Polonia Bancorp Inc - FORM 10-Q

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EX-31.1 - EXHIBIT 31.1 - Polonia Bancorp Inc	v409516_ex31-1.htm
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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, 2015

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

For the transition period from __________ to __________

Commission file number: 0-54850

POLONIA BANCORP, INC.

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

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

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

(Address of principal executive offices) (Zip Code)

215) 938-8800

(Registrant’s telephone number, including area code)

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 13, 2015, there were 3,334,130 shares of the registrant’s common stock outstanding.

POLONIA BANCORP, INC.
Table of Contents

		Page No.

Part I.	Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets at March 31, 2015 and December 31, 2014 (Unaudited)	3

	Consolidated Statements of Income (Loss) for the Three Months Ended March 31, 2015 and 2014 (Unaudited)	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2015 and 2014 (Unaudited)	5

	Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2015 (Unaudited)	6

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (Unaudited)	7

	Notes to The Unaudited Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	36

Item 4.	Controls and Procedures	36

Part II.	Other Information

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

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

Item 3.	Defaults Upon Senior Securities	37

Item 4.	Mine Safety Disclosures	37

Item 5.	Other Information	37

Item 6.	Exhibits	37

	Signatures	38

PART 1.

FINANCIAL INFORMATION

Item 1.

Financial Statements

POLONIA BANCORP, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	March 31,			December 31,
	2015			2014
ASSETS
Cash and due from banks	$	1,801,986		$	1,624,482
Interest-bearing deposits with other institutions		34,751,300			10,549,748
Cash and cash equivalents		36,553,286			12,174,230

Investment securities available for sale		10,492,025			11,711,533
Investment securities held to maturity (fair value of $44,452,852 and $46,193,447)		42,797,294			44,741,534
Loans held for sale		4,622,267			4,221,438
Loans receivable		175,043,835			199,094,306
Covered loans		13,471,945			14,457,364
Total loans		188,515,780			213,551,670
Less: allowance for loan losses		1,350,930			1,415,983
Net loans		187,164,850			212,135,687
Accrued interest receivable		687,595			788,684
Federal Home Loan Bank stock		3,866,700			3,843,500
Premises and equipment, net		4,179,153			4,257,726
Bank-owned life insurance		4,266,156			4,268,181
FDIC indemnification asset		1,277,318			1,417,355
Other assets		8,700,368			8,197,043
TOTAL ASSETS	$	304,607,012		$	307,756,911

LIABILITIES
Deposits	$	196,333,655		$	199,553,997
FHLB advances – long term		59,000,000			59,000,000
Advances by borrowers for taxes and insurance		891,793			1,208,824
Accrued interest payable		158,253			143,798
Other liabilities		9,169,213			9,027,309
TOTAL LIABILITIES		265,552,914			268,933,928

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; 3,334,130 and 3,334,130 shares issued)		33,341			33,341
Additional paid-in-capital		25,272,971			25,219,224
Retained earnings		15,008,692			14,870,920
Unallocated shares held by Employee Stock Ownership Plan “ESOP” (176,631 and 181,415 shares)		(1,477,215	)		(1,517,302	)
Accumulated other comprehensive income		216,309			216,800
TOTAL STOCKHOLDERS’ EQUITY		39,054,098			38,822,983
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	304,607,012		$	307,756,911

See accompanying notes to the unaudited consolidated financial statements.

POLONIA BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)

	Three Months
	Ended March 31,
	2015			2014

INTEREST AND DIVIDEND INCOME
Loans receivable	$	2,190,586		$	2,343,601
Investment securities		357,462			440,541
Other interest and dividend income		131,830			44,041
Total interest and dividend income		2,679,878			2,828,183

INTEREST EXPENSE
Deposits		428,154			425,475
FHLB advances – long term		367,892			367,892
Advances by borrowers for taxes and insurance		858			948
Total interest expense		796,904			794,315

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		1,882,974			2,033,868
Provision for loan losses		63,150			15,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,819,824			2,018,868

NONINTEREST INCOME
Service fees on deposit accounts		23,044			30,687
Earnings on bank-owned life insurance		(2,025	)		1,902
Gain on sale of loans, net		803,709			590,163
Rental income		63,402			70,502
Other		340,310			43,754
Total noninterest income		1,228,440			737,008

NONINTEREST EXPENSE
Compensation and employee benefits		1,328,358			1,582,296
Occupancy and equipment		328,716			409,006
Federal deposit insurance premiums		145,653			85,108
Data processing expense		102,024			112,032
Professional fees		178,683			128,333
Other		749,676			577,645
Total noninterest expense		2,833,110			2,894,420

Income (loss) before income tax expense (benefit)		215,154			(138,545	)
Income tax expense (benefit)		77,382			(42,104	)

NET INCOME (LOSS)	$	137,772		$	(96,441	)

EARNINGS PER SHARE – Basic and Diluted	$	0.04		$	(0.03	)

See accompanying notes to the unaudited consolidated financial statements.

POLONIA BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

	Three Months Ended March 31,
	2015			2014

Net income (loss)	$	137,772		$	(96,441	)

Changes in net unrealized loss on investment securities available for sale		(744	)		(23,535	)

Tax effect		253			8,002

Total other comprehensive loss		(491	)		(15,533	)

Total comprehensive income (loss)	$	137,281		$	(111,974	)

See accompanying notes to the unaudited consolidated financial statements.

POLONIA BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

												Accumulated
					Additional				Unallocated			Other
	Common Stock				Paid-In-		Retained		Shared Held			Comprehensive
	Shares		Amount		Capital		Earnings		by ESOP			Income			Total
Balance, December 31, 2014		3,334,130	$	33,341	$	25,219,224	$	14,870,920	$	(1,517,302	)	$	216,800		$	38,822,983

Net income								137,772								137,772
Other comprehensive loss, net													(491	)		(491	)
Stock options compensation expense						16,924										16,924
Allocation of unearned ESOP shares						12,323				40,087						52,410
Allocation of unearned RSP shares						24,500										24,500

Balance, March 31, 2015		3,334,130	$	33,341	$	25,272,971	$	15,008,692	$	(1,477,215	)	$	216,309		$	39,054,098

See accompanying notes to the unaudited consolidated financial statements.

POLONIA BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Three Months Ended March 31,
	2015			2014
OPERATING ACTIVITIES
Net income (loss)	$	137,772		$	(96,441	)
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Provision for loan losses		63,150			15,000
Depreciation, amortization, and accretion		214,299			336,553
Proceeds from sale of loans held for sale		14,444,634			10,705,791
Net gain on sale of loans held for sale		(607,970	)		(590,163	)
Loans originated for sale		(14,237,493	)		(11,208,974	)
Net gain on sale of loans held for investment		(195,739	)		-
Gain on the sale of other real estate owned		(61,260	)		-
Earnings on bank-owned life insurance		2,025			(1,902	)
Deferred federal income taxes		(3,688	)		(5,791	)
(Decrease) increase in accrued interest receivable		101,089			(57,597	)
Increase in accrued interest payable		14,455			13,323
Decrease in accrued payroll and commissions		(111,028	)		(425,202	)
Compensation expense for stock options, ESOP and restricted stock		93,834			90,812
Other, net		(380,504	)		(109,378	)
Net cash used for operating activities		(526,424	)		(1,333,969	)

INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from principal repayments and maturities		1,232,009			336,430
Investment securities held to maturity:
Proceeds from principal repayments and maturities		1,913,973			1,789,611
Purchases		-			(1,383,038	)
Proceeds from sale of loans held for investment		21,091,231			-
Decrease in loans receivable, net		3,005,394			1,512,139
Decrease in covered loans		1,013,226			420,636
Purchases of Federal Home Loan Bank stock		(35,100	)		-
Redemptions of Federal Home Loan Bank stock		11,900			14,200
Proceeds from the sale of other real estate owned		221,697			2,024
Payments received from FDIC under loss share agreement		-			133,990
Purchase of premises and equipment		(11,477	)		(22,078	)
Net cash provided by investing activities		28,442,853			2,803,914

FINANCING ACTIVITIES
Decrease in deposits, net		(3,220,342	)		(2,487,104	)
Decrease in advances by borrowers for taxes and insurance, net		(317,031	)		(338,249	)
Repurchase of stock		-			(448,500	)
Net cash used for financing activities		(3,537,373	)		(3,273,853	)
Increase (decrease) in cash and cash equivalents		24,379,056			(1,803,908	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		12,174,230			15,764,320
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	36,553,286		$	13,960,412

SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid:
Interest	$	782,449		$	780,992
Income taxes		400,000			400,000
Noncash items:
Loans transferred to other real estate owned		-			503,722

See accompanying notes to the unaudited consolidated financial statements.

POLONIA BANCORP, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies

Basis of Presentation

Polonia Bancorp, Inc. (the “Company”), a Maryland corporation, was incorporated in August 2011 and organized by Polonia MHC, Polonia Bancorp, and Polonia Bank (the “Bank”) to facilitate the second-step conversion of the Company from the mutual holding company structure to the stock holding company structure (the “Conversion”). Upon consummation of the Conversion, which occurred on November 9, 2012, the Company became the holding company for the Bank and a 100 percent publicly owned stock holding company.

The Bank was incorporated under federal law in 1923. The Bank is a federally chartered savings bank located in Huntingdon Valley, Pennsylvania, whose principal sources of revenue emanate from its investment securities portfolio and its portfolio of residential real estate, commercial real estate, and consumer loans, as well as a variety of deposit services offered to its customers through five offices located in the Greater Philadelphia area. As of December 31, 2014, the Bank was subject to regulation by the Office of Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”).

The consolidated financial statements include the accounts of the Bank and the Bank’s wholly owned subsidiaries, PBHMC (“PBMHC”), a Delaware investment company, and Community Abstract Agency, LLC (“CAA”). CAA provides title insurance on loans secured by real estate. All significant intercompany transactions have been eliminated in consolidation. The investment in subsidiaries on the parent Company’s financial statements is carried at the parent Company’s equity in the underlying net assets.

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 FDIC as receiver for Earthstar.

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, 2015 are not necessarily indicative of the results that may be expected for the full year. The December 31, 2014 Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles (“GAAP”). For additional information, refer to the financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2014.

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 GAAP 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. Material 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 May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update's core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting Update.

In January 2015, the FASB issued ASU 2015-01, Income Statement –Extraordinary and Unusual Items, as part of its initiative to reduce complexity in accounting standards. This Update eliminates from GAAP the concept of extraordinary items. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810). The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position and results of operations.

In April 2015, the FASB issued ASU 2015-04, Compensation-Retirement Benefits (Topic 715), as part of its initiative to reduce complexity in accounting standards. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this Update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity's fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. The amendments in this Update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-05, Intangible – Goodwill and Other Internal Use Software (Topic 350-40), as part of its initiative to reduce complexity in accounting standards. This guidance will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. For public business entities, the Board decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities. This Update 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.

Earnings Per Share

There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share; therefore, net income (loss) as presented on the Consolidated Statement of Income (Loss) will be used as the numerator.

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

	Three Months Ended March 31,
	2015			2014

Net income (loss):	$	137,772		$	(96,441	)
Weighted average number of shares issued		3,334,130			3,507,443
Less weighted average number of unearned ESOP shares		(178,278	)		(197,406	)
Less weighted average number of nonvested restricted
stock awards		(32,480	)		(58,426	)
Weighted average shares outstanding basic		3,123,372			3,251,611
Dilutive effect of nonvested stock		764			-
Dilutive effect of stock options		44,748			-
Weighted average shares outstanding diluted		3,168,884			3,251,611
Earnings per share:
Basic	$	0.04		$	(0.03	)
Diluted		0.04			(0.03	)

At March 31, 2015 there were 32,480 shares of restricted stock outstanding at a grant date fair value of $10.25 per share and options to purchase 110,976 shares of common stock at a price of $10.25 per share that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive. Options to purchase 145,124 shares of common stock at a price of $10.25 per share as of March 31, 2014, as well as 57,368 shares of restricted stock at a price of $10.25 per share as of March 31, 2014, were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.

Investment Securities

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

	March 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale
Mortgage-backed securities:
Fannie Mae	$	1,332,622	$	86,007	$	-		$	1,418,629
Freddie Mac		33,670		1,706		-			35,376
Government National Mortgage Association		453,642		61,889		-			515,531
Collateralized mortgage obligations-government sponsored entities		1,037,076		31,298		(5,255	)		1,063,119
Total mortgage-backed securities		2,857,010		180,900		(5,255	)		3,032,655
Corporate securities		7,307,274		153,426		(1,330	)		7,459,370

Total	$	10,164,284	$	334,326	$	(6,585	)	$	10,492,025

Held to Maturity
Mortgage-backed securities:
Fannie Mae	$	31,607,246	$	1,482,071	$	(13,133	)	$	33,076,184
Freddie Mac		11,190,048		263,321		(76,701	)		11,376,668
Total mortgage-backed securities	$	42,797,294	$	1,745,392	$	(89,834	)	$	44,452,852

	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Available for Sale
Mortgage-backed securities:
Fannie Mae	$	1,445,913	$	94,904	$	-		$	1,540,817
Freddie Mac		39,424		1,991		-			41,415
Government National Mortgage Association		469,373		58,936		-			528,309
Collateralized mortgage obligations-government sponsored entities		1,135,489		29,125		(13,241	)		1,151,373
Total mortgage-backed securities		3,090,199		184,956		(13,241	)		3,261,914
Corporate securities		8,292,849		159,204		(2,434	)		8,449,619

Total	$	11,383,048	$	344,160	$	(15,675	)	$	11,711,533

Held to Maturity
Mortgage-backed securities:
Fannie Mae	$	33,121,331	$	1,378,136	$	(61,305	)	$	34,438,162
Freddie Mac		11,620,203		247,896		(112,814	)		11,755,285
Total mortgage-backed securities	$	44,741,534	$	1,626,032	$	(174,119	)	$	46,193,447

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 unrealized loss position.

	March 31, 2015
	Less Than Twelve Months					Twelve Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Mortgage-backed securities:
Fannie Mae	$	3,206,095	$	(13,133	)	$	-	$	-		$	3,206,095	$	(13,133	)
Freddie Mac		-		-			5,077,637		(76,701	)		5,077,637		(76,701	)
Collateralized mortgage obligations-government sponsored entities		80,509		(121	)		232,150		(5,134	)		312,659		(5,255	)
Total mortgage-backed
Securities		3,286,604		(13,254	)		5,309,787		(81,835	)		8,596,391		(95,089	)
Corporate securities		-		-			498,670		(1,330	)		498,670		(1,330	)

Total	$	3,286,604	$	(13,254	)	$	5,808,457	$	(83,165	)	$	9,095,061	$	(96,419	)

	December 31, 2014
	Less Than Twelve Months					Twelve Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Mortgage-backed securities:
Fannie Mae	$	-	$	-		$	7,153,455	$	(61,305	)	$	7,153,455	$	(61,305	)
Freddie Mac		1,946,251		(3,284	)		5,210,889		(109,530	)		7,157,140		(112,814	)
Collateralized mortgage obligations-government sponsored entities		220,486		(4,339	)		239,587		(8,902	)		460,073		(13,241	)
Total mortgage-backed
Securities		2,166,737		(7,623	)		12,603,931		(179,737	)		14,770,668		(187,360	)
Corporate securities		1,752,260		(519	)		498,085		(1,915	)		2,250,345		(2,434	)

Total	$	3,918,997	$	(8,142	)	$	13,102,016	$	(181,652	)	$	17,021,013	$	(189,794	)

The Company reviews its position quarterly and has determined that at March 31, 2015, 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 12 positions that were temporarily impaired at March 31, 2015. 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, 2015, by contractual maturity, are shown below. Mortgage-backed securities provide for periodic, general monthly, payments of principal and interest and have contractual maturities ranging from 3 to 30 years. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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

Due within one year	$	2,284,404	$	2,294,047	$	-	$	-
Due after one year through five years		4,484,343		4,609,651		1,702,340		1,760,909
Due after five years through ten years		1,759,483		1,840,396		7,221,620		7,715,780
Due after ten years		1,636,054		1,747,931		33,873,334		34,976,163

Total	$	10,164,284	$	10,492,025	$	42,797,294	$	44,452,852

The Company had no sales of investment securities for the three month periods ended March 31, 2015 and 2014.

Loans Receivable

Loans receivable consist of the following:

	March 31,			December 31,
	2015			2014
Mortgage Loans:
One-to-four family	$	157,594,834		$	178,214,260
Multi-family and commercial real estate		11,026,338			14,840,883
		168,621,172			193,055,143

Home equity loans		2,480,000			2,040,458
Home equity lines of credit (“HELOCs”)		1,817,943			1,521,341
Education loans		1,401,688			1,557,801
Other consumer loans		247			1,373
Non-covered consumer loans purchased		594,045			639,092
Covered loans		13,471,945			14,457,364
		188,387,040			213,272,572
Less:
Net deferred loan costs		(128,740	)		(279,098	)
Allowance for loan losses		1,350,930			1,415,983

Total	$	187,164,850		$	212,135,687

The components of covered loans by portfolio class as of March 31, 2015 and December 31, 2014 were as follows:

	March 31,		December 31,
	2015		2014
Mortgage loans:
One-to-four family	$	7,364,479	$	7,846,156
Multi-family and commercial real estate		6,103,448		6,438,651
		13,467,927		14,284,807
Commercial		4,018		172,557
Total Loans	$	13,471,945	$	14,457,364

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, 2015

December 31, 2014

Acquired Loans

Without Specific

Acquired Loans

Without Specific

With Specific

Evidence of

With Specific

Evidence of

Deterioration in

Evidence of

Deterioration in

Credit Quality

Deterioration in

Credit Quality

(ASC 310-30

Credit Quality

(ASC 310-30

(ASC 310-30)

Analogized)

(ASC 310-30)

Analogized)

Outstanding balance

807,972

21,424,442

807,613

22,933,822

Carrying amount, net of allowance

479,984

13,586,006

481,271

14,615,185

During the three months ended March 31, 2015 and 2014, respectively, the Company did not record a provision or charge-off for increases in the expected losses for acquired loans with specific evidence of deterioration in credit quality.

Changes in the accretable yield for acquired loans were as follows for the three months ended March 31, 2015 and 2014.

	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014
	Acquired Loans			Acquired Loans
	Without Specific			Without Specific
	Evidence of			Evidence of
	Deterioration in			Deterioration in
	Credit Quality			Credit Quality
	(ASC 310-30			(ASC 310-30
	Analogized)			Analogized)

Balance at beginning of period	$	6,381,792		$	7,791,222
Reclassifications and other		825,688			(351,430	)
Accretion		(245,430	)		(280,259	)
Balance at end of period	$	6,962,050		$	7,159,533

The $245,430 and $280,259 recognized as accretion represents the interest income earned on acquired loans for the three months ended March 31, 2015 and 2014, respectively. Included in reclassifications and other for loans acquired without specific evidence of deterioration in credit quality was $1,120,197 and $109,481 of reclassifications from non-accretable discounts to accretable discounts for the three months ended March 31, 2015 and 2014, respectively. The remaining $(294,509) and $(460,911) change in the accretable yield represents reductions in contractual interest due to contractual principal prepayments for the three months ended March 31, 2015 and 2014, respectively.

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: one-to-four family real estate, multi-family and commercial real estate, commercial loans, home equity loans, home equity lines of credit, and education and other consumer 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 get the adjusted factor to be applied to non-classified loans. The following qualitative factors are analyzed for each portfolio segment:

Levels of and trends in delinquencies and classifications

Trends in volume and terms

Changes in collateral

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.

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the Consolidated Balance Sheet date. The Company considers the allowance for loan losses adequate to cover loan losses inherent in the loan portfolio, at March 31, 2015.

The following table summarizes changes in the allowance for loan losses:

	Allowance for Loan Losses For the Three Months Ended March 31, 2015 and 2014
	One-to- Four Family Real Estate			Multi-Family and Commercial Real Estate			Commercial		Home Equity		HELOCs		Education and Other Consumer			Unallocated		Total
Three Months Ended March 31, 2015
Allowance for Loan Losses:
Balance at beginning of period	$	962,753		$	427,636		$	-	$	7,590	$	10,599	$	6,771		$	634	$	1,415,983
Provision (credit) for loan losses		60,321			(16,514	)		-		1,694		2,066		(1,450	)		17,033		63,150
Charge-offs		(128,424	)		-			-		-		-		-			-		(128,424	)
Recoveries		221			-			-		-		-		-			-		221
Net (charge-offs) recoveries		(128,203	)		-			-		-		-		-			-		(128,203	)
Balance at end of period	$	894,871		$	411,122		$	-	$	9,284	$	12,665	$	5,321		$	17,667	$	1,350,930

Three Months Ended March 31, 2014
Allowance for Loan Losses:
Balance at beginning of period	$	908,591		$	444,909		$	-	$	4,730	$	2,922	$	7,858		$	9,003	$	1,378,013
Provision (credit) for loan losses		(55,290	)		14,487			-		4,599		4,603		(375	)		46,976		15,000
Charge-offs		(11,307	)		-			-		-		-		-			-		(11,307	)
Recoveries		-			-			-		-		-		-			-		-
Net (charge-offs) recoveries		(11,307	)		-			-		-		-		-			-		(11,307	)
Balance at end of period	$	841,994		$	459,396		$	-	$	9,329	$	7,525	$	7,483		$	55,979	$	1,381,706

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

	At March 31, 2015
	One-to- Four Family Real Estate		Multi-family and Commercial Real Estate		Commercial		Home Equity		HELOCs		Education and Other Consumer		Unallocated		Total
Allowance for loan losses:
Ending balance	$	894,871	$	411,122	$	-	$	9,284	$	12,665	$	5,321	$	17,667	$	1,350,930

Ending balance: individually evaluated for impairment	$	10,870	$	-	$	-	$	-	$	-	$	-	$	-	$	10,870

Ending balance: collectively evaluated for impairment	$	884,001	$	411,122	$	-	$	9,284	$	12,665	$	5,321	$	17,667	$	1,340,060

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

Loans:
Ending balance	$	164,959,313	$	17,129,786	$	4,018	$	2,480,000	$	1,817,943	$	1,995,980	$	-	$	188,387,040

Ending balance: individually evaluated for impairment	$	3,141,986	$	629,017	$	-	$	58,007	$	-	$	-	$	-	$	3,829,010

Ending balance: collectively evaluated for impairment	$	154,452,848	$	10,397,321	$	-	$	2,421,993	$	1,817,943	$	1,401,935	$	-	$	170,492,040

Ending balance: loans acquired with deteriorated credit quality	$	7,364,479	$	6,103,448	$	4,018	$	-	$	-	$	594,045	$	-	$	14,065,990

	At December 31, 2014
	One-to- Four Family Real Estate		Multi-family and Commercial Real Estate		Commercial		Home Equity		HELOCs		Education and Other Consumer		Unallocated		Total
Allowance for loan losses:
Ending balance	$	962,753	$	427,636	$	-	$	7,590	$	10,599	$	6,771	$	634	$	1,415,983

Ending balance: individually evaluated for impairment	$	10,870	$	-	$	-	$	-	$	-	$	-	$	-	$	10,870

Ending balance: collectively evaluated for impairment	$	951,883	$	427,636	$	-	$	7,590	$	10,599	$	6,771	$	634	$	1,405,113

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

Loans:
Ending balance	$	186,060,416	$	21,279,534	$	172,557	$	2,040,458	$	1,521,341	$	2,198,266	$	-	$	213,272,572

Ending balance: individually evaluated for impairment	$	2,567,633	$	632,717	$	-	$	60,475	$	-	$	-	$	-	$	3,260,825

Ending balance: collectively evaluated for impairment	$	175,646,627	$	14,208,166	$	-	$	1,979,983	$	1,521,341	$	1,559,174	$	-	$	194,915,291

Ending balance: loans acquired with deteriorated credit quality	$	7,846,156	$	6,438,651	$	172,557	$	-	$	-	$	639,092	$	-	$	15,096,456

Credit Quality Information

The following tables represent credit exposures by internally assigned grades at March 31, 2015 and December 31, 2014. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

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

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

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

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

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

The following table presents classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful, and Loss within the internal risk rating system as of March 31, 2015 and December 31, 2014.

	March 31,				December 31,
	2015				2014
	Multi-Family				Multi-Family
	and Commercial				and Commercial
	Real Estate		Commercial		Real Estate		Commercial

Pass	$	14,107,330	$	4,018	$	18,228,956	$	172,557
Special Mention		1,681,398		-		1,699,786		-
Substandard		1,341,058		-		1,350,792		-
Doubtful		-		-		-		-
Loss		-		-		-		-
Total	$	17,129,786	$	4,018	$	21,279,534	$	172,557

Multi-family and commercial real estate and commercial loans are categorized by risk classification as of March 31, 2015 and December 31, 2014. For one-to-four family real estate, home equity, HELOCs, and education and other consumer loans, the Company evaluates credit quality based on the performance of the individual credits. Payment activity is reviewed by management on a monthly basis to determine how loans are performing. Loans are considered to be nonperforming when they become 90 days past due.

The following table presents recorded investment in the loan classes based on payment activity as of March 31, 2015 and December 31, 2014:

	At March 31, 2015
	One-to- Four Family Real Estate		Home Equity		HELOCs		Education and Other Consumer		Non-covered Consumer Loans Purchased
Performing	$	162,354,065	$	2,421,993	$	1,817,943	$	1,372,362	$	531,293
Nonperforming		2,605,248		58,007		-		29,573		62,752
Total	$	164,959,313	$	2,480,000	$	1,817,943	$	1,401,935	$	594,045

	At December 31, 2014
	One-to- Four Family Real Estate		Home Equity		HELOCs		Education and Other Consumer		Non-covered Consumer Loans Purchased
Performing	$	183,988,450	$	1,979,983	$	1,521,341	$	1,465,276	$	639,092
Nonperforming		2,071,966		60,475		-		93,898		-
Total	$	186,060,416	$	2,040,458	$	1,521,341	$	1,559,174	$	639,092

The following table presents an aging analysis of the recorded investment of past-due loans.

	At March 31, 2015
													Recorded
											Total		Investment >
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Loans Receivable		90 Days and Accruing
One-to-four family real estate	$	358,121	$	86,368	$	2,297,936	$	2,742,425	$	162,216,888	$	164,959,313	$	-
Multi-family and commercial real estate		-		-		431,817		431,817		16,697,969		17,129,786		-
Commercial		-		-		-		-		4,018		4,018		-
Home equity		-		-		-		-		2,480,000		2,480,000		-
HELOCs		-		-		-		-		1,817,943		1,817,943		-
Education and other consumer		36,048		-		29,573		65,621		1,336,314		1,401,935		-
Non-covered consumer loans purchased		-		62,752		-		62,752		531,293		594,045		-
Total	$	394,169	$	149,120	$	2,759,326	$	3,302,615	$	185,084,425	$	188,387,040	$	-

	At December 31, 2014
													Recorded
											Total		Investment >
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Loans Receivable		90 Days and Accruing
One-to-four family real estate	$	58,481	$	1,034,424	$	1,798,213	$	2,891,118	$	183,169,298	$	186,060,416	$	-
Multi-family and commercial real estate		86,027		-		431,817		517,844		20,761,690		21,279,534		-
Commercial		-		-		-		-		172,557		172,557		-
Home equity		60,475		-		-		60,475		1,979,983		2,040,458		-
HELOCs		-		-		-		-		1,521,341		1,521,341		-
Education and other consumer		29,265		1,497		93,898		124,660		1,434,514		1,559,174		-
Non-covered consumer loans purchased		78,650		14,676		-		93,326		545,766		639,092		-
Total	$	312,898	$	1,050,597	$	2,323,928	$	3,687,423	$	209,585,149	$	213,272,572	$	-

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, 2015 and December 31, 2014. The balances are presented by class of loans.

	March 31, 2015		December 31, 2014
One-to-four family mortgage	$	2,605,248	$	2,071,966
Multi-family and commercial real estate		515,610		517,844
Home Equity		58,007		60,475
Education and other consumer		29,573		93,898
Non-covered consumer loans purchased		62,752		-
Total	$	3,271,190	$	2,744,183

Interest income on loans would have been increased by approximately $35,469 and $31,891 during the three months ended March 31, 2015 and 2014, respectively, if these loans had performed in accordance with their original terms. Management evaluates commercial real estate loans which are 90 days or more past due for impairment.

Impaired Loans

The following table presents the recorded investment and unpaid principal balances for impaired loans and related allowance, if applicable.

	March 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
One-to-four family real estate	$	2,759,530	$	3,356,126	$	-
Multi-family and commercial real estate		1,233,566		1,538,013		-
Commercial		-		71,130		-
Home Equity		58,007		59,077		-
With an allowance recorded:
One-to-four family real estate	$	669,446	$	671,095	$	10,870
Multi-family and commercial real estate		-		-		-
Commercial		-		-		-
Home Equity		-		-		-

Total:
One-to-four family real estate	$	3,428,976	$	4,027,221	$	10,870
Multi-family and commercial real estate		1,233,566		1,538,013		-
Commercial		-		71,130		-
Home Equity		58,007		59,077		-

	December 31, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
One-to-four family real estate	$	2,226,812	$	2,823,616	$	-
Multi-family and commercial real estate		1,239,500		1,544,656		-
Commercial		-		84,010		-
Home Equity		60,475		60,925		-
With an allowance recorded:
One-to-four family real estate	$	675,473	$	676,073	$	10,870
Multi-family and commercial real estate		-		-		-
Commercial		-		-		-
Home Equity		-		-		-

Total:
One-to-four family real estate	$	2,902,285	$	3,499,689	$	10,870
Multi-family and commercial real estate		1,239,500		1,544,656		-
Commercial		-		84,010		-
Home Equity		60,475		60,925		-

The following table represents 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.

	Three Months Ended
	March 31,
	2015		2014		2015		2014
	Average Recorded Investment		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized
With no related allowance recorded:
One-to-four family real estate	$	3,012,821	$	2,234,209	$	3,974	$	7,236
Multi-family and commercial real estate		1,234,432		1,161,399		9,301		9,576
Commercial		-		-		770		1,257
Home Equity		59,197		-		-		-
With an allowance recorded:
One-to-four family real estate	$	671,825	$	687,796	$	4,349	$	5,813
Multi-family and commercial real estate		-		-		-		-
Commercial		-		-		-		-
Home Equity		-		-		-		-

Total:
One-to-four family real estate	$	3,684,646	$	2,922,005	$	8,323	$	13,049
Multi-family and commercial real estate		1,234,432		1,161,399		9,301		9,576
Commercial		-		-		770		1,257
Home Equity		59,197		-		-		-

Foreclosed Assets Held For Sale

Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the Consolidated Balance Sheet. As of March 31, 2015 and December 31, 2014 included with other assets are $329,000 and $490,000, respectively, of foreclosed assets. As of March 31, 2015, included within the foreclosed assets is $39,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of March 31, 2015, the Company has initiated formal foreclosure proceeds on $58,000 of consumer residential mortgages, which have not yet been transferred into foreclosed assets.

Loan Modifications and Troubled Debt Restructurings

A loan is considered to be a troubled debt restructuring loan when the Company grants a concession to the borrower because of the borrower’s 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 completed during the three months ended March 31, 2015 and 2014, respectively.

There were no troubled debt restructurings modified within the past year that subsequently defaulted during the three month periods ended March 31, 2015 and 2014.

Indemnification Asset

Changes in the FDIC indemnification asset during the three months ended March 31, 2015 and 2014, respectively, were as follows:

	2015			2014
Balance at December 31	$	1,417,355		$	2,515,287
Cash payments received or receivable due from the FDIC		-			(133,990	)
Increase in FDIC share of estimated losses		-			-
Net amortization		(140,037	)		(192,835	)

Balance at March 31	$	1,277,318		$	2,188,462

Deposits

Deposit accounts are summarized as follows for the periods ending March 31, 2015 and December 31, 2014.

	March 31, 2015					December 31, 2014
	Amount		%			Amount		%

Non-interest bearing demand	$	5,386,897		2.74	%	$	6,482,695		3.25	%
NOW accounts		13,066,911		6.66			13,562,430		6.80
Money market deposit		36,788,979		18.74			37,259,728		18.67
Savings		28,131,359		14.33			28,589,859		14.33
Time deposits		112,959,509		57.53			113,659,285		56.95
Total	$	196,333,655		100.00	%	$	199,553,997		100.00	%

Life Insurance and Retirement Plan

The Company has a Supplemental Life Insurance Plan (“Plan”) for a former president and two 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 Company funded life insurance policies with an aggregate amount of $3,085,000 on the lives of those officers that currently have a death benefit of $11,975,329. The cash surrender value of these policies totaled $4,266,156 and $4,268,181 at March 31, 2015 and December 31, 2014, respectively. The Plan provides that death benefits totaling $6.0 million at March 31, 2015, will be paid to their beneficiaries in the event the officers should die.

Additionally, the Company has a Supplemental Retirement Plan (“SRP”) for the two former presidents as well as two senior officers of the Bank. At March 31, 2015 and December 31, 2014, $2,152,159 and $2,142,579, respectively, has been accrued under these SRPs, and this liability and the related deferred tax asset of $731,734 and $728,477, respectively, are recognized in the financial statements.

The deferred compensation for the two former presidents 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 first 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 or 4 percent, whichever is higher. The second 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 $42,226 and $45,364 for the three months ended March 31, 2015 and 2014.

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

	Three Months Ended
	March 31,
	2015		2014
Components of net periodic benefit cost:
Service cost	$	33,543	$	16,567
Interest cost		8,683		28,797
Net periodic benefit cost	$	42,226	$	45,364

Fair Value Measurements

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels of pricing 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: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires the use of observable market data when available.

The following table presents the assets reported on the Consolidated Balance Sheet at their fair value as of March 31, 2015 and December 31, 2014, 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, 2015 and December 31, 2014, are as follows:

	March 31, 2015
	Level I		Level II		Level III		Total
Assets:
Available for Sale
Mortgage-backed securities	$	-	$	3,032,655	$	-	$	3,032,655
Corporate Securities		-		7,459,370		-		7,459,370

Total	$	-	$	10,492,025	$	-	$	10,492,025

	December 31, 2014
	Level I		Level II		Level III		Total
Assets:
Available for Sale
Mortgage-backed securities	$	-	$	3,261,914	$	-	$	3,261,914
Corporate Securities		-		8,449,619		-		8,449,619

Total	$	-	$	11,711,533	$	-	$	11,711,533

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, 2015 and December 31, 2014, are as follows:

	March 31, 2015
	Level I		Level II		Level III		Total

Assets:
Impaired loans	$	-	$	-	$	4,709,679	$	4,709,679
Other real estate owned		-		-		329,400		329,400

	December 31, 2014
	Level I		Level II		Level III		Total

Assets:
Impaired loans	$	-	$	-	$	4,191,390	$	4,191,390
Other real estate owned		-		-		489,837		489,837

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, 2015 Quantitative Information About Level III Fair Value Measurements
	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range	Weighted Average

Impaired loans	$	2,175,284	Appraisal of collateral (1)	Appraisal adjustments (2)	0% to 20%		6	%
				Liquidation expenses (2)	0% to 6%		6	%

		2,534,395	Discounted cash flows	Discount Rates	5% to 8%		7	%

Other real estate owned		329,400	Appraisal of collateral (1), (3)	Appraisal adjustments (2)	0%		0	%
				Liquidation expenses (2)	6%		6	%

	December 31, 2014 Quantitative Information About Level III Fair Value Measurements
	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range	Weighted Average

Impaired loans	$	1,624,037	Appraisal of collateral (1)	Appraisal adjustments (2)	0% to 20%		9	%
				Liquidation expenses (2)	0% to 6%		4	%

		2,567,353	Discounted cash flows	Discount rates	5% to 8%		6	%

Other real estate owned		489,837	Appraisal of collateral (1), (3)	Appraisal adjustments (2)	0%		0	%
				Liquidation expenses (2)	6%		6	%

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

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

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

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

Impaired loans are reported at fair value utilizing Level 3 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, 2015, and December 31, 2014 impaired loans with a carrying value of $4,720,549 and $4,202,260 were reduced by specific valuation allowances totaling $10,870 and $10,870 resulting in a net fair value of $4,709,679 and $4,191,390 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 are conducted and a charge-offs 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 multiplies 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, 2015 and December 31, 2014, all of the financial assets measured at fair value, on a recurring basis, utilized the market approach.

10.

Fair Value Disclosure

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

	Fair Value Measurements at March 31, 2015
	Carrying Value		Fair Value		Level I		Level II		Level III

Financial assets:
Cash and cash equivalents	$	36,553,286	$	36,553,286	$	36,553,286	$	-	$	-
Investment securities
Available for sale		10,492,025		10,492,025		-		10,492,025		-
Held to maturity		42,797,294		44,452,852		-		44,452,852		-
Loans held for sale		4,622,267		4,622,267		4,622,267		-		-
Net loans receivable		187,164,850		189,363,466		-		-		189,363,466
Accrued interest receivable		687,595		687,595		687,595		-		-
Federal Home Loan Bank stock		3,866,700		3,866,700		3,866,700		-		-
Bank-owned life insurance		4,266,156		4,266,156		4,266,156		-		-
FDIC indemnification asset		1,277,318		1,277,318		-		-		1,277,318

Financial liabilities:
Deposits		196,333,655		198,547,661		83,374,146		-		115,173,515
FHLB advance – long-term		59,000,000		61,507,500		-		-		61,507,500
Advances by borrowers for taxes and insurance		891,793		891,793		891,793		-		-
Accrued interest payable		158,253		158,253		158,253		-		-

	Fair Value Measurements at December 31, 2014
	Carrying Value		Fair Value		Level I		Level II		Level III

Financial assets:
Cash and cash equivalents	$	12,174,230	$	12,174,230	$	12,174,230	$	-	$	-
Investment securities
Available for sale		11,711,533		11,711,533		-		11,711,533		-
Held to maturity		44,741,534		46,193,447		-		46,193,447		-
Loans held for sale		4,221,438		4,221,438		4,221,438		-		-
Net loans receivable		212,135,687		213,022,071		-		-		213,022,071
Accrued interest receivable		788,684		788,684		788,684		-		-
Federal Home Loan Bank stock		3,843,500		3,843,500		3,843,500		-		-
Bank-owned life insurance		4,268,181		4,268,181		4,268,181		-		-
FDIC indemnification asset		1,417,355		1,417,355		-		-		1,417,355

Financial liabilities:
Deposits		199,553,997		201,952,208		85,894,712		-		116,057,496
FHLB advance – long-term		59,000,000		60,711,000		-		-		60,711,000
Advances by borrowers for taxes and insurance		1,208,824		1,208,824		1,208,824		-		-
Accrued interest payable		143,798		143,798		143,798		-		-

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

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

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

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

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

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

The fair value is equal to the current carrying value.

Loans Held for Sale

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

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

Investment Securities Available for Sale and Held to Maturity

The fair value of investment securities available for sale 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.

Acquired loans are recorded at fair value on the date of acquisition. The fair values of loans with evidence of credit deterioration (impaired loans) are recorded net of a nonaccretable difference and, if appropriate, an accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the nonaccretable difference, which is included in the carrying amount of acquired loans.

FDIC Indemnification Asset

As part of the Purchase and Assumption Agreements entered into in connection with the acquisition of Earthstar, the Bank and the FDIC entered into loss sharing agreements. These agreements cover realized losses on loans, which are more fully described in Note 6.

Under the agreement, the FDIC agreed to reimburse the Bank for 80% of realized losses. The indemnification asset was originally recorded at fair value on the acquisition date (December 10, 2010) and at March 31, 2015 and December 31, 2014, the carrying value of the FDIC indemnification asset was $1.3 million and $1.4 million, respectively.

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

Deposits and FHLB Advances – Long-Term

The fair values of certificates of deposit and FHLB advances 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.

11.

Accumulated Other Comprehensive Income

The activity in accumulated other comprehensive income for the three months ended March 31, 2015 and 2014 are as follows:

	Accumulated Other Comprehensive Income (1)
	Unrealized Gains (Losses) on Securities Available-for-Sale
Balance at December 31, 2013	$	264,360

Other comprehensive loss before reclassifications		(15,533	)
Balance at March 31, 2014	$	248,827

Balance at December 31, 2014	$	216,800

Other comprehensive loss before reclassifications		(491	)
Balance at March 31, 2015	$	216,309

There were no amounts reclassified from accumulated other comprehensive income for the three month periods ended March 31, 2015 and 2014.

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

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

Forward-Looking Statements

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of Polonia Bancorp and Polonia Bank. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. Polonia Bancorp’s and Polonia Bank’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiary include, but are not limited to the following: changes in interest rates; national and regional economic conditions; legislative and regulatory changes; monetary and fiscal policies of the U.S. government; including policies of the U.S. Treasury and the Federal Reserve Board; the quality and composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company’s market area; changes in real estate market values in the Company’s market area; the potential for additional regulatory restrictions on our operations; 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, 2014 under “Item 1A: Risk Factors” filed with the Securities and Exchange Commission (the “SEC”) which is available through the SEC’s website at www.sec.gov. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

General

Polonia Bancorp’s business activities are the ownership of the outstanding capital stock of Polonia Bank. Currently, Polonia Bancorp neither owns or leases any property, but instead uses the premises, equipment and other property of Polonia Bank and pays appropriate rental fees, as required by 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 five full-service locations, including our main office in Huntingdon Valley, Pennsylvania and our branch offices in the city of Philadelphia and Bucks County.

Recent Regulatory Developments

Effective October 21, 2014, Polonia Bank and the OCC entered into a formal written agreement (the “Agreement”). The Agreement relates to the findings of the OCC following its regularly scheduled examination of the Bank that began in the second quarter of 2014. The Agreement does not affect the Bank’s current status as “well capitalized” under applicable regulatory capital guidelines.

The Agreement provides, among other things, that within specified time frames, the Bank will:

•

establish a Compliance Committee of its Board of Directors to monitor and coordinate the Bank’s adherence to the Agreement and to prepare periodic reports describing the Bank’s progress in complying with the Agreement;

•

ensure that it has competent management in place, undertake periodic reviews of the Bank’s management, implement a program to enhance and improve the skills the Bank’s management team, where necessary, act to fill any vacancies among the Bank’s senior executive officers within prescribed timeframes and in accordance with regulations of the OCC;

•

revise its written strategic plan and submit such revised plan to the OCC for review, with such strategic plan establishing objectives for the Bank’s overall risk profile, earnings performance, growth, balance sheet mix, off-balance sheet activities, liability structure, capital and liquidity adequacy, product line development, outsourcing and market segments, together with strategies to achieve the Bank’s objectives;

•

implement a revised asset liability management program to address the Bank’s interest rate risk tolerance;

•

implement a mortgage banking operations risk management program;

•

confirm the terms of the Bank’s current outstanding obligation to fund third party obligations and implement a program for oversight of the Bank’s mortgage origination funding activities;

•

implement a revised internal audit program;

•

implement a program relating to the compensation payable to the Bank’s executive officers, employees and directors to ensure that such compensation is reasonable and not excessive; and

•

implement a revised third party risk management program that is consistent with OCC guidance.

The Agreement and each of its provisions will remain in effect unless and until the provisions are amended, suspended, waived, or terminated in writing by the OCC. As a result of the foregoing, the Bank is deemed to be in “troubled condition” and is not considered an “eligible institution” under applicable regulations. As a result, the Bank remains ineligible for expedited processing of any applications that it might file and must obtain the approval of the OCC prior to effecting any change in its directors or senior executive officers. In addition, the Bank is restricted from paying any capital distributions without prior approval of the OCC.

Polonia’s board of directors has created a Compliance Committee to ensure that all of the requirements noted in the Formal Agreement are being addressed in a timely and effective manner.

In addition, the OCC imposed individual minimum capital requirements (“IMCRs”) on the Bank effective January 20, 2015. The IMCRs require the Bank to maintain a leverage ratio (equal to Tier 1 capital to average total consolidated assets) of at least 10.00% and a total capital ratio (equal to total capital to total risk-weighted assets) of at least 15.00%. Absent the IMCRs, the Bank must maintain a leverage ratio of at least 5.00% and a total capital ratio of at least 10.00% to be considered well-capitalized. At March 31, 2015, the Bank had a Tier 1 leverage ratio of 11.21% and a total risk-based capital ratio of 25.26%.

On February 17, 2015, the Company entered into a Memorandum of Understanding (“MOU”) with the Federal Reserve Bank of Philadelphia. Among other things, the MOU prohibits the Company from paying dividends, repurchasing its stock or making other capital distributions without prior written approval of the Federal Reserve Bank of Philadelphia.

Critical Accounting Policies

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

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

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

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, 2015 and December 31, 2014

Total assets at March 31, 2015 were $304.6 million, a decrease of $3.2 million from total assets of $307.8 million at December 31, 2014. The sale of 30-year jumbo mortgage loans and the maturity and pay-down of securities resulted in a shift in our asset mix, as loans and investments decreased while cash and cash equivalents increased pending reinvestment into higher yielding assets. Deposits declined due to competitive conditions, as we allowed some deposit run-off to manage our liquidity needs. The decrease in liabilities was primarily due to a $3.3 million decrease in deposits. Total stockholders’ equity at March 31, 2015 increased to $39.1 million as compared to $38.8 million at December 31, 2014. The increase of $231,000 was primarily due to the net operating profit during the period.

Cash and cash equivalents increased to $36.6 million from $12.2 million during the three months ended March 31, 2015, was primarily as the result of the sale of $20.9 million in loans held for investment during the period.

Investment securities available-for-sale decreased to $10.5 million from $11.7 million during the three months ended March 31, 2015, a decrease of $1.2 million, or 10.3%. The decrease in investment securities available-for-sale was attributable to $1.0 million in maturities of corporate securities and $232,000 in principal payments.

Investment securities held-to-maturity decreased to $42.8 million from $44.7 million during the three months ended March 31, 2015, a decrease of $1.9 million, or 4.3%. The decrease in investment securities held-to-maturity was attributable to principal payments.

Loans held for sale increased to $4.6 million from $4.2 million during the three months ended March 31, 2015, an increase of $401,000, or 9.5%. The increase in loans held for sale was the result of the normal fluctuation in loan activity associated with this type of business.

Total loans decreased $25.1 million, or 11.8%, to $188.5 million at March 31, 2015, compared to $213.6 million at December 31, 2014. The decrease in total loans was primarily the result of the sale of $20.9 million in 30-year, fixed-rate jumbo loans. The loan sale was undertaken as part of our strategy to mitigate interest rate risk.

Total deposits decreased to $196.3 million from $199.6 million during the three months ended March 31, 2015, a decrease of $3.3 million, or 1.7%. The decrease of $3.3 million was primarily the result of a decrease in savings accounts of $2.3 million and interest-bearing demand deposit accounts of $2.0 million, partially offset by a $1.2 million increase in money market deposits. The increase in the higher average yield paid on time deposits is primarily the result of a special time deposit offering during the quarter ended December 31, 2014. Based on our loan demand and liquidity needs, we opted not to match competitors' rates.

Total FHLB advances remained unchanged at $59.0 million at March 31, 2015.

Comparison of Operating Results For the Three Months Ended March 31, 2015 and 2014

General. We recorded net income of $138,000 during the three months ended March 31, 2015 compared to a net loss of $96,000 during the three months ended March 31, 2014. The biggest contributors to our improved performance were an increase in noninterest income, which was driven by the sale of loans during the quarter, and a decrease in noninterest expense, which reflected lower compensation and operating expenses. Detracting from our performance were a decrease in net interest income and an increase in provision expense.

Net Interest Income. The following table summarizes changes in interest income and expense for the three months ended March 31, 2015 and 2014.

	Three Months Ended March 31,
	2015		2014
	(Dollars in thousands)
Interest and dividend income:
Loans receivable	$	2,191	$	2,344
Investment securities		357		440
Other interest and dividend income		132		44
Total interest and dividend income		2,680		2,828
Interest Expense:
Deposits		428		425
FHLB advances – long-term		368		368
Advances by borrowers for taxes and insurance		1		1
Total interest expense		797		794
Net interest income	$	1,883	$	2,034

The following table summarizes average balances and average yields and costs for the three months ended March 31, 2015 and 2014.

	Three Months Ended
	March 31,
	2015						2014
	Average Balance			Yield/ Cost			Average Balance			Yield/ Cost
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans	$	206,520			4.24	%	$	203,597			4.61	%
Investment securities		54,727			2.61			65,886			2.67
Other interest-earning assets		25,424			2.11			18,932			0.94
Total interest earning-assets		286,671			3.79	%		288,415			3.98	%
Noninterest-earning assets:		20,507						16,830
Allowance for Loan Losses		(1,396	)					(1,378	)
Total assets	$	305,782					$	303,867

Liabilities and equity:
Interest-bearing liabilities:
Interest-bearing demand deposits	$	13,502			0.15	%	$	15,548			0.16	%
Money Market Deposits		36,464			0.37			35,253			0.37
Savings accounts		28,398			0.16			30,703			0.25
Time deposits		112,996			1.36			112,705			1.32
Total interest-bearing deposits		191,360			0.91	%		194,209			0.89	%
FHLB advances – long-term		59,000			2.53			59,000			2.53
Advances by borrowers for taxes and insurance		1,180			0.34			1,251			0.32
Total interest-bearing liabilities		251,540			1.28	%		254,460			1.27	%
Noninterest-bearing liabilities:		15,140						9,062
Total liabilities		266,680						263,522
Retained earnings		39,102						40,345
Total liabilities and retained earnings	$	305,782					$	303,867

Interest rate spread					2.51	%					2.71	%
Net yield on interest-earning assets					2.66	%					2.86	%
Ratio of average interest-earning assets to average interest-bearing liabilities					113.97	%					113.34	%

Net Interest Income. Net interest income for the three months ended March 31, 2015 decreased $151,000 from the same period last year. Our interest rate spread decreased to 2.51% for the three months ended March 31, 2015 from 2.71% for the same period last year. The primary reasons for the decrease in net interest income for the three month period were a lower average yield earned on loans and investment securities and a higher average rate paid on deposits, partially offset by a higher average yield earned on other interest-earning assets. The higher average yield earned on other interest-earning assets was primarily the result of a special one time dividend of $96,000 paid by FHLB Pittsburgh. This dividend was based on the annual average balance of FHLB Stock held by the Bank during the year ended December 31, 2014. Also contributing to the lower net interest income was a lower average balance of investment securities, partially offset by a higher average balance of other interest-earning assets, a higher average balance of loans and a lower average balance of deposits.

Provision for Loan Losses. For the three months ended March 31, 2015 we recorded a provision for loan losses of $63,000 as compared to $15,000 for the three months ended March 31, 2014. The provisions reflect management’s assessment of lending activities, changes in the loan portfolio, increased nonperforming loans, levels of current delinquencies and current economic conditions. There was one loan charge-off of $128,000 during the three months ended March 31, 2015 as compared to $11,000 during the three months ended March 31, 2014.

Noninterest Income. The following table shows the components of noninterest income for the three months ended March 31, 2015 and 2014.

	Three Months Ended March 31,
	2015			2014
	(Dollars in thousands)
Service fees on deposit accounts	$	23		$	31
Earnings on bank-owned life insurance		(2	)		2
Gain on sale of loans, net		804			590
Rental Income		63			70
Other		340			44
Total	$	1,228		$	737

The $491,000 increase in noninterest income during the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 was primarily due to a $214,000 increase in gain on the sale of loans and a $296,000 increase in other income, partially offset by a decrease of $8,000 in service fees on deposit accounts and a $7,000 decrease in rental income. The increase in the gain on the sale of loans was due primarily to the sale of $20.9 million in loans held for investment resulting in a gain of $196,000. The increase in other income was the result of the increase of $240,000 in the value of deferred compensation plan assets and a gain of on the sale of other real estate owned of $61,000.

Noninterest Expense. The following table shows the components of noninterest expense for the three months ended March 31, 2015 and 2014.

	Three Months Ended March 31,
	2015		2014
	(Dollars in thousands)
Compensation and employee benefits	$	1,328	$	1,582
Occupancy and equipment		329		409
Federal deposit insurance premiums		145		85
Data processing expense		102		112
Professional fees		179		128
Other		750		578
Total	$	2,833	$	2,894

The $61,000 decrease in noninterest expense during the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 was primarily due to a $254,000 decrease in compensation and employee benefits, an $80,000 decrease in occupancy and equipment and a $10,000 decrease in data processing expense, partially offset by a $172,000 increase in other expense, a $61,000 increase in federal deposit insurance premiums and a $51,000 increase in professional fees. The decrease in compensation and employee benefits was the result of changes in staffing, the closing of an underperforming branch in the second quarter of 2014 and costs related to employee benefits. The $80,000 decrease in occupancy and equipment was the result of the closing of an underperforming branch in the second quarter of 2014 and the continued efforts to control and eliminate operating expenses. The increase in other expense was primarily related to an increase of $240,000 in the liability associated with the deferred compensation plan, partially offset by a decrease of $67,000 in expense primarily related to the amortization of the FDIC indemnification asset. The increase of $61,000 in federal deposit insurance premiums was the result of higher premiums related to the Formal Agreement between the Bank and the OCC and the increase in professional fees of $51,000 was the result of costs of complying with the Formal Agreement with the OCC.

Income Taxes. We recorded a tax expense of $77,000 for the three months ended March 31, 2015 compared to a tax benefit of $42,000 during the three months ended March 31, 2014. The increase of the tax expense 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, 2015, cash and cash equivalents totaled $36.6 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $10.5 million at March 31, 2015. In addition, at March 31, 2015 we had the ability to borrow a total of approximately $151.1 million from the FHLB of Pittsburgh. On March 31, 2015, we had $59.0 million of borrowings outstanding. Any growth of our loan portfolio may require us to borrow additional funds.

At March 31, 2015, we had $3.4 million in mortgage loan commitments outstanding and $5.1 million in unused lines of credit. Time deposits due within one year of March 31, 2015 totaled $35.6 million, or 31.5% 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 that we currently pay on the time deposits due on or before March 31, 2016. 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 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 is 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, 2015, we exceeded all of our regulatory capital requirements.

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 three months ended March 31, 2015 and the year ended December 31, 2014 we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

Item 4. Controls and Procedures

The Company’s principal executive officer and principal financial officer, has 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 his 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, 2015, 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, 2014, which could materially affect our business, financial condition or future results. At March 31, 2015 the risk factors of the Company have not changed materially from those reported in our Annual Report on Form 10-K. However, the risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us to 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 Disclosure

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

3.1	Articles of Incorporation of Polonia Bancorp, Inc.⁽¹⁾
3.2	Bylaws of Polonia Bancorp, Inc.⁽²⁾
4.0	Stock Certificate of Polonia Bancorp, Inc.⁽³⁾
31.1	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer and Principal Financial Officer
32.0	Section 1350 Certification

101	The following materials from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (Loss), (iii) the Consolidated Statement of Comprehensive Income (Loss), (iv) the Consolidated Statement of Changes in Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows and (vi) related notes.

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

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

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

Signatures

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	POLONIA BANCORP, INC.

Date: May 13, 2015	By:	/s/ Paul D. Rutkowski
		Paul D. Rutkowski
		Chief Financial Officer and Treasurer

Attached files

Polonia Bancorp Inc Reports

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