10-Q 1 v327484_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2012

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: 0-54850

POLONIA BANCORP, INC.

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

Maryland		45-3181577
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3993 Huntingdon Pike, 3^rd Floor, Huntingdon Valley, Pennsylvania 19006

(Address of principal executive offices) (Zip Code)

(215) 938-8800

(Registrant’s telephone number, including area code)

POLONIA BANCORP

(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 November 8, 2012, there were 3,153,132 shares of the registrant’s common stock outstanding.

POLONIA BANCORP, INC.

Table of Contents

		Page
		No.

Part I.	Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets at September 30, 2012 and December 31, 2011 (Unaudited)	1

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)	2

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited)	3

	Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended September 30, 2012 (Unaudited)	4

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (Unaudited)	5

	Notes to Unaudited Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	36

Part II.	Other Information

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 3.	Defaults Upon Senior Securities	37

Item 4.	Mine Safety Disclosures	37

Item 5.	Other Information	37

Item 6.	Exhibits	37

	Signatures	39

PART 1.

FINANCIAL INFORMATION

Item 1.

Financial Statements

POLONIA BANCORP

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	September 30,			December 31,
	2012			2011
ASSETS
Cash and due from banks	$	2,682,592		$	2,312,801
Interest-bearing deposits with other institutions		20,391,847			15,103,397
Cash and cash equivalents		23,074,439			17,416,198

Investment securities available for sale		15,878,110			17,348,485
Investment securities held to maturity (fair value of $62,541,676 and $58,992,283)		59,054,666			56,597,111
Loans held for sale		10,929,600			-
Loans receivable		114,342,674			128,922,661
Covered loans		22,263,609			25,708,179
Total loans		136,606,283			154,630,840
Less: allowance for loan losses		1,213,538			1,279,008
Net loans		135,392,745			153,351,832
Accrued interest receivable		887,298			970,966
Federal Home Loan Bank stock		2,621,200			2,822,600
Premises and equipment, net		4,994,200			5,085,980
Bank-owned life insurance		4,230,651			4,200,181
FDIC indemnification asset		4,544,028			5,218,506
Other assets		2,165,657			2,038,563
TOTAL ASSETS	$	263,772,594		$	265,050,422

LIABILITIES
Deposits	$	197,135,224		$	203,016,286
FHLB advances - long-term		25,649,974			31,091,302
Advances by borrowers for taxes and insurance		520,140			939,092
Accrued interest payable		94,712			95,894
Stock offering subscription rights		9,602,456			-
Other liabilities		2,844,072			2,269,471
TOTAL LIABILITIES		235,846,578			237,412,045

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		14,162,343			14,051,475
Retained earnings		15,373,949			15,399,854
Unallocated shares held by Employee Stock Ownership Plan "ESOP" (79,918 and 87,514 shares)		(799,184	)		(875,144	)
Treasury Stock (153,118 and 151,136 shares)		(1,289,889	)		(1,274,528	)
Accumulated other comprehensive income		445,734			303,657
TOTAL STOCKHOLDERS' EQUITY		27,926,016			27,638,377
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	263,772,594		$	265,050,422

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,
	2012			2011		2012			2011
INTEREST AND DIVIDEND INCOME
Loans receivable	$	2,146,133		$	2,209,375	$	6,131,166		$	6,743,531
Investment securities		565,163			630,908		1,731,573			1,863,190
Other interest and dividend income		3,595			1,136		9,840			5,604
Total interest and dividend income		2,714,891			2,841,419		7,872,579			8,612,325

INTEREST EXPENSE
Deposits		459,385			644,654		1,494,127			1,983,292
FHLB advances - short-term		-			-		-			11,187
FHLB advances - long-term		185,183			210,659		556,904			594,947
Advances by borrowers for taxes and insurance		5,068			5,664		15,995			16,703
Total interest expense		649,636			860,977		2,067,026			2,606,129

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		2,065,255			1,980,442		5,805,553			6,006,196
Provision for loan losses		123,731			229,041		314,305			344,230

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,941,524			1,751,401		5,491,248			5,661,966

NONINTEREST INCOME
Service fees on deposit accounts		24,159			33,677		105,074			116,363
Earnings on bank-owned life insurance		9,555			14,739		30,470			49,477
Investment securities gains, net		-			16,489		-			234,584
Gain on sale of loans, net		791,499			250,051		1,132,478			354,074
Rental income		72,910			78,423		217,874			228,958
Other		28,162			56,923		220,994			230,175
Total noninterest income		926,285			450,302		1,706,890			1,213,631

NONINTEREST EXPENSE
Compensation and employee benefits		1,716,588			1,125,757		4,132,536			3,443,803
Occupancy and equipment		346,963			314,128		1,033,187			1,007,914
Federal deposit insurance premiums		69,126			6,297		224,281			212,964
Data processing expense		96,237			124,576		294,737			437,743
Professional fees		118,279			99,718		326,873			289,461
Other		632,753			360,679		1,230,127			1,087,902
Total noninterest expense		2,979,946			2,031,155		7,241,741			6,479,787

Income (loss) before income tax expense (benefit)		(112,137	)		170,549		(43,603	)		395,810
Income tax expense (benefit)		(45,913	)		53,741		(17,698	)		64,776

NET INCOME (LOSS)	$	(66,224	)	$	116,808	$	(25,905	)	$	331,034

EARNINGS PER SHARE - Basic and Diluted	$	(0.02	)	$	0.04	$	(0.01	)	$	0.11

See accompanying notes to the unaudited consolidated financial statements.

POLONIA BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2012			2011			2012			2011

Net income (loss)	$	(66,224	)	$	116,808		$	(25,905	)	$	331,034

Reclassification adjustment for gains on available for sale securities included in net income (loss)		-			(16,489	)		-			(234,584	)

Tax effect		-			5,606			-			79,759

Changes in net unrealized gain (loss) on investment securities available for sale		170,110			(253,053	)		254,518			(367,474	)

Tax effect		(57,837	)		86,038			(86,536	)		124,941

Total comprehensive income (loss)	$	46,049		$	(61,090	)	$	142,077		$	(66,324	)

See accompanying notes to the unaudited consolidated financial statements.

POLONIA BANCORP

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

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

Balance, December 31, 2011		3,306,250	$	33,063	$	14,051,475		$	15,399,854		$	(875,144	)	$	(1,274,528	)	$	303,657	$	27,638,377

Net loss									(25,905	)										(25,905	)
Other comprehensive income; net																		142,077		142,077
Purchase of treasury stock (1,982) shares, at cost															(15,361	)				(15,361	)
Stock options compensation expense						67,194														67,194
Allocation of unearned ESOP shares						(33,481	)					75,960								42,479
Allocation of unearned restricted stock						77,155														77,155

Balance, September 30, 2012		3,306,250	$	33,063	$	14,162,343		$	15,373,949		$	(799,184	)	$	(1,289,889	)	$	445,734	$	27,926,016

See accompanying notes to the unaudited consolidated financial statements.

POLONIA BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended
	September 30,
	2012			2011
OPERATING ACTIVITIES
Net income (loss)	$	(25,905	)	$	331,034
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Provision for loan losses		314,305			344,230
Depreciation, amortization and accretion		630,089			429,930
Investment securities gains, net		-			(234,584	)
Origination of loans held for sale		(42,022,334	)		(17,173,036	)
Proceeds from sale of loans		32,046,660			17,527,110
Net gain on sale of loans		(953,926	)		(354,074	)
Gain on the sale of other real estate owned		(29,236	)		-
Earnings on bank-owned life insurance		(30,470	)		(49,477	)
Deferred federal income taxes		(46,250	)		(63,020	)
Decrease in accrued interest receivable		83,668			51,353
Increase (decrease) in accrued interest payable		(1,182	)		25,371
Compensation expense for stock options, ESOP and restricted stock		186,828			196,086
Other, net		791,902			471,916
Net cash provided by (used for) operating activities		(9,055,852	)		1,502,839

INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales		-			6,079,283
Proceeds from principal repayments and maturities		3,485,195			4,369,848
Purchases		(1,805,800	)		(1,933,200	)
Investment securities held to maturity:
Proceeds from principal repayments and maturities		9,169,555			5,069,014
Purchases		(11,738,900	)		(36,490,767	)
Decrease in loans receivable, net		13,965,246			9,705,803
Decrease in covered loans		3,476,929			5,386,494
Proceeds from sale of other real estate owned		385,461			-
Redemptions of Federal Home Loan Bank stock		222,000			494,400
Purchase of Federal Home Loan Bank stock		(20,600	)		-
Payments received from FDIC under loss share agreement		383,251			-
Purchase of premises and equipment		(345,973	)		(237,409	)
Net cash (used for) provided by investing activities		17,176,364			(7,556,534	)

FINANCING ACTIVITIES
Decrease in deposits, net		(5,853,848	)		(31,538,815	)
Net increase in FHLB advances - short term		-			(2,190,601	)
Repayment of FHLB advances - long-term		(5,441,328	)		-
Proceeds of FHLB advances - long-term		-			5,000,000
Purchase of treasury stock		(15,361	)		(12,387	)
Proceeds from stock subscription rights		9,602,456			-
Deferred conversion costs		(335,238	)		-
Decrease in advances by borrowers for taxes and insurance, net		(418,952	)		(469,920	)
Net cash used for financing activities		(2,462,271	)		(29,211,723	)
Increase (decrease) in cash and cash equivalents		5,658,241			(35,265,418	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		17,416,198			54,004,549
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	23,074,439		$	18,739,131

SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid:
Interest		2,068,208			2,580,758
Income taxes		235,000			35,000
Noncash items:
Transfers from loans to other real estate owned		269,263			-
Transfers from premises and equipment		108,309			-

See accompanying notes to the unaudited consolidated financial statements.

POLONIA BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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, 2012 are not necessarily indicative of the results that may be expected for the full year. The December 31, 2011 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, 2011.

Use of Estimates in the Preparation of Financial Statements. The accounting principles followed by the Company and the methods of applying these principles conform to U.S. generally accepted accounting principles and to general practice within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the Consolidated Balance Sheet date and reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. Materials estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, and the fair value of financial instruments.

Recent Accounting and Regulatory Pronouncements

In December 2011, the FASB issued ASU 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification. The amendments in this Update affect entities that cease to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary's nonrecourse debt. Under the amendments in this Update, when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary's nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest under Subtopic 810-10, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary's operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. The amendments in this Update should be applied on a prospective basis to deconsolidation events occurring after the effective date. Prior periods should not be adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning on or after September 15, 2012. This ASU is not expected to have a significant impact on the Company’s financial statements.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities . The amendments in this Update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. This information will enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative 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 (loss) or consolidated stockholders’ equity.

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,
	2012			2011			2012			2011
Net Income (Loss):	$	(66,224	)	$	116,808		$	(25,905	)	$	331,034

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		(151,998	)		(149,994	)		(151,425	)		(149,437	)
Less weighted average number of unearned ESOP shares		(80,676	)		(89,316	)		(82,823	)		(91,456	)
Less weighted average number of nonvested restricted stock awards		(2,164	)		(14,477	)		(3,104	)		(15,405	)
Weighted average shares outstanding basic		3,071,412			3,052,463			3,068,898			3,049,952
Weighted average shares outstanding diluted		3,071,412			3,052,463			3,068,898			3,049,952
Earnings per share:
Basic	$	(0.02	)	$	0.04		$	(0.01	)	$	0.11
Diluted		(0.02	)		0.04			(0.01	)		0.11

Options to purchase 153,903 shares at $9.40 per share of common stock as of September 30, 2012 and 2011, as well as 14,364 shares of restricted stock as of September 30, 2011, respectively, were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.

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 53% of the total loans pooled at September 30, 2012, 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 41 percent of the total loans pooled at September 30, 2012. 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 1 percent of the total loans pooled at September 30, 2012. 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 5 percent of the total loans pooled at September 30, 2012. 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 outstanding balance, including interest, and carrying values of loans acquired were as follows:

September 30, 2012

December 31, 2011

Acquired Loans

Acquired Loans

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

3,139,373

36,708,701

3,751,512

41,396,457

Carrying amount, net of allowance

1,082,033

22,106,112

1,226,434

25,433,101

During the nine months ended September 30, 2012, the Company recorded a provision and charge-off of $14,702 for increases in the expected losses for acquired loans with specific evidence of deterioration in credit quality. For the year ended December 31, 2011, the Company recorded a provision of $73,270 for increases in the expected losses for acquired loans with specific evidence of deterioration in credit quality. There was an allowance for loan loss of $68,481 reversed during the nine months ended September 30, 2012 and no allowance for loan loss reversed for the year ended December 31, 2011. There was no allowance for loan losses recorded for acquired loans without specific evidence of deterioration of credit quality for the nine months ended September 30, 2012 and for the year ended December 31, 2011.

Changes in the accretable yield for acquired loans were as follows for the three and nine months ended September 30, 2012 and 2011.

	Three Months Ended September 30, 2012					Nine Months Ended September 30, 2012
			Acquired Loans						Acquired Loans
			Without Specific						Without Specific
	Acquired Loans With		Evidence of			Acquired Loans With			Evidence of
	Specific Evidence of		Deterioration in			Specific Evidence of			Deterioration in
	Deterioration in		Credit Quality			Deterioration in			Credit Quality
	Credit Quality		(ASC 310-30			Credit Quality			(ASC 310-30
	(ASC 310-30)		Analogized)			(ASC 310-30)			Analogized)

Balance at beginning of period	$	-	$	12,588,168		$	48,637		$	8,680,970
Reclassifications and other		-		(328,712	)		-			4,317,082
Accretion		-		(394,610	)		(48,637	)		(1,133,206	)
Balance at end of period	$	-	$	11,864,846		$	-		$	11,864,846

	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
				Acquired Loans						Acquired Loans
				Without Specific						Without Specific
	Acquired Loans With			Evidence of			Acquired Loans With			Evidence of
	Specific Evidence of			Deterioration in			Specific Evidence of			Deterioration in
	Deterioration in			Credit Quality			Deterioration in			Credit Quality
	Credit Quality			(ASC 310-30			Credit Quality			(ASC 310-30
	(ASC 310-30)			Analogized)			(ASC 310-30)			Analogized)

Balance at beginning of period	$	80,598		$	9,123,029		$	114,448		$	10,665,986
Reclassifications and other		1,370			(367,362	)		-			(983,031	)
Accretion		(21,244	)		(422,685	)		(53,724	)		(1,349,973	)
Balance at end of period	$	60,724		$	8,332,982		$	60,724		$	8,332,982

The $394,610 and $1,133,206 recognized as accretion represents the interest income earned on acquired loans for the three and nine months ended September 30, 2012. Included in reclassification and other for loans acquired without specific evidence of deterioration in credit quality was ($33,743) and $4,589,066 for the three and nine months ended September 30, 2012 of reclassifications from non-accretable discounts to accretable discounts. The remaining ($294,969) and ($271,984) change in the accretable yield represents decreases in expected interest due to decreased expected principal repayments during the three and nine month periods ended September 30, 2012, respectively.

Investment Securities

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

	September 30, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for Sale
Mortgage-backed securities:
Fannie Mae	$	3,799,437	$	315,797	$	-		$	4,115,234
Freddie Mac		141,729		10,563		-			152,292
Government National Mortgage Association		738,451		110,528		-			848,979
Collateralized mortgage obligations-government sponsored entities		2,741,130		76,818		(38,157	)		2,779,791
Total mortgage-backed securities		7,420,747		513,706		(38,157	)		7,896,296
Corporate securities		7,782,009		258,620		(58,815	)		7,981,814

Total	$	15,202,756	$	772,326	$	(96,972	)	$	15,878,110

Held to Maturity
Mortgage-backed securities:
Fannie Mae	$	48,163,640	$	2,881,007	$	-		$	51,044,647
Freddie Mac		10,891,026		606,003		-			11,497,029
Total mortgage-backed securities	$	59,054,666	$	3,487,010	$	-		$	62,541,676

	December 31, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for Sale
Mortgage-backed securities:
Fannie Mae	$	5,048,803	$	364,619	$	-		$	5,413,422
Freddie Mac		226,397		16,307		-			242,704
Government National Mortgage Association		891,547		122,503		-			1,014,050
Collateralized mortgage obligations-government sponsored entities		3,749,738		85,709		(23,942	)		3,811,505
Total mortgage-backed securities		9,916,485		589,138		(23,942	)		10,481,681
Corporate securities		6,971,914		63,753		(168,863	)		6,866,804

Total	$	16,888,399	$	652,891	$	(192,805	)	$	17,348,485

Held to Maturity
Mortgage-backed securities:
Fannie Mae	$	46,771,951	$	1,991,083	$	-		$	48,763,034
Freddie Mac		9,825,160		404,089		-			10,229,249
Total mortgage-backed securities	$	56,597,111	$	2,395,172	$	-		$	58,992,283

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, 2012
	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	$	322,029	$	(19,644	)	$	247,536	$	(18,513	)	$	569,565	$	(38,157	)
Total mortgage-backed securities		322,029		(19,644	)		247,536		(18,513	)		569,565		(38,157	)
Corporate securities		464,915		(35,085	)		476,270		(23,730	)		941,185		(58,815	)

Total	$	786,944	$	(54,729	)	$	723,806	$	(42,243	)	$	1,510,750	$	(96,972	)

	December 31, 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	$	529,409	$	(22,168	)	$	6,690	$	(1,774	)	$	536,099	$	(23,942	)
Total mortgage-backed securities		529,409		(22,168	)		6,690		(1,774	)		536,099		(23,942	)
Corporate securities		4,358,300		(168,863	)		-		-			4,358,300		(168,863	)

Total	$	4,887,709	$	(191,031	)	$	6,690	$	(1,774	)	$	4,894,399	$	(192,805	)

The Company reviews its position quarterly and has determined that at September 30, 2012, 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, 2012. 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, 2012, 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	$	947,298	$	950,608	$	-	$	-
Due after one year through five years		6,070,901		6,303,618		-		-
Due after five years through ten years		3,610,589		3,768,975		13,883,693		14,818,976
Due after ten years		4,573,968		4,854,909		45,170,973		47,722,700

Total	$	15,202,756	$	15,878,110	$	59,054,666	$	62,541,676

The Company had no sales of investment securities for the three and nine month periods ending September 30, 2012. For the three month period ended September 30, 2011, the Company realized gross gains of $16,489 from the sale of investment securities and proceeds from the sale of investment securities of $34,989. For the nine month period ended 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.

Loans Receivable

Loans receivable consist of the following:

	September 30,		December 31,
	2012		2011

Mortgage Loans:
One-to-four family	$	98,300,922	$	111,271,871
Multi-family and commercial real estate		8,596,832		9,438,816
		106,897,754		120,710,687

Home equity loans		2,569,598		2,817,654
Home equity lines of credit ("HELOCs")		1,887,315		1,766,999
Education loans		2,329,897		2,885,067
Other consumer loans		461		7,381
Non-covered consumer loans purchased		924,536		1,024,626
Covered loans		22,263,609		25,708,179
		136,873,170		154,920,593
Less:
Net deferred loan fees		266,887		289,753
Allowance for loan losses		1,213,538		1,279,008

Total	$	135,392,745	$	153,351,832

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, 2012 and December 31, 2011 is dependent upon the local economic conditions.

Covered Loans

At September 30, 2012, and December 31, 2011, the Company had $22.3 million and $25.7 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 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 $1.1 million and $1.2 million at September 30, 2012 and December 31, 2011, respectively. The fair value of purchased credit-impaired loans, on the acquisition date, was determined primarily based on the fair value of loan collateral.

Loans acquired in the FDIC-assisted transaction have been performing better than originally expected. Based on the September 30, 2012 re-forecast of expected cash flows, an increased amount of the purchase discount is expected to accrete into interest income over the remaining average lives of the respective pools and individual loans. Due to the decrease in estimated losses to be incurred in the remaining portfolio, the expected reimbursement from the FDIC under the loss sharing agreement decreased. The FDIC loss sharing asset at September 30, 2012 will be reduced by loss claims submitted to the FDIC with the remaining balance amortized on the same basis as the discount, not to exceed its remaining contract life of approximately 8 years.

The carrying value of acquired, covered loans without specific evidence of deterioration in credit quality at the time of the acquisition was $22.1 million and $25.4 million at September 30, 2012 and December 31, 2011, 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.

The components of covered loans by portfolio class as of September 30, 2012 and December 31, 2011 were as follows:

	September 30,		December 31,
	2012		2011
Mortgage loans:
One-to-four family	$	12,467,914	$	14,442,335
Multi-family and commercial real estate		9,775,687		10,918,588
		22,243,601		25,360,923
Commercial		20,008		347,256
Total Loans	$	22,263,609	$	25,708,179

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 added 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 2012, the qualitative factors were reviewed and some changes were made.

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 adequate to cover loan losses inherent in the loan portfolio, at September 30, 2012. There was no allowance for loan losses and $73,270 related to loans covered by loss-share agreements with the FDIC as of September 30, 2012 and December 31, 2011, respectively.

The following tables summarize changes in the allowance for loan losses:

	Allowance for Loan Losses
	For the Three and Nine Months Ended September 30, 2012 and 2011
	One-to-			Multi-Family and											Education
	Four Family			Commercial											and Other
	Real Estate			Real Estate			Commercial		Home Equity			HELOCs			Consumer			Total

Three Months Ended September 30, 2012 Allowance for Loan Losses:
Balance at beginning of period	$	720,382		$	478,093		$	-	$	18,807		$	9,778		$	19,935		$	1,246,995
Provision (credit) for loan losses		20,953			92,367			-		(4,978	)		23,672			(8,283	)		123,731
Charge-offs		(61,810	)		(102,199	)		-		-			-			-			(164,009	)
Recoveries		636			6,185			-		-			-			-			6,821
Net charge-offs		(61,174	)		(96,014	)		-		-			-			-			(157,188	)
Balance at end of period	$	680,161		$	474,446		$	-	$	13,829		$	33,450		$	11,652		$	1,213,538

Three Months Ended September 30, 2011 Allowance for Loan Losses:
Balance at beginning of period	$	595,026		$	311,469		$	-	$	14,155		$	10,444		$	21,931		$	953,025
Provision (credit) for loan losses		27,657			197,416			-		4,294			(16	)		(310	)		229,041
Charge-offs		-			-			-		-			-			-			-
Recoveries		414			-			-		-			-			-			414
Net charge-offs		414			-			-		-			-			-			414
Balance at end of period	$	623,097		$	508,885		$	-	$	18,449		$	10,428		$	21,621		$	1,182,480

Nine Months Ended September 30, 2012 Allowance for Loan Losses:
Balance at beginning of period	$	611,280		$	618,233		$	-	$	19,304		$	8,835		$	21,356		$	1,279,008
Provision (credit) for loan losses		352,642			(47,773	)		-		(5,475	)		24,615			(9,704	)		314,305
Charge-offs		(285,228	)		(102,199	)		-		-			-			-			(387,427	)
Recoveries		1,467			6,185			-		-			-			-			7,652
Net charge-offs		(283,761	)		(96,014	)		-		-			-			-			(379,775	)
Balance at end of period	$	680,161		$	474,446		$	-	$	13,829		$	33,450		$	11,652		$	1,213,538

Nine Months Ended September 30, 2011 Allowance for Loan Losses:
Allowance for loan losses:	$	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
Balance at end of period	$	623,097		$	508,885		$	-	$	18,449		$	10,428		$	21,621		$	1,182,480

The following tables present the allowance for credit losses and recorded investments in loans by category:

	At September 30, 2012
	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:
Ending balance	$	680,161	$	474,446	$	-	$	13,829	$	33,450	$	11,652	$	1,213,538

Ending balance: individually evaluated for impairment	$	39,640	$	-	$	-	$	-	$	-	$	-	$	39,640

Ending balance: collectively evaluated for impairment	$	640,521	$	474,446	$	-	$	13,829	$	33,450	$	11,652	$	1,173,898

Ending balance: loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Loans:
Ending Balance	$	110,768,836	$	18,372,519	$	20,008	$	2,569,598	$	1,887,315	$	3,254,894	$	136,873,170

Ending balance: individually evaluated for impairment	$	1,402,653	$	783,621	$	-	$	-	$	-	$	-	$	2,186,274

Ending balance: collectively evaluated for impairment	$	96,898,269	$	7,813,211	$	-	$	2,569,598	$	1,887,315	$	2,330,358	$	111,498,751

Ending balance: loans acquired with deteriorated credit quality	$	12,467,914	$	9,775,687	$	20,008	$	-	$	-	$	924,536	$	23,188,145

	At December 31, 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:
Ending balance	$	611,280	$	618,233	$	-	$	19,304	$	8,835	$	21,356	$	1,279,008

Ending balance: individually evaluated for impairment	$	183,806	$	82,709	$	-	$	-	$	-	$	-	$	266,515

Ending balance: collectively evaluated for impairment	$	358,993	$	530,735	$	-	$	19,304	$	8,835	$	21,356	$	939,223

Ending balance: loans acquired with deteriorated credit quality	$	68,481	$	4,789	$	-	$	-	$	-	$	-	$	73,270

Loans:
Ending Balance	$	125,714,206	$	20,357,404	$	347,256	$	2,817,654	$	1,766,999	$	3,917,074	$	154,920,593

Ending balance: individually evaluated for impairment	$	1,441,659	$	799,876	$	-	$	-	$	-	$	-	$	2,241,535

Ending balance: collectively evaluated for impairment	$	109,835,038	$	8,634,113	$	-	$	2,817,654	$	1,766,999	$	2,892,448	$	125,946,252

Ending balance: loans acquired with deteriorated credit quality	$	14,442,335	$	10,918,588	$	347,256	$	-	$	-	$	1,024,626	$	26,732,805

Credit Quality Information

The following tables represent credit exposures by internally assigned grades at September 30, 2012 and December 31, 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 six 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 addition, 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, 2012 and December 31, 2011:

	September 30,				December 31,
	2012				2011
	Multi-Family				Multi-Family
	and Commercial				and Commercial
	Real Estate		Commercial		Real Estate		Commercial

Pass	$	12,083,131	$	20,008	$	15,046,793	$	347,256
Special Mention		2,348,768		-		1,832,849		-
Substandard		3,940,620		-		3,477,762		-
Doubtful		-		-		-		-
Loss		-		-		-		-
Total	$	18,372,519	$	20,008	$	20,357,404	$	347,256

Multi-family and commercial real estate and commercial loans are categorized by risk classification as of September 30, 2012 and December 31, 2011. 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. 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, 2012 and December 31, 2011:

	At September 30, 2012
	One-to- Four Family Real Estate		Home Equity		HELOCs		Education and Other Consumer		Non-covered Consumer Loans Purchased
Performing	$	109,376,721	$	2,559,269	$	1,887,315	$	2,239,631	$	828,855
Nonperforming		1,392,115		10,329		-		90,727		95,681
Total	$	110,768,836	$	2,569,598	$	1,887,315	$	2,330,358	$	924,536

	At December 31, 2011
	One-to- Four Family Real Estate		Home Equity		HELOCs		Education and Other Consumer		Non-covered Consumer Loans Purchased
Performing	$	124,249,535	$	2,762,755	$	1,766,999	$	2,678,002	$	942,973
Nonperforming		1,464,671		54,899		-		214,446		81,653
Total	$	125,714,206	$	2,817,654	$	1,766,999	$	2,892,448	$	1,024,626

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

	At September 30, 2012
													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	$	1,862,814	$	356,799	$	1,392,115	$	3,611,728	$	107,157,108	$	110,768,836	$	-
Multi-family and commercial real estate		765,184		14,688		1,637,808		2,417,680		15,954,839		18,372,519		-
Commercial		9,221		-		-		9,221		10,787		20,008		-
Home equity		-		-		10,329		10,329		2,559,269		2,569,598		-
HELOCs		-		-		-		-		1,887,315		1,887,315		-
Education and other consumer		111,833		10,424		90,727		212,984		2,117,374		2,330,358		-
Non-covered consumer loans purchased		84,833		-		95,681		180,514		744,022		924,536		-
Total	$	2,833,885	$	381,911	$	3,226,660	$	6,442,456	$	130,430,714	$	136,873,170	$	-

	At December 31, 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	$	1,349,589	$	96,230	$	1,464,671	$	2,910,490	$	122,803,716	$	125,714,206	$	-
Multi-family and commercial real estate		243,211		721,984		828,132		1,793,327		18,564,077		20,357,404		-
Commercial		-		-		-		-		347,256		347,256		-
Home equity		-		-		54,899		54,899		2,762,755		2,817,654		-
HELOCs		-		-		-		-		1,766,999		1,766,999		-
Education and other consumer		58,192		15,420		214,446		288,058		2,604,390		2,892,448		-
Non-covered consumer loans purchased		14,832		-		81,953		96,785		927,841		1,024,626		-
Total	$	1,665,824	$	833,634	$	2,644,101	$	5,143,559	$	149,777,034	$	154,920,593	$	-

Nonaccrual Loans

Loans are generally considered for nonaccrual status upon 90 days delinquency. 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, 2012 and December 31, 2011. The balances are presented by class of loans.

	September 30,		December 31,
	2012		2011

One-to-four family mortgage	$	1,392,115	$	1,464,671
Multi-family and commercial real estate		1,637,808		828,132
Commercial		-		-
Home Equity		10,329		54,899
HELOCs		-		-
Education and other consumer		90,727		214,446
Non-covered consumer loans purchased		95,681		81,953
Total	$	3,226,660	$	2,644,101

Interest income on loans would have been increased by approximately $90,312 during the nine month period ended September 30, 2012 and $193,323 during the period ending December 31 2011, 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.

Impaired Loans

The following table presents the recorded investment and unpaid principal balances for impaired loans and related allowance, if applicable. Also, presented are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired.

	September 30, 2012
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
One -to-four family real estate	$	522,654	$	522,654	$	-	$	522,470	$	-
Multi-family and commercial real estate		1,228,723		1,335,283		-		1,095,329		32,996
With an allowance recorded:
One -to-four family real estate	$	941,809	$	941,809	$	39,640	$	973,386	$	21,201
Multi-family and commercial real estate		-		-		-		-		-

Total:
One -to-four family real estate	$	1,464,463	$	1,464,463	$	39,640	$	1,495,856	$	21,201
Multi-family and commercial real estate		1,228,723		1,335,283		-		1,095,329		32,996

	December 31, 2011
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
One -to-four family real estate	$	-	$	-	$	-	$	-	$	-
Multi-family and commercial real estate		-		-		-		-		-
With an allowance recorded:
One -to-four family real estate	$	1,510,140	$	1,510,140	$	252,287	$	791,554	$	11,935
Multi-family and commercial real estate		950,485		950,485		87,498		566,405		21,471

Total:
One -to-four family real estate	$	1,510,140	$	1,510,140	$	252,287	$	791,554	$	11,935
Multi-family and commercial real estate		950,485		950,485		87,498		566,405		21,471

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 three and nine months ended September 30, 2012 and 2011 were as follows:

(In Thousands, Except Number of Contracts)	Three Months Ended September 30,
	2012						2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings
One-to-four family mortgage		-	$	-	$	-		2	$	851,191	$	851,191
Multi-family and commercial real estate		1		211,269		197,082		1		903,651		903,651
Total		1	$	211,269	$	197,082		3	$	1,754,842	$	1,754,842

(In Thousands, Except Number of Contracts)	Nine Months Ended September 30,
	2012						2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings
One-to-four family mortgage		-	$	-	$	-		2	$	851,191	$	851,191
Multi-family and commercial real estate		1		211,269		197,082		1		903,651		903,651
Total		1	$	211,269	$	197,082		3	$	1,754,842	$	1,754,842

There were no TDRs modified within the past year that subsequently defaulted during the three or nine month periods ended September 30, 2012.

Deposits

Deposit accounts are summarized as follows for the periods ending September 30, 2012 and December 31, 2011.

	September 30, 2012					December 31, 2011
	Amount		%			Amount		%

Non-interest-bearing demand	$	5,533,121		2.81	%	$	6,644,398		3.27	%
NOW accounts		12,711,175		6.45			15,721,299		7.75
Money market deposit		41,677,160		21.14			43,655,929		21.50
Savings		29,673,941		15.05			30,235,259		14.89
Time deposits		107,539,827		54.55			106,759,401		52.59
Total	$	197,135,224		100.00	%	$	203,016,286		100.00	%

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 $4,230,651 and $4,200,181 at September 30, 2012 and December 31, 2011, respectively. The Plan provides that death benefits totaling $6.0 million at September 30, 2012, will be paid to their beneficiaries in the event the officers should die.

Additionally, 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, 2012 and December 31, 2011, $1,721,738 and $1,621,532 had been accrued under these SRPs, respectively, and this liability and the related deferred tax assets of $585,391 and $551,321 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 $63,829 and $54,790 for the three months ended September 30, 2012 and 2011, and $188,106 and $162,653 for the nine months ended September 30, 2012 and 2011, respectively.

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,
	2012		2011		2012		2011
Components of net periodic benefit cost:
Service cost	$	38,493	$	31,039	$	112,097	$	91,399
Interest cost		25,336		23,751		76,009		71,254
Net periodic benefit cost	$	63,829	$	54,790	$	188,106	$	162,653

10.

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, 2012 and December 31, 2011, 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.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2012 and December 31, 2011, are as follows:

	September 30, 2012
	Level I		Level II		Level III		Total
Assets:
Available for Sale
Mortgage-backed securities	$	-	$	7,896,296	$	-	$	7,896,296
Corporate securities		-		7,981,814		-		7,981,814

	December 31, 2011
	Level I		Level II		Level III		Total
Assets:
Available for Sale
Mortgage-backed securities	$	-	$	10,481,681	$	-	$	10,481,681
Corporate securities		-		6,866,804		-		6,866,804

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2012 and December 31, 2011, are as follows:

	September 30, 2012
	Level I		Level II		Level III		Total

Assets:
Impaired loans	$	-	$	-	$	2,653,546	$	2,653,546
Other real estate owned		-		-		108,309		108,309

	December 31, 2011
	Level I		Level II		Level III		Total

Assets:
Impaired loans	$	-	$	-	$	2,120,840	$	2,120,840
Other real estate owned		-		-		82,942		82,942

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

September 30, 2012

Quantitative Information about Level 3 Fair Value Measurements

Fair Value

Valuation

Unobservable

Estimate

Techniques

Input

Range

Impaired loans

2,653,546

Appraisal of collateral (1)

Appraisal adjustments (2)

0% to 30%

Liquidation expenses (2)

0% to 6%

Other real estate owned

108,309

Appraisal of collateral (1), (3)

Appraisal adjustments (2)

0% to 30%

Liquidation expenses (2)

0% to 6%

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.

(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

(3)

Includes qualitative adjustments by management and estimated liquidation expenses.

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, 2012, impaired loans with a carrying value of $2,693,186 were reduced by specific valuation allowance totaling $39,640 resulting in a net fair value of $2,653,546 based on Level 3 inputs.

Other real estate owned is reported at fair value utilizing level 3 inputs. For these assets, a review of the collateral and an analysis of the expenses related to selling these assets is conducted and a charge-off is recorded to the allowance for loan losses.

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, 2012 and December 31, 2011, all of the financial assets measured at fair value, on a recurring basis, utilized the market approach.

11.

Fair Value Disclosure

The estimated fair values of the Company’s financial instruments are summarized below:

	Fair Value Measurements at
	September 30, 2012
	(Level 1)		(Level 2)		(Level 3)		Total

Financial assets:
Cash and cash equivalents	$	23,074,439	$		$		$	23,074,439
Investment securities
Available for sale				15,878,110				15,878,110
Held to maturity				62,541,676				62,541,676
Loans held for sale		10,929,600						10,929,600
Net loans receivable						141,643,339		141,643,339
Accrued interest receivable		887,298						887,298
Federal Home Loan Bank stock		2,621,200						2,621,200
Bank-owned life insurance		4,230,651						4,230,651

Financial liabilities:
Deposits		89,595,397				109,056,139		198,651,536
FHLB advance - long-term						27,519,857		27,519,857
Advances by borrowers for taxes and insurance		520,140						520,140
Accrued interest payable		94,712						94,712

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

	September 30, 2012				December 31, 2011
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value

Financial assets:
Cash and cash equivalents	$	23,074,439	$	23,074,439	$	17,416,198	$	17,416,198
Investment securities
Available for sale		15,878,110		15,878,110		17,348,485		17,348,485
Held to maturity		59,054,666		62,541,676		56,597,111		58,992,283
Loans held for sale		10,929,600		10,929,600		-		-
Net loans receivable		135,392,745		141,643,339		153,351,832		160,333,403
Accrued interest receivable		887,298		887,298		970,966		970,966
Federal Home Loan Bank stock		2,621,200		2,621,200		2,822,600		2,822,600
Bank-owned life insurance		4,230,651		4,230,651		4,200,181		4,200,181

Financial liabilities:
Deposits	$	197,135,224	$	198,651,536	$	203,016,286	$	205,800,372
FHLB advances - long-term		25,649,974		27,519,857		31,091,302		29,626,439
Advances by borrowers for taxes and insurance		520,140		520,140		939,092		939,092
Accrued interest payable		94,712		94,712		95,894		95,894

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 addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.

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

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

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

The fair value is equal to the current carrying value.

Loans Held for Sale

The fair value of mortgage loans held for sale is determined, when possible, using Level 1 quoted secondary-market prices. If no such quoted price exists, the fair value of a loan is determined based on sales of similar assets.

All mortgage loans held for sale are sold 100% servicing released and made in compliance with applicable loan criteria and underwriting standards established by the buyers. These loans are originated according to applicable federal and state laws and follow proper standards for servicing valid liens.

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

As part of the Purchase and Assumption Agreements, the Bank and the FDIC entered into loss sharing agreements. These agreements cover realized losses on loans, which are more fully described in Note 3.

Under the agreement, the FDIC agreed to reimburse the Bank for 80% of realized losses. The indemnification asset was originally recorded at fair value on the acquisition date (December 10, 2010) and at September 30, 2012 and December 31, 2011, the carrying value of the FDIC indemnification asset was $4.5 million and $5.2 million, respectively.

From the date of acquisition, the agreements extend ten years for 1-4 family real estate loans and five years for other loans. The loss sharing assets are measured separately from the loan portfolios because they are not contractually embedded in the loans and are not transferable with the loans should the Bank choose to dispose of them. Fair values on the acquisition dates were estimated using projected cash flows available for loss sharing based on the credit adjustments estimated for each loan pool and the loss sharing percentages. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursements from the FDIC. The Bank will collect the assets over the next several years. The amount ultimately collected will depend on the timing and amount of collections and charge-offs on the acquired assets covered by the loss sharing agreements. While the assets were recorded at their estimated fair values on the acquisition dates, it is not practicable to complete fair value analyses on a quarterly or annual basis. Estimating the fair value of the FDIC indemnification asset would involve preparing fair value analyses of the entire portfolios of loans and foreclosed assets covered by the loss sharing agreements from the acquisition on a quarterly or annual basis.

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.

Explanatory Note

Polonia Bancorp, Inc., a Maryland corporation (the “Registrant”), was incorporated on August 26, 2011 to become the holding company for Polonia Bank (the “Bank”) upon completion of the “second-step” conversion of the Bank from a mutual holding company structure to a stock holding company structure (the “Conversion”). The Conversion involved the sale by the Registrant of 2,025,078 shares of common stock in a public offering to depositors and community members, the exchange of 1,486,366 shares of common stock of the Registrant for shares of common stock of the former Polonia Bancorp (the “Company”) held by persons other than Polonia MHC (the “MHC”), and the elimination of the Company and the MHC. The Conversion was completed on November 9, 2012. As the Conversion was completed after September 30, 2012, the information in this report is for the Company. Separate financial statements for the Registrant have not been included in this report because the Registrant, as of September 30, 2012, had not issued any shares and had engaged only in organizational activities to date, had no significant assets, contingent or other liabilities, revenues or expenses.

As of September 30, 2012, Conversion costs totaling $896,005 were deferred and will be deducted from the proceeds of the stock offering. At September 30, 2012, subscriptions received from the stock offering totaled $9.6 million and were held in escrow.

Per share information in this report is based on outstanding shares as of the dates indicated and does not reflect the Conversion. Following the Conversion, the Registrant had 3,511,444 shares of common stock outstanding. In future filings, prior period and per share amounts will be adjusted to give retroactive recognition of the share exchange ratio applied in the Conversion.

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 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 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: 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. Additionally, other risks and uncertainties are described herein and in the Company’s Form 10-K for the year ended December 31, 2011 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’s business activities are the ownership of the outstanding capital stock of Polonia Bank. 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, 2012 and December 31, 2011

Total assets at September 30, 2012 were $263.8 million, a decrease of $1.3 million, from total assets of $265.1 million at December 31, 2011. The decrease in assets resulted primarily from a decrease in loans receivable of $18.0 million, primarily due to loan sales and loan prepayments. Total liabilities at September 30, 2012 were $235.8 million compared to $237.4 million at December 31, 2011, a decrease of $1.6 million. The decrease in liabilities was primarily due to a reduction in FHLB advances and a decrease in deposits, partially offset by $9.6 million in subscriptions received for the Company’s pending stock offering. Total stockholders’ equity increased to $27.9 million at September 30, 2012 from $27.6 million at December 31, 2011, an increase of $288,000.

Loans receivable decreased $18.0 million, or 11.6%, to $136.6 million at September 30, 2012, compared to $154.6 million at December 31, 2011. The size of our loan portfolio decreased during the nine months ended September 30, 2012 due primarily to loan payoffs and re-payments, partially offset by new loans.

Non-performing non-covered loans totaled $2.6 million, or 2.1% of total non-covered loans, at September 30, 2012 compared to $2.0 million, or 1.52% of total non-covered loans, at December 31, 2011 and $1.2 million, or 0.9% of total non-covered loans, at September 30, 2011. The increase in non-performing non-covered loans as a percentage of total non-covered loans since December 31, 2011 was primarily the result of a $600,000 increase in one relationship in the multi-family and commercial real estate category as well as a $3.7 million decrease in our total non-covered loan portfolio. The increase in that same ratio from September 30, 2011 to September 30, 2012 reflects a $3.6 million decrease in total non-covered loans as well as a $1.4 million increase in non-performing non-covered loans, primarily the result of $1.3 million increase in one relationship in the multi-family and commercial real estate category.

Loans held for sale increased to $10.9 million at September 30, 2012 as the new Retail Mortgage Banking Division, which primarily originates FHA loans began to produce loans on a consistent basis during the quarter ended September 30, 2012 which was the divisions first full quarter in operation.

Historically, we have originated FHA loans on a limited basis in order to accommodate customers who may not qualify for a conventional mortgage loan. FHA loans have mortgage insurance provided by the federal government. The loans are up to 96.5% of the lesser of the appraised value or purchase price and are originated and underwritten manually according to private investor and FHA guidelines. We have recently expanded our FHA lending activities by forming a new Retail Mortgage Banking Division and hiring an experienced team of originators in an effort to increase noninterest income through gains on the sale of loans. Our FHA lending team has been expanded from two (2) to 13 employees. We originate FHA loans from within our market area with the intention of selling the loans on a flow basis to the U.S. Department of Housing and Urban Development (“HUD”) and other private investors with servicing released.

Investment securities available-for-sale decreased to $15.9 million from $17.3 million during the nine months ended September 30, 2012, a decrease of $1.4 million, or 8.1%. The decrease in investment securities available for sale was attributable to $3.5 million in principal payments and maturities, partially offset by $1.8 million in purchases.

Investment securities held to maturity increased to $59.0 million from $56.6 million during the nine months ended September 30, 2012, an increase of $2.4, or 4.2%. The increase in investment securities held to maturity was attributable, in part, to $11.7 million in purchases, partially offset by $9.2 million in principal repayments.

Cash and cash equivalents increased to $23.1 million from $17.4 million during the nine months ended September 30, 2012, an increase of $5.7 million, or 32.8%. The increase in cash and cash equivalents was primarily attributable to an $18.0 million decrease in loans receivable and $9.6 million in stock subscriptions received in the Conversion, partially offset by a decrease of $5.9 million in deposits and a $5.5 million decrease in FHLB advances.

Total deposits decreased to $197.1 million from $203.0 million during the nine months ended September 30, 2012, a decrease of $5.9 million, or 1.4%. The decrease in deposits was attributable, in part, to lower rates offered on deposit products.

We utilize borrowings from the FHLB of Pittsburgh to supplement our supply of funds for loans and investments. The $5.5 million decrease in FHLB advances long-term was due to maturities and repayments.

Comparison of Operating Results For The Three and Nine Months Ended September 30, 2012 and 2011

General. We recorded a net loss of $66,000 during the three months ended September 30, 2012, compared to net income of $117,000 during the three months ended September 30, 2011. The lower net income for the three month period ended September 30, 2012 was primarily related to an increase in noninterest expense of $949,000, partially offset by a $476,000 increase in noninterest income, a $105,000 decrease in provision for loan losses, a $100,000 decrease in income tax expense and a $85,000 increase in net interest income.

We recorded a net loss of $26,000 during the nine months ended September 30, 2012, compared to net income of $331,000 during the nine months ended September 30, 2011. The lower net income for the nine month period ended September 30, 2012 was primarily related to an increase in noninterest expense of $762,000 and lower net interest income of $200,000, partially offset by higher noninterest income of $493,000, lower income tax expense of $83,000 and a lower provision for loan losses expense of $30,000.

Net Interest Income. The following table summarizes changes in interest income and expense for the three and nine months ended September 30, 2012 and 2011.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
	(Dollars in thousands)				(Dollars in thousands)
Interest and dividend income:
Loans receivable	$	2,146	$	2,209	$	6,131	$	6,743
Investment securities		565		631		1,732		1,863
Other interest and dividend income		4		1		10		6
Total interest and dividend income		2,715		2,841		7,873		8,612
Interest Expense:
Deposits		460		644		1,494		1,983
FHLB advances - short-term		-		-		-		11
FHLB advances - long-term		185		211		557		595
Advances by borrowers for taxes and insurance		5		6		16		17
Total interest expense		650		861		2,067		2,606
Net interest income	$	2,065	$	1,980	$	5,806	$	6,006

The following table summarizes average balances and average yields and costs for the three and nine months ended September 30, 2012 and 2011.

	Three Months Ended												Nine Months Ended
	September 30,												September 30,
	2012						2011						2012						2011
	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	$	141,237			5.95	%	$	162,643			5.31	%	$	144,553			5.59	%	$	169,632		5.24	%
Investment securities		74,099			2.98			76,648			3.22			73,026			3.13			72,140		3.41
Other interest-earning assets		25,110			0.06			16,707			0.02			23,104			0.06			16,355		0.05
Total interest-earning assets		240,446			4.48	%		255,998			4.40	%		240,683			4.37	%		258,127		4.46	%
Noninterest-earning assets:		19,489						19,774						19,508						20,159
Allowance for Loan Losses		(1,250	)					(1,704	)					(1,240	)					(1,259
Total assets	$	258,685					$	274,068					$	258,951					$	277,027

Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	14,513			0.30	%	$	13,356			0.62	%	$	15,374			0.50	%	$	13,089		0.61	%
Money market deposits		42,141			0.45			47,158			0.66			42,565			0.56			50,137		0.68
Savings accounts		29,895			0.29			30,288			0.45			29,840			0.32			30,081		0.44
Time deposits		107,920			1.39			115,451			1.76			107,906			1.47			115,635		1.81
Total interest-bearing deposits		194,469			0.94	%		206,253			1.24	%		195,685			1.02	%		208,942		1.27	%
FHLB advances - short-term		-			-			-			-			-			-			2,176		0.68
FHLB advances - long-term		25,743			2.85			31,325			2.67			26,003			2.86			28,942		2.75
Advances by borrowers for taxes and insurance		755			2.63			927			2.14			817			2.62			957		2.38
Total interest-bearing liabilities		220,967			1.17	%		238,505			1.43	%		222,505			1.24	%		241,017		1.45	%
Noninterest-bearing liabilities:		9,699						7,751						8,447						10,032
Total liabilities		230,666						246,256						230,952						251,049
Retained earnings		28,019						27,812						27,999						25,978
Total liabilities and retained earnings	$	258,685					$	274,068					$	258,951					$	277,027

Interest rate spread					3.31	%					2.97	%					3.13	%				3.02	%
Net yield on interest-bearing assets					3.41	%					3.07	%					3.23	%				3.11	%
Ratio of average interest-earning assets to average interest-bearing liabilities					108.82	%					107.33	%					108.17	%				107.10	%

Net Interest Income. Net interest income for the three months ended September 30, 2012 increased $85,000, or 4.3%, to $2.1 million, from $2.0 million during the same period last year. Our net interest rate spread increased to 3.31% for the three months ended September 30, 2012 from 2.97% for the same period in 2011. The primary reasons for the increase in net interest income for the three month period are a higher average balance of other interest earning assets, a lower average balance of interest bearing deposits and a lower average balance of FHLB advances, partially offset by a lower average balance of loans and investment securities. Also contributing to the higher net interest income was a higher average rate earned on loans, other interest earning assets and a lower average rate paid on deposits, partially offset by a lower average rate earned on investment securities. The average balance of loans decreased during the three months ended September 30, 2012 due to increased loan payoffs and sales. Lower interest expense on deposits for the three months ended September 30, 2012 was due to lower rates offered on deposit products. The decrease in the average balance of investment securities during the three month period ended September 30, 2012 was due to payments and maturities, partially offset by purchases.

Net interest income for the nine months ended September 30, 2012 decreased $200,000, or 3.3%, to $5.8 million, from $6.0 million during the same period last year. Our net interest rate spread increased to 3.13% for the nine months ended September 30, 2012 from 3.02% for the same period in 2011. The primary reasons for the decrease in net interest income for the nine month period are a lower average balance of loans, partially offset by a lower average balance of deposits and FHLB advances. Also contributing to the decrease in net interest income was a lower yield on investment securities and a higher average rate paid on FHLB advances, partially offset by a higher average yield on loans and a lower average rate paid on deposits. The average balance of loans decreased during the nine months ended September 30, 2012 due to increased loan payoffs and sales. Lower interest expense on deposits for the nine months ended September 30, 2012 was due to a lower average yield on all deposit products.

Provision for Loan Losses. For the three months ended September 30, 2012 we recorded a provision for loan losses of $124,000 as compared to a provision for loan losses of $229,000 for the three months ended September 30, 2011. For the nine months ended September 30, 2012 we recorded a provision for loan losses of $314,000 as compared to a provision for loan losses of $344,000 for the nine months ended September 30, 2011. The provisions reflect management’s assessment of lending activities, increased non-performing loans, levels of current delinquencies and current economic conditions.

Noninterest Income. The following table summarizes noninterest income for the three and nine months ended September 30, 2012 and 2011.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
	(Dollars in thousands)				(Dollars in thousands)
Service fees on deposit accounts	$	24	$	34	$	105	$	116
Earnings on bank-owned life insurance		9		15		30		50
Investment securities gains, net		-		16		-		235
Gain on sale of loans, net		792		250		1,133		354
Rental income		73		78		218		229
Other		28		57		221		230
Total	$	926	$	450	$	1,707	$	1,214

The $476,000 increase in noninterest income during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 was primarily due to a $516,000 increase in gain on the sale of loans. The new Retail Mortgage Banking Division contributed $609,000 to the increase in the gain on the sale of loans for the three months ended September 30, 2012.

The $493,000 increase in noninterest income during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 was primarily due to a $779,000 increase in gains on the sale of loans, partially offset by a $235,000 decrease in gains on the sale of investments. The new Retail Mortgage Banking Division contributed $657,000 to the increase in the gain on the sale of loans for the nine months ended September 30, 2012.

Noninterest Expense. The following table summarizes noninterest expense for the three and nine months ended September 30, 2012 and 2011.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
	(Dollars in thousands)				(Dollars in thousands)
Compensation and employee benefits	$	1,717	$	1,126	$	4,133	$	3,444
Occupancy and equipment		347		314		1,033		1,008
Federal deposit insurance premiums		69		6		224		213
Data processing expense		96		124		295		438
Professional fees		118		100		327		289
Other		633		361		1,230		1,088
Total	$	2,980	$	2,031	$	7,242	$	6,480

The $949,000 increase in noninterest expense during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 was primarily due to a $591,000 increase in compensation and employee benefits due mainly to the expense of $597,000 related to the new Retail Mortgage Banking Division, a $272,000 increase in other expenses primarily related to the amortization of the FDIC indemnification asset of $256,000, and a $63,000 increase in federal deposit insurance premiums expense, which is related to an over accrual of expense related to the revised FDIC insurance calculation in 2011.

Total noninterest expense increased $762,000, or 11.8%, to $7.2 million for the nine months ended September 30, 2012 from the prior year period. The increase in noninterest expense for the nine months ended September 30, 2012 as compared to the prior year period was primarily the result of a $689,000 increase in compensation and employee benefits due mainly to the expense of $639,000 related to the new Retail Mortgage Banking Division, and a $142,000 increase in other expense primarily related to the amortization of the FDIC indemnification asset of $228,000, partially offset by a $143,000 decrease in data processing expense.

Approximately $343,000 of the noninterest expense related to the new Retail Mortgage Banking Division for the three and nine months ended September 30, 2012, respectively, were one-time, non-recurring costs.

Income Taxes. We recorded a tax benefit of $46,000 for the three months ended September 30, 2012 compared to tax expense of $54,000 during the three months ended September 30, 2011. The decrease of tax expenses resulted from the decrease in our taxable operating profits.

We recorded tax expense of $18,000 for the nine months ended September 30, 2012 compared to tax expense of $65,000 during the nine months ended September 30, 2011. The decrease of tax expenses resulted from the decrease 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, 2012, cash and cash equivalents totaled $23.1 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $15.9 million at September 30, 2012. In addition, at September 30, 2012, we had the ability to borrow a total of approximately $97.1 million from the FHLB of Pittsburgh. On September 30, 2012, we had $25.6 million of borrowings outstanding. Any growth of our loan portfolio may require us to borrow additional funds.

At September 30, 2012, we had $10.0 million in mortgage loan commitments outstanding, $4.8 million in available credit on lines of credit and $15,000 in a standby letter of credit. Time deposits due within one year of September 30, 2012 totaled $50.5 million, or 47.0% of time deposits. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the time deposits due on or before September 30, 2013. 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 addition 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, 2012, 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, 2012 and the year ended December 31, 2011 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 1. Legal Proceedings

From time to time, we may be party to various legal proceedings incident to our business. At September 30, 2012, we were not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I,“Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition or future results. At September 30, 2012 the risk factors of the Company have not changed materially from those reported in our Annual Report on Form 10-K. However, the risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

						Total Number
						of Shares
	Total					Purchased as
	Number of			Average		Part of Publicly
	Shares			Price Paid		Announced Plans
Period	Purchased			Per Share		or Programs

July 1 - 31, 2012		-		$	-		-
August 1 - 31, 2012		1,982	(1)		7.75		-
September 1 - 30, 2012		-			-		-

Total		1,982		$	7.75		-

(1) Repurchases made pursuant to tax witholding obligations in connection with restricted stock awards.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

1.0	Agency Agreement between Polonia Bancorp, Polonia MHC, Polonia Bank and new Polonia Bancorp, Inc. and Sandler O’Neill & Partners, L.P., dated August 10, 2012⁽¹⁾

3.1	Articles of Incorporation⁽²⁾

3.2	Bylaws⁽³⁾

4.0	Form of Specimen Stock Certificate⁽⁴⁾

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, 2012, 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.

(1) Incorporated by reference to Exhibit 1.1 to the Company’s Form 8-K (File No. 333-176759) filed with the Commission on August 15, 2012.

(2) Incorporated by reference to Exhibit 3.1 to the Company’s Form S-1 (File No. 333-176759) filed with the Commission on September 9, 2011.

(3) Incorporated by reference to Exhibit 3.2 to the Company’s Form S-1 (File No. 333-176759) filed with the Commission on September 9, 2011.

(4) Incorporated by reference to Exhibit 4.0 to the Company’s Form S-1 (File No. 333-176759) filed with the Commission on September 9, 2011.

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, INC.

Date: November 14, 2012	By:	/s/ Anthony J. Szuszczewicz
		Anthony J. Szuszczewicz
		President and Chief Executive Officer
		(principal executive officer)

Date: November 14, 2012	By:	/s/ Paul D. Rutkowski
		Paul D. Rutkowski
		Chief Financial Officer and Treasurer
		(principal financial and accounting officer)