Polonia Bancorp 10-Q 2009 Q3 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 September 30, 2009

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 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 ¨                   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 13, 2009, there were 3,159,078 shares of the registrant’s common stock outstanding.

POLONIA BANCORP

Table of Contents

		Page
		No.
Part I.    Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets at September 30, 2009 and December 31, 2008 (Unaudited)	2
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2009 and  2008 (Unaudited)	3
	Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended September 30, 2009 (Unaudited)	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008  (Unaudited)	5
	Notes to Unaudited Consolidated Financial Statements.	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
Part II.   Other Information
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
Item 5.	Other Information	24
Item 6.	Exhibits	24
	Signatures	25

PART 1.                          FINANCIAL INFORMATION

Item 1.                              Financial Statements

POLONIA BANCORP

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	September 30,			December 31,
	2009			2008
ASSETS
Cash and due from banks	$	3,658,056		$	1,938,465
Interest-bearing deposits with other institutions		11,462,757			2,732,477
Cash and cash equivalents		15,120,813			4,670,942
Investment securities available for sale		41,901,287			37,788,887
Loans receivable (net of allowance for loan losses of $1,160,646 and $857,702)		149,686,751			163,758,907
Accrued interest receivable		963,107			881,954
Federal Home Loan Bank stock		2,279,200			2,279,200
Premises and equipment, net		4,825,965			4,970,314
Bank-owned life insurance		4,015,266			3,936,358
Other assets		1,806,536			1,949,641
TOTAL ASSETS	$	220,598,925		$	220,236,203
LIABILITIES
Deposits	$	170,067,284		$	164,586,405
FHLB advances - short-term		-			4,000,000
FHLB advances - long-term		23,607,084			24,553,349
Advances by borrowers for taxes and insurance		742,003			1,413,396
Accrued interest payable		120,475			63,867
Other liabilities		2,295,133			2,015,505
TOTAL LIABILITIES		196,831,979			196,632,522
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		13,648,095			13,515,680
Retained earnings		11,371,103			11,506,078
Unallocated shares held by Employee Stock Ownership Plan "ESOP"  (105,855 and 112,324 shares)		(1,058,553	)		(1,123,243	)
Treasury Stock (147,172 and 115,190 shares)		(1,251,735	)		(983,145	)
Accumulated other comprehensive income		1,024,973			655,248
TOTAL STOCKHOLDERS' EQUITY		23,766,946			23,603,681
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	220,598,925		$	220,236,203

See accompanying notes to the unaudited consolidated financial statements.

2

POLONIA BANCORP

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months					Nine Months
	Ended September 30,					Ended September 30,
	2009		2008			2009			2008
INTEREST AND DIVIDEND INCOME
Loans receivable	$	2,139,573	$	2,313,650		$	6,631,286		$	6,516,567
Investment securities		515,269		491,075			1,466,787			1,522,484
Other interest and dividend income		1,609		43,739			7,227			136,455
Total interest and dividend income		2,656,451		2,848,464			8,105,300			8,175,506
INTEREST EXPENSE
Deposits		1,020,610		1,225,285			3,250,342			3,499,927
FHLB advances - short-term		-		2,669			396			47,547
FHLB advances - long-term		190,359		156,889			574,711			355,768
Advances by borrowers for taxes and insurance		6,911		6,579			21,444			19,132
Total interest expense		1,217,880		1,391,422			3,846,893			3,922,374
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		1,438,572		1,457,042			4,258,407			4,253,132
Provision for loan losses		80,304		84,992			299,344			84,992
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,358,268		1,372,050			3,959,063			4,168,140
NONINTEREST INCOME
Service fees on deposit accounts		21,121		24,201			66,115			88,973
Earnings on Bank-owned life insurance		45,987		(44,688	)		78,908			(124,684	)
Investment securities losses, net		-		(411,500	)		-			(411,500	)
Gain on sale of loans		58,012		83,640			180,870			99,440
Rental income		71,997		78,627			215,626			236,582
Other		36,368		40,636			141,956			140,846
Total noninterest income		233,485		(229,084	)		683,475			29,657
NONINTEREST EXPENSE
Compensation and employee benefits		843,601		853,805			2,581,717			2,560,900
Occupancy and equipment		250,179		276,009			752,388			820,286
Federal deposit insurance premiums		70,320		27,285			335,086			73,335
Data processing expense		67,261		63,807			198,501			196,535
Professional fees		86,242		78,999			263,044			234,640
Other		234,246		204,765			714,219			721,693
Total noninterest expense		1,551,849		1,504,670			4,844,955			4,607,389
Income (loss) before income tax expense (benefit)		39,904		(361,704	)		(202,417	)		(409,592	)
Income tax expense (benefit)		15,421		34,145			(67,442	)		45,410
NET INCOME (LOSS)	$	24,483	$	(395,849	)	$	(134,975	)	$	(455,002	)
EARNINGS PER SHARE	$	0.01	$	(0.13	)	$	(0.04	)	$	(0.15	)

See accompanying notes to the unaudited consolidated financial statements.

3

POLONIA BANCORP

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

	Shares of																	Accumulated
	Common																	Other
	Stock			Common		Additional			Retained			Unallocated			Treasury			Comprehensive					Comprehensive
	Outstanding			Stock		Paid-In-Capital			Earnings			ESOP Shares			Stock			Income		Total			Income (Loss)
Balance, December 31, 2008		3,191,060		$	33,063	$	13,515,680		$	11,506,078		$	(1,123,243	)	$	(983,145	)	$	655,248	$	23,603,681
Net loss										(134,975	)										(134,975	)	$	(134,975	)
Other comprehensive income:
Unrealized gain on available-for-sale securities, net of taxes of $190,464																			369,725		369,725			369,725
Comprehensive income																							$	234,750
Purchase of treasury stock		(31,982	)													(268,590	)				(268,590	)
Stock options compensation expense							67,194														67,194
Allocation of unearned ESOP shares							(21,579	)					64,690								43,111
Allocation of unearned restricted stock							86,800														86,800
Balance, September 30, 2009		3,159,078		$	33,063	$	13,648,095		$	11,371,103		$	(1,058,553	)	$	(1,251,735	)	$	1,024,973	$	23,766,946

See accompanying notes to the unaudited consolidated financial statements.

4

POLONIA BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended
	September 30,
	2009			2008
OPERATING ACTIVITIES
Net loss	$	(134,975	)	$	(455,002	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses		299,344			84,992
Depreciation, amortization and accretion		160,923			287,009
Investment securities losses, net		-			411,500
Origination of loans held for sale		(19,880,941	)		-
Proceeds from sale of loans		20,061,811			-
Net gain on sale of loans		(180,870	)		(99,440	)
Earnings on bank-owned life insurance		(78,908	)		124,684
Deferred federal income taxes		(48,023	)		(15,692	)
Decrease in accrued interest receivable		(81,153	)		(105,213	)
Increase in accrued interest payable		56,608			117,403
Compensation expense for stock options, ESOP and restricted stock		197,105			269,258
Other, net		280,292			263,433
Net cash provided by operating activities		651,213			882,932
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from principal repayments and maturities		8,326,734			15,009,760
Purchases		(11,882,038	)		(7,186,764	)
Decrease (increase) in loans receivable, net		13,829,049			(26,853,059	)
Loans purchased		-			(2,966,157	)
Proceeds from the sale of loans		-			5,007,927
Purchase of Federal Home Loan Bank stock		-			(1,819,900	)
Redemptions of Federal Home Loan Bank stock		-			1,084,300
Purchase of premises and equipment		(69,718	)		(154,520	)
Net cash provided by (used for) investing activites		10,204,027			(17,878,413	)
FINANCING ACTIVITES
Increase in deposits, net		5,480,879			6,071,759
Net decrease in FHLB advances - short-term		(4,000,000	)		(6,000,000	)
Repayment of FHLB advances - long-term		(946,265	)		(978,593	)
Proceeds of FHLB advances - long-term		-			21,766,000
Purchase of treasury stock		(268,590	)		(753,525	)
Decrease in advances by borrowers for taxes and insurance, net		(671,393	)		(399,523	)
Net cash provided by (used for) financing activites		(405,369	)		19,706,118
Increase in cash and cash equivalents		10,449,871			2,710,637
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		4,670,942			3,825,725
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	15,120,813		$	6,536,362
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid:
Interest	$	3,790,286		$	3,804,971
Income taxes		75,000			-

See accompanying notes to the unaudited consolidated financial statements.

5

POLONIA BANCORP

NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Basis of Presentation

             The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three and nine month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the full year.  The December 31, 2008 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, 2008.

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.

Recent Accounting and Regulatory Pronouncements

         In April 2009, the FASB issued new guidance impacting ASC 825-10-50, Financial Instruments, which relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value.  This guidance amended existing GAAP to require disclosures about fair value of financial instruments for interim reporting of publicly traded companies as well as in annual financial statements.  This guidance is effective for interim and annual periods ending after June 15, 2009.  The Company has presented the necessary disclosures in Note 6 herein.

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

          In December 2007, FASB issued an accounting standard related to business combinations which is effective for fiscal years beginning on or after December 15, 2008.  This standard 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.  This accounting standard was subsequently codified into Accounting Standards Codification (ASC) Topic 805, Business Combinations.    The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

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

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

6

       In June 2009, the FASB issued FAS No. 167, Amendments to FASB Interpretation No. 46(R). FAS 167, which amends FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, (FIN 46(R)).  Under FASB’s Codification at ASC 105-10-65-1-d, FAS No. 167 will remain authoritative until integrated into the FASB Codification.  This statement prescribes a qualitative model for identifying whether a company has a controlling financial interest in a variable interest entity (VIE) and eliminates the quantitative model prescribed by FIN 46(R). The new model identifies two primary characteristics of a controlling financial interest: (1) provides a company with the power to direct significant activities of the VIE, and (2) obligates a company to absorb losses of and/or provides rights to receive benefits from the VIE. FAS No. 167 requires a company to reassess on an ongoing basis whether it holds a controlling financial interest in a VIE. A company that holds a controlling financial interest is deemed to be the primary beneficiary of the VIE and is required to consolidate the VIE. This statement is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

       In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 200-01, Topic 105 - Generally Accepted Accounting Principles - FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.  The Codification is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (GAAP).  The Codification does not change current GAAP, but is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place.  Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants.  The Company adopted this standard for the interim reporting period ending September 30, 2009.  The adoption of this standard did not have a material impact on the Company’s results of operations or financial position.

       In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic – 820) – Measuring Liabilities at Fair Value.  This ASU provides amendments for fair value measurements of liabilities.  It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques.  ASU 2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.  ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance or fourth quarter 2009.  The Company is currently evaluating the impact of this standard on the Company’s financial condition, results of operations, and disclosures.

Reclassification of Comparative Amounts

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

7

2.  Earnings Per Share

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Net Income (loss)	$	24,483		$	(395,849	)	$	(134,975	)	$	(455,002	)
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		(146,052	)		(81,877	)		(143,356	)		(36,716	)
Less weighted average number of unearned ESOP shares		(106,596	)		(115,236	)		(108,736	)		(117,383	)
Less weighted average number of nonvested restricted stock awards		(39,101	)		(53,025	)		(40,029	)		(53,856	)
Weighted average shares outstanding basic		3,014,501			3,056,112			3,014,129			3,098,295
Weighted average shares outstanding diluted		3,014,501			3,056,112			3,014,129			3,098,295
Earnings per share:
Basic	$	0.01		$	(0.13	)	$	(0.04	)	$	(0.15	)
Diluted		0.01			(0.13	)		(0.04	)		(0.15	)

Options to purchase 153,903 shares at $9.40 per share and 162,003 shares at $9.40 per share of common stock as of September 30, 2009 and 2008, as well as 35,910 shares and 45,198 shares of restricted stock as of September 30, 2009 and 2008, respectively, were not included in the computation of diluted earnings per share because they are in a loss position.

3. Comprehensive Income

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

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009		2008			2009			2008
Net income (loss):	$	24,483	$	(395,849	)	$	(134,975	)	$	(455,002	)
Other comprehensive income (loss), net of tax
Fair value adjustment on securities available for sale, net of taxes of $97,110, $73,932, $190,464 and $(41,869)		188,508		143,515			369,725			(81,276	)
Other comprehensive income (loss), net of tax		188,508		143,515			369,725			(81,276	)
Comprehensive income (loss)	$	212,991	$	(252,334	)	$	234,750		$	(536,278	)

8

4.             Investment Securities

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

	September 30, 2009
				Gross		Gross
		Amortized		Unrealized		Unrealized			Fair
		Cost		Gains		Losses			Value
Available for Sale
Fannie Mae		$	20,946,142	$	1,008,855	$	-		$	21,954,997
Freddie Mac			5,481,342		283,681		-			5,765,023
Government National Mortgage
Association securities			1,436,850		110,865		-			1,547,715
Other mortgage-backed securities			88,214		4,540		(3,690	)		89,064
Total mortgage-backed
securities			27,952,548		1,407,941		(3,690	)		29,356,799
Corporate securities			12,377,249		140,723		-			12,517,972
Total debt securities			40,329,797		1,548,664		(3,690	)		41,874,771
Equity securities			18,500		8,016		-			26,516
Total		$	40,348,297	$	1,556,680	$	(3,690	)	$	41,901,287
	December 31, 2008
				Gross		Gross
		Amortized		Unrealized		Unrealized			Fair
		Cost		Gains		Losses			Value
Available for Sale
Fannie Mae		$	23,870,316	$	766,189	$	(8,608	)	$	24,627,897
Freddie Mac			6,835,338		164,728		(549	)		6,999,517
Government National Mortgage
Association securities			1,627,489		60,819		-			1,688,308
Other mortgage-backed securities			98,069		19		(4,359	)		93,729
Total mortgage-backed
securities			32,431,212		991,755		(13,516	)		33,409,451
Corporate securities			4,346,375		28,231		(620	)		4,373,986
Total debt securities			36,777,587		1,019,986		(14,136	)		37,783,437
Equity securities			18,500		-		(13,050	)		5,450
Total		$	36,796,087	$	1,019,986	$	(27,186	)	$	37,788,887

9

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, 2009
	Less Than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Other mortgage-backed securities	$	-	$	-		$	8,260	$	(3,690	)	$	8,260	$	(3,690	)
Total	$	-	$	-		$	8,260	$	(3,690	)	$	8,260	$	(3,690	)
	December 31, 2008
	Less Than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Fannie Mae	$	629,367	$	(8,608	)	$	-	$	-		$	629,367	$	(8,608	)
Freddie Mac		116,064		(549	)		-		-			116,064		(549	)
Other mortgage-backed securities		-		-			9,312		(4,359	)		9,312		(4,359	)
Corporate securities		1,999,380		(620	)		-		-			1,999,380		(620	)
Equity securities		5,450		(13,050	)		-		-			5,450		(13,050	)
									��
Total	$	2,750,261	$	(22,827	)	$	9,312	$	(4,359	)	$	2,759,573	$	(27,186	)

There is one position that is considered temporarily impaired as of September 30, 2009.   The Company reviews its position quarterly and has asserted that at September 30, 2009, the declines outlined in the above table represent temporary declines, and the Company does not have the intent to sell these securities and it is more likely then not that it will not have to sell the securities before recovery of their cost basis.  The Company has identified certain investment securities for which it has determined the unrealized losses to be other than temporary.  The Company recorded an other-than-temporary impairment charge of $411,500 for the year ended December 31, 2008.

There were no sales of securities available for sale during the periods ended September 30, 2009 and 2008.

The amortized cost and fair value of debt securities at September 30, 2009, by contractual maturity, are shown below.  Mortgage-backed securities provide for periodic, generally monthly, payments of principal and interest and have contractual maturities ranging from 3 to 30 years.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

10

	Amortized		Fair
	Cost		Value
Due within one year	$	1,750,187	$	1,772,330
Due after one year through five years		2,768,727		2,867,858
Due after five years through ten years		11,992,565		12,544,591
Due after ten years		23,818,318		24,689,992
Total	$	40,329,797	$	41,874,771

5.           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 $10,957,007.  The cash surrender value of these policies totaled $4,015,266 and $3,936,358 at September 30, 2009 and December 31, 2008, respectively.  The Plan provides that death benefits totaling $6.0 million at September 30, 2009, 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, 2009 and December 31, 2008, $1,475,299 and $1,444,546 had been accrued under these SRPs, respectively, and this liability and the related deferred tax assets of $501,602 and $491,146 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 $39,681 and $41,010 for the three months ended September 30, 2009 and 2008, and $114,793 and $120,328 for the nine months ended September 30, 2009 and 2008, respectively.  The accruals change each year based on a discount rate of 6.25 percent used in determining the estimated liability that will be accrued when the employees are eligible for benefits.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
Components of net periodic benefit cost:
Service cost	$	17,110	$	20,765	$	47,080	$	59,593
Interest cost		22,571		20,245		67,713		60,735
Net periodic benefit cost	$	39,681	$	41,010	$	114,793	$	120,328

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6.           Fair Value Measurements

             US 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 balance sheet at their fair value as of September 30, 2009 and December 31, 2008, respectively, by level within the fair value hierarchy.  As required by GAAP, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	September 30, 2009
	Level I		Level II		Level III		Total
Assets:
Available for Sale
Mortgage-backed securities	$	-	$	29,356,799	$	-	$	29,356,799
Corporate securities		-		12,517,972		-		12,517,972
Equity securities		-		26,516		-		26,516
Total	$	-	$	41,901,287	$	-	$	41,901,287
	December 31, 2008
	Level I		Level II		Level III		Total
Assets:
Available for Sale
Mortgage-backed securities	$	-	$	33,409,451	$	-	$	33,409,451
Corporate securities		-		4,373,986		-		4,373,986
Equity securities		-		5,450		-		5,450
Total	$	-	$	37,788,887	$	-	$	37,788,887

          Most of the securities classified as available for sale are reported at fair value utilizing Level 2 inputs.  For theses 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.

          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.

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           As of September 30, 2009, the Company 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 September 30, 2009, all of the financial assets measured at fair value utilized the market approach.

7.          Fair Value Disclosure

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

	September 30, 2009				December 31, 2008
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial assets:
Cash and cash equivalents	$	15,120,813	$	15,120,813	$	4,670,942	$	4,670,942
Investment securities
available for sale		41,901,287		41,901,287		37,788,887		37,788,887
Net loans receivable		149,686,751		157,500,962		163,758,907		168,774,162
Accrued interest receivable		963,107		963,107		881,954		881,954
Federal Home Loan Bank stock		2,279,200		2,279,200		2,279,200		2,279,200
Bank-owned life insurance		4,015,266		4,015,266		3,936,358		3,936,358
Financial liabilities:
Deposits	$	170,067,284	$	176,519,204	$	164,586,405	$	170,256,832
FHLB advances - short-term		-		-		4,000,000		4,000,000
FHLB advances - long-term		23,607,084		24,735,658		24,553,349		25,878,974
Advances by borrowers
for taxes and insurance		742,003		742,003		1,413,396		1,413,396
Accrued interest payable		120,475		120,475		63,867		63,867

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

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

                    If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or 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.

13

                  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, FHLB Advances – Short-Term, Accrued Interest Payable, and Advances by Borrowers for Taxes and Insurance

The fair value is equal to the current carrying value.

Investment Securities Available for Sale

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

Net Loans Receivable

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

Deposits and 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.

8.             Subsequent Events

The Company assessed events occurring subsequent to September 30, 2009 through November 13, 2009 for potential recognition and disclosure in the consolidated financial statements.  No events have occurred that would require adjustment to or disclosure in the consolidated financial statements which were issued on November 13, 2009.

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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-K for the year ended December 31, 2008 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 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.

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.

15

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, 2009 and December 31, 2008

Total assets at September 30, 2009 were $220.6 million, an increase of $400,000, or 0.2%, from total assets of $220.2 million at December 31, 2008.  The increase in assets resulted primarily from a $10.4 million increase in cash and cash equivalents and a $4.1 million increase in investment securities available for sale, partially offset by an $14.1 million decrease in loans.  Total liabilities at September 30, 2009 were $196.8 million compared to $196.6 million at December 31, 2008, an increase of $200,000, or 0.1%.  The increase in liabilities was primarily due to a $5.5 million increase in deposits, partially offset by a $5.0 million decrease in FHLB advances and a $700,000 decrease in advances by borrowers for taxes and insurance.  Total stockholders’ equity increased to $23.8 million at September 30, 2009 from $23.6 million at December 31, 2008, an increase of $200,000, or 0.7%, primarily due to a $370,000 increase in accumulated other comprehensive income and a $132,000 increase in additional paid in capital, partially offset by $269,000 in stock repurchases and a $135,000 decrease in retained earnings.

Cash and cash equivalents increased to $15.1 million from $4.7 million during the nine months ended September 30, 2009, an increase of $10.4 million, or 221.3%.  The increase in cash and cash equivalents was attributable, in part, to an increase in deposits with other institutions due to the offering of competitive rates and the uncertainty of investors who have opted to deposit funds into financial institutions rather than invest in other alternatives and a higher amount of loan payoffs during the period.

               Investment securities available for sale increased to $41.9 million from $37.8 million during the nine months ended September 30, 2009, an increase of $4.1 million, or 10.8%. The increase in investment securities available for sale was attributable, in part, to investing excess cash in high quality, market yielding securities.

               Loans, net, decreased $14.1 million, or 8.6%, to $149.7 million at September 30, 2009, compared to $163.8 million at December 31, 2008.  The size of our loan portfolio decreased during the nine months ended September 30, 2009 due primarily to the  early payoff of loans and regular amortization of loans.

Total deposits increased to $170.1 million from $164.6 million during the nine months ended September 30, 2009, an increase of $5.5 million, or 3.3%.  The increase in deposits was attributable, in part, to the higher rates offered on certificates of deposit and money market accounts during the first quarter as we anticipated increased loan production during the quarter. However, as loan production did not meet our expectations, we reduced rates by the end of the first quarter and have continued to do so through the end of the nine month period ending September 30, 2009. The continued increase in deposits is due in part to the economic uncertainty for investors as they seek lower risk investment alternatives.

We utilize borrowings from the FHLB of Pittsburgh to supplement our supply of funds for loans and investments.  FHLB advances short-term decreased $4.0 million to $0 at September 30, 2009.  The $4.0 million decrease in FHLB advances short-term was due to more attractive longer term funding opportunities available through deposits.

16

Comparison of Operating Results For The Three and Nine Months Ended September 30, 2009 and 2008

General.We recorded net income of $24,000 during the three months ended September 30, 2009, compared to a net loss of $396,000 during the three months ended September 30, 2008.  The higher net income for the 2009 period was primarily related to higher noninterest income, lower tax expense and a lower provision for loan losses, partially offset by lower net interest income and higher noninterest expense.

             We recorded a net loss of $135,000 during the nine months ended September 30, 2009, compared to a net loss of $455,000 during the nine months ended September 30, 2008. The lower net loss for 2009 was primarily related to higher noninterest income, lower tax expense and higher net interest income, partially offset by higher noninterest expense and a higher provision for loan losses.

Net Interest Income.The following table summarizes changes in interest income and expense for the three and nine months ended September 30, 2009 and 2008.

	Three Months Ended				Nine Months Ended
	September				September
	2009		2008		2009		2008
	(Dollars in thousands)				(Dollars in thousands)
Interest and dividend income:
Loans receivable	$	2,139	$	2,313	$	6,631	$	6,517
Investment securities		515		491		1,467		1,522
Other interest and dividend income		2		44		7		136
Total interest and dividend income		2,656		2,848		8,105		8,175
Interest Expense:
Deposits		1,021		1,225		3,250		3,500
FHLB advances - short-term		-		3		-		47
FHLB advances - long-term		190		157		575		356
Advances by borrowers for taxes and insurance		7		6		22		19
Total interest expense		1,218		1,391		3,847		3,922
Net interest income	$	1,438	$	1,457	$	4,258	$	4,253

17

The following table summarizes average balances and average yields and costs for the three and nine months ended September 30, 2009 and 2008.

	Three Months Ended												Nine Months Ended
	September 30,												September 30,
	2009						2008						2009						2008
	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	$	152,516			5.49	%	$	160,657			5.76	%	$	155,458			5.62	%	$	149,403			5.82	%
Investment securities		42,082			4.79			38,008			5.17			39,658			4.88			39,841			5.09
Other interest-earning assets		13,437			0.06			7,836			2.23			13,801			0.07			7,239			2.50
Total interest-earning assets		208,035			5.07	%		206,501			5.47	%		208,917			5.19	%		196,483			5.54	%
Noninterest-earning assets:		13,374						13,238						13,777						12,918
Allowance for Loan Losses		(1,094	)					(799	)					(1,009	)					(764	)
Total assets	$	220,315					$	218,940					$	221,685					$	208,637
Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits		11,210			0.78	%		11,701			0.92	%		10,781			0.71	%		11,880			0.83	%
Money market deposits		31,767			1.51			26,590			2.98			30,234			2.05			27,323			3.05
Savings accounts		29,427			0.63			35,780			0.93			32,747			0.80			35,982			0.87
Time deposits		91,864			3.59			92,277			3.93			91,332			3.71			84,224			4.06
Total interest-bearing deposits		164,268			2.47	%		166,348			2.92	%		165,094			2.63	%		159,409			2.92	%
FHLB advances - short-term		-			-			413			2.88			103			-			2,000			3.13
FHLB advances - long-term		23,754			3.18			20,682			3.01			24,089			3.19			15,743			3.01
Advances by borrowers for taxes and insurance		1,273			2.18			1,288			1.85			1,333			2.21			1,262			2.01
Total interest-bearing liabilities		189,295			2.55	%		188,731			2.92	%		190,619			2.70	%		178,414			2.93	%
Noninterest-bearing liabilities:		7,372						7,029						7,573						6,465
Total liabilities		196,667						195,760						198,192						184,879
Retained earnings		23,648						23,180						23,493						23,758
Total liabilities and retained earnings	$	220,315					$	218,940					$	221,685					$	208,637
Interest rate spread					2.51	%					2.55	%					2.49	%					2.61	%
Net yield on interest-bearing assets					2.74	%					2.80	%					2.72	%					2.88	%
Ratio of average interest-earning assets to average interest-bearing liabilities					109.90	%					109.42	%					109.60	%					110.13	%

       Our net interest rate spread declined from 2.55% for the three months ended September 30, 2008 to 2.51% for the same period in 2009.  Our net interest rate spread declined from 2.61% for the nine months ended September 30, 2008 to 2.49% for the same period in 2009. Net interest income for the three months ended September 30, 2009 decreased $18,000 to $1.4 million, or 1.2%, from $1.5 million during the same period last year.  Net interest income for the nine months ended September 30, 2009 increased $5,000 to $4.3 million, 0.1%, from $4.3 million during the same period last year. The primary reasons for the decrease in net interest income for the three month period reflects a lower average interest rate earned on loans, investment securities and other interest-earning assets, a lower average balance on loans, a higher average balance of money market accounts, a higher average balance of FHLB advances and a higher average interest rate paid on FHLB advances, partially offset by a higher average balance in investment securities and other interest-earning assets, a lower weighted average rate paid on deposits and a lower average balance in savings accounts.  The primary reasons for the increase in net interest income for the nine month period reflects a higher average balance in loans and other interest-earning assets, a lower average interest rate paid on deposit accounts, partially offset by a lower average interest rate earned on loans, investment securities and other interest-earning assets, a higher average balance of deposit accounts and a higher average balance of FHLB advances long-term. The average balance of loans decreased during the three months ended September 30, 2009 due to increased payoffs as compared to the same period last year. The average balance of loans increased during the nine months ended September 30, 2009 due to increased loan production.  Lower interest expense on deposits for the three and nine months ended September 30, 2009 was due to a continuing decline in market interest rates due to a lower Federal Funds rate. The higher average balance of other interest-earning assets was due to an increase in deposits held in other banks during the three and nine months ended September 30, 2009.  Other interest-earning assets primarily consist of cash and cash equivalents.

18

               Provision for Loan Losses.The following table summarizes the activity in the allowance for loan losses and provision for loan losses for the three and nine months ended September 30, 2009 and 2008.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
	(Dollars in thousands)				(Dollars in thousands)
Allowance at beginning of period	$	1,079	$	770	$	858	$	731
Provision for loan losses		80		85		299		85
Charge-offs		-		-		-		-
Recoveries		2		1		4		40
Net charge-offs		2		1		4		40
Allowance at end of period	$	1,161	$	856	$	1,161	$	856

              We recorded a provision for loan losses of $80,000 for the three months ended September 30, 2009 as compared to a provision for loan losses of $85,000 for the three months ended September 30, 2008.  For the nine months ended September 30, 2009 we recorded a provision for loan losses of $299,000 as compared to a provision for loan losses of $85,000 for the nine months ended September 30, 2008. The provisions reflect management’s assessment of increased lending activities, increased non-performing loans, levels of current delinquencies and current economic conditions.  Provisions for loan losses are charged to earnings to maintain the total allowance for loan losses at a level believed by management sufficient to cover all known and inherent losses in the loan portfolio which are both probable and reasonably estimable. Management’s analysis includes consideration of the Company’s historical experience, the volume and type of lending conducted by the Company, the amount of the Company’s classified and criticized assets, the status of past due principal and interest payments, general economic conditions, particularly as they relate to the Company’s primary market area, and other factors related to the collectability of the Company’s loan portfolio.

             The following table provides information with respect to our nonperforming assets at the dates indicated.  During the quarter ending June 30, 2009 the Company restructured one troubled loan, and at September 30, 2009, this loan was still classified as delinquent.  At September 30, 2009 we did not have any accruing loans past due 90 days or more at the dates presented. During the nine month period ended September 30, 2009 the Bank had three participation loans from one borrower totaling $1.5 million reach non-accrual status. These three loans were collateralized by 67 single family properties located in the city of Philadelphia. The Company, along with other participants in the loans, are in the process of taking control of the management of these properties and should be foreclosing on these properties in December, 2009. The participants in these loans established a separate company to buy and subsequently manage and sell these properties. To accomplish this, a Home Equity Line of Credit (“HELOC”) was granted to this subsidiary in the amount of $3.5 million to purchase these loans from the participants. Our share in these transactions has been and will continue to be 49%. This HELOC has been placed on non-accrual status and we are accounting for this transaction utilizing the equity method. During the quarter one additional residential single family loan in the amount of $475,000 reached nonaccrual status.

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	At September 30,			At September 30,
	2009			2008
	(Dollars in thousands)
Nonaccrual loans	$	2,808		$	703
Real estate owned		-			-
Total nonperforming assets	$	2,808		$	703
Total nonperforming loans to total loans		1.86	%		0.43	%
Total nonperforming loans to total assets		1.27	%		0.32	%
Total nonperforming assets to total assets		1.27	%		0.32	%

                Noninterest Income.The following table summarizes noninterest income for the three months and nine months ended September 30, 2009 and 2008.

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009		2008			2009		2008
	(Dollars in thousands)					(Dollars in thousands)
Service fees on deposit accounts	$	21	$	24		$	66	$	90
Earnings on Bank-owned life insurance		46		(45	)		79		(125	)
Investment Securities losses, net		-		(412	)		-		(412	)
Gain on sale of loans		58		84			181		99
Rental income		72		79			215		237
Other		36		41			142		141
Total	$	233	$	(229	)	$	683	$	30

The $462,000 increase in noninterest income during the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 was primarily due to no losses recorded on investment securities as compared to $412,000 last year related to our investment in Freddie Mac (“FHLMC”) securities, a $91,000  increase in earnings on Bank-owned life insurance, partially offset by a $26,000 decrease in gains on the sale of loans and a $7,000 decrease in rental income related to increased vacancies in our office building.

                The $653,000 increase in noninterest income during the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 was primarily due to no losses recorded on investment securities as compared to $412,000 last year related to our investment in FHLMC securities, a $204,000  increase in earnings on the Bank-owned life insurance and by $82,000 in gains on the sale of loans related to the sale of $20.0 million of loans, partially offset by a $24,000 decrease in service fees on deposit accounts due to the introduction of a no monthly service charge fee checking account during the second quarter of 2008 and reduced fee income generated by wire transfer activity, and a $22,000 decrease in rental income related to increased vacancies in our office building.

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Noninterest Expense.The following table summarizes noninterest expense for the three and nine months ended September 30, 2009 and 2008.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
	(Dollars in thousands)				(Dollars in thousands)
Compensation and employee benefits	$	844	$	854	$	2,582	$	2,561
Occupancy and equipment		250		276		752		820
Federal deposit insurance premiums		70		27		335		73
Data processing expense		67		64		199		196
Professional fees		86		79		263		235
Other		234		205		714		722
Total	$	1,551	$	1,505	$	4,845	$	4,607

Total noninterest expense increased $46,000, or 3.1%, to $1.6 million for the three months ended September 30, 2009 from the prior year period.  The increase in noninterest expense for the three months ended September 30, 2009 as compared to the prior year period was primarily the result of a $43,000 increase in federal deposit insurance premiums related to the expiring of the one time credit received from the FDIC in 2007 and increased fees related to increased FDIC insurance premium fees during 2009, a $29,000 increase in other expenses related to our investment in a subsidiary set up to manage and dispose of foreclosed property, a $7,000 increase in professional fees related to compliance with Sarbanes-Oxley, partially offset by a $26,000 decrease in occupancy and equipment and a $10,000 decrease in compensation and employee benefits.

Total noninterest expense increased $238,000, or 5.2%, to $4.8 million for the nine months ended September 30, 2009 from the prior year period.  The increase in noninterest expense for the nine months ended September 30, 2009 as compared to the prior year period was primarily the result of a $262,000 increase in federal deposit insurance premiums related to the expiring of the one time credit received from the FDIC in 2007 and increased fees related to revised insurance premium fees during 2009, a $28,000 increase in professional fees related to compliance with Sarbanes-Oxley and a $21,000 increase in compensation and employee benefits, partially offset by a $68,000 decrease in occupancy and equipment and a $8,000 decrease in other expenses related to lower costs associated with equity plan expense for directors partially offset by costs related to our investment in a subsidiary set up to manage and dispose of foreclosed property.

Income Taxes.We recorded tax expense of $15,000 for the three months ended September 30, 2009 compared to tax expense of $34,000 during the three months ended September 30, 2008.

                We recorded a tax benefit of $67,000 for the nine months ended September 30, 2009 compared to a tax expense of $45,000 during the nine months ended September 30, 2008.  The recording of a tax benefit in 2009 as compared to 2008 resulted from the increase in our taxable operating losses.

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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 September 30, 2009, cash and cash equivalents totaled $15.1 million.  Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $41.9 million at September 30, 2009.  In addition, at September 30, 2009, we had the ability to borrow a total of approximately $94.9 million from the FHLB of Pittsburgh.  On September 30, 2009, we had $23.6 million of borrowings outstanding.  Any growth of our loan portfolio may require us to borrow additional funds.

             At September 30, 2009, we had $895,000 in mortgage loan commitments outstanding and $156,000 in a standby Letter of Credit.  Time deposits due within one year of September 30, 2009 totaled $52.1 million, or 56.2% 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, 2010.  We believe, however, based on past experience that a significant portion of our time deposits will remain with us.  We have the ability to attract and retain deposits by adjusting the interest rates offered.

             Our primary investing activities are the origination of loans and the purchase of securities.  Our primary financing activities consist of activity in deposit accounts and FHLB advances.  Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local 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 September 30, 2009, 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 has been reduced as net proceeds from the stock offering have been used for general corporate purposes, including the funding of lending activities.  We may use capital management tools such as cash dividends and common share repurchases.

            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, 2009 and the year ended December 31, 2008 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

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, 2009, 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, 2008, which could materially affect our business, financial condition or future results. At September 30, 2009 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.

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

						Total Number		Maximum
						of Shares		Number of Shares
	Total					Purchased as		that May Yet be
	Number of			Average		Part of Publicly		Purchased Under
	Shares			Price Paid		Announced Plans		the Plans or
Period	Purchased			Per Share		or Programs		Programs
July 1 - 31, 2009		-		$	-		-		-
August 1 - 31, 2009		1,982	(1)		6.10		-		-
September 1 - 30, 2009		-			-		-		-
Total		1,982		$	6.10		-

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

Item 3.              Defaults Upon Senior Securities

Not applicable.

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 (2)

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 ExchangeCommission on the Registration Statement on Form SB-2, and any amendments thereto, Registration No. 333-135643.

(2)  Incorporated herein by reference to Exhibit 3.1 to the current report on Form 8-K filed with the Securities and Exchange Commission on January 22, 2009 (file no. 000-52667).

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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:  November 13, 2009	By:	/s/ Anthony J. Szuszczewicz
		Anthony J. Szuszczewicz
		President and Chief Executive Officer
		(principal executive officer)
Date:  November 13, 2009	By:	/s/ Paul D. Rutkowski
		Paul D. Rutkowski
		Chief Financial Officer and Treasurer
		(principal financial and accounting officer)

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