Polonia Bancorp 10-Q 2008 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2008

OR

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

For the transition period from ______________ to _____________

Commission file number: 0-52267

POLONIA BANCORP

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

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

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

(215) 938-8800

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check mark whether the issuer: (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 xNo o

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 definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o        Accelerated Filer o        Non-accelerated filer o        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 o       No x

As of May 14, 2008, there were 3,278,750 shares of the registrant’s common stock outstanding.

POLONIA BANCORP

TABLE OF CONTENTS

		Page No.
Part I.	Financial Information
Item 1.	Financial Statements	2
	Consolidated Balance Sheets at March 31, 2008 and December 31, 2007 (Unaudited)	2
	Consolidated Statements of Income for the Three Months Ended March 31, 2008 and 2007 (Unaudited)	3
	Consolidated Statement of Changes in Stockholders' Equity for the Three Months Ended March 31, 2008 (Unaudited)	4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007 (Unaudited)	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17

Part II.	Other Information
Item 1.	Legal Proceedings	17
Item 1A.	Risk Factors	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3.	Defaults Upon Senior Securities	17
Item 4.	Submission of Matters to a Vote of Security Holders	18
Item 5.	Other Information	18
Item 6.	Exhibits	18
	Signatures	19

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

POLONIA BANCORP

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	March 31, 2008			December 31, 2007
ASSETS
Cash and due from banks	$	868,838		$	980,929
Interest-bearing deposits with other institutions		4,292,951			2,844,796
Cash and cash equivalents		5,161,789			3,825,725
Investment securities available for sale		39,787,887			45,885,415
Loans receivable (net of allowance for loan losses of $732,688 and $731,338)		141,964,417			137,279,915
Accrued interest receivable		878,245			848,930
Federal Home Loan Bank stock		1,797,200			1,270,800
Premises and equipment, net		5,122,078			5,195,812
Bank-owned life insurance		4,132,104			4,172,776
Other assets		1,899,844			2,117,796
TOTAL ASSETS	$	200,743,564		$	200,597,169
LIABILITIES
Deposits	$	155,146,334		$	163,216,663
FHLB advances - short-term		—			6,000,000
FHLB advances - long-term		18,541,258			4,098,370
Advances by borrowers for taxes and insurance		895,980			1,224,248
Accrued interest payable		65,192			9,504
Other liabilities		1,855,450			2,054,639
TOTAL LIABILITIES		176,504,214			176,603,424
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 and outstanding)		33,063			33,063
Additional paid-in-capital		13,861,285			13,843,776
Retained earnings		11,696,001			11,752,230
Unallocated shares held by Employee Stock Ownership Plan “ESOP” (118,808 and 120,964 shares)		(1,188,080	)		(1,209,647	)
Unearned restricted shares (64,800 and 64,800 shares)		(538,056	)		(568,512	)
Accumulated other comprehensive income		375,137			142,835
TOTAL STOCKHOLDERS' EQUITY		24,239,350			23,993,745
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	200,743,564		$	200,597,169

See accompanying notes to the unaudited consolidated financial statements.

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POLONIA BANCORP

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended March 31,
	2008			2007
INTEREST AND DIVIDEND INCOME
Loans receivable	$	2,039,573		$	1,652,196
Investment securities		533,158			576,007
Other interest and dividend income		42,005			281,070
Total interest and dividend income		2,614,736			2,509,273
INTEREST EXPENSE
Deposits		1,160,437			1,271,780
FHLB advances - short-term		33,664			—
FHLB advances - long-term		68,178			54,805
Advances by borrowers for taxes and insurance		6,614			5,577
Total interest expense		1,268,893			1,332,162
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		1,345,843			1,177,110
Provision for loan losses		—			31,367
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,345,843			1,145,743
NONINTEREST INCOME
Service fees on deposit accounts		27,801			30,676
Earnings on Bank-owned life insurance		(40,672	)		20,388
Rental income		80,833			69,552
Other		58,454			53,567
Total noninterest income		126,416			174,183
NONINTEREST EXPENSE
Compensation and employee benefits		865,377			766,808
Occupancy and equipment		277,069			245,474
Federal deposit insurance premiums		21,970			47,560
Data processing expense		67,904			61,699
Professional fees		81,166			105,934
Other		225,376			249,128
Total noninterest expense		1,538,862			1,476,603
Loss before income tax benefit		(66,603	)		(156,677	)
Income tax benefit		(10,374	)		(58,166	)
NET LOSS	$	(56,229	)	$	(98,511	)
EARNINGS PER SHARE	$	(0.02	)	$	(0.03	)

See accompanying notes to the unaudited consolidated financial statements.

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POLONIA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

	Common Stock				Additional			Retained			Unallocated			Unearned			Accumulated Other Comprehensive					Comprehensive
	# of Shares		Amount		Paid-In-Capital			Earning			ESOP Shares			RSP Shares			Income		Total			Income
Balance, December 31, 2007		3,306,250	$	33,063	$	13,843,776		$	11,752,230		$	(1,209,647	)	$	(568,512	)	$	142,835	$	23,993,745
Common stock issued
Net loss									(56,229	)										(56,229	)	$	(56,229	)
Other comprehensive gain:
Unrealized gain on available-for-sale securities, net of tax benefit of $119,671																		232,302		232,302			232,302
Comprehensive income																						$	176,073
Stock options compensation expense						23,577														23,577
Allocation of unearned ESOP shares						(6,068	)					21,567								15,499
Allocation of unearned RSP shares															30,456					30,456
Balance, March 31, 2008		3,306,250	$	33,063	$	13,861,285		$	11,696,001		$	(1,188,080	)	$	(538,056	)	$	375,137	$	24,239,350

See accompanying notes to the unaudited consolidated financial statements.

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POLONIA BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three Months Ended March 31,
	2008			2007
OPERATING ACTIVITIES
Net loss	$	(56,229	)	$	(98,511	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses		—			31,367
Depreciation, amortization and accretion		101,900			113,986
Earnings on Bank-owned life insurance		40,672			(20,388	)
Increase in other payables		—			256,367
Deferred federal income taxes		(5,231	)		155,395
Increase in accrued interest receivable		(29,315	)		(107,877	)
Increase in accrued interest payable		55,688			19,068
Stock compensation expense		23,577			—
Compensation expense on ESOP and RSP shares		52,023			—
Other, net		(101,745	)		56,515
Net cash provided by operating activities		81,340			405,922
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from principal repayments and maturities		8,462,451			1,780,868
Purchases		(2,022,150	)		(383,662	)
Increase in loans receivable, net		(4,679,841	)		(6,077,689	)
Purchase of Federal Home Loan Bank stock		(1,090,600	)		(8,000	)
Redemptions of Federal Home Loan Bank stock		564,200			15,300
Purchase of premises and equipment		(23,627	)		(230,518	)
Net cash provided by (used for) investing activites		1,210,433			(4,903,701	)
FINANCING ACTIVITES
Increase (decrease) in deposits, net		(8,070,329	)		5,166,806
Net decrease in FHLB advances - short-term		(6,000,000	)		—
Repayment of FHLB advances - long-term		(323,112	)		(662,362	)
Proceeds from FHLB advances - long-term		14,766,000			—
Repayment of stock offering subscription rights		—			(12,233,800	)
Deferred conversion costs		—			(373,947	)
Decrease in advances by borrowers for taxes and insurance, net		(328,268	)		(333,195	)
Net cash provided by financing activites		44,291			(8,436,498	)
Increase (decrease) in cash and cash equivalents		1,336,064			(12,934,277	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		3,825,725			31,866,257
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	5,161,789		$	18,931,980
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid:
Interest	$	1,213,205		$	1,313,094
Income taxes		—			—
Noncash transactions		—			—
Transfers from subscription rights to common stock		—			12,549,938
Transfers from customers savings to common stock		—			993,818
Record payable for investment purchased not yet settled		—			1,028,713

See accompanying notes to the unaudited consolidated financial statements.

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POLONIA BANCORP

NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2008 are not necessarily indicative of the results that may be expected for the full year. The December 31, 2007, 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-KSB for the year ended December 31, 2007.

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

Certain items previously reported have been reclassified to conform to the current period reporting format. Such reclassifications did not affect net income or retained earnings.

Recent Accounting and Regulatory Pronouncements

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

In September 2006, the FASB issued FAS No. 157, Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The Standard does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued Staff Position No. 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, which removed leasing transactions accounted for under FAS No. 13 and related guidance from the scope of FAS No. 157. Also in February 2008, the FASB issued Staff Position No.157-2, Partial Deferral of the Effective Date of Statement 157, which deferred the effective date of FAS No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

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

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In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. FAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest.  It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest.   FAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited.  The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, to require enhanced disclosures about derivative instruments and hedging activities. The new standard has revised financial reporting for derivative instruments and hedging activities by requiring more transparency about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. FAS No. 161 requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also requires entities to provide more information about their liquidity by requiring disclosure of derivative features that are credit risk-related. Further, it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. FAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encourage. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

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

2. Earnings Per Share

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

	Three Months Ended March 31,
	2008			2007
Net Loss	$	(56,229	)	$	(98,511	)
Weighted average number of shares issued		3,306,250			3,306,250
Less weighted average number of unearned ESOP shares		(119,525	)		(128,484	)
Less weighted average number of nonvested restricted stock awards		(58,356	)		—
Weighted average shares outstanding basic		3,128,369			3,177,766
Weighted average shares outstanding diluted		3,128,369			3,177,766
Earnings per shares:
Basic	$	(0.02	)	$	(0.03	)
Diluted		(0.02	)		(0.03	)

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The three months earnings per share calculation for 2007 is based on the earnings of the Company from January 11, 2007, the date of the initial public offering, through March 31, 2007.

As of March 31, 2008, options to purchase 162,003 shares of Common Stock at a price of $9.40 and 57,240 shares of restricted Common Stock were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.

3. Comprehensive Income

In complying with FAS No. 130, Reporting Comprehensive Income, the Company has developed the following table, which includes the tax effects of the components of other comprehensive income (loss). Other comprehensive income (loss) consists of net unrealized gain (loss) on securities available for sale and derivatives that qualify as cash flow hedges. Other comprehensive income (loss) and related tax effects for the indicated periods, consists of:

	Three Months Ended March 31,
	2008			2007
Net loss:	$	(56,229	)	$	(98,511	)
Other comprehensive income (loss), net of tax
Fair value adjustment on securities available for sale, net of tax benefit of $119,671 and $67,653		232,302			131,326
Other comprehensive income, net of tax		232,302			131,326
Comprehensive income	$	176,073		$	32,815

4. 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 $11,333,131. The cash surrender value of these policies totaled $4,132,104 and $4,172,776 at March 31, 2008 and December 31, 2007, respectively. The Plan provides that death benefits totaling $6.0 million at March 31, 2008, 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 March 31, 2008 and December 31, 2007, $1,405,247 and $1,392,149 had been accrued under these SRPs, respectively, and this liability and the related deferred tax assets of $477,784 and $473,331 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 $40,420 and $66,828 for the three months ended March 31, 2008 and 2007, respectively. The accruals increase each year based on a discount rate of 6.25 percent used in determining the estimated liability that will be accrued when the employees are eligible for benefits.

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

	Three Months Ended March 31,
	2008			2007
Components of net periodic benefit cost:
Service cost	$	49,934		$	49,116
Interest cost		(9,514	)		17,712
Net periodic benefit cost	$	40,420		$	66,828

5. Mutual Holding Company Reorganization And Minority Stock Issuance

Polonia Bancorp was organized as a federal corporation at the direction of the Bank in connection with a mutual holding company reorganization of the Bank (the “Reorganization”). The Reorganization was completed on January 11, 2007. In the reorganization, the Company sold 45% of its outstanding shares of common stock (1,487,813 shares) to eligible depositors of the Bank and the ESOP, and issued 55% of its outstanding shares of common stock (1,818,437 shares) to Polonia MHC, the parent mutual holding company of Polonia Bancorp. In addition, the Bank contributed $100,000 to capitalize Polonia MHC.

6. Fair Value Measurements

In September 2006, the FASB issued FASB No. 157, Fair Value Measurements, to provide consistency and comparability in determining fair value measurements and to provide for expanded disclosures about fair value measurements. The definition of fair value maintains the exchange price notion in earlier definitions of fair value but focuses on the exit price of the asset or liability. The exit price is the price that would be received to sell the asset or paid to transfer the liability adjusted for certain inherent risks and restrictions. Expanded disclosures are also required about the use of fair value to measure assets and liabilities.

The following table presents information about the Banks assets measured at fair value on a recurring basis as of March 31, 2008 and indicates the fair value hierarchy of the valuation techniques utilized by the Bank to determine such fair value: 

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Balance as of March 31, 2008
Securities available-for-sale	$	—	$	39,787,887	$	39,787,887

As required by FASB No. 157, each financial asset and liability must be identified as having been valued according to specified level of input, 1, 2 or 3. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Bank has the ability to access at the measurement date. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly. Level 2 inputs include quoted prices for similar assets in active markets, and inputs other than quoted prices that are observable for the asset or liability.  Level 3 inputs are unobservable inputs for the asset, and include situations where there is little, if any, market activity for the asset or liability. 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 Bank’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.

As of March 31, 2008, the Bank did not have any assets measured at fair value on a nonrecurring basis. 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 March 31, 2008, all of the financial assets measured at fair value utilized the market approach.

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

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

Forward-Looking Statements

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of Polonia MHC, Polonia Bancorp and Polonia Bank. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. Polonia MHC’s, Polonia Bancorp’s and Polonia Bank’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to, 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 in the Company’s Form 10-KSB for the year ended December 31, 2007 under “Item 1: Description of Business - 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 was organized as a federally chartered corporation at the direction of the Bank in January 2007 to become the mid-tier stock holding company for the Bank upon the completion of its reorganization into the mutual holding company form of organization. Pursuant to the Plan of Reorganization, the Bank converted to stock form with all of its stock owned by the Polonia Bancorp and organized Polonia MHC as a federally chartered mutual holding company that owns 55% of the common stock of Polonia Bancorp. As part of the reorganization, the Company sold 1,487,813 shares of its common stock at a price of $10.00 per share to eligible depositors of the Bank and the ESOP in a subscription offering raising approximately $13.8 million in net proceeds.

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 five full-service locations, including our main office in Huntingdon Valley, Pennsylvania and our branch offices in the city of Philadelphia.

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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 March 31, 2008 and December 31, 2007

Total assets at March 31, 2008 were $200.7 million, an increase of $100,000, or 0.1%, from total assets of $200.6 million at December 31, 2007. The increase in assets resulted primarily from a $4.7 million increase in loans and a $1.4 million increase in cash and cash equivalents, partially offset by a $6.1 million decrease in investment securities available for sale. Total liabilities at March 31, 2008 were $176.5 million compared to $176.6 million at December 31, 2007, a decrease of $100,000, or 0.1%. The decrease in liabilities was mainly due to a $8.1 million decrease in deposits, and a $6.0 million decrease in FHLB advances - short-term, partially offset by a $14.4 million increase FHLB advances - long-term. Total stockholders’ equity increased to $24.2 million at March 31, 2008 from $24.0 million at December 31, 2007, an increase of $200,000, or 0.8%, primarily due to a $300,000 increase in accumulated other comprehensive income, partially offset by a $100,000 decrease in retained earnings.

Loans, net, increased $4.7 million, or 3.4%, to $142.0 million at March 31, 2008, compared to $137.3 million at December 31, 2007. The size of our loan portfolio increased during the three months ended March 31, 2008 due primarily to the hiring of two one-to-four family loan originators who have been active in the funding of originations throughout our lending territory.

Total deposits decreased to $155.1 million from $163.2 million during the three months ended March 31, 2008, a decrease of $8.1 million, or 5.0%. The decrease in deposits was attributable, in part, to the maturity of a $5.0 million time deposit with the Pennsylvania Local Government Investment Trust (“PLGIT”) and increased competition in our market area.

We utilize borrowings from the FHLB of Pittsburgh to supplement our supply of funds for loans and investments. FHLB advances long-term increased $14.4 million to $18.5 million at March 31, 2008, from $4.1 million at December 31, 2007, an increase of 351.2%. The $14.4 million increase in FHLB advances long-term was due to better funding opportunities available through the FHLB. The advances outstanding at March 31, 2008 mature in 2008 through 2018. The $8.4 million increase in FHLB advances was the result of funding the decline in deposits.

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Comparison of Operating Results For The Three Months Ended March 31, 2008 and 2007

General.We recorded a net loss of $56,000 during the three months ended March 31, 2008, compared to a net loss of $99,000 during the three months ended March 31, 2007. The change in net loss for the 2008 period was primarily related to higher net interest and dividend income, partially offset by higher noninterest expense and lower noninterest income.

Net Interest Income. The following table summarizes changes in interest income and expense for the three months ended March 31, 2008 and 2007.

	Three Months Ended March 31,
	2008		2007
	(Dollars in thousands)
Interest and dividend income:
Loans receivable	$	2,040	$	1,652
Investment securities		533		576
Other interest and dividend income		42		281
Total interest and dividend income		2,615		2,509
Interest Expense:
Deposits		1,160		1,272
FHLB advances - short-term		34		—
FHLB advances - long-term		68		55
Advances by borrowers for taxes and insurance		7		6
Total interest expense		1,269		1,332
Net interest income	$	1,346	$	1,177

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The following table summarizes average balances and average yields and costs for the three months ended March 31, 2008 and 2007.

	Three Months Ended
	March 31,
	2008						2007
	Average			Yield/			Average			Yield/
	Balance			Cost			Balance			Cost
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans	$	139,698			5.84	%	$	114,542			5.85	%
Investment securities		42,451			5.02			45,353			5.15
Other interest-earning assets		4,336			3.89			22,300			5.11
Total interest-earning assets		186,485			5.62	%		182,195			5.58	%
Noninterest-earning assets:		12,867						13,342
Allowance for Loan Losses		(732	)					(714	)
Total assets	$	198,620					$	194,823
Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits		11,595			0.73	%		11,832			0.55	%
Money market deposits		29,718			3.19			27,814			5.09
Savings accounts		35,585			0.82			40,389			0.80
Time deposits		78,439			4.24			74,464			4.50
Total interest-bearing deposits		155,337			3.00	%		154,499			3.34	%
FHLB advances - short-term		3,714			3.67			—			—
FHLB advances - long-term		8,072			3.38			5,953			3.75
Advances by borrowers for taxes and insurance		1,322			2.12			1,161			2.10
Total interest-bearing liabilities		168,445			3.02	%		161,613			3.34	%
Noninterest-bearing liabilities:		5,945						10,177
Total liabilities		174,390						171,790
Retained earnings		24,230						23,033
Total liabilities and retained earnings	$	198,620					$	194,823
Interest rate spread					2.60	%					2.24	%
Net yield on interest-bearing assets					2.90	%					2.62	%
Ratio of average interest-earning assets to average interest-bearing liabilities					110.71	%					112.74	%

Our net interest spread improved from 2.24% for the three months ended March 31, 2007 to 2.60% for the same period in 2008. Since August 2007, the Federal Reserve has cut the Fed Funds rate by 300 basis points, the largest decline in a 26 week period since 1985. During this time, the yield curve has become relatively normal. For the quarter ended March 31, 2008, the rate cuts had a positive impact on the Company by decreasing our short-term cost of funds more than the decrease in interest income earned on shorter term interest earning assets. As such, the Bank’s interest margin has continued to improve. Management continues to review various pricing and investment strategies in an attempt to maintain or improve upon our current interest margin. Net interest and dividend income for the three months ended March 31, 2008 increased $169,000 to $1.4 million, or 14.4%, from $1.2 million during the same period last year, primarily reflecting higher volume in loans and a lower weighted average rate paid on deposits, partially offset by lower average balance on other interest-earning assets and investment securities, a lower average interest rate earned on other interest

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earning assets and investment securities and a higher average balance of FHLB advances. The average balance of loans grew during the quarter due to a continued effort by our new loan officers. Lower interest expense on deposits was due to a continuing decline in rates due to a lower Federal Funds rate. The lower average balance of other interest-earning assets was due to an increase in loan fundings during the quarter.

Provision for Loan Losses. The following table summarizes the activity in the allowance for loan losses and provision for loan losses for the three months ended March 31, 2008 and 2007.

	Three Months Ended
	March 31,
	2008		2007
	(Dollars in thousands)
Allowance at beginning of period	$	731	$	695
Provision for loan losses		—		31
Charge-offs		—		—
Recoveries		2		1
Net charge-offs		2		1
Allowance at end of period	$	733	$	727

We did not record a provision for loan losses for the three months ended March 31, 2008, compared to a $31,000 provision for loan losses for the three months ended March 31, 2007. The lack of provision during the period ending March 31, 2008 reflects management’s assessment of charge-off activity, decreased non-performing loans and improved loan delinquencies.

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

	At March 31,			At March 31,
	2008			2007
	(Dollars in thousands)
Nonaccrual loans	$	212		$	329
Real estate owned		—			—
Total nonperforming assets	$	212		$	329
Total nonperforming loans to total loans		0.15	%		0.28	%
Total nonperforming loans to total assets		0.11	%		0.17	%
Total nonperforming assets to total assets		0.11	%		0.17	%

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Noninterest Income.The following table summarizes noninterest income for the three months ended March 31, 2008 and 2007.

	Three Months Ended March 31,
	2008			2007
	(Dollars in thousands)
Service fees on deposit accounts	$	28		$	31
Earnings on Bank-owned life insurance		(41	)		20
Rental income		81			70
Other		58			53
Total	$	126		$	174

The $48,000 decrease in non-interest income during the three months ended March 31, 2008 as compared to the three months ended March 31, 2007 was primarily due to the decrease in earnings on Bank-owned life insurance and service fees on deposit accounts, partially offset by higher rental income from our office building and higher other income from revenues generated by our title insurance subsidiary.

Noninterest Expense. The following table summarizes noninterest expense for the three months ended March 31, 2008 and 2007.

	Three Months Ended March 31,
	2008		2007
	(Dollars in thousands)
Compensation and employee benefits	$	865	$	767
Occupancy and equipment		277		245
Federal deposit insurance premiums		22		48
Data processing expense		68		62
Professional fees		81		106
Other		226		249
Total	$	1,539	$	1,477

Total non-interest expense increased $62,000, or 4.2%, to $1.5 million for the three months ended March 31, 2008 from the prior year period. The increases in non-interest expenses for the three months ended March 31, 2008 as compared to the prior year periods were primarily the result of higher compensation and employee benefits due to annual salary increases, increased costs of medical insurance, additional pension expense, higher occupancy and equipment and higher data processing expense, partially offset by lower federal deposit insurance premiums, lower professional fees and lower other expenses.

Income Taxes. We recorded a tax benefit of $10,000 for the three months ended March 31, 2008 compared to a tax benefit of $58,000 during the three months ended March 31, 2007. The decrease in the tax benefit in 2008 resulted from lower operating losses before taxes.

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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 March 31, 2008, cash and cash equivalents totaled $5.2 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $39.8 million at March 31, 2008. In addition, at March 31, 2008, we had the ability to borrow a total of approximately $149.8 million from the FHLB of Pittsburgh. On March 31, 2008, we had $18.5 million of borrowings outstanding. Future growth of our loan portfolio resulting from our expansion efforts may require us to borrow additional funds.

At March 31, 2008, we had $4.0 million in mortgage loan commitments outstanding. Time deposits due within one year of March 31, 2008 totaled $33.2 million, or 44.7% 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 March 31, 2009. 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.

Capital Management. We are subject to various regulatory capital requirements administered by the Office of Thrift Supervision, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2008, we exceeded all of our regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines.

We also manage our capital for maximum stockholder benefit. The capital from the offering significantly increased our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering continue to be used for general corporate purposes, including the funding of lending activities. Our financial condition and results of operations are expected to be enhanced by the capital from the offering, resulting in increased net interest-earning assets and net income. However, the large increase in equity resulting from the capital raised in the offering has an adverse impact on our return on equity. We may use capital management tools such as cash dividends and common share repurchases.

On October 2, 2007, the Company authorized the funding of a trust that will purchase 64,800 shares, or 1.96%, of the Company’s outstanding common stock. The acquired shares will be used to fund restricted stock awards under the equity incentive plan.

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 three months ended March 31, 2008 and the year ended December 31, 2007 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.

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

In the normal course of conducting business activities, the Company is exposed to market risk, principally interest rate risk, through the operations of its banking subsidiary. Interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and values of financial instruments. No material changes in market risk strategy occurred during the current period. For information regarding market risk at December 31, 2007, see “Interest Rate Risk Management” in the Company’s Form 10-KSB for the period ended December 31, 2007.

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 March 31, 2008, 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-KSB for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. At March 31, 2008 the risk factors of the Company have not changed materially from those reported in our Annual Report on Form 10-KSB. However, the risks described in our Annual Report on Form 10-KSB 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

The Company did not repurchase any of its common stock during the quarter ended March 31, 2008.

Item 3. Defaults Upon Senior Securities

Not applicable.

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Item 4. Submission Of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

3.1 Charter of Polonia Bancorp ⁽¹⁾

3.2 Bylaws of Polonia Bancorp ⁽¹⁾

4.0 Stock Certificate of Polonia Bancorp ⁽¹⁾

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

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

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SIGNATURES

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

POLONIA BANCORP

Date: May 14, 2008

By:  /s/ Anthony J. Szuszczewicz

Anthony J. Szuszczewicz

President and Chief Executive Officer

(principal executive officer)

Date: May 14, 2008

By:  /s/ Paul D. Rutkowski

Paul D. Rutkowski

Chief Financial Officer and Treasurer

(principal financial and accounting officer)