Securities and Exchange Commission

Washington, D.C. 20549

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

For the fiscal year ended December 31, 2008

¨	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

(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, 3rd 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

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 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 $9,535,165. For purposes of this calculation, officers and directors of the Registrant are considered affiliates.

At March 25, 2009, the Registrant had 3,161,060 shares of $0.01 par value common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement for the 2009 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

		Page

PART I

Item 1.	Business	1
Item 1A.	Risk Factors	5
Item 1B.	Unresolved Staff Comments	16
Item 2.	Properties	17
Item 3.	Legal Proceedings	17
Item 4.	Submission of Matters to a Vote of Security Holders	17

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	18
Item 6.	Selected Financial Data	19
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 8.	Financial Statements and Supplementary Data	39
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	39
Item 9A(T).	Controls and Procedures	39
Item 9B.	Other Information	39

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	40
Item 11.	Executive Compensation	40
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	40
Item 13.	Certain Relationships and Related Transactions, and Director Independence	41
Item 14.	Principal Accountant Fees and Services	41

PART IV

Item 15.	Exhibits and Financial Statement Schedules	41

Signatures

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

Management’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of Polonia Bancorp and its subsidiaries include, but are not limited to, the following: interest rate trends; the general economic climate in the market area in which we operate, as well as nationwide; our ability to control costs and expenses; competitive products and pricing; loan delinquency rates and changes in federal and state legislation and regulation. 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.

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.

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.

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, 2008, which is the most recent date for which data is available from the FDIC, we held less than 1% of the deposits in the Philadelphia metropolitan area. In addition, banks owned by large bank holding companies such as PNC Financial Services Group, Inc., Wachovia Corporation, Commerce Bancorp, Inc. and Citizens Financial Group, Inc. also operate in our market areas. These institutions are significantly larger than us and, therefore, have significantly greater resources.

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

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

General. Our loan portfolio consists primarily of one- to four-family residential real estate loans. To a much lesser extent, our loan portfolio includes multi-family and nonresidential real estate loans, home equity loans and consumer loans. We originate loans primarily for investment purposes. Currently, we only offer fixed-rate mortgage products. In 2008 we hired a commercial real estate lender with several years of experience in our local market.

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

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

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 1.25x. Environmental surveys are obtained when circumstances suggest the possibility of the presence of hazardous materials.

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, 2008, our general regulatory limit on loans to one borrower was $3.1 million. At that date, our largest lending relationship was $2.1 million and was secured by two one-to-four family properties. These loans were performing in accordance with their original terms at December 31, 2008.

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

Investment Activities

We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and municipal governments, mortgage-backed securities, deposits at the Federal Home Loan Bank (“FHLB”) of Pittsburgh and time deposits of federally insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in mutual funds. We also are required to maintain an investment in FHLB of Pittsburgh stock. While we have the authority under applicable law to invest in derivative securities, our investment policy does not permit this investment. We had no investments in derivative securities at December 31, 2008.

At December 31, 2008 our investment portfolio totaled $37.8 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.

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.

As of December 31, 2008, we had 41 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.

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

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

We had net operating losses of $246,000, $326,000 and $219,000 for the years ended December 31, 2008, 2007 and 2006, respectively. The primary reasons for the operating losses in 2008 were the result of write-downs taken on our investment in Freddie Mac preferred stock of $412,000 and a decrease in the value of our bank-owned life insurance (“BOLI”) of $237,000. The primary reasons for the operating losses in 2007 were the result of additional expenses of $266,000 related to operating as a public company. The primary reasons for the operating losses in 2006 were non-recurring transactions related to the restructuring of our investment portfolio and due to the recognition of an other-than-temporary impairment charge related to the market value of mutual fund securities of $167,000. We incurred non-recurring restructuring charges of $0, $0 and $167,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

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 rising 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.

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, 2008, our investment portfolio included securities with a book value of $36.8 million and an estimated fair value of $37.8 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.

Future FDIC assessments will hurt our earnings.

In February 2009, the FDIC adopted an interim final rule imposing a special assessment on all insured institutions due to recent bank and savings association failures. The emergency assessment amounts to 20 basis points of assessable deposits as of June 30, 2009. The assessment will be collected on September 30, 2009. The special assessment will negatively impact the Company’s earnings and the Company expects that non-interest expenses will increase approximately $330,000 in 2009 as compared to 2008. In addition, the interim rule would also permit the FDIC to impose additional emergency special assessments after June 30, 2009, of up to 10 basis points per quarter if necessary to maintain public confidence in federal deposit insurance or as a result of deterioration in the deposit insurance fund reserve ratio due to institution failures. Any additional emergency special assessment imposed by the FDIC will further hurt the Company’s earnings.

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.

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

Our operating expenses, which consist primarily of salaries and employee benefits, occupancy, furniture and equipment expense, professional fees and data processing expense, totaled $6.1 million and $5.9 million for the years ended December 31, 2008 and 2007, respectively. Our ratio of non-interest expense to average total assets was 2.89% and 2.99% for the years ended December 31, 2008 and 2007, respectively. Our efficiency ratio totaled 104.4% for 2008 compared to 108.5% for 2007. The increase in expenses during 2008 was primarily due to higher compensation and employee benefits. 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, 2008, 17.2% 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, 2008, 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.

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

Return on equity, which equals net income divided by average equity, is a ratio used by many investors to compare the performance of a particular company with other companies. For the year ended December 31, 2008, our annualized return on equity was negative 1.04%. Over time, we intend to use the net proceeds from our recent stock offering to increase earnings per share and book value per share, without assuming undue risk, with the goal of achieving a return on equity that is competitive with other publicly held subsidiaries of mutual holding companies. This goal could take a number of years to achieve, and we cannot assure you that it will be attained. Consequently, you should not expect a competitive return on equity in the near future. Failure to achieve a competitive return on equity might make an investment in our common stock unattractive to some investors and might cause our common stock to trade at lower prices than comparable companies with higher returns on equity.

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

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

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

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

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

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

Regulation and Supervision

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.

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.

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, 2008, Polonia Bank met each of its capital requirements.

The following table presents Polonia Bank’s capital position at December 31, 2008.

	Capital
	Actual		Required		Excess
	(Dollars in thousands)

Tangible	$	19,898	$	4,392	$	15,506
Tier 1/Leverage		19,898		8,783		11,115
Tier 1/Risk-based		19,898		4,432		15,466
Total/Risk-based		20,756		8,863		11,893

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

Insurance of Deposit Accounts. Polonia Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Deposit Insurance Fund is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. Under the FDIC’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. An institution’s assessment rate depends upon the category to which it is assigned, with less risky institutions paying lower assessments. For 2008, assessments ranged from five to 43 basis points of assessable deposits. No institution may pay a dividend if in default of the federal deposit insurance assessment.

Due to losses incurred by the Deposit Insurance Fund from failed institutions in 2008, and anticipated future losses, the FDIC adopted, pursuant to a Restoration Plan to replenish the fund, an across the board seven basis point increase in the assessment range for the first quarter of 2009. The FDIC subsequently adopted further refinements to its risk-based assessment system, effective April 1, 2009, that effectively make the range seven to 77.5 basis points. The FDIC 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. The FDIC has also imposed on all insured institutions an emergency special assessment of 20 basis points of assessable deposits as of June 30, 2009 in order to cover losses to the Deposit Insurance Fund and has mentioned the possibility of additional emergency assessments of up to ten basis points per quarter, as deemed necessary.

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, 2010. In addition, the FDIC adopted an optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest bearing transaction accounts would receive unlimited insurance coverage until December 31, 2009 and certain senior unsecured debt issued by institutions and their holding companies would be guaranteed by the FDIC for a limited period. 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.

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

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund. That payment is established quarterly and during the calendar year ending December 31, 2008 averaged 1.12 basis points of assessable deposits.

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

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

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

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

A savings association that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. As of December 31, 2008, Polonia Bank maintained 91.2% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test.

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

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, 2008 totaled $69,000.

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, 2008 of $2.3 million.

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

Federal Reserve System

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

Federal and State Taxation

Federal Income Taxation

General. We report our income on a fiscal year basis using the accrual method of accounting. The federal income tax laws apply to us in the same manner as to other corporations with some exceptions, including our reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to us. For its 2008 year, Polonia Bancorp’s maximum federal income tax rate was 34%.

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

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

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.

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

ITEM 1B.

UNRESOLVED STAFF COMMENTS

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, 2008.

Location	Original Year Leased or Acquired	Leased, Licensed or Owned	Net Book Value of Property or Leasehold Improvements at December 31, 2008 (In thousands)

Main/Executive Office:
3993 Huntingdon Pike Huntingdon Valley, Pennsylvania 19006	1996	Owned	$	2,459

Branch Offices:
2646 East Allegheny Avenue Philadelphia, Pennsylvania 19134	1970	Owned	$	1,294

2133 Spring Garden Street Philadelphia, Pennsylvania 19130	1979	Owned	$	295

2628 Orthodox Street Philadelphia, Pennsylvania 19137	1999	Owned	$	122

8000 Frankford Avenue Philadelphia, Pennsylvania 19136	1992	Owned	$	412

ITEM 3.

LEGAL PROCEEDINGS

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

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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.” The Company completed its initial public offering on January 11, 2007 and commenced trading on January 16, 2007.

	High		Low			High		Low
2008:					2007:

First Quarter	$	10.27	$	8.10	First Quarter	$	10.25	$	9.75
Second Quarter		10.00		7.80	Second Quarter		10.05		9.55
Third Quarter		9.00		7.00	Third Quarter		10.20		8.85
Fourth Quarter		9.00		8.10	Fourth Quarter		9.98		8.05

As of March 25, 2009 there were approximately 196 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. Based on the results of fiscal 2007 and 2008, Polonia Bank would not be permitted to dividend funds to Polonia Bancorp without OTS approval.

As of December 31, 2008, 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’s repurchases of equity securities for the fourth quarter of 2008 were as follows:

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs

October 1 - 31, 2008		13,500	$	8.60		13,500		47,741
November 1 - 30, 2008		13,200		8.60		13,200		34,541
December 1 - 31, 2008		-		-		-		-

Total		26,700	$	8.60		26,700

(1) On March 4, 2008, the Company announced that the Board of Directors had approved a stock repurchase program authorizing the company to repurchase up to 148,741 shares of the Company's common stock.

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.

	2008			2007			2006
(Dollars in thousands, except per share data)							(Bank only data)
Financial Condition Data:
Total assets	$	220,236		$	200,597		$	203,374
Securities available-for-sale		37,789			45,885			45,681
Loans receivable, net		163,759			137,280			111,923
Cash and cash equivalents		4,671			3,826			31,866
Deposits		164,586			163,217			157,722
FHLB advances short-term		4,000			6,000			–
FHLB advances long-term		24,553			4,098			6,245
Stockholders’ equity		23,604			23,994			11,777
Book value per common share		7.40			7.26			N/A

Operating Data:
Interest income	$	11,069		$	10,297		$	8,590
Interest expense		5,312			5,639			4,240
Net interest income		5,757			4,658			4,350
Provision for loan losses		85			31			58
Net interest income after provision for loan losses		5,672			4,627			4,292
Non-interest income		85			760			650
Non-interest expense		6,101			5,878			5,363
Loss before income taxes		(344	)		(491	)		(421	)
Provision for income taxes		(98	)		(165	)		(202	)
Net loss	$	(246	)	$	(326	)	$	(219	)
Basic and diluted earnings per share		(0.08	)		(0.10	)		N/A

Performance Ratios:
Return on average assets		(0.12	)%		(0.17	)%		(0.13	)%
Return on average equity		(1.04	)		(1.37	)		(1.87	)
Interest rate spread(1)		2.63			2.19			2.67
Net interest margin(2)		2.89			2.53			2.78
Noninterest expense to average assets		2.89			2.99			3.17
Efficiency ratio(3)		104.43			108.45			107.26
Average interest-earning assets to average interest-bearing liabilities		109.76			111.23			104.04
Average equity to average assets		11.15			12.10			6.91

Capital Ratios (4):
Tangible capital		9.06			10.03			5.91
Core capital		9.06			10.03			5.91
Total risk-based capital		18.73			21.65			14.49

	2008			2007			2006
	(Dollars in thousands)
Asset Quality Ratios:
Allowance for loan losses as a percent of total loans		0.52	%		0.53	%		0.62	%
Allowance for loan losses as a percent of nonperforming loans		117.70			338.43			253.64
Net charge-offs (recoveries) to average outstanding loans during the period		(0.03	)		(0.01	)		0.01
Non-performing loans as a percent of total loans		0.44			0.16			0.24

Other Data:
Number of:
Real estate loans outstanding		1,082			1,020			939
Deposit accounts		9,468			9,863			10,942
Full-service offices		5			5			5

(1)

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

(2)

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

(3)

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

(4)

Ratios are for Polonia Bank.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

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

Salaries and employee benefits consist primarily of: salaries and wages paid to our employees; payroll taxes; and expenses for health insurance and other employee benefits. We have incurred additional annual employee compensation expenses in fiscal 2008 stemming from the adoption of an equity incentive plan.

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

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

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

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

Critical Accounting Policies

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

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

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

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

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, 2008, our ratio of loans to total assets was 74.4%.

The largest segment of our loan portfolio is one-to four-family residential loans. At December 31, 2008, these loans totaled $144.5 million and represented 87.7% of total loans, compared to $120.8 million, or 87.4% of total loans, at December 31, 2007. The size of our one- to four-family residential loan portfolio increased during the year ended December 31, 2008 due primarily to the hiring of two one- to four-family loan originators who have been active in the funding of originations throughout our lending territory.

Home equity loans totaled $4.2 million and represented 2.5% of total loans at December 31, 2008, compared to $4.3 million, or 3.1% of total loans at December 31, 2007. Home equity loans decreased $100,000 or 2.3% during the year ended December 31, 2008. Home equity lines of credit totaled $1.4 million and represented 0.8% of total loans at December 31, 2008 compared to $980,000 or 0.7% at total loans at December 31, 2007.

Multi-family and commercial real estate loans totaled $12.0 million and represented 7.3% of total loans at December 31, 2008, compared to $9.8 million, or 7.1% of total loans, at December 31, 2007. Multi-family and commercial real estate loans increased $2.2 million, or 22.4%, during the year ended December 31, 2008. The increase in multi-family and commercial real estate loans in 2008 was due to new loan participations.

Consumer loans totaled $2.8 million and represented 1.7% of total loans at December 31, 2008 compared to $2.3 million, or 1.6% of total loans at December 31, 2007. Consumer loans increased $500,000, or 22.1%, during the year ended December 31, 2008.

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

	At December 31,
	2008					2007					2006					2005					2004
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Real estate loans:
One- to four-family	$	144,508		87.68	%	$	120,774		87.42	%	$	100,152		88.84	%	$	88,873		90.96	%	$	87,653		89.99	%
Multi-family and commercial real estate		12,020		7.29			9,803		7.09			5,212		4.62			3,563		3.65			3,611		3.71
Home equity loans		4,172		2.53			4,343		3.14			4,229		3.75			2,558		2.61			2,705		2.78
Home equity lines of credit		1,361		0.83			980		0.71			980		0.87			–		–			–		–
Total real estate loans	$	162,061		98.33		$	135,900		98.36		$	110,573		98.08		$	94,994		97.22		$	93,969		96.48

Consumer:
Education	$	2,690		1.63		$	2,170		1.57		$	2,137		1.90		$	2,679		2.74		$	3,117		3.19
Loans on savings accounts		59		0.04			85		0.06			27		0.02			38		0.04			154		0.16
Other		1		–			5		0.01			1		–			2		–			162		0.17
Total consumer loans		2,750		1.67			2,260		1.64			2,165		1.90			2,719		2.78			3,433		3.52
Total loans		164,811		100.00	%		138,160		100.00	%		112,738		100.00	%		97,713		100.00	%		97,402		100.00	%

Net deferred loan fees		195					149					120					157					254
Allowance for loan losses		857					731					695					651					692
Loans, net	$	163,759				$	137,280				$	111,923				$	96,905				$	96,456

The following table sets forth certain information at December 31, 2008 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	$	18	$	700	$	980	$	1,083	$	2,781
More than one to five years		2,018		1,858		334		890		5,100
More than five years		142,472		9,462		4,219		777		156,930
Total	$	144,508	$	12,020	$	5,533	$	2,750	$	164,811

The following table sets forth the dollar amount of all loans at December 31, 2008 that are due after December 31, 2009.

	Fixed Rate		Adjustable Rate
	(Dollars in thousands)
Real estate loans:
One- to four-family	$	144,490	$	–
Multi-family and commercial real estate		11,320		–
Home equity loans and lines of credit		4,172		381
Consumer loans		1,667		–
Total	$	161,649	$	381

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

	December 31, 2008			December 31, 2007			December 31, 2006
	(Dollars in thousands)

Total loans at beginning of period	$	138,160		$	112,738		$	97,713
Loans originated:
Real estate loans:
One- to four-family		40,121			30,470			21,947
Multi-family and commercial real estate		710			3,441			1,606
Home equity loans and lines of credit		1,531			1,036			3,537
Consumer		903			548			477
Total loans originated		43,265			35,495			27,567
Loans purchased		2,966			3,855			3,581
Deduct:
Real estate loan principal repayments		(13,742	)		(13,928	)		(16,123	)
Loans sold		(5,838	)		–			–
Total deductions		(19,580	)		(13,928	)		(16,123	)
Net loan activity		26,651			25,422			15,025
Total loans at end of period	$	164,811		$	138,160		$	112,738

Securities. Our securities portfolio consists primarily of mortgage-backed securities. The weighted average rate of our securities portfolio was 5.25% as of December 31, 2008 as compared to 5.30% as of December 31, 2007 and the weighted average maturity was 14 years as of December 31, 2008 and 2007, respectively. Investment securities available for sale decreased $8.1 million to $37.8 million from $45.9 million at December 31, 2007. The reason for the decrease was due to payments, calls and maturities. The following table sets forth the amortized cost and fair values of our securities portfolio at the dates indicated.

	At December 31,
	2008				2007				2006
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Securities available-for-sale:
Fannie Mae	$	23,870	$	24,628	$	24,744	$	24,970	$	25,301	$	25,044
Freddie Mac		6,835		7,000		8,594		8,601		10,715		10,571
Government National Mortgage Association		1,628		1,688		2,006		2,057		2,404		2,420
Other		98		94		157		157		257		253
Total mortgage-backed securities		32,431		33,410		35,501		35,785		38,677		38,288

U.S. government agency securities		–		–		4,108		4,131		1,400		1,356
Corporate securities		4,346		4,374		5,630		5,632		5,630		5,587
Total debt securities		36,777		37,784		45,239		45,548		45,707		45,231
Equity securities		19		5		430		337		430		451
Total	$	36,796	$	37,789	$	45,669	$	45,885	$	46,137	$	45,682

At December 31, 2008, 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, 2008.

The following table sets forth the stated maturities and weighted average yields of securities at December 31, 2008. Certain mortgage-backed securities have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below. Yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.

	One Year or Less					More than One Year to Five Years					More than Five Years to Ten Years					More than Ten Years					Total
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
	(Dollars in thousands)
Securities available-for-sale:
Fannie Mae	$	–		–	%	$	167		5.52	%	$	10,145		5.10	%	$	13,558		5.10	%	$	23,870		5.10	%
Freddie Mac		–		–			–		–			3,696		4.86			3,139		5.32			6,835		5.07
Government National Mortgage Association		–		–			13		6.95			38		7.23			1,577		6.28			1,628		6.31
Other		–		–			–		–			–		–			98		4.94			98		4.94
U.S. Government agency securities		–		–			–		–			–		–			–		–			–		–
Corporate securities		1,349		6.54			–		–			–		–			2,997		5.67			4,346		5.94
Equity securities		–		–			–		–			–		–			–		–			–		–
Total	$	1,349		6.54	%	$	180		5.63	%	$	13,879		5.04	%	$	21,369		5.30	%	$	36,777		5.25	%

Deposits. Our primary source of funds is our deposit accounts, which are comprised of noninterest-bearing accounts, interest-bearing demand accounts, money market accounts, savings accounts and time deposits. These deposits are provided primarily by individuals who live or work within our market areas. We have not used brokered deposits as a source of funding. Deposits increased $1.4 million, or 0.9% for the year ended December 31, 2008, and was attributable, in part, to the offering of a competitive certificate of deposit during the year, as well as increased advertising and the introduction of an Automatic Transfer product and a No Minimum Balance Checking account.

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

	At December 31,
	2008					2007					2006
	Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)

Noninterest-bearing accounts	$	3,986		2.42	%	$	3,455		2.12	%	$	4,190		2.66	%
NOW accounts		10,301		6.26			11,223		6.88			12,128		7.69
Money market		25,603		15.56			33,101		20.28			24,235		15.37
Savings accounts		34,346		20.87			36,193		22.17			41,664		26.42
Time deposits		90,350		54.89			79,245		48.55			75,505		47.86
Total	$	164,586		100.00	%	$	163,217		100.00	%	$	157,722		100.00	%

Maturity Period	Time Deposits
	(Dollars in thousands)

3 Months or less	$	720
Over 3 Through 6 Months		856
Over 6 Through 12 Months		5,575
Over 12 Months		12,844
Total	$	19,995

	Amount Due
	Less Than One Year		More Than One Year to Two Years		More Than Two Years to Three Years		More Than Three Years to Four Years		More Than Four Years		Total		Percent of Total Certificate Accounts
	(Dollars in thousands)

1.00 – 1.99%	$	–	$	–	$	–	$	–	$	–	$	–		0.00	%
2.00 – 3.99%		31,650		10,203		792		303		13,233		56,181		62.18
4.00 – 5.99%		7,576		6,321		13,379		4,909		1,910		34,095		37.74
6.00 – 7.99%		74		–		–		–		–		74		0.08
Total	$	39,300	$	16,524	$	14,171	$	5,212	$	15,143	$	90,350		100.00	%

	Year Ended December 31,
	2008			2007			2006
	(Dollars in thousands)
Maximum amount of advances outstanding at any month end during the period:
FHLB Advances	$	28,553		$	10,508		$	17,353
Average advances outstanding during the period:
FHLB Advances	$	20,084		$	6,372		$	10,983
Weighted average interest rate during the period:
FHLB Advances		3.02	%		3.93	%		3.94	%
Balance outstanding at end of period:
FHLB Advances	$	28,553		$	10,098		$	6,245
Weighted average interest rate at end of period:
FHLB Advances		2.81	%		3.81	%		3.69	%

	Year Ended December 31,
	2008								2007								2006
	Average 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	$	153,077		$	8,908		5.82	%	$	124,622		$	7,254		5.82	%	$	103,806		$	6,011		5.79	%
Investment securities		39,310			2,014		5.12			45,652			2,361		5.17			46,025			2,237		4.86
Other interest earning assets		6,624			147		2.22			13,543			682		5.04			6,723			342		5.09
Total interest-earning assets		199,011			11,069		5.56	%		183,817			10,297		5.60	%		156,554			8,590		5.49	%
Noninterest-earning assets		13,122								13,243								13,298
Allowance for Loan Losses		(787	)							(727	)							(569	)
Total assets	$	211,346							$	196,333							$	169,283

Liabilities and equity:
Interest-bearing liabilities:
NOW accounts	$	11,667			96		0.82	%	$	11,411			68		0.60	%	$	12,718			68		0.53	%
Money market deposits		26,949			818		3.04			33,241			1,615		4.86			6,796			346		5.09
Savings accounts		35,647			310		0.87			38,947			318		0.82			52,090			357		0.69
Time deposits		85,740			3,456		4.03			74,262			3,366		4.53			66,980			3,017		4.50
Total interest-bearing deposits		160,003			4,680		2.93			157,861			5,367		3.40			138,584			3,788		2.73
FHLB advances – short-term		2,074			51		2.46			1,271			60		4.72			2,083			105		5.04
FHLB advances – long-term		18,010			556		3.09			5,101			190		3.72			8,900			328		3.69
Advances by borrowers for taxes and insurance		1,230			25		2.03			1,031			21		2.04			901			19		2.11
Total interest-bearing liabilities		181,317			5,312		2.93	%		165,264			5,638		3.41	%		150,468			4,240		2.82	%
Non-interest-bearing liabilities		6,457								7,311								7,125
Total liabilities		187,774								172,575								157,593
Stockholders equity		23,572								23,758								11,690
Total liabilities and stockholders’ equity	$	211,346							$	196,333							$	169,283

Net interest income				$	5,757							$	4,659							$	4,350
Interest rate spread							2.63	%							2.19	%							2.67	%
Net interest margin							2.89	%							2.53	%							2.78	%
Average interest-earning assets to average interest-bearing liabilities							109.76	%							111.23	%							104.04	%

	For the Year Ended December 31, 2008 Compared to Year Ended December 31, 2007									For the Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Net			Volume			Rate			Net
	(Dollars in thousands)
Interest and dividend income:
Loans receivable	$	1,656		$	(2	)	$	1,654		$	1,211		$	32		$	1,243
Investment securities		(325	)		(22	)		(347	)		(18	)		142			124
Other		(255	)		(280	)		(535	)		343			(3	)		340
Total interest-earning assets	$	1,076		$	(304	)	$	772		$	1,536		$	171		$	1,707

Interest expense:
NOW accounts	$	2		$	25		$	27		$	–		$	–		$	–
Money market deposits		(267	)		(530	)		(797	)		1,284			(15	)		1,269
Savings accounts		(35	)		27			(8	)		(161	)		122			(39	)
Time deposits		317			(227	)		90			330			19			349
Short-term borrowings		(37	)		28			(9	)		(39	)		(6	)		(45	)
Other borrowings		393			(27	)		366			(142	)		4			(138	)
Advances by borrowers for taxes and insurance		4			–			4			3			(1	)		2
Total interest-bearing liabilities	$	376		$	(702	)	$	(214	)	$	1,275		$	123		$	1,398

CChange in net interest income	$	699		$	399		$	1,098		$	261		$	48		$	309

	Year Ended December 31,

	2008			2007
	(Dollars in thousands)

Compensation and employee benefits	$	3,332		$	2,961
Occupancy and equipment		1,072			1,036
Federal deposit insurance premiums		121			138
Data processing expense		271			262
Professional fees		315			474
Other		990			1,007
Total non-interest expense	$	6,101		$	5,878

Efficiency ratio		104.43	%		108.45	%

	December 31,
	2008			2007			2006			2005			2004
	(Dollars in thousands)

Allowance at beginning of period	$	731		$	695		$	651		$	692		$	736
Provision for loan losses		85			31			58			–			–
Charge-offs:
One-to four-family		–			–			(19	)		(66	)		(49	)
Multi-family and commercial real estate		–			–			–			–			–
Home equity loans and lines of credit		–			–			–			–			–
Consumer		–			–			–			–			–
Total		–			–			(19	)		(66	)		(49	)

Recoveries:
One-to four-family		42			5			5			25			5
Multi-family and commercial real estate		–			–			–			–			–
Home equity loans		–			–			–			–			–
Consumer		–			–			–			–			–
Total		42			5			5			25			5
Net charge-offs		42			5			(14	)		(41	)		(44	)

Allowance at end of period	$	858		$	731		$	695		$	651		$	692

Allowance to nonperforming loans		118	%		338	%		254	%		230	%		188	%
Allowance to total loans outstanding at the end of the period		0.52	%		0.53	%		0.62	%		0.67	%		0.71	%
Net charge-offs (recoveries) to average loans outstanding during the period		(0.03	)%		(0.01	)%		0.01	%		0.04	%		0.05	%

	Estimated Net Portfolio Value								Net Portfolio Value as % of Portfolio Value of Assets
Basis Point (“bp”) Change in Rates	$ Amount		$ Change			% Change			NPV Ratio			Change (bp)
	(Dollars in thousands)
300	$	13,521	$	(8,390	)		(38.00	)%		6.34	%		(323	)
200		18,127		(3,784	)		(17.00	)		8.24			(134	)
100		21,073		(538	)		(2.00	)		9.46			(11	)
0		21,911		–			–			9.57			–
(100)		20,273		(1,738	)		(8.00	)		8.78			(79	)
(200)		–		–			–			–			–

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		162,003		$ 9.40		-
Equity compensation plans not approved by security holders		-		-		-
Total		162,003		$ 9.40		-

23.1	Consent of S.R. Snodgrass, A.C.
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0	Section 1350 Certification

(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).

	POLONIA BANCORP

Date: March 30, 2009	By:	/s/ Anthony J. Szuszczewicz
		Anthony J. Szuszczewicz
		Chairman, President and Chief Executive Officer

Name	Title	Date

/s/ Anthony J. Szuszczewicz	Chairman, President and Chief Executive	March 30, 2009
Anthony J. Szuszczewicz	Officer (principal executive officer)

/s/ Paul D. Rutkowski	Chief Financial Officer and Treasurer	March 30, 2009
Paul D. Rutkowski	(principal accounting and financial officer)

/s/ Dr. Eugene Andruczyk	Director	March 30, 2009
Dr. Eugene Andruczyk

/s/ Frank J. Byrne	Director	March 30, 2009
Frank J. Byrne

/s/ Edward W. Lukiewski	Director	March 30, 2009
Edward W. Lukiewski

/s/ Timothy O' Shaughnessy	Director	March 30, 2009
Timothy O' Shaughnessy

/s/ Robert J. Woltjen	Director	March 30, 2009
Robert J. Woltjen

	Page
	Number

Management’s Report on Internal Control Over Financial Reporting	F – 1

Report of Independent Registered Public Accounting Firm	F - 2

Financial Statements

Consolidated Balance Sheet	F - 3

Consolidated Statement of Income	F - 4

Consolidated Statement of Changes in Stockholders’ Equity	F - 5

Consolidated Statement of Cash Flows	F - 6

Notes to the Consolidated Financial Statements	F - 7 – F - 31

																	Accumulated
																	Other
	Common Stock				Additional			Retained			Unallocated			Treasury			Comprehensive						Comprehensive
	Shares		Amount		Paid-In-Capital			Earnings			ESOP Shares			Stock			Income (Loss)			Total			Income (Loss)

Balance, December 31, 2006		-	$	-	$	-		$	12,077,801 $			-		$	-		$	(300,808	)	$	11,776,993

Net loss									(325,571	)											(325,571	)		(325,571	)
Other comprehensive income:
Unrealized gain on available-for-sale securities, net of taxes of $228,543																		443,643			443,643			443,643
Comprehensive income																							$	118,072
Common stock issued		3,306,250		33,063		13,192,598						(1,296,050	)								11,929,611
Stock options compensation expense						31,436															31,436
Allocation of unearned ESOP shares						10,622						86,403									97,025
Allocation of unearned restricted shares						40,608															40,608

Balance, December 31, 2007		3,306,250		33,063		13,275,264			11,752,230			(1,209,647	)		-			142,835			23,993,745

Net 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			512,413
Comprehensive income																							$	266,261
Purchase of treasury stock (115,190 shares)															(983,145	)					(983,145	)
Stock options compensation expense						111,593															111,593
Allocation of unearned ESOP shares						(15,335	)					86,404									71,069
Allocation of unearned restricted stock						144,158															144,158

Balance, December 31, 2008		3,306,250	$	33,063	$	13,515,680		$	11,506,078 $			(1,123,243	)	$	(983,145	)	$	655,248		$	23,603,681

Components of other comprehensive income:								2008			2007
Changes in net unrealized gain on investment securities available for sale								$	784,003 $		$	443,643
Realized losses included in net loss, net of tax benefit of $139,910									(27,590	)		-

Total								$	512,413 $		$	443,643

	2008			2007

Weighted-average common shares outstanding		3,306,250			3,306,250

Average unearned nonvested shares		(51,946	)		(5,459	)

Average unallocated shares held by ESOP		(116,299	)		(125,176	)

Average treasury stock shares		(53,968	)		-

Weighted-average common shares and common stock equivalents used to calculate basic earnings per share		3,084,037			3,175,615

	December 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for Sale

Fannie Mae	$	23,870,316	$	766,189	$	(8,608	)	$	24,627,897
Freddie Mac		6,835,338		164,728		(549	)		6,999,517
Government National Mortgage Association securities		1,627,489		60,819		-			1,688,308
Other		98,069		19		(4,359	)		93,729
Total mortgage-backed securities		32,431,212		991,755		(13,516	)		33,409,451
Corporate securities		4,346,375		28,231		(620	)		4,373,986
Total debt securities		36,777,587		1,019,986		(14,136	)		37,783,437
Equity securities		18,500		-		(13,050	)		5,450

Total	$	36,796,087	$	1,019,986	$	(27,186	)	$	37,788,887

	December 31, 2007
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for Sale

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

Total	$	45,668,997	$	403,692	$	(187,274	)	$	45,885,415

	December 31, 2008
	Less Than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses

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	)
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	)

			Amounts
2007	Additions		Collected		2008

$ 2,788,280	$	448,167	$	1,110,896	$	2,125,551

	December 31, 2008

2009	$	39,299,695
2010		16,524,557
2011		14,171,498
2012		5,211,808
2013		15,142,603

Total	$	90,350,161

	December 31, 2008

Within three months	$	720,341
Three through six months		856,297
Six through twelve months		5,575,192
Over twelve months		12,843,430

Total	$	19,995,260

			Weighted-			Stated interest
	Maturity range		average			rate range						At December 31,
Description	from	to	interest rate			from			to			2008		2007

Convertible	03/19/18	08/27/18		3.08	%		2.13	%		4.15	%	$	17,000,000		-
Fixed-rate	02/06/13	02/06/13		3.58	%		3.58	%		3.58	%		1,500,000		-
Fixed-rate amortizing	08/26/09	12/26/12		3.85	%		3.75	%		3.87	%		2,787,349		4,098,370
Mid-term repo fixed	02/08/10	02/22/11		2.87	%		2.73	%		3.15	%		3,266,000		-

	Total											$	24,553,349	$	4,098,370

Year Ending			Weighted-
December 31,	Amount		Average Rate

2009	$	1,079,825		3.81	%
2010		2,047,330		3.03	%
2011		2,334,892		3.21	%
2012		591,302		3.87	%
2013 and thereafter		18,500,000		3.12	%

Total	$	24,553,349		3.17	%

	2008		2007

Allocated shares		17,280		8,640

Unreleased shares		112,325		120,965

Total ESOP shares		129,605		129,605

Fair value of unreleased shares	$	982,835	$	1,118,926

			Weighted-
			Average
	Number of		Grant Date
	Restricted Stock		Fair Value

Nonvested at December 31, 2007		64,800	$	9.40
Granted		-		-
Vested		15,552		9.40
Forfeited		-		-
Nonvested at December 31, 2008		49,248	$	9.40

	For the Year Ended
	2008		2007

Components of net periodic benefit cost:
Service cost	$	72,609	$	194,937
Interest cost		87,009		70,845
Net periodic benefit cost	$	159,618	$	265,782

	December 31, 2008
	Level I		Level II		Level III		Total
Assets:
Investment securities available for sale	$	-	$	37,788,887	$	-	$	37,788,887

	December 31, 2008				December 31, 2007
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value

Financial assets:
Cash and cash equivalents	$	4,670,942	$	4,670,942	$	3,825,725	$	3,825,725
Investment securities available for sale		37,788,887		37,788,887		45,885,415		45,885,415
Net loans receivable		163,758,907		168,774,162		137,279,915		135,013,465
Accrued interest receivable		881,954		881,954		848,930		848,930
Federal Home Loan Bank stock		2,279,200		2,279,200		1,270,800		1,270,800
Bank-owned life insurance		3,936,358		3,936,358		4,172,776		4,172,776

Financial liabilities:
Deposits	$	164,586,405	$	170,256,832	$	163,216,663	$	164,561,304
FHLB advances - short-term		4,000,000		4,000,000		6,000,000		6,000,000
FHLB advances - long-term		24,553,349		25,878,974		4,098,370		4,073,370
Advances by borrowers for taxes and insurance		1,413,396		1,413,396		1,224,248		1,224,248
Accrued interest payable		63,867		63,867		9,504		9,504

CONDENSED BALANCE SHEET

	December 31,
	2008		2007

ASSETS
Cash	$	3,363,830	$	4,170,910
Loans receivable		1,123,243		1,209,647
Investment in subsidiary		19,430,322		19,072,339
Other assets		113,384		103,525

TOTAL ASSETS	$	24,030,779	$	24,556,421

LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities	$	427,099	$	562,676
Stockholders' equity		23,603,680		23,993,745

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	24,030,779	$	24,556,421

CONDENSED STATEMENT OF LOSS

	Year Ended			For the Period
	December 31,			of January 11 to
	2008			December 31, 2007

INCOME
ESOP loan interest income	$	103,102		$	103,702
Investment income		111,939			138,963
Total income		215,041			242,665

EXPENSES		218,948			191,376

Income (loss) before income tax expense		(3,907	)		51,289
Income tax expense		1,413			20,820

Income (loss) before equity in undistributed earnings of subsidiary		(5,320	)		30,469
Equity in undistributed earnings of subsidiary		(240,832	)		(356,040	)

NET LOSS	$	(246,152	)	$	(325,571	)

CONDENSED STATEMENT OF CASH FLOWS

	Year Ended			For the Period
	December 31,			of January 11 to
	2008			December 31, 2007
OPERATING ACTIVITIES
Net loss	$	(246,152	)	$	(325,571	)
Adjustments to reconcile net loss to
net cash used for operating activities:
Equity in undistributed earnings of subsidiary		240,832			356,040
Stock compensation expense		326,820			169,069
Other, net		(145,435	)		459,151
Net cash used for operating activities		176,065			658,689

INVESTING ACTIVITIES
Capital contribution in subsidiary Bank		-			(8,417,390	)
Net cash used for investing activities		-			(8,417,390	)

FINANCING ACTIVITIES
Net proceeds from the issuance of common stock		-			11,929,611
Purchase of treasury stock		(983,145	)		-
Net cash (used for) provided by financing activities		(983,145	)		11,929,611

Increase (decrease) in cash		(807,080	)		4,170,910

CASH AT BEGINNING OF PERIOD		4,170,910			-

CASH AT END OF PERIOD	$	3,363,830		$	4,170,910

	Three Months Ended
	March 31,			June 30,			September 30,			December 31,
	2008			2008			2008			2008

Total interest income	$	2,614,736		$	2,712,306		$	2,848,464		$	2,893,693
Total interest expense		1,268,893			1,262,059			1,391,422			1,389,598

Net interest income		1,345,843			1,450,247			1,457,042			1,504,095
Provision for loan losses		-			-			84,992			-

Net interest income after
provision for loan losses		1,345,843			1,450,247			1,372,050			1,504,095

Total noninterest income		126,416			132,325			(229,084	)		54,789
Total noninterest expense		1,538,862			1,563,857			1,504,669			1,493,642

Income (loss) before income taxes		(66,603	)		18,715			(361,703	)		65,242
Income taxes (benefit)		(10,374	)		21,639			34,145			(143,608	)

Net income (loss)	$	(56,229	)	$	(2,924	)	$	(395,848	)	$	208,850

Per share data:
Net income (loss)
Basic and diluted	$	(0.02	)	$	-		$	(0.13	)	$	0.07
Average shares outstanding
Basic and diluted		3,128,369			3,106,095			3,056,112			3,036,827