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, 2012

 

OR

 

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

 

For the transition period from ______________ to _____________

 

Commission file number:   0-52267

 

POLONIA BANCORP

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

 

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

 

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

(Address of principal executive offices)         (Zip Code)

(215) 938-8800

(Registrant’s telephone number, including area code)

N/A

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

 

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

Yes x            No ¨

 

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

Yes x            No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filed, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨	Accelerated Filer ¨	Non-accelerated filer  ¨
Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨            No x

 

As of May 15, 2012, there were 3,155,114 shares of the registrant’s common stock outstanding.

 

 

POLONIA BANCORP

Table of Contents

 

		Page
		No.
Part I.	Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets at March 31, 2012 and December 31, 2011 (Unaudited)	3
	Consolidated Statements of Income for the Three Months Ended March 31, 2012 and 2011 (Unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011 (Unaudited)	5
	Consolidated Statement of Changes in Stockholders' Equity for the Three Months Ended March 31, 2012 (Unaudited)	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited)	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	34
Part II.	Other Information
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	34
	Signatures	35

 

 

PART 1.

FINANCIAL INFORMATION

Item 1.

Financial Statements

 

POLONIA BANCORP

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

		March 31,				December 31,
		2012				2011
ASSETS
Cash and due from banks		$	1,523,995			$	2,312,801
Interest-bearing deposits with other institutions			20,492,509				15,103,397
Cash and cash equivalents			22,016,504				17,416,198
Investment securities available for sale			16,519,681				17,348,485
Investment securities held to maturity (fair value of $58,123,794 and $58,992,283)			55,638,590				56,597,111
Loans receivable			121,899,838				128,922,661
Covered loans			24,416,678				25,708,179
Total loans			146,316,516				154,630,840
Less: allowance for loan losses			1,145,952				1,279,008
Net loans			145,170,564				153,351,832
Accrued interest receivable			928,215				970,966
Federal Home Loan Bank stock			2,681,400				2,822,600
Premises and equipment, net			5,089,455				5,085,980
Bank-owned life insurance			4,210,727				4,200,181
FDIC indemnification asset			5,129,199				5,218,506
Other assets			2,579,943				2,038,563
TOTAL ASSETS		$	259,964,278			$	265,050,422
LIABILITIES
Deposits		$	203,175,347			$	203,016,286
FHLB advances - long-term			25,945,611				31,091,302
Advances by borrowers for taxes and insurance			637,407				939,092
Accrued interest payable			86,826				95,894
Other liabilities			2,286,153				2,269,471
TOTAL LIABILITIES			232,131,344				237,412,045
Commitments and contingencies			-				-
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value; 1,000,000 shares authorized; none issued or outstanding)			-				-
Common stock ($.01 par value; 14,000,000 shares authorized; 3,306,250 shares issued)			33,063				33,063
Additional paid-in-capital			14,081,572				14,051,475
Retained earnings			15,475,668				15,399,854
Unallocated shares held by Employee Stock Ownership Plan
"ESOP" (84,248 and 87,514 shares)			(842,480	)			(875,144	)
Treasury Stock (151,136 shares)			(1,274,528	)			(1,274,528	)
Accumulated other comprehensive income			359,639				303,657
TOTAL STOCKHOLDERS' EQUITY			27,832,934				27,638,377
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	259,964,278			$	265,050,422

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

POLONIA BANCORP

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

		Three Months
		Ended March 31,
		2012				2011
INTEREST AND DIVIDEND INCOME
Loans receivable		$	1,996,624			$	2,229,652
Investment securities			588,372				569,496
Other interest and dividend income			2,236				3,526
Total interest and dividend income			2,587,231				2,802,674
INTEREST EXPENSE
Deposits			526,645				673,327
FHLB advances - short-term			-				3,302
FHLB advances - long-term			187,096				190,744
Advances by borrowers for taxes and insurance			5,968				5,746
Total interest expense			719,709				873,119
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES			1,867,522				1,929,555
Provision for loan losses			90,059				25,766
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			1,777,464				1,903,789
NONINTEREST INCOME
Service fees on deposit accounts			32,634				29,570
Earnings on bank-owned life insurance			10,546				17,369
Gain on sale of loans, net			141,561				-
Rental income			73,494				72,790
Other			105,915				61,745
Total noninterest income			364,150				181,474
NONINTEREST EXPENSE
Compensation and employee benefits			1,163,047				1,100,519
Occupancy and equipment			332,573				353,189
Federal deposit insurance premiums			74,130				92,391
Data processing expense			99,821				151,224
Professional fees			99,568				94,014
Other			253,505				304,605
Total noninterest expense			2,022,645				2,095,942
Income (loss) before income tax expense (benefit)			118,969				(10,679	)
Income tax expense (benefit)			43,156				(4,277	)
NET INCOME (LOSS)		$	75,814			$	(6,402	)
EARNINGS PER SHARE - Basic and Diluted		$	0.02			$	0.00

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

POLONIA BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

		Three Months
		Ended March 31,
		2012				2011
Net income (loss)		$	75,814			$	(6,402	)
Changes in net unrealized gain on investment securities available for sale			84,821				18,141
Tax effect			(28,839	)			(6,168	)
Total comprehensive income		$	131,796			$	5,571

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

POLONIA BANCORP

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

 

																										Accumulated
		Shares of																Unallocated								Other
		Common				Common				Additional				Retained				Shares Held				Treasury				Comprehensive
		Stock				Stock				Paid-In-Capital				Earnings				by ESOP				Stock				Income				Total
Balance, December 31, 2011			3,306,250			$	33,063			$	14,051,475			$	15,399,854			$	(875,144	)		$	(1,274,528	)		$	303,657			$	27,638,377
Net income															75,814																75,814
Other comprehensive income; net																											55,982				55,982
Stock options compensation expense											22,398																				22,398
Allocation of unearned ESOP shares											(21,234	)							32,664												11,430
Allocation of unearned restricted stock											28,933																				28,933
Balance, March 31, 2012			3,306,250			$	33,063			$	14,081,572			$	15,475,668			$	(842,480	)		$	(1,274,528	)		$	359,639			$	27,832,934

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

POLONIA BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

		Three Months Ended
		March 31,
		2012				2011
OPERATING ACTIVITIES
Net income (loss)		$	75,814			$	(6,402	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses			90,059				25,766
Depreciation, amortization and accretion			117,875				151,587
Origination of loans held for sale			(4,492,020	)			-
Proceeds from sale of loans			4,633,581				-
Net gain on sale of loans			(141,561	)			-
Earnings on bank-owned life insurance			(10,546	)			(17,369	)
Deferred federal income taxes			(31,931	)			57,664
Decrease (increase) in accrued interest receivable			42,751				(26,747	)
Increase in accrued interest payable			(9,068	)			(2,759	)
Compensation expense for stock options, ESOP and restricted stock			62,761				63,942
Other, net			(252,343	)			65,872
Net cash provided by operating activities			85,372				311,554
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from principal repayments and maturities			908,940				1,627,609
Investment securities held to maturity:
Proceeds from principal repayments and maturities			2,480,032				1,579,639
Purchases			(1,555,781	)			(29,016,481	)
Decrease (increase) in loans receivable, net			6,552,864				(2,401,058	)
Decrease in covered loans			1,276,294				1,411,493
Redemptions of Federal Home Loan Bank stock			141,200				173,300
Payments received from FDIC under loss share agreement			100,576				-
Purchase of premises and equipment			(108,330	)			(69,393	)
Net cash (used for) provided by investing activites			9,795,795				(26,694,891	)
FINANCING ACTIVITES
Increase (decrease) in deposits, net			166,515				(22,394,036	)
Net increase in FHLB advances - short term			-				5,000,000
Repayment of FHLB advances - long-term			(5,145,691	)			(1,906,168	)
Decrease in advances by borrowers for taxes and insurance, net			(301,685	)			(287,852	)
Net cash used for financing activites			(5,280,861	)			(19,588,056	)
Increase (decrease) in cash and cash equivalents			4,600,306				(45,971,393	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			17,416,198				54,004,549
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	22,016,504			$	8,033,156
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid:
Interest		$	728,777			$	875,878
Income taxes			200,000				-
Noncash items:
Transfers from loans to other real estate owned			269,263				-

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

POLONIA BANCORP

NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

 

1.	Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the full year.  The December 31, 2011 balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles.  For additional information, refer to the financial statements and footnotes thereto included in Polonia Bancorp’s (the “Company”) Form 10-K for the year ended December 31, 2011.

 

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

 

Recent Accounting and Regulatory Pronouncements

 

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

 

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this Update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. This information will enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. This ASU is not expected to have a significant impact on the Company’s financial statements.

 

 

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities should begin applying these requirements for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. This ASU is not expected to have a significant impact on the Company’s financial statements.

 

 Reclassification of Comparative Amounts

 

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

 

2.	Earnings Per Share

 

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

 

		Three Months Ended
		March 31,
		2012				2011
Net Income (loss):		$	75,814			$	(6,402	)
Weighted average number of shares issued			3,306,250				3,306,250
Less weighted average number of treasury stock shares			(151,136	)			(149,154	)
Less weighted average number of unearned ESOP shares			(84,989	)			(93,629	)
Less weighted average number of nonvested restricted stock awards			(6,190	)			(18,502	)
Weighted average shares outstanding basic			3,063,935				3,044,965
Weighted average shares outstanding diluted			3,063,935				3,044,965
Earnings per share:
Basic		$	0.02			$	0.00
Diluted			0.02				0.00

 

Options to purchase 153,903 shares at $9.40 per share of common stock as of March 31, 2012 and 2011, as well as 5,130 shares and 17,442 shares of restricted stock as of March 31, 2012 and 2011, respectively, were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.

 

3.	FDIC-Assisted Acquisition

 

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

 

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

 

 

Under U.S. generally accepted accounting principles, fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values become available. The Company deemed it appropriate to analogize the accounting guidance under ASC 310-30 to all other loans since (i) the discount recognized for these loans was attributable at least in part to credit quality, and (ii) the Company was unable to identify specific loans within this portfolio for which it was probable at acquisition that the Company would be unable to collect all contractually required payments receivable. The Company has aggregated all other loans into four loan pools by common risk characteristics, which generally conform to the loan type. The first pool of loans consists primarily of 15 and 20 year loans and lines of credit secured by 1-4 family residential properties within our current market area. Such loans represented approximately 54% of the total loans pooled at March 31, 2012, and have been aggregated into this pool because of the similarities of the underlying products which have combined loan to value ratios of up to 80%. This pool relates primarily to loans originated for the withdrawal of additional equity from an existing home, and to a much lesser extent the purchase or refinance of a home. The second pool of loans consisted primarily of fixed rate, multi-family and nonresidential real estate loans originated within the Company’s market area. These loans are generally secured by apartment buildings, small office buildings and owner-occupied properties and make up approximately 41 percent of the total loans pooled at March 31, 2012. The third pool of loans primarily consisted of secured commercial and industrial loans originated to small business within the Company’s market area. Commercial loans account for approximately 1 percent of the total loans pooled at March 31, 2012. The last pool of loans consisted of consumer loans, which are almost entirely made up of mobile home loans. These loans were generally originated with 20 to 30 year maturities. Such loans total approximately 4 percent of the total loans pooled at March 31, 2012. For each loan pool, the Company has developed individual cash flow expectations and calculates a non-accretable difference and an accretable difference. The difference between contractually required payments and the cash flows expected to be collected at acquisition is the nonaccretable difference. The accretable difference on purchased loans is the difference between the expected cash flows and the net present value of expected cash flows (fair value of the loan pool). The accretable difference is accreted into earnings using the level yield method over the term of the loan pool. Over the life of the acquired loan pool, the Company continues to estimate cash flows expected to be collected on acquired loans with specific evidence of credit deterioration as well as on pools of loans sharing common risk characteristics. The Company evaluates, at each balance sheet date, whether the present value of its loans has significantly decreased and if so, recognizes a provision for loan loss in its consolidated statement of income. For any significant increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life.

 

The carrying value of loans acquired and accounted for in accordance with ASC 310-30 was determined by projecting discounted contractual cash flows.

 

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

 

March 31, 2012

December 31, 2011

Acquired Loans

Acquired Loans

Acquired Loans

Without Specific

Acquired Loans

Without Specific

With Specific

Evidence of

With Specific

Evidence of

Evidence of

Deterioration in

Evidence of

Deterioration in

Deterioration in

Credit Quality

Deterioration in

Credit Quality

Credit Quality

(ASC 310-30

Credit Quality

(ASC 310-30

(ASC 310-30)

Analogized)

(ASC 310-30)

Analogized)

Outstanding balance

$

3,328,476

$

39,099,508

$

3,751,512

$

41,396,457

Carrying amount, net of allowance

$

1,113,024

$

24,202,290

$

1,226,434

$

25,433,101

 

During the three months ended March 31, 2012, the Company did not record a provision for increases in the expected losses for acquired loans with specific evidence of deterioration in credit quality. For the year ended December 31, 2011, the Company recorded a provision of $73,270 for increases in the expected losses for acquired loans with specific evidence of deterioration in credit quality. There was no allowance for loan losses recorded for acquired loans without specific evidence of deterioration of credit quality for the three months ended March 31, 2012 and for the year ended December 31, 2011. There has been no allowance reversed for the three months ended March 31, 2012 and for the year ended December 31, 2011.

 

 

Changes in the accretable yield for acquired loans were as follows for the three months ended March 31, 2012 and 2011:

 

		March 31, 2012								March 31, 2011
						Acquired Loans								Acquired Loans
						Without Specific								Without Specific
		Acquired Loans With				Evidence of				Acquired Loans With				Evidence of
		Specific Evidence of				Deterioration in				Specific Evidence of				Deterioration in
		Deterioration in				Credit Quality				Deterioration in				Credit Quality
		Credit Quality				(ASC 310-30				Credit Quality				(ASC 310-30
		(ASC 310-30)				Analogized)				(ASC 310-30)				Analogized)
Balance at beginning of period		$	48,637			$	8,680,970			$	114,448			$	10,665,986
Reclassifications and other			-				(137,116	)			-				(343,149	)
Accretion			(12,203	)			(378,353	)			(16,240	)			(475,799	)
Balance at end of period		$	36,434			$	8,165,501			$	98,208			$	9,847,038

 

The $390,556 and $492,039 recognized as accretion represents the interest income earned on these loans for the three month periods ending March 31, 2012 and 2011, respectively. Included in reclassification and other for loans acquired without specific evidence of deterioration in credit quality was $823,260 as March 31, 2012 and $39,000 as of March 31, 2011 of reclassifications from non-accretable discounts to accretable discounts.  The remaining $(960,376) for March 31, 2012 and $(383,000) change in the accretable yield represents reductions in contractual interest due to contractual principal prepayments during the period.

 

 

4.	Investment Securities

 

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

 

		March 31, 2012
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Available for Sale
Mortgage-backed securities:
Fannie Mae		$	4,595,920			$	350,182			$	-			$	4,946,102
Freddie Mac			197,850				14,629				-				212,479
Government National Mortgage Association			844,191				118,983				-				963,174
Collateralized mortgage obilgations- government sponsored entities			3,363,805				70,760				(46,083	)			3,388,482
Total mortgage-backed securities			9,001,766				554,554				(46,083	)			9,510,237
Corporate securities			6,973,008				142,136				(105,700	)			7,009,444
Total		$	15,974,774			$	696,690			$	(151,783	)		$	16,519,681
Held to Maturity
Mortgage-backed securities:
Fannie Mae		$	46,284,396			$	2,054,476			$	-			$	48,338,872
Freddie Mac			9,354,194				430,728				-				9,784,922
Total mortgage-backed securities		$	55,638,590			$	2,485,204			$	-			$	58,123,794

 

		December 31, 2011
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Available for Sale
Mortgage-backed securities:
Fannie Mae		$	5,048,803			$	364,619			$	-			$	5,413,422
Freddie Mac			226,397				16,307				-				242,704
Government National Mortgage Association			891,547				122,503				-				1,014,050
Collateralized mortgage obilgations- government sponsored entities			3,749,738				85,709				(23,942	)			3,811,505
Total mortgage-backed securities			9,916,485				589,138				(23,942	)			10,481,681
Corporate securities			6,971,914				63,753				(168,863	)			6,866,804
Total		$	16,888,399			$	652,891			$	(192,805	)		$	17,348,485
Held to Maturity
Mortgage-backed securities:
Fannie Mae		$	46,771,951			$	1,991,083			$	-			$	48,763,034
Freddie Mac			9,825,160				404,089				-				10,229,249
Total mortgage-backed securities		$	56,597,111			$	2,395,172			$	-			$	58,992,283

 

 

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

 

		March 31, 2012
		Less Than Twelve Months								Twelve Months or Greater								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
Mortgage-backed securities:
Collateralized mortgage obligations-government sponsored entities		$	478,990			$	(17,778	)		$	262,060			$	(28,305	)		$	741,050			$	(46,083	)
Total mortgage-backed securities			478,990				(17,778	)			262,060				(28,305	)			741,050				(46,083	)
Corporate securities			894,300				(105,700	)			-				-				894,300				(105,700	)
Total		$	1,373,290			$	(123,478	)		$	262,060			$	(28,305	)		$	1,635,350			$	(151,783	)

 

		December 31, 2011
		Less Than Twelve Months								Twelve Months or Greater								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
Mortgage-backed securities:
Collateralized mortgage obligations-government sponsored entities			529,409				(22,168	)			6,690				(1,774	)			536,099				(23,942	)
Total mortgage-backed securities			529,409				(22,168	)			6,690				(1,774	)			536,099				(23,942	)
Corporate securities			4,358,300				(168,863	)			-				-				4,358,300				(168,863	)
Total		$	4,887,709			$	(191,031	)		$	6,690			$	(1,774	)		$	4,894,399			$	(192,805	)

 

The Company reviews its position quarterly and has determined that at March 31, 2012, the declines outlined in the above table represent temporary declines and the Company does not intend to sell these securities and does not believe they will be required to sell these securities before recovery of their cost basis, which may be at maturity. There were 11 positions that were temporarily impaired at March 31, 2012. The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes that are not expected to result in the non-collection of principal and interest during the period.

 

The amortized cost and fair value of debt securities at March 31, 2012, by contractual maturity, are shown below.  Mortgage-backed securities provide for periodic, generally monthly, payments of principal and interest and have contractual maturities ranging from 1 to 32 years.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		Available for Sale								Held to Maturity
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
Due within one year		$	2,027,676			$	2,041,729			$	-			$	-
Due after one year through five years			5,360,997				5,535,056				-				-
Due after five years through ten years			2,764,459				2,833,404				13,464,052				14,122,267
Due after ten years			5,821,642				6,109,492				42,174,538				44,001,527
Total		$	15,974,774			$	16,519,681			$	55,638,590			$	58,123,794

  

 

The Company had no sales of investment securities for the three month periods ending March 31, 2012 and 2011, respectively. 

 

5.	Loans Receivable

 

Loans receivable consist of the following:

 

		March 31,				December 31,
		2012				2011
Mortgage Loans:
One-to-four family		$	106,267,366			$	111,271,871
Multi-family and commercial real estate			7,554,401				9,438,816
			113,821,766				120,710,687
Home equity loans			2,882,638				2,817,654
Home equity lines of credit ("HELOCs")			1,698,850				1,766,999
Education loans			2,803,792				2,885,067
Other consumer loans			1,312				7,381
Non-covered consumer loans purchased			971,906				1,024,626
Covered loans			24,416,678				25,708,179
			146,596,943				154,920,593
Less:
Net deferred loan fees			280,426				289,753
Allowance for loan losses			1,145,952				1,279,008
Total		$	145,170,564			$	153,351,832

 

The Company’s loan portfolio consists predominantly of one-to-four family unit first mortgage loans in the northwest suburban area of metropolitan Philadelphia, primarily in Philadelphia, Montgomery and Bucks Counties.  These loans are typically secured by first lien positions on the respective real estate properties and are subject to the Bank’s loan underwriting policies.  In general, the Company’s loan portfolio performance at March 31, 2012 and December 31, 2011 is dependent upon the local economic conditions.

 

6.	Covered Loans

 

At March 31, 2012, and December 31, 2011, the Company had $24.4 million and $25.7 million (net of fair value adjustments) of covered loans (covered under loss share agreements with the FDIC). Covered loans were recorded at fair value pursuant to acquisition accounting guidelines. Purchased loans acquired in a business combination, including loans purchased in our FDIC-assisted transaction, are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses.

 

Upon acquisition, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30. Purchased credit-impaired loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. The carrying value of covered loans acquired with specific evidence of deterioration in credit quality was $1.1 million and $1.2 million at March 31, 2012 and December 31, 2011, respectively. There were no significant increases or decreases in the expected cash flows of covered loans between December 10, 2010 (the “acquisition date”) and December 31, 2011, or through March 31, 2012. The fair value of purchased credit-impaired loans, on the acquisition date, was determined primarily based on the fair value of loan collateral.

 

 

The carrying value of acquired, covered loans without specific evidence of deterioration in credit quality at the time of the acquisition was $24.2 million and $25.4 million at March 31, 2012 and December 31, 2011, respectively. The fair value of loans that were not credit-impaired was determined based on estimates of losses on defaults and other market factors. The Company deemed it appropriate to analogize the accounting guidance under ASC 310-30 to all other loans since (i) the discount recognized for these loans was attributable at least in part to credit quality, and (ii) the Company was unable to identify specific loans within this portfolio for which it was probable at acquisition that the Company would be unable to collect all contractually required payments receivable.

 

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

 

		March 31,				December 31,
		2012				2011
Mortgage loans:
One-to-four family		$	13,763,581			$	14,442,335
Multi-family and commercial real estate			10,536,445				10,918,588
			24,300,026				25,360,923
Commercial			116,652				347,256
Total Loans		$	24,416,678			$	25,708,179

 

7.	Allowance for Loan Losses

 

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

 

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

 

These qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the portfolio.  During 2012, the qualitative factors were reviewed and remained unchanged.

 

The total allowance reflects management's estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses adequate to cover loan losses inherent in the loan portfolio, at March 31, 2012.  Included in the allowance for loan losses is $73,270 related to loans covered by loss-share agreements with the FDIC as of March 31, 2012 and December 31, 2011.

 

 

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

 

		Allowance for Loan Losses
		For the Three Months Ended March 31, 2012 and 2011
		One-to-				Multi-Family and																Education
		Four Family				Commercial																and Other
		Real Estate				Real Estate				Commercial				Home Equity				HELOCs				Consumer				Total
Balance, December 31, 2011
Allowance for loan losses:		$	611,280			$	618,233			$	-			$	19,304			$	8,835			$	21,356			$	1,279,008
Provision (credit) for loan losses			209,314				(118,657	)			-				336				(341	)			(593	)			90,059
Charge-offs			(223,418	)			-				-				-				-				-				(223,418	)
Recoveries			303				-				-				-				-				-				303
Net charge-offs			(223,115	)			-				-				-				-				-				(223,115	)
Balance, March 31, 2012		$	597,479			$	499,576			$	-			$	19,640			$	8,494			$	20,763			$	1,145,952
Balance, December 31, 2010
Allowance for loan losses:		$	519,182			$	274,286			$	-			$	14,592			$	9,885			$	16,039			$	833,984
Provision (credit) for loan losses			18,707				2,631				-				(653	)			(87	)			5,168				25,766
Charge-offs			-				-				-				-				-				-				-
Recoveries			2,889				-				-				-				-				-				2,889
Net charge-offs			2,889				-				-				-				-				-				2,889
Balance, March 31, 2011		$	540,778			$	276,917			$	-			$	13,939			$	9,798			$	21,207			$	862,639

 

 

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

 

		At March 31, 2012
		One-to-				Multi-Family and																Education
		Four Family				Commercial																and Other
		Real Estate				Real Estate				Commercial				Home Equity				HELOCs				Consumer				Total
Allowance for loan losses:
Ending balance		$	597,479			$	499,576			$	-			$	19,640			$	8,494			$	20,763			$	1,145,952
Ending balance: individually
evaluated for impairment		$	91,906			$	82,709			$	-			$	-			$	-			$	-			$	174,615
Ending balance: collectively
evaluated for impairment		$	437,092			$	412,078			$	-			$	19,640			$	8,494			$	20,763			$	898,067
Ending balance: loans acquired with
deteriorated credit quality		$	68,481			$	4,789			$	-			$	-			$	-			$	-			$	73,270
Loans:
Ending Balance		$	120,030,947			$	18,090,846			$	116,652			$	2,882,638			$	1,698,850			$	3,777,010			$	146,596,943
Ending balance: individually
evaluated for impairment		$	1,438,593			$	794,501			$	-			$	-			$	-			$	-			$	2,233,094
Ending balance: collectively
evaluated for impairment		$	104,828,773			$	6,759,900			$	-			$	2,882,638			$	1,698,850			$	2,805,104			$	118,975,265
Ending balance: loans acquired with
deteriorated credit quality		$	13,763,581			$	10,536,445			$	116,652			$	-			$	-			$	971,906			$	25,388,584

 

		At December 31, 2011
		One-to-				Multi-Family and																Education
		Four Family				Commercial																and Other
		Real Estate				Real Estate				Commercial				Home Equity				HELOCs				Consumer				Total
Allowance for loan losses:
Ending balance		$	611,280			$	618,233			$	-			$	19,304			$	8,835			$	21,356			$	1,279,008
Ending balance: individually
evaluated for impairment		$	183,806			$	82,709			$	-			$	-			$	-			$	-			$	266,515
Ending balance: collectively
evaluated for impairment		$	358,993			$	530,735			$	-			$	19,304			$	8,835			$	21,356			$	939,223
Ending balance: loans acquired with
deteriorated credit quality		$	68,481			$	4,789			$	-			$	-			$	-			$	-			$	73,270
Loans:
Ending Balance		$	125,714,206			$	20,357,404			$	347,256			$	2,817,654			$	1,766,999			$	3,917,074			$	154,920,593
Ending balance: individually
evaluated for impairment		$	1,441,659			$	799,876			$	-			$	-			$	-			$	-			$	2,241,535
Ending balance: collectively
evaluated for impairment		$	109,835,038			$	8,634,113			$	-			$	2,817,654			$	1,766,999			$	2,892,448			$	125,946,252
Ending balance: loans acquired with
deteriorated credit quality		$	14,442,335			$	10,918,588			$	347,256			$	-			$	-			$	1,024,626			$	26,732,805

 

 

Credit Quality Information

 

The following tables represent credit exposures by internally assigned grades at March 31, 2012 and December 31, 2011. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company's internal credit risk grading system is based on experiences with similarly graded loans.

 

The Company's internally assigned grades are as follows:

 

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

 

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

 

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

 

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

 

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

 

The following table presents classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful, and Loss within the internal risk rating system as of March 31, 2012 and December 31, 2011:

 

		March 31,								December 31,
		2012								2011
		Multi-Family								Multi-Family
		and Commercial								and Commercial
		Real Estate				Commercial				Real Estate				Commercial
Pass		$	14,738,921			$	116,652			$	15,046,793			$	347,256
Special Mention			-				-				1,832,849				-
Substandard			3,351,925				-				3,477,762				-
Doubtful			-				-				-				-
Loss			-				-				-				-
Total		$	18,090,846			$	116,652			$	20,357,404			$	347,256

 

For one-to-four family real estate, home equity, HELOCs, and education and other loans, the Company evaluates credit quality based on the performance of the individual credits.  Multi-family and commercial real estate and commercial loans are categorized by risk classification as of March 31, 2012 and December 31, 2011.  Payment activity is reviewed by management on a monthly basis to determine how loans are performing.  Loans are considered to be nonperforming when they become 90 days past due.

 

 

The following table presents recorded investment in the loan classes based on payment activity as of March 31, 2012 and December 31, 2011:

 

		At March 31, 2012
		One-to-												Education				Non-covered
		Four Family				Home								and Other				Consumer Loans
		Real Estate				Equity				HELOCs				Consumer				Purchased
Performing		$	118,431,026			$	2,827,618			$	1,698,850			$	2,640,814			$	887,579
Nonperforming			1,599,921				55,020				-				164,290				84,327
Total		$	120,030,947			$	2,882,638			$	1,698,850			$	2,805,104			$	971,906

 

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

 

 

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

 

		At March 31, 2012
																										Recorded
																						Total				Investment >
		30-59 Days				60-89 Days				90 Days				Total Past								Loans				90 Days and
		Past Due				Past Due				Or Greater				Due				Current				Receivable				Accruing
One-to-four family
real estate		$	700,903			$	485,415			$	1,599,921			$	2,786,239			$	117,244,708			$	120,030,947			$	-
Multi-family and
commercial real estate			20,466				804,167				630,881				1,455,514				16,635,332				18,090,846				-
Commercial			-				-				-				-				116,652				116,652				-
Home equity			-				-				55,020				55,020				2,827,618				2,882,638				-
HELOCs			-				-				-				-				1,698,850				1,698,850				-
Education and other
consumer			29,869				6,308				164,290				200,467				2,604,637				2,805,104				-
Non-covered consumer
loans puchased			14,191				-				84,327				98,518				873,388				971,906				-
Total		$	765,429			$	1,295,890			$	2,534,439			$	4,595,758			$	142,001,185			$	146,596,943			$

 

		At December 31, 2011
																										Recorded
																						Total				Investment >
		30-59 Days				60-89 Days				90 Days				Total Past								Loans				90 Days and
		Past Due				Past Due				Or Greater				Due				Current				Receivable				Accruing
One-to-four family
real estate		$	1,349,589			$	96,230			$	1,464,671			$	2,910,490			$	122,803,716			$	125,714,206			$	-
Multi-family and
commercial real estate			243,211				721,984				828,132				1,793,327				18,564,077				20,357,404				-
Commercial			-				-				-				-				347,256				347,256				-
Home equity			-				-				54,899				54,899				2,762,755				2,817,654				-
HELOCs			-				-				-				-				1,766,999				1,766,999				-
Education and other
consumer			58,192				15,420				214,446				288,058				2,604,390				2,892,448				-
Non-covered consumer
loans puchased			14,832				-				81,953				96,785				927,841				1,024,626				-
Total		$	1,665,824			$	833,634			$	2,644,101			$	5,143,559			$	149,777,034			$	154,920,593			$

 

Nonaccrual Loans

 

Loans are generally considered for nonaccrual status upon 90 days delinquency. When a loan is placed in nonaccrual status, previously accrued but unpaid interest is deducted from interest income.

 

 

On the following table are the loans on nonaccrual status as of March 31, 2012 and December 31, 2011.  The balances are presented by class of loans.

 

 

		March 31,				December 31,
		2012				2011
One-to-four family mortgage		$	1,599,921			$	1,464,671
Multi-family and commercial real estate			630,881				828,132
Commercial			-				-
Home Equity			55,020				54,899
HELOCs			-				-
Education and other consumer			164,290				214,446
Non-covered consumer loans purchased			84,327				81,953
Total		$	2,534,439			$	2,644,101

 

Interest income on loans would have been increased by approximately $29,997 and $193,323 during those periods, if these loans had performed in accordance with their original terms.  Management considers multi-family, commercial real estate, and commercial loans which are 90 days or more past due to be impaired.

 

Impaired Loans

 

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

 

 

		March 31, 2012
						Unpaid								Average				Interest
		Recorded				Principal				Related				Recorded				Income
		Investment				Balance				Allowance				Investment				Recognized
Witn no related allowance recorded:
One -to-four family real estate		$	-			$	-			$	-			$	-			$	-
Multi-family and commercial real estate			-				-				-				-				-
With an allowance recorded:
One -to-four family real estate		$	1,507,074			$	1,507,074			$	160,387			$	1,507,469			$	6,823
Multi-family and commercial real estate			945,110				945,110				87,498				946,905				7,601
Total:
One -to-four family real estate		$	1,507,074			$	1,507,074			$	160,387			$	1,507,469			$	6,823
Multi-family and commercial real estate			945,110				945,110				87,498				946,905				7,601

 

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

 

Loan Modifications and Troubled Debt Restructurings

 

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

 

There were no loan modifications that are considered troubled debt restructurings (“TDR”) completed during the three month period ended March 31, 2012.

 

There were no TDRs modified within the past year that subsequently defaulted during the period ended March 31, 2012.

 

 

8.

Deposits

 

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

 

		March 31, 2012								December 31, 2011
		Amount				%				Amount				%
Non-interest-bearing demand		$	6,415,792				3.16	%		$	6,644,398				3.27	%
NOW accounts			16,221,985				7.98				15,721,299				7.75
Money market deposit			42,736,844				21.03				43,655,929				21.50
Savings			29,516,725				14.53				30,235,259				14.89
Time deposits			108,284,000				53.30				106,759,401				52.59
Total		$	203,175,347				100.00	%		$	203,016,286				100.00	%

 

9.	Life Insurance and Retirement Plans

 

The Bank has a Supplemental Life Insurance Plan (the “Plan”) for three officers of the Bank.  The Plan requires the Bank to make annual payments to the beneficiaries upon their death.  In connection with the Plan, the Bank funded life insurance policies with an original investment of $3,085,000 on the lives of those officers.  These life insurance policies currently have a death benefit of $11,975,329.  The cash surrender value of these policies totaled $4,210,727 and $4,200,181 at March 31, 2012 and December 31, 2011, respectively.  The Plan provides that death benefits totaling $6.0 million at March 31, 2012, will be paid to their beneficiaries in the event the officers should die.

 

Additionally, the Bank has a Supplemental Retirement Plan (“SRP”) for the Bank’s current and former presidents as well as two senior officers of the Bank.  At March 31, 2012 and December 31, 2011, $1,654,934 and $1,621,532 had been accrued under these SRPs, respectively, and this liability and the related deferred tax assets of $562,678 and $551,321 for the respective periods, are recognized in the financial statements.  The deferred compensation for the current and former president is to be paid for the remainder of their lives commencing with the first year following the termination of employment after completion of required service.  The current president’s payment is based on 60 percent of his final full year annual gross taxable compensation adjusted annually for the change in the consumer price index or 4 percent, whichever is higher.  The former president’s payment is based on 60 percent of his final full year annual gross taxable compensation adjusted annually for the change in the consumer price index.  The deferred compensation for the two senior officers is to be paid at the rate of $50,000 per year for twenty years commencing five years after retirement or age 65, whichever comes first, following the termination of employment.  The Company records periodic accruals for the   cost of providing such benefits by charges to income.  The amount accrued was approximately $62,831 and $54,790 for the three  months ended March 31, 2012 and 2011,  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
		March 31,
		2012				2011
Components of net periodic benefit cost:
Service cost		$	37,495			$	31,039
Interest cost			25,336				23,751
Net periodic benefit cost		$	62,831			$	54,790

 

10.	Fair Value Measurements

 

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

 

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

 

 

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

 

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

 

The following table presents the assets reported on the consolidated balance sheets at their fair value as of March 31, 2012 and December 31, 2011, respectively, by level within the fair value hierarchy.  Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

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

 

		March 31, 2012
		Level I				Level II				Level III				Total
Assets:
Available for Sale
Mortgage-backed securities		$	-			$	9,510,237			$	-			$	9,510,237
Corporate securities			-				7,009,444				-				7,009,444
Total		$	-			$	16,519,681			$	-			$	16,519,681

 

		December 31, 2011
		Level I				Level II				Level III				Total
Assets:
Available for Sale
Mortgage-backed securities		$	-			$	10,481,681			$	-			$	10,481,681
Corporate securities			-				6,866,804				-				6,866,804
Total		$	-			$	17,348,485			$	-			$	17,348,485

 

 

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

 

		March 31, 2012
		Level I				Level II				Level III				Total
Assets:
Impaired loans		$	-			$	-			$	2,204,299			$	2,204,299
Other real estate owned			-				-				352,205				352,205

 

		December 31, 2011
		Level I				Level II				Level III				Total
Assets:
Impaired loans		$	-			$	-			$	2,120,840			$	2,120,840
Other real estate owned			-				-				82,942				82,942

 

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

 

March 31, 2012

Quantitative Information about Level 3 Fair Value Measurements

Fair Value

Valuation

Unobservable

Estimate

Techniques

Input

Range

Impaired loans

2,204,299

Appraisal of

Appraisal

collateral (1)

adjustments (2)

0% to 30%

Liquidation

expenses (2)

0% to 6%

Other real estate owned

352,205

Appraisal of

Appraisal

collateral (1), (3)

adjustments (2)

0% to 30%

Liquidation

expenses (2)

0% to 6%

 

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

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

(3) Includes qualitative adjustments by management and estimated liquidation expenses.

 

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

 

 

Impaired loans are reported at fair value utilizing level three inputs. For these loans, a review of the collateral is conducted and an appropriate allowance for loan losses is allocated to the loan. At March 31, 2012, impaired loans with a carrying value of $2,452,184 were reduced by specific valuation allowance totaling $247,885 resulting in a net fair value of $2,204,299 based on Level 3 inputs.

 

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

 

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

 

The measurement of fair value should be consistent with one of the following valuation techniques: market approach, income approach, and/or cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative). Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. As of March 31, 2012 and December 31, 2011, all of the financial assets measured at fair value, on a recurring basis, utilized the market approach.

 

11.	Fair Value Disclosure

 

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

 

		Fair Value Measurements at
		March 31, 2012
		(Level 1)				(Level 2)				(Level 3)				Total
Financial assets:
Cash and cash equivalents		$	22,016,504			$	-			$	-			$	22,016,504
Investment securities
Available for sale			-				16,519,681				-				16,519,681
Held to maturity			-				58,123,794				-				58,123,794
Net loans receivable			-				-				150,135,142				150,135,142
Accrued interest receivable			928,215				-				-				928,215
Federal Home Loan Bank stock			2,681,400				-				-				2,681,400
Bank-owned life insurance			4,210,727				-				-				4,210,727
FDIC indemnification asset			-				-				5,129,199				5,129,199
Financial liabilities:
Deposits			94,891,347				-				110,049,030				204,940,377
FHLB advance - long-term			-				-				27,611,319				27,611,319
Advances by borrowers
for taxes and insurance			637,407				-				-				637,407
Accrued interest payable			86,826				-				-				86,826

 

 

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

 

		March 31, 2012								December 31, 2011
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
Financial assets:
Cash and cash equivalents		$	22,016,504			$	22,016,504			$	17,416,198			$	17,416,198
Investment securities
Available for sale			16,519,681				16,519,681				17,348,485				17,348,485
Held to maturity			55,638,590				58,123,794				56,597,111				58,992,283
Net loans receivable			145,170,564				150,135,142				153,351,832				160,333,403
Accrued interest receivable			928,215				928,215				970,966				970,966
Federal Home Loan Bank stock			2,681,400				2,681,400				2,822,600				2,822,600
Bank-owned life insurance			4,210,727				4,210,727				4,200,181				4,200,181
FDIC indemnification asset			5,129,199				5,129,199				5,218,506				5,218,506
Financial liabilities:
Deposits		$	203,175,347			$	204,904,377			$	203,016,286			$	205,800,372
FHLB advances - long-term			25,945,611				27,611,319				31,091,302				29,626,439
Advances by borrowers
for taxes and insurance			637,407				637,407				939,092				939,092
Accrued interest payable			86,826				86,826				95,894				95,894

 

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

 

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

 

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

 

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

 

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

 

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

 

The fair value is equal to the current carrying value.

 

 

Investment Securities Available for Sale and Held to Maturity

 

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

 

Net Loans Receivable

 

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

 

FDIC Indemnification Asset

 

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

 

Deposits and FHLB Advances – Long-Term

 

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

 

Bank-Owned Life Insurance

 

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

 

Commitments to Extend Credit

 

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

 

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

 

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

 

Forward-Looking Statements

 

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of Polonia MHC, Polonia Bancorp and Polonia Bank.  These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions.  Polonia MHC’s, Polonia Bancorp’s and Polonia Bank’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to the following: the ability to successfully integrate the operations of Earthstar Bank; changes in interest rates; national and regional economic conditions; legislative and regulatory changes; monetary and fiscal policies of the U.S. government; including policies of the U.S. Treasury and the Federal Reserve Board; the quality and composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company’s market area; changes in real estate market values in the Company’s market area; and changes in relevant accounting principles and guidelines.  Additionally, other risks and uncertainties are described herein and in the Company’s Form 10-K for the year ended December 31, 2011 under “Item 1A:  Risk Factors” filed with the Securities and Exchange Commission (the “SEC”) which is available through the SEC’s website at www.sec.gov . These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

 

 

General

 

Polonia Bancorp (The “Company”) was organized as a federally chartered corporation at the direction of the Bank in January 2007 to become the mid-tier stock holding company for the Bank upon the completion of its reorganization into the mutual holding company form of organization. As a result of the reorganization, Polonia Bancorp’s business activities are the ownership of the outstanding capital stock of Polonia Bank and management of the investment of offering proceeds retained from the reorganization. Currently, Polonia Bancorp neither owns or leases any property, but instead uses the premises, equipment and other property of Polonia Bank and pays appropriate rental fees, as by required applicable law and regulations. In the future, Polonia Bancorp may acquire or organize other operating subsidiaries; however, there are no current plans, arrangements, or understandings, written or oral, to do so.

 

Polonia Bank operates as a community-oriented financial institution offering a variety of deposit products as well as providing residential real estate loans, and to a lesser degree, multi-family and nonresidential real estate loans, home equity loans and consumer loans primarily to individuals, families and small businesses located in Bucks, Philadelphia and Montgomery Counties, Pennsylvania.  The Bank operates from nine full-service locations, including our main office in Huntingdon Valley, Pennsylvania and our branch offices in the city of Philadelphia and Bucks County.

 

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

 

Critical Accounting Policies

 

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies.  We consider the following to be our critical accounting policies.

 

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

 

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

 

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

 

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

 

Comparison of Financial Condition at March 31, 2012 and December 31, 2011

 

Total assets at March 31, 2012 were $260.0 million, a decrease of $5.1 million, or 1.9%, from total assets of $265.1 million at December 31, 2011. The decrease in assets resulted primarily from a $8.3 million decrease in loans receivable and covered loans, partially offset by a $4.6 million increase in cash and cash equivalents. Total liabilities at March 31, 2012 were $232.1 million compared to $237.4 million at December 31, 2011, a decrease of $5.3 million, or 2.2%. The decrease in liabilities was primarily due to a $5.1 million decrease in FHLB advances-long-term. Total stockholder’s equity increased to $27.8 million at March 31, 2012 from $27.6 million at December 31, 2011, an increase of $195,000, or 0.7%, primarily as a result of our operating profit and an increase in fair value of AFS securities.

 

 

Cash and cash equivalents increased to $22.0 million from $17.4 million during the three months ended March 31, 2012, an increase of $4.6 million, or 26.4%. The increase in cash and cash equivalents was attributable in part, to the decrease in loans of $8.3 million, partially offset by the decline in FHLB advances - long-term of $5.1 million.

 

Investment securities available for sale decreased to $16.5 million from $17.3 million during the three months ended March 31, 2012, a decrease of $828,000, or 4.6%. The decrease in investment securities available for sale was attributable to payments received.

 

Investment securities held to maturity decreased to $55.6 million from $56.6 million during the three months ended March 31, 2012, a decrease of $958,000, or 1.8%. The decrease in investment securities held to maturity was attributable, in part, to $2.5 million in payments received, partially offset by the purchase of $1.6 million in mortgage backed securities.

 

Loans receivable decreased $8.3 million, or 5.4%, to $146.3 million at March 31, 2012, compared to $154.6 million at December 31, 2011. The size of our loan portfolio decreased during the three months ended March 31, 2012 primarily due to $7.8 million, net in loan repayments during the period.

 

Total deposits increased to $203.2 million from $203.0 million during the three months ended March 31, 2012, an increase of $159,000, or 0.1%. The increase in deposits is a result of competitively priced deposits.

 

FHLB advances long-term decreased $5.1 million, or 16.5%, to $25.9 at March 31, 2012 compared to $31.1 million at December 31, 2011. The decrease in FHLB advances – long term was the result of the maturity of $5.0 million in advances during the period.

 

Comparison of Operating Results For The Three Months Ended March 31, 2012 and 2011

 

General. We recorded net income of $76,000 during the three months ended March 31, 2012, compared to a net loss of $6,000 during the three months ended March 31, 2011. The higher net income for the three month period ended March 31, 2012 was primarily due to higher noninterest income and lower noninterest expense, partially offset by lower net interest income and a higher provision for loan losses.

 

Net Interest Income.   The following table summarizes changes in interest income and expense for the three months ended March 31, 2012 and 2011.

 

		Three Months Ended
		March 31,
		2012				2011
		(Dollars in thousands)
Interest and dividend income:
Loans receivable		$	1,997			$	2,230
Investment securities			589				569
Other interest and dividend income			2				4
Total interest and dividend income			2,588				2,803
Interest Expense:
Deposits			527				673
FHLB advances - short-term			-				3
FHLB advances - long-term			187				191
Advances by borrowers for taxes and insurance			6				6
Total interest expense			720				873
Net interest income		$	1,868			$	1,930

 

 

 

The following table summarizes average balances and average yields and costs for the three months ended March 31, 2012 and 2011.

 

		Three Months Ended
		March 31,
		2012								2011
		Average				Yield/				Average				Yield/
		Balance				Cost				Balance				Cost
		(Dollars in thousands)
Assets:
Interest-earning assets:
Loans		$	151,240				5.22	%		$	173,976				5.13	%
Investment securities			72,805				3.20				71,837				3.17
Other interest-earning assets			17,273				0.05				24,676				0.07
Total interest-earning assets			241,318				4.30	%			270,489				4.20	%
Noninterest-earning assets:			19,513								15,933
Allowance for Loan Losses			(1,267	)							(792	)
Total assets		$	259,564							$	285,630
Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits		$	15,989				0.68	%		$	13,121				0.62	%
Money market deposits			43,299				0.62				55,561				0.66
Savings accounts			29,958				0.35				29,874				0.45
Time deposits			107,149				1.52				118,241				1.82
Total interest-bearing deposits			196,395				1.08	%			216,797				1.26	%
FHLB advances - short-term			-				-				1,778				0.68
FHLB advances - long-term			26,377				2.84				27,398				2.83
Advances by borrowers for taxes and insurance			947				2.54				1,024				2.38
Total interest-bearing liabilities			223,719				1.29	%			246,997				1.43	%
Noninterest-bearing liabilities:			7,987								11,309
Total liabilities			231,706								258,306
Retained earnings			27,858								27,324
Total liabilities and retained earnings		$	259,564							$	285,630
Interest rate spread							3.01	%							2.77	%
Net yield on interest-bearing assets							3.10	%							2.89	%
Ratio of average interest-earning assets to
average interest-bearing liabilities							107.87	%							109.51	%

 

Our net interest rate spread increased to 3.01% for the three months ended March 31, 2012 from 2.77% for the same period in 2011. The primary reasons for the increase in our net interest spread for the three month period reflects a higher average yield earned on loans and investments securities and a lower average yield paid on all interest bearing deposits. Net interest income for the three months ended March 31, 2012 decreased $62,000 to $1.9 million, or 3.2% from $1.9 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 balance of loans and other interest earning assets, partially offset by, a lower average interest rate paid on money market accounts, savings accounts, and time deposits. The average balance of loans decreased during the three months ended March 31, 2012 due to increased payments and payoffs from the same period last year. Lower interest expense on deposits for the three months ended March 31, 2012 was due to a continuing decline in market interest rates. The increase in the average balance of investment securities during the three month period ended March 31, 2012 was due to the purchase of mortgage backed securities held to maturity.

 

Provision for Loan Losses. We recorded a provision for loan losses of $90,000 for the three months ended March 31, 2012 as compared to a provision for loan losses of $26,000 for the three months ended March 31, 2011. The provisions reflect management’s assessment of lending activities, increased non-performing loans, levels of current delinquencies and current economic conditions. Provisions for loan losses are charged to earnings to maintain the total allowance for loan losses at a level believed by management sufficient to cover all known and inherent losses in the loan portfolio which are both probable and reasonably estimable. Management’s analysis includes consideration of the Company’s historical experience, the volume and type of lending conducted by the Company, the amount of the Company’s classified and criticized assets, the status of past due principal and interest payments, general economic conditions, particularly as they relate to the Company’s primary market area, and other factors related to the collectability of the Company’s loan portfolio.

 

 

Noninterest Income.     The following table summarizes noninterest income for the three months ended March 31, 2012 and 2011.

 

		Three Months Ended
		March 31,
		2012				2011
		(Dollars in thousands)
Service fees on deposit accounts		$	33			$	30
Earnings on bank-owned life insurance			10				17
Gain on sale of loans, net			142				-
Rental income			73				73
Accretion of FDIC indemnification asset			-				11
Other			106				50
Total		$	364			$	181

 

The $183,000 increase in noninterest income during the three months ended March 31, 2012 as compared to the three months ended March 31, 2011 was primarily due to a $142,000 increase in gains on the sale of loans, a $56,000 increase in other income was primarily due to $46,000 in payments received on charged off Earthstar loans, partially offset by a $7,000 decrease in earnings on Bank-owned life insurance.

 

Noninterest Expense.   The following table summarizes noninterest expense for the three months ended March 31, 2012 and 2011.

 

 

		Three Months Ended
		March 31,
		2012				2011
		(Dollars in thousands)
Compensation and employee benefits		$	1,163			$	1,101
Occupancy and equipment			333				353
Federal deposit insurance premiums			74				92
Data processing expense			100				151
Professional fees			99				94
Other			254				305
Total		$	2,023			$	2,096

 

Total noninterest expense decreased $73,000, or 3.5%, to $2.0 million for the three months ended March 31, 2012 from the prior year period. The decrease in noninterest expense for the three months ended March 31, 2012 as compared to the prior year period was primarily the result of decreases of $51,000 in data processing expense, $51,000 in other expenses, $20,000 in occupancy and equipment expense and a $18,000 in federal deposit insurance premiums, partially offset by an increase of $62,000 in compensation and employee benefits. The reduction in expenses from the prior year period are primarily related to reduced costs related to the Earthstar transaction and the decrease in FDIC insurance premiums is also related to the reduction in the assessment calculation. The increase in compensation and employee benefits is related to the increase in staff and the hiring of branch management staff.

 

Income Taxes. We recorded tax expense of $43,000 for the three months ended March 31, 2012 compared to a tax benefit of $4,000 during the three months ended March 31, 2011. The increase of tax expenses resulted from the increase in our taxable operating profits.

 

 

Liquidity and Capital Management

 

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

 

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

 

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2012, cash and cash equivalents totaled $22.0 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $16.5 million at March 31, 2012. In addition, at March 31, 2012, we had the ability to borrow a total of approximately $79.1 million from the FHLB of Pittsburgh. On March 31, 2012, we had $25.9 million of borrowings outstanding. Any growth of our loan portfolio may require us to borrow additional funds.

 

At March 31, 2012, we had $3.1 million in mortgage loan commitments outstanding and $36,000 in a standby letter of credit. Time deposits due within one year of March 31, 2012 totaled $60.5 million, or 63.3% 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, 2013. We believe, however, based on past experience that a significant portion of our time deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

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

 

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

 

Capital Management. We are subject to various regulatory capital requirements administered by the Office of the Comptroller of Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2012, we exceeded all of our regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines.

 

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

 

For the three months ended March 31, 2012 and the year ended December 31, 2011 we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

 

Not applicable.

 

 

Item4.

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, 2012, we were not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I,“Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition or future results. At March 31, 2012 the risk factors of the Company have not changed materially from those reported in our Annual Report on Form 10-K. However, the risks described in our Annual Report on Form 10-Kare 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

 

Not applicable.

 

Item 3.

Defaults Upon Senior Securities

 

Not applicable

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

Item 5.

Other Information

 

None

 

Item 6.  Exhibits
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0		Section 1350 Certifications

 

101*   The following materials from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2012, formatted in XBRL (Extensible Business reporting Language):  (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statement of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) related notes.

 

*Furnished, not filed.

 

 

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 15, 2012	By:	/s/ Anthony J. Szuszczewicz
		Anthony J. Szuszczewicz
		President and Chief Executive Officer
		(principal executive officer)
Date: May 15, 2012	By:	/s/ Paul D. Rutkowski
		Paul D. Rutkowski
		Chief Financial Officer and Treasurer
		(principal financial and accounting officer)