been written
      down in 2004, 2005 and for the quarter ended March 31, 2006 for other-than
      temporary-impairment of their market value. The proceeds from this sale were
      utilized to further reduce FHLB borrowings. The amounts of the securities
      write-downs in 2006 totaled $167,000. The following table sets forth the
      amortized cost and fair values of our securities portfolio at the dates
      indicated.




23




**At
                December 31,****2007**
            
            **2006**
            
            **2005****AmortizedCost**
            
            **Fair
                Value**
            
            **AmortizedCost**
            
            **Fair
                Value**
            
            **AmortizedCost**
            
            **Fair
                Value****(Dollars
                in thousands)**Securities
                available-for-sale:Fannie
                Mae
            
            $
            24,744
            
            $
            24,970
            
            $
            25,301
            
            $
            25,044
            
            $
            22,566
            
            $
            22,303Freddie
                Mac
            
            
            8,594
            
            
            8,601
            
            
            10,715
            
            
            10,571
            
            
            11,941
            
            
            11,794Government National MortgageAssociation
            
            
            2,006
            
            
            2,057
            
            
            2,404
            
            
            2,420
            
            
            3,059
            
            
            3,118Other
            
            
            157
            
            
            157
            
            
            257
            
            
            253
            
            
            18
            
            
            18Total mortgage-backed securities
            
            
            35,501
            
            
            35,785
            
            
            38,677
            
            
            38,288
            
            
            37,584
            
            
            37,233U.S. government agency securities
            
            
            4,108
            
            
            4,131
            
            
            1,400
            
            
            1,356
            
            
            1,400
            
            
            1,353Corporate
                securities
            
            
            5,630
            
            
            5,632
            
            
            5,630
            
            
            5,587
            
            
            1,973
            
            
            1,959Total debt securities
            
            
            45,239
            
            
            45,548
            
            
            45,707
            
            
            45,231
            
            
            40,957
            
            
            40,545Equity securities
            
            
            430
            
            
            337
            
            
            430
            
            
            451
            
            
            17,759
            
            
            17,763Total
            
            $
            45,669
            
            $
            45,885
            
            $
            46,137
            
            $
            45,682
            
            $
            58,716
            
            $
            58,308





At
      December 31, 2007, we had no investments in a single company or entity (other
      than U.S. Government-sponsored entity securities) that had an aggregate book
      value in excess of 10% of our equity at December 31, 2007.




The
      following table sets forth the stated maturities and weighted average yields
      of
      securities at December 31, 2007. Certain mortgage-backed securities have
      adjustable interest rates and will reprice annually within the various maturity
      ranges. These repricing schedules are not reflected in the table below. Yields
      are not presented on a tax-equivalent basis. Any adjustments necessary to
      present yields on a tax-equivalent basis are insignificant.





**One
                Year or Less**
            
            **More
                than One**
              **Year
                to Five Years**
            
            **More
                than Five**
              **Years
                to Ten Years**
            
            **More
                than**
              **Ten
                Years**
            
            **Total****Carrying**
              **Value**
            
            **Weighted**
              **Average**
              **Yield**
            
            **Carrying**
              **Value**
            
            **Weighted**
              **Average**
              **Yield**
            
            **Carrying**
              **Value**
            
            **Weighted**
              **Average**
              **Yield**
            
            **Carrying**
              **Value**
            
            **Weighted**
              **Average**
              **Yield**
            
            **Carrying**
              **Value**
            
            **Weighted**
              **Average**
              **Yield****(Dollars
                in thousands)**Securities
                available-for-sale:Fannie
                Mae
            
            $
            -
            
            
            -
            %
            $
            -
            
            
            -
            %
            $
            12,985
            
            
            5.04
            %
            $
            11,759
            
            
            5.15
            %
            $
            24,744
            
            
            5.12
            %Freddie
                Mac
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,809
            
            
            4.84
            
            
            3,785
            
            
            5.27
            
            
            8,594
            
            
            5.03Government
                National Mortgage Association
            
            
            -
            
            
            -
            
            
            25
            
            
            6.39
            
            
            45
            
            
            7.02
            
            
            1,936
            
            
            6.26
            
            
            2,006
            
            
            6.27Other
            
            
            -
            
            
            -
            
            
            45
            
            
            2.89
            
            
            -
            
            
            -
            
            
            112
            
            
            5.57
            
            
            157
            
            
            4.79U.S.
                Government agency securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,079
            
            
            5.31
            
            
            1,029
            
            
            6.01
            
            
            4,108
            
            
            5.49Corporate
                securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,630
            
            
            6.00
            
            
            -
            
            
            -
            
            
            5,630
            
            
            6.00Equity
                securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            -
            
            
            -
            %
            $
            70
            
            
            4.16
            %
            $
            26,548
            
            
            5.24
            %
            $
            18,621
            
            
            5.34
            %
            $
            45,239
            
            
            5.30
            %





***Deposits.***  Our
      primary source of funds is our deposit accounts, which are comprised of
      noninterest-bearing accounts, interest-bearing demand accounts, money market
      accounts, savings accounts and time deposits. These deposits are provided
      primarily by individuals who live or work within our market areas. We have
      not
      used brokered deposits as a source of funding. Deposits increased $5.5 million,
      or 3.5% for the year ended December 31, 2007, and was attributable, in part,
      to
      the launching of a tiered signature money market account which accounted for
      approximately $32.5 million in funds since its introduction in July, 2006 and
      a
      $3.7 million increase in time deposits, offset by a $5.5 million decrease in
      savings accounts and a $905,000 decrease in interest-bearing deposit accounts
      and a $735,000 decrease in noninterest-bearing accounts. Our deposits totaled
      $163.2 million and $157.7 million at December 31, 2007 and 2006, respectively.




24


The
      following table sets forth the balances of our deposit products at the dates
      indicated.





**At
                December 31,****2007**
            
            **2006**
            
            **2005****Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent****(Dollars
                in thousands)**Noninterest-bearing
                accounts
            
            $
            3,455
            
            
            2.12
            %
            $
            4,190
            
            
            2.66
            %
            $
            4,900
            
            
            3.45
            %NOW
                accounts
            
            
            11,223
            
            
            6.88
            
            
            12,128
            
            
            7.69
            
            
            13,078
            
            
            9.21Money
                market
            
            
            33,101
            
            
            20.28
            
            
            24,235
            
            
            15.37
            
            
            629
            
            
            0.44Savings
                accounts
            
            
            36,193
            
            
            22.17
            
            
            41,664
            
            
            26.42
            
            
            47,470
            
            
            33.43Time
                deposits
            
            
            79,245
            
            
            48.55
            
            
            75,505
            
            
            47.86
            
            
            75,930
            
            
            53.47Total
            
            $
            163,217
            
            
            100.00
            %
            $
            157,722
            
            
            100.00
            %
            $
            142,007
            
            
            100.00
            %




The
      following table indicates the amount of jumbo time deposits by time remaining
      until maturity as of December 31, 2007. Jumbo time deposits require minimum
      deposits of $100,000.





**Maturity
                Period**
            
            **Time
                Deposits****(Dollars in thousands)**3
                Months or less
            
            $
            6,025Over
                3 Through 6 Months
            
            
            4,655Over
                6 Through 12 Months
            
            
            3,505Over
                12 Months
            
            
            8,494Total
            
            $
            22,679


.


The
      following table sets forth our time deposits classified by rates at the dates
      indicated.





**At
                December 31,****2007**
            
            **2006**
            
            **2005****(Dollars
                in thousands)**1.00 –
                1.99%
            
            $
            3
            
            $
            387
            
            $
            1,9012.00
                – 3.99%
            
            
            16,082
            
            
            18,005
            
            
            50,8624.00
                – 5.99%
            
            
            63,090
            
            
            57,047
            
            
            22,3416.00
                – 7.99%
            
            
            70
            
            
            66
            
            
            826Total
            
            $
            79,245
            
            $
            75,505
            
            $
            75,930




25




The
      following table sets forth the amount and maturities of time deposits classified
      by rates at December 31, 2007.


**Amount Due**
              
              **Percent of****Less Than**
                **One Year**
              
              **More Than**
                **One Year to**
                **Two Years**
              
              **More Than**
                **Two Years to**
                **Three Years**
              
              **More Than**
                **Three Years**
                **to Four Years**
              
              **More Than**
                **Four Years**
              
              **Total**
              
              **Total**
                **Certificate**
                **Accounts****(Dollars
                  in thousands)**1.00 –
                  1.99%
              
              $
              3
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              3
              
              
              0.01
              %2.00
                  – 3.99%
              
              
              14,135
              
              
              1,932
              
              
              15
              
              
              -
              
              
              -
              
              
              16,082
              
              
              20.294.00
                  – 5.99%
              
              
              24,656
              
              
              5,341
              
              
              5,744
              
              
              9,557
              
              
              17,792
              
              
              63,090
              
              
              79.616.00
                  – 7.99%
              
              
              -
              
              
              70
              
              
              -
              
              
              -
              
              
              -
              
              
              70
              
              
              0.09Total
              
              $
              38,794
              
              $
              7,343
              
              $
              5,759
              
              $
              9,557
              
              $
              17,792
              
              $
              79,245
              
              
              100.00
              %




The
      following table sets forth deposit activity for the periods indicated.





**Year
                Ended December 31,****2007**
            
            **2006**
            
            **2005****(Dollars
                in thousands)**Beginning
                balance
            
            $
            157,722
            
            $
            142,007
            
            $
            132,887Increase
                before interest credited
            
            
            128
            
            
            11,927
            
            
            6,795Interest
                credited
            
            
            5,367
            
            
            3,788
            
            
            2,325Net
                increase in deposits
            
            
            5,495
            
            
            15,715
            
            
            9,120Ending
                balance
            
            $
            163,217
            
            $
            157,722
            
            $
            142,007





***Borrowings*** **.** **** We
      utilize borrowings from the FHLB of Pittsburgh to supplement our supply of
      funds
      for loans and investments. Our FHLB borrowings are categorized as short-term
      borrowings and other borrowings. Short-term borrowings primarily consist of
      draws on “RepoPlus” line of credit advances. The RepoPlus line of credit carries
      an adjustable rate that is subject to annual renewal and incurs no service
      charges. All borrowings from the FHLB are secured by a blanket security
      agreement on qualifying residential mortgage loans, certain pledged investment
      securities and our investment in FHLB stock.


**Year
                  Ended December 31,****2007**
              
              **2006**
              
              **2005****(Dollars
                  in thousands)**Maximum
                  amount of advances outstanding at any month end during the
                  period:FHLB
                  Advances
              
              $
              10,508
              
              $
              17,353
              
              $
              27,228Average
                  advances outstanding during the period:FHLB
                  Advances
              
              $
              6,372
              
              $
              10,983
              
              $
              24,231Weighted
                  average interest rate during the period:FHLB
                  Advances
              
              
              3.93
              %
              
              3.94
              %
              
              4.70
              %Balance
                  outstanding at end of period:FHLB
                  Advances
              
              $
              10,098
              
              $
              6,245
              
              $
              16,909Weighted
                  average interest rate at end of period:FHLB
                  Advances
              
              
              3.81
              %
              
              3.69
              %
              
              3.82
              %





FHLB
      advances long-term decreased $2.1 million to $4.1 million at December 31, 2007,
      from $6.2 million at December 31, 2006, a decrease of 33.9%. The $2.1
      million decrease in FHLB advances long-term reflect regularly scheduled
      repayments. The advances outstanding at December 31, 2007 mature in 2009 through
      2012. In order to fund our $25.4 million increase in loans we utilized $6.0
      million of short-term borrowings from the FHLB.





***Stockholders’
      Equity.*** Stockholders’
      equity increased $12.2 million to $24.0 million at December 31, 2007, from
      $11.8 million at December 31, 2006. The increase in stockholders’ equity
      was primarily related to the receipt of $13.9 million in proceeds related to
      the
      Company’s stock offering, partially offset by a $1.3 million purchase of common
      stock related to the Company’s employee stock ownership plan.




26




**Comparison
      of Results of Operations for the Years Ended December 31, 2007 and
      2006**





***Overview.***




**Year
                Ended December 31,**
            
            **% Change****2007**
            
            **2006**
            
            **2007/2006****(Dollars
                in thousands)**Net
                loss
            
            $
            (326
            )
            $
            (219
            )
            
            N/MReturn
                on average assets (1)
            
            
            (0.17
            )%
            
            (0.13
            )%
            
            N/MReturn
                on average equity (2)
            
            
            (1.37
            )
            
            (1.87
            )
            
            N/MAverage
                equity-to-assets ratio (3)
            
            
            12.10
            
            
            6.91
            
            
            75.1
            %







(1)  Net
      income (loss) divided by average assets.


(2)  Net
      income (loss) divided by average equity.


(3)  Average
      equity divided by average total assets.





A
      loss of
      $326,000 was reported for 2007 compared to a loss of $219,000 in 2006 primarily
      due to higher non interest expense, partially offset by an increase in
      net-interest income and higher non-interest income. Non-interest expenses
      increased $500,000, or 9.3%, to $5.9 million primarily as a result of higher
      professional fees related to operating as a public company and an increase
      in
      occupancy and equipment expense.





***Net
      Interest Income.*** ** Net
      interest income for year ended December 31, 2007 increased $300,000 to $4.7
      million, or 6.8%, from $4.4 million last year, primarily reflecting higher
      interest income earned on assets and the higher average balance of loans and
      other interest-earning assets, partially offset by a lower average balance
      on
      investment securities, higher interest expense paid on deposits and a higher
      average balance of deposits. The increase in the higher weighted average rate
      paid on deposits was mainly due to our tiered signature money market account
      and
      in increase in the average balance of time deposits, which was partially offset
      by a decrease in the average balance of savings accounts and reduced borrowings
      expense due to a decrease in the average balance of borrowings. Total interest
      and dividend income increased $1.7 million as the average balance of loans
      and
      other interest earning assets increased, partially offset by a decrease in
      the
      average balance of investment securities. Total interest expense increased
      $1.4
      million as a result of higher average balance of money market accounts and
      time
      deposits, partially offset by a decrease in the average balance of savings
      accounts and borrowings.





***Average
      Balances and Yields.*** ** The
      following table presents information regarding average balances


of
      assets
      and liabilities, as well as the total dollar amounts of interest income and
      dividends from average interest-earning assets and interest expense on average
      interest-bearing liabilities and the resulting average yields and costs. The
      yields and costs for the periods indicated are derived by dividing income or
      expense by the average balances of assets or liabilities, respectively, for
      the
      periods presented. For purposes of this table, average balances have been
      calculated using month-end balances, and nonaccrual loans are included in
      average balances only. Management does not believe that the use of month-end
      balances instead of daily average balances has caused any material differences
      in the information presented. Loan fees are included in interest income on
      loans
      and are insignificant. Yields are not presented on a tax-equivalent basis.
      Any
      adjustments necessary to present yields on a tax-equivalent basis are
      insignificant.




27




**Year
                  Ended December 31,****2007**
              
              **2006**
              
              **2005****Average****Balance**
              
              **Interest****andDividends**
              
              **Yield/****Cost**
              
              **Average****Balance**
              
              **Interest****and****Dividends**
              
              **Yield/****Cost**
              
              **Average****Balance**
              
              **Interest****and****Dividends**
              
              **Yield/****Cost****(Dollars
                  in thousands)****Assets:**Interest-earning
                  assets:Loans
              
              $
              124,622
              
              $
              7,254
              
              
              5.82
              %
              $
              103,806
              
              $
              6,011
              
              
              5.79
              %
              $
              95,481
              
              $
              5,569
              
              
              5.83
              %Investment
                  securities
              
              
              45,652
              
              
              2,361
              
              
              5.17
              
              
              46,025
              
              
              2,237
              
              
              4.86
              
              
              59,264
              
              
              2,584
              
              
              4.36Other
                  interest earning assets
              
              
              13,543
              
              
              682
              
              
              5.04
              
              
              6,723
              
              
              342
              
              
              5.09
              
              
              3,892
              
              
              76
              
              
              1.95Total
                  interest-earning assets
              
              
              183,817
              
              
              10,297
              
              
              5.60
              %
              
              156,554
              
              
              8,590
              
              
              5.49
              %
              
              158,637
              
              
              8,229
              
              
              5.19
              %Noninterest-earning
                  assets
              
              
              13,243
              
              
              
              
              
              
              
              
              13,298
              
              
              
              
              
              
              
              
              14,897Loan
                  loss reserve
              
              
              (727
              )
              
              
              
              
              
              
              
              (569
              )
              
              
              
              
              
              
              
              (651
              )Total
                  assets
              
              $
              196,333
              
              
              
              
              
              
              
              $
              169,283
              
              
              
              
              
              
              
              $
              172,883**Liabilities
                  and equity:**Interest-bearing
                  liabilities:NOW
                  accounts
              
              $
              11,411
              
              
              68
              
              
              0.60
              %
              $
              12,718
              
              
              68
              
              
              0.53
              %
              $
              13,957
              
              
              75
              
              
              0.54
              %Money
                  market deposits
              
              
              33,241
              
              
              1,615
              
              
              4.86
              
              
              6,796
              
              
              346
              
              
              5.09
              
              
              613
              
              
              5
              
              
              0.82Savings
                  accounts
              
              
              38,947
              
              
              318
              
              
              0.82
              
              
              52,090
              
              
              357
              
              
              0.69
              
              
              48,914
              
              
              380
              
              
              0.78Time
                  deposits
              
              
              74,262
              
              
              3,366
              
              
              4.53
              
              
              66,980
              
              
              3,017
              
              
              4.50
              
              
              65,835
              
              
              1,865
              
              
              2.83Total
                  interest-bearing deposits
              
              
              157,861
              
              
              5,367
              
              
              3.40
              
              
              138,584
              
              
              3,788
              
              
              2.73
              
              
              129,319
              
              
              2,325
              
              
              1.80FHLB
                  advances - short-term
              
              
              1,271
              
              
              60
              
              
              4.72
              
              
              2,083
              
              
              105
              
              
              5.04
              
              
              1,750
              
              
              79
              
              
              4.51FHLB
                  advances - long-term
              
              
              5,101
              
              
              190
              
              
              3.72
              
              
              8,900
              
              
              328
              
              
              3.69
              
              
              22,481
              
              
              1,061
              
              
              4.72Advances
                        by borrowers for taxes and insurance
              
              
              1,031
              
              
              21
              
              
              2.04
              
              
              901
              
              
              19
              
              
              2.11
              
              
              704
              
              
              15
              
              
              2.13Total
                  interest-bearing liabilities
              
              
              165,264
              
              
              5,638
              
              
              3.41
              %
              
              150,468
              
              
              4,240
              
              
              2.82
              %
              
              154,254
              
              
              3,480
              
              
              2.26
              %Non-interest-bearing
                  liabilities
              
              
              7,311
              
              
              
              
              
              
              
              
              7,125
              
              
              
              
              
              
              
              
              5,551Total
                  liabilities
              
              
              172,575
              
              
              
              
              
              
              
              
              157,593
              
              
              
              
              
              
              
              
              159,805Retained
                  earnings
              
              
              23,758
              
              
              
              
              
              
              
              
              11,690
              
              
              
              
              
              
              
              
              13,078Total
                  liabilities and retained earnings
              
              $
              196,333
              
              
              
              
              
              
              
              $
              169,283
              
              
              
              
              
              
              
              $
              172,883Net
                  interest income
              
              
              
              
              $
              4,659
              
              
              
              
              
              
              
              $
              4,350
              
              
              
              
              
              
              
              $
              4,749Interest
                  rate spread
              
              
              
              
              
              
              
              
              2.19
              %
              
              
              
              
              
              
              
              2.67
              %
              
              
              
              
              
              
              
              2.93
              %Net
                  interest margin
              
              
              
              
              
              
              
              
              2.53
              %
              
              
              
              
              
              
              
              2.78
              %
              
              
              
              
              
              
              
              2.99
              %Average
                  interest-earning assets to average interest-bearing
                  liabilities
              
              
              
              
              
              
              
              
              111.23
              %
              
              
              
              
              
              
              
              104.04
              %
              
              
              
              
              
              
              
              102.84
              %




28


***Rate/Volume
      Analysis*** **.** The
      following table sets forth the effects of changing rates and volumes on our
      net
      interest income. The rate column shows the effects attributable to changes
      in
      rate (changes in rate multiplied by prior volume). The volume column shows
      the
      effects attributable to changes in volume (changes in volume multiplied by
      prior
      rate). The net column represents the sum of the prior columns. For purposes
      of
      this table, changes attributable to changes in both rate and volume that cannot
      be segregated have been allocated proportionately based on the changes due
      to
      rate and the changes due to volume.





**For the Year Ended****December 31, 2007****Compared to Year Ended****December 31, 2006**
            
            **For the Year Ended****December 31, 2006****Compared to Year Ended****December 31, 2005****Increase (Decrease)**
              **Due to**
            
            
            
            **Increase (Decrease)**
              **Due to****Volume**
            
            **Rate**
            
            **Net**
            
            **Volume**
            
            **Rate**
            
            **Net****(Dollars
                in thousands)**Interest
                and dividend income:Loans
                receivable
            
            $
            1,211
            
            $
            32
            
            $
            1,243
            
            $
            482
            
            $
            (40
            )
            $
            442Investment
                securities
            
            
            (18
            )
            
            142
            
            
            124
            
            
            (713
            )
            
            366
            
            
            (347
            )Other
            
            
            343
            
            
            (3
            )
            
            340
            
            
            83
            
            
            183
            
            
            266Total
                interest-earning
                assets
            
            $
            1,536
            
            $
            171
            
            $
            1,707
            
            $
            (149
            )
            $
            510
            
            $
            361Interest
                expense:NOW
                accounts
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            (7
            )
            $
            (0
            )
            $
            (7
            )Money
                market deposits
            
            
            1,284
            
            
            (15
            )
            
            1,269
            
            
            224
            
            
            117
            
            
            341Savings
                accounts
            
            
            (161
            )
            
            122
            
            
            (39
            )
            
            28
            
            
            (51
            )
            
            (23
            )Time
                deposits
            
            
            330
            
            
            19
            
            
            349
            
            
            33
            
            
            1,119
            
            
            1,152Short-term
                borrowings
            
            
            (39
            )
            
            (6
            )
            
            (45
            )
            
            16
            
            
            10
            
            
            26Other
                borrowings
            
            
            (142
            )
            
            4
            
            
            (138
            )
            
            (538
            )
            
            (195
            )
            
            (733
            )Advances
                by borrowers for taxes and insurance
            
            
            3
            
            
            (1
            )
            
            2
            
            
            4
            
            
            (0
            )
            
            4Total
                interest-bearing liabilities
            
            $
            1,275
            
            $
            123
            
            $
            1,398
            
            $
            (239
            )
            $
            999
            
            $
            760Change
                in net interest income
            
            $
            261
            
            $
            48
            
            $
            309
            
            $
            90
            
            $
            (489
            )
            $
            (399
            )





***Provision
      for Loan Losses.*** We
      recorded a provision for loan losses for the year ended December 31, 2007 of
      $31,000 as compared to $58,000 for loan losses recorded in 2006. The decreased
      loan loss provision reflects management’s estimate of the losses inherent in our
      total loan portfolio and the increase in our overall loan portfolio. The
      provision during these periods reflects management’s assessment of charge-off
      activity, decreased non-performing loans and increased loan delinquencies.
      We
      used the same methodology and generally similar assumptions in assessing the
      allowance for both periods. An analysis of the changes in the allowance for
      loan
      losses, non-performing loans and classified loans is presented under *“-Risk
      Management-Analysis of Non-Performing and Classified Assets”* and
“ *-Risk
      Management-Analysis and Determination of the Allowance for Loan
      Losses.”* ****




29




***Non-Interest
      Income.*** ** The
      following table shows the components of non-interest income for the year ended
      December 31, 2007 and 2006.





**Year
                Ended December 31,****2007**
            
            **2006****(Dollars
                in thousands)**Service
                fees on deposit accounts
            
            $
            129
            
            $
            141Earnings
                on bank-owned life insurance
            
            
            192
            
            
            164Investment
                securities losses, net
            
            
            -
            
            
            (167
            )Rental
                income
            
            
            293
            
            
            321Other
            
            
            146
            
            
            191Total
            
            $
            760
            
            $
            650





The
      $110,000 increase in non-interest income for the year ended December 31, 2007
      as
      compared to last year was primarily due to the losses on the sale of investment
      securities in 2006 as compared to no sales activity in 2007 and higher reported
      income attributable to bank-owned life insurance, partially offset by lower
      fees
      on deposit accounts, lower rental income from our office building due to higher
      vacancies and a decrease in revenues from our title insurance
      subsidiary.





***Non-Interest
      Expense.*** The
      following table shows the components of non-interest expense.





**Year
                Ended**
              **December
                31,****2007**
            
            **2006****(Dollars
                in thousands)**Compensation
                and employee benefits
            
            $
            2,961
            
            $
            2,949Occupancy
                and equipment
            
            
            1,036
            
            
            859Federal
                deposit insurance premiums
            
            
            138
            
            
            136Data
                processing expense
            
            
            262
            
            
            227Professional
                fees
            
            
            474
            
            
            151Other
            
            
            1,007
            
            
            1,038Total
                non-interest expense
            
            $
            5,878
            
            $
            5,360Efficiency
                ratio
            
            
            108.45
            %
            
            107.26
            %





Total
      non-interest expense increased $500,000, or 9.3%, to $5.9 million for the year
      ended December 31, 2007 from the prior year. The increases in non-interest
      expenses for the year ended December 31, 2007 as compared to the prior year
      periods were primarily the result of higher professional fees related to
      operating as a public company, including the costs associated with compliance
      with the Sarbanes-Oxley Act of 2002 and higher occupancy and equipment costs
      related to the installation of new ATMs, additional service contract expenses,
      costs associated with the implementation of our retail internet banking product
      and costs associated with our Polonia Bank Online division.





***Income
      Tax Expense*** **.** An
      income tax benefit of $165,000 was recorded for the year ended December 31,
      2007 compared to a $202,000 benefit in 2006 reflecting the reporting of a
      $326,000 loss.




30




**Risk
      Management**





***Overview*** **.** Managing
      risk is an essential part of successfully managing a financial institution.
      Our
      most prominent risk exposures are credit risk, interest rate risk and market
      risk. Credit risk is the risk of not collecting the interest and/or the
      principal balance of a loan or investment when it is due. Interest rate risk
      is
      the potential reduction of interest income as a result of changes in interest
      rates. Market risk arises from fluctuations in interest rates that may result
      in
      changes in the values of financial instruments, such as available-for-sale
      securities that are accounted for on a mark-to-market basis. Other risks that
      we
      encounter are operational risks, liquidity risks and reputation risk.
      Operational risks include risks related to fraud, regulatory compliance,
      processing errors, technology and disaster recovery. Liquidity risk is the
      possible inability to fund obligations to depositors, lenders or borrowers.
      Reputation risk is the risk that negative publicity or press, whether true
      or
      not, could cause a decline in our customer base or revenue.





***Credit
      Risk Management*** **.** Our
      strategy for credit risk management focuses on having well-defined credit
      policies and uniform underwriting criteria and providing prompt attention to
      potential problem loans. Our strategy also emphasizes the origination of one-
      to
      four-family mortgage loans, which typically have lower default rates than other
      types of loans and are secured by collateral that generally tends to appreciate
      in value.





When
      a
      borrower fails to make a required loan payment, we take a number of steps to
      attempt to have the borrower cure the delinquency and restore the loan to
      current status. When the loan becomes 15 days past due, a past due notice is
      generated and sent to the borrower and phone calls are made. If payment is
      not
      then received by the 30 th day of
      delinquency, a further notification is sent to the borrower. If payment is
      not
      received by the 60 th day of
      delinquency, a further notification is sent to the borrowers giving notice
      of
      possible foreclosure actions. If no successful workout can be achieved by the
      90 th day of
      delinquency, we will commence foreclosure proceedings. If a foreclosure action
      is instituted and the loan is not brought current, paid in full, or refinanced
      before the foreclosure sale, the real property securing the loan generally
      is
      sold at foreclosure. Generally, when a consumer loan becomes 90 days past due,
      we institute collection proceedings and attempt to repossess any personal
      property that secures the loan. We may consider loan workout arrangements with
      certain borrowers under certain circumstances.





Management
      reports to the board of directors monthly regarding the amount of loans
      delinquent more than 30 days, all loans in foreclosure and all foreclosed and
      repossessed property that we own.





***Analysis
      of Non-Performing and Classified Assets.*** We
      consider repossessed assets and loans that are 90 days or more past due to
      be
      nonperforming assets. Loans are generally placed on nonaccrual status when
      they
      become 90 days delinquent at which time the accrual of interest ceases and
      the
      allowance for any uncollectible accrued interest is established and charged
      against operations. Typically, payments received on a nonaccrual loan are
      applied to the outstanding principal and interest as determined at the time
      of
      collection of the loan.





Real
      estate that we acquire as a result of foreclosure or by deed-in-lieu of
      foreclosure is classified as foreclosed assets until it is sold. When property
      is acquired, it is recorded at the lower of its cost, which is the unpaid
      balance of the loan plus foreclosure costs, or fair market value at the date
      of
      foreclosure. Holding costs and declines in fair value after acquisition of
      the
      property result in charges against income.




31




The
      following table provides information with respect to our nonperforming assets
      at
      the dates indicated. We did not have any troubled debt restructurings or any
      accruing loans past due 90 days or more at the dates presented.


**At
                  December 31,****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003****(Dollars
                  in thousands)**Nonaccrual
                  loans:Real
                  estate loans:One-
                  to four-family
              
              $
              179
              
              $
              181
              
              $
              234
              
              $
              309
              
              $
              401Multi-family
                  and commercial real estate
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              30Home
                  equity loans and lines of credit
              
              
              -
              
              
              -
              
              
              12
              
              
              16
              
              
              14Consumer
              
              
              37
              
              
              93
              
              
              38
              
              
              43
              
              
              -Total
              
              
              216
              
              
              274
              
              
              284
              
              
              368
              
              
              445Real
                  estate owned
              
              
              -
              
              
              -
              
              
              428
              
              
              680
              
              
              709Other
                  nonperforming assets
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  nonperforming assets
              
              $
              216
              
              $
              274
              
              $
              712
              
              $
              1,048
              
              $
              1,154Total
                  nonperforming loans to total loans
              
              
              0.16
              %
              
              0.24
              %
              
              0.29
              %
              
              0.38
              %
              
              0.45
              %Total
                  nonperforming loans to total assets
              
              
              0.11
              %
              
              0.13
              %
              
              0.16
              %
              
              0.21
              %
              
              0.24
              %Total
                  nonperforming assets and troubled
                debt
                  restructurings to total assets
              
              
              0.11
              %
              
              0.13
              %
              
              0.41
              %
              
              0.60
              %
              
              0.62
              %


Interest
      income that would have been recorded for the years ended December 31, 2007,
      2006
      and 2005 had nonaccruing loans been current according to their original terms
      was not material.





Federal
      regulations require us to review and classify our assets on a regular basis.
      In
      addition, the Office of Thrift Supervision has the authority to identify problem
      assets and, if appropriate, require them to be classified. There are three
      classifications for problem assets: substandard, doubtful and loss. “Substandard
      assets” must have one or more defined weaknesses and are characterized by the
      distinct possibility that we will sustain some loss if the deficiencies are
      not
      corrected. “Doubtful assets” have the weaknesses of substandard assets with the
      additional characteristic that the weaknesses make collection or liquidation
      in
      full on the basis of currently existing facts, conditions and values
      questionable, and there is a high possibility of loss. An asset classified
      “loss” is considered uncollectible and of such little value that continuance as
      an asset of the institution is not warranted. The regulations also provide
      for a
“special mention” category, described as assets which do not currently expose us
      to a sufficient degree of risk to warrant classification but do possess credit
      deficiencies or potential weaknesses deserving our close attention. When we
      classify an asset as special mention, substandard or doubtful we establish
      a
      specific allowance for loan losses. If we classify an asset as loss, we allocate
      an amount equal to 100% of the portion of the asset classified loss.





The
      following table shows the aggregate amounts of our classified assets at the
      dates indicated.





**At
                December 31,****2007**
            
            **2006**
            
            **2005****(Dollars
                in thousands)**Special
                mention assets
            
            $
            -
            
            $
            -
            
            $
            -Substandard
                assets
            
            
            216
            
            
            274
            
            
            777Doubtful
                assets
            
            
            -
            
            
            -
            
            
            -Loss
                assets
            
            
            -
            
            
            -
            
            
            -Total
                classified assets
            
            $
            216
            
            $
            274
            
            $
            777




Other
      than disclosed in the above tables, there are no other loans at December 31,
      2007 that management has serious doubts about the ability of the borrowers
      to
      comply with the present loan repayment terms.




32




***Delinquencies*** ***.*** The
      following table provides information about delinquencies in our loan portfolio
      at the dates indicated.




**At
                December 31,****2007**
            
            **2006**
            
            **2005****30-59**
              **Days**
              **Past Due**
            
            **60-89**
              **Days**
              **Past Due**
            
            **30-59**
              **Days**
              **Past Due**
            
            **60-89**
              **Days**
              **Past Due**
            
            **30-59**
              **Days**
              **Past Due**
            
            **60-89**
              **Days**
              **Past Due****(Dollars
                in thousands)**Real
                estate loansOne-
                to four-family
            
            $
            77
            
            $
            -
            
            $
            521
            
            $
            -
            
            $
            92
            
            $
            -Multi-family
                  and commercial real
                  estate
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Home
                equity loans and lines of credit
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Consumer
            
            
            35
            
            
            22
            
            
            22
            
            
            2
            
            
            47
            
            
            48Total
            
            $
            112
            
            $
            22
            
            $
            543
            
            $
            2
            
            $
            139
            
            $
            48




***Analysis
      and Determination of the Allowance for Loan Losses*** ***.*** The
      allowance for loan losses is a valuation allowance for probable incurred credit
      losses in the loan portfolio. We evaluate the need to establish allowances
      against losses on loans on a quarterly basis. When additional allowances are
      necessary, a provision for loan losses is charged to earnings.





Our
      methodology for assessing the appropriateness of the allowance for loan losses
      consists of: (1) a specific allowance on identified problem loans; and (2)
      a
      general valuation allowance on the remainder of the loan portfolio. Although
      we
      determine the amount of each element of the allowance separately, the entire
      allowance for loan losses is available for the entire portfolio.





*Specific
      Allowance Required for Identified Problem Loans.* ** We
      establish an allowance on certain identified problem loans where the loan
      balance exceeds the fair market value, when collection of the full amount
      outstanding becomes improbable and when an accurate estimate of the loss can
      be
      documented.





*General
      Valuation Allowance on the Remainder of the Loan Portfolio.* ** We
      establish a general allowance for loans that are not delinquent to recognize
      the
      inherent losses associated with lending activities. This general valuation
      allowance is determined by segregating the loans by loan category and assigning
      percentages to each category. The percentages are adjusted for significant
      factors that, in management’s judgment, affect the collectibility of the
      portfolio as of the evaluation date. These significant factors may include
      changes in existing general economic and business conditions affecting our
      primary lending areas and the national economy, staff lending experience, recent
      loss experience in particular segments of the portfolio, specific reserve and
      classified asset trends, delinquency trends and risk rating trends. The applied
      loss factors are reevaluated periodically to ensure their relevance in the
      current economic environment.





We
      identify loans that may need to be charged off as a loss by reviewing all
      delinquent loans, classified loans and other loans that management may have
      concerns about collectibility. For individually reviewed loans, the borrower’s
      inability to make payments under the terms of the loan or a shortfall in
      collateral value would result in our allocating a portion of the allowance
      to
      the loan that was impaired.





The
      Office of Thrift Supervision, as an integral part of its examination process,
      periodically reviews our allowance for loan losses. The Office of Thrift
      Supervision may require us to make additional provisions for loan losses based
      on judgments different from ours.




At
      December 31, 2007, our allowance for loan losses represented 0.53% of total
      gross loans and 338.4% of nonperforming loans. At December 31, 2006, our
      allowance for loans losses represented 0.62% of total gross loans and 253.7%
      of
      nonperforming loans. The allowance for loans losses increased by $36,000 to
      $731,000 at December 31, 2007 from $695,000 at December 31, 2006 as we
      recorded a provision for loan losses of $31,000 and recoveries of
      $5,000.




33
 
 The
          following table sets forth the breakdown of the allowance for loan losses
          by
          loan category at the dates indicated.
 At
                            December 31,2007
                        
                        2006
                        
                        2005
                        
                        2004
                        
                        2003Amount
                        
                        % of
                          Allowance
                          to Total
                          Allowance
                        
                        % of
                          Loans in
                          Category
                          to Total
                          Loans
                        
                        Amount
                        
                        % of
                          Allowance
                          to Total
                          Allowance
                        
                        % of
                          Loans in
                          Category
                          to Total
                          Loans
                        
                        Amount
                        
                        % of
                          Allowance
                          to Total
                          Allowance
                        
                        % of
                          Loans in
                          Category
                          to Total
                          Loans
                        
                        Amount
                        
                        % of
                          Allowance
                          to Total
                          Allowance
                        
                        % of
                          Loans in
                          Category
                          to Total
                          Loans
                        
                        Amount
                        
                        % of
                          Allowance
                          to Total
                          Allowance
                        
                        % of
                          Loans in
                          Category
                          to Total
                          Loans(Dollars
                            in thousands)Real
                            estate loans:One-to
                            four-family
                        
                        $
                        443
                        
                        
                        60.00
                        %
                        
                        87.00
                        %
                        $
                        314
                        
                        
                        45.00
                        %
                        
                        89.00
                        %
                        $
                        373
                        
                        
                        57.00
                        %
                        
                        91.00
                        %
                        $
                        362
                        
                        
                        52.00
                        %
                        
                        90.00
                        %
                        $
                        353
                        
                        
                        48.00
                        %
                        
                        89.00
                        %Multi-family
                            and commercial real estate loans
                        
                        
                        250
                        
                        
                        34.00
                        
                        
                        7.00
                        
                        
                        344
                        
                        
                        50.00
                        
                        
                        5.00
                        
                        
                        252
                        
                        
                        39.00
                        
                        
                        4.00
                        
                        
                        299
                        
                        
                        43.00
                        
                        
                        4.00
                        
                        
                        348
                        
                        
                        47.00
                        
                        
                        4.00Home
                            equity loans and lines of credit
                        
                        
                        27
                        
                        
                        4.00
                        
                        
                        4.00
                        
                        
                        26
                        
                        
                        4.00
                        
                        
                        5.00
                        
                        
                        13
                        
                        
                        2.00
                        
                        
                        2.00
                        
                        
                        14
                        
                        
                        2.00
                        
                        
                        3.00
                        
                        
                        17
                        
                        
                        2.00
                        
                        
                        3.00Consumer
                        
                        
                        11
                        
                        
                        2.00
                        
                        
                        2.00
                        
                        
                        11
                        
                        
                        1.00
                        
                        
                        1.00
                        
                        
                        13
                        
                        
                        2.00
                        
                        
                        3.00
                        
                        
                        17
                        
                        
                        3.00
                        
                        
                        3.00
                        
                        
                        18
                        
                        
                        3.00
                        
                        
                        4.00Total
                            allowance for loan losses
                        
                        $
                        731
                        
                        
                        100.00
                        %
                        
                        100.00
                        %
                        $
                        695
                        
                        
                        100.00
                        %
                        
                        100.00
                        %
                        $
                        651
                        
                        
                        100.00
                        %
                        
                        100.00
                        %
                        $
                        692
                        
                        
                        100.00
                        %
                        
                        100.00
                        %
                        $
                        736
                        
                        
                        100.00
                        %
                        
                        100.00
                        %
 Although
          we believe that we use the best information available to establish the
          allowance
          for loan losses, future adjustments to the allowance for loan losses may
          be
          necessary and our results of operations could be adversely affected if
          circumstances differ substantially from the assumptions used in making
          the
          determinations. Furthermore, while we believe we have established our allowance
          for loan losses in conformity with generally accepted accounting principles,
          there can be no assurance that regulators, in reviewing our loan portfolio,
          will
          not request us to increase our allowance for loan losses. In addition,
          because
          future events affecting borrowers and collateral cannot be predicted with
          certainty, there can be no assurance that increases will not be necessary
          should
          the quality of any loans deteriorate as a result of the factors discussed
          above.
          Any material increase in the allowance for loan losses may adversely affect
          our
          financial condition and results of operations
  34





***Analysis
      of Loan Loss Experience.*** The
      following table sets forth an analysis of the allowance for loan losses for
      the
      periods indicated.





**December
                31,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****(Dollars
                in thousands)**Allowance
                at beginning of period
            
            $
            695
            
            $
            651
            
            $
            692
            
            $
            736
            
            $
            725Provision
                for loan losses
            
            
            31
            
            
            58
            
            
            –
            
            
            –
            
            
            –Charge-offs:One-to
                four-family
            
            
            –
            
            
            (19
            )
            
            (66
            )
            
            (49
            )
            
            (30
            )Multi-family
                and commercial real estate
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –Home
                equity loans and lines of credit
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –Consumer
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –Total
            
            
            0
            
            
            (19
            )
            
            (66
            )
            
            (49
            )
            
            (30
            )Recoveries:One-to
                four-family
            
            
            5
            
            
            5
            
            
            25
            
            
            5
            
            
            41Multi-family
                and commercial real estate
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –Home
                equity loans
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –Consumer
            
            
            –
            
            
            –
            
            
            –
            
            
            –
            
            
            –Total
            
            
            5
            
            
            5
            
            
            25
            
            
            5
            
            
            41Net
                charge-offs
            
            
            5
            
            
            (14
            )
            
            (41
            )
            
            (44
            )
            
            11Allowance
                at end of period
            
            $
            731
            
            $
            695
            
            $
            651
            
            $
            692
            
            $
            736Allowance
                to nonperforming loans
            
            
            338
            %
            
            254
            %
            
            230
            %
            
            188
            %
            
            64
            %Allowance
                to total loans outstanding at the endof
                the period
            
            
            0.53
            %
            
            0.62
            %
            
            0.67
            %
            
            0.71
            %
            
            0.74
            %Net
                charge-offs (recoveries) to average loansoutstanding
                during the period
            
            
            (0.01
            )%
            
            0.01
            %
            
            0.04
            %
            
            0.05
            %
            
            (0.01
            )%





***Interest
      Rate Risk Management.*** We
      manage
      the interest rate sensitivity of our interest-bearing liabilities and
      interest-earning assets in an effort to minimize the adverse effects of changes
      in the interest rate environment. Deposit accounts typically react more quickly
      to changes in market interest rates than mortgage loans because of the shorter
      maturities of deposits. As a result, sharp increases in interest rates may
      adversely affect our earnings while decreases in interest rates may beneficially
      affect our earnings. To reduce the potential volatility of our earnings, we
      have
      sought to improve the match between asset and liability maturities and rates,
      while maintaining an acceptable interest rate spread. Our strategy for managing
      interest rate risk emphasizes: adjusting the maturities of borrowings; adjusting
      the investment portfolio mix and duration; and periodically selling fixed-rate
      mortgage loans and available-for-sale securities. We currently do not
      participate in hedging programs, interest rate swaps or other activities
      involving the use of derivative financial instruments.




We
      have
      an Asset/Liability Committee, which includes members of management and the
      board
      of directors, to communicate, coordinate and control all aspects involving
      asset/liability management. The committee establishes and monitors the volume,
      maturities, pricing and mix of assets and funding sources with the objective
      of
      managing assets and funding sources to provide results that are consistent
      with
      liquidity, growth, risk limits and profitability goals.





We
      use an
      interest rate sensitivity analysis prepared by the Office of Thrift Supervision
      to review our level of interest rate risk. This analysis measures interest
      rate
      risk by computing changes in net portfolio value of our cash flows from assets,
      liabilities and off-balance sheet items in the event of a range of assumed
      changes in market interest rates. Net portfolio value represents the market
      value of portfolio equity and is equal to the market value of assets minus
      the
      market value of liabilities, with adjustments made for off-balance sheet items.
      This analysis assesses the risk of loss in market risk sensitive instruments
      in
      the event of a sudden and sustained 100 to 300 basis point increase or 100
      and
      200 basis point decrease in market interest rates with no effect given to any
      steps that we might take to counter the effect of that interest rate movement.
      Because of the low level of market interest rates, this analysis is not
      performed for decreases of more than 200 basis points. We measure interest
      rate
      risk by modeling the changes in net portfolio value over a variety of interest
      rate scenarios.


35


The
      following table, which is based on information that we provide to the Office
      of
      Thrift Supervision, presents the change in our net portfolio value at December
      31, 2007, that would occur in the event of an immediate change in interest
      rates
      based on Office of Thrift Supervision assumptions, with no effect given to
      any
      steps that we might take to counteract that change.




**Basis Point (“bp”)**
              
              **Estimated
                  Net Portfolio Value**
              
              **Net
                  Portfolio Value as % of**
                **Portfolio
                  Value of Assets****Change
                  in Rates**
              
              **$ Amount**
              
              **$
                  Change**
              
              **%
                  Change**
              
              **NPV Ratio**
              
              **Change
                  (bp)****(Dollars
                  in thousands)**300
              
              $
              11,806
              
              $
              (13,246
              )
              
              (53.00
              )%
              
              6.19
              %
              
              (583
              )200
              
              
              16,407
              
              
              (8,645
              )
              
              (35.00
              )
              
              8.34
              
              
              (368
              )100
              
              
              21,064
              
              
              (3,988
              )
              
              (16.00
              )
              
              10.39
              
              
              (164
              )0
              
              
              25,052
              
              
              –
              
              
              –
              
              
              12.02
              
              
              –(100)
              
              
              26,513
              
              
              1,461
              
              
              6.00
              
              
              12.53
              
              
              51(200)
              
              
              26,048
              
              
              995
              
              
              4.00
              
              
              12.24
              
              
              22





The
      Office of Thrift Supervision use various assumptions in assessing interest
      rate
      risk. These assumptions relate to interest rates, loan prepayment rates, deposit
      decay rates, and the market values of certain assets under differing interest
      rate scenarios, among others. As with any method of measuring interest rate
      risk, certain shortcomings are inherent in the methods of analyses presented
      in
      the foregoing table. For example, although certain assets and liabilities may
      have similar maturities or periods to repricing, they may react in different
      degrees to changes in market interest rates. Also, the interest rates on certain
      types of assets and liabilities may fluctuate in advance of changes in market
      interest rates, while interest rates on other types may lag behind changes
      in
      market rates. Additionally, certain assets have features that restrict changes
      in interest rates on a short-term basis and over the life of the asset. Further,
      in the event of a change in interest rates, expected rates, expected rates
      of
      prepayments on loans and early withdrawals from certificates could deviate
      significantly from those assumed in calculating the table. Prepayment rates
      can
      have a significant impact on interest income. Because of the large percentage
      of
      loans we hold, rising or falling interest rates have a significant impact on
      the
      prepayment speeds of our earning assets that in turn affect the rate sensitivity
      position. When interest rates rise, prepayments tend to slow. When interest
      rates fall, prepayments tend to rise. Our asset sensitivity would be reduced
      if
      prepayments slow and vice versa. While we believe these assumptions to be
      reasonable, there can be no assurance that assumed prepayment rates will
      approximate actual future loan repayment activity.




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




We
      regularly adjust our investments in liquid assets based upon our assessment
      of
      (1) expected loan demand, (2) expected deposit flows, (3) yields available
      on
      interest-earning deposits and securities and (4) the objectives of our
      asset/liability management policy.





Our
      most
      liquid assets are cash and cash equivalents. The levels of these assets depend
      on our operating, financing, lending and investing activities during any given
      period. At December 31, 2007, cash and cash equivalents totaled $3.8 million.
      Securities classified as available-for-sale, which provide additional sources
      of
      liquidity, totaled $45.9 million at December 31, 2007. In addition, at December
      31, 2007, we had the ability to borrow a total of approximately $149.4 million
      from the FHLB of Pittsburgh. On December 31, 2007, we had $10.1 million of
      borrowings outstanding. Future growth of our loan portfolio resulting from
      our
      expansion efforts may require us to borrow additional funds.




At
      December 31, 2007, we had $3.5 in mortgage loan commitments outstanding. Time
      deposits due within one year of December 31, 2007 totaled $38.8 million, or
      49.0% of time deposits. If these maturing deposits do not remain with us, we
      will be required to seek other sources of funds, including other time deposits
      and borrowings. Depending on market conditions, we may be required to pay higher
      rates on such deposits or other borrowings than we currently pay on the time
      deposits due on or before December 31, 2008. We believe, however, based on
      past
      experience that a significant portion of our time deposits will remain with
      us.
      We have the ability to attract and retain deposits by adjusting the interest
      rates offered.


36





Our
      primary investing activities are the origination of loans and the purchase
      of
      securities. Our primary financing activities consist of activity in deposit
      accounts and FHLB advances. Deposit flows are affected by the overall level
      of
      interest rates, the interest rates and products offered by us and our local
      competition and other factors. We generally manage the pricing of our deposits
      to be competitive and to increase core deposit relationships. Occasionally,
      we
      offer promotional rates on certain deposit products to attract
      deposits.





***Capital
      Management.*** We have
      managed our capital to maintain strong protection for depositors and creditors.
      We are subject to various regulatory capital requirements administered by the
      Office of Thrift Supervision, including a risk-based capital measure. The
      risk-based capital guidelines include both a definition of capital and a
      framework for calculating risk-weighted assets by assigning balance sheet assets
      and off-balance sheet items to broad risk categories. At December 31, 2007,
      we
      exceeded all of our regulatory capital requirements. We are considered “well
      capitalized” under regulatory guidelines. See “ *Regulation
      and Supervision— Federal Savings Associations Regulation—Capital
      Requirements* ”
and
      note 13 of the notes to the consolidated financial statements.





We
      also
      manage our capital for maximum shareholder benefit. The capital from the
      offering significantly increased our liquidity and capital resources. Over
      time,
      the initial level of liquidity will be reduced as net proceeds from the stock
      offering are used for general corporate purposes, including the funding of
      lending activities. Our financial condition and results of operations are
      expected to be enhanced by the capital from the offering, resulting in increased
      net interest-earning assets and net income. However, the large increase in
      equity resulting from the capital raised in the offering will, initially, have
      an adverse impact on our return on equity. We may use capital management tools
      such as cash dividends and common share repurchases. However, under OTS
      regulations, we are not allowed to repurchase any shares during the first year
      following our offering, except to fund the restricted stock awards under the
      equity incentive plan, unless extraordinary circumstances exist and we receive
      regulatory approval.





**Off-Balance
      Sheet Arrangements**





In
      the
      normal course of operations, we engage in a variety of financial transactions
      that, in accordance with generally accepted accounting principles, are not
      recorded in our financial statements. These transactions involve, to varying
      degrees, elements of credit, interest rate and liquidity risk. Such transactions
      are used primarily to manage customers’ requests for funding and take the form
      of loan commitments. A presentation of our outstanding loan commitments at
      December 31, 2007 and their effect on our liquidity is presented at note 11
      of the notes to the consolidated financial statements and under *“—Risk
      Management—Liquidity Management.”*





For
      the
      years ended December 31, 2007 and December 31, 2006, we did not engage in any
      off-balance-sheet transactions reasonably likely to have a material effect
      on
      our financial condition, results of operations or cash flows.





**Effect
      of Inflation and Changing Prices**





The
      financial statements and related financial data presented in this annual report
      on Form 10-KSB have been prepared in accordance with U.S. generally accepted
      accounting principles, which require the measurement of financial position
      and
      operating results in terms of historical dollars without considering the change
      in the relative purchasing power of money over time due to inflation. The
      primary impact of inflation on our operations is reflected in increased
      operating costs. Unlike most industrial companies, virtually all the assets
      and
      liabilities of a financial institution are monetary in nature. As a result,
      interest rates generally have a more significant impact on a financial
      institution’s performance than do general levels of inflation. Interest rates do
      not necessarily move in the same direction or to the same extent as the prices
      of goods and services.





**ITEM
              7.**
            **FINANCIAL
                STATEMENTS**





Information
      required by this item is included herein beginning on page F-1.


37


**ITEM
              8.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**





None.





**ITEM
              8A(T).**
            **CONTROLS
                AND PROCEDURES**





The
      Company’s management, including the Company’s principal executive officer and
      principal financial officer, have evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
      promulgated under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”). Based upon their evaluation, the principal executive officer
      and principal financial officer concluded that, as of the end of the period
      covered by this report, the Company’s disclosure controls and procedures were
      effective for the purpose of ensuring that the information required to be
      disclosed in the reports that the Company files or submits under the Exchange
      Act with the Securities and Exchange Commission (1) is recorded, processed,
      summarized and reported within the time periods specified in the SEC’s rules and
      forms and (2) is accumulated and communicated to the Company’s management,
      including its principal executive officer and principal financial officer,
      as
      appropriate to allow timely decisions regarding required disclosure. In
      addition, based on that evaluation, no changes in the Company’s internal control
      over financial reporting occurred during the quarter ended December 31, 2007
      that have materially affected, or are reasonably likely to materially affect,
      the Company’s internal controls over financial reporting.





Management’s
      report on internal control over financial reporting is incorporated herein
      by
      reference to the section captioned *“Management’s
      Report on Internal Control Over Financial Reporting”* immediately preceding the Company’s Consolidated Financial Statements beginning
      on page F-1 of this Annual Report on Form 10-KSB.





**ITEM
              8B.**
            **OTHER
                INFORMATION**





None.


38


**PART
      III**





**ITEM
              9.**
            **DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
                COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                ACT**





**Board
      of Directors**





For
      information relating to the directors of the Company, the section captioned *“Item
      1 - Election of Directors”* in the
      Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders is
      incorporated by reference.





**Executive
      Officers**





For
      information relating to the executive officers of the Company, the section
      captioned *“Item
      1 - Election of Directors”* in the
      Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders is
      incorporated by reference.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





For
      information regarding compliance with Section 16(a) of the Exchange Act, the
      cover page to this Annual Report on Form 10-KSB and the section captioned *“Section
      16(a) Beneficial Ownership Compliance”* in the
      Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders are
      incorporated by reference.




**Code
      of Ethics and Business Conduct**





The
      Company has adopted a Code of Ethics and Business Conduct. A copy of the Code
      of
      Ethics and Business Conduct is available, without charge, upon written request
      to Paul D. Rutkowski, Corporate Secretary, Polonia Bancorp, 3993 Huntingdon
      Pike, Suite 300, Huntingdon Valley, Pennsylvania 19006.





**Audit
      Committee of the Board of Directors**





For
      information regarding the audit committee and its composition and the audit
      committee financial expert, the section captioned *“Item
      1 – Election of Directors”* in the
      Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders is
      incorporated by reference.





**ITEM
              10.**
            **EXECUTIVE
                COMPENSATION**





For
      information regarding executive compensation the section entitled *“Executive
      Compensation”* and *“Directors’
      Compensation”* in
      the
      Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders are
      incorporated by reference.





**ITEM
              11.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS**





***(a)***  ***Security
      Ownership of Certain Beneficial Owners***




The
      information required by this item is incorporated herein by reference to the
      section captioned *“Stock
      Ownership”* in the
      Proxy Statement.





***(b)***  ***Security
      Ownership of Management***





The
      information required by this item is incorporated herein by reference to the
      section captioned *“Stock
      Ownership”* in the
      Proxy Statement.


39


***(c)***
            ***Changes
                in Control***





Management
      of Polonia Bancorp knows of no arrangements, including any pledge by any person
      of securities of Polonia Bancorp, the operation of which may at a subsequent
      date result in a change in control of the registrant.





***(d)***
            ***Securities
                Authorized for Issuance under Equity Compensation
                Plans***





The
      Company has adopted the Polonia Bancorp 2007 Equity Incentive Plan, which was
      approved by stockholders in July 2007. The following table sets forth certain
      information with respect to the Company’s equity compensation plan as of
      December 31, 2007.





**Plan
                Category**
            
            Number of securities
              to be issued upon
              the exercise of
              outstanding options,
              warrants and rights
            
            Weighted-average
              exercise price of
              outstanding options,
              warrants and rights
            
            Number of securities
              remaining available
              for future issuance under equity
              compensation plans (excluding
              securities reflected in the first
              column)Equity
                compensation plansapproved
                by security holders
            
            162,003
            
            $9.40
            
            –Equity
                compensation plansnot
                approved by security holders
            
            –
            
            –
            
            –Total
            
            162,003
            
            $9.40
            
            –




**ITEM
              12.**
            **CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                INDEPENDENCE**





**Certain
      Relationships and Related Transactions**





For
      information regarding certain relationships and related transactions, the
      section captioned *”Transactions
      with Related Persons”* in the
      Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders is
      incorporated by reference.





**Corporate
      Governance**





For
      information regarding director independence, the section captioned *“Item
      1 - Election of Directors”* in
      the
      Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders is
      incorporated by reference.





**ITEM
              13.**
            **EXHIBITS**




3.1
              Charter
                  of Polonia Bancorp(1)3.2
              Bylaws
                  of Polonia Bancorp(1)4.0
              Stock
                  Certificate of Polonia Bancorp(1)10.1
              Polonia
                  Bank Employment Agreement(1)10.2
              Polonia
                  Bancorp Employment Agreement(1)10.3
              Polonia
                  Bank Employee Severance Compensation Plan(1)10.4
              Supplemental
                  Executive Retirement Plan(1)10.5
              Supplemental
                  Executive Retirement Plan for Anthony J. Szuszczewicz(1)10.6
              Supplemental
                  Executive Retirement Plan for Edward W. Lukiewski(1)10.7
              Non-Qualified
                  Deferred Compensation Plan(1)10.8
              Supplemental
                  Executive Retirement Plan for Paul D. Rutkowski(1)10.9
              Supplmental
                  Executive Retirement Plan for Kenneth J. Maliszewski(1)10.10
              Split
                  Dollar Life Insurance Agreement with Paul D. Rutkowski(2)10.11
              Split
                  Dollar Life Insurance Agreement with Kenneth J. Maliszewski(2)21.0
              Subsidiaries
                  of the Registrant23.1
              Consent
                  of S.R. Snodgrass, A.C.31.1
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief Executive
                  Officer31.2
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief Financial
                  Officer32.0
              Section
                  1350 Certification


40


__________


(1)
            Incorporated
                by reference into this document from the Exhibits filed with the
                Securities and Exchange Commission on the Registration Statement
                on Form
                SB-2, (File No. 333-135643) and any amendments thereto.


(2)
            Incorporated
                by reference into this document from the Exhibits filed with the
                Securities and Exchange Commission on the Current Report on Form
                8-K,
                filed on January 25, 2007 (File No.
                000-52267).





**ITEM
              14.**
            **PRINCIPAL
                ACCOUNTANT FEES AND
                SERVICES**





For
      information regarding the principal accountant fees and expenses, the section
      captioned *“Independent
      Registered Public Accounting Firm”* in the
      Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders is
      incorporated by reference.


41


**MANAGEMENT’S
      REPORT ON**


**INTERNAL
      CONTROL OVER FINANCIAL REPORTING**





The
      Company’s management is responsible for establishing and maintaining adequate
      internal control over financial reporting. Our internal control over financial
      reporting is a process designed to provide reasonable assurance regarding the
      reliability of our financial reporting and of the preparation of our
      consolidated financial statements for external purposes in accordance with
      United States generally accepted accounting principles.





A
      company’s internal control over financial reporting includes those policies and
      procedures that (1) pertain to the maintenance of records that, in reasonable
      detail, accurately and fairly reflect the transactions and dispositions of
      the
      assets of the company; (2) provide reasonable assurance that transactions are
      recorded as necessary to permit preparation of consolidated financial statements
      in accordance with generally accepted accounting principles, and that receipts
      and expenditures of the company are being made only in accordance with
      authorizations of management and directors of the company; and (3) provide
      reasonable assurance regarding prevention or timely detection of unauthorized
      acquisition, use, or disposition of the company’s assets that could have a
      material effect on the consolidated financial statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





The
      Company’s management assessed the effectiveness of its internal control over
      financial reporting as of


December
      31, 2007, using the criteria established in *Internal
      Control-Integrated Framework, issued by the Committee of Sponsoring
      Organizations of the Treadway Commission* (“COSO”). Based on this assessment, management has concluded that, as of
      December 31, 2007, the Company’s internal control over financial reporting was
      effective based on the criteria.





This
      annual report does not include an attestation report of the Company’s
      Independent Registered Public Accounting Firm regarding internal control over
      financial reporting. Management’s report was not subject to attestation by the
      Company’s Independent Registered Public Accounting Firm pursuant to temporary
      rules of the Securities and Exchange Commission that permit the Company to
      provide only management’s report in this annual report.


42


**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





POLONIA
                BANCORPDate:
                March 28, 2008
            By:
            /s/
                Anthony J. SzuszczewiczAnthony
                J. SzuszczewiczChairman,
                President and Chief Executive
                Officer




In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant in the capacities and on the
      dates
      indicated.





Name
            
            Title
            
            Date/s/
                Anthony J. Szuszczewicz
            
            Chairman,
                President and Chief Executive
            
            March
                28, 2008Anthony
                J. Szuszczewicz
            
            Officer
                (principal executive officer)/s/
                Paul D. Rutkowski
            
            Chief
                Financial Officer and Treasurer
            
            March
                28, 2008Paul
                D. Rutkowski
            
            (principal
                accounting and financial officer)/s/
                Dr. Eugene Andruczyk
            
            Director
            
            March
                28, 2008Dr.
                Eugene Andruczyk/s/
                Frank J. Byrne
            
            Director
            
            March
                28, 2008Frank
                J. Byrne/s/
                Gordon R. Johnston, III
            
            Director
            
            March
                28, 2008Gordon
                R. Johnston, III/s/
                Edward W. Lukiewski
            
            Director
            
            March
                28, 2008Edward
                W. Lukiewski/s/
                Robert J. Woltjen
            
            Director
            
            March
                28, 2008Robert
                J. Woltjen







POLONIA
      BANCORP


AUDITED
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2007





PageNumberReport
                of Independent Registered Public Accounting Firm
            F
                -
                1Financial
                StatementsConsolidated
                Balance Sheet
            F
                -
                2Consolidated
                Statement of Income
            F
                -
                3Consolidated
                Statement of Changes in Stockholders’ Equity
            F
                -
                4Consolidated
                Statement of Cash Flows
            F
                -
                5Notes
                to the Consolidated Financial Statements
            F
                -
                6 – F - 28







REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board
      of
      Directors


Polonia
      Bancorp





We
      have
      audited the consolidated balance sheets of Polonia Bancorp and subsidiary as
      of
      December 31, 2007 and 2006, and the related consolidated statements of income,
      stockholders’ equity, and cash flows for the years then ended. These financial
      statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Polonia Bancorp and
      subsidiary as of December 31, 2007 and 2006, and the results of their operations
      and their cash flows for the years then ended, in conformity with U.S. generally
      accepted accounting principles.





We
      were
      not engaged to examine management’s assertion about the effectiveness of Polonia
      Bancorp’s internal control over financial reporting as of December 31, 2007,
      included in the accompanying “Management’s Report on Internal Control” and,
      accordingly, we do not express and opinion thereon.





/s/
      S.R.
      Snodgrass, A.C.





Wexford,
      PA


March
      24,
      2008








POLONIA
      BANCORP


CONSOLIDATED
      BALANCE SHEET





December 31,2007
            
            2006ASSETSCash and due from banks
            
            $
            980,929
            
            $
            863,059Interest-bearing deposits with other institutions
            
            
            2,844,796
            
            
            31,003,198Cash and cash equivalents
            
            
            3,825,725
            
            
            31,866,257Investment securities available for sale
            
            
            45,885,415
            
            
            45,680,651Loans receivable (net of allowance for loan losses of $731,338 and
                $694,570)
            
            
            137,279,915
            
            
            111,922,796Accrued interest receivable
            
            
            848,930
            
            
            795,585Federal Home Loan Bank stock
            
            
            1,270,800
            
            
            934,600Premises and equipment, net
            
            
            5,195,812
            
            
            5,294,758Bank-owned life insurance
            
            
            4,172,776
            
            
            3,980,693Other assets
            
            
            2,117,796
            
            
            2,898,851TOTAL ASSETS
            
            $
            200,597,169
            
            $
            203,374,191LIABILITIESDeposits
            
            $
            163,216,663
            
            $
            157,722,003FHLB advances - short-term
            
            
            6,000,000
            
            
            -FHLB advances - long-term
            
            
            4,098,370
            
            
            6,245,223Advances by borrowers for taxes and insurance
            
            
            1,224,248
            
            
            1,104,245Accrued interest payable
            
            
            9,504
            
            
            20,447Stock offering subscription rights
            
            
            -
            
            
            24,822,062Other liabilities
            
            
            2,054,639
            
            
            1,683,218TOTAL LIABILITIES
            
            
            176,603,424
            
            
            191,597,198Commitments and contingencies (Note 10)
            
            
            -
            
            
            -STOCKHOLDERS'
                EQUITYPreferred stock ($.01 par value; 1,000,000 shares authorized; none
                issued
                or outstanding)
            
            
            -
            
            
            -Common stock ($.01 par value; 14,000,000 shares authorized; 3,306,250
                shares issued  and outstanding)
            
            
            33,063
            
            
            -Additional paid-in-capital
            
            
            13,843,776
            
            
            -Retained earnings
            
            
            11,752,230
            
            
            12,077,801Unallocated shares held by Emploee Stock Ownership Plan ("ESOP")
                (120,964
                shares)
            
            
            (1,209,647
            )
            
            -Unearned restricted shares (64,800 shares)
            
            
            (568,512
            )
            
            -Accumulated other comprehensive income (loss)
            
            
            142,835
            
            
            (300,808
            )TOTAL STOCKHOLDERS' EQUITY
            
            
            23,993,745
            
            
            11,776,993TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            200,597,169
            
            $
            203,374,191





See
      accompanying notes to the consolidated financial statements.


F
          - 2





POLONIA
      BANCORP


CONSOLIDATED
      STATEMENT OF INCOME





Year
                Ended December 31,2007
            
            2006INTEREST
                AND DIVIDEND INCOMELoans receivable
            
            $
            7,253,595
            
            $
            6,010,824Investment securities
            
            
            2,361,318
            
            
            2,236,657Interest-bearing deposits and other dividends
            
            
            682,375
            
            
            342,112Total interest and dividend income
            
            
            10,297,288
            
            
            8,589,593INTEREST
                EXPENSEDeposits
            
            
            5,367,463
            
            
            3,788,248FHLB advances - short-term
            
            
            59,899
            
            
            105,357FHLB advances - long-term
            
            
            190,359
            
            
            327,500Advances by borrowers for taxes and insurance
            
            
            20,869
            
            
            18,887Total interest expense
            
            
            5,638,590
            
            
            4,239,992NET
                INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
            
            
            4,658,698
            
            
            4,349,601Provision
                for loan losses
            
            
            31,367
            
            
            57,973NET
                INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
            
            
            4,627,331
            
            
            4,291,628NONINTEREST
                INCOMEService
                fees on deposit accounts
            
            
            129,014
            
            
            141,420Earnings
                on bank-owned life insurance
            
            
            192,083
            
            
            164,022Investment
                securities losses, net
            
            
            -
            
            
            (167,697
            )Rental
                income
            
            
            292,875
            
            
            321,314Other
            
            
            146,552
            
            
            191,090Total noninterest income
            
            
            760,524
            
            
            650,149NONINTEREST
                EXPENSECompensation
                and employee benefits
            
            
            2,960,996
            
            
            2,948,759Occupancy
                and equipment
            
            
            1,036,242
            
            
            858,120Federal
                deposit insurance premiums
            
            
            138,289
            
            
            136,088Data
                processing expense
            
            
            261,337
            
            
            226,582Professional
                fees
            
            
            474,166
            
            
            150,754Other
            
            
            1,006,978
            
            
            1,042,493Total noninterest expense
            
            
            5,878,008
            
            
            5,362,796Loss
                before income tax benefit
            
            
            (490,153
            )
            
            (421,019
            )Income
                tax benefit
            
            
            (164,582
            )
            
            (201,981
            )NET
                LOSS
            
            $
            (325,571
            )
            $
            (219,038
            )EARNINGS
                PER SHARE, BASIC AND DILUTED*
            
            $
            (0.10
            )
            $
            N/AWeighted average common shares outstanding, basic and diluted
            
            $
            3,175,615
            
            
            N/A




*
      Earnings per share for the year ended December 31, 2007, are based on the period
      after Polonia's reorganization, January 17, 2007.




See
      accompanying notes to the consolidated financial statements.


F
          - 3





POLONIA
      BANCORP


CONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY




Common
                  Stock
              
              Additional
              
              Retained
              
              Unallocated
              
              Unearned
              
              AccumulatedOtherComprehensive
              
              
              
              Comprehensive#
                  of Shares
              
              Amount
              
              Paid-In-capital
              
              Earnings
              
              ESOP Shares
              
              Restricted Shares
              
              Income (Loss)
              
              Total
              
              Income (Loss)Balance, December 31, 2005
              
              
              -
              
              $
              -
              
              $
              -
              
              $
              12,296,839
              
              $
              -
              
              $
              -
              
              $
              (268,622
              )
              $
              12,028,217Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              (219,038
              )
              
              
              
              
              
              
              
              
              
              
              (219,038
              )
              $
              (219,038
              )Other
                  comprehensive loss:Unrealized
                  loss on available- for-sale securities, net of reclassification
                  adjustment, net of tax benefit of $16,581
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (32,186
              )
              
              (32,186
              )
              
              (32,186
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (251,224
              )Balance,
                  December 31, 2006
              
              
              -
              
              $
              -
              
              $
              -
              
              $
              12,077,801
              
              $
              -
              
              $
              -
              
              $
              (300,808
              )
              $
              11,776,993Common
                  stock issued
              
              
              3,306,250
              
              
              33,063
              
              
              13,801,718
              
              
              
              
              
              (1,296,050
              )
              
              (609,120
              )
              
              
              
              
              11,929,611Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              (325,571
              )
              
              
              
              
              
              
              
              
              
              
              (325,571
              )
              $
              (325,571
              )Other
                  comprehensive income:Unrealized
                  gain on available-for-sale securities, net of tax benefit   of
                  $228,543
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              443,643
              
              
              443,643
              
              
              443,643Comprehensive
                  income
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              118,072Stock
                  options compensation expense
              
              
              -
              
              
              -
              
              
              31,436
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              31,436Allocation
                  of unearned ESOP shares
              
              
              -
              
              
              -
              
              
              10,622
              
              
              -
              
              
              86,403
              
              
              
              
              
              
              
              
              97,025Allocation
                  of unearned restricted shares
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              40,608
              
              
              
              
              
              40,608Balance,
                  December 31, 2007
              
              
              3,306,250
              
              $
              33,063
              
              $
              13,843,776
              
              $
              11,752,230
              
              $
              (1,209,647
              )
              $
              (568,512
              )
              $
              142,835
              
              $
              23,993,745Components
                  of other comprehensive income (loss):
              
              
              
              
              
              
              
              
              
              
              
              2007
              
              
              2006Changes
                  in net unrealized gain on investment securities available for sale
              
              
              
              
              
              
              
              
              
              
              $
              443,643
              
              $
              (142,866
              )Realized
                  losses included in net loss,   net of tax benefit of
                  $57,017
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              110,680Total
              
              
              
              
              
              
              
              
              
              
              $
              443,643
              
              $
              (32,186
              )




See
      accompanying notes to the consolidated financial statements.


F
          - 4





POLONIA
      BANCORP


CONSOLIDATED
      STATEMENT OF CASH FLOWS





Year
                Ended December 31,2007
            
            2006OPERATING
                ACTIVITIESNet loss
            
            $
            (325,571
            )
            $
            (219,038
            )Adjustments to reconcile net loss to net cash provided by (used for)
                operating activities:Provision for loan losses
            
            
            31,367
            
            
            57,973Depreciation, amortization, and accretion
            
            
            393,778
            
            
            559,480Investment securities losses, net
            
            
            -
            
            
            167,697Earnings on bank-owned life insurance
            
            
            (192,083
            )
            
            (164,022
            )Deferred federal income taxes
            
            
            (217,855
            )
            
            53,541Increase in accrued interest receivable
            
            
            (53,345
            )
            
            (95,599
            )Decrease in accrued interest payable
            
            
            (10,943
            )
            
            (29,606
            )Stock compensation expense
            
            
            169,069
            
            
            -Other, net
            
            
            (136,748
            )
            
            191,391Net cash provided by (used for) operating activities
            
            
            (342,331
            )
            
            521,817INVESTING
                ACTIVITIESInvestment securities available for sale:Proceeds from sales
            
            
            -
            
            
            17,161,006Proceeds from principal repayments and maturities
            
            
            10,282,486
            
            
            8,530,402Purchases
            
            
            (9,852,370
            )
            
            (13,510,397
            )Increase in loans receivable, net
            
            
            (21,504,304
            )
            
            (11,451,431
            )Loans purchased
            
            
            (3,855,244
            )
            
            (3,580,800
            )Proceeds from sales of real estate owned
            
            
            -
            
            
            457,004Disbursements to improve real estate owned
            
            
            -
            
            
            (29,279
            )Purchase of Federal Home Loan Bank stock
            
            
            (466,800
            )
            
            (535,100
            )Redemptions of Federal Home Loan Bank stock
            
            
            130,600
            
            
            1,210,300Purchase of premises and equipment
            
            
            (286,450
            )
            
            (17,618
            )Net
                cash used for investing activities
            
            
            (25,552,082
            )
            
            (1,765,913
            )FINANCING
                ACTIVITIESIncrease in deposits, net
            
            
            6,488,478
            
            
            15,714,828Net increase (decrease) in FHLB advances - short-term
            
            
            6,000,000
            
            
            (3,500,000
            )Repayment of FHLB advances - long-term
            
            
            (2,146,853
            )
            
            (7,163,935
            )Proceeds from stock subscription rights
            
            
            -
            
            
            24,822,062Repayment of stock offering subscription rights
            
            
            (12,233,800
            )
            
            -Deferred conversion costs
            
            
            (373,947
            )
            
            (669,402
            )Increase (decrease) in advances by borrowers for taxes and insurance,
                  net
            
            
            120,003
            
            
            140,352Net cash provided by (used for) financing activities
            
            
            (2,146,119
            )
            
            29,343,905Increase (decrease) in cash and cash equivalents
            
            
            (28,040,532
            )
            
            28,099,809CASH
                AND CASH EQUIVALENTS AT BEGINNING OF YEAR
            
            
            31,866,257
            
            
            3,766,448CASH
                AND CASH EQUIVALENTS AT END OF YEAR
            
            $
            3,825,725
            
            $
            31,866,257SUPPLEMENTAL
                CASH FLOW DISCLOSURESCash paid:Interest
            
            $
            5,649,533
            
            $
            4,269,598Income taxes (refunds)
            
            
            75,000
            
            
            (184,503
            )Noncash transactions:Transfers from subscriptions rights to stockholders' equity
            
            
            12,549,940
            
            
            -Transfers from customers savings to stockholders' equity
            
            
            993,818
            
            
            -





See
      accompanying notes to the consolidated financial statements.


F
          - 5




**POLONIA
      BANCORP**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**





**1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**





A
      summary
      of significant accounting and reporting policies applied in the presentation
      of
      the accompanying consolidated financial statements follows:





**Nature
      of Operations and Basis of Presentation**





Polonia
      Bancorp (the “Company”) was organized as a federally chartered corporation at
      the direction of Polonia Bank (the “Bank”) in January 2007 to become the
      mid-tier stock holding company for the Bank upon the completion of its
      reorganization into the mutual holding company form of organization. Pursuant
      to
      the Plan of Reorganization, the Bank converted to stock form with all of its
      stock owned by the Company.





The
      Bank
      is a federally chartered savings bank located in Huntingdon Valley,
      Pennsylvania, whose principal sources of revenue emanate from its investment
      securities portfolio and its portfolio of residential real estate, commercial
      real estate, and consumer loans, as well as a variety of deposit services
      offered to its customers through five offices located in the Greater
      Philadelphia area. The Bank is subject to regulation by the Office of Thrift
      Supervision (the “OTS”) and the Federal Deposit Insurance Corporation. Community
      Abstract Agency, LLC, “CAA,” a wholly owned subsidiary of the Bank, provides
      title insurance on loans secured by real estate.




The
      consolidated financial statements include the accounts of the Bank and the
      Bank’s wholly owned subsidiaries, Polonia Bank Mutual Holding Company (“PBMHC”),
      a Delaware investment company, and CAA. All intercompany transactions have
      been
      eliminated in consolidation. The
      investment in subsidiaries on the parent Company’s financial statements is
      carried at the parent Company’s equity in the underlying net
      assets.





**Use
      of Estimates in the Preparation of Financial
      Statements**





The
      accounting principles followed by the Company and the subsidiaries and the
      methods of applying these principles conform to U.S. generally accepted
      accounting principles and to general practice within the banking industry.
      In
      preparing the consolidated financial statements, management is required to
      make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities as of the balance sheet date and related revenues and expenses
      for
      the period. Actual results could differ significantly from those
      estimates.





**Investment
      Securities**





Investment
      securities are classified at the time of purchase, based on management’s
      intention and ability, as securities held to maturity or securities available
      for sale. Debt securities acquired with the intent and ability to hold to
      maturity are stated at cost, adjusted for amortization of premium and accretion
      of discount, which are computed using the interest method and recognized as
      adjustments of interest income. Certain other debt securities have been
      classified as available for sale to serve principally as a source of liquidity.
      Unrealized holding gains and losses for available-for-sale securities are
      reported as a separate component of stockholders’ equity, net of tax, until
      realized. Realized security gains and losses are computed using the specific
      identification method for debt securities and the average cost method for
      marketable equity securities. Interest and dividends on investment securities
      are recognized as income when earned.





Common
      stock of the Federal Home Loan Bank of Pittsburgh (“FHLB”) represents ownership
      in an institution that is wholly owned by other financial institutions. This
      equity security is accounted for at cost and classified separately on the
      Consolidated Balance Sheet.


F
          - 6


**1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (Continued)**





**Loans
      Receivable**





Loans
      are
      stated at the principal amount outstanding less the allowance for loan losses
      and net of deferred loan origination fees and costs. Interest on loans is
      recognized as income when earned on the accrual method.





Loans
      on
      which the accrual of interest has been discontinued are designated as nonaccrual
      loans. Accrual of interest on loans is generally discontinued when it is
      determined that a reasonable doubt exists as to the collectibility of principal,
      interest, or both. Loans are returned to accrual status when past due interest
      is collected and the collection of principal is probable.





Loan
      origination fees and certain direct loan origination costs are being deferred
      and the net amount amortized as an adjustment of the related loan’s yield. The
      Company is amortizing these amounts over the contractual life of the related
      loans using the interest method.





**Allowance
      for Loan Losses**





The
      allowance for loan losses is maintained at a level by management which
      represents the evaluation of known and inherent risks in the loan portfolio
      at
      the consolidated balance sheet date. The allowance method is used in providing
      for loan losses. Accordingly, all loan losses are charged to the allowance,
      and
      all recoveries are credited to it. The allowance is established through a
      provision which is charged to operations. Management’s evaluation takes into
      consideration the risks inherent in the loan portfolio, past experience with
      losses, the impact of economic conditions on borrowers, and other relevant
      factors. The estimates used in determining the adequacy of the allowance,
      including the amounts and timing of future cash flows expected on impaired
      loans, are particularly susceptible to significant changes in the near term.





A
      commercial real estate loan is considered impaired when it is probable the
      borrower will not repay the loan according to the original contractual terms
      of
      the loan agreement. Management has determined that first mortgage loans on
      one-to-four family properties and all consumer loans represent large groups
      of
      smaller-balance homo-geneous loans that are to be collectively evaluated. Loans
      that experience insignificant payment delays, which are defined as 90 days
      or
      less, generally are not classified as impaired. A loan is not impaired during
      a
      period of delay in payment if the Company expects to collect all amounts due
      including interest accrued at the contractual interest rate for the period
      of
      delay. All loans identified as impaired are evaluated independently by
      management. The Company estimates credit losses on impaired loans based on
      the
      present value of expected cash flows or the fair value of the underlying
      collateral if the loan repayment is expected to come from the sale or operation
      of such collateral. Impaired loans, or portions thereof, are charged off when
      it
      is determined that a realized loss has occurred. Until such time, an allowance
      is maintained for estimated losses. Cash receipts on impaired loans are applied
      first to accrued interest receivable unless otherwise required by the loan
      terms, except when an impaired loan is also a nonaccrual loan, in which case
      the
      portion of the receipts related to interest is recognized as income.





Mortgage
      loans on one-to-four family properties and all consumer loans are large groups
      of smaller-balance homogeneous loans and are measured for impairment
      collectively. Loans that experience insignificant payment delays, which are
      defined as 90 days or less, generally are not classified as impaired. Management
      determines the significance of payment delays on a case-by-case basis taking
      into consideration all of the circumstances surrounding the loan and the
      borrower including the length of the delay, the borrower’s prior payment record,
      and the amount of shortfall in relation to the principal and interest
      owed.





**Premises
      and Equipment**





Premises
      and equipment are stated at cost less accumulated depreciation and amortization.
      Depreciation is calculated using the straight-line method over the useful lives
      of the related assets, which range from 3 to 20 years for furniture, fixtures,
      and equipment and 40 years for building premises. Expenditures for maintenance
      and repairs are charged to operations as incurred. Costs of major additions
      and
      improvements are capitalized.


F
          - 7


**1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (Continued)**





**Bank-Owned
      Life Insurance**





The
      Company owns insurance on the lives of a certain group of key employees. The
      policies were purchased to help offset the increase in the costs of various
      fringe benefit plans including healthcare. The cash surrender value of these
      policies is included as an asset on the consolidated statements of financial
      condition, and any increases in the cash surrender value are recorded as
      noninterest income on the consolidated statements of income. In the event of
      the
      death of an insured individual under these policies, the Company would receive
      a
      death benefit, which would be recorded as noninterest income.





**Real
      Estate Owned**





Real
      estate owned is carried at the lower of cost or fair value minus estimated
      costs
      to sell. Valuation allowances for estimated losses are provided when the
      carrying value of the real estate acquired exceeds fair value minus estimated
      costs to sell. Operating expenses of such properties, net of related income,
      are
      expensed in the period incurred.





**Federal
      Income Taxes**





The
      Company and subsidiaries file a consolidated federal income tax return. Deferred
      tax assets and liabilities are reflected based on the differences between the
      financial statement and the income tax basis of assets and liabilities using
      the
      enacted marginal tax rates. Deferred income tax expense and benefit are based
      on
      the changes in the deferred tax assets or liabilities from period to
      period.





**Cash
      and Cash Equivalents**





The
      Company has defined cash and cash equivalents as cash and due from banks and
      interest-bearing deposits with other institutions that have original maturities
      of less than 90 days.





**Comprehensive
      Income (Loss)**





The
      Company is required to present comprehensive income (loss) and its components
      in
      a full set of general-purpose financial statements for all periods presented.
      Other comprehensive income is composed exclusively of net unrealized holding
      gains (losses) on its available-for-sale securities portfolio. The Company
      has
      elected to report the effects of other comprehensive income as part of the
      Consolidated Statement of Changes in Stockholders’ Equity.





**Employee
      Stock Ownership Plan (“ESOP”)**





The
      Company accounts for the ESOP in accordance with Statement of Position 93-6, *“Employers’
      Accounting for Employee Stock Ownership Plans”* (“SOP
      93-6”). The value of unearned shares to be allocated to ESOP participants is
      recognized as a reduction to stockholders’ equity in the Company’s balance
      sheet. Unallocated ESOP shares, not yet committed to be released, are not
      considered outstanding for the purpose of calculating net income per common
      share. Dividends paid on allocated ESOP shares are charged to retained earnings
      and dividends paid on unallocated ESOP shares are used to satisfy debt service.
      The loan to the ESOP is repaid principally from the Bank’s contributions to the
      ESOP and dividends payable on common stock held by the ESOP over a period of
      15
      years. Compensation expense is recognized as ESOP shares are committed to be
      released.





**Equity
      Incentive Plan**





During
      the years ended December 31, 2007 and 2006, the Bank recorded $31,436 and
      $0, respectively, in expense related to share-based awards. As of December
      31,
      2007, there was approximately $440,104 of unrecognized cost related to unvested
      share-based awards granted. That cost is expected to be recognized over the
      next
      four years.


F
          - 8


**1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (Continued)**





**Stock
      Options** **(Continued)**





The
      fair
      value of each option is amortized into expense on a straight-line basis between
      the grant date for the option and each vesting date. The fair value of each
      stock option granted was estimated using the following weighted-average
      assumptions:





ExpectedGrant
            
            Dividend
            
            Risk-Free
            
            Expected
            
            ExpectedYear
            
            Yield
            
            Interest
                Rate
            
            Volatility
            
            Life
                (in years)2007
            
            
            -
            
            
            4.6%
            
            
            10.3%
            
            
            7.75





The
      weighted average fair value of stock options granted for 2007 was
      $2.91.





**Recent
      Accounting Pronouncements**





In
      December 2007, the FASB issued FAS No. 141 (revised 2007), *Business
      Combinations* (“FAS
      141(R)”), which establishes principles and requirements for how an acquirer
      recognizes and measures in its financial statements the identifiable assets
      acquired, the liabilities assumed, and any noncontrolling interest in an
      acquiree, including the recognition and measurement of goodwill acquired in
      a
      business combination.  FAS No. 141(R) is effective for fiscal years
      beginning on or after December 15, 2008.  Earlier adoption is
      prohibited. The
      adoption of this standard is not expected to have a material effect on the
      Company’s results of operations or financial position.





In
      September 2006, the FASB issued FAS No. 157, *Fair
      Value Measurements* ,
      which
      provides enhanced guidance for using fair value to measure assets and
      liabilities. The standard applies whenever other standards require or permit
      assets or liabilities to be measured at fair value. The standard does not expand
      the use of fair value in any new circumstances. FAS No. 157 is effective
      for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. Early
      adoption is permitted. The adoption of this standard is not expected to have
      a
      material effect on the Company’s results of operations or financial
      position.





In
      February 2007, the FASB issued FAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB Statement No. 115* ,
      which
      provides all entities with an option to report selected financial assets and
      liabilities at fair value. The objective of the FAS No. 159 is to improve
      financial reporting by providing entities with the opportunity to mitigate
      volatility in earnings caused by measuring related assets and liabilities
      differently without having to apply the complex provisions of hedge accounting.
      FAS No. 159 is effective as of the beginning of an entity’s first fiscal year
      beginning after November 15, 2007. Early adoption is permitted as of the
      beginning of a fiscal year that begins on or before November 15, 2007, provided
      the entity also elects to apply the provisions of FAS No. 157, *Fair
      Value Measurements* .
      The
      adoption of this standard is not expected to have a material effect on the
      Company’s results of operations or financial position.





In
      December 2007, the FASB issued FAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements — an amendment of ARB
      No. 51* .
      FAS No.
      160 amends ARB No. 51 to establish accounting and reporting standards for the
      noncontrolling interest in a subsidiary and for the deconsolidation of a
      subsidiary.  It clarifies that a noncontrolling interest in a subsidiary,
      which is sometimes referred to as minority interest, is an ownership interest
      in
      the consolidated entity that should be reported as equity in the consolidated
      financial statements.  Among other requirements, this statement requires
      consolidated net income to be reported at amounts that include the amounts
      attributable to both the parent and the noncontrolling interest.  It also
      requires disclosure, on the face of the consolidated income statement, of the
      amounts of consolidated net income attributable to the parent and to the
      noncontrolling interest.   FAS No. 160 is effective for fiscal years
      beginning on or after December 15, 2008. Earlier adoption is prohibited. 
The Company is currently evaluating the impact the adoption of the standard
      will
      have on the Company’s results of operations.


F
          - 9


**1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (Continued)**





In
      September 2006, the FASB reached consensus on the guidance provided by Emerging
      Issues Task Force Issue 06-4 (“EITF 06-4”), *Accounting
      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements* .
      The
      guidance is applicable to endorsement split-dollar life insurance arrangements,
      whereby the employer owns and controls the insurance policy, that are associated
      with a postretirement benefit. EITF 06-4 requires that for a split-dollar life
      insurance arrangement within the scope of the Issue, an employer should
      recognize a liability for future benefits in accordance with FAS No. 106 (if,
      in
      substance, a postretirement benefit plan exists) or Accounting Principles Board
      Opinion No. 12 (if the arrangement is, in substance, an individual deferred
      compensation contract) based on the substantive agreement with the employee.
      EITF 06-4 is effective for fiscal years beginning after December 15, 2007.
      The
      adoption of this EITF is not expected to have a material effect on the Company’s
      results of operations or financial position.





In
      March
      2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 (“EITF
      06-10”), *Accounting
      for Collateral Assignment Split-Dollar Life Insurance
      Agreements* .
      EITF
      06-10 provides guidance for determining a liability for the postretirement
      benefit obligation as well as recognition and measurement of the associated
      asset on the basis of the terms of the collateral assignment agreement. EITF
      06-10 is effective for fiscal years beginning after December 15, 2007. The
      adoption of this EITF is not expected to have a material effect on the Company’s
      results of operations or financial position.





In
      June
      2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11 (“EITF
      06-11”), *Accounting
      for Income Tax Benefits of Dividends on Share-Based Payment
      Awards* .
      EITF
      06-11 applies to share-based payment arrangements with dividend protection
      features that entitle employees to receive (a) dividends on equity-classified
      nonvested shares, (b) dividend equivalents on equity-classified nonvested share
      units, or (c) payments equal to the dividends paid on the underlying shares
      while an equity-classified share option is outstanding, when those dividends
      or
      dividend equivalents are charged to retained earnings under FAS No. 123R, *Share-Based
      Payment* ,
      and
      result in an income tax deduction for the employer. A consensus was reached
      that
      a realized income tax benefit from dividends or dividend equivalents that are
      charged to retained earnings and are paid to employees for equity-classified
      nonvested equity shares, nonvested equity share units, and outstanding equity
      share options should be recognized as an increase in additional paid-in capital.
      EITF 06-11 is effective for fiscal years beginning after December 15, 2007,
      and
      interim periods within those fiscal years.  The
      adoption of this EITF is not expected to have a material effect on the Company’s
      results of operations or financial position.





**Reclassification
      of Comparative Amounts**





Certain
      items previously reported have been reclassified to conform to the current
      year’s reporting format. Such reclassifications did not affect net income or
      stockholders’ equity.


F
          - 10


**2.**
            **EARNINGS
                PER SHARE**





There
      are
      no convertible securities which would affect the numerator in calculating basic
      and diluted earnings per share; therefore, net income as presented on the
      Consolidated Statement of Income will be used as the numerator.





The
      following table sets forth the composition of the weighted-average common shares
      (denominator) used in the basic and diluted earnings per share computation.


2007
              
              2006Weighted-average
                  common shares outstanding
              
              
              3,306,250
              
              
              N/AAverage
                  unearned restricted shares
              
              
              (5,459
              )
              
              N/AAverage
                  unallocated shares held by ESOP
              
              
              (125,176
              )
              
              N/AWeighted-average
                  common shares and common stock equivalents used to calculate basic
                  earnings per share
              
              
              3,175,615
              
              
              N/A





Options
      to purchase 162,003 shares of common stock at a price of $9.40 as of December
      31, 2007, were not included in the computation of diluted earnings per share
      because to do so would have been anti-dilutive.


F
          - 11


**3.**
            **INVESTMENT
                SECURITIES**





The
      amortized cost and fair value of investment securities available for sale are
      summarized as follows:





December
                31, 2007Gross
            
            GrossAmortized
            
            Unrealized
            
            Unrealized
            
            FairCost
            
            Gains
            
            Losses
            
            Value**Available
                for Sale**Fannie
                Mae
            
            $
            24,743,554
            
            $
            286,003
            
            $
            (60,044
            )
            $
            24,969,513Freddie
                Mac
            
            
            8,594,009
            
            
            27,435
            
            
            (20,503
            )
            
            8,600,941Government
                    National Mortgage Association securities
            
            
            2,006,332
            
            
            62,000
            
            
            (10,861
            )
            
            2,057,471Other
            
            
            156,958
            
            
            1,325
            
            
            (1,176
            )
            
            157,107Total
                  mortgage-backed securities
            
            
            35,500,853
            
            
            376,763
            
            
            (92,584
            )
            
            35,785,032U.S.
                government agencysecurities
            
            
            4,108,237
            
            
            25,091
            
            
            (2,190
            )
            
            4,131,138Corporate
                securities
            
            
            5,629,907
            
            
            1,838
            
            
            -
            
            
            5,631,745Total
                debt securities
            
            
            45,238,997
            
            
            403,692
            
            
            (94,774
            )
            
            45,547,915Equity
                securities
            
            
            430,000
            
            
            -
            
            
            (92,500
            )
            
            337,500Total
            
            $
            45,668,997
            
            $
            403,692
            
            $
            (187,274
            )
            $
            45,885,415


December
                  31, 2006Gross
              
              GrossAmortized
              
              Unrealized
              
              Unrealized
              
              FairCost
              
              Gains
              
              Losses
              
              Value**Available
                  for Sale**Fannie
                  Mae
              
              $
              25,300,504
              
              $
              26,699
              
              $
              (283,602
              )
              $
              25,043,601Freddie
                  Mac
              
              
              10,714,608
              
              
              11,238
              
              
              (154,647
              )
              
              10,571,199Government
                  National Mortgage Association securities
              
              
              2,404,329
              
              
              32,374
              
              
              (16,911
              )
              
              2,419,792Other
              
              
              257,136
              
              
              16
              
              
              (4,601
              )
              
              252,551Total
                  mortgage-backed securities
              
              
              38,676,577
              
              
              70,327
              
              
              (459,760
              )
              
              38,287,143U.S.
                  government agency securities
              
              
              1,400,000
              
              
              -
              
              
              (44,310
              )
              
              1,355,690Corporate
                  securities
              
              
              5,629,843
              
              
              -
              
              
              (43,025
              )
              
              5,586,818Total
                  debt securities
              
              
              45,706,420
              
              
              70,327
              
              
              (547,096
              )
              
              45,229,651Equity
                  securities
              
              
              430,000
              
              
              21,000
              
              
              -
              
              
              451,000Total
              
              $
              46,136,420
              
              $
              91,327
              
              $
              (547,096
              )
              $
              45,680,651


F
          - 12


**3.**
            **INVESTMENT
                SECURITIES (Continued)**





The
      following table shows the Company’s gross unrealized losses and fair value,
      aggregated by investment category and length of time that the individual
      securities have been in a continuous unrealized loss position.





December
                31, 2007Less
                Than Twelve Months
            
            Twelve
                Months or Greater
            
            TotalGross
            
            
            
            Gross
            
            
            
            GrossFair
            
            Unrealized
            
            Fair
            
            Unrealized
            
            Fair
            
            UnrealizedValue
            
            Losses
            
            Value
            
            Losses
            
            Value
            
            LossesFannie
                Mae
            
            $
            1,642,784
            
            $
            (2,076
            )
            $
            4,725,909
            
            $
            (57,968
            )
            $
            6,368,693
            
            $
            (60,044
            )Freddie
                Mac
            
            
            193,520
            
            
            (232
            )
            
            5,552,862
            
            
            (20,271
            )
            
            5,746,382
            
            
            (20,503
            )Government
                    National Mortgage Association securities
            
            
            -
            
            
            -
            
            
            475,480
            
            
            (10,861
            )
            
            475,480
            
            
            (10,861
            )Other
            
            
            14,830
            
            
            (955
            )
            
            45,021
            
            
            (221
            )
            
            59,851
            
            
            (1,176
            )U.S.
                    government agency securities
            
            
            -
            
            
            -
            
            
            997,810
            
            
            (2,190
            )
            
            997,810
            
            
            (2,190
            )Corporate
                securities
            
            
            337,500
            
            
            (92,500
            )
            
            -
            
            
            -
            
            
            337,500
            
            
            (92,500
            )Total
            
            $
            2,188,634
            
            $
            (95,763
            )
            $
            11,797,082
            
            $
            (91,511
            )
            $
            13,985,716
            
            $
            (187,274
            )





December
                31, 2006Less
                Than Twelve Months
            
            Twelve
                Months or Greater
            
            TotalGross
            
            
            
            Gross
            
            
            
            GrossFair
            
            Unrealized
            
            Fair
            
            Unrealized
            
            Fair
            
            UnrealizedValue
            
            Losses
            
            Value
            
            Losses
            
            Value
            
            LossesFannie
                Mae
            
            $
            4,007,180
            
            $
            (16,588
            )
            $
            16,283,792
            
            $
            (267,014
            )
            $
            20,290,972
            
            $
            (283,602
            )Freddie
                Mac
            
            
            -
            
            
            -
            
            
            9,838,471
            
            
            (154,647
            )
            
            9,838,471
            
            
            (154,647
            )Government
                  National MortgageAssociation securities
            
            
            -
            
            
            -
            
            
            597,869
            
            
            (16,911
            )
            
            597,868
            
            
            (16,911
            )Other
            
            
            -
            
            
            -
            
            
            236,749
            
            
            (4,601
            )
            
            236,749
            
            
            (4,601
            )U.S.
                  government agencysecurities
            
            
            -
            
            
            -
            
            
            1,355,690
            
            
            (44,310
            )
            
            1,355,690
            
            
            (44,310
            )Corporate
                securities
            
            
            5,586,818
            
            
            (43,025
            )
            
            -
            
            
            -
            
            
            5,586,818
            
            
            (43,025
            )Total
            
            $
            9,593,998
            
            $
            (59,613
            )
            $
            28,312,571
            
            $
            (487,483
            )
            $
            37,906,568
            
            $
            (547,096
            )





The
      policy of the Company is to recognize an other-than-temporary impairment of
      equity securities where the fair value has been significantly below cost for
      an
      extended time period. For fixed-maturity investments with unrealized losses
      due
      to interest rates where the Company has the positive intent and ability to
      hold
      the investment for a period of time sufficient to allow a market recovery,
      declines in value below cost are not assumed to be other than temporary. There
      are 25 positions that are considered temporarily impaired as of December 31,
      2007. The Company reviews its position quarterly and has asserted that at
      December 31, 2007, the declines outlined in the above table represent temporary
      declines, and the Company does have the intent and ability either to hold those
      securities to maturity or to allow a market recovery.


F
          - 13


**3.**
            **INVESTMENT
                SECURITIES (Continued)**





The
      Company has identified certain investment securities for which it has determined
      the unrealized losses to be other than temporary. The Company recorded an
      other-than-temporary impairment charge of $167,697 for the year ended December
      31, 2006.





Proceeds
      from the sale of securities available for sale amounted to $17,161,006 in 2006.
      There was no gain or loss recognized on the sale.





The
      amortized cost and estimated market value of debt securities at December 31,
      2007, by contractual maturity, are shown below. Mortgage-backed securities
      provide for periodic, generally monthly, payments of principal and interest
      and
      have contractual maturities ranging from 3 to 30 years. Expected maturities
      will
      differ from contractual maturities because borrowers may have the right to
      call
      or prepay obligations with or without call or prepayment penalties.





Amortized
            
            FairDecember
                31, 2007
            
            Cost
            
            ValueDue
                within one year
            
            $
            358
            
            $
            364Due
                after one year through five years
            
            
            69,777
            
            
            70,125Due
                after five years through ten years
            
            
            26,548,728
            
            
            26,767,761Due
                after ten years
            
            
            18,620,134
            
            
            18,709,665Total
            
            $
            45,238,997
            
            $
            45,547,915


F
          - 14




**4.**
            **LOANS
                RECEIVABLE**





Loans
      receivable consist of the following:





December
                31,2007
            
            2006Mortgage
                loans:One-to-four family
            
            $
            120,774,255
            
            $
            100,152,081Multi-family and commercial
            
            
            9,802,864
            
            
            5,211,510130,577,119
            
            
            105,363,591Home
                equity loans and HELOCs
            
            
            5,322,808
            
            
            5,209,057Education
                loans
            
            
            2,170,015
            
            
            2,136,608Loans
                on savings accounts
            
            
            84,770
            
            
            27,516Other
            
            
            5,521
            
            
            1,512138,160,233
            
            
            112,738,284Less:Net deferred loan fees
            
            
            148,980
            
            
            120,918Allowance for loan losses
            
            
            731,338
            
            
            694,570Total
            
            $
            137,279,915
            
            $
            111,922,796





The
      Company’s loan portfolio consists predominantly of one-to-four family unit first
      mortgage loans in the northwest suburban area of metropolitan Philadelphia,
      primarily in Montgomery and Bucks Counties. These loans are typically secured
      by
      first lien positions on the respective real estate properties and are subject
      to
      the Bank’s loan underwriting policies. In general, the Company’s loan portfolio
      performance at December 31, 2007 and 2006, is dependent upon the local economic
      conditions.





Activity
      in the allowance for loan losses for the periods ended is summarized as
      follows:





Year
                Ended December 31,2007
            
            2006Balance, beginning of period
            
            $
            694,570
            
            $
            650,943Add:Provision charged to operations
            
            
            31,367
            
            
            57,973Loan recoveries
            
            
            5,401
            
            
            5,401731,338
            
            
            714,317Less:Charge-offs
            
            
            -
            
            
            19,747Balance, end of period
            
            $
            731,338
            
            $
            694,570





In
      the
      normal course of business, loans are extended to officers, directors, and
      corporations in which they are beneficially interested as stockholders,
      officers, or directors. A summary of loan activity for those officers and
      directors with aggregate loan balances in excess of $60,000 for the year ended
      December 31, 2007, is as follows:





Amounts2006
            
            Additions
            
            Collected
            
            2007$ 2,686,848
            
            $
            200,000
            
            $
            98,568
            
            $
            2,788,280


F
          - 15




**5.**
            **FEDERAL
                HOME LOAN BANK STOCK**





The
      Company is a member of the Federal Home Loan Bank System. As a member, the
      Company maintains an investment in the capital stock of the FHLB of Pittsburgh
      in an amount not less than 70 basis points of the outstanding unused FHLB
      borrowing capacity and one-twentieth of its outstanding FHLB borrowings, as
      calculated throughout the year.





**6.**
            **PREMISES
                AND EQUIPMENT**





Premises
      and equipment consist of the following:





December
                31,2007
            
            2006Land
            
            $
            55,000
            
            $
            55,000Buildings
            
            
            6,950,850
            
            
            6,950,850Furniture,
                fixtures, and equipment
            
            
            2,154,799
            
            
            2,071,5089,160,649
            
            
            9,077,358Less
                accumulated depreciation
            
            
            3,964,837
            
            
            3,782,600Total
            
            $
            5,195,812
            
            $
            5,294,758





Depreciation
      expense amounted to $385,396 and $373,033 for the years ended December 31,
      2007
      and 2006, respectively.





**7.**
            **DEPOSITS**





Deposit
      accounts are summarized as follows as of December 31:





2007
            
            2006Amount
            
            %
            
            Amount
            
            %Non-interest-bearing
                demand
            
            $
            3,455,320
            
            
            2.12
            %
            $
            4,189,704
            
            
            2.66
            %NOW
                accounts
            
            
            11,222,806
            
            
            6.88
            
            
            12,127,497
            
            
            7.69Money
                market deposit
            
            
            33,100,834
            
            
            20.3
            
            
            24,235,253
            
            
            15.4Savings
            
            
            36,192,411
            
            
            22.2
            
            
            41,664,404
            
            
            26.483,971,371
            
            
            51.45
            
            
            82,216,858
            
            
            52.14Time
                deposits:1.00 - 1.99%
            
            
            2,988
            
            
            0.01
            
            
            387,125
            
            
            0.242.00 - 3.99%
            
            
            16,082,510
            
            
            9.85
            
            
            18,004,759
            
            
            11.44.00 - 5.99%
            
            
            63,089,979
            
            
            38.7
            
            
            57,047,551
            
            
            36.26.00 - 7.99%
            
            
            69,815
            
            
            0.04
            
            
            65,710
            
            
            0.0479,245,292
            
            
            48.55
            
            
            75,505,145
            
            
            47.86Total
            
            $
            163,216,663
            
            
            100.00
            %
            $
            157,722,003
            
            
            100.00
            %




F
          - 16





**7.**
            **DEPOSITS
                (Continued)**





The
      scheduled maturities of time deposits are as follows:





December
                31, 20072008
            
            $
            38,793,9852009
            
            
            7,342,7542010
            
            
            5,759,5932011
            
            
            9,556,7722012
            
            
            17,792,188Total
            
            $
            79,245,292





Time
      deposits include those in denominations of $100,000 or more. Such deposits
      aggregated $22,678,719 and $22,793,119 at December 31, 2007 and 2006,
      respectively.





The
      scheduled maturities of time deposits in denominations of $100,000 or more
      are
      as follows:





December
                31, 2007Within
                three months
            
            $
            6,024,579Three
                through six months
            
            
            4,654,530Six
                through twelve months
            
            
            3,505,345Over
                twelve months
            
            
            8,494,265Total
            
            $
            22,678,719





The
      aggregate amount of time deposits with a minimum denomination of $100,000 was
      $22,678,719 and $22,793,119 at December 31, 2007 and 2006, respectively.
      Deposits in excess of $100,000, with the exception of individual retirement
      accounts that are in excess of $250,000, are not federally insured.





Interest
      expense by deposit category is as follows:





Year
                ended December 31,2007
            
            2006NOW
            
            $
            68,187
            
            $
            68,202Money
                market
            
            
            1,614,680
            
            
            345,901Savings
            
            
            318,369
            
            
            356,845Time
                deposits
            
            
            3,366,227
            
            
            3,017,300Total
            
            $
            5,367,463
            
            $
            3,788,248




F
          - 17





**8.**
            **FHLB
                ADVANCES – SHORT-TERM**





Short-term
      borrowings consisted of draws on the Company’s “RepoPlus” line of credit
      advances through the FHLB. The RepoPlus line carries an adjustable rate that
      is
      subject to annual renewal and incurs no service charges. All outstanding
      borrowings are secured by a blanket security agreement on qualifying residential
      mortgage loans, certain pledged investment securities, and the Company’s
      investment in FHLB stock.





**The
      following table sets forth information concerning short-term
      borrowings:**




December
                31,2007
            
            2006Balance
                at year-end
            
            $
            6,000,000
            
            $
            -Maximum
                amount outstanding at any month-end
            
            
            6,000,000
            
            
            5,500,000Average
                balance outstanding during the year
            
            
            1,271,233
            
            
            2,083,333Weighted-average
                interest rate:As
                of year-end
            
            
            3.80
            %
            
            -Paid
                during the year
            
            
            4.71
            %
            
            5.06
            %





Average
      balances outstanding during the year represent daily average balances, and
      average interest rates represent interest expenses divided by the related
      average balance.





**9.**
            **FHLB
                ADVANCES - LONG-TERM**





The
      following table sets forth information concerning FHLB advances –
long-term:





Maturity Range
            
            Weighted- Average Interest Rate
            
            Stated Interest Rate Range
            
            At December 31,Description
            
            From
            
            to
            
            
            
            From
            
            to
            
            2007
            
            2006Fixed-rate
                amortizing
            
            
            08/26/09
            
            
            12/26/12
            
            
            3.83
            %
            
            3.75
            %
            
            3.87
            %
            
            4,098,370
            
            
            6,245,223





Payments
      of FHLB borrowings are summarized as follows:





December
                31,2007Year
                Ending
            
            
            
            Weighted-December
                31,
            
            Amount
            
            Average
                Rate2008
            
            $
            1,311,021
            
            
            3.80
            %2009
            
            
            1,079,825
            
            
            3.81
            %2010
            
            
            547,330
            
            
            3.87
            %2011
            
            
            568,892
            
            
            3.87
            %2012
            
            
            591,302
            
            
            3.87
            %Total
            
            $
            4,098,370
            
            
            3.83
            %





As
      of
      December 31, 2007, the Company had two fixed-rate amortizing borrowings with
      the
      FHLB, which were originated in August 2002 and December 2002. The fixed-rate
      amortizing borrowings require aggregate monthly payments of principal and
      interest of $120,445 through August 2009 and $50,314 for the remaining borrowing
      through December 2012.


F
          - 18





**9.**
            **FHLB
                ADVANCES – LONG-TERM****(Continued)**





All
      borrowings from the FHLB are secured by a blanket lien on qualified collateral,
      defined principally as investment securities and mortgage loans which are owned
      by the Bank free and clear of any liens or encum-brances. In addition,
      t he
      Company has a maximum borrowing capacity of $149.4 million with the FHLB at


December
      31, 2007.





**10.**
            **INCOME
                TAXES**





The
      provision for income tax benefit consists of:





Year
                Ended December 31,2007
            
            2006Current
                tax expense (benefit):Federal
            
            $
            53,273
            
            $
            (95,466
            )State
            
            
            -
            
            
            (160,056
            )53,273
            
            
            (255,522
            )Deferred
                taxes
            
            
            (308,717
            )
            
            (68,980
            )Valuation
                allowance
            
            
            90,862
            
            
            122,521Total
            
            $
            (164,582
            )
            $
            (201,981
            )





The
      tax
      effects of deductible and taxable temporary differences that gave rise to
      significant portions of the deferred tax assets and deferred tax liabilities,
      respectively, are as follows:





Year
                Ended December 31,2007
            
            2006Deferred
                tax assets:Allowance
                for loan losses
            
            $
            236,154
            
            $
            236,154Deferred
                loan fees
            
            
            1,229
            
            
            2,943Deferred
                compensation
            
            
            904,308
            
            
            809,435Federal
                net operating loss carryforward
            
            
            47,677
            
            
            -Investment
                securities impairment
            
            
            23,800
            
            
            23,800Deferred
                health care
            
            
            66,697
            
            
            58,065State
                net operating loss carryforward
            
            
            294,026
            
            
            218,756Capital
                loss carryforwards
            
            
            299,436
            
            
            299,436Premises
                and equipment
            
            
            92,035
            
            
            53,172Other
            
            
            74,687
            
            
            34,604Net
                unrealized loss on securities
            
            
            -
            
            
            154,961Total
                gross deferred tax assets
            
            
            2,040,049
            
            
            1,891,326Valuation
                allowance
            
            
            (667,454
            )
            
            (576,592
            )Total
                net deferred tax assets
            
            
            1,372,595
            
            
            1,314,734Deferred
                tax liabilities:Prepaid
                insurance
            
            
            40,768
            
            
            45,802Net
                unrealized gain on securities
            
            
            73,582
            
            
            -Total
                gross deferred tax liabilities
            
            
            114,350
            
            
            45,802Net
                deferred tax assets
            
            $
            1,258,245
            
            $
            1,268,932




F
          - 19





**10.**
            **INCOME
                TAXES (Continued)**





For
      the
      periods ended, a valuation allowance has been established for 100 percent of
      the
      state net operating loss carryforwards, capital loss carryforwards, investment
      securities impairment, and other various carryforwards that management believes
      may not be realizable.





The
      reconciliation of the federal statutory rate and the Company’s effective income
      tax rate is as follows:





Year
                Ended December 31,2007
            
            2006%
                of
            
            
            
            %
                ofPretax
            
            
            
            PretaxAmount
            
            Income
            
            Amount
            
            IncomeProvision
                at statutory rate
            
            $
            (166,652
            )
            
            (34.0
            )%
            $
            (143,146
            )
            
            (34.0)
            %Tax-exempt
                income
            
            
            (65,308
            )
            
            (13.3
            )
            
            (55,767
            )
            
            (13.3
            )Valuation
                allowance
            
            
            15,592
            
            
            3.2
            
            
            36,456
            
            
            8.7Other,
                net
            
            
            51,786
            
            
            10.6
            
            
            (39,524
            )
            
            (9.4
            )Actual
                  tax expense and effective rate
            
            $
            (164,582
            )
            
            (33.5
            )%
            $
            (201,981
            )
            
            (48.0)
            %





The
      Bank
      is subject to the Pennsylvania Mutual Thrift Institutions Tax that is calculated
      at 11.5 percent of Pennsylvania earnings based on U.S. generally accepted
      accounting principles with certain adjustments.





At
      December 31, 2007, the Company has an available net operating loss carryforward
      of approximately $2,557,000 for state tax purposes that will begin to expire
      in
      2008. The Bank also has an available capital loss carryforward of approximately
      $454,000 that will expire in 2010.





The
      Company adopted the provisions of FIN No.48, *Accounting
      for Uncertainty in Income Taxes, an interpretation of FASB Statement
      109* ,
      effective January1, 2007. FIN No. 48 prescribes a recognition threshold and
      a
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return. Benefits from
      tax
      positions should be recognized in the financial statements only when it is
      more
      likely than not that the tax position will be sustained upon examination by
      the
      appropriate taxing authority that would have full knowledge of all relevant
      information. A tax position that meets the more-likely-than-not recognition
      threshold is measured at the largest amount of benefit that is greater than
      50
      percent likely of being realized upon ultimate settlement. Tax positions that
      previously failed to meet the more-likely-than-not recognition threshold should
      be recognized in the first subsequent financial reporting period in which that
      threshold is met. Previously recognized tax positions that no longer meet the
      more-likely-than-not recognition threshold should be derecognized in the first
      subsequent financial reporting period in which that threshold is no longer
      met.
      FIN No. 48 also provides guidance on the accounting for and disclosure of
      unrecognized tax benefits, interest, and penalties. The adoption of FIN No.
      48
      did not have a significant impact on the Company’s financial
      statements.


F
          - 20





**11.**
            **COMMITMENTS
                AND CONTINGENT LIABILITIES******





**Commitments**





In
      the
      normal course of business, management makes various commitments that are not
      reflected in the accom-panying consolidated financial statements. These
      commitments involve, to varying degrees, elements of credit and interest rate
      risk in excess of the amount recognized in the consolidated balance sheet.
      The
      Company’s exposure to credit loss in the event of nonperformance by the other
      parties to the financial instruments is represented by the contractual amounts
      as disclosed. The Company minimizes its exposure to credit loss under these
      commitments by subjecting them to credit approval and review procedures and
      collateral requirements, as deemed necessary, in compliance with lending policy
      guidelines. Generally, collateral, usually in the form of real estate, is
      required to support financial instruments with credit risk.





The
      off-balance sheet commitments consisted of the following:





December
                31,2007
            
            2006Commitments
                to extend credit
            
            $
            3,540,350
            
            $
            892,000





Commitments
      to extend credit consist of fixed-rate commitments with interest rates ranging
      from 6.00 percent to 7.60 percent. The commitments outstanding at December
      31,
      2007, contractually mature in less than one year.





Commitments
      to extend credit are agreements to lend to a customer as long as there is no
      violation of any condition established in the loan agreement. These commitments
      consisted primarily of available commercial and personal lines of credit and
      loans approved but not yet funded. Commitments generally have fixed expiration
      dates or other termination clauses and may require payment of a fee.





**Contingent
      Liabilities**





The
      Company is involved in various legal actions from the normal course of business
      activities. Management believes the liability, if any, arising from such actions
      will not have a material adverse effect on the Company’s financial
      position.





**12.**
            **EMPLOYEE
                BENEFITS**





**Benefit
      Plan**





The
      Company has a defined contribution pension plan (the “DCP Plan”) for all regular
      full-time employees meeting certain eligibility requirements. Annual
      contributions are discretionary but will not exceed 15 percent of eligible
      employees’ salaries. The DCP Plan may be terminated at any time at the
      discretion of the Board of Directors. Pension expense for the profit sharing
      portion of the Plan was $77,044 and $75,570 for the years ended December 31,
      2007 and 2006, respectively.





Effective
      January 1, 1995, the DCP Plan was amended and restated to include provisions
      to
      include employee and employer 401(k) contributions. Under the DCP Plan, the
      Company will match 100 percent of the employees’ eligible contributions, up to
      the maximum of 5 percent of each qualifying employee’s salary, and an additional
      10 percent of each non-qualifying employee’s salary. The Company contributions
      for the 401(k) plan were $170,586 and $207,500 for the years ended December
      31,
      2007 and 2006, respectively.


F
          - 21





**12.**
            **EMPLOYEE
                BENEFITS (Continued)**





**ESOP**





In
      connection with the conversion, the Company created an ESOP for the benefit
      of
      employees who meet the eligibility requirements, which include having completed
      one year of service with the Company or its subsidiary and attained age 18.
      The
      ESOP trust acquired 129,605 shares of the Company’s stock from proceeds from a
      loan with the Company. The Company makes cash contributions to the ESOP on
      an
      annual basis sufficient to enable the ESOP to make the required loan payments.
      The ESOP trust’s outstanding loan bears interest at 8.25 percent and requires an
      annual payment of principal and interest of $153,439 through December of
      2021.





As
      the
      debt is repaid, shares are released from the collateral and allocated to
      qualified employees based on the proportion of payments made during the year
      to
      remaining amount of payments due on the loan through maturity. Accordingly,
      the
      shares pledged as collateral are reported as unallocated common stock held
      by
      the ESOP shares in the Consolidated Balance Sheet. As shares are released from
      collateral, the Company reports compensation expense equal to the current market
      price of the shares, and the shares become outstanding for earnings-per-share
      computations. The Company recognized ESOP expense of $84,000 for the year ended
      December 31, 2007.





The
      following table presents the components of the ESOP shares:





2007Allocated
                shares
            
            
            8,640Unreleased
                shares
            
            
            120,965Total
                ESOP shares
            
            
            129,605Fair
                value of unreleased shares
            
            $
            1,118,926





**2007
      Equity Incentive Plan**





Effective
      July 17, 2007, shareholders of the Company approved the 2007 Equity Incentive
      Plan (the “EI Plan”). Employees and non-employee corporate directors are
      eligible to receive awards of restricted stock and stock options. Awards granted
      under the EI Plan are in the form of the Company’s common stock and options to
      purchase stock and are subject to certain vesting requirements including
      continuous employment or service with the company. At December 31, 2007, the
      Company had awarded restricted stock and stock options representing 226,808
      shares of the Company’s common stock under the EI Plan. No further awards are
      available for issuance pursuant to the EI Plan. The EI Plan assists the Company
      in attracting, retaining, and motivating employees and non-employee directors
      to
      make substantial contributions to the success of the Company and to increase
      the
      emphasis on the use of equity as a key component of compensation.





**Restricted
      Stock Awards**





In
      connection with the Plan, the Company awarded 64,800 shares of restricted stock
      to directors and officers of the Company on August 21, 2007. These shares vest
      equally over a five year period commencing on the first anniversary of the
      date
      of grant. Compensation expense related to the vesting of shares was $40,608
      for
      the year ended December 31, 2007.




F
          - 22







**12.**
            **EMPLOYEE
                BENEFITS (Continued)**





**Stock
      Options**





The
      EI
      Plan provides for granting incentive options to key officers and other employees
      of the Company and nonqualified stock options to nonemployee directors of the
      Company. At December 31, 2007, a total of 162,003 stock options were awarded
      to
      directors and officers of the Company. All options have a contractual life
      of 10
      years and vest equally over a period of five years.





The
      following table presents share data related to the stock option
      plans:





2007
            
            Weighted-
                  Average
                  Exercise
                  PriceOutstanding,
                beginning
            
            
            -
            
            $
            -Granted
            
            
            162,003
            
            
            9.40Exercised
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Outstanding,
                ending
            
            
            162,003
            
            $
            9.40Exercisable
                at year-end
            
            
            -
            
            $
            -





The
      following table summarizes characteristics of stock options outstanding and
      exercisable at December 31, 2007:





Outstanding
            
            ExercisableRemaining
            
            Average
            
            
            
            AverageAverage
            
            Exercise
            
            
            
            ExerciseShares
            
            Life
            
            Price
            
            Shares
            
            Price162,003
            
            9.64
            
            $
            9.40
            
            -
            
            -162,003
            
            
            
            
            
            -





Aggregate
      fair value of options outstanding and exercisable as of December 31, 2007 was
      $255,464. As of December 31, 2007, no shares are exercisable.





**Supplemental
      Retirement Plan**





The
      Company has a Supplemental Life Insurance Plan (“Plan”) for three officers of
      the Bank. The Plan requires the Bank to make annual payments to the
      beneficiaries upon their death. In connection with the Plan, the Company funded
      life insurance policies with an aggregate amount of $3,085,000 on the lives
      of
      those officers that currently have a death benefit of $11,378,747. The cash
      surrender value of these policies totaled $4,172,776 and $3,980,693 at December
      31, 2007 and 2006, respectively. The Plan provides that death benefits totaling
      $6.0 million at December 31, 2007, will be paid to their beneficiaries in the
      event the officers should die.





Additionally,
      the Company has a Supplemental Retirement Plan (“SRP”) for the current and
      former presidents as well as two senior officers of the Bank. At December 31,
      2007 and 2006, $1,392,149 and $1,230,850, respectively, has been accrued under
      these SRPs, and this liability and the related deferred tax asset of $473,331
      and $418,489, respectively, are recognized in the financial
      statements.




F
          - 23


**12.**
              **EMPLOYEE
                  BENEFITS (Continued)**





**Supplemental
      Retirement Plan** **(Continued)**





The
      deferred compensation for the current and former president is to be paid for
      the
      remainder of their lives commencing with the first year following the
      termination of employment after completion of required service. The current
      president’s payment is based on 60 percent of his final full year annual gross
      taxable compensation adjusted annually for the change in the consumer price
      index or 4 percent, whichever is higher. The former president’s payment is based
      on 60 percent of his final full year annual gross taxable compensation adjusted
      annually for the change in the consumer price index. The deferred compensation
      for the two senior officers is to be paid at the rate of $50,000 per year for
      20
      years commencing 5 years after retirement or age 65, whichever comes first,
      following the termination of employment. The Company records periodic accruals
      for the cost of providing such benefits by charges to income. The amount accrued
      was approximately $265,782 and $264,158 for the years ended December 31, 2007
      and 2006, respectively. The accruals increase each year based on a discount
      rate
      of 6.25 percent used in determining the estimated liability that will be accrued
      when the employees are eligible for benefits.





The
      following table illustrates the components of the net periodic benefit cost
      for
      the supplemental retirement plan:




For
                the Year Ended2007
            
            2006Components
                of net periodic benefit cost:Service
                cost
            
            $
            194,937
            
            $
            197,431Interest
                cost
            
            
            70,845
            
            
            66,727Net
                periodic benefit cost
            
            $
            265,782
            
            $
            264,158





**13.**
              **REGULATORY
                  RESTRICTIONS**




**Regulatory
      Capital Requirements**





Federal
      regulations require the Bank to maintain minimum amounts of capital.
      Specifically, each is required to maintain certain minimum dollar amounts and
      ratios of Total and Tier I capital to risk-weighted assets and of Core capital
      to average total assets.




In
      addition to the capital requirements, the Federal Deposit Insurance Corporation
      Improvement Act (“FDICIA”) established five capital categories ranging from
“well capitalized” to “critically undercapitalized.” Should any institution fail
      to meet the requirements to be considered “adequately capitalized,” it would
      become subject to a series of increasingly restrictive regulatory actions. **** Management
      believes, as of December 31, 2007, the Bank met all capital adequacy
      requirements to which they are subject.




As
      of
      December 31, 2007 and 2006, the Office of Thrift Supervision categorized the
      Bank as well capitalized under the regulatory framework for prompt corrective
      action. To be classified as a well capitalized financial institution, Total
      risk-based, Tier 1 risk-based, core capital, and tangible equity capital ratios
      must be at least 10.0 percent, 6.0 percent, 5.0 percent, and 1.5 percent,
      respectively. There have been no conditions or events since the notification
      that management believes have changed the Bank’s category.





The
      Bank’s actual capital ratios are presented in the following tables, which show
      that the Bank met all regulatory capital requirements.




F
          - 24




**13.**
            **REGULATORY
                RESTRICTIONS (Continued)**





**Regulatory
      Capital Requirements (Continued)**





The
      following table reconciles the Bank’s capital under accounting principles
      generally accepted in the United States of America to regulatory
      capital.





December
                31,2007
            
            2006Total
                retained earnings
            
            $
            20,281,986
            
            $
            11,776,993Accumulated
                other comprehensive (income) loss
            
            
            (142,835
            )
            
            300,808Tier
                I, core, and tangible capital
            
            
            20,139,151
            
            
            12,077,801Allowance
                for loan losses
            
            
            731,338
            
            
            694,570Unrealized
                gains on equity securities
            
            
            -
            
            
            9,450Total
                risk-based capital
            
            $
            20,870,489
            
            $
            12,781,821





The
      Bank’s actual capital ratios are presented in the following table:





December
                31,2007
            
            2006Amount
            
            Ratio
            
            Amount
            
            RatioTotal
                Capital(to
                Risk-Weighted Assets)Actual
            
            $
            20,870,489
            
            
            21.65
            %
            $
            12,781,821
            
            
            14.49
            %For
                Capital Adequacy Purposes
            
            
            7,711,359
            
            
            8.00
            
            
            7,054,480
            
            
            8.00To
                Be Well Capitalized
            
            
            9,639,199
            
            
            10.00
            
            
            8,810,100
            
            
            10.00Tier
                I Capital(to
                Risk-Weighted Assets)Actual
            
            $
            20,139,150
            
            
            20.89
            %
            $
            12,077,801
            
            
            13.70
            %For
                Capital Adequacy Purposes
            
            
            3,855,680
            
            
            4.00
            
            
            3,527,240
            
            
            4.00To
                Be Well Capitalized
            
            
            5,783,519
            
            
            6.00
            
            
            5,290,860
            
            
            6.00Core
                Capital(to
                Adjusted Assets)Actual
            
            $
            20,139,150
            
            
            10.03
            %
            $
            12,077,801
            
            
            5.91
            %For
                Capital Adequacy Purposes
            
            
            8,031,263
            
            
            4.00
            
            
            8,171,391
            
            
            4.00To
                Be Well Capitalized
            
            
            10,039,079
            
            
            5.00
            
            
            10,214,238
            
            
            5.00Tangible
                Capital(to
                Adjusted Assets)Actual
            
            $
            20,139,150
            
            
            10.03
            %
            $
            12,077,801
            
            
            5.91
            %For
                Capital Adequacy Purposes
            
            
            4,015,632
            
            
            1.50
            
            
            4,085,695
            
            
            1.50To
                Be Well Capitalized
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A





The
      Bank
      accumulated approximately $1.4 million of retained earnings at December 31,
      1996, which represents allocations of income to bad debt deductions for tax
      purposes only. Since this amount represents the accumulated bad debt reserves
      prior to 1987, no provision for federal income tax has been made. If any portion
      of this amount is used other than to absorb loan losses (which is not
      anticipated), the amount will be subject to federal income tax at the current
      corporate rate.




F
          - 25




**14.**
            **FAIR
                VALUE DISCLOSURE**




The
      estimated fair values of the Company’s financial instruments are as
      follows:


December 31, 2007
              
              December 31, 2006Carrying
                Value
              
              Fair
                Value
              
              Carrying
                Value
              
              Fair
                ValueFinancial
                  assets:Cash
                  and cash equivalents
              
              $
              3,825,725
              
              $
              3,825,725
              
              $
              31,866,257
              
              $
              31,866,257Investment
                  securities available for sale available for sale
              
              
              45,885,415
              
              
              45,885,415
              
              
              45,680,651
              
              
              45,680,651Net
                  loans receivable
              
              
              137,279,915
              
              
              135,013,465
              
              
              111,922,796
              
              
              110,183,453Accrued
                  interest receivable
              
              
              848,930
              
              
              848,930
              
              
              795,585
              
              
              795,585Federal
                  Home Loan Bank stock
              
              
              1,270,800
              
              
              1,270,800
              
              
              934,600
              
              
              934,600Bank-owned
                  life insurance
              
              
              4,172,776
              
              
              4,172,776
              
              
              3,980,693
              
              
              3,980,693Financial
                  liabilities:Deposits
              
              $
              163,216,663
              
              $
              164,561,304
              
              $
              157,722,003
              
              $
              157,673,916FHLB
                  advances - short-term
              
              
              6,000,000
              
              
              6,000,000
              
              
              -
              
              
              -FHLB
                  advances - long-term
              
              
              4,098,370
              
              
              4,073,370
              
              
              6,245,223
              
              
              6,119,704Accrued
                  interest payable
              
              
              9,504
              
              
              9,504
              
              
              20,447
              
              
              20,447Advances
                  by borrowers for taxes and insurance
              
              
              1,224,248
              
              
              1,224,248
              
              
              1,104,245
              
              
              1,104,245




Financial
      instruments are defined as cash, evidence of ownership interest in an entity,
      or
      a contract that creates an obligation or right to receive or deliver cash or
      another financial instrument from/to a second entity on potentially favorable
      or
      unfavorable terms.





Fair
      value is defined as the amount at which a financial instrument could be
      exchanged in a current transaction between willing parties other than in a
      forced or liquidation sale. If a quoted market price is available for a
      financial instrument, the estimated fair value would be calculated based upon
      the market price per trading unit of the instrument.





If
      no
      readily available market exists, the fair value estimates for financial
      instruments should be based upon management’s judgment regarding current
      economic conditions, interest rate risk, expected cash flows, future estimated
      losses, and other factors as determined through various option pricing formulas
      or simulation modeling. As many of these assumptions result from judgments
      made
      by management based upon estimates that are inherently uncertain, the resulting
      estimated fair values may not be indicative of the amount realizable in the
      sale
      of a particular financial instrument. In addition, changes in assumptions on
      which the estimated fair values are based may have a significant impact on
      the
      resulting estimated fair values.





As
      certain assets such as deferred tax assets and premises and equipment are not
      considered financial instruments, the estimated fair value of financial
      instruments would not represent the full value of the Company.





The
      Company employed simulation modeling in determining the estimated fair value
      of
      financial instruments for which quoted market prices were not available based
      upon the following assumptions:





**Cash
      and Cash Equivalents, Accrued Interest Receivable, Federal Home Loan Bank Stock,
      Short-Term Borrowings, Accrued Interest Payable, and Advances by Borrowers
      for
      Taxes and Insurance**





The
      fair
      value is equal to the current carrying value.




F
          - 26




**14.**
            **FAIR
                VALUE DISCLOSURE
                (Continued)**





**Investment
      Securities Available for Sale**





The
      fair
      value of investment securities available for sale is equal to the available
      quoted market price. If no quoted market price is available, fair value is
      estimated using the quoted market price for similar securities.





**Net
      Loans Receivable, Deposits, and Other Borrowings**





The
      fair
      value for loans is estimated by discounting contractual cash flows and adjusting
      for prepayment estimates. Discount rates are based upon rates generally charged
      for such loans with similar characteristics. Demand, savings, and money market
      deposit accounts are valued at the amount payable on demand as of year-end.
      Fair
      values for time deposits and other borrowings are estimated using a discounted
      cash flow calculation that applies contractual costs currently being offered
      in
      the existing portfolio with current market rates being offered for products
      of
      similar remaining maturities.





**Bank-Owned
      Life Insurance**





The
      fair
      value is equal to the cash surrender value of the life insurance
      policies.




**Commitments
      to Extend Credit**





These
      financial instruments are generally not subject to sale, and estimated fair
      values are not readily available. The carrying value, represented by the net
      deferred fee arising from the unrecognized commitment, and the fair value,
      determined by discounting the remaining contractual fee over the term of the
      commitment using fees currently charged to enter into similar agreements with
      similar credit risk, are not considered material for disclosure. The contractual
      amounts of unfunded commitments are presented in Note 10.





**15.**
            **CONVERSION
                AND REORGANIZATION**





On
      January 11, 2007, the Board of Directors of the Bank unanimously adopted a
      Plan
      of Reorganization and stock Issuance (the “Plan”) pursuant to which the Bank
      reorganized into the federal mutual holding company form of organization as
      a
      wholly owned subsidiary of Polonia Bancorp (the “Stock Holding Company”), which
      in turn is a majority-owned subsidiary of Polonia MHC. The newly chartered
      Stock
      Holding Company offered shares of its common stock to the Bank’s eligible
      account holders and to the Bank’s tax-qualified employee benefit plans. The
      amount of common stock sold in the offering did not exceed 49 percent of the
      total outstanding shares of the Stock Holding Company. The majority of the
      common stock is owned by Polonia MHC.





Following
      the sale of common stock, all depositors who had membership or liquidation
      rights with respect to the Bank as of the effective date of the transaction
      continue to have such rights solely with respect to Polonia MHC as long as
      they
      continue to hold deposit accounts with the Bank. In addition, all persons who
      become depositors of the Bank subsequent to the date of the transaction will
      have such membership and liquidation rights with respect to Polonia MHC.
      Borrowers of the Bank as of the date of the transaction will have the same
      membership rights in Polonia MHC that they had in the Bank immediately prior
      to
      the date of the transaction as long as their existing borrowings remain
      outstanding.





The
      regulations of the OTS prohibit the Bank from declaring or paying a cash
      dividend if the effect thereof would cause the Bank’s regulatory capital to be
      reduced below either the amount required for the liquidation account or the
      federal regulatory capital requirement in Section 567.2 of the Rules and
      Regulations of the OTS.





The
      conversion was completed as of January 11, 2007, with the sale of 1,487,813
      number of shares resulting in net proceeds of approximately $13,800,000. The
      deferred costs associated with the conversion are $1,043,000.




F
          - 27





**16.**
            **PARENT
                COMPANY**





Condensed
      financial statements of Polonia Bancorp are as follows:





CONDENSED
      BALANCE SHEET





December 31,2007ASSETSCash
            
            $
            4,170,910Loans
                receivable
            
            
            1,209,647Investment
                in subsidiary
            
            
            19,072,339Other
                assets
            
            
            103,525TOTAL
                ASSETS
            
            $
            24,556,421LIABILITIES
                AND STOCKHOLDERS' EQUITYOther
                liabilities
            
            $
            562,676Stockholders'
                equity
            
            
            23,993,745TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            24,556,421





CONDENSED
      STATEMENT OF LOSS





For the period ofJanuary 11 toDecember 31,2007INCOMEESOP
                loan interest income
            
            $
            103,702Investment
                income
            
            
            138,963Total
                income
            
            
            242,665EXPENSES
            
            $
            191,376Income
                before income tax expense
            
            
            51,289Income
                tax expense
            
            
            20,820Income
                        before equity in undistributed net earnings of
                        subsidiary
            
            
            30,469Equity
                in undistributed net earnings of subsidiary
            
            
            (356,040
            )NET
                LOSS
            
            $
            (325,571
            )





F
          - 28





**16.**
            **PARENT
                COMPANY (Continued)**





CONDENSED
      STATEMENT OF CASH FLOWS





For the period ofJanuary 11 toDecember 31,2007OPERATING
                ACTIVITIESNet
                loss
            
            $
            (325,571
            )Adjustments
                to reconcile net loss to net
                cash used for operating activities:Equity
                in undistributed net earnings of subsidiary
            
            
            356,040Stock
                compensation expense
            
            
            169,069Other,
                net
            
            
            459,151Net
                cash used for operating activities
            
            
            658,689INVESTING
                ACTIVITIESCapital
                contribution in subsidiary Bank
            
            
            (8,417,390
            )Net
                cash used for investing activities
            
            
            (8,417,390
            )FINANCING
                ACTIVITIESNet
                proceeds from the issuance of common stock
            
            
            11,929,611Net
                cash provided by financing activities
            
            
            11,929,611Increase
                in cash
            
            
            4,170,910CASH
                AT BEGINNING OF PERIOD
            
            
            -CASH
                AT END OF PERIOD
            
            $
            4,170,910





F
          - 29




**17.**
            **SELECTED
                QUARTERLY DATA (Unaudited)**





Three
                Months EndedMarch
                31,
            
            June
                30,
            
            September 30,
            
            December 31,2007
            
            2007
            
            2007
            
            2007Total
                interest income
            
            $
            2,509,272
            
            $
            2,564,739
            
            $
            2,587,955
            
            $
            2,635,322Total
                interest expense
            
            
            1,332,162
            
            
            1,430,956
            
            
            1,424,674
            
            
            1,450,798Net
                interest income
            
            
            1,177,110
            
            
            1,133,783
            
            
            1,163,281
            
            
            1,184,524Provision
                for loan losses
            
            
            31,367
            
            
            -
            
            
            -
            
            
            -Net
                  interest income afterprovision
                  for loan losses
            
            
            1,145,743
            
            
            1,133,783
            
            
            1,163,281
            
            
            1,184,524Total
                noninterest income
            
            
            174,183
            
            
            184,620
            
            
            179,102
            
            
            222,619Total
                noninterest expense
            
            
            1,476,603
            
            
            1,478,596
            
            
            1,530,507
            
            
            1,392,302Income
                (loss) before income taxes
            
            
            (156,677
            )
            
            (160,193
            )
            
            (188,124
            )
            
            14,841Income
                taxes (benefit)
            
            
            (58,166
            )
            
            (70,274
            )
            
            (79,140
            )
            
            42,998Net
                loss
            
            $
            (98,511
            )
            $
            (89,919
            )
            $
            (108,984
            )
            $
            (28,157
            )Per
                share data:Net
                lossBasic
                and diluted
            
            $
            (0.03
            )
            $
            (0.03
            )
            $
            (0.03
            )
            $
            (0.01
            )Average
                shares outstandingBasic
                and diluted
            
            
            3,177,766
            
            
            3,178,616
            
            
            3,181,749
            
            
            3,162,898Three
                Months EndedMarch 31,
            
            
            June 30,
            
            
            September 30,
            
            
            December 31,2006
            
            
            2006
            
            
            2006
            
            
            2006Total
                interest income
            
            $
            2,124,485
            
            $
            2,058,982
            
            $
            2,091,849
            
            $
            2,314,277Total
                interest expense
            
            
            990,781
            
            
            955,571
            
            
            1,047,661
            
            
            1,245,979Net
                interest income
            
            
            1,133,704
            
            
            1,103,411
            
            
            1,044,188
            
            
            1,068,298Provision
                for loan losses
            
            
            -
            
            
            -
            
            
            -
            
            
            57,973Net
                  interest income afterprovision
                  for loan losses
            
            
            1,133,704
            
            
            1,103,411
            
            
            1,044,188
            
            
            1,010,325Total
                noninterest income
            
            
            74,641
            
            
            217,786
            
            
            187,273
            
            
            170,449Total
                noninterest expense
            
            
            1,372,440
            
            
            1,242,171
            
            
            1,329,370
            
            
            1,418,815Income
                (loss) before income taxes
            
            
            (164,095
            )
            
            79,026
            
            
            (97,909
            )
            
            (238,041
            )Income
                taxes (benefit)
            
            
            2,765
            
            
            (7,125
            )
            
            (119,078
            )
            
            (78,543
            )Net
                income (loss)
            
            $
            (166,860
            )
            $
            86,151
            
            $
            21,169
            
            $
            (159,498
            )Per
                share data:Net
                income (loss)Basic
                and diluted
            
            $
            N/A
            
            $
            N/A
            
            $
            N/A
            
            $
            N/AAverage
                shares outstandingBasic
                and diluted
            
            
            N/A
            
            
            N/A
            
            
            N/A
            
            
            N/A





F
          - 30