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

Forward-Looking Statements

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

General

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

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

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

Critical Accounting Policies

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

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

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

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

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

Total assets at June 30, 2012 were $257.9 million, a decrease of $7.2 million, or 2.7%, from total assets of $265.1 million at December 31, 2011. The decrease in assets resulted primarily from a decrease in loans receivable of $17.6 million, primarily due to loan sales and loan prepayments that funded a reduction in borrowings and deposits. Total liabilities at June 30, 2012 were $230.0 million compared to $237.4 million at December 31, 2011, a decrease of $7.4 million, or 3.1%. The decrease in liabilities was primarily due to a reduction in FHLB advances and a decrease in deposits. Total stockholders' equity increased to $27.8 million at June 30, 2012 from $27.6 million at December 31, 2011, an increase of $199,000, or 0.7%.

Loans receivable decreased $17.6 million, or 11.4%, to $137.0 at June 30, 2012, compared to $154.6 million at December 31, 2011. The size of our loan portfolio decreased during the six months ended June 30, 2012 due primarily to $29.4 million in loan payments, payoffs and sales, partially offset by $13.6 million in new loans.

Non-performing non-covered loans totaled $1.9 million, or 1.64% of total non-covered loans, at June 30, 2012 compared to $2.0 million, or 1.52% of total non-covered loans, at December 31, 2011and $1.1 million, or 0.78% of total non-covered loans, at June 30, 2011. The increase in non-performing non-covered loans as a percentage of total non-covered loans since December 31, 2011was primarily the result of a $14.8 million decrease in our total non-covered loan portfolio. The increase in that same ratio from June 30, 2011 to June 30, 2012 reflects a $25.2 million decrease in total non-covered loans as well as a $788,000 increase in non-performing non-covered loans, which consisted primarily of $560,000 in non-performing non-covered multi-family and commercial real estate loans.

Investment securities available for sale decreased to $16.4 million from $17.3 million during the six months ended June 30, 2012, a decrease of $899,000, or 5.2%. The decrease in investment securities available for sale was attributable to $2.7 million in principal payments and maturities, partially offset by $1.8 million in purchases.

Investment securities held to maturity decreased to $55.8 million from $56.6 million during the six months ended June 30, 2012, a decrease of $758,000, or 1.3%. The decrease in investment securities held to maturity was attributable, in part, to $5.2 million in principal repayments, partially offset by $4.4 million in purchases.

Cash and cash equivalents increased to $28.0 million from $17.4 million during the six months ended June 30, 2012, an increase of $10.6 million, or 60.8%. The increase in cash and cash equivalents was primarily attributable to loan sales and loan prepayments.

Total deposits decreased to $201.0 million from $203.0 million during the six months ended June 30, 2012, a decrease of $2.0 million, or 1.0%. The decrease in deposits was attributable, in part, to lower rates offered on deposit products.

We utilize borrowings from the FHLB of Pittsburgh to supplement our supply of funds for loans and investments. The $5.3 million decrease in FHLB advances long-term was due to maturities and repayments.

Comparison of Operating Results For The Three and Six Months Ended June 30, 2012 and 2011

General. We recorded a net loss of $35,000 during the three months ended June 30, 2012, compared to net income of $221,000 during the three months ended June 30, 2011. The lower net income for the three month period ended June 30, 2012 was primarily related to a decrease in net interest income of $223,000 and a decrease of $166,000 in noninterest income, partially offset by a $114,000 decrease in noninterest expense and a $30,000 decrease in income tax expense.

We recorded net income of $40,000 during the six months ended June 30, 2012, compared to net income of $214,000 during the six months ended June 30, 2011. The lower net income for the six month period ended June 30, 2012 was the result of lower net interest income, higher provision for loan losses and higher income tax expense, partially offset by lower noninterest expense and higher noninterest income.

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

                                                     Three Months Ended                 Six Months Ended
                                                          June 30,                          June 30,
                                                    2012              2011            2012              2011
                                                   (Dollars in thousands)            (Dollars in thousands)
Interest and dividend income:
Loans receivable                                $       1,989       $   2,304     $       3,985       $   4,534
Investment securities                                     578             663             1,167           1,232
Other interest and dividend income                          4               1                 6               5
Total interest and dividend income                      2,571           2,968             5,158           5,771
Interest Expense:
Deposits                                                  508             665             1,035           1,339
FHLB advances - short-term                                  -               8                 -              11
FHLB advances - long-term                                 185             194               372             384
Advances by borrowers for taxes and insurance               5               5                11              11
Total interest expense                                    698             872             1,418           1,745
Net interest income                             $       1,873       $   2,096     $       3,740       $   4,026

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

                                            Three Months Ended                                     Six Months Ended
                                                 June 30,                                              June 30,
                                      2012                       2011                       2012                       2011
                              Average       Yield/       Average       Yield/       Average       Yield/       Average       Yield/
                              Balance        Cost        Balance        Cost        Balance        Cost        Balance        Cost
                                          (Dollars in thousands)                                (Dollars in thousands)
Assets:
Interest-earning assets:
Loans                        $ 141,008         5.58 %   $ 172,723         5.28 %   $ 146,230         5.42 %   $ 175,382         5.14 %
Investment securities           72,159         3.17        79,406         3.30        72,485         3.20        72,981         3.36
Other interest-earning
assets                          26,913         0.06         9,000         0.04        22,091         0.05        16,165         0.06
Total interest-earning
assets                         240,080         4.30 %     261,129         4.56 %     240,806         4.32 %     264,528         4.40 %
Noninterest-earning
assets:                         19,528                     20,400                     19,516                     20,339
Allowance for Loan Losses       (1,204 )                   (1,256 )                   (1,236 )                   (1,033 )
Total assets                 $ 258,404                  $ 280,273                  $ 259,086                  $ 283,834

Liabilities and equity:
Interest-bearing
liabilities:
Interest-bearing demand
deposits                     $  15,629         0.49 %   $  13,292         0.60 %   $  15,809         0.59 %   $  12,942         0.62 %
Money market deposits           42,261         0.60        51,338         0.66        42,780         0.61        51,563         0.68
Savings accounts                29,668         0.32        30,109         0.44        29,813         0.34        29,975         0.44
Time deposits                  108,649         1.48       114,696         1.84       107,899         1.51       118,807         1.80
Total interest-bearing
deposits                       196,207         1.04 %     209,435         1.27 %     196,301         1.06 %     213,287         1.27 %
FHLB advances - short-term           -            -         4,769         0.67             -            -         3,282         0.68
FHLB advances - long-term       25,891         2.87        28,060         2.77        26,134         2.87        27,731         2.79
Advances by borrowers for
taxes and insurance                750         2.67           920         2.18           848         2.62           972         2.28
Total interest-bearing
liabilities                    222,848         1.26 %     243,184         1.44 %     223,283         1.28 %     245,272         1.43 %
Noninterest-bearing
liabilities:                     7,648                      9,632                      7,814                     11,169
Total liabilities              230,496                    252,816                    231,097                    256,441
Retained earnings               27,908                     27,457                     27,989                     27,393
Total liabilities and
retained earnings            $ 258,404                  $ 280,273                  $ 259,086                  $ 283,834

Interest rate spread                           3.04 %                     3.12 %                     3.04 %                     2.96 %
Net yield on
interest-bearing assets                        3.13 %                     3.22 %                     3.13 %                     3.07 %
Ratio of average
interest-earning assets to
average interest-bearing
liabilities                                  107.73 %                   107.38 %                   107.85 %                   107.85 %

Net Interest Income. Net interest income for the three months ended June 30, 2012 decreased $223,000, or 10.6%, to $1.9 million, from $2.1 million during the same period last year. Our net interest rate spread decreased to 3.04% for the three months ended June 30, 2012 from 3.12% for the same period in 2011. The primary reasons for the decrease in net interest income for the three month period are a lower average balance of loans and investment securities, partially offset by a higher average balance of other interest earning assets, a lower average balance of interest bearing deposits and a lower average balance of FHLB advances. Also, contributing to the lower net interest income was a lower average rate earned on interest earning assets, partially offset by a lower average rate paid on deposits. The average balance of loans decreased during the three months ended June 30, 2012 due to increased loan payoffs and sales. Lower interest expense on deposits for the three months ended June 30, 2012 was due to lower rates offered on deposit products. The decrease in the average balance of investment securities during the three month period ended June 30, 2012 was due to payments and maturities, partially offset by purchases.

Net interest income for the six months ended June 30, 2012 decreased $286,000, or 7.1%, to $3.7 million, from $4.0 million during the same period last year. Our net interest rate spread increased to 3.04% for the six months ended June 30, 2012 from 2.96% for the same period in 2011. The primary reasons for the decrease in net interest income for the six month period are a lower average balance of loans, partially offset by a lower average balance of deposits and a higher average balance of other interest earning assets. Also, contributing to the decrease in net interest income was a lower yield on investment securities, partially offset by a higher yield on loans and a lower average rate paid on deposits. The average balance of loans decreased during the six months ended June 30, 2012 due to increased loan payoffs and sales. Lower interest expense on deposits for the six months ended June 30, 2012 was due to a lower average yield on all deposit products.

Provision for Loan Losses. For the three months ended June 30, 2012 we recorded a provision for loan losses of $100,000 as compared to a provision for loan losses of $89,000 for the three months ended June 30, 2011. The provisions reflect management's assessment of lending activities, increased non-performing loans, levels of current delinquencies and current economic conditions.

For the six months ended June 30, 2012 we recorded a provision for loan losses of $190,000 as compared to a provision for loan losses of $115,000 for the six months ended June 30, 2011. The provisions reflect management's assessment of lending activities, increased non-performing loans, levels of current delinquencies and current economic conditions.

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

                                                Three Months Ended                 Six Months Ended
                                                     June 30,                          June 30,
                                              2012              2011           2012                2011
                                              (Dollars in thousands)            (Dollars in thousands)
Service fees on deposit accounts           $        48       $       53     $        81         $        83
Earnings on bank-owned life insurance               10               17              21                  35
Investment securities gains, net                     -              218               -                 218
Gain on sale of loans, net                         199              104             341                 104
Rental income                                       72               78             145                 150
Other                                               87              112             193                 173
Total                                      $       416       $      582     $       781         $       763

The $166,000 decrease in noninterest income during the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 was primarily due to a $218,000 lower gain on the sale of investment securities, lower other income of $24,000, lower earnings on bank owned life insurance of $7,000, lower rental income of $7,000 and lower service fees on deposit accounts of $5,000, partially offset by higher gains on the sale of loans of $95,000.

The $17,000 increase in noninterest income during the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 was primarily due to a $237,000 increase in gains on the sale of loans and a $20,000 increase in other income, partially offset by a $218,000 decrease in gains on the sale of investments.

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

                                                Three Months Ended                 Six Months Ended
                                                     June 30,                          June 30,
                                               2012              2011            2012              2011
                                              (Dollars in thousands)            (Dollars in thousands)
Compensation and employee benefits         $       1,253       $   1,217     $       2,416       $   2,318
Occupancy and equipment                              353             341               686             694
Federal deposit insurance premiums                    81             114               155             207
Data processing expense                               99             162               198             313
Professional fees                                    109              96               209             190
Other                                                344             423               598             727
Total                                      $       2,239       $   2,353     $       4,262       $   4,449

The $114,000 decrease in noninterest expense during the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 was primarily due to a $79,000 reduction in other expenses, a $63,000 reduction in data processing expenses and a $33,000 reduction in federal deposit insurance premiums, partially offset by a $35,000 increase in compensation and employee benefits, a $13,000 increase in occupancy and equipment and a $13,000 increase in professional fees. The decrease in noninterest expense is primarily due to related efficiencies incurred following the Earthstar bank acquisition, a change in the calculation methodology for FDIC insurance premiums, as well as a small decrease in other expenses.

Total noninterest expense decreased $187,000, or 4.2%, to $4.3 million for the six months ended June 30, 2012 from the prior year period. The decrease in noninterest expense for the six months ended June 30, 2012 as compared to the prior year period was primarily the result of a $130,000 decrease in other noninterest expense, a $114,000 decrease in data processing expense, a $52,000 decrease in federal deposit insurance premiums and an $8,000 decrease in occupancy and equipment, partially offset by a $98,000 increase in compensation and employee benefits and a $19,000 increase in professional fees. The decrease in noninterest expense is primarily due to related efficiencies incurred following the Earthstar Bank acquisition, a change in the calculation methodology for FDIC insurance premiums, as well as a small decrease in other expenses.

Income Taxes. We recorded a tax benefit of $15,000 for the three months ended June 30, 2012 compared to tax expense of $15,000 during the three months ended June 30, 2011. The decrease of tax expenses resulted from the decrease in our taxable operating profits.

We recorded tax expense of $28,000 for the six months ended June 30, 2012 compared to tax expense of $11,000 during the six months ended June 30, 2011. The increase in tax expenses resulted principally from the fact that a $75,000 benefit was recorded in the six months ended June 30, 2011 due to the reversal of a valuation allowance related to capital loss carryforwards.

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 June 30, 2012, cash and cash equivalents totaled $28.0 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $16.4 million at June 30, 2012. In addition, at June 30, 2012, we had the ability to borrow a total of approximately $108.1 million from the FHLB of Pittsburgh. On June 30, 2012, we had $25.8 million of borrowings outstanding. Any growth of our loan portfolio may require us to borrow additional funds.

At June 30, 2012, we had $3.4 million in mortgage loan commitments outstanding and $36,000 in a standby letter of credit. Time deposits due within one year of June 30, 2012 totaled $54.5 million, or 50.5% 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 than we currently pay on the time deposits due on or before June 30, 2013. We believe, however, based on past experience that a significant portion of our time deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activities are the origination of loans and the purchase of securities. Our primary financing activities consist of activity in deposit accounts and FHLB advances. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits . . .