10-Q 1 v307607_10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011

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

For the transition period from ______________ to _____________

Commission file number: 0-52267

POLONIA BANCORP

(Exact name of small business issuer as specified in its charter)

United States		41-2224099
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


3993 Huntingdon Pike, 3rd Floor, Huntingdon Valley, Pennsylvania	19006
(Address of principal executive offices)	(Zip Code)

(215) 938-8800

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

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

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filed, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “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

As of March 26, 2012, there were 3,155,114 shares of the registrant’s common stock outstanding.

	POLONIA BANCORP
	Table of Contents
		Page
		No.
Part I.	Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets at September 30, 2011 and December 31, 2010 (Unaudited)	1

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2011 and
	2010 (Unaudited)	2

	Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended
	September 30, 2011 (Unaudited)	3

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010
	(Unaudited)	4

	Notes to Unaudited Consolidated Financial Statements	5

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	32

Part II.	Other Information

Item 6.	Exhibits	33

	Signatures	34

PART 1.	FINANCIAL INFORMATION
Item 1.	Financial Statements

POLONIA BANCORP

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

		September 30,			December 31,
		2011			2010
ASSETS
Cash and due from banks	$	3,553,969		$	2,426,126
Interest-bearing deposits with other institutions		15,185,162			51,578,423
Cash and cash equivalents		18,739,131			54,004,549

Investment securities available for sale		18,616,731			27,350,263
Investment securities held to maturity (fair value of $59,785,520 and $26,075,142)		57,430,850			26,127,630
Loans receivable		128,769,821			138,499,284
Covered loans		27,357,059			32,808,086
Total loans		156,126,880			171,307,370
Less: allowance for loan losses		1,182,480			833,984
Net loans		154,944,400			170,473,386
Accrued interest receivable		1,021,870			1,073,223
Federal Home Loan Bank stock		2,971,200			3,465,600
Premises and equipment, net		4,560,319			4,571,178
Bank-owned life insurance		4,189,744			4,140,267
FDIC indemnification asset		5,362,521			5,397,192
Other assets		2,167,718			2,225,661
TOTAL ASSETS	$	270,004,484		$	298,828,949

LIABILITIES
Deposits	$	208,042,753		$	239,705,812
FHLB advances - long-term		31,235,592			28,426,193
Advances by borrowers for taxes and insurance		535,833			1,005,753
Accrued interest payable		128,905			103,534
Other liabilities		2,529,640			2,328,096
TOTAL LIABILITIES		242,472,723			271,569,388

Commitments and contingencies		-			-

STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value; 1,000,000 shares authorized; none issued or outstanding)		-			-
Common stock ($.01 par value; 14,000,000 shares authorized; 3,306,250 shares issued)		33,063			33,063
Additional paid-in-capital		14,002,685			13,863,863
Retained earnings		15,332,249			15,001,215
Unallocated shares held by Employee Stock Ownership Plan
"ESOP" (89,317 and 95,043 shares)		(893,173	)		(950,437	)
Treasury Stock (151,136 and 149,154 shares)		(1,274,528	)		(1,262,141	)
Accumulated other comprehensive income		331,465			573,998
TOTAL STOCKHOLDERS' EQUITY		27,531,761			27,259,561
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	270,004,484		$	298,828,949

See accompanying notes to the unaudited consolidated financial statements

POLONIA BANCORP

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months					Nine Months
	Ended September 30,					Ended September 30,
	2011		2010			2011		2010
INTEREST AND DIVIDEND INCOME
Loans receivable	$	2,209,375	$	1,998,645		$	6,743,531	$	6,188,760
Investment securities		630,908		351,289			1,863,190		1,218,345
Other interest and dividend income		1,136		2,697			5,604		4,665
Total interest and dividend income		2,841,419		2,352,631			8,612,325		7,411,770

INTEREST EXPENSE
Deposits		644,654		687,690			1,983,292		2,142,873
FHLB advances - short-term		-		-			11,187		-
FHLB advances - long-term		210,659		205,028			594,947		615,159
Advances by borrowers for taxes and insurance		5,664		5,880			16,703		18,341
Total interest expense		860,977		898,598			2,606,129		2,776,373

NET INTEREST INCOME BEFORE PROVISION (CREDIT) FOR LOAN LOSSES		1,980,442		1,454,033			6,006,196		4,635,397
Provision (credit) for loan losses		229,041		(62,736	)		344,230		(274,870	)

NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES		1,751,401		1,516,769			5,661,966		4,910,266

NONINTEREST INCOME
Service fees on deposit accounts		33,677		21,056			116,363		61,832
Earnings on bank-owned life insurance		14,739		21,539			49,477		69,089
Investment securities gains, net		16,489		-			234,584		293,815
Gain on sale of loans, net		250,051		134,406			354,074		271,783
Rental income		78,423		71,741			228,958		215,057
Other		56,923		51,535			230,175		335,757
Total noninterest income		450,302		300,277			1,213,631		1,247,333

NONINTEREST EXPENSE
Compensation and employee benefits		1,125,757		874,911			3,443,803		2,667,552
Occupancy and equipment		314,128		260,080			1,007,914		768,604
Federal deposit insurance premiums		6,297		72,651			212,964		302,729
Data processing expense		124,576		71,085			437,743		209,827
Professional fees		99,718		83,410			289,461		271,294
Other		360,679		357,676			1,087,902		1,520,486
Total noninterest expense		2,031,155		1,719,813			6,479,787		5,740,492

Income before income tax expense		170,549		97,233			395,810		417,107
Income tax expense		53,741		36,514			64,776		40,994

NET INCOME	$	116,808	$	60,719		$	331,034	$	376,113

EARNINGS PER SHARE - Basic and Diluted	$	0.04	$	0.02		$	0.11	$	0.12

See accompanying notes to the unaudited consolidated financial statements.

POLONIA BANCORP

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

																Accumulated
	Shares of				Additional					Unallocated						Other
	Common		Common		Paid-In-			Retained		Shares Held			Treasury			Comprehensive						Comprehensive
	Stock		Stock		Capital			Earnings		by ESOP			Stock			Income			Total			Income

Balance, December 31, 2010		3,306,250	$	33,063	$	13,863,863		$	15,001,215	$	(950,437	)	$	(1,262,141	)	$	573,998		$	27,259,561


Net income									331,034											331,034		$	331,034
Other comprehensive loss:
Unrealized loss on available-for-sale securities, net of reclassification adjustment, net of tax benefit of $(124,941)																	(242,533	)		(242,533	)		(242,533	)
Comprehensive income																						$	88,501
Purchase of treasury stock (1,982 shares, at cost)														(12,387	)					(12,387	)
Stock options compensation expense						67,193														67,193
Allocation of unearned ESOP shares						(15,171	)				57,264									42,093
Allocation of unearned restricted stock						86,800														86,800

Balance, September 30, 2011		3,306,250	$	33,063	$	14,002,685		$	15,332,249	$	(893,173	)	$	(1,274,528	)	$	331,465		$	27,531,761

See accompanying notes to the unaudited consolidated financial statements

POLONIA BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine Months Ended
	September 30,
	2011			2010
OPERATING ACTIVITIES
Net income	$	331,034		$	376,113
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan losses		344,230			(274,870	)
Depreciation, amortization and accretion		429,930			347,182
Investment securities gains, net		(234,584	)		(293,815	)
Origination of loans held for sale		(17,173,036	)		(12,555,278	)
Proceeds from sale of loans		17,527,110			12,827,061
Net gain on sale of loans		(354,074	)		(271,783	)
Earnings on bank-owned life insurance		(49,477	)		(69,089	)
Deferred federal income taxes		(63,020	)		(9,450	)
Decrease in accrued interest receivable		51,353			62,677
Increase in accrued interest payable		25,371			57,632
Compensation expense for stock options, ESOP and restricted stock		196,086			192,365
Other, net		471,916			87,192
Net cash provided by operating activities		1,502,839			475,938

INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales		6,079,283			6,483,428
Proceeds from principal repayments and maturities		4,369,848			11,898,731
Purchases		(1,933,200	)		(7,376,564	)
Investment securities held to maturity:
Proceeds from principal repayments and maturities		5,069,014			2,469,509
Purchases		(36,490,767	)		(11,601,717	)
Decrease in loans receivable, net		9,705,803			9,581,722
Decrease in covered loans		5,386,494			-
Redemptions of Federal Home Loan Bank stock		494,400			-
Purchase of Federal Home Loan Bank stock		-			(54,600	)
Purchase of premises and equipment		(237,409	)		(101,343	)
Net cash (used for) provided by investing activites		(7,556,534	)		11,299,166

FINANCING ACTIVITES
Decrease in deposits, net		(31,538,815	)		(5,580,540	)
Repayment of FHLB advances - long-term		(2,190,601	)		(1,908,509	)
Proceeds of FHLB advances - long-term		5,000,000			4,000,000
Purchase of treasury stock		(12,387	)		(10,406	)
Decrease in advances by borrowers for taxes and insurance, net		(469,920	)		(674,106	)
Net cash used for financing activites		(29,211,723	)		(4,173,561	)
Increase (decrease) in cash and cash equivalents		(35,265,418	)		7,601,543

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		54,004,549			8,426,530
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	18,739,131		$	16,028,073

SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid:
Interest	$	2,580,758		$	2,718,741
Income taxes		35,000			30,000

See accompanying notes to the unaudited consolidated financial statements

POLONIA BANCORP

NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

1.	Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2011 are not necessarily indicative of the results that may be expected for the full year. The December 31, 2010 balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. For additional information, refer to the financial statements and footnotes thereto included in Polonia Bancorp’s (the “Company”) Form 10-K for the year ended December 31, 2010.

Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain recorded amounts and disclosures. Accordingly, actual results could differ from those estimates. The most significant estimate pertains to the allowance for loan losses.

Recent Accounting and Regulatory Pronouncements

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring . The amendments in this Update provide additional guidance or clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual reporting period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company provided the necessary disclosures in Note 8.

In April 2011, the FASB issued ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements . The main objective in developing this Update is to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this Update apply to all entities, both public and nonpublic. The amendments affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The guidance in this Update is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs . The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other Topics (Topic 350), Testing Goodwill for Impairment. The objective of this update is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this Update apply to all entities, both public and nonpublic, that have goodwill reported in their financial statements and are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. This ASU is not expected to have a significant impact on the Company’s financial statements.

In September 2011, the FASB issued ASU 2011-09, Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80). The amendments in this Update will require additional disclosures about an employer’s participation in a multiemployer pension plan to enable users of financial statements to assess the potential cash flow implications relating to an employer’s participation in multiemployer pension plans. The disclosures also will indicate the financial health of all of the significant plans in which the employer participates and assist a financial statement user to access additional information that is available outside the financial statements. For public entities, the amendments in this Update are effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. For nonpublic entities, the amendments are effective for annual periods of fiscal years ending after December 15, 2012, with early adoption permitted. The amendments should be applied retrospectively for all prior periods presented. This ASU is not expected to have a significant impact on the Company’s financial statements.

Reclassification of Comparative Amounts

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

2.	Earnings Per Share

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Net Income	$	116,808		$	60,719		$	331,034		$	376,113

Weighted average number of shares issued		3,306,250			3,306,250			3,306,250			3,306,250
Less weighted average number of treasury stock shares		(149,994	)		(147,926	)		(149,437	)		(147,426	)
Less weighted average number of unearned ESOP shares		(89,316	)		(97,956	)		(91,456	)		(100,096	)
Less weighted average number of nonvested restricted stock awards		(14,477	)		(26,789	)		(15,405	)		(27,717	)
Weighted average shares outstanding basic		3,052,463			3,033,579			3,049,952			3,031,011
Weighted average shares outstanding diluted		3,052,463			3,033,579			3,049,952			3,031,011
Earnings per share:
Basic	$	0.04		$	0.02		$	0.11		$	0.12
Diluted		0.04			0.02			0.11			0.12

Options to purchase 153,903 shares at $9.40 per share of common stock as of September 30, 2011 and 2010, as well as 14,364 shares and 23,598 shares of restricted stock as of September 30, 2011 and 2010, respectively, were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.

3.	FDIC-Assisted Acquisition

During 2010, the Company acquired certain assets and assumed certain liabilities of Earthstar Bank (“Earthstar”) in loss-share transactions facilitated by the Federal Deposit Insurance Corporation (“FDIC”). Under the loss-share agreements, the Company will share in the losses on assets (loans and other real estate owned) covered under the agreement (referred to as “covered loans”).

U.S. generally accepted accounting principles prohibits carrying over an allowance for loan losses for impaired loans purchased in the Earthstar FDIC-assisted acquisition. Purchased credit-impaired loans are accounted for in accordance with guidance for certain loans or debt securities acquired in a transfer when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments. For evidence of credit deterioration since origination, the Company considered loans on a loan-by-loan basis by primarily focusing on past due status, frequency of late payments, internal loan classification, as well as interviews with current loan officers and collection employees for other evidence that may be indicative of deterioration of credit quality. Once these loans were segregated, the Company evaluated each of these loans on a loan-by-loan basis to determine the probability of collecting all contractually required payments. On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans with specific evidence of credit impairment acquired in the Earthstar acquisition was $3.3 million and the estimated fair value of the loans was $1.6 million. Total contractually required payments on these loans, including interest at the acquisition date was $4.4 million. However, the Company’s preliminary estimate of expected cash flows was $1.8 million. At such date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from the customer or liquidation of collateral) of $2.7 million relating to these impaired loans, reflected in the recorded net fair value. The Bank further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount of $114,448 on the acquisition date relating to these impaired loans.

Under U.S. generally accepted accounting principles, fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values become available. The Company deemed it appropriate to analogize the accounting guidance under ASC 310-30 to all other loans since (i) the discount recognized for these loans was attributable at least in part to credit quality, and (ii) the Company was unable to identify specific loans within this portfolio for which it was probable at acquisition that the Company would be unable to collect all contractually required payments receivable. The Company has aggregated all other loans into four loan pools by common risk characteristics, which generally conform to the loan type. The first pool of loans consists primarily of 15 and 20 year loans and lines of credit secured by 1-4 family residential properties within our current market area. Such loans represented approximately 55% of the total loans pooled at September 30, 2011, and have been aggregated into this pool because of the similarities of the underlying products which have combined loan to value ratios of up to 80%. This pool relates primarily to loans originated for the withdrawal of additional equity from an existing home, and to a much lesser extent the purchase or refinance of a home. The second pool of loans consisted primarily of fixed rate, multi-family and nonresidential real estate loans originated within the Company’s market area. These loans are generally secured by apartment buildings, small office buildings and owner-occupied properties and make up approximately 39 percent of the total loans pooled at September 30, 2011. The third pool of loans primarily consisted of secured commercial and industrial loans originated to small business within the Company’s market area. Commercial loans account for approximately 3 percent of the total loans pooled at September 30, 2011. The last pool of loans consisted of consumer loans, which are almost entirely made up of mobile home loans. These loans were generally originated with 20 to 30 year maturities. Such loans total approximately 4 percent of the total loans pooled at September 30, 2011. For each loan pool, the Company has developed individual cash flow expectations and calculates a non-accretable difference and an accretable difference. The difference between contractually required payments and the cash flows expected to be collected at acquisition is the nonaccretable difference. The accretable difference on purchased loans is the difference between the expected cash flows and the net present value of expected cash flows (fair value of the loan pool). The accretable difference is accreted into earnings using the level yield method over the term of the loan pool. Over the life of the acquired loan pool, the Company continues to estimate cash flows expected to be collected on acquired loans with specific evidence of credit deterioration as well as on pools of loans sharing common risk characteristics. The Company evaluates, at each balance sheet date, whether the present value of its loans has significantly decreased and if so, recognizes a provision for loan loss in its consolidated statement of income. For any significant increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life.

The carrying value of loans acquired and accounted for in accordance with ASC 310-30 was determined by projecting discounted contractual cash flows. The table below presents the components of the acquisition accounting adjustments related to the loans acquired in the Earthstar acquisition accounted for under ASC 310-30 and ASC 310-30 by analogy as of the beginning of the period ended September 30, 2011:

				Acquired Loans
	Acquired Loans			Without Specific
	With Specific			Evidence of
	Evidence of			Deterioration in
	Deterioration in			Credit Quality
	Credit Quality			(ASC 310-30
	(ASC 310-30)			Analogized)
	(unaudited)

Contractually required principal and interest	$	4,419,384		$	51,386,762
Non-accretable discount		(2,657,833	)		(8,289,676	)
Expected cash flows		1,761,551			43,097,086
Accretable yield		(114,448	)		(10,665,986	)
Basis in acquired loans	$	1,647,103		$	32,431,100

The outstanding balance, including interest, and carrying values of loans acquired were as follows:

September 30, 2011
(unaudited)

December 31, 2010

Acquired Loans

Without Specific

Acquired Loans

Without Specific

With Specific

Evidence of

With Specific

Evidence of

Deterioration in

Evidence of

Deterioration in

Credit Quality

Deterioration in

Credit Quality

(ASC 310-30

Credit Quality

(ASC 310-30

(ASC 310-30)

Analogized)

(ASC 310-30)

Analogized)

Outstanding balance

3,909,688

43,771,907

4,419,384

51,386,762

Carrying amount, net of allowance

1,243,817

27,090,318

1,647,103

32,431,100

During the nine-months ended September 30, 2011, the Company recorded a provision of $80,084 for increases in the expected losses for acquired loans with specific evidence of deterioration in credit quality. There has been no allowance for loan losses reversed. There was no allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of December 31, 2010 as well as those acquired without specific evidence of deterioration in credit quality as of September 30, 2011.

Changes in the accretable yield for acquired loans were as follows for the nine-months ended September 30, 2011 (unaudited):

				Acquired Loans
				Without Specific
	Acquired Loans With			Evidence of
	Specific Evidence of			Deterioration in
	Deterioration in			Credit Quality
	Credit Quality			(ASC 310-30
	(ASC 310-30)			Analogized)
	(Unaudited)
Balance at beginning of period	$	114,448		$	10,665,986
Reclassifications and other		-			(983,031	)
Accretion		(53,724	)		(1,349,973	)
Balance at end of period	$	60,724		$	8,332,982

The $1,349,973 recognized as accretion for acquired loans without specific evidence of deterioration in credit quality represents the interest income earned on these loans for the nine-months ended September 30, 2011. Included in reclassification and other for loans acquired without specific evidence of deterioration in credit quality was $181,000 of reclassifications from non-accretable discounts to accretable discounts. The remaining $(1,164,031) change in the accretable yield represents reductions in contractual interest due to contractual principal prepayments during the period. There was no aitional accretion recognized since there was no change in the expected cash flows related to these loans during the period.

4.	Comprehensive Income

In complying with U. S. generally accepted accounting principles, the Company has developed the following table, which includes the tax effects of the components of other comprehensive income. Other comprehensive income consists of net unrealized gains on securities available for sale. Other comprehensive income and related tax effects for the indicated periods, consists of:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2011			2010		2011			2010
Net income	$	116,808		$	60,719	$	331,034		$	376,113
Other comprehensive income (loss), net of tax:
Changes in net unrealized gain (loss) on investment securities available for sale, net of taxes of $(80,432), $84,634, $(45,183) and $164,811		(156,132	)		164,289		(87,708	)		319,927
Reclassification adjustment for realized gains on investment securities included in net income, net of taxes of $(5,606), $0, $(79,759) and $(99,897)		(10,883	)		-		(154,825	)		(193,918	)

Other comprehensive income (loss), net of tax		(167,015	)		164,289		(242,533	)		126,009

Comprehensive loss (income)	$	(50,207	)	$	225,008	$	88,501		$	502,122

5.	Investment Securities

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

	September 30, 2011
				Gross		Gross
		Amortized		Unrealized		Unrealized			Fair
		Cost		Gains		Losses			Value
Available for Sale
Mortgage-backed securities:
Fannie Mae	$	5,825,723	$	376,987	$	-		$	6,202,710
Freddie Mac		255,100		18,984		-			274,084
Government National Mortgage
Association		920,594		127,140		-			1,047,734
Collateralized mortgage obilgations-
government sponsored entities		4,142,008		82,142		(25,839	)		4,198,311
Total mortgage-backed
securities		11,143,425		605,253		(25,839	)		11,722,839
Corporate securities		6,971,086		57,694		(134,888	)		6,893,892
Total debt securities	$	18,114,511	$	662,947	$	(160,727	)	$	18,616,731

Held to Maturity
Mortgage-backed securities:
Fannie Mae	$	46,941,892	$	1,921,156	$	-		$	48,863,048
Freddie Mac		10,488,958		433,514		-			10,922,472
Total mortgage-backed
securities	$	57,430,850	$	2,354,670	$	-		$	59,785,520

	December 31, 2010
				Gross		Gross
		Amortized		Unrealized		Unrealized			Fair
		Cost		Gains		Losses			Value
Available for Sale
Mortgage-backed securities:
Fannie Mae	$	7,557,936	$	440,925	$	-		$	7,998,861
Freddie Mac		1,061,808		54,633		-			1,116,441
Government National Mortgage
Association		1,054,443		124,805		-			1,179,248
Collateralized mortgage obilgations-
government sponsored entities		6,236,550		24,575		(16,411	)		6,244,714
Total mortgage-backed
securities		15,910,737		644,938		(16,411	)		16,539,264
Corporate securities		10,551,331		251,437		(869	)		10,801,899
Total debt securities		26,462,068		896,375		(17,280	)		27,341,163
Equity securities - financial services		18,500		-		(9,400	)		9,100

Total	$	26,480,568	$	896,375	$	(26,680	)	$	27,350,263

Held to Maturity
Mortgage-backed securities:
Fannie Mae	$	22,611,248	$	165,083	$	(213,520	)	$	22,562,811
Freddie Mac		3,516,382		-		(4,051	)		3,512,331
Total mortgage-backed
securities	$	26,127,630	$	165,083	$	(217,571	)	$	26,075,142

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

	September 30, 2011
	Less Than Twelve Months					Twelve Months or Greater					Total
				Gross					Gross					Gross
		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
		Value		Losses			Value		Losses			Value		Losses
Mortgage-backed securities:
Collateralized mortgage obligations-
government sponsored entities	$	571,566	$	(23,986	)	$	7,007	$	(1,853	)	$	578,573	$	(25,839	)
Total mortgage-backed
securities		571,566		(23,986	)		7,007		(1,853	)		578,573		(25,839	)
Corporate securities		4,223,800		(134,888	)		-		-			4,223,800		(134,888	)

Total	$	4,795,366	$	(158,874	)	$	7,007	$	(1,853	)	$	4,802,373	$	(160,727	)

	December 31, 2010
	Less Than Twelve Months					Twelve Months or Greater					Total
				Gross					Gross					Gross
		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
		Value		Losses			Value		Losses			Value		Losses
Mortgage-backed securities:
Fannie Mae	$	10,974,673	$	(213,520	)	$	-	$	-		$	10,974,673	$	(213,520	)
Freddie Mac		3,512,331		(4,051	)		-		-			3,512,331		(4,051	)
Collateralized mortgage obligations-
government sponsored entities		3,500,603		(14,718	)		7,712		(1,693	)		3,508,315		(16,411	)
Total mortgage-backed
securities		17,987,607		(232,289	)		7,712		(1,693	)		17,995,319		(233,982	)
Corporate securities		874,765		(869	)		-		-			874,765		(869	)
Equity securities - financial services		9,100		(9,400	)		-		-			9,100		(9,400	)

Total	$	18,871,472	$	(242,558	)	$	7,712	$	(1,693	)	$	18,879,184	$	(244,251	)

The Company reviews its position quarterly and has determined that at September 30, 2011, the declines outlined in the above table represent temporary declines and the Company does not intend to sell these securities and does not believe they will be required to sell these securities before recovery of their cost basis, which may be at maturity. There were 10 positions that were temporarily impaired at September 30, 2011 and eight positions that were temporarily impaired at December 31, 2010. The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes that are not expected to result in the non-collection of principal and interest during the period.

The amortized cost and fair value of debt securities at September 30, 2011, by contractual maturity, are shown below. Mortgage-backed securities provide for periodic, generally monthly, payments of principal and interest and have contractual maturities ranging from 1 to 32 years. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

		Available for Sale				Held to Maturity
		Amortized		Fair		Amortized		Fair
		Cost		Value		Cost		Value

Due within one year	$	987,928	$	961,270	$	-	$	-
Due after one year through five years		6,679,831		6,785,474		-		-
Due after five years through ten years		3,351,844		3,430,104		15,425,843		16,033,755
Due after ten years		7,094,908		7,439,884		42,005,007		43,751,765

Total	$	18,114,511	$	18,616,731	$	57,430,850	$	59,785,520

For the three month period ending September 30, 2011, the Company realized gross gains of $16,489 and proceeds from the sale of investment securities of $34,989. The Company had no sales of investment securities for the three month period ending September 30, 2010. For the nine month period ending September 30, 2011, the Company realized gross gains of $234,584 from the sale of investment securities and proceeds from the sale of investment securities of $6,079,283 and for the nine month period ending September 30, 2010, the Company realized gross gains of $293,815 from the sale of investment securities and proceeds from the sale of investment securities of $6,483,428.

6.	Loans Receivable

Loans receivable consist of the following:

	September 30,		December 31,
	2011		2010

Mortgage Loans:
One-to-four family	$	110,420,343	$	119,085,014
Multi-family and commercial real estate		9,701,099		10,272,043
		120,121,442		129,357,057

Home equity loans		2,845,088		2,918,492
Home equity lines of credit ("HELOCs")		2,085,686		2,023,561
Education loans		2,923,726		3,178,622
Other consumer loans		592		29,062
Non-covered consumer loans purchased		1,057,161		1,270,117
Covered loans		27,357,059		32,808,086
		156,390,754		171,584,997
Less:
Net deferred loan fees		263,874		277,627
Allowance for loan losses		1,182,480		833,984

Total	$	154,944,400	$	170,473,386

The Company’s loan portfolio consists predominantly of one-to-four family unit first mortgage loans in the northwest suburban area of metropolitan Philadelphia, primarily in Philadelphia, Montgomery and Bucks Counties. These loans are typically secured by first lien positions on the respective real estate properties and are subject to the Bank’s loan underwriting policies. In general, the Company’s loan portfolio performance at September 30, 2011 and December 31, 2010 is dependent upon the local economic conditions.

7.	Covered Loans

At September 30, 2011 (unaudited), and December 31, 2010, the Company had $27.4 million and $32.8 million (net of fair value adjustments) of covered loans (covered under loss share agreements with the FDIC). Covered loans were recorded at fair value pursuant to acquisition accounting guidelines. Purchased loans acquired in a business combination, including loans purchased in our FDIC-assisted transaction, are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan losses.

Upon acquisition, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30. Purchased credit-impaired loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. The carrying value of covered loans acquired with specific evidence of deterioration in credit quality was $1.2 million and $1.6 million at September 30, 2011 (unaudited) and December 31, 2010, respectively. There were no significant increases or decreases in the expected cash flows of covered loans between December 10, 2010 (the “acquisition date”) and December 31, 2010, or through September 30, 2011 (unaudited). The fair value of purchased credit-impaired loans, on the acquisition date, was determined primarily based on the fair value of loan collateral.

The carrying value of acquired, covered loans without specific evidence of deterioration in credit quality at the time of the acquisition was $27.1 million and $32.4 million at September 30, 2011 (unaudited) and December 31, 2010, respectively. The fair value of loans that were not credit-impaired was determined based on estimates of losses on defaults and other market factors. The Company deemed it appropriate to analogize the accounting guidance under ASC 310-30 to all other loans since (i) the discount recognized for these loans was attributable at least in part to credit quality, and (ii) the Company was unable to identify specific loans within this portfolio for which it was probable at acquisition that the Company would be unable to collect all contractually required payments receivable.

Under U.S. generally accepted accounting principles, fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as aitional information regarding the closing date fair values become available.

	September 30,		December 31,
	2011		2010
Mortgage loans:
One-to-four family	$	15,571,976	$	18,771,142
Multi-family and commercial real estate		11,058,187		12,783,952
		26,630,163		31,555,094
Commercial		726,896		1,252,992
Total Loans	$	27,357,059	$	32,808,086

8.	Allowance for Loan Losses

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type. Loans are segmented into the following pools: 1-4 family, multi-family and commercial real estate, commercial, home equity, home equity lines of credit, and education and other loans. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. These historical loss percentages are calculated over a three year period for all portfolio segments. Certain qualitative factors are then aed to the historical allocation percentage to arrive at get the adjusted factor to be applied to nonclassified loans. The following qualitative factors are analyzed for each portfolio segment:

	Levels of and trends in delinquencies
	Trends in volume and terms
	Trends in credit quality ratings
	Changes in management and lending staff
	Economic trends
	Concentrations of credit Changes in lending policies Changes in loan review External factors

These qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the portfolio. During 2011, the qualitative factors were reviewed and remained unchanged.

Changes in the allowance for loan losses for the three and nine month periods ended September 30, 2011 and 2010 are as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2011		2010			2011		2010

Allowance at beginning of period	$	953,025	$	904,778		$	833,984	$	1,115,141
Provision (credit) for loan losses		229,041		(62,736	)		344,230		(274,870	)
Charge-offs		-		-			-		(961	)
Recoveries		414		398			4,266		3,130
Net charge-offs		414		398			4,266		2,169
Allowance at end of period	$	1,182,480	$	842,440		$	1,182,480	$	842,440

The total allowance reflects management's estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $1,182,480 adequate to cover loan losses inherent in the loan portfolio, at September 30, 2011. Included in the allowance for loan losses is $80,084 related to loans covered by loss-share agreements with the FDIC.

The following table presents the activity in the allowance for loan losses, balance in allowance for loan losses and recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2011 and December 31, 2010.

	At September 30, 2011
		One-to-		Multi-Family and								Education
		Four Family		Commercial								and Other
		Real Estate		Real Estate		Commercial		Home Equity		HELOCs		Consumer		Total

Allowance for loan losses:
Allowance at beginning of period	$	519,182	$	274,286	$	-	$	14,592	$	9,885	$	16,039	$	833,984
Provision (credit) for loan losses		99,649		234,599		-		3,857		543		5,582		344,230
Charge-offs		-		-		-		-		-		-		-
Recoveries		4,266		-		-		-		-		-		4,266
Net charge-offs		4,266		-		-		-		-		-		4,266
Allowance at end of period	$	623,097	$	508,885	$	-	$	18,449	$	10,428	$	21,621	$	1,182,480

Ending Balance	$	623,097	$	508,885	$	-	$	18,449	$	10,428	$	21,621	$	1,182,480

Ending balance: individually
evaluated for impairment	$	159,426	$	82,709	$	-	$	-	$	-	$	-	$	242,135

Ending balance: collectively
evaluated for impairment	$	388,119	$	421,644	$	-	$	18,449	$	10,428	$	21,621	$	860,261

Ending balance: loans acquired with
deteriorated credit quality	$	75,552	$	4,532	$	-	$	-	$	-	$	-	$	80,084

Loans:
Ending Balance	$	125,992,319	$	20,759,286	$	726,896	$	2,845,088	$	2,085,686	$	3,981,479	$	156,390,754

Ending balance: individually
evaluated for impairment	$	1,332,425	$	805,206	$	-	$	-	$	-	$	-	$	2,137,631

Ending balance: collectively
evaluated for impairment	$	109,087,918	$	8,895,893	$	-	$	2,845,088	$	2,085,686	$	2,924,318	$	125,838,903

Ending balance: loans acquired with
deteriorated credit quality	$	15,571,976	$	11,058,187	$	726,896	$	-	$	-	$	1,057,161	$	28,414,220

	At December 31, 2010
		One-to-		Multi-Family and						Education
		Four Family		Commercial						and Other
		Real Estate		Real Estate		Home Equity		HELOCs		Consumer		Total

Allowance for loan losses:
Ending Balance	$	519,182	$	274,286	$	14,592	$	9,885	$	16,039	$	833,984

Ending balance: individually
evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-

Ending balance: collectively
evaluated for impairment	$	519,182	$	274,286	$	14,592	$	9,885	$	16,039	$	833,984

Loans:
Ending Balance	$	119,085,014	$	10,272,043	$	2,918,492	$	2,023,561	$	3,207,684	$	137,506,794

Ending balance: individually
evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-

Ending balance: collectively
evaluated for impairment	$	119,085,014	$	10,272,043	$	2,918,492	$	2,023,561	$	3,207,684	$	137,506,794

The average recorded investment on impaired loans at September 30, 2011 was $732,130. The interest income recorded on the impaired loans for the three months ended September 30, 2011 was $12,678. All impaired loans had a related allowance.

Credit Quality Information

The following tables represent credit exposures by internally assigned grades at September 30, 2011. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company's internal credit risk grading system is based on experiences with similarly graded loans.

The Company's internally assigned grades are as follows:

Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. There are three sub-grades within the pass category to further distinguish the loan.

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset. In aition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

The following table presents classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful, and Loss within the internal risk rating system as of September 30, 2011 and December 31, 2010:

	September 30,				December 31,
	2011				2010
				Multi-Family		Multi-Family
				and Commercial		and Commercial
		Commercial		Real Estate		Real Estate

Pass	$	-	$	17,391,872	$	7,475,825
Special Mention		-		1,842,790		2,775,251
Substandard		726,896		1,524,624		20,967
Doubtful		-		-		-
Loss		-		-		-
Ending Balance	$	726,896	$	20,759,286	$	10,272,043

For one-to-four family real estate, home equity, HELOCs, and education and other loans, the Company evaluates credit quality based on the performance of the individual credits. At December 31, 2010, certain multi-family and commercial real estate, and commercial loans acquired were being monitored by payment activity until management finalized assigning risk ratings on these loans. This process has been completed and these loans are categorized by risk classification as of September 30, 2011. Payment activity is reviewed by management on a monthly basis to determine how loans are performing. Loans are considered to be nonperforming when they become 90 days past due.

The following table presents recorded investment in the loan classes based on payment activity as of September 30, 2011 and December 31, 2010:

	At September 30, 2011
		One-to-		Multi - Family								Education		Non-covered Consumer
		Four Family		and Commercial				Home				and Other		Loans
		Real Estate		Real Estate		Commercial		Equity		HELOCs		Consumer		Purchased
Performing	$	124,386,619	$	20,419,556	$	726,896	$	2,800,632	$	2,085,686	$	2,866,825	$	973,563
Nonperforming		1,605,700		339,730		-		44,456		-		57,493		83,598
Total	$	125,992,319	$	20,759,286	$	726,896	$	2,845,088	$	2,085,686	$	2,924,318	$	1,057,161

	At December 31, 2010
		One-to-		Multi - Family								Education		Non-covered Consumer
		Four Family		and Commercial				Home				and Other		Loans
		Real Estate		Real Estate		Commercial		Equity		HELOCs		Consumer		Purchased
Performing	$	136,801,157	$	22,877,483	$	657,224	$	2,918,492	$	1,976,912	$	2,992,563	$	1,258,908
Nonperforming		1,054,999		178,512		595,768		-		46,649		215,121		11,209
Total	$	137,856,156	$	23,055,995	$	1,252,992	$	2,918,492	$	2,023,561	$	3,207,684	$	1,270,117

Following is a table which includes an aging analysis of the recorded investment of past due loans:

	At September 30, 2011
													Recorded
											Total		Investment >
	30-59 Days		60-89 Days		90 Days		Total Past				Loans		90 Days and
	Past Due		Past Due		Or Greater		Due		Current		Receivable		Accruing
One-to-four family
real estate	$	557,084	$	8,121	$	1,605,700	$	2,170,905	$	123,821,414	$	125,992,319	$	-
Multi-family and
commercial real estate		-		1,396,668		339,730		1,736,398		19,022,888		20,759,286		-
Commercial		-		-		-		-		726,896		726,896		-
Home equity		-		10,329		44,456		54,785		2,790,303		2,845,088		-
HELOCs		-		-		-		-		2,085,686		2,085,686		-
Education and other
consumer		142,998		47,196		57,493		247,687		2,676,631		2,924,318		-
Non-covered consumer
loans puchased		3,707		2,351		83,598		89,656		967,505		1,057,161		-
Total	$	703,789	$	1,464,665	$	2,130,977	$	4,299,431	$	152,091,323	$	156,390,754	$

	At December 31, 2010
														Recorded
												Total		Investment >
		30-59 Days		60-89 Days		90 Days		Total Past				Loans		90 Days and
		Past Due		Past Due		Or Greater		Due		Current		Receivable		Accruing
One-to-four family
real estate	$	2,446,538	$	864,659	$	1,054,999	$	4,366,196	$	133,489,960	$	137,856,156	$	-
Multi-family and
commercial real estate		166,454		-		178,512		344,966		22,711,029		23,055,995		-
Commercial		-		-		595,768		595,768		657,224		1,252,992		-
Home equity		-		-		-		-		2,918,492		2,918,492		-
HELOCs		-		-		46,649		46,649		1,976,912		2,023,561		-
Education and other
consumer		66,274		24,397		215,121		305,792		2,901,892		3,207,684		-
Non-covered consumer
loans puchased		3,254		1,756		11,209		16,219		1,253,898		1,270,117		-
Total	$	2,682,520	$	890,812	$	2,102,258	$	5,675,590	$	165,909,407	$	171,584,997	$

Nonaccrual Loans

Multi-family and commercial loans are considered for nonaccrual status upon 90 days delinquency and, one-to-four family loans are considered for nonaccrual status after 120 days. When a loan is placed in nonaccrual status, previously accrued but unpaid interest is deducted from interest income.

On the following table are the loans on nonaccrual status as of September 30, 2011 and December 31, 2010. The balances are presented by class of loans.

	September 30,		December 31,
	2011		2010

One-to-four family mortgage	$	1,605,700	$	1,054,999
Multi-family and commercial real estate		339,730		178,512
Commercial		-		595,768
HELOCs		44,456		46,649
Education and other consumer		57,493		215,121
Non-covered consumer loans purchased		83,598		11,209
Total	$	2,130,977	$	2,102,258

The Company had nonaccrual loans of $2,130,977 as of September 30, 2011 and $2,102,258 as of December 31, 2010. Interest income on loans would have been increased by approximately $18,827 and $48,193 during those periods, if these loans had performed in accordance with their original terms. Management considers multi-family, commercial real estate, and commercial loans which are 90 days or more past due to be impaired.

Loan Modifications and Troubled Debt Restructurings

A loan is considered to be a troubled debt restructuring (“TDR”) loan when the Company grants a concession to the borrower because of the borrowers’ financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk.

Loan modifications that are considered troubled debt restructurings (“TDR”) completed during the nine month period ended September 30, 2011 were as follows:

	For the Nine Months Ended
	September 30, 2011
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Troubled Debt Restructurings
One-to-four family mortgage	2	$	851,191	$	851,191
Multi-family and commercial real estate	1		903,651		903,651
Total	3	$	1,754,842	$	1,754,842

There were no TDRs modified within the past year that subsequently defaulted during the period ended September 30, 2011.

Deposits

Deposit accounts are summarized as follows for the periods ending September 30, 2011 and December 31, 2010.

	September 30, 2011				December 31, 2010
		Amount	%			Amount	%

Non-interest-bearing demand	$	4,423,415	2.13	%	$	8,806,067	3.68	%
NOW accounts		13,169,174	6.33			14,767,387	6.16
Money market deposit		46,038,230	22.13			56,768,776	23.70
Savings		30,166,612	14.50			29,523,229	12.32
Time deposits		114,245,322	54.91			129,840,353	54.14
Total	$	208,042,753	100.00	%	$	239,705,812	100.00	%

10.	Life Insurance and Retirement Plans

The Bank has a Supplemental Life Insurance Plan (the “Plan”) for three officers of the Bank. The Plan requires the Bank to make annual payments to the beneficiaries upon their death. In connection with the Plan, the Bank funded life insurance policies with an original investment of $3,085,000 on the lives of those officers. These life insurance policies currently have a death benefit of $11,975,329. The cash surrender value of these policies totaled $4,189,744 and $4,140,267 at September 30, 2011 and December 31, 2010, respectively. The Plan provides that death benefits totaling $6.0 million at September 30, 2011, will be paid to their beneficiaries in the event the officers should die.

Aitionally, the Bank has a Supplemental Retirement Plan (“SRP”) for the Bank’s current and former presidents as well as two senior officers of the Bank. At September 30, 2011 and December 31, 2010, $1,596,164 and $1,520,087 had been accrued under these SRPs, respectively, and this liability and the related deferred tax assets of $542,696 and $516,830 for the respective periods, are recognized in the financial statements. The deferred compensation for the current and former president is to be paid for the remainder of their lives commencing with the first year following the termination of employment after completion of required service. The current president’s payment is based on 60 percent of his final full year annual gross taxable compensation adjusted annually for the change in the consumer price index or 4 percent, whichever is higher. The former president’s payment is based on 60 percent of his final full year annual gross taxable compensation adjusted annually for the change in the consumer price index. The deferred compensation for the two senior officers is to be paid at the rate of $50,000 per year for twenty years commencing five years after retirement or age 65, whichever comes first, following the termination of employment. The Company records periodic accruals for the cost of providing such benefits by charges to income. The amount accrued was approximately $54,790 and $38,064 for the three months ended September 30, 2011 and 2010, respectively, and $162,653 and $112,472 for the nine months ended September 30, 2011 and 2010, respectively. The accruals change each year based on a discount rate of 6.25 percent used in determining the estimated liability that will be accrued when the employees are eligible for benefits.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Components of net periodic benefit cost:
Service cost	$	31,039	$	14,852	$	91,399	$	42,837
Interest cost		23,751		23,212		71,254		69,635
Net periodic benefit cost	$	54,790	$	38,064	$	162,653	$	112,472

11.	Fair Value Measurements

U.S. Generally Accepted Accounting Principles (“GAAP”) establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by GAAP hierarchy are as follows:

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

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

Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following table presents the assets reported on the consolidated balance sheets at their fair value as of September 30, 2011 and December 31, 2010, respectively, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	September 30, 2011
		Level I		Level II		Level III		Total
Assets:
Available for Sale
Recurring:
Mortgage-backed securities	$	-	$	11,722,839	$	-	$	11,722,839
Corporate securities		-		6,893,892		-		6,893,892

Total	$	-	$	18,616,731	$	-	$	18,616,731


Non-recurring:
Impaired loans	$	-	$	-	$	1,895,496	$	1,895,496

Total	$	-	$	-	$	1,895,496	$	1,895,496

	December 31, 2010
		Level I		Level II		Level III		Total
Assets:
Available for Sale
Mortgage-backed securities	$	-	$	16,539,264	$	-	$	16,539,264
Corporate securities		-		10,801,899		-		10,801,899
Equity securities - financial services		-		9,100		-		9,100

Total	$	-	$	27,350,263	$	-	$	27,350,263

All of the securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Impaired loans are reported at fair value utilizing level three inputs. For these loans, a review of the collateral is conducted and an appropriate allowance for loan losses is allocated to the loan. At September 30, 2011, impaired loans with a carrying value of $2,137,631 were reduced by a specific valuation totaling $242,135 resulting in a net fair value of $1,895,496 based on Level 3 inputs.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy, within which the fair value measurement in its entirety falls, has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.

The measurement of fair value should be consistent with one of the following valuation techniques: market approach, income approach, and/or cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative). Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. As of September 30, 2011 and December 31, 2010, all of the financial assets measured at fair value, on a recurring basis, utilized the market approach.

12.	Fair Value Disclosure

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

	September 30, 2011				December 31, 2010
		Carrying		Fair		Carrying		Fair
		Value		Value		Value		Value

Financial assets:
Cash and cash equivalents	$	18,739,131	$	18,739,131	$	54,004,549	$	54,004,549
Investment securities
Available for sale		18,616,731		18,616,731		27,350,263		27,350,263
Held to maturity		57,430,850		59,785,520		26,127,630		26,075,142
Net loans receivable		154,944,400		159,939,489		170,473,386		178,676,219
Accrued interest receivable		1,021,870		1,021,870		1,073,223		1,073,223
FDIC indemnification asset		5,362,521		5,362,521		5,397,192		5,397,192
Federal Home Loan Bank stock		2,971,200		2,971,200		3,465,600		3,465,600
Bank-owned life insurance		4,189,744		4,189,744		4,140,267		4,140,267


Financial liabilities:
Deposits	$	208,042,753	$	210,881,466	$	239,705,812	$	241,401,576
FHLB advances - long-term		31,235,592		30,102,656		28,426,193		29,900,092
Advances by borrowers
for taxes and insurance		535,833		535,833		1,005,753		1,005,753
Accrued interest payable		128,905		128,905		103,534		103,534

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

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

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

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

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

Cash and Cash Equivalents, Accrued Interest Receivable, Federal Home Loan Bank Stock, Accrued Interest Payable, and Advances by Borrowers for Taxes and Insurance

The fair value is equal to the current carrying value.

Investment Securities Available for Sale and Held to Maturity

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

Net Loans Receivable

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

FDIC Indemnification Asset

The indemnification asset represents the present value of the estimated cash payments expected to be received from the FDIC for future losses on covered assets based on the credit adjustment estimated for each covered asset and loss sharing percentages. These cash flows are discounted at a market-based rate to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC.

Deposits and FHLB Advances – Long-Term

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

Bank-Owned Life Insurance

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

Commitments to Extend Credit

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

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

Management’s discussion and analysis of the Company’s financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Polonia Bancorp. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and footnotes appearing in Part I, Item 1 of this document.

Forward-Looking Statements

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of Polonia MHC, Polonia Bancorp and Polonia Bank. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. Polonia MHC’s, Polonia Bancorp’s and Polonia Bank’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 the Company and its subsidiary include, but are not limited to the following: the ability to successfully integrate the operations of Earthstar Bank; changes in interest rates; national and regional economic conditions; legislative and regulatory changes; monetary and fiscal policies of the U.S. government; including policies of the U.S. Treasury and the Federal Reserve Board; the quality and composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company’s market area; changes in real estate market values in the Company’s market area; and changes in relevant accounting principles and guidelines. Aitionally, other risks and uncertainties are described herein and in the Company’s Form 10-K for the year ended December 31, 2010 under “Item 1A: Risk Factors” filed with the Securities and Exchange Commission (the “SEC”) which is available through the SEC’s website at www.sec.gov . These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

General

Polonia Bancorp (The “Company”) was organized as a federally chartered corporation at the direction of the Bank in January 2007 to become the mid-tier stock holding company for the Bank upon the completion of its reorganization into the mutual holding company form of organization. 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 or leases any property, but instead uses the premises, equipment and other property of Polonia Bank and pays appropriate rental fees, as by required 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 operates as a community-oriented financial institution offering a variety of deposit products as well as providing residential real estate loans, and to a lesser degree, multi-family and nonresidential real estate loans, home equity loans and consumer loans primarily to individuals, families and small businesses located in Bucks, Philadelphia and Montgomery Counties, Pennsylvania. The Bank operates from nine full-service locations, including our main office in Huntingdon Valley, Pennsylvania and our branch offices in the city of Philadelphia and Bucks County.

On December 10, 2010, Polonia Bank assumed certain of the deposits and acquired certain assets of Earthstar Bank (“Earthstar”), a state charted bank from the Federal Deposit Insurance Corporation (“FDIC”), as receiver for Earthstar. We acquired approximately $67 million in assets, including approximately $42 million in loans (comprised primarily of single-family residential and home equity loans (“Single-Family Loans”) and commercial business and commercial real estate loans (“Commercial Loans”)), and approximately $8 million in investments securities. We also assumed approximately $90 million in deposits.

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.

Securities . Securities are reported at fair value adjusted for premiums and discounts which are recognized in interest income using the interest method over the period to maturity. Declines in the fair value of individual securities below their amortized cost, and that are deemed to be other than temporary, will be written down to current market value and included in earnings as realized losses. Management systematically evaluates securities for other than temporary declines in fair value on a quarterly basis.

Allowance for loan losses . The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). The Company’s periodic evaluation of the adequacy of the allowance for loan losses is determined by management through evaluation of the loss exposure on individual non-performing, delinquent and high-dollar loans; review of economic conditions and business trends; historical loss experience and growth and composition of the loan portfolio, as well as other relevant factors.

A quantitative analysis is utilized to support the adequacy of the allowance for loan losses. This analysis includes review of historical charge-off rates for loan categories, fluctuations and trends in the amount of classified loans and economic factors. Significant to this analysis are any changes in observable trends that may be occurring relative to loans to assess potential weaknesses within the credit. Current economic factors and trends in risk ratings are considered in the determination and allocation of the allowance for loan losses.

Income taxes. The Company files a consolidated federal income tax return. Deferred tax assets and liabilities are computed based on the difference between the financial statement and the income tax basis of assets and liabilities using the enacted marginal tax rates. Deferred income taxes or benefits are based on changes in the deferred tax asset or liability from period to period. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which such items are expected to be realized or settled. As changes in tax rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Comparison of Financial Condition at September 30, 2011 and December 31, 2010

Total assets at September 30, 2011 were $270.0 million, a decrease of $28.8 million, or 9.6%, from total assets of $298.8 million at December 31, 2010. The decrease in assets resulted primarily from a $35.3 million decrease in cash and cash equivalents and a $15.1 million decrease in loans receivable and covered loans, partially offset by a $22.6 million increase in investment securities. Total liabilities at September 30, 2011 were $242.5 million compared to $271.6 million at December 31, 2010, a decrease of $29.1 million, or 10.7%. The decrease in liabilities was primarily due to a $31.7 million decrease in deposits, partially offset by a $2.8 million increase in FHLB advances-long-term. Total stockholder’s equity increased to $27.5 million at September 30, 2011 from $27.3 million at December 31, 2010, an increase of $200,000, or 0.7%, primarily as a result of our operating profit.

Cash and cash equivalents decreased to $18.7 million from $54.0 million during the nine months ended September 30, 2011, a decrease of $35.3 million, or 65.4%. The decrease in cash and cash equivalents was attributable to the purchase of $36.5 million in investment securities held to maturity, partially offset by a $2.8 million increase in FHLB advances – long term.

Investment securities available for sale decreased to $18.6 million from $27.4 million during the nine months ended September 30, 2011, a decrease of $8.8 million, or 32.1%. The decrease in investment securities available for sale was attributable to sales of securities of $5.8 million and payments received of $4.4 million, partially offset by a $1.9 million purchase in corporate bonds.

Investment securities held to maturity increased to $57.4 million from $26.1 million during the nine months ended September 30, 2011, an increase of $31.3 million, or 120.0%. The increase in investment securities held to maturity was attributable, in part, to the purchase of $36.5 million in mortgaged-backed securities, partially offset by $5.1 million in payments received.

Loans receivable decreased $15.1 million, or 8.9%, to $156.1 million at September 30, 2011, compared to $171.3 million at December 31, 2010. The size of our loan portfolio decreased during the nine months ended September 30, 2011 primarily due to $14.0 million in loan repayments during the period.

Total deposits decreased to $208.0 million from $239.7 million during the nine months ended September 30, 2011, a decrease of $31.7 million, or 13.2%. The decrease in deposits was attributable, in part, to the outflow of $15.6 million in time deposits, as rates offered on the maturity of time deposits were below rates offered in the marketplace, $10.7 million decrease in money market accounts, and $4.4 million decrease in noninterest bearing demand deposits.

We utilize borrowings from the FHLB of Pittsburgh to supplement our supply of funds for loans and investments. The $2.8 million increase in FHLB advances long-term was due to more attractive longer term funding opportunities available through advances. The proceeds of these borrowings were used to fund the outflow of higher interest earning certificates of deposit which matured during the period.

Comparison of Operating Results For The Three and Nine Months Ended September 30, 2011 and 2010

General. We recorded net income of $117,000 during the three months ended September 30, 2011, compared to net income of $61,000 during the three months ended September 30, 2010. The higher net income for the three month period ended September 30, 2011 was primarily related to higher net interest income and noninterest income, partially offset by higher noninterest expense and provision for loan losses.

We recorded net income of $331,000 during the nine months ended September 30, 2011, compared to net income of $376,000 during the nine months ended September 30, 2010. The lower net income for the nine month period ended September 30, 2011 was primarily related to higher noninterest expense and a higher provision for loan losses, partially offset by higher net interest income.

Net Interest Income. The following table summarizes changes in interest income and expense for the three and nine months ended September 30, 2011 and 2010.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
	(Dollars in thousands)				(Dollars in thousands)
Interest and dividend income:
Loans receivable	$	2,209	$	1,999	$	6,743	$	6,189
Investment securities		631		351		1,863		1,218
Other interest and dividend income		1		3		6		5
Total interest and dividend income		2,841		2,353		8,612		7,412
Interest Expense:
Deposits		644		688		1,983		2,143
FHLB advances - short-term		-		-		11		-
FHLB advances - long-term		211		205		595		615
Advances by borrowers for taxes and insurance		6		6		17		18
Total interest expense		861		899		2,606		2,776
Net interest income	$	1,980	$	1,454	$	6,006	$	4,635

The following table summarizes average balances and average yields and costs for the three and nine months ended September 30, 2011 and 2010.

	Three Months Ended												Nine Months Ended
	September 30,												September 30,
	2011						2010						2011						2010
	Average			Yield/			Average			Yield/			Average			Yield/			Average			Yield/
	Balance			Cost			Balance			Cost			Balance			Cost			Balance			Cost
	(Dollars in thousands)												(Dollars in thousands)
Assets:
Interest-earning assets:
Loans	$	162,643			5.31	%	$	143,372			5.46	%	$	169,632			5.24	%	$	147,495			5.53	%
Investment securities		76,648			3.22			42,069			3.26			72,140			3.41			42,823			3.75
Other interest-earning assets		16,707			0.02			15,618			0.08			16,355			0.05			11,118			0.06
Total interest-earning assets		255,998			4.40	%		201,059			4.64	%		258,127			4.46	%		201,436			4.92	%
Noninterest-earning assets:		19,774						14,349						20,159						14,504
Allowance for Loan Losses		(1,704	)					(863	)					(1,259	)					(968	)
Total assets	$	274,068					$	214,545					$	277,027					$	214,972

Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	13,356			0.62	%	$	10,923			0.69	%	$	13,089			0.61	%	$	11,135			0.68	%
Money market deposits		47,158			0.66			33,566			0.99			50,137			0.68			33,300			1.11
Savings accounts		30,288			0.45			29,433			0.46			30,081			0.44			29,615			0.52
Time deposits		115,451			1.76			79,995			2.73			115,635			1.81			80,213			2.82
Total interest-bearing deposits		206,253			1.24	%		153,917			1.77	%		208,942			1.27	%		154,263			1.86	%
FHLB advances - short-term		-			-			-			-			2,176			0.68			-			-
FHLB advances - long-term		31,325			2.67			28,651			2.84			28,942			2.75			28,840			2.85
Advances by borrowers for taxes and insurance		927			2.14			1,031			2.31			957			2.38			1,099			2.19
Total interest-bearing liabilities		238,505			1.43	%		183,599			1.94	%		241,017			1.45	%		184,202			2.01	%
Noninterest-bearing liabilities:		7,751						6,487						10,032						6,526
Total liabilities		246,256						190,086						251,049						190,728
Stockholders' equity		27,812						24,459						25,978						24,244
Total liabilities and Stockholders' equity	$	274,068					$	214,545					$	277,027					$	214,972

Interest rate spread					2.97	%					2.70	%					3.02	%					2.90	%
Net yield on interest-bearing assets					3.07	%					2.87	%					3.11	%					3.08	%
Ratio of average interest-earning assets to
average interest-bearing liabilities					107.33	%					109.51	%					107.10	%					109.36	%

Our net interest rate spread increased to 2.97% for the three months ended September 30, 2011 from 2.70% for the same period in 2010. Our net interest rate spread increased to 3.02% for the nine months ended September 30, 2011 from 2.90% for the same period in 2010. Net interest income for the three months ended September 30, 2011 increased $526,000 to $2.0 million, or 35.1% from $1.5 million during the same period last year. Net interest income for the nine months ended September 30, 2011 increased $1.4 million to $6.0 million, or 30.4% from $4.6 million during the same period last year. The primary reasons for the increase in net interest income for the three and nine month period reflects a higher average balance of loans and investment securities primarily related to the acquisition of assets from the former Earthstar Bank, a lower average interest rate paid on money market accounts, savings accounts, time deposits and FHLB advances. The average balance of loans increased during the three and nine months ended September 30, 2011 due to the increased balance of loans acquired from the former Earthstar Bank, increased loan originations from the same period last year, partially offset by increased loan sales from the same period as last year. Lower interest expense on deposits for the three and nine months ended September 30, 2011 was due to a continuing decline in market interest rates. The increase in the average balance of investment securities during the three and nine month periods ended September 30, 2011 was due to the purchase of investment securities held to maturity as well as the securities acquired from the former Earthstar Bank.

Provision for Loan Losses. We recorded a provision for loan losses of $229,000 for the three months ended September 30, 2011 as compared to a credit provision for loan losses of $63,000 for the three months ended September 30, 2010. For the nine months ended September 30, 2011 we recorded a provision for loan losses of $344,000 as compared to a credit provision for loan losses of $275,000 for the nine months ended September 30, 2010. The provisions reflect management’s assessment of lending activities, increased non-performing loans, levels of current delinquencies and current economic conditions. Provisions for loan losses are charged to earnings to maintain the total allowance for loan losses at a level believed by management sufficient to cover all known and inherent losses in the loan portfolio which are both probable and reasonably estimable. Management’s analysis includes consideration of the Company’s historical experience, the volume and type of lending conducted by the Company, the amount of the Company’s classified and criticized assets, the status of past due principal and interest payments, general economic conditions, particularly as they relate to the Company’s primary market area, and other factors related to the collectability of the Company’s loan portfolio.

Noninterest Income. The following table summarizes noninterest income for the three and nine months ended September 30, 2011 and 2010.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
	(Dollars in thousands)				(Dollars in thousands)
Service fees on deposit accounts	$	34	$	21	$	116	$	62
Earnings on bank-owned life insurance		15		22		50		69
Investment securities gains, net		16		-		235		294
Gain on sale of loans, net		250		134		354		272
Rental income		78		72		229		215
Other		57		51		230		335
Total	$	450	$	300	$	1,214	$	1,247

The $150,000 increase in noninterest income during the three months ended September 30, 2011 as compared to the three months ended September 30, 2010 was primarily due to a $116,000 increase in gains on the sale of loans, a $16,000 increase in gains on the sale of investments, a $13,000 increase in service fees on deposit accounts, and a $6,000 increase in rental income and other income, partially offset by a $7,000 decrease in earnings on Bank-owned life insurance.

The $33,000 decrease in noninterest income during the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010 was primarily due to a $105,000 decrease in other noninterest income, a $59,000 decrease in gains in the sale of investments, a $19,000 decrease in earnings on bank-owned life insurance, partially offset by a $82,000 gain on sale of loans, a $54,000 increase in service fees on deposit accounts and a $14,000 increase in rental income. The decrease in other non interest income was partially due to a one-time fee resulting from the Company serving as a potential funding facility for certain loans originated by another entity. This arrangement expired without any loans being funded.

Noninterest Expense. The following table summarizes noninterest expense for the three and nine months ended September 30, 2011 and 2010.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
	(Dollars in thousands)				(Dollars in thousands)
Compensation and employee benefits	$	1,126	$	875	$	3,444	$	2,667
Occupancy and equipment		314		260		1,008		769
Federal deposit insurance premiums		6		73		213		303
Data processing expense		124		71		438		210
Professional fees		100		83		289		271
Other		361		358		1,088		1,520
Total	$	2,031	$	1,720	$	6,480	$	5,740

Total noninterest expense increased $311,000, or 18.1%, to $2.0 million for the three months ended September 30, 2011 from the prior year period. The increase in noninterest expense for the three months ended September 30, 2011 as compared to the prior year period was primarily the result of a $251,000 increase in compensation and employee benefits related to the acquisition of Earthstar Bank, a $54,000 increase in occupancy and equipment due to the operation of aitional branches acquired in the Earthstar transaction, a $53,000 increase in data processing expense resulting from conversion of the computer systems related to the Earthstar transaction and a $17,000 increase in professional fees, partially offset by a decrease of $67,000 in Federal deposit insurance premiums related to the overaccrual of expense related to the revised FDIC insurance assessment calculation.

Total noninterest expense increased $740,000, or 12.9%, to $6.5 million for the nine months ended September 30, 2011 from the prior year period. The increase in noninterest expense for the nine months ended September 30, 2011 as compared to the prior year period was primarily the result of a $777,000 increase in compensation and employee benefits related to the acquisition of Earthstar Bank, a $239,000 increase in occupancy and equipment due to the operation of aitional branches acquired in the Earthstar transaction, a $228,000 increase in data processing expense resulting from conversion of the computer systems related to the Earthstar transaction, partially offset by a decrease of $432,000 in other expense. The decrease in other expense of $432,000 is comprised of a decrease of $675,000 in expenses related to our investment in a subsidiary set up to manage and dispose of foreclosed property, partially offset by an increase of $239,000 in other expense related to the Earthstar acquisition and a $90,000 decrease in Federal deposit insurance premiums related to the revised FDIC insurance assessment calculation.

Income Taxes. We recorded tax expense of $54,000 for the three months ended September 30, 2011 compared to tax expense of $37,000 during the three months ended September 30, 2010. The increase of tax expenses resulted from the increase in our taxable operating profits.

We recorded tax expense of $65,000 for the nine months ended September 30, 2011 compared to tax expense of $41,000 during the nine months ended September 30, 2010. The increase of tax expenses resulted from the increase in our taxable operating profits.

Liquidity and Capital Management

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

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

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September 30, 2011, cash and cash equivalents totaled $18.7 million. Securities classified as available-for-sale, which provide aitional sources of liquidity, totaled $18.6 million at September 30, 2011. In aition, at September 30, 2011, we had the ability to borrow a total of approximately $87.5 million from the FHLB of Pittsburgh. On September 30, 2011, we had $31.2 million of borrowings outstanding. Any growth of our loan portfolio may require us to borrow aitional funds.

At September 30, 2011, we had $4.0 million in mortgage loan commitments outstanding and $36,000 in a standby letter of credit. Time deposits due within one year of September 30, 2011 totaled $67.2 million, or 58.9% of time deposits. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the time deposits due on or before September 30, 2012. We believe, however, based on past experience that a significant portion of our time deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

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

The Company is a separate entity and apart from the Bank and must provide for its own liquidity. In aition to its operating expenses, the Company may utilize its cash position for the payment of dividends or to repurchase common stock, subject to applicable restrictions. The Company’s primary source of funds are dividends from the Bank. Payment of such dividends to the Company by the Bank is limited under federal law. The amount that can be paid in any calendar year, without prior regulatory approval, cannot exceed the retained net earnings (as defined) for the year plus the preceding two calendar years. The Company believes that such restriction will not have an impact on the Company’s ability to meet its ongoing cash obligations.

Capital Management. We are subject to various regulatory capital requirements administered by the Office of the Comptroller of Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2011, we exceeded all of our regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines.

Off-Balance Sheet Arrangements . In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments.

For the nine months ended September 30, 2011 and the year ended December 31, 2010 we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(e) that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits
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 Certifications

101* The following materials from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2011, formatted in XBRL (Extensible Business reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statement of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) related notes.

*Furnished, not filed.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	POLONIA BANCORP

Date: March 29, 2012	By:	/s/ Anthony J. Szuszczewicz
		Anthony J. Szuszczewicz
		President and Chief Executive Officer
		(principal executive officer)

Date: March 29, 2012	By:	/s/ Paul D. Rutkowski
		Paul D. Rutkowski
		Chief Financial Officer and Treasurer
		(principal financial and accounting officer)