United
States


Securities
and Exchange Commission


Washington,
D.C. 20549





FORM 10-K





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





For the
fiscal year ended December 31, 2009





 ̈
            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)





Indicate
by check mark whether the Registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.    Yes    ̈
    No   x





Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.    Yes    ̈
    No   x





Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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    ̈





Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for shorter period that the registrant was required to submit and
post such files).


Yes   ̈No    ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this Chapter) is not contained herein, and will not
be contained, to the best of Registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.   x





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer,” “non-accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.





Large
accelerated filer   ̈
        Accelerated filer  ̈
        Non-accelerated filer 
 ̈
        Smaller Reporting Company 
x





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





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant upon the closing price of such common equity as
of last business day of most recently completed second fiscal quarter was
$8,338,177.  For purposes of this calculation, officers and directors
of the Registrant are considered affiliates.





At March
24, 2010, the Registrant had 3,159,078 shares of $0.01 par value common stock
outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE:





Portions
of the Proxy Statement for the 2010 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.





TABLE OF CONTENTS





PagePART
      IItem
      1.
                Business
                1Item
      1A.
                Risk
      Factors
                5Item
      1B.
                Unresolved
      Staff Comments
                16Item
      2.
                Properties
                17Item
      3.
                Legal
      Proceedings
                17Item
      4.
                [Removed
      and Reserved]
                17PART
      IIItem
      5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                18Item
      6.
                Selected
      Financial Data
                19Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                20Item
      7A.
                Quantitative
      and Qualitative Disclosures About Market Risk
                41Item
      8.
                Financial
      Statements and Supplementary Data
                41Item
      9.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                41Item
      9A.(T)
                Controls
      and Procedures
                41Item
      9B.
                Other
      Information
                41PART
      IIIItem
      10.
                Directors,
      Executive Officers and Corporate Governance
                42Item
      11.
                Executive
      Compensation
                42Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                42Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence
                43Item
      14.
                Principal
      Accountant Fees and Services
                43PART
      IVItem
      15.
                Exhibits
      and Financial Statement Schedules
                44Signatures




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 egulation. Additional factors that may affect our
results are discussed in this Annual Report on Form 10-K under “Item 1A – Risk
Factors.” 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.
            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.




1


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.




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, 2009, 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, TD Bank 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.




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.




2


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.




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. Generally, all loans are subject to the same stringent
underwriting standards with the intention to hold in portfolio. Management
occasionally sells loans to (1) limit the Bank’s exposure to a single borrower
or (2) in specific circumstances to manage the interest rate risk. All loans
subject to sale are identified at the time of origination.




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%. We offer loans with adjustable interest rates tied to a market
index in our market area.




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 1.20x. Environmental
surveys are obtained when circumstances suggest the possibility of the presence
of hazardous materials.




3


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. Generally, all loans are subject to
the same stringent underwriting standards with the intention to hold in
portfolio. Management occasionally sells loans to (1) limit the Bank’s exposure
to a single borrower or (2) in specific circumstances to manage the interest
rate risk. All loans subject to sale are identified at the time of origination.




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, 2009, 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 two one-to-four family
properties. These loans were performing in accordance with their original terms
at December 31, 2009.




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 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, 2009.




At
December 31, 2009 our investment portfolio totaled $44.4 million and consisted
primarily of 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.




4


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.




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, 2009, we had 44 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.





ITEM
    1A.
            RISK
    FACTORS





The
current economic environment poses significant challenges for us and could
adversely affect our financial condition and results of operations.





We
currently are operating in a challenging and uncertain economic environment,
both nationally and in the local markets that we serve. Financial institutions
continue to be affected by sharp declines in financial and real estate values.
Continued declines in real estate values and home sales, and an increase in the
financial stress on borrowers stemming from an uncertain economic environment,
including high unemployment, could have an adverse effect on our borrowers or
their customers, which could adversely impact the repayment of the loans we have
made. The overall deterioration in economic conditions also could subject us to
increased regulatory scrutiny. In addition, a prolonged recession, or further
deterioration in local economic conditions, could result in an increase in loan
delinquencies; an increase in problem assets and foreclosures; and a decline in
the value of the collateral for our loans. Furthermore, a prolonged recession or
further deterioration in local economic conditions could drive the level of loan
losses beyond the level we have provided for in our loan loss allowance, which
could necessitate our increasing our provision for loans losses, which would
reduce our earnings. Additionally, the demand for our products and services
could be reduced, which would adversely impact our liquidity and the level of
revenues we generate.




5


If
we conclude that the decline in value of any of our investment securities is
other than temporary, we are required to write down the value of that security
through a charge to earnings.




We review
our investment securities portfolio at each quarter-end reporting period to
determine whether the fair value is below the current carrying value. When the
fair value of any of our investment securities has declined below its carrying
value, we are required to assess whether the decline is other than temporary. If
we conclude that the decline is other than temporary, we are required to write
down the value of that security through a charge to earnings. As of December 31,
2009, our investment portfolio included securities with a book value of $43.5
million and an estimated fair value of $44.2 million. Changes in the expected
cash flows of these securities and/or prolonged price declines may result in our
concluding in future periods that the impairment of these securities is other
than temporary, which would require a charge to earnings to write down theses
securities to their fair value. Any charges for other-than-temporary impairment
would not impact cash flow, tangible capital or liquidity.




Higher
FDIC deposit insurance premiums and assessments could adversely affect our
financial condition.




FDIC
insurance premiums increased substantially in 2009 and we expect to pay
significantly higher FDIC premiums in the future. Market developments have
significantly depleted the DIF and reduced the ratio of reserves to insured
deposits. The FDIC adopted a revised risk-based deposit insurance assessment
schedule on February 27, 2009, which raised deposit insurance premiums. On May
22, 2009, the FDIC also implemented a five basis point special assessment of
each insured depository institution’s assets minus Tier 1 capital as of June 30,
2009, but no more than 10 basis points times the institution’s assessment base
for the second quarter of 2009, which was collected on September 30, 2009. In
imposing the special assessment, the FDIC noted that additional special
assessments may be imposed by the FDIC for future periods.




On
November 12, 2009, the FDIC adopted a final rule that requires insured
depository institutions to prepay their quarterly risk-based assessments for the
fourth quarter of 2009, and for all of 2010, 2011, and 2012, on
December 30, 2009, along with each institution’s risk-based deposit
insurance assessment for the third quarter of 2009. For purposes of calculating
the prepaid amount, the base assessment rate in effect at September 30,
2009 would be used for 2010. That rate would be increased by an annualized 3
basis points for 2011 and 2012 assessments. The prepayment calculation would
also assume a 5 percent annual growth rate, increased quarterly, through the end
of 2012. Under the final rule, an institution will account for the prepayment by
recording the entire amount of its prepaid assessment as a prepaid expense (an
asset) as of December 30, 2009. Subsequently,
each institution will record an expense (charge to earnings) for its regular
quarterly assessment and an offsetting credit to the prepaid assessment until
the asset is exhausted. Once the asset is exhausted, the institution would
resume paying and accounting for quarterly deposit insurance assessments as they
do currently. Under the final rule, the FDIC stated that its requirement for
prepaid assessments does not preclude the FDIC from changing assessment rates or
from further revising the risk-based assessment system during 2009, 2010, 2011,
2012, or thereafter, pursuant to notice-and-comment rulemaking procedures
provided by statute, and therefore, continued actions by the FDIC could
significantly increase the Bank’s noninterest expense in fiscal 2010 and for the
foreseeable future.





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





Like
other financial institutions, the Company is subject to interest rate
risk.  The Company’s primary source of income is net interest income,
which is the difference between interest earned on loans and investments and the
interest paid on deposits and borrowings. Changes in the general level of
interest rates can affect the Company’s net interest income by affecting the
difference between the weighted-average yield earned on the Company’s
interest-earning assets and the weighted-average rate paid on the Company’s
interest-bearing liabilities, or interest rate spread and the average life of
the Company’s interest-earning assets and interest-bearing
liabilities.  Changes in interest rates also can
affect:  (1) the ability to originate loans; (2) the value of the
Company’s interest-earning assets and the Company’s ability to realize gains
from the sale of such assets; and (3) the ability to obtain and retain deposits
in competition with other available investment alternatives.  Interest
rates are highly sensitive to many factors, including government monetary
policies, domestic and international economic and political conditions and other
factors beyond the Company’s control.  Although the Company believes
that the estimated maturities of its interest-earning assets currently are well
balanced in relation to the estimated maturities of its interest-bearing
liabilities, there can be no assurance that the Company’s profitability would
not be adversely affected during any period of changes in interest
rates.




6


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, federal deposit
insurance premiums and data processing expense, totaled $6.6 million and $6.1
million for the years ended December 31, 2009 and 2008, respectively. Our ratio
of non-interest expense to average total assets was 2.96% and 2.89% for the
years ended December 31, 2009 and 2008, respectively. Our efficiency ratio
totaled 91.72% for 2009 compared to 104.4% for 2008. The increase in expenses
during 2009 was primarily due to higher compensation and employee benefits and
higher federal deposit insurance premiums. 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, 2009, 20.4% 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, 2009, 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.”




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.




7


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.




Anti-takeover
provisions in our charter restrict the accumulation of our common stock, which
may adversely affect our stock price.




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.




8


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.




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.




9


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.




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 seek to 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.




10


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.




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,
2009, Polonia Bank met each of its capital requirements.




11


The following table presents Polonia
Bank’s capital position at December 31, 2009.





CapitalActual
                  
                  
                  Required
                  
                  
                  Excess(Dollars
      in thousands)Tangible
                  
                  $
                  20,301
                  
                  
                  $
                  4,348
                  
                  
                  $
                  15,953Tier
      1 / Leverage
                  
                  
                  20,301
                  
                  
                  
                  8,696
                  
                  
                  
                  11,605Tier
      1 / Risk-based
                  
                  
                  20,301
                  
                  
                  
                  4,332
                  
                  
                  
                  15,969Total
      / Risk-based
                  
                  
                  21,416
                  
                  
                  
                  8,663
                  
                  
                  
                  12,753





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 Federal Deposit Insurance
Corporation.  The Deposit Insurance Fund is the successor to the Bank
Insurance Fund and the Savings Association Insurance Fund, which were merged in
2006.





Under the Federal Deposit Insurance
Corporation’s risk-based assessment system, insured institutions are assigned to
one of four risk categories based on supervisory evaluations, regulatory capital
levels and certain other factors, with less risky institutions paying lower
assessments.  An institution’s assessment rate depends upon the
category to which it is assigned.  For calendar 2008, assessments
ranged from five to forty-three basis points of each institution’s deposit
assessment base.  Due to losses incurred by the Deposit Insurance Fund
in 2008 from failed institutions, and anticipated future losses, the Federal
Deposit Insurance Corporation adopted an across the board seven basis point
increase in the assessment range for the first quarter of 2009.  The
Federal Deposit Insurance Corporation made further refinements to its risk-based
assessment system effective April 1, 2009 that effectively made the range seven
to 771/2 basis
points.  The Federal Deposit Insurance Corporation may adjust the
scale uniformly from one quarter to the next, except that no adjustment can
deviate more than three basis points from the base scale without notice and
comment rulemaking.  No institution may pay a dividend if in default
of the federal deposit insurance assessment.





The Federal Deposit Insurance
Corporation also imposed on all insured institutions a special emergency
assessment of five basis points of total assets minus tier 1 capital, as of June
30, 2009 (capped at ten basis points of an institution’s deposit assessment base
on the same date) in order to cover losses to the Deposit Insurance
Fund.  That special assessment was collected on September 30,
2009.  The Federal Deposit Insurance Corporation provided for similar
special assessments during the final two quarters of 2009, if deemed
necessary.  However, in lieu of further special assessments, the
Federal Deposit Insurance Corporation required insured institutions to prepay
estimated quarterly risk-based assessments for the fourth quarter of 2009
through the fourth quarter of 2012.  The estimated assessments, which
include an assumed annual assessment base increase of 5%, were recorded as a
prepaid expense asset as of December 30, 2009.  As of December 31,
2009, and each quarter thereafter, a charge to earnings will be recorded for
each regular assessment with an offsetting credit to the prepaid
asset.




12


Due to the recent difficult economic
conditions, deposit insurance per account owner has been raised to $250,000 for
all types of accounts until January 1, 2013. In addition, the FDIC adopted an
optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest
bearing transaction accounts receive unlimited insurance coverage until December
31, 2009, subsequently extended until June 30, 2009, and certain senior
unsecured debt issued by institutions and their holding companies during
specified periods would be guaranteed by the FDIC through June 30, 2012, or in
certain cases, to December 31, 2012. Polonia Bank made the business decision to
participate in the unlimited noninterest bearing transaction account coverage
and Polonia Bank, Polonia MHC and Polonia Bancorp opted to participate in the
unsecured debt guarantee program.




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
four quarters ending December 31, 2009 averaged 1.1 basis points of assessable
deposits.




The Federal Deposit Insurance
Corporation 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 the Bank. Management cannot
predict what insurance assessment rates will be in the future.




Insurance of deposits may be terminated
by the Federal Deposit Insurance Corporation 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 Federal Deposit Insurance Corporation or the
Office of Thrift Supervision. The management of the 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, 2009, Polonia Bank maintained 91.4% of its portfolio assets in
qualified thrift investments and, therefore, met the qualified thrift lender
test.




13


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.




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, 2009 totaled
$69,000.




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, 2009 of $2.3
million.




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). For 2009,
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 $44.4 million; a 10% reserve ratio is
applied above $44.4 million. The first $10.3 million of otherwise reservable
balances (subject to adjustments by the Federal Reserve Board) were exempted
from the reserve requirements. The amounts are adjusted annually and, for 2010,
require a 3% ratio for up to $552. million and an exemption of $10.7 million.
Polonia Bank complies with the foregoing requirements.




Regulatory Restructuring
Legislation




The Obama Administration has proposed,
and the House of Representatives and Senate are currently considering,
legislation that would restructure the regulation of depository institutions.
Proposals have ranged from the merger of the Office of Thrift Supervision with
the Office of the Comptroller of the Currency, which regulates national banks,
to the creation of an independent federal agency that would assume the
regulatory responsibilities of the Office of Thrift Supervision, Federal Deposit
Insurance Corporation, Office of the Comptroller of the Currency and Federal
Reserve Board. The federal savings association charter would be eliminated and
federal associations required to become banks under some proposals, although
others would grandfather existing charters such as that of the Bank. Savings and
loan holding companies would become regulated as bank holding companies. Also
proposed is the creation of a new federal agency to administer and enforce
consumer and fair lending laws, a function that is now performed by the
depository institution regulators. The federal preemption of state laws
currently accorded federally chartered depository institutions would be reduced
under certain proposals as well.




Enactment of any of these proposals
would revise the regulatory structure imposed on the Bank, which could result in
more stringent regulation. At this time, management has no way of predicting the
contents of any final legislation, or whether any legislation will be enacted at
all.




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 2009 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.




15


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.




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 2009 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
    1B.
            UNRESOLVED STAFF
      COMMENTS





None.


16


ITEM 2.
              PROPERTIES




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, 2009.





Net
      Book Value ofProperty
      orLeaseholdOriginal
      Year
                                          
                                          Leased,
                                          
                                          Improvements
      atLeased
      or
                                          
                                          Licensed
      or
                                          
                                          December
      31, 2009Location
                                          
                                          Acquired
                                          
                                          Owned
                                          
                                          (In thousands)Main/Executive
      Office:3993
      Huntingdon PikeHuntingdon
      Valley, Pennsylvania 19006
                                          
                                          1996
                                          
                                          Owned
                                          
                                          $
                                          2,371Branch
      Offices:2646
      East Allegheny AvenuePhiladelphia,
      Pennsylvania 19134
                                          
                                          1970
                                          
                                          Owned
                                          
                                          $
                                          1,2442133
      Spring Garden StreetPhiladelphia,
      Pennsylvania 19130
                                          
                                          1979
                                          
                                          Owned
                                          
                                          $
                                          2742628
      Orthodox StreetPhiladelphia,
      Pennsylvania 19137
                                          
                                          1999
                                          
                                          Owned
                                          
                                          $
                                          1188000
      Frankford AvenuePhiladelphia,
      Pennsylvania 19136
                                          
                                          1992
                                          
                                          Owned
                                          
                                          $
                                          396





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.
              [REMOVED AND
      RESERVED]





17


PART
II





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





The
common stock of Polonia Bancorp is traded on the OTC Electronic Bulletin Board
under the symbol “PBCP.OB.”





High
                  
                  
                  Low
                  
                  
                  
                  High
                  
                  
                  Low2009
                  
                  
                  
                  
                  
                  
                  2008First
      Quarter
                  
                  $
                  8.75
                  
                  
                  $
                  7.50
                  
                  First
      Quarter
                  
                  $
                  10.27
                  
                  
                  $
                  8.10Second
      Quarter
                  
                  
                  7.95
                  
                  
                  
                  7.50
                  
                  Second
      Quarter
                  
                  
                  10.00
                  
                  
                  
                  7.80Third
      Quarter
                  
                  
                  7.50
                  
                  
                  
                  6.10
                  
                  Third
      Quarter
                  
                  
                  9.00
                  
                  
                  
                  7.00Fourth
      Quarter
                  
                  
                  7.75
                  
                  
                  
                  3.20
                  
                  Fourth
      Quarter
                  
                  
                  9.00
                  
                  
                  
                  8.10





As of
March 24, 2010 there were approximately 192 holders of record of the Company’s
common stock.





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.





As of
December 31, 2009, 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.





The
Company did not repurchase any of its equity securities for the fourth quarter
of 2009 and no shares were available for repurchase pursuant to publicly
announced plans.


18





ITEM
    6.
            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.





2009
                            
                            
                            2008
                            
                            
                            2007(Dollars
      in thousands, except per share data)Financial
      Condition Data:Totals
      assets
                            
                            $
                            218,071
                            
                            
                            $
                            220,236
                            
                            
                            $
                            200,597Securities
      available-for-sale
                            
                            
                            30,602
                            
                            
                            
                            37,789
                            
                            
                            
                            45,885Securities
      held-to-maturity
                            
                            
                            13,780
                            
                            
                            
                            –
                            
                            
                            
                            –Loans
      receivable, net
                            
                            
                            150,177
                            
                            
                            
                            163,759
                            
                            
                            
                            137,280Cash
      and cash equivalents
                            
                            
                            8,427
                            
                            
                            
                            4,671
                            
                            
                            
                            3,826Deposits
                            
                            
                            164,207
                            
                            
                            
                            164,586
                            
                            
                            
                            163,217FHLB
      Advances - short-term
                            
                            
                            –
                            
                            
                            
                            4,000
                            
                            
                            
                            6,000FHLB
      Advances - long-term
                            
                            
                            26,474
                            
                            
                            
                            24,553
                            
                            
                            
                            4,098Stockholders'
      equity
                            
                            
                            23,845
                            
                            
                            
                            23,604
                            
                            
                            
                            23,994Book
      value per common share
                            
                            
                            7.55
                            
                            
                            
                            7.40
                            
                            
                            
                            7.26Operating
      Data:Interest
      income
                            
                            $
                            10,707
                            
                            
                            $
                            11,069
                            
                            
                            $
                            10,297Interest
      expense
                            
                            
                            5,000
                            
                            
                            
                            5,312
                            
                            
                            
                            5,639Net
      interest income
                            
                            
                            5,707
                            
                            
                            
                            5,757
                            
                            
                            
                            4,658Provision
      for loan losses
                            
                            
                            252
                            
                            
                            
                            85
                            
                            
                            
                            31Net
      interest income after provision for loan losses
                            
                            
                            5,455
                            
                            
                            
                            5,672
                            
                            
                            
                            4,627Non-interest
      income
                            
                            
                            1,444
                            
                            
                            
                            85
                            
                            
                            
                            760Non-interest
      expense
                            
                            
                            6,559
                            
                            
                            
                            6,101
                            
                            
                            
                            5,878Income/Loss
      before income taxes
                            
                            
                            340
                            
                            
                            
                            (344
                            )
                            
                            
                            (491
                            )Provision
      for income taxes
                            
                            
                            9
                            
                            
                            
                            (98
                            )
                            
                            
                            (165
                            )Net
      income/loss
                            
                            $
                            331
                            
                            
                            $
                            (246
                            )
                            
                            $
                            (326
                            )Basic
      and diluted earnings per share
                            
                            
                            0.11
                            
                            
                            
                            (0.08
                            )
                            
                            
                            (0.10
                            )Performance
      Ratios:Return
      on average assets
                            
                            
                            0.15
                            %
                            
                            
                            (0.12
                            )%
                            
                            
                            (0.17
                            )%Return
      on average equity
                            
                            
                            1.60
                            
                            
                            
                            (1.04
                            )
                            
                            
                            (1.37
                            )Interest
      rate spread (1)
                            
                            
                            2.55
                            
                            
                            
                            2.63
                            
                            
                            
                            2.19Net
      interest margin (2)
                            
                            
                            2.74
                            
                            
                            
                            2.89
                            
                            
                            
                            2.53Non-interest
      expense to average assets
                            
                            
                            2.96
                            
                            
                            
                            2.89
                            
                            
                            
                            2.99Efficiency
      ratio (3)
                            
                            
                            91.72
                            
                            
                            
                            104.43
                            
                            
                            
                            108.45Average
      interest-earning assets to average interest-bearing
      liabilities
                            
                            
                            107.95
                            
                            
                            
                            109.76
                            
                            
                            
                            111.23Average
      equity to average assets
                            
                            
                            9.36
                            
                            
                            
                            11.15
                            
                            
                            
                            12.10Capital
      Ratios (4):Tangible
      capital
                            
                            
                            9.34
                            
                            
                            
                            9.06
                            
                            
                            
                            10.03Core
      capital
                            
                            
                            9.34
                            
                            
                            
                            9.06
                            
                            
                            
                            10.03Total
      risk-based capital
                            
                            
                            19.78
                            
                            
                            
                            18.73
                            
                            
                            
                            21.65




19





2009
                
                
                2008
                
                
                2007Asset
      Quality Ratios:Allowance
      for loan losses as a percent of total loans
                
                
                0.74
                %
                
                
                0.52
                %
                
                
                0.53
                %Allowance
      for loan losses as a percent of nonperforming loans
                
                
                40.66
                
                
                
                117.70
                
                
                
                338.43Net
      charge-offs (recoveries) to average outstanding loans during the
      period
                
                
                (0.01
                )
                
                
                (0.03
                )
                
                
                (0.01
                )Non-performing
      loans as a percent of total loans
                
                
                1.81
                
                
                
                0.44
                
                
                
                0.16Other
      Data:Number
      of:Real
      estate loans outstanding
                
                
                968
                
                
                
                1,082
                
                
                
                1,020Deposit
      accounts
                
                
                8,729
                
                
                
                9,468
                
                
                
                9,863Full-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.





ITEM
    7.
            MANAGEMENT’S DISCUSSION AND
      ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





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 incurred additional annual employee
compensation expenses in fiscal 2009 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.


20


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-K.





Deferred Income
Taxes.   We use the asset and liability method of accounting
for income taxes as prescribed by United States Generally Accepted Accounting
Principles (U.S. GAAP). 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.   U.S. GAAP requires 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. Securities are periodically reviewed for other-than-temporary
impairment based upon a number of factors, including, but not limited to, the
length of time and extent to which the market value has been less than cost, the
financial condition of the underlying issuer, the ability of the issuer to meet
contractual obligations, the likelihood of the security’s ability to recover any
decline in its market value, and management’s intent and ability to hold the
security for a period of time sufficient to allow for a recovery in market
value. Among the factors that are considered in determining management’s intent
and ability is a review of the Company’s capital adequacy, interest rate risk
position, and liquidity. The assessment of a security’s ability to recover any
decline in market value, the ability of the issuer to meet contractual
obligations, and management’s intent and ability requires considerable judgment.
A decline in value that is considered to be other than temporary is recorded as
a loss within noninterest income in the Consolidated Statement of
Income.




21


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, 2009, our ratio of loans to total assets was
68.9%.





The largest segment of our loan
portfolio is one-to four-family residential loans.  At December 31,
2009, these loans totaled $131.6 million and represented 86.8% of total loans,
compared to $144.5 million, or 87.7% of total loans, at December 31,
2008.  The size of our one- to four-family residential loan portfolio
decreased during the year ended December 31, 2009 due primarily to the sale
of loans and repayments.





Home equity loans totaled $3.4 million
and represented 2.2% of total loans at December 31, 2009, compared to $4.2
million, or 2.5% of total loans at December 31, 2008.  Home equity
loans decreased $800,000 or 19.0% during the year ended December 31,
2009.  Home equity lines of credit totaled $3.0 million and
represented 2.0% of total loans at December 31, 2009 compared to $1.4
million or 0.8% of total loans at December 31, 2008.





Multi-family and commercial real estate
loans totaled $10.2 million and represented 6.7% of total loans at December 31,
2009, compared to $12.0 million, or 7.3% of total loans, at December 31,
2008.  Multi-family and commercial real estate loans decreased $1.8
million, or 15.0%, during the year ended December 31, 2009.  The
decrease in multi-family and commercial real estate loans in 2009 was primarily
due to loan payoffs.





Consumer loans totaled $3.3 million and
represented 2.2% of total loans at December 31, 2009 compared to $2.8 million,
or 1.7% of total loans at December 31, 2008.  Consumer loans
increased $564,000, or 20.5%, during the year ended December 31,
2009.


22





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





At
      December 31,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent(Dollars
      in thousands)Real
      estate loans:One-to-four
      family
                
                $
                131,571
                
                
                
                86.84
                %
                
                $
                144,508
                
                
                
                87.68
                %
                
                $
                120,774
                
                
                
                87.42
                %
                
                $
                100,152
                
                
                
                88.84
                %
                
                $
                88,873
                
                
                
                90.96
                %Multi-family
      and commercial real estate
                
                
                10,214
                
                
                
                6.74
                
                
                
                12,020
                
                
                
                7.29
                
                
                
                9,803
                
                
                
                7.09
                
                
                
                5,212
                
                
                
                4.62
                
                
                
                3,563
                
                
                
                3.65Home
      equity loans
                
                
                3,372
                
                
                
                2.23
                
                
                
                4,172
                
                
                
                2.53
                
                
                
                4,343
                
                
                
                3.14
                
                
                
                4,229
                
                
                
                3.75
                
                
                
                2,558
                
                
                
                2.61Home
      equity lines of credit
                
                
                3,036
                
                
                
                2.00
                
                
                
                1,361
                
                
                
                0.83
                
                
                
                980
                
                
                
                0.71
                
                
                
                980
                
                
                
                0.87
                
                
                
                -
                
                
                
                -Total
      real estate loans:
                
                $
                148,193
                
                
                
                97.81
                
                
                $
                162,061
                
                
                
                98.33
                
                
                $
                135,900
                
                
                
                98.36
                
                
                $
                110,573
                
                
                
                98.08
                
                
                $
                94,994
                
                
                
                97.22Consumer:Education
                
                $
                3,281
                
                
                
                2.17
                
                
                $
                2,690
                
                
                
                1.63
                
                
                $
                2,170
                
                
                
                1.57
                
                
                $
                2,137
                
                
                
                1.90
                
                
                $
                2,679
                
                
                
                2.74Loans
      on savings accounts
                
                
                32
                
                
                
                0.02
                
                
                
                59
                
                
                
                0.04
                
                
                
                85
                
                
                
                0.06
                
                
                
                27
                
                
                
                0.02
                
                
                
                38
                
                
                
                0.04Other
                
                
                1
                
                
                
                –
                
                
                
                1
                
                
                
                –
                
                
                
                5
                
                
                
                0.01
                
                
                
                1
                
                
                
                –
                
                
                
                2
                
                
                
                –Total
      consumer loans
                
                
                3,314
                
                
                
                2.19
                
                
                
                2,750
                
                
                
                1.67
                
                
                
                2,260
                
                
                
                1.64
                
                
                
                2,165
                
                
                
                1.92
                
                
                
                2,719
                
                
                
                2.78Total
      loans
                
                
                151,507
                
                
                
                100.00
                %
                
                
                164,811
                
                
                
                100.00
                %
                
                
                138,160
                
                
                
                100.00
                %
                
                
                112,738
                
                
                
                100.00
                %
                
                
                97,713
                
                
                
                100.00
                %Net
      deferred loan fees
                
                
                215
                
                
                
                
                
                
                
                195
                
                
                
                
                
                
                
                149
                
                
                
                
                
                
                
                120
                
                
                
                
                
                
                
                157Allowance
      for loan losses
                
                
                1,115
                
                
                
                
                
                
                
                857
                
                
                
                
                
                
                
                731
                
                
                
                
                
                
                
                695
                
                
                
                
                
                
                
                651Loans,
      net
                
                $
                150,177
                
                
                
                
                
                
                $
                163,759
                
                
                
                
                
                
                $
                137,280
                
                
                
                
                
                
                $
                111,923
                
                
                
                
                
                
                $
                96,905




23


The
following table sets forth certain information at December 31, 2009 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
                  and
                  Commercial
                  Real Estate
                  Loans
                
                
                Home Equity
                  Loans and
                  Lines of
                  Credit
                
                
                Consumer
                  Loans
                
                
                Total
                  Loans(Dollars
      in thousands)Amounts
      due in:One
      year or less
                
                $
                58
                
                
                $
                854
                
                
                $
                1,031
                
                
                $
                1,516
                
                
                $
                3,459More
      than one to five years
                
                
                2,081
                
                
                
                1,036
                
                
                
                311
                
                
                
                1,095
                
                
                
                4,523More
      than five years
                
                
                129,432
                
                
                
                8,324
                
                
                
                5,066
                
                
                
                703
                
                
                
                143,525Total
                
                $
                131,571
                
                
                $
                10,214
                
                
                $
                6,408
                
                
                $
                3,314
                
                
                $
                151,507





The following table sets forth the
dollar amount of all loans at December 31, 2009 that are due after December 31,
2010.





Fixed Rate
                  
                  
                  Adjustable
                    Rate(Dollars
      in thousands)Real
      Estate Loans:One-to-four-family
                  
                  $
                  131,513
                  
                  
                  $
                  –Multi-family
      and commercial real estate
                  
                  
                  9,360
                  
                  
                  
                  –Home
      equity loans and lines of credit
                  
                  
                  3,363
                  
                  
                  
                  2,014Consumer
      Loans
                  
                  
                  1,798
                  
                  
                  
                  –Total
                  
                  $
                  146,034
                  
                  
                  $
                  2,014





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





December
      31,
                
                
                December
      31,
                
                
                December
      31,2009
                
                
                2008
                
                
                2007(Dollars
      in thousands)Total
      loans at beginning of period
                
                $
                164,811
                
                
                $
                138,160
                
                
                $
                112,738Loans
      originated:Real
      estate loans:One-to-four-family
                
                
                32,424
                
                
                
                40,121
                
                
                
                30,470Multi-family
      and commercial real estate
                
                
                840
                
                
                
                710
                
                
                
                3,441Home
      equity loans and lines of credit
                
                
                2,173
                
                
                
                1,531
                
                
                
                1,036Consumer
                
                
                830
                
                
                
                903
                
                
                
                548Total
      loans originated
                
                
                36,267
                
                
                
                43,265
                
                
                
                35,495Loans
      purchased
                
                
                3,980
                
                
                
                2,966
                
                
                
                3,855Deduct:Real
      estate loan principal repayments
                
                
                (28,679
                )
                
                
                (13,742
                )
                
                
                (13,928
                )Loans
      sold
                
                
                (24,872
                )
                
                
                (5,838
                )
                
                
                –Total
      deductions
                
                
                (53,551
                )
                
                
                (19,580
                )
                
                
                (13,928
                )Net
      loan activity
                
                
                (13,304
                )
                
                
                26,651
                
                
                
                25,422Total
      loans at end of period
                
                $
                151,507
                
                
                $
                164,811
                
                
                $
                138,160





24


Securities.
 Our securities
portfolio consists primarily of mortgage-backed securities.  The
weighted average rate of our securities portfolio was 4.99% as of
December 31, 2009 as compared to 5.25% as of December 31, 2008 and the
weighted average maturity was 13 years as of December 31, 2009 and 14 years as
of December 31, 2008, respectively.  Investment securities available
for sale decreased $7.1 million to $29.7 million from $36.8 million at December
31, 2008.  The reason for the decrease was primarily due to the sale
of $9.3 million in securities.  Investment securities held to maturity
increased to $13.8 million. The reason for the increase was primarily due to the
purchase of $14.0 million in held to maturity securities. The following table
sets forth the amortized cost and fair values of our securities portfolio at the
dates indicated.





At December 31,2009
                
                
                2008
                
                
                2007Amortized
                
                
                Fair
                
                
                Amortized
                
                
                Fair
                
                
                Amortized
                
                
                FairCost
                
                
                Value
                
                
                Cost
                
                
                Value
                
                
                Cost
                
                
                Value(Dollars
      in thousands)Securities
      available-for-sale:Fannie
      Mae
                
                $
                13,163
                
                
                $
                13,719
                
                
                $
                23,870
                
                
                $
                24,628
                
                
                $
                24,744
                
                
                $
                24,970Freddie
      Mac
                
                
                2,763
                
                
                
                2,906
                
                
                
                6,835
                
                
                
                7,000
                
                
                
                8,594
                
                
                
                8,601Government
      National Mortgage Association securities
                
                
                1,339
                
                
                
                1,447
                
                
                
                1,628
                
                
                
                1,688
                
                
                
                2,006
                
                
                
                2,057Other
                
                
                86
                
                
                
                87
                
                
                
                98
                
                
                
                94
                
                
                
                157
                
                
                
                157Total
      mortgage-backed securities
                
                
                17,351
                
                
                
                18,159
                
                
                
                32,431
                
                
                
                33,410
                
                
                
                35,501
                
                
                
                35,785U.S.
      government agency securities
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                4,108
                
                
                
                4,131Corporate
      securities
                
                
                12,370
                
                
                
                12,425
                
                
                
                4,346
                
                
                
                4,374
                
                
                
                5,630
                
                
                
                5,632Total
      debt securities
                
                
                29,721
                
                
                
                30,584
                
                
                
                36,777
                
                
                
                37,784
                
                
                
                45,239
                
                
                
                45,548Equity
      securities
                
                
                19
                
                
                
                18
                
                
                
                19
                
                
                
                5
                
                
                
                430
                
                
                
                337Total
                
                $
                29,740
                
                
                $
                30,602
                
                
                $
                36,796
                
                
                $
                37,789
                
                
                $
                45,669
                
                
                $
                45,885





Securities
      held-to-maturity:Fannie
      Mae mortgage-backed securities
                        
                        $
                        13,780
                        
                        
                        $
                        13,641
                        
                        
                        $
                        –
                        
                        
                        $
                        –
                        
                        
                        $
                        –
                        
                        
                        $
                        –





At December 31, 2009, 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, 2009.




25


The
following table sets forth the stated maturities and weighted average yields of
securities at December 31, 2009.  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
                    
                    
                    TotalWeighted
                    
                    
                    
                    
                    
                    Weighted
                    
                    
                    
                    
                    
                    Weighted
                    
                    
                    
                    
                    
                    Weighted
                    
                    
                    
                    
                    
                    WeightedAmortized
                    
                    
                    Average
                    
                    
                    Amortized
                    
                    
                    Average
                    
                    
                    Amortized
                    
                    
                    Average
                    
                    
                    Amortized
                    
                    
                    Average
                    
                    
                    Amortized
                    
                    
                    AverageCost
                    
                    
                    Yield
                    
                    
                    Cost
                    
                    
                    Yield
                    
                    
                    Cost
                    
                    
                    Yield
                    
                    
                    Cost
                    
                    
                    Yield
                    
                    
                    Cost
                    
                    
                    YieldSecurities
      available-for-sale:Fannie
      Mae
                    
                    $
                    –
                    
                    
                    
                    –
                    %
                    
                    $
                    96
                    
                    
                    
                    5.34
                    %
                    
                    $
                    4,691
                    
                    
                    
                    5.09
                    %
                    
                    $
                    8,376
                    
                    
                    
                    4.80
                    %
                    
                    $
                    13,163
                    
                    
                    
                    4.91
                    %Freddie
      Mac
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    308
                    
                    
                    
                    4.89
                    
                    
                    
                    2,455
                    
                    
                    
                    5.08
                    
                    
                    
                    2,763
                    
                    
                    
                    5.07Government
      National Mortgage Association Securities
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    6
                    
                    
                    
                    6.88
                    
                    
                    
                    34
                    
                    
                    
                    7.43
                    
                    
                    
                    1,299
                    
                    
                    
                    6.33
                    
                    
                    
                    1,339
                    
                    
                    
                    6.36Other
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    86
                    
                    
                    
                    4.89
                    
                    
                    
                    86
                    
                    
                    
                    4.89U.S.
      Government agency securities
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Corporate
      securities
                    
                    
                    1,750
                    
                    
                    
                    4.50
                    
                    
                    
                    2,645
                    
                    
                    
                    4.20
                    
                    
                    
                    975
                    
                    
                    
                    5.08
                    
                    
                    
                    7,000
                    
                    
                    
                    5.25
                    
                    
                    
                    12,370
                    
                    
                    
                    4.91Equity
      securities
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Total
                    
                    $
                    1,750
                    
                    
                    
                    4.50
                    %
                    
                    $
                    2,747
                    
                    
                    
                    4.24
                    %
                    
                    $
                    6,008
                    
                    
                    
                    5.09
                    %
                    
                    $
                    19,216
                    
                    
                    
                    5.11
                    %
                    
                    $
                    29,721
                    
                    
                    
                    4.99
                    %Securities
      held-to-maturity:Fannie
      Mae
                    
                    $
                    –
                    
                    
                    
                    –
                    %
                    
                    $
                    –
                    
                    
                    
                    –
                    %
                    
                    $
                    12,377
                    
                    
                    
                    2.95
                    %
                    
                    $
                    1,403
                    
                    
                    
                    3.63
                    %
                    
                    $
                    13,780
                    
                    
                    
                    3.02
                    %Total
                    
                    $
                    –
                    
                    
                    
                    –
                    %
                    
                    $
                    –
                    
                    
                    
                    –
                    %
                    
                    $
                    12,377
                    
                    
                    
                    2.95
                    %
                    
                    $
                    1,403
                    
                    
                    
                    3.63
                    %
                    
                    $
                    13,780
                    
                    
                    
                    3.02
                    %





26


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 decreased $379,000, or 0.2% for the year ended
December 31, 2009.





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





At
      December 31,2009
                
                
                2008
                
                
                2007Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent
                
                
                Amount
                
                
                Percent(Dollars
      in thousands)Noninterest-bearing
      accounts
                
                $
                5,650
                
                
                
                3.44
                %
                
                $
                3,986
                
                
                
                2.42
                %
                
                $
                3,455
                
                
                
                2.12
                %Interest-bearing
      accounts
                
                
                11,118
                
                
                
                6.77
                
                
                
                10,301
                
                
                
                6.26
                
                
                
                11,223
                
                
                
                6.88Money
      market
                
                
                32,859
                
                
                
                20.01
                
                
                
                25,603
                
                
                
                15.56
                
                
                
                33,101
                
                
                
                20.28Savings
      accounts
                
                
                29,088
                
                
                
                17.71
                
                
                
                34,346
                
                
                
                20.87
                
                
                
                36,193
                
                
                
                22.17Time
      deposits
                
                
                85,492
                
                
                
                52.07
                
                
                
                90,350
                
                
                
                54.89
                
                
                
                79,245
                
                
                
                48.55Total
                
                $
                164,207
                
                
                
                100.00
                %
                
                $
                164,586
                
                
                
                100.00
                %
                
                $
                163,217
                
                
                
                100.00
                %





The
following table indicates the amount of jumbo time deposits by time remaining
until maturity as of December 31, 2009.  Jumbo time deposits require
minimum deposits of $100,000.





Maturity Period
                    
                    Time Deposits(Dollars
      in thousands)3
      Months or less
                    
                    $
                    5,254Over
      3 Through 6 Months
                    
                    
                    1,512Over
      6 Through 12 Months
                    
                    
                    2,182Over
      12 Months
                    
                    
                    13,258Total
                    
                    $
                    22,206





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





At December 31,2009
                    
                    
                    2008
                    
                    
                    2007(Dollars
      in thousands)1.00
      - 1.99%
                    
                    $
                    32,383
                    
                    
                    $
                    –
                    
                    
                    $
                    32.00
      - 3.99%
                    
                    
                    26,129
                    
                    
                    
                    56,181
                    
                    
                    
                    16,0824.00
      - 5.99%
                    
                    
                    26,980
                    
                    
                    
                    34,095
                    
                    
                    
                    63,0906.00
      - 7.99%
                    
                    
                    –
                    
                    
                    
                    74
                    
                    
                    
                    70Total
                    
                    $
                    85,492
                    
                    
                    $
                    90,350
                    
                    
                    $
                    79,245




27


The following table sets forth the
amount and maturities of time deposits classified by rates at December 31,
2009.





Amount DueLess Than
                  One Year
                
                
                More Than
                  One Year
                  to Two
                  Years
                
                More Than
                  Two Years
                  to Three
                  Years
                
                More
                  Than
                  Three
                  Years
                  to Four
                
                
                More Than
                  Four Years
                
                Total
                
                
                Percent
                  of Total
                  Time
                  Deposits(Dollars
      in thousands)1.00
      - 1.99%
                
                $
                15,110
                
                
                $
                4,581
                
                
                $
                76
                
                
                $
                –
                
                
                $
                12,616
                
                
                $
                32,383
                
                
                
                37.88
                %2.00
      - 3.99%
                
                
                16,851
                
                
                
                5,661
                
                
                
                648
                
                
                
                1,667
                
                
                
                1,301
                
                
                
                26,128
                
                
                
                30.564.00
      - 5.99%
                
                
                6,616
                
                
                
                13,360
                
                
                
                4,979
                
                
                
                1,946
                
                
                
                80
                
                
                
                26,981
                
                
                
                31.56Total
                
                $
                38,577
                
                
                $
                23,602
                
                
                $
                5,703
                
                
                $
                3,613
                
                
                $
                13,997
                
                
                $
                85,492
                
                
                
                100.00
                %





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





Year Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007(Dollars
      in thousands)Beginning
      balance
                  
                  $
                  164,586
                  
                  
                  $
                  163,217
                  
                  
                  $
                  157,722Increase
      (decrease) before interest credited
                  
                  
                  (5,379
                  )
                  
                  
                  (3,943
                  )
                  
                  
                  128Interest
      credited
                  
                  
                  5,000
                  
                  
                  
                  5,312
                  
                  
                  
                  5,367Net
      increase (decrease) in deposits
                  
                  
                  (379
                  )
                  
                  
                  1,369
                  
                  
                  
                  5,495Ending
      balance
                  
                  $
                  164,207
                  
                  
                  $
                  164,586
                  
                  
                  $
                  163,217





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 31,2009
                
                
                2008
                
                
                2007(Dollars
      in thousands)Maximum
      amount of advances outstanding at any month end during the
      period:FHLB
      Advances
                
                $
                26,474
                
                
                $
                28,553
                
                
                $
                10,508Average
      advances outstanding during the period:FHLB
      Advances
                
                $
                24,129
                
                
                $
                20,084
                
                
                $
                6,372Weighted
      average interest rate during the period:FHLB
      Advances
                
                
                3.17
                %
                
                
                3.02
                %
                
                
                3.93
                %Balance
      outstanding at end of period:FHLB
      Advances
                
                $
                26,474
                
                
                $
                28,553
                
                
                $
                10,098Weighted
      average interest rate at end of period:FHLB
      Advances
                
                
                2.97
                %
                
                
                2.81
                %
                
                
                3.81
                %





FHLB
advances long-term increased $1.9 million to $26.5 million at December 31, 2009,
from $24.6 million at December 31, 2008, an increase of
7.8%.  The $1.9 million increase in FHLB advances long-term was due to
more attractive longer term funding opportunities available through the
FHLB.  The advances outstanding at December 31, 2009 mature in 2010
through 2018.


28


Stockholders’
Equity. Stockholders’ equity increased $200,000 to $23.8
million at December 31, 2009, from $23.6 million at December 31,
2008.  The increase in stockholders’ equity was primarily related to
the operating income recorded in 2009.





Comparison
of Results of Operations for the Years Ended December 31, 2009 and
2008





Overview.





Year Ended December 31,%
      Change2009
                    
                    
                    2008
                    
                    
                    2009 / 2008(Dollars
      in thousands)Net
      income (loss)
                    
                    $
                    331
                    
                    
                    $
                    (246
                    )
                    
                    
                    N/A
                    %Return
      on average assets (1)
                    
                    
                    0.15
                    %
                    
                    
                    (0.12
                    )%
                    
                    
                    N/AReturn
      on average equity (2)
                    
                    
                    1.60
                    
                    
                    
                    (1.04
                    )
                    
                    
                    N/AAverage
      equity-to-assets ratio (3)
                    
                    
                    9.36
                    
                    
                    
                    11.15
                    
                    
                    
                    (16.10
                    )







(1)
            Net
      loss divided by average assets.


(2)
            Net
      loss divided by average equity.


(3)
            Average
      equity divided by average total
assets.





Net income of $331,000 was reported for
2009 compared to a net loss of $246,000 in 2008 primarily due to higher
non-interest income, partially offset by lower net interest income and higher
non-interest expense.  Non-interest income increased $1.3 million to
$1.4 million, primarily as a result of gains on the sales of securities, higher
earnings on BOLI and higher gains on the sale of loans.





Net Interest
Income. 
Net interest income for year ended December 31, 2009 decreased $100,000 to $5.7
million, or 1.7%, from $5.8 million last year, primarily reflecting a lower
average rate earned on loans, investment securities and other interest-earning
assets and a higher average balance of interest-bearing deposits and FHLB
advances long-term and a higher average interest rate paid on FHLB advances
long-term, partially offset by lower interest expense paid on
deposits.




29


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.





Year
      Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Average
                    Balance
                  
                  
                  Interest
                    and
                    Dividends
                  
                  
                  Yield/
                    Cost
                  
                  
                  Average
                    Balance
                  
                  
                  Interest
                    and
                    Dividends
                  
                  
                  Yield/
                    Cost
                  
                  
                  Average
                    Balance
                  
                  
                  Interest
                    and
                    Dividends
                  
                  
                  Yield/
                    Cost(Dollars
      in thousands)Assets:Interest-earning
      assets:Loans
                  
                  $
                  154,555
                  
                  
                  $
                  8,772
                  
                  
                  
                  5.68
                  %
                  
                  $
                  153,077
                  
                  
                  $
                  8,908
                  
                  
                  
                  5.82
                  %
                  
                  $
                  124,622
                  
                  
                  $
                  7,254
                  
                  
                  
                  5.82
                  %Investment
      securities
                  
                  
                  40,535
                  
                  
                  
                  1,926
                  
                  
                  
                  4.75
                  
                  
                  
                  39,310
                  
                  
                  
                  2,014
                  
                  
                  
                  5.12
                  
                  
                  
                  45,652
                  
                  
                  
                  2,361
                  
                  
                  
                  5.17Other
      interest-earning assets
                  
                  
                  13,482
                  
                  
                  
                  9
                  
                  
                  
                  0.07
                  
                  
                  
                  6,624
                  
                  
                  
                  147
                  
                  
                  
                  2.22
                  
                  
                  
                  13,543
                  
                  
                  
                  682
                  
                  
                  
                  5.04Total
      interest-earning assets
                  
                  
                  208,572
                  
                  
                  
                  10,707
                  
                  
                  
                  5.13
                  %
                  
                  
                  199,011
                  
                  
                  
                  11,069
                  
                  
                  
                  5.56
                  %
                  
                  
                  183,817
                  
                  
                  
                  10,297
                  
                  
                  
                  5.60
                  %Noninterest-earning
      assets:
                  
                  
                  14,002
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  13,122
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  13,243Allowance
      for Loan Losses
                  
                  
                  (1,035
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (787
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (727
                  )Total
      assets
                  
                  $
                  221,539
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  211,346
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  196,333Liabilities
      and equity:Interest-bearing
      liabilities:Interest-bearing
      demand deposits
                  
                  
                  10,776
                  
                  
                  
                  77
                  
                  
                  
                  0.71
                  %
                  
                  
                  11,667
                  
                  
                  
                  96
                  
                  
                  
                  0.82
                  %
                  
                  
                  11,411
                  
                  
                  
                  68
                  
                  
                  
                  0.60
                  %Money
      market deposits
                  
                  
                  34,173
                  
                  
                  
                  582
                  
                  
                  
                  1.70
                  
                  
                  
                  26,949
                  
                  
                  
                  818
                  
                  
                  
                  3.04
                  
                  
                  
                  33,241
                  
                  
                  
                  1,615
                  
                  
                  
                  4.86Savings
      accounts
                  
                  
                  31,809
                  
                  
                  
                  237
                  
                  
                  
                  0.75
                  
                  
                  
                  35,647
                  
                  
                  
                  310
                  
                  
                  
                  0.87
                  
                  
                  
                  38,947
                  
                  
                  
                  318
                  
                  
                  
                  0.82Time
      deposits
                  
                  
                  91,166
                  
                  
                  
                  3,313
                  
                  
                  
                  3.63
                  
                  
                  
                  85,740
                  
                  
                  
                  3,456
                  
                  
                  
                  4.03
                  
                  
                  
                  74,262
                  
                  
                  
                  3,366
                  
                  
                  
                  4.53Total
      interest-bearing deposits
                  
                  
                  167,924
                  
                  
                  
                  4,209
                  
                  
                  
                  2.51
                  %
                  
                  
                  160,003
                  
                  
                  
                  4,680
                  
                  
                  
                  2.93
                  %
                  
                  
                  157,861
                  
                  
                  
                  5,367
                  
                  
                  
                  3.40
                  %FHLB
      advances - short-term
                  
                  
                  77
                  
                  
                  
                  1
                  
                  
                  
                  1.30
                  
                  
                  
                  2,074
                  
                  
                  
                  51
                  
                  
                  
                  2.46
                  
                  
                  
                  1,271
                  
                  
                  
                  60
                  
                  
                  
                  4.72FHLB
      advances - long-term
                  
                  
                  23,963
                  
                  
                  
                  763
                  
                  
                  
                  3.18
                  
                  
                  
                  18,010
                  
                  
                  
                  556
                  
                  
                  
                  3.09
                  
                  
                  
                  5,101
                  
                  
                  
                  190
                  
                  
                  
                  3.72Advances
      by borrowers for taxes and insurance
                  
                  
                  1,254
                  
                  
                  
                  27
                  
                  
                  
                  2.15
                  
                  
                  
                  1,230
                  
                  
                  
                  25
                  
                  
                  
                  2.03
                  
                  
                  
                  1,031
                  
                  
                  
                  21
                  
                  
                  
                  2.04Total
      interest-bearing liabilities
                  
                  
                  193,218
                  
                  
                  
                  5,000
                  
                  
                  
                  2.59
                  %
                  
                  
                  181,317
                  
                  
                  
                  5,312
                  
                  
                  
                  2.93
                  %
                  
                  
                  165,264
                  
                  
                  
                  5,638
                  
                  
                  
                  3.41
                  %Noninterest-bearing
      liabilities:
                  
                  
                  7,583
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  6,457
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  7,311Total
      liabilities
                  
                  
                  200,801
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  187,774
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  172,575Stockholders'
      equity
                  
                  
                  20,738
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  23,572
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  23,758Total
      liabilities and stockholders' equity
                  
                  $
                  221,539
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  211,346
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  196,333Net
      interest income
                  
                  
                  
                  
                  
                  $
                  5,707
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  5,757
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  4,659Interest
      rate spread
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.55
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.63
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.19
                  %Net
      yield on interest-bearing assets
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.74
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.89
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.53
                  %Ratio
      of average interest-earning assets to average interest-bearing
      liabilities
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  107.95
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  109.76
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  111.23
                  %


30


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
                
                
                For
      the Year EndedDecember
      31, 2009
                
                
                December
      31, 2008Compared
      to Year Ended
                
                
                Compared
      to Year EndedDecember 31, 2008
                
                
                December 31, 2007Increase
      (Decrease)
                
                
                
                
                
                Increase
      (Decrease)Due to
                
                
                
                
                
                Due toVolume
                
                
                Rate
                
                
                Net
                
                
                Volume
                
                
                Rate
                
                
                Net(Dollars
      in thousands)Interest
      and dividend income:Loans
      receivable
                
                $
                87
                
                
                $
                (223
                )
                
                $
                (136
                )
                
                $
                1,656
                
                
                $
                (2
                )
                
                $
                1,654Investment
      securities
                
                
                66
                
                
                
                (154
                )
                
                
                (88
                )
                
                
                (325
                )
                
                
                (22
                )
                
                
                (347
                )Other
                
                
                (2,183
                )
                
                
                2,045
                
                
                
                (138
                )
                
                
                (255
                )
                
                
                (280
                )
                
                
                (535
                )Total
      interest-earnings assets
                
                $
                (2,031
                )
                
                $
                1,669
                
                
                $
                (362
                )
                
                $
                1,075
                
                
                $
                (303
                )
                
                $
                772Interest
      expense:Interest-bearing
      demand deposits
                
                $
                (7
                )
                
                $
                (12
                )
                
                $
                (19
                )
                
                $
                2
                
                
                $
                25
                
                
                $
                27Money
      market accounts
                
                
                370
                
                
                
                (606
                )
                
                
                (236
                )
                
                
                (271
                )
                
                
                (413
                )
                
                
                (684
                )Savings
      accounts
                
                
                (31
                )
                
                
                (42
                )
                
                
                (73
                )
                
                
                (35
                )
                
                
                27
                
                
                
                (8
                )Time
      Deposits
                
                
                258
                
                
                
                (401
                )
                
                
                (143
                )
                
                
                317
                
                
                
                (227
                )
                
                
                90FHLB
      Advances - short-term
                
                
                (34
                )
                
                
                (16
                )
                
                
                (50
                )
                
                
                (37
                )
                
                
                28
                
                
                
                (9
                )FHLB
      Advances - long-term
                
                
                189
                
                
                
                18
                
                
                
                207
                
                
                
                393
                
                
                
                (27
                )
                
                
                366Advances
      by borrowers for taxes and insurance
                
                
                –
                
                
                
                2
                
                
                
                2
                
                
                
                4
                
                
                
                –
                
                
                
                4Total
      interest-bearing liabilities
                
                $
                745
                
                
                $
                (1,057
                )
                
                $
                (312
                )
                
                $
                373
                
                
                $
                (587
                )
                
                $
                (214
                )Change
      in net interest income
                
                $
                (2,776
                )
                
                $
                2,726
                
                
                $
                (50
                )
                
                $
                702
                
                
                $
                284
                
                
                $
                986





Provision for
Loan Losses.   We recorded a provision for loan losses for the
year ended December 31, 2009 of $252,000 as compared to $85,000 for the year
ended December 31, 2008.  The increased loan loss provision reflects
management’s estimate of the losses inherent in our total loan portfolio and the
increase in non-accrual loans during the year.  The provision during
these periods reflects management’s assessment of charge-off activity, increased
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.”




31


Non-Interest
Income. 
The following table shows the components of non-interest income for the year
ended December 31, 2009 and 2008.





Year Ended December 31,2009
                  
                  
                  2008(Dollars
      in thousands)Service
      fees on deposit accounts
                  
                  $
                  92
                  
                  
                  $
                  116Earnings
      on Bank-owned life insurance
                  
                  
                  117
                  
                  
                  
                  (236
                  )Investment
      securities gains, net
                  
                  
                  486
                  
                  
                  
                  (412
                  )Gain
      on sale of  loans
                  
                  
                  288
                  
                  
                  
                  123Rental
      income
                  
                  
                  290
                  
                  
                  
                  311Other
                  
                  
                  171
                  
                  
                  
                  183Total
                  
                  $
                  1,444
                  
                  
                  $
                  85





The $1.4 million increase in non-interest income
for the year ended December 31, 2009 as compared to last year was primarily due
to gains on the sale of investment securities of  $486,000 as compared
to write-downs of $412,000 on investment securities from the prior period,
specifically our investment in Freddie Mac Preferred Stock, an increase in
earnings on BOLI of $117,000 as compared to a decrease in earnings on BOLI of
$236,000 from the prior period, gains on the sale of loans to $288,000 as
compared to $123,000 from the prior period, partially offset by reductions in
service fees on deposit accounts, rental income and other
income.





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





Year Ended December 31,2009
                  
                  
                  2008(Dollars
      in thousands)Compensation
      and employee benefits
                  
                  $
                  3,503
                  
                  
                  $
                  3,332Occupancy
      and equipment
                  
                  
                  1,013
                  
                  
                  
                  1,072Federal
      deposit insurance premiums
                  
                  
                  409
                  
                  
                  
                  121Data
      processing expense
                  
                  
                  269
                  
                  
                  
                  271Professional
      fees
                  
                  
                  331
                  
                  
                  
                  315Other
                  
                  
                  1,034
                  
                  
                  
                  990Total
      non-interest expense
                  
                  $
                  6,559
                  
                  
                  $
                  6,101Efficiency
      ratio
                  
                  
                  91.72
                  %
                  
                  
                  104.43
                  %





Total non-interest expense increased $458,000, or
7.5%, to $6.6 million for the year ended December 31, 2009 from the prior
year.  The increases in non-interest expenses for the year ended
December 31, 2009 as compared to the prior year period were primarily the result
of higher compensation and employee benefits including the costs related to the
hiring of more experienced branch management staff, experienced lending staff,
and costs associated with annual merit increases, higher federal deposit
insurance premiums related to special assessments imposed by the
FDIC,  partially offset by lower occupancy and equipment
expenses.





Income Tax
Expense.   Income tax expense of $8,000 was recorded for the
year ended December 31, 2009 compared to a $98,000 benefit in 2008
reflecting the reporting of a $331,000 profit.  Our effective tax
rates for 2009 and 2008 were positive 2.5% and negative 28.5%,
respectively.





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.




32


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 60th 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 90th 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.




33


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 31,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005(Dollars
      in thousands)Nonaccrual
      loans:Real
      estate loans:One-to-four
      family
                
                $
                1,169
                
                
                $
                705
                
                
                $
                179
                
                
                $
                181
                
                
                $
                234Multi-family
      and commercial real estate
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –Home
      equity loans and lines of credit
                
                
                1,532
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                12Consumer
                
                
                41
                
                
                
                24
                
                
                
                37
                
                
                
                93
                
                
                
                38Total
                
                
                2,742
                
                
                
                729
                
                
                
                216
                
                
                
                274
                
                
                
                284Real
      estate owned
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                428Other
      nonperforming assets
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –Total
      nonperforming assets
                
                $
                2,742
                
                
                $
                729
                
                
                $
                216
                
                
                $
                274
                
                
                $
                712Total
      nonperforming loans to total loans
                
                
                1.81
                %
                
                
                0.44
                %
                
                
                0.16
                %
                
                
                0.24
                %
                
                
                0.29
                %Total
      nonperforming loans to total assets
                
                
                1.26
                %
                
                
                0.33
                %
                
                
                0.11
                %
                
                
                0.13
                %
                
                
                0.16
                %Total
      nonperforming assets and troubled debt restructurings to total
      assets
                
                
                1.26
                %
                
                
                0.33
                %
                
                
                0.11
                %
                
                
                0.13
                %
                
                
                0.41
                %





Interest
income that would have been recorded for the years ended December 31, 2009, 2008
and 2007 was $86,000, $28,000 and $0 had nonaccruing loans been current
according to their original terms.





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 31,2009
                  
                  
                  2008
                  
                  
                  2007(Dollars
      in thousands)Special
      mention assets
                  
                  $
                  2,933
                  
                  
                  $
                  –
                  
                  
                  $
                  –Substandard
      assets
                  
                  
                  2,742
                  
                  
                  
                  729
                  
                  
                  
                  216Doubtful
      assets
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –Loss
      assets
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –Total
      classified assets
                  
                  $
                  5,675
                  
                  
                  $
                  729
                  
                  
                  $
                  216





Other
than disclosed in the above tables, there are no other loans at December 31,
2009 that management has serious doubts about the ability of the borrowers to
comply with the present loan repayment terms.




34


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





At December 31,2009
                
                
                2008
                
                
                200730-59
                  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 loans:One-to-four
      family
                
                $
                348
                
                
                $
                31
                
                
                $
                164
                
                
                $
                –
                
                
                $
                77
                
                
                $
                –Multi-family
      and commercial real estate
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –Home
      equity loans and lines of credit
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –Consumer
                
                
                75
                
                
                
                7
                
                
                
                59
                
                
                
                4
                
                
                
                35
                
                
                
                22Total
                
                $
                423
                
                
                $
                38
                
                
                $
                223
                
                
                $
                4
                
                
                $
                112
                
                
                $
                22





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 collectability 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 collectability.  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.




35


At
December 31, 2009, our allowance for loan losses represented 0.74% of total
gross loans and 40.66% of nonperforming loans.  At December 31, 2008,
our allowance for loans losses represented 0.52% of total gross loans and
117.70% of nonperforming loans.  The allowance for loans losses
increased by $257,000 to $1.1 million at December 31, 2009 from $858,000 at
December 31, 2008 as we recorded a provision for loan losses of  $252,000
and recoveries of $5,000.


36




The
following table sets forth the breakdown of the allowance for loan losses by
loan category at the dates indicated.




At December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Amount
            
            
            % ofAllowanceto TotalAllowance
            
            
            % of
      Loans in Category to Total Loans
            
            
            Amount
            
            
            % ofAllowanceto TotalAllowance
            
            
            % of
      Loans in Category to Total Loans
            
            
            Amount
            
            
            % ofAllowanceto TotalAllowance
            
            
            % of
      Loans in Category to Total Loans
            
            
            Amount
            
            
            % ofAllowanceto TotalAllowance
            
            
            % of
      Loans in Category to Total Loans
            
            
            Amount
            
            
            % ofAllowanceto TotalAllowance
            
            
            % of
      Loans in Category to Total Loans(Dollars
      in thousands)Real
      estate loans:One-to-four
      family
            
            $
            516
            
            
            
            46.00
            %
            
            
            87.00
            %
            
            $
            501
            
            
            
            58.00
            %
            
            
            88.00
            %
            
            $
            443
            
            
            
            60.00
            %
            
            
            87.00
            %
            
            $
            314
            
            
            
            45.00
            %
            
            
            89.00
            %
            
            $
            373
            
            
            
            57.00
            %
            
            
            91.00
            %Multi-family
      and commercial real estate
            
            
            283
            
            
            
            25.00
            
            
            
            7.00
            
            
            
            316
            
            
            
            37.00
            
            
            
            7.00
            
            
            
            250
            
            
            
            34.00
            
            
            
            7.00
            
            
            
            344
            
            
            
            50.00
            
            
            
            5.00
            
            
            
            252
            
            
            
            39.00
            
            
            
            4.00Home
      equity loans and lines of credit
            
            
            299
            
            
            
            27.00
            
            
            
            4.00
            
            
            
            28
            
            
            
            3.00
            
            
            
            3.00
            
            
            
            27
            
            
            
            4.00
            
            
            
            4.00
            
            
            
            26
            
            
            
            4.00
            
            
            
            5.00
            
            
            
            13
            
            
            
            2.00
            
            
            
            2.00Consumer
            
            
            17
            
            
            
            2.00
            
            
            
            2.00
            
            
            
            13
            
            
            
            2.00
            
            
            
            2.00
            
            
            
            11
            
            
            
            2.00
            
            
            
            2.00
            
            
            
            11
            
            
            
            1.00
            
            
            
            1.00
            
            
            
            13
            
            
            
            2.00
            
            
            
            3.00Total
      allowance for  loan losses
            
            $
            1,115
            
            
            
            100.00
            %
            
            
            100.00
            %
            
            $
            858
            
            
            
            100.00
            %
            
            
            100.00
            %
            
            $
            731
            
            
            
            100.00
            %
            
            
            100.00
            %
            
            $
            695
            
            
            
            100.00
            %
            
            
            100.00
            %
            
            $
            651
            
            
            
            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.


37


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





December 31,2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005(Dollars
      in thousands)Allowance
      at beginning of period
                
                $
                858
                
                
                $
                731
                
                
                $
                695
                
                
                $
                651
                
                
                $
                692Provision
      for loan losses
                
                
                252
                
                
                
                85
                
                
                
                31
                
                
                
                58
                
                
                
                -Charge-offs:One-to-four
      family
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                (19
                )
                
                
                (66
                )Multi-family
      and commercial real estate
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –Home
      equity loans and lines of credit
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –Consumer
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –Total
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                (19
                )
                
                
                (66
                )Recoveries:One-to-four
      family
                
                
                5
                
                
                
                42
                
                
                
                5
                
                
                
                5
                
                
                
                25Multi-family
      and commercial real estate
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –Home
      equity loans and lines of credit
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –Consumer
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –Total
                
                
                5
                
                
                
                42
                
                
                
                5
                
                
                
                5
                
                
                
                25Net
      recoveries (charge-offs)
                
                
                5
                
                
                
                42
                
                
                
                5
                
                
                
                (14
                )
                
                
                (41
                )Allowance
      at end of period
                
                $
                1,115
                
                
                $
                858
                
                
                $
                731
                
                
                $
                695
                
                
                $
                651Allowance
      to nonperforming loans
                
                
                41
                %
                
                
                118
                %
                
                
                338
                %
                
                
                254
                %
                
                
                230
                %Allowance
      to total loans outstanding at the end of period
                
                
                0.74
                %
                
                
                0.52
                %
                
                
                0.53
                %
                
                
                0.62
                %
                
                
                0.67
                %Net
      charge-offs (recoveries) to average loans outstanding during the
      period
                
                
                (0.01
                )%
                
                
                (0.01
                )%
                
                
                (0.01
                )%
                
                
                0.01
                %
                
                
                0.04
                %





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.




38


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, 2009, 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.





Estimated Net Portfolio
    Value
                
                
                Net Portfolio Value as % of
                  Portfolio Value of AssetsBasis Point (“bp”)
                  Change in Rates
                
                $ Amount
                
                
                $ Change
                
                
                % Change
                
                
                NPV Ratio
                
                
                Change
                  (bp)(Dollars
      in thousands)300
                
                $
                13,532
                
                
                $
                (15,673
                )
                
                
                (54.00
                )%
                
                
                6.47
                %
                
                
                (622
                )%200
                
                
                19,315
                
                
                
                (9,890
                )
                
                
                (34.00
                )
                
                
                8.92
                
                
                
                (377
                )100
                
                
                24,821
                
                
                
                (4,384
                )
                
                
                (15.00
                )
                
                
                11.09
                
                
                
                (160
                )0
                
                
                29,205
                
                
                
                –
                
                
                
                –
                
                
                
                12.69
                
                
                
                –(100)
                
                
                31,508
                
                
                
                2,303
                
                
                
                8.00
                
                
                
                13.45
                
                
                
                76(200)
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –





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, 2009, cash and cash
equivalents totaled $8.4 million.  Securities classified as
available-for-sale, which provide additional sources of liquidity, totaled $30.6
million at December 31, 2009.  In addition, at December 31, 2009, we
had the ability to borrow a total of approximately $100.3 million from the FHLB
of Pittsburgh.  On December 31, 2009, we had $26.5 million of
borrowings outstanding.  Future growth of our loan portfolio resulting
from our expansion efforts may require us to borrow additional
funds.




39


At
December 31, 2009, we had $1.4 in mortgage loan commitments outstanding and
$663,000 in unused lines of credit.  Time deposits due within one year
of December 31, 2009 totaled $38.6 million, or 45.1% 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, 2010.  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.





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,
2009, 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, 2009 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, 2009
and December 31, 2008, 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-K 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.




40


ITEM
      7A.
            QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET
RISK





Not applicable as the Company is a
smaller reporting company.





ITEM
    8.
            FINANCIAL STATEMENTS AND
      SUPPLEMENTARY DATA





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





ITEM
    9.
            CHANGES IN AND DISAGREEMENTS WITH
      ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
  DISCLOSURE





None.





ITEM
    9A.
            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, 2009 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control 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-K.




ITEM
    9B.
              OTHER
      INFORMATION





None.




41


PART III





ITEM
    10.
            DIRECTORS, EXECUTIVE OFFICERS AND
      CORPORATE GOVERNANCE





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 2010 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 2010 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-K and the section captioned “Section 16(a) Beneficial Ownership
Compliance” in the Company’s Proxy Statement for the 2010 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 2010
Annual Meeting of Stockholders is incorporated by reference.





ITEM 11.
            EXECUTIVE
      COMPENSATION




For information regarding executive
compensation the section entitled “Executive Compensation” and
“Directors’
Compensation” in the Company’s Proxy Statement for the 2010 Annual
Meeting of Stockholders are incorporated by reference.




ITEM
    12.
              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
Company’s Proxy Statement for the 2010 Annual Meeting of
Stockholders.





(b)           
Security Ownership of Management





The information required by this item
is incorporated herein by reference to the section captioned “Stock Ownership” in the
Company’s Proxy Statement for the 2010 Annual Meeting of
Stockholders.


42


(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, 2009.





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 plans approved by security holders
                
                
                153,903
                
                
                $
                9.40
                
                
                
                –Equity
      compensation plans not approved by security holders
                
                
                –
                
                
                
                –
                
                
                
                –Total
                
                
                153,903
                
                
                $
                9.40
                
                
                
                –





ITEM
      13.
            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 2010 Annual Meeting of
Stockholders is incorporated by reference.





Corporate
Governance





For information regarding director
independence, the section captioned “Corporate Governance – Director
Independence” in the Company’s Proxy Statement for the 2010 Annual
Meeting of Stockholders is incorporated by reference.




ITEM
    14.
              PRINCIPAL ACCOUNTANT FEES AND
      SERVICES




For information regarding the principal
accountant fees and expenses, the section captioned “Proposal 2 – Ratification of
Independent Registered Public Accounting Firm” in the Company’s Proxy
Statement for the 2010 Annual Meeting of Stockholders is incorporated by
reference.


43




ITEM15.
            EXHIBITS AND FINANCIAL STATEMENT
      SCHEDULES




3.1
              Charter
      of Polonia Bancorp (1)3.2
              Bylaws
      of Polonia Bancorp (4)4.0
              Stock
      Certificate of Polonia Bancorp (1)10.1
              Amended
      and Restated Polonia Bancorp Employment Agreement with Anthony J.
      Szuszczewicz (5)10.2
              Amended
      and Restated Polonia Bank Employment Agreement with Anthony J.
      Szuszczewicz (5)10.3
              Amended
      and Restated Polonia Bancorp Employment Agreement with Paul D. Rutkowski
      (5)10.4
              Amended
      and Restated Polonia Bank Employment Agreement with Paul D. Rutkowski
      (5)10.5
              Amended
      and Restated Polonia Bancorp Employment Agreement with Kenneth J.
      Maliszewski (5)10.6
              Amended
      and Restated Polonia Bank Employment Agreement with Kenneth J. Maliszewski
      (5)10.7
              Amended
      and Restated Polonia Bank Employee Severance Compensation Plan (5)10.8
              Amended
      and Restated Supplemental Executive Retirement Plan (5)10.9
              Supplemental
      Executive Retirement Plan for Anthony J. Szuszczewicz (1)10.10
              Supplemental
      Executive Retirement Plan for Edward W. Lukiewski (1)10.11
              Non-Qualified
      Deferred Compensation Plan (1)10.12
              Supplemental
      Executive Retirement Plan for Paul D. Rutkowski (1)10.13
              Supplemental
      Executive Retirement Plan for Kenneth J. Maliszewski (1)10.14
              Split
      Dollar Life Insurance Agreement with Paul D. Rutkowski (2)10.15
              Split
      Dollar Life Insurance Agreement with Kenneth J. Maliszewski (2)10.16
              Polonia
      Bancorp 2007 Equity Incentive Plan (3)10.17
              Form
      of Amendment to the Supplemental Executive Retirement Plan Participation
      Agreement (5)10.18
              Amendment
      to the Supplemental Executive Retirement Plan for Anthony J. Szuszczewicz
      (5)10.19
              Amendment
      to Polonia Bank Non-Qualified Deferred Compensation Plan (5)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





(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).(3)
            Incorporated
      herein by reference to Appendix D in the definitive proxy statement filed
      with the SEC on June 12, 2007 (File No. 000-52267).(4)
            Incorporated
      herein by reference to Exhibit 3.1 filed with the Securities and Exchange
      Commission on the Current Report on Form 8-K, filed on January 22, 2009
      (File No. 000-52267).(5)
            Incorporated
      herein by reference to the Exhibits on Form 10-K filed with the SEC on
      March 31, 2009 (File No.
000-52267).





44


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 31, 2010
              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
      31, 2010Anthony
      J. Szuszczewicz
              
              Officer
      (principal executive officer)/s/ Paul D. Rutkowski
              
              Chief
      Financial Officer and Treasurer
              
              March
      31, 2010Paul
      D. Rutkowski
              
              (principal
      accounting and financial officer)/s/ Dr. Eugene Andruczyk
              
              Director
              
              March
      31, 2010Dr.
      Eugene Andruczyk/s/ Frank J. Byrne
              
              Director
              
              March
      31, 2010Frank
      J. Byrne/s/ Edward W. Lukiewski
              
              Director
              
              March
      31, 2010Edward
      W. Lukiewski/s/ Timothy O' Shaughnessy
              
              Director
              
              March
      31, 2010Timothy
      O' Shaughnessy/s/ Robert J. Woltjen
              
              Director
              
              March
      31, 2010Robert
      J. Woltjen




45


POLONIA
BANCORP


AUDITED
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009





PageNumberManagement’s
      Report on Internal Control Over Financial Reporting
                F –
      1Report
      of Independent Registered Public Accounting Firm
                F -
      2Financial
      StatementsConsolidated
      Balance Sheet
                F -
      3Consolidated
      Statement of Income
                F -
      4Consolidated
      Statement of Changes in Stockholders’ Equity
                F -
      5Consolidated
      Statement of Cash Flows
                F -
      6Notes
      to the Consolidated Financial Statements
                F -
      7 – F - 31







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, 2009, 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, 2009, 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.


F-1








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, 2009 and 2008, 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, 2009 and 2008, 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, 2009,
included in the accompanying “Management’s Report on Internal Control” and,
accordingly, we do not express an opinion thereon.











Wexford,
PA


March 31,
2010





S.R. Snodgrass, A.C. * 2100 Corporate Drive, Suite 400 * Wexford, Pennsylvania  15090-8399 * Phone: (724) 934-0344 * Facsimile: (724) 934-0345


F-2


POLONIA
BANCORP


CONSOLIDATED
BALANCE SHEET





December 31,2009
                    
                    
                    2008ASSETSCash
      and due from banks
                    
                    $
                    2,454,959
                    
                    
                    $
                    1,938,465Interest-bearing
      deposits with other institutions
                    
                    
                    5,971,571
                    
                    
                    
                    2,732,477Cash
      and cash equivalents
                    
                    
                    8,426,530
                    
                    
                    
                    4,670,942Investment
      securities available for sale
                    
                    
                    30,601,587
                    
                    
                    
                    37,788,887Investment
      securities held to maturity (fair value $13,640,975)
                    
                    
                    13,780,267
                    
                    
                    
                    -Loans
      receivable (net of allowance for loan lossesof
      $1,115,141 and $857,702)
                    
                    
                    150,177,130
                    
                    
                    
                    163,758,907Accrued
      interest receivable
                    
                    
                    930,336
                    
                    
                    
                    881,954Federal
      Home Loan Bank stock
                    
                    
                    2,279,200
                    
                    
                    
                    2,279,200Premises
      and equipment, net
                    
                    
                    4,760,680
                    
                    
                    
                    4,970,314Bank-owned
      life insurance
                    
                    
                    4,053,225
                    
                    
                    
                    3,936,358Other
      assets
                    
                    
                    3,061,704
                    
                    
                    
                    1,949,641TOTAL
      ASSETS
                    
                    $
                    218,070,659
                    
                    
                    $
                    220,236,203LIABILITIESDeposits
                    
                    $
                    164,207,245
                    
                    
                    $
                    164,586,405FHLB
      advances - short-term
                    
                    
                    -
                    
                    
                    
                    4,000,000FHLB
      advances - long-term
                    
                    
                    26,473,524
                    
                    
                    
                    24,553,349Advances
      by borrowers for taxes and insurance
                    
                    
                    1,280,863
                    
                    
                    
                    1,413,396Accrued
      interest payable
                    
                    
                    63,647
                    
                    
                    
                    63,867Other
      liabilities
                    
                    
                    2,200,421
                    
                    
                    
                    2,015,505TOTAL
      LIABILITIES
                    
                    
                    194,225,700
                    
                    
                    
                    196,632,522Commitments
      and contingencies (Note 11)
                    
                    
                    -
                    
                    
                    
                    -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)
                    
                    
                    33,063
                    
                    
                    
                    33,063Additional
      paid-in-capital
                    
                    
                    13,694,394
                    
                    
                    
                    13,515,680Retained
      earnings
                    
                    
                    11,837,420
                    
                    
                    
                    11,506,078Unallocated
      shares held by Emploee Stock Ownership Plan"ESOP"
      (103,684 and 112,324 shares)
                    
                    
                    (1,036,840
                    )
                    
                    
                    (1,123,243
                    )Treasury
      stock (147,172 and 115,190 shares)
                    
                    
                    (1,251,735
                    )
                    
                    
                    (983,145
                    )Accumulated
      other comprehensive income
                    
                    
                    568,657
                    
                    
                    
                    655,248TOTAL
      STOCKHOLDERS' EQUITY
                    
                    
                    23,844,959
                    
                    
                    
                    23,603,681TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                    
                    $
                    218,070,659
                    
                    
                    $
                    220,236,203





See
accompanying notes to the consolidated financial statements.


F-3


POLONIA
BANCORP


CONSOLIDATED
STATEMENT OF INCOME





Year Ended December 31,2009
                
                
                2008INTEREST
      AND DIVIDEND INCOMELoans
      receivable
                
                $
                8,772,106
                
                
                $
                8,908,312Investment
      securities
                
                
                1,926,637
                
                
                
                2,013,748Interest-bearing
      deposits and other dividends
                
                
                8,751
                
                
                
                147,139Total
      interest and dividend income
                
                
                10,707,494
                
                
                
                11,069,199INTEREST
      EXPENSEDeposits
                
                
                4,209,076
                
                
                
                4,680,041FHLB
      advances - short-term
                
                
                396
                
                
                
                51,290FHLB
      advances - long-term
                
                
                763,705
                
                
                
                555,512Advances
      by borrowers for taxes and insurance
                
                
                27,057
                
                
                
                25,130Total
      interest expense
                
                
                5,000,234
                
                
                
                5,311,973NET
      INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
                
                
                5,707,260
                
                
                
                5,757,226Provision
      for loan losses
                
                
                252,489
                
                
                
                84,992NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
                
                
                5,454,771
                
                
                
                5,672,234NONINTEREST
      INCOMEService
      fees on deposit accounts
                
                
                92,211
                
                
                
                115,551Earnings
      on bank-owned life insurance
                
                
                116,867
                
                
                
                (236,418
                )Investment
      securities gains (losses), net
                
                
                485,886
                
                
                
                (411,500
                )Gain
      on sale of loans
                
                
                287,641
                
                
                
                122,658Rental
      income
                
                
                290,173
                
                
                
                311,002Other
                
                
                171,117
                
                
                
                183,153Total
      noninterest income
                
                
                1,443,895
                
                
                
                84,446NONINTEREST
      EXPENSECompensation
      and employee benefits
                
                
                3,503,238
                
                
                
                3,331,853Occupancy
      and equipment
                
                
                1,012,502
                
                
                
                1,072,173Federal
      deposit insurance premiums
                
                
                408,643
                
                
                
                121,132Data
      processing expense
                
                
                269,026
                
                
                
                271,197Professional
      fees
                
                
                331,296
                
                
                
                314,855Other
                
                
                1,034,195
                
                
                
                989,820Total
      noninterest expense
                
                
                6,558,900
                
                
                
                6,101,030Income
      (loss) before income tax expense (benefit)
                
                
                339,766
                
                
                
                (344,350
                )Income
      tax expense (benefit)
                
                
                8,424
                
                
                
                (98,198
                )NET
      INCOME (LOSS)
                
                $
                331,342
                
                
                $
                (246,152
                )EARNINGS
      PER SHARE, BASIC AND DILUTED
                
                $
                0.11
                
                
                $
                (0.08
                )Weighted-average
      common shares outstanding, basic and diluted
                
                
                3,015,800
                
                
                
                3,084,037





See
accompanying notes to the consolidated financial
statements.


F-4


POLONIA
BANCORP


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY





AccumulatedOtherCommon
      Stock
                                  
                                  
                                  Additional
                                  
                                  
                                  Retained
                                  
                                  
                                  Unallocated
                                  
                                  
                                  Treasury
                                  
                                  
                                  Comprehensive
                                  
                                  
                                  
                                  
                                  
                                  ComprehensiveShares
                                  
                                  
                                  Amount
                                  
                                  
                                  Paid-In Capital
                                  
                                  
                                  Earnings
                                  
                                  
                                  ESOP
      Shares
                                  
                                  
                                  Stock
                                  
                                  
                                  Income
      (Loss)
                                  
                                  
                                  Total
                                  
                                  
                                  Income
      (Loss)Balance,
      December 31, 2007
                                  
                                  
                                  3,306,250
                                  
                                  
                                  $
                                  33,063
                                  
                                  
                                  $
                                  13,275,264
                                  
                                  
                                  $
                                  11,752,230
                                  
                                  
                                  $
                                  (1,209,647
                                  )
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  142,835
                                  
                                  
                                  $
                                  23,993,745Net
      loss
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (246,152
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (246,152
                                  )
                                  
                                  $
                                  (246,152
                                  )Other
      comprehensive income:Unrealized
      gain on available-for-sale securities, net of reclassification
      adjustment, net of taxes of $263,970
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  512,413
                                  
                                  
                                  
                                  512,413
                                  
                                  
                                  
                                  512,413Comprehensive
      income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  266,261Purchase
      of treasury stock (115,190 shares)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (983,145
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (983,145
                                  )Stock
      options compensation expense
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  111,593
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  111,593Allocation
      of unearned ESOP shares
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (15,335
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  86,404
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  71,069Allocation
      of unearned restricted stock
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  144,158
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  144,158Balance,
      December 31, 2008
                                  
                                  
                                  3,306,250
                                  
                                  
                                  
                                  33,063
                                  
                                  
                                  
                                  13,515,680
                                  
                                  
                                  
                                  11,506,078
                                  
                                  
                                  
                                  (1,123,243
                                  )
                                  
                                  
                                  (983,145
                                  )
                                  
                                  
                                  655,248
                                  
                                  
                                  
                                  23,603,681Net
      income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  331,342
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  331,342
                                  
                                  
                                  $
                                  331,342Other
      comprehensive income:Unrealized
      loss on available-for-sale securities, net of reclassification
      adjustment, net of tax benefit of $44,607
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (86,591
                                  )
                                  
                                  
                                  (86,591
                                  )
                                  
                                  
                                  (86,591
                                  )Comprehensive
      income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  244,751Purchase
      of treasury stock (31,982 shares)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (268,590
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (268,590
                                  )Stock
      options compensation expense
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  89,593
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  89,593Allocation
      of unearned ESOP shares
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (26,612
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  86,403
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  59,791Allocation
      of unearned restricted stock
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  115,733
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  115,733Balance,
      December 31, 2009
                                  
                                  
                                  3,306,250
                                  
                                  
                                  $
                                  33,063
                                  
                                  
                                  $
                                  13,694,394
                                  
                                  
                                  $
                                  11,837,420
                                  
                                  
                                  $
                                  (1,036,840
                                  )
                                  
                                  $
                                  (1,251,735
                                  )
                                  
                                  $
                                  568,657
                                  
                                  
                                  $
                                  23,844,9592009
                                  
                                  
                                  2008Components
      of other comprehensive income (loss):Changes
      in net unrealized gain on investment securities available for
      sale
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  234,094
                                  
                                  
                                  $
                                  240,823Realized
      gains (losses) included in net income (loss),net of tax benefit of
      $165,201 and $139,910
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (320,685
                                  )
                                  
                                  
                                  271,590Total
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  (86,591
                                  )
                                  
                                  $
                                  512,413





See
accompanying notes to the unaudited consolidated financial
statements.


F-5


POLONIA
BANCORP


CONSOLIDATED
STATEMENT OF CASH FLOWS





Year
      Ended December 31,2009
                      
                      
                      2008OPERATING
      ACTIVITIESNet
      loss
                      
                      $
                      331,342
                      
                      
                      $
                      (246,152
                      )Adjustments
      to reconcile net loss to net cash providedby
      (used for) operating activities:Provision
      for loan losses
                      
                      
                      252,489
                      
                      
                      
                      84,992Depreciation,
      amortization, and accretion
                      
                      
                      256,772
                      
                      
                      
                      349,537Increase
      in prepaid federal deposit insurance premium
                      
                      
                      (1,019,486
                      )
                      
                      
                      -Investment
      securities losses (gains), net
                      
                      
                      (485,886
                      )
                      
                      
                      411,500Proceeds
      from sale of loans
                      
                      
                      24,872,007
                      
                      
                      
                      5,837,574Net
      gain on sale of loans
                      
                      
                      (287,641
                      )
                      
                      
                      (122,658
                      )Loans
      originated for sale
                      
                      
                      (24,584,366
                      )
                      
                      
                      (5,714,916
                      )Earnings
      on bank-owned life insurance
                      
                      
                      (116,867
                      )
                      
                      
                      236,418Deferred
      federal income taxes
                      
                      
                      (137,322
                      )
                      
                      
                      (211,032
                      )Increase
      in accrued interest receivable
                      
                      
                      (48,382
                      )
                      
                      
                      (33,024
                      )Increase
      (decrease) in accrued interest payable
                      
                      
                      (220
                      )
                      
                      
                      54,363Compensation
      expense for stock options, ESOP, and restricted stock
                      
                      
                      265,117
                      
                      
                      
                      326,820Other,
      net
                      
                      
                      278,295
                      
                      
                      
                      76,083Net
      cash provided by (used for) operating activities
                      
                      
                      (424,148
                      )
                      
                      
                      1,049,505INVESTING
      ACTIVITIESInvestment
      securities available for sale:Proceeds
      from sales
                      
                      
                      9,786,536
                      
                      
                      
                      -Proceeds
      from principal repayments and maturities
                      
                      
                      13,863,947
                      
                      
                      
                      16,972,041Purchases
                      
                      
                      (29,924,517
                      )
                      
                      
                      (8,528,764
                      )Decrease
      (increase) in loans receivable, net
                      
                      
                      17,380,558
                      
                      
                      
                      (23,564,121
                      )Loans
      purchased
                      
                      
                      (3,979,689
                      )
                      
                      
                      (2,966,157
                      )Purchase
      of Federal Home Loan Bank stock
                      
                      
                      -
                      
                      
                      
                      (2,092,700
                      )Redemptions
      of Federal Home Loan Bank stock
                      
                      
                      -
                      
                      
                      
                      1,084,300Purchase
      of premises and equipment
                      
                      
                      (86,991
                      )
                      
                      
                      (191,943
                      )Proceeds
      from the sale of premises and equipment
                      
                      
                      -
                      
                      
                      
                      52,332Net
      cash provided by (used for) investing activities
                      
                      
                      7,039,844
                      
                      
                      
                      (19,235,012
                      )FINANCING
      ACTIVITIESIncrease
      (decrease) in deposits, net
                      
                      
                      (379,160
                      )
                      
                      
                      1,369,742Net
      decrease in FHLB advances - short-term
                      
                      
                      (4,000,000
                      )
                      
                      
                      (2,000,000
                      )Repayment
      of FHLB advances - long-term
                      
                      
                      (1,079,825
                      )
                      
                      
                      (1,311,021
                      )Proceeds
      of FHLB advances - long-term
                      
                      
                      3,000,000
                      
                      
                      
                      21,766,000Purchase
      of treasury stock
                      
                      
                      (268,590
                      )
                      
                      
                      (983,145
                      )Increase
      (decrease) in advances by borrowersfor
      taxes and insurance, net
                      
                      
                      (132,533
                      )
                      
                      
                      189,148Net
      cash provided by (used for) financing activities
                      
                      
                      (2,860,108
                      )
                      
                      
                      19,030,724Increase
      in cash and cash equivalents
                      
                      
                      3,755,588
                      
                      
                      
                      845,217CASH
      AND CASH EQUIVALENTS AT BEGINNING OF YEAR
                      
                      
                      4,670,942
                      
                      
                      
                      3,825,725CASH
      AND CASH EQUIVALENTS AT END OF YEAR
                      
                      $
                      8,426,530
                      
                      
                      $
                      4,670,942SUPPLEMENTAL
      CASH FLOW DISCLOSURESCash
      paid:Interest
                      
                      $
                      5,000,454
                      
                      
                      $
                      5,257,610Income
      taxes
                      
                      
                      93,569
                      
                      
                      
                      -





See
accompanying notes to the consolidated financial statements.


F-6


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”) 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
was incorporated under Pennsylvania law in 1923.  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”) 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 Consolidated 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-7





1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





Investment Securities
(Continued)





Securities
are periodically reviewed for other-than-temporary impairment based upon a
number of factors, including, but not limited to, the length of time and extent
to which the market value has been less than cost, the financial condition of
the underlying issuer, the ability of the issuer to meet contractual
obligations, the likelihood of the security’s ability to recover any decline in
its market value, and whether or not the Company intends to sell the security or
whether its more likely than not that the Company would be required to sell the
security before its anticipated recovery in market value. A decline in value
that is considered to be other than temporary is recorded as a loss within
non-interest income in the Consolidated Statement of Income.





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.


F-8





1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





Allowance for Loan Losses(Continued)





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.





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 Balance Sheet, 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





The
Company is required to present comprehensive income 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.


F-9





1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





Stock
Options





The
Company accounts for stock options based on the grant-date fair value of all
share-based payment awards that are expected to vest, including employee share
options, to be recognized as expense over the requisite service
period.  During the years ended December 31, 2009 and 2008, the
Bank recorded $89,593 and $111,593, respectively, in expense related to
share-based awards.  As of December 31, 2009, there was approximately
$238,836 of unrecognized cost related to unvested share-based awards
granted.  That cost is expected to be recognized over the next three
years.





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





Recent Accounting
Pronouncements





In June
2009, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) No. 2009-01, Topic 105 - Generally Accepted Accounting
Principles, FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted
Accounting Principles. The Codification is the single source of
authoritative nongovernmental U.S. generally accepted accounting principles
(GAAP).  The Codification does not change current GAAP, but is
intended to simplify user access to all authoritative GAAP by providing all the
authoritative literature related to a particular topic in one
place.  Rules and interpretive releases of the SEC under federal
securities laws are also sources of authoritative GAAP for SEC registrants. The
Company adopted this standard for the interim reporting period ending September
30, 2009.





In April
2009, the FASB issued new guidance impacting ASC Topic 820, Fair Value Measurements and
Disclosures.  This ASC provides additional guidance in
determining fair values when there is no active market or where the price inputs
being used represent distressed sales.  It reaffirms the need to use
judgment to ascertain if a formerly active market has become inactive and in
determining fair values when markets have become inactive.  The
adoption of this new guidance did not have a material effect on the Company’s
results of operations or financial position.





In
September 2006, the FASB issued an accounting standard related to fair
value measurements, which was effective for the Company on January 1,
2008.  This standard defined fair value, established a framework for
measuring fair value, and expanded disclosure requirements about fair value
measurements.  On January 1, 2008, the provisions of this accounting
standard became effective for the Company’s financial assets and financial
liabilities and on January 1, 2009 for nonfinancial assets and nonfinancial
liabilities.  This accounting standard was subsequently codified into
ASC Topic 820, Fair Value
Measurements and Disclosures.  See Note 14 for the necessary
disclosures.





In August
2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and
Disclosures (Topic 820) – Measuring Liabilities at Fair
Value.  This ASU provides amendments for fair value
measurements of liabilities.  It provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more techniques.


F-10


1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





Recent Accounting
Pronouncements (Continued)





ASU
2009-05 also clarifies that when estimating a fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of the liability.  ASU 2009-05 is effective for the first
reporting period (including interim periods) beginning after issuance or the
fourth quarter 2009.  The Company has presented the necessary
disclosures in Note 14 herein.





In April
2009, the FASB issued new guidance impacting ASC 825-10-50, Financial Instruments, which
relates to fair value disclosures for any financial instruments that are not
currently reflected on the balance sheet of companies at fair
value.  This guidance amended existing GAAP to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial
statements.  This guidance is effective for interim and annual periods
ending after June 15, 2009.  The Company has presented the necessary
disclosures in Note 14 herein.





In April
2009, the FASB issued new guidance impacting ASC 320-10, Investments — Debt and Equity
Securities, which provides additional guidance designed to create greater
clarity and consistency in accounting for and presenting impairment losses on
securities.  This guidance is effective for interim and annual periods
ending after June 15, 2009.  The adoption of this new guidance did not
have a material impact on the Company’s financial position or results of
operations.





In
June 2009, the FASB issued an accounting standard related to the accounting
for transfers of financial assets, which is effective for fiscal years beginning
after November 15, 2009, and interim periods within those fiscal
years.  This standard enhances reporting about transfers of financial
assets, including securitizations, and where companies have continuing exposure
to the risks related to transferred financial assets. This standard eliminates
the concept of a “qualifying special-purpose entity” and changes the
requirements for derecognizing financial assets. This standard also requires
additional disclosures about all continuing involvements with transferred
financial assets including information about gains and losses resulting from
transfers during the period.  This accounting standard was
subsequently codified into ASC Topic 860, Transfers and
Servicing.  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 an accounting standard related to
noncontrolling interests in consolidated financial statements, which is
effective for fiscal years beginning on or after December 15,
2008.  This standard establishes 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.   This accounting standard was subsequently
codified into ASC 810-10, Consolidation.  The
adoption of this standard did not have a material effect on the Company’s
financial statements.





On April
1, 2009, the FASB issued new authoritative accounting guidance under ASC
Topic 805, Business
Combinations, which became effective for periods beginning after December
15, 2008.  ASC Topic 805 applies to all transactions and other
events in which one entity obtains control over one or more other businesses.
ASC Topic 805 requires an acquirer, upon initially obtaining control of
another entity, to recognize the assets, liabilities and any non-controlling
interest in the acquiree at fair value as of the acquisition date. Contingent
consideration is required to be recognized and measured at fair value on the
date of acquisition rather than at a later date when the amount of that
consideration may be determinable beyond a reasonable doubt. This fair value
approach replaces the cost-allocation process required under previous accounting
guidance whereby the cost of an acquisition was allocated to the individual
assets acquired and liabilities assumed based on their estimated fair value. ASC
Topic 805 requires acquirers to expense acquisition-related costs as
incurred rather than allocating such costs to the assets acquired and
liabilities assumed, as was previously the case under prior accounting guidance.
Assets acquired and liabilities assumed in a business combination that arise
from contingencies are to be recognized at fair value if fair value can be
reasonably estimated. If fair value of such an asset or liability cannot be
reasonably estimated, the asset or liability would generally be recognized in
accordance with ASC Topic 450, Contingencies. Under ASC
Topic 805, the requirements of ASC Topic 420, Exit or Disposal Cost
Obligations, would have to be met in order to accrue for a restructuring
plan in purchase accounting. Pre-acquisition contingencies are to be recognized
at fair value, unless it is a non-contractual contingency that is not likely to
materialize, in which case,nothing should be recognized in purchase accounting
and, instead, that contingency would be subject to the probable and estimable
recognition criteria of ASC Topic 450, Contingencies.  The
adoption of this new guidance did not have a material impact on the Company’s
financial position or results of operations.


F-11





1.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





Recent Accounting
Pronouncements (Continued)





In
June 2009, the FASB issued new authoritative accounting guidance under ASC
Topic 810, Consolidation, which amends
prior guidance to change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a company is
required to consolidate an entity is based on, among other things, an entity’s
purpose and design and a company’s ability to direct the activities of the
entity that most significantly impact the entity’s economic performance. The new
authoritative accounting guidance requires additional disclosures about the
reporting entity’s involvement with variable-interest entities and any
significant changes in risk exposure due to that involvement as well as its
affect on the entity’s financial statements. The new authoritative accounting
guidance under ASC Topic 810 will be effective January 1, 2010, and is
not expected to have a significant impact on the Company’s financial
statements.





On
December 30, 2008, the FASB issued new authoritative accounting guidance under
ASC Topic 715, Compensation—Retirement
Benefits, which provides guidance related to an employer’s disclosures
about plan assets of defined benefit pension or other post-retirement benefit
plans. Under ASC Topic 715, disclosures should provide users of financial
statements with an understanding of how investment allocation decisions are
made, the factors that are pertinent to an understanding of investment policies
and strategies, the major categories of plan assets, the inputs and valuation
techniques used to measure the fair value of plan assets, the effect of fair
value measurements using significant unobservable inputs on changes in plan
assets for the period and significant concentrations of risk within plan assets.
This guidance is effective fiscal year ending after December 15,
2009.  The new authoritative accounting guidance under ASC
Topic 715 became effective for the Company’s financial statements for the
year ended December 31, 2009, and the required disclosures are reported in
Note 12.





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-12





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 (loss) 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.


2009
                        
                        
                        2008Weighted-average
      common sharesoutstanding
                        
                        
                        3,306,250
                        
                        
                        
                        3,306,250Average
      unearned nonvested shares
                        
                        
                        (38,482
                        )
                        
                        
                        (51,946
                        )Average
      unallocated shares held by ESOP
                        
                        
                        (107,650
                        )
                        
                        
                        (116,299
                        )Average
      treasury stock shares
                        
                        
                        (144,318
                        )
                        
                        
                        (53,968
                        )Weighted-average
      common shares andcommon
      stock equivalents used tocalculate
      basic earnings per share
                        
                        
                        3,015,800
                        
                        
                        
                        3,084,037





Options
to purchase 153,903 and 162,003 shares of common stock as of December 31, 2009
and 2008, as well as 32,832 and 45,198 shares of restricted stock as of December
31, 2009 and 2008, respectively, were not included in the computation of diluted
earnings per share because to do so would have been anti-dilutive.





3.
            INVESTMENT
      SECURITIES





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





December 31, 2009Gross
                                  
                                  
                                  GrossAmortized
                                  
                                  
                                  Unrealized
                                  
                                  
                                  Unrealized
                                  
                                  
                                  FairCost
                                  
                                  
                                  Gains
                                  
                                  
                                  Losses
                                  
                                  
                                  ValueAvailable
      for SaleMortgage-backed
      securities:Fannie
      Mae
                                  
                                  $
                                  13,162,586
                                  
                                  
                                  $
                                  557,138
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  13,719,724Freddie
      Mac
                                  
                                  
                                  2,763,475
                                  
                                  
                                  
                                  142,253
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,905,728Government
      National MortgageAssociation
      securities
                                  
                                  
                                  1,339,327
                                  
                                  
                                  
                                  107,672
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,446,999Other
                                  
                                  
                                  85,639
                                  
                                  
                                  
                                  4,873
                                  
                                  
                                  
                                  (3,558
                                  )
                                  
                                  
                                  86,954Total
      mortgage-backedsecurities
                                  
                                  
                                  17,351,027
                                  
                                  
                                  
                                  811,936
                                  
                                  
                                  
                                  (3,558
                                  )
                                  
                                  
                                  18,159,405Corporate
      securities
                                  
                                  
                                  12,370,458
                                  
                                  
                                  
                                  156,124
                                  
                                  
                                  
                                  (101,900
                                  )
                                  
                                  
                                  12,424,682Total
      debt securities
                                  
                                  
                                  29,721,485
                                  
                                  
                                  
                                  968,060
                                  
                                  
                                  
                                  (105,458
                                  )
                                  
                                  
                                  30,584,087Equity
      securities
                                  
                                  
                                  18,500
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,000
                                  )
                                  
                                  
                                  17,500Total
                                  
                                  $
                                  29,739,985
                                  
                                  
                                  $
                                  968,060
                                  
                                  
                                  $
                                  (106,458
                                  )
                                  
                                  $
                                  30,601,587Held
      to MaturityFannie
      Mae mortgage-backedsecurities
                                  
                                  $
                                  13,780,267
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  (139,292
                                  )
                                  
                                  $
                                  13,640,975




F-13





3.
            INVESTMENT
      SECURITIES (Continued)





December 31, 2008Gross
                          
                          
                          GrossAmortized
                          
                          
                          Unrealized
                          
                          
                          Unrealized
                          
                          
                          FairCost
                          
                          
                          Gains
                          
                          
                          Losses
                          
                          
                          ValueAvailable
      for SaleMortgage-backed
      securities:Fannie
      Mae
                          
                          $
                          23,870,316
                          
                          
                          $
                          766,189
                          
                          
                          $
                          (8,608
                          )
                          
                          $
                          24,627,897Freddie
      Mac
                          
                          
                          6,835,338
                          
                          
                          
                          164,728
                          
                          
                          
                          (549
                          )
                          
                          
                          6,999,517Government
      National MortgageAssociation
      securities
                          
                          
                          1,627,489
                          
                          
                          
                          60,819
                          
                          
                          
                          -
                          
                          
                          
                          1,688,308Other
                          
                          
                          98,069
                          
                          
                          
                          19
                          
                          
                          
                          (4,359
                          )
                          
                          
                          93,729Total
      mortgage-backedsecurities
                          
                          
                          32,431,212
                          
                          
                          
                          991,755
                          
                          
                          
                          (13,516
                          )
                          
                          
                          33,409,451Corporate
      securities
                          
                          
                          4,346,375
                          
                          
                          
                          28,231
                          
                          
                          
                          (620
                          )
                          
                          
                          4,373,986Total
      debt securities
                          
                          
                          36,777,587
                          
                          
                          
                          1,019,986
                          
                          
                          
                          (14,136
                          )
                          
                          
                          37,783,437Equity
      securities
                          
                          
                          18,500
                          
                          
                          
                          -
                          
                          
                          
                          (13,050
                          )
                          
                          
                          5,450Total
                          
                          $
                          36,796,087
                          
                          
                          $
                          1,019,986
                          
                          
                          $
                          (27,186
                          )
                          
                          $
                          37,788,887





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, 2009Less Than Twelve Months
                        
                        
                        Twelve Months or Greater
                        
                        
                        TotalGross
                        
                        
                        
                        
                        
                        Gross
                        
                        
                        
                        
                        
                        GrossFair
                        
                        
                        Unrealized
                        
                        
                        Fair
                        
                        
                        Unrealized
                        
                        
                        Fair
                        
                        
                        UnrealizedValue
                        
                        
                        Losses
                        
                        
                        Value
                        
                        
                        Losses
                        
                        
                        Value
                        
                        
                        LossesMortgage-backed
      securities:Fannie
      Mae
                        
                        $
                        13,640,975
                        
                        
                        $
                        (139,292
                        )
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        13,640,975
                        
                        
                        $
                        (139,292
                        )Other
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        7,790
                        
                        
                        
                        (3,558
                        )
                        
                        
                        7,790
                        
                        
                        
                        (3,558
                        )Total
      mortgage-backedsecurities
                        
                        
                        13,640,975
                        
                        
                        
                        (139,292
                        )
                        
                        
                        7,790
                        
                        
                        
                        (3,558
                        )
                        
                        
                        13,648,765
                        
                        
                        
                        (142,850
                        )Corporate
      Securities
                        
                        
                        5,898,100
                        
                        
                        
                        (101,900
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        5,898,100
                        
                        
                        
                        (101,900
                        )Equity
      securities
                        
                        
                        17,500
                        
                        
                        
                        (1,000
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        17,500
                        
                        
                        
                        (1,000
                        )Total
                        
                        $
                        19,556,575
                        
                        
                        $
                        (242,192
                        )
                        
                        $
                        7,790
                        
                        
                        $
                        (3,558
                        )
                        
                        $
                        19,564,365
                        
                        
                        $
                        (245,750
                        )





December
      31, 2008Less
      Than Twelve Months
                    
                    
                    Twelve
      Months or Greater
                    
                    
                    TotalGross
                    
                    
                    
                    
                    
                    Gross
                    
                    
                    
                    
                    
                    GrossFair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    UnrealizedValue
                    
                    
                    Losses
                    
                    
                    Value
                    
                    
                    Losses
                    
                    
                    Value
                    
                    
                    LossesMortgage-backed
      securities:Fannie
      Mae
                    
                    $
                    629,367
                    
                    
                    $
                    (8,608
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    629,367
                    
                    
                    $
                    (8,608
                    )Freddie
      Mac
                    
                    
                    116,064
                    
                    
                    
                    (549
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    116,064
                    
                    
                    
                    (549
                    )Other
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    9,312
                    
                    
                    
                    (4,359
                    )
                    
                    
                    9,312
                    
                    
                    
                    (4,359
                    )Total
      mortgage-backedsecurities
                    
                    
                    745,431
                    
                    
                    
                    (9,157
                    )
                    
                    
                    9,312
                    
                    
                    
                    (4,359
                    )
                    
                    
                    754,743
                    
                    
                    
                    (13,516
                    )Corporate
      Securities
                    
                    
                    1,999,380
                    
                    
                    
                    (620
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,999,380
                    
                    
                    
                    (620
                    )Equity
      securities
                    
                    
                    5,450
                    
                    
                    
                    (13,050
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,450
                    
                    
                    
                    (13,050
                    )Total
                    
                    $
                    2,750,261
                    
                    
                    $
                    (22,827
                    )
                    
                    $
                    9,312
                    
                    
                    $
                    (4,359
                    )
                    
                    $
                    2,759,573
                    
                    
                    $
                    (27,186
                    )




F-14





3.
            INVESTMENT
      SECURITIES (Continued)





The
Company reviews its position quarterly and has asserted that at December 31,
2009, the declines outlined in the above table represent temporary declines and
the Company does not intend to sell and does not believe they will be required
to sell these securities before recovery of their cost basis, which may be at
maturity.  There were seven and five positions that were temporarily
impaired at December 31, 2009 and December 31, 2008,
respectively.  The Company has concluded that the unrealized losses
disclosed above are not other than temporary but are the result of interest rate
changes, sector credit ratings changes, or Company-specific ratings changes that
are not expected to result in the non-collection of principal and interest
during the period.  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 $411,500 for the year ended December 31, 2008.





The
amortized cost and fair value of debt securities at December 31, 2009, 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.





Available for Sale
                  
                  
                  Held to MaturityAmortized
                  
                  
                  Fair
                  
                  
                  Amortized
                  
                  
                  FairCost
                  
                  
                  Value
                  
                  
                  Cost
                  
                  
                  ValueDue
      within one year
                  
                  $
                  1,750,000
                  
                  
                  $
                  1,760,727
                  
                  
                  $
                  -
                  
                  
                  $
                  -Due
      after one year through five years
                  
                  
                  2,746,812
                  
                  
                  
                  2,860,102
                  
                  
                  
                  -
                  
                  
                  
                  -Due
      after five years through ten years
                  
                  
                  6,007,357
                  
                  
                  
                  6,286,312
                  
                  
                  
                  12,377,449
                  
                  
                  
                  12,255,937Due
      after ten years
                  
                  
                  19,217,316
                  
                  
                  
                  19,676,946
                  
                  
                  
                  1,402,818
                  
                  
                  
                  1,385,038Total
                  
                  $
                  29,721,485
                  
                  
                  $
                  30,584,087
                  
                  
                  $
                  13,780,267
                  
                  
                  $
                  13,640,975





For the
year ended December 31, 2009, the Company realized gross gains of $486,000 and
proceeds from the sale of investment securities of $9,787,000. The Company had
no sales of investment securities for the year ended December 31,
2008.





4.
            LOANS
      RECEIVABLE





Loans
receivable consist of the following:





December
      31,2009
                  
                  
                  2008Mortgage
      loans:One-to-four
      family
                  
                  $
                  131,570,796
                  
                  
                  $
                  144,507,702Multi-family
      and commercial
                  
                  
                  10,214,036
                  
                  
                  
                  12,020,667141,784,832
                  
                  
                  
                  156,528,369Home
      equity loans
                  
                  
                  3,372,071
                  
                  
                  
                  4,171,868HELOCs
                  
                  
                  3,036,690
                  
                  
                  
                  1,361,315Education
      loans
                  
                  
                  3,281,029
                  
                  
                  
                  2,690,170Loans
      on savings accounts
                  
                  
                  32,014
                  
                  
                  
                  59,271Other
                  
                  
                  376
                  
                  
                  
                  499151,507,012
                  
                  
                  
                  164,811,492Less:Net
      deferred loan fees
                  
                  
                  214,741
                  
                  
                  
                  194,883Allowance
      for loan losses
                  
                  
                  1,115,141
                  
                  
                  
                  857,702Total
                  
                  $
                  150,177,130
                  
                  
                  $
                  163,758,907





The
Company’s loan portfolio consists predominantly of one-to-four family unit first
mortgage loans 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, 2009 and 2008, is dependent
upon the local economic conditions.


F-15


4.
            LOANS
      RECEIVABLE (Continued)





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





Year Ended December 31,2009
                  
                  
                  2008Balance,
      beginning of period
                  
                  $
                  857,702
                  
                  
                  $
                  731,338Add:Provision
      charged to operations
                  
                  
                  252,489
                  
                  
                  
                  84,992Loan
      recoveries
                  
                  
                  4,950
                  
                  
                  
                  41,3721,115,141
                  
                  
                  
                  857,702Less:Charge-offs
                  
                  
                  -
                  
                  
                  
                  -Balance,
      end of period
                  
                  $
                  1,115,141
                  
                  
                  $
                  857,702





Mortgage
loans serviced by the Company for others amounted to $13,559,584 and $5,041,712
at December 31, 2009 and 2008, respectively.





The
Company had nonaccrual loans of $2,741,967 and $729,074 at December 31, 2009 and
2008, respectively.  Interest income on loans would have increased by
approximately $86,069 and $28,003 during 2009 and 2008, respectively, if these
loans had performed in accordance with their original terms.





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 for the year ended December 31, 2009, is as follows:





Amounts2008
                      
                      
                      Additions
                      
                      
                      Collected
                      
                      
                      2009$
                      2,125,551
                      
                      
                      $
                      225,509
                      
                      
                      $
                      312,132
                      
                      
                      $
                      2,038,928





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.


F-16





6.
            PREMISES
      AND EQUIPMENT





Premises
and equipment consist of the following:





December 31,2009
                  
                  
                  2008Land
                  
                  $
                  55,000
                  
                  
                  $
                  55,000Buildings
                  
                  
                  6,968,562
                  
                  
                  
                  6,968,562Furniture,
      fixtures, and equipment
                  
                  
                  2,320,162
                  
                  
                  
                  2,237,1999,343,724
                  
                  
                  
                  9,260,761Less
      accumulated depreciation
                  
                  
                  4,583,044
                  
                  
                  
                  4,290,447Total
                  
                  $
                  4,760,680
                  
                  
                  $
                  4,970,314





Depreciation
expense amounted to $292,597 and $365,109 for the years ended December 31, 2009
and 2008, respectively.





7.
            DEPOSITS





Deposit
accounts are summarized as follows as of December 31:





2009
                  
                  
                  2008Amount
                  
                  
                  %
                  
                  
                  Amount
                  
                  
                  %Non-interest-bearing
      demand
                  
                  $
                  5,649,802
                  
                  
                  
                  3.44
                  %
                  
                  $
                  3,986,145
                  
                  
                  
                  2.42
                  %NOW
      accounts
                  
                  
                  11,118,180
                  
                  
                  
                  6.77
                  
                  
                  
                  10,300,480
                  
                  
                  
                  6.26Money
      market deposit
                  
                  
                  32,859,511
                  
                  
                  
                  20.01
                  
                  
                  
                  25,603,226
                  
                  
                  
                  15.56Savings
                  
                  
                  29,088,102
                  
                  
                  
                  17.71
                  
                  
                  
                  34,346,393
                  
                  
                  
                  20.8778,715,595
                  
                  
                  
                  47.93
                  
                  
                  
                  74,236,244
                  
                  
                  
                  45.11Time
      deposits:1.00
      - 1.99%
                  
                  
                  32,382,963
                  
                  
                  
                  19.72
                  
                  
                  
                  -
                  
                  
                  
                  -2.00
      - 3.99%
                  
                  
                  26,128,457
                  
                  
                  
                  15.91
                  
                  
                  
                  56,181,049
                  
                  
                  
                  34.134.00
      - 5.99%
                  
                  
                  26,980,230
                  
                  
                  
                  16.44
                  
                  
                  
                  34,094,924
                  
                  
                  
                  20.726.00
      - 7.99%
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  74,188
                  
                  
                  
                  0.0485,491,650
                  
                  
                  
                  52.07
                  
                  
                  
                  90,350,161
                  
                  
                  
                  54.89Total
                  
                  $
                  164,207,245
                  
                  
                  
                  100.00
                  %
                  
                  $
                  164,586,405
                  
                  
                  
                  100.00
                  %





The
scheduled maturities of time deposits are as follows:





December 31, 20092010
                          
                          $
                          38,577,4862011
                          
                          
                          23,601,2942012
                          
                          
                          5,702,8452013
                          
                          
                          3,613,0772014
                          
                          
                          13,996,948Total
                          
                          $
                          85,491,650





Time
deposits include those in denominations of $100,000 or more.  Such
deposits aggregated $22,206,002 and $19,995,260 at December 31, 2009 and 2008,
respectively.


F-17


7.
            DEPOSITS
      (Continued)





The
scheduled maturities of time deposits in denominations of $100,000 or more at
December 31, 2009, are as follows:





Within
      three months
                  
                  $
                  5,253,876Three
      through six months
                  
                  
                  1,512,262Six
      through twelve months
                  
                  
                  2,181,468Over
      twelve months
                  
                  
                  13,258,396Total
                  
                  $
                  22,206,002





Interest
expense by deposit category is as follows:





Year ended December 31,2009
                  
                  
                  2008NOW
                  
                  $
                  76,736
                  
                  
                  $
                  95,501Money
      market
                  
                  
                  581,998
                  
                  
                  
                  818,663Savings
                  
                  
                  237,084
                  
                  
                  
                  310,213Time
      certificates of deposit
                  
                  
                  3,313,258
                  
                  
                  
                  3,455,664Total
                  
                  $
                  4,209,076
                  
                  
                  $
                  4,680,041





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, and the Company’s investment
in FHLB stock.





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





December 31,2009
                    
                    
                    2008Balance
      at year-end
                    
                    $
                    -
                    
                    
                    $
                    4,000,000Maximum
      amount outstanding at any month-end
                    
                    
                    -
                    
                    
                    
                    5,000,000Average
      balance outstanding during the year
                    
                    
                    76,712
                    
                    
                    
                    2,073,770Weighted-average
      interest rate:As
      of year-end
                    
                    
                    -
                    
                    
                    
                    0.59
                    %Paid
      during the year
                    
                    
                    0.52
                    %
                    
                    
                    2.47
                    %





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


F-18





9.
            FHLB
      ADVANCES – LONG-TERM





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





Weighted-
                              
                              
                              Stated interestMaturity range
                              
                              average
                              
                              
                              rate range
                              
                              
                              At December 31,Description
                              
                              from
                              
                              to
                              
                              interest rate
                              
                              
                              from
                              
                              
                              to
                              
                              
                              2009
                              
                              
                              2008Convertible
                              
                              03/19/18
                              
                              08/27/18
                              
                              
                              3.08
                              %
                              
                              
                              2.13
                              %
                              
                              
                              4.15
                              %
                              
                              $
                              17,000,000
                              
                              
                              $
                              17,000,000Fixed-rate
                              
                              02/06/13
                              
                              02/06/13
                              
                              
                              3.58
                              %
                              
                              
                              3.58
                              %
                              
                              
                              3.58
                              %
                              
                              
                              1,500,000
                              
                              
                              
                              1,500,000Fixed-rate
      amortizing
                              
                              12/26/12
                              
                              12/26/12
                              
                              
                              3.87
                              %
                              
                              
                              3.87
                              %
                              
                              
                              3.87
                              %
                              
                              
                              1,707,524
                              
                              
                              
                              2,787,349Mid-term
      repo fixed
                              
                              02/08/10
                              
                              01/03/12
                              
                              
                              2.29
                              %
                              
                              
                              1.65
                              %
                              
                              
                              3.15
                              %
                              
                              
                              6,266,000
                              
                              
                              
                              3,266,000Total
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              26,473,524
                              
                              
                              $
                              24,553,349





Payments
of FHLB borrowings are summarized as follows:





Year Ending
                    
                    
                    
                    
                    Weighted-December 31,
                    
                    Amount
                    
                    
                    Average Rate2010
                    
                    $
                    2,047,330
                    
                    
                    
                    3.03
                    %2011
                    
                    
                    2,334,892
                    
                    
                    
                    3.21
                    %2012
                    
                    
                    3,591,302
                    
                    
                    
                    2.02
                    %2013
                    
                    
                    1,500,000
                    
                    
                    
                    3.58
                    %2014
      and thereafter
                    
                    
                    17,000,000
                    
                    
                    
                    3.08
                    %Total
                    
                    $
                    26,473,524
                    
                    
                    
                    2.97
                    %





As of
December 31, 2009, the Company had one fixed-rate amortizing borrowings with the
FHLB, which was originated in December 2002.  The fixed-rate
amortizing borrowing requires aggregate monthly payments of principal and
interest of $50,314 for the remaining borrowing through December
2012.  The Company also has three convertible select borrowings, four
mid-term repo-fixed borrowings, and one fixed-rate borrowing.  These
borrowings were originated in 2008 and 2009 and mature from February 2010
through August 2018.  All borrowings acquired in 2008 and 2009 require
quarterly payments of interest only.  The convertible select
borrowings are convertible to variable-rate advances on specific dates at the
discretion of the FHLB.  Should the FHLB convert these advances, the
Bank has the option of accepting the variable rate or repaying the advance
without penalty.





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, the Company has a maximum borrowing capacity of $100.3 million with
the FHLB at


December
31, 2009.





10.
            INCOME
      TAXES





The
provision for income taxes (benefit) consists of:





Year Ended December 31,2009
                  
                  
                  2008Current
      tax expense
                  
                  $
                  145,746
                  
                  
                  $
                  112,834Deferred
      taxes
                  
                  
                  (137,322
                  )
                  
                  
                  (211,032
                  )Total
                  
                  $
                  8,424
                  
                  
                  $
                  (98,198
                  )


F-19


10.
            INCOME
      TAXES (Continued)





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 31,2009
                  
                  
                  2008Deferred
      tax assets:Allowance
      for loan losses
                  
                  $
                  350,897
                  
                  
                  $
                  265,051Deferred
      loan fees
                  
                  
                  112
                  
                  
                  
                  226Deferred
      compensation
                  
                  
                  1,010,510
                  
                  
                  
                  961,013Investment
      securities impairment
                  
                  
                  163,710
                  
                  
                  
                  163,710Deferred
      health care
                  
                  
                  69,062
                  
                  
                  
                  69,809State
      net operating loss carryforward
                  
                  
                  177,765
                  
                  
                  
                  283,743Capital
      loss carryforwards
                  
                  
                  181,282
                  
                  
                  
                  299,436Premises
      and equipment
                  
                  
                  85,203
                  
                  
                  
                  72,131Charitable
      contribution carryforward
                  
                  
                  31,114
                  
                  
                  
                  35,396Other
                  
                  
                  45,109
                  
                  
                  
                  53,432Total
      gross deferred tax assets
                  
                  
                  2,114,764
                  
                  
                  
                  2,203,947Valuation
      allowance
                  
                  
                  (390,160
                  )
                  
                  
                  (618,575
                  )Total
      net deferred tax assets
                  
                  
                  1,724,604
                  
                  
                  
                  1,585,372Deferred
      tax liabilities:Prepaid
      insurance
                  
                  
                  44,333
                  
                  
                  
                  42,513Net
      unrealized gain on securities
                  
                  
                  292,945
                  
                  
                  
                  337,552Total
      gross deferred tax liabilities
                  
                  
                  337,278
                  
                  
                  
                  380,065Net
      deferred tax assets
                  
                  $
                  1,387,326
                  
                  
                  $
                  1,205,307





The
valuation allowance as of December 31, 2009 and 2008, consisted of a 100 percent
allowance against specific deferred tax assets.  These deferred tax
assets are subject to expiration periods ranging from three years to five
years.  It could not be determined that it was more than likely that
the Company would be in a taxable position adequate to utilize these deferred
tax assets prior to their expiration.  These deferred tax assets were
the Pennsylvania Mutual thrift tax loss carryforward of $177,765 in 2009 and
$283,743 in 2008; capital loss carryforward of $181,282 and $299,436 for 2009
and 2008; and the charitable contribution carryforward of $31,114 in 2009 and
$35,396 in 2008.





The
Company has been in a cumulative loss position for the past several years;
however, the losses have been declining in a manor consistent with the current
business plan and did record profits for 2009.  The Company has
projected that it will continue to be in a taxable position resulting from
implementation of the business plan.  Based upon the long-term nature
of the remaining deferred tax assets, it was determined that the Company would
likely be in a taxable position to allow for the utilization of the remaining
deferred tax assets and that a valuation allowance on those deferred tax assets
was not appropriate.





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


Year Ended December 31,2009
                    
                    
                    2008% of
                    
                    
                    
                    
                    
                    % ofPretax
                    
                    
                    
                    
                    
                    PretaxAmount
                    
                    
                    Income
                    
                    
                    Amount
                    
                    
                    IncomeProvision
      at statutory rate
                    
                    $
                    115,521
                    
                    
                    
                    34.0
                    %
                    
                    $
                    (117,079
                    )
                    
                    
                    (34.0
                    )%Tax-exempt
      income
                    
                    
                    (39,735
                    )
                    
                    
                    (11.7
                    )
                    
                    
                    80,382
                    
                    
                    
                    23.3Valuation
      allowance
                    
                    
                    (110,456
                    )
                    
                    
                    (32.5
                    )
                    
                    
                    (38,596
                    )
                    
                    
                    (11.2
                    )Other,
      net
                    
                    
                    43,094
                    
                    
                    
                    12.7
                    
                    
                    
                    (22,905
                    )
                    
                    
                    (6.6
                    )Actual
      tax expense andeffective
      rate
                    
                    $
                    8,424
                    
                    
                    
                    2.5
                    %
                    
                    $
                    (98,198
                    )
                    
                    
                    (28.5
                    )%


F-20


10.
            INCOME
      TAXES (Continued)





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, 2008, the Company has an available net operating loss carryforward
of approximately $3,738,377 for state tax purposes that expired in
2009.  The Bank also has an available capital loss carryforward of
approximately $533,181 that will expire in 2011.





U.S.
generally accepted accounting principles prescribe 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.





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 31,2009
                    
                    
                    2008Commitments
      to extend credit
                    
                    $
                    1,362,650
                    
                    
                    $
                    2,542,730Unused
      lines of credit
                    
                    
                    663,304
                    
                    
                    
                    248,681Letters
      of Credit
                    
                    
                    155,978
                    
                    
                    
                    -





Commitments
to extend credit consist of fixed-rate commitments with interest rates ranging
from 4.875 percent to 7.25 percent.  The commitments outstanding at
December 31, 2009, 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.


F-21





12.
            EMPLOYEE
      BENEFITS





Benefit
Plan





The
Company has a defined contribution pension plan (the “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 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 $49,228 and $50,000 for the years ended December
31, 2009 and 2008, respectively.





The Plan
includes provisions to include employee and employer 401(k)
contributions.  Under the 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 $182,173 and $183,117 for the years ended December 31, 2009 and
2008, respectively.





Employee Stock Ownership
Plan (“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 $59,791 and $71,069 for the
years ended December 31, 2009 and 2008, respectively.





The
following table presents the components of the ESOP shares:





2009
                  
                  
                  2008Allocated
      shares
                  
                  
                  25,921
                  
                  
                  
                  17,280Unreleased
      shares
                  
                  
                  103,684
                  
                  
                  
                  112,325Total
      ESOP shares
                  
                  
                  129,605
                  
                  
                  
                  129,605Fair
      value of unreleased shares
                  
                  $
                  725,788
                  
                  
                  $
                  982,835





Equity Incentive
Plan





Employees
and non-employee corporate directors are eligible to receive awards of
restricted stock and options based upon performance related
requirements.  Awards granted under the 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.  The Company has authorized 226,808 shares of the Company’s
common stock under the Plan.  The 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.


F-22





12.
            EMPLOYEE
      BENEFITS (Continued)





Restricted Stock
Plan





In
connection with the Equity Incentive Plan, the Company awarded 64,800 shares of
restricted stock to directors and officers of the Company on August 21,
2007.  These shares vest over a five-year period ending in
2012.  Compensation expense related to the vesting of shares was
$115,733 and $144,158 for the years ended December 31, 2009 and 2008,
respectively.


Weighted-AverageNumber of
                            
                            
                            Grant DateRestricted Stock
                            
                            
                            Fair ValueNonvested
      at December 31, 2008
                            
                            
                            49,248
                            
                            
                            $
                            9.40Granted
                            
                            
                            -
                            
                            
                            
                            -Vested
                            
                            
                            12,312
                            
                            
                            
                            9.40Forfeited
                            
                            
                            -
                            
                            
                            
                            -Nonvested
      at December 31, 2009
                            
                            
                            36,936
                            
                            
                            $
                            9.40





Stock Option
Plan





In
connection with the 2007 Equity Incentive Plan, the Board of Directors approved
the formation of a stock option plan.  The 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.  A
total of 162,003 shares of either authorized and unissued shares or authorized
shares issued by and subsequently reacquired by the Bank as treasury stock shall
be issuable under the plans.  The plans shall terminate after the
tenth anniversary of the plan.  The per share exercise price of any
option granted will not be less than the fair market value of a share of common
stock on the date the option is granted.  The options granted are
vested over various time periods and are determined at the time of
grant.





The
following table is a summary of the Company’s stock option activity and related
information for its option plan:





Weighted-Weighted-
                                    
                                    
                                    AverageAverage
                                    
                                    
                                    Remaining
                                    
                                    
                                    AggregateExercise
                                    
                                    
                                    Contractual
                                    
                                    
                                    Intrinsic2009
                                    
                                    
                                    Price
                                    
                                    
                                    Term (in years)
                                    
                                    
                                    ValueOutstanding,
      beginning
                                    
                                    
                                    162,003
                                    
                                    
                                    $
                                    9.40
                                    
                                    
                                    
                                    7.64
                                    
                                    
                                    
                                    -Granted
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Exercised
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Forfeited
                                    
                                    
                                    (8,100
                                    )
                                    
                                    
                                    9.40
                                    
                                    
                                    
                                    7.64
                                    
                                    
                                    
                                    -Outstanding,
      ending
                                    
                                    
                                    153,903
                                    
                                    
                                    $
                                    9.40
                                    
                                    
                                    
                                    7.64
                                    
                                    
                                    
                                    -Vested
      and exercisable at year-end
                                    
                                    
                                    61,561
                                    
                                    
                                    $
                                    9.40
                                    
                                    
                                    
                                    7.64
                                    
                                    
                                    
                                    -





The
following table summarizes the Company’s nonvested options and changes therein
during the year ended December 31, 2009:


Weighted-averageNumber of
                      
                      
                      Grant DateStock Options
                      
                      
                      Fair ValueNonvested
      at December 31, 2008
                      
                      
                      123,122
                      
                      
                      $
                      9.40Granted
                      
                      
                      -
                      
                      
                      
                      -Vested
                      
                      
                      (30,780
                      )
                      
                      
                      9.40Forfeited
                      
                      
                      -
                      
                      
                      
                      -Nonvested
      at December 31, 2009
                      
                      
                      92,342
                      
                      
                      $
                      9.40


F-23


12.
            EMPLOYEE
      BENEFITS (Continued)





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
$10,938,081.  The cash surrender value of these policies totaled
$4,053,225 and $3,936,358 at December 31, 2009 and 2008,
respectively.  The Plan provides that death benefits totaling $6.0
million at December 31, 2009, 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, 2009 and 2008, $1,485,552 and $1,444,546, respectively, has been
accrued under these SRPs, and this liability and the related deferred tax asset
of $505,088 and $491,146, respectively, are recognized in the financial
statements.





The
deferred compensation for the current and former presidents 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 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 Ended2009
                  
                  
                  2008Components
      of net periodic benefit cost:Service
      cost
                  
                  $
                  62,472
                  
                  
                  $
                  72,609Interest
      cost
                  
                  
                  90,284
                  
                  
                  
                  87,009Net
      periodic benefit cost
                  
                  $
                  152,756
                  
                  
                  $
                  159,618


13.
            REGULATORY
      RESTRICTIONS





Federal Reserve Cash
Requirements





The Bank
is required to maintain average cash reserve balance in vault cash or with the
Federal Reserve Bank.  The amount of these restricted cash reserve
balances at December 31, 2009, was $25,000.


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, 2009, the Bank met all capital adequacy
requirements to which they are subject.





As of
December 31, 2009 and 2008, 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.


F-24


13.
            REGULATORY
      RESTRICTIONS (Continued)





Regulatory Capital
Requirements (Continued)





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





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





December
      31,2009
                  
                  
                  2008Total
      stockholders' equity
                  
                  $
                  20,869,520
                  
                  
                  $
                  20,553,566Accumulated
      other comprehensive income
                  
                  
                  (568,657
                  )
                  
                  
                  (655,248
                  )Tier
      I, core, and tangible capital
                  
                  
                  20,300,863
                  
                  
                  
                  19,898,318Allowance
      for loan losses
                  
                  
                  1,115,141
                  
                  
                  
                  857,702Total
      risk-based capital
                  
                  $
                  21,416,004
                  
                  
                  $
                  20,756,020





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





December 31,2009
                                  
                                  
                                  2008Amount
                                  
                                  
                                  Ratio
                                  
                                  
                                  Amount
                                  
                                  
                                  RatioTotal
      Capital(to Risk-Weighted Assets)Actual
                                  
                                  $
                                  21,416,004
                                  
                                  
                                  
                                  19.78
                                  %
                                  
                                  $
                                  20,756,020
                                  
                                  
                                  
                                  18.73
                                  %For
      Capital Adequacy Purposes
                                  
                                  
                                  8,663,360
                                  
                                  
                                  
                                  8.00
                                  
                                  
                                  
                                  8,863,362
                                  
                                  
                                  
                                  8.00To
      Be Well Capitalized
                                  
                                  
                                  10,829,200
                                  
                                  
                                  
                                  10.00
                                  
                                  
                                  
                                  11,079,203
                                  
                                  
                                  
                                  10.00Tier
      I Capital(to Risk-Weighted Assets)Actual
                                  
                                  $
                                  20,300,863
                                  
                                  
                                  
                                  18.75
                                  %
                                  
                                  
                                  19,898,318
                                  
                                  
                                  
                                  17.96
                                  %For
      Capital Adequacy Purposes
                                  
                                  
                                  4,331,680
                                  
                                  
                                  
                                  4.00
                                  
                                  
                                  
                                  4,431,681
                                  
                                  
                                  
                                  4.00To
      Be Well Capitalized
                                  
                                  
                                  6,497,520
                                  
                                  
                                  
                                  6.00
                                  
                                  
                                  
                                  6,647,522
                                  
                                  
                                  
                                  6.00Core
      Capital(to Adjusted Assets)Actual
                                  
                                  $
                                  20,300,863
                                  
                                  
                                  
                                  9.34
                                  %
                                  
                                  
                                  19,898,318
                                  
                                  
                                  
                                  9.06
                                  %For
      Capital Adequacy Purposes
                                  
                                  
                                  8,695,776
                                  
                                  
                                  
                                  4.00
                                  
                                  
                                  
                                  8,783,488
                                  
                                  
                                  
                                  4.00To
      Be Well Capitalized
                                  
                                  
                                  10,869,720
                                  
                                  
                                  
                                  5.00
                                  
                                  
                                  
                                  10,979,360
                                  
                                  
                                  
                                  5.00Tangible
      Capital(to Adjusted Assets)Actual
                                  
                                  $
                                  20,300,863
                                  
                                  
                                  
                                  9.34
                                  %
                                  
                                  
                                  19,898,318
                                  
                                  
                                  
                                  9.06
                                  %For
      Capital Adequacy Purposes
                                  
                                  
                                  4,347,888
                                  
                                  
                                  
                                  1.50
                                  
                                  
                                  
                                  4,391,744
                                  
                                  
                                  
                                  1.50To
      Be Well Capitalized
                                  
                                  
                                  N/A
                                  
                                  
                                  
                                  N/A
                                  
                                  
                                  
                                  N/A
                                  
                                  
                                  
                                  N/A





The Bank
accumulated approximately $1.4 million of retained earnings, 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 MEASUREMENTS





The
following disclosures show the hierarchal disclosure framework associated with
the level of pricing observations utilized in measuring assets and liabilities
at fair value.  The three broad levels defined by U.S. generally
accepted accounting principles are as follows:





Level
      I:
            Quoted
      prices are available in active markets for identical assets or liabilities
      as of the reported date.





Level
      II:
            Pricing
      inputs are other than the quoted prices in active markets, which are
      either directly or indirectly observable as of the reported
      date.  The nature of these assets and liabilities includes items
      for which quoted prices are available but traded less frequently and items
      that are fair-valued using other financial instruments, the parameters of
      which can be directly observed.





Level
      III:
            Valuations
      derived from valuation techniques in which one or more significant inputs
      or significant value drivers are
unobservable.





This
hierarchy requires the use of observable market data when
available.





The
following table presents the assets reported on the balance sheet at their fair
value as of December 31, 2009 and 2008, by level within the fair value
hierarchy.  Financial assets and liabilities are classified in their
entirety based on the lowest level of input that is significant to the fair
value measurement.





December 31, 2009Level I
                        
                        
                        Level II
                        
                        
                        Level III
                        
                        
                        TotalAssets:Investment
      securitiesavailable
      for sale:Mortgage-backed
      securities
                        
                        $
                        -
                        
                        
                        $
                        18,159,405
                        
                        
                        $
                        -
                        
                        
                        $
                        18,159,405Corporate
      securities
                        
                        
                        -
                        
                        
                        
                        12,424,682
                        
                        
                        
                        -
                        
                        
                        
                        12,424,682Equity
      securities
                        
                        
                        -
                        
                        
                        
                        17,500
                        
                        
                        
                        -
                        
                        
                        
                        17,500$
                        -
                        
                        
                        $
                        30,601,587
                        
                        
                        $
                        -
                        
                        
                        $
                        30,601,587$
                        -
                        
                        
                        $
                        30,601,587
                        
                        
                        $
                        -
                        
                        
                        $
                        30,601,587





December
      31, 2008Level
      I
                        
                        
                        Level
      II
                        
                        
                        Level
      III
                        
                        
                        TotalAssets:Investment
      securitiesavailable
      for sale:Mortgage-backed
      securities
                        
                        $
                        -
                        
                        
                        $
                        33,409,451
                        
                        
                        $
                        -
                        
                        
                        $
                        33,409,451Corporate
      securities
                        
                        
                        -
                        
                        
                        
                        4,373,986
                        
                        
                        
                        -
                        
                        
                        
                        4,373,986Equity
      securities
                        
                        
                        -
                        
                        
                        
                        5,450
                        
                        
                        
                        -
                        
                        
                        
                        5,450$
                        -
                        
                        
                        $
                        37,788,887
                        
                        
                        $
                        -
                        
                        
                        $
                        37,788,887$
                        -
                        
                        
                        $
                        37,788,887
                        
                        
                        $
                        -
                        
                        
                        $
                        37,788,887


F-26





15.
            FAIR
      VALUE DISCLOSURE





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





December 31, 2009
                        
                        
                        December 31, 2008Carrying
                        
                        
                        Fair
                        
                        
                        Carrying
                        
                        
                        FairValue
                        
                        
                        Value
                        
                        
                        Value
                        
                        
                        ValueFinancial
      assets:Cash
      and cash equivalents
                        
                        $
                        8,426,530
                        
                        
                        $
                        8,426,530
                        
                        
                        $
                        4,670,942
                        
                        
                        $
                        4,670,942Investment
      securitiesAvailable
      for sale
                        
                        
                        30,601,587
                        
                        
                        
                        30,601,587
                        
                        
                        
                        37,788,887
                        
                        
                        
                        37,788,887Held
      to maturity
                        
                        
                        13,780,267
                        
                        
                        
                        13,780,267
                        
                        
                        
                        -
                        
                        
                        
                        -Net
      loans receivable
                        
                        
                        150,177,130
                        
                        
                        
                        156,195,753
                        
                        
                        
                        163,758,907
                        
                        
                        
                        168,774,162Accrued
      interest receivable
                        
                        
                        930,336
                        
                        
                        
                        930,336
                        
                        
                        
                        881,954
                        
                        
                        
                        881,954Federal
      Home Loan Bank stock
                        
                        
                        2,279,200
                        
                        
                        
                        2,279,200
                        
                        
                        
                        2,279,200
                        
                        
                        
                        2,279,200Bank-owned
      life insurance
                        
                        
                        4,053,225
                        
                        
                        
                        4,053,225
                        
                        
                        
                        3,936,358
                        
                        
                        
                        3,936,358Financial
      liabilities:Deposits
                        
                        $
                        164,207,245
                        
                        
                        $
                        166,885,243
                        
                        
                        $
                        164,586,405
                        
                        
                        $
                        170,256,832FHLB
      advances - short-term
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        4,000,000
                        
                        
                        
                        4,000,000FHLB
      advances - long-term
                        
                        
                        26,473,524
                        
                        
                        
                        27,365,487
                        
                        
                        
                        24,553,349
                        
                        
                        
                        25,878,974Advances
      by borrowersfor
      taxes and insurance
                        
                        
                        1,280,863
                        
                        
                        
                        1,280,863
                        
                        
                        
                        1,413,396
                        
                        
                        
                        1,413,396Accrued
      interest payable
                        
                        
                        63,647
                        
                        
                        
                        63,647
                        
                        
                        
                        63,867
                        
                        
                        
                        63,867





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.





Investment Securities
Available for Sale and Held to Maturity





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.


F-27


15.
            FAIR
      VALUE DISCLOSURE (Continued)





Net Loans
Receivable





The fair
value is estimated by discounting future cash flows using current market inputs
at which loans with similar terms and qualities would be made to borrowers of
similar credit quality.  Where quoted market prices were available,
primarily for certain residential mortgage loans, such market rates were
utilized as estimates for fair value.





Deposits and Other Borrowed
Funds





The fair
values of certificates of deposit and other borrowed funds are based on the
discounted value of contractual cash flows.  The discount rates are
estimated using rates currently offered for similar instruments with similar
remaining maturities.  Demand, savings, and money market deposits are
valued at the amount payable on demand as of year-end.





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 11.


F-28





16.
            PARENT
      COMPANY





Condensed
financial statements of Polonia Bancorp are as follows:





CONDENSED
BALANCE SHEET





December
      31,2009
                  
                  
                  2008ASSETSCash
                  
                  $
                  3,170,220
                  
                  
                  $
                  3,363,830Loans
      receivable
                  
                  
                  1,036,840
                  
                  
                  
                  1,123,243Investment
      in subsidiary
                  
                  
                  19,832,680
                  
                  
                  
                  19,430,322Other
      assets
                  
                  
                  120,719
                  
                  
                  
                  113,384TOTAL
      ASSETS
                  
                  $
                  24,160,459
                  
                  
                  $
                  24,030,779LIABILITIES
      AND STOCKHOLDERS' EQUITYOther
      liabilities
                  
                  $
                  315,500
                  
                  
                  $
                  427,098Stockholders'
      equity
                  
                  
                  23,844,959
                  
                  
                  
                  23,603,681TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                  
                  $
                  24,160,459
                  
                  
                  $
                  24,030,779





CONDENSED
STATEMENT OF INCOME





Year Ended December 31,2009
                    
                    
                    2008INCOMEESOP
      loan interest income
                    
                    $
                    98,668
                    
                    
                    $
                    103,102Investment
      income
                    
                    
                    62,995
                    
                    
                    
                    111,939Total
      income
                    
                    
                    161,663
                    
                    
                    
                    215,041EXPENSES
                    
                    
                    211,469
                    
                    
                    
                    218,948Loss
      before income tax expense
                    
                    
                    (49,806
                    )
                    
                    
                    (3,907
                    )Income
      tax expense
                    
                    
                    21,396
                    
                    
                    
                    1,413Loss
      before equity in undistributedearnings
      of subsidiary
                    
                    
                    (71,202
                    )
                    
                    
                    (5,320
                    )Equity
      in undistributed earnings of subsidiary
                    
                    
                    402,544
                    
                    
                    
                    (240,832
                    )NET
      INCOME (LOSS)
                    
                    $
                    331,342
                    
                    
                    $
                    (246,152
                    )


F-29


16.
            PARENT
      COMPANY (Continued)





CONDENSED
STATEMENT OF CASH FLOWS





Year Ended December 31,2009
                    
                    
                    2008OPERATING
      ACTIVITIESNet
      income (loss)
                    
                    $
                    331,342
                    
                    
                    $
                    (246,152
                    )Adjustments
      to reconcile net income (loss) tonet
      cash provided by (used for) operating activities:Equity
      in undistributed earnings of subsidiary
                    
                    
                    (402,544
                    )
                    
                    
                    240,832Stock
      compensation expense
                    
                    
                    265,117
                    
                    
                    
                    326,820Other,
      net
                    
                    
                    (118,935
                    )
                    
                    
                    (145,435
                    )Net
      cash provided by operating activities
                    
                    
                    74,980
                    
                    
                    
                    176,065FINANCING
      ACTIVITIESPurchase
      of treasury stock
                    
                    
                    (268,590
                    )
                    
                    
                    (983,145
                    )Net
      cash (used for) provided by financing activities
                    
                    
                    (268,590
                    )
                    
                    
                    (983,145
                    )Decrease
      in cash
                    
                    
                    (193,610
                    )
                    
                    
                    (807,080
                    )CASH
      AT BEGINNING OF PERIOD
                    
                    
                    3,363,830
                    
                    
                    
                    4,170,910CASH
      AT END OF PERIOD
                    
                    $
                    3,170,220
                    
                    
                    $
                    3,363,830




F-30


17.
            SELECTED
      QUARTERLY DATA (Unaudited)





Three Months EndedMarch 31,
                      
                      
                      June 30,
                      
                      
                      September 30,
                      
                      
                      December 31,2009
                      
                      
                      2009
                      
                      
                      2009
                      
                      
                      2009Total
      interest income
                      
                      $
                      2,752,754
                      
                      
                      $
                      2,696,094
                      
                      
                      $
                      2,656,452
                      
                      
                      $
                      2,602,193Total
      interest expense
                      
                      
                      1,340,048
                      
                      
                      
                      1,288,966
                      
                      
                      
                      1,217,880
                      
                      
                      
                      1,153,340Net
      interest income
                      
                      
                      1,412,706
                      
                      
                      
                      1,407,128
                      
                      
                      
                      1,438,572
                      
                      
                      
                      1,448,853Provision
      for loan losses
                      
                      
                      105,328
                      
                      
                      
                      113,712
                      
                      
                      
                      80,304
                      
                      
                      
                      (46,855
                      )Net
      interest income afterprovision
      for loan losses
                      
                      
                      1,307,378
                      
                      
                      
                      1,293,416
                      
                      
                      
                      1,358,268
                      
                      
                      
                      1,495,708Total
      noninterest income
                      
                      
                      205,719
                      
                      
                      
                      244,271
                      
                      
                      
                      233,485
                      
                      
                      
                      760,420Total
      noninterest expense
                      
                      
                      1,666,295
                      
                      
                      
                      1,626,810
                      
                      
                      
                      1,551,849
                      
                      
                      
                      1,713,945Income
      (loss) before income taxes
                      
                      
                      (153,198
                      )
                      
                      
                      (89,123
                      )
                      
                      
                      39,904
                      
                      
                      
                      542,183Income
      taxes (benefit)
                      
                      
                      (38,368
                      )
                      
                      
                      (44,495
                      )
                      
                      
                      15,421
                      
                      
                      
                      75,866Net
      income (loss)
                      
                      $
                      (114,830
                      )
                      
                      $
                      (44,628
                      )
                      
                      $
                      24,483
                      
                      
                      $
                      466,317Per
      share data:Net
      income (loss)Basic
      and diluted
                      
                      $
                      (0.04
                      )
                      
                      $
                      (0.01
                      )
                      
                      $
                      0.01
                      
                      
                      $
                      0.15Average
      shares outstandingBasic
      and diluted
                      
                      
                      3,013,469
                      
                      
                      
                      3,011,203
                      
                      
                      
                      3,014,501
                      
                      
                      
                      3,017,567





Three Months EndedMarch 31,
                    
                    
                    June 30,
                    
                    
                    September 30,
                    
                    
                    December 31,2008
                    
                    
                    2008
                    
                    
                    2008
                    
                    
                    2008Total
      interest income
                    
                    $
                    2,614,736
                    
                    
                    $
                    2,712,306
                    
                    
                    $
                    2,848,464
                    
                    
                    $
                    2,893,693Total
      interest expense
                    
                    
                    1,268,893
                    
                    
                    
                    1,262,059
                    
                    
                    
                    1,391,422
                    
                    
                    
                    1,389,598Net
      interest income
                    
                    
                    1,345,843
                    
                    
                    
                    1,450,247
                    
                    
                    
                    1,457,042
                    
                    
                    
                    1,504,095Provision
      for loan losses
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    84,992
                    
                    
                    
                    -Net
      interest income afterprovision
      for loan losses
                    
                    
                    1,345,843
                    
                    
                    
                    1,450,247
                    
                    
                    
                    1,372,050
                    
                    
                    
                    1,504,095Total
      noninterest income
                    
                    
                    126,416
                    
                    
                    
                    132,325
                    
                    
                    
                    (229,084
                    )
                    
                    
                    54,789Total
      noninterest expense
                    
                    
                    1,538,862
                    
                    
                    
                    1,563,857
                    
                    
                    
                    1,504,669
                    
                    
                    
                    1,493,642Income
      (loss) before income taxes
                    
                    
                    (66,603
                    )
                    
                    
                    18,715
                    
                    
                    
                    (361,703
                    )
                    
                    
                    65,242Income
      taxes (benefit)
                    
                    
                    (10,374
                    )
                    
                    
                    21,639
                    
                    
                    
                    34,145
                    
                    
                    
                    (143,608
                    )Net
      income (loss)
                    
                    $
                    (56,229
                    )
                    
                    $
                    (2,924
                    )
                    
                    $
                    (395,848
                    )
                    
                    $
                    208,850Per
      share data:Net
      income (loss)Basic
      and diluted
                    
                    $
                    (0.02
                    )
                    
                    $
                    -
                    
                    
                    $
                    (0.13
                    )
                    
                    $
                    0.07Average
      shares outstandingBasic
      and diluted
                    
                    
                    3,128,369
                    
                    
                    
                    3,106,095
                    
                    
                    
                    3,056,112
                    
                    
                    
                    3,036,827





F-31