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As filed with the Securities and Exchange Commission on July 27, 2017

Registration No. 333-217275

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

PRE-EFFECTIVE AMENDMENT NO. 2 TO THE

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

PDL Community Bancorp

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Federal		6035		Being applied for
(State or other jurisdiction of		(Primary Standard Industrial		(I.R.S. Employer
incorporation or organization)		Classification Code Number)		Identification Number)

2244 Westchester Avenue

Bronx, New York 10462

(718) 931-9000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Carlos P. Naudon

President and Chief Executive Officer

2244 Westchester Avenue

Bronx, New York 10462

(718) 931-9000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Douglas P. Faucette, Esq.		John P. Soukenik, Esq.
Daniel P. Weitzel, Esq.		Ross Bevan, Esq.
Locke Lord LLP		Silver, Freedman, Taff & Tiernan LLP
701 8th Street, N.W., Suite 700		3299 K Street, N.W., Suite 100
Washington, D.C. 20001		Washington, DC 20007
(202) 220-6900		(202) 295-4500

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ☒

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement. number of the earlier effective registration statement for the same offering:  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ☐

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

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☐  (Do not check if a smaller reporting company)		Smaller reporting company		☒
				Emerging growth company		☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of securities to be registered		Amount to be registered		Proposed maximum offering price per share (1)		Proposed maximum aggregate offering price (1)		Amount of registration fee
Common Stock, $0.01 par value per share		8,917,641		$10.00		$89,176,410		$10,336 (2)

(1)	Estimated solely for purposes of calculating the amount of the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.

(2)	Previously paid.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

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PROSPECTUS

 

(Proposed Holding Company for Ponce Bank)

Up to 7,224,663 Shares of Common Stock

(Subject to increase to up to 8,308,362 shares)

 

 

PDL Community Bancorp is offering up to 7,224,663 shares of its common stock for sale at $10.00 per share on a best efforts basis in connection with the reorganization of Ponce De Leon Federal Bank into the mutual holding company form of ownership. There is no established market for our common stock. We expect that our common stock will be traded on the Nasdaq Global Market under the symbol “PDLB” upon conclusion of the stock offering. We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012.

The shares being offered represent 45% of the shares of common stock of PDL Community Bancorp that will be outstanding following the offering. In addition, we will contribute $200,000 and 3.3% of our then outstanding shares of common stock following the offering to a new charitable foundation, the Ponce De Leon Foundation, which we are establishing in connection with the reorganization. After the offering, 51.7% of our outstanding common stock will be owned by Ponce Bank Mutual Holding Company, our federally chartered mutual holding company. These percentages will not be affected by the number of shares we sell in the offering. We must sell a minimum of 5,339,969 shares in order to complete the offering. We may sell up to 8,308,362 shares to reflect demand for the shares or changes in market conditions following the commencement of the offering, without resoliciting subscribers.

We are offering the shares of common stock in a “subscription offering” to eligible depositors and borrowers of Ponce De Leon Federal Bank and to our tax-qualified employee benefit plan. Depositors who had accounts with aggregate balances of at least $50 at the close of business on October 31, 2015 will have first priority to purchase shares of common stock of PDL Community Bancorp. Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a “community offering.” To the extent any shares offered for sale are not purchased in the subscription or community offerings, they may be sold in a “syndicated community offering” to be managed by Raymond James & Associates, Inc.

The minimum number of shares of common stock you may order is 25 shares. The maximum number of shares of common stock that can be ordered by any person in the offering, or persons exercising subscription rights through a single deposit account, is 30,000 shares, and no person together with an associate or group of persons acting in concert may purchase more than 50,000 shares.

The offering is scheduled to expire at 12:00 p.m., noon, Eastern Time on September 6, 2017. We may extend the expiration date without notice to you, until October 21, 2017, or such later date as the Board of Governors of the Federal Reserve System may approve, which may not be beyond September 18, 2019. Once submitted, orders are irrevocable unless the offering is terminated or extended beyond October 21, 2017, or the number of shares of common stock to be sold is increased to more than 8,308,362 shares or decreased to less than 5,339,969 shares. If the offering is extended beyond October 21, 2017, all subscribers will be notified and given an opportunity to confirm, cancel or change their orders. If you do not respond to this notice, we will promptly return your funds with interest or cancel your deposit account withdrawal authorization. If the number of shares to be sold in the offering is increased to more than 8,308,362 shares or decreased to less than 5,339,969 shares, we will resolicit subscribers, and all funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest. Funds submitted for the purchase of shares in the offering will be held in a segregated account at Ponce De Leon Federal Bank and will earn interest at 0.10% per annum until completion or termination of the offering.

Raymond James & Associates, Inc. will use its best efforts to assist us in selling our common stock, but is not obligated to purchase any of the common stock that is being offered for sale. In addition, officers and directors may participate in the solicitation of offers to purchase common stock in reliance upon Rule 3a4-1 under the Securities Exchange Act of 1934, as amended. Subscribers will not pay any commissions to purchase shares of common stock in the offering.

 

 

 

This investment involves a degree of risk, including the possible loss of principal. Please read the “Risk Factors” beginning on page 17.

OFFERING SUMMARY

Price: $10.00 per share

 

		Minimum				Midpoint				Maximum				Adjusted Maximum
Number of shares			5,339,969				6,282,316				7,224,663				8,308,362
Gross offering proceeds		$	53,399,690			$	62,823,160			$	72,246,630			$	83,083,620
Estimated offering expenses, excluding selling agent fees and expenses		$	1,966,713			$	1,966,713			$	1,966,713			$	1,966,713
Estimated selling agent fees and expenses (1)		$	634,000			$	720,026			$	806,051			$	904,981
Estimated net proceeds (1)		$	50,798,977			$	60,136,421			$	69,473,866			$	80,211,926
Estimated net proceeds per share (1)		$	9.51			$	9.57			$	9.62			$	9.65

 

 

(1)

The figures shown assume that all shares are sold in the subscription and the community offering, and include estimated reimbursable expenses. See “The Reorganization and Offering—Plan of Distribution and Marketing Arrangements” for a discussion of Raymond James & Associates, Inc.’s compensation for this offering and the compensation to be received by Raymond James & Associates, Inc. and the other broker-dealers who may participate in a syndicated community offering. If all shares of common stock were sold in the syndicated community offering, excluding those purchased by our insiders and our employee stock ownership plan, for which no selling agent fee will be paid, the maximum selling agent fees and expenses would be $2.9 million, $3.4 million, $4.0 million and $4.6 million at the minimum, midpoint, maximum and adjusted maximum levels of the offering, respectively.

These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. None of the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

For assistance, please contact the Stock Information Center at (888) 317-2811.

The date of this prospectus is July 31, 2017.

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SUMMARY			1
RISK FACTORS			17
SELECTED FINANCIAL AND OTHER DATA			31
RECENT DEVELOPMENTS			33
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS			39
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING			41
OUR POLICY REGARDING DIVIDENDS			42
MARKET FOR THE COMMON STOCK			43
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE			44
CAPITALIZATION			45
PRO FORMA DATA			47
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT OUR CHARITABLE FOUNDATION			54
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PONCE DE LEON FEDERAL BANK			55
BUSINESS OF PDL COMMUNITY BANCORP			72
BUSINESS OF PONCE BANK MUTUAL HOLDING COMPANY			73
BUSINESS OF PONCE DE LEON FEDERAL BANK			73
TAXATION			98
REGULATION AND SUPERVISION			99
MANAGEMENT			108
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS			118
THE REORGANIZATION AND OFFERING			119
OUR CHARITABLE FOUNDATION			137
RESTRICTIONS ON THE ACQUISITION OF PDL COMMUNITY BANCORP AND PONCE BANK			140
DESCRIPTION OF CAPITAL STOCK OF PDL COMMUNITY BANCORP			142
TRANSFER AGENT AND REGISTRAR			143
LEGAL AND TAX MATTERS			143
EXPERTS			143
WHERE YOU CAN FIND MORE INFORMATION			144
REGISTRATION REQUIREMENTS			144
INDEX TO FINANCIAL STATEMENTS OF PONCE DE LEON FEDERAL BANK			F-1

 

 

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RISK FACTORS

You should consider carefully the following risk factors, in addition to all other information in this prospectus,

in evaluating an investment in our common stock.

Risks Related to Our Business

Multifamily, nonresidential and construction and land loans carry greater credit risk than loans secured by owner occupied one- to- four family real estate.

Our focus is primarily on prudently growing our multifamily, nonresidential and construction and land loan portfolio. At March 31, 2017, $339.9 million, or 49.5%, of our loan portfolio consisted of multifamily, nonresidential and construction and land loans as compared to $310.0 million, or 47.6%, of our loan portfolio at December 31, 2016. Given their larger balances and the complexity of the underlying collateral, multifamily, nonresidential and construction and land loans generally expose a lender to greater credit risk than loans secured by owner occupied one- to- four family real estate.

Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to an owner occupied one- to- four family residential real estate loan. In addition, any adverse developments with respect to borrowers or groups of borrowers that have more than one of these types of loans outstanding can expose us to significantly greater risk of loss compared to borrowers or groups of borrowers that only have one type of these loans. If loans that are collateralized by real estate or other business assets become troubled and the value of the collateral has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision for loan losses which would in turn adversely affect our operating results and financial condition. Further, if we foreclose on the collateral, our holding period for the collateral may be longer than for one- to- four family real estate loans because there are fewer potential purchasers of the collateral, which can result in substantial holding costs.

Some of our borrowers have more than one of these types of loans outstanding. At March 31, 2017, 390 loans with an aggregate balance of $311.8 million are to borrowers with only one loan. Another 59 loans are to borrowers with more than one loan with a corresponding aggregate balance of $28.1 million. The 59 loans are held by 25 borrowers of which 24 borrowers account for two loans each with an aggregate balance of $26.2 million. One borrower accounts for eleven loans with an aggregate balance of $1.9 million.

There are also groups of related borrowers either by common ownership or a guaranty relationship. At March 31, 2017, there were 41 groups that account for 107 loans with an aggregate balance of $80.0 million. Of these groups, 29 account for two loans each with an aggregate balance of $36.9 million. Six of these groups account for three loans each with an aggregate balance of $19.0 million. Five of these groups account for four loans each with an aggregate balance of $22.2 million. One group accounts for 11 loans with a balance of $1.9 million.

The unseasoned nature of our multifamily, nonresidential and construction and land loans portfolio may result in changes to our estimates of collectability, which may lead to additional provisions or charge-offs, which could hurt our profits.

Our multifamily, nonresidential and construction and land loan portfolio has increased approximately $29.9 million, or 9.6%, from $310.0 million at December 31, 2016 to $339.9 million at March 31, 2017 and increased approximately $57.8 million, or 22.9%, from $252.2 million at December 31, 2015 to $310.0 million at December 31, 2016. A large portion of our multifamily, nonresidential and construction and land loan portfolio is unseasoned and does not provide us with a significant payment or charge-off history pattern from which to judge future collectability. Currently, we estimate potential charge-offs using a rolling 12 quarter average and peer data adjusted for qualitative factors specific to us. As a result, it may be difficult to predict the future performance of this part of our loan portfolio. These loans may have delinquency or charge-off levels above our historical experience or current estimates, which could adversely affect our future performance. Further, these types of loans generally have larger balances and involve a greater risk than one- to- four family owner occupied residential mortgage loans. Accordingly, if we make any errors in judgment in the collectability of our multifamily, nonresidential and construction and land loans, any resulting charge-offs may be larger on a per loan basis than those incurred historically with our residential mortgage loan or consumer loan portfolios.

 

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Our business may be adversely affected by credit risk associated with residential property.

At March 31, 2017 and December 31, 2016, one-to-four family residential real estate loans amounted to $334.0 million and $325.0 million, or 48.6% and 49.9%, respectively, of our total loan portfolio. Of this, $237.9 million and $227.4 million, or 71.2% and 70.0%, respectively, is comprised of one-to-four family residential investor properties. One- to- four family residential mortgage lending, whether owner occupied or non-owner occupied, is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations. Declines in real estate values could cause some of our one- to- four family mortgages to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.

One- to- four family residential mortgage lending, whether owner occupied or non-owner occupied, with combined higher loan-to-value ratios are more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their properties, they may be unable to repay their loans in full from the sale proceeds. For those home equity loans and lines of credit secured by a second mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan proceeds in the event of default unless we are prepared to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the property. In addition, the current judicial and legal climate make it difficult to foreclose on residential properties expeditiously and with reasonable costs. For these reasons, we may experience higher rates of delinquencies, default and losses on our one- to- four family loans.

The geographic concentration of our loan portfolio and lending activities makes us vulnerable to a downturn in the local economy.

While there is not a single employer or industry in our market area on which a significant number of our customers are dependent, a substantial portion of our loan portfolio is composed of loans secured by property located in the greater New York metropolitan area. This can make us vulnerable to a downturn in the local economy and real estate markets. Adverse conditions in the local economy such as unemployment, recession, a catastrophic event or other factors beyond our control could impact the ability of our borrowers to repay their loans, which could impact our net interest income. Decreases in local real estate values caused by economic conditions or other events could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure. For more information about our market area, see “Business of Ponce De Leon Federal Bank—Market Area” and “—Competition.”

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings and capital could decrease.

At March 31, 2017 and December 31, 2016 and 2015, respectively, our allowance for loan losses totaled $10.4 million, $10.2 million and $9.5 million, which represented 1.51%, 1.57% and 1.64% of total loans at such dates. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for many of our loans. In determining the amount of the allowance for loan losses, we review our loans, loss and delinquency experience, and business and commercial real estate peer data and we evaluate other factors including, among other things, current economic conditions. If our assumptions are incorrect, or if delinquencies or non-performing loans increase, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, which would require additions to our allowance, which could materially decrease our net income.

In addition, our regulators, as well as internal and external auditors, as an integral part of their examination process, periodically review the allowance for loan losses and, as a result of such reviews, we may determine that it is appropriate to increase the allowance for loan losses by recognizing additional provisions for loan losses charged to income, or to charge off loans, which, net of any recoveries, would decrease the allowance for loan losses. Any such additional provisions for loan losses or charge-offs could have a material adverse effect on our financial condition and results of operations.

A worsening of economic conditions in our market area could reduce demand for our products and services and/or result in increases in our level of nonperforming loans, which could adversely affect our operations, financial condition and earnings.

Local economic conditions have a significant impact on the ability of our borrowers to repay loans and the value of the collateral securing loans. Any deterioration in economic conditions could have the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

 

•

demand for our products and services may decline;

 

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loan delinquencies, problem assets and foreclosures may increase;

 

•

collateral for loans, especially real estate, may decline in value, thereby reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans; and

 

•

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

Moreover, a significant decline in general economic conditions caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

Our business strategy includes growth, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively. Growing our operations could also cause our expenses to increase faster than our revenues.

Our business strategy includes growth in assets, deposits and the scale of our operations. Achieving such growth will require us to attract customers that currently bank at other financial institutions in our market area. Our ability to successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, competition from other financial institutions in our market area and our ability to manage our growth. Growth opportunities may not be available or we may not be able to manage our growth successfully. If we do not manage our growth effectively, our financial condition and operating results could be negatively affected. Furthermore, there can be considerable costs involved in expanding deposit and lending capacity that generally require a period of time to generate the necessary revenues to offset their costs, especially in areas in which we do not have an established presence and require alternative delivery methods. Accordingly, any such business expansion can be expected to negatively impact our earnings for some period of time until certain economies of scale are reached. Our expenses could be further increased if we encounter delays in modernizing existing facilities, opening of new branches or deploying new services.

We depend on our management team to implement our business strategy and execute successful operations and we could be harmed by the loss of their services.

We are dependent upon the services of the members of our senior management team who direct our strategy and operations. Members of our senior management team, or lending personnel who possess expertise in our markets and key business relationships, could be difficult to replace. Our loss of these persons, or our inability to hire additional qualified personnel, could impact our ability to implement our business strategy and could have a material adverse effect on our results of operations and our ability to compete in our markets. See “Management.”

Adherence to our internal policies and procedures by management is critical to our performance and how we are perceived by our regulators.

Our internal policies and procedures are a critical component of our corporate governance and, in some cases, compliance with applicable regulations. We adopt internal policies and procedures to guide management and employees regarding the operation and conduct of our business. We may not always achieve absolute compliance with all of our policies and procedures. Any deviation or non-adherence to these internal policies and procedures, whether intentional or unintentional, could have a detrimental effect on our management, operations or financial condition.

Our efficiency ratio is high, and we anticipate that it may remain high, as a result of the ongoing implementation of our business strategy.

Our non-interest expense totaled $7.1 million and $7.0 million for the three months ended March 31, 2017 and 2016, respectively, while such expense totaled $27.9 million and $26.2 million for the years ended December 31, 2016 and 2015 respectively. Although we continue to analyze our expenses and pursue efficiencies where available, our efficiency ratio remains high as a result of the implementation of our business strategy combined with operating in an expensive market. Our efficiency ratio was 88.1% and 90.3% for the three months ended March 31, 2017 and 2016, respectively. Our efficiency

 

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ratio was 92.2% and 86.2% for the years ended December 31, 2016 and 2015, respectively. If we are unable to successfully implement our business strategy and increase our revenues, our profitability could be adversely affected.

A continuation of the historically low interest rate environment and the possibility that we may access higher-cost funds to support our loan growth and operations may adversely affect our net interest income and profitability.

In recent years the Federal Reserve Board’s policy has been to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. Recently, the Federal Reserve Board has indicated that it believes a gradual increase in the targeted federal funds rate is appropriate. To this end, the Federal Reserve Board raised the targeted federal funds rate in December 2016 and March 2017. We cannot make any representation as to whether, or how many times, the Federal Reserve will increase the targeted federal funds rate in the future. Notwithstanding the Federal Reserve Board’s expressed intentions, our ability to reduce our interest expense may be limited at current interest rate levels while the average yield on our interest-earning assets may continue to decrease, and our interest expense may increase as we access non-core funding sources or increase deposit rates to fund our operations. A continuation of a low, or relatively low, interest rate environment or our increasing our cost of funds may adversely affect our net interest income, which would have an adverse effect on our profitability.

Future changes in interest rates could reduce our profits and asset values.

Net income is the amount by which net interest income and non-interest income exceeds non-interest expense and the provision for loan losses. Net interest income makes up a majority of our income and is based on the difference between:

 

•

the interest income we earn on interest-earning assets, such as loans and securities; and

 

•

the interest expense we pay on interest-bearing liabilities, such as deposits and borrowings.

The rates we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. Like many savings institutions, our liabilities generally have shorter contractual maturities than our assets. This imbalance can create significant earnings volatility because market interest rates change over time. In a period of rising interest rates, the interest income we earn on our assets may not increase as rapidly as the interest we pay on our liabilities. In a period of declining interest rates, the interest income we earn on our assets may decrease more rapidly than the interest we pay on our liabilities, as borrowers prepay mortgage loans, and mortgage-backed securities and callable investment securities are called, requiring us to reinvest those cash flows at lower interest rates.

In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A decline in interest rates results in increased prepayments of loans and mortgage-backed and related securities as borrowers refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Furthermore, an inverted interest rate yield curve, where short-term interest rates (which are usually the rates at which financial institutions borrow funds) are higher than long-term interest rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans) can reduce a financial institution’s net interest margin and create financial risk for financial institutions who originate longer-term, fixed rate mortgage loans.

Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Changes in the level of interest rates also may negatively affect the value of our assets and ultimately affect our earnings.

We monitor interest rate risk through the use of simulation models, including estimates of the amounts by which the fair value of our assets and liabilities (our net present value or “NPV”) and our net interest income would change in the event of a range of assumed changes in market interest rates. At March 31, 2017, in the event of an instantaneous 200 basis point increase in interest rates, we estimate that we would experience an 11.26% decrease in NPV and a 5.18% decrease in net interest income. For further discussion of how changes in interest rates could impact us, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”

Changes in the valuation of securities held could adversely affect us.

At March 31, 2017 and December 31, 2016 and 2015, respectively, our securities portfolio totaled $51.9 million, $52.7 million and $82.0 million, which represented 6.6%, 7.1% and 11.7% of total assets. All of the securities in our

 

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portfolio are classified as available-for-sale. Accordingly, a decline in the fair value of our securities could cause a material decline in our reported equity and/or net income. At least quarterly, and more frequently when warranted by economic or market conditions, management evaluates all securities classified as available-for-sale with a decline in fair value below the amortized cost of the investment to determine whether the impairment is deemed to be other-than-temporary (“OTTI”). For impaired debt securities that are intended to be sold, or more likely than not will be required to be sold, the full amount of market decline is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive income net of applicable taxes. A decline in the market value of our securities portfolio could adversely affect our earnings.

Strong competition within our market areas may limit our growth and profitability.

Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms and unregulated or less regulated non-banking entities, operating locally and elsewhere. Many of these competitors have substantially greater resources and higher lending limits than we have and offer certain services that we do not or cannot provide. In addition, some of our competitors offer loans with lower interest rates on more attractive terms than loans we offer. Competition also makes it increasingly difficult and costly to attract and retain qualified employees. Our profitability depends upon our continued ability to successfully compete in our market area. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected.

The financial services industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. For additional information see “Business of Ponce De Leon Federal Bank—Market Area” and “—Competition.”

Our small size makes it more difficult for us to compete.

Our small asset size makes it more difficult to compete with other financial institutions that are larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new products and services as quickly as our competitors. Our lower earnings may also make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base may make it difficult to generate meaningful non-interest income from such activities as securities and insurance brokerage. Finally, as a smaller institution, we are disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.

Ponce De Leon Federal Bank is subject to extensive regulation, supervision and examination by the Office of the Comptroller of the Currency, and PDL Community Bancorp will be subject to extensive regulation, supervision and examination by the Federal Reserve Board. Such regulation and supervision governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of the federal deposit insurance fund and the depositors and borrowers of Ponce De Leon Federal Bank, rather than for our stockholders. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. These regulations, along with existing tax, accounting, securities, insurance and monetary laws, rules, standards, policies, and interpretations,

 

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control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firms. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of operations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has significantly changed the regulation of banks and savings institutions and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies have been given significant discretion in drafting the implementing rules and regulations, many of which are not in final form. As a result, we cannot at this time predict the full extent to which the Dodd-Frank Act will impact our business, operations or financial condition. However, compliance with the Dodd-Frank Act and its implementing regulations and policies has already resulted in changes to our business and operations, as well as additional costs, and has diverted management’s time from other business activities, all of which have adversely affected our financial condition and results of operations. However, in February 2017, the President issued an executive order stating that a policy of his administration would be to make regulations efficient, effective, and appropriately tailored. The executive order directed certain regulatory agencies to review and identify laws and regulations that inhibit federal regulation of the U.S. financial system in a manner consistent with the policies stated in the executive order. Any changes in laws or regulation as a result of this review could result in a repeal, amendment to or delayed implementation of the Dodd-Frank Act.

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches. The policies and procedures we have adopted that are designed to assist in compliance with these laws and regulations may not be effective in preventing violations of these laws and regulations.

Our ability to originate loans could be restricted by recently adopted federal regulations.

The Consumer Financial Protection Bureau has issued a rule intended to clarify how lenders can avoid legal liability under the Dodd-Frank Act, which holds lenders accountable for ensuring a borrower’s ability to repay a mortgage loan. Under the rule, loans that meet the “qualified mortgage” definition will be presumed to have complied with the new ability-to-repay standard. Under the rule, a “qualified mortgage” loan must not contain certain specified features, including:

 

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excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);

 

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interest-only payments;

 

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negative amortization; and

 

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terms of longer than 30 years.

Also, to qualify as a “qualified mortgage,” a loan must be made to a borrower whose total monthly debt-to-income ratio does not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify a borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments.

In addition, the Dodd-Frank Act requires the Consumer Finance Protection Bureau to adopt rules and publish forms that combine certain disclosures that consumers receive in connection with applying for and closing on certain mortgage loans under the Truth in Lending Act and the Real Estate Settlement Procedures Act. The Consumer Financial Protection Bureau has implemented a final rule to implement this requirement, and the final rule was effective in October 2015.

 

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We face significant operational risks because the financial services business involves a high volume of transactions and increased reliance on technology, including risk of loss related to cyber-security breaches.

We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions and to collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and others and concerning our own business, operations, plans and strategies. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, systems failures or interruptions, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of operational deficiencies or as a result of non-compliance with applicable regulatory standards or customer attrition due to potential negative publicity. In addition, we outsource some of our data processing to certain third-party providers. If these third-party providers encounter difficulties, including as a result of cyber-attacks or information security breaches, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected.

In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, or a breach of our security systems, including if confidential or proprietary information were to be mishandled, misused or lost, we could suffer financial loss, face regulatory action, civil litigation and/or suffer damage to our reputation.

We have become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or limit our ability to pay dividends or repurchase shares.

A final capital rule, effective for Ponce De Leon Federal Bank on January 1, 2015, includes new minimum risk-based capital and leverage ratios and refines the definition of what constitutes “capital” for calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6.0% (increased from 4.0%); (iii) a total capital ratio of 8.0% (unchanged from prior rules); and (iv) a Tier I leverage ratio of 4.0%. The final rule also establishes a “capital conservation buffer” of 2.5%, and, when fully phased in, will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement is being phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount.

We have analyzed the effects of these new capital requirements, and we believe that Ponce De Leon Federal Bank meets all of these new requirements, including the full 2.5% capital conservation buffer as if it had been fully phased in.

The application of more stringent capital requirements could, among other things, result in lower returns on equity, and result in regulatory actions if we are unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of the requirements of the Basel Committee on Banking Supervision (“Basel III”) could result in our having to lengthen the term of our funding sources, change our business models or increase our holdings of liquid assets. Specifically, following the completion of the stock offering, Ponce Bank’s ability to pay dividends to PDL Community Bancorp will be limited if it does not have the capital conservation buffer required by the new capital rules, which may further limit PDL Community Bancorp’s ability to pay dividends to stockholders. See “Regulation and Supervision—Federal Banking Regulation—Capital Requirements.”

The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.

As a result of the completion of this offering, we will become a public reporting company. We expect that the obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes Oxley Act”) requires annual management

 

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assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the Securities and Exchange Commission. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price. In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. As a result, we may need to rely on outside consultants to provide these services for us until qualified personnel are hired. These obligations will increase our operating expenses and could divert our management’s attention from our operations.

Changes in accounting standards could affect reported earnings.

The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.

Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our financial condition or operating results.

In preparing this prospectus as well as periodic reports we will be required to file under the Securities Exchange Act of 1934, including our consolidated financial statements, our management is and will be required under applicable rules and regulations to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management include our evaluation of the adequacy of our allowance for loan losses and our determinations with respect to amounts owed for income taxes.

We intend to terminate our pension plan at some point following the completion of the reorganization and offering, although the time of the termination is uncertion, which will reduce our net income in the year of termination.

We intend to terminate the Bank’s pension plan at some point following the completion of the reorganization and offering, although the time of the termination is uncertain. As of March 31, 2017, the Bank estimated that terminating the plan would result in a $1.6 million charge to operations. We intend to use a portion of the proceeds of the offering, anticipated to be $1.6 million, net, to fund the expense associated with the termination of the Bank’s pension plan, which will reduce the amount of proceeds available to support our growth strategy and other business purposes. Because the cost to terminate the pension plan is primarily dependent on the value of the pension plan’s assets and applicable interest rates at the time of the termination of the pension plan, we will not know the actual costs associated with the termination of the pension plan until the date of the termination, and the actual cost could be significantly different from the estimated cost. See “Management—Benefit Plans and Agreements—Pension Plan.”

Legal and regulatory proceedings and related matters could adversely affect us.

We have been and may in the future become involved in legal and regulatory proceedings. We consider most of the proceedings to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and we may not prevail in any proceedings or litigation. There could be substantial cost and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.

We are subject to environmental liability risk associated with lending activities or properties we own.

A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties, or with respect to properties that we own in operating our business. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may

 

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materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Our policies, which require us to perform an environmental review before initiating any foreclosure action on non-residential real property, may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.

We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.

We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected.

Our historical markets, minority and immigrant individuals, may be threatened by gentrification and adverse political developments, which could decrease our growth and profitability.

We believe that our historical strength has been our focus on the minority and immigrant markets. The continuing displacement of minorities due to gentrification of our communities may adversely affect us unless we are able to adapt and increase the acceptance of our products and services by non-minority customers. We may also be unfavorably impacted by political developments adverse to markets that are dependent on immigrant populations.

Risks Related to the Offering

The future price of our common stock may be less than the purchase price in the stock offering.

If you purchase shares of common stock in the offering, you may not be able to sell them later at or above the $10.00 purchase price in the offering. In many cases, shares of common stock issued by newly converted savings institutions or mutual holding companies have traded below the initial offering price. The aggregate purchase price of the shares of common stock sold in the offering will be based on an independent appraisal. The independent appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The independent appraisal is based on certain estimates, assumptions and projections, all of which are subject to change from time to time. After the shares begin trading, the trading price of our common stock will be determined by the marketplace, and may be influenced by many factors, including prevailing interest rates, the overall performance of the economy, changes in federal tax laws, new regulations, investor perceptions of PDL Community Bancorp and the outlook for the financial services industry in general. Price fluctuations in our common stock may be unrelated to our operating performance.

The capital we raise in the stock offering may negatively impact our return on equity until we can fully implement our business plan. This could negatively affect the trading price of our shares of common stock.

Net income divided by average equity, known as “return on equity,” is a ratio many investors use to compare the performance of a financial institution to its peers. We expect our return on equity to remain relatively low until we are able to implement our business plan and leverage the additional capital we receive from the stock offering. Although we anticipate increasing net interest income using proceeds of the stock offering, our return on equity will be reduced by the capital raised in the stock offering, higher expenses from the costs of being a public company, and added expenses associated with our employee stock ownership plan, the stock-based benefit plans we intend to adopt and our charitable foundation. Until we can implement our business plan and increase our net interest income through investment of the proceeds of the offering, we expect our return on equity to remain relatively low compared to our peer group, which may reduce the value of our shares.

 

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There may be a limited trading market in our common stock, which would hinder your ability to sell our common stock and may lower the market price of the stock.

We have never issued capital stock and there is no established market for our common stock. We expect that our common stock will be quoted and traded on the Nasdaq Global Market under the symbol “PDLB” upon conclusion of the stock offering, subject to completion of the stock offering and compliance with certain conditions. The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. In addition, our public “float,” which is the total number of our outstanding shares less the shares held by Ponce Bank Mutual Holding Company, our employee stock ownership plan and our directors and executive officers, is likely to be quite limited. As a result, it is unlikely that an active trading market for the common stock will develop or that, if it develops, it will continue. If you purchase shares of common stock, you may not be able to sell them at or above $10.00 per share. Purchasers of common stock in this stock offering should have long-term investment intent and should recognize that there will be a limited trading market in the common stock. This may make it difficult to sell the common stock after the stock offering and may have an adverse impact on the price at which the common stock can be sold.

Our stock-based benefit plans will increase our costs, which will reduce our income.

We anticipate that our employee stock ownership plan will purchase an amount of shares of our common stock equal to 3.92% of our outstanding shares (including the shares held by Ponce Bank Mutual Holding Company and our charitable foundation), provided that, with approval of the Federal Reserve Board, our employee stock ownership plan may purchase some or all of such shares in the open market following the completion of the offering. If all shares are purchased in the open market at a price of $10.00 per share, the cost of acquiring the shares of common stock for the employee stock ownership plan will be between $4.7 million at the minimum of the offering range and $7.2 million at the adjusted maximum of the offering range. We will record annual employee stock ownership plan expenses in an amount equal to the fair value of shares of common stock committed to be released to employees. If shares of common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase.

We also have adopted an employee stock ownership plan equalization plan in order to provide contributions for certain executives who are prevented from receiving full contributions and allocations under the employee stock ownership plan. This plan will increase our compensation expense, which presently is not quantifiable. It is anticipated that this expense will continue for the same period of time that the employee stock ownership plan is allocating shares of our common stock.

We also intend to adopt one or more stock-based benefit plans after the offering, under which participants would be awarded shares of restricted common stock (at no cost to them) and/or options to purchase shares of our common stock. Under federal regulations, we are authorized to grant awards of stock or options under one or more stock-based benefit plans in an amount up to 25% of the shares of common stock held by persons other than Ponce Bank Mutual Holding Company. The number of shares of common stock or options granted under any initial stock-based benefit plan may not exceed 1.96% and 4.90%, respectively, of our total outstanding shares, including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation.

The shares of restricted common stock granted under the stock-based benefit plans will be expensed by us over their vesting period based on the fair market value of the shares on the date they are awarded. If the shares of restricted common stock to be granted under the stock-based benefit plans are repurchased in the open market (rather than issued directly from authorized but unissued shares by PDL Community Bancorp) and cost the same as the purchase price in the offering, the reduction to stockholders’ equity due to the plan would be between $2.3 million at the minimum of the offering range and $3.6 million at the adjusted maximum of the offering range. To the extent we repurchase shares of common stock in the open market to fund the grants of shares of restricted common stock under the plan, and the price of such shares exceeds the offering price of $10.00 per share, the reduction to stockholders’ equity would exceed the range described above. Conversely, to the extent the price of such shares is below the offering price of $10.00 per share, the reduction to stockholders’ equity would be less than the range described above.

We will generally recognize as an expense in our income statement the grant-date fair value of stock options as such options vest. When we record an expense related to the grant of options using the fair value method, we will incur significant

 

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compensation and benefits expense. As discussed in “Management’s Discussion and Analysis”, and based on certain assumptions discussed therein, we estimate this annual expense would be approximately $469,000 on an after-tax basis, assuming we sell 8,308,362 shares in the offering.

The implementation of one or more stock-based benefit plans may dilute your ownership interest.

We intend to adopt one or more stock-based benefit plans following the reorganization and offering. The stock-based benefit plans will be funded through either open market purchases, if permitted, or from the issuance of authorized but unissued shares. Public stockholders would experience a reduction in ownership interest totaling 6.42% in the event newly issued shares are used to fund stock options and stock awards in an amount equal to 4.90% and 1.96%, respectively, of the total shares issued in the reorganization and offering (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation).

We have broad discretion in using the proceeds of the stock offering. Our failure to effectively deploy the net proceeds of the offering may have an adverse effect on our financial performance and the value of our common stock.

We intend to invest between $25.4 million and $34.7 million of the net proceeds of the offering in Ponce Bank. We also expect to use a portion of the net proceeds we retain to fund a loan for the purchase of shares of common stock in the offering by our employee stock ownership plan, incur an expense relating to the termination of the Bank’s pension plan and will contribute $200,000 to our charitable foundation as a part of the initial funding of the charitable foundation. We may use the remaining net proceeds to invest in short-term and other investments, repurchase shares of common stock, pay dividends, or for other general corporate purposes. Ponce Bank intends to use the net proceeds it receives to fund new loans, enhance existing products and services, invest in securities, expand its banking franchise, or for other general corporate purposes. However, with the exception of the loan to the employee stock ownership plan and the contribution to our charitable foundation, we have not allocated specific amounts of the net proceeds for any of these purposes, and we will have significant flexibility in determining the amount of the net proceeds we apply to different uses and the timing of such applications. Also, certain of these uses, such as any potential acquisition, paying dividends and repurchasing common stock, may require the approval of or non-objection from the Office of the Comptroller of the Currency or the Federal Reserve Board. We have not established a timetable for investing the net proceeds, and, accordingly, we may not invest the net proceeds at the time that is most beneficial to PDL Community Bancorp, Ponce Bank or the stockholders. For additional information see “How We Intend To Use The Proceeds From The Offering.”

Persons who purchase stock in the offering will own a minority of PDL Community Bancorp’s common stock and will not be able to exercise voting control over most matters put to a vote of stockholders.

Public stockholders will own a minority of the outstanding shares of PDL Community Bancorp’s common stock. As a result, stockholders other than Ponce Bank Mutual Holding Company will not be able to exercise voting control over most matters put to a vote of stockholders. Ponce Bank Mutual Holding Company will own a majority of PDL Community Bancorp’s common stock after the offering and, through its board of directors, will be able to exercise voting control over most matters put to a vote of stockholders. The same directors and officers who manage Ponce Bank will also manage PDL Community Bancorp and Ponce Bank Mutual Holding Company. Our board of directors, officers or Ponce Bank Mutual Holding Company may take action that the public stockholders believe to be contrary to their interests. The only matters as to which stockholders other than Ponce Bank Mutual Holding Company will be able to exercise voting control currently include any proposal to implement one or more stock-based benefit plans or a second-step conversion adopted within the first year after the reorganization is completed. In addition, Ponce Bank Mutual Holding Company may exercise its voting control to prevent a sale or merger transaction in which stockholders could receive a premium for their shares.

Our stock value may be negatively affected by our mutual holding company structure and federal regulations restricting takeovers.

Ponce Bank Mutual Holding Company, as the majority stockholder of PDL Community Bancorp, will be able to control the outcome of virtually all matters presented to stockholders for their approval, including a proposal to acquire PDL Community Bancorp Accordingly, Ponce Bank Mutual Holding Company may prevent the sale of control or merger of PDL Community Bancorp or its subsidiaries even if such a transaction were favored by a majority of the public stockholders of PDL Community Bancorp. The board of directors of Ponce De Leon Federal Bank has decided to form a mutual holding company rather than undertake a standard conversion to stock form in part because the mutual holding company structure

 

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will allow our board of directors to control the future of PDL Community Bancorp and its subsidiaries. Additionally, although federal regulations permit a mutual holding company to be acquired by a mutual institution in a remutualization transaction, such a transaction may be unlikely because of the heightened regulatory scrutiny given to such transactions.

For three years following the offering, federal regulations prohibit any person from acquiring or offering to acquire more than 10% of our common stock without the prior written approval of the Federal Reserve Board and/or the Office of the Comptroller of the Currency. Moreover, current Federal Reserve Board and Office of the Comptroller of the Currency policy prohibits the acquisition of a mutual holding company subsidiary by any person or entity other than a mutual holding company or a mutual institution, and restricts the terms of permissible acquisitions. See “Restrictions on the Acquisition of PDL Community Bancorp and Ponce Bank” for a discussion of applicable Federal Reserve Board Regulations regarding acquisitions.

The corporate governance provisions in our charter and bylaws may prevent or impede the holders of a minority of our common stock from obtaining representation on our board of directors and may also prevent or impede a change in control.

Provisions in our charter and bylaws may prevent or impede holders of a minority of our common stock from obtaining representation on our board of directors. For example, our board of directors will be divided into three classes with staggered three-year terms. A classified board makes it more difficult for stockholders to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur. Second, our charter provides that there will not be cumulative voting by stockholders for the election of our directors, which means that Ponce Bank Mutual Holding Company, as the holder of a majority of the shares eligible to be voted at a meeting of stockholders, may elect all of our directors to be elected at that meeting. Also, we have the ability to issue preferred stock with voting rights to third parties who may be friendly to our board of directors.

In addition, a section in each of PDL Community Bancorp’s and Ponce Bank’s respective charters will generally provide that, for a period of five years from the closing of the offering, no person, other than Ponce Bank Mutual Holding Company, and, with respect to Ponce Bank, other than Ponce Bank Mutual Holding Company and PDL Community Bancorp, may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of equity security of PDL Community Bancorp or Ponce Bank held by persons other than Ponce Bank Mutual Holding Company, and, with respect to Ponce Bank, other than PDL Community Bancorp, and that any shares acquired in excess of this limit would not be entitled to be voted and would not be counted as voting stock in connection with any matters submitted to the stockholders for a vote.

Our management team has limited experience managing a public company, and regulatory compliance may divert its attention from the day-to-day management of our business.

Our management team has limited experience managing a publicly-traded company or complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition into a public company, which will be subject to significant regulatory oversight and reporting obligations under federal securities laws. In particular, these new obligations will require substantial attention from our management and may divert their attention away from the day-to-day management of our business, which could materially and adversely impact our business operations.

You may not receive dividends on our common stock.

Holders of our common stock are only entitled to receive such dividends as our board of directors may declare out of funds legally available for such payments. The declaration and payment of future cash dividends will be subject to, among other things, regulatory restrictions, our then current and projected consolidated operating results, financial condition, tax considerations, future growth plans, general economic conditions, and other factors our board of directors deems relevant. In particular, we will be limited in our ability to pay dividends to our public stockholders only, under the regulations that have been implemented by the Federal Reserve Board following the enactment of the Dodd-Frank Act with regard to dividend waivers by mutual holding companies. See “Regulation and Supervision—Federal Banking Regulation—Capital Requirements”; “— Capital Distributions”; and “—Holding Company Regulation—Waivers of Dividends by Ponce Bank Mutual Holding Company.”

 

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PDL Community Bancorp will depend primarily upon the proceeds it retains from the offering as well as earnings of Ponce Bank to provide funds to pay dividends on our common stock. The payment of dividends by Ponce Bank also is subject to certain regulatory restrictions. Federal law generally prohibits a depository institution from making any capital distributions (including payment of a dividend) to its parent holding company if the depository institution would thereafter be or continue to be undercapitalized, and dividends by a depository institution are subject to additional limitations.

As a result, any payment of dividends in the future by PDL Community Bancorp will depend, in large part, on Ponce Bank’s ability to satisfy these regulatory restrictions and its earnings, capital requirements, financial condition and other factors.

Under current law, if we declare dividends on our common stock, Ponce Bank Mutual Holding Company will be restricted from waiving the receipt of dividends.

PDL Community Bancorp’s board of directors will have the authority to declare dividends on our common stock, subject to statutory and regulatory requirements. If PDL Community Bancorp pays dividends to its stockholders, it also will be required to pay dividends to Ponce Bank Mutual Holding Company, unless Ponce Bank Mutual Holding Company is permitted by the Federal Reserve Board to waive the receipt of dividends. The Federal Reserve Board’s current regulations significantly restrict the ability of newly organized mutual holding companies to waive dividends declared by their subsidiaries. Accordingly, because dividends would likely be required to be paid to Ponce Bank Mutual Holding Company along with all other stockholders, the amount of dividends available for all other stockholders will be less than if Ponce Bank Mutual Holding Company were to waive the receipt of dividends. PDL Community Bancorp has no present plan or intention to declare dividends on its common stock and no assurance can be given that it will consider the payment of dividends in the future.

You may not be able to sell your shares of common stock until you have received a statement reflecting ownership of shares, which will affect your ability to take advantage of changes in the stock price immediately following the offering.

A statement reflecting ownership of shares of common stock purchased in the offering may not be delivered for several days after the completion of the offering and the commencement of trading in the common stock. Your ability to sell the shares of common stock before receiving your ownership statement will depend on arrangements you may make with a brokerage firm, and you may not be able to sell your shares of common stock until you have received your ownership statement. As a result, you may not be able to take advantage of fluctuations in the price of the common stock immediately following the offering.

We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As an emerging growth company, we also will not be subject to Section 404(b) of the Sarbanes-Oxley Act of 2002, which would require that our independent auditors review and attest as to the effectiveness of our internal control over financial reporting. We have also elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period.

 

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As a result, our stockholders may not have access to certain information they may deem important, and investors may find our common stock less attractive if we choose to rely on these exemptions. This could result in a less active trading market for our common stock and the price of our common stock may be more volatile.

Provisions in the Ponce Bank Mutual Holding Company charter may impede our ability to raise additional capital and may negatively impact the trading value of our stock.

The charter of Ponce Bank Mutual Holding Company requires the affirmative vote of a two-thirds majority of the votes cast at a members meeting to approve any plan of conversion and reorganization and related stock issuance plan of Ponce Bank Mutual Holding Company or Ponce Bank, and its affiliates. These provisions are in addition to the provisions in the Federal Reserve Board regulations that require the approval of such plans by an affirmative vote of two-thirds of Ponce Bank Mutual Holding Company’s board of directors and a majority of the votes eligible to be cast at a meeting of members called to consider such plans. The additional requirement may impede or prevent our ability to raise additional capital in the future by establishing a second member vote threshold that needs to be met prior to undertaking a stock offering. The uncertainty related to the ability to meet the second threshold may negatively impact the trading value of our stock.

Risks Related to the Contribution to our Charitable Foundation

The contribution to our charitable foundation will adversely affect net income in the year we complete the offering.

We intend to establish and fund a charitable foundation in connection with the reorganization and offering. We intend to contribute $200,000 of the gross proceeds raised in the offering and 3.3% of our outstanding shares of common stock to a charitable foundation that we are establishing. The contribution will have an adverse effect on our net income for the quarter and year in which we make the contribution to our charitable foundation. The after-tax expense of the contribution will reduce net income in the year in which we complete the offering by approximately $3.6 million at the maximum of the offering range.

Our contribution to our charitable foundation may not be tax deductible, which could decrease our profits.

We believe that the contribution to our charitable foundation will be deductible for federal income tax purposes. However, the Internal Revenue Service may disagree with our determination and not grant tax-exempt status to our charitable foundation. If the contribution is not deductible, we would not receive any tax benefit from the contribution. It is expected that the value of the contribution of cash and shares will be $5.5 million at the maximum of the offering range, which would result in after-tax expenses of approximately $3.6 million. In the event that the Internal Revenue Service does not grant tax-exempt status to our charitable foundation or the contribution to our charitable foundation is otherwise not tax deductible, we would recognize as after-tax expense the full value of the entire contribution.

In addition, even if the contribution is tax deductible, we may not have sufficient profits to be able to use the deduction fully. Pursuant to the Internal Revenue Code of 1986, as amended, or the “Code,” an entity is permitted to deduct charitable contributions up to 10.0% of its taxable income prior to the charitable contribution deduction in any one year. Any contribution in excess of the 10.0% limit may be deducted for federal and state income tax purposes over each of the five years following the year in which the charitable contribution is made. Accordingly, a charitable contribution could, if necessary, be deducted over a six-year period. Our pre-tax income over this period may not be sufficient to fully use this deduction.

 

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SELECTED FINANCIAL AND OTHER DATA

The summary information presented below at each date or for each of the periods presented is derived in part from the financial statements of Ponce De Leon Federal Bank. The financial condition data at December 31, 2016 and 2015, and the operating data for the years ended December 31, 2016 and 2015 were derived from the audited financial statements of Ponce De Leon Federal Bank included elsewhere in this prospectus. The information at and for the years ended December 31, 2014, 2013 and 2012 was derived in part from audited financial statements that are not included in this prospectus. The information at March 31, 2017 and for the three months ended March 31, 2017 and 2016 is unaudited and reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results for all of fiscal 2017 or any other interim period. The following information is only a summary, and should be read in conjunction with our financial statements and notes beginning on page F-1 of this prospectus.

 

		At March 31, 2017				At December 31,
						2016				2015				2014				2013				2012
						(In thousands)
Selected Financial Condition Data:
Total assets		$	786,253			$	744,983			$	703,157			$	706,414			$	730,644			$	761,544
Cash and cash equivalents			16,504				11,716				12,694				15,849				12,752				21,141
Available for sale securities			51,937				52,690				82,034				100,574				102,305				108,693
Loans held for sale			2,143				2,143				3,303				2,707				5,667				—
Loans receivable, net			677,525				642,148				567,662				543,289				561,623				584,606
Other real estate owned			—				—				76				162				1,059				1,200
Bank premises and equipment, net			25,687				26,028				27,177				28,718				29,891				29,293
Federal Home Loan Bank stock, at cost			2,089				964				1,162				1,267				1,596				1,124
Deposits			655,882				643,078				599,506				599,697				627,060				666,851
Borrowings			28,000				3,000				8,000				10,000				11,000				—
Total capital accounts			93,474				92,992				91,062				89,600				87,711				86,147

 

		For the Three Months Ended March 31,								For the Years Ended December 31,
		2017				2016				2016				2015				2014				2013				2012
																		(In thousands)
Selected Operating Data:
Interest and dividend income		$	8,794			$	8,600			$	33,741			$	33,590			$	35,495			$	37,162			$	41,078
Interest expense			1,496				1,434				5,936				5,650				5,730				7,701				9,504
Net interest income			7,298				7,166				27,805				27,940				29,765				29,461				31,574
Provision (recovery) for loan losses			52				(547	)			(57	)			353				1,183				3,426				5,132
Net interest income after provision (recovery) for loan losses			7,246				7,713				27,862				27,587				28,582				26,035				26,442
Noninterest income			758				541				2,431				2,462				2,749				3,106				3,042
Noninterest expense			7,096				6,956				27,863				26,216				25,797				24,671				23,970
Income before provision for income taxes			908				1,298				2,430				3,833				5,534				4,470				5,514
Provision for income taxes			345				490				1,005				1,315				2,998				2,015				1,424
Net income			563				808				1,425				2,518				2,536				2,455				4,090

 

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		At or For the Three Months Ended March								At or For the Years Ended December 31,
		2017 (1)				2016 (1)				2016				2015				2014				2013				2012
Performance Ratios:
Return on average assets			0.30	%			0.46	%			0.20	%			0.35	%			0.35	%			0.33	%			0.53	%
Return on average equity			2.43	%			3.46	%			1.53	%			2.76	%			2.80	%			2.79	%			4.68	%
Interest rate spread (2)			3.88	%			4.09	%			3.82	%			3.96	%			4.26	%			3.99	%			4.16	%
Net interest margin (3)			4.09	%			4.28	%			4.02	%			4.14	%			4.42	%			4.18	%			4.36	%
Noninterest expense to average assets			3.80	%			3.95	%			3.84	%			3.67	%			3.59	%			3.30	%			3.13	%
Efficiency ratio (4)			88.08	%			90.26	%			92.15	%			86.23	%			79.34	%			75.75	%			69.25	%
Average interest-earning assets to average interest- bearing liabilities			124.86	%			122.55	%			123.84	%			121.66	%			119.27	%			117.72	%			115.75	%
Average equity to average assets			12.38	%			12.99	%			12.81	%			12.78	%			12.58	%			11.79	%			11.41	%
Capital Ratios:
Total capital to risk weighted assets (bank only)			18.16	%			20.65	%			19.21	%			20.72	%			20.32	%			18.85	%			17.97	%
Tier 1 capital to risk weighted assets (bank only)			16.91	%			19.40	%			17.96	%			19.46	%			19.06	%			17.59	%			16.71	%
Common equity Tier 1 capital to risk-weighted assets (bank only)			16.91	%			19.40	%			17.96	%			19.46	%			N/A				N/A				N/A
Tier 1 capital to average assets (bank only)			13.08	%			13.80	%			13.32	%			13.67	%			13.46	%			12.65	%			11.86	%
Asset Quality Ratios:
Allowance for loan losses as a percentage of total loans			1.51	%			1.61	%			1.57	%			1.64	%			1.71	%			1.74	%			1.69	%
Allowance for loan losses as a percentage of nonperforming loans			134.92	%			117.15	%			132.15	%			99.78	%			58.79	%			21.80	%			17.39	%
Net (charge-offs) recoveries to average outstanding loans during the year			0.02	%			0.09	%			0.13	%			(0.06	%)			(0.30	%)			(0.61	%)			(0.48	%)
Non-performing loans as a percentage of total loans			1.12	%			1.38	%			1.19	%			1.65	%			2.91	%			7.98	%			9.73	%
Non-performing loans as a percentage of total assets			0.98	%			1.12	%			1.04	%			1.35	%			2.28	%			6.29	%			7.59	%
Total non-performing assets as a percentage of total assets			0.98	%			1.12	%			1.04	%			1.36	%			2.30	%			6.38	%			7.75	%
Total non-performing assets, accruing loans past due 90 days or more, and accruing troubled debt restructured loans as a percentage of total assets			3.29	%			3.84	%			3.50	%			4.19	%			5.33	%			7.50	%			9.25	%
Other:
Number of offices			14				14				14				14				14				14				13
Number of full-time equivalent employees			177				172				174				175				164				168				168

 

(1)	Ratios are annualized where appropriate.

(2)	Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of average interest-bearing liabilities.

(3)	Represents net interest income as a percentage of average interest-earning assets.

(4)	Represents noninterest expense divided by the sum of net interest income and noninterest income.

 

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RECENT DEVELOPMENTS

The following tables set forth selected consolidated historical financial and other data of Ponce De Leon Federal Bank for the periods and at the dates indicated. The data presented at June 30, 2017 and for the three and six months ended June 30, 2017 and 2016 are derived from unaudited financial statements but reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2017 or for any other period.

 

		At June 30,				At December 31,
		2017				2016
		(In thousands)
Selected Financial Condition Data:
Total assets		$	812,996			$	744,983
Cash and cash equivalents			9,495				11,716
Available for sale securities			29,668				52,690
Loans held for sale			2,143				2,143
Loans receivable, net			732,521				642,148
Other real estate owned			—				—
Bank premises and equipment, net			25,599				26,028
Federal Home Loan Bank stock, at cost			1,289				964
Deposits			702,405				643,078
Borrowings			8,000				3,000
Total capital accounts			94,674				92,992

 

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2017				2016				2017				2016
		(In thousands)
Selected Operating Data:
Interest and dividend income		$	9,704			$	8,229			$	18,497			$	16,829
Interest expense			1,621				1,487				3,116				2,920
Net interest income			8,083				6,742				15,381				13,909
Provision (recovery) for loan losses			207				235				259				(312	)
Net interest income after provision for loan losses			7,876				6,507				15,122				14,221
Noninterest income			884				671				1,642				1,212
Noninterest expense			6,995				6,965				14,091				13,921
Income before provision for income taxes			1,765				213				2,673				1,511
Provision for income taxes			641				117				986				607
Net income			1,124				96				1,687				904

 

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		At or For the Three Months Ended June 30,								At or For the Six Months Ended June 30,
		2017 (1)				2016 (1)				2017 (1)				2016 (1)
Performance Ratios:
Return on average assets			0.57	%			0.05	%			0.44	%			0.25	%
Return on average equity			4.75	%			0.41	%			3.60	%			1.96	%
Interest rate spread (2)			4.07	%			3.70	%			3.98	%			3.89	%
Net interest margin (3)			4.29	%			3.91	%			4.19	%			4.09	%
Noninterest expense to average assets			3.56	%			3.84	%			3.68	%			3.90	%
Efficiency ratio (4)			78.02	%			93.96	%			82.78	%			92.06	%
Average interest-earning assets to average interest- bearing liabilities			125.73	%			124.15	%			125.30	%			123.29	%
Average equity to average assets			12.03	%			12.82	%			12.20	%			12.90	%
Capital Ratios:
Total capital to risk weighted assets (bank only)			17.34	%			19.94	%			17.34	%			19.94	%
Tier 1 capital to risk weighted assets (bank only)			16.09	%			18.68	%			16.09	%			18.68	%
Common equity Tier 1 capital to risk-weighted assets (bank only)			16.09	%			18.68	%			16.09	%			18.68	%
Tier 1 capital to average assets (bank only)			12.70	%			13.46	%			12.70	%			13.46	%
Asset Quality Ratios:
Allowance for loan losses as a percentage of total loans			1.43	%			1.62	%			1.43	%			1.62	%
Allowance for loan losses as a percentage of nonperforming loans			138.27	%			120.90	%			138.27	%			120.90	%
Net (charge-offs) recoveries to average outstanding loans during the year			0.01	%			0.01	%			0.03	%			0.10	%
Non-performing loans as a percentage of total loans			1.04	%			1.34	%			1.04	%			1.34	%
Non-performing loans as a percentage of total assets			0.95	%			1.11	%			0.95	%			1.11	%
Total non-performing assets as a percentage of total assets			0.95	%			1.11	%			0.95	%			1.11	%
Total non-performing assets, accruing loans past due 90 days or more, and accruing troubled debt restructured loans as a percentage of total assets			3.05	%			3.68	%			3.05	%			3.68	%
Other:
Number of offices			14				14				14				14
Number of full-time equivalent employees			178				176				178				176

 

(1)	Ratios are annualized where appropriate.

(2)	Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of average interest-bearing liabilities.

(3)	Represents net interest income as a percentage of average interest-earning assets.

(4)	Represents noninterest expense divided by the sum of net interest income and noninterest income.

 

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Comparison of Financial Condition at June 30, 2017 and December 31, 2016

Total Assets. Total assets were $813.0 million at June 30, 2017, an increase of $68.0 million, or 9.1%, when compared to $745.0 million at December 31, 2016. The increase was primarily attributable to an increase in net loans receivable of $90.4 million. The growth in loans was predominately in adjustable-rate mortgages.

Cash and Cash Equivalents. Cash and cash equivalents decreased $2.2 million, or 18.9%, to $9.5 million at June 30, 2017, when compared to $11.7 million at December 31, 2016. The decrease in cash and cash equivalents was primarily driven by the use of such funds to fund, in part, the loan growth experienced.

Net Loans Receivable. Net loans receivable (which excludes $2.1 million of loans held for sale) increased $90.4 million, or 14.1%, to $732.5 million at June 30, 2017 from $642.1 million at December 31, 2016. During the six months ended June 30, 2017, we originated $128.1 million of loans, $53.5 million of which were one-to-four family residential loans, $43.1 million were non-residential loans, of which $22.8 million were multi-family loans, $7.0 million were land and construction loans, $1.4 million were business loans and the remaining $255,000 were consumer loans. Principal repayments and other credits to net loans receivable for the six months ended June 30, 2017 were $37.7 million.

During the six months ended June 30, 2017, one-to-four family investor owned residential real estate loans increased $29.6 million, or 13.0%, to $257.0 million at June 30, 2017 from $227.4 million at December 31, 2016; one-to-four family owner occupied residential real estate loans increased $2.3 million or 2.4%, to $99.9 million at June 30, 2017 from $97.6 million at December 31, 2016; multi-family loans increased $14.0 million, or 8.8%, to $172.2 million at June 30, 2017 from $158.2 million at December 31, 2016; nonresidential mortgages increased $34.2 million, or 28.1%, to $155.7 million at June 30, 2017 from $121.5 million at December 31, 2016; construction and land loans increased $11.8 million, or 38.8%, to $42.1 million at June 30, 2017 from $30.3 million at December 31, 2016. Business loans decreased $1.1 million or 6.8% to $14.7 million at June 30, 2017 from $15.7 at December 31, 2016. Consumer loans remained relatively unchanged.

Available for Sale Securities. Available-for-sale securities, consisting primarily of U.S. Government agency sponsored securities, as well as mortgage-backed securities and, to a lesser extent, certificates of deposit decreased $23.0 million, or 43.7% to $29.7 million at June 30, 2017 from $52.7 million at December 31, 2016. The decrease was primarily driven by $20.4 million of securities sold, with the funds used to fund, in part, the growth in the loan portfolio.

Deposits. Total deposits increased $59.3 million, or 9.2%, to $702.4 million at June 30, 2017 from $643.1 million at December 31, 2016. The increase was primarily due to increases in certificates of deposits of $36.8 million, or 10.0%, to $405.5 million at June 30, 2017 from $368.7 million at December 31, 2016 and demand accounts of $12.3 million, or 15.6%, to $91.1 million at June 30, 2017 from $78.8 million at December 31, 2016. In addition, money market accounts increased $6.3 million, or 14.7%, to $49.1 million at June 30, 2017 from $42.8 million at December 31, 2016. The increase in certificates of deposit was mainly due to $39.5 million in brokered deposits and $14.0 million in listing service deposits while the increase in demand deposits is mainly due to an increase of $11.3 million in commercial checking accounts offset by maturities and draws during the period. Brokered and listing service deposits are alternative funding sources that have previously been available to the Bank, but have not historically been used as a funding source. Deposits obtained through a listing service are not considered brokered because the listing service does not engage in the business of placing deposits; it simply compiles information about interest rates offered on certificates of deposit by other insured depository institutions, then makes the list available to subscribing financial institutions. The brokered and listing service certificates of deposit provide the Bank an alternative funding source to fund loan growth and to lock in interest rates and complementary maturity structures in a rising rate environment.

Total Capital. Total capital increased $1.7 million, or 1.8%, to $94.7 million at June 30, 2017 from $93.0 million at December 31, 2016. The increase resulted primarily from net income for the six months ended June 30, 2017 of $1.7 million.

Comparison of Operating Results for the Three Months Ended June 30, 2017 and June 30, 2016

General. Our net income for the quarter ended June 30, 2017 was $1.1 million compared to net income of $96,000 for the quarter ended June 30, 2016, an increase of $1.0 million. The increase was primarily due to a $1.3 million increase in net interest income, a $213,000 increase in non-interest income; partially offset by an increase in income tax expense of $524,000.

 

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Interest Income. Interest and dividend income increased $1.5 million, or 17.9%, to $9.7 million for the quarter ended June 30, 2017 from the comparable quarter in 2016. Interest income on loans increased $1.7 million primarily due to a $111.7 million increase in the average balance of loans during the second quarter of 2017 compared to the same quarter in 2016. Interest income on securities available for sale decreased $200,000 primarily due to a 43 basis point decrease in average yield on the securities portfolio and a $44.8 million decrease in the average balance of the securities portfolio during the quarter ended June 30, 2017 mainly due to $20.4 million of securities sold in order to help fund the growth in the loan portfolio.

Interest Expense. Total interest expense increased $134,000 or 9.0%, to $1.6 million for the quarter ended June 30, 2017 from $1.5 million for the quarter ended June 30, 2016. Interest expense on deposit accounts increased $102,000 or 6.9%, to $1.6 million for the quarter ended June 30, 2017 from $1.5 million for the quarter ended June 30, 2016. The increase between comparable quarters in 2017 and 2016 was primarily due to a $33,000 increase in interest expense on certificates of deposit resulting from a $3.0 million, or 0.8%, increase in the average balance of these certificates. Interest expense on savings accounts increased $55,000 during the quarter ended June 30, 2017, and interest expense on checking and money market accounts increased $14,000 from the comparable quarter in 2016. The increases in interest expense in the deposit portfolios reflect the interest rate environment that the Bank is currently operating within.

Interest expense on FHLB advances increased $32,000 and the average balance of advances increased $10.6 million for the three months ended June 30, 2017, as compared to the same three month period in 2016, while the average cost of these advances was 1.21%. The Bank did not have any advances outstanding for the three month period ended June 30, 2016. The increase in the average balance of advances is due to management utilizing FHLB advances in 2017 as a funding source for loan originations.

Net Interest Income. Net interest income increased $1.3 million, or 19.9 %, to $8.1 million for the quarter ended June 30, 2017 compared to $6.7 million for the quarter ended June 30, 2016, primarily as a result of increasing loan volumes combined with higher yields on the overall loan portfolio. While interest expense on interest-bearing liabilities increased due to increased volumes, the yield on the overall interest bearing liabilities remained essentially unchanged. Average interest-earning assets increased $62.2 million primarily due to a $111.7 million increase in average outstanding loans during the quarter. Interest-bearing liabilities increased $42.4 million from the same quarter in 2016 due to the funding needed for the increase in lending experienced during the second quarter of 2017. The interest rate spread increased 37 basis points to 4.07% for the quarter ended June 30, 2017 from 3.70% for the comparable quarter in 2016. Our net interest margin increased 38 basis points to 4.29% for the second quarter of 2017 from 3.91% for the quarter ended June 30, 2016.

Provision for Loan Losses. The provision for loan losses decreased $28,000, or 11.9%, to $207,000 for the quarter ended June 30, 2017 from $235,000 for the same quarter in 2016. The decrease in the provision for loan losses was due to the improving quality of the loan portfolio as total delinquencies and the level of nonperforming loans decreased.

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at June 30, 2017. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses and as a result of such reviews we may determine to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.

Non-Interest Income. Non-interest income increased $213,000, or 31.7%, to $884,000 for the quarter ended June 30, 2017 from $671,000 for the comparable quarter in 2016. The increase was due to an increase in loan volume during the second quarter of 2017 compared to the same quarter in 2016, which resulted in increased loan fees of $156,000 and increased brokerage commissions of $98,000. Other non-interest income decreased $37,000, or 12.6%, to $256,000 and service fees decreased $4,000, or 1.7%, during the second quarter of 2017 compared to the same quarter in 2016.

Non-Interest Expense. Non-interest expense increased $30,000 or 0.4%, to $7.0 million for the quarter ended June 30, 2017 compared to the quarter ended June 30, 2016. The increase was due in part to a $268,000, or 7.3%, increase in salary and employee benefits to $4.0 million in the second quarter of 2017 from $3.7 million for the comparable quarter in 2016 caused by staffing demands, normal salary increases and an increase in the cost of medical insurance coverage. Data processing expense increased $37,000 or 9.7%, to $418,000 during the quarter ended June 30, 2017 from $381,000 for the quarter ended June 30, 2016, mainly due to ongoing improvements in products and technologies. Other non-interest expense decreased $312,000 or 20.3%, to $1.2 million during the second quarter of 2017 from $1.5 million for the comparable quarter in 2016 due primarily to decreased costs related to the lending function.

 

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Income Tax Expense. Income tax expense, which is primarily based on operating results, increased $524,000 due to increased net income for the quarter ended June 30, 2017.

Comparison of Operating Results for the Six Months Ended June 30, 2017 and June 30, 2016

General. Our net income for the six months ended June 30, 2017 was $1.7 million compared to net income of $904,000 for the six months ended June 30, 2016, an increase of $783,000 or 86.6%. The increase was primarily due to a $1.5 million increase in net interest income and a $430,000 increase in non-interest income. These increases were partially offset by a $570,000 increase in the loan loss provision, an increase in non-interest expense of $170,000 and an increase in income tax expense of $379,000 during the first six months of 2017.

Interest Income. Interest and dividend income increased $1.7 million, or 9.9%, to $18.5 million for the six months ended June 30, 2017 from $16.8 million for the comparable six months in 2016. Interest income on loans increased $2.0 million primarily due to a $97.0 million increase in the average balance of loans during the first six months of 2017 compared to the same six month period in 2016, partially offset by a 19 basis point decrease in the average yield on loans. Interest income on securities available for sale decreased $321,000 primarily due to a 22 basis point decrease in average yield on the securities portfolio combined with a $37,000 decrease in the average balance mainly attributable to $20.4 million in sales of securities during the six months ended June 30, 2017. Interest income on other investments increased $17,000 in the first six months of 2017 compared to the same period in 2016.

Interest Expense. Total interest expense increased $196,000, or 6.7%, to $3.1 million for the six months ended June 30, 2017 from $2.9 million for the six months ended June 30, 2016. Interest expense on deposit accounts increased $141,000 or 4.9%, to $3.1 million for the six months ended June 30, 2017 from $2.9 million for the six months ended June 30, 2016. The increase between comparable six month periods in 2017 from 2016 was primarily due to increases in interest expense on savings accounts of $109,000 and on checking and money market accounts of $19,000. Certificates of deposit interest expense remained unchanged at $2.7 million. The increases in interest expense in the deposit portfolios reflect the interest rate environment that the Bank is currently operating within.

Interest expense on FHLB advances increased $54,000 or 771.4%, to $61,000 for the six months ended June 30, 2017 from $7,000 for the six months ended June 30, 2016. The average balance of advances increased $9.8 million to $11.8 million for the six months ended June 30, 2017 from $2.0 million for the same six month period in 2016, while the average cost of these advances increased 40 basis points to 1.04% from 0.64%. The increase in the average balance of advances is due to management utilizing advances as a funding source for loan originations.

Net Interest Income. Net interest income increased $1.5 million or 10.6%, to $15.4 million for the six months ended June 30, 2017 compared to $13.9 million for the six months ended June 30, 2016, primarily as a result of increasing loan volumes offset by a lower yield on the overall loan portfolio. While interest expense on interest-bearing liabilities increased due to increased volumes, the yield on overall interest-bearing liabilities remained essentially unchanged. Average interest-earning assets increased $56.7 million primarily due to a $97.0 million increase in average loans outstanding during the six months ended June 30, 2017. Interest-bearing liabilities increased $36.0 million from the comparable six month period in 2016 in order to help fund the increase in lending experienced during the first six months of 2017. The interest rate spread increased 9 basis points to 3.98% for the six months ended June 30, 2017 from 3.89% for the comparable six months in 2016. Our net interest margin increased 10 basis points to 4.19% for the first six months of 2017 from 4.09% for the six months ended June 30, 2016.

Provision for Loan Losses. The provision for loan losses increased $571,000, or 183.0%, to $259,000 for the six months ended June 30, 2017 from a recovery of $312,000 for the same six month period in 2016.

Non-Interest Income. Non-interest income increased $430,000 or 35.5%, to $1.6 million for the six months ended June 30, 2017 from $1.2 million for the comparable six months in 2016. The increase was due primarily to a loan held for sale which was sold in March 2016 with a loss of $116,000, which reduced other non-interest income by such amount for the six months ended June 30, 2016. During the six months ended June 30, 2017, other non-interest income increased $106,000, or 30.3%, to $456,000, compared to $350,000 for the same period in 2016.

Non-Interest Expense. Non-interest expense increased $170,000 or 1.2%, to $14.1 million for the six months ended June 30, 2017 compared to $13.9 million for the six months ended June 30, 2016. The increase was due in part to a $432,000 or 5.9%, increase in salary and employee benefits to $7.8 million in the six months ended June 30, 2017 from $7.4 million for the comparable six month period in 2016 caused by staffing demands, normal salary increases and an increase in the cost of medical insurance coverage. Occupancy expense remained essentially unchanged at $2.8 million for the six months ended June 30, 2017 and June 30, 2016. Data processing expenses increased $81,000, or 10.3%, to $866,000 during the six months ended June 30, 2017 from $785,000 for the six months ended June 30, 2016. The increase was mainly due to the ongoing

 

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improvements in products and technologies. Insurance and surety bond premiums decreased $111,000, or 40.8%, to $161,000 for the six months ended June 30, 2017 from $272,000 for the six months ended June 30, 2016. FDIC deposit insurance premiums decreased $320,000, or 72.1%, to $124,000 for the six months ended June 30, 2017 from $444,000 for the six months ended June 30, 2016. Both of these decreases were due to upgrades in regulatory risk categories. Other non-interest expenses increased $33,000, or 1.4%, to $2.3 million during the six months ended June 30, 2017 from the comparable six month period in 2016.

Income Tax Expense. Income tax expense, which is primarily based on operating results, increased $379,000 due to increased net income for the six months ended June 30, 2017.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

•

statements of our goals, intentions and expectations;

 

•

statements regarding our business plans, prospects, growth and operating strategies;

 

•

statements regarding the quality of our loan and investment portfolios; and

 

•

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this prospectus.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

•

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

•

changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

 

•

our ability to access cost-effective funding;

 

•

fluctuations in real estate values and real estate market conditions;

 

•

demand for loans and deposits in our market area;

 

•

our ability to implement and change our business strategies;

 

•

competition among depository and other financial institutions;

 

•

inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;

 

•

adverse changes in the securities or secondary mortgage markets;

 

•

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including as a result of Basel III;

 

•

the impact of the Dodd-Frank Act and the implementing regulations;

 

•

changes in the quality or composition of our loan or investment portfolios;

 

•

technological changes that may be more difficult or expensive than expected;

 

•

the inability of third party providers to perform as expected;

 

•

our ability to manage market risk, credit risk and operational risk in the current economic environment;

 

•

our ability to enter new markets successfully and capitalize on growth opportunities;

 

•

our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;

 

•

changes in consumer spending, borrowing and savings habits;

 

•

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

 

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•

our ability to retain key employees;

 

•

our compensation expense associated with equity allocated or awarded to our employees; and

 

•

changes in the financial condition, results of operations or future prospects of issuers of securities that we may own.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Please see “Risk Factors” beginning on page 17.

 

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HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

Although we will not be able to determine the amount of actual net proceeds we will receive from the sale of shares of common stock until the offering is completed, we anticipate that the net proceeds will be between $50.8 million and $69.5 million, or $80.2 million if the offering is increased by 15%, assuming in each case all shares are sold in the subscription offering and the community offering.

PDL Community Bancorp intends to distribute the net proceeds from the offering as follows:

 

		Based Upon the Sale at $10.00 Per Share of
		5,339,969 Shares at Minimum of OfferingRange								6,282,316 Shares at Midpoint of Offering Range								7,224,663 Shares at Maximum of Offering Range								8,308,362 Shares at Adjusted Maximum of Offering Range (1)
		Amount				Percent of Net Proceeds				Amount				Percent of Net Proceeds				Amount				Percent of Net Proceeds				Amount				Percent of Net Proceeds
		(Dollars in thousands)
Offering proceeds		$	53,400							$	62,823							$	72,247							$	83,084
Less: offering expenses			(2,601	)							(2,687	)							(2,773	)							(2,872	)
Net offering proceeds			50,799				100	%			60,136				100	%			69,474				100	%			80,212				100	%
Less:
Proceeds to Ponce Bank			25,400				50				30,068				50				34,737				50				40,106				50
Proceeds contributed to charitable foundation			200				0.4				200				0.3				200				0.3				200				0.2
Proceeds used for loan to employee stock ownership plan (2)			4,652				9.2				5,473				9.1				6,293				9.1				7,238				9.0
Expense relating to termination of pension plan, net			1,639				3.2				1,639				2.7				1,639				2.4				1,639				2.0
Proceeds retained by PDL Community Bancorp		$	18,908				37.2	%		$	22,757				37.8	%		$	26,604				38.3	%		$	31,029				38.8	%

 

(1)	As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

(2)

The employee stock ownership plan will purchase 3.92% of our outstanding shares (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation). The loan will be repaid principally through Ponce Bank’s contribution to the employee stock ownership plan and dividends payable on common stock held by the employee stock ownership plan over the anticipated 15 year term of the loan. The interest rate for the employee stock ownership plan loan is expected to be equal to the prime rate, as published in The Wall Street Journal, on the closing date of the offering.

The net proceeds may vary because total expenses relating to the reorganization and offering may be more or less than our estimates. For example, our expenses would increase if a syndicated community offering were used to sell shares of common stock not purchased in the subscription offering and the community offering. See “The Reorganization and Offering—Plan of Distribution and Marketing Arrangements” for a discussion of fees to be paid in the event that shares are sold in a syndicated community offering. Payments for shares made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of Ponce Bank’s deposits. Ponce Bank will receive at least 50% of the net proceeds of the offering.

Use of Proceeds Retained by PDL Community Bancorp

PDL Community Bancorp:

 

•

intends to initially invest the proceeds that it retains in interest earning deposits and in securities, including securities issued by the U. S. government and its agencies or government sponsored enterprises, mortgage-backed securities, and other securities as permitted by our investment policy. See “Business of Ponce Bank—Investment Activities;”

 

•

may, in the future, use a portion of the proceeds that it retains to pay cash dividends or to repurchase shares of our common stock, although under current federal regulations, we may not repurchase shares of our common stock

 

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during the first year following the reorganization and offering except to fund stock-based benefit plans or when extraordinary circumstances exist with prior regulatory approval;

 

•

may, in the future, use a portion of the proceeds that it retains to finance acquisitions of financial institutions or other financial services businesses, although no specific transactions are being considered at this time and no specific expansion is being considered at this time; and

 

•

expects to use the proceeds that it retains from time to time for other general corporate purposes.

The use of the proceeds may change based on changes in interest rates, equity markets, laws and regulations affecting the financial services industry, our relative position in the financial services industry, the attractiveness of potential acquisitions to expand our operations, and overall market conditions.

Use of Proceeds Received by Ponce Bank

Ponce Bank:

 

•

intends to use a portion of the proceeds received to increase our lending capacity by providing us with additional capital to support new loans and higher lending limits;

 

•

intends to use a portion of the proceeds received to fund new residential mortgage loans, nonresidential real estate loans, construction and land loans and business and consumer loans, in accordance with our business plan and lending guidelines. See “Business of Ponce De Leon Federal Bank—Lending Activities;”

 

•

may use a portion of the proceeds received to support new loan, deposit and other financial products and services, including SBA and CDFI loans, if our board of directors determines that such products will help us compete more effectively in our market area or increase our financial performance;

 

•

may invest a portion of the proceeds received in securities issued by the U. S. government and its agencies or government sponsored enterprises, mortgage-backed securities, and other securities as permitted by our investment policy. See “Business of Ponce De Leon Federal Bank—Investment Activities;”

 

•

may, in the future, use a portion of the proceeds received to expand our retail banking franchise, by acquiring other financial institutions, branch offices or other financial services businesses, or establishing new branches or loan production offices, although no specific transactions are being considered at this time; and

 

•

expects to use the proceeds received from time to time for other general corporate purposes.

The use of the proceeds may change based on changes in interest rates, equity markets, laws and regulations affecting the financial services industry, our relative position in the financial services industry, the attractiveness of potential acquisitions to expand our operations, and overall market conditions.

OUR POLICY REGARDING DIVIDENDS

We have no current plan or intention to pay cash dividends to our stockholders. However, if in the future the board of directors considers the payment of dividends, the payment and amount of any dividend payments will be subject to statutory and regulatory limitations, and will depend upon a number of factors, including the following: regulatory capital requirements; our financial condition and results of operations; our other uses of funds for the long-term value of stockholders; tax considerations; the Federal Reserve Board’s current regulations restricting the waiver of dividends by mutual holding companies; and general economic conditions. No assurance can be given that the board of directors will ever consider the payment of dividends and shareholders should have no expectation of such.

The Federal Reserve Board has issued a policy statement providing that dividends should be paid only out of current earnings and only if our prospective rate of earnings retention is consistent with our capital needs, asset quality and overall financial condition. Regulatory guidance also provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the holding company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the holding company’s overall rate or earnings retention is inconsistent with its capital needs and overall financial condition. We have no current plan or intention to pay dividends. However, should the board of directors in the future determine to consider the payment of dividends, the board of

 

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directors is expected to take into account a number of factors, including regulatory capital requirements, our financial condition and results of operations, other uses of funds for the long-term value of stockholders, tax considerations, statutory and regulatory limitations and general economic conditions. In addition, Ponce Bank’s ability to pay dividends will be limited if it does not have the capital conservation buffer required by the new capital rules, which may limit our ability to pay dividends to stockholders. See “Regulation and Supervision—Federal Banking Regulation—Capital Requirements.” No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future.

We will file a consolidated federal tax return with Ponce Bank. Accordingly, it is anticipated that any cash distributions that we make to our stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal and state tax purposes. Additionally, pursuant to regulations of the Federal Reserve Board, during the three-year period following the stock offering, we may not take any action to declare an extraordinary dividend to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.

Pursuant to our charter, we are authorized to issue preferred stock. If we issue preferred stock, the holders thereof may have a priority over the holders of our shares of common stock with respect to the payment of dividends. For a further discussion concerning the payment of dividends on our shares of common stock, see “Description of Capital Stock of PDL Community Bancorp—Common Stock.” Dividends we can declare and pay will depend, in part, upon receipt of dividends from Ponce Bank, because initially we will have no source of income other than dividends from Ponce Bank and earnings from the investment of the net proceeds from the sale of shares of common stock retained by PDL Community Bancorp and interest payments received in connection with the loan to the employee stock ownership plan. Regulations of the Federal Reserve Board and the Office of the Comptroller of the Currency impose limitations on “capital distributions” by savings institutions. See “Regulation and Supervision—Federal Banking Regulation—Capital Distributions.”

Any payment of dividends by Ponce Bank to PDL Community Bancorp that would be deemed to be drawn out of Ponce Bank’s bad debt reserves, if any, would require a payment of taxes at the then-current tax rate by Ponce Bank on the amount of earnings deemed to be removed from the reserves for such distribution. Ponce Bank does not intend to make any distribution to PDL Community Bancorp that would create such a federal tax liability. See “Taxation.”

If PDL Community Bancorp should ever pay dividends to its stockholders, it will likely pay dividends to Ponce Bank Mutual Holding Company. The Federal Reserve Board’s current regulations significantly restrict the ability of newly organized mutual holding companies to waive dividends declared by their subsidiaries. Accordingly, we do not anticipate that, should a dividend ever be paid, Ponce Bank Mutual Holding Company will waive dividends paid by PDL Community Bancorp. See “Risk Factors—Risks Related to the Offering—Under current law, if we declare dividends on our common stock, Ponce Bank Mutual Holding Company will be restricted from waiving the receipt of dividends.”

MARKET FOR THE COMMON STOCK

PDL Community Bancorp is a to-be-formed company and has never issued capital stock. Ponce De Leon Federal Bank, as a mutual institution, has never issued capital stock. Accordingly, there is no established market for our common stock. PDL Community Bancorp expects that its common stock will be traded on the Nasdaq Global Market under the symbol “PDLB”.

In order to list our common stock on the Nasdaq Global Market, we are required to have at least three broker-dealers who will make a market in our common stock. Raymond James & Associates, Inc. has advised us that it intends to make a market in our common stock following the reorganization and offering, but it is under no obligation to do so or to continue to do so if it begins. Raymond James & Associates, Inc. also may assist us, if needed, in obtaining other market makers after the offering. We cannot assure you that other market makers will be obtained or that an active and liquid trading market for the common stock will develop or, if developed, will be maintained.

The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. Furthermore, we cannot assure you that, if you purchase shares of common stock, you will be able to sell them at or above $10.00 per share. Purchasers of common stock in this stock offering should have long-term investment intent and should recognize that there may be a limited trading market in the common stock. This may make it difficult to sell the common stock after the stock offering and may have an adverse impact on the price at which the common stock can be sold.

 

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HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

At March 31, 2017, Ponce De Leon Federal Bank exceeded all of the applicable regulatory capital requirements and was considered “well capitalized.” The table below sets forth the historical equity capital and regulatory capital of Ponce De Leon Federal Bank at March 31, 2017, and the pro forma equity capital and regulatory capital of Ponce Bank after giving effect to the sale of shares of common stock at $10.00 per share. The table assumes the receipt by Ponce Bank of 50% of the net proceeds. See “How We Intend to Use the Proceeds from the Offering.”

 

										Pro Forma at March 31, 2017, Based Upon the Sale in the Offering of (1)
		Ponce De Leon Federal Bank Historical at March 31, 2017								5,339,969 Shares								6,282,316 Shares								7,224,663 Shares								8,308,362 Shares (2)
		Amount				Percent of Assets (3)				Amount				Percent of Assets (3)				Amount				Percent of Assets (3)				Amount				Percent of Assets (3)				Amount				Percent of Assets (3)
		(Dollars in thousands)
Equity		$	93,474				11.89	%		$	111,696				13.76	%		$	115,133				14.11	%		$	118,571				14.45	%		$	122,523				14.83	%
Tier 1 leverage capital		$	99,803				13.08	%		$	118,025				14.97	%		$	121,462				15.32	%		$	124,900				15.66	%		$	128,852				16.05	%
Tier 1 leverage capital requirement			38,153				5.00	%			39,413				5.00	%			39,647				5.00	%			39,880				5.00	%			40,148				5.00	%
Excess		$	61,650				8.08	%		$	78,612				9.97	%		$	81,815				10.32	%		$	85,020				10.66	%		$	88,704				11.05	%
Tier 1 risk-based capital (4)		$	99,803				16.91	%		$	118,025				19.82	%		$	121,462				20.37	%		$	124,900				20.91	%		$	128,852				21.54	%
Tier 1 risk-based requirement		$	47,224				8.00	%			47,627				8.00	%			47,701				8.00	%			47,776				8.00	%			47,862				8.00	%
Excess		$	52,579				8.91	%		$	70,398				11.82	%		$	73,761				12.37	%		$	77,124				12.91	%		$	80,990				13.54	%
Total risk-based capital (4)		$	107,219				18.16	%		$	125,441				21.07	%		$	128,878				21.61	%		$	132,316				22.16	%		$	136,268				22.78	%
Total risk-based requirement		$	59,029				10.00	%		$	59,533				10.00	%		$	59,627				10.00	%		$	59,720				10.00	%		$	59,828				10.00	%
Excess		$	48,190				8.16	%		$	65,908				11.07	%		$	69,251				11.61	%		$	72,596				12.16	%		$	76,440				12.78	%
Common equity tier 1 risk-based capital (4)		$	99,803				16.91	%		$	118,025				19.82	%		$	121,462				20.37	%		$	124,900				20.91	%		$	128,852				21,54	%
Common equity tier 1 risk-based requirement			38,369				6.50	%			38,697				6.50	%			38,757				6.50	%			38,818				6.50	%			38,888				6.50	%
Excess		$	61,434				10.41	%		$	79,328				13.32	%		$	82,705				13.87	%		$	86,082				14.41	%		$	89,964				15.04	%
Reconciliation of capital infused into Ponce Bank:
Net offering proceeds to Ponce Bank										$	25,400							$	30,068							$	34,737							$	40,106
Less: Common stock acquired by employee stock ownership plan											(4,652	)							(5,473	)							(6,293	)							(7,238	)
Less: Common stock acquired for stock-based benefit plans											(2,326	)							(2,736	)							(3,147	)							(3,619	)
Less: Assets retained by Ponce Bank Mutual Holding Company adjustment											(200	)							(200	)							(200	)							(200	)
Pro forma increase										$	18,222							$	21,659							$	25,097							$	29,049

 

(1)

Pro forma capital levels assume that the employee stock ownership plan purchases 3.92% of our total outstanding shares (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation) with funds we lend and that PDL Community Bancorp purchases 1.96% of our total outstanding shares (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation) for one or more stock based benefit plans for restricted stock awards. Pro forma capital calculated under generally accepted accounting principles (“GAAP”) and regulatory capital have been reduced by the amount required to fund these plans. See “Management - Employee Stock Ownership Plan”.

(2)	As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

(3)	Tier 1 leverage capital levels are shown as a percentage of total adjusted assets. Risk-based capital levels are shown as a percentage of risk-weighted assets.

(4)	Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting.

 

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CAPITALIZATION

The following table presents the historical capitalization of Ponce De Leon Federal Bank at March 31, 2017, and the pro forma consolidated capitalization of PDL Community Bancorp after giving effect to the offering, based upon the sale of the number of shares of common stock indicated in the table and the other assumptions set forth under “Pro Forma Data.”

 

		Ponce De Leon Federal Bank Historical Capitalization at March 31, 2017				Pro Forma Consolidated Capitalization at March 31, 2017 of PDL Community Bancorp Based Upon the Sale for $10.00 Per Share of
						5,339,969 Shares				6,282,316 Shares				7,224,663 Shares				8,308,362 Shares (1)
						(Dollars in thousands)
Deposits (2)		$	655,882			$	655,882			$	655,882			$	655,882			$	655,882
Borrowings			28,000				28,000				28,000				28,000				28,000
Total deposits and borrowings		$	683,882			$	683,882			$	683,882			$	683,882			$	683,882
Stockholders’ equity:
Preferred Stock, $0.01 par value per share:10,000,000 shares authorized (post offering);none to be issued		$	—			$	—			$	—			$	—			$	—
Common Stock, $0.01 par value per share: 50,000,000 shares authorized (post offering); shares to be issued as reflected (3)			—				119				140				161				185
Additional paid-in capital (3)			—				54,596				64,603				74,611				86,120
Retained earnings (4)			99,805				99,805				99,805				99,805				99,805
Tax benefit of contribution to charitable foundation			—				1,399				1,634				1,869				2,140
Accumulated other comprehensive income			(227	)			(227	)			(227	)			(227	)			(227	)
Less:
Assets retained by Ponce Bank Mutual Holding Company (5)							(200	)			(200	)			(200	)			(200	)
Common stock acquired by employee stock ownership plan (6)							(4,652	)			(5,473	)			(6,293	)			(7,238	)
Common stock acquired for stock-based benefit plans (7)							(2,326	)			(2,736	)			(3,147	)			(3,619	)
Expense of contribution of stock to charitable foundation			—				(3,916	)			(4,607	)			(5,298	)			(6,093	)
Expense of cash contribution to charitable foundation (5)			—				(200	)			(200	)			(200	)			(200	)
Defined benefit pension liabilities, net of taxes			(6,104	)			(6,104	)			(6,104	)			(6,104	)			(6,104	)
Expense relating to termination of pension plan, net (8)			—				(1,639	)			(1,639	)			(1,639	)			(1,639	)
Total stockholders’ equity		$	93,474			$	136,655			$	144,996			$	153,338			$	162,930
Total tangible stockholders’ equity		$	93,474			$	136,655			$	144,996			$	153,338			$	162,930
Pro forma shares outstanding:
Shares offered for sale			—				5,339,969				6,282,316				7,224,663				8,308,362
Shares issued to Ponce Bank Mutual Holding Company			—				6,135,031				7,217,684				8,300,337				9,545,388
Shares issued to charitable foundation			—				391,598				460,703				529,808				609,279
Total shares outstanding (7)			—				11,866,598				13,960,703				16,054,808				18,463,029
Total stockholders’ equity as a percentage of pro forma total assets			11.89	%			16.48	%			17.31	%			18.12	%			19.04	%

 

(1)

As adjusted to give effect to a 15% increase in the number of shares of common stock outstanding after the offering, which could occur due to an increase in the maximum of the independent valuation to reflect demand for the shares or changes in market conditions following the commencement of the offering.

(2)	Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the offering. Such withdrawals would reduce pro forma deposits by the amount of such withdrawals.

(3)

No effect has been given to the issuance of additional shares of common stock pursuant to stock options under one or more stock-based benefit plans that PDL Community Bancorp expects to adopt. The plan of reorganization permits PDL Community Bancorp to adopt one or more stock benefit plans, subject to stockholder approval, in an amount up to 25% of the shares of common stock held by persons other than Ponce Bank Mutual Holding Company and our charitable foundation. If the plans are implemented within one year following the completion of the offering, up to 4.90% and 1.96% of PDL Community Bancorp outstanding shares of common stock (including shares issued to Ponce Bank Mutual Holding Company and contributed to our charitable foundation) will be reserved for issuance upon the exercise of stock option and for issuance as restricted stock awards, respectively. See “Management—Benefits to be Considered Following Completion of the Stock Offering”.

(4)	The retained earnings of Ponce Bank will be substantially restricted after the offering. See “Regulation and Supervision—Federal Banking Regulation—Capital Distributions.”

(5)	Pro forma stockholders’ equity reflects a $200,000 initial capitalization of Ponce Bank Mutual Holding Company and a $200,000 contribution to our charitable foundation.

(6)

Assumes that 3.92% of the shares of common stock outstanding following the reorganization and offering (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation) will be purchased by the employee stock ownership plan at a price of $10.00 per share and that the funds used to acquire the employee stock ownership plan shares will be borrowed from PDL Community Bancorp. The common stock acquired by the employee stock ownership plan is reflected as a reduction of stockholders’ equity. Ponce Bank will provide the funds to repay the employee stock ownership plan loan. See “Management—Employee Stock Ownership Plan.”

 

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(continued from previous page)

 

(7)

Assumes that subsequent to the offering, 1.96% of the shares of common stock issued in the offering (including shares of common stock issued to Ponce Bank Mutual Holding Company and to our charitable foundation) are purchased in the open market by PDL Community Bancorp for stock awards under one or more stock-based benefit plans and, further, that all of such shares will be subsequently awarded and will eventually vest according to the terms of such awards. The shares of common stock to be purchased by PDL Community Bancorp for the stock-based benefit plans are reflected as a reduction of stockholders’ equity and all of such shares are deemed to be outstanding. See “Pro Forma Data” and “Management—Benefits to be Considered Following Completion of the Stock Offering.” The plan of reorganization permits PDL Community Bancorp to adopt one or more stock-based benefit plans that award stock or stock options, in an aggregate amount up to 25% of the shares of common stock held by persons other than Ponce Bank Mutual Holding Company. The stock-based benefit plans will not be implemented for at least six months after the reorganization and offering and not until they have been approved by stockholders.

(8)	Assumes that subsequent to the reorganization and offering, we will terminate our pension plan. See “Management—Benefit Plans and Agreements—Pension Plan.”

 

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PRO FORMA DATA

The following tables summarize historical data of Ponce De Leon Federal Bank and pro forma data of PDL Community Bancorp at and for the three months ended March 31,2017 and at and for the year ended December 31, 2016. The information provided illustrates our pro forma net income and shareholders’ equity based on the sale of common stock at the minimum, midpoint, maximum and 15.0% above the maximum of the offering range. The actual net proceeds from the sale of the common stock cannot be determined until the offering is completed and may vary from our estimates.

Net proceeds indicated in the following tables are based upon the following assumptions:

 

•

all shares of common stock will be sold in the subscription and community offerings;

 

•

our employee stock ownership plan will purchase 3.92% of the total shares of common stock issued in the offering (including shares of common stock issued to Ponce Bank Mutual Holding Company and contributed to our charitable foundation) with a loan from PDL Community Bancorp. The loan will be repaid in substantially equal payments of principal and interest over a period of 15 years;

 

•

Raymond James & Associates, Inc. will receive a marketing fee equal to 1.0% of the dollar amount of the shares of common stock sold in the subscription and community offerings. Shares purchased by our employee stock ownership plan or by our officers, directors and employees, and their immediate families and shares contributed to our charitable foundation will not be included in calculating the shares of common stock sold for this purpose;

 

•

a contribution of $200,000 and 3.3% of our outstanding shares of common stock will be made to the charitable foundation;

 

•

an expense of $1.6 million, net, to fund the termination of the Bank’s pension plan; and

 

•

expenses of the offering, other than fees to be paid to Raymond James & Associates, Inc., will be approximately $2.0 million.

We calculated pro forma consolidated net income for the three months ended March 31, 2017 and the year ended December 31, 2016, as if the estimated net proceeds had been invested at an assumed interest rate of 1.93% (1.27% on an after-tax basis). This represents the yield on the five-year United States Treasury Note at March 31, 2017, which, in light of current market interest rates, we consider to more accurately reflect the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest earning assets and the weighted average rate paid on our deposits, which is the reinvestment rate generally required by federal regulators.

We calculated historical and pro forma per share amounts by dividing historical and pro forma consolidated net income and shareholders’ equity by the indicated number of shares of common stock. We computed per share amounts as if the shares of common stock were outstanding at the beginning of the period, but we did not adjust per share historical or pro forma shareholders’ equity to reflect the earnings on the estimated net proceeds.

The pro forma tables give effect to the implementation of a stock-based benefit plan. Subject to the receipt of shareholder approval, we have assumed that PDL Community Bancorp will acquire for restricted stock awards a number of shares of common stock equal to 1.96% of the outstanding shares of common stock (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation) at the same price for which they were sold in the offering. We assume that shares of common stock are granted under the plan in awards that vest over a five-year period.

We have also assumed that options to acquire shares of common stock equal to 4.9% of the outstanding shares of common stock (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation) will be granted under a stock-based benefit plan. In preparing the tables below, we assumed that shareholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of 10 years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $2.83 for each option. In addition to the terms of the options described above, the Black-Scholes option pricing model assumed an estimated volatility rate of 13.73% for the shares of common stock, a dividend yield of 0.0%, an expected option life of 10 years and a risk-free interest rate of 2.40%.

We may grant options and award shares of common stock under a stock-based benefit plan in excess of 4.9% and 1.96%, respectively, of the outstanding shares of common stock (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation) if the stock-based benefit plan is adopted more than one year following the offering.

 

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In addition, we may grant options and award shares that vest sooner than over a five-year period if the stock-based benefit plan is adopted more than one year following the offering.

As discussed under the section of this prospectus entitled “How We Intend To Use The Proceeds From The Offering,” we intend to contribute 50% of the net proceeds to Ponce Bank, to contribute a portion of the net proceeds to our charitable foundation, and to fund a loan to the employee stock ownership plan with a portion of the net proceeds. We intend to retain the rest of the proceeds for future use.

The pro forma table does not give effect to:

 

•

withdrawals from deposit accounts to purchase shares of common stock in the offering;

 

•

our results of operations after the offering; or

 

•

changes in the market price of the shares of common stock after the offering.

The following pro forma information may not represent the financial effects of the offering at the date on which the offering actually occurs and you should not use the table to indicate future results of operations. Pro forma shareholders’ equity represents the difference between the stated amount of our assets and liabilities, computed in accordance with generally accepted accounting principles. We did not increase or decrease shareholders’ equity to reflect the difference between the carrying value of loans and other assets and their market value. Pro forma shareholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to shareholders if we liquidated. Pro forma shareholders’ equity does not give effect to the impact of intangible assets or the liquidation account we will establish in the reorganization.

 

		At or For the Three Months Ended March 31, 2017 Based Upon the Sale at $10.00 Per Share of
		5,339,969 Shares (Minimum of Offering Range)				6,282,316 Shares (Midpoint of Offering Range)				7,224,663 Shares (Maximum of Offering Range)				8,308,362 Shares (Adjusted Maximum of Offering Range) (1)
		(Dollars in thousands, except per share amounts)
Gross proceeds of offering:		$	53,400			$	62,823			$	72,247			$	83,084
Less—Expenses			2,601				2,687				2,773				2,872
Estimated net proceeds		$	50,799			$	60,136			$	69,474			$	80,212
Less: Expense related to termination of pension plan, net			(1,639	)			(1,639	)			(1,639	)			(1,639	)
Less: Cash contribution to charitable foundation			(200	)			(200	)			(200	)			(200	)
Less: Common Stock purchased by employee stock ownership plan (2)			(4,652	)			(5,473	)			(6,293	)			(7,238	)
Less: Common Stock awarded under equity incentive plan (3)			(2,326	)			(2,736	)			(3,147	)			(3,619	)
Estimated net proceeds as adjusted		$	41,982			$	50,089			$	58,195			$	67,517
Net Income:
Historical		$	563			$	563			$	563			$	563
Pro forma interest income on adjusted net proceeds			134				160				185				215
Pro forma capitalization of Ponce Bank Mutual Holing Company adjustment			(1	)			(1	)			(1	)			(1	)
Pro forma employee stock ownership plan adjustment (2)			(51	)			(60	)			(69	)			(80	)
Pro forma stock award adjustment (3)			(77	)			(90	)			(104	)			(120	)
Pro form stock option adjustment (4)			(75	)			(89	)			(102	)			(117	)
Pro forma net income:		$	493			$	483			$	473			$	461
Per basic share net income:
Historical		$	0.05			$	0.04			$	0.04			$	0.03
Pro forma interest income on adjusted net proceeds			0.01				0.01				0.01				0.01
Pro forma capitalization of Ponce Bank Mutual Holing Company adjustment			0.00				0.00				0.00				0.00
Pro forma employee stock ownership plan adjustment (2)			0.00				0.00				0.00				0.00
Pro forma stock award adjustment (3)			(0.01	)			(0.01	)			(0.01	)			(0.01	)
Pro forma stock option adjustment (4)			(0.01	)			(0.01	)			(0.01	)			(0.01	)
Pro forma net income per basic share (5)			0.04			$	0.03			$	0.03			$	0.02
Offering price as a percentage of proform stockholders’ equity per share			62.50				83.33				83.33				125.00
Number of shares outstanding for pro forma net income per share calculations (5)			11,409,180				13,422,564				15,435,948				17,751,340

 

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		At or For the Three Months Ended March 31, 2017 Based Upon the Sale at $10.00 Per Share of
		5,339,969 Shares (Minimum of Offering Range)				6,282,316 Shares (Midpoint of Offering Range)				7,224,663 Shares (Maximum of Offering Range)				8,308,362 Shares (Adjusted Maximum of Offering Range) (1)
		(Dollars in thousands, except per share amounts)
Stockholders’ equity:
Historical		$	93,474			$	93,474			$	93,474			$	93,474
Estimated net proceeds			50,799				60,136				69,474				80,212
Less: Capitalization of Ponce Bank Mutual Holding Company			(200	)			(200	)			(200	)			(200	)
Less: Expense related to termination of pension plan, net			(1,639	)			(1,639	)			(1,639	)			(1,639	)
Plus: Market value of shares issues to charitable foundation			3,916				4,607				5,298				6,093
Less: Expense of contribution of stock to charitable foundation (6)			(3,916	)			(4,607	)			(5,298	)			(6,093	)
Less: Expense of cash contribution to charitable foundation (6)			(200	)			(200	)			(200	)			(200	)
Plus: Tax benefit of contribution to charitable foundation			1,399				1,634				1,869				2,140
Less: Common stock acquired by employee stock ownership plan			(4,652	)			(5,473	)			(6,293	)			(7,238	)
Less: Common stock awarded under equity incentive plan (3)(4)			(2,326	)			(2,736	)			(3,147	)			(3,619	)
Pro forma stockholders’ equity		$	136,655			$	144,996			$	153,338			$	162,930
Intangible assets			(3	)			(3	)			(3	)			(3	)
Pro forma tangible stockholders’ equity		$	136,652			$	144,993			$	153,335			$	162,927
Stockholders’ equity per share:
Historical		$	7.88			$	6.70			$	5.82			$	5.06
Estimated net proceeds			4.28				4.31				4.32				4.34
Less: Capitalization of Ponce Bank Mutual Holding Company			(0.02	)			(0.01	)			(0.01	)			(0.01	)
Less: Expense related to termination of pension plan, net			(0.14	)			(0.12	)			(0.10	)			(0.09	)
Plus: Market value of shares issued to charitable foundation			0.33				0.33				0.33				0.33
Less: Expense of contribution of stock to charitable foundation			(0.33	)			(0.33	)			(0.33	)			(0.33	)
Less: Expense of cash contribution to charitable foundation			(0.02	)			(0.01	)			(0.01	)			(0.01	)
Plus: Tax benefit of contribution to charitable foundation			0.12				0.12				0.12				0.12
Less: Common stock acquired by employee stock ownership plan (2)			(0.39	)			(0.39	)			(0.39	)			(0.39	)
Less: Common stock awarded under equity incentive plan (3)			(0.20	)			(0.20	)			(0.20	)			(0.20	)
Pro forma stockholders’ equity per share		$	11.51			$	10.38			$	9.55			$	8.82
Intangible assets			0.00				0.00				0.00				0.00
Pro forma tangible stockholders’ equity per share		$	11.51			$	10.38			$	9.55			$	8.82
Offering price as a percentage of pro forma shareholders’ equity per share			86.88	%			96.34	%			104.71	%			113.38	%
Offering price as a percentage of pro forma tangible stockholders’ equity per share			86.88	%			96.34	%			104.71	%			113.38	%
Number of shares outstanding for pro forma book value per share calculation			11,866,598				13,960,703				16,054,808				18,463,029

 

(1)	As adjusted to give effect to an increase in the number of shares which could occur due a 15.0% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

(2)

Assumes that 3.92% of the outstanding shares of common stock (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation) will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed from PDL Community Bancorp at a fixed-rate per annum equal to the Wall Street Journal prime rate on the closing of the offering. Ponce Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt, based upon 15 equal annual installments of principal and interest. Accounting Standard Codification. or “ASC” 718-40-30 requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in 15 equal annual installments, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 34.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of shareholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income assumes that 7,753, 9,121, 10,489 and 12,063 shares were committed to be released during the three months ended March 31, 2017 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. In accordance with ASC 718-40-30,

 

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only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of income per share calculations.

(3)

If approved by PDL Community Bancorp’s shareholders, one or more stock-based benefit plans may issue an aggregate number of shares of common stock equal to 1.96% of the outstanding share of common stock (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation) (or possibly a greater number of shares if the plan is implemented more than one year after completion of the reorganization). Shareholder approval of the stock-based benefit plans and purchases may not occur earlier than six months following the completion of the reorganization. The shares may be acquired directly from PDL Community Bancorp or through open market purchases. The funds to be used by the stock-based benefit plan to purchase the shares will be provided by PDL Community Bancorp. The table assumes that (i) the stock-based benefit plan acquires the shares through open market purchases at $10.00 per share; (ii) 20.0% of the amount contributed to the stock-based benefit plan is amortized as an expense during the fiscal year and (iii) the stock-based benefit plan expense reflects an effective combined federal and state tax rate of 34.0%. Assuming shareholder approval of the stock-based benefit plan and that shares of common stock equal to 1.96% of the outstanding share of common stock (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation) are awarded through the use of authorized but unissued shares of common stock, shareholders would have their ownership and voting interests diluted by approximately 1.9%.

(4)

If approved by PDL Community Bancorp’s shareholders, one or more stock-based benefit plans may grant options to acquire an aggregate number of shares of common stock equal to 4.9% of the outstanding share of common stock (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation) (or possibly a greater number of shares if the plan is implemented more than one year after completion of the reorganization). Shareholder approval of the stock-based benefit plan may not occur earlier than six months following the completion of the reorganization. In calculating the pro forma effect of the stock options to be granted under the stock-based benefit plan, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $2.83 for each option, and the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options. The actual expense of the stock options to be granted under the stock-based benefit plan will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plan will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise of options under the stock-based benefit plan is obtained from the issuance of authorized but unissued shares, our net income per share and shareholders’ equity per share would decrease. Assuming shareholder approval of the stock-based benefit plan and that shares of common stock used to fund stock options equal to 4.9% of the outstanding share of common stock (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation) are awarded through the use of authorized but unissued shares of common stock, shareholders would have their ownership and voting interests diluted by approximately 4.7%.

(5)

Income per share computations are determined by taking the number of shares assumed to be sold in the offering and in accordance with applicable accounting standards for employee stock ownership plans, subtracting the employee stock ownership plan shares that have not been committed for release during the period. See footnote 2 above. As PDL Community Bancorp has no potential dilutive shares outstanding, pro forma net income per diluted share is equal to pro forma net income per basic share.

(6)

Does not give effect to the nonrecurring expense that is expected to be recognized as a result of the contribution of cash and shares of common stock to our charitable foundation. Assuming the contribution to the foundation was expensed, the estimated before tax expense, estimated after-tax expense and pro forma tax benefit associated with the contribution to the foundation, and the pro forma net loss and pro forma net loss per share are set forth in the table below. The pro forma data assume that we will realize 100.0% of the income tax benefit as a result of the contribution to the foundation based on a 34.0% income tax rate. The realization of the tax benefit is limited annually to 10% of our annual taxable income. However, for federal and state tax purposes, we can carry forward any unused portion of the deduction for five years following the year in which the contribution is made.

 

		Minimum of Offering Range				Midpoint of Offering Range				Maximum of Offering Range				Adjusted Maximum of Offering Range
		(In Thousands)
For the three months ended March 31, 2017
Before tax expense of contribution		($	4,116	)		($	4,807	)		($	5,498	)		($	6,293	)
Estimated after tax expense of contribution		($	2,717	)		($	3,173	)		($	3,629	)		($	4,153	)
Pro forma net loss		($	2,224	)		($	2,690	)		($	3,156	)		($	3,692	)
Pro forma net loss per share		($	0.19	)		($	0.20	)		($	0.20	)		($	0.21	)
Pro forma tax benefit		$	1,399			$	1,634			$	1,869			$	2,140

 

(7)

The retained earnings of Ponce Bank will be substantially restricted after the reorganization. See “Our Policy Regarding Dividends,” and “Regulation and Supervision” The number of shares used to calculate pro forma shareholders’ equity per share is equal to the total number of shares to be outstanding upon completion of the offering.

 

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		At or For the Year Ended December 31, 2016 Based Upon the Sale at $10.00 Per Share of
		5,339,969 Shares (Minimum of Offering Range)				6,282,316 Shares (Midpoint of Offering Range)				7,224,663 Shares (Maximum of Offering Range)				8,308,362 Shares (Adjusted Maximum of Offering Range) (1)
		(Dollars in thousands, except per share amounts)
Gross proceeds of offering:		$	53,400			$	62,823			$	72,247			$	83,084
Less—Expenses			2,601				2,687				2,773				2,872
Estimated net proceeds		$	50,799			$	60,136			$	69,474			$	80,212
Less: Expense related to termination of pension plan, net			(1,639	)			(1,639	)			(1,639	)			(1,639	)
Less: Cash contribution to charitable foundation			(200	)			(200	)			(200	)			(200	)
Less: Common stock purchased by employee stock ownership plan (2)			(4,652	)			(5,473	)			(6,293	)			(7,238	)
Less: Common stock awarded under equity incentive plan (3)			(2,326	)			(2,736	)			(3,147	)			(3,619	)
Estimated net proceeds as adjusted		$	41,982			$	50,089			$	58,195			$	67,517
Net Income:
Historical		$	1,425			$	1,425			$	1,425			$	1,425
Pro forma interest income on adjusted net proceeds			535				638				741				860
Pro forma capitalization of Ponce Bank Mutual Holding Company adjustment			(3	)			(3	)			(3	)			(3	)
Pro forma employee stock ownership plan adjustment (2)			(205	)			(241	)			(277	)			(318	)
Pro forma stock award adjustment (3)			(307	)			(361	)			(415	)			(478	)
Pro form stock option adjustment (4)			(301	)			(354	)			(407	)			(469	)
Pro forma net income:		$	1,144			$	1,104			$	1,064			$	1,017
Per basic share net income:
Historical		$	0.12			$	0.11			$	0.09			$	0.08
Pro forma interest income on adjusted net proceeds			0.05				0.05				0.05				0.05
Pro forma capitalization of Ponce Bank Mutual Holding Company adjustment			0.00				0.00				0.00				0.00
Pro forma employee stock ownership plan adjustment (2)			(0.02	)			(0.02	)			(0.02	)			(0.02	)
Pro forma stock award adjustment (3)			(0.03	)			(0.03	)			(0.03	)			(0.03	)
Pro forma stock option adjustment (4)			(0.03	)			(0.03	)			(0.03	)			(0.03	)
Pro forma net income per basic share (5)			0.09			$	0.08			$	0.06			$	0.05
Offering price as a percentage of proform stockholders’ equity per share			111.11				125.00				166.67				200.00
Number of shares outstanding for pro forma net income per share calculations (5)			11,432,438				13,449,927				15,467,416				17,787,528
Stockholders’ equity:
Historical		$	92,992			$	92,992			$	92,992			$	92,992
Estimated net proceeds			50,799				60,136				69,474				80,212
Less: Capitalization of Ponce Bank Mutual Holding Company			(200	)			(200	)			(200	)			(200	)
Less: Expense related to termination of pension plan, net			(1,639	)			(1,639	)			(1,639	)			(1,639	)
Plus: Market value of shares issues to charitable foundation			3,916				4,607				5,298				6,093
Less: Expense of contribution of stock to charitable foundation (6)			(3,916	)			(4,607	)			(5,298	)			(6,093	)
Less: Expense of cash contribution to charitable foundation (6)			(200	)			(200	)			(200	)			(200	)
Plus: Tax benefit of contribution to charitable foundation			1,399				1,634				1,869				2,140
Less: Common stock acquired by employee stock ownership plan			(4,652	)			(5,473	)			(6,293	)			(7,238	)
Less: Common stock awarded under equity incentive plan (3)(4)			(2,326	)			(2,736	)			(3,147	)			(3,619	)
Pro forma stockholders’ equity		$	136,173			$	144,515			$	152,856			$	162,448
Intangible assets			(3	)			(3	)			(3	)			(3	)
Pro forma tangible stockholders’ equity		$	136,170			$	144,512			$	152,853			$	162,445

 

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		At or For the Year Ended December 31, 2016 Based Upon the Sale at $10.00 Per Share of
		5,339,969 Shares (Minimum of Offering Range)				6,282,316 Shares (Midpoint of Offering Range)				7,224,663 Shares (Maximum of Offering Range)				8,308,362 Shares (Adjusted Maximum of Offering Range) (1)
		(Dollars in thousands, except per share amounts)
Stockholders’ equity per share:
Historical		$	7.84			$	6.65			$	5.79			$	5.04
Estimated net proceeds			4.28				4.31				4.32				4.34
Less: Capitalization of Ponce Bank Mutual Holding Company			(0.02	)			(0.01	)			(0.01	)			(0.01	)
Less: Expense related to termination of pension plan, net			(0.14	)			(0.12	)			(0.10	)			(0.09	)
Plus: Market value of shares issued to charitable foundation			0.33				0.33				0.33				0.33
Less: Expense of contribution of stock to charitable foundation			(0.33	)			(0.33	)			(0.33	)			(0.33	)
Less: Expense of cash contribution to charitable foundation			(0.02	)			(0.01	)			(0.01	)			(0.01	)
Plus: Tax benefit of contribution to charitable foundation			0.12				0.12				0.12				0.12
Less: Common stock acquired by employee stock ownership plan (2)			(0.39	)			(0.39	)			(0.39	)			(0.39	)
Less: Common stock awarded under equity incentive plan (3)			(0.20	)			(0.20	)			(0.20	)			(0.20	)
Pro forma stockholders’ equity per share		$	11.47			$	10.35			$	9.52			$	8.80
Intangible assets			0.00				0.00				0.00				0.00
Pro forma tangible stockholders’ equity per share		$	11.47			$	10.35			$	9.52			$	8.80
Offering price as a percentage of pro forma shareholders’ equity per share			87.18	%			96.62	%			105.04	%			113.64	%
Offering price as a percentage of pro forma tangible stockholders’ equity per share			87.18	%			96.62	%			105.04	%			113.64	%
Number of shares outstanding for pro forma book value per share calculation			11,866,598				13,960,703				16,054,808				18,463,029

 

(1)	As adjusted to give effect to an increase in the number of shares which could occur due a 15.0% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

(2)

Assumes that 3.92% of the outstanding shares of common stock (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation) will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed from PDL Community Bancorp at a fixed-rate per annum equal to the Wall Street Journal prime rate on the closing of the offering. Ponce Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt, based upon 15 equal annual installments of principal and interest. Accounting Standard Codification. or “ASC” 718-40-30 requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in 15 equal annual installments, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 34.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of shareholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income assumes that 31,011, 36,484, 41,957 and 48,250 shares were committed to be released during the year ended December 31, 2016 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. In accordance with ASC 718-40-30, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of income per share calculations.

(3)

If approved by PDL Community Bancorp’s shareholders, one or more stock-based benefit plans may issue an aggregate number of shares of common stock equal to 1.96% of the outstanding share of common stock (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation) (or possibly a greater number of shares if the plan is implemented more than one year after completion of the reorganization). Shareholder approval of the stock-based benefit plans and purchases may not occur earlier than six months following the completion of the reorganization. The shares may be acquired directly from PDL Community Bancorp or through open market purchases. The funds to be used by the stock-based benefit plan to purchase the shares will be provided by PDL Community Bancorp. The table assumes that (i) the stock-based benefit plan acquires the shares through open market purchases at $10.00 per share; (ii) 20.0% of the amount contributed to the stock-based benefit plan is amortized as an expense during the fiscal year and (iii) the stock-based benefit plan expense reflects an effective combined federal and state tax rate of 34.0%. Assuming shareholder approval of the stock-based benefit plan and that shares of common stock equal to 1.96% of the outstanding share of common stock (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation) are awarded through the use of authorized but unissued shares of common stock, shareholders would have their ownership and voting interests diluted by approximately 1.9%.

 

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(4)

If approved by PDL Community Bancorp’s shareholders, one or more stock-based benefit plans may grant options to acquire an aggregate number of shares of common stock equal to 4.9% of the outstanding share of common stock (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation) (or possibly a greater number of shares if the plan is implemented more than one year after completion of the reorganization). Shareholder approval of the stock-based benefit plan may not occur earlier than six months following the completion of the reorganization. In calculating the pro forma effect of the stock options to be granted under the stock-based benefit plan, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $2.83 for each option, and the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options. The actual expense of the stock options to be granted under the stock-based benefit plan will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plan will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise of options under the stock-based benefit plan is obtained from the issuance of authorized but unissued shares, our net income per share and shareholders’ equity per share would decrease. Assuming shareholder approval of the stock-based benefit plan and that shares of common stock used to fund stock options equal to 4.9% of the outstanding share of common stock (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation) are awarded through the use of authorized but unissued shares of common stock, shareholders would have their ownership and voting interests diluted by approximately 4.7%.

(5)

Income per share computations are determined by taking the number of shares assumed to be sold in the offering and in accordance with applicable accounting standards for employee stock ownership plans, subtracting the employee stock ownership plan shares that have not been committed for release during the period. See footnote 2 above. As PDL Community Bancorp has no potential dilutive shares outstanding, pro forma net income per diluted share is equal to pro forma net income per basic share.

(6)

Does not give effect to the nonrecurring expense that is expected to be recognized as a result of the contribution of cash and shares of common stock to our charitable foundation. Assuming the contribution to the foundation was expensed, the estimated before tax expense, estimated after-tax expense and pro forma tax benefit associated with the contribution to the foundation, and the pro forma net loss and pro forma net loss per share are set forth in the table below. The pro forma data assume that we will realize 100.0% of the income tax benefit as a result of the contribution to the foundation based on a 34.0% income tax rate. The realization of the tax benefit is limited annually to 10% of our annual taxable income. However, for federal and state tax purposes, we can carry forward any unused portion of the deduction for five years following the year in which the contribution is made.

 

		Minimum of Offering Range				Midpoint of Offering Range				Maximum of Offering Range				Adjusted Maximum of Offering Range
		(In Thousands)
For the year ended December 31, 2016
Before tax expense of contribution		($	4,116	)		($	4,807	)		($	5,498	)		($	6,293	)
Estimated after tax expense of contribution		($	2,717	)		($	3,173	)		($	3,629	)		($	4,153	)
Pro forma net loss		($	1.573	)		($	2,069	)		($	2,565	)		($	3,136	)
Pro forma net loss per share		($	0.14	)		($	0.15	)		($	0.17	)		($	0.18	)
Pro forma tax benefit		$	1,399			$	1,634			$	1,869			$	2,140

 

(7)

The retained earnings of Ponce Bank will be substantially restricted after the reorganization. See “Our Policy Regarding Dividends,” and “Regulation and Supervision” The number of shares used to calculate pro forma shareholders’ equity per share is equal to the total number of shares to be outstanding upon completion of the offering.

 

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COMPARISON OF VALUATION AND PRO FORMA INFORMATION

WITH AND WITHOUT OUR CHARITABLE FOUNDATION

As reflected in the table below, if we did not intend to establish and fund our charitable foundation as part of the offering, RP Financial LC. estimates that our pro forma valuation would be greater and, as a result, a greater number of shares of common stock would be offered in the offering. At the minimum, midpoint, maximum and adjusted maximum of the valuation range, our pro forma valuation is $118.7 million, $139.6 million, $160.5 million and $184.6 million, respectively, with our charitable foundation, as compared to $122.4 million, $144.0 million, $165.6 million and $190.4 million, respectively, without our charitable foundation. There is no assurance that in the event our charitable foundation were not formed, the appraisal prepared at that time would conclude that our pro forma market value would be the same as that estimated in the table below. Any appraisal prepared at that time would be based on the facts and circumstances existing at that time, including, among other things, market and economic conditions.

For comparative purposes only, set forth below are certain pricing ratios and financial data and ratios at and for the three months ended March 31, 2017 at the minimum, midpoint, maximum and adjusted maximum of the offering range, assuming the offering was completed at the beginning of the year, with and without our charitable foundation.

 

		Minimum of Offering Range								Midpoint of Offering Range								Maximum of Offering Range								Adjusted Maximum of Offering Range
		With Foundation				Without Foundation				With Foundation				Without Foundation				With Foundation				Without Foundation				With Foundation				Without Foundation
		(Dollars in Thousands, except per share data)
Estimated offering amount		$	53,400			$	59,119			$	62,823			$	69,552			$	72,247			$	79,985			$	83,084			$	91,983
Estimated enterprise value			118,666				122,400				139,607				144,000				160,548				165,600				184,630				190,440
Total assets			829,434				833,680				837,775				842,747				846,117				851,813				855,709				862,240
Total liabilities			692,779				692,779				692,779				692,779				692,779				692,779				692,779				692,779
Pro forma shareholders’ equity			136,655				140,901				144,996				149,968				153,338				159,034				162,930				169,461
Pro forma net income		$	493			$	504			$	483			$	496			$	473			$	488			$	461			$	479
Pro forma stockholders’ equity per share		$	11.51			$	11.51			$	10.38			$	10.42			$	9.55			$	9.59			$	8.82			$	8.89
Pro forma net income per share		$	0.04			$	0.04			$	0.03			$	0.03			$	0.03			$	0.03			$	0.02			$	0.02
Pro forma pricing ratios:
Offering price as a percentage of pro forma stockholder’s equity per share			86.88	%			86.88	%			96.34	%			95.97	%			104.71	%			104.28	%			113.38	%			112.49	%
Offering price to pro forma net income per share			62.50	x			62.50	x			83.33	x			83.33	x			83.33	x			83.33	x			125.00	x			125.00	x
Pro forma financial ratios:
Return on assets			0.24	%			0.24	%			0.23	%			0.24	%			0.22	%			0.23	%			0.22	%			0.22	%
Return on equity			1.44	%			1.43	%			1.33	%			1.32	%			1.23	%			1.23	%			1.13	%			1.13	%
Equity to assets			16.48	%			16.90	%			17.31	%			17.80	%			18.12	%			18.67	%			19.04	%			19.65	%
Total shares issued			11,866,598				12,240,000				13,960,703				14,400,000				16,054,808				16,560,000				18,463,029				19,044,000

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS OF PONCE DE LEON FEDERAL BANK

This discussion and analysis reflects our financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the financial statements, which appear beginning on page F-1 of this prospectus. You should read the information in this section in conjunction with the business and financial information regarding Ponce De Leon Federal Bank provided in this prospectus.

Overview

Total assets increased $41.3 million, or 5.5%, to $786.3 million at March 31, 2017 from $745.0 million at December 31, 2016. Total assets increased $41.8 million, or 5.9%, to $745.0 million at December 31, 2016 from $703.2 million at December 31, 2015. The increases were due to an increase in loans, partially offset by a decrease in available-for-sale securities. Net loans receivable (which excludes loans held for sale) increased $35.4 million, or 5.5%, to $677.5 million at March 31, 2017 from $642.1 million at December 31, 2016 and increased $74.4 million, or 13.1%, to $642.1 million at December 31, 2016 from $567.7 million at December 31, 2015, reflecting increases in all loan categories. Available-for-sale securities decreased $800,000, or 1.5%, to $51.9 million at March 31, 2017 from $52.7 million at December 31, 2016 and decreased $29.3 million, or 35.7%, to $52.7 million at December 31, 2016 from $82.0 million at December 31, 2015. The decrease in the available-for-sale securities portfolio in 2016 was mainly attributed to maturities, calls, and pay downs throughout the year.

Net income decreased $245,000, or 30.3%, to $563,000 for the three months ended March 31, 2017, compared to $808,000 for the three months ended March 31, 2016. The decrease was due to a decrease in net interest income after provision for loan losses, which decreased $467,000, or 6.1%, to $7.2 million for the three months ended March 31, 2017 from $7.7 million for the three months ended March 31, 2016. This decrease was partially offset by an increase in non-interest income of $217,000, or 40.1%, to $758,000 for the three months ended March 31, 2017 from $541,000 for the three months ended March 31, 2016. Net income decreased $1.1 million, or 44.0%, to $1.4 million for the year ended December 31, 2016, compared to $2.5 million for the year ended December 31, 2015. The decrease was due to an increase in non-interest expenses, which increased $1.7 million, or 6.5%, to $27.9 million for the year ended December 31, 2016 from $26.2 million for the year ended December 31, 2015. This was caused primarily by a $1.5 million, or 11.1%, increase in compensation, employee benefits and recruitment expenses, as we continued to add experienced senior level individuals to complement our management team and increase our sales and relationship management personnel and marketing outlays to generate organic growth, and by a $303,000, or 12.7%, increase in other operating expenses and $318,000, or 24.5%, increase in data processing expenses. These increases in non-interest expense were mitigated by a $361,000, or 40.2% decrease in federal deposit insurance premiums and a $235,000, or 33.6%, decrease in insurance and surety bond premiums.

We have made significant investments over the last several years in adding senior management, experienced senior level individuals, and upgrading technology and facilities. This has had an adverse effect on our net income during those periods. During these same periods, we have been able to significantly improve our asset quality, resulting in lower provisions for loan losses. We believe the lower provisions for loan losses will continue as a result of the efforts of new senior management to enhance our underwriting standards and, in turn, asset quality.

An increase in interest rates will present us with a challenge in managing our interest rate risk. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which can result in interest expense increasing more rapidly than increases in interest income as interest rates increase. Therefore, increases in interest rates may adversely affect our net interest income and net economic value, which in turn would likely have an adverse effect on our results of operations. As described in “—Management of Market Risk,” we expect that our net interest income and our net economic value would decrease as a result of an instantaneous increase in interest rates. To help manage interest rate risk, we promote core deposit products and we are diversifying our loan portfolio by introducing new lending programs. See “—Business Strategy”, “—Management of Market Risk” and “Risk Factors—Risks Related to Our Business—Future changes in interest rates could reduce our profits and asset values.”

Business Strategy

Our goal is to provide long-term value to our stockholders, customers, employees and the communities we serve by executing a safe and sound business strategy that produces increasing earnings. We believe there is a significant opportunity

 

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for a community-focused, minority oriented bank to provide a full range of financial services to commercial and retail customers in our market area, and the increased capital we will have after the completion of the offering will enable us to compete more effectively in the financial services marketplace.

Our current business strategy consists of the following:

 

•

Continue to expand our multifamily and nonresidential loans. The additional capital raised in the stock offering will increase our capacity to originate multifamily and nonresidential loans. At March 31, 2017 and December 31, 2016, multifamily and nonresidential loans (not including loans secured by owner occupied properties), together with construction and land loans, totaled $309.2 million and $291.7 million, or 288.3% and 274.7%, respectively, of total risk-based capital. Under our current board approved loan concentration policy, such loans, including construction and land loans, shall not exceed 330% of our total risk-based capital. Most multifamily and nonresidential loans are originated with adjustable rates and, as a result, these loans are expected to increase loan yields with shorter repricing terms than fixed-rate loans. Multifamily and nonresidential loan originations increased during the three months ended March 31, 2017 by $12.3 million, or 56.9%, when compared to the same period in 2016 and increased in 2016 by $30.9 million, or 59.0%, when compared to 2015 originations.

 

•

Introduce new lending programs. The Bank is currently in the process of becoming an authorized direct lender under the Small Business Administration (SBA). The Bank is also currently in the process of becoming a Community Development Financial Institution (CDFI). The addition of both of these programs combined with the existing products will bolster the Bank’s commitment to continue to serve the communities that it has supported over the past sixty years.

 

•

Continue to increase core deposits, with an emphasis on low cost commercial demand deposits, and add non-core funding sources. Deposits are the major source of balance sheet funding for lending and other investments. We have made significant investments in new products and services, personnel, branch distribution system as well as enhancing our electronic delivery solutions in an effort to become more competitive in the financial services marketplace and attract more core deposits. Core deposits are our least costly source of funds and represent our best opportunity to develop customer relationships that enable us to cross-sell our enhanced products and services. Total deposits increased by $12.8 million, or 2.0%, at March 31, 2017 to $655.9 million compared to $643.1 million at December 31, 2016. The majority of the increase was due to an increase of $9.9 million, or 5.1%, in interest bearing deposits and $6.2 million, or 7.8%, in demand deposits. Total deposits increased by $43.6 million, or 7.3%, at December 31, 2016 to $643.1 million compared to $599.5 million at December 31, 2015. The majority of the increase was due to an increase of $20.2 million, or 34.4%, in demand deposits and $16.6 million, or 63.4%, in money market accounts. Certificates of deposit accounted for 55.7%, 57.3% and 60.7% of total deposits at March 31, 2017, December 31, 2016 and December 31, 2015, respectively. While we will continue to use certificates of deposit as a funding source, our goal is to continue to reduce our heavy reliance on this source of funding as we grow our core deposit base.

 

•

Manage credit risk to maintain a low level of nonperforming assets. We believe strong asset quality is a key to our long-term financial success. Our strategy for credit risk management focuses on having an experienced team of credit professionals, well-defined policies and procedures, appropriate loan underwriting criteria and active credit monitoring. Our non-performing assets to total assets ratio was 0.98% at March 31, 2017, 1.04% at December 31, 2016 and 1.35% at December 31, 2015, compared to 7.59% at December 31, 2012. The majority of our non-performing assets have been related to one-to-four family and multifamily residential real estate loans, as our residential borrowers experienced difficulties repaying their loans during the past recession. We intend to increase our investment in our credit review function, both in personnel as well as ancillary systems, in order to be able to evaluate more complex loans and better manage credit risk, which will also support our intended loan growth.

 

•

Expand our employee base to support future growth. We have already made significant investments in our employee base. However the additional capital being raised in the offering will provide us with additional resources to attract and retain the necessary talent to support increased lending, deposit activities and enhanced information technology. The potential to offer equity awards in the future following the offering will also allow us to be more competitive when hiring experienced banking personnel.

 

•

Grow organically and through opportunistic bank or branch acquisitions. We expect to consider both organic growth as well as acquisition opportunities that we believe would enhance the value of our franchise and yield potential financial benefits for our stockholders. Although we believe opportunities exist to increase our market share in our historical markets, we will explore expanding into nearby markets. We will consider expanding our branch network and adding loan production offices. The capital we are raising in the offering will also provide us

 

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the opportunity to acquire smaller institutions located in our market area and nearby markets, and will help fund improvements in our operating facilities, credit reporting and customer delivery services in order to enhance our competitiveness.

Anticipated Increase in Noninterest Expense

Following the completion of the reorganization and stock offering, our noninterest expense is expected to increase because of the increased costs associated with operating as a public company, and the increased compensation expenses associated with the purchase of shares of common stock by our employee stock ownership plan, our charitable foundation, and the possible implementation of one or more stock-based benefit plans, if approved by our stockholders. For further information, see “Summary-Our Officers, Directors and Employees Will Receive Additional Benefits and Compensation After the Reorganization and Offering;” “Risk Factors—Risks Related to the Offering—Our stock-based benefit plans will increase our costs, which will reduce our income;” and “Management—Benefits to be Considered Following Completion of the Stock Offering.” See “Risks Factors—Risks Related to Our Business.”

Summary of Significant Accounting Policies

The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we intend to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

The following represent our significant accounting policies:

Loans Receivable. Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at current unpaid principal balances, net of the allowance for loan losses and including net deferred loan origination fees and costs.

Interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method without anticipating prepayments.

A loan is moved to nonaccrual status in accordance with the Bank’s policy, typically after 90 days of non-payment. The accrual of interest on mortgage and business loans is generally discontinued at the time the loan becomes 90 days past due unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past-due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off if collection of principal or interest is considered doubtful. All nonaccrual loans are considered impaired loans.

All interest accrued but not received for loans placed on nonaccrual are reversed against interest income. Interest received on such loans is accounted for on the cash-basis or recorded against principal balances only, until qualifying for return to accrual. Cash-basis interest recognition is only applied on nonaccrual loans with a sufficient collateral margin to ensure no doubt with respect to the collectability of principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and remain current for a period of time (typically six months) and future payments are reasonably assured.

Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance, or portion

 

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thereof, is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDR”) and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impaired loans are measured for impairment using the fair value of the collateral, present value of cash flows, or the observable market price of the note. Impairment measurement for all collateral dependent loans, excluding accruing TDR’s is based on the fair value of collateral, less costs to sell, if necessary. A loan is considered collateral dependent if repayment of the loan is expected to be provided solely by the sale or the operation of the underlying collateral.

When the Bank modifies a loan in a TDR, management evaluates for any possible impairment using either the discounted cash flows method, where the value of the modified loan is based on the present value of expected cash flows, discounted at the contractual interest rate of the original loan agreement, or by using the fair value of the collateral less selling costs if repayment under the modified terms becomes doubtful.

When establishing the allowance for loan losses, management categorizes loans into risk categories reflecting individual borrower earnings, liquidity, leverage and cash flow, as well as the nature of underlying collateral. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. As of March 31, 2017, the Bank determines the historical loss experience by portfolio segment and it is based on the actual losses experienced by the Bank using a rolling 12 quarter average. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

Management believes that the allowance for loan losses is appropriate at March 31, 2017. The allowance for loan losses is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies and audit and accounting firms periodically review the allowance for loan losses. As a result of these reviews, we may be required to make additions to the allowance for loan losses based on their judgments of collectability based on information available to them at the time of their review.

Refer to Note 1 to the Financial Statements for management’s assessment of recently issued accounting pronouncements.

Securities. Management determines the appropriate classification of securities at the date individual investment securities are acquired, and the appropriateness of such classification is reassessed at each statement of financial condition date.

Debt securities that management has the positive intent and ability to hold to maturity, if any, are classified as “held to maturity” and recorded at amortized cost. Trading securities, if any, are carried at fair value, with unrealized gains and losses recognized in earnings. Securities not classified as held to maturity or trading, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of taxes. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

 

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Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the consolidated statement of income and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the discounted present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. The sale of a held-to-maturity security within three months of its maturity date or after collection of at least 85% of the principal outstanding at the time the security was acquired is considered a maturity for purposes of classification and disclosure.

Income Taxes. The Bank recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all or some portion of the deferred tax assets will not be realized.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

At March 31, 2017 and December 31, 2016 and 2015, there were no liabilities recorded related to uncertain tax positions. The Bank is no longer subject to income tax examinations by U.S. federal, state or local tax authorities for years before 2013.

Interest and penalties associated with unrecognized tax benefits, if any, would be classified as additional provision for income taxes in the consolidated statements of income.

Comparison of Financial Condition at March 31, 2017 and December 31, 2016

Total Assets. Total assets increased $41.3 million, or 5.5%, at March 31, 2017, to $786.3 million from $745.0 million at December 31, 2016. The increase was due to an increase in loans, partially offset by a decrease in available-for-sale securities, as discussed in more detail below.

Available for Sale Securities. Available-for-sale securities, consisting primarily of U.S. Government agency sponsored securities, as well as mortgage-backed securities and, to a lesser extent, certificates of deposit, decreased $753,000, or 1.4% to $51.9 million at March 31, 2017 from $52.7 million at December 31, 2016. The decrease resulted primarily from principal pay downs of mortgage-backed securities.

We had $2.1 million of loans held for sale at March 31, 2017 and at December 31, 2016.

 

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Net Loans Receivable. Net loans receivable (which excludes $2.1 million of loans held for sale) increased $35.4 million, or 5.5%, to $677.5 million at March 31, 2017 from $642.1 million at December 31, 2016, reflecting increases in most loan categories. One-to-four family residential loans increased $8.9 million to $334.0 million at March 31, 2017 from $325.0 million at December 31, 2016. Multifamily residences, nonresidential properties and construction and land loans increased $3.6 million, $19.1 million, and $7.3 million, respectively, at March 31, 2017. These represented increases of 2.3%, 15.6% and 24.0%, respectively. This growth reflects our strategy to grow the portfolio with adjustable-rate loans to mitigate interest rate risk and increase our efficiency of operations. Business and consumer loans decreased $3.3 million and $47,000, or 20.9% and 5.6%, respectively, at March 31, 2017 as compared to December 31, 2016.

Deposits. Total deposits increased $12.8 million, or 2.0%, to $655.9 million at March 31, 2017 from $643.1 million at December 31, 2016. The increase was primarily due to increases in demand accounts of $6.2 million, or 7.8%, to $84.9 million at March 31, 2017 from $78.8 million at December 31, 2016 and money market accounts of $5.3 million, or 12.4%, to $48.1 million at March 31, 2017 from $42.8 million at December 31, 2016.

Borrowings. We had outstanding borrowings at March 31, 2017 and December 31, 2016 of $28.0 million and $3.0 million, respectively. These borrowings are in the form of advances from the Federal Home Loan Bank of New York. We have historically placed limited reliance on borrowings to fund our operations. However, as we did during the three months ended March 31, 2017, we may utilize advances from the Federal Home Loan Bank of New York as a supplement to the supply of investable funds.

Total Capital. Total capital increased $482,000, or 0.5%, to $93.5 million at March 31, 2017 from $93.0 million at December 31, 2016. The increase was substantially due to net income of $563,000 for the three months ended March 31, 2017. Capital was negatively affected by increases in unrealized losses on available-for-sale securities, net of tax, of $61,000 and defined benefit pension plan liabilities, net of tax, of $20,000 during the three months ended March 31, 2017.

Comparison of Financial Condition at December 31, 2016 and 2015

Total Assets. Total assets increased $41.8 million, or 5.9%, to $745.0 million at December 31, 2016 from $703.2 million at December 31, 2015. The increase was due to an increase in loans, partially offset by a decrease in available-for-sale securities, as discussed in more detail below.

Available for Sale Securities. Available-for-sale securities, consisting primarily of U.S. Government agency sponsored securities, as well as mortgage-backed securities and, to a lesser extent, certificates of deposit decreased $29.3 million, or 35.7%, to $52.7 million at December 31, 2016 from $82.0 million at December 31, 2015. The decrease resulted primarily from maturities, calls, and principal paydowns of the U.S. Government and Federal Agencies portfolio which decreased by $29.6 million, or 41.6%, to $41.6 million, at December 31, 2016 from $71.2 million at December 31, 2015. These proceeds were used, along with the increase in deposits, to support the loan growth in 2016.

We had $2.1 million of loans held for sale at December 31, 2016 compared to $3.3 million of loans held for sale at December 31, 2015.

Net Loans Receivable. Net loans receivable (which excludes $2.1 million of loans held for sale) increased $74.4 million, or 13.1%, to $642.1 million at December 31, 2016 from $567.7 million at December 31, 2015, reflecting increases in all loan categories. One- to four-family residential loans increased $15.7 million, or 5.1%, to $325.0 million at December 31, 2016 from $309.3 million at December 31, 2015. Multifamily residences, non-residential properties and construction and land loans increased $35.4 million, $15.0 million and $7.5 million, respectively, at December 31, 2016 compared to December 31, 2015. These represented increases of 28.8%, 14.1% and 32.6%, respectively. Business and consumer loans also increased by $1.4 million and $55,000, or 9.5% and 7.0%, respectively, at December 31, 2016 compared to December 31, 2015. This growth reflects our strategy to grow the portfolio with adjustable-rate loans to mitigate interest rate risk and increase our efficiency of operations.

Deposits. Total deposits increased $43.6 million, or 7.3%, to $643.1 million at December 31, 2016 from $599.5 million at December 31, 2015. The increase was primarily due to increases in demand accounts of $20.2 million, or 34.4%, to $78.8 million at December 31, 2016 from $58.6 million at December 31, 2015 and money market accounts of $16.6 million, or 63.5%, to $42.8 million at December 31, 2016 from $26.2 million at December 31, 2015. The increase in demand accounts was primarily due to the increase in the balance of commercial checking accounts by $15.8 million.

 

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Borrowings. We had outstanding borrowings at December 31, 2016 and 2015 of $3.0 million and $8.0 million, respectively. These borrowings are in the form of advances from the Federal Home Loan Bank of New York. We have historically placed limited reliance on borrowings to fund our operations. However, we may utilize advances from the Federal Home Loan Bank of New York as a supplement to the supply of investable funds.

Total Capital. Total capital increased $1.9 million, or 2.1%, to $93.0 million at December 31, 2016 from $91.1 million at December 31, 2015. The increase was substantially due to net income of $1.4 million for the year ended December 31, 2016. Capital was also positively affected by decreases in unrealized losses on available-for-sale securities, net of taxes, of $204,000 and defined benefit pension plan liabilities, net of tax, of $301,000 during the year ended December 31, 2016.

Average Balance Sheets

The following tables set forth average balance sheets, average yields and costs, and certain other information at the dates and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are monthly average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Loan balances exclude loans held for sale.

 

		At March 31, 2017				For the Three Months Ended March 31,
						2017												2016
		Yield/Rate				Average Outstanding Balance				Interest				Average Yield/Rate (1)				Average Outstanding Balance				Interest				Average Yield/Rate (1)
		(Dollars in thousands)
Interest-earning assets:
Loans			5.07	%		$	662,174			$	8,592				5.26	%		$	580,106			$	8,279				5.74	%
Available-for-sale securities			1.43	%			52,341				183				1.42	%			80,645				305				1.52	%
Other (2)			0.54	%			9,963				19				0.77	%			12,774				16				0.50	%
Total interest-earning assets							724,478				8,794				4.92	%			673,525				8,600				5.14	%
Non-interest-earning assets							32,887												34,733
Total assets						$	757,365											$	708,258
Interest-bearing liabilities:
Savings accounts			0.38	%			128,859				123				0.39	%			124,413				68				0.22	%
Interest-bearing demand			0.14	%			71,043				27				0.15	%			51,175				22				0.17	%
Certificates of deposit			1.46	%			362,470				1,316				1.47	%			366,145				1,336				1.47	%
Total deposits							562,372				1,466				1.06	%			541,733				1,425				1.06	%
Advance payments by borrowers			0.06	%			4,928				1				0.08	%			3,814				1				0.11	%
Borrowings			0.42	%			12,955				29				0.91	%			4,066				7				0.69	%
Total interest-bearing liabilities							580,255				1,496				1.05	%			549,613				1,434				1.05	%
Non-interest-bearing liabilities:
Non-interest-bearing demand							80,066				—								63,474				—
Other non-interest-bearing liabilities							3,247				—								3,198				—
Total non-interest-bearing liabilities							83,313				—								66,672				—
Total liabilities							663,568				1,496								616,285				1,434
Total equity							93,797												91,973
Total liabilities and total equity						$	757,365								1.05	%		$	708,258								1.05	%
Net interest income										$	7,298											$	7,166
Net interest rate spread (3)															3.88	%											4.09	%
Net interest-earning assets (4)						$	144,223											$	123,912
Net interest margin (5)															4.09	%											4.28	%
Average interest-earning assets to interest-bearing liabilities															124.86	%											122.55	%

 

Footnotes on following page.

 

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		At December 31, 2016				For the Years Ended December 31,
						2016												2015												2014
		Average Yield/Rate				Average Outstanding Balance				Interest				Average Yield/Rate				Average Outstanding Balance				Interest				Average Yield/Rate				Average Outstanding Balance				Interest				Average Yield/Rate
		(Dollars in thousands)
Interest-earning assets:
Loans			4.99	%		$	605,878			$	32,660				5.39	%		$	569,032			$	32,100				5.64	%		$	558,761			$	33,867				6.06	%
Available-for-sale securities			1.92	%			70,142				1,012				1.44	%			96,777				1,429				1.48	%			102,715				1,567				1.53	%
Other (2)			0.87	%			15,365				69				0.45	%			9,465				61				0.64	%			11,788				61				0.52	%
Total interest-earning assets							691,385				33,741				4.88	%			675,274				33,590				4.97	%			673,264				35,495				5.27	%
Non-interest-earning assets							33,759												38,769												46,058
Total assets						$	725,144											$	714,043											$	719,322
Interest-bearing liabilities:
Savings accounts			0.26	%			126,573				327				0.26	%			122,538				240				0.20	%			127,200				248				0.19	%
Interest-bearing demand			0.14	%			54,493				96				0.18	%			46,692				77				0.16	%			44,546				60				0.13	%
Certificates of deposit			1.49	%			371,313				5,502				1.48	%			366,958				5,268				1.44	%			379,860				5,376				1.42	%
Total deposits							552,379				5,925				1.07	%			536,188				5,585				1.04	%			551,606				5,684				1.03	%
Advance payments by borrowers			0.11	%			4,770				4				0.09	%			3,815				4				0.10	%			3,740				3				0.08	%
Borrowings			0.25	%			1,145				7				0.61	%			15,050				61				0.41	%			9,129				43				0.47	%
Total interest-bearing liabilities							558,294				5,936				1.06	%			555,053				5,650				1.02	%			564,475				5,730				1.02	%
Non-interest-bearing liabilities:
Non-interest-bearing demand							70,407				—								61,524				—								60,318				—
Other non-interest bearing liabilities							3,519				—								6,195				—								4,024				—
Total non-interest-bearing liabilities							73,926				—								67,719				—								64,342				—
Total liabilities							632,220				5,936								622,773				5,650								628,817				5,730
Total equity							92,924												91,270												90,505
Total liabilities and total equity						$	725,144								1.06	%		$	714,043								1.02	%		$	719,322								1.02	%
Net interest income										$	27,805											$	27,940											$	29,765
Net interest rate spread (3)															3.82	%											3.96	%											4.26	%
Net interest-earning assets (4)						$	133,091											$	120,221											$	108,789
Net interest margin (5)															4.02	%											4.14	%											4.42	%
Average interest-earning assets to interest-bearing liabilities															123.84	%											121.66	%											119.27	%

 

(1)	Annualized where appropriate.

(2)	Includes FHLB demand accounts and FHLB stock dividends.

(3)	Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(4)	Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(5)	Net interest margin represents net interest income divided by average total interest-earning assets.

 

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Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.

 

		Three Months Ended March 31, 2017 vs. 2016												Years Ended December 31, 2016 vs. 2015												Years Ended December 31, 2015 vs. 2014
		Increase (Decrease) Due to								Total Increase (Decrease)				Increase (Decrease) Due to								Total Increase (Decrease)				Increase (Decrease) Due to								Total Increase (Decrease)
		Volume				Rate								Volume				Rate								Volume				Rate
						(In thousands)												(In thousands)												(In thousands)
Interest-earning assets:
Loans		$	1,101			$	(788	)		$	313			$	2,029			$	(1,469	)		$	560			$	613			$	(2,380	)		$	(1,767	)
Securities			(100	)			(21	)			(121	)			(386	)			(31	)			(417	)			(89	)			(48	)			(137	)
Other			4				(2	)			2				(21	)			29				8				(2	)			1				(1	)
Total interest-earning assets			1,005				(811	)			194				1,622				(1,471	)			151				522				(2,427	)			(1,905	)
Interest-bearing liabilities:
Savings			2				43				55				8				79				87				(9	)			2				(7	)
Interest-bearing demand			8				(3	)			5				14				4				18				3				14				17
Certificates of deposit			(13	)			(7	)			(20	)			63				171				234				(184	)			76				(108	)
Total deposits			(3	)			43				40				85				254				339				(190	)			92				(98	)
Advance payment by borrowers			—				—				—				1				(1	)			—				—				—				—
Borrowings			19				4				23				(77	)			24				(53	)			24				(6	)			18
Total interest-bearing liabilities			16				47				63				9				277				286				(166	)			86				(80	)
Change in net interest income		$	989			$	(858	)		$	131			$	1,613			$	(1,748	)		$	(135	)		$	688			$	(2,513	)		$	(1,825	)

Comparison of Operating Results for the Three Months Ended March 31, 2017 and 2016

General. Net income decreased $245,000, or 30.3%, to $563,000 for the three months ended March 31, 2017, compared to $808,000 for the three months ended March 31, 2016. The decrease was due to a decrease in net interest income after provision for loan losses, which decreased $467,000, or 6.1%, to $7.2 million for the three months ended March 31, 2017 from $7.7 million for the three months ended March 31, 2016. This decrease was partially offset by an increase in non-interest income of $217,000, or 40.1%, to $758,000 for the three months ended March 31, 2017 from $541,000 for the three months ended March 31, 2016.

Interest Income. Interest and dividend income increased $194,000, or 2.3%, to $8.8 million for the three months ended March 31, 2017 from $8.6 million for the three months ended March 31, 2016. The increase was due primarily to a $313,000, or 3.8%, increase in interest income on loans, which is our primary source of interest income. Our average balance of loans increased $82.1 million, or 14.2%, to $662.2 million for the three months ended March 31, 2017 from $580.1 million for the three months ended March 31, 2016. The increase in average balance resulted primarily from increases in the multifamily residential and nonresidential mortgage loan portfolios. Our average yield on loans decreased 48 basis points to 5.26% for the three months ended March 31, 2017 from 5.74% for the three months ended March 31, 2016, as higher-yielding loans have been repaid or refinanced and replaced with lower-yielding loans in the current interest rate environment.

Interest income on interest and dividends on investment securities and Federal Home Loan Bank of New York stock decreased $119,000, or 37.1%, to $202,000 for the three months ended March 31, 2017 from $321,000 for the three months ended March 31, 2016. The average rate we earned on investment securities and Federal Home Loan Bank of New York stock decreased 7 basis points to 1.31% for the three months ended March 31, 2017 from 1.38% for the three months ended March 31, 2016. Our average balance of investment securities and Federal Home Loan Bank of New York stock decreased $31.1 million, or 33.3%, to $62.3 million for the three months ended March 31, 2017 from $93.4 million for the three months ended March 31, 2016.

 

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Interest Expense. Interest expense increased $62,000 or 4.3%, to $1.5 million for the three months ended March 31, 2017 from $1.4 million for the three months ended March 31, 2016. The increase was the result of an increase in interest expense on borrowings and other deposits, offset by a decrease in interest expense on certificates of deposit. Specifically, interest expense on other deposits increased $60,000, or 65.9%, to $151,000 for the three months ended March 31, 2017 from $91,000 for the three months ended March 31, 2016. The average balance of certificates of deposit decreased $3.6 million, or 1.0%, to $362.5 million for the three months ended March 31, 2017 from $366.1 million for the three months ended March 31, 2016, while the average rate we paid on certificates of deposit remained constant at 1.47% for the three months ended March 31, 2017 and for the three months ended March 31, 2016.

Interest expense on other deposits and borrowings increased $82,000 to $180,000 for the three months ended March 31, 2017 from $98,000 for the three months ended March 31, 2016. This increase resulted from an increase in the average rate we paid on other deposits and borrowings. The average balance of other deposits and borrowings increased $33.2 million, or 18.5%, to $212.9 million for the three months ended March 31, 2017 from $179.7 million for the three months ended March 31, 2016, and the average rate we paid on other deposits and borrowings increased 13 basis points to 0.34% for the three months ended March 31, 2017 from 0.21% for the three months ended March 31, 2016, reflecting higher market interest rates.

Net Interest Income. Net interest income increased $132,000, or 1.8%, to $7.3 million for the three months ended March 31, 2017 from $7.2 million for the three months ended March 31, 2016, primarily as a result of increasing loan volumes offset by lower market yields on earning assets. Our average net interest-earning assets increased by $51.0 million, or 7.6%, to $724.5 million for the three months ended March 31, 2017 from $673.5 million for the three months ended March 31, 2016, due primarily to our loan growth, described above. Our net interest rate spread decreased by 21 basis points to 3.88% for the three months ended March 31, 2017 from 4.09% for the three months ended March 31, 2016, and our net interest margin decreased by 19 basis points to 4.09% for the three months ended March 31, 2017 from 4.28% for the three months ended March 31, 2016, reflecting primarily a higher cost of funds and lower market yields on earning assets.

An increase in interest rates will present us with a challenge in managing our interest rate risk. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which can result in interest expense increasing more rapidly than increases in interest income as interest rates increase. Therefore, increases in interest rates may adversely affect our net interest income and net economic value, which in turn would likely have an adverse effect on our results of operations. As described in “—Business Strategy”, “—Management of Market Risk,” we expect that our net interest income and our net economic value would decrease as a result of an instantaneous increase in interest rates. To help manage interest rate risk, we are promoting core deposit products while concurrently diversifying our loan portfolio by introducing new lending programs. See “—Management of Market Risk” and “Risk Factors—Risks Related to Our Business—Future changes in interest rates could reduce our profits and asset values.”

Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. See “—Summary of Significant Accounting Policies” and “Business of Ponce De Leon Federal Bank—Allowance for Loan Losses” for additional information.

After an evaluation of these factors, we established a provision for loan losses for the three months ended March 31, 2017 of $52,000 as compared to a recovery of $547,000 for the three months ended March 31, 2016. Our allowance for loan losses was $10.4 million at March 31, 2017 as compared to $9.5 million at March 31, 2016. The allowance for loan losses to total loans decreased to 1.51% at March 31, 2017 from 1.61% at March 31, 2016, and the allowance for loan losses to non-performing loans increased to 134.9% at March 31, 2017 from 117.2% at March 31, 2016. We decreased the portion of the allowance for loan losses attributable to one-to-four family residential real estate loans due to a continued decrease in loss history related to this portion of the portfolio, as well as recoveries related to this portion of the portfolio exceeding charge-offs.

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at March 31, 2017. However, future changes in the factors described above, including, but not limited to, actual loss experience

 

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with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses and as a result of such reviews, we may determine to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.

Non-interest Income. Non-interest income information is as follows.

 

		Three Months Ended March 31,								Change								Years Ended December 31,								Change
		2017				2016				Amount				Percent				2016				2015				Amount				Percent
		(Dollars in thousands)
Service charges and fees		$	229			$	238			$	(9	)			(3.8	%)		$	938			$	1,073			$	(135	)			(12.6	%)
Brokerage commissions			118				179				(61	)			(34.1	%)			515				421				94				22.3	%
Late and prepayment charges			211				66				145				219.7	%			302				548				(246	)			(44.9	%)
Other			200				58				142				244.8	%			676				420				256				61.0	%
Total noninterest income		$	758			$	541			$	217				40.1	%		$	2,431			$	2,462			$	(31	)			(1.3	%)

The increase in non-interest income for the three months ended March 31, 2017 compared to the same period in 2016 was primarily due to increases of $145,000 and $142,000 in late and prepayment charges and other, respectively. The other category included a loan held for sale which was sold in March 2016 with a loss of $116,000, which reduced other non-interest income by such amount for the three months ended March 31, 2016.

Non-interest Expense. Non-interest expense information is as follows.

 

		Three Months Ended March 31,								Change								Years Ended December 31,								Change
		2017				2016				Amount				Percent				2016				2015				Amount				Percent
		(Dollars in thousands)
Compensation and benefits		$	3,829			$	3,664			$	165				4.5	%		$	14,979			$	13,463			$	1,516				11.3	%
Occupancy			1,425				1,408				17				1.2	%			5,651				5,754				(103	)			(1.8	%)
Data processing			448				370				78				21.1	%			1,617				1,299				318				24.5	%
Direct loan expense			195				254				(59	)			(23.2	%)			860				725				135				18.6	%
Insurance and surety bond premiums			82				137				(55	)			(40.1	%)			464				699				(235	)			(33.6	%)
Office supplies, telephone and postage			254				261				(7	)			(2.7	%)			1,071				997				74				7.4	%
Federal deposit insurance premiums			66				225				(159	)			(70.7	%)			538				899				(361	)			(40.2	%)
Other operating expenses			797				637				160				25.1	%			2,683				2,380				303				12.7	%
Total noninterest expense		$	7,096			$	6,956			$	140				2.0	%		$	27,863			$	26,216			$	1,647				6.3	%

For the three months ended March 31, 2017 compared to the same period in 2016, compensation and benefits expense increased by $165,000 mainly due to our investment in our employee base, including the senior management team and our sales and relationship management personnel, to help support our continued growth strategy. Other operating expenses increased by $160,000, due to marketing outlays to generate organic growth and investments in new products and services, as well as an increase in audit and accounting services. Data processing expenses also increased by $78,000 mainly due to the level of new products and services that were introduced during 2016 combined with an increase in volume. These increases were partially offset by a decrease of $159,000 in FDIC insurance assessments for the three months ended March 31, 2017.

Income Tax Expense. We incurred income tax expense of $345,000 and $490,000 for the three months ended March 31, 2017 and 2016, respectively, resulting in effective rates of 38.0% and 37.8%, respectively. At both March 31, 2017 and 2016, net deferred tax assets amounted to $3.4 million. The decrease in tax expense resulted from a $390,000, or 30.0%, decrease in pre-tax income to $908,000 for the three months ended March 31, 2017 from $1.3 million for the three months ended March 31, 2016.

 

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Comparison of Operating Results for the Years Ended December 31, 2016 and 2015

General. Net income decreased $1.1 million, or 43.4%, to $1.4 million for the year ended December 31, 2016, compared to $2.5 million for the year ended December 31, 2015. The decrease was due primarily to an increase in non-interest expenses as described below.

Interest Income. Interest and dividend income increased $151,000, or 0.4%, to $33.7 million for the year ended December 31, 2016 from $33.6 million for the year ended December 31, 2015. The increase was due primarily to a $560,000, or 1.7%, increase in interest income on loans, which is our primary source of interest income. Our average balance of loans increased $36.9 million, or 6.5%, to $605.9 million for the year ended December 31, 2016 from $569.0 million for the year ended December 31, 2015. The increase in average balance resulted primarily from increases in the one-to-four family and multifamily residential mortgage loan portfolios. Our average yield on loans decreased 25 basis points to 5.39% for the year ended December 31, 2016 from 5.64% for the year ended December 31, 2015, as higher-yielding loans have been repaid or refinanced and replaced with lower-yielding loans in the current interest rate environment.

Interest income on interest and dividends on investment securities and Federal Home Loan Bank of New York stock decreased $409,000, or 26.7%, to $1.1 million for the year ended December 31, 2016 from $1.5 million for the year ended December 31, 2015. The average rate we earned on investment securities and Federal Home Loan Bank of New York stock decreased 14 basis points to 1.26% for the year ended December 31, 2016 from 1.40% for the year ended December 31, 2015, due to $52.9 million of securities, with an average yield of 1.44%, being called and $25.9 million of securities, with an average yield of 1.21%, being purchased. Our average balance of investment securities and Federal Home Loan Bank of New York stock decreased $20.7 million, or 19.4%, to $85.5 million for the year ended December 31, 2016 from $106.2 million for the year ended December 31, 2015.

Interest Expense. Interest expense increased $286,000 or 5.1%, to $5.9 million for the year ended December 31, 2016 from $5.7 million for the year ended December 31, 2015. The increase was the result of an increase in interest expense on certificates of deposit and other deposits, offset by a decrease in interest expense on borrowings. Specifically, interest expense on certificates of deposit increased $234,000, or 4.4%, to $5.5 million for the year ended December 31, 2016 from $5.3 million for the year ended December 31, 2015. This increase resulted from increases in both the average balance of certificates of deposit in excess of $100,000 and the average rate we paid on certificates of deposit. The average balance of certificates of deposit increased $4.3 million, or 1.2%, to $371.3 million for the year ended December 31, 2016 from $367.0 million for the year ended December 31, 2015, and the average rate we paid on certificates of deposit increased 4 basis points to 1.48% for the year ended December 31, 2016 from 1.44% for the year ended December 31, 2015.

Interest expense on other deposits and borrowings increased $52,000 to $434,000 for the year ended December 31, 2016 from $382,000 for the year ended December 31, 2015. This increase resulted from an increase in the average rate we paid on other deposits and borrowings. The average balance of other deposits and borrowings decreased $1.1 million, or 0.6%, to $187.0 million for the year ended December 31, 2016 from $188.1 million for the year ended December 31, 2015, and the average rate we paid on other deposits and borrowings increased 3 basis points to 0.23% for the year ended December 31, 2016 from 0.20% for the year ended December 31, 2015, reflecting higher market interest rates.

Net Interest Income. Net interest income decreased $135,000, or 0.5%, to $27.8 million for the year ended December 31, 2016 from $27.9 million for the year ended December 31, 2015, primarily as a result of higher cost of funds and lower market yields on earning assets. Our average net interest-earning assets increased by $16.1 million, or 2.4%, to $691.4 million for the year ended December 31, 2016 from $675.3 million for the year ended December 31, 2015, due primarily to our loan growth, described above. Our net interest rate spread decreased by 14 basis points to 3.82% for the year ended December 31, 2016 from 3.96% for the year ended December 31, 2015, and our net interest margin decreased by 12 basis points to 4.02% for the year ended December 31, 2016 from 4.14% for the year ended December 31, 2015, reflecting primarily a higher cost of funds and lower market yields on earning assets.

An increase in interest rates will present us with a challenge in managing our interest rate risk. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which can result in interest expense increasing more rapidly than increases in interest income as interest rates increase. Therefore, increases in interest rates may adversely affect our net interest income and net economic value, which in turn would likely have an adverse effect on our results of operations. As described in “—Business Strategy”, “—Management of Market Risk,” we expect that our net interest income and our net economic value would decrease as a result of an instantaneous increase in interest rates. To help

 

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manage interest rate risk, we are promoting core deposit products while concurrently diversifying our loan portfolio by introducing new lending programs. See “—Management of Market Risk” and “Risk Factors—Risks Related to Our Business—Future changes in interest rates could reduce our profits and asset values.”

Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. See “—Summary of Significant Accounting Policies” and “Business of Ponce De Leon Federal Bank—Allowance for Loan Losses” for additional information.

After an evaluation of these factors, we decreased our provision for loan losses for the year ended December 31, 2016 to a credit of $57,000 and increased our provision for loan losses for the year ended December 31, 2015 by $353,000. Our allowance for loan losses was $10.2 million at December 31, 2016 compared to $9.5 million at December 31, 2015. The allowance for loan losses to total loans decreased to 1.57% at December 31, 2016 from 1.64% at December 31, 2015, and the allowance for loan losses to non-performing loans increased to 132.2% at December 31, 2016 from 99.8% at December 31, 2015. We decreased the portion of the allowance for loan losses attributable to one- to- four family residential real estate loans due to a continued decrease in loss history related to this portion of the portfolio, as well as recoveries related to this portion of the portfolio exceeding charge-offs.

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at December 31, 2016. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, will periodically review our allowance for loan losses and as a result of such reviews, we may determine to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.

Non-interest Income. The decrease in non-interest income for the year ended December 31, 2016 compared to the same period in 2015 was primarily due to decreases of $135,000 and $246,000 in service charges and fees and late and prepayment charges, respectively.

Non-interest Expense. For the year ended December 31, 2016 compared to the same period in 2015, salaries and employee benefits expense increased by $1.5 million mainly due to our investment in our employee base, including the senior management team and our sales and relationship management personnel, to help support our continued growth strategy. Other operating expense increased by $303,000, due to marketing outlays to generate organic growth and investments in new products and services, as well as a $128,000 increase in the provision for unfunded commitments and contingencies. Data processing expenses also increased by $318,000 mainly due to the level of new products and services that were introduced during 2016 combined with an increase in volume. These increases were partially offset by decreases of $361,000 in FDIC insurance assessments and $235,000 in insurance and surety bond expenses for the year ended December 31, 2016.

Income Tax Expense. We incurred income tax expense of $1.0 million and $1.3 million for the years ended December 31, 2016 and 2015, respectively, resulting in effective rates of 41.4% and 34.3%, respectively. At December 31, 2016 and 2015, net deferred tax assets amounted to $3.4 million and $3.8 million, respectively. The decrease in tax expense resulted from a $1.4 million, or 36.8%, decrease in pre-tax income to $2.4 million for the year ended December 31, 2016 from $3.8 million for the year ended December 31, 2015.

Management of Market Risk

General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates.

 

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Our Asset/Liability Management Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. We currently utilize a third-party modeling solution that is prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk:

 

•

reducing our reliance on higher costing certificates of deposit;

 

•

growing our volume of transaction deposit accounts; and

 

•

continue to offer only adjustable rate loans on the multifamily and nonresidential mortgages with adjustments that are based on a spread ranging between 2.75% to 3.00% over the five year Federal Home Loan Bank of New York rate.

By following these strategies, we believe that we will be better positioned to react to increases in market interest rates.

We do not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.

Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 100 basis point increments, with changes in interest rates representing immediate and permanent shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.

The table below sets forth, as of March 31, 2017, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.

 

Rate Shift (1)		Net Interest Income Year 1 Forecast				Year 1 Change from Level
		(Dollars in thousands)
+400		$	25,713				-11.74	%
+300			26,690				-8.39	%
+200			27,624				-5.18	%
+100			28,460				-2.31	%
Level			29,134				—
-100			29,159				0.09	%

 

(1)	Assumes an immediate uniform change in interest rates at all maturities.

The table above indicates that at March 31, 2017, in the event of an instantaneous 200 basis point increase in interest rates, we would experience a 5.18% decrease in net interest income, and in the event of an instantaneous 100 basis point decrease in interest rates, we would experience a 0.09% increase in net interest income.

Net Present Value. We also compute amounts by which the net present value of our assets and liabilities (net present value or “NPV”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 100 basis point increments, with changes in interest rates representing immediate and permanent shifts in the yield curve.

 

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The table below sets forth, as of March 31, 2017, the calculation of the estimated changes in our NPV that would result from the designated immediate changes in the United States Treasury yield curve.

 

														Value of Assets (3)
Change in Interest Rates (basis points) (1)		Estimated NPV (2)				Estimated Increase (Decrease) in NPV								NPV Ratio (4)				Increase (Decrease) (basis points)
						Amount				Percent
						(Dollars in thousands)
+400		$	92,175			$	(32,196	)			-25.89	%			12.48	%			(283	)
+300			101,594				(22,778	)			-18.31	%			13.41	%			(190	)
+200			110,373				(13,999	)			-11.26	%			14.22	%			(110	)
+100			118,239				(6,132	)			-4.93	%			14.88	%			(44	)
———			124,372				—				0.00	%			15.31	%			—
-100			129,134				4,762				3.83	%			15.60	%			29

 

(1)	Assumes an immediate uniform change in interest rates at all maturities.

(2)	NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.

(3)	Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.

(4)	NPV Ratio represents NPV divided by the present value of assets.

The table above indicates that at March 31, 2017, in the event of an instantaneous 200 basis point increase in interest rates, we would experience an 11.26% decrease in net economic value, and in the event of an instantaneous 100 basis point decrease in interest rates, we would experience a 3.83% increase in net economic value.

GAP Analysis. In addition, we analyze our interest rate sensitivity by monitoring our interest rate sensitivity “gap.” Our interest rate sensitivity gap is the difference between the amount of our interest-earning assets maturing or repricing within a specific time period and the amount of our interest bearing-liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets maturing or repricing during a period exceeds the amount of interest rate sensitive liabilities maturing or repricing during the same period, and a gap is considered negative when the amount of interest rate sensitive liabilities maturing or repricing during a period exceeds the amount of interest rate sensitive assets maturing or repricing during the same period.

The following table sets forth our interest-earning assets and our interest-bearing liabilities at March 31, 2017, which are anticipated to reprice or mature in each of the future time periods shown based upon certain assumptions. The amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at March 31, 2017, on the basis of contractual maturities, anticipated prepayments and

 

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scheduled rate adjustments. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and as a result of contractual rate adjustments on adjustable-rate loans.

 

		Time to Repricing
		Zero to 90 Days				Zero to 180 Days				Zero Days to One Year				Zero Days to Two Years				Zero Days to Five Years				Five Years Plus				Total Earning Assets & Costing Liabilities				Non Earning Assets & Non Costing Liabilities				Total
		(Dollars in thousands)
Assets:
Interest-bearing deposits in banks		$	11,947			$	11,947			$	11,947			$	11,947			$	11,947			$	11,947			$	11,947			$	4,557			$	16,504
Securities			2,008				3,046				10,300				38,273				51,878				52,281				52,281				(344	)			51,937
Net loans (includes LHFS)			53,429				89,463				167,968				289,973				612,938				680,875				680,875				(1,208	)			679,667
FHLB Stock			—				—				—				—				2,089				2,089				2,089				—				2,089
Other assets			—																6				6				6				36,050				36,056
Total		$	67,384			$	104,456			$	190,215			$	340,193			$	678,858			$	747,198			$	747,198			$	39,055			$	786,253
Liabilities:
Non-maturity deposits		$	206,585			$	206,585			$	206,585			$	206,585			$	206,585			$	206,585			$	206,585			$	80,053			$	286,638
Certificates of deposit			51,205				85,555				155,131				238,838				362,820				365,407				365,407				—				365,407
Other liabilities			28,000				28,000				28,000				28,000				28,000				28,000				28,000				12,734				40,734
Total liabilities			285,790				320,140				389,716				473,423				597,405				599,992				599,992				92,787				692,779
Capital			—				—				—				—				—				—				—				93,474				93,474
Total liabilities and capital		$	285,790			$	320,140			$	389,716			$	473,423			$	597,405			$	599,992			$	599,992			$	186,261			$	786,253
Asset/liability gap		$	(218,406	)		$	(215,684	)		$	(199,501	)		$	(133,230	)		$	81,453			$	147,206			$	147,206
Gap/assets ratio			23.58	%			32.63	%			48.81	%			71.86	%			113.63	%			124.53	%			124.53	%

At March 31, 2017, our asset/liability gap from zero days to one year was ($199.5) million, resulting in a gap/assets ratio of 48.81%.

The following table sets forth our interest-earning assets and our interest-bearing liabilities at December 31, 2016, which are anticipated to reprice or mature in each of the future time periods shown based upon certain assumptions. The amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at December 31, 2016, on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and as a result of contractual rate adjustments on adjustable-rate loans.

 

		Time to Repricing
		Zero to 90 Days				Zero to 180 Days				Zero Days to One Year				Zero Days to Two Years				Zero Days to Five Years				Five Years Plus				Total Earning Assets & Costing Liabilities				Non Earning Assets & Non Costing Liabilities				Total
		(Dollars in thousands)
Assets:
Interest-bearing deposits in banks		$	6,920			$	6,920			$	6,920			$	6,920			$	6,920			$	6,920			$	6,920			$	4,796			$	11,716
Securities			596				3,268				9,368				40,612				52,243				52,942				52,942				(252	)			52,690
Net loans (includes LHFS)			46,325				86,334				163,005				283,027				579,173				645,082				645,082				(763	)			644,319
FHLB Stock			—				—				—				—				964				964				964				—				964
Other assets			—																7				7				7				35,287				35,294
Total		$	53,841			$	96,522			$	179,293			$	330,559			$	639,307			$	705,915			$	705,915			$	39,068			$	744,983
Liabilities:
Non-maturity deposits		$	197,285			$	197,285			$	197,285			$	197,285			$	197,285			$	197,285			$	197,285			$	74,529			$	271,814
Certificates of deposit			52,597				98,133				166,781				236,755				366,562				368,721				368,721				—				368,721
Other liabilities			3,000				3,000				3,000				3,000				3,000				3,000				3,000				8,456				11,456
Total liabilities		$	252,882			$	298,418			$	367,066			$	437,040			$	566,847			$	569,006			$	569,006			$	82,985			$	651,991
Capital			—				—				—				—				—				—				—				92,992				92,992
Total liabilities and capital		$	252,882			$	298,418			$	367,066			$	437,040			$	566,847			$	569,006			$	569,006			$	175,977			$	744,983
Asset/liability gap		$	(199,041	)		$	(201,896	)		$	(187,773	)		$	(106,481	)		$	72,460			$	136,909			$	136,909
Gap/assets ratio			21.29	%			32.34	%			48.84	%			75.64	%			112.78	%			124.06	%			124.06	%

 

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At December 31, 2016, our asset/liability gap from zero days to one year was ($187.8 million), resulting in a gap/assets ratio of 48.84%.

Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net interest income and net economic value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net interest income and NPV tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and NPV and will differ from actual results. Furthermore, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates both on a short-term basis and over the life of the asset. In the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the gap table.

Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.

Liquidity and Capital Resources

Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the Federal Home Loan Bank of New York. At March 31, 2017 and December 31, 2016, we had $28.0 million and $3.0 million, respectively, of outstanding advances from the Federal Home Loan Bank of New York, on an overnight line of credit basis and also had a guarantee from the Federal Home Loan Bank of New York through a standby letter of credit of $3.6 million. At March 31, 2017, we had eligible collateral of approximately $166.2 million in mortgage loans available to secure advances from the Federal Home Loan Bank of New York. At March 31, 2017 and December 31, 2016, we had the ability to borrow up to $25.0 million under repurchase agreements with three brokers. We had no securities sold under repurchase agreements with brokers as of March 31, 2017 and December 31, 2016.

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. Our most liquid assets are cash and interest-bearing deposits in banks. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $2.9 million and $3.8 million for the three months ended March 31, 2017 and 2016, respectively. Net cash (used in) investing activities, which consists primarily of disbursements for loan originations, offset by principal collections on loans, proceeds from maturing securities and pay downs on mortgage-backed securities, was $(36.0) million and $(4.8) million for the three months ended March 31, 2017 and 2016, respectively. Net cash provided by financing activities, consisting of activities in deposit accounts, was $37.8 million and $13.2 million for three months ended March 31, 2017 and 2016, respectively.

Net cash provided by operating activities was $4.3 million and $5.2 million for the years ended December 31, 2016 and 2015, respectively. Net cash (used in) investing activities, which consists primarily of disbursements for loan originations and the purchases of securities, offset by principal collections on loans, proceeds from maturing securities and pay downs on mortgage-backed securities, was $(43.9) million and $(6.2) million for the years ended December 31, 2016 and 2015, respectively. Net cash provided by (used in) financing activities, consisting of activities in deposit accounts, was $38.6 million and $(2.2) million for the years ended December 31, 2016 and 2015, respectively.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

 

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At March 31, 2017 and December 31, 2016, we exceeded all of our regulatory capital requirements, and we were categorized as well capitalized at March 31, 2017 and December 31, 2016 and 2015. Management is not aware of any conditions or events since the most recent notification that would change our category. See “Historical and Pro Forma Regulatory Capital Compliance.”

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At March 31, 2017 and December 31, 2016, we had outstanding commitments to originate loans of $90.6 million and $63.7 million, respectively. We anticipate that we will have sufficient funds available to meet our current lending commitments. Certificates of deposit that are scheduled to mature in less than one year from March 31, 2017 totaled $157.7 million and from December 31, 2016 totaled $168.9 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

Impact of Inflation and Changing Price

The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

BUSINESS OF PDL COMMUNITY BANCORP

We have not engaged in any business to date. Upon completion of the reorganization and offering, we will own all of the issued and outstanding common stock of Ponce Bank. We intend to retain up to 50% of the net proceeds from the offering. A portion of the net proceeds we retain will be used to make a loan to fund the purchase of shares of our common stock by the Ponce Bank employee stock ownership plan. We intend to invest our capital as discussed in “How We Intend to Use the Proceeds from the Offering.”

In the future, PDL Community Bancorp, as the holding company of Ponce Bank, will be authorized to pursue other business activities permitted by applicable laws and regulations for savings and loan holding companies, which may include the acquisition of banking and financial services companies. We have no plans for any mergers or acquisitions, or other diversification of the activities of PDL Community Bancorp at the present time.

Our cash flow will depend on earnings from the investment of the net proceeds we retain, and any dividends received from Ponce Bank. Initially, PDL Community Bancorp will neither own nor lease any property, but will instead use the premises, equipment and furniture of Ponce Bank. At the present time, we intend to employ only persons who are officers of Ponce Bank to serve as officers of PDL Community Bancorp. We will also use the support staff of Ponce Bank from time to time. These persons will not be separately compensated by PDL Community Bancorp. PDL Community Bancorp may hire additional employees, as appropriate, to the extent it expands its business in the future.

 

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BUSINESS OF PONCE BANK MUTUAL HOLDING COMPANY

Ponce De Leon Federal Bank will become Ponce Bank Mutual Holding Company, a federal mutual holding company, and will at all times own a majority of the outstanding shares of PDL Community Bancorp’s common stock. Persons who had membership rights in Ponce De Leon Federal Bank as of the date of the reorganization will continue to have membership rights; however, these membership rights will be in Ponce Bank Mutual Holding Company.

Ponce Bank Mutual Holding Company’s principal assets will be the common stock of PDL Community Bancorp it receives in the reorganization and offering and $200,000 cash in initial capitalization. Presently, it is expected that the only business activity of Ponce Bank Mutual Holding Company will be to own a majority of PDL Community Bancorp’s common stock. Ponce Bank Mutual Holding Company will be authorized, however, to engage in any other business activities that are permissible for mutual holding companies under federal law, including investing in loans and securities.

Ponce Bank Mutual Holding Company will neither own nor lease any property, but will instead use the premises, equipment and furniture of Ponce Bank. It is anticipated that Ponce Bank Mutual Holding Company will employ only persons who are officers of Ponce Bank to serve as officers of Ponce Bank Mutual Holding Company. Those persons will not be separately compensated by Ponce Bank Mutual Holding Company. The initial directors of Ponce Bank Mutual Holding Company will consist of the current directors of Ponce De Leon Federal Bank.

BUSINESS OF PONCE DE LEON FEDERAL BANK

General

Ponce De Leon Federal Bank is a federally chartered savings association headquartered in Bronx, New York. Ponce De Leon Federal Bank was originally chartered in 1960 as a federally-chartered mutual savings and loan association under the name Ponce De Leon Federal Savings and Loan Association. In 1985, we changed our name to “Ponce De Leon Federal Savings Bank.” In 1997, we changed our name to “Ponce De Leon Federal Bank.” The Bank is designated a Minority Depository Institution under applicable regulations.

We conduct our business from our administrative center and 13 banking offices. Our banking offices are located in Bronx (5 branches), Manhattan (2 branches), Queens (3 branches) and Brooklyn (3 branches), New York, and one branch in Union City, New Jersey.

We maintain a local community banking emphasis, with a primary strategic objective of meeting the borrowing and savings needs of our local customer base. Historically, as a traditional thrift institution, our lending activities were concentrated in origination of one-to-four family residential investor owned and owner occupied mortgage loans and, at March 31, 2017, such loans continue to comprise the largest concentration of the loan portfolio (48.6% of total loan balance and 52.4% of the total number of loans at such date). In recent years, we embarked on a new strategic direction designed to build a full service community banking franchise dedicated to meeting the banking needs of business and retail customers in the communities that we serve. In connection with the implementation of a full service community banking strategy, we invested in infrastructure and personnel to manage and facilitate our growth strategy. Most notably, in support of implementation of a diversified lending strategy, we have been building a team of commercial lenders experienced in developing full service commercial banking relationships in the local market. Our objective is to fund asset growth primarily through deposit growth, emphasizing growth of lower cost core deposits. Core deposit growth is expected to be in part facilitated by growth of commercial lending relationships, pursuant to which we are seeking to establish a full service banking relationship with our commercial loan customers through offering a full range of commercial loan products that can be packaged with lower cost commercial deposit products.

We have earned a reputation for serving the needs of our communities by emphasizing the importance of personal banking via our loan and deposit product offerings and by promoting local economic development. We are customer-driven and are committed to providing quality and reliable service to our existing customer base as well as new customers in the communities we serve. Our focus on minority populations reflects our founding roots.

Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations, in mortgage loans, consisting of one-to-four family residential investor owned and owner

 

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occupied, multifamily residential, nonresidential property and construction and land, and, to a lesser extent, business and consumer loans. Subject to market conditions, we expect to increase our focus on multifamily and nonresidential loans in an effort to grow our overall loan portfolio, increase the overall yield earned on our loans and assist in managing interest rate risk. We also invest in securities, which have historically consisted primarily of securities issued by the U.S. Government and federal agencies and mortgage-backed securities issued by U.S. government sponsored enterprises. We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts. We have made limited use of borrowings in recent years to fund our operations.

Our executive office is located at 2244 Westchester Avenue, Bronx, New York 10462, and our telephone number at this address is (718) 931-9000. Our website address is www.poncebank.net. Information on our website is not and should not be considered a part of this prospectus.

Market Area

We are headquartered in Bronx, New York, with our primary market in the boroughs of New York City (excluding Staten Island) and Hudson County, New Jersey. The size and complex nature of the geographic footprint makes for diverse demographics that continue to undergo a significant change, in terms of economic, racial, ethnic and age parameters, all with potentially substantial long-term institutional ramifications.

Our primary deposit base includes a large and stable base of locally employed blue collar workers with low-to-medium income, middle-aged, and with limited investment funds. Within the base of locally employed blue-collar workers there is a significant, and growing, portion of recently immigrated, younger, lower-skilled laborers. The influx of immigrant lower-skilled workers, however, has been hampered by the increases in rental rates in the rental housing market within the New York city metropolitan area. Nevertheless, we still adhere to our purpose since inception, “to promote community oriented banking and to serve a necessary and desirable function for the Hispanic community and all consumers within the areas of business.” We have provided the funding for economic development in much of the Hispanic community within our market area and we primarily serve low and moderate income areas. We are seeking to increase this effect through our expected application to be designated a Community Development Financial Institution.

Another significant customer segment consists of middle aged and older white collar, high-income individuals, many of which are self-employed real estate investors and developers. They constitute a large percentage of the borrowing base of the Bank and, increasingly, are becoming the source of a significant percentage of commercial deposits.

The Bank historically has been funded through local community deposits. Today, the Bank continues to rely primarily on community deposits to fund investments and loans. However, the mix of community deposits now includes consumer and commercial deposits but with a strong reliance on time deposits when compared to our peers, resulting in a historically higher-than-peer cost of funds.

Until we expanded our branch network, our Bronx-based image and emphasis on personal services to minorities allowed us to maintain adequate market standing in consumer deposits and mortgage loans. The Bank’s branch expansion and the gentrification of substantial parts of New York City altered our competitive landscape. The branch expansion resulted in primarily one-time increases in our deposit base. Subsequent competitive pressures, coupled with the Bank’s desire to control its cost of funds, have resulted in deposit growth after 2011 that just matches overall market growth. Since then, assets and deposits have remained relatively stable overall but have shown significant internal shifting between products as the Bank and its customers continue to adjust to current economic realities. The internal shifting also reflects the Bank’s sale of distressed assets and the partial use of proceeds to fund desirable outflows of higher costing time deposits.

Competition

The Bank faces significant competition within the Bank’s market both in making loans and attracting deposits. There is high concentration of financial institutions in the Bank’s market area, including national, regional and other locally operated commercial banks, savings banks and credit unions. Several “mega” banks exist in the market, such as JPMorgan Chase, Citibank and Capital One, many of which are making a new push for retail deposits. A number of our competitors offer products and services that the Bank does not currently offer, such as trust services, private banking, insurance services and asset management. Additionally, the Bank faces an increasing level of competition from non-core financial service providers that do not necessarily maintain a physical presence in the Bank’s market area, such as Quicken Loans, Freedom Mortgage and many internet financial service providers. The litany of competitors facing the Bank is extensive.

 

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Deposit market share in the New York area can be difficult to grasp, as some “mega” banks will include large scale deposits from around the world as held at the headquarters. However, in Bronx County, New York, where the Bank maintains five branches, we hold 1.95% (June 30, 2016) of the market’s deposits. This represents the Bank’s largest market share in a county level area. Generally speaking, the Bank has been able to grow deposits at about the same rates as our respective markets of operation. Between June 30, 2015 and June 30, 2016, the Queens County market increased 14%, and the Bank grew deposits at its branches in tandem with that rate. The Bank will continue to work to improve its market position by expanding its brand within its current market, and building the capability to offer more mortgage products that it can originate and hold or sell into the secondary market.

Lending Activities

General. Our principal lending activity is originating one-to-four family residential real estate, including investor owned and owner occupied, multifamily, nonresidential and to a lesser extent construction loans. To a much lesser extent, we also originate commercial and industrial (“C&I”) business loans and consumer loans. Subject to market conditions and our asset-liability analysis, we expect to increase our emphasis on multifamily and nonresidential loans in an effort to grow our overall loan portfolio and increase the overall yield earned on our loans.

Lending activities are conducted primarily by our salaried loan personnel operating at our main and branch office locations and by our loan officers. All loan originated by us are underwritten pursuant to our policies and procedures. We currently intend that substantially all of our loan originations will be with adjustable interest rates. For our C&I loan originations, variable rate pricing will be offered based on prime rate pricing plus margin. Our ability to originate adjustable rate loans is dependent upon customer acceptance of such loans, which may be affected by current and expected future levels of market interest rates. We originate real estate and other loans through our loan officers, marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders and attorneys.

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated. In addition to the loans included in the table below, at both March 31, 2017 and December 31, 2016, we had $2.1 million of loans held-for-sale. Loans in process at March 31, 2017 and December 31, 2016 were $29.9 million and $21.4 million, respectively.

 

		At March 31,								At December 31,
		2017								2016								2015								2014								2013								2012
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
										(Dollars in thousands)
Mortgage loans:
1-4 family residences
Investor Owned		$	237,904				34.62	%		$	227,409				34.90	%		$	203,239				35.25	%		$	190,726				34.54	%		$	195,762				34.27	%		$	207,981				34.99	%
Owner-Occupied			96,085				13.98	%			97,631				14.98	%			106,053				18.39	%			105,222				19.05	%			111,252				19.47	%			105,084				17.68	%
Multifamily residences			161,833				23.55	%			158,200				24.28	%			122,836				21.30	%			110,978				20.10	%			107,541				18.82	%			107,949				18.16	%
Nonresidential properties			140,501				20.45	%			121,500				18.64	%			106,462				18.46	%			111,806				20.24	%			109,603				19.19	%			115,614				19.45	%
Construction and land			37,610				5.47	%			30,340				4.66	%			22,883				3.97	%			18,707				3.39	%			25,567				4.48	%			29,708				5.00	%
Total mortgage loans			673,933				98.07	%			635,080				97.46	%			561,473				97.37	%			537,439				97.32	%			549,725				96.23	%			566,336				95.28	%
Nonmortgage loans:
Business			12,434				1.81	%			15,719				2.41	%			14,350				2.49	%			14,206				2.57	%			20,349				3.56	%			26,545				4.47	%
Consumer			796				0.12	%			843				0.13	%			788				0.14	%			614				0.11	%			1,210				0.21	%			1,537				0.25	%
Total nonmortgage loans			13,230				1.93	%			16,562				2.54	%			15,138				2.63	%			14,820				2.68	%			21,559				3.77	%			28,082				4.72	%
			687,163				100.00	%			651,642				100.00	%			576,611				100.00	%			552,259				100.00	%			571,284				100.00	%			594,418				100.00	%
Net deferred loan origination costs			732								711								535								479								279								244
Allowance for losses on loans			(10,370	)							(10,205	)							(9,484	)							(9,449	)							(9,940	)							(10,056	)
Loans, net		$	677,525							$	642,148							$	567,662							$	543,289							$	561,623							$	584,606

 

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Loan Products Offered by the Bank. The following table provides a breakdown of the Bank’s loan portfolio (excluding loans held-for-sale) by product type and principal balance outstanding at March 31, 2017:

 

At March 31, 2017
Loan Type		# of Loans				Principal Balance (In Thousands)				% of Portfolio
Mortgage loans:
1-4 family residences
1-4 Family Investor Owned			514			$	237,904				34.62	%
1-4 Family Owner Occupied			292				96,085				13.98	%
Multifamily residences			225				161,833				23.55	%
Nonresidential properties			203				140,501				20.45	%
Construction and land
Construction 1-4 Investor			5				2,426				0.35	%
Construction Multifamily			12				30,057				4.37	%
Construction Nonresidential			3				4,824				0.70	%
Land loan			1				303				0.04	%
Nonmortgage loans:
Business loans
C&I lines of credit			93				7,491				1.09	%
C&I loans (term)			21				4,943				0.72	%
Consumer loans
Unsecured			34				339				0.05	%
Passbook			139				457				0.07	%
Total			1,542			$	687,163				100.00	%

One-to-four Family Investor Owned Loans. At $237.9 million, or 34.6%, of the Bank’s total loan portfolio at March 31, 2017, investor owned mortgage loans secured by non-owner occupied one-to-four family residences represent the Bank’s largest single lending category. The majority of this portfolio, $199.5 million, or 83.9%, are two-to-four family properties (407 accounts), while the remaining $38.4 million, or 16.1%, are single family non-owner occupied investment properties (107 accounts). The three largest loans in this category are $5.0 million, $3.1 million and $2.8 million. In this category, loans totaling $105.3 million, or 44.1%, are secured by properties located in Queens County, $70.8 million, or 29.7%, in Kings County, $20.3 million, or 8.5%, in Bronx County, and $16.9 million, or 7.1%, in New York County. The rest of this category, less than 11.0%, is spread out in other counties and no other concentration exceeded $10.0 million or 5.0%.

One-to-four family investor-owned loans involve a greater degree of risk than one-to-four family owner occupied loans. Rather than depending on the borrower’s repayment ability from employment or other income, the borrower’s repayment ability is primarily dependent on ensuring that a tenant occupies the investor property and has the financial capacity to pay sufficient rent to cover the borrower’s debt. In addition, if an investor borrower has several loans secured by properties in the same market, the loans have risks similar to a multifamily real estate loan and repayment of those loans is subject to adverse conditions in the rental market or the local economy.

The Bank imposes strict underwriting guidelines in the origination of such loans, including lower maximum loan-to-value ratios of 70% on purchases and 65% on refinances, a required minimum debt service coverage ratio (net operating income divided by debt service requirement) of 1.20x that must be met by either the property on a standalone basis, or by the inclusion of the owner(s) as co-borrower(s). In addition, all such loans currently require that the transaction exhibit a global debt service coverage ratio (net operating income divided by debt service requirement) of no less than 1.0 times. This indicates that the owner has the capacity to support the loan along with all of his personal obligations. On occasion, the Bank has required that the borrower establish a cash reserve to be held at the Bank in order to provide additional security. The maximum term on such loans is 30 years, typically with five year adjustable rates.

One-to-four Family Owner Occupied Loans. Lending in this category totaled $96.1 million, or 14.0% of the Bank’s total loan portfolio at March 31, 2017. None of the loans in this category exceeded $2.0 million in outstanding balances, with

 

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the three largest having $1.8 million, $1.8 million and $1.6 million in outstanding balances. There are only 14 loans with an outstanding balance in excess of $1.0 million, which in total account for less than 20% of this category. At March 31, 2017, approximately 39.8% of this category is secured by properties located in Queens County and 11.4% in New York County. None of the other geographical concentrations exceeded 10% of this category.

It is the Bank’s policy to underwrite loans secured by one-to-four family owner occupied residential real estate in a manner that ensures strict compliance with Dodd-Frank regulatory requirements. This includes underwriting only mortgages that have a debt-to-income ratio of 43% or less. That is the highest ratio a borrower can have and still get qualified mortgage. A qualified mortgage is presumed to meet the borrower’s ability to repay the loan. As part of this effort, the Bank employs software that tests each loan for compliance.

The Bank generally limits loans in this category to a maximum loan-to-value ratio of 90% for a purchase and 80% for a refinance, based on the lower of the purchase price or appraised value. The maximum loan term is 30 years, self-amortizing. Being that the Bank is a portfolio lender, it presently does not offer a fixed-rate product. The Bank offers mostly 5/1 and 5/5 adjustable rate loans that adjust based on a spread currently ranging between 2.75% to 3.00% over the one or five year Treasury Note. The maximum amount by which the interest rate may increase is limited to 2% for the first two adjustments and 5% for the life of the loan.

Multifamily and NonResidential Lending. At $302.3 million, or 44.0% of the Bank’s total loan portfolio at March 31, 2017, mortgages secured by multifamily and nonresidential properties represent the Bank’s largest lending concentration. The nonresidential portfolio accounts for $140.5 million of the $302.3 million, of which $30.7 million is classified as owner used, owner occupied. The overall mix is quite diverse in terms of property types, with the largest concentration being retail and wholesale at $53.9 million or 38.4% of the portfolio, industrial and warehouse at $24.5 million or 17.5%, service, doctor, dentist, beauty, etc. at $18.3 million or 13.0%, offices at $14.6 million or 10.4%, churches at $12.3 million or 8.7%, restaurants at $7.6 million or 5.4% and hotels and motels at $6.3 million or 4.5%. The rest of the portfolio accounts for other property types, with none exceeding 1% as a portfolio concentration. The three largest loans were $7.5 million, $7.4 million and $5.7 million, with the largest being a nonresidential building, and the other two consist of multifamily and nonresidential buildings. From the total of $302.3 million, 80 loans have balances in excess of $1.0 million and they account for $164.7 million, or approximately 54.5% of this lending concentration. In terms of geographical concentrations, $125.4 million, or 41.5%, are secured by properties located in Queens County, $60.5 million, or 20.0%, in Bronx County, $45.0 million or 14.9%, in Kings County, $21.0 million, or 6.9%, in New York County and $18.8 million, or 6.2%, in Westchester County. All other concentrations by county, which account for less than 11% of this category, are balances of $10.0 million or less.

The Bank considers a number of factors in originating multifamily and nonresidential mortgages. Loans secured by multifamily and nonresidential real estate generally have larger balances and involve a greater degree of risk than one-to-four family residential real estate loans. The primary concern in this type of lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. To address the risks involved with evaluating the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, the Bank considers the financial resources of the borrower, the borrower’s experience in owning or managing similar properties and the borrower’s payment history with the Bank and other financial institutions. In evaluating the property securing the loan, the factors considered include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value or purchase price of the mortgaged property (whichever is lower), and the debt service coverage ratio. All multifamily and non-residential loans are supported by appraisals that conform to the Bank’s appraisal policy.

The Bank generally limits the maximum loan-to-value ratio on these loans to 75%, based on the lower of the purchase price or appraised value of the subject property (70% on the refinance of nonresidential properties such as retail spaces, office buildings, and warehouses). The maximum loan term ranges between 25 and 30 years. As is the Bank’s general policy, the Bank offers only adjustable rates on its multifamily and nonresidential mortgages - with adjustments based on a spread currently ranging between 2.75% to 3.00% over the five year Federal Home Loan Bank of New York rate.

 

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Construction and Land Lending. Construction and land lending totaled $37.6 million, or 5.5% (21 projects), of the Bank’s total loan portfolio as of March 31, 2017, with the majority consisting of multifamily residential projects (12 projects). Out of the $37.6 million, $30.1 million are multifamily of which $12.4 million are secured by properties located in Queens County, $14.3 in Kings County, $2.7 million in Bronx County and $550,000 in New York County. Size varies from 5 unit gut rehab projects to 49 residential units on a single project. In total, the multifamily construction portfolio accounts for 253 residential units. At March 31, 2017, loans in process related to construction loans totaled $29.9 million.

The Bank’s typical construction loan has a term of up to 24 months and contains:

 

•

a minimum of 5% contingency;

 

•

a minimum of 5% retainage;

 

•

a loan-to-cost ratio of 70% or less;

 

•

an end loan loan-to-value ratio of 65% or less;

 

•

an interest reserve;

 

•

guarantees of all owners / partners / shareholders of a closely held organization owning 20% or more of company stock or entity ownership; and

 

•

an option to convert to a permanent mortgage loan upon completion of the project.

Construction lending involves additional risks when compared with permanent lending because funds are advanced upon the security of the project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. The Bank’s approach to the underwriting of construction loans is driven by five factors: analysis of the developer; analysis of the contractor; analysis of the project; valuation of the project; and evaluation of the source of repayment.

The developer’s character, capacity and capital are analyzed to determine that the individual or entity has the ability to first complete the project and then either sell it or carry permanent financing. The general contractor is analyzed for reputation, sufficient expertise and capacity to complete the project within the allotted time. The project is analyzed in order to ensure that the project will be completed within a reasonable period of time according to the plans and specifications, and can either be sold or refinanced once completed. All construction loans are supported by appraisals which conform to the Bank’s appraisal policy and affirm the value of the project both “As Is” and “As Completed”. Lastly, the Bank reviews the developer’s cash flow estimations for the project on an “As Completed” basis. These projections are compared to the appraiser’s estimates. Debt service coverage using projected net income must be at least 1.2 times the estimated debt service when operating at stabilized levels.

Upon closing of the construction loan, the Bank begins monitoring the project and funding requisitions for completed stages upon inspection and confirmation by third party firms, such as engineers, of the work performed and its value and quality. Conversion to permanent financing usually occurs upon a conversion underwriting and receipt of certificates of occupancy, as applicable.

 

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The following table provides a breakdown of the Bank’s loan portfolio (excluding loans held-for-sale) by product type and principal balance outstanding at December 31, 2016:

 

At December 31, 2016
Loan Type		# of Loans				Principal Balance (In Thousands)				% of Portfolio
Mortgage loans:
1-4 family residences
1-4 Family Investor Owned			508			$	227,409				34.90	%
1-4 Family Owner Occupied			295				97,631				14.98	%
Multifamily residences			223				158,200				24.28	%
Nonresidential properties			201				121,500				18.65	%
Construction and land
Construction 1-4 Investor			4				1,699				0.26	%
Construction Multifamily			11				21,635				3.32	%
Construction Nonresidential			4				6,690				1.03	%
Land loan			1				316				0.05	%
Nonmortgage loans:
Business loans
C&I lines of credit			93				10,946				1.68	%
C&I (term)			22				4,773				0.73	%
Consumer loans
Unsecured			40				353				0.05	%
Passbook			138				490				0.08	%
Total			1,540			$	651,642				100.00	%

One-to-four Family Investor Owned Loans. At $227.4 million, or 34.9%, of the Bank’s total loan portfolio at December 31, 2016, investor owned mortgage loans secured by non-owner occupied one-to-four family residences represent the Bank’s largest lending category. The majority of this portfolio, $187.5 million or 82.5% are two-to-four family properties, (399 accounts), while the remaining $39.9 million or 17.5% are single family non-owner occupied investment properties (109 accounts). The three largest loans in this category are $5.0 million, $2.8 million and $2.7 million. In this category, loans totaling $95.0 million, or 41.7%, are secured by properties located in Queens County, $69.0 million, or 30.4%, in Kings County, $20.0 million, or 8.9%, in Bronx County, and $16.4 million, or 7.2%, in New York County. The rest of this category, less than 14.0%, is spread out in other counties and no other concentration exceeded $10.0 million or 5.0%.

One-to-four Family Owner Occupied Loans. Lending in this category totaled $97.6 million or 15.0% of the Bank’s total loan portfolio at December 31, 2016. None of the loans in this category exceeded $2.0 million in outstanding balances, with the three largest having $1.8 million, $1.8 million and $1.6 million in outstanding balances. There are only 14 loans with an outstanding balance in excess of $1.0 million, which in total account for less than 20% of this category. At December 31, 2016, approximately 39.4% of this category is secured by properties located in Queens County and 11.9% in New York County. None of the other geographical concentrations exceeded 10% of this category.

Multifamily and NonResidential Lending. At $279.7 million, or 42.9% of the Bank’s total loan portfolio at December 31, 2016, mortgages secured by multifamily and nonresidential properties represent the Bank’s largest lending concentration. The nonresidential portfolio accounts for $121.5 million of the $279.7 million, of which $18.3 million is classified as owner used, owner occupied. The overall mix is quite diverse in terms of property types, with the largest concentration being retail and wholesale at $45.6 million or 37.5% of the portfolio, industrial and warehouse at $18.7 million or 15.4%, service, doctor, dentist, beauty, etc. at $15.8 million or 12.8%, offices at $13.3 million or 10.9%, churches at $10.1 million or 8.3%, restaurants at $8.5 million or 7.0% and hotels and motels at $6.3 million or 5.2%. The rest of the portfolio accounts for other property types, with none exceeding 1% as a portfolio concentration. The three largest loans were $7.4 million, $5.7 million and $5.0 million, with the largest being a multifamily residential building, and the other two nonresidential. From the total of $279.7 million, 71 loans have balances in excess of $1.0 million and they account for $141.6 million, or approximately 50.6% of this lending concentration. In terms of geographical concentrations, $127.4 million, or 45.5%, are secured by

 

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properties located in Queens County, $43.0 million, or 15.4%, in Bronx County, $39.3 million or 14.0%, in Kings County, $20.4 million, or 7.3%, in New York County and $19.0 million, or 6.8%, in Westchester County. All other concentrations by county, which account for less than 11% of this category, have balances of $10.0 million or less.

Construction and Land Lending. Construction and land lending totaled $30.3 million, or 4.7% (20 projects), of the Bank’s total loan portfolio at December 31, 2016, with the majority consisting of multifamily residential projects (11 projects). Out of the $30.3 million, $21.6 million are multifamily of which $9.6 million are secured by properties located in Queens County, $9.0 million in Kings County, $2.4 million in Bronx County and $600,000 in New York County. Size varies from 5 unit gut rehab projects to 44 residential units on a single project. In total, the multifamily construction portfolio accounts for 204 residential units. At December 31, 2016, loans in process related to construction loans totaled $21.4 million.

C&I Loans and Lines of Credit. C&I loans and lines of credit represent a small portion of the Bank’s total loan portfolio at March 31, 2017 and December 31, 2016, less than 2.0% and 2.5%, respectively. Unlike residential real estate loans, which are secured by real property whose value tends to be more easily ascertainable, commercial and industrial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business and the collateral securing these loans may fluctuate in value.

Although the Bank’s loan policy allows for the extension of secured and unsecured financing, the Bank usually obtains collateral when in initial discussions with potential borrowers. Unsecured credit facilities are made only to strong borrowers that possess established track records with the Bank (or come highly recommended) and are supported by guarantors. Guarantees are required of any individual or entity owning or controlling 20% or more of the borrowing entity, with exceptions requiring approval of the Board of Directors. When credits are not secured by a specific lien on an asset, the Bank usually requires a general lien on all business assets as evidenced by a UCC filing. Pricing is typically based on the Wall Street Journal prime rate plus a spread driven by risk rating variables.

Underwriters are required to identify at least two sources of repayment, usually recommend that loans contain covenants, such as minimum debt service coverage ratios, minimum global debt service coverage ratios, maximum leverage ratios, 30-day “cleanups” or “clean-downs”, as applicable, and must require periodic financial reporting. In addition, every effort is made to set up borrowers with auto-debit for loan payments, and they are strongly encouraged to maintain operating accounts at the Bank.

Lines of credit are typically short term facilities (12 months) that are provided for occasional or seasonal needs. They are extended to only the strongest borrowers who have established cash flow from operations and a clean history. An annual 30-day clean-up or 75% annual pay-down period is required. A clean-up period generally is not required on secured lines. Guarantors, which are usually required, must have clean credit histories and a substantial outside net worth. Most lines contain an option to convert to a term loan upon maturity.

Secured term loans are long term facilities extended typically for the purpose of financing the purchase of a long term asset. At a minimum, they will be collateralized by the asset being purchased. They may also be secured by an existing long term business asset or outside collateral pledged by the guarantor. Unsecured term loans will only be extended to the strongest borrowers who have established cash flow from operations and a clean credit history. Although Bank policy allows term loans for up to 10 years, the preference is to offer self-amortizing term loans based on a term of no more than five to seven years.

 

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Loan Originations, Purchases and Sales. The following table sets forth our loan originations, sales, purchases and principal repayment activities during the periods indicated.

 

		Three Months Ended March 31,								Years Ended December 31,
		2017				2016				2016				2015				2014				2013				2012
		(In thousands)
Total loans at beginning of year		$	651,642			$	576,611			$	576,611			$	552,259			$	571,284			$	594,418			$	622,359
Loans originated:
Mortgage loans:
1-4 family residences
Investor owned			19,379				9,471				57,167				39,309				34,603				31,508				20,544
Owner occupied			4,374				2,747				14,741				12,555				11,625				23,001				10,171
Multifamily residences			9,030				18,763				51,876				34,048				28,965				21,986				19,955
Nonresidential properties			24,746				2,764				31,408				18,365				15,972				13,850				9,902
Construction and land			15,675				6,850				5,693				3,497				15,485				10,389				13,589
Total mortgage loans			73,204				40,595				160,885				107,774				106,650				100,734				74,161
Nonmortgage loans:
Business			1,555				414				1,222				7,451				4,540				5,084				1,924
Consumer			67				149				718				692				277				516				782
Total nonmortgage loans			1,622				563				1,940				8,143				4,817				5,600				2,706
Total loans			74,826				41,158				162,825				115,917				111,467				106,334				76,867
Loans purchased:
Mortgage loans:
1-4 family residences			—				—				—				—				—				—				—
Investor owned			—				—				—				—				—				—				—
Owner occupied			—				—				—				—				—				—				—
Multifamily residences			—				—				—				—				—				—				—
Nonresidential properties			—				—				—				—				—				—				—
Construction and land			—				—				—				—				—				—				—
Total mortgage loans			—				—				—				—				—				—				—
Nonmortgage loans:
Business			—				—				—				—				—				—				—
Consumer			—				—				—				—				—				—				—
Total nonmortgage loans			—				—				—				—				—				—				—
Total loans			—				—				—				—				—				—				—
Loans sold:
Mortgage loans:
1-4 family residences			—				—				—				—				—				—				—
Investor owned			—				—				—				—				—				—				—
Owner occupied			—				—				—				—				—				—				(441	)
Multifamily residences			—				—				—				—				(850	)			—				(991	)
Nonresidential properties			—				—				—				—				—				—				—
Construction and land			—				—				—				—				—				—				(1,285	)
Total mortgage loans			—				—				—				—				(850	)			—				(2,717	)
Nonmortgage loans:
Business			—				—				—				—				—				—				—
Consumer			—				—				—				—				—				—				—
Total nonmortgage loans			—				—				—				—				—				—				—
Total loans			—				—				—				—				(850	)			—				(2,717	)
Principal repayments and other			(39,305	)			(30,493	)			(87,794	)			(91,565	)			(131,342	)			(129,468	)			(107,525	)
Net loan activity			35,521				10,665				75,031				24,352				(19,025	)			(23,134	)			(27,941	)
Total loans at end of year		$	687,163			$	587,276			$	651,642			$	576,611			$	552,259			$	571,284			$	594,418

 

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Loan Approval Procedures and Authority. Our maximum loan to one borrower is 90% of the Bank’s legal lending limit, individually and cumulatively. At March 31, 2017, our internal lending limit to one borrower was $14.5 million.

At March 31, 2017, our largest relationship was $13.0 million consisting of one multifamily construction project in Kings County, with an outstanding balance of $3.7 million. The second largest relationship consists of four loans in total with one located in Queens County, an almost completed residential construction project for $8.0 million and three non-residential loans located in Nassau County with a balance of $1.9 million. No other loan or loans to one borrower, individually or cumulatively exceeded $10.0 million, or 70% of our lending limit.

The Bank’s lending is subject to written policies, underwriting standards and operating procedures. Decisions on the loan applications are made on the basis of detailed applications submitted by the prospective borrower, credit histories that we obtain and property valuations, consistent with our appraisal policy. The appraisals are prepared by outside independent licensed appraisers approved by the Board of Directors. They are also subject to internal evaluations using scorecards which are reviewed periodically. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and all information provided with the application and the provided checklists as part of the application package are thoroughly evaluated by the loan underwriting department.

The lending approval process starts with the processing of the application package, which is reviewed for completeness and then all necessary agency reports are ordered. Upon initial review and preparation of preliminary documents by the processors in the underwriting department, the file is assigned to an underwriter. The underwriters are responsible for presenting the loan request - with a recommendation - to the Loan Committee and then the Board of Directors, when the credit exposure is greater than the Loan Committee’s authority. If approved, closed and booked, the loan reviewers then undertake the responsibility of monitoring the credit file for the life of the loan by assessing the borrower’s creditworthiness periodically, given certain criteria and following certain operating procedures. An independent third party also performs loan reviews following similar criteria and scope, under the oversight of the Audit Committee of the board of directors.

The Bank also offers smaller commercial and consumer loans of up to $250,000 that follow an “Express Approval” process based on certain underwriting guidelines. Express Approval loans require the signature of only three (3) Loan Committee members.

At this time, the Bank does not originate loans with the intent of selling them into the secondary market. However, the Bank does have three non-accruing troubled debt restructured loans, totaling $2.1 million, which constitute the held-for-sale portfolio. These are the remaining nonperforming loans that the Bank moved to the held-for-sale portfolio in an effort to decrease our nonperforming loans.

Contractual Maturities. The following tables set forth the contractual maturities of our total loan portfolio at March 31, 2017 and December 31, 2016. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The tables present contractual maturities and do not reflect repricing or the effect of prepayments. Actual maturities may differ.

 

March 31, 2017		1-4 family residences - Investor Owned				1-4 family residences - Owner Occupied				Multifamily Residences				Nonresidential properties
		(In thousands)
Amounts due in:
One year or less		$	3,107			$	2,689			$	3,601			$	1,794
More than one to five years			12,917				3,270				5,225				10,286
More than five years			221,880				90,126				153,007				128,420
Total		$	237,904			$	96,085			$	161,833			$	140,500
March 31, 2017		Construction and Land				Business				Consumer				Total
		(In thousands)
Amounts due in:
One year or less		$	23,920			$	5,901			$	125			$	41,137
More than one to five years			13,691				6,533				671				52,593
More than five years			—				—				—				593,433
Total		$	37,611			$	12,434			$	796			$	687,163

 

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December 31, 2016		1-4 family residences - Investor Owned				1-4 family residences - Owner Occupied				Multifamily Residences				Nonresidential Properties
		(In thousands)
Amounts due in:
One year or less		$	4,930			$	1,465			$	2,197			$	1,813
More than one to five years			13,915				4,078				6,593				9,598
More than five years			208,564				92,088				149,410				110,089
Total		$	227,409			$	97,631			$	158,200			$	121,500
December 31, 2016		Construction and Land				Business				Consumer				Total
		(In thousands)
Amounts due in:
One year or less		$	22,336			$	9,003			$	126			$	41,870
More than one to five years			8,004				6,716				717				49,621
More than five years			—				—				—				560,151
Total		$	30,340			$	15,719			$	843			$	651,642

The following tables set forth our fixed and adjustable-rate loans at March 31, 2017 that are contractually due after March 31, 2018 and at December 31, 2016 that are contractually due after December 31, 2017.

 

		Due After March 31, 2018
		Fixed				Adjustable				Total
		(In thousands)
Mortgage loans:
1-4 family residences
Investor Owned		$	25,670			$	209,127			$	234,797
Owner Occupied			37,690				55,706				93,396
Multifamily residences			8,913				149,319				158,232
Nonresidential properties			10,802				127,904				138,706
Construction and land			13,691				—				13,691
Total mortgage loans			96,766				542,056				638,822
Nonmortgage loans:
Business			4,550				1,983				6,533
Consumer			671				—				671
Total nonmortgage loans			5,221				1,983				7,204
Total		$	101,987			$	544,039			$	646,026
		Due After December 31, 2017
		Fixed				Adjustable				Total
		(In thousands)
Mortgage loans:
1-4 family residences
Investor owned		$	33,225			$	189,254			$	222,479
Owner occupied			42,087				54,079				96,166
Multifamily residences			15,126				140,877				156,003
Nonresidential properties			24,170				95,517				119,687
Construction and land			8,004				—				8,004
Total mortgage loans			122,612				479,727				602,339
Nonmortgage loans:
Business			4,623				2,093				6,716
Consumer			717				—				717
Total nonmortgage loans			5,340				2,093				7,433
Total		$	127,952			$	481,820			$	609,772

 

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Delinquencies and Non-Performing Assets

Delinquency Procedures. The Collection Department representatives commence collection efforts on the 11th day of delinquency based on the borrower’s payment behavior. Calls will be made with respect to loans considered high risk (Classified loans) as well as loans which experienced lateness/sporadic payments and newly originated credit facilities within the last twelve months. Calls begin on the 17th day of delinquency for all remaining loans. Late notices are mailed on the 17th and 30th day and will continue to follow the same cycle thereafter. If a multifamily or nonresidential property loan becomes 30 days past due the Bank will determine if a cure letter is warranted. The Collection Department will pursue collection efforts up until the 90th day past due. At that time, the Bank usually will institute legal procedures for collection or foreclosure unless it is in the best interest of the Bank to work further with the borrower to arrange a suitable workout plan.

When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. The real estate is recorded at the lower of carrying amount or fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal to determine the current fair value of the property. Any excess of the recorded value of the loan over the fair value of the property is charged against the allowance for loan losses. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.

For the three months ended March 31, 2017 and 2016, we collected $38,208 and $58,947, respectively, of interest income on our non-accruing troubled debt restructured loans, of which we recognized $13,813 and $9,958, respectively. For the years ended December 31, 2016 and 2015, we collected $159,270 and $378,878, respectively, of interest income on our non-accruing troubled debt restructured loans, of which we recognized $26,193 and $71,698, respectively. The remaining interest collected on our non-accruing troubled debt restructured loans for these periods was applied as a principal reduction for the remaining life of the loan, or the loan is deemed performing.

Delinquent Loans. The following table set forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.

 

		At March 31,												At December 31,
		2017												2016												2015
		30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due				30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due				30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due
		(In thousands)
Mortgages:
1-4 Family
Investor owned		$	2,043			$	—			$	325			$	2,716			$	—			$	325			$	2,306			$	659			$	805
Owner occupied			2,904				169				2,495				2,562				557				1,734				1,023				311				1,712
Multifamily residences			1,567				—				—				819				—				—				84				—				—
Nonresidential properties			1,244				—				1,994				41				—				1,994				680				55				859
Construction and land			133				—				—				—				—				—				—				—				—
Nonmortgage Loans:
Business			38				—				12				25				—				22				—				—				—
Consumer			—				—				—				—				—				—				—				—				—
Total		$	7,929			$	169			$	4,826			$	6,163			$	557			$	4,075			$	4,093			$	1,025			$	3,376

 

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		At December 31,
		2014												2013												2012
		30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due				30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due				30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due
		(In thousands)
Mortgages:
1-4 Family
Investor owned		$	1,413			$	320			$	1,107			$	6,179			$	232			$	6,887			$	11,024			$	2,637			$	13,470
Owner occupied			1,477				607				2,183				2,569				703				3,830				7,966				1,736				7,548
Multifamily residences			8				—				2,956				1,466				—				971				2,002				3,100				1,941
Nonresidential properties			1,783				957				176				2,381				789				1,604				6,464				2,236				4,040
Construction and land			2,228				—				1,280				4,774				1,243				2,207				337				2,009				3,578
Nonmortgage Loans:
Business			195				—				600				1,741				679				—				2,261				1,837				5,026
Consumer			2				—				—				15				18				—				51				8				3
Total		$	7,106			$	1,884			$	8,302			$	19,125			$	3,664			$	15,499			$	30,105			$	13,563			$	35,606

Non-Performing Assets. The following table sets forth information regarding our non-performing assets. Non-accrual loans include non-accruing troubled debt restructurings of $2.6 million at March 31, 2017 and $2.7 million, $4.5 million, $9.0 million, 24.3 million and $22.1 million at December 31, 2016, 2015, 2014, 2013 and 2012, respectively.

 

		At March 31, 2017				At December 31,
						2016				2015				2014				2013				2012
						(Dollars in thousands)
Nonaccrual loans:
Mortgage loans:
1-4 family residences
Investor owned		$	573			$	809				$1,635				$2,721			$	7,365			$	12,504
Owner occupied			1,723				1,463				1,078				1,036				4,983				6,762
Multifamily residences			—				—				—				2,957				4,040				4,320
Nonresidential properties			1,606				1,614				1,660				72				1,579				3,232
Construction and land			1,142				1,145				637				259				3,019				7,143
Nonmortgage loans:
Business			12				22				13				14				236				1,686
Consumer			—				—				—				—				29				40
Total nonaccrual loans (not including nonaccruing troubled debt restructured loans)		$	5,056			$	5,053				$5,023				$7,059			$	21,251			$	35,687
Nonaccruing troubled debt restructured loans:
Mortgage loans:
1-4 family residences
Investor owned		$	1,214			$	1,240				$2,599			$	4,585			$	10,059			$	7,666
Owner occupied			636				646				1,055				1,923				7,471				7,534
Multifamily residences			—				—				—				—				396				450
Nonresidential properties			780				783				828				2,427				5,658				5,508
Construction and land			—				—				—				—				—				154
Nonmortgage loans:
Business			—				—				—				79				751				824
Consumer			—				—				—				—				—				—
Total nonaccruing troubled debt restructured loans			2,630				2,669				4,482				9,014				24,335				22,136
Total nonaccrual loans		$	7,686			$	7,722				$9,505			$	16,073			$	45,586			$	57,823

 

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		At March 31, 2017				At December 31,
						2016				2015				2014				2013				2012
						(Dollars in thousands)
Real estate owned:
Mortgage loans:
1-4 family residences
Investor owned			—				—				—				—				—				—
Owner occupied			—				—				—				—				—				—
Multifamily residences			—				—				—				—				—				—
Nonresidential properties			—				—				—				—				—				—
Construction and land			—				—				76				162				1,059				1,200
Nonmortgage loans:
Business			—				—				—				—				—				—
Consumer			—				—				—				—				—				—
Total real estate owned			—				—				76				162				1,059				1,200
Total nonperforming assets		$	7,686			$	7,722			$	9,581			$	16,235			$	46,645			$	59,023
Accruing loans past due 90 days or more:
Mortgage loans:
1-4 family residences
Investor owned			—				—				—				—				—				—
Owner occupied			—				—				—				—				—				—
Multifamily residences			—				—				—				—				—				—
Nonresidential properties			—				—				—				126				127				299
Construction and land			—				—				—				1,257				894				—
Nonmortgage loans:
Business			—				—				—				600				—				3,511
Consumer			—				—				—				—				—				—
Total accruing loans past due 90 days or more			—				—				—				1,983				1,021				3,810
Accruing troubled debt restructured loans:
Mortgage loans:
1-4 family residences
Investor owned			6,385				6,422				6,579				5,179				2,371				4,134
Owner occupied			7,232				7,271				8,326				9,661				2,476				2,209
Multifamily residences			—				—				—				—				—				—
Nonresidential properties			4,036				4,066				4,186				3,590				2,262				1,256
Construction and land			—				—				—				—				—				—
Nonmortgage loans:
Business			546				593				814				970				—				—
Consumer			—				—				—				—				—				—
Total accruing troubled debt restructured loans		$	18,199			$	18,352			$	19,905			$	19,400			$	7,109			$	7,599
Total nonperforming assets, accruing loans past due 90 days or more and accruing troubled debt restructured loans		$	25,885			$	26,074			$	29,486			$	37,618			$	54,775			$	70,432
Total nonperforming loans to total loans			1.12	%			1.19	%			1.65	%			2.91	%			7.98	%			9.73	%
Total nonperforming assets to total assets			0.98	%			1.04	%			1.35	%			2.28	%			6.24	%			7.59	%
Total nonperforming assets, accruing loans past due 90 days or more and accruing troubled debt restructured loans to total assets			3.29	%			3.50	%			4.19	%			5.33	%			7.50	%			9.25	%

For the periods ended March 31, 2017 and December 31, 2016 and 2015, we collected $65,000, $315,000 and $597,000, respectively, of interest income on our non-accruing loans, of which we recognized $21,000, $83,000 and $115,000, respectively.

 

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Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the Office of the Comptroller of the Currency to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.

Under OCC regulations, when an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.

In connection with the filing of our periodic reports with the Office of the Comptroller of the Currency and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations.

On the basis of this review of our loans, our classified and special mention loans at the dates indicated were as follows:

 

		At March 31, 2017				At December 31,
						2016				2015				2014				2013				2012
		(In Thousands)
Classified Loans:
Substandard		$	19,360			$	19,225			$	17,786			$	18,862			$	53,690			$	71,197
Doubtful			—				—				—				—				—				1,252
Loss			—				—				—				—				—				—
Total classified loans			19,360				19,225				17,786				18,862				53,690				72,449
Special mention loans			4,649				2,549				6,469				10,501				22,134				1,367
Total classified and special mention loans		$	24,009			$	21,774			$	24,255			$	29,363			$	75,824			$	73,816

Troubled Debt Restructurings. We occasionally modify loans to help a borrower stay current on his or her loan and to avoid foreclosure. We consider modifications only after analyzing the borrower’s current repayment capacity, evaluating the strength of any guarantors based on documented current financial information, and assessing the current value of any collateral pledged. We generally do not forgive principal or interest on loans, but may do so if it is in our best interest and increases the likelihood that we can collect the remaining principal balance. We may modify the terms of loans to lower interest rates, which may be at below market rates, to provide for fixed interest rates on loans where fixed rates are otherwise not available, or to provide for interest-only terms. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and that is in our best interests.

At March 31, 2017, we had 57 loans totaling $23.0 million (including three loans held-for-sale totaling $2.1 million) that were classified as troubled debt restructurings. Of these, ten loans totaling $4.8 million (including all three of our loans held-for-sale totaling $2.1 million) were included in our non-accrual loans at such date because they were not performing in accordance with their modified terms, and the remaining 47 loans, totaling $18.2 million, had been performing in accordance with their modified terms for a minimum of six months since the date of restructuring.

At December 31, 2016, we had 61 loans totaling $23.2 million (including three loans held-for-sale totaling $2.1 million) that were classified as troubled debt restructurings. Of these, ten loans totaling $4.8 million (including all three of our loans

 

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held-for-sale totaling $2.1 million) were included in our non-accrual loans at such date because they were not performing in accordance with their modified terms, and the remaining 51 loans, totaling $18.4 million, had been performing in accordance with their modified terms for a minimum of six months since the date of restructuring.

Allowance for Loan Losses

The Bank has approved and maintained an appropriate, systematic and consistently applied process to determine the dollar amounts of the allowance for loan losses (“ALLL”) that is adequate to absorb inherent losses in the loan portfolio and other held financial instruments. An inherent loss, as defined by GAAP, and applicable banking regulations, is an unconfirmed loss that probably exists based on the information that is available as of the evaluation date. It is not a loss that may arise from events that might occur as a result of a possible future event. Arriving at an appropriate allowance involves a high degree of management’s judgment, is inevitably imprecise, and results in a range of possible losses.

The determination of the dollar amounts of the ALLL are based on management’s current judgments about the credit quality of the loan portfolio taking into consideration all known relevant internal and external factors that affect loan payment at the end of each month. The dollar amounts reported each month for the ALLL are reviewed at least quarterly by the Board. To ensure that the methodology remains appropriate for the Bank, the Board periodically has the methodology validated externally and causes revisions to be made when appropriate. The Audit Committee oversees and monitors the internal controls over the ALLL determination process. The Bank adheres to a safe and sound banking practice by maintaining, analyzing, and supporting an adequate ALLL in accordance with GAAP and supervisory guidance.

The Bank’s ALLL methodology consists of a system designed and implemented to estimate loan and lease losses. The Bank’s ALLL methodology incorporates management’s current judgments about the credit quality of the loan and lease portfolio through a disciplined and consistently applied process.

The Bank’s loan policy requires the following when the Bank calculates the level of ALLL:

 

•

All loans shall be taken into consideration in the ALLL methodology whether on an individual or group basis.

 

•

The Bank shall identify all loans to be evaluated for impairment on an individual basis under ASC 310 (formerly FAS 114) and segment the remainder of the loan portfolio into groups of loans with similar risk characteristics for evaluation and analysis under ASC 450 (formerly FAS 5).

 

•

All known relevant internal and external factors that may affect the collection of the loan shall be taken into consideration.

 

•

All known relevant internal and external factors that may affect loan collectability shall be considered and applied consistently; however, when appropriate, these factors may be modified for new factors affecting loan collectability.

 

•

The particular risks inherent in different kinds of lending shall be taken into consideration.

 

•

The current collateral values, less the costs to sell, shall be taken into consideration when applicable.

 

•

The Bank shall require that competent and well-trained personnel perform the analysis, estimates, reviews and other ALLL methodology functions.

 

•

The ALLL methodology shall be based on current and reliable information.

 

•

The ALLL methodology shall be well documented, in writing, with clear explanations of the supporting analyses and rationale.

 

•

The ALLL methodology shall include a systematic and logical method to consolidate the loss estimates and ensure the ALLL balance is recorded in accordance with GAAP.

Loan pools with similar risk characteristics. Loss histories are the starting point for the calculation of ALLL balances. Loss histories are calculated for each of the pools by aggregating the historical losses less recoveries within the respective pools and annualizing the number over the determined length of time. The length of time may vary according to the relevance of past periods’ experience to the current period, among other considerations. The Bank currently uses a prior twelve quarter rolling average for its historical loss rates.

 

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Each segment’s historical loss rate is adjusted for the effects of the qualitative or environmental factors. The factors analyzed include:

 

•

Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices.

 

•

Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.

 

•

Changes in the nature and volume of the portfolio and in the terms of loans.

 

•

Changes in the experience, ability and depth of lending management and other relevant staff.

 

•

Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans.

 

•

Changes in the quality of the Bank’s loan review system.

 

•

Changes in the value of underlying collateral for collateral-dependent loans.

 

•

The existence and effect of any concentration of credit, and changes in the level of such concentrations.

 

•

The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.

The Bank utilizes a risk-based approach to determine the appropriate adjustments for each qualitative factor. A matrix containing definitions of low, medium, and high risk levels are be used to assess the individual factors to determine their respective directional characteristics. These risk levels serve as the foundation for determining the individual adjustments for each factor for each pool of loans.

The qualitative factor adjustments are supported by applicable reports, graphs articles and any other relevant information to evidence and document management’s judgment as to the respective levels of risk and adjustment requirements.

Each of the qualitative adjustment factors is applied to each of the loan pools to reflect adjustments that increase or decrease the historical loss rates applied to each loan pool. Each of these adjustment factors is individually supported and justified, and a discrete narrative for each reflects current information, events, circumstances, and conditions influencing the adjustment. The narratives include descriptions of each factor, management’s analysis of how each factor has changed over time, which loan pool’s loss rates have been adjusted, the amount by which loss estimates have been adjusted for changes in conditions, an explanation of how management estimated the impact, and other available data that support the reasonableness of the adjustments.

Once these qualitative adjustment factors are determined for each pool of loans, they are added to the historical loss numbers for each corresponding pool of loans to arrive at a loss factor for each pool based on historical loss experience and qualitative or environmental influences. These loss factors are adjusted to appropriately reflect the respective risk rating categories within each pool by applying the weighting factors described above to those loans within the respective pools risk rates.

The series of calculations described above can be expressed as the following equation:

[(H*P) + (Q*P)] = R, where

H = Historical loss factor for the pool

Q = Qualitative/Environmental aggregate adjustment for the pool

P = Total loans within the pool

R = Required reserve amount for the risk rating category within the pool

Specific allowances for identified problem loans. The Bank considers a loan to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. All troubled debt restructurings and loans on non-accrual status are deemed to be impaired. A specific valuation allowance is established for the impairment amount of each loan,

 

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calculated using the present value of expected cash flows, observable market price, or the fair value of the collateral, in accordance with the most likely means of recovery.

Factors evaluated in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not be classified as impaired. The Bank determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

An unallocated component may be maintained to cover uncertainties that could affect our estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

Validation of the ALLL. The Bank considers its ALLL methodology valid when it accurately estimates the amount of loss contained in the loan portfolio. The Bank has employed procedures, including the following, when validating the reasonableness of its ALLL methodology and determining whether there may be deficiencies in its overall methodology or loan grading process:

 

•

A review of trends in loan volume, delinquencies, loan restructurings and concentrations.

 

•

A review of previous charge-offs and recovery history, including an evaluation of the timeliness of the entries to record both the charge-offs and the recoveries.

 

•

An at least annual review by a third party that is independent of the ALLL estimation process.

 

•

An evaluation of the appraisal process of the underlying collateral.

The Bank supports the independent validation process with the work papers from the ALLL review function and may include the summary findings of an independent reviewer. The Board reviews the findings and acknowledges its review in the minutes of its meeting. If the methodology is changed based upon the findings of the validation process, the documentation that describes and supports the changes is maintained.

As an integral part of its examination process, the Office of the Comptroller of the Currency will periodically review our allowance for loan losses. Following such review, we may determine that it is appropriate to recognize additions to the allowance based on our judgment and information available to us at the time of such examination.

Current expected credit losses. On June 16, 2016, the Financial Accounting Standards Board issued the current expected credit losses (“CECL”) standard. The new standard will have a pervasive impact on us. In response to the new model, we have reassessed our risk management policies and procedures in order for us to successfully implement CECL. Once adopted, we will have to estimate the allowance for loan losses on expected losses rather than incurred losses.

 

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The following table sets forth activity in our allowance for loan losses for the periods indicated.

 

		Three Months Ended March 31,								Years Ended December 31,
		2017				2016				2016				2015				2014				2013				2012
		(Dollars in thousands)
Allowance at beginning of year		$	10,205			$	9,484			$	9,484			$	9,449			$	9,940			$	10,056			$	7,872
Provision (recovery) for loan losses			52				(547	)			(57	)			353				1,184				3,426				5,132
Charge offs:
Mortgage loans:
1-4 family residences
Investor owned			—				—				(38	)			(142	)			(494	)			(1,042	)			(376	)
Owner occupied			—				—				—				(140	)			(207	)			(491	)			(128	)
Multifamily residences			—				—				(3	)			(257	)			(252	)			(254	)			(26	)
Nonresidential properties			—				—				—				(19	)			(268	)			(184	)			—
Construction and land			—				(85	)			(85	)			(77	)			(32	)			(434	)			(467	)
Nonmortgage loans:
Business			(10	)			—				—				—				(945	)			(1,440	)			(1,954	)
Consumer			—				—				(13	)			(8	)			(19	)			(18	)			(56	)
Total chargeoffs			(10	)			(85	)			(139	)			(643	)			(2,217	)			(3,863	)			(3,007	)
Recoveries:
Mortgage loans:
1-4 family residences
Investor owned			5				3				18				53				198				4				2
Owner occupied			1				134				142				10				37				—				—
Multifamily residences			1				—				1				—				61				32				11
Nonresidential properties			2				2				9				31				10				—				6
Construction and land			—				—				5				—				—				133				—
Nonmortgage loans:
Business			113				470				733				224				231				147				34
Consumer			1				1				9				7				5				5				6
Total recoveries			123				610				917				325				542				321				59
Net (chargeoffs) recoveries			113				525				778				(318	)			(1,675	)			(3,542	)			(2,948	)
Allowance at end of year		$	10,370			$	9,462			$	10,205			$	9,484			$	9,449			$	9,940			$	10,056
Allowance for loan losses as a percentage for nonperforming loans			134.92	%			117.15	%			132.15	%			99.78	%			58.79	%			21.80	%			17.39	%
Allowance for loan losses as a percentage of total loans			1.51	%			1.61	%			1.57	%			1.64	%			1.71	%			1.74	%			1.69	%
Net (chargeoffs) recoveries to average loans outstanding during the year			0.02	%			0.09	%			0.13	%			(0.06	%)			(0.30	%)			(0.61	%)			(0.48	%)

 

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Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of the allowance in each category to the total allocated allowance at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 

														At December 31,
		At March 31, 2017												2016												2015
		Allowance for Loan Losses				Percent of Allowance in Each Category to Total Allocated Allowance				Percent of Loans in Each Category to Total Loans				Allowance for Loan Losses				Percent of Allowance in Each Category to Total Allocated Allowance				Percent of Loans in Each Category to Total Loans				Allowance for Loan Losses				Percent of Allowance in Each Category to Total Allocated Allowance				Percent of Loans in Each Category to Total Loans
		(Dollars in thousands)
Mortgage loans:
1-4 family residences
Investor owned		$	3,181				31.58	%			34.62	%		$	3,146				30.83	%			34.90	%		$	2,843				29.98	%			35.25	%
Owner occupied			1,729				17.16	%			13.98	%			1,805				17.69	%			14.98	%			2,126				22.42	%			18.39	%
Multifamily residences			2,800				27.79	%			23.55	%			2,705				26.51	%			24.28	%			1,994				21.02	%			21.30	%
Nonresidential properties			1,568				15.56	%			20.45	%			1,320				12.93	%			18.64	%			1,298				13.69	%			18.46	%
Construction and land			672				6.67	%			5.47	%			615				6.03	%			4.66	%			502				5.29	%			3.97	%
Total mortgage loans			9,950				98.77	%			98.07	%			9,591				93.98	%			97.46	%			8,763				92.40	%			97.37	%
Nonmortgage loans:
Business			115				1.14	%			1.81	%			597				5.85	%			2.41	%			709				7.48	%			2.49	%
Consumer			9				0.09	%			0.12	%			17				0.17	%			0.13	%			12				0.13	%			0.14	%
Total nonmortgage loans			124				1.23	%			1.93	%			614				6.02	%			2.54	%			721				7.60	%			2.63	%
Total allocated allowance			10,074				100.00	%			100.00	%			10,205				100.00	%			100.00	%			9,484				100.00	%			100.00	%
Unallocated			296												—												—
Total		$	10,370											$	10,205											$	9,484

 

		At December 31,
		2014												2013												2012
						Percent of												Percent of												Percent of
						Allowance in												Allowance in												Allowance in
						Each				Percent of								Each				Percent of								Each				Percent of
						Category to				Loans in								Category to				Loans in								Category to				Loans in
		Allowance				Total				Each				Allowance				Total				Each				Allowance				Total				Each
		for Loan				Allocated				Category to				for Loan				Allocated				Category to				for Loan				Allocated				Category to
		Losses				Allowance				Total Loans				Losses				Allowance				Total Loans				Losses				Allowance				Total Loans
		(Dollars in thousands)
Mortgage loans:
1-4 family residences
Investor owned		$	2,727				28.86	%			34.54	%		$	2,978				29.96	%			34.27	%		$	3,426				34.07	%			34.99	%
Owner occupied			2,277				24.10	%			19.05	%			2,035				20.47	%			19.47	%			1,295				12.88	%			17.68	%
Multifamily residences			1,669				17.66	%			20.10	%			1,538				15.47	%			18.82	%			963				9.58	%			18.16	%
Nonresidential properties			1,529				16.18	%			20.24	%			1,321				13.29	%			19.19	%			974				9.69	%			19.45	%
Construction and land			504				5.33	%			3.39	%			656				6.60	%			4.48	%			656				6.52	%			5.00	%
Total mortgage loans			8,706				92.14	%			97.32	%			8,528				85.79	%			96.23	%			7,314				72.73	%			95.28	%
Nonmortgage loans:
Business			732				7.75	%			2.57	%			1,394				14.02	%			3.56	%			2,703				26.88	%			4.47	%
Consumer			11				0.12	%			0.11	%			18				0.18	%			0.21	%			39				0.39	%			0.25	%
Total nonmortgage loans			743				7.86	%			2.68	%			1,412				14.21	%			3.77	%			2,742				27.27	%			4.72	%
Total allocated allowance			9,449				100.00	%			100.00	%			9,940				100.00	%			100.00	%			10,056				100.00	%			100.00	%
Unallocated			—												—												—
Total		$	9,449											$	9,940											$	10,056

 

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At March 31, 2017, our allowance for loan losses represented 1.51% of total loans and 134.92% of nonperforming loans. The allowance for loan losses increased to $10.4 million at March 31, 2017 from $10.2 million at December 31, 2016. There were $113,000 and $525,000 in net loan recoveries during the three months ended March 31, 2017 and March 31, 2016, respectively.

At December 31, 2016, our allowance for loan losses represented 1.57% of total loans and 132.15% of nonperforming loans. The allowance for loan losses increased to $10.2 million at December 31, 2016 from $9.5 million at December 31, 2015. There were $778,000 in net loan recoveries and $318,000 in net loan charge-offs during the years ended December 31, 2016 and December 31, 2015, respectively.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe that we have established our allowance for loan losses in conformity with GAAP, after a review of our loan portfolio by regulators, we may determine it is appropriate to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate and increases may be necessary should the quality of any loan deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

Investment Activities

General. Our investment policy was adopted by the board of directors. The investment policy is reviewed annually by the board of directors. The Chief Financial Officer is designated as the Chief Investment Officer. The Chief Financial Officer will plan and execute investment strategies consistent with the policies approved by the Board of Directors. The Chief Financial Officer provides an investment schedule detailing the investment portfolio which is reviewed at least quarterly by the Bank’s asset-liability committee and the board of directors.

Our current investment policy permits, with certain limitations, investments in United States Treasury securities; securities issued by the United States Government and its agencies or government sponsored enterprises including mortgage-backed and collateralized mortgage obligations (“CMO”) issued by Fannie Mae, Ginnie Mae and Freddie Mac; corporate bonds and obligations, and certificates of deposit in other financial institutions.

At March 31, 2017 and December 31, 2016, our investment portfolio consisted of securities and obligations issued by the U.S. government and government sponsored enterprises and the Federal Home Loan Bank of New York. At March 31, 2017 and December 31, 2016, we owned $2.1 million and $1.0 million, respectively, of Federal Home Loan Bank of New York stock. As a member of Federal Home Loan Bank of New York, we are required to purchase stock in the Federal Home Loan Bank of New York, which stock is carried at cost and classified as restricted equity securities.

Securities Portfolio Composition. The following table sets forth the amortized cost and estimated fair value of our available-for-sale securities portfolio at the dates indicated, which consisted of U.S. government and federal agencies, pass-through mortgage-backed securities, and certificates of deposit.

 

										At December 31,
		At March 31, 2017								2016								2015								2014								2013								2012
		Amortized				Estimated				Amortized				Estimated				Amortized				Estimated				Amortized				Estimated				Amortized				Estimated				Amortized				Estimated
		Cost				Fair Value				Cost				Fair Value				Cost				Fair Value				Cost				Fair Value				Cost				Fair Value				Cost				Fair Value
										(In thousands)
U.S. Government and Federal Agencies		$	41,907			$	41,484			$	41,906			$	41,559			$	71,899			$	71,166			$	88,828			$	87,088			$	90,823			$	86,662			$	96,022			$	95,894
Certificates of Deposit			500				500				500				500				—				—				—				—				—				—				—				—
Mortgage-Backed Securities
FHLMC Certificates			190				213				192				216				202				222				212				234				222				238				332				355
FNMA Certificates			3,374				3,365				3,600				3,606				4,411				4,432				5,732				5,872				6,536				6,548				872				948
GNMA Certificates			6,310				6,375				6,744				6,809				6,084				6,214				7,211				7,380				8,668				8,857				11,158				11,496
Total		$	52,281			$	51,937			$	52,942			$	52,690			$	82,596			$	82,034			$	101,983			$	100,574			$	106,249			$	102,305			$	108,384			$	108,693

At March 31, 2017 and December 31, 2016, there were no securities of which the amortized cost or estimated fair value exceeded 10% of our total equity.

 

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Mortgage-Backed Securities. At March 31, 2017 and December 31, 2016, we had mortgage-backed securities with a carrying value of $10.0 million and $10.6 million, respectively. Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as “pass through” certificates because the underlying loans are “passed through” to investors, net of certain costs, including servicing and guarantee fees. Mortgage-backed securities typically are collateralized by pools of one- to- four family or multifamily mortgages, although we invest primarily in mortgage-backed securities backed by one- to- four family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as Ponce De Leon Federal Bank. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. All of our mortgage-backed securities are backed by Freddie Mac and Fannie Mae, which are government-sponsored enterprises, or Ginnie Mae, which is a government-owned enterprise.

Residential mortgage-backed securities issued by United States Government agencies and government-sponsored enterprises are more liquid than individual mortgage loans because there is an active trading market for such securities. In addition, residential mortgage-backed securities may be used to collateralize our borrowings. Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.

Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at March 31, 2017, are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. Adjustable-rate mortgage-backed securities are included in the period in which interest rates are next scheduled to adjust.

 

		One Year or Less								More than One Year through Five Years								More than Five Years through Ten Years								More than Ten Years								Total
		Amortized Cost				Weighted Average Yield				Amortized Cost				Weighted Average Yield				Amortized Cost				Weighted Average Yield				Amortized Cost				Weighted Average Yield				Amortized Cost				Fair Value				Weighted Average Yield
		(Dollar in thousands)
U.S. Government and Federal Agencies		$	2,000				0.652	%		$	39,907				1.293	%		$	—				—			$	—				—			$	41,907			$	41,484				1.262	%
Certificates of Deposit			500				0.700	%			—				—				—				—				—				—				500				500				0.700	%
Mortgage-Backed Securities
FHLMC Certificates			—				—				—				—				—				—				190				6.122	%			190				213				6.122	%
FNMA Certificates			—				—				19				4.536	%			1,422				1.829	%			1,933				2.559	%			3,374				3,365				2.262	%
GNMA Certificates			—				—				—				—				—				—				6,310				2.091	%			6,310				6,375				2.091	%
Total		$	2,500				0.662	%		$	39,926				1.294	%		$	1,422				1.829	%		$	8,433				2.131	%		$	52,281			$	51,937				1.418	%

Sources of Funds

General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also may use borrowings, primarily Federal Home Loan Bank of New York advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. At March 31, 2017, the amount available to the Bank to borrow from the Federal Home Loan Bank of New York was $114.4 million. In addition, we receive funds from scheduled loan payments, investment maturities and calls, loan prepayments and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.

Deposits. Our deposits are generated primarily from our primary market area. We offer a selection of deposit accounts, including demand accounts, savings accounts, certificates of deposit and individual retirement accounts. Deposit account terms vary, with the primary differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate.

Interest rates paid, maturity terms, service fees and premature withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. We rely upon personalized customer service, long-standing relationships with customers, and the favorable image of the Bank in the community to attract and retain deposits. We recently implemented a

 

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fully functional electronic banking platform, including a mobile application and online bill pay, as a service to our retail and business customers.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. Based on experience, we believe that our deposits are relatively stable. However, the ability to attract and maintain deposits and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions.

The following table sets forth the average balance and weighted average rate of our deposit products for the periods indicated.

 

		For the Three Months Ended												For the Years Ended December 31,
		March 31, 2017												2016												2015												2014
										Weighted												Weighted												Weighted												Weighted
		Average								Average				Average								Average				Average								Average				Average								Average
		Balance				Percent				Rate				Balance				Percent				Rate				Balance				Percent				Rate				Balance				Percent				Rate
		(Dollars in thousands)
Deposit type:
Savings		$	128,859				20.06	%			0.38	%		$	126,573				20.32	%			0.26	%		$	122,538				20.50	%			0.20	%		$	127,200				20.79	%			0.19	%
Interest-bearing demand			71,043				11.06	%			0.15	%			54,493				8.75	%			0.18	%			46,692				7.81	%			0.16	%			44,546				7.28	%			0.13	%
Certificates of deposit			362,470				56.42	%			1.47	%			371,313				59.62	%			1.48	%			366,958				61.40	%			1.44	%			379,860				62.07	%			1.42	%
Interest-bearing deposits			562,372				87.54	%			1.06	%			552,379				88.69	%			1.07	%			536,188				89.71	%			1.04	%			551,606				90.14	%			1.03	%
Non-interest bearing demand			80,066				12.46	%			—				70,407				11.31	%			—				61,524				10.29	%			—				60,318				9.86	%			—
Total deposits		$	642,438				100.00	%			0.92	%		$	622,786				100.00	%			0.95	%		$	597,712				100.00	%			0.93	%		$	611,924				100.00	%			0.93	%

The following table sets forth our deposit activities for the periods indicated.

 

		At or For the Three Months Ended March 31,								At or For the Years Ended December 31,
		2017				2016				2016				2015				2014
		(In thousands)
Beginning balance		$	643,078			$	599,506			$	599,506			$	599,697			$	627,060
Net deposits (withdrawals) before interest credited			11,339				19,764				38,070				(5,459	)			(32,739	)
Interest credited			1,465				1,425				5,502				5,268				5,376
Net increase (decrease) in deposits			12,804				21,189				43,572				(191	)			(27,363	)
Ending balance		$	655,882			$	620,695			$	643,078			$	599,506			$	599,697

The following table sets forth our certificates of deposit classified by interest rate as of the dates indicated.

 

		At March 31, 2017				At December 31,
						2016				2015				2014
		(In thousands)
Interest Rate:
0.05% - 0.99%		$	53,327			$	58,874			$	86,624			$	127,612
1.00% - 1.49%			143,269				144,193				131,065				105,358
1.50% - 1.99%			71,129				66,455				56,453				47,856
2.00% - 2.49%			92,845				94,394				62,224				39,412
2.50% - 2.99%			4,837				4,805				26,222				38,184
3.00% and greater			—				—				1,297				12,495
Total		$	365,407			$	368,721			$	363,885			$	370,917

 

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The following table sets forth the amount and maturities of our certificates of deposit by interest rate at March 31, 2017.

 

		Period to Maturity
		Less Than or Equal to One Year				More Than One to Two Years				More Than Two to Three Years				More Than Three Years				Total				Percent of Total
						(Dollars in thousands)
Interest Rate Range:
0.05% - 0.99%		$	53,275			$	52			$	—			$	—			$	53,327				14.59	%
1.00% - 1.49%			76,280				59,232				7,242				515				143,269				39.21	%
1.50% - 1.99%			23,311				13,722				12,285				21,811				71,129				19.47	%
2.00% - 2.49%			4,853				9,345				15,050				63,597				92,845				25.41	%
2.50% - 2.99%			—				1,355				211				3,271				4,837				1.32	%
Total		$	157,719			$	83,706			$	34,788			$	89,194			$	365,407				100.00	%

At March 31, 2017, the aggregate amount of all our certificates of deposit in amounts greater than or equal to $100,000 was approximately $232.2 million. The following table sets forth the maturity of these certificates as of March 31, 2017.

 

		At March 31, 2017
Maturity Period:		(In thousands)
Three months or less		$	30,894
Over three months through six months			18,638
Over six months through one year			44,592
Over one year to three years			76,701
Over three years			61,369
Total		$	232,194

At March 31, 2017, certificates of deposit equal to or greater than $250,000 totaled $85.5 million of which $33.2 million matures on or before March 31, 2018.

At March 31, 2017, our passbook savings accounts and certificates of deposit with a passbook feature totaled $230.7 million, reflecting our depositors’ preference for traditional banking services.

Borrowings. We may obtain advances from the Federal Home Loan Bank of New York by pledging as security our capital stock at the Federal Home Loan Bank of New York and certain of our mortgage loans and mortgage-backed securities. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. To the extent such borrowings have different terms to repricing than our deposits; they can change our interest rate risk profile. During the past several years, we have generally used shorter term Federal Home Loan Bank of New York advances. At March 31, 2017 and December 31, 2016 we had $28.0 million and $3.0 million, respectively, outstanding of Federal Home Loan Bank of New York advances.

The following table sets forth information concerning balances and interest rates on our borrowings at the dates and for the periods indicated.

 

		Months Ended								At or For the Year
		March 31,								December 31,
		2017				2016				2016				2015				2014
		(Dollars in Thousands)
FHLB Advances:
Balance outstanding at end of period		$	28,000			$	—			$	3,000			$	8,000			$	10,000
Average amount outstanding during the period			12,955				4,066				1,145				15,050				9,129
Maximum outstanding at any month end during the period			31,000				12,000				12,000				24,000				18,000
Weighted average interest rate during the period			0.91	%			0.69	%			0.61	%			0.41	%			0.47	%
Weighted average interest rate at the end of the period			1.04	%			0.00	%			0.78	%			0.56	%			0.45	%

 

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Properties

As of March 31, 2017, the net book value of our office properties was $24.3 million, and the net book value of our furniture, fixtures and equipment was $1.4 million. The following table sets forth information regarding our offices.

 

Location		Leased or Owned				Year Acquired or Leased				Net Book Value of Real Property
										(In thousands)
Main Office:
2244 Westchester Avenue			Owned				1995			$	6,505
Bronx, NY 10462
Other Properties:
980 Southern Blvd.			Leased				Pre 1990			$	1,254
Bronx, NY 10459
37-60 82nd Street			Owned				2006			$	8,631
Jackson Heights, NY 11372
30 East 170th Street			Owned				1987			$	129
Bronx, NY 10452
169-174 Smith Street			Owned				1988			$	45
Brooklyn, NY 11201
1925 Third Avenue			Leased				1996			$	16
New York, NY 1996
2244 Westchester Avenue			Owned				1995			$	587
Bronx, NY 10462
5560 Broadway			Owned				1998			$	1,127
Bronx, NY 10463
3405-3407 Broadway			Leased				2001			$	0
Astoria, NY 11106
3821 Bergenline Avenue			Owned				2001			$	1,799
Union City, NJ 07087
1900-1960 Ralph Avenue			Leased				2007			$	346
Brooklyn, NY 11234
20-47 86th Street			Owned				2010			$	1,966
Brooklyn, NY 11214
100-20 Queens Blvd			Leased				2010			$	677
Forest Hills, NY 11375
319 First Avenue			Leased				2010			$	1,200
New York, NY 10003

Infrastructure improvements are currently underway as one branch (at 86th Street in Brooklyn) is being completely renovated, while another branch (at 3rd Avenue in Manhattan) is scheduled to also undergo complete renovation this year. The remaining branches will also undergo renovations and upgrades, though in some cases, less substantial. As part of these improvements, the Bank intends to upgrade its ATM network and related service technologies.

Subsidiaries

We have two subsidiaries, Ponce De Leon Mortgage Corporation, a New York chartered mortgage brokerage entity whose employees are registered in New York and New Jersey and PFS Services Inc., which owns two of our properties.

Legal Proceedings

We are not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business. At March 31, 2017, we were not involved in any legal proceedings the outcome of which would be material to our financial condition or results of operations.

 

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Expense and Tax Allocation

Ponce Bank will enter into an agreement with PDL Community Bancorp and Ponce Bank Mutual Holding Company to provide them with certain administrative support services for compensation not less than the fair market value of the services provided. In addition, Ponce Bank and PDL Community Bancorp will enter into an agreement to establish a method for allocating and for reimbursing the payment of their consolidated tax liability. The Bank’s ESOP Trust will also enter into a borrowing agreement with PDL Community Bancorp to enable the ESOP to purchase the requisite shares of PDL Community Bancorp.

Personnel

At March 31, 2017, we had 177 full-time equivalent employees. Our employees are not represented by any collective bargaining group. Management believes that we have good working relations with our employees.

TAXATION

Ponce De Leon Federal Bank is, and Ponce Bank Mutual Holding Company, PDL Community Bancorp and Ponce Bank will be, subject to federal and state income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal and state taxation is intended only to summarize material income tax matters and is not a comprehensive description of the tax rules applicable to Ponce Bank Mutual Holding Company, PDL Community Bancorp, and Ponce Bank.

Our federal and state tax returns have not been audited for the past five years.

Federal Taxation

Method of Accounting. For federal income tax purposes, Ponce De Leon Federal Bank currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its federal income tax returns. PDL Community Bancorp and Ponce Bank will file a consolidated federal income tax return. The Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for income taxes on bad debt reserves by savings institutions. For taxable years beginning after 1995, Ponce De Leon Federal Bank has been subject to the same bad debt reserve rules as commercial banks. It currently utilizes the specific charge-off method under Section 582(a) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”).

Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, less an exemption amount, referred to as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent tax computed this way exceeds tax computed by applying the regular tax rates to regular taxable income. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. After the computation of taxes for the three months ended March 31, 2017, Ponce De Leon Federal Bank does not have a minimum tax credit carryforward.

Net Operating Loss Carryovers. Generally, a financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At March 31, 2017, Ponce De Leon Federal Bank had no federal net operating loss carryforwards.

Capital Loss Carryovers. A corporation cannot recognize capital losses in excess of capital gains generated. Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any other capital losses for the year to which carried and is used to offset any capital gains. Any undeducted loss remaining after the five-year carryover period is not deductible. At March 31, 2017, Ponce De Leon Federal Bank had no capital loss carryovers.

Corporate Dividends. PDL Community Bancorp may generally exclude from its income 100% of dividends received from Ponce Bank as a member of the same affiliated group of corporations.

 

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State Taxation

Ponce De Leon Federal Bank is and Ponce Bank will be treated as a financial institution under New York and New Jersey state income tax law. The states of New York and New Jersey subject financial institutions to all state and local taxes in the same manner and to the same extent as other business corporations in New York and New Jersey. Additionally, depository financial institutions are subject to local business license taxes and a special occupation tax.

Consolidated Group Return. With tax years beginning after January 1, 2015, New York State and New York City require unitary combined reporting for all entities engaged in a unitary business that meet certain ownership requirements. All applicable entities meet the ownership requirements in the Ponce De Leon Federal Bank filing group and a combined return is appropriately filed. Furthermore, New Jersey is not a unitary business state. Affiliated corporations that file a consolidated federal income tax return must file separate income tax returns unless they have prior approval or have been requested to file a consolidated return by the Commissioner of the New Jersey Department of Revenue.

Net Operating Loss Carryovers. The state and city of New York allow for a three-year carryback period and carryforward period of twenty years on net operating losses generated on or after tax year 2015, for tax years prior to 2015, no carryback period is allowed. Ponce De Leon Federal Bank has pre-2015 carryforwards of $1.9 million for New York State purposes and $1.8 million for New York City purposes. Furthermore, there are post-2015 carryforwards available of $13.2 million for New York State purposes and $7.6 million for New York City purposes. Finally, for New Jersey purposes, losses may only be carried forward 20 years, with no allowable carryback period. At March 31, 2017, Ponce De Leon Federal Bank had no New Jersey net operating loss carryforwards.

REGULATION AND SUPERVISION

General

As a federal savings association, Ponce De Leon Federal Bank is and Ponce Bank will be subject to examination, supervision and regulation, primarily by the Office of the Comptroller of the Currency, and, secondarily, by the Federal Deposit Insurance Corporation (“FDIC”) as the insurer of deposits. Prior to July 21, 2011, the Office of Thrift Supervision was Ponce De Leon Federal Bank’s primary federal regulator. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which is discussed further below, eliminated the Office of Thrift Supervision and transferred the Office of Thrift Supervision’s functions relating to federal savings associations, including rulemaking authority, to the Office of the Comptroller of the Currency, effective July 21, 2011. The federal system of regulation and supervision establishes a comprehensive framework of activities in which Ponce De Leon Federal Bank is engaging and Ponce Bank will engage and is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund.

Ponce De Leon Federal Bank is and Ponce Bank will also be regulated to a lesser extent by the Board of Governors of the Federal Reserve System, or the “Federal Reserve Board,” which governs the reserves to be maintained against deposits and other matters. In addition, Ponce De Leon Federal Bank is and Ponce Bank will be a member of and owns stock in the Federal Home Loan Bank of New York, which is one of the 11 regional banks in the Federal Home Loan Bank System. Ponce De Leon Federal Bank’s relationship with its depositors and borrowers also is and Ponce Bank’s will be regulated to a great extent by federal law and, to a lesser extent, state law, including in matters concerning the ownership of deposit accounts and the form and content of loan documents.

As a savings and loan holding company, PDL Community Bancorp and Ponce Bank Mutual Holding Company will be subject to examination and supervision by, and be required to file certain reports with, the Federal Reserve Board. The Office of Thrift Supervision’s functions relating to savings and loan holding companies were transferred to the Federal Reserve Board on July 21, 2011 pursuant to the Dodd-Frank Act regulatory restructuring. PDL Community Bancorp will also be subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Set forth below are certain material regulatory requirements that will be applicable to Ponce Bank and PDL Community Bancorp. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on Ponce Bank and PDL Community Bancorp. Any change in these laws or regulations, whether by Congress or the applicable regulatory agencies, could have a material adverse impact on PDL Community Bancorp, Ponce Bank and their operations.

 

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Dodd-Frank Act

As noted above, the Dodd-Frank Act made significant changes to the regulatory structure for depository institutions and their holding companies. However, the Dodd-Frank Act’s changes go well beyond that and affect the lending, investments and other operations of all depository institutions. The Dodd-Frank Act required the Federal Reserve Board to set minimum capital levels for both bank holding companies and savings and loan holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital for holding companies were restricted to capital instruments that were then currently considered to be Tier I capital for insured depository institutions. Subsequent regulations issued by the Federal Reserve Board generally exempted from these requirements bank and savings and loan holding companies of less than $1 billion of consolidated assets. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect upon passage, and directed the federal banking regulators to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Ponce Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets continue to be examined for compliance by their applicable bank regulators. The new legislation also weakened the federal preemption available for national banks and federal savings associations, and gave state attorneys general the ability to enforce applicable federal consumer protection laws.

The Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The legislation also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per separately insured depositor, retroactive to January 1, 2008. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directed the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded. Further, the legislation required that originators of securitized loans retain a percentage of the risk for transferred loans, directed the Federal Reserve Board to regulate pricing of certain debit card interchange fees and contained a number of reforms related to mortgage origination.

Many provisions of the Dodd-Frank Act involve delayed effective dates and/or require implementing regulations. The implementation of the legislation is an ongoing process and the impact on operations cannot yet fully be assessed. However, subject to the next sentence, there is a significant likelihood that the Dodd-Frank Act will result in an increased regulatory burden and compliance, operating and interest expenses for Ponce Bank and PDL Community Bancorp. However, in February 2017, the President issued an executive order stating that a policy of his administration would be to make regulations efficient, effective, and appropriately tailored. The executive order directed certain regulatory agencies to review and identify laws and regulations that inhibit federal regulation of the U.S. financial system in a manner inconsistent with the policies stated in the executive order. Any changes in laws or regulation as a result of this review could result in a repeal, amendment to or delayed implementation of the Dodd-Frank Act.

Federal Banking Regulation

Business Activities. A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, Ponce Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. The Dodd-Frank Act authorized, for the first time, the payment of interest on commercial checking accounts, effective July 21, 2011. Ponce Bank may also establish, subject to specified investment limits, service corporation subsidiaries that may engage in certain activities not otherwise permissible for Ponce Bank, including real estate investment and securities and insurance brokerage.

Examinations and Assessments. Ponce De Leon Federal Bank is and Ponce Bank will be primarily supervised by the Office of the Comptroller of the Currency. Ponce De Leon Federal Bank is and Ponce Bank will be required to file reports

 

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with and is subject to periodic examination by the Office of the Comptroller of the Currency. Ponce De Leon Federal Bank is and Ponce Bank will be required to pay assessments to the Office of the Comptroller of the Currency to fund the agency’s operations. PDL Community Bancorp will be required to file reports with and will be subject to periodic examination by the Federal Reserve Board. It also will be required to pay assessments to the Federal Reserve Board to fund the agency’s operations.

Capital Requirements. Federal regulations require FDIC-insured depository institutions, including federal savings associations, to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets and a Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.

The capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and Total capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively. The regulations also establish a minimum required leverage ratio of at least 4% Tier 1 capital. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1 capital. Additional Tier I capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier I capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. In 2015 Ponce De Leon Federal Bank made a one-time, permanent election to opt-out regarding the treatment of AOCI. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, an institution’s assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests), are multiplied by a risk weight factor assigned by the regulations based on the risk deemed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.

At March 31, 2017, Ponce De Leon Federal Bank’s capital exceeded all applicable requirements. See “Historical and Pro Forma Regulatory Capital Compliance.”

Loans-to-One Borrower. Generally, a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by “readily marketable collateral,” which generally includes certain financial instruments (but not real estate). As of March 31, 2017, Ponce De Leon Federal Bank was in compliance with the loans-to-one borrower limitations.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems

 

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and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.

Prompt Corrective Action Regulations. Under the federal Prompt Corrective Action statute, the Office of the Comptroller of the Currency is required to take supervisory actions against undercapitalized institutions under its jurisdiction, the severity of which depends upon the institution’s level of capital. An institution that has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a common equity Tier 1 ratio of less than 4.5% or a leverage ratio of less than 4% is considered to be “undercapitalized.” A savings institution that has total risk-based capital of less than 6.0%, a Tier I risk-based capital ratio of less than 4.0%, a common equity Tier 1 ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be “significantly undercapitalized.” A savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be “critically undercapitalized.”

Generally, the Office of the Comptroller of the Currency is required to appoint a receiver or conservator for a federal savings association that becomes “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the Office of the Comptroller of the Currency within 45 days of the date that a federal savings association is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company of a federal savings association that is required to submit a capital restoration plan must guarantee performance under the plan in an amount of up to the lesser of 5.0% of the savings association’s assets at the time it was deemed to be undercapitalized by the Office of the Comptroller of the Currency or the amount necessary to restore the savings association to adequately capitalized status. This guarantee remains in place until the Office of the Comptroller of the Currency notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters. Institutions that are undercapitalized become subject to certain mandatory measures such as restrictions on capital distributions and asset growth. The Office of the Comptroller of the Currency may also take any one of a number of discretionary supervisory actions against undercapitalized federal savings associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.

At March 31, 2017, Ponce De Leon Federal Bank met the criteria for being considered “well capitalized,” which means that its total risk-based capital ratio exceeded 10%, its Tier 1 risk-based ratio exceeded 8.0%, its common equity Tier I ratio exceeded 6.5% and its leverage ratio exceeded 5.0%.

Qualified Thrift Lender Test. As a federal savings association, Ponce Bank must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Ponce Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of every 12-month period. “Portfolio assets” generally means total assets of a savings association, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.

Alternatively, Ponce Bank may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.

A savings association that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement action for a violation of law. At March 31, 2017, Ponce De Leon Federal Bank satisfied the QTL test.

Capital Distributions. Federal regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the savings association’s capital account. A federal savings association must file an application with the Office of the Comptroller of the Currency for approval of a capital distribution if:

 

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the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years;

 

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the savings association would not be at least adequately capitalized following the distribution;

 

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the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or

 

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the savings association is not eligible for expedited treatment of its filings.

Even if an application is not otherwise required, every savings association that is a subsidiary of a savings and loan holding company, such as Ponce Bank, must file a notice with the Federal Reserve Board at least 30 days before its board of directors declares a dividend.

An application or notice related to a capital distribution may be disapproved if:

 

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the federal savings association would be undercapitalized following the distribution;

 

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the proposed capital distribution raises safety and soundness concerns; or

 

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the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement. A federal savings association also may not make a capital distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock form.

Community Reinvestment Act and Fair Lending Laws. All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings association, the Office of the Comptroller of the Currency is required to assess the federal savings association’s record of compliance with the Community Reinvestment Act. A savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of the Comptroller of the Currency, as well as other federal regulatory agencies and the Department of Justice.

The Community Reinvestment Act requires all institutions insured by the FDIC to publicly disclose their rating. Ponce De Leon Federal Bank received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.

Transactions with Related Parties. A federal savings association’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control with an insured depository institution such as Ponce Bank. PDL Community Bancorp will be an affiliate of Ponce Bank because of its control of Ponce Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates.

Ponce Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:

 

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be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and

 

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not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Ponce Bank’s capital.

In addition, extensions of credit in excess of certain limits must be approved by Ponce Bank’s board of directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.

 

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Enforcement. The Office of the Comptroller of the Currency has primary enforcement responsibility over federal savings associations and has authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a federal savings association. Formal enforcement action by the Office of the Comptroller of the Currency may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution to the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day. The FDIC also has the authority to terminate deposit insurance or recommend to the Office of the Comptroller of the Currency that enforcement action be taken with respect to a particular savings association. If such action is not taken, the FDIC has authority to take the action under specified circumstances.

Insurance of Deposit Accounts. The Deposit Insurance Fund of the FDIC insures deposits at FDIC insured financial institutions such as Ponce Bank. Deposit accounts in Ponce Bank are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts.

The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund. Under the FDIC’s risk-based assessment system, insured institutions were assigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s rate depended upon the category to which it is assigned, and certain adjustments specified by FDIC regulations. Institutions deemed less risky pay lower FDIC assessments. The Dodd-Frank Act required the FDIC to revise its procedures to base its assessments upon each insured institution’s total assets less tangible equity instead of deposits. The FDIC finalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity.

Effective July 1, 2016, the FDIC adopted changes that eliminated the risk categories. Assessments for most institutions are now based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure within three years. In conjunction with the Deposit Insurance Fund reserve ratio achieving 1.5%, the assessment range (inclusive of possible adjustments) was reduced for most banks and savings associations to 1.5 basis points to 30 basis points.

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended March 31, 2017, the annualized FICO assessment was equal to 0.56 basis points of total assets less tangible capital.

The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Ponce Bank. Management cannot predict what assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.

Federal Home Loan Bank System. Ponce De Leon Federal Bank is and Ponce Bank will be a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of New York, Ponce De Leon Federal Bank is and Ponce Bank will be required to acquire and hold shares of capital stock in the Federal Home Loan Bank of New York. As of March 31, 2017, Ponce De Leon Federal Bank was in compliance with this requirement. Ponce Bank may utilize advances from the Federal Home Loan Bank of New York as a supplement to the supply of investable funds.

Other Regulations

Interest and other charges collected or contracted for by Ponce De Leon Federal Bank are and by Ponce Bank will be subject to state usury laws and federal laws concerning interest rates. Ponce De Leon Federal Bank’s operations are and Ponce Bank’s will be also subject to federal laws applicable to credit transactions, such as the:

 

 

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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

 

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Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

 

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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

 

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Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

 

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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

 

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Truth in Savings Act; and

 

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rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The operations of Ponce De Leon Federal Bank also are and Ponce Bank’s will be subject to the:

 

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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

 

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Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

 

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Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

 

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The USA PATRIOT Act, which requires savings associations to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

 

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The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

Holding Company Regulation

General. PDL Community Bancorp and Ponce Bank Mutual Holding Company will be non-diversified savings and loan holding companies within the meaning of the Home Owners’ Loan Act. As such, PDL Community Bancorp and Ponce Bank Mutual Holding Company will be registered with the Federal Reserve Board and be subject to the regulation, examination, supervision and reporting requirements applicable to savings and loan holding companies. In addition, the Federal Reserve Board has enforcement authority over PDL Community Bancorp, Ponce Bank Mutual Holding Company and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.

Permissible Activities. Under present law, the business activities of PDL Community Bancorp and Ponce Bank Mutual Holding Company are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, provided certain conditions are met and financial holding company status is elected, or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to regulatory approval, and certain additional activities authorized by federal regulations. PDL Community Bancorp and Ponce Bank Mutual Holding Company have not elected financial holding company status.

 

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Federal law prohibits a savings and loan holding company, including PDL Community Bancorp and Ponce Bank Mutual Holding Company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5.0% of another savings institution or savings and loan holding company, without prior Federal Reserve Board approval. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board considers factors such as the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.

The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:

 

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the approval of interstate supervisory acquisitions by savings and loan holding companies; and

 

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the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.

Capital. Savings and loan holding companies have historically not been subjected to consolidated regulatory capital requirements. The Dodd-Frank Act required the Federal Reserve Board to establish for all bank and savings and loan holding companies minimum consolidated capital requirements that are as stringent as those required for the insured depository subsidiaries. However, pursuant to legislation passed in December 2014, the Federal Reserve Board extended to savings and loan holding companies the applicability of the “Small Bank Holding Company” exception to its consolidated capital requirements and increased the threshold for the exception from $500 million of assets to $1.0 billion, effective May 15, 2015. As a result, savings and loan holding companies with less than $1.0 billion in consolidated assets are generally not subject to the capital requirements unless otherwise advised by the Federal Reserve Board.

Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has issued regulations requiring that all savings and loan holding companies serve as a source of strength to their subsidiary depository institutions.

Dividends and Stock Repurchases. The Federal Reserve Board has issued a policy statement regarding the payment of dividends by holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall supervisory financial condition. Separate regulatory guidance provides for prior consultation with Federal Reserve Bank staff concerning dividends in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate or earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a savings and loan holding company to pay dividends may be restricted if a subsidiary savings association becomes undercapitalized. The regulatory guidance also states that a savings and loan holding company should inform Federal Reserve Bank supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the savings and loan holding company is experiencing financial weaknesses or the repurchase or redemption would result in a net reduction, at the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of PDL Community Bancorp to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.

Waivers of Dividends by Ponce Bank Mutual Holding Company. PDL Community Bancorp may pay dividends on its common stock to public stockholders. If it does, it is also required to pay dividends to Ponce Bank Mutual Holding Company, unless Ponce Bank Mutual Holding Company elects to waive the receipt of dividends. Under the Dodd-Frank Act, Ponce Bank Mutual Holding Company must receive the approval of the Federal Reserve Board before it may waive the receipt of any dividends from PDL Community Bancorp. The Federal Reserve Board has issued an interim final rule providing that it will not object to dividend waivers under certain circumstances, including circumstances where the waiver is not detrimental to the safe and sound operation of the savings association and a majority of the mutual holding company’s members have approved the waiver of dividends by the mutual holding company within the previous twelve months. In addition, for a “non-grandfathered” mutual holding company such as Ponce Bank Mutual Holding Company, each officer or director of PDL Community Bancorp and Ponce Bank, and any tax-qualified stock benefit plan or non-tax-qualified stock benefit plan in which such individual participates that holds any shares of stock to which the waiver would apply, must waive the right to receive any such dividend declared. In addition, any dividends waived by Ponce Bank Mutual Holding Company must be considered in determining an appropriate exchange ratio in the event of a conversion of the mutual holding company to stock form.

 

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Acquisition. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company’s outstanding voting stock, unless the Federal Reserve Board has found that the acquisition will not result in control of the company. A change in control definitively occurs upon the acquisition of 25% or more of the company’s outstanding voting stock. Under the Change in Bank Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.

Federal Securities Laws

PDL Community Bancorp’s common stock will be registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. PDL Community Bancorp will be subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

Emerging Growth Company Status

The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in April 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” PDL Community Bancorp qualifies as an emerging growth company under the JOBS Act.

An “emerging growth company” may choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting, and can provide scaled disclosure regarding executive compensation. PDL Community Bancorp will also not be subject to the auditor attestation requirement or additional executive compensation disclosure so long as it remains a “smaller reporting company” under Securities and Exchange Commission regulations (generally less than $75 million of voting and non-voting equity held by non-affiliates). Finally, an emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. PDL Community Bancorp has elected to comply with new or amended accounting pronouncements in the same manner as a private company.

A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.0 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).

 

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MANAGEMENT

Our Directors

The board of directors of PDL Community Bancorp will initially consist of seven members, all of whom are directors of Ponce De Leon Federal Bank. Directors will serve three-year staggered terms so that approximately one-third of the directors will be elected at each annual meeting of stockholders. Because Ponce Bank Mutual Holding Company will own a majority of our outstanding common stock, we will be a “controlled corporation” within the meaning of the Nasdaq corporate governance guidelines. As a “controlled corporation,” we will be exempt from certain requirements, including that a majority of our board of directors be independent under those standards, and that executive compensation and director nominations be overseen by independent directors. However, at the present time, each of our directors, other than Steven Tsavaris, Executive Chairman, and Carlos P. Naudon, President and Chief Executive Officer, would be considered independent under the Nasdaq Stock Market corporate governance listing standards. See “—Board Independence” below.

The following table states our directors’ names, their ages as of December 31, 2016, and the calendar years when they began serving as directors of Ponce De Leon Federal Bank:

 

Directors		Position		Age				Director Since				Current Term to Expire
James C. Demetriou		Director			70				2009				2018
William Feldman		Director			74				1993				2020
Julio Gurman		Director			80				1994				2019
Nick R. Lugo		Director			74				1999				2018
Carlos P. Naudon		President, Chief Executive Officer and Director			66				2014				2019
Manuel A. Romero		Director			53				2015				2019
Steven Tsavaris		Executive Chairman of the Board			67				1990				2020

The business experience for the past five years of each of our directors is set forth below. The biographies also contain information regarding the person’s experience, qualifications, attributes or skills that caused the board of directors to determine that the person should serve as a director. Unless otherwise indicated, directors have held their positions for the past five years.

James C. Demetriou is the President and Chief Executive Officer of First Management Corp., a property management company located in Astoria, New York, established in 1985 and which has a portfolio of over 130 residential, cooperative, condominium and commercial buildings. Mr. Demetriou is also a partner in the accounting firm, J. Demetriou & Co., established in 1970. In addition, Mr. Demetriou has been a New York licensed real estate broker and sponsoring broker of Archway Realty, Inc., in Astoria, New York since 1985. Furthermore, Mr. Demetriou is the President and Founder of Foxx Capital Funding, Inc. a New York licensed mortgage broker established in 1999.

William Feldman has been investing in and managing commercial and residential real estate properties in the New York metropolitan area for over 30 years. As the present time, Mr. Feldman is managing 13 properties, with ownership interests varying between 12.5% to 50.0%, held by The Feldman Living Trust. Mr. Feldman is also President of the Southern Boulevard Business Improvement District, a not-for-profit entity whose mission is to increase the economic growth and stability of the Southern Boulevard shopping area. Prior to 2013, Mr. Feldman owned several men’s clothing stores.

Julio Gurman is an investor in and manager of commercial and residential real estate properties in the New York metropolitan area. Mr. Gurman is a co-investor/manager of the same 13 properties as Mr. Feldman.

Nick R. Lugo is an investor in real estate properties located in the New York area and holds these investments in several limited liability companies. Mr. Lugo is also President of Nick Lugo Travel Corp., which he founded in 1980. In addition, Mr. Lugo is also the owner and publisher of LaVoz Hispana, a weekly newspaper. Mr. Lugo also founded in 2006 the New York City Hispanic Chamber of Commerce and serves as its Chairman and President. Mr. Lugo is a Director of the Southern Boulevard Business Improvement District.

Carlos P. Naudon has served as President and Chief Operating Officer of Ponce De Leon Federal Bank since 2015, having joined the Board of Directors in 2014. No later than one year after completion of the reorganization, or January 1, 2019, if earlier, Mr. Naudon will become President and Chief Executive Officer of Ponce Bank. Upon completion of the

 

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reorganization, Mr. Naudon will become President and Chief Executive Officer of PDL Community Bancorp and President and Chief Operating Officer of Ponce Bank Mutual Holding Company. Prior to becoming President of Ponce De Leon Federal Bank, Mr. Naudon served as a consultant and compliance counsel to Ponce De Leon Federal Bank. Mr. Naudon owns Banking Spectrum, Inc., now a banking publishing company, formerly a bank consulting company. Until 2015, Mr. Naudon was a partner in the law firm of Allister & Naudon. Both of the foregoing firms were established in 1984 to provide services to banking institutions. Mr. Naudon became Of Counsel to the law firm Cullen & Dykman in 2015. Mr. Naudon has also previously served in many senior management positions at other companies. Before retiring from his consulting and law firms in 2015, Mr. Naudon was a frequent lecturer and speaker on banking issues, corporate governance, quality assurance and performance incentives. Mr. Naudon has current and previous service in various healthcare and community organizations. Mr. Naudon is a member of the New York State Bar Association, the New York City Hispanic Chamber of Commerce and other professional associations.

Manuel A. Romero is President of Manuel A. Romero, P.C., a professional corporation specializing in personal injury law matters. Mr. Romero is the head trial lawyer at the law firm and has served in that capacity for over 28 years. Mr. Romero serves as a member of the Finance Committee of the New York State Bar Association and teaches trial techniques at Cornell Law School on behalf of the Trial Academy of the New York State Bar Association.

Steven Tsavaris is currently the Chairman of the Board and Chief Executive Officer of Ponce De Leon Federal Bank. No later than one year after completion of the reorganization, or January 1, 2019, if earlier, Mr. Tsavaris will become Executive Chairman, a salaried officer, of Ponce Bank. Upon completion of the reorganization, Mr. Tsavaris will become Chairman of the Board and Chief Executive Officer of Ponce Bank Mutual Holding Company and Executive Chairman, a salaried officer, of PDL Community Bancorp. Mr. Tsavaris joined Ponce De Leon Federal Bank as an Executive Vice President in 1995, became President in 1999, and was made Chief Executive Officer in 2011. In 2013, Mr. Tsavaris became Chairman of the Board.

Executive Officer of Ponce De Leon Federal Bank, Ponce Bank, Ponce Bank Mutual Holding Company and PDL Community Bancorp who is Not a Director

Frank Perez, age 49, was appointed Executive Vice President and Chief Financial Officer of Ponce De Leon Federal Bank in January 2017. Upon completion of the reorganization, Mr. Perez will become Executive Vice President and Chief Financial Officer of Ponce Bank, Ponce Bank Mutual Holding Company and PDL Community Bancorp. Mr. Perez is a certified public accountant and has over 20 years of experience in the banking industry. Until recently, Mr. Perez was the sole employee of Tennessee Commerce Bancorp, Inc., Franklin, Tennessee, a former bank holding company in the process of winding down its residual operations. Prior to joining Ponce De Leon Federal Bank, Mr. Perez was, from January 2015 until July 2016, Executive Vice President and Chief Financial Officer of First Volunteer Bank, Chattanooga, Tennessee, a privately held bank. From May 2012 until January 2015, Mr. Perez was the Executive Vice President and Chief Financial Officer of First Financial Service Corporation, the bank holding company for First Federal Savings Bank of Elizabethtown, Elizabethtown, Kentucky. From August 2008 to February 2012 Mr. Perez was the Chief Financial Officer and Investment Relations Officer of Tennessee Commerce Bancorp, Inc. and its subsidiary, Tennessee Commerce Bank. On January 27, 2012, Tennessee Commerce Bank was closed by the Tennessee Department of Financial Institutions, which appointed the FDIC as receiver. Subsequent to this receivership, Mr. Perez assumed his positions at First Financial Service Corporation and First Federal Savings Bank of Elizabethtown. As a consequence of First Federal Savings Bank of Elizabethtown being designated at that time as a troubled bank by the FDIC, First Federal Savings Bank of Elizabethtown had to file a notice of change of a senior executive officer as required by federal law and regulation. Upon completion of its review, the FDIC issued a notice that it did not object to Mr. Perez’s appointment as Chief Financial Officer of First Federal Savings Bank of Elizabethtown.

Executive Officers of Ponce De Leon Federal Bank and Ponce Bank who are Not Directors

The following sets forth information regarding our executive officers who are not directors. Age information is as of December 31, 2016. The executive officers of PDL Community Bancorp and Ponce Bank are elected annually.

Ioannis Kouzilos, age 38, is currently our Senior Vice President, Chief Lending Officer, a position he assumed in March, 2017. Prior to assuming his current position, Mr. Kouzilos was our Senior Vice President, Asset Management. Mr. Kouzilos has been employed by Ponce De Leon Federal Bank since July 2013 and has managed a number of departments, primarily focusing on asset quality, credit risk, asset recovery and lending operations. From April 2011 to June 2013, Mr. Kouzilos was Vice President, Credit Administrator for Alma Bank, New York, New York.

 

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Elizabeth Macias, age 60, is currently our Senior Vice President and Chief Information Systems Officer. In this position, Ms. Macias manages our Information Technology, Vendor Management, Loan Servicing Systems and Facilities Management. Ms. Macias joined Ponce De Leon Federal Bank in August 2015. Prior to this time, Ms. Macias served as Vice President of Information Technology at Intervest National Bank for ten years and has held senior management positions in information technology, management information systems and information security for over 30 years.

Madeline V. Marquez, age 59, is currently our Senior Vice President of SBA/CDFI Initiatives and assumed this position on February 1, 2017. Prior to that time, Ms. Marquez served as Executive Vice President of the Business Initiative Corporation of New York (“BICNY”) which is a Certified SBA 504 Lender in New York State. Ms. Marquez held various positions of increasing responsibility with BICNY starting in 1998. In October 2012, Ms. Marquez became Chief Operating Officer of BICNY and Executive Vice President in January 2016.

David Rodriguez, age 61, has been employed by Ponce De Leon Federal Bank since April 2005. Mr. Rodriquez is currently Senior Vice President, Chief Relationship Manager and was, until March 2017, Senior Vice President and Chief Lending Officer and had held this position since 2007.

Rafael Sanchez, age 43, was appointed our Senior Vice President of Retail and Commercial Banking in November 2016. Mr. Sanchez is responsible for the oversight of the Sales and Marketing Department, Branch Operations Control Department, Regional Commercial Relationship Officers and Retail Banking. Prior to joining Ponce De Leon Federal Bank, Mr. Sanchez has held various positions in retail banking, most recently as Senior Vice President and Regional Manager at Popular Community Bank, Bronx, New York from February 2012 until joining Ponce De Leon Federal Bank.

Board Independence

The board of directors has determined that each of our directors, with the exception of Steven Tsavaris, Executive Chairman, and Carlos P. Naudon, President and Chief Executive Officer, is “independent” as defined in the listing standards of the Nasdaq Stock Market. Mr. Tsavaris and Mr. Naudon are not considered independent because they are executive officers as well as directors. In determining the independence of our directors, the board of directors considered relationships between Ponce De Leon Federal Bank and our directors that are not required to be reported under “—Transactions With Certain Related Persons,” below, consisting of deposit accounts that our directors maintain at Ponce De Leon Federal Bank. In addition, we utilize the services of Foxx Capital Funding, Inc., an independent mortgage broker, for certain real estate transactions, of which Director James C. Demetriou is President. We paid Foxx Capital Funding, Inc. commissions of $43,250 for the year ended December 31, 2016. For the year ended December 31, 2016, we paid Banking Spectrum, Inc., a company owned by Mr. Naudon, $5,000. Mr. Naudon is Of Counsel to the law firm of Cullen and Dykman LLP and we paid such law firm $22,189 in fees during the year ended December 31, 2016.

Transactions With Certain Related Persons

The Sarbanes-Oxley Act of 2002 generally prohibits publicly traded companies from making loans to their executive officers and directors, but it contains a specific exemption from such prohibition for loans made by federally insured financial institutions, such as Ponce De Leon Federal Bank and Ponce Bank, to their executive officers and directors in compliance with federal banking regulations.

Ponce De Leon Federal Bank currently has outstanding mortgage loans, either directly or indirectly, to directors Demetriou, Feldman, Gurman, Lugo and Naudon. All loans to directors and executive officers are made in the ordinary course of business, made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to Ponce De Leon Federal Bank and for which management believes neither involve more than the normal risk of collection nor present other unfavorable features. Since January 1, 2015, we and our subsidiaries have not had any transaction or series of transactions, or business relationships, nor are any such transactions or relationships proposed, in which the amount involved exceeds $120,000 and in which our directors or executive officers have a direct or indirect material interest.

Meetings and Committees of the Board of Directors

We conduct business through meetings of our board of directors and its committees, including an Audit Committee and a Governance Committee. During the year ended December 31, 2016, the board of directors of Ponce De Leon Federal Bank met 12 times. It is expected that the board of directors of PDL Community Bancorp will establish a standing audit committee, which will operate under a written charter, which will govern its composition, responsibilities and operations.

 

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PDL Community Bancorp’s Audit Committee will consist of all directors with the exception of Mr. Tsavaris and Mr. Naudon. Compensation and nominating decisions will be made by the board of directors, with the exception of Mr. Naudon and Mr. Tsavaris, as permitted under Nasdaq Stock Market rules for “Controlled Companies.” We will be a Controlled Company because Ponce Bank Mutual Holding Company will own a majority of our outstanding shares of common stock.

Corporate Governance Policies and Procedures

In addition to establishing committees of our board of directors, PDL Community Bancorp will adopt several policies to govern the activities of both PDL Community Bancorp and Ponce Bank, including corporate governance policies and a code of business conduct and ethics. The corporate governance policies are expected to involve such matters as the following:

 

•

the composition, responsibilities and operation of our board of directors;

 

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the establishment and operation of board committees, including audit, nominating and corporate governance and compensation committees;

 

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convening executive sessions of independent directors; and

 

•

our board of directors’ interaction with management and third parties.

The code of business conduct and ethics, which is expected to apply to all employees and directors, will address conflicts of interest, the treatment of confidential information, general employee conduct and compliance with applicable laws, rules and regulations. In addition, the code of business conduct and ethics will be designed to deter wrongdoing and to promote honest and ethical conduct, the avoidance of conflicts of interest, full and accurate disclosure and compliance with all applicable laws, rules and regulations.

Executive Compensation

Summary Compensation Table. The table below summarizes the total compensation paid to or earned by Ponce De Leon Federal Bank’s Chairman and Chief Executive Officer, President and Chief Operating Officer and former Executive Vice President and Chief Financial Officer for the year ended December 31, 2016. Each individual listed in the table below is referred to as a “named executive officer.”

 

Summary Compensation Table
Name and principal position		Year				Salary ($)				Bonus ($) (1)				All other Compensation ($) (2)				Total ($)
Steven Tsavaris, Chairman and Chief Executive Officer			2016				600,000				125,000				100,777				825,777
Carlos P. Naudon, President and Chief Operating Officer Mario Pastorino, Executive Vice President and Chief Financial Officer (3)			2016 2016				550,000 192,000				125,000 15,000				144,077 23,431				819,077 230,431

 

Name		401(k) Profit Sharing ($)				Health Insurance ($)				Automobile Allowance ($)				Deferred Compensation Plan ($)				Supplemented Compensation ($)				Total All Other Compensation ($)
Steven Tsavaris			7,950				16,897				15,930				—				60,000				100,777
Carlos P. Naudon			—				16,897				22,180				50,000				55,000				144,077
Mario Pastorino (3)			6,534				16,897				—				—				—				23,431

 

(1)	Represents discretionary cash bonuses, which were paid during the year ending December 31, 2016.

(2)	A break-down of the various elements of compensation in this column is set forth in the following table:

(3)

Mr. Pastorino’s employment with Ponce De Leon Federal Bank terminated effective December 31, 2016. In connection with Mr. Pastorino’s termination of employment with the Ponce De Leon Federal Bank, Ponce De Leon Federal Bank and Mr. Pastorino entered into a settlement and general release agreement. This agreement provides for a severance payment to Mr. Pastorino of $144,000 to be paid over a nine month period from January 2017 to September 2017, together with continued medical insurance coverage for the same period of time. Mr. Pastorino has agreed to release Ponce De Leon Federal Bank from all claims, keep confidential all non-public Bank information as to which he has knowledge, and not make derogatory comments about Ponce De Leon Federal Bank and its directors, officers and employees.

 

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Employment Agreements

Ponce De Leon Federal Bank. Ponce De Leon Federal Bank recently entered into employment agreements with Steven A. Tsavaris, Carlos P. Naudon and Frank Perez. The agreements reflect Mr. Tsavaris’ position as Chairman of the Board of Directors and Chief Executive Officer, Mr. Naudon’s position as President and Chief Operating Officer, and Mr. Perez’s position as Executive Vice President and Chief Financial Officer. The agreement with Mr. Tsavaris provides that no later than one year after the effective date of the reorganization, or January 1, 2019, if earlier, Mr. Tsavaris shall resign from the position of Chief Executive Officer of Ponce Bank and continue as Executive Chairman, a salaried officer of Ponce Bank. The agreement with Mr. Naudon provides that no later than one year after the effective date of the reorganization, or January 1, 2019, if earlier, Mr. Naudon shall relinquish the position of Chief Operating Officer of Ponce Bank, continue as President, and shall assume the position of Chief Executive Officer of Ponce Bank.

The agreements with Messrs. Tsavaris and Naudon are each for a three-year term beginning on March 16, 2017, while the agreement with Mr. Perez is for a one-year term beginning on that date. Each agreement is automatically extended for an additional year unless Ponce De Leon Federal Bank or the executive provides a notice of nonrenewal to the other party at least 90 days prior to the end of the original or any extended term.

The employment agreements provide for minimum annual base salaries of $660,000, $605,000 and $190,000, respectively for Messrs. Tsavaris, Naudon and Perez. Each employment agreement also provides for discretionary incentive and/or bonus compensation, participation on generally applicable terms and conditions in other compensation and fringe benefit plans, and certain perquisites, four weeks paid vacation, and if the executive becomes disabled, long term disability benefits for the then remaining term of the agreement equal to 100% of the executive’s base salary. In addition, the agreements for Messrs. Tsavaris and Naudon provide for the use of an automobile and reimbursement of automobile-related expenses.

At any time Ponce De Leon Federal Bank may terminate an executive’s employment, with or without cause, and the executive may resign, with or without good reason. In the event Ponce De Leon Federal Bank terminates Mr. Tsavaris or Mr. Naudon without cause or the executive resigns for good reason, as such terms are defined in the agreements, the executive will be entitled to the following severance benefits:

 

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An amount equal to three times (two times in the event of resignation for good reason) the sum of (i) the executive’s annual base salary in effect at the time of his termination; and (ii) annual incentive compensation and any other compensation received by the executive for the calendar year immediately preceding termination.

 

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An amount equal to the aggregate value of any shares of restricted stock, stock options or other awards issued to the executive under any plan adopted by Ponce De Leon Federal Bank or any affiliate of Ponce De Leon Federal Bank or any successor plan that are forfeited as a result of such termination, whether vested or unvested.

 

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An amount equal to the pro-rata annual bonus, if any, that the executive would have earned for the year in which the termination occurs based on the achievement of applicable performance goals for such year.

 

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If the executive is eligible for and elects to receive COBRA health continuation coverage, Ponce De Leon Federal Bank will pay toward the cost of COBRA coverage for the executive and his family the amount Ponce De Leon Federal Bank would have paid to provide health insurance to the executive if his employment had continued. Such payments shall continue for 24 months or the executive’s COBRA health continuation period, whichever ends earlier.

In the event Ponce De Leon Federal Bank terminates Mr. Perez without cause or he resigns for good reason, Mr. Perez will be entitled to the following severance benefits:

 

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An amount equal to 1.5 times (1.0 times in the event of resignation for good reason) the sum of (i) his annual base salary in effect at the time of his termination; and (ii) annual incentive compensation and any other compensation received by Mr. Perez for the calendar year immediately preceding termination.

 

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An amount equal to the aggregate value of any shares of restricted stock, stock options or other awards issued to Mr. Perez under any plan adopted by Ponce De Leon Federal Bank or any affiliate of Ponce De Leon Federal Bank or any successor plan that are forfeited as a result of such termination, whether vested or unvested.

 

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An amount equal to the pro-rata annual bonus, if any, that Mr. Perez would have earned for the year in which the termination occurs based on the achievement of applicable performance goals for such year.

 

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•

If Mr. Perez is eligible for and elects to receive COBRA health continuation coverage, Ponce De Leon Federal Bank will pay toward the cost of COBRA coverage for Mr. Perez and his family the amount Ponce De Leon Federal Bank would have paid to provide health insurance to Mr. Perez if his employment had continued. Such payments shall continue for 24 months or Mr. Perez’s COBRA health continuation period, whichever ends earlier.

For purposes of the above severance benefits, “good reason” for resigning includes: a reduction in the executive’s base salary; a material reduction in the executive’s target annual incentive opportunity under any annual incentive compensation or incentive plan or program; a relocation of the executive’s principal place of employment outside of Bronx, Queens, Manhattan, Brooklyn, New York or Hudson County, New Jersey; a material breach by Ponce De Leon Federal Bank of any material provision of the employment agreement; a material adverse change in the executive’s title, authority, duties or responsibilities (other than temporarily while the executive is physically or mentally incapacitated or as required by applicable law or as contemplated by the employment agreement); a material adverse change in the reporting structure applicable to the executive; or the failure of Ponce De Leon Federal Bank to extend the employment agreement for an additional year. In the case of Messrs. Tsavaris and Naudon, “good reason” also includes the failure of the Executive to be reappointed to the Board of Directors of Ponce De Leon Federal Bank. The basis for good reason for any executive will not constitute good reason unless the executive gives Ponce De Leon Federal Bank notice of the basis for good reason within 30 days after the initial existence of the basis for good reason and Ponce De Leon Federal Bank does not cure the basis for good reason within 30 days after having received such notice.

In the event Messrs. Tsavaris, Naudon or Perez’s employment is involuntarily terminated by Ponce De Leon Federal Bank for reasons other than for cause, disability or death, or the executive voluntarily resigns for good reason, in either case after a change in control of Ponce De Leon Federal Bank, then in lieu of the severance benefits described above executive will be entitled to the following severance benefits:

 

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An amount equal to 2.99 times his highest annual compensation for services rendered that was includible in the executive’s gross income (partial years being annualized) for the three taxable years immediately preceding the year during which the change in control occurred (or such shorter period as the executive was employed).

 

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An amount equal to the aggregate value of any shares of restricted stock, stock options or other awards issued to the executive under any plan adopted by Ponce De Leon Federal Bank or any affiliate of Ponce De Leon Federal Bank or any successor plan that are forfeited as a result of such termination, whether vested or unvested.

 

•

If the executive is eligible for and elects to receive COBRA health continuation coverage, Ponce De Leon Federal Bank will pay toward the cost of COBRA coverage for the executive and his family the amount Ponce De Leon Federal Bank would have paid to provide health insurance to the executive if his employment had continued. Such payments shall continue for 24 months or the executive’s COBRA health continuation period, whichever ends earlier.

Any severance payments required under the employment agreements in connection with a change in control of Ponce De Leon Federal Bank will be reduced to the extent necessary to avoid penalties under Section 280G of the Code.

In the event Messrs. Tsavaris, Naudon or Perez’s employment is involuntarily terminated by Ponce De Leon Federal Bank for cause or the executive resigns without good reason, the executive shall be entitled to receive only accrued but unpaid salary, vacation pay and bonuses, plus such additional benefits as the executive may be entitled to under any employee benefit plans sponsored by Ponce De Leon Federal Bank.

The employment agreements with Messrs. Tsavaris, Naudon and Perez each provide that during the term of the agreement and for one year thereafter, the executive is generally prohibited from:

 

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competing with Ponce De Leon Federal Bank within any county or borough in which Ponce Bank Mutual Holding Company, PDL Community Bancorp or Ponce De Leon Federal Bank or any of their affiliates maintains or has pending as of the termination date a filing for permission to establish a branch, loan production office, or mortgage production office;

 

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soliciting customers and employees of Ponce De Leon Federal Bank; or

 

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interfering with any of the contracts or relationships of the Ponce Bank Mutual Holding Company, PDL Community Bancorp, Ponce De Leon Federal Bank or any of their affiliates with any independent contractor, customer, client or supplier.

 

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Ponce Bank Mutual Holding Company and PDL Community Bancorp. The Board of Directors of Ponce De Leon Federal Bank also approved the form of employment agreements to be entered into between Ponce Bank Mutual Holding Company, PDL Community Bancorp and each of Messrs. Tsavaris, Naudon and Perez. The agreements reflect Mr. Tsavaris’ positions as Chairman of the Board of Directors and Chief Executive Officer of Ponce Bank Mutual Holding Company and Executive Chairman of the Board of Directors of PDL Community Bancorp, a salaried officer; Mr. Naudon’s positions as President and Chief Operating Officer of Ponce Bank Mutual Holding Company and President and Chief Executive Officer of PDL Community Bancorp; and Mr. Perez’s positions as Executive Vice President and Chief Financial Officer of Ponce Bank Mutual Holding Company and PDL Community Bancorp.

The agreements with Messrs. Tsavaris and Naudon are each to be for a three-year term beginning on the date they are executed, while the agreement with Mr. Perez is for a one-year term beginning on the date it is executed. The agreements are expected to be executed on the date of the completion and effectiveness of the reorganization, but not before. Each agreement is automatically extended for an additional year unless Ponce Bank Mutual Holding Company and PDL Community Bancorp or the executive provides a notice of nonrenewal to the other party at least 90 days prior to the end of the original or any extended term.

The employment agreements with Messrs. Tsavaris, Naudon and Perez each provides compensation and benefits substantially similar to those provided by the corresponding employment agreements between Ponce De Leon Federal Bank and the executive, except that the compensation and benefits under an employment agreement with Ponce Bank Mutual Holding Company and PDL Community Bancorp are reduced by the comparable compensation and benefits provided by the corresponding employment agreement with Ponce De Leon Federal Bank.

Deferred Compensation Plan

Ponce De Leon Federal Bank has adopted a nonqualified deferred compensation plan that covers certain members of management or highly compensated employees designated by Ponce De Leon Federal Bank. Mr. Naudon is the only executive currently designated to participate in the plan. Under the plan Ponce De Leon Federal Bank periodically makes contributions to an account designated for the benefit of Mr. Naudon. Under the plan, contributions are discretionary in amount, however, the employment agreement between Ponce De Leon Federal Bank and Mr. Naudon requires Ponce De Leon Federal Bank to make contributions to the plan during the term of the employment agreement equal to 10% of his base salary. Ponce De Leon Federal Bank expects to contribute $50,000 for the year ended December 31, 2016 prior to the end of 2017. The account is periodically credited with earnings based on investments within the account as directed by Mr. Naudon. At December 31, 2016, the total amount accrued under the plan, including earnings, was $51,508.

Amounts credited under the plan are fully vested at all times and will be distributed to Mr. Naudon upon the termination of his employment with Ponce De Leon Federal Bank for any reason or a change in control of Ponce De Leon Federal Bank. In the event of Mr. Naudon’s death while employed by Ponce De Leon Federal Bank, the total amount credited under the plan for the benefit of Mr. Naudon will be distributed to his designated beneficiaries.

Benefit Plans and Agreements

401(k) Plan. Ponce De Leon Federal Bank maintains the Ponce De Leon Bank 401(k) Profit Sharing Plan, a tax-qualified defined contribution plan for eligible employees (the “401(k) Plan”). The named executive officers are eligible to participate in the 401(k) Plan just like other employees. An employee must attain age 21 and complete one year of service to be eligible to participate in the 401(k) Plan.

Under the 401(k) Plan a participant may elect to defer, on a pre-tax basis, the maximum amount as permitted by the Internal Revenue Code. For 2017, the salary deferral contribution limit is $18,000; provided, however, that a participant over age 50 may contribute an additional $6,000 to the 401(k) Plan for a total of $24,000. In addition to salary deferral contributions, Ponce De Leon Federal Bank may make discretionary matching contributions, discretionary profit sharing contributions or safe harbor contributions to the 401(k) Plan. Discretionary matching contributions are allocated on the basis of salary deferral contributions. Discretionary profit sharing contributions are based on three classifications set forth in the Plan: (i) Class A – Chairman, President, and Executive Vice Presidents; (i) Class B – Senior Vice Presidents, Chief Vice Presidents and Assistant Vice Presidents; and (iii) Class C – all other eligible employees. The contribution for a class will be the same percentage of compensation for all participants in that class. If Ponce De Leon Federal Bank decides to make a safe harbor contribution for a plan year, each participant will receive a contribution equal to 3% of his or her compensation for the

 

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plan year. Ponce De Leon Federal Bank only made a safe harbor contribution to the 401(k) Plan for the plan year ended December 31, 2016.

A participant is always 100% vested in his or her salary deferral contributions and safe harbor contributions. Discretionary matching and profit sharing contributions are 20% vested after two years of service, plus an additional 20% for each additional year of service; so all participants are fully vested after six years of service. Participants also will become fully vested automatically upon normal retirement, death or disability, a change in control, or termination of the 401(k) Plan. Generally, participants will receive distributions from the 401(k) Plan upon separation from service in accordance with the terms of the plan document. Expense recognized in connection with the 401(k) Plan totaled approximately $265,000 for the year ended December 31, 2016.

Pension Plan. Ponce De Leon Federal Bank maintains the Ponce De Leon Federal Savings Bank Retirement Income Plan, a tax-qualified defined benefit pension plan for eligible employees (the “Pension Plan”). Effective May 31, 2007, the Pension Plan was frozen. No additional benefits accrued under the Pension Plan after that date. All participants in the Pension Plan are fully vested in their benefits accrued as of that date and are entitled to receive their benefits upon retirement. We intend to terminate the Pension Plan at some point subsequent to the completion of the reorganization and offering, although the exact timing of such termination is uncertain. The exact timing of the termination of the Pension Plan will depend on, among various factors, our post-conversion capital levels and needs, our evaluation of future interest rates and annuity cost trends, and the estimated cost to terminate the plan, as they may change from time to time. Any such termination would be conditioned upon the approval by the Pension Benefit Guaranty Corporation, the federal entity that insures pension benefits. In connection with the termination, each participant will be given the choice to receive an annuity to provide his or her benefits under the Pension Plan or a lump sum cash distribution equal to the present value of his or her accrued benefits. As of December 31, 2016, the Pension Plan had approximately $15.0 million in assets. We currently estimate that the aggregate value of termination benefits under the Pension Plan will be $16.7 million to $18.3 million. In connection with the termination and as a condition of Pension Benefit Guaranty Corporation approval, we will agree to contribute to the Pension Plan an amount equal to the value of termination benefits required in excess of the value of the Pension Plan’s assets on termination. Based on the Pension Plan’s assets and liabilities at December 31, 2016, this could require a contribution of a minimum of $1.7 million and a maximum of $3.3 million upon termination; however, the actual amount of any contribution could be higher or lower since the actual value of the aggregate termination benefits is dependent, among other things, on the then value of the Pension Plan’s assets and interest rates at the effective date of the termination of the Pension Plan.

Employee Stock Ownership Plan. In connection with the reorganization, we have adopted an employee stock ownership plan (“ESOP”) for eligible employees. The named executive officers are eligible to participate in the ESOP just like other employees. Eligible employees will begin participation in the ESOP on the later of the effective date of the reorganization or upon the first entry date commencing on or after the eligible employee’s completion of one year of service and attainment of age 21.

The ESOP trustee is expected to purchase, on behalf of the ESOP, 3.92% of the total number of shares of PDL Community Bancorp common stock outstanding (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation). We anticipate that the ESOP will fund its stock purchase with a loan from PDL Community Bancorp equal to the aggregate purchase price of the common stock. The loan will be repaid principally through Ponce Bank’s contributions to the ESOP over the anticipated 15 year term of the loan and any dividends payable on common stock held by the ESOP. The interest rate for the ESOP loan is expected to equal the prime rate, as published in The Wall Street Journal, on the closing date of the offering. See “Pro Forma Data.”

The trustee of the trust funding the ESOP will hold the shares purchased by the ESOP in an unallocated suspense account, and shares will be released from the suspense account on a pro-rata basis as we repay the loan. The trustee will allocate the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants. A participant will become 100% vested in his or her account balance after three years of service. Participants who were employed by Ponce De Leon Federal Bank immediately prior to the offering will receive credit for vesting purposes for years of service prior to adoption of the ESOP. Participants also will become fully vested automatically upon normal retirement, death or disability, a change in control, or termination of the ESOP. Generally, participants will receive distributions from the ESOP upon separation from service in accordance with the terms of the plan document. The ESOP reallocates any unvested shares forfeited upon termination of employment among the remaining participants.

The ESOP will permit participants to direct the trustee as to how to vote the shares of common stock allocated to their accounts. The trustee will vote unallocated shares and allocated shares for which participants do not timely provide

 

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instructions on any matter in the same ratio as those shares for which participants provide timely instructions, subject to fulfillment of the trustee’s fiduciary responsibilities.

Under applicable accounting requirements, Ponce Bank will record a compensation expense for the ESOP at the fair market value of the shares as they are committed to be released from the unallocated suspense account to participants’ accounts, which may be more or less than the original issue price. The compensation expense resulting from the release of the common stock from the suspense account and allocation to plan participants will result in a corresponding reduction in the earnings of PDL Community Bancorp.

ESOP Equalization Plan

In connection with the reorganization, Ponce De Leon Federal Bank has adopted the Ponce Bank ESOP Equalization Plan, a nonqualified plan that provides notional contributions for certain executives approved by the Compensation Committee of Ponce De Leon Federal Bank who are prevented from receiving full contributions to and allocation under the ESOP due to limitations on: (i) the maximum annual compensation that may be recognized under the ESOP for benefit computation purposes pursuant to Code Section 401(a)(17) of the Code ($270,000 for 2017); and (ii) the maximum annual additions to the ESOP pursuant to Code Section 415(c). The Plan is designed to equalize contributions and allocations for those that fall below and above these limitations. Currently, only Mr. Tsavaris and Mr. Naudon are approved to participate in the Ponce Bank ESOP Equalization Plan. No amounts will be credited under the Ponce Bank ESOP Equalization Plan until contributions are made to the ESOP.

A participant’s balance under the Ponce Bank ESOP Equalization Plan will be paid to him in a single lump sum within 90 days after his termination of service. However, as required by Section 409A of the Code, which governs deferred compensation plans, payments to certain specified employees of a publicly-traded corporation following separation from service cannot be paid until six months following separation from service except following the death of the participant. Any payment that would have been distributed from the Ponce Bank ESOP Equalization Plan to such a participant during the six-month period following separation from service, will be accumulated and paid to the participant in a single lump sum as soon as administratively practicable following the end of the six-month period or the participant’s death, if applicable.

The Ponce Bank ESOP Equalization Plan will be entirely unfunded. Employees who participate in the Ponce Bank ESOP Equalization Plan have only the rights of general unsecured creditors with respect to any rights under the Ponce Bank ESOP Equalization Plan.

Director Compensation

Directors earn an annual fee of $48,000 per year. Directors currently receive fees of $500 per meeting for service on the committees of the board of directors. Executive officers serving on the board of directors do not receive directors compensation for such service.

The following table sets forth for the year ended December 31, 2016 certain information as to the total remuneration we paid to our directors who were not executive officers.

 

Directors Compensation Table For the Year Ended December 31, 2016
Name		Fees earned or paid in cash ($)				All Other Compensation ($)				Total ($)
James C. Demetriou			60,000				—				60,000
William Feldman			54,000				16,897				70,897
Julio Gurman			54,000				16,897				70,897
Nick R. Lugo			54,000				23,429				77,429
Manuel A. Romero			54,000				7,480				61,480

Each person who will serve as a director of PDL Community Bancorp will also serve as a director of Ponce Bank and will initially earn a monthly fee only in his or her capacity as a board or committee member of Ponce Bank. Upon completion of the reorganization, additional director fees may be paid for PDL Community Bancorp director meetings although no such determination has been made at this time.

 

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Benefits to be Considered Following Completion of the Stock Offering

Following the stock offering, we intend to adopt one or more new stock-based benefit plans that will provide for grants of stock options and awards of shares of restricted common stock. In accordance with applicable regulations, we anticipate that the plan will authorize a number of stock options and a number of shares of restricted common stock, not to exceed 4.9% and 1.96%, respectively, of the shares issued in the offering (including shares issued to Ponce Bank Mutual Holding Company and our charitable foundation). These limitations may not apply if the plans are implemented more than one year after the reorganization and offering, subject to any applicable regulatory approvals.

The stock-based benefit plans will not be established sooner than six months after the stock offering and, if adopted within one year after the stock offering, the plans must be approved by a majority of the votes eligible to be cast by our stockholders, as well as a majority of the votes eligible to be cast by our stockholders other than Ponce Bank Mutual Holding Company. If stock-based benefit plans are established more than one year after the stock offering, they must be approved by a majority of votes cast by our stockholders, as well as a majority of votes cast by our stockholders other than Ponce Bank Mutual Holding Company.

Certain additional restrictions would apply to our stock-based benefit plans if adopted within one year after the stock offering, including:

 

•

non-employee directors in the aggregate may not receive more than 30% of the options and shares of restricted common stock authorized under the plans;

 

•

any non-employee director may not receive more than 5% of the options and restricted stock awards authorized under the plans;

 

•

any officer or employee may not receive more than 25% of the options and restricted stock awards authorized under the plans;

 

•

the options and shares of restricted common stock may not vest more rapidly than 20% per year, beginning on the first anniversary of stockholder approval of the plans; and

 

•

accelerated vesting is not permitted except for death, disability or upon a change in control of PDL Community Bancorp or Ponce Bank.

We have not yet determined whether we will present stock-based benefit plans for stockholder approval within one year following the completion of the reorganization or whether we will present plans for stockholder approval more than one year after the completion of the reorganization. In the event of changes in applicable regulations or policies regarding stock-based benefit plans, including any regulations or policies restricting the size of awards and vesting of benefits as described above, the restrictions described above may not be applicable.

We may obtain the shares needed for our stock-based benefit plans by issuing additional shares of common stock from authorized but unissued shares or through purchases of shares in the open market or otherwise.

 

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SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth information regarding intended common stock subscriptions by each of our directors and executive officers and their associates, and by all directors, officers and their associates as a group. However, there can be no assurance that any such person or group will purchase any specific number of shares of our common stock. In the event the individual maximum purchase limitation is increased, persons subscribing for the maximum amount may increase their purchase order. Directors and officers will purchase shares of common stock at the same $10.00 purchase price per share and on the same terms as other purchasers in the offering. This table excludes shares of common stock to be purchased by the employee stock ownership plan, as well as any stock awards or stock option grants that may be made no earlier than six months after the completion of the offering. Purchases by directors, officers and their associates will be included in determining whether the required minimum number of shares has been subscribed for in the offering. The shares being acquired by the directors, executive officers and their associates are being acquired for investment purposes, and not with a view towards resale. Our directors and executive officers will be subject to the same minimum purchase requirements and purchase limitations as other participants in the offering set forth under “The Reorganization and Offering—Limitations on Purchase of Shares.”

 

Name and Title		Number of Shares (1)				Aggregate Purchase Price (1)				Percent at Minimum of Offering Range (2)
James C. Demetriou, Director			50,000			$	500,000				*
William Feldman, Director			30,000			$	300,000				*
Julio Gurman, Director			30,000			$	300,000				*
Nick R. Lugo, Director			50,000			$	500,000				*
Carlos P. Naudon, President, Chief Executive Officer and Director			30,000			$	300,000				*
Manuel A. Romero, Director			30,000			$	300,000				*
Steven Tsavaris, Executive Chairman of the Board			50,000			$	500,000				*
Ioannis Kouzilos, Senior Vice President, Chief Lending Officer			5,000			$	50,000				*
Elizabeth Macias, Senior Vice President and Chief Information Systems Officer			5,000			$	50,000				*
Madeline V. Marquez, Senior Vice President of SBA/CDFI Initiatives			300			$	3,000				*
Frank Perez, Executive Vice President and Chief Financial Officer			3,000			$	30,000				*
David Rodriquez, Senior Vice President and Chief Relationship Manager			500			$	5,000				*
Rafael Sanchez, Senior Vice President of Retail and Commercial Banking			1,000			$	10,000				*
All directors and executive officers as a group (13) persons			284,800			$	2,848,000				5.3	%

 

*	Less than 1.0%.

(1)

Includes purchases by the named individual’s spouse and other relatives of the named individual, if applicable. Other than as set forth above, the named individuals are not aware of any other purchases by a person who or entity that would be considered an associate of the named individuals under the plan of reorganization.

(2)	At the adjusted maximum of the offering range, directors and executive officers would own 3.4% of our shares of common stock sold to the public.

 

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THE REORGANIZATION AND OFFERING

The board of directors of Ponce De Leon Federal Bank has approved the plan of reorganization. The plan of reorganization must also be approved by Ponce De Leon Federal Bank’s members. A special meeting of members has been called for this purpose. We have filed an application with respect to the reorganization and stock offering with the Federal Reserve Board, and the approval of the Federal Reserve Board is required before we can consummate the reorganization and stock offering. We also have filed certain applications with respect to the reorganization with the Office of the Comptroller of the Currency and the FDIC. The final approvals of the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC are required before we can consummate the reorganization and stock offering. Any approval by the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC does not constitute a recommendation or endorsement of the plan of reorganization.

General

On November 17, 2016, our board of directors unanimously adopted the plan and on April 7, 2017 and July 6, 2017 our board of directors unanimously adopted amendments No. 1 and No. 2, respectively, to the plan pursuant to which we will reorganize from a federally chartered mutual savings association into a two-tier federal mutual holding company structure. After the reorganization, PDL Community Bancorp will be the mid-tier stock holding company and Ponce Bank Mutual Holding Company will be the top-tier mutual holding company. After the offering, subscribers in the offering, including our employee stock ownership plan, will own 45%, Ponce Bank Mutual Holding Company will own 51.7% and our charitable foundation will own 3.3% of the outstanding shares of common stock of PDL Community Bancorp.

Consummation of the reorganization and stock offering is subject to, among other things, approval of the plan of reorganization, as amended, by the members of Ponce De Leon Federal Bank as of the voting record date. A special meeting of members has been called for this purpose, to be held on September 18, 2017. The reorganization will be completed as follows, or in any manner approved by regulators that is consistent with the purposes of the plan of reorganization and applicable laws and regulations:

 

(i)

Ponce De Leon Federal Bank will organize a stock savings association as a wholly owned subsidiary (“Stock Bank”);

 

(ii)

After Stock Bank receives approval from the FDIC for insurance of accounts and the FDIC has issued it a certificate number, Ponce De Leon Federal Bank will transfer pursuant to a purchase and assumption agreement all of its assets and liabilities, except $200,000 in cash, to Stock Bank, and Stock Bank will be the stock savings association resulting from the reorganization, including the purchase and assumption transaction pursuant to the plan;

 

(iii)

Ponce De Leon Federal Bank will amend its charter and bylaws to read in the form of a federal mutual holding company to become Ponce Bank Mutual Holding Company;

 

(iv)

Ponce Bank Mutual Holding Company will organize PDL Community Bancorp as a wholly-owned subsidiary, and transfer $1,000 to PDL Community Bancorp in exchange for 100 shares of PDL Community Bancorp common stock; and

 

(v)

Ponce Bank Mutual Holding Company will transfer all of the initially issued stock of the Stock Bank to PDL Community Bancorp in exchange for additional shares of PDL Community Bancorp common stock, and the Stock Bank will become a wholly-owned subsidiary of PDL Community Bancorp, operating under the name Ponce Bank.

Concurrently with the reorganization, PDL Community Bancorp will offer for sale 45% of its common stock representing 45% of the pro forma market value of PDL Community Bancorp.

We have mailed to each person eligible to vote at the special meeting a proxy statement containing information concerning the business purposes of the reorganization and the effects of the reorganization on voting rights, liquidation rights, existing savings accounts, deposit insurance, loans and Ponce De Leon Federal Bank’s business. The proxy statement also describes the manner in which the plan may be amended or terminated. Included with the proxy statement is a proxy card that can be used to vote on the plan.

The following is a summary of the material aspects of the plan of reorganization, the subscription offering, and the community offering. The plan of reorganization should be consulted for a more detailed description of its terms.

 

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Reasons for the Reorganization

The primary purpose of the reorganization is to establish a holding company and to reorganize Ponce De Leon Federal Bank to the stock form of ownership in order to compete and expand more effectively in the financial services marketplace. The stock form of ownership is the corporate form used by commercial banks, most major businesses and a large number of savings institutions. The reorganization also will enable customers, employees, management and directors to have an equity ownership interest in our company. Management believes that this will enhance the long-term growth and performance of Ponce Bank and PDL Community Bancorp by enabling us to attract and retain qualified employees who have a direct interest in our financial success and that customer ownership may enhance our connection with our customers. The reorganization will permit us to issue and sell capital stock, which is a source of capital not available to mutual savings institutions. The reorganization also will give us greater flexibility to structure and finance the expansion of our operations and increase our capital to support future growth and profitability, including the potential acquisition of other financial institutions, and to diversify into other financial services, to the extent permissible by applicable law and regulation. Although there are no current arrangements, understandings or agreements regarding any such opportunities, we will be in a position after the reorganization, subject to regulatory limitations and our financial condition, to take advantage of any such opportunities that may arise, and to compete more effectively in the financial services marketplace. The reorganization and the capital raised in the offering are expected to increase our lending capacity by providing us with additional capital to support new loans and higher lending limits, support the growth of our banking franchise, provide an additional cushion against unforeseen risk and expand our asset base. In addition, the contribution to the charitable foundation will not only complement our existing charitable activities but also enable the communities that we serve to share in our long-term growth. Lastly, the reorganization will enable us to better manage our capital by providing broader investment opportunities through the holding company structure and by enabling us to repurchase our common stock as market conditions permit. Although the reorganization and offering will create a stock savings institution and stock holding company, only a minority of the common stock will be offered for sale in the offering. As a result, our mutual form of ownership and its ability to provide community-oriented financial services will be preserved through the mutual holding company structure.

Our board of directors believes that the advantages of the mutual holding company structure outweigh the potential disadvantages of the mutual holding company structure to minority stockholders, including the inability of stockholders other than Ponce Bank Mutual Holding Company to own a majority of the common stock of PDL Community Bancorp. A majority of our voting stock will be owned by Ponce Bank Mutual Holding Company, which will be controlled by its board of directors. Although this structure will permit management to focus on our long-term business strategy for growth and capital redeployment without undue pressure from stockholders, it will also serve to perpetuate our existing management and directors. Ponce Bank Mutual Holding Company will be able to elect all the members of PDL Community Bancorp’s board of directors, and will be able to control the outcome of substantially all matters presented to our stockholders for resolution by vote. No assurance can be given that Ponce Bank Mutual Holding Company will not take action adverse to the interests of stockholders other than Ponce Bank Mutual Holding Company. For example, Ponce Bank Mutual Holding Company could prevent the sale of control of PDL Community Bancorp, defeat a candidate for the board of directors of PDL Community Bancorp, prevent stockholders from forcing a second step conversion transaction that such stockholders may find advantageous or other proposals put forth by stockholders.

Since we will not be offering all of our common stock for sale in the offering, the reorganization will result in less capital raised in comparison to a standard mutual-to-stock conversion which we are not undertaking at this time. The reorganization, however, will allow us to raise additional capital in the future because a majority of our common stock will be available for sale in the event of a conversion of Ponce Bank Mutual Holding Company to stock form. Our board of directors has determined that offering 45% of our to be outstanding shares of common stock for sale in the offering allows for an efficient use of the net proceeds by PDL Community Bancorp and Ponce Bank over the next several years.

The reorganization does not preclude the conversion of Ponce Bank Mutual Holding Company from the mutual to stock form of organization in the future. No assurance can be given when, if ever, Ponce Bank Mutual Holding Company will convert to stock form or what conditions the Federal Reserve Board or other regulatory agencies may impose on such a transaction. See “Summary—Possible Conversion of Ponce Bank Mutual Holding Company to Stock Form.”

Effects of the Reorganization and Offering on Depositors and Borrowers of Ponce De Leon Federal Bank

Continuity. While the reorganization is being accomplished, and after its completion, our routine business of accepting deposits and making loans will continue without interruption. Ponce Bank will continue to be subject to regulation by the

 

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Office of the Comptroller of the Currency and the FDIC. After the reorganization, we will continue to provide services for depositors and borrowers under current policies by our management and staff.

Liquidation Rights. Following the completion of the reorganization, all depositors who had liquidation rights with respect to Ponce De Leon Federal Bank as of the effective date of the reorganization will continue to have such rights solely with respect to Ponce Bank Mutual Holding Company, so long as they continue to hold their deposit accounts with Ponce Bank. In addition, all persons who become depositors of Ponce Bank subsequent to the reorganization will have such liquidation rights with respect to Ponce Bank Mutual Holding Company.

Deposit Accounts and Loans. Under the plan of reorganization, each depositor of Ponce De Leon Federal Bank at the time of the reorganization will automatically continue as a depositor after the reorganization, and each such deposit account will remain the same with respect to deposit balance, interest rate and other terms, except to the extent such deposit is reduced by withdrawals to purchase common stock in the offering. All insured deposit accounts of Ponce Bank will continue to be federally insured by the FDIC up to the legal maximum limit in the same manner as deposit accounts existing in Ponce De Leon Federal Bank immediately prior to the reorganization. Furthermore, no loan outstanding will be affected by the reorganization, and the amounts, interest rates, maturity and security for each loan will remain the same as they were prior to the reorganization.

Voting Rights. Following the completion of the reorganization and offering, members of Ponce De Leon Federal Bank will no longer have voting rights in Ponce Bank, but will have voting rights in Ponce Bank Mutual Holding Company. Following the completion of the reorganization and offering, voting rights in PDL Community Bancorp will be held exclusively by its stockholders. Each share of outstanding common stock held by a stockholder will entitle the stockholder to one vote on matters considered by PDL Community Bancorp stockholders. Although PDL Community Bancorp will have the power to issue shares of capital stock to persons other than Ponce Bank Mutual Holding Company, as long as Ponce Bank Mutual Holding Company is in existence, Ponce Bank Mutual Holding Company will be required to own a majority of the voting stock of PDL Community Bancorp, and consequently will be able to control the outcome of substantially all matters put to a vote of stockholders. PDL Community Bancorp must own 100% of the voting stock of Ponce Bank.

Offering of Common Stock

Under the plan of reorganization, up to 7,224,663 shares (subject to increase to up to 8,308,362 shares) of PDL Community Bancorp common stock will be offered for sale, subject to certain restrictions described below, through a subscription and community offering.

Subscription Offering. The subscription offering will expire at 12:00 p.m., noon, Eastern Time, on September 6, 2017, unless otherwise extended by Ponce De Leon Federal Bank. Regulations require that all shares to be offered in the offering be sold within a period ending not more than 90 days after regulatory approval of the plan of reorganization or a longer period as may be approved by the Federal Reserve Board or, despite approval of the plan of reorganization by our members, the reorganization and offering will not be effected. This period expires on October 21, 2017, unless extended with the approval of the Federal Reserve Board. If the offering is not completed by October 21, 2017, all subscribers will have the right to modify or rescind their subscriptions and to have their subscription funds returned promptly with interest. In the event of an extension of this type, all subscribers will be notified in writing of the time period within which subscribers must notify Ponce De Leon Federal Bank of their intention to maintain, modify or rescind their subscriptions. If the subscriber rescinds or does not respond in any manner to Ponce De Leon Federal Bank’s notice, the funds submitted will be refunded to the subscriber with interest at 0.10% per annum, which is Ponce De Leon Federal Bank’s current passbook savings rate, and/or the subscriber’s withdrawal authorizations will be terminated. In the event that the offering is not consummated, all funds submitted and not previously refunded pursuant to the subscription and community offering will be promptly refunded to subscribers with interest at 0.10% per annum, and all withdrawal authorizations will be terminated.

Subscription Rights. Under the plan of reorganization, nontransferable subscription rights to purchase the shares of common stock have been issued to persons and entities entitled to purchase the shares of common stock in the subscription offering. The amount of shares of common stock that these parties may purchase will depend on the availability of the common stock for purchase under the categories described in the plan of reorganization. Subscription priorities have been established for the allocation of common stock to the extent that the common stock is available. These priorities are as follows:

 

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Priority 1: Eligible Account Holders. Subject to the maximum purchase limitations, each depositor with $50.00 or more on deposit at Ponce De Leon Federal Bank as of the close of business on October 31, 2015 will receive nontransferable subscription rights to subscribe for up to the greater of the following:

 

•

$300,000 of common stock;

 

•

one-tenth of one percent of the total offering of common stock; or

 

•

15 times the product, rounded down to the nearest whole number, obtained by multiplying the total number of shares of common stock to be sold by a fraction, the numerator of which is the amount of the qualifying deposit of the eligible account holder and the denominator is the total amount of qualifying deposits of all eligible account holders.

If the exercise of subscription rights in this category results in an oversubscription, shares of common stock will be allocated among subscribing eligible account holders so as to permit each one, to the extent possible, to purchase a number of shares sufficient to make the person’s total allocation equal 100 shares or the number of shares for which the person has actually subscribed, whichever is less. Thereafter, unallocated shares will be allocated among the remaining subscribing eligible account holders whose subscriptions remain unfilled in the proportion that the amounts of their respective qualifying deposits bear to the total amount of qualifying deposits of all remaining eligible account holders whose subscriptions remain unfilled; however, no fractional shares shall be issued. If the amount so allocated exceeds the amount subscribed for by any one or more eligible account holders, the excess shall be reallocated, one or more times as necessary, among those eligible account holders whose subscriptions are still not fully satisfied on the same principle until all available shares have been allocated or all subscriptions satisfied. Subscription rights received by officers and directors and their associates in this category based on their increased deposits in Ponce De Leon Federal Bank in the one-year period preceding October 31, 2015 are subordinated to the subscription rights of other eligible account holders.

To ensure proper allocation of stock, each eligible account holder must list on his or her stock order form all deposit accounts in which he or she had an ownership interest on October 31, 2015. Failure to list an account, or providing incorrect information, could result in the loss of all or part of a subscriber’s stock allocation if the offering is oversubscribed.

Priority 2: Tax-Qualified Employee Plans. The plan of reorganization provides that tax-qualified employee plans of Ponce Bank, such as the employee stock ownership plan, will receive nontransferable subscription rights to purchase up to 4.90% of the shares of common stock issued and outstanding following the completion of the offering. The only tax-qualified employee benefit plan participating in the offering is the employee stock ownership plan which intends to purchase 3.92% of our outstanding shares (including shares issued to Ponce Bank Mutual Holding Company and shares contributed to our charitable foundation). In the event the number of shares offered in the offering is increased above the maximum of the valuation range, tax-qualified employee plans will have a priority right to purchase any shares exceeding that amount up to 4.90% of the common stock issued and outstanding following the completion of the offering, provided that the employee stock ownership plan cannot purchase more than 3.92% of our outstanding shares, including shares issued to Ponce Bank Mutual Holding Company and contributed to our charitable foundation.    The employee stock ownership plan may, with Federal Reserve Board approval, purchase some or all of the shares of common stock it intends to purchase in the open market or may purchase shares of common stock directly from PDL Community Bancorp.

Priority 3: Supplemental Eligible Account Holders. To the extent that there are sufficient shares of common stock remaining after satisfaction of subscriptions by eligible account holders and the tax-qualified employee plans, and subject to the maximum purchase limitations, each depositor with $50.00 or more on deposit as of the close of business on June 30, 2017 excluding officers, directors and their associates, will receive nontransferable subscription rights to subscribe for up to the greater of:

 

•

$300,000 of common stock;

 

•

one-tenth of one percent of the total offering of common stock; or

 

•

15 times the product, rounded down to the nearest whole number, obtained by multiplying the total number of shares of common stock to be issued by a fraction, the numerator of which is the amount of qualifying deposits of the supplemental eligible account holder and the denominator is the total amount of qualifying deposits of all supplemental eligible account holders.

If the exercise of subscription rights in this category results in an oversubscription, shares of common stock will be allocated among subscribing supplemental eligible account holders so as to permit each supplemental eligible accountholder,

 

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to the extent possible, to purchase a number of shares sufficient to make his or her total allocation equal 100 shares or the number of shares for which the person has actually subscribed, whichever is less. Thereafter, unallocated shares will be allocated among subscribing supplemental eligible account holders whose subscriptions remain unfilled in the proportion that the amounts of their respective qualifying deposits bear to total qualifying deposits of all subscribing supplemental eligible account holders; however, no fractional shares shall be issued. If the amount so allocated exceeds the amount subscribed for by any one or more supplemental eligible account holders, the excess shall be reallocated, one or more times as necessary, among those supplemental eligible account holders whose subscriptions are still not fully satisfied on the same principle until all available shares have been allocated or all subscriptions satisfied.

To ensure proper allocation of stock, each supplemental eligible account holder must list on his or her stock order form all deposit accounts in which he or she had an ownership interest on June 30, 2017. Failure to list an account, or providing incorrect information, could result in the loss of all or part of a subscriber’s stock allocation if the offering is oversubscribed.

Priority 4: Other Members. To the extent that there are sufficient shares of common stock remaining after satisfaction of subscriptions by eligible account holders, the tax-qualified employee plans and supplemental eligible account holders, and subject to the maximum purchase limitations, each member of Ponce De Leon Federal Bank as of the close of business on July 24, 2017 who is not an eligible account holder, supplemental eligible account holder or tax-qualified employee plan, including borrowers from Ponce De Leon Federal Bank as of April 11, 1985 who maintained such borrowings as of the close of business on July 24, 2017, will receive nontransferable subscription rights to purchase up to the greater of $300,000 or one-tenth of one percent of the total offering of common stock.

If there is an oversubscription in this category, the available shares of common stock will be allocated proportionately based on the size of such other member’s orders.

To ensure proper allocation of stock, each other member must list on his or her stock order form all deposit and loan accounts in which he or she had an ownership interest on July 24, 2017. Failure to list an account, or providing incorrect information, could result in the loss of all or part of a subscriber’s stock allocation if the offering is oversubscribed.

Community Offering. Any shares of common stock which have not been purchased in the subscription offering may be offered by PDL Community Bancorp in a community offering to members of the general public to whom PDL Community Bancorp delivers a copy of this prospectus and a stock order form, with preference given to natural persons (including trusts of natural persons) residing in the New York Counties of Bronx, New York, Queens and Kings and the New Jersey County of Hudson. Subject to the maximum purchase limitations, these persons may purchase up to $300,000 of common stock. The community offering, if any, may be undertaken concurrently with, during, or promptly after the subscription offering, and may terminate at any time without notice. Subject to any required regulatory approvals, PDL Community Bancorp will determine in its sole discretion the advisability of a community offering, the commencement and termination dates of any community offering, and the methods of finding potential purchasers in such offering. The opportunity to subscribe for shares of common stock in the community offering is subject to the right of PDL Community Bancorp and Ponce De Leon Federal Bank, in their sole discretion, to accept or reject these orders in whole or in part either at the time of receipt of an order or as soon as practicable thereafter.

If we do not have sufficient shares of common stock available to fill the orders of natural persons (including trusts of natural persons) residing in the New York Counties of Bronx, New York, Queens and Kings and the New Jersey County of Hudson whose orders are accepted by Ponce De Leon Federal Bank, we will allocate the available shares among those persons in a manner that permits each of them, to the extent possible, to purchase the lesser of 100 shares, or the number of shares subscribed for by such person. Thereafter, unallocated shares will be allocated among natural persons (including trusts of natural persons) residing in the New York Counties of Bronx, New York, Queens and Kings and the New Jersey County of Hudson, whose orders remain unsatisfied on an equal number of shares basis per order. If, after allocation of shares to natural persons (including trusts of natural persons) residing in the New York Counties of Bronx, New York, Queens and Kings and the New Jersey County of Hudson, we do not have sufficient shares of common stock available to fill the orders of other members of the general public, we will allocate the available shares among those persons in a manner that permits each of them, to the extent possible, to purchase the lesser of 100 shares, or the number of shares subscribed for by such person. Thereafter, unallocated shares will be allocated among members of the general public whose orders remain unsatisfied on an equal number of shares basis per order.

 

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Syndicated Community Offering. The plan of reorganization provides that, if necessary, all shares of common stock not purchased in the subscription offering and community offering may be offered for sale to the general public in a syndicated community offering to be managed by Raymond James & Associates, Inc., acting as our agent. In such capacity, Raymond James & Associates, Inc. may form a syndicate of other brokers-dealers who are member firms of the Financial Industry Regulatory Authority, Inc. (“FINRA”). Neither Raymond James & Associates, Inc. nor any registered broker-dealer will have any obligation to take or purchase any shares of the common stock in the syndicated community offering; however, Raymond James & Associates, Inc. has agreed to use its best efforts in the sale of shares in any syndicated community offering. We have not selected any other broker-dealers to participate in a syndicated community offering and will not do so until prior to the commencement of the syndicated community offering. The syndicated community offering would terminate no later than 45 days after the expiration of the subscription offering, unless extended by us, with approval of the Federal Reserve Board. See “—Community Offering” above for a discussion of rights of subscribers in the event an extension is granted.

The opportunity to subscribe for shares of common stock in the syndicated community offering is subject to the right of PDL Community Bancorp and Ponce De Leon Federal Bank, in their sole discretion, to accept or reject these orders in whole or in part either at the time of receipt of an order or as soon as practicable thereafter.

The price at which shares of common stock are sold in the syndicated community offering will be the same price as in the subscription and community offerings. Subject to the overall purchase limitations, no person by himself or herself may subscribe for or purchase more than $300,000 of common stock.

In the event of a syndicated community offering, it is currently expected that investors would follow the same general procedures applicable to purchasing shares in the subscription and community offerings (the use of stock order forms and the submission of funds directly to PDL Community Bancorp for the payment of the purchase price of the shares ordered) except that payment must be in immediately available funds (bank checks, money orders, deposit account withdrawals from accounts at Ponce De Leon Federal Bank or wire transfers). See “ Procedure for Purchasing Shares.”

If for any reason we cannot effectuate a syndicated offering of shares of common stock not purchased in the subscription and community offerings, or if there are an insignificant number of shares remaining unsold after such offerings, we will try to make other arrangements for the sale of unsubscribed shares. The Federal Reserve Board and the FINRA must approve any such arrangements.

Limitations on Purchase of Shares. The plan provides for certain limitations on the purchase of shares of common stock in the offering. These limitations are as follows:

 

A.

The aggregate amount of outstanding common stock of PDL Community Bancorp owned or controlled by persons other than Ponce Bank Mutual Holding Company at the close of the reorganization and offering shall be less than 50% of PDL Community Bancorp’s total outstanding common stock.

 

B.

The minimum number of shares of common stock you may order is 25 shares. The maximum number of shares of common stock that can be ordered by any person in the offering, or persons exercising subscription rights through a single deposit account, is 30,000 shares, and no person together with an associate or group of persons acting in concert may purchase more than 50,000 shares, except that: (i) PDL Community Bancorp may, in its sole discretion and without further notice to or solicitation of subscribers or other prospective purchasers, increase such maximum purchase limitation to 9.9% of the number of shares sold in the offering, provided that the total number of shares purchased by persons, their associates and those persons with which they are acting in concert, to the extent such purchases exceed 5% of the shares sold in the offering, shall not exceed, in the aggregate, 10% (or such higher percentage as may be determined by our board of directors with the approval of federal banking regulators) of the total number of the shares sold in the offering; (ii) the tax-qualified employee plans may purchase up to 10% of the shares offered in the offering; and (iii) for purposes of this paragraph B shares to be held by any tax-qualified employee plan and attributable to a person shall not be aggregated with other shares purchased directly by or otherwise attributable to such person.

 

C.

The aggregate amount of common stock acquired in the offering, plus all prior stock offerings by PDL Community Bancorp, by any non-tax-qualified employee plan or any management person (as defined in the plan) and his or her associates, exclusive of any shares of common stock acquired by such plan or management person and his or her associates in the secondary market, shall not exceed 4.9% of the outstanding shares of common stock of PDL

 

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Community Bancorp, at the conclusion of the offering. In calculating the number of shares held by any management person and his or her associates under this paragraph, shares held by any tax-qualified employee plan or non-tax-qualified employee plan of PDL Community Bancorp, or Ponce Bank that are attributable to such person shall not be counted.

 

D.

The aggregate amount of common stock acquired in the offering, plus all prior stock issuances by PDL Community Bancorp, by any one or more tax-qualified employee plans, or any management person and his or her associates, exclusive of any shares of common stock acquired by such plan or management person and his or her associates in the secondary market, shall not exceed 4.9% of the stockholders’ equity of PDL Community Bancorp, at the conclusion of the offering. In calculating the number of shares held by any management person and his or her associates under this paragraph, shares held by any tax-qualified employee plan or non-tax-qualified employee plan of PDL Community Bancorp, or Ponce Bank that are attributable to such person shall not be counted.

 

E.

The aggregate amount of common stock acquired in the offering, plus all prior stock issuances by PDL Community Bancorp, by any one or more tax-qualified employee plans, exclusive of any shares of common stock acquired by such plans in the secondary market, shall not exceed 4.9% of the outstanding shares of common stock of PDL Community Bancorp at the conclusion of the offering.

 

F.

The aggregate amount of common stock acquired in the offering, plus all prior stock issuances by PDL Community Bancorp, by any one or more tax-qualified employee plans, exclusive of any shares of common stock acquired by such plans in the secondary market, shall not exceed 4.9% of the stockholders’ equity of PDL Community Bancorp at the conclusion of the offering.

 

G.

The aggregate amount of common stock acquired in the offering, plus all prior issuances by PDL Community Bancorp, by any one or more management recognition plans, exclusive of any shares of common stock acquired by such plans in the secondary market, shall not exceed, in the aggregate, either 1.47% of the outstanding shares of common stock of PDL Community Bancorp or 1.47% of PDL Community Bancorp’s stockholders’ equity at the conclusion of the offering, provided, however, if PDL Community Bancorp’s tangible capital is at least 10.0% at the time of the implementation of the plans, the Federal Reserve Board may permit the plans to acquire, in the aggregate, up to 1.96% of the outstanding shares of common stock of PDL Community Bancorp or 1.96% of PDL Community Bancorp’s stockholders’ equity at the conclusion of the offering.

 

H.

The aggregate amount of common stock acquired in the offering, plus all prior issuances by PDL Community Bancorp, by any one or more tax-qualified employee plans and management recognition plans, exclusive of any shares of common stock acquired by such plans in the secondary market, shall not exceed, in the aggregate, either 4.9% of the outstanding shares of common stock of PDL Community Bancorp or 4.9% of PDL Community Bancorp’s stockholders’ equity at the conclusion of the offering, provided, however, if PDL Community Bancorp’s tangible capital is at least 10.0% at the time of the implementation of the plans, the Federal Reserve Board may permit the plans to acquire, in the aggregate, up to 5.88% of the outstanding shares of common stock of PDL Community Bancorp or 5.88% of PDL Community Bancorp’s stockholders’ equity at the conclusion of the offering.

 

I.

A tax-qualified employee plan, a management recognition plan or a stock option plan modified or adopted no earlier than one year after the conclusion of the offering or any subsequent issuance that is made in substantial conformity with the purchase priorities set forth in 12 CFR Section 239.59(a) of the regulations of the Federal Reserve Board, may exceed the percentage limitations set forth in the foregoing sub-sections G and H (plan expansion), subject to the following: (i) all common stock awarded in connection with any plan expansion must be acquired for such awards in the secondary market, and (ii) such acquisitions must begin no earlier than when such plan expansion is permitted to be made.

 

J.

The aggregate amount of common stock that may be encompassed under all stock option plans and restricted stock plans of PDL Community Bancorp may not exceed, in the aggregate, 25% of the outstanding shares of common stock of PDL Community Bancorp held by persons other than Ponce Bank Mutual Holding Company at the conclusion of the stock offering.

 

K.

The aggregate amount of common stock acquired in the offering, plus all prior stock issuances by PDL Community Bancorp, by all non-tax-qualified employee plans or management persons and their associates, exclusive of any common stock acquired by such plans or management persons and their associates in the secondary market, shall not exceed 25% (or such higher percentage as may be set by our board of directors with the approval of federal banking regulators) of the outstanding shares of common stock held by persons other than Ponce Bank Mutual

 

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Holding Company at the conclusion of the offering. In calculating the number of shares held by management persons and their associates under this paragraph or paragraph I. below, shares held by any tax-qualified employee plan or non-tax-qualified employee plan that are attributable to such persons shall not be counted.

 

L.

The aggregate amount of common stock acquired in the offering, plus all prior stock issuances by PDL Community Bancorp, by all non-tax-qualified employee plans or management persons and their associates, exclusive of any common stock acquired by such plans or management persons and their associates in the secondary market, shall not exceed 25% of the stockholders’ equity of PDL Community Bancorp held by persons other than Ponce Bank Mutual Holding Company at the conclusion of the offering.

 

M.

Notwithstanding any other provision of the plan of reorganization, no person shall be entitled to purchase any common stock to the extent such purchase would be illegal under any federal law or state law or regulation or would violate regulations or policies of FINRA. PDL Community Bancorp and/or its agents may ask for an acceptable legal opinion from any purchaser as to the legality of such purchase and may refuse to honor any purchase order if such opinion is not timely furnished.

 

N.

The board of directors of PDL Community Bancorp has the right in its sole discretion to reject any order submitted by a person whose representations our board of directors believes to be false or who it otherwise believes, either alone or acting in concert with others, is violating, circumventing, or intends to violate, evade or circumvent the terms and conditions of the plan.

 

O.

A minimum of 25 shares of common stock must be purchased by each person purchasing shares in the offering to the extent those shares are available; provided, however, that in the event the minimum number of shares of common stock purchased times the price per share exceeds $500, then such minimum purchase requirement shall be reduced to such number of shares which when multiplied by the price per share shall not exceed $500, as determined by our board of directors.

For purposes of the plan of reorganization, the members of our board of directors are not deemed to be acting in concert solely by reason of their board membership. The term “associate” is used above to indicate any of the following relationships with a person:

 

•

any corporation or organization, other than Ponce Bank Mutual Holding Company, PDL Community Bancorp, Ponce De Leon Federal Bank or Ponce Bank or a majority-owned subsidiary of PDL Community Bancorp, Ponce De Leon Federal Bank or Ponce Bank, of which a person is a senior officer or partner, or beneficially owns, directly or indirectly, 10% or more of any class of equity securities of the corporation or organization;

 

•

any trust or other estate, if the person has a substantial beneficial interest in the trust or estate or is a trustee or fiduciary of the trust or estate except that for the purposes relating to subscriptions in the stock offering and the sale of common stock following the reorganization, a person who has a substantial beneficial interest in any non-tax-qualified employee plan or any tax-qualified employee plan, or who is a trustee or fiduciary of such plan, is not an associate of such plan, and except that for purposes of aggregating total shares that may be held by officers and directors, the term “associate” does not include any tax-qualified employee plan; or

 

•

any person who is related by blood or marriage to such person and (i) who lives in the same house as the person; or (ii) who is a director or senior officer of Ponce Bank Mutual Holding Company, PDL Community Bancorp, Ponce Bank or Ponce De Leon Federal Bank or a subsidiary thereof.

As used above, the term “acting in concert” means:

 

•

knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or

 

•

a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. A person or company that acts in concert with another person or company (“other party”) shall also be deemed to be acting in concert with any person or company who is also acting in concert with that other party, except that any tax-qualified employee plan will not be deemed to be acting in concert with its trustee or a person who serves in a similar capacity solely for the purpose of determining whether stock held by the trustee and stock held by the plan will be aggregated.

Persons or companies who file jointly a Schedule 13D or Schedule 13G with any regulatory agency will be deemed to be acting in concert.

 

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The boards of directors of PDL Community Bancorp and Ponce De Leon Federal Bank may, in their sole discretion, and without notice or solicitation of other prospective purchasers, increase the maximum purchase limitation to 9.9% of the number of shares sold in the offering provided that the total number of shares purchased by persons, their associates and those persons with which they are acting in concert, to the extent such purchases exceed 5% of the shares sold in the offering, shall not exceed, in the aggregate, 10% (or such higher percentage as may be determined by our board of directors with the approval of the federal banking regulators) of the total number of shares sold in the offering. Requests to purchase shares of PDL Community Bancorp common stock under this provision will be allocated by the boards of directors of PDL Community Bancorp and Ponce De Leon Federal Bank in accordance with the priority rights and allocation procedures set forth above. Depending upon market and financial conditions, and subject to certain regulatory limitations, the boards of directors of PDL Community Bancorp and Ponce De Leon Federal Bank, with the approval of the federal banking regulators and without further approval of the members, may increase or decrease any of the above purchase limitations at any time. To the extent that shares are available, each subscriber must subscribe for a minimum of 25 shares. In computing the number of shares of common stock to be allocated, all numbers will be rounded down to the next whole number.

Shares of common stock purchased in the offering will be freely transferable except for shares of common stock purchased by executive officers and directors of Ponce De Leon Federal Bank or PDL Community Bancorp and except as described below. In addition, under FINRA guidelines, members of the FINRA and their associates are subject to certain reporting requirements upon purchase of these securities.

Plan of Distribution and Marketing Arrangements

Offering materials for the offering initially have been distributed to certain persons by mail, with additional copies made available through our Stock Information Center and Raymond James & Associates, Inc.

To assist in the marketing of our common stock, we have retained Raymond James & Associates, Inc., which is a broker-dealer registered with FINRA. In its role as financial advisor and marketing agent, Raymond James & Associates, Inc. will, among other things:

 

•

Assist us in assessing the financial and securities market implications of the plan and in structuring and communicating the terms of the plan and the offering;

 

•

Assist us in the preparation of documents related to the execution of the plan, including the prospectus, stock order form and all marketing materials (it being understood that the preparation and filing of any and all such documents will be our responsibility);

 

•

Assist us in scheduling and preparing for meetings with potential investors and/or other broker-dealers related to the offering, as necessary;

 

•

Establish a Stock Information Center at Raymond James & Associates, Inc. office in Chicago, Illinois;

 

•

Assist in the training of our personnel for interaction with customers during the offering period; and

 

•

Such other financial advisory and investment banking services in connection with the offering as may be agreed upon by Raymond James & Associates, Inc. and us.

For its services as financial advisor, Raymond James & Associates, Inc. will receive (i) a non-refundable management fee of $50,000, which we have already paid, and (ii) a success fee of 1.0% of the aggregate dollar amount of all shares of common stock sold in the subscription and community offerings. No fee will be paid on any shares purchased by our directors, officers or employees or members of their immediate families (whether directly or through a personal trust), or purchased by any employee benefit plan or trust established for the benefit of our directors, officers and employees, or contributed to our charitable foundation.

In the event shares of common stock are sold in a syndicated community offering, we will pay fees of 6.0% of the aggregate dollar amount of shares of common stock sold in the syndicated community offering to Raymond James & Associates, Inc. and any other broker-dealers included in the syndicated community offering. Any such offering will be on a best efforts basis, and Raymond James & Associates, Inc. will serve as sole book-running manager in such an offering. All fees payable with respect to a syndicated community offering will be in addition to fees payable with respect to the subscription and community offerings.

The aggregate of the success fee and the commissions earned in the syndicated community offering, if any, will be reduced by the amount of the management fee.

 

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We also will reimburse Raymond James & Associates, Inc. for its reasonable expenses associated with its marketing effort in an amount not to exceed $50,000 and for attorney’s fees and expenses not to exceed $100,000. These expenses may be increased in the event of unusual circumstances; such increases may not exceed $10,000 and $25,000, respectively.

We will indemnify Raymond James & Associates, Inc. against liabilities and expenses (including legal fees) incurred in connection with certain claims or litigation arising out of or based upon untrue statements or omissions contained in the offering material for the common stock, including liabilities under the Securities Act of 1933.

Raymond James & Associates, Inc. has not prepared any report or opinion constituting a recommendation or advice to us or to persons who subscribe for stock, nor has it prepared an opinion as to the fairness to us of the purchase price or the terms of the stock to be sold. Raymond James & Associates, Inc. expresses no opinion as to the prices at which the shares of common stock to be issued may trade.

Our directors and executive officers may participate in the solicitation of offers to purchase shares of common stock. Other trained employees may participate in the offering in ministerial capacities, providing clerical work in effecting a sales transaction or answering questions of a ministerial nature. Other questions of prospective purchasers will be directed to executive officers or registered representatives. We will rely on Rule 3a4-1 of the Securities Exchange Act of 1934, so as to permit officers, directors, and employees to participate in the sale of shares of common stock. No officer, director or employee will be compensated for his participation by the payment of commissions or other remuneration based either directly or indirectly on the transactions in the shares of common stock. Raymond James & Associates, Inc. will solicit orders and conduct sales of the common stock of PDL Community Bancorp in states in which our directors and executive officers are not permitted to offer and sell our shares of common stock.

Records Agent Services

We have also engaged Raymond James & Associates, Inc. to act as our records agent in connection with the offering. In this role as records agent, Raymond James & Associates, Inc. will provide, among other things:

 

•

Customer File Processing Services—processing of our customer account records for each record date required by the Plan; consolidation of eligible customer accounts by ownership and creation of a central file for determination of subscription and voting rights;

 

•

Stock Order Processing Services—processing of stock order forms received, required reporting, allocation of shares to qualifying subscribers if the offering is oversubscribed; and coordination with our transfer agent for stock issuance; and

 

•

Member Proxy Vote Services—tabulating and reporting of member proxy votes received; proxy target group identification and reporting to assist with solicitation efforts; and acting as or supporting the Inspector of Election for the Special Meeting of Members.

For these services, Raymond James & Associates, Inc. will receive a fee of $25,000 which is non-refundable and has already been paid.

How We Determined the Stock Pricing and the Number of Shares to be Issued

The plan of reorganization and federal regulations require that the aggregate purchase price of the common stock sold in the offering be based on the appraised pro forma market value of the common stock, as determined by an independent valuation. We have retained RP Financial, LC. to prepare an independent valuation appraisal. For its services in preparing the initial valuation RP Financial, LC. will receive a fee of $115,000, and will receive a fee of $10,000 for each appraisal update. RP Financial, LC. will be reimbursed for its expenses up to $7,500.

We are not affiliated with RP Financial, LC., and neither we nor RP Financial, LC. have an economic interest in, or is held in common with, the other. RP Financial, LC. has represented and warranted to us that it is not aware of any fact or circumstance that would cause it not to be “independent” within the meaning of the reorganization regulations or the applicable regulatory valuation guidelines or otherwise prohibit or restrict in anyway RP Financial, LC. from serving in the role of our independent appraiser.

We have agreed to indemnify RP Financial, LC. and its employees and affiliates against specified losses, including any losses in connection with claims under the federal securities laws, arising out of its services as independent appraiser, except where such liability results from its negligence or bad faith.

 

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The independent valuation appraisal considered the pro forma impact of the offering. Consistent with federal appraisal guidelines, the appraisal applied three primary methodologies: (1) the pro forma price-to-book value approach applied to both reported book value and tangible book value; (2) the pro forma price-to-earnings approach applied to reported and core earnings; and (3) the pro forma price-to-assets approach. The market value ratios applied in the three methodologies were based upon the current market valuations of the peer group companies identified by RP Financial, LC., subject to valuation adjustments applied by RP Financial, LC. to account for differences between us and our peer group. RP Financial, LC. placed the greatest emphasis on the price-to-book value and price-to-earnings approaches in estimating pro forma market value. RP Financial, LC. considered the pro forma price-to-assets approach to be less meaningful in preparing the appraisal, as this approach is more meaningful when a company has low equity or earnings. The price-to-assets approach is less meaningful for a company like us, as we have equity in excess of regulatory capital requirements and positive reported and core earnings.

The independent valuation was prepared by RP Financial, LC. in reliance upon the information contained in this prospectus, including our financial statements. RP Financial, LC. also considered the following factors, among others:

 

•

our operating results and financial condition;

 

•

the economic and demographic conditions in our existing market area;

 

•

certain historical, financial and other information relating to us;

 

•

a comparative evaluation of our operating and financial characteristics with those of other similarly situated publicly traded savings institutions;

 

•

the impact of the reorganization and the offering on our equity and earnings potential;

 

•

our proposed dividend policy; and

 

•

the trading market for securities of comparable institutions and general conditions in the market for such securities.

The independent valuation is also based on an analysis of a peer group of publicly traded savings and loan holding companies that RP Financial, LC. considered comparable to us under regulatory guidelines applicable to the independent valuation. Under these guidelines, a minimum of ten peer group companies are selected from the universe of all publicly-traded savings institutions with relatively comparable resources, strategies and financial and other operating characteristics. Such companies must also be traded on an exchange (such as Nasdaq or the New York Stock Exchange). The peer group companies selected also consisted of fully-converted stock institutions that were not subject to an actual or rumored acquisition and that had been in fully-converted form for at least one year. In addition, RP Financial, LC. limited the peer group companies to the following two selection criteria: (i) Mid-Atlantic institutions with assets between $500 million and $1.5 billion, tangible equity-to-assets ratios of greater than 7.0% and positive reported and core earnings; and (ii) New England institutions with assets between $500 million and $1.5 billion, tangible equity-to-assets ratios of greater than 7.0% and positive reported and core earnings.

In applying each of the valuation methods, RP Financial, LC. considered adjustments to the pro forma market value based on a comparison of us with the peer group. RP Financial, LC. advised the board of directors that the valuation conclusion included the following adjustments relative to the peer group:

 

•

a moderate down adjustment was made for profitability, growth and viability of earnings due to Ponce De Leon Federal Bank’s less favorable core earnings measures and lower pro forma returns as a percentage of assets and equity;

 

•

a slight upward adjustment was made for asset growth due to Ponce De Leon Federal Bank’s greater pro forma leverage capacity; and

 

•

a slight downward adjustment was made for dividends due to the MHC ownership structure and dividend waiver regulations in place for MHCs that impact minority ownership ratios, in comparison to the fully-converted peer group companies.

RP Financial, LC. made no adjustments for financial condition, primary market area, liquidity of the shares, marketing of the issue, management, or effect of government regulations and regulatory reform.

Included in the independent valuation were certain assumptions as to our pro forma earnings after the reorganization that were utilized in determining the appraised value. These assumptions included estimated expenses, an assumed after-tax

 

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rate of return on the net offering proceeds and purchases in the open market of 5.88% of the shares of common stock to be outstanding by the stock-based benefit plans at the $10.00 purchase price. See “Pro Forma Data” for additional information concerning these assumptions. The use of different assumptions may yield different results.

On the basis of the foregoing, RP Financial, LC. advised us that as of May 5, 2017, the estimated pro forma market value of the common stock, assuming we were selling a minority of our shares in the offering, was $139.6 million. Based on applicable regulations, this forms a midpoint of a valuation range with a minimum of $118.7 million and a maximum of $160.5 million. Our board of directors determined to offer the shares of common stock in the offering at the purchase price of $10.00 per share and that 45.0% of the shares issued should be held by purchasers in the offering, 3.3% should be held by our charitable foundation and 51.7% should be held by Ponce Bank Mutual Holding Company. Based on the estimated valuation range and the purchase price of $10.00 per share, the total number of shares of common stock that PDL Community Bancorp will issue will range from 11,866,598 shares to 16,054,808 shares, with a midpoint of 13,960,703 shares (including in each case shares issued to Ponce Bank Mutual Holding Company and our charitable foundation), and the number of shares sold in the offering will range from 5,339,969 shares to 7,224,663 shares, with a midpoint of 6,282,316 shares.

Our board of directors reviewed the independent valuation and, in particular, considered (i) our financial condition and results of operations for the three months ended March 31, 2017 and two years ended December 31, 2016, (ii) financial comparisons to other financial institutions, and (iii) stock market conditions generally and, in particular, for financial institutions. All of these factors are set forth in the independent valuation. Our board of directors also reviewed the methodology and the assumptions used by RP Financial, LC. in preparing the independent valuation. The estimated valuation range may be amended with the approval of the Federal Reserve Board, if necessitated by subsequent developments in our financial condition or market conditions generally.

Following commencement of the subscription offering, the maximum of the estimated valuation range may be increased by up to 15%, to up to $184.6 million and the maximum number of shares that will be outstanding immediately following the offering may be increased up to 15% to up to 18,463,029 shares. Under such circumstances the number of shares sold in the offering will be increased to up to 8,308,362 shares, the number of shares held by Ponce Bank Mutual Holding Company will be increased to up to 9,545,388 shares and the number of shares contributed to our charitable foundation will be increased to up to 609,279. The increase in the valuation range may occur to reflect demand for the shares or changes in market conditions, and can be implemented without the resolicitation of subscribers. The minimum of the estimated valuation range and the minimum of the offering range may not be decreased without a resolicitation of subscribers. The purchase price of $10.00 per share will remain fixed. See “—Offering of Common Stock—Limitations On Purchase of Shares” as to the method of distribution and allocation of additional shares of common stock that may be issued in the event of an increase in the offering range to fill unfilled orders in the subscription and community offerings.

The independent valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. RP Financial, LC. did not independently verify the financial statements and other information provided by Ponce De Leon Federal Bank, nor did RP Financial, LC. value independently the assets or liabilities of Ponce De Leon Federal Bank. The independent valuation considers Ponce De Leon Federal Bank as a going concern and should not be considered as an indication of its liquidation value. Moreover, because the valuation is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons purchasing shares in the offering will thereafter be able to sell such shares at prices at or above the purchase price.

The independent valuation will be updated at the time of the completion of the offering. If the update to the independent valuation at the conclusion of the offering results in an increase in the pro forma market value of the common stock to more than $184.6 million or a decrease in the pro forma market value to less than $118.7 million, then PDL Community Bancorp, after consulting with the Federal Reserve Board, may terminate the plan of reorganization and return all funds promptly, with interest on payments made by check, certified or teller’s check, bank draft or money order; extend or hold a new subscription offering, community offering, or both; establish a new offering range and commence a resolicitation of subscribers; or take such other actions as may be permitted by the Federal Reserve Board in order to complete the reorganization and offering. In the event that a resolicitation is commenced due to a change in the independent valuation, all funds will be promptly returned to investors and investors will be given the opportunity to place a new order for a period of time. A resolicitation, if any, following the conclusion of the subscription and community offerings would not exceed 45 days unless further extended by regulators for periods of up to 90 days not to extend beyond 24 months following the special meeting of members, or September 18, 2019.

 

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An increase in the independent valuation and the number of shares to be issued in the offering would decrease both a subscriber’s ownership interest and PDL Community Bancorp’s pro forma earnings and stockholders’ equity on a per share basis while increasing pro forma earnings and stockholders’ equity on an aggregate basis. A decrease in the independent valuation and the number of shares of common stock to be issued in the offering would increase both a subscriber’s ownership interest and PDL Community Bancorp’s pro forma earnings and stockholders’ equity on a per share basis while decreasing pro forma net income and stockholders’ equity on an aggregate basis. For a presentation of the effects of such changes, see “Pro Forma Data.”

Copies of the appraisal report of RP Financial, LC. and the detailed memorandum of the appraiser setting forth the method and assumptions for such appraisal are available for inspection at the main office of Ponce De Leon Federal Bank and the other locations specified under “Where You Can Find More Information.”

No sale of shares of common stock may occur unless, prior to such sale, RP Financial, LC. confirms to Ponce De Leon Federal Bank and the Federal Reserve Board that, to the best of its knowledge, nothing of a material nature has occurred that, taking into account all relevant factors, would cause RP Financial, LC. to conclude that the independent valuation is incompatible with its estimate of the pro forma market value of the common stock of PDL Community Bancorp at the conclusion of the offering. Any change that would result in an aggregate purchase price that is below the minimum or above the maximum of the estimated valuation range would be subject to regulatory approval. If such confirmation is not received, we may extend the offering; reopen the offering or commence a new offering; establish a new estimated valuation range and commence a resolicitation of all purchasers with the approval of federal regulators; or take such other actions as permitted in order to complete the offering.

Prospectus Delivery

To ensure that each purchaser in the subscription and community offerings receives a prospectus at least 48 hours before the expiration of the offering in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, we may not mail a prospectus any later than five days prior to the expiration date or hand deliver a prospectus any later than two days prior to that date. We are not obligated to deliver a prospectus or stock order form by means other than U.S. Mail. Execution of a stock order form will confirm receipt of delivery of a prospectus in accordance with Rule 15c2-8. Stock order forms will be distributed only if preceded or accompanied by a prospectus.

In the syndicated community offering, a prospectus and stock order form in electronic format may be made available on Internet sites or through other online services maintained by Raymond James & Associates, Inc. or one or more other members of the syndicate, or by their respective affiliates. In those cases, prospective investors may view offering terms online and, depending upon the syndicate member, prospective investors may be allowed to place orders online. The members of the syndicate may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made on the same basis as other allocations.

Other than the prospectus in electronic format, the information on the Internet sites referenced in the preceding paragraph and any information contained in any other Internet site maintained by any member of the syndicate is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or by Raymond James & Associates, Inc. or any other member of the syndicate in its capacity as selling agent or syndicate member and should not be relied upon by investors.

Procedure for Purchasing Shares

Expiration Date. The offering will expire at 12:00 p.m., noon, Eastern Time, on September 6, 2017, unless we extend it for up to 45 days. This extension may be approved by us, in our sole discretion, without further approval or additional notice to subscribers in the offering. Any extension of the subscription and/or community offering beyond October 21, 2017 would require regulatory approval. If the offering is extended past October 21, 2017, we will resolicit subscribers. You will have the opportunity to confirm, change or cancel your order within a specified period of time. If you do not respond during that period, your stock order will be cancelled and your deposit account withdrawal authorizations will be cancelled or your funds submitted will be returned promptly with interest at 0.10% per annum from the date your stock order was processed. No single extension will exceed 90 days. Aggregate extensions may not go beyond September 18, 2019, which is two years after the special meeting of members. We reserve the right in our sole discretion to terminate the offering at any time and for any reason, in which case we will cancel any deposit account withdrawal authorizations and promptly return all funds submitted, with interest at 0.10% per annum from the date of processing as described above.

 

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We have the right to reject any order submitted in the offering by a person who we believe is making false representations or who we otherwise believe, either alone or acting in concert with others, is violating, evading, circumventing, or intends to violate, evade or circumvent the terms and conditions of the plan of reorganization.

Use of Stock Order Forms. In order to purchase shares of common stock, you must complete and sign an original stock order form and remit full payment. We will not be required to accept incomplete stock order forms, unsigned stock order forms, or orders submitted on photocopied or facsimiled stock order forms. All stock order forms must be received, not postmarked, prior to 12:00 p.m., noon, Eastern Time, September 6, 2017. We will not accept stock order forms that are not received by that time, are executed defectively or are received without full payment or without appropriate deposit account withdrawal instructions. We are not required to notify subscribers of incomplete or improperly executed stock order forms. We have the right to permit the correction of incomplete or improperly executed stock order forms. We do not represent, however, that we will do so. You may submit your stock order form and payment in one of three ways: 1) by mail, using the stock order reply envelope provided; 2) by overnight delivery to the address indicated for that purpose on the stock order form; or 3) by hand-delivery to Ponce De Leon Federal Bank’s administrative office located at 2244 Westchester Avenue, Bronx, New York. However, please know that all stock order forms, with full payment, must be received (not postmarked) by 12:00 p.m., noon, Eastern Time, on September 6, 2017. Please do not mail stock order forms to Ponce De Leon Federal Bank. We encourage subscribers to consider in-person or overnight delivery to enhance the likelihood that your order is received before the deadline. Once tendered, an order form cannot be modified or revoked unless the offering is terminated or is extended beyond October 21, 2017, or the number of shares of common stock to be sold is increased to more than 8,308,362 shares or decreased to less than 5,339,969 shares. We reserve the absolute right, in our sole discretion, to reject orders received in the community offering and the syndicated community offering, in whole or in part, at the time of receipt or at any time prior to completion of the offering.

If you are ordering shares in the subscription offering, you must represent that you are purchasing shares for your own account and that you have no agreement or understanding with any person for the sale or transfer of the shares. Our interpretation of the terms and conditions of the plan of reorganization and of the acceptability of the order forms will be final.

To ensure that eligible account holders, supplemental eligible account holders, and other members are properly identified as to their stock purchase priorities, such parties must list all deposit and loan accounts on the stock order form giving all names on each deposit and loan account and the account numbers at the applicable eligibility date.

By signing the order form, you will be acknowledging that the common stock is not a deposit or savings account and is not federally insured or otherwise guaranteed by Ponce De Leon Federal Bank or the federal government, and that you received a copy of this prospectus. However, signing the order form will not result in you waiving your rights under the Securities Act of 1933 or the Securities Exchange Act of 1934.

Payment for Shares. Payment for all shares of common stock will be required to accompany all completed stock order forms for the purchase to be valid. Payment for shares may be made by:

 

•

personal check, bank check or money order, payable to PDL Community Bancorp; or

 

•

authorization of withdrawal from Ponce De Leon Federal Bank deposit account(s), other than checking accounts or individual retirement accounts (“IRAs”).

Appropriate means for designating withdrawals from deposit accounts at Ponce De Leon Federal Bank are provided in the stock order forms. The funds designated must be available in the account(s) at the time the stock order form is received. A hold will be placed on these funds, making them unavailable to the depositor. Funds authorized for withdrawal will continue to earn interest within the account at the contract rate until the offering is completed, at which time the designated withdrawal will be made. Interest will remain in the account. Interest penalties for early withdrawal applicable to certificate of deposit accounts will not apply to withdrawals authorized for the purchase of shares of common stock; however, if a withdrawal results in a certificate of deposit account with a balance less than the applicable minimum balance requirement, the certificate of deposit will be cancelled at the time of withdrawal without penalty, and the remaining balance will earn interest at the rate of 0.10% per annum subsequent to the withdrawal.

In the case of payments made by personal check, these funds must be available in the account(s). Checks and money orders will be immediately cashed and placed in a segregated account at Ponce De Leon Federal Bank and will earn interest at a rate of 0.10% per annum from the date payment is processed until the offering is completed, at which time, a subscriber will be issued a check for interest earned.

 

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Regulations prohibit Ponce De Leon Federal Bank from knowingly lending funds or extending credit to any person to purchase shares of common stock in the offering. You may not pay by wire transfer. You may not submit cash or use a check drawn on a Ponce De Leon Federal Bank line of credit. We will not accept third-party checks (a check written by someone other than you) payable to you and endorsed over to PDL Community Bancorp. You may not designate on your stock order form a direct withdrawal from a Ponce De Leon Federal Bank retirement account. See “—Using Retirement Account Funds” for information on using such funds. Additionally, you may not designate on your stock order form a direct withdrawal from Ponce De Leon Federal Bank deposit accounts with check-writing privileges. Please submit a check instead. If you request direct withdrawal, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and we will immediately withdraw the amount from your checking account(s). Once we receive your executed stock order form, it may not be modified, amended or rescinded without our consent, unless the offering is not completed by the expiration date, in which event purchasers may be given the opportunity to increase, decrease or rescind their orders for a specified period of time.

We have the right, in our sole discretion, to permit institutional investors to submit irrevocable orders together with the legally binding commitment for payment and to thereafter pay for the shares of common stock for which they subscribe at any time prior to 48 hours before the completion of the offering. This payment may be made by wire transfer.

Our employee stock ownership plan will not be required to pay for any shares purchased in the offering until completion of the stock offering, provided there is a loan commitment from either an unrelated financial institution or PDL Community Bancorp to lend to the employee stock ownership plan the necessary amount to fund the purchase at the time of the expiration of the subscription offering.

Using Retirement Account Funds. If you are interested in using your individual retirement account funds to purchase shares of common stock, you must do so through a self-directed individual retirement account such as a brokerage firm individual retirement account. By regulation, Ponce De Leon Federal Bank’s individual retirement accounts are not self-directed, so they cannot be invested in shares of our common stock. Therefore, if you wish to use your funds that are currently in a Ponce De Leon Federal Bank individual retirement account, you may not designate on the stock order form that you wish funds to be withdrawn from the account for the purchase of common stock. The funds you wish to use for the purchase of common stock will have to be transferred to a brokerage account. It may take several weeks to transfer your Ponce De Leon Federal Bank individual retirement account to an independent trustee, so please allow yourself sufficient time to take this action. There will be no early withdrawal or Internal Revenue Service interest penalties for these transfers. A one-time and/or annual administrative fee may be payable to the independent custodian or trustee. Depositors interested in using funds in an individual retirement account or any other retirement account to purchase shares of common stock should contact our Stock Information Center as soon as possible, preferably at least two weeks prior to September 6, 2017 end of the offering period, because processing such transactions takes additional time, and whether such funds can be used may depend on limitations imposed by the institutions where such funds are currently held. We cannot guarantee that you will be able to use such funds.

Delivery of Stock Purchased

All shares of common stock sold will be issued in book entry form. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock issued in the subscription and community offerings will be mailed by our transfer agent to the persons entitled thereto at the registration address noted by them on their stock order forms as soon as practicable following consummation of the stock offering. Shares of common stock sold in the syndicated community offering may be delivered electronically through the services of The Depository Trust Company, subject to any necessary regulatory approval. We expect trading in the stock to begin on the day of completion of the stock offering or the next business day. Until a statement reflecting ownership of shares of common stock is available and delivered to purchasers, purchasers might not be able to sell the shares of common stock that they purchased, even though the common stock will have begun trading. Your ability to sell your shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.

Restrictions on Transfer of Subscription Rights and Shares

Federal Reserve Board regulations prohibit any person with subscription rights, specifically the eligible account holders, supplemental eligible account holders and other members, from transferring or entering into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the plan of reorganization or the shares of common stock to be issued upon their exercise. These rights may be exercised only by the person to whom they are granted

 

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and only for his or her account. Each person exercising subscription rights will be required to certify that he or she is purchasing shares solely for his or her own account and that he or she has no agreement or understanding regarding the sale or transfer of such shares. The regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase subscription rights or shares of common stock to be issued upon their exercise prior to completion of the offering. On the stock order form, you cannot add the names of others for joint stock registration unless they are also named on a qualifying deposit or loan account with a subscription priority the same as your own.

We intend to pursue any and all legal and equitable remedies in the event we become aware of the transfer of subscription rights, and we will not honor orders that we believe involve the transfer of subscription rights.

Other Restrictions

Notwithstanding any other provision of the plan of reorganization, no person is entitled to purchase any shares of common stock to the extent the purchase would be illegal under any federal or state law or regulation, including state “blue sky” regulations, or would violate regulations or policies of the FINRA, particularly those regarding free riding and withholding. We may ask for an acceptable legal opinion from any purchaser as to the legality of his or her purchase and we may refuse to honor any stock order if an opinion is not timely furnished.

How You Can Obtain Additional Information—Stock Information Center

Our banking personnel may not, by law, assist with investment-related questions about the offering. If you have questions regarding the reorganization or offering, please call our Stock Information Center at (888) 317-2811. The Stock Information Center will be open Monday through Friday, between 10:00 a.m. and 4:00 p.m., Eastern Time. The Stock Information Center will be closed on bank holidays. Alternatively, if you have questions regarding the reorganization or offering, you may also discuss those questions in person with a representative of Raymond James & Associates, Inc., who is assisting us with the offering, by visiting the Bank’s administrative office located at 2244 Westchester Avenue, Bronx, NY, beginning the week of August 21, 2017, Monday 1:00 p.m. to 5:00 p.m., Tuesday through Thursday 9:00 a.m. to 5:00 p.m., and Friday 9:00 a.m. to 1:00 p.m.

Material Income Tax Consequences

Consummation of the reorganization is subject to the prior receipt of an opinion of counsel or tax advisor with respect to federal and state income taxation that the reorganization will not be a taxable transaction to Ponce De Leon Federal Bank, PDL Community Bancorp, eligible account holders, supplemental eligible account holders and other members. Unlike private letter rulings, opinions of counsel or tax advisors are not binding on the Internal Revenue Service or any state taxing authority, and such authorities may disagree with such opinions. In the event of such disagreement, there can be no assurance that Ponce De Leon Federal Bank or PDL Community Bancorp would prevail in a judicial proceeding.

Ponce De Leon Federal Bank and PDL Community Bancorp have received an opinion of Crowe Horwath LLP, regarding all of the material federal income tax consequences of the reorganization, which includes the following:

 

1.

The conversion of Ponce De Leon Federal Bank to Ponce Bank Mutual Holding Company will qualify as a tax-free reorganization under Internal Revenue Code Section 368(a)(1)(F) and no gain or loss will be recognized as a result of such conversion.

 

2

The transfer by Ponce De Leon Federal Bank in mutual form (the “Mutual Bank”) of substantially all of its assets and liabilities to Ponce Bank in stock form (the “Stock Bank”) qualifies as an exchange under Internal Revenue Code Section 351 and the Mutual Bank will recognize no gain or loss upon the transfer of substantially all of its assets and liabilities solely in exchange for the voting common stock of the Stock Bank.

 

3.

The Mutual Bank’s holding period in the common stock of the Stock Bank received in the reorganization will include the holding period during which the property exchanged was held in accordance with Internal Revenue Code Section 1223(1).

 

4.

Mutual Bank will recognize no income with respect to its bad debt reserve established under Internal Revenue Code Section 593.

 

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5.

The Stock Bank will recognize no gain or loss upon its receipt of property from the Mutual Bank in exchange for its stock in accordance with Internal Revenue Code Section 1032(a).

 

6.

The Stock Bank’s basis in the property received from the Mutual Bank will be the same as the basis of such property in the hands of the Mutual Bank immediately prior to the reorganization in accordance with Internal Revenue Code Section 362(a).

 

7.

The Stock Bank’s holding period for the property received from the Mutual Bank will include the period during which such property was held by the Mutual Bank prior to the conversion, in accordance with Internal Revenue Code Section 1223(2).

 

8.

Mutual Bank’s members will recognize no gain or loss by reason of the reorganization.

 

9.

No gain or loss will be recognized by eligible account holders, supplemental eligible account holders or other members of the Mutual Bank on the issuance to them of withdrawable deposit accounts in the Stock Bank plus liquidation rights with respect to Ponce Bank Mutual Holding Company, in exchange for their deposit accounts in the Mutual Bank or to the other depositors on the issuance to them of withdrawable deposit accounts in accordance with Internal Revenue Code Section 354(a).

 

10.

It is more likely than not that the fair market value of the subscription rights to purchase common stock is zero. Accordingly, no gain or loss will be recognized by eligible account holders, supplemental eligible account holders or other members upon the distribution to them of the nontransferable subscription rights to purchase shares of stock of PDL Community Bancorp in accordance with Internal Revenue Code Section 305(a). Gain realized, if any, by the eligible account holders, supplemental eligible account holders and other members on the distribution to them of nontransferable subscription rights to purchase shares of common stock will be recognized, but only in an amount not in excess of the fair market value of such subscription rights in accordance with Internal Revenue Code Section 356(a).

 

In addition, eligible account holders and supplemental eligible account holders will not realize any taxable income as a result of the exercise by them of the nontransferable subscription rights consistent with Rev. Rul. 56-572.

 

11.

The basis of the deposit accounts in the Stock Bank to be received by the eligible account holders, supplemental eligible account holders and other members of the Mutual Bank will be the same as the basis of their deposit accounts in Mutual Bank surrendered in exchange therefor in accordance with Internal Revenue Code Section 358(a)(1). Additionally, the basis of the interests in the liquidation rights in Ponce Bank Mutual Holding Company to be received by the eligible account holders, supplemental eligible account holders, and other members of the Mutual Bank shall be zero consistent with Rev. Rul. 71-233.

 

12.

Ponce Bank Mutual Holding Company and the persons who purchase common stock of PDL Community Bancorp in the subscription and community offerings (“minority stockholders”) will recognize no gain or loss upon the transfer of Stock Bank stock and cash, respectively, to PDL Community Bancorp in accordance with Internal Revenue Code Section 351(a).

 

13.

PDL Community Bancorp will recognize no gain or loss on its receipt of the Stock Bank stock and cash in accordance with Internal Revenue Code Section 1032(a).

 

14.

Ponce Bank Mutual Holding Company’s basis in the PDL Community Bancorp common stock will be increased by its basis in the Stock Bank stock transferred in accordance with Internal Revenue Code Section 358(a)(1).

 

15.

Ponce Bank Mutual Holding Company’s holding period in PDL Community Bancorp common stock received will include the period during which it held the Stock Bank common stock, provided that the property was a capital asset on the date of the exchange in accordance with Internal Revenue Code Section 1223(1).

 

16.

PDL Community Bancorp’s basis in the Stock Bank stock received from Ponce Bank Mutual Holding Company will be the same as the basis of such property in the hands of Ponce Bank Mutual Holding Company in accordance with Internal Revenue Code Section 362(a).

 

17.

PDL Community Bancorp’s holding period for the Stock Bank stock received from Ponce Bank Mutual Holding Company will include the period during which the property was held by Ponce Bank Mutual Holding Company in accordance with Internal Revenue Code Section 1223(2).

 

18.

It is more likely than not that the basis of PDL Community Bancorp common stock to its stockholders will be the purchase price thereof in accordance with Internal Revenue Code Section 1012.

 

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19.

The holding period of the PDL Community Bancorp common stock purchased pursuant to the exercise of subscription rights will commence on the date on which the right to acquire the stock was exercised in accordance with Internal Revenue Code Section 1223(6).

We believe that that the tax opinions summarized above address all material federal income tax consequences that are generally applicable to PDL Community Bancorp, Ponce Bank Mutual Holding Company, Ponce Bank, Ponce De Leon Federal Bank and persons receiving subscription rights. The tax opinions as to items 10 and 18 above are based on the position that subscription rights to be received by eligible account holders do not have any economic value at the time of distribution or the time the subscription rights are exercised. In this regard, Crowe Horwath LLP noted that the subscription rights will be granted at no cost to the recipients, are legally non-transferable and of short duration, and will provide the recipient with the right only to purchase shares of common stock at the same price to be paid by members of the general public in any community offering. Crowe Horwath LLP also noted that the Internal Revenue Service has not in the past concluded that subscription rights have value. Based on the foregoing, Crowe Horwath LLP believes that it is more likely than not that the nontransferable subscription rights to purchase shares of common stock have no value. However, the issue of whether or not the nontransferable subscription rights have value is based on all the facts and circumstances. If the subscription rights granted to eligible account holders are deemed to have an ascertainable value, receipt of these rights could result in taxable gain to those eligible account holders who exercise the subscription rights in an amount equal to the ascertainable value, and we could recognize gain on a distribution. Eligible account holders are encouraged to consult with their own tax advisors as to the tax consequences in the event that subscription rights are deemed to have an ascertainable value.

We have been informed that in the view of RP Financial, LC. (which is acting as independent appraiser of the value of the shares of PDL Community Bancorp common stock in connection with the reorganization), the subscription rights do not have any value for the reasons set forth above. RP Financial, LC.‘s view is not binding on the Internal Revenue Service. If the subscription rights granted to eligible account holders, supplemental eligible account holders and other members are deemed to have an ascertainable value, receipt of these rights could result in taxable gain to those eligible account holders, supplemental eligible account holders and other members who exercise the subscription rights in an amount equal to their value, and PDL Community Bancorp could recognize gain on a distribution. Eligible account holders, supplemental eligible account holders and other members are encouraged to consult with their own tax advisors as to the tax consequences in the event that subscription rights are deemed to have an ascertainable value.

The Internal Revenue Service will not issue private letter rulings with respect to the issue of whether nontransferable rights have value. Unlike private letter rulings, an opinion of counsel or the view of an independent appraiser is not binding on the Internal Revenue Service and the Internal Revenue Service could disagree with the conclusions reached therein. Depending on the conclusion or conclusions with which the Internal Revenue Service disagrees, the Internal Revenue Service may take the position that the transaction is taxable to any one or more of Ponce De Leon Federal Bank, the members of Ponce De Leon Federal Bank, PDL Community Bancorp, eligible account holders, supplemental eligible account holders and other members who exercise their subscription rights. In the event of a disagreement, there can be no assurance that PDL Community Bancorp or Ponce Bank would prevail in a judicial or administrative proceeding.

The federal tax opinion has been filed with the Securities and Exchange Commission as an exhibit to PDL Community Bancorp’s registration statement. An opinion regarding the New York and New Jersey state income tax consequences consistent with the federal tax opinion has been issued by Crowe Horwath, LLC, tax advisors to Ponce De Leon Federal Bank and PDL Community Bancorp.

Restrictions on Purchase or Transfer of Our Shares after Reorganization

The shares being acquired by the directors, executive officers and their associates are being acquired for investment purposes, and not with a view towards resale. All shares of common stock purchased in the offering by a director or an executive officer of PDL Community Bancorp or Ponce Bank generally may not be sold for a period of one year following the closing of the reorganization, except in the event of the death of the director or executive officer. Each certificate for restricted shares will bear a legend giving notice of this restriction on transfer, and instructions will be issued to the effect that any transfer within this time period of any certificate or ownership of the shares other than as provided above is a violation of the restriction. Any shares of common stock issued at a later date as a stock dividend, stock split or otherwise with respect to the restricted stock will be similarly restricted. The directors and executive officers of PDL Community Bancorp also will be restricted by the insider trading rules promulgated pursuant to the Securities Exchange Act of 1934.

 

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Purchases of shares of our common stock by any of our directors, executive officers and their associates, during the three-year period following the closing of the reorganization may be made only through a broker or dealer registered with the Securities and Exchange Commission, except with the prior written approval of the Federal Reserve Board and the Office of the Comptroller of the Currency. This restriction does not apply, however, to negotiated transactions involving more than 1% of our outstanding common stock, to purchases of our common stock to fund stock options by one or more stock-based benefit plans or to any of our tax-qualified employee stock benefit plans or nontax-qualified employee stock benefit plans, including any stock-based benefit plans.

Federal regulations prohibit PDL Community Bancorp from repurchasing its shares of common stock during the first year following the reorganization unless compelling business reasons exist for such repurchases, or to fund management recognition plans that have been ratified by stockholders (with regulatory approval) or tax-qualified employee stock benefit plans.

OUR CHARITABLE FOUNDATION

General

In furtherance of our commitment to our local communities, a new charitable foundation, Ponce De Leon Foundation, will be established in connection with the reorganization. The foundation will be established as a non-stock, non-profit corporation in connection with the reorganization. The new charitable foundation will be funded with shares of our common stock and cash, as further described below and is referred herein as “our charitable foundation”.

By further enhancing our visibility and reputation in our local communities, we believe that our charitable foundation will enhance the long-term value of Ponce Bank’s community banking franchise. The offering presents us with a unique opportunity to provide a substantial and continuing benefit to the communities located in any county or borough in which Ponce Bank has a branch office now or in the future (“our communities”) through our charitable foundation.

Purpose of our Charitable Foundation

In connection with the closing of the offering, we intend to contribute to our charitable foundation $200,000 and 3.3% of our outstanding shares of common stock. The purpose of our charitable foundation is to provide financial support to appropriate organizations in our communities and to enable our communities to share in our long-term growth. Our charitable foundation will be dedicated to community activities and the promotion of charitable causes, and may be able to support such activities in ways that are not presently available to us. Our charitable foundation will also support our ongoing obligations to the community under the Community Reinvestment Act.

Funding our charitable foundation with shares of our common stock in addition to cash is also intended to allow our communities to share in our potential growth and success after the offering is completed because our charitable foundation will benefit directly from any increases in the value of our shares of common stock. In addition, our charitable foundation will maintain close ties with Ponce Bank, thereby forming a partnership within our communities.

Structure of our Charitable Foundation

Our charitable foundation will be incorporated under Delaware law as a non-stock, nonprofit corporation. The certificate of incorporation of our charitable foundation will provide that the corporation is organized exclusively for charitable purposes as set forth in Section 501(c)(3) of the Code. The certificate of incorporation will further provide that no part of the net earnings of our charitable foundation will inure to the benefit of, or be distributable to, its directors, officers, members or other private individuals.

Our charitable foundation will be governed by a board of directors, initially consisting of seven individuals. Initially and for a period of at least five years after the offering, at least one of the directors of our charitable foundation will be an individual from our local community who has experience with local community charitable organizations and grant making and who is not one of our officers, directors or employees. Unless modified as a result of the requirements under the heading “—Regulatory Requirements Imposed on our Charitable Foundation”, the terms of office of the directors of the charitable foundation shall be as provided below. The initial board of directors shall be classified, with respect to the time for which they severally hold office, into three classes as nearly equal in number as reasonably possible. One such class of directors shall serve until the 2018 annual meeting of the charitable foundation; another class shall serve until the 2019 annual meeting; and the last such class shall serve until the 2020 annual meeting. Thereafter directors of the charitable foundation will be elected to serve for three-year terms.

 

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The board of directors of our charitable foundation will be responsible for establishing its grant and donation policies, consistent with the purposes for which it was established. As directors of a nonprofit corporation, directors of our charitable foundation will at all times be bound by their fiduciary duty to advance our charitable foundation’s charitable goals, to protect its assets and to act in a manner consistent with the charitable purposes for which our charitable foundation is established. The directors of our charitable foundation also will be responsible for directing the activities of our charitable foundation, including the management and voting of the shares of our common stock held by our charitable foundation. However, as required by applicable regulations, all shares of our common stock held by our charitable foundation must be voted in the same ratio as all other shares of our common stock on all proposals considered by our stockholders.

Our charitable foundation’s initial place of business will be located at our corporate headquarters. The board of directors of our charitable foundation will appoint such officers and employees as may be necessary to manage its operations. To the extent applicable, we will comply with the affiliate restrictions set forth in Sections 23A and 23B of the Federal Reserve Act and the regulations of the Federal Reserve governing transactions between Ponce Bank and our charitable foundation.

Our charitable foundation will receive working capital from the initial cash contribution and from:

 

(1)

any dividends that may be paid on our shares of common stock in the future;

 

(2)

within the limits of applicable federal and state laws, loans collateralized by the shares of common stock; or

 

(3)

the proceeds of the sale of any of the shares of common stock in the open market from time to time.

As a private foundation under Section 501(c)(3) of the Code, our charitable foundation will be required to distribute annually in grants or donations an amount not less than the “distributable amount” as determined under Section 4942(d) of the Code. While the definition and calculation of the “distributable amount” is more involved, it essentially amounts to a minimum of 5.0% of the average fair market value of its net investment assets.

Tax Considerations

We believe that an organization created for the above purposes should qualify as a Section 501(c)(3) exempt organization under the Code and should be classified as a private foundation. Our charitable foundation will submit a timely request to the Internal Revenue Service to be recognized as an exempt organization. As long as our charitable foundation files its application for tax-exempt status within 27 months of the last day of the month in which it was organized, and provided the Internal Revenue Service approves the application, its effective date as a Section 501(c)(3) organization will be the date of its organization.

PDL Community Bancorp, Ponce Bank and Ponce De Leon Federal Bank are or will be authorized by federal law to make charitable contributions. We believe that the offering presents a unique opportunity to establish and fund a charitable foundation given the substantial amount of additional capital being raised. In making such a determination, we considered the dilutive impact to our stockholders of the contribution of shares of common stock to our charitable foundation.

We believe that our contribution of shares of our common stock to our charitable foundation should not constitute an act of self-dealing and that we should be entitled to a federal tax deduction in the amount of the fair market value of the stock at the time of the contribution. We are permitted to deduct for charitable purposes only an amount equal to 10.0% of our annual taxable income in any one year. We are permitted under the Code to carry the excess contribution over the five-year period following the contribution to our charitable foundation. We estimate that at all levels of the offering range, the contribution should be deductible for federal tax purposes over the six-year period (i.e., the year in which the contribution is made and the succeeding five-year period). However, we do not have any assurance that the Internal Revenue Service will grant tax-exempt status to our charitable foundation. In such event, our contribution to our charitable foundation would be expensed without a tax benefit, resulting in a reduction in earnings in the year in which the Internal Revenue Service makes such a determination. Furthermore, even if the contribution is deductible, we may not have sufficient earnings to be able to use the deduction in full. Any such decision to continue to make additional contributions to our charitable foundation in the future would be based on an assessment of, among other factors, our financial condition at that time, the interests of our stockholders and depositors, and the financial condition and operations of the foundation.

Assuming our charitable foundation is classified by the Internal Revenue Service as a private foundation, then the earnings and gains, if any, from the sale of common stock owned by our charitable foundation or the sale of other assets of

 

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our charitable foundation will be exempt from federal and state income taxation. However, investment income, such as interest, dividends and capital gains, is generally taxed at a rate of 2.0%. We anticipate that our charitable foundation will be a calendar year taxpayer, and as such will be required to file an annual return with the Internal Revenue Service on May 15th of each year, with the first such annual return likely being due on May 15, 2018. Our charitable foundation will be required to make its annual return available for public inspection. The annual return for a private foundation includes, among other things, an itemized list of all grants made or approved, showing the amount of each grant, the recipient, any relationship between a grant recipient and the foundation’s managers and a concise statement of the purpose of each grant.

Regulatory Requirements Imposed on our Charitable Foundation

Applicable federal regulations impose the following requirements on the establishment of our charitable foundation:

 

(1)

the Federal Reserve Board may examine our charitable foundation at the charitable foundation’s expense;

 

(2)

our charitable foundation must comply with all supervisory directives imposed by the Federal Reserve Board;

 

(3)

our charitable foundation must provide annually to the Federal Reserve Board a copy of the annual report that the charitable foundation submits to the Internal Revenue Service;

 

(4)

our charitable foundation must operate according to written policies adopted by its board of directors, including a conflict of interest policy;

 

(5)

our charitable foundation may not engage in self-dealing and must comply with all laws necessary to maintain its tax-exempt status under the Code; and

 

(6)

our charitable foundation must vote its shares of our common stock in the same ratio as all of the other shares voted on each proposal considered by our stockholders.

Within six months of completing the offering, our charitable foundation must submit to the Federal Reserve a business plan, a conflicts of interest policy, a gift instrument, bylaws and a certificate of organization.

 

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RESTRICTIONS ON THE ACQUISITION OF PDL COMMUNITY BANCORP AND PONCE BANK

The principal federal regulatory restrictions which affect the ability of any person, firm or entity to acquire PDL Community Bancorp, Ponce Bank or their respective capital stock are described below. Also discussed are certain provisions in PDL Community Bancorp’s charter and bylaws that may be deemed to affect the ability of a person, firm or entity to acquire PDL Community Bancorp.

Mutual Holding Company Structure

Ponce Bank Mutual Holding Company will own a majority of the outstanding common stock of PDL Community Bancorp after the offering and, through its board of directors, will be able to exercise voting control over virtually all matters put to a vote of stockholders. For example, Ponce Bank Mutual Holding Company may exercise its voting control to prevent a sale or merger transaction or to defeat a stockholder nominee for election to the board of directors of PDL Community Bancorp. It will not be possible for another entity to acquire PDL Community Bancorp without the consent of Ponce Bank Mutual Holding Company. Ponce Bank Mutual Holding Company, as long as it remains in the mutual form of organization, will control a majority of the voting stock of PDL Community Bancorp.

Federal Law

Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition.

Control, as defined under federal law, means ownership, control, or holding with power to vote, of 25% or more of any class of voting stock. Federal regulations establish a rebuttable presumption of control upon ownership, control, or holding with power to vote, of 10% or more of a class of voting stock (i) where the company has registered securities under Section 12 of the Securities Exchange Act of 1934 or (ii) no other person will own control or hold the power to vote a greater percentage of that class of voting securities.

The Federal Reserve Board may deny an acquisition of control if it finds, among other things, that:

 

•

the acquisition would result in a monopoly or substantially lessen competition;

 

•

the financial condition of the acquiring person might jeopardize the financial stability of the institution;

 

•

the competence, experience or integrity of the acquiring person indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person; or

 

•

the acquisition would have an adverse effect on the Deposit Insurance Fund.

For a period of three years following completion of the offering, Federal Reserve Board regulations generally prohibit any person from acquiring or making an offer to acquire beneficial ownership of more than 10% of the stock of PDL Community Bancorp or Ponce Bank without the Federal Reserve Board’s prior approval.

Charters and Bylaws of PDL Community Bancorp and Ponce Bank

The following discussion is a summary of provisions of the charter and bylaws of PDL Community Bancorp and Ponce Bank that may be deemed to affect the ability of a person, firm or entity to acquire PDL Community Bancorp. The description is necessarily general and qualified by reference to the charter and bylaws.

Classified Board of Directors. The board of directors of PDL Community Bancorp is required by the charter and bylaws to be divided into three staggered classes that are as equal in size as is possible. Each year one class will be elected by stockholders of PDL Community Bancorp for a three-year term. A classified board promotes continuity and stability of management of PDL Community Bancorp, but makes it more difficult for stockholders to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur.

Authorized but Unissued Shares of Capital Stock. Following the offering, PDL Community Bancorp will have authorized but unissued shares of preferred stock and common stock. See “Description of Capital Stock of PDL Community Bancorp”. Although these shares could be used by the board of directors of PDL Community Bancorp to make it more

 

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difficult or to discourage an attempt to obtain control of PDL Community Bancorp through a merger, tender offer, proxy contest or otherwise, it is unlikely that we would use or need to use shares for these purposes since Ponce Bank Mutual Holding Company will own a majority of the common stock for so long as we remain in the mutual holding company structure.

How Shares are Voted. PDL Community Bancorp’s charter provides that there will not be cumulative voting by stockholders for the election of PDL Community Bancorp’s directors. No cumulative voting rights means that Ponce Bank Mutual Holding Company, as the holder of a majority of the shares eligible to be voted at a meeting of stockholders, may elect all directors of PDL Community Bancorp to be elected at that meeting. This could prevent minority stockholder representation on PDL Community Bancorp’s board of directors.

Restrictions on Acquisitions of Shares. A section in PDL Community Bancorp’s charter provides that for a period of five years from the completion of the reorganization, no person, other than Ponce Bank Mutual Holding Company, and, with respect to Ponce Bank, other than Ponce Bank Mutual Holding Company and PDL Community Bancorp, may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of equity security of PDL Community Bancorp or Ponce Bank held by persons other than Ponce Bank Mutual Holding Company, and, with respect to Ponce Bank, other than PDL Community Bancorp, and that any shares acquired in excess of this limit would not be entitled to be voted and would not be counted as voting stock in connection with any matters submitted to the stockholders for a vote.

Procedures for Stockholder Nominations and Proposals for New Business. PDL Community Bancorp’s bylaws provide that any stockholder wanting to make a nomination for the election of directors or a proposal for new business at a meeting of stockholders must send written notice to the Secretary of PDL Community Bancorp at least five days before the date of the annual meeting. Management believes that it is in the best interests of PDL Community Bancorp and its stockholders to provide enough time for management to disclose to stockholders information about a dissident slate of nominations for directors. This advance notice requirement may also give management time to solicit its own proxies in an attempt to defeat any dissident slate of nominations if management thinks it is in the best interest of stockholders generally. Similarly, adequate advance notice of stockholder proposals will give management time to study such proposals and to determine whether to recommend to the stockholders that such proposals be adopted.

Limitations on Calling Special Meetings of Stockholders. Our federal charter provides that special meetings of our stockholders may be called by the chairman of the board, the president, or a majority of the board of directors, and shall be called by the chairman of the board, the president, or the secretary upon the written request of the holders of not less than one-tenth of all of our outstanding shares of voting stock.

Purpose and Anti-Takeover Effects of PDL Community Bancorp’s Charter and Bylaws. Our board of directors believes that the provisions described above are prudent and will reduce our vulnerability to takeover attempts and certain other transactions that have not been negotiated with and approved by our board of directors. These provisions also will assist us in the orderly deployment of the offering proceeds into productive assets during the initial period after the stock offering. We believe these provisions are in the best interests of PDL Community Bancorp and its stockholders. Our board of directors believes that it will be in the best position to determine the true value of PDL Community Bancorp and to negotiate more effectively for what may be in the best interests of all our stockholders. Accordingly, our board of directors believes that it is in the best interests of PDL Community Bancorp and all of our stockholders to encourage potential acquirers to negotiate directly with the board of directors and that these provisions will encourage such negotiations and discourage hostile takeover attempts. It is also the view of our board of directors that these provisions should not discourage persons from proposing a merger or other transaction at a price reflective of the true value of PDL Community Bancorp and that is in the best interests of all our stockholders.

Takeover attempts that have not been negotiated with and approved by our board of directors present the risk of a takeover on terms that may be less favorable than might otherwise be available. A transaction that is negotiated and approved by our board of directors, on the other hand, can be carefully planned and undertaken at an opportune time in order to obtain maximum value for our stockholders, with due consideration given to matters such as the management and business of the acquiring corporation.

Although a tender offer or other takeover attempt may be made at a price substantially above the current market price, such offers are sometimes made for less than all of the outstanding shares of a target company. As a result, stockholders may be presented with the alternative of partially liquidating their investment at a time that may be disadvantageous, or retaining their investment in an enterprise that is under different management and whose objectives may not be similar to those of the remaining stockholders.

 

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Despite our belief as to the benefits to stockholders of these provisions of PDL Community Bancorp’s charter and bylaws, these provisions also may have the effect of discouraging a future takeover attempt that would not be approved by our board of directors, but pursuant to which stockholders may receive a substantial premium for their shares over then current market prices. As a result, stockholders who might desire to participate in such a transaction may not have any opportunity to do so. Such provisions will also make it more difficult to remove our board of directors and management. We believe, however, that the potential benefits outweigh the possible disadvantages.

Benefit Plans

In addition to the provisions of PDL Community Bancorp’s charter and bylaws described above, benefit plans of PDL Community Bancorp and Ponce Bank that may authorize the issuance of equity to its board of directors, officers and employees adopted in connection with the offering or proposed to be adopted subsequent thereto, as well as the employment agreements, contain provisions which also may discourage hostile takeover attempts which the board of directors of Ponce Bank might conclude are not in the best interests of PDL Community Bancorp and Ponce Bank or PDL Community Bancorp’s stockholders.

DESCRIPTION OF CAPITAL STOCK OF PDL COMMUNITY BANCORP

General

PDL Community Bancorp is authorized to issue 50,000,000 shares of common stock having a par value of $0.01 per share and 10,000,000 shares of serial preferred stock, par value of $0.01 per share. Each share of PDL Community Bancorp’s common stock will have the same relative rights as, and will be identical in all respects with, each other share of common stock. Upon payment of the purchase price for the common stock in accordance with the plan or reorganization and stock issuance plan, all of the stock will be duly authorized, fully paid and nonassessable. Presented below is a description of the features of PDL Community Bancorp’s capital stock that are deemed material to an investment decision with respect to the offering. The common stock of PDL Community Bancorp will represent nonwithdrawable capital, will not be an account of an insurable type, and will not be insured by the FDIC.

PDL Community Bancorp currently expects that it will have a maximum of up to 18,463,030 shares of common stock outstanding after the offering, of which up to 8,917,641 shares will be held by persons other than Ponce Bank Mutual Holding Company. Our board of directors can, without stockholder approval, issue additional shares of common stock, although Ponce Bank Mutual Holding Company, so long as it is in existence, must own a majority of PDL Community Bancorp’s outstanding shares of common stock. PDL Community Bancorp’s issuance of additional shares of common stock could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control. PDL Community Bancorp has no present plans to issue additional shares of common stock other than pursuant to the stock benefit plans previously discussed.

Common Stock

Distributions. PDL Community Bancorp can pay dividends if, as and when declared by its board of directors, subject to compliance with limitations which are imposed by law. There are no present plans or intentions to declare dividends. The holders of common stock of PDL Community Bancorp will be entitled to receive and share equally in such dividends as may be declared by the board of directors of PDL Community Bancorp out of funds legally available therefor. Dividends from PDL Community Bancorp will depend, in large part, upon receipt of dividends from Ponce Bank, because PDL Community Bancorp initially will have no source of income other than dividends from Ponce Bank, earnings from the investment of proceeds from the sale of shares of common stock, and interest payments with respect to PDL Community Bancorp’s loans to the employee stock ownership plan and our charitable foundation. Regulations of the Federal Reserve Board and the Office of the Comptroller of the Currency impose limitations on “capital distributions” by savings institutions.

If PDL Community Bancorp pays dividends to its stockholders, it would likely pay dividends to Ponce Bank Mutual Holding Company, unless Ponce Bank Mutual Holding Company is permitted by the Federal Reserve Board to waive the receipt of dividends. The Federal Reserve Board’s current regulations significantly restrict the ability of newly organized mutual holding companies to waive dividends declared by their subsidiaries. Accordingly, because dividends would be required to be paid to Ponce Bank Mutual Holding Company along with all other stockholders, the amount of dividends available for all other stockholders would be less than if Ponce Bank Mutual Holding Company were permitted to waive the receipt of dividends.

 

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Pursuant to our charter, PDL Community Bancorp is authorized to issue preferred stock. If PDL Community Bancorp issues preferred stock, the holders thereof may have a priority over the holders of the common stock with respect to dividends.

Voting Rights. Upon the effective date of the offering, the holders of common stock of PDL Community Bancorp will possess exclusive voting rights in PDL Community Bancorp. Each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. If PDL Community Bancorp issues preferred stock, holders of the preferred stock may also possess voting rights.

Liquidation. In the event of any liquidation, dissolution or winding up of Ponce Bank, PDL Community Bancorp, as holder of Ponce Bank’s capital stock, would be entitled to receive, after payment or provision for payment of all debts and liabilities of Ponce Bank, including all deposit accounts and accrued interest thereon, all assets of Ponce Bank available for distribution. In the event of liquidation, dissolution or winding up of PDL Community Bancorp, the holders of its common stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of PDL Community Bancorp available for distribution. If preferred stock is issued, the holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution.

Rights to Buy Additional Shares. Holders of the common stock of PDL Community Bancorp will not be entitled to preemptive rights with respect to any shares which may be issued. Preemptive rights are the priority right to buy additional shares if PDL Community Bancorp issues more shares in the future. The common stock is not subject to redemption.

Preferred Stock

None of the shares of PDL Community Bancorp’s authorized preferred stock will be issued in the offering. Such stock may be issued with such preferences and designations as our board of directors may from time to time determine. Our board of directors can, without stockholder approval, issue preferred stock with voting, dividend, liquidation and conversion rights which could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control. The issuance of preferred stock must be approved by a majority of our independent directors who do not have an interest in the transaction and who have access, at our expense, to legal counsel. PDL Community Bancorp has no present plans to issue preferred stock.

TRANSFER AGENT AND REGISTRAR

American Stock Transfer and Trust Company, Brooklyn, New York, will act as the transfer agent and registrar for the common stock.

LEGAL AND TAX MATTERS

The legality of the common stock has been passed upon for Ponce De Leon Federal Bank and PDL Community Bancorp by the firm of Locke Lord LLP, Washington, D.C. The federal income tax consequences and the New York and New Jersey state income tax consequences of the reorganization and offering have been passed upon for Ponce De Leon Federal Bank and PDL Community Bancorp by Crowe Horwath LLP, New York, New York. Locke Lord LLP and Crowe Horwath LLP have consented to the references in this prospectus to their opinions. Certain legal matters regarding the reorganization and offering will be passed upon for Raymond James & Associates, Inc. by Silver, Freedman, Taff & Tiernan LLP, Washington, D.C.

EXPERTS

The financial statements of Ponce De Leon Federal Bank as of December 31, 2016 and 2015 and for each of the years in the two-year period ended December 31, 2016 have been audited by Mazars USA LLP, an independent registered public accounting firm, as stated in their report thereon and included in this prospectus and the registration statement in reliance upon such report of such firm as experts in accounting and auditing.

 

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RP Financial, LC. has consented to the publication in this prospectus of the summary of its report to Ponce De Leon Federal Bank and PDL Community Bancorp setting forth its opinion as to the estimated pro forma market value of the common stock upon the completion of the reorganization and offering and its valuation with respect to subscription rights.

WHERE YOU CAN FIND MORE INFORMATION

PDL Community Bancorp has filed a registration statement with the Securities and Exchange Commission under the Securities Act of 1933, with respect to the common stock offered hereby. As permitted by the rules and regulations of the Securities and Exchange Commission, this prospectus does not contain all the information set forth in the registration statement. This information, including the appraisal report which is an exhibit to the registration statement, can be examined without charge at the Public Reference Room of the Securities and Exchange Commission located at 100 F Street, N.E., Washington, D.C. 20549 and copies of the material can be obtained from the Securities and Exchange Commission at prescribed rates. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The registration statement also is available through the Securities and Exchange Commission’s website on the internet at http://www.sec.gov. The statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions thereof and are not necessarily complete but do contain all material information regarding the documents; each statement is qualified by reference to the contract or document.

PDL Community Bancorp and Ponce De Leon Federal Bank have filed applications with the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC with respect to the reorganization and offering. Pursuant to the rules and regulations of the Federal Reserve Board, this prospectus omits certain information contained in such applications. To obtain a copy of non-confidential portions of the applications filed with the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC, you may contact Judy Lynn, Federal Reserve Bank of Philadelphia, at (215) 574-6600, the Northeastern District Office of the Office of the Comptroller of the Currency located at 340 Madison Avenue, New York, New York 10173, and the New York Regional Office of the FDIC located at 350 Fifth Avenue, New York, New York 10118-0110.

A copy of the charter and bylaws of PDL Community Bancorp is available without charge from Ponce De Leon Federal Bank.

REGISTRATION REQUIREMENTS

In connection with the offering, PDL Community Bancorp will register its common stock with the Securities and Exchange Commission under Section 12(b) of the Securities Exchange Act of 1934. Upon this registration, PDL Community Bancorp and the holders of its shares of common stock will become subject to the proxy solicitation rules, reporting requirements and restrictions on stock purchases and sales by directors, officers and greater than 10% stockholders, the annual and periodic reporting and certain other requirements of the Securities Exchange Act of 1934. Under the plan of reorganization, PDL Community Bancorp has undertaken that it will not terminate this registration for a period of at least three years following the completion of the reorganization.

 

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Contents

 

Independent Auditor’s Report			F-2
Financial Statements:
Consolidated Statements of Financial Condition			F-3
Consolidated Statements of Income			F-4
Consolidated Statements of Comprehensive Income			F-5
Consolidated Statements of Changes in Capital Accounts			F-6
Consolidated Statements of Cash Flows			F-7 - F-8
Notes to Consolidated Financial Statements			F-9 - F-43

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors

Ponce De Leon Federal Bank

Bronx, New York

We have audited the accompanying consolidated statements of financial condition of Ponce De Leon Federal Bank and Subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in capital accounts, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ponce De Leon Federal Bank and Subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Mazars USA LLP

New York, New York

March 15, 2017

 

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Ponce De Leon Federal Bank and Subsidiaries

Consolidated Statements of Financial Condition

March 31, 2017 (Unaudited) and December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

		March 31, 2017				December 31,
						2016				2015
		(Unaudited)
ASSETS
Cash and due from banks (Note 2):
Cash		$	4,557			$	4,796			$	5,435
Interest-bearing deposits in banks			11,947				6,920				7,259
Total cash and cash equivalents			16,504				11,716				12,694
Available-for-sale securities, at fair value (Note 3)			51,937				52,690				82,034
Loans held for sale			2,143				2,143				3,303
Loans receivable, net of allowance for loan losses - 2017 $10,370; 2016 $10,205; 2015 $9,484 (Note 4)			677,525				642,148				567,662
Accrued interest receivable			2,749				2,707				2,668
Other real estate owned			—				—				76
Bank premises and equipment, net (Note 5)			25,687				26,028				27,177
Federal Home Loan Bank Stock (FHLB), at cost			2,089				964				1,162
Deferred tax assets (Note 8)			3,378				3,379				3,765
Core deposit intangible, net			3				3				132
Other assets			4,238				3,205				2,484
Total assets		$	786,253			$	744,983			$	703,157
LIABILITIES AND CAPITAL ACCOUNTS
Liabilities:
Deposits (Note 6)		$	655,882			$	643,078			$	599,506
Accrued interest payable			26				28				36
Advance payments by borrowers for taxes and insurance			5,670				3,882				2,600
Advances from the Federal Home Loan Bank (Note 7)			28,000				3,000				8,000
Other liabilities			3,201				2,003				1,953
Total liabilities			692,779				651,991				612,095
Commitments and contingencies (Note 10)
Capital accounts:
Retained earnings			99,805				99,242				97,817
Accumulated other comprehensive loss (Note 13):
Net unrealized loss on available-for-sale securities, net of taxes			(227	)			(166	)			(370	)
Defined benefit pension liabilities, net of taxes (Note 9)			(6,104	)			(6,084	)			(6,385	)
			(6,331	)			(6,250	)			(6,755	)
Total capital accounts			93,474				92,992				91,062
Total liabilities and capital accounts		$	786,253			$	744,983			$	703,157

The accompanying notes are an integral part of the consolidated financial statements.

 

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Ponce De Leon Federal Bank and Subsidiaries

Consolidated Statements of Income

Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years

Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

		For the Three Months Ended March 31,								For the Years Ended December 31,
		(Unaudited)
		2017				2016				2016				2015
Interest and dividend income:
Interest on loans receivable		$	8,592			$	8,279			$	32,660			$	32,100
Interest and dividends on investment securities and FHLB stock			202				321				1,081				1,490
Total interest and dividend income			8,794				8,600				33,741				33,590
Interest expense:
Interest on certificates of deposit			1,316				1,336				5,502				5,268
Interest on other deposits			151				91				427				321
Interest on borrowings			29				7				7				61
Total interest expense			1,496				1,434				5,936				5,650
Net interest income			7,298				7,166				27,805				27,940
Provision for loan losses (recovery) (Note 4)			52				(547	)			(57	)			353
Net interest income after provision for loan losses (recovery)			7,246				7,713				27,862				27,587
Noninterest income:
Service charges and fees			229				238				938				1,073
Brokerage commissions			118				179				515				421
Late and prepayment charges			211				66				302				548
Other			200				58				676				420
Total noninterest income			758				541				2,431				2,462
Noninterest expense:
Compensation and benefits			3,829				3,664				14,979				13,463
Occupancy expense			1,425				1,408				5,651				5,754
Data processing expenses			448				370				1,617				1,299
Direct loan expenses			195				254				860				725
Insurance and surety bond premiums			82				137				464				699
Office supplies, telephone and postage			254				261				1,071				997
FDIC deposit insurance assessment			66				225				538				899
Other operating expenses			797				637				2,683				2,380
Total noninterest expense			7,096				6,956				27,863				26,216
Income before income taxes			908				1,298				2,430				3,833
Provision for income taxes (Note 8)			345				490				1,005				1,315
Net income		$	563			$	808			$	1,425			$	2,518

The accompanying notes are an integral part of the consolidated financial statements.

 

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Ponce De Leon Federal Bank and Subsidiaries

Consolidated Statements of Comprehensive Income

Three Months Ended March 31, 2017 and 2016 (Unaudited) and

Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

		For the Three Months Ended March 31,								For the Years Ended December 31,
		(Unaudited)
		2017				2016				2016				2015
Net income		$	563			$	808			$	1,425			$	2,518
Other comprehensive loss:
Net change in unrealized gains (losses) on securities available-for-sale:
Unrealized gains (losses)			(91	)			545				309				847
Income tax effect			30				(185	)			(105	)			(372	)
Unrealized (losses) gains on securities, net			(61	)			360				204				475
Pension benefit liability adjustment:
Net gain (loss) during the period			(31	)			—				456				(1,829	)
Reclassification adjustment for amortization of prior service cost and net gain included in net periodic pension cost			—				—				—				245
Income tax effect			11				—				(155	)			53
Pension (liability) benefit adjustment, net of tax			(20	)			—				301				(1,531	)
Other comprehensive (loss) income, net of tax			(81	)			360				505				(1,056	)
Total comprehensive income		$	482			$	1,168			$	1,930			$	1,462

The accompanying notes are an integral part of the consolidated financial statements.

 

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Ponce De Leon Federal Bank and Subsidiaries

Consolidated Statements of Changes in Capital Accounts

Three Months Ended March 31, 2017 (Unaudited) and Years

Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

 

		Retained Earnings				Accumulated Other Comprehensive Loss				Total
Balance, December 31, 2014		$	95,299			$	(5,699	)		$	89,600
Net income			2,518				—				2,518
Other comprehensive loss, net of tax			—				(1,056	)			(1,056	)
Balance, December 31, 2015			97,817				(6,755	)			91,062
Net income			1,425				—				1,425
Other comprehensive income, net of tax			—				505				505
Balance, December 31, 2016		$	99,242			$	(6,250	)		$	92,992
Net income			563				—				563
Other comprehensive (loss), net of tax			—				(81	)			(81	)
Balance, March 31, 2017 (Unaudited)		$	99,805			$	(6,331	)		$	93,474

The accompanying notes are an integral part of the consolidated financial statements.

 

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Ponce De Leon Federal Bank and Subsidiaries

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2017 and 2016 (Unaudited) and

Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

		Three Months Ended March 31,								Years Ended December 31,
		(Unaudited)
		2017				2016				2016				2015
Cash Flows From Operating Activities:
Net income		$	563			$	808			$	1,425			$	2,518
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums on securities,net			7				1				11				6
Loss on sale of loans			—				200				13				73
Write-down of loans held for sale			—				—				—				9
Write-down of other real estate owned			—				—				—				86
Gain on sale of other real estate owned			—				(4	)			(4	)			—
Provision for (recovery from) loan losses			52				(547	)			(57	)			353
Depreciation and amortization			404				423				1,679				1,817
Amortization of core deposit intangible assets			—				36				129				144
Deferred income taxes			43				165				126				1,086
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable			(42	)			(114	)			(39	)			81
(Increase) decrease in other assets			(1,036	)			(499	)			175				3,168
Decrease in accrued interest payable			(2	)			(1	)			(8	)			(10	)
Net increase (decrease) in other liabilities			2,956				3,343				893				(4,101	)
Net cash provided by operating activities			2,945				3,811				4,343				5,230
Cash Flows From Investing Activities:
Net (increase) decrease in investments in FHLB Stock			(1,123	)			360				198				105
Purchases of available-for-sale securities			—				—				(25,914	)			—
Proceeds from maturities, calls and principal repayments on available-for-sale securities			655				4,487				55,556				19,381
Proceeds from sales of loans			—				1,669				4,386				3,981
Net increase in loans			(35,430	)			(11,305	)			(77,669	)			(29,385	)
Proceeds from sale of other real estate owned			—				80				80				—
Purchases of premises and equipment			(63	)			(53	)			(530	)			(276	)
Net cash used in investing activities			(35,961	)			(4,762	)			(43,893	)			(6,194	)

The accompanying notes are an integral part of the consolidated financial statements

 

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Ponce De Leon Federal Bank and Subsidiaries

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2017 and 2016 (Unaudited) and

Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

		Three Months Ended March 31,								Years Ended December 31,
		(Unaudited)
		2017				2016				2016				2015
Cash Flows From Financing Activities:
Net increase (decrease) in deposits		$	12,804			$	21,189			$	43,572			$	(191	)
Net increase (decrease) in FHLB advances			25,000				(8,000	)			(5,000	)			(2,000	)
Net cash provided by (used in) financing activities			37,804				13,189				38,572				(2,191	)
Net decrease in cash and cash equivalents			4,788				12,238				(978	)			(3,155	)
Cash and Cash Equivalents:
Beginning			11,716				12,694				12,694				15,849
Ending		$	16,504			$	24,932			$	11,716			$	12,694
Supplemental Disclosures:
Cash paid during the year:
Interest		$	1,498			$	1,434			$	5,944			$	5,660
Income taxes		$	77			$	55			$	1,280			$	1,598
Supplemental Disclosures of Noncash Investing Activities:
Transfer of loans and loans held for sale to other real estate owned		$	—			$	—			$	—			$	—
Transfer of loans to loans held for sale		$	—			$	1,171			$	3,239			$	6,526
Transfer of loans held for sale to loans		$	—			$	—			$	—			$	1,867

The accompanying notes are an integral part of the consolidated financial statements.

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 1. Nature of Business and Summary of Significant Accounting Policies

Ponce De Leon Federal Bank (the “Bank”) was formed by a charter issued by the Federal Home Loan Bank (“FHLB”) Board on March 31, 1960 as a federal savings and loan association, and it is regulated by the Office of Comptroller of the Currency (the “OCC”). The Bank operates as a mutual institution and has not issued any common stock. The Bank’s primary business activities include attracting deposits from the general public and originating real property mortgage loans (e.g., 1-4 family home mortgages, multifamily and construction property loans). The Bank also makes nonresidential real estate loans, commercial business and consumer loans. The Bank is subject to competition from other financial institutions. Deposits at the Bank are insured up to applicable limits by the Federal Deposit Insurance Corporation (the “FDIC”).

The following is a summary of the Bank’s significant accounting policies:

Basis of Financial Statement Presentation and Use of Estimates: The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and general practices 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 and disclosure of contingent assets and liabilities, as of the date of the consolidated statement of financial condition, and revenues and expenses for the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, the valuation of loans held for sale, the valuation of deferred tax assets and investment securities, and the determination of pension benefit obligations.

Interim Financial Statements: The interim financial statements at March 31, 2017, and for the three months ended March 31, 2017 and 2016 are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three months ended March 31, 2017, are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2017, or any other period.

Principles of Consolidation: The consolidated financial statements include the accounts of the Bank and its wholly-owned subsidiaries, PFS Service Corp., which owns some of the Bank’s real property, and Ponce de Leon Mortgage Corp., which is a mortgage banking entity. All significant intercompany transactions and balances have been eliminated in consolidation.

Significant Group Concentrations of Credit Risk: Most of the Bank’s activities are with customers located within New York City. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio is susceptible to changes in the local market conditions. Note 3 discusses the types of securities that the Bank invests in. Notes 4 and 10 discuss the types of lending that the Bank engages in, and other concentrations.

Cash and Cash Equivalents: Cash and cash equivalents include cash on hand and amounts due from banks (including items in process of clearing). For purposes of reporting cash flows, the Bank considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash flows from loans originated by the Bank, interest-bearing deposits in financial institutions, and deposits are reported net.

Securities: Management determines the appropriate classification of securities at the date individual investment securities are acquired, and the appropriateness of such classification is reassessed at each statement of financial condition date.

Debt securities that management has the positive intent and ability to hold to maturity, if any, are classified as “held to maturity” and recorded at amortized cost. Trading securities, if any, are carried at fair value, with unrealized gains and losses recognized in earnings. Securities not classified as held to maturity or trading, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of taxes. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 1. Nature of Business and Summary of Significant Accounting Policies  (Continued)

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the consolidated statement of income and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the discounted present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. The sale of a held-to-maturity security within three months of its maturity date or after collection of at least 85% of the principal outstanding at the time the security was acquired is considered a maturity for purposes of classification and disclosure.

Federal Home Loan Bank Stock: The Bank is a member of the Federal Home Loan Bank of New York (the “FHLB”). Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Loans Receivable: Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at current unpaid principal balances, net of the allowance for loan losses and including net deferred loan origination fees and costs.

Interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method without anticipating prepayments.

A loan is moved to nonaccrual status in accordance with the Bank’s policy, typically after 90 days of non-payment. The accrual of interest on mortgage and commercial loans is generally discontinued at the time the loan becomes 90 days past due unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past-due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off if collection of principal or interest is considered doubtful. All nonaccrual loans are considered impaired loans.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or recorded against principal balances only, until qualifying for return to accrual. Cash-basis interest recognition is only applied on nonaccrual loans with a sufficient collateral margin to ensure no doubt with respect to the collectability of principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and remain current for a period of time (typically six months) and future payments are reasonably assured.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 1. Nature of Business and Summary of Significant Accounting Policies  (Continued)

 

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDR”) and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impaired loans are measured for impairment using the fair value of the collateral, present value of cash flows, or the observable market price of the note. Impairment measurement for all collateral dependent loans, excluding accruing TDR’s is based on the fair value of collateral, less costs to sell, if necessary. A loan is considered collateral dependent if repayment of the loan is expected to be provided solely by the sale or the operation of the underlying collateral.

When the Bank modifies a loan in a TDR, management evaluates for any possible impairment using either the discounted cash flows method, where the value of the modified loan is based on the present value of expected cash flows, discounted at the contractual interest rate of the original loan agreement, or by using the fair value of the collateral less selling costs if repayment under the modified terms becomes doubtful.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Bank over the most recent 5 years. As of March 31, 2017, the Bank determines the historical loss experience by portfolio segment and it is based on the actual loss experienced by the Bank over a 12 month rolling quarter period. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

When establishing the allowance for loan losses, management categorizes loans into risk categories reflecting individual borrower earnings, liquidity, leverage and cash flow, as well as the nature of underlying collateral. These risk categories and relevant risk characteristics are as follows:

Residential and Multifamily Mortgage Loans: The majority of loans at the Bank are secured by first mortgages. Residential and multifamily mortgage loans are typically underwritten with loan-to-value ratios ranging from 65% to 90%. The primary risks involved in residential mortgages are the borrower’s loss of employment, or other significant event, that negatively impacts the source of repayment. Additionally, a serious decline in home values could jeopardize the Bank’s position in the event that the underlying collateral needs to be liquidated to pay off the loan.

Nonresidential Mortgage Loans: Nonresidential mortgage loans are primarily secured by commercial buildings, office and industrial buildings, warehouses, small retail shopping centers and various special purpose properties, including hotels, restaurants and nursing homes. These loans are typically underwritten at no more than 75% loan-to-value ratio. Although

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 1. Nature of Business and Summary of Significant Accounting Policies  (Continued)

 

terms vary, commercial real estate loans generally have loan terms of 15 to 30 years, as well as balloon payments of 10 to 15 years, and terms which provide that the interest rate is adjusted on a 5 year schedule.

Construction and Land Loans: Construction real estate loans consist of vacant land and property that is in the process of improvement. Repayment of these loans can be dependent on the sale of the property to third parties or the successful completion of the improvements by the builder for the end user. In the event a loan is made on property that is not yet improved for the planned development, there is the risk that government approvals will not be granted or will be delayed. Construction loans also run the risk that improvements will not be completed on time or in accordance with specifications and projected costs. Construction real estate loans generally have terms of six months to two years during the construction period with fixed rates and interest rates based on a designated index.

Business Loans: Business loans are loans for commercial, corporate and business purposes, including issuing letters of credit. These loans are secured by business assets or may be unsecured and repayment is directly dependent on the successful operation of the borrower’s business and the borrower’s ability to convert the assets to operating revenue and possess greater risk than most other types of loans should the repayment capacity of the borrower not be adequate. Business loans generally have terms of five to seven years or less and interest rates that float in accordance with a designated published index. Substantially all such loans are secured and backed by the personal guarantees of the owners of the business.

Consumer Loans: Consumer loans generally have higher interest rates than mortgage loans. The risk involved in consumer loans is the type and nature of the collateral and, in certain cases, the absence of collateral. Consumer loans include passbook loans and other secured and unsecured loans that have been made for a variety of consumer purposes.

Loans Held for Sale: Loan sales occur from time to time as part of strategic business or regulatory compliance initiatives. Loans held for sale, including deferred fees and costs, are reported at the lower of cost or fair value as determined by expected bid prices from potential investors. Loans are sold without recourse and servicing released. When a loan is transferred from portfolio to held for sale and the fair value is less than cost, a charge off is recorded against the allowance for loan losses. Subsequent declines in fair value, if any, are charged against earnings.

Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when all of the components meet the definition of a participating interest and when control over the assets has been surrendered. A participating interest generally represents (1) a proportionate (pro rata) ownership interest in an entire financial asset, (2) a relationship where from the date of transfer all cash flows received from the entire financial asset are divided proportionately among the participating interest holders in an amount equal to their share of ownership, (3) the priority of cash flows has certain characteristics, including no reduction in priority, subordination of interest, or recourse to the transferor other than standard representation or warranties, and (4) no party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to pledge or exchange the entire financial asset. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through either (a) an agreement to repurchase them before their maturity or (b) the ability to unilaterally cause the holder to return specific assets, other than through a clean-up call.

Core Deposit Intangible Assets: Acquired intangible assets with finite lives, such as core deposit intangibles are initially recorded at estimated fair value and are amortized over their estimated lives. The Bank currently amortizes its core deposit intangible, resulting from a branch acquisition, using an accelerated method over an estimated useful life of approximately six years. The Bank periodically assesses whether events or changes in circumstances indicate that the carrying amounts of the core deposit intangible asset may be impaired.

Bank Premises and Equipment: Bank premises and equipment are stated at cost, less accumulated depreciation.

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 1. Nature of Business and Summary of Significant Accounting Policies  (Continued)

 

Depreciation is computed and charged to operations using the straight-line method over the estimated useful lives of the respective assets as follows:

 

		Years
Building			39
Building improvements			15 - 39
Furniture, fixtures, and equipment			3 - 10

Leasehold improvements are amortized over the shorter of the improvements’ estimated economic lives or the related lease terms, including extensions expected to be exercised. Gains and losses on dispositions are recognized upon realization. Maintenance and repairs are expensed as incurred and improvements are capitalized. Leasehold improvements in process are not amortized until the assets are placed in operation.

Impairment of Long-Lived Assets: Long-lived assets, including Bank premises and equipment which are held and used by the Bank and intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment is indicated by that review, the asset is written down to its estimated fair value through a charge to noninterest expense.

Other Real Estate Owned: Other Real Estate Owned (“OREO”) represents properties acquired through, or in lieu of, loan foreclosure or other proceedings. OREO is initially recorded at fair value, less estimated disposal costs, at the date of foreclosure, which establishes a new cost basis. After foreclosure, the properties are held for sale and are carried at the lower of cost or fair value, less estimated costs of disposal. Any write-down to fair value, at the time of transfer to OREO, is charged to the allowance for loan losses. Properties are evaluated regularly to ensure that the recorded amounts are supported by current fair values and charges against earnings are recorded as necessary to reduce the carrying amount to fair value, less estimated costs to dispose. Costs relating to the development and improvement of the property are capitalized, subject to the limit of fair value of the OREO, while costs relating to holding the property are expensed. Gains or losses are included in operations upon disposal.

Income Taxes: The Bank recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all or some portion of the deferred tax assets will not be realized.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 1. Nature of Business and Summary of Significant Accounting Policies  (Continued)

 

As of March 31, 2017, December 31, 2016 and 2015, there are no liabilities recorded related to uncertain tax positions. The Bank is no longer subject to income tax examinations by U.S. federal, state or local tax authorities for years before 2013.

Interest and penalties associated with unrecognized tax benefits, if any, would be classified as additional provision for income taxes in the consolidated statements of income.

Related Party Transactions: Directors and officers of the Bank and their affiliates have been customers of and have had transactions with the Bank, and it is expected that such persons will continue to have such transactions in the future. Management believes that all deposit accounts, loans, services and commitments comprising such transactions were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers who are not directors or officers. In the opinion of management, the transactions with related parties did not involve more than normal risk of collectability, nor favored treatment or terms, nor present other unfavorable features. Note 14 contains details regarding related party transactions.

Pension Benefits: The Bank has a noncontributory defined benefit pension plan, which was effectively frozen on May 31, 2007. Pension costs are accrued based on the frozen initial liability cost method. The Bank’s funding policy is to contribute annually the amounts sufficient to meet the minimum funding standards established by the Employee Retirement Income Security Act (“ERISA”), and additional amounts as determined by management based on actuary recommendations.

Comprehensive Income (Loss): Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, unrecognized gains and losses on actuarial loss and prior service cost of the defined benefit plan, which are also recognized as separate components of equity.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the operations and financial position of the Bank.

Fair Value of Financial Instruments: Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Recent Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities”. The main objective in developing this new ASU is to enhance the reporting model for financial

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 1. Nature of Business and Summary of Significant Accounting Policies  (Continued)

 

instruments to provide users of financial statements with more useful information. The update requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. It simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The amendment eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. It requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Financial assets and financial liabilities are to be presented separately by measurement category and form of financial asset and the need for a valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated with the entity’s other deferred tax assets. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, for public business entities. As the Bank will take advantage of the extended transition period for complying with new or revised accounting standards assuming we remain an emerging growth company (“EGC”), we will adopt the amendments in this update beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Bank expects to apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption through an adjustment to retained earnings. The adoption of this update is not expected to have a material impact on the Bank’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, for public business entities. As the Bank will take advantage of the extended transition period for complying with new or revised accounting standards assuming we remain an EGC, we will adopt the amendments in this update beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.

The Bank has begun its evaluation of the amended guidance including the potential impact on its consolidated financial statements. To date, the Bank has identified its leased office space as within the scope of the guidance. The Bank continues to evaluate the impact of the guidance, including determining whether other contracts exist that are deemed to be in scope. As such, no conclusions have yet been reached regarding the potential impact of adoption on the Bank’s consolidated financial statements. Further, to date, no guidance has been issued by the Bank’s primary regulator with respect to how the impact of the amended standard is to be treated for regulatory capital purposes.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718).” The objective of the Update is to simplify accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the update, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current accounting) or account for forfeitures when they occur. Within the Cash Flow Statement, excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. The amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, for public business entities. As the Bank will take advantage of the extended transition

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 1. Nature of Business and Summary of Significant Accounting Policies  (Continued)

 

period for complying with new or revised accounting standards assuming we remain an EGC, we will adopt the amendments in this update beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Bank expects to apply the amendments in this update by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted, or prospectively, as applicable. The adoption of this update is not expected to have a material impact on the Bank’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, for public business entities. As the Bank will take advantage of the extended transition period for complying with new or revised accounting standards assuming we remain an EGC, we will adopt the amendments in this update beginning after December 15, 2020, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Bank is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Bank’s consolidated financial statements.

While early adoption is permitted, the Bank does not expect to elect that option. The Bank has begun its evaluation of the amended guidance including the potential impact on its consolidated financial statements. As a result of the required change in approach toward determining estimated credit losses from the current “incurred loss” model to one based on estimated cash flows over a loan’s contractual life, adjusted for prepayments (a “life of loan” model), the Bank expects that the new guidance will result in an increase in the allowance for loan losses, particularly for longer duration loan portfolios. The Bank also expects that the new guidance may result in an allowance for debt securities. In both cases, the extent of the change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions and forecasts at that time. Further, to date, no guidance has been issued by the Bank’s primary regulator with respect to how the impact of the amended standard is to be treated for regulatory purposes.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” This ASU is intended to reduce diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, for public business entities. As the Bank will take advantage of the extended transition period for complying with new or revised accounting standards assuming we remain an EGC, we will adopt the amendments in this update beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. A retrospective transition method should be applied to each period presented, unless it is impracticable to apply the amendments retrospectively for some of the issues, then the amendments for those issues would be applied prospectively as of the earliest date practicable. The adoption of this update is not expected to have a material impact on the Bank’s consolidated financial statements.

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 1. Nature of Business and Summary of Significant Accounting Policies  (Continued)

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, that amended guidance on revenue recognition from contracts with customers. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most contract revenue recognition guidance, including industry-specific guidance. The core principle of the amended guidance is that an entity should recognize revenue to depict the transfer of promised 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. The amended guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, for public business entities. As the Bank will take advantage of the extended transition period for complying with new or revised accounting standards assuming we remain an EGC, we will adopt the amendments in this update in our annual period beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Bank expects to apply the amendments in this update by means of a cumulative-effect adjustment as of the beginning of the period in which the guidance is adopted. The Bank is in its preliminary stages of evaluating the impact of these amendments, although it does not expect the amendments to have a significant impact to the Bank’s financial position or results of operations. The amendments could potentially impact accounting procedures and processes over the recognition of certain revenue sources, including, but not limited to, non-interest income. The Bank is expecting to begin developing processes and procedures during 2017 to ensure it is fully compliant with these amendments at the date of adoption. The adoption of this update is not expected to have a material impact on the Bank’s consolidated financial statements.

Note 2. Restrictions on Cash and Due From Banks

The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The Bank had $4,398 in cash to cover its minimum reserve requirement of $2,515 at March 31, 2017, and $4,516 and $5,262 in cash to cover its minimum reserve requirements of $2,349 and $2,063 at December 31, 2016 and 2015, respectively.

Note 3. Available-for-Sale Securities

The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale securities at March 31, 2017 and December 31, 2016 and 2015 are summarized as follows:

 

		March 31, 2017
		(Unaudited)
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. Government and Federal Agencies		$	41,907			$	—			$	(423	)		$	41,484
Certificates of Deposit			500				—				—				500
Mortgage-Backed Securities:
FHLMC Certificates			190				23				—				213
FNMA Certificates			3,374				9				(18	)			3,365
GNMA Certificates			6,310				88				(23	)			6,375
		$	52,281			$	120			$	(464	)		$	51,937

 

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 3. Available-for-Sale Securities  (Continued)

 

		December 31, 2016
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. Government and Federal Agencies		$	41,906			$	—			$	(347	)		$	41,559
Certificates of Deposit			500				—				—				500
Mortgage-Backed Securities:
FHLMC Certificates			192				24				—				216
FNMA Certificates			3,600				11				(5	)			3,606
GNMA Certificates			6,744				97				(32	)			6,809
		$	52,942			$	132			$	(384	)		$	52,690
		December 31, 2015
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. Government and Federal Agencies		$	71,899			$	—			$	(733	)		$	71,166
Mortgage-Backed Securities:
FHLMC Certificates			202				20				—				222
FNMA Certificates			4,411				25				(4	)			4,432
GNMA Certificates			6,084				130				—				6,214
		$	82,596			$	175			$	(737	)		$	82,034

The Bank had no investments that were classified as held to maturity as of March 31, 2017, December 31, 2016 and 2015. There were no sales of investment securities in the three months ended March 31, 2017 and for the years ended December 31, 2016 or 2015.

The following tables present the Bank’s securities’ gross unrealized losses and fair values, aggregated by the length of time the individual securities have been in a continuous unrealized loss position, at March 31, 2017 and at December 31, 2016 and 2015:

 

		March 31, 2017 (Unaudited)
		Securities With Gross Unrealized Losses
		Less Than 12 Months								12 Months or More								Total Fair Value				Total Unrealized Loss
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
U.S. Government and Federal Agencies		$	41,484			$	(423	)		$	—			$	—			$	41,484			$	(423	)
Mortgage-Backed
FHLMC Certificates			—				—								—				—				—
FNMA Certificates			3,255				(18	)			—				—				3,255				(18	)
GNMA Certificates			2,464				(23	)			—				—				2,464				(23	)
		$	47,203			$	(464	)		$	—			$	—			$	47,203			$	(464	)

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 3. Available-for-Sale Securities  (Continued)

 

		December 31, 2016
		Securities With Gross Unrealized Losses
		Less Than 12 Months								12 Months or More								Total Fair Value				Total Unrealized Loss
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
U.S. Government and Federal Agencies		$	41,559			$	(347	)		$	—			$	—			$	41,559			$	(347	)
Mortgage-Backed
FHLMC Certificates			—				—								—				—				—
FNMA Certificates			3,489				(5	)			—				—				3,489				(5	)
GNMA Certificates			2,645				(32	)			—				—				2,645				(32	)
		$	47,693			$	(384	)		$	—			$	—			$	47,693			$	(384	)
		December 31, 2015
		Securities With Gross Unrealized Losses
		Less Than 12 Months								12 Months or More								Total Fair Value				Total Unrealized Loss
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
U.S. Government and Federal Agencies		$	15,759			$	(106	)		$	55,407			$	(627	)		$	71,166			$	(733	)
Mortgage-Backed
FHLMC Certificates			—				—								—				—				—
FNMA Certificates			1,956				(4	)			—				—				1,956				(4	)
GNMA Certificates			—				—				—				—				—				—
		$	17,715			$	(110	)		$	55,407			$	(627	)		$	73,122			$	(737	)

The Bank’s investment portfolio had 52 investment securities at March 31, 2017 and 52 and 63 investment securities at December 31, 2016 and 2015, respectively. Management believes that the unrealized losses on 25 of its investment securities at March 31, 2017, and 25 and 33 of its investment securities at December 31, 2016 and 2015, respectively, are not other than temporary because the unrealized losses in those securities relate to market interest rate changes and the Bank has the ability to hold them and does not have the intent to sell these securities, and it is not more likely than not that the Bank will be required to sell these securities, before recovery of the cost basis. In addition, management also considers the issuers of the securities to be financially sound and believes the Bank will receive all contractual principal and interest related to these investments.

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 3. Available-for-Sale Securities  (Continued)

 

The following is a summary of maturities of securities at March 31, 2017 and December 31, 2016. Amounts are shown by contractual maturity. Because borrowers for mortgage-backed securities have the right to prepay obligations with or without prepayment penalties, these securities are not included within the maturity summary.

 

		March 31, 2017 (Unaudited) Available-for-Sale
		Amortized Cost				Fair Value
U.S. Government and Federal Agency Securities:
Amounts maturing:
Three months or less		$	1,000			$	1,000
After three months through one year			1,000				999
After one year through five years			39,907				39,485
			41,907				41,484
Certificates of Deposit
Three months or less			500				500
Mortgage-Backed Securities			9,874				9,953
Total		$	52,281			$	51,937

 

		December 31, 2016
		Available-for-Sale
		Amortized Cost				Fair Value
U.S. Government and Federal Agency Securities:
Amounts maturing:
After three months through one year		$	2,000			$	1,998
After one year through five years			39,906				39,561
After ten years			—				—
			41,906				41,559
Certificates of Deposit
After three months through one year			500				500
Mortgage-Backed Securities			10,536				10,631
Total		$	52,942			$	52,690

There were no securities pledged at March 31, 2017, December 31, 2016 and December 31, 2015.

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

 

Note 4. Loans Receivable and Allowance for Loan Losses

Loans at March 31, 2017 and December 31, 2016 and 2015 are summarized as follows:

 

		March 31,				December 31,
		2017				2016				2015
		(Unaudited)
Mortgage loans:
1-4 family residences		$	333,989			$	325,040			$	309,292
Multifamily residences			161,833				158,200				122,836
Nonresidential properties			140,501				121,500				106,462
Construction and land			37,610				30,340				22,883
Nonmortgage loans:
Business loans			12,434				15,719				14,350
Consumer loans			796				843				788
			687,163				651,642				576,611
Net deferred loan origination costs			732				711				535
Allowance for losses on loans			(10,370	)			(10,205	)			(9,484	)
Loans, net		$	677,525			$	642,148			$	567,662

The Bank’s lending activities are conducted principally in New York City. The Bank grants primarily loans secured by real estate to individuals and businesses. The Bank has established credit policies applicable to each type of lending activity in which it engages. The Bank evaluates the creditworthiness of each customer and, in most cases, extends credit up to 75% of the market value of the collateral at the date of the credit extension, depending on the borrowers’ creditworthiness and the type of collateral. The market value of collateral is monitored on an ongoing basis and additional collateral is obtained when warranted. Real estate is the primary form of collateral. Other important forms of collateral are time deposits and marketable securities. While collateral provides assurance as a secondary source of repayment, the Bank ordinarily requires the primary source of repayment to be based on the borrowers’ ability to generate continuing cash flows.

For disclosures related to the allowance for loan losses and credit quality, the Bank does not have any disaggregated classes of loans below the segment level.

Credit-Quality Indicators: The Bank utilizes internally assigned risk ratings as its credit-quality indicators, which are reviewed by management on a quarterly basis.

The objectives of the Bank’s risk-rating system are to provide the board of directors and senior management with an objective assessment of the overall quality of the loan portfolio, to promptly and accurately identify loans with well-defined credit weaknesses so that timely action can be taken to minimize credit loss, to identify relevant trends affecting the collectability of the loan portfolio and to isolate potential problem areas and to provide essential information for determining the adequacy of the allowance for loan losses.

Below are the definitions of the Bank’s internally assigned risk ratings:

 

•

Strong Pass – Loans to new or existing borrowers collateralized at least 90 percent by an unimpaired deposit account at the Bank.

 

•

Good Pass – A loan to a new or existing borrower like a well-established business in excellent financial condition with strong liquidity and a history of consistently high level of earnings, cash flow and debt service capacity.

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 4. Loans Receivable and Allowance for Loan Losses  (Continued)

 

•

Satisfactory Pass – Loan to a new or existing borrower of average strength with acceptable financial condition, satisfactory record of earnings and sufficient historical and projected cash flow to service the debt.

 

•

Performance Pass – New or existing loans evidencing less than average strength, financial condition, record of earnings, or projected cash flows with which to service debt.

 

•

Special Mention – Loans in this category are currently protected but show one or more potential weakness and risks which may inadequately protect the Bank’s credit position or the borrower’s ability to meet repayment terms at some future date if the weakness is not checked or corrected.

 

•

Substandard – Loans that are inadequately protected by the repayment capacity of the borrower or the current sound net worth of the collateral pledged, if any. Loans in this category have well defined weaknesses and risks that jeopardize the repayment. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

 

•

Doubtful – Loans that have all the weaknesses of loans classified as “Substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable.

 

•

Loss – Loans that are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.

Loans within the top four categories above are considered pass rated, as commonly defined. Risk ratings are assigned as necessary to differentiate risk within the portfolio. They are reviewed on an ongoing basis and revised to reflect changes in the borrowers’ financial condition and outlook, debt service coverage capability, repayment performance, collateral value and coverage as well as other considerations.

The following tables present credit risk ratings by loan segment as of March 31, 2017 and December 31, 2016 and 2015:

 

		March 31, 2017
		(Unaudited)
		Mortgage Loans																Nonmortgage Loans
		1-4 Family				Multifamily				Nonresidential				Construction and Land				Business				Consumer				Total Loans
Risk Rating:
Pass		$	320,845			$	161,293			$	136,492			$	31,306			$	12,422			$	796			$	663,154
Special mention			4,109				540				—				—				—				—				4,649
Substandard			9,035				—				4,009				6,304				12				—				19,360
Doubtful			—				—				—				—				—				—				—
Total		$	333,989			$	161,833			$	140,501			$	37,610			$	12,434			$	796			$	687,163

 

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Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 4. Loans Receivable and Allowance for Loan Losses  (Continued)

 

		December 31, 2016
		Mortgage Loans																Nonmortgage Loans
		1-4 Family				Multifamily				Nonresidential				Construction and Land				Business				Consumer				Total Loans
Risk Rating:
Pass		$	313,345			$	158,200			$	117,467			$	24,316			$	15,697			$	843			$	629,868
Special mention			2,549				—				—				—								—				2,549
Substandard			9,146				—				4,033				6,024				22				—				19,225
Doubtful			—				—				—				—				—				—				—
Total		$	325,040			$	158,200			$	121,500			$	30,340			$	15,719			$	843			$	651,642
		December 31, 2015
		Mortgage Loans																Nonmortgage Loans
		1-4 Family				Multifamily				Nonresidential				Construction and Land				Business				Consumer				Total Loans
Risk Rating:
Pass		$	295,796			$	122,836			$	101,858			$	16,740			$	14,338			$	788			$	552,356
Special mention			3,020				—				359				3,090				—				—				6,469
Substandard			10,476				—				4,245				3,053				12				—				17,786
Doubtful			—				—				—				—				—				—				—
Total		$	309,292			$	122,836			$	106,462			$	22,883			$	14,350			$	788			$	576,611

An aging analysis of loans, as of March 31, 2017, December 31, 2016 and 2015, is as follows:

 

		March 31, 2017
		(Unaudited)
		Current				30-59 Days Past Due				60-89 Days Past Due				Over 90 Days Past Due				Total				Nonaccrual Loans				Over 90 Days Accruing
Mortgages:
1-4 Family		$	326,053			$	4,947			$	169			$	2,820			$	333,989			$	4,146			$	—
Multifamily			160,266				1,567				—				—				161,833				—				—
Nonresidential properties			137,263				1,244				—				1,994				140,501				2,386				—
Construction and land			37,477				133				—				—				37,610				1,142				—
Nonmortgage Loans:																			—
Business			12,384				38				—				12				12,434				12				—
Consumer			796				—				—				—				796				—				—
Total		$	674,239			$	7,929			$	169			$	4,826			$	687,163			$	7,686			$	—

 

F - 23

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Table of Contents

Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 4. Loans Receivable and Allowance for Loan Losses  (Continued)

 

		December 31, 2016
		Current				30-59 Days Past Due				60-89 Days Past Due				Over 90 Days Past Due				Total				Nonaccrual Loans				Over 90 Days Accruing
Mortgages:
1-4 Family		$	317,146			$	5,278			$	557			$	2,059			$	325,040			$	4,158			$	—
Multifamily			157,381				819				—				—				158,200				—				—
Nonresidential properties			119,465				41				—				1,994				121,500				2,397				—
Construction and land			30,340				—				—				—				30,340				1,145				—
Nonmortgage Loans:
Business			15,672				25				—				22				15,719				22				—
Consumer			843				—				—				—				843				—				—
Total		$	640,847			$	6,163			$	557			$	4,075			$	651,642			$	7,722			$	—
		December 31, 2015
		Current				30-59 Days Past Due				60-89 Days Past Due				Over 90 Days Past Due				Total				Nonaccrual Loans				Over 90 Days Accruing
Mortgages:
1-4 Family		$	302,476			$	3,329			$	970			$	2,517			$	309,292			$	6,367			$	—
Multifamily			122,752				84				—				—				122,836				—				—
Nonresidential properties			104,868				680				55				859				106,462				2,488				—
Construction and land			22,883				—				—				—				22,883				637				—
Nonmortgage Loans:
Business			14,350				—				—				—				14,350				13				—
Consumer			788				—				—				—				788				—				—
Total		$	568,117			$	4,093			$	1,025			$	3,376			$	576,611			$	9,505			$	—

 

F - 24

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 4. Loans Receivable and Allowance for Loan Losses  (Continued)

 

The following schedules illustrate the composition of the allowance for loan losses and the related recorded investment in loans as of March 31, 2017 and December 31, 2016 and 2015:

 

		March 31, 2017
		(Unaudited)
		Mortgage Loans																Nonmortgage Loans												Total
		1-4 Family				Multifamily				Nonresidential				Construction and Land				Business				Consumer				Unallocated				2017
Allowances for loan losses:
Balance, beginning of year		$	4,951			$	2,705			$	1,320			$	615			$	597			$	17			$	—			$	10,205
Provision charged to expense			(47	)			94				246				57				(585	)			(9	)			296				52
Losses charged off			—				—				—				—				(10	)			—				—				(10	)
Recoveries			6				1				2				—				113				1				—				123
Balance, end of year		$	4,910			$	2,800			$	1,568			$	672			$	115			$	9			$	296			$	10,370
Ending balance: individually evaluated for impairment		$	1,077			$	—			$	260			$	—			$	—			$	—			$	—			$	1,337
Ending balance: collectively evaluated for impairment			3,833				2,800				1,308				672				115				9				—				8,737
Unallocated			—				—				—				—				—				—				296				296
Total		$	4,910			$	2,800			$	1,568			$	672			$	115			$	9			$	296			$	10,370
Loans:
Ending balance: individually evaluated for impairment		$	17,764			$	—			$	6,421			$	1,142			$	546			$	12			$	—			$	25,885
Ending balance: collectively evaluated for impairment			316,225				161,833				134,080				36,468				11,888				784				—				661,278
Total		$	333,989			$	161,833			$	140,501			$	37,610			$	12,434			$	796			$	—			$	687,163

 

F - 25

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 4. Loans Receivable and Allowance for Loan Losses  (Continued)

 

		December 31, 2016
		Mortgage Loans																Nonmortgage Loans												Total
		1-4 Family				Multifamily				Nonresidential				Construction and Land				Business				Consumer				Unallocated				2016
Allowances for loan losses:
Balance, beginning of year		$	4,969			$	1,994			$	1,298			$	502			$	709			$	12			$	—			$	9,484
Provision charged to expense			(140	)			713				13				193				(845	)			9				—				(57	)
Losses charged off			(38	)			(3	)			—				(85	)			—				(13	)			—				(139	)
Recoveries			160				1				9				5				733				9				—				917
Balance, end of year		$	4,951			$	2,705			$	1,320			$	615			$	597			$	17			$	—			$	10,205
Ending balance: individually evaluated for impairment		$	1,102			$	—			$	261			$	—			$	10			$	—			$	—			$	1,373
Ending balance: collectively evaluated for impairment			3,849				2,705				1,059				615				587				17				—				8,832
Unallocated			—				—				—				—				—				—				—				—
Total		$	4,951			$	2,705			$	1,320			$	615			$	597			$	17			$	—			$	10,205
Loans:
Ending balance: individually evaluated for impairment		$	17,856			$	—			$	6,459			$	1,145			$	615			$	—			$	—			$	26,075
Ending balance: collectively evaluated for impairment			307,184				158,200				115,041				29,195				15,104				843				—				625,567
Total		$	325,040			$	158,200			$	121,500			$	30,340			$	15,719			$	843			$	—			$	651,642

 

F - 26

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 4. Loans Receivable and Allowance for Loan Losses  (Continued)

 

		December 31, 2015
		Mortgage Loans																Nonmortgage Loans												Total
		1-4 Family				Multi-Family				Nonresidential				Construction and Land				Business				Consumer				Unallocated				2015
Allowances for loan losses:
Balance, beginning of year		$	5,004			$	1,669			$	1,529			$	504			$	732			$	11			$	—			$	9,449
Provision charged to expense			184				582				(243	)			75				(247	)			2				—				353
Losses charged off			(282	)			(257	)			(19	)			(77	)			—				(8	)			—				(643	)
Recoveries			63				—				31				—				224				7				—				325
Balance, end of year		$	4,969			$	1,994			$	1,298			$	502			$	709			$	12			$	—			$	9,484
Ending balance: individually evaluated for impairment		$	1,169			$	—			$	277			$	—			$	1			$	—			$	—			$	1,447
Ending balance: collectively evaluated for impairment			3,800				1,994				1,021				502				708				12				—				8,037
Unallocated			—				—				—				—				—				—				—				—
Total		$	4,969			$	1,994			$	1,298			$	502			$	709			$	12			$	—			$	9,484
Loans:
Ending balance: individually evaluated for impairment		$	21,259			$	—			$	6,671			$	637			$	826			$	—			$	—			$	29,393
Ending balance: collectively evaluated for impairment			288,033				122,836				99,791				22,246				13,524				788				—				547,218
Total		$	309,292			$	122,836			$	106,462			$	22,883			$	14,350			$	788			$	—			$	576,611

Loans are considered impaired when current information and events indicate that the Bank may be unable to collect all amounts due according to the contractual terms of the related loan agreements. The Bank identifies impaired loans, including TDR’s, by applying its normal loan review procedures in accordance with its Allowance for Loan Loss methodology. Management periodically assesses loans to determine whether impairment exists. Any loan that is or will potentially no longer perform in accordance with the terms of the original loan contract is evaluated to determine impairment.

 

F - 27

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 4. Loans Receivable and Allowance for Loan Losses  (Continued)

 

The following information relates to impaired loans as of and for the three months ended March 31, 2017 and as of and for the years ended December 31, 2016 and 2015:

 

March 31, 2017		Unpaid Contractual Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Total Recorded Investment				Related Allowance				Average Recorded Investment				Interest Income Recognized on Cash Basis
(Unaudited)
Mortgages:
1-4 Family		$	19,257			$	7,477			$	10,287			$	17,764			$	1,077			$	17,781			$	216
Multifamily			—				—				—				—				—				—				—
Nonresidential properties			7,057				3,876				2,545				6,421				260				6,427				69
Construction and land			1,254				1,142				—				1,142				—				1,132				—
Nonmortgage Loans:
Business			600				558				—				558				—				558				—
Consumer			—				—				—				—				—				—				—
Total		$	28,168			$	13,053			$	12,832			$	25,885			$	1,337			$	25,898			$	285

 

2016		Unpaid Contractual Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Total Recorded Investment				Related Allowance				Average Recorded Investment				Interest Income Recognized on Cash Basis
Mortgages:
1-4 Family		$	19,367			$	7,507			$	10,349			$	17,856			$	1,102			$	20,131			$	722
Multifamily			—				—				—				—				—				309				—
Nonresidential properties			7,096				3,897				2,562				6,459				261				6,541				235
Construction and land			1,241				1,145				—				1,145				—				912				—
Nonmortgage Loans:
Business			672				605				10				615				10				748				24
Consumer			—				—				—				—				—				—				—
Total		$	28,376			$	13,154			$	12,921			$	26,075			$	1,373			$	28,641			$	981
2015		Unpaid Contractual Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Total Recorded Investment				Related Allowance				Average Recorded Investment				Interest Income Recognized on Cash Basis
Mortgages:
1-4 Family		$	23,060			$	11,024			$	10,235			$	21,259			$	1,169			$	24,797			$	993
Multifamily			—				—				—				—				—				1,544				2
Nonresidential properties			7,264				4,028				2,643				6,671				277				6,595				302
Construction and land			662				637				—				637				—				931				45
Nonmortgage Loans:			891
Business			—				755				71				826				1				993				44
Consumer			—				—				—				—				—				2				3
Total		$	31,877			$	16,444			$	12,949			$	29,393			$	1,447			$	34,862			$	1,389

 

F - 28

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 4. Loans Receivable and Allowance for Loan Losses  (Continued)

 

The Bank’s portfolio also includes certain loans that have been modified in a TDR. TDR’s occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, unless it results in a delay in payment that is insignificant. These concessions could include a reduction of interest rate on the loan, payment and maturity extensions, forbearance, or other actions intended to maximize collections. When the Bank modifies a loan in a TDR, management evaluates for any possible impairment using either the discounted cash flows method, where the value of the modified loan is based on the present value of expected cash flows, discounted at the contractual interest rate of the original loan agreement, or by using the fair value of the collateral less selling costs if repayment under the modified terms becomes doubtful. If management determines that the value of the modified loan in a TDR is less than the recorded investment in the loan, impairment is recognized through a specific allowance estimate or charge-off to the allowance.

As of and for the three months ended March 31, 2017 and year ended December 31, 2016, there were no loans that were restructured as a TDR. As of the year ended December 31, 2015, there was one loan amounting to approximately $242 that was restructured with an interest rate adjustment and deemed a TDR. For the three months ended March 31, 2017 and years ended December 31, 2016 and 2015, there were no outstanding TDR loans that had a payment default within 12 months following their modification.

The financial effects of the loans modified were not material. Loans restructured in a TDR in 2015, resulted in no charge-offs or specific reserves. At March 31, 2017, the Bank had 54 TDR loans, included in impaired loans of $20,829. At December 31, 2016 and 2015, the Bank had 58 and 61 TDR loans, included in impaired loans, of $21,021 and $24,395, respectively. The Bank has no commitments to lend additional funds to borrowers whose loans have been modified in a TDR. The financial impact from the concessions made by the Bank represents specific impairment reserves on these loans which aggregated $1,337, $1,373 and $1,447 at March 31, 2017, December 31, 2016 and 2015, respectively.

Note 5. Bank Premises and Equipment

A summary of premises and equipment at March 31, 2017, December 31, 2016 and 2015 is as follows:

 

		March 31, 2017				December 31,
						2016				2015
		(Unaudited)
Land		$	3,979			$	3,979			$	3,979
Buildings and improvements			15,972				15,972				15,966
Leasehold improvements			19,294				19,280				20,411
Furniture, fixtures and equipment			3,848				3,799				4,484
			43,093				43,030				44,840
Less accumulated depreciation and amortization			(17,406	)			(17,002	)			(17,663	)
		$	25,687			$	26,028			$	27,177

Depreciation and amortization expense amounted to $404 and $423 for the three months ended March 31, 2017 and 2016, respectively, and $1,679 and $1,817 for the years ended December 31, 2016 and 2015, respectively, and is included in occupancy expense.

 

F - 29

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

 

Note 6. Deposits

Deposits at March 31, 2017, December 31, 2016 and 2015 are summarized as follows:

 

		March 31, 2017				December 31,
						2016				2015
		(Unaudited)
Demand		$	84,944			$	78,792			$	58,622
Interest-bearing deposits:
NOW/IOLA accounts			27,979				25,692				25,687
Money market accounts			48,096				42,788				26,169
Savings accounts			129,456				127,085				125,143
Total savings, NOW and money market			205,531				195,565				176,999
Certificates of deposit of $250K or more			85,544				90,267				68,987
All other certificates of deposit			279,863				278,454				294,898
Total certificates of deposit			365,407				368,721				363,885
Total interest-bearing deposits			570,938				564,286				540,884
Total deposits		$	655,882			$	643,078			$	599,506

At March 31, 2017 and December 31, 2016, scheduled maturities of certificates of deposit were as follows:

 

March 31, (Unaudited)
2018		$	157,719
2019			83,706
2020			34,788
2021			50,607
2022			38,587
		$	365,407

 

December 31,
2017		$	168,940
2018			69,973
2019			40,690
2020			35,327
2021			53,791
		$	368,721

Overdrawn deposit accounts that have been reclassified to loans amounted to $182, $149 and $239 as of March 31, 2017, December 31, 2016 and 2015, respectively.

 

F - 30

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

 

Note 7. Borrowings

FHLB Advances: The Bank is a member of the FHLB of New York. At March 31, 2017, the Bank has the ability to borrow from the FHLB based on a certain percentage of the value of the Bank’s qualified collateral, as defined in the FHLB Statement of Credit Policy, at the time of the borrowing. In accordance with an agreement with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances.

The Bank had $28,000 and $3,000 of outstanding advances from the FHLB on an overnight line of credit basis at March 31, 2017 and December 31, 2016. The Bank also had a guarantee from the FHLB through a standby letter of credit of $3,583 and $3,583 at March 31, 2017 and December 31, 2016, respectively.

The floating interest rate on the overnight advances from the FHLB was 1.04% and 0.78% at March 31, 2017 and December 31, 2016, respectively. The floating interest rate on the overnight advances from FHLB was 0.56% at December 31, 2015. Interest expense on FHLB advances totaled $29 and $6 for the three months ended March 31, 2017 and 2016, respectively. Interest expense on FHLB advances totaled $8 and $44 for the years 2016 and 2015, respectively.

As of March 31, 2017 and December 31, 2016, the Bank had eligible collateral of approximately $166,151 and $164,843 in mortgage loans available to secure advances from the FHLB.

Securities Sold under Agreement to Repurchase: At March 31, 2017 and December 31, 2016, the Bank had the ability to borrow up to $25,000 under repurchase agreements with three brokers. The Bank had no securities sold under repurchase agreements with brokers as of March 31, 2017, December 31, 2016 and 2015. Interest expense on securities sold under repurchase agreements totaled $0 and $0 for the three months ended March 31, 2017 and 2016, respectively. Interest expense on securities sold under repurchase agreements totaled $0 and $17 for the years ended December 31, 2016 and 2015, respectively.

Note 8. Income Taxes

The provision (benefit) for income taxes for the three months ended March 31, 2017 and 2016 and for the years ended December 31, 2016 and 2015 consists of the following:

 

		Three Months Ended March 31,								Years Ended December 31,
		2017				2016				2016				2015
		(Unaudited)
Federal:
Current		$	253			$	226			$	642			$	91
Deferred			110				144				387				1,090
			363				370				1,029				1,181
State and local:
Current			49				54				237				122
Deferred			(199	)			1				(754	)			(722	)
			(150	)			55				(517	)			(600	)
Changes in valuation allowance			132				65				493				734
Provision for income taxes		$	345			$	490			$	1,005			$	1,315

 

F - 31

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 8. Income Taxes  (Continued)

 

Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% for the three months ended March 31, 2017 and 2016 and for the years ended December 31, 2016 and 2015 to income before income taxes as a result of the following:

 

		Three Months Ended March 31,								Years Ended December 31,
		2017				2016				2016				2015
		(Unaudited)
Income tax, at federal rate		$	309			$	441			$	826			$	1,303
State and local tax, net of federal taxes			(96	)			(16	)			(341	)			(395	)
Valuation allowance, net of the federal benefit			132				65				493				734
Other			—				—				27				(327	)
		$	345			$	490			$	1,005			$	1,315

Management maintains a valuation allowance against its net New York State and New York City deferred tax assets as it is unlikely these deferred tax assets will impact the Bank’s tax liability in future years.

Management has determined that it is not required to establish a valuation allowance against any other deferred tax assets since it is more likely than not that the deferred tax assets will be fully utilized in future periods. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax liabilities, the level of historical taxable income, and the projected future taxable income over the periods that the temporary differences comprising the deferred tax assets will be deductible.

At March 31, 2017, December 31, 2016 and 2015, the Bank had no unrecognized tax benefits recorded. The Bank does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. The Bank recognizes interest and penalties on unrecognized tax benefits as a component of income tax expense.

The Bank is subject to U.S. federal income tax, New York State income tax, New Jersey income tax, and New York City income tax. The Bank is no longer subject to examination by taxing authorities for years before 2013.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31, 2017, December 31, 2016 and 2015 are presented below:

 

		At March 31, 2017				Years Ended December 31,
						2016				2015
		(Unaudited)
Deferred tax assets:
Allowance for losses on loans		$	4,446			$	4,352			$	4,125
Pension obligations			3,145				3,134				3,289
Interest on nonaccrual loans			335				525				645
Unrealized loss on available-for-sale securities			117				86				191
Amortization of intangible assets			213				219				191
Deferred rent payable			221				212				184
Net operating losses			1,483				1,340				780
Other			15				20				72
Total gross deferred tax assets			9,975				9,888				9,477

 

F - 32

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 8. Income Taxes  (Continued)

 

		At March 31, 2017				Years Ended December 31,
						2016				2015
		(Unaudited)
Deferred tax liabilities:
Cumulative employee contribution in excess of net periodic benefit costs			4,313				4,313				4,056
Depreciation and amortization of premises and equipment			374				426				448
Deferred loan fees			312				303				233
Other			17				17				18
Total gross deferred tax liabilities			5,016				5,059				4,755
Valuation allowance			1,581				1,450				957
Net deferred tax assets		$	3,378			$	3,379			$	3,765

The deferred tax expense (benefit) has been allocated between operations and equity as follows:

 

		Three Months Ended March 31,								Years Ended December 31,
		2017				2016				2016				2015
		(Unaudited)
Equity		$	(41	)		$	185			$	260			$	320
Operations			42				141				126				1,086
		$	1			$	326			$	386			$	1,406

Note 9. Pension Plans

Defined Benefit Plan: Effective January 1, 2007, the Bank replaced its noncontributory defined benefit pension plan (the “Old Pension Plan”) with a qualified defined contribution plan (the “401(k) Plan”) as noted in more detail below. The Old Pension Plan covered substantially all Bank employees. Employees were eligible to participate after one year of service. Normal retirement age was 65, with an early retirement provided for at age 55. The Old Pension Plan was effectively frozen on May 31, 2007 (the curtailment date) and this resulted in an actuarial reassessment of the Old Pension Plan’s future estimated obligations. All participants that are presently vested with the Old Pension Plan will remain in the Old Pension Plan and will receive the full accrued benefit, as defined, upon retirement, in accordance with the plan document.

In May of 2015, the Old Pension Plan was amended to provide an early retirement window from February 19, 2015 to July 1, 2015, for individuals who met certain criteria with regards to age and years of service. Participants who met the criteria were essentially able to receive their expected retirement benefits three years earlier if they chose to exercise the early retirement option. The amendment also gave participants the option of receiving their vested pension benefits via a lump sum payment upon retirement.

 

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Table of Contents

Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 9. Pension Plans  (Continued)

 

The following table sets forth the Old Pension Plan’s funded status and amounts recognized in the Bank’s consolidated statements of financial condition as of March 31, 2017, December 31, 2016 and 2015 using a measurement date as of March 31, 2017, December 31, 2016 and 2015:

 

		March 31, 2017				December 31,
						2016				2015
		(Unaudited)
Projected benefit obligation		$	(14,108	)		$	(14,142	)		$	(14,903	)
Fair value of plan assets			14,963				15,038				14,553
Funded status		$	855			$	896			$	(350	)
Accumulated benefit obligation		$	(14,108	)		$	(14,142	)		$	(14,903	)

Amounts recognized in accumulated other comprehensive loss, which will be amortized into net periodic benefit cost over the coming years, consisted of the following components at March 31, 2017, December 31, 2016 and 2015:

 

		March 31, 2017				December 31,
						2016				2015
		(Unaudited)
Net loss		$	(9,249	)		$	(9,217	)		$	(9,673	)

The net periodic benefit cost and amounts recognized in other comprehensive loss are as follows for the three months ended March 31, 2017 and the years ended December 31, 2016 and 2015:

 

		March 31, 2017				December 31,
						2016				2015
		(Unaudited)
Net periodic benefit		$	10			$	79			$	64
Net actuarial gain (loss)			31				(456	)			1,583
Total recognized in net periodic benefit cost and other comprehensive loss		$	41			$	(377	)		$	1,647

Weighted-average assumptions used by the Bank to determine the net benefit obligations consisted of the following as of March 31, 2017, December 31, 2016 and 2015:

 

		March 31, 2017				December 31,
						2016				2015
		(Unaudited)
Discount rate			4.25	%			4.25	%			4.25	%
Rate of compensation increase			0.00	%			0.00	%			0.00	%

 

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Table of Contents

Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 9. Pension Plans  (Continued)

 

Weighted-average assumptions used by the Bank to determine the net benefit cost consisted of the following for the three months ended March 31, 2017 and for the years ended December 31, 2016 and 2015:

 

		March 31, 2017				December 31,
						2016				2015
		(Unaudited)
Discount rate			4.25	%			4.25	%			4.25	%
Rate of compensation increase			0.00	%			0.00	%			0.00	%
Expected long-term rate of return on assets			6.00	%			6.00	%			6.00	%

The Bank’s expected rate of return on plan assets is estimated based on the Old Pension Plan’s historical performance of return on assets.

The Bank’s investment policy for plan assets is to manage the portfolio to preserve principal and liquidity while maximizing the return on the plan’s investment portfolio through the full investment of available funds. The Old Pension Plan’s assets are currently maintained in a guaranteed deposit account with Prudential Retirement Insurance and Annuity Company, earning interest at rates that are determined at the beginning of each year.

Pension assets consist solely of funds on deposit in a guaranteed deposit account. The fair value of the Bank’s pension plan assets at March 31, 2017, December 31, 2016 and 2015 was $14,963, $15,038 and $14,553, respectively.

The guaranteed deposit account is valued at fair value by discounting the related cash flows based on current yields of similar instruments with comparable durations considering the creditworthiness of the issuer. Such fair value measurement is considered a Level 2 measurement.

Employer contributions and benefit payments for the three months ended March 31, 2017 and for the years ended December 31, 2016 and 2015 are as follows:

 

		March 31, 2017				December 31,
						2016				2015
		(Unaudited)
Employer contribution		$	—			$	870			$	3,520
Benefits paid		$	184			$	853			$	1,383

Employee benefit payments expected to be paid in the future are as follows:

 

As of March 31, 2017 (Unaudited)
2017		$	670
2018			841
2019			840
2020			818
2021			798
Thereafter			3,841
		$	7,808

 

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Table of Contents

Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 9. Pension Plans  (Continued)

 

Year ending December 31,
2017		$	854
2018			841
2019			840
2020			818
2021			798
Thereafter			3,841
		$	7,992

401(k) Plan: Following is a summary of the provisions of the 401(k) Plan:

On January 1, 2007, the Bank adopted a qualified defined contribution retirement plan under Section 401(k) of the Internal Revenue Code. The 401(k) Plan also qualifies under the Internal Revenue Service safe harbor provisions, as defined. Employees are eligible to participate in the 401(k) Plan after completing one year of service. The 401(k) Plan provides for elective employee/participant deferrals of income. The Bank may elect to provide discretionary matching, profit-sharing, and safe harbor contributions, not to exceed 4% of employee compensation and profit-sharing contributions. No contributions were made for the three months ended March 31, 2017. Contributions were approximately $339 and $295 for the years ended December 31, 2016 and 2015, respectively.

Note 10. Commitments, Contingencies and Credit Risk

Financial Instruments With Off-Balance-Sheet Risk: In the normal course of business, the Bank is party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized on the consolidated statements of financial condition. The contractual amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.

The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless. The Bank uses the same credit policies in making commitments and contractual obligations as it does for on-balance-sheet instruments. Financial instruments whose contractual amounts represent credit risk at March 31, 2017, December 31, 2016 and 2015 are as follows:

 

		March 31, 2017				December 31,
						2016				2015
		(Unaudited)
Commitments to grant mortgage loans		$	53,627			$	33,813			$	28,386
Unfunded commitments under lines of credit			34,453				27,404				22,174
Standby letters of credit			2,487				2,487				3,761
		$	90,567			$	63,704			$	54,321

Commitments to Grant Mortgage Loans: Commitments to grant mortgage loans are agreements to lend to a customer as long as all terms and conditions are met as established in the contract. Commitments generally have fixed expiration dates or other termination clauses, and may require payment of a fee by the borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The

 

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Table of Contents

Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 10. Commitments, Contingencies and Credit Risk  (Continued)

 

Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. The Bank does not anticipate any material losses as a result of these transactions.

Unfunded Commitments Under Lines of Credit: Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extension of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and, ultimately, may not be drawn upon to the total extent to which the Bank is committed.

Standby Letters of Credit: Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Bank deems necessary.

Concentration by Geographic Location: Loans, commitments to extend credit and standby letters of credit have been granted to customers who are located primarily in New York City. Generally, the Bank’s loans are secured by one-to-four family residences. The loans are expected to be repaid from the borrowers’ cash flows.

Lease Commitments: At December 31, 2016, the Bank was obligated under noncancelable operating leases for office space and equipment that expire on various dates through 2031. One such lease contains an escalation clause providing for increased rental based primarily on increases in real estate taxes. Net rental expenses under operating leases, included in occupancy expense, totaled $355 and $333 for the three months ended March 31, 2016 and 2015, respectively. Net rental expenses under operating leases, included in occupancy expense, totaled $1,393 and $1,334 for the years ended December 31, 2016 and 2015, respectively.

The projected minimum rental payments under the terms of the leases at March 31, 2017 and December 31, 2016 are as follows:

 

		March 31,				December 31,
		(Unaudited)
2017		$	728			$	1,062
2018			990				990
2019			1,011				1,011
2020			1,041				1,041
2021			1,072				1,072
Thereafter			6,654				6,654
		$	11,496			$	11,830

Legal Matters: The Bank is involved in various legal proceedings which have arisen in the normal course of business. Management believes that resolution of these matters will not have a material effect on the Bank’s financial condition or results of operations.

Regulatory Agreement: On July 2013, the Bank entered into a formal written agreement (the “Supervisory Agreement”) with the OCC which requires the Bank to take certain actions related to its management and operations, including internal controls. The Bank achieved full compliance with all articles of the formal written agreement. As a result, the OCC terminated its enforcement action with the Bank as of May 25, 2016.

 

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Table of Contents

Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

 

Note 11. Fair Value

The following fair value hierarchy is used based on the lowest level of input significant to the fair value measurement. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Bank used the following methods and significant assumptions to estimate fair value:

Cash and Cash Equivalents, Accrued Interest Receivable, Advance Payments by Borrowers for Taxes and Insurance, Short-Term Borrowings Under Repurchase Agreements and Accrued Interest Payable: The carrying amount is a reasonable estimate of fair value. The Bank did not record these assets and liabilities at fair value on a recurring basis.

Available-for-Sale Securities: These financial instruments are recorded at fair value in the consolidated financial statements on a recurring basis. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted prices are not available, then fair values are estimated by using pricing models (e.g., matrix pricing) or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. Examples of such instruments include government agency bonds and mortgage-backed securities. Level 3 securities are securities for which significant unobservable inputs are utilized. There were no changes in valuation techniques used to measure similar assets during the year.

FHLB Stock: The carrying value of FHLB stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Loans: For variable rate loans, which reprice frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values, adjusted for credit losses inherent in the portfolios. The fair value of fixed rate loans is estimated by discounting the future cash flows using estimated year-end market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the portfolios. Impaired loans are valued using a present value discounted cash flow method, or the fair value of the collateral. The Bank does not record loans at fair value on a recurring basis.

Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is determined from actual bids from bona fide investors. The Bank classifies these assets as Level 2.

Other Real Estate Owned: Other real estate owned represents real estate acquired through foreclosure, and is recorded at fair value less estimated disposal costs on a nonrecurring basis. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Bank classifies the asset as Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank classifies the asset as Level 3.

Deposits: The fair values of demand deposits, savings, NOW and money market accounts equal their carrying amounts, which represent the amounts payable on demand at the reporting date. Fair values for fixed-term, fixed-rate certificates of

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 11. Fair Value  (Continued)

 

deposit are estimated using a discounted cash flow calculation that applies market interest rates on certificates of deposit to a schedule of aggregated expected monthly maturities on such deposits. The Bank does not record deposits at fair value on a recurring basis.

Advances From the Federal Home Loan Bank: The fair value of the advances is estimated using a discounted cash flow calculation that applies current market-based FHLB interest rates for advances of similar maturity to a schedule of maturities of such advances. The Bank does not record these borrowings at fair value on a recurring basis.

Off-Balance-Sheet Instruments: Fair values for the Bank’s off-balance-sheet instruments (lending commitments and standby letters of credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The Bank does not record its off-balance-sheet instruments at fair value on a recurring basis.

The following tables detail the assets that are carried at fair value and measured at fair value on a recurring basis as of March 31, 2017, December 31, 2016 and 2015, and indicate the level within the fair value hierarchy utilized by the Bank to determine the fair value:

 

						March 31, 2017
						(Unaudited)
Description		Total				Level 1				Level 2				Level 3
Available-for-Sale Securities:
U.S. government and federal agencies		$	41,484			$	—			$	41,484			$	—
Certificates of Deposit			500								500
Mortgage-Backed Securities:
FHLMC Certificates			213				—				213				—
FNMA Certificates			3,365				—				3,365				—
GNMA Certificates			6,375				—				6,375				—
		$	51,937			$	—			$	51,937			$	—

 

						December 31, 2016
Description		Total				Level 1				Level 2				Level 3
Available-for-Sale Securities:
U.S. government and federal agencies		$	41,559			$	—			$	41,559			$	—
Certificates of Deposit			500								500
Mortgage-Backed Securities:
FHLMC Certificates			216				—				216				—
FNMA Certificates			3,606				—				3,606				—
GNMA Certificates			6,809				—				6,809				—
		$	52,690			$	—			$	52,690			$	—

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 11. Fair Value  (Continued)

 

						December 31, 2015
Description		Total				Level 1				Level 2				Level 3
Available-for-Sale Securities:
U.S. government and federal agencies		$	71,166			$	—			$	71,166			$	—
Mortgage-Backed Securities:
FHLMC Certificates			222				—				222				—
FNMA Certificates			4,432				—				4,432				—
GNMA Certificates			6,214				—				6,214				—
		$	82,034			$	—			$	82,034			$	—

The following tables detail the assets carried at fair value and measured at fair value on a nonrecurring basis as of March 31, 2017, December 31, 2016 and 2015 and indicate the fair value hierarchy utilized by the Bank to determine the fair value:

 

		March 31, 2017
		(Unaudited)
		Total				Level 1				Level 2				Level 3
Impaired loans		$	25,885			$	—			$	—			$	25,885
Loans held for sale		$	2,143			$	—			$	2,143			$	—
Other real estate owned		$	—			$	—			$	—			$	—

 

		December 31, 2016
		Total				Level 1				Level 2				Level 3
Impaired loans		$	26,075			$	—			$	—			$	26,075
Loans held for sale		$	2,143			$	—			$	2,143			$	—
Other real estate owned		$	—			$	—			$	—			$	—

 

		December 31, 2015
		Total				Level 1				Level 2				Level 3
Impaired loans		$	29,393			$	—			$	—			$	29,393
Loans held for sale		$	3,303			$	—			$	3,303			$	—
Other real estate owned		$	76			$	—			$	76			$	—

Losses on assets carried at fair value on a nonrecurring basis were immaterial for the three months ended March 31, 2017 and 2016 and for the years ended December 31, 2016 and 2015.

The Bank discloses fair value information about financial instruments, whether or not recognized in the consolidated statements of financial condition, for which it is practicable to estimate that value. Certain financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bank.

The estimated fair value amounts for 2017, 2016 and 2015 have been measured as of their respective period-ends and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates.

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 11. Fair Value  (Continued)

 

As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than amounts reported at each period.

The information presented should not be interpreted as an estimate of the fair value of the entire Bank since a fair value calculation is only required for a limited portion of the Bank’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Bank’s disclosures and those of other banks may not be meaningful.

As of March 31, 2017, December 31, 2016 and 2015, the recorded book balances and estimated fair values of the Bank’s financial instruments were as follows:

 

		March 31, 2017								December 31,
										2016								2015
		(Unaudited)
		Carrying Amount				Fair Value				Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets:
Cash and cash equivalents		$	16,504			$	16,504			$	11,716			$	11,716			$	12,694			$	12,694
Investment securities			51,937				51,937				52,690				52,690				82,034				82,034
Loans held for sale			2,143				2,143				2,143				2,143				3,303				3,303
Loans receivable, net			677,525				692,566				642,148				660,706				567,662				586,735
Accrued interest receivable			2,749				2,749				2,707				2,707				2,668				2,668
FHLB stock			2,089				2,089				964				964				1,162				1,162
Financial liabilities:
Deposits:
Demand deposits			84,944				84,944				78,792				78,792				58,622				58,622
Interest-bearing deposits			205,531				205,531				195,565				195,565				176,999				176,999
Certificates of deposit			365,407				371,948				368,721				368,721				363,885				369,416
Advance payments by borrowers for taxes and insurance			5,670				5,670				3,882				3,882				2,600				2,600
Advances from FHLB			28,000				28,000				3,000				3,000				8,000				8,000
Accrued interest payable			26				26				28				28				36				36

Off-Balance-Sheet Instruments: Loan commitments on which the committed interest rate is less than the current market rate were insignificant at March 31, 2017, December 31, 2016 and 2015.

Note 12. Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the OCC. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s operations and financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total risk-based and Tier 1 capital to risk-weighted assets (as defined in the regulations), Tier 1 capital to

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

Note 12. Regulatory Capital Requirements  (Continued)

 

adjusted total assets (as defined) and tangible capital to adjusted total assets (as defined). Management believes that, as of March 31, 2017, December 31, 2016 and 2015, the Bank met all capital adequacy requirements to which it is subject.

The most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There were no conditions or events since then that management believes have changed the Bank’s category.

The Bank’s actual capital amounts and ratios as of March 31, 2017, December 31, 2016 and 2015 as compared to regulatory requirements are as follows (dollars in thousands):

 

																		To Be Well
																		Capitalized Under
										For Capital								Prompt Corrective
		Actual								Adequacy Purposes								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
March 31, 2017: (Unaudited)
Total Capital to Risk-Weighted Assets		$	107,219				18.16	%		$	47,224				8.00	%		$	59,029				10.00	%
Tier 1 Capital to Risk-Weighted Assets			99,803				16.91	%			35,418				6.00	%			47,224				8.00	%
Common Equity Tier 1 Capital Ratio			99,803				16.91	%			26,563				4.50	%			38,369				6.50	%
Tier 1 Capital to Total Assets			99,803				13.08	%			30,523				4.00	%			38,153				5.00	%

 

																		To Be Well
																		Capitalized Under
										For Capital								Prompt Corrective
		Actual								Adequacy Purposes								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
December 31, 2016:
Total Capital to Risk-Weighted Assets		$	106,190				19.21	%		$	44,217				8.00	%		$	55,271				10.00	%
Tier 1 Capital to Risk-Weighted Assets			99,240				17.96	%			33,163				6.00	%			44,217				8.00	%
Common Equity Tier 1 Capital Ratio			99,240				17.96	%			24,872				4.50	%			35,926				6.50	%
Tier 1 Capital to Total Assets			99,240				13.32	%			29,805				4.00	%			37,256				5.00	%
																		To Be Well
																		Capitalized Under
										For Capital								Prompt Corrective
		Actual								Adequacy Purposes								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
December 31, 2015:
Total Capital to Risk-Weighted Assets		$	104,085				20.72	%		$	40,197				8.00	%		$	50,246				10.00	%
Tier 1 Capital to Risk-Weighted Assets			97,764				19.46	%			30,148				6.00	%			40,197				8.00	%
Common Equity Tier 1 Capital Ratio			97,764				19.46	%			22,611				4.50	%			32,660				6.50	%
Tier 1 Capital to Total Assets			97,764				13.67	%			28,604				4.00	%			35,755				5.00	%

 

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Ponce De Leon Federal Bank and Subsidiaries

Notes to Consolidated Financial Statements

As of March 31, 2017 (Unaudited) and December 31, 2016 and 2015, and Three Months Ended March 31, 2017 and 2016 (Unaudited) and Years Ended December 31, 2016 and 2015

(In thousands of US dollars unless otherwise stated)

 

 

Note 13. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive losses are as follows:

 

		March 31, 2017 (Unaudited)
		December 31, 2016				Current Year Change				March 31, 2017
Unrealized losses on securities available for sale, net		$	(166	)		$	(61	)		$	(227	)
Unrealized losses on pension benefits, net			(6,084	)			(20	)			(6,104	)
Total		$	(6,250	)		$	(81	)		$	(6,331	)

 

		December 31, 2016
		December 31, 2015				Current Year Change				December 31, 2016
Unrealized gains (losses) on securities available for sale, net		$	(370	)		$	204			$	(166	)
Unrealized gains (losses) on pension benefits, net			(6,385	)			301				(6,084	)
Total		$	(6,755	)		$	505			$	(6,250	)
		December 31, 2015
		December 31, 2014				Current Year Change				December 31, 2015
Unrealized gains (losses) on securities available for sale, net		$	(845	)		$	475			$	(370	)
Unrealized gains (losses) on pension benefits, net			(4,854	)			(1,531	)			(6,385	)
Total		$	(5,699	)		$	(1,056	)		$	(6,755	)

Note 14. Transactions With Related Parties

Directors and officers of the Bank and their affiliates have been customers of and have had transactions with the Bank, and it is expected that such persons will continue to have such transactions in the future. Aggregate loan transactions with related parties for the three months ended March 31, 2017 and 2016 and for the years ended December 31, 2016 and 2015 were as follows:

 

		March 31,								December 31,
		2017				2016				2016				2015
		(Unaudited)
Beginning balance		$	1,573			$	1,728			$	1,728			$	398
Originations			—				—				—				1,494
Payments			(33	)			(26	)			(155	)			(164	)
Ending balance		$	1,540			$	1,702			$	1,573			$	1,728

The Bank held deposits in the amount of $5,295, $6,856 and $5,702 from officers and directors at March 31, 2017 and December 31, 2016 and 2015, respectively.

 

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No person has been authorized to give any information or to make any representation other than as contained in this prospectus and, if given or made, such other information or representation must not be relied upon as having been authorized by PDL Community Bancorp or Ponce Bank. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this prospectus nor any sale hereunder shall under any circumstances create any implication that there has been no change in the affairs of PDL Community Bancorp or Ponce Bank since any of the dates as of which information is furnished herein or since the date hereof.

Up to 7,224,663 Shares

(Subject to Increase to up to 8,308,362 shares)

 

(Proposed Holding Company for Ponce Bank)

COMMON STOCK

par value $0.01 per share

 

 

PROSPECTUS

 

 

July 31, 2017

These securities are not deposits or accounts and are not federally insured or guaranteed.

 

 

Until September 5, 2017, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 

 

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Part II

Information not required in prospectus

 

Item 13.

Other expenses of issuance and distribution

The following table sets forth the estimated costs and expenses payable by the registrant in connection with the registration of securities being registered under this Registration Statement. All amounts except the SEC registration fee are estimates.

 

		Amount (1)
Registrant’s Legal Fees and Expenses		$	1,000,000
Registrant’s Accounting Fees and Expenses			170,000
Marketing Agent Fees and Expenses (1)			880,081
Records Agent Fees and Expenses (1)			25,000
Appraisal Fees and Expenses			132,500
Printing, Postage, Mailing and EDGAR fees			375,000
Filing Fees (Nasdaq, FINRA and SEC)			149,213
Transfer Agent Fees and Expenses			20,000
Business Plan Fees and Expenses			40,000
Other			80,000
Total		$	2,878,794

 

(1)

PDL Community Bancorp has retained Raymond James & Associates, Inc. to assist in the sale of common stock on a best efforts basis in the subscription, community and syndicated offerings. Fees are estimated at the adjusted maximum of the offering range, assuming all of the shares are sold in the subscription and community offerings.

 

Item 14.

Indemnification of directors and officers

Article XII of the Bylaws of PDL Community Bancorp sets forth indemnification provisions under which directors, officers and employees of PDL Community Bancorp shall be indemnified against liability which they incur in their capacities as such:

Article XII - Indemnification

The Company shall indemnify its personnel, including directors, officers and employees, to the fullest extent authorized by applicable law and regulations, as the same exists or may hereafter be amended; provided, any indemnification by the Company of the Company’s personnel is subject to any applicable rules or regulations of the FRB.

 

Item 15.

Recent sales of unregistered securities

Not applicable.

 

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Item 16.

Exhibits and financial statement schedules

(a) Exhibits. The exhibits and financial statement schedules filed as part of this registration statement are as follows:

 

 

#	Management contract or compensation plan or arrangement.

†	Previously filed.

 

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(b) Financial Statement Schedule. No financial statement schedules are filed because the required information is not applicable or is included in the consolidated financial statements or related notes.

 

Item 17.

Undertakings

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any of the securities being registered winch remain unsold at the termination of the offering.

(4) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:

The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (§230.424 of this chapter);

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

(5) That, for purposes of determining any liability under the Securities Act of 1933, the information omitted front the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a fonts of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(6) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a fonts of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

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(7) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

(8) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

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Signatures

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Bronx County, State of New York, on this 27^th day of July, 2017.

 

Power of Attorney

We, the undersigned directors and officers of PDL Community Bancorp hereby severally constitute and appoint Carlos P. Naudon and Steven Tsavaris, and each of them, as our true and lawful attorney and agent, to do any and all things in our names in the capacities indicated below which said Carlos P. Naudon and Steven Tsavaris, and each of them, may deem necessary or advisable to enable the Company to comply with the Securities Act of 1933, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the registration statement on Form S-1 relating to the offering of the Company’s common stock, including specifically, but not limited to, power and authority to sign for us in our names in the capacities indicated below the registration statement and any and all amendments (including post-effective amendments) thereto; and we hereby approve, ratify and confirm all that said Carlos P. Naudon and Steven Tsavaris, and each of them, shall do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, this Form S-1 has been signed by the following persons in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Carlos P. Naudon Carlos P. Naudon		President, Chief Executive Officer and Director		July 27, 2017
/s/ Frank Perez Frank Perez		Executive Vice President and Chief Financial Officer		July 27, 2017
/s/ Steven Tsavaris Steven Tsavaris		Executive Chairman of the Board		July 27, 2017
/s/ James C. Demetriou		Director		July 27, 2017
James C. Demetriou
/s/ William Feldman		Director		July 27, 2017
William Feldman
/s/ Julio Gurman		Director		July 27, 2017
Julio Gurman
/s/ Nick R. Lugo		Director		July 27, 2017
Nick R. Lugo
/s/ Manuel A. Romero Manuel A. Romero		Director		July 27, 2017

 

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Exhibit Index

 

Exhibit number		Description of exhibit
1.1		Engagement Letter, dated as of December 2, 2016, between Ponce De Leon Federal Bank and Raymond James & Associates, Inc., as amended May 12, 2017†
1.2		Form of Agency Agreement between Ponce De Leon Federal Bank and Raymond James & Associates, Inc.
2.1		Amendment No. 2 to the Plan of Reorganization from Mutual Bank to a Mutual Holding Company and Stock Issuance Plan
3.1		Charter of PDL Community Bancorp†
3.2		ByLaws of PDL Community Bancorp
4.1		Form of Common Stock Certificate of PDL Community Bancorp
5.1		Opinion of Locke Lord LLP regarding legality of securities being registered†
8.1		Federal and State Tax Opinion of Crowe Horwath LLP
10.1		Ponce Bank Employee Stock Ownership Plan #†
10.2		Ponce Bank ESOP Equalization Plan #†
10.3		Ponce De Leon Federal Bank Deferred Compensation Plan #†
10.4		Employment Agreement, dated as of March 23, 2017, by and between Ponce De Leon Federal Bank and Carlos P. Naudon #†
10.5		Form of Employment Agreement to be entered into by and among Ponce Bank Mutual Holding Company, PDL Community Bancorp and Carlos P. Naudon #†
10.6		Employment Agreement, dated March 23, 2017, by and between Ponce De Leon Federal Bank and Steven Tsavaris #†
10.7		Form of Employment Agreement to be entered into by and among Ponce Bank Mutual Holding Company, PDL Community Bancorp and Steven Tsavaris #†
10.8		Employment Agreement, dated March 31, 2017, by and between Ponce De Leon Federal Bank and Frank Perez #†
10.9		Form of Employment Agreement to be entered into by and among Ponce Bank Mutual Holding Company, PDL Community Bancorp and Frank Perez #†
21.1		Subsidiaries of the Registrant†
23.1		Consent of Locke Lord LLP (contained in Opinion included as Exhibit 5.1)
23.2		Consent of RP Financial, LC.†
23.3		Consent of  Mazars USA, LLP
23.4		Consent of Crowe Horwath LLP (contained in Opinion included as Exhibit 8.1)
24.1		Power of Attorney (set forth on signature page)
99.1		Appraisal Agreement between Ponce De Leon Federal Bank and RP Financial, LC.†
99.2		Letter of RP Financial, LC. with respect to Subscription Rights†
99.3		Appraisal Report of RP Financial, LC.†
99.4		Marketing Materials
99.5		Stock Order and Certification Form

 

#	Management contract or compensation plan or arrangement.

†	Previously filed.

 

II - 6

Exhibit 1.2

PDL COMMUNITY BANCORP

Up to 7,224,663 Shares

(subject to increase up to 8,308,362 shares)

COMMON STOCK

($0.01 Par Value)

Subscription Price $10.00 Per Share

AGENCY AGREEMENT

                          , 2017

Raymond James & Associates, Inc.

880 Carillon Parkway

St. Petersburg, FL 33716

Ladies and Gentlemen:

Ponce De Leon Federal Bank, a federally chartered mutual savings bank headquartered in Bronx, New York (the “Bank”), the deposit accounts of which are insured by the Federal Deposit Insurance Corporation (“FDIC”), PDL Community Bancorp, a federal corporation in organization (the “Holding Company”), and Ponce Bank Mutual Holding Company, a federally chartered mutual holding company in formation (the “MHC” and, together with the Bank and the Holding Company, the “Ponce Parties”) hereby confirm their agreement with Raymond James & Associates, Inc. (the “Agent”) as follows:

Section 1. The Offering. The Bank, in accordance with the Plan of Reorganization from a Mutual Bank to a Mutual Holding Company and Stock Issuance Plan, as amended (the “Plan”), adopted by the Board of Directors of the Bank, intends to reorganize into the mutual holding company form of organization (the “Reorganization”) in compliance with the regulations of the Board of Governors of the Federal Reserve System (the “FRB”). Pursuant to the Plan, the Holding Company will offer and sell up to 7,224,663 shares (subject to increase up to 8,308,362 shares) (the “Shares”) of its common stock, $0.01 par value per share (the “Common Stock”) in a subscription offering (the “Subscription Offering”) to (1) depositors of the Bank with Qualifying Deposits (as defined in the Plan) as of October 31, 2015 (“Eligible Account Holders”), (2) the Bank’s tax-qualified employee benefit plans, including the employee stock ownership plan established by the Bank (the “ESOP”), (3) depositors of the Bank with Qualifying Deposits as of                          , 2017 (“Supplemental Eligible Account Holders”), and (4) Other Members of the Bank as defined in the Plan. Subject to the prior subscription rights of the above-listed parties, the Holding Company may offer for sale in a community offering (the “Community Offering” and when referred to together with or subsequent to the Subscription Offering, the “Subscription and Community Offering”) the Shares not subscribed for or ordered in the Subscription Offering to members of the general public to whom a copy of the Prospectus (as hereinafter defined) is delivered with a preference given first to natural persons and trusts of natural persons residing in New York Counties of Bronx, New York, Queens and Kings and the New Jersey County of Hudson, and thereafter to cover orders of other members of the general public. It is anticipated that shares not subscribed for in the Subscription and Community Offering may be offered to certain members of the general public on a best efforts basis through a selected dealers agreement (the “Syndicated Community Offering”) (the Subscription Offering, Community Offering and Syndicated Community Offering are collectively referred to as the “Offering”). It is acknowledged that the purchase of Shares in the Offering is subject to the maximum and minimum purchase limitations as described in the Plan and that the Holding Company may reject, in whole or in part, any orders received in the Community Offering or Syndicated Community Offering. In addition, as described herein, the Holding Company will contribute in accordance with the Plan, subject to compliance with certain conditions as may be imposed by regulatory authorities, a number of shares of Common Stock to Ponce De Leon Foundation (the “Foundation”) (such shares hereinafter being referred to as the “Foundation Shares”) equal to 3.3% of the issued and outstanding shares of Common Stock (taking into account the shares of Common Stock issued to the MHC in the Reorganization), plus cash in the amount of $200,000. The Holding Company currently plans to sell up to approximately 45.0% of its to be issued shares of Common Stock in accordance with the Plan. As a result of the sale of the Shares and the contribution of the Foundation Shares under the Plan, the MHC will own approximately 51.7% of the Holding Company’s outstanding shares of Common Stock upon completion of the Reorganization.

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As a federally chartered mutual savings and loan association, the Bank has no stockholders and is controlled by its members. Pursuant to the terms of the Plan, upon completion of the Reorganization and the Offering, all of the assets, except for $200,000, and liabilities of the Bank will be transferred to and assumed by a newly formed federal stock savings bank subsidiary of the Holding Company, operating under the name “Ponce Bank” (the “Stock Bank”), and the Holding Company will be a majority-owned subsidiary of the MHC. As a result of the transfer of the assets and liabilities of the Bank to Stock Bank, all property of the Bank, other than $200,000, including its right, title and interest in and to all property of whatever kind and nature, whether real, personal, or mixed, and things, and choses in action, and every right, privilege, interest and asset of every conceivable value or benefit then existing or pertaining to it, or which would inure to it, immediately by operation of law will vest in the Stock Bank.

The Holding Company has filed with the Securities and Exchange Commission (the “SEC”) a registration statement on Form S-1 (File No. 333-217275) (the “Registration Statement”), containing a prospectus relating to the Offering, for the registration of the Shares and the Foundation Shares under the Securities Act of 1933, as amended (the “1933 Act”), and has filed such amendments thereof and such amended prospectuses as may have been required to the date hereof. The term “Registration Statement” shall include any documents incorporated by reference therein and all financial schedules and exhibits thereto, as amended, including post-effective amendments. The prospectus, as amended, on file with the SEC at the time the Registration Statement initially became effective is hereinafter called the “Prospectus,” except that if any revised prospectus is used by the Holding Company in connection with the Offering or the Syndicated Community Offering (whether or not such revised prospectus is required to be filed by the Holding Company pursuant to Rule 424(b) or (c) of the rules and regulations of the SEC under the 1933 Act (the “1933 Act Regulations”)) differing from the prospectus on file at the time the Registration Statement initially became effective, the term “Prospectus” shall refer to the revised prospectus from and after the time said prospectus is provided to the Agent for such use.

In connection with the Reorganization, the Bank filed with the (i) FRB a Combined Notice of Mutual Holding Company Reorganization on Form MHC-1 (the “Form MHC-1”) and an Application for Approval of a Minority Stock Issuance by a Subsidiary of a Mutual Holding Company (the “Form MHC-2”), including exhibits and the Prospectus (the Form MHC-1 and the Form MHC-2 are hereafter collectively referred to as the “MHC Notice”); (ii) Office of the Comptroller of the Currency (the “OCC”) pursuant to federal law and the rules and regulations thereof, and specifically 12 C.F.R. § 5.53(c), an Interagency Bank Merger Application and an Interim Bank Charter Application, (such applications hereinafter collectively referred to as the “OCC Applications”), and (iii) Federal Deposit Insurance Corporation (the “FDIC”) pursuant to federal law and the rules and the regulations thereof, an Insurance of Accounts Application (the “FDIC Application”) and in each case has filed such amendments thereto and supplementary materials as may have been required to the date hereof, including copies of the Bank’s Proxy Statement for a Special Meeting of its Members relating to the Reorganization and the establishment of the Foundation (the “Members’ Proxy Statement”), the Reorganization Valuation Appraisal Report (the “Appraisal”) prepared by RP Financial, LC., and the Prospectus. In addition, the Holding Company has filed with the FRB an application on Form H-(e)1 for approval, pursuant to Section 10(e) of the Home Owners’ Loan Act, as amended (“HOLA”), and the regulations promulgated thereunder (the “Control Act Regulations”) for the Holding Company to become a savings and loan holding company with respect to the Bank (the “Holding Company Application”). The MHC Notice, the OCC Applications, the FDIC Application and the Holding Company Application, collectively, as amended to date, if applicable, and as from time to time amended or supplemented hereafter, are hereinafter referred to as the “Reorganization Applications”.

Section 2. Retention of Agent; Compensation. Subject to the terms and conditions herein set forth, the Bank and the Holding Company hereby appoint the Agent as their exclusive financial advisor and marketing agent (i) to utilize its best efforts to solicit subscriptions for Shares and to advise and assist the Holding Company and the Bank with respect to the Holding Company’s sale of the Shares in the Offering and (ii) to participate in the Offering in the areas of market making and in syndicate formation (if necessary).

On the basis of the representations, warranties, and agreements herein contained, but subject to the terms and conditions herein set forth, the Agent accepts such appointment and agrees to consult with and advise the Bank and the Holding Company as to the matters set forth in the letter agreement, dated December 2, 2016, between the Bank

 

2

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and the Agent (a copy of which is attached hereto as Exhibit A) (the “Engagement Letter”). It is acknowledged by the Bank and the Holding Company that the Agent shall not be required to purchase any Shares or be obligated to take any action which is inconsistent with all applicable laws, regulations, decisions or orders.

The obligations of the Agent pursuant to this Agreement shall terminate upon termination of the Offering, but in no event later than 45 days after the completion of the Subscription Offering (the “End Date”). All fees or expenses due to the Agent but unpaid will be payable to the Agent in next day funds at the earlier of the Closing Date (as hereinafter defined) or the End Date. In the event the Offering is extended beyond the End Date, the Ponce Parties and the Agent may agree to renew this Agreement under mutually acceptable terms.

In the event the Holding Company is unable to sell a minimum of 5,339,969 Shares within the period herein provided, this Agreement shall terminate and the Holding Company shall refund to any persons who have subscribed for any of the Shares the full amount which it may have received from them plus accrued interest, as set forth in the Prospectus; and none of the parties to this Agreement shall have any obligation to the other parties hereunder, except as set forth in this Section 2 and in Sections 7, 9 and 10 hereof. In the event the Offering is terminated for any reason not attributable to the action or inaction of the Agent, the Agent shall be paid the fees and expenses due to the date of such termination pursuant to subsections (a), (d), and (e) below.

Per the terms of the Engagement Letter, the Agent shall receive the following compensation for its services hereunder:

 

a)

Management Fee. The Ponce Parties will pay to the Agent a non-refundable cash fee of $50,000 (the “Management Fee”), which has already been paid. The Management Fee will be credited against any Success Fee owed pursuant to subsection (b) below and, to the extent applicable, the aggregate commissions owed the Agent pursuant to subsection (c) below.

 

b)

Success Fee. The Ponce Parties shall pay a fee of one percent (1.00%) of the aggregate purchase price of the Shares sold in the Subscription and Community Offerings (the “Success Fee”). Such fee shall be due at the closing of the Offerings. No fee shall be payable for any shares of Common Stock sold to the officers, directors, employees or the immediate family of such persons, and qualified and non-qualified employee benefit plans or contributed to the Foundation in connection with the Reorganization. “Immediate family” for purposes of this Agreement includes the spouse, parents, siblings and children who live in the same house as the officer, director or employee. The Management Fee set forth in subsection (a) above will be credited against the Success Fee.

 

c)

Syndicated Community Offering. In the event the Ponce Parties elect to pursue a Syndicated Community Offering, the Ponce Parties shall pay to the Agent, in addition to (and not in lieu of) the Success Fee, a commission not to exceed 6.0% of the aggregate purchase price of the shares sold in the Syndicated Community Offering. For purposes of calculating the aggregate commission due hereunder, to the extent not already credited against the Success Fee, the Management Fee will be credited against the commissions due the Agent pursuant to this subsection (c). The Agent, as sole book running manager, may seek to form a syndicate of registered dealers to assist in the sale of such common stock on a best efforts basis, subject to the terms and conditions set forth in a selected dealers agreement to be entered into between the Ponce Parties and the Agent. The Agent will endeavor to distribute the common stock among dealers, if any, in a fashion that best meets the distribution objectives of the Ponce Parties and the requirements of the Plan, which may result in limiting the allocation of stock to certain selected dealers. It is understood that in no event shall the Agent be obligated to take or purchase any shares of the Common Stock in the Offering.

 

d)

Records Agent Fee. The Agent shall also receive a non-refundable cash fee of $25,000 for certain records agent services set forth in the Engagement Letter, $5,000 of which has already been paid to the Agent and the balance of which shall be payable to the Agent upon the mailing of subscription documents with respect to the Offering.

 

3

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e)

Expenses. The Ponce Parties will pay all of the fees, disbursements and expenses in connection with the Offering customarily borne by issuers, including without limitation (a) costs of obtaining all securities and bank regulatory approvals, including any required SEC or Financial Industry Regulatory Authority (“FINRA”) filing fees; (b) costs of printing and distributing the materials used in connection with the Offering; (c) costs to register the Shares for sale with required state securities agencies (Blue Sky filings); (d) Nasdaq Stock Market listing fees or OTC Markets Group fees; (e) DTCC clearing eligibility fees; (f) fees and disbursements of the Ponce Parties’ counsel, accountants and other advisors; (g) operational expenses for the Stock Information Center (e.g. postage, telephones, supplies, temporary employees, etc.); and (h) Syndicated Community Offering expenses associated with the Offering. In the event the Agent incurs any such fees and expenses on behalf of the Ponce Parties, the Ponce Parties will reimburse the Agent for such fees and expenses whether or not the Offering is consummated.

In addition, whether or not the proposed Offering is consummated and in addition to any fees payable to the Agent pursuant to this Section 2, the Ponce Parties will reimburse the Agent for all of its reasonable out-of-pocket expenses incurred in connection with, or arising out of, the Agent’s activities under, or contemplated by, its engagement hereunder, including without limitation travel costs, meals and lodging, photocopying, data processing fees and expenses, advertising and communications expenses, which will not exceed $50,000. In addition, the Agent will be reimbursed for the fees and the reasonable out-of-pocket expenses of legal counsel not to exceed $100,000. These expenses assume no unusual circumstances or delays, or a resolicitation in connection with the Offering. The Agent and the Ponce Parties acknowledge that such expense limitations may be increased by mutual consent, by an additional amount not to exceed $25,000 for fees of legal counsel and not to exceed $10,000 for other out-of-pocket expenses, in the event of a material delay of the Offering requiring an update to the financial information contained within the registration statement to reflect a period later than set forth in the original filing of the offering documents, or in the event of a resolicitation of the Offering. Such limitation on expense reimbursement shall not affect the Ponce Parties’ obligations to pay legal fees and other expenses under this Section 2 as well as Sections 9 and 10 hereof. All expense reimbursements to be made to the Agent hereunder shall be made by the Ponce Parties promptly upon submission by the Agent to the Ponce Parties of invoices therefor.

If (i) the Plan is abandoned or terminated by the Holding Company; (ii) the Offering is not consummated by December 31, 2017; (iii) the Agent terminates this Agreement because there has been a material adverse change in the financial condition or operations of the Bank since December 31, 2016; or (iv) immediately prior to the commencement of the Offering, the Agent terminates this Agreement because in its opinion, which shall have been formed in good faith after reasonable determination and consideration of all relevant factors, there has been a failure to satisfactorily disclose all relevant information in the Registration Statement, the Prospectus, the Members’ Proxy Statement or the Reorganization Applications or market conditions exist that might render the sale of the Shares by the Holding Company inadvisable, the management fee set forth in subsection (a) of this Section 2 shall serve as compensation for the Agent’s advisory and administrative services as set forth in the Engagement Letter, in addition to reimbursement of the Agent’s reasonable out-of-pocket expenses as set forth above.

The compensation specified above shall be payable (to the extent not already paid) to the Agent in next day funds on the earlier of the Closing Date (as hereinafter defined), a determination by the Ponce Parties to terminate or abandon the Plan, or the termination of this Agreement by the Agent or the Ponce Parties.

Section 3. Sale and Delivery of Shares. If all the conditions precedent to the consummation of the Reorganization, including without limitation, the sale of all Shares required by the Plan to be sold, are satisfied, the Holding Company agrees to issue, or have issued, the Shares sold in the Offering and the Foundation Shares contributed to the Foundation and to release for delivery certificates or statements evidencing ownership of such Shares and the Foundation Shares on the Closing Date against payment to the Holding Company by any means authorized by the Plan; provided, however, that no funds shall be released to the Holding Company until the conditions specified in Section 8 hereof shall have been complied with. The release of the Shares against payment therefor and the Foundation Shares shall be made on a date and at a place acceptable to the Ponce Parties and the Agent as set forth in Section 14. Certificates or statements of ownership for shares shall be delivered directly to the purchasers in accordance with their directions as provided by the Holding Company to the Holding Company’s registrar and transfer agent. The date upon which the Holding Company shall release or deliver the Shares sold in the Offering and the Foundation Shares are contributed to the Foundation, in accordance with the terms herein, is called the “Closing Date.”

 

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Section 4. Representations and Warranties of the Ponce Parties. The Ponce Parties jointly and severally represent and warrant to and agree with the Agent as follows:

 

(a)

The Registration Statement, which was prepared by the Holding Company and the Bank and filed with the SEC, has been declared effective by the SEC, no stop order has been issued with respect thereto and no proceedings therefor have been initiated or, to the knowledge of the Ponce Parties, threatened by the SEC. At the time the Registration Statement became effective, at the Applicable Time (as defined in Section 4(c) hereof) and at the Closing Date, the Registration Statement complied and will comply in all material respects as to form with the requirements of the 1933 Act and the 1933 Act Regulations and the Registration Statement did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and at the time any Rule 424(b) Prospectus is filed with the SEC and at the Closing Date referred to in Section 2 hereof, the Prospectus (including any amendment or supplement thereto) and any information regarding the Ponce Parties contained in Sales Information (as such term is defined in Section 9 hereof) authorized by the Ponce Parties for use in connection with the Offering will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this Section 4(a) shall not apply to statements or omissions made in reliance upon and in conformity with written information furnished to the Ponce Parties by the Agent or its counsel expressly regarding the Agent for use in the Prospectus in the first sentence of the third paragraph under the caption “The Reorganization and Offering—Plan of Distribution and Marketing Arrangements” (the “Agent Information”).

 

(b)

No Ponce Party has directly or indirectly distributed or otherwise used and will not directly or indirectly distribute or otherwise use any prospectus, any “free writing prospectus” (as defined in Rule 405 of the 1933 Act Regulations) or other offering material (including, without limitation, content on the party’s website that may be deemed to be a prospectus, free writing prospectus or other offering material) in connection with the offering and sale of the Shares other than any Permitted Free Writing Prospectus (as defined in Section 4(c) hereof) or the Prospectus or other materials permitted by the 1933 Act and the 1933 Act Regulations distributed by the Ponce Parties and reviewed and approved in advance for distribution by the Agent. No Ponce Party has, directly or indirectly, prepared or used and will not directly or indirectly, prepare or use, any Permitted Free Writing Prospectus except in compliance with the filing and other requirements of Rules 164 and 433 of the 1933 Act Regulations; assuming that such Permitted Free Writing Prospectus is so sent or given after the Registration Statement was filed with the SEC (and after such Permitted Free Writing Prospectus was, if required pursuant to Rule 433(d) of the 1933 Act Regulations, filed with the SEC), the sending or giving, by the Agent, of any Permitted Free Writing Prospectus will satisfy the provisions of Rules 164 and 433 of the 1933 Act Regulations (without reliance on subsections (b), (c) and (d) for Rule 164 of the 1933 Act Regulations); and the Holding Company is not an “ineligible issuer” (as defined in Rule 405 of the 1933 Act Regulations) as of the eligibility determination date for purposes of Rules 164 and 433 of the 1933 Act Regulations with respect to the offering of the Shares or otherwise precluded under Rule 164 of the 1933 Act Regulations from using free writing prospectuses in connection with the offering of the Shares.

 

(c)

As of the Applicable Time (as defined below), neither (i) the Issuer-Represented General Free Writing Prospectus(es) issued at or prior to the Applicable Time and the Statutory Prospectus, all considered together (collectively, the “General Disclosure Package”), nor (ii) any individual Issuer-Represented Limited-Use Free Writing Prospectus, when considered together with the General Disclosure Package, included any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from any Prospectus included in the Registration Statement relating to the offered Shares or any Issuer-Represented Free Writing Prospectus based upon and in conformity with written information furnished to the Holding Company by the Agent specifically for use therein, it being understood and agreed that the only information furnished by the Agent consists of the Agent Information. As used in this paragraph and elsewhere in this Agreement:

 

1.

“Applicable Time” means each and every date when a potential purchaser submitted a subscription or otherwise committed to purchase Shares.

 

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2.

“Statutory Prospectus,” as of any time, means the Prospectus relating to the offered Shares that is included in the Registration Statement relating to the offered Shares immediately prior to the Applicable Time, including any document incorporated by reference therein.

 

3.

“Issuer-Represented Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433(h) of the 1933 Act Regulations, relating to the offered Shares in the form filed or required or, if not required to be filed, in the form retained in the Holding Company’s records pursuant to Rule 433(g) under the 1933 Act Regulations. The term does not include any writing exempted from the definition of prospectus pursuant to clause (a) of Section 2(a)(10) of the 1933 Act, without regard to Rule 172 or Rule 173 of the 1933 Act Regulations.

 

4.

“Issuer-Represented General Free Writing Prospectus” means any Issuer-Represented Free Writing Prospectus that is intended for general distribution to prospective investors.

 

5.

“Issuer-Represented Limited-Use Free Writing Prospectus” means any Issuer-Represented Free Writing Prospectus that is not an Issuer-Represented General Free Writing Prospectus. The term Issuer-Represented Limited-Use Free Writing Prospectus also includes any “bona fide electronic road show,” as defined in Rule 433 of the 1933 Act Regulations, that is made available without restriction pursuant to Rule 433(d)(8)(ii) of the 1933 Act Regulations or otherwise, even though not required to be filed with the SEC.

 

6.

“Permitted Free Writing Prospectus” means any free writing prospectus as defined in Rule 405 of the 1933 Act Regulations that is consented to by the Holding Company, the Bank and the Agent.

 

(d)

Each Issuer-Represented Free Writing Prospectus, as of its date of first use and at all subsequent times through the completion of the Offering and sale of the offered Shares or until any earlier date that the Holding Company notified or notifies the Agent (as described in the next sentence), did not, does not and will not include any information that conflicted, conflicts or will conflict with the information contained in the Registration Statement, including any document incorporated by reference therein that has not been superseded or modified. If at any time following the date of first use of an Issuer-Represented Free Writing Prospectus, there occurred or occurs an event or development as a result of which such Issuer-Represented Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement relating to the offered Shares or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances prevailing at that subsequent time, not misleading, the Holding Company has notified or will notify promptly the Agent so that any use of such Issuer-Represented Free-Writing Prospectus may cease until it is amended or supplemented and the Holding Company has promptly amended or will promptly amend or supplement such Issuer-Represented Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission. The foregoing two sentences do not apply to statements in or omissions from any Issuer-Represented Free Writing Prospectus based upon and in conformity with written information furnished to the Holding Company by the Agent specifically for use therein.

 

(e)

The Prospectus and each Issuer-Represented Free Writing Prospectus when filed, if filed by electronic transmission, pursuant to EDGAR (except as may be permitted by Regulation S-T under the Securities Act), was identical to the copy thereof delivered to the Agent for use in connection with the offering of the Shares.

 

(f)

In connection with the Reorganization, the Bank has filed with the (i) FRB the MHC Notice; (ii) OCC the OCC Applications, and (iii) FDIC the FDIC Application and in each case has filed such amendments thereto and supplementary materials as may have been required to the date hereof. The FRB has conditionally approved the MHC Notice, such approval remains in full force and effect and no order has been issued by the FRB suspending or revoking such approval and no proceedings therefor have been initiated or, to the knowledge of the Ponce Parties, threatened by the FRB. The OCC has conditionally approved the OCC Applications, such approval remains in full force and effect and no order has been issued by the OCC suspending or revoking such approval and no proceedings therefor have been initiated or, to the knowledge of the Ponce Parties, threatened by the OCC. The FDIC has conditionally approved

 

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the FDIC Application and such approval remains in full force and effect and no order has been issued by the FDIC suspending or revoking such approval and no proceedings therefor have been initiated or, to the knowledge of the Ponce Parties, threatened by the FDIC. At the time of the approval of the MHC Notice, including the Prospectus and the Members’ Proxy Statement (including any amendment or supplement thereto), by the FRB, the OCC Application by the OCC and the FDIC Applications by the FDIC and at all times subsequent thereto until the Closing Date referred to in Section 2, the Reorganization Applications, including the Prospectus and the Members’ Proxy Statement (including any amendment or supplement thereto), will comply in all material respects with MHC Regulations, and applicable federal law and regulations of the OCC and the FDIC, and the Reorganization Applications were truthful and accurate in all material respects.

 

(g)

The Holding Company has filed the Holding Company Application with the FRB and the Holding Company Application is accurate and complete in all material respects. The FRB has conditionally approved the Holding Company Application, such approval remains in full force and effect and no order has been issued by the FRB suspending or revoking such approval and no proceedings therefor have been initiated or, to the knowledge of the Ponce Parties, threatened by the FRB. At the date of such approval and as of the Closing Date referred to in Section 2, the Holding Company Application complied and will comply in all material respects with the applicable requirements of HOLA and the Control Act Regulations, except as the FRB has expressly waived such regulations in writing and the Holding Company Application is truthful and accurate in all material respects.

 

(h)

The Ponce Parties have filed the Prospectus and the Sales Information (as defined in Section 9(a)) with the SEC and the FRB. The Prospectus and the Sales Information, as of the date the Registration Statement became effective and on the Closing Date referred to in Section 2, complied and will comply in all material respects with the applicable requirements of the 1933 Act Regulations and, at or prior to the time of their first use, will have received all required authorizations of the FRB and SEC for use in final form. No approval of any other regulatory or supervisory or other public authority is required in connection with the distribution of the Prospectus and any Sales Information that has not been obtained and a copy of which has been delivered to the Agent. The Ponce Parties have not distributed any offering material in connection with the Offering except for the Prospectus and any Sales Information that has been filed with the Registration Statement and the MHC Notice and authorized for use by the SEC and the FRB. The information contained in the Sales Information filed as an exhibit to both the Registration Statement and the MHC Notice does not conflict in any material respect with information contained in the Registration Statement and the Prospectus. No order has been issued by any state securities administrator preventing or suspending the use of the Prospectus or any Sales Information authorized by the Ponce Parties for use in connection with the Offering and no action by or before any such government entity to revoke any approval, authorization or order of effectiveness related to the Reorganization is pending or, to the knowledge of the Ponce Parties, threatened. At the time of their use, the Proxy Statement and any other proxy solicitation materials with respect to the Special Meeting of Members of the Bank will comply in all material respects with the applicable provisions of the MHC Regulations and will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

 

(i)

The Offering and the Plan have been adopted by the Board of Directors of the Bank and such adoptions have not been rescinded or revoked, and the offer and sale of the Shares and the contribution of the Foundation Shares to the Foundation will have been conducted in all material respects in accordance with the Plan, the MHC Regulations, and all other applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and provisions precedent to the Offering imposed upon the Ponce Parties by the FRB, the OCC, the FDIC, the SEC, or any other regulatory authority, except to the extent waived or otherwise approved by such regulatory authority, and in the manner described in the Prospectus. To the knowledge of the Ponce Parties, no person has sought to obtain review of the final action of the FRB, in approving the Plan or the Reorganization, or in not objecting thereto, or in approving the Holding Company Application.

 

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(j)

The Bank has been duly organized and validly existing as a federally chartered savings association in mutual form and upon completion of the Reorganization will be duly organized and validly existing as a federally chartered mutual holding company, in both instances duly authorized to conduct its business and own its property as described in the Registration Statement, the Prospectus and the General Disclosure Package; the Stock Bank is a federally chartered stock savings association in organization and upon completion of the Reorganization will be duly organized and validly existing and in good standing as a federally chartered stock savings association with full corporate power and authority to own, lease and operate its properties and to conduct its business is described in the Registration Statement, Prospectus and General Disclosure Package; the Bank has, and the Stock Bank will have, obtained all licenses, permits, easements, convents, and other governmental authorizations (“Permits”) currently required for the conduct of its business, except those that individually or in the aggregate would not have a material adverse effect on the conduct of the business, financial condition, results of operations, capital, properties, management, affairs or prospects of the Ponce Parties and the Subsidiaries (as hereinafter defined), taken as a whole (a “Material Adverse Effect”); all such Permits are in full force and effect and the Bank has not, and the Stock Bank will not have, received notice of any proceeding or action relating to the revocation or modification of any such Permit which, individually or in the aggregate, if subject to an unfavorable decision, ruling or finding, might result in a Material Adverse Effect; the Bank is and the Stock Bank will be in compliance with all statutes, laws, rules, regulations, decisions, directives and orders applicable to the operation of its business, except where failure to be in compliance would not have a Material Adverse Effect and the Bank has not received any written, or to its knowledge, oral communication asserting that it is not in material compliance with any statute, law, rule, regulation, decision, directive or order; and the Bank is and the Stock Bank will be, duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which its ownership of property or leasing of property or the conduct of its business requires such qualification, unless the failure to be so qualified in one or more of such jurisdictions would not have a Material Adverse Effect. Following completion of the Reorganization and the Offering, the authorized capital stock of the Stock Bank will consist of fifty million (50,000,000) shares of common stock, par value $0.01 per share (the “Bank Common Stock”), and ten million (10,000,000) shares of preferred stock, par value $0.01 (the “Bank Preferred Stock”). At the Closing, (i) all of the outstanding capital stock of the Stock Bank will be duly authorized, validly issued and fully paid and non-assessable and owned directly by the Holding Company free and clear of any security interest, mortgage, pledge, lien, encumbrances or legal or equitable claim, or restriction of any kind, (ii) the Holding Company will have no direct subsidiaries other than the Bank, and (iii) there will be no outstanding warrants or options to purchase any securities of the Stock Bank. The Reorganization will be effected in all material respects in accordance with all applicable statutes, regulations, decisions and orders; and, except with respect to the filing of certain post-sale, post-Reorganization reports, and documents in compliance with the 1933 Act Regulations, the MHC Regulations, the Control Act Regulations or letters or orders of approval, at the Closing Date, all terms, conditions, requirements and provisions with respect to the Reorganization imposed by the SEC, the FRB, the OCC and the FDIC, if any, will have been complied with by the Ponce Parties in all material respects or appropriate waivers will have been obtained and all applicable notice and waiting periods will have been satisfied, waived or elapsed.

 

(k)

At the Closing Date, the Holding Company will be a stock corporation duly organized, validly existing and in good standing as a corporation under the laws of the United States with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement, the Prospectus and the General Disclosure Package, and the Holding Company at the Closing Date will be qualified to do business as a foreign corporation in each jurisdiction in which the conduct of its business requires such qualification, except where the failure to so qualify would not have a Material Adverse Effect. The Holding Company as of the Closing Date will have obtained all Permits required for the conduct of its business except those that individually or in the aggregate would not have a Material Adverse Effect; all such Permits will be in full force and effect, and the Holding Company will in all material respects complying therewith and with all statutes, laws, rules, regulations, decisions, directives, and orders applicable to the operation of its business. There will not be any outstanding warrants or options to purchase any securities of the Holding Company as of the Closing Date. Following the completion of the Reorganization, the Company will be a registered savings and loan holding company under HOLA. At the Closing Date, the MHC will be a mutual holding company, duly organized, validly existing and in good standing as a mutual holding company under the laws of the United States with full corporate power and authority to own, lease and operate its properties and conduct

 

8

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its business as described in the Prospectus; and at the Closing Time will be duly qualified to do business as a foreign corporation in each other jurisdiction in which the conduct of its business requires such qualification, except where the failure to so qualify would not have a Material Adverse Effect. Following the completion of the Reorganization, the MHC will be a registered savings and loan holding company under HOLA.

 

(l)

Except as described in the Prospectus there are no encumbrances or restrictions or requirements or material legal restrictions or requirements required to be described therein, on the ability of any of the Ponce Parties, (i) to pay dividends or make any other distributions on its capital stock or to pay any indebtedness owed to another party, (ii) to make any loans or advances to, or investments in, another party or (iii) to transfer any of its property or assets to another party.

 

(m)

The Bank has properly administered all accounts for which it acts as a fiduciary, including but not limited to accounts for which it serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment advisor, in accordance with the terms of the governing documents and applicable state and federal law and regulation, except where the failure to do so would not have a Material Adverse Effect. Neither the Bank, nor any of its directors, officers or employees has committed any material breach of trust with respect to any such fiduciary account, and the accountings for each such fiduciary account are true and correct in all material respects and accurately reflect the assets of such fiduciary account in all material respects.

 

(n)

The Bank is a member of the Federal Home Loan Bank of New York (“FHLB-New York”). The deposit accounts of the Bank are, and at the Closing Date will be, insured by the FDIC up to the applicable limits, and no proceedings for the termination or revocation of such insurance are pending or, to the knowledge of the Ponce Parties, threatened. The Bank is a “qualified thrift lender” within the meaning of 12 U.S.C. § 1467a(m).

 

(o)

At the Closing Date, the Holding Company will have no direct subsidiaries other than the Bank. The Bank has two subsidiaries as set forth on Exhibit C hereto (the “Subsidiaries”). Each Subsidiary is duly organized, validly existing in good standing under the laws of the jurisdiction of its incorporation, has full power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus; has obtained all Permits currently required for the conduct of its business except those that individually or in the aggregate would not have a Material Adverse Effect; all such Permits are in full force and effect, and the Subsidiary is in all material respects complying therewith and with all statutes, laws, rules, regulations, decisions, directives, and orders applicable to the operation of its business; and is duly qualified to do business as a foreign corporation in each jurisdiction in which the conduct its business requires such qualification, except where the failure to so qualify would not have a Material Adverse Effect; the activities of each Subsidiary are permitted to subsidiaries of a federally chartered savings association and a federally chartered holding company by the regulations of the FRB and the OCC; all of the issued and outstanding capital stock or ownership interests of each Subsidiary has been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Bank, free and clear of any security interest, mortgage, pledge, lien, encumbrance or legal or equitable claim. No Ponce Party owns equity securities or any equity interest in any other business enterprise except as otherwise described in the Registration Statement and Prospectus or as are immaterial in amount and are not required to be described in the Registration Statement and the Prospectus.

 

(p)

The Ponce Parties and Subsidiaries have good and marketable title to all real property owned by them and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectus or (b) would not, singly or in the aggregate, result in a Material Adverse Effect; and all of the leases and subleases material to the business of the Ponce Parties and the Subsidiaries, considered as one enterprise, and under which the Ponce Parties holds properties, including those described in the Prospectus, are in full force and effect, and no Ponce Party has received any written or, to the knowledge of the Ponce Parties, oral notice of any material claim of any sort that has been asserted by anyone adverse to the rights of such Ponce Party under any such leases or subleases.

 

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(q)

The Holding Company has received an opinion of its tax advisor, Crowe Horwath LLP, with respect to the federal income tax consequences of the Reorganization and with respect to the New York and New Jersey income tax consequences of the Reorganization, and all material aspects of such opinion are accurately summarized in the Registration Statement and the Prospectus. The Ponce Parties represent and warrant that the facts upon which such opinion is based are truthful, accurate and complete in all material respects. None of the Ponce Parties will take any action inconsistent therewith.

 

(r)

Each of the Ponce Parties has all such power, authority, authorizations, approvals and orders as may be required to enter into this Agreement, to carry out the provisions and conditions hereof and to issue and sell the Shares to be sold by the Holding Company as provided herein and to contribute the Foundation Shares to the Foundation by the Holding Company and as described in the Prospectus, subject to approval or confirmation by the FRB of the final Appraisal as may be required. The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated have been duly and validly authorized by all necessary corporate action on the part of each of the Ponce Parties. This Agreement has been validly executed and delivered by each of the Ponce Parties and, assuming due execution and delivery by the Agent, is the valid, legal and binding agreement of each of the Ponce Parties enforceable in accordance with its terms (except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors’ rights generally or the rights of creditors of savings and loan holding companies, the accounts of whose subsidiaries are insured by the FDIC, or by general equity principles, regardless of whether such enforceability is considered in a proceeding in equity or at law, and except to the extent, if any, that the provisions of Sections 9 and 10 hereof may be unenforceable as against public policy or pursuant to applicable Federal law and the rules and regulations of the FRB).

 

(s)

As of the date hereof and as of the Closing Date, neither the Ponce Parties nor any of the Subsidiaries are subject to and have not been advised by the FRB, the OCC, or any other federal or state governmental authorities that it is considering issuing or requesting, any cease and desist order, written agreement, directive, memorandum of understanding or other regulatory enforcement actions, proceeding or order, commitment letter or similar undertaking (other than orders or directives applicable to the banking industry as a whole), supervisory letter or adoption of board resolutions. None of the Ponce Parties is in violation of any directive received from the OCC, the FRB, the SEC, or any other agency to make any material change in the method of conducting its business so as to comply in all material respects with all applicable statutes and regulations (including, without limitation, regulations, decisions, directives and orders of the OCC, the FRB and the SEC).

 

(t)

Except as described in the General Disclosure Package and the Prospectus, no suit or proceeding, charge, investigation or action before or by any court, regulatory authority or governmental agency or body is or will be pending or, to the knowledge of the Ponce Parties, threatened, which might materially and adversely affect the performance by the Ponce Parties of their obligations under this Agreement or the consummation of the transactions contemplated in the Plan and as described in the Prospectus, or which might result in a Material Adverse Effect or which is required to be disclosed in the Registration Statement, the Prospectus, or any Permitted Free Writing Prospectus and is not so disclosed. No Ponce Party has failed to file with applicable regulatory authorities any statement, report, information or form required by any applicable law, regulation or order, except where the failure to be so in compliance would not, individually or in the aggregate, have a Material Adverse Effect, all such filings were in material compliance with applicable laws when filed and no material deficiencies have been asserted by any regulatory commission, agency or authority with respect to any such filings or submissions.

 

(u)

The financial statements, schedules and notes related thereto which are included in the Registration Statement, General Disclosure Package and the Prospectus fairly present the balance sheet, statement of income, statement of comprehensive income, statement of changes in capital accounts and statement of cash flows of the Bank at the respective dates indicated and for the respective periods covered thereby and comply as to form in all material respects with the applicable accounting requirements of the 1933 Act Regulations and the MHC Regulations. Such financial statements, schedules and notes related thereto have been prepared in accordance with generally accepted accounting principles (“GAAP”)

 

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consistently applied through the periods involved, present fairly in all material respects the information required to be stated therein and are consistent with the most recent financial statements and other reports filed by the Bank with the OCC, and any other applicable regulatory authority, except that accounting principles employed in such regulatory filings conform to the requirements of such authorities and not necessarily to GAAP. The other financial, statistical and pro forma information and related notes included in the Prospectus and the General Disclosure Package present fairly the information shown therein on a basis consistent with the audited and unaudited financial statements of the Bank included in the Prospectus, and as to the pro forma adjustments, the adjustments made therein have been properly applied on the basis described therein.

 

(v)

The Ponce Parties and the Subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar industries. All policies of insurance insuring the Ponce Parties and the Subsidiaries or any of their respective businesses, assets, employees, officers and directors are in full force and effect, and the Ponce Parties and the Subsidiaries are in compliance with the terms of such policies in all material respects. No Ponce Party or Subsidiary has been refused any insurance coverage sought or applied for during the last four years; and no Ponce Party or Subsidiary has any reason to believe that they will not be able to renew their existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. None of the Ponce Parties or Subsidiaries has received notice from any insurer or agent of such insurer that substantial capital improvements or other expenditures shall have to be made in order to continue such insurance. There are no claims under any such policy or instrument as to which an insurance company is denying liability or defending under a reservation of rights clause where absence of coverage would have a Material Adverse Effect.

 

(w)

Since the respective dates as of which information is given in the Registration Statement, including the Prospectus and except as disclosed in the General Disclosure Package and the Prospectus: (i) no event resulting in a Material Adverse Effect has occurred, whether or not arising in the ordinary course of business; (ii) there has not been any material increase in the long-term debt of any of the Ponce Parties or in the principal amount of the Ponce Parties’ consolidated assets which are classified by any of such entities as impaired, substandard, doubtful or loss or in loans past due 90 days or more or real estate acquired by foreclosure, by deed-in-lieu of foreclosure or deemed in-substance foreclosure or any material decrease in equity capital or total assets of any of the Ponce Parties; nor has any of the Ponce Parties issued any securities (other than in connection with the incorporation of the Holding Company) or incurred any liability or obligation, direct or contingent, for borrowed money, except borrowings from the same or similar sources indicated in the Prospectus in the ordinary course of business; (iii) there have not been any material transactions entered into by the Ponce Parties; (iv) there has not been any material adverse change in the aggregate dollar amount of the Ponce Parties deposits or its capital accounts; (v) there has been no material adverse change in any of the Ponce Parties’ or Subsidiaries’ relationship with its insurance carriers, including, without limitation, cancellation or other termination of any of the Ponce Parties’ or Subsidiaries’ fidelity bond or any other type of insurance coverage; (vi) there has been no material change in management of any of the Ponce Parties; (vii) none of the Ponce Parties or Subsidiaries has sustained any material loss or interference with its respective business or properties from fire, flood, windstorm, earthquake, accident or other calamity, whether or not covered by insurance; (viii) none of the Ponce Parties has defaulted in the payment of principal or interest on any outstanding debt obligations; (ix) the capitalization, liabilities, assets, properties and business of the Ponce Parties conform in all material respects to the descriptions thereof contained in the General Disclosure Package and the Prospectus; and (x) none of the Ponce Parties has any material liabilities, contingent or otherwise, except as set forth in the Prospectus.

 

(x)

None of the Ponce Parties is in violation of their respective charters or bylaws (and none of the Ponce Parties will be in violation of its charter or bylaws upon completion of the Reorganization). The execution and delivery of this Agreement and the consummation of the transactions herein contemplated will not: (i) conflict with or constitute a breach of, or default (or an event which, with notice or lapse of time, or both, would constitute a breach or default) under, or result in the creation of any lien, charge or

 

11

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encumbrance upon any of the assets of any of the Ponce Parties pursuant to the respective charters or bylaws of the Ponce Parties or any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease, franchise, license, Permit or any other agreement or instrument in which the Ponce Parties has a beneficial interest, or any applicable law, rule, regulation or order; (ii) violate any authorization, approval, judgment, decree, order, statute, rule or regulation applicable to any of the Ponce Parties, except for such violations as would not have a Material Adverse Effect; or (iii) result in the creation of any lien, charge or encumbrance upon any property of the Ponce Parties or the Subsidiaries.

 

(y)

All documents made available or delivered by, or to be made available to or delivered by the Ponce Parties or their representatives in connection with the issuance and sale of the Shares and the contribution of the Foundation Shares, or in connection with the Agent’s exercise of due diligence, except for those documents which were prepared by parties other than the Ponce Parties or their representatives were on the dates on which they were delivered, or will be on the dates on which they are to be delivered, true, complete and correct in all material respects. The records used by the Ponce Parties to determine the identities of Eligible Account Holders, Supplemental Eligible Account Holders and Other Members are accurate and complete in all material respects.

 

(z)

Upon consummation of the Reorganization and the contribution of the Foundation Shares, the authorized, issued and outstanding equity capital of the Holding Company will be within the range set forth in the General Disclosure Package and the Prospectus under the caption “Capitalization,” and no Shares or Foundation Shares have been or will be issued and outstanding prior to the Closing Date, except that shares of Common Stock may be issued to the Bank for organizational purposes, which shares shall be cancelled on or prior to the Closing Date; the Shares and the Foundation Shares will have been duly and validly authorized for issuance and, with respect to the Shares when issued and delivered by the Holding Company pursuant to the Plan against payment of the consideration calculated as set forth in the Plan and in the Prospectus, will be duly and validly issued, fully paid and non-assessable, and with respect to the Foundation Shares, when contributed by the Holding Company pursuant to the Plan, will be duly and validly issued and fully paid and non-assessable; except to the extent that subscription rights and priorities pursuant thereto exist pursuant to the Plan, no preemptive rights exist with respect to the Shares; and the terms and provisions of the Shares and the Foundation Shares will conform in all material respects to the description thereof contained in the Registration Statement and the Prospectus. Upon the issuance of the Shares and the Foundation Shares, good title to the Shares and the Foundation Shares will be transferred from the Holding Company to the purchasers thereof against payment therefor, subject to such claims as may be asserted against the purchasers thereof by third-party claimants, or the Foundation, as applicable.

 

(aa)

No default exists, and no event has occurred which, with notice or lapse of time or both, would constitute a default, on the part of any of the Ponce Parties or Subsidiaries in the due performance and observance of any term, covenant, agreement, obligation, representation, warranty or condition of any indenture, mortgage, deed of trust, note, bank loan or credit agreement, lease, license, Permit or any other instrument or agreement to which the Ponce Parties or Subsidiaries or by which any of them or any of their respective property is bound or affected which, in any such case, could have, individually or in the aggregate with other breaches, violations or defaults, a Material Adverse Effect; each of such agreements is in full force and effect and is the legal, valid and binding agreement of the applicable Ponce Party or Subsidiary and, to the knowledge of the Ponce Parties, the other parties thereto, enforceable, in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally and subject to general principles of equity and no other party to any such agreement has instituted or, to the knowledge of the Ponce Parties, threatened any action or proceeding wherein any of the Ponce Parties or Subsidiaries would or might be alleged to be in default thereunder where such action or proceeding, if determined adversely to the Ponce Parties, would have a Material Adverse Effect. There are no contracts or documents that are required to be filed as exhibits to the Registration Statement or described in the Registration Statement, the Prospectus, the General Disclosure Package or any Permitted Free Writing Prospectus which are not so filed or described as required, and such contracts and documents as are summarized in the Registration Statement, the Prospectus, the General Disclosure Package and any Permitted Free Writing Prospectus are fairly summarized in all material respects. No party has sent or received any notice indicating the

 

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termination of or intention to terminate any of the contracts or agreements referred to or described in the Registration Statement, the Prospectus, the General Disclosure Package or any Permitted Free Writing Prospectus, or filed as an exhibit to the Registration Statement, and, to the knowledge of the Ponce Parties, no such termination has been threatened by any party to any such contract or agreement.

 

(bb)

Subsequent to the date the Registration Statement is declared effective by the SEC and prior to the Closing Date, except as otherwise may be indicated or contemplated in the Registration Statement, none of the Ponce Parties has or will have issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, except borrowings from the same or similar sources indicated in the Prospectus in the ordinary course of its business.

 

(cc)

Except for the Ponce De Leon Federal Bank 401(k) Profit Sharing Plan and the Ponce De Leon Federal Bank Defined Benefit Pension Plan, none of the Ponce Parties or Subsidiaries maintains any “pension plan,” as defined in the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). In addition, (A) the employee benefit plans, including employee welfare benefit plans, of the Ponce Parties and the Subsidiaries (the “Employee Plans”) have been operated in compliance with the applicable provisions of ERISA, the Internal Revenue Code of 1986, as amended (the “Code”), all regulations, rulings and announcements promulgated or issued thereunder and all other applicable laws and governmental regulations, (B) no reportable event under Section 4043(c) of ERISA has occurred with respect to any Employee Plan of the Ponce Parties for which the reporting requirements have not been waived by the Pension Benefit Guaranty Corporation, (C) no prohibited transaction under Section 406 of ERISA, for which an exemption does not apply, has occurred with respect to any Employee Plan of the Ponce Parties and (D) all Employee Plans that are group health plans have been operated in compliance with the group health plan continuation coverage requirements of Section 4980B of the Code, except to the extent such noncompliance, reportable event or prohibited transaction would not have, individually or in the aggregate, a Material Adverse Effect. There are no pending or, to the knowledge of the Ponce Parties, threatened, claims by or on behalf of any Employee Plan, by any employee or beneficiary covered under any such Employee Plan or by any governmental authority, or otherwise involving such Employee Plans or any of their respective fiduciaries (other than for routine claims for benefits).

 

(dd)

No approval of any regulatory or supervisory or other public authority is required in connection with the execution and delivery of this Agreement, or the issuance of the Shares and the Foundation Shares, except for the approval of the FRB, the OCC, the FDIC and the SEC, and any necessary qualification, notification, registration or exemption under the securities or blue sky laws of the various states in which the Shares are to be offered, and except as may be required under the rules and regulations of FINRA.

 

(ee)

Mazars USA LLP, which has certified the audited financial statements of the Bank included in the Prospectus, has advised the Ponce Parties in writing that they are, with respect to the Ponce Parties, independent certified public accountants as required by the Code of Professional Ethics of the American Institute of Certified Public Accountants, the applicable rules of the Public Company Accounting Oversight Board (United States) (“PCAOB”) and the SEC and the FRB, they are registered with the PCAOB and such firm is not, with respect to the Ponce Parties, in violation of the auditor independence requirements of the Sarbanes Oxley Act of 2002 and the rules and regulations promulgated in connection therewith (“Sarbanes-Oxley Act”).

 

(ff)

RP Financial LC., which has prepared the Appraisal, has advised the Bank in writing that it is independent of the Ponce Parties within the meaning of the MHC Regulations and is believed by the Ponce Parties to be experienced and expert in the valuation and the appraisal of business entities, including savings institutions, and the Ponce Parties believe that RP Financial LC. has prepared the Appraisal information set forth in the Prospectus in accordance with the requirements of the MHC Regulations.

 

(gg)

The Ponce Parties and the Subsidiaries have timely filed or extended all required federal, state and local tax returns; the Ponce Parties have paid all taxes that have become due and payable in respect of such returns, except where permitted to be extended or where such taxes may be contested in good faith, have made adequate reserves for similar future tax liabilities and no deficiency has been asserted with respect

 

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thereto by any taxing authority. The Ponce Parties have no knowledge of any tax deficiency which has been or might be assessed against any of them or Subsidiaries which, if the subject of an unfavorable decision, ruling or finding, could have, individually or in the aggregate with other tax deficiencies, a Material Adverse Effect. All material tax liabilities have been adequately provided for in the financial statements of the Ponce Parties in accordance with GAAP. There are no transfer taxes or other similar fees or charges under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement by the Holding Company or with the issuance, sale or contribution by the Holding Company of the Shares and the Foundation Shares.

 

(hh)

The operations of each of the Ponce Parties are and have been conducted at all times in compliance in all material respects with the anti-money laundering statutes of applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any applicable governmental agency (collectively, the “Anti-Money Laundering Laws”) and to their knowledge, no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Ponce Parties with respect to the Anti-Money Laundering Laws is pending or, to the knowledge of the Ponce Parties, threatened.

 

(ii)

No labor dispute with the employees of the Ponce Parties exists or, to the knowledge of the Ponce Parties, is threatened, and, to the knowledge of the Ponce Parties, there are no existing or threatened labor disturbance by the employees of any of its or any subsidiaries’ principal customers or contractors, which, in either case, may reasonably be expected to result in a Material Adverse Effect.

 

(jj)

No Ponce Party or any director, officer or employee of the Ponce Parties nor, to the knowledge of the Ponce Parties, any agent, affiliate or other person associated with or acting on behalf of the Ponce parties has (a) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (b) made or taken an act in furtherance of an offer, promise or authorization of any direct or indirect unlawful payment or benefit to any foreign or domestic government official or employee, including of any government-owned or controlled entity or of a public international organization, or any person acting in an official capacity for or on behalf of any of the foregoing, or any political party or party official or candidate for political office; (c) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977, as amended, or any applicable law or regulation implementing the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, or committed an offence under the Bribery Act 2010 of the United Kingdom or any other applicable anti-bribery or anti-corruption law; or (d) made, offered, agreed, requested or taken an act in furtherance of any unlawful bribe or other unlawful benefit, including, without limitation, any rebate, payoff, influence payment, kickback or other unlawful or improper payment or benefit. The Bank has instituted, maintains and enforces, and the Company, the Bank and the MHC will continue to maintain and enforce policies and procedures designed to promote and ensure compliance with all applicable anti-bribery and anti-corruption laws.

 

(kk)

None of the Ponce Parties has: (i) issued any securities within the last 18 months (except for notes to evidence bank loans and reverse repurchase agreements or other liabilities in the ordinary course of business or as described in the Prospectus); (ii) had any dealings within the 12 months prior to the date hereof with any member of FINRA, or any person related to or associated with such member, other than discussions and meetings relating to the proposed Offering and routine purchases and sales of United States government and agency and other securities in the ordinary course of business; (iii) entered into a financial or management consulting agreement except as contemplated hereunder; and (iv) engaged any intermediary between the Agent and the Holding Company or the Bank in connection with the offering of the Shares, and no person is being compensated in any manner for such service. The Ponce Parties have not relied upon the Agent or its legal counsel for any legal, tax or accounting advice in connection with the Reorganization. There are no affiliations or associations (as such terms are defined by the FINRA) between any member of FINRA and any of the Ponce Parties’ officers or directors.

 

(ll)

The Ponce Parties own, or possess adequate rights to use, all patents, copyrights, trademarks, service marks, trade names and other rights necessary to conduct the businesses now conducted by them in all material respects or as described in the Prospectus and any Permitted Free Writing Prospectus and no

 

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Ponce Party has received any written notice or has any knowledge of infringement or conflict with asserted rights of others or of any facts or circumstances which would render invalid or inadequate to protect the rights of the Ponce Parties with respect to any patents, copyrights, trademarks, service marks, trade names or other rights which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect, and, to the knowledge of the Ponce Parties, there is no basis for any such infringement or conflict which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could have a Material Adverse Effect.

 

(mm)

Except as has not had and would not reasonably be expected to have a Material Adverse Effect:

 

(i)

The Bank has complied in all material respects with, and all documentation in connection with the origination, processing, underwriting and credit approval of any mortgage loan originated, purchased or serviced by the Bank satisfied, (A) all applicable federal and state laws, rules and regulations with respect to the origination, insuring, purchase, sale, pooling, servicing, subservicing, or filing of claims in connection with mortgage loans, including all laws relating to real estate settlement procedures, consumer credit protection, truth in lending laws, usury limitations, fair housing, transfers of servicing, collection practices, equal credit opportunity and adjustable rate mortgages, (B) the responsibilities and obligations relating to mortgage loans set forth in any agreement between the Ponce Parties and any Agency, Loan Investor or Insurer, (C) the applicable rules, regulations, guidelines, handbooks and other requirements of any Agency, Loan Investor or Insurer and (D) the terms and provisions of any mortgage or other collateral documents and other loan documents with respect to each mortgage loan; and

 

(ii)

No Agency, Loan Investor or Insurer has (A) notified the Bank in writing that the Bank has violated or has not complied with the applicable underwriting standards with respect to mortgage loans sold by the Bank to a Loan Investor or Agency, or with respect to any sale of mortgage servicing rights to a Loan Investor, (B) imposed in writing restrictions on the activities (including commitment authority) of the Bank or (C) indicated in writing to the Bank that it has terminated or intends to terminate its relationship with the Bank for poor performance, poor loan quality or concern with respect to the Bank compliance with laws.

 

For purposes of this Section 4.1(ll): (A) “Agency” means the Federal Housing Administration, the Federal Home Loan Mortgage Corporation, the Farmers Home Administration (now known as Rural Housing and Community Development Services), the Federal National Mortgage Association, the United States Department of Veterans’ Affairs, the Rural Housing Service of the U.S. Department of Agriculture or any other federal or state agency with authority to (i) determine any investment, origination, lending or servicing requirements with regard to mortgage loans originated, purchased or serviced by the Bank or (ii) originate, purchase, or service mortgage loans, or otherwise promote mortgage lending, including state and local housing finance authorities; (B) “Loan Investor” means any person (including an Agency) having a beneficial interest in any mortgage loan originated, purchased or serviced by the Ponce Parties or a security backed by or representing an interest in any such mortgage loan; and (Z) “Insurer” means a person who insures or guarantees for the benefit of the mortgagee all or any portion of the risk of loss upon borrower default on any of the mortgage loans originated, purchased or serviced by the Company or the Bank, including the Federal Housing Administration, the United States Department of Veterans’ Affairs, the Rural Housing Service of the U.S. Department of Agriculture and any private mortgage insurer, and providers of hazard, title or other insurance with respect to such mortgage loans or the related collateral.

 

(nn)

None of the Ponce Parties is, and neither intends to conduct business in a manner which would cause it to become, an “investment company,” an entity “controlled” by an “investment company” or an “investment adviser” within the meaning of the Investment Company Act of 1940, as amended, or the Investment Advisers Act of 1940, as amended.

 

(oo)

None of the Ponce Parties or Subsidiaries or any properties owned or operated by any of the Ponce Parties or Subsidiaries, is in violation of or liable under any Environmental Law (as defined below), except for such violations or liabilities that, individually or in the aggregate, would not have a Material

 

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Adverse Effect. There are no actions, suits or proceedings, or demands, claims, notices or investigations (including, without limitation, notices, demand letters or requests for information from any environmental agency) instituted or pending or, to the knowledge of the Ponce Parties, threatened relating to the liability of any property owned or operated by the Ponce Parties or Subsidiaries under any Environmental Law. To the knowledge of the Ponce Parties, there are no events or circumstances that could form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Ponce Parties relating to any Environmental Law. For purposes of this subsection, the term “Environmental Law” means any federal, state, local or foreign law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any regulatory authority relating to (i) the protection, preservation or restoration of the environment (including, without limitation, air, water, vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any other natural resource), and/or (ii) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, whether by type or by quantity, including any material containing any such substance as a component.

 

(pp)

The Ponce Parties maintain a system of internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with management’s general or specific authorizations, (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (C) access to assets is permitted only in accordance with management’s general or specific authorization, and (D) the recorded accounts or assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. To the knowledge of the Ponce Parties, Mazars USA LLP and the Audit Committee of the Board of Directors have been advised of: (A) any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which could adversely affect the Holding Company’s and the Bank’s ability to record, process, summarize, and report financial data; and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Holding Company’s or the Bank’s internal accounting controls.

 

(qq)

All of the loans represented as assets of the Ponce Parties in the Prospectus meet or are exempt from all requirements of federal, state and local law pertaining to lending, including, without limitation, truth in lending (including the requirements of Regulation Z and 12 C.F.R. Parts 226 and 1026), real estate settlement procedures, consumer credit protection, equal credit opportunity and all disclosure laws applicable to such loans, except for violations which, if asserted, would not have a Material Adverse Effect. All such loans secured by dwellings constitute qualified mortgages within the meaning of 12 C.F.R. § 1026.43.

 

(rr)

All of the information, as may have been updated or amended, provided to the Agent or to counsel for the Agent by the Ponce Parties and their respective officers and directors in connection with letters, filings or other supplemental information provided to FINRA pursuant to FINRA Rules 5110 and 5121 is true, complete and correct.

 

(ss)

The Ponce Parties have taken all actions necessary to obtain on the Closing Date a Blue Sky Memorandum from Locke Lord LLP which sets forth those states in which the Shares are registered or qualified for sale, or exempt from any such registration or qualification of sale.

 

(tt)

Other than as contemplated by this Agreement, there is no broker, finder or other party that is entitled to receive from the Ponce Parties any brokerage or finder’s fee or any other fee, commission or payment as a result of the transactions contemplated by this Agreement.

 

(uu)

The statistical and market related data contained in any Permitted Free Writing Prospectus, the Prospectus and the Registration Statement are based on or derived from sources which the Ponce Parties believe were reliable and accurate at the time they were filed with the SEC. No forward-looking statement (within the meaning of Section 27A of the 1933 Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”)) contained in the Registration Statement, the Prospectus, or any Permitted Free Writing Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.

 

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(vv)

To the knowledge of the Ponce Parties, with the exception of the intended loan to the Bank’s ESOP by the Company to enable the ESOP to purchase Shares in an amount up to 3.92% of the Common Stock that will be outstanding following the Reorganization, including the contribution of the Foundation Shares, none of the Ponce Parties or their employees has made any payment of funds of the Ponce Parties as a loan for the purchase of the Common Stock or made any other payment of funds prohibited by law, and no funds have been set aside to be used for any payment prohibited by law.

 

(ww)

The Company has submitted or will have submitted prior to Closing Date all notices required to consummate the Reorganization and to have the Shares and the Foundation Shares listed on the Nasdaq Global Market effective as of the Closing Date referred to in Section 2 hereof.

 

(xx)

At or prior to the Closing Time, the Company will have filed a Form 8-A for the Securities to be registered under Section 12(g) of the Exchange Act (the “Exchange Act Registration Statement”).

 

(yy)

The Holding Company is in compliance with the applicable provisions of the Sarbanes-Oxley Act, the rules and regulations of the Commission thereunder, and the Nasdaq corporate governance rules applicable to the Company, and will use its best efforts to comply with those provisions of the Sarbanes-Oxley Act and the Nasdaq corporate governance rules that will become effective in the future upon their effectiveness.

 

(zz)

Neither any of the Ponce Parties nor any director, officer, employee or, to the knowledge of the Ponce Parties, after due inquiry, agent or affiliate thereof is (a) currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”) or relevant sanctioning authority; (b) located, organized or resident in a country or territory that is the subject of such sanctions (including, without limitation, Burma/Myanmar, Cuba, Iran, North Korea, Sudan and Syria); and (c) the Holding Company will not, directly or indirectly, use the proceeds of the Offerings, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person, or engage in dealings or transactions with any person, or in any country, or territory, subject to any U.S. sanctions administered by OFAC or relevant sanctioning authority.

 

(aaa)

Neither any of the Ponce Parties nor any of their affiliates does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Section 517.075, Florida Statutes. For purposes of this subsection, “affiliate” means a person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Holding Company or the Bank.

 

(bbb)

The Foundation has been duly authorized and incorporated and is validly existing as a non-stock corporation in good standing under the laws of the State of Delaware with corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; the Foundation will not be a savings and loan holding company within the meaning of 12 C.F.R. Section 238.2 as a result of the issuance of shares of Common Stock to it in accordance with the terms of the Plan and in the amounts as described in the Prospectus; no regulatory approvals are required to establish the Foundation and to contribute the shares of Common Stock thereto as described in the Prospectus other than those obtained from the FRB; except as specifically disclosed in the Prospectus, there are no agreements and/or understandings, written or oral, between the Holding Company and the Bank on the one hand and the Foundation, on the other, with respect to the control, directly or indirectly, over the voting and the acquisition or disposition of the Foundation Shares; at the Closing Time, the Foundation Shares will have been duly authorized for issuance and, when issued and contributed by the Company pursuant to the Plan, will be duly and validly issued and fully paid and nonassessable. The issuance of the Foundation Shares to the Foundation pursuant to the Plan has been registered under the Securities Act pursuant to the Registration Statement.

 

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(ccc)

Any certificates signed by an officer of any of the Ponce Parties pursuant to the conditions of this Agreement and delivered to the Agent or their counsel that refers to this Agreement shall be deemed to be a representation and warranty by such Ponce Party to the Agent as to the matters covered thereby with the same effect as if such representation and warranty were set forth herein.

Section 5. Representations and Warranties of the Agent. The Agent represents and warrants to the Ponce Parties as follows:

 

(a)

The Agent is a corporation and is validly existing in good standing under the laws of the State of Maryland with full power and authority to provide the services to be furnished to the Ponce Parties hereunder. The Agent is registered as a broker-dealer with the SEC and is a member of FINRA.

 

(b)

Any funds received by the Agent to purchase Shares in the Syndicated Community Offering will be handled in accordance with Rule 15c2-4 under the 1934 Act, to the extent applicable.

 

(c)

With respect to certain non-public information about the Bank’s depositors and customers (“Customer Information”) that the Agent may be provided access to in connection with providing services under this Agreement, the Agent shall: (i) use Customer Information only as necessary to perform its obligations pursuant to this Agreement or as permitted by the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”), and OCC policies thereunder and other applicable law, all as may be amended from time to time; (ii) not disclose Customer Information to any third party, except to other third party service providers assisting the Bank with the Offering and the Reorganization or the Agent with respect to its obligations under this Agreement, unless the Bank has consented in writing to the disclosure or the Bank has confirmed that such disclosure is permissible pursuant to applicable law; and (iii) adopt reasonably appropriate measures to protect against unauthorized access to or use of the Customer Information in its control that could result in substantial harm or inconvenience to any customer of the Bank.

 

(d)

Each of the Agent and its employees, agents and representatives who shall perform any of the services hereunder shall be duly authorized and empowered, and shall have all licenses, approvals and permits necessary to perform such services; and the Agent is a registered selling agent in each of the jurisdictions in which the Shares are to be offered by the Holding Company in reliance upon the Agent as a registered selling agent as set forth in the blue sky memorandum prepared with respect to the Offering.

 

(e)

No approval of any regulatory or supervisory or other public authority is required in connection with the Agent’s execution and delivery of this Agreement, except as may have been received.

 

(f)

There is no suit or proceeding or charge or action pending before or by any court, regulatory authority or government agency or body or, to the knowledge of the Agent, threatened, which might materially adversely affect the Agent’s performance under this Agreement.

 

(g)

The execution and delivery of this Agreement by the Agent, the consummation of the transactions contemplated hereby and compliance with the terms and provisions hereof will not conflict with, or result in a breach of, any of the terms, provisions or conditions of, or constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, the articles of incorporation or bylaws of the Agent or any agreement, indenture or other instrument to which the Agent is a party or by which it or its property is bound.

 

(h)

The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action on the part of the Agent, and this Agreement has been duly and validly executed and delivered by the Agent and is a legal, valid and binding agreement of the Agent, enforceable in accordance with its terms, except as the legality, validity, binding nature and enforceability thereof may be limited by (i) bankruptcy, insolvency, moratorium, reorganization, conservatorship, receivership or other similar laws relating to or affecting the enforcement of creditors’ rights generally, and (ii) general equity principles regardless of whether such enforceability is considered in a proceeding in equity or at law.

 

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Section 6. Covenants of the Ponce Parties. The Ponce Parties hereby jointly and severally covenant and agree with the Agent as follows:

 

(a)

The Ponce Parties will not, after the date of effectiveness or approval, as applicable, file any amendment or supplement to the Registration Statement, the Prospectus or any Reorganization Application without written notice to the Agent of their intention to do so and providing the Agent and its counsel an opportunity to review such amendment or supplement, nor will any Ponce Party file any such amendment or supplement to which the Agent shall reasonably object.

 

(b)

If at any time following issuance of an Issuer-Represented Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer Represented Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in light of the circumstances prevailing at the subsequent time, not misleading, the Ponce Parties will notify promptly the Agent so that any use of such Issuer-Represented Free Writing Prospectus may cease until it is amended or supplemented and the Holding Company will promptly amend or supplement such Issuer-Represented Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission; provided, however, that this covenant shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Ponce Parties by the Agent expressly for use therein.

 

(c)

Each of the Ponce Parties represents and agrees that, unless it obtains the prior consent of the Agent, and the Agent represents and agrees that, unless it obtains the prior consent of the Ponce Parties, it has not made and will not make any offer relating to the Shares that would constitute an “issuer free writing prospectus” as defined in Rule 433 of the 1933 Act Regulations, or that would constitute a “free writing prospectus,” as defined in Rule 405 of the 1933 Act Regulations, required to be filed with the SEC. The Ponce Parties represent that they have treated or agree that they will treat each Permitted Free Writing Prospectus as an “issuer free writing prospectus,” as defined in Rule 433 of the 1933 Act Regulations, and has complied and will comply in all material respects with the requirements of Rule 433 of the 1933 Act Regulations applicable to any Permitted Free Writing Prospectus, including timely SEC filing where required, legending and record keeping. The Ponce Parties need not treat any communication as a free writing prospectus if it is exempt from the definition of prospectus pursuant to clause (a) of Section 2(a)(10) of the 1933 Act without regard to Rule 172 or 173 of the 1933 Act Regulations.

 

(d)

The Ponce Parties will use their best efforts to cause any post-effective amendment to the Registration Statement to be declared effective by the SEC and any post-approval amendment to the MHC Notice and/or the Holding Company Application to be approved by the FRB, any post-approval amendment to the OCC Applications to be approved by the OCC and any post-approval amendment to the FDIC Application to be approved by the FDIC and will immediately upon receipt of any information concerning the events listed below notify the Agent: (i) when the Registration Statement, as amended, has become effective; (ii) when the MHC Notice and/or Holding Company Application have been approved by the FRB, when the OCC Applications have been approved by the OCC, when the FDIC Application has been approved by the FDIC; (iii) of any comments from the SEC, the FRB, the OCC, the FDIC or any other governmental entity with respect to the Reorganization contemplated by this Agreement; (iv) of the request by the SEC, the FRB, the OCC, the FDIC or any other governmental entity for any amendment or supplement to the Registration Statement, the MHC Notice, the Holding Company Application, the OCC Applications, the FDIC Application or for additional information; (v) of the issuance by the SEC, the FRB, the OCC or any other governmental entity of any order or other action suspending the Reorganization or the use of the Registration Statement or the Prospectus or any other filing of the MHC, Holding Company or the Bank under the MHC Regulations, or other applicable law, or the threat of any such action; (vi) of the issuance by the SEC, the FRB, the OCC, the FDIC or any authority of any stop order suspending the effectiveness of the Registration Statement or of the initiation or threat of initiation or threat of any proceedings for that purpose; or (vii) of the occurrence of any event mentioned in paragraph (h) below. The Ponce Parties will make every reasonable effort (i) to prevent the issuance by the SEC, the FRB or any other regulatory authority of any such order and (ii) if any such order shall at any time be issued, to obtain the lifting thereof at the earliest possible time. The Ponce Parties will provide copies of the foregoing comments, requests and orders to the Agent upon receipt of such items.

 

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(e)

The Ponce Parties will deliver to the Agent and to its counsel two conformed copies of the Registration Statement, the MHC Notice, the Holding Company Application, the OCC Applications and the FDIC Application, as originally filed and of each amendment or supplement thereto, including all exhibits. Further, the Ponce Parties will deliver such additional copies of the foregoing documents to counsel to the Agent as may be required for any FINRA filings. In addition, the Ponce Parties will also promptly deliver to the Agent such number of copies of the closing documents with respect to the Reorganization and the Offering as the Agent may reasonably request.

 

(f)

The Holding Company and the Bank will furnish to the Agent, from time to time during the period when the Prospectus (or any later prospectus related to this offering) is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of such Prospectus (as amended or supplemented) as the Agent may reasonably request for the purposes contemplated by the 1933 Act, the 1933 Act Regulations, the 1934 Act or the rules and regulations promulgated under the 1934 Act (the “1934 Act Regulations”), state securities laws or regulations or applicable rules of any other governmental entity. The Ponce Parties authorize the Agent to use the Prospectus (as amended or supplemented, if amended or supplemented) in any lawful manner contemplated by the Plan in connection with the sale of the Shares by the Agent.

 

(g)

The Ponce Parties will comply with any and all material terms, conditions, requirements and provisions with respect to the Reorganization and the Offering imposed by the SEC, the FRB, the OCC, the FDIC, the MHC Regulations or the Control Act Regulations, and by the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations to be complied with prior to or subsequent to the Closing Date and when the Prospectus is required to be delivered, and during such time period the Ponce Parties will comply, at their own expense, with all material requirements imposed upon them by the SEC, the FRB, the OCC, the FDIC, the MHC Regulations or the Control Act Regulations, and by the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations, including, without limitation, Rule 10b-5 under the 1934 Act, in each case as from time to time in force, so far as necessary to permit the continuance of sales or dealing in the Shares during such period in accordance with the provisions hereof and the Prospectus. The Holding Company will comply in all material respects with all undertakings contained in the Registration Statement.

 

(h)

If, at any time during the period when the Prospectus is required to be delivered, any event relating to or affecting any of the Ponce Parties shall occur, as a result of which it is necessary or appropriate, in the opinion of counsel for the Holding Company and in the reasonable opinion of the Agent’s counsel, to amend or supplement the Registration Statement or Prospectus in order to make the Registration Statement or Prospectus not misleading in light of the circumstances existing at the time the Prospectus is delivered to a purchaser, the Holding Company will immediately so inform the Agent and prepare and file, at its own expense, with the SEC, and the FRB, and furnish to the Agent a reasonable number of copies, of an amendment or amendments of, or a supplement or supplements to, the Registration Statement or Prospectus (in form and substance reasonably satisfactory to the Agent and its counsel after a reasonable time for review) which will amend or supplement the Registration Statement or Prospectus so that as amended or supplemented it will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading. For the purpose of this Agreement, the Holding Company will timely furnish to the Agent such information with respect to the Ponce Parties as the Agent may from time to time reasonably request.

 

(i)

The Ponce Parties will take all necessary actions in cooperating with the Agent and furnish to whomever the Agent may direct such information as may be required to qualify or register the Shares and the Foundation Shares, to the extent applicable, for offering and sale by the Holding Company or to exempt such Shares from registration, or to exempt the Holding Company as a broker-dealer and its officers, directors and employees as broker-dealers or agents under the applicable securities or blue sky laws of

 

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such jurisdictions in which the Shares are required under the MHC Regulations to be sold or as the Agent and the Holding Company may reasonably agree upon; provided, however, that the Holding Company shall not be obligated to file any general consent to service of process, to qualify to do business in any jurisdiction in which it is not so qualified, or to register its directors or officers as brokers, dealers, salesmen or agents in any jurisdiction. In each jurisdiction where any of the Shares shall have been qualified or registered as above provided, the Holding Company will make and file such statements and reports in each fiscal period as are or may be required by the laws of such jurisdiction.

 

(j)

The Holding Company will not sell or issue, contract to sell or otherwise dispose of, for a period of 90 days after the Closing Date, without the Agent’s prior written consent, any of its shares of common stock, other than the Shares and the Foundation Shares or other than in connection with any plan or arrangement described in the Prospectus.

 

(k)

The Holding Company will register its common stock under Section 12(g) of the 1934 Act. The Holding Company shall maintain the effectiveness of such registration for not less than three years from the time of effectiveness. For three years, the Holding Company will use its best efforts to effect and maintain the listing of the Common Stock on the Nasdaq Global Market and, once listed on the Nasdaq Global Market, the Company will comply with all applicable listing standards required by the Nasdaq Stock Market.

 

(l)

During the period during which the Common Stock is registered under the 1934 Act or for three years from the date hereof, whichever period is greater, the Holding Company will furnish to its stockholders as soon as practicable after the end of each fiscal year an annual report of the Holding Company (including a consolidated balance sheet and statements of consolidated income, stockholders’ equity and cash flows of the Holding Company and its subsidiaries as at the end of and for such year, certified by independent registered public accountants in accordance with Regulation S-X under the 1933 Act and the 1934 Act) and make available as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the first fiscal quarter ending after the effective time of the Registration Statement) financial information of the Holding Company and its subsidiaries for such quarter in reasonable detail.

 

(m)

During the period of three years from the date hereof, the Holding Company will furnish to the Agent: (i) as soon as practicable after such information is publicly available, a copy of each report of the Holding Company furnished to or filed with the SEC under the 1934 Act or any national securities exchange or system on which any class of securities of the Holding Company is listed or quoted (including, but not limited to, reports on Forms 10-K, 10-Q and 8-K and all proxy statements and annual reports to stockholders); provided, however, that for purposes of this requirement, documents filed electronically on the SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) System shall be deemed to be delivered to the Agent upon filing with the SEC: (ii) a copy of each other non-confidential report of the Holding Company mailed to its stockholders or filed with the SEC, the OCC, the FRB or any other supervisory or regulatory authority or any national securities exchange or system on which any class of securities of the Holding Company is listed or quoted, each press release and material news items and additional documents and information with respect to the Holding Company or the Bank as the Agent may reasonably request; and (iii) from time to time, such other nonconfidential information concerning the Holding Company or the Bank as the Agent may reasonably request.

 

(n)

The Holding Company and the Bank will use the net proceeds from the sale of the Shares in the manner set forth in the Prospectus under the caption “How We Intend to Use the Proceeds from the Offering.”

 

(o)

The Holding Company will make generally available to its security holders as soon as practicable, but not later than 60 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 of the 1933 Act Regulations) covering a twelve-month period beginning not later than the first day of the Holding Company’s fiscal quarter next following the effective date (as defined in such Rule 158) of the Registration Statement.

 

(p)

The Holding Company shall notify the Agent when funds shall have been received for the minimum number of Shares set forth in the Prospectus.

 

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(q)

The Ponce Parties will maintain appropriate arrangements for depositing all funds received from persons mailing or delivering subscriptions for or orders to purchase Shares in the Offering with the Bank, on an interest-bearing basis at the rate described in the Prospectus until the Closing Date and satisfaction of all conditions precedent to the release of the Holding Company’s or the Bank’s obligation to refund payments received from persons subscribing for or ordering Shares in the Offering in accordance with the Plan and as described in the Prospectus or until refunds of such funds have been made to the persons entitled thereto or withdrawal authorizations canceled in accordance with the Plan and as described in the Prospectus. The Bank will maintain such records of all funds received to permit the funds of each subscriber to be separately insured by the FDIC (to the maximum extent allowable) and to enable the Holding Company to make the appropriate refunds of such funds in the event that such refunds are required to be made in accordance with the Plan and as described in the Prospectus.

 

(r)

The Holding Company will report the use of proceeds of the Offering in accordance with Rule 463 under the 1933 Act.

 

(s)

The Holding Company and the MHC will promptly take all necessary action to each register as a savings and loan holding company under the HOLA within the time period required by applicable law.

 

(t)

The Ponce Parties will take such actions and furnish such information as are reasonably requested by the Agent in order for the Agent to ensure compliance with FINRA Rules 5130 and 5131.

 

(u)

None of the Ponce Parties will amend the Plan without notifying the Agent and the Agent’s counsel prior thereto.

 

(v)

The Holding Company shall assist the Agent, if necessary, in connection with the allocation of the Shares in the event of an oversubscription and shall provide the Agent with any information necessary to assist the Holding Company in allocating the Shares in such event and such information shall be accurate and reliable in all material respects.

 

(w)

Prior to the Closing Date, the Holding Company and the Bank will inform the Agent of any event or circumstances of which either is aware as a result of which the Registration Statement and/or Prospectus, as then amended or supplemented, would contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading.

 

(x)

The Holding Company will not deliver the Shares or the Foundation Shares until the Ponce Parties have satisfied or caused to be satisfied each condition set forth in Section 8 hereof, unless such condition is waived in writing by the Agent.

 

(y)

Subsequent to the date the Registration Statement is declared effective by the SEC and prior to the Closing Date, except as otherwise may be indicated or contemplated therein or set forth in an amendment or supplement thereto, none of the Ponce Parties will have: (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, except borrowings from the same or similar sources indicated in the Prospectus in the ordinary course of its business, or (ii) entered into any transaction which is material in light of the business and properties of the Ponce Parties, taken as a whole.

 

(z)

Until the Closing Date, the Ponce Parties will conduct their businesses in compliance in all material respects with all applicable federal and state laws, rules, regulations, decisions, directives and orders, including all decisions, directives and orders of the SEC, the OCC, the FDIC and the FRB.

 

(aa)

The facts and representations provided to Locke Lord LLP by the Ponce Parties and upon which Locke Lord will base its opinion under Section 8(c) are and will be truthful, accurate and complete.

 

(bb)

Other than as permitted by the MHC Regulations, the 1933 Act, the 1933 Act Regulations and the laws of any jurisdiction in which the Shares are qualified for sale, the Ponce Parties will not distribute any offering material in connection with the Offering except for the Prospectus and the Sales Information that has been filed with the Registration Statement and the MHC Application and authorized for use by the SEC and the FRB. The Sales Information shall not conflict in any material respect with the information contained in the Registration Statement and the Prospectus.

 

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(cc)

The Holding Company will comply in all material respects with all applicable provisions of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act and all applicable rules, regulations, guidelines and interpretations promulgated thereunder by any governmental entity having jurisdiction over the Holding Company.

 

(dd)

The Ponce Parties will not, prior to the Closing Date, incur any liability or obligation, direct or contingent, or enter into any material transaction, other than in the ordinary course of business consistent with past practice, except as contemplated by the Prospectus.

 

(ee)

Prior to the Closing Date, the Holding Company will establish and maintain “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the 1934 Act) that are designed to ensure that the information it will be required to disclose in the reports it files or submits under the 1934 Act is accumulated and communicated to the Holding Company’s management (including the Holding Company’s chief executive officer and chief financial officer) in a timely manner and recorded, processed, summarized and reported within the periods specified in the SEC’s rules and forms. The books, records and accounts and systems of internal accounting control of the Ponce Parties and its subsidiaries will comply in all material respects with the requirements of the 1934 Act.

 

(ff)

During the period when the Prospectus is required to be delivered, the Holding Company and the Bank will comply, at their own expense, with all requirements imposed upon them by the FRB, by the applicable MHC Regulations, as from time to time in force, and by the Nasdaq Stock Market, the 1933 Act, the 1933 Act Regulations, the 1934 Act, and the 1934 Act Regulations, including, without limitation, Regulation M under the 1934 Act, so far as necessary to permit the continuance of sales or dealing in shares of Common Stock during such period in accordance with the provisions hereof and the Prospectus.

 

(gg)

The Ponce Parties will take all necessary action, in cooperation with the Agent, to qualify the Shares for offering and sale under the applicable securities laws of such states of the United States and other jurisdictions as the MHC Regulations may require and as the Agent and the Holding Company have agreed; provided, however, that none of the Ponce Parties shall be obligated to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified. In each jurisdiction in which the Shares have been so qualified, the Holding Company and the Bank will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement.

 

(hh)

The Holding Company authorizes the Agent and any selected dealer to act as agents of the Holding Company in distributing the Prospectus to persons entitled to receive subscription rights and other persons to be offered Shares having record addresses in the states or jurisdictions set forth in a survey of the securities or “blue sky” laws of the various jurisdictions in which the Offering will be made.

 

(ii)

The Ponce Parties will promptly inform the Agent upon its receipt of service with respect to any material litigation or administrative action instituted with respect to the Reorganization, the contribution of the Foundation Shares or the Offering.

 

(jj)

The Ponce Parties will use all reasonable efforts to comply with, or cause to be complied with, the conditions precedent to the several obligations of the Agent specified in Section 8.

 

(kk)

The Ponce Parties shall use their best efforts to ensure that the Foundation submits within the time frames required by applicable law a request to the Internal Revenue Service to be recognized as a tax-exempt organization under Section 501(c)(3) of the Code; the Ponce Parties will take no action which may reasonably be expected to result in the possible loss of the Foundation’s tax-exempt status; and none of the Ponce Parties will contribute any additional assets to the Foundation until such time that such additional contributions will be deductible for federal and state income tax purposes.

 

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Section 7. Payment of Expenses. Whether or not the Reorganization is completed or the sale of the Shares by the Holding Company is consummated, the Ponce Parties jointly and severally agree to pay or reimburse the Agent for: (a) all filing fees in connection with all filings related to the Reorganization with FINRA; (b) any stock issue or transfer taxes which may be payable with respect to the sale of the Shares; (c) subject to Section 2(e), all expenses of the Reorganization, including but not limited to the Agent’s attorneys’ fees, blue sky fees, transfer agent, registrar and other agent charges, fees relating to auditing and accounting or other advisors and costs of printing all documents necessary in connection with the Offering. In the event the Holding Company is unable to sell the minimum number of shares necessary to complete the Reorganization or the Reorganization is terminated or otherwise abandoned, the Ponce Parties shall promptly reimburse the Agent in accordance with Section 2(e) hereof.

Section 8. Conditions to the Agent’s Obligations. The obligations of the Agent hereunder, as to the Shares to be delivered at the Closing Date, are subject, to the extent not waived in writing by the Agent, to the condition that all representations and warranties of the Ponce Parties herein are, at and as of the commencement of the Offering and at and as of the Closing Date, true and correct in all material respects, the condition that the Ponce Parties shall have performed all of its obligations hereunder to be performed on or before such dates, and to the following further conditions:

 

(a)

At the Closing Date, the Ponce Parties shall have conducted the Reorganization and the establishment of and contribution to the Foundation of the Foundation Shares in all material respects in accordance with the Plan, the MHC Regulations (except to the extent waived or otherwise approved by the FRB), and all other applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and provisions precedent to the Reorganization imposed upon them by the FRB, the OCC or the FDIC or any other regulatory body to the reasonable satisfaction of Agent and its counsel.

 

(b)

The Registration Statement shall have been declared effective by the SEC, the MHC Notice and the Holding Company Application shall have been approved by the FRB, the OCC Applications shall have been approved by the OCC and the FDIC Application shall have been approved by the FDIC not later than 5:30 p.m. on the date of this Agreement, or with the Agent’s consent at a later time and date; and at the Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefore initiated or threatened by the SEC or any regulatory authority, and no order or other action suspending the authorization of the Prospectus or the consummation of the Reorganization shall have been issued or proceedings therefore initiated or, to the Ponce Parties’ knowledge, threatened by the SEC, the FRB, the OCC or the FDIC or any other regulatory authority, except in such states in which the registration of the Offering or the Shares has been withdrawn and no injunction, restraining order, or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Shares or the Foundation Shares. The Registration Statement and all amendments thereto shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and the Members’ Proxy Statement, and all amendments or supplements thereto, shall not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. None of the Permitted Free Writing Prospectuses, if any, shall include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading.

 

(c)

At the Closing Date, the Agent shall have received the favorable opinion, dated as of the Closing Date and addressed to the Agent and for its benefit and upon which Agent’s counsel may rely for purposes of delivering its legal opinion pursuant to Section 8(d), of Locke Lord LLP, special counsel for the Ponce Parties, in form and substance satisfactory to the Agent and its counsel, as attached hereto as Exhibit B.

 

(d)

At the Closing Date, the Agent shall have received the favorable opinion, dated as of the Closing Date and addressed to the Agent and for its benefit, of Silver, Freedman, Taff & Tiernan LLP, special counsel for the Agent, with respect to such matters as the Agent may reasonably require. Such opinion may rely upon certificates of officers and directors of the Ponce Parties delivered pursuant hereto or as such counsel shall reasonably request and the opinion of Locke Lord LLP delivered pursuant to subsection (c) above.

 

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(e)

Prior to the mailing of the Prospectus to eligible subscribers, a blue sky memorandum from Locke Lord LLP relating to the Offering, including Agent’s participation therein, shall have been furnished to the Holding Company with a copy thereof addressed to Agent or upon which Locke Lord LLP shall state the Agent may rely. The blue sky memorandum will relate to the necessity of obtaining or confirming exemptions, qualifications or the registration of the Shares under applicable state securities law.

 

(f)

At the Closing Date, the Agent shall receive a certificate of the Chief Executive Officer and the Chief Financial Officer of each of the Ponce Parties in form and substance reasonably satisfactory to the Agent’s Counsel, dated as of such Closing Date, to the effect that: (i) they have carefully examined the Registration Statement, the Prospectus and the General Disclosure Package and, in their opinion, as of the effective date of the Registration Statement, and at the time the Prospectus became authorized for final use, the Registration Statement, the Prospectus and the General Disclosure Package did not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading; (ii) since the date the Prospectus became authorized for final use, no event has occurred which should have been set forth in an amendment or supplement to the Prospectus which has not been so set forth, including specifically, but without limitation, any material adverse change in the condition, financial or otherwise, or in the earnings, capital, properties or business of the Ponce Parties; (iii) since the respective dates as of which information is given in the Registration Statement, the Prospectus and the General Disclosure Package, there has been no material adverse change in the condition, financial or otherwise, or in the earnings, capital, properties or business of the Ponce Parties independently, or of the Ponce Parties considered as one enterprise, whether or not arising in the ordinary course of business; (iv) the representations and warranties in Section 4 are true and correct with the same force and effect as though expressly made at and as of the Closing Date; (v) the Ponce Parties complied in all material respects with all agreements and satisfied all conditions on their part to be performed or satisfied at or prior to the Closing Date, including the conditions set forth in this Section 8, and will comply in all material respects with all obligations to be satisfied by them after the Closing Date; (vi) based on each of their knowledge, the financial statements and other financial information included in the Registration Statement, the Prospectus and the General Disclosure Package fairly present the financial condition and results of operations of the Bank as of and for the dates and periods covered by the Registration Statement and the Prospectus; (vii) they are responsible for establishing and maintaining disclosure controls and procedures; (viii) they have designed such disclosure controls and procedures to ensure that material information relating to the Holding Company and the Bank is made known to them; (ix) they have evaluated the effectiveness of their disclosure controls and procedures; (x) they have disclosed to Mazars USA LLP and the Audit Committee (A) all significant deficiencies in the design or operation of disclosure controls and procedures which are reasonably likely to adversely affect the Holding Company’s and the Bank’s ability to record, process, summarize, and report financial data, and have identified for the Holding Company’s and the Bank’s independent registered public accounting firm any material weaknesses in disclosure controls and procedures and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Holding Company’s and the Bank’s disclosure controls and procedures; (xi) the Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement has been initiated or, to the knowledge of the Ponce Parties, threatened by the SEC or any state or federal authority; (xii) no order suspending the Reorganization, the Offering or the use of the Prospectus has been issued and no proceedings for that purpose are pending or, to the knowledge of the Ponce Parties, threatened by the SEC, the FRB, the OCC, the FDIC or any state or federal authority; and (xiii) to the knowledge of the Ponce Parties, no person has sought to obtain review of the final action of the FRB approving the MHC Notice, including the Plan included therein, or the Holding Company Application; (xiv) no order suspending the FRB’s approval of the Holding Company Application and the MHC Notice, the OCC’s approval of the OCC Applications and the FDIC’s approval of the FDIC Application or the transactions contemplated thereby has been issued and no proceedings for that purpose have been initiated or, to the knowledge of the Company, the Bank or the MHC, threatened by the FRB, the OCC or the FDIC and (xv) no order suspending the Subscription and Community Offering or the Syndicated Offering or authorization for use of the Prospectus has been issued and no proceedings for that purpose have been initiated by the FRB.

 

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(g)

None of the Ponce Parties shall have sustained, since the date of the latest financial statements included in the Registration Statement, the General Disclosure Package and Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth in the Registration Statement and the Prospectus, and since the respective dates as of which information is given in the Registration Statement, the Prospectus and the General Disclosure Package, there shall not have been any Material Adverse Effect that is in the Agent’s reasonable judgment sufficiently material and adverse as to make it impracticable or inadvisable to proceed with the Offering or the delivery of the Shares on the terms and in the manner contemplated in the Prospectus.

 

(h)

Prior to and at the Closing Date, in the reasonable opinion of the Agent, (i) there shall have been no material adverse change in the financial condition, results of operations, business, affairs or prospects of the Ponce Parties considered as one enterprise, from that as of the latest dates as of which such condition is set forth in the Prospectus, other than transactions referred to or contemplated therein; (ii) there shall have been no material transaction entered into by any Ponce Party since the latest dates as of which the financial condition of the Ponce Parties is set forth in the Prospectus, other than transactions referred to or contemplated therein; (iii) none of the Ponce Parties shall have received from the OCC or the FRB any direction (oral or written) to make any material change in the method of conducting their business with which it has not complied (which direction, if any, shall have been disclosed to the Agent) or which materially and adversely would affect the financial condition, results of operations or business of the Ponce Parties taken as a whole; (iv) none of the Ponce Parties shall have been in default (nor shall an event have occurred which, with notice or lapse of time or both, would constitute a default) under any provision of any agreement or instrument relating to any outstanding indebtedness; (v) no action, suit or proceeding, at law or in equity or before or by any federal or state commission, board or other administrative agency, not disclosed in the Prospectus, shall be pending or, to the knowledge of the Ponce Parties, threatened against the any of the Ponce Parties or affecting any of their properties wherein an unfavorable decision, ruling or finding would have a Material Adverse Effect; and (vi) the Shares shall have been qualified or registered for offering and sale or exempted therefrom under the securities or blue sky laws of the jurisdictions as the Agent shall have reasonably requested and as agreed to by the Ponce Parties.

 

(i)

Concurrently with the execution of this Agreement, the Agent shall receive a letter from Mazars USA LLP, dated as of the date hereof and addressed to the Agent: (i) confirming that Mazars USA LLP is a firm of independent registered public accountants within the applicable rules of the SEC and the PCAOB and stating in effect that in its opinion the financial statements and related notes of the Bank as of December 31, 2016 and 2015, and for each of the years in the two-year period ended December 31, 2016, and covered by their opinion included in the Prospectus, and any other more recent unaudited financial statements included in the Prospectus, comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and related published rules and regulations of the SEC; (ii) stating in effect that, on the basis of certain agreed upon procedures (but not an audit in accordance with standards of the PCAOB) consisting of a reading of the latest available financial statements of the Bank prepared by the Bank, a reading of the minutes of the meetings of the Boards of Directors of each of the Ponce Parties and consultations with officers of the Bank responsible for financial and accounting matters, nothing came to their attention which caused them to believe that: (A) the audited financial statements and any unaudited interim financial statements included in the Prospectus are not in conformity with the applicable accounting requirements of the 1933 Act and the 1934 Act and related published rules and regulations of the SEC and accounting principles generally accepted in the United States of America applied on a basis substantially consistent with that of the audited financial statements included in the Prospectus; or (B) during the period from the date of the latest financial statements included in the Prospectus to a specified date not more than three business days prior to the date of the Prospectus, except as has been described in the Prospectus, there was any increase in long-term or short-term debt or non-performing assets of the Bank; or (C), except as set forth in said letter, there was any decrease in the total assets, total loans, the allowance for loan losses, total deposits, or total capital

 

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accounts of the Bank at the date of such letter as compared with amounts shown in the latest balance sheet included in the Prospectus; or (D) there was any decrease in total interest income, net interest income, net interest income after provision for loan losses, non-interest income or net income or increase in non-interest expense or the provision for loan losses of the Bank, in each case for the number of full months commencing immediately after the period covered by the latest audited balance sheet and income statement included in the Prospectus and ended on the latest month end prior to the date of the Prospectus as compared to the corresponding period in the preceding year; and (iii) stating that, in addition to the audit referred to in their opinion included in the Prospectus and the performance of the procedures referred to in clause (ii) of this subsection (i), they have compared with the general accounting records of the Bank, which are subject to the internal controls of the Bank, the accounting system and other data prepared by the Bank, directly from such accounting records, to the extent specified in such letter, such amounts and/or percentages set forth in the Prospectus, any Permitted Free Writing Prospectus and any prospectus supplement, as the Agent may reasonably request; and they have found such amounts and percentages to be in agreement therewith (subject to rounding).

 

(j)

At the Closing Date, the Agent shall receive a letter dated the Closing Date, addressed to the Agent, confirming the statements made by Mazars USA LLP in the letter delivered by it pursuant to subsection (i) of this Section 8, the “specified date” referred to in clause (ii)(B) of subsection (i) to be a date specified in the letter required by this subsection (j) which for purposes of such letter shall not be more than three business days prior to the Closing Date.

 

(k)

At the Closing Date, the Holding Company shall receive a letter from RP Financial, LC., dated the Closing Date (i) confirming that said firm is independent of the Ponce Parties and is experienced and expert in the area of corporate appraisals within the meaning of the MHC Regulations, (ii) stating in effect that the Appraisal prepared by such firm complies in all material respects with the applicable requirements of the MHC Regulations, and (iii) further stating that its opinion of the aggregate pro forma market value of the Holding Company including the Bank, as most recently updated, remains in effect.

 

(l)

At or prior to the Closing Date, the Agent shall receive: (i) a copy of the letter from the FRB approving the MHC Notice, including the establishment of the Foundation; (ii) a copy of the letter from the FRB approving the Holding Company Application; (iii) a copy of the letter from the OCC approving the OCC Applications, (iv) a copy of the letter from the FDIC approving the FDIC Application, (v) a copy of the order from the SEC declaring the Registration Statement effective, if available; (vi) a certificate from the FDIC evidencing the Bank’s insurance of accounts; (vii) a certificate from the FHLB-New York evidencing the Bank’s membership therein; (viii) a certified copy of each of the Holding Company’s, the Bank’s and the MHC’s Charter and Bylaws, as applicable; and (ix) any other documents that Agent shall reasonably request.

 

(m)

At the Closing Time, the Shares and the Foundation Shares shall have been approved for listing on the Nasdaq Global Market.

 

(n)

Subsequent to the date hereof, there shall not have occurred any of the following; (i) a suspension or limitation in trading in securities generally on the New York Stock Exchange (the “NYSE”) or the NYSE MKT or quotations halted generally on the Nasdaq Stock Market or in the over-the-counter market or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required by the NYSE, the NYSE MKT or the Nasdaq Stock Market or in the over-the-counter market or by order of the SEC, FINRA or any other governmental authority; (ii) a general moratorium on the operations of commercial banks, or savings associations or a general moratorium on the withdrawal of deposits from commercial banks or savings associations declared by federal or state authorities; (iii) the engagement by the United States in hostilities which have resulted in the declaration, on or after the date hereof, of a national emergency or war or a material decline in the price of equity or debt securities, if the effect of such declaration or decline, in the Agent’s reasonable judgment, makes it impracticable or inadvisable to proceed with the Offering or the delivery of the Shares on the terms and in the manner contemplated in the Registration Statement and the Prospectus.

 

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(o)

At or prior to the Closing Date, the Agent and counsel to the Agent shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling them to pass upon the sale of the Shares and the contribution of the Foundation Shares as herein contemplated and related proceedings or in order to evidence the occurrence or completeness of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Ponce Parties in connection with the sale of the Shares and contribution of the Foundation Shares as herein contemplated shall be satisfactory in form and substance to the Agent or its counsel.

 

(p)

All opinions, certificates, letters and documents delivered pursuant to this Section 8 will be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to the Agent or to counsel for the Agent. Any certificate signed by an officer of any of the Ponce Parties and delivered to the Agent or to counsel for the Agent shall be deemed a representation and warranty by such Ponce Party to the Agent as to the statements made therein.

Section 9. Indemnification.

 

(a)

The Ponce Parties jointly and severally agree to indemnify and hold harmless the Agent, its officers and directors, employees and agents, and each person, if any, who controls the Agent within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act, against any and all loss, liability, claim, damage or expense whatsoever (including, but not limited to, settlement expenses), joint or several, that the Agent or any of them may suffer or to which the Agent and any such persons may become subject under all applicable federal or state laws or otherwise, and to promptly reimburse the Agent and any such persons upon written demand for any expense (including all fees and disbursements of counsel) incurred by the Agent or any of them in connection with investigating, preparing or defending any actions, proceedings or claims (whether commenced or threatened) to the extent such losses, claims, damages, liabilities or actions: (i) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment or supplement thereto), the General Disclosure Package, any Issuer-Represented Limited-Use Free Writing Prospectus, any Issuer Represented General Free Writing Prospectus, preliminary or final Prospectus (or any amendment or supplement thereto), the MHC Notice (or any amendment or supplement thereto), the Holding Company Application (or any amendment or supplement thereto), the OCC Applications (or any amendment or supplement thereto), the FDIC Application (or any amendment or supplement thereto) or any instrument or document executed by the Ponce Parties or based upon written information supplied the by the Holding Company filed in any state or jurisdiction to register or qualify any or all of the Shares or the Foundation Shares or to claim an exemption therefrom or provided to any state or jurisdiction to exempt the Ponce Parties as a broker-dealer or its officers, directors and employees as broker-dealers or agents, under the securities laws thereof (collectively, the “Blue Sky Application”), or any document, advertisement, oral statement or communication, or supplemental sales material (including the supplemental sales material filed as an exhibit to the Registration Statement and the MHC Notice) (“Sales Information”) prepared, made or executed by or on behalf of the Ponce Parties with its consent and based upon written or oral information furnished by or on behalf of the Ponce Parties, whether or not filed in any jurisdiction, in order to qualify or register the Shares or the Foundation Shares or to claim an exemption therefrom under the securities laws thereof; (ii) arise out of or are based upon the omission or alleged omission to state in any of the foregoing documents or information a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; or (iii) arise from any theory of liability whatsoever relating to or arising from or based upon the Registration Statement (or any amendment or supplement thereto), preliminary or final Prospectus (or any amendment or supplement thereto), the General Disclosure Package, any Issuer-Represented Limited-Use Free Writing Prospectus, any Issuer–Represented General Free Writing Prospectus, the MHC Notice (or any amendment or supplement thereto) the Holding Company Application (or any amendment or supplement thereto), any Blue Sky Application or Sales Information or other documentation distributed in connection with the Reorganization; provided, however, that no indemnification is required under this paragraph (a) to the extent such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue material statement or alleged untrue material statement in, or material omission or alleged material omission from, the Registration Statement (or any amendment or supplement thereto), preliminary or final Prospectus (or any amendment or supplement

 

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thereto), the General Disclosure Package, any Issuer-Represented Limited-Use Free Writing Prospectus, any Issuer-Represented General Free Writing Prospectus, the MHC Application, the Holding Company Application, the OCC Applications, the FDIC Application, any Blue Sky Application or Sales Information made in reliance upon and in conformity with the Agent Information.

 

(b)

The Agent agrees to indemnify and hold harmless the Ponce Parties, their directors and officers and each person, if any, who controls the Holding Company or the Bank within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act against any and all loss, liability, claim, damage or expense whatsoever (including but not limited to settlement expenses), joint or several, which they, or any of them, may suffer or to which they, or any of them may become subject under all applicable federal and state laws or otherwise, and to promptly reimburse the Ponce Parties, and any such persons upon written demand for any expenses (including reasonable fees and disbursements of counsel) incurred by them, or any of them, in connection with investigating, preparing or defending any actions, proceedings or claims (whether commenced or threatened) to the extent such losses, claims, damages, liabilities or actions: (i) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment or supplement thereto), the preliminary or final Prospectus (or any amendment or supplement thereto), any Blue Sky Application or Sales Information, (ii) are based upon the omission or alleged omission to state in any of the foregoing documents a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or (iii) arise from any theory of liability whatsoever relating to or arising from or based upon the Registration Statement (or any amendment or supplement thereto), preliminary or final Prospectus (or any amendment or supplement thereto), or any Blue Sky Application or Sales Information or other documentation distributed in connection with the Offering; provided, however, that the Agent’s obligations under this Section 9(b) shall exist only if and only to the extent that such untrue statement or alleged untrue statement was made in, or such material fact or alleged material fact was omitted from, the Registration Statement (or any amendment or supplement thereto), the preliminary or final Prospectus (or any amendment or supplement thereto), any Blue Sky Application or Sales Information in reliance upon and in conformity with the Agent Information.

 

(c)

Each indemnified party shall give prompt written notice to each indemnifying party of any action, proceeding, claim (whether commenced or threatened), or suit instituted against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve it from any liability which it may have on account of this Section 9 or otherwise. An indemnifying party may participate at its own expense in the defense of such action. In addition, if it so elects within a reasonable time after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume defense of such action with counsel chosen by it and approved by the indemnified parties that are defendants in such action, unless such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them that are different from or in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying parties shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action, proceeding or claim, other than reasonable costs of investigation. In no event shall the indemnifying parties be liable for the fees and expenses of more than one separate firm of attorneys (and any special counsel that said firm may retain) for each indemnified party in connection with any one action, proceeding or claim or separate but similar or related actions, proceedings or claims in the same jurisdiction arising out of the same general allegations or circumstances. The Ponce Parties will not, without the Agent’s prior written consent, settle, compromise, consent to the entry of any judgment in or otherwise seek to terminate any action, claim, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not any indemnified person is a party thereto) unless such settlement, compromise, consent or termination does not include a statement or acknowledgment as to, or an admission of, fault, culpability or failure to act by or on behalf of any indemnified party and provides that the Agent and the other indemnified parties shall be unconditionally and irrevocably released from all liability in respect of such action, claim, suit or proceeding. No indemnified party seeking indemnification or reimbursement under this Section 9 or contribution under Section 10 will, without the indemnifying parties’ prior written consent, which consent may not be unreasonably withheld, settle, compromise, consent to the entry of

 

29

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any judgment in or otherwise seek to terminate any action, claim, suit, investigation or proceeding referred to in the preceding sentence. The Agent will not enter into any settlement for which the Ponce Parties could be liable without the Ponce Parties’ prior written consent, not to be unreasonably withheld or delayed.

 

(d)

In addition to, and without limiting, the provisions of Section 9(a) hereof, in the event that the Agent, any person, if any, who controls the Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or any of its partners, directors, officers, employees, affiliates or agents is requested or required to appear as a witness or otherwise gives testimony in any action, proceeding, investigation or inquiry brought by or on behalf of or against the Ponce Parties, the Agent or any of its affiliates or any participant in the transactions contemplated hereby in which the Agent or such person or agent is not named as a defendant, the Ponce Parties jointly and severally agree to reimburse the Agent and its partners, directors, officers, employees or agents for all reasonable and necessary direct out-of-pocket expenses incurred by them in connection with preparing or appearing as a witness or otherwise giving testimony and to compensate the Agent and its partners, directors, officers, employees or agents in an amount to be mutually agreed upon.

Section 10. Contribution.

 

(a)

In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Section 9 is due in accordance with its terms but is for any reason held by a court to be unavailable from the Ponce Parties or the Agent, the Ponce Parties and the Agent shall contribute to the aggregate losses, claims, damages and liabilities (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding, but after deducting any contribution received by the Ponce Parties or the Agent from persons other than the other parties thereto, who may also be liable for contribution) in such proportion so that the Agent is responsible for that portion represented by the percentage that the fees paid to the Agent pursuant to Section 2 of this Agreement (not including expenses) bears to the gross proceeds received by the Holding Company from the sale of the Shares in the Offering, and the Ponce Parties shall be responsible for the balance. If, however, the allocation provided above is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative fault of the Ponce Parties on the one hand and the Agent on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions, proceedings or claims in respect thereto), but also the relative benefits received by the Ponce Parties on the one hand and the Agent on the other from the Offering (before deducting expenses). The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Ponce Parties on the one hand or the Agent on the other and the parties’ relative intent, good faith, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Ponce Parties and the Agent agree that it would not be just and equitable if contribution pursuant to this Section 10 were determined by pro-rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to above in this Section 10. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions, proceedings or claims in respect thereof) referred to above in this Section 10 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action, proceeding or claim. It is expressly agreed that the Agent shall not be liable for any loss, liability, claim, damage or expense or be required to contribute any amount pursuant to Section 9(b) or this Section 10 which in the aggregate exceeds the amount paid (excluding reimbursable expenses) to the Agent under this Agreement. It is understood that the above stated limitation on the Agent’s liability is essential to the Agent and that the Agent would not have entered into this Agreement if such limitation had not been agreed to by the parties to this Agreement. No person found guilty of any fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. The obligations of the Ponce Parties under this Section 10 and under Section 9 shall be in addition to any liability which the Holding Company and the Agent may otherwise have. For purposes of this Section 10, each of the Agent’s and the Ponce Parties’ officers and

 

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directors and each person, if any, who controls the Agent or any of the Ponce Parties within the meaning of the 1933 Act and the 1934 Act shall have the same rights to contribution as the Agent on the one hand, or, the Ponce Parties on the other hand. Any party entitled to contribution, promptly after receipt of notice of commencement of any action, suit, claim or proceeding against such party in respect of which a claim for contribution may be made against another party under this Section 10, will notify such party from whom contribution may be sought, but the omission to so notify such party shall not relieve the party from whom contribution may be sought from any other obligation it may have hereunder or otherwise than under this Section 10.

 

(b)

Neither termination nor completion of the engagement of the Agent nor any investigation made by or on behalf of the Agent shall affect the indemnification obligations of the Ponce Parties or the Agent hereunder, which shall remain and continue to be operative and in full force and effect.

Section 11. Termination. The Agent may terminate this Agreement by giving the notice indicated below in Section 12 at any time after this Agreement becomes effective as follows:

 

(a)

If any domestic or international event or act or occurrence has materially disrupted the United States securities markets such as to make it, in the Agent’s reasonable opinion, impracticable to proceed with the offering of the Shares; or if trading on the NYSE, NYSE MKT, Nasdaq Stock Market, or over-the-counter market (“OTC”) shall have suspended (except that this shall not apply to the imposition of NYSE, NYSE MKT, Nasdaq Stock Market, or OTC trading collars imposed on program trading); or if the United States shall have become involved in a war or major hostilities or escalation thereof; or if a general banking moratorium has been declared by a state or federal authority which has a material effect on the Ponce Parties on a consolidated basis; or if a moratorium in foreign exchange trading by major international banks or persons has been declared; or if there shall have been a material adverse change in the financial condition, results of operations or business of any of the Ponce Parties, or if any of the Ponce Parties shall have sustained a material or substantial loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act, whether or not said loss shall have been insured; or, if there shall have been a material adverse change in the financial condition, results of operations or business of the Ponce Parties taken as a whole.

 

(b)

In the event the Holding Company fails to sell the required minimum number of the Shares by the date when such sales must be completed, in accordance with the provisions of the Plan or as required by the MHC Regulations, and applicable law, this Agreement shall terminate upon refund by the Holding Company to each person who has subscribed for or ordered any of the Shares the full amount which it may have received from such person, together with interest as provided in the Prospectus, and no party to this Agreement shall have any obligation to the other hereunder, except as set forth in Sections 2(a), 2(d), 2(e), 6, 8, 9 and 10 hereof.

 

(c)

If any of the conditions specified in Section 8 shall not have been fulfilled when and as required by this Agreement, unless waived in writing, or by the Closing Date, this Agreement and all of the Agent’s obligations hereunder may be cancelled by the Agent by notifying the Holding Company of such cancellation in writing or by electronic mail at any time at or prior to the Closing Date, and any such cancellation shall be without liability of any party to any other party except as otherwise provided in Sections 2(a), 2(d), 2(e), 6, 8, 9 and 10 hereof.

 

(d)

If the Agent elects to terminate this Agreement as provided in this Section, the Ponce Parties shall be notified promptly by telephone or electronic mail, confirmed by letter.

Any of the Ponce Parties may terminate this Agreement in the event the Agent is in material breach of the representations and warranties or covenants contained in Section 5 and such breach has not been cured within a reasonable time period after the Ponce Party has provided the Agent with notice of such breach.

This Agreement may also be terminated by mutual written consent of the parties hereto.

 

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Section 12. Notices. All communications hereunder, except as herein otherwise specifically provided, shall be mailed in writing and if sent to the Agent shall be mailed, delivered by facsimile or email and confirmed to Raymond James & Associates, Inc., 222 Riverside Plaza, 7^th Floor, Chicago, IL 60606, Attention: Allan D. Jean, with a copy to Philip Ross Bevan, Silver, Freedman, Taff & Tiernan, LLP, 3299 K Street, N.W., Suite 100, Washington, DC 20007, and, if sent to a Ponce Party, shall be mailed or delivered and confirmed to such Ponce Party at 2244 Westchester Avenue, Bronx, New York 10462, Attention: Carlos P. Naudon, President and COO, with a copy to Douglas P. Faucette, Locke Lord LLP, 701 8^th Street, N.W., Suite 700, Washington, DC 20001.

Section 13. Parties. The Ponce Parties shall be entitled to act and rely on any request, notice, consent, waiver or agreement purportedly given on behalf of the Agent when the same shall have been given by the undersigned. The Agent shall be entitled to act and rely on any request, notice, consent, waiver or agreement purportedly given on behalf of the Ponce Parties, when the same shall have been given by the undersigned or any other officer of any of the Ponce Parties. This Agreement shall inure solely to the benefit of, and shall be binding upon, the Agent, the Ponce Parties and their respective successors and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. It is understood and agreed that this Agreement is the exclusive agreement among the parties hereto, and supersedes any prior agreement among the parties and may not be varied except in writing signed by all the parties.

Section 14. Closing. The closing for the sale of the Shares (the “Closing”) shall take place on the Closing Date at such location as mutually agreed upon by the Agent and the Holding Company and the Bank. At the Closing, the Ponce Parties shall deliver to the Agent in next day funds the commissions, fees and expenses due and owing to the Agent as set forth in Sections 2 and 7 hereof and the opinions and certificates required hereby and other documents deemed reasonably necessary by the Agent shall be executed and delivered to effect the sale of the Shares and the contribution of the Foundation Shares as contemplated hereby and pursuant to the terms of the Prospectus.

Section 15. Partial Invalidity. In the event that any term, provision or covenant herein or the application thereof to any circumstance or situation shall be invalid or unenforceable, in whole or in part, the remainder hereof and the application of said term, provision or covenant to any other circumstances or situation shall not be affected thereby, and each term, provision or covenant herein shall be valid and enforceable to the full extent permitted by law.

Section 16. Governing Law and Construction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of law.

Section 17. Counterparts. This Agreement may be executed in separate counterparts, each of which so executed and delivered shall be an original, but all of which together shall constitute but one and the same instrument.

Section 18. No Fiduciary Duty. Notwithstanding any pre-existing relationship, advisory or otherwise, between the parties or any oral representations or assurances previously or subsequently made by anyone, the Ponce Parties acknowledge and agree that (i) nothing herein shall create a fiduciary or agency relationship between the Ponce Parties, on the one hand, and Raymond James, on the other hand; (ii) the relationship between the Ponce Parties and Raymond James is entirely and solely commercial, and any duties and obligations that Raymond James may have to the Ponce Parties shall be limited to those duties and obligations specifically stated herein; and (iii) notwithstanding anything in this Agreement to the contrary, the Ponce Parties acknowledge that Raymond James may have financial interests in the success of the Offering that are not limited to the difference between the price to the public and the purchase price paid to the Holding Company for the shares and such interests may differ from the interests of the Ponce Parties, and Raymond James has no obligation to disclose, or account to the Ponce Parties for any benefit they may derive from such additional financial interests. The Ponce Parties hereby waive and release, to the fullest extent permitted by the applicable law, any claims it may have against Raymond James with respect to any breach or alleged breach of fiduciary duty and agrees that Raymond James shall have no liability (whether direct or indirect) to the Ponce Parties in respect of such a fiduciary duty claim or to any person asserting a fiduciary duty claim on behalf of or in right of the Ponce Parties or any of its stockholders, managers, employees or creditors.

 

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Section 19. Entire Agreement. This Agreement, including schedules and exhibits hereto, which are integral parts hereof and incorporated as though set forth in full, constitutes the entire agreement between the parties pertaining to the subject matter hereof superseding any and all prior or contemporaneous oral or prior written agreements, proposals, letters of intent and understandings, and cannot be modified, changed, waived or terminated except by a writing which expressly states that it is an amendment, modification or waiver, refers to this Agreement and is signed by the party to be charged. No course of conduct or dealing shall be construed to modify, amend or otherwise affect any of the provisions hereof.

Section 20. Survival. The respective indemnities, agreements, representations, warranties and other statements of the Ponce Parties and the Agent, as set forth in this Agreement, shall remain in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation (or any statement as to the results thereof) made by or on behalf of the Agent or any of the Agent’s officers or directors or any person controlling the Agent, or the Ponce Parties, or any of their respective officers or directors or any person controlling the Ponce Parties, and shall survive termination of this Agreement and receipt or delivery of any payment for the Shares.

Section 21. Waiver of Trial by Jury. Each of the Agent and the Ponce Parties waives all right to trial by jury in any action, proceeding, claim or counterclaim (whether based on contract, tort or otherwise) related to or arising out of this Agreement.

This Agreement is made solely for the benefit of, and will be binding upon, the parties hereto and their respective successors and the directors, officers and controlling persons and no other person will have any right or obligation hereunder.

The term “successors” as used in this Agreement shall not include any purchaser of any of the Shares. Time shall be of the essence for this Agreement.

[Remainder of page intentionally blank]

 

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If the foregoing correctly sets forth the arrangement among the Ponce Parties and the Agent, please indicate acceptance thereof in the space provided below for that purpose, whereupon this letter and the Agent’s acceptance shall constitute a binding agreement.

Very truly yours,

 

PONCE DE LEON FEDERAL BANK						PDL COMMUNITY BANCORP
By Its Authorized Representative:						By Its Authorized Representative:
Carlos P. Naudon President and Chief Operating Officer						Carlos P. Naudon President and Chief Executive Officer
PONCE BANK MUTUAL HOLDING COMPANY
By Its Authorized Representative:
Carlos P. Naudon President and Chief Operating Officer
Accepted as of the date first above written
RAYMOND JAMES & ASSOCIATES, INC.
By its Authorized Representative
Allan D. Jean Director of Mutual Conversions

 

34

Exhibit 2.1

PONCE De LEON FEDERAL BANK

AMENDMENT NO. 2 TO THE

PLAN OF REORGANIZATION

FROM A MUTUAL BANK

TO A MUTUAL HOLDING COMPANY

AND STOCK ISSUANCE PLAN

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TABLE OF CONTENTS

 

1.		Introduction			1
2.		Definitions			2
3.		The Reorganization			8
4.		Conditions to Implementation of the Reorganization			10
5.		Special Meeting of Members			11
6.		Rights of Members of the MHC			11
7.		Conversion of MHC to Stock Form			11
8.		Timing of the Reorganization and Sale of Capital Stock			12
9.		Establishment of the Foundation			13
10.		Number of Shares to be Offered			14
11.		Independent Valuation and Purchase Price of Shares			14
12.		Method of Offering Shares and Rights to Purchase Stock			15
13.		Additional Limitations on Purchases of Common Stock			19
14.		Payment for Stock			22
15.		Manner of Exercising Subscription Rights Through Order Forms			23
16.		Undelivered, Defective or Late Order Form; Insufficient Payment			24
17.		Completion of the Stock Offering			24
18.		Market for Common Stock			24
19.		Stock Purchases by Management Persons After the Stock Offering			24
20.		Resales of Stock by Directors and Officers			25
21.		Stock Certificates			25
22.		Restriction on Financing Stock Purchases			25
23.		Stock Benefit Plans			25
24.		Post-Reorganization Filing and Market Making			25
25.		Payment of Dividends and Repurchase of Stock			26
26.		Reorganization and Stock Offering Expenses			26
27.		Employment and Other Severance Agreements			26
28.		Residents of Foreign Countries and Certain States			26
29.		Interpretation			27
30.		Amendment or Termination of the Plan			27

 

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Exhibits
Exhibit A		Charter and Bylaws of the Bank
Exhibit B		Charter and Bylaws of the Holding Company
Exhibit C		Charter and Bylaws of the MHC

 

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1.	Introduction.

This Amendment No. 2 to the Plan of Reorganization from a Mutual Bank to a Mutual Holding Company and Stock Issuance Plan, dated as of July 6, 2017 (the “Plan”), provides for the reorganization of Ponce De Leon Federal Bank (the “Bank”) from a federally-chartered mutual bank into a mutual holding company structure (the “Reorganization”) under the laws of the United States of America and the regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), and other applicable requirements. The mutual holding company (the “MHC”) will be a mutually-owned federal corporation, and all of the current ownership and voting rights of the Members of the Bank will be transferred to the MHC. As part of the Reorganization, the Bank will amend its charter to become the MHC, and the Holding Company and the Stock Bank will be established as federal corporations and majority owned subsidiaries so long as the MHC remains in existence. Concurrently with the Reorganization, the Holding Company intends to offer for sale up to 49.9% of its Common Stock in the Stock Offering. The Common Stock will be offered on a priority basis to depositors and the Tax-Qualified Employee Plans of the Bank, with any remaining shares offered to the public in a Community Offering, a Syndicated Community Offering, or a Firm Commitment Underwritten Offering, or a combination thereof. The Reorganization, Stock Offering and issuance of Common Stock shall be conducted in accordance with the Federal Reserve’s Regulation MM, 12 CFR Part 239, and other applicable regulatory requirements.

The primary purpose of the Reorganization is to establish a holding company and to convert the Bank to the stock form of ownership, which will enable the Bank to compete and expand more effectively in the financial services marketplace. The Reorganization will permit the Holding Company to issue Capital Stock, which is a source of capital not available to mutual banks. Since the Holding Company will not offer all of its Common Stock for sale to depositors and the public in the Stock Offering, the Reorganization will result in less capital raised in comparison to a standard mutual-to-stock conversion. The Reorganization, however, will also permit the Bank to raise additional capital since a majority of the Holding Company’s common stock could be made available for sale in the future. The Bank has no present intention to pursue a majority sale. It will also facilitate the funding of a charitable foundation to support the Bank’s community. It will also provide the Bank with greater flexibility to structure and finance the expansion of its operations, including the potential acquisition of other financial institutions. The expansion of the Bank’s operations will produce certain economies of scale which will enable it to meet increasing compliance and technology costs. Lastly, the Reorganization will enable the Bank to better manage its capital by (i) providing broader acquisition and investment opportunities through the holding company structure, (ii) enabling the Bank to distribute capital to stockholders of the Holding Company in the form of dividends, and (iii) enabling the Holding Company to repurchase its common stock as market conditions warrant. Although the Reorganization and Stock Offering will create a stock savings bank and stock holding company, only a minority of the Common Stock will be offered for sale in the Stock Offering. As a result, the Bank’s mutual form of ownership and its ability to remain an independent community bank will be preserved through the mutual holding company structure. The Reorganization is subject to the receipt of all necessary regulatory approvals, including the approval of the Federal Reserve, and must be approved by the affirmative vote of a majority of the total votes eligible to be cast by Members.

 

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2.	Definitions.

As used in this Plan, the terms set forth below have the following meanings:

Acting in Concert: The term Acting in Concert means (i) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or (ii) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. A Person or company which acts in concert with another Person or company (“other party”) shall also be deemed to be acting in concert with any Person or company who is also acting in concert with that other party, except that any Tax-Qualified Employee Plan will not be deemed to be acting in concert with its trustee or a Person who serves in a similar capacity solely for the purpose of determining whether stock held by the trustee and stock held by the plan will be aggregated.

Actual Purchase Price: The price per share, determined as provided in this Plan, at which the Common Stock will be sold in the Stock Offering.

Affiliate: Any Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with another Person.

Associate: The term “Associate,” when used to indicate a relationship with any Person, means: (i) any corporation or organization (other than the Bank, the Holding Company, the MHC or a majority-owned subsidiary of any thereof) of which such Person is a senior officer or partner, or beneficially owns, directly or indirectly, 10% or more of any class of equity securities of the corporation or organization; (ii) any trust or other estate, if the Person has a substantial beneficial interest in the trust or estate or is a trustee or fiduciary of the trust or estate except that for the purposes of this Plan relating to subscriptions in the Stock Offering and the sale of Common Stock following the Reorganization, a Person who has a substantial beneficial interest in any Non-Tax-Qualified Employee Plan or any Tax-Qualified Employee Plan, or who is a trustee or fiduciary of such plan, is not an associate of such plan, and except that for purposes of aggregating total shares that may be held by Officers and Directors, the term “Associate” does not include any Tax-Qualified Employee Plan, and (iii) any Person who is related by blood or marriage to such Person and who (A) lives in the same home as such Person or (B) is a Director or Officer of the Bank, the Holding Company, the MHC or a subsidiary of the Bank, the Holding Company or the MHC.

Bank: Ponce De Leon Federal Bank in its pre-Reorganization mutual form or Ponce Bank in its post-Reorganization stock form, as indicated by the context.

Bank Regulators: The Federal Reserve and other federal bank regulatory agencies, including the OCC and FDIC, as applicable, responsible for reviewing and approving the Reorganization and Stock Offering, including the organization of an interim stock savings bank, the insurance of deposit accounts, and the transfer of assets and liabilities required to effect the Reorganization.

Capital Stock: Any and all authorized stock of the Bank or the Holding Company.

 

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Common Stock: Common stock issuable by the Holding Company in connection with the Reorganization, including securities convertible into Common Stock, pursuant to its stock charter.

Community: Bronx—Bronx County; Manhattan—New York County; Queens—Queens County; and Brooklyn—Kings County, New York; and Hudson County, New Jersey.

Community Offering: The offering to certain members of the general public of any unsubscribed shares in the Subscription Offering. The Community Offering may include a Syndicated Community Offering or public offering.

Control: (including the terms “controlling,” “controlled by” and “under common control with”) means the direct or indirect power to direct or exercise a controlling influence over the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise as described in 12 CFR Part 238.

Deposit Account(s): Any withdrawable account, including, without limitation, savings, time, demand, NOW accounts, money market, certificate and passbook accounts.

Effective Date: The date upon which all necessary approvals have been obtained to complete the Reorganization, and the Reorganization and Stock Offering have been completed.

Eligible Account Holder: Any person holding a Qualifying Deposit on the Eligibility Record Date for purposes of determining subscription rights.

Eligibility Record Date: October 31, 2015, the date for determining who qualifies as an Eligible Account Holder of the Bank.

Employee Plans: The Tax-Qualified and Non-Tax Qualified Employee Plans of the Bank and/or the Holding Company.

ESOP: The Bank’s employee stock ownership plan.

Estimated Valuation Range: The range of the estimated pro forma market value of the total number of shares of Common Stock to be issued by the Holding Company to the MHC and to Minority Stockholders, as determined by the Independent Appraiser prior to the Subscription Offering and as it may be amended from time to time thereafter.

Exchange Act: The Securities Exchange Act of 1934, as amended.

Federal Reserve: The Board of Governors of the Federal Reserve System.

FDIC: The Federal Deposit Insurance Corporation.

Firm Commitment Underwritten Offering: The offering, at the sole discretion of the Holding Company, of shares of Common Stock not subscribed for in the Subscription Offering and any Community Offering or Syndicated Community Offering, to members of the general public through one or more underwriters. A Firm Commitment Underwritten Offering may occur following the Subscription Offering and any Community Offering or Syndicated Community Offering.

 

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Foundation: A charitable foundation qualifying as an exempt organization under Section 501(c)(3) of the Internal Revenue Code established as part of the Reorganization,

HOLA: The Home Owners’ Loan Act, as amended.

Holding Company: The federal corporation created in the Reorganization. The Holding Company will be majority-owned by the MHC and will own 100% of the common stock of the Bank.

Holding Company Application: The Holding Company Application on such form as may be prescribed by the Federal Reserve which will be filed with the Federal Reserve in connection with the Reorganization and the formation of the MHC and the Holding Company.

Independent Appraiser: The appraiser retained by the Bank to prepare an appraisal of the pro forma market value of the Bank and the Holding Company.

Interim One: The interim federal stock savings bank established by the Bank as a wholly-owned subsidiary.

Management Person: Any Officer or director of the Bank or any Affiliate of the Bank, and any person acting in concert with any such Officer or director.

Market Maker: A dealer (i.e., any person who engages directly or indirectly as agent, broker, or principal in the business of offering, buying, selling or otherwise dealing or trading in securities issued by another person) who, with respect to a particular security, (1) regularly publishes bona fide competitive bid and offer quotations on request, and (2) is ready, willing and able to effect transactions in reasonable quantities at the dealer’s quoted prices with other brokers or dealers.

Member: Any person or entity who qualifies as a member of the Bank pursuant to its charter and bylaws.

MHC: The mutual holding company created in the Reorganization.

Minority Ownership Interest: The shares of the Holding Company’s Common Stock owned by persons other than the MHC, expressed as a percentage of the total shares of Holding Company Common Stock outstanding.

Minority Stock Offering: One or more offerings of less than 50% in the aggregate of the outstanding Common Stock of the Holding Company to persons other than the MHC.

Minority Stockholder: Any owner of the Holding Company’s Common Stock, other than the MHC.

Non-Voting Stock: Any Capital Stock other than Voting Stock.

 

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Notice: The Notice of Mutual Holding Company Reorganization to be submitted by the Bank to the Federal Reserve to notify the Federal Reserve of the Reorganization and the Stock Offering.

OCC: The Office of the Comptroller of the Currency.

Offering Range: The aggregate purchase price of the Common Stock to be sold in the Stock Offering based on the Independent Valuation expressed as a range, which may vary within 15% above or 15% below the midpoint of such range, with a possible adjustment by up to 15% above the maximum of such range. The Offering Range will be based on the Estimated Valuation Range, but will represent a Minority Ownership Interest equal to up to 49.9% of the Common Stock.

Officer: An executive officer of the MHC, the Holding Company or the Bank, including the Chief Executive Officer, President, Senior Vice Presidents in charge of principal business functions, Secretary, Treasurer and any other person performing similar policy making functions.

Order Form: Any form (together with any attached cover letter and/or certifications or acknowledgements), sent by the Bank to any Person containing among other things a description of the alternatives available to such Person under the Plan and by which any such Person may make elections regarding purchases of Common Stock in the Subscription and Community Offerings.

Other Member: Any person who is a Member of the Bank at the close of business on the Voting Record Date who is not an Eligible Account Holder or Supplemental Eligible Account Holder, or Tax-Qualified Employee Plan.

Person: An individual, corporation, partnership, association, joint-stock company, limited liability company, trust, unincorporated organization, or a government or political subdivision of a government.

Plan: This Amendment No. 1 to the Plan of Reorganization from a Mutual Bank to a Mutual Holding Company and Stock Issuance Plan, as amended.

Qualifying Deposit: The aggregate balance of each Deposit Account of an Eligible Account Holder as of the close of business on the Eligibility Record Date or of a Supplemental Eligible Account Holder as of the close of business on the Supplemental Eligibility Record Date, as the case may be, provided such aggregate balance is not less than $50.

Regulations: The rules and regulations of the Bank Regulators, including the Federal Reserve rules and regulations regarding mutual holding companies and any applicable rules and regulations of the OCC and the FDIC.

Reorganization: The reorganization of the Bank into the mutual holding company structure including the organization of the MHC, the Holding Company and the Stock Bank pursuant to this Plan.

 

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Resident: The terms “resident,” “residence,” “reside,” “resided” or “residing” as used herein with respect to any person shall mean any person who occupied a dwelling within the Bank’s Community, has an intent to remain within the Community for a period of time, and manifests the genuineness of that intent by establishing an ongoing physical presence within the Community together with an indication that such presence within the Community is something other than merely transitory in nature. To the extent the Person is a corporation or other business entity, the principal place of business or headquarters shall be in the Community. To the extent a person is a personal benefit plan, the circumstances of the beneficiary shall apply with respect to this definition. In the case of all other benefit plans, the circumstances of the trustee shall be examined for purposes of this definition. The Bank may utilize deposit or loan records or such other evidence provided to it to make a determination as to whether a person is a resident. In all cases, however, such a determination shall be in the sole discretion of the Bank.

SEC: The Securities and Exchange Commission.

Special Meeting: The Special Meeting of Members called for the purpose of voting on the Plan.

Stock Bank: The federally chartered stock savings bank resulting from the Reorganization, including the purchase and assumption transaction between the Bank and Interim One pursuant to this Plan.

Stock Offering: The offering of Common Stock of the Holding Company to persons other than the MHC, in a Subscription Offering and, to the extent shares remain available, in a Community Offering, Syndicated Community Offering and/or Firm Commitment Underwritten Offering, as the case may be.

Subscription Offering: The offering of Common Stock of the Holding Company for subscription and purchase pursuant to Section 12. A. of this Plan.

Subsidiary: A company that is controlled by another company, either directly or indirectly through one or more subsidiaries.

Supplemental Eligible Account Holder: Any Person holding a Qualifying Deposit on the Supplemental Eligibility Record Date, who is not an Eligible Account Holder, a Tax-Qualified Employee Plan or an Officer or director of the Bank.

Supplemental Eligibility Record Date: The date for determining Supplemental Eligible Account Holders, which shall be the last day of the calendar quarter preceding Federal Reserve approval of the Reorganization. The Supplemental Eligibility Record Date will only occur if the Federal Reserve has not approved the Reorganization within 15 months after the Eligibility Record Date.

Syndicated Community Offering: The offering of Common Stock following or contemporaneously with the Community Offering through a syndicate of broker-dealers.

 

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Tax-Qualified Employee Plan: Any defined benefit plan or defined contribution plan (including any employee stock ownership plan, stock bonus plan, profit-sharing plan, or other plan) of the Bank, the Holding Company, the MHC or any of their affiliates, which, with its related trusts, meets the requirements to be qualified under Section 401 of the Internal Revenue Code. The term “Non-Tax-Qualified Employee Plan” means any stock benefit plan which is not so qualified under Section 401 of the Internal Revenue Code.

Voting Member: Any Person who at the close of business on the Voting Record Date is entitled to vote as a Member of the Bank pursuant to its charter and bylaws.

Voting Record Date: The date established by the Bank for determining which Members are entitled to vote on the Plan.

Voting Stock:

 

(1)

Voting Stock means common stock or preferred stock, or similar interests if the shares by statute, charter or in any manner, entitle the holder:

 

(i)

To vote for or to select directors of the Bank or the Holding Company; and

 

(ii)

To vote on or to direct the conduct of the operations or other significant policies of the Bank or the Holding Company.

 

(2)

Notwithstanding anything in paragraph (1) above, preferred stock is not “Voting Stock” if:

 

(i)

Voting rights associated with the preferred stock are limited solely to the type customarily provided by statute with regard to matters that would significantly and adversely affect the rights or preferences of the preferred stock, such as the issuance of additional amounts or classes of senior securities, the modification of the terms of the preferred stock, the dissolution of the Bank, or the payment of dividends by the Bank when preferred dividends are in arrears;

 

(ii)

The preferred stock represents an essentially passive investment or financing device and does not otherwise provide the holder with control over the issuer; and

 

(iii)

The preferred stock does not at the time entitle the holder, by statute, charter, or otherwise, to select or to vote for the selection of directors of the Bank or the Holding Company.

 

(3)

Notwithstanding anything in paragraphs (1) and (2) above, “Voting Stock” shall be deemed to include preferred stock and other securities that, upon transfer or otherwise, are convertible into Voting Stock or exercisable to acquire Voting Stock where the holder of the stock, convertible security or right to acquire Voting Stock has the preponderant economic risk in the underlying Voting Stock. Securities immediately convertible into Voting Stock at the option of the holder without payment of additional consideration shall be deemed to constitute the

 

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Voting Stock into which they are convertible; other convertible securities and rights to acquire Voting Stock shall not be deemed to vest the holder with the preponderant economic risk in the underlying Voting Stock if the holder has paid less than 50% of the consideration required to directly acquire the Voting Stock and has no other economic interest in the underlying Voting Stock.

 

3.	The Reorganization.

 

A.

Organization of the Holding Companies and the Bank.

As part of the Reorganization, the Bank will amend its charter to become the MHC, and the Holding Company and the Stock Bank will be established as federal corporations. The Reorganization will be effected as follows, or in any manner approved by the Bank Regulators that is consistent with the purposes of this Plan and applicable laws and regulations: (i) the Bank will organize Interim One, and transfer pursuant to a purchase and assumption agreement, after Interim One receives approval from the FDIC for insurance of accounts and the FDIC has issued it a certificate number, all of its assets and liabilities, except up to $200,000 in cash, to Interim One, which will become the Stock Bank; (ii) the Bank will amend its charter and bylaws to read in the form of a federal mutual holding company to become the MHC; (iii) the MHC will organize the Holding Company as a wholly-owned subsidiary, and transfer $1,000 to the Holding Company in exchange for 100 shares of Holding Company Common Stock; and (iv) the MHC will transfer all of the initially issued stock of the Stock Bank to the Holding Company in exchange for additional shares of Holding Company Common Stock, and the Stock Bank will become a wholly-owned subsidiary of the Holding Company.

Contemporaneously with the Reorganization, the Holding Company will offer for sale in the Stock Offering shares of Common Stock representing less than 50% of the pro forma market value of the Holding Company and the Bank. Upon consummation of the Reorganization, the legal existence of the Bank will not terminate, but the MHC will be a continuation of the Bank, provided that all property of the Bank, including its right, title, and interest in and to all of its property and assets of every conceivable value or benefit then existing or pertaining to the Bank, or which would inure to the Bank will be transferred to the Stock Bank, except for up to $200,000 in cash. The Stock Bank will have, hold, and enjoy the same in its right and fully and to the same extent as the same was possessed, held, and enjoyed by the Bank. The Stock Bank will continue to have, succeed to, and be responsible for all the assets, rights, liabilities and obligations of the Bank and will maintain its headquarters and operations at the Bank’s present locations.

Upon consummation of the Reorganization, substantially all of the assets and liabilities (including the savings accounts, demand accounts, tax and loan accounts, United States Treasury General Accounts, or United States Treasury Time Deposit Open Accounts, as defined in the Regulations) of the Bank shall become the assets and liabilities of the Stock Bank, which will thereupon become an operating savings bank subsidiary of the Holding Company and of the MHC. The Bank will apply to the Bank Regulators to have the Holding Company receive or retain (as the case may be) up to 50% of the net proceeds of the Stock Offering, or such other amount as may be determined by the Board of Directors. The Stock Bank may distribute additional capital to the Holding Company following the Reorganization, subject to the applicable requirements set forth in the Regulations governing capital distributions.

 

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B.

Effect on Deposit Accounts and Borrowings.

Each deposit account in the Bank on the Effective Date will remain a deposit account in the Stock Bank in the same amount and upon the same terms and conditions, and will continue to be federally insured up to the legal maximum by the FDIC in the same manner as the deposit account existed in the Bank immediately prior to the Reorganization. Upon consummation of the Reorganization, all loans and other borrowings from the Bank shall retain the same status with the Stock Bank after the Reorganization as they had with the Bank immediately prior to the Reorganization.

 

C.

The Bank.

Upon completion of the Reorganization the Stock Bank will be authorized to exercise any and all powers, rights and privileges of, and will be subject to all limitations applicable to, capital stock savings banks under federal law. A copy of the proposed charter and bylaws of the Stock Bank is attached hereto as Exhibit A and made a part of this Plan. The Reorganization will not result in any reduction of the amount of retained earnings (other than the assets of the Bank retained by or distributed to the Holding Company or the MHC), undivided profits, and general loss reserves that the Bank had prior to the Reorganization. Such retained earnings and general loss reserves will be accounted for by the MHC, the Holding Company and the Stock Bank on a consolidated basis in accordance with generally accepted accounting principles.

The initial members of the Board of Directors of the Stock Bank will be the members of the existing Board of Directors of the Bank. The Stock Bank will be wholly-owned by the Holding Company. The Holding Company will be wholly-owned by its stockholders who will consist of the MHC and the persons who purchase Common Stock in the Stock Offering and any subsequent Minority Stock Offering. Upon the Effective Date of the Reorganization, the voting and membership rights of Members will be transferred to the MHC, subject to the conditions specified below.

 

D.

The Holding Company.

The Holding Company will be authorized to exercise any and all powers, rights and privileges, and will be subject to all limitations applicable to savings and loan holding companies and mutual holding companies under federal law and regulations. The initial members of the Board of Directors of the Holding Company will be the existing Board of Directors of the Bank. Thereafter, the voting stockholders of the Holding Company will elect approximately one-third of the Holding Company’s directors annually. A copy of the proposed charter and bylaws of the Holding Company is attached as Exhibit B and made part of this Plan.

The Holding Company will have the power to issue shares of Capital Stock to persons other than the MHC. However, so long as the MHC is in existence, the MHC will be required to own at least a majority of the Voting Stock of the Holding Company. The Holding Company will be authorized to undertake one or more Minority Stock Offerings of less than 50% in the aggregate of the total outstanding Common Stock of the Holding Company, and the Holding Company intends to offer for sale up to 49.9% of its Common Stock in the Stock Offering.

 

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E.

The Mutual Holding Company.

As a mutual corporation, the MHC will have no stockholders. The members of the MHC will have exclusive voting authority as to all matters requiring a vote of members under the charter of the MHC. Persons who have membership rights with respect to the Bank under its existing charter immediately prior to the Reorganization shall continue to have such rights solely with respect to the MHC after the Reorganization so long as such persons remain Members of the Bank after the Reorganization. In addition, all persons who become depositors of the Stock Bank following the Reorganization will have membership rights with respect to the MHC. The rights and powers of the MHC will be defined by the MHC’s charter and bylaws (a copy of which is attached to this Plan as Exhibit C and made a part hereof) and by the statutory and regulatory provisions applicable to savings and loan holding companies and mutual holding companies. In particular, the MHC will be subject to the limitations and restrictions imposed on savings and loan holding companies by Section 10(o)(5) of the HOLA.

The initial members of the Board of Directors of the MHC will be the existing Board of Directors of the Bank. Thereafter, approximately one-third of the directors of the MHC will be elected annually by the members of the MHC who will consist of the former Members of the Bank, who continue to be depositors of the Bank, and all persons who become depositors of the Bank after the Reorganization.

 

4.	Conditions to Implementation of the Reorganization.

Consummation of the Reorganization is expressly conditioned upon the following:

 

A.

Approval of the Plan by a majority of the Board of Directors of the Bank.

 

B.

The filing of a Reorganization Notice, including the Plan, with the Federal Reserve and either:

 

(i)

The Federal Reserve has given written notice of its intent not to disapprove the Reorganization; or

 

(ii)

Sixty days have passed since the Federal Reserve received the Reorganization Notice and deemed it complete under § 12 CFR 39.10(e) and/or § 12 CFR 238.14(g) of the Federal Reserve regulations, and the Federal Reserve has not given written notice that the Reorganization is disapproved or extended for an additional 30 days the period during which disapproval may be issued.

 

C.

The filing of a holding company application with and approval by the Federal Reserve pursuant to the HOLA for the Holding Company and MHC to become mutual savings and loan holding companies by owning or acquiring up to 100% of the common stock of the Stock Bank and the Holding Company, respectively, to be issued in connection with the Reorganization.

 

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D.

Submission of the Plan to the Members for approval pursuant to a Proxy Statement and form of proxy cleared in advance by the Bank Regulators, and such Plan is approved by a majority of the total votes of the Voting Members eligible to be cast at a meeting held at the call of the directors in accordance with the procedures prescribed by the Bank’s charter and bylaws.

 

E.

All necessary approvals and non-objections have been obtained from the Bank Regulators, in connection with the adoption of the charter and bylaws of the MHC, the Holding Company and the Stock Bank, the issuance of deposit insurance and a certificate number by the FDIC to the Stock Bank, and the transfer of assets and liabilities of the Bank to the Stock Bank pursuant to the Plan; and all conditions specified or otherwise imposed by the Bank Regulators, in connection with their approvals and/or non-objections, have been satisfied.

 

5.	Special Meeting of Members.

Subsequent to the approval of the Plan by the Bank Regulators, the Special Meeting shall be scheduled in accordance with the Bank’s Bylaws. Promptly after receipt of approval and at least 15 days but not more than 45 days prior to the Special Meeting, the Bank shall distribute proxy solicitation materials to all Voting Members. The proxy solicitation materials shall include a proxy statement and other documents authorized for use by the regulatory authorities. A copy of the Plan will be made available to Voting Members upon request. Pursuant to the Regulations, an affirmative vote of not less than a majority of the total outstanding votes of the Voting Members is required for approval of the Plan. Voting may be in person or by proxy. The Bank Regulators shall be notified promptly of the actions of the Voting Members.

 

6.	Rights of Members of the MHC.

Following the Reorganization, all persons who had membership rights with respect to the Bank as of the date of the Reorganization will continue to have such rights solely with respect to the MHC as long as they remain Members with the Bank. All existing proxies granted by members of the Bank to the Board of Directors of the Bank shall automatically become proxies granted to the Board of Directors of the MHC. In addition, all persons who become depositors of the Stock Bank subsequent to the Reorganization also will have membership rights with respect to the MHC. In each case, no person who ceases to be the holder of a deposit account with the Stock Bank after the Reorganization shall have any membership or other rights with respect to the MHC. Borrowers of the Stock Bank who were borrower members of the Bank at the time of Reorganization will have the same membership rights in the MHC as they had in the Bank immediately prior to the Reorganization for so long their pre-Reorganization borrowings remain outstanding. Borrowers will not receive membership rights in connection with any new borrowings made after the Reorganization.

 

7.	Conversion of MHC to Stock Form.

Following the completion of the Reorganization, the MHC may elect to convert to stock form in accordance with applicable law (a “Conversion Transaction”). The Board of Directors has no current intention to pursue a Conversion Transaction and, thus, there can be no assurance when, if ever, a Conversion Transaction will occur.

 

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In a Conversion Transaction, the MHC would merge with and into the Stock Bank or the Holding Company, with the Stock Bank or the Holding Company as the resulting entity, and the depositors of the Stock Bank would receive the right to subscribe for shares of common stock of the Holding Company or its successor, which shares would represent the ownership interest of the MHC in the Holding Company and the Stock Bank. The additional shares of common stock of the Holding Company issued in the Conversion Transaction would be sold at their aggregate pro forma market value as determined by an Independent Appraisal.

Any Conversion Transaction shall be fair and equitable to Minority Stockholders. In any Conversion Transaction, Minority Stockholders, if any, will be entitled without additional consideration to maintain the same percentage ownership interest in the Holding Company after the Conversion Transaction as their percentage ownership interest in the Holding Company immediately prior to the Conversion Transaction (i.e., the “Minority Ownership Interest”). The Minority Ownership Interest of Minority Stockholders shall not be reduced in a Conversion Transaction as a result of any waiver of dividends by the MHC.

At the sole discretion of the Board of Directors of the MHC and the Holding Company, a Conversion Transaction may be effected in any other manner necessary to qualify the Conversion Transaction as a tax-free reorganization under applicable federal and state tax laws, provided such Conversion Transaction does not diminish the rights and ownership interest of Minority Stockholders. If a Conversion Transaction does not occur, the MHC will always own a majority of the Voting Stock of the Holding Company. Management of the Bank has no current intention to conduct a Conversion Transaction.

A Conversion Transaction would require the approval of the Federal Reserve and would be presented to a vote of the members of the MHC. Federal regulatory policy requires that in any Conversion Transaction the members of the MHC will be accorded the same stock purchase priorities as if the MHC were a mutual savings bank converting to stock form.

 

8.	Timing of the Reorganization and Sale of Capital Stock.

The Bank intends to consummate the Reorganization as soon as feasible following the receipt of all approvals referred to in Section 4 of this Plan. Subject to the approval of the Bank Regulators, the Holding Company intends to commence the Stock Offering concurrently with the proxy solicitation of Members. The Holding Company may close the Stock Offering before the Special Meeting, provided that the offer and sale of the Common Stock shall be conditioned upon approval of the Plan by the Members at the Special Meeting. Subject to Bank Regulator approval, the Bank’s proxy solicitation materials may permit certain Members to return to the Bank by a reasonable date certain a postage paid card or other written communication requesting receipt of the prospectus if the prospectus is not mailed concurrently with the proxy solicitation materials. The Stock Offering shall be conducted in compliance with the Regulations, including 12 CFR 239.24 and 239.25 of the Federal Reserve’s Regulation MM and the securities offering regulations of the SEC.

 

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9.	Establishment of the Foundation.

As part of the Reorganization, the Bank, in conjunction with funding from the Holding Company, intends to establish a Foundation which will qualify as an exempt organization under Section 501(c)(3) of the Internal Revenue Code and to contribute to the Foundation cash in the amount of $200,000 of the gross proceeds raised in the Stock Offering and a number of shares of Common Stock equal to 3.3% of the shares of Common Stock to be outstanding following the Reorganization and the Stock Offering.

The Foundation is being formed in connection with the Reorganization in order to support the Bank’s charitable activities within the communities located in the counties served by the Bank, and to complement the Bank’s community reinvestment activities in a manner that will allow the Bank’s local communities in the counties in which the Bank has a branch office (now and in the future) to share in the Bank’s financial success as a locally headquartered, community-minded, financial services institution. The funding of the Foundation with Holding Company Common Stock accomplishes this goal as it enables such communities to share in the growth and profitability of the Holding Company and the Bank over the long term. The Foundation will be dedicated to the promotion of charitable purposes including, without limitation, community development, grants or donations to support housing assistance, not-for-profit community groups and other types of organizations or civic minded projects. The Foundation will annually distribute total grants to assist charitable organizations or to fund projects within the communities located in the counties in which the Bank has a branch office (now and in the future) of not less than the “distributable amount” as defined in Section 4942(d) (which is essentially 5.0% of the average fair value of Foundation assets each year, less certain expenses). In order to serve the purposes for which it was formed and maintain its Section 501(c)(3) qualification, the Foundation may sell a portion of the Common Stock contributed to it by the Holding Company. The Foundation will operate in accordance with the following conditions:

 

(l)

The Foundation must vote its shares of Common Stock in the same ratio as other holders of such shares;

 

(2)

The Foundation shall be subject to examination by the Federal Reserve at the Foundation’s expense;

 

(3)

The Foundation shall operate in compliance with written policies adopted by its board of directors, including adopting a business plan and conflict of interest policy;

 

(4)

The Foundation shall provide annual reports to the Federal Reserve describing the grants made and the grant recipients;

 

(5)

The Foundation shall not engage in self-dealing and shall comply with all laws necessary to maintain its tax-exempt status under the Internal Revenue Code; and

 

(6)

Such conditions, if any, as may be imposed by the Federal Reserve.

 

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The board of directors of the Foundation initially will consist of a majority of individuals who are directors and officers of the Holding Company, the Bank or the MHC. The board of directors of the Foundation will be responsible for establishing the policies of the Foundation with respect to grants or donations, consistent with the stated purposes of the Foundation. For a period of five years following the Reorganization, at least one director on the board of directors of the Foundation will be an independent director who is not an employee, Officer or director of the MHC, the Holding Company or the Bank.

 

10.	Number of Shares to be Offered.

The total number of shares (or range thereof) of Common Stock to be issued and offered for sale pursuant to the Plan shall be determined initially by the Board of Directors of the Bank and the Holding Company in conjunction with the determination of the Independent Appraiser. The number of shares to be offered may be adjusted prior to completion of the Stock Offering. The total number of shares of Common Stock that may be issued to persons other than the MHC at the close of the Stock Offering must be less than 50% of the issued and outstanding shares of Common Stock of the Holding Company.

 

11.	Independent Valuation and Purchase Price of Shares.

All shares of Common Stock sold in the Stock Offering shall be sold at a uniform price per share. The purchase price and number of shares to be outstanding shall be determined by the Board of Directors of the Holding Company on the basis of the estimated pro forma market value of the Holding Company and the Bank. The aggregate purchase price for the Common Stock will not be inconsistent with such market value of the Holding Company and the Bank. The pro forma market value of the Holding Company and the Bank will be determined for such purposes by the Independent Appraiser.

Prior to the commencement of the Stock Offering, an Estimated Valuation Range will be established, which range may vary within 15% above to 15% below the midpoint of such range, and up to 15% greater than the maximum of such range, as determined by the Board of Directors at the time of the Stock Offering and consistent with applicable requirements set forth in the Regulations. The Holding Company intends to issue up to 49.9% of its Common Stock in the Stock Offering. The number of shares of Common Stock to be issued and the ownership interest of the MHC may be increased or decreased by the Holding Company, taking into consideration any change in the independent valuation and other factors, at the discretion of the Board of Directors of the Bank and the Holding Company.

Based upon the independent valuation as updated prior to the commencement of the Stock Offering, the Board of Directors may establish the minimum and maximum percentage of shares of Common Stock that will be offered for sale in the Stock Offering, or it may fix the percentage of shares that will be offered for sale in the Stock Offering. In the event the percentage of the shares offered for sale in the Minority Stock Offering is not fixed in the Stock Offering, the Minority Ownership Interest resulting from the Stock Offering will be determined as follows: (a) the product of (x) the total number of shares of Common Stock sold by the Holding Company and (y) the purchase price per share, divided by (b) the aggregate pro forma market value of the Bank and the Holding Company upon the closing of the Stock Offering and sale of all the Common Stock.

 

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Notwithstanding the foregoing, no sale of Common Stock may be consummated unless, prior to such consummation, the Independent Appraiser confirms to the Holding Company, the Bank and to the Bank Regulators, that, to the best knowledge of the Independent Appraiser, nothing of a material nature has occurred which, taking into account all relevant factors, would cause the Independent Appraiser to conclude that the aggregate value of the Common Stock sold in the Stock Offering at the Actual Purchase Price is incompatible with its estimate of the aggregate consolidated pro forma market value of the Holding Company and the Bank. If such confirmation is not received, the Holding Company may cancel the Stock Offering, extend the Stock Offering and establish a new price range and/or estimated price range, extend, reopen or hold a new Stock Offering or take such other action as the Bank Regulators may permit.

The estimated market value of the Holding Company and the Bank shall be determined for such purpose by an Independent Appraiser on the basis of such appropriate factors as are not inconsistent with the applicable Regulations. The Common Stock to be issued in the Stock Offering shall be fully paid and nonassessable.

If there is a Community Offering, Syndicated Community Offering or Firm Commitment Underwritten Offering of shares of Common Stock not subscribed for in the Subscription Offering, the price per share at which the Common Stock is sold in such Community Offering, Syndicated Community Offering or Firm Commitment Underwritten Offering shall be the Actual Purchase Price which will be equal to the purchase price per share at which the Common Stock is sold to persons in the Subscription Offering. Shares sold in the Community Offering, Syndicated Community Offering or Firm Commitment Underwritten Offering will be subject to the same limitations as shares sold in the Subscription Offering.

 

12.	Method of Offering Shares and Rights to Purchase Stock.

In descending order of priority, the opportunity to purchase Common Stock shall be given in the Subscription Offering to: (1) Eligible Account Holders; (2) Tax-Qualified Employee Plans; (3) Supplemental Eligible Account Holders; and (4) Other Members, pursuant to priorities established by the Board of Directors. Any shares of Common Stock that are not subscribed for in the Subscription Offering may at the discretion of the Bank and the Holding Company be offered for sale in a Community Offering, a Syndicated Community Offering or a Firm Commitment Underwritten Offering. The minimum purchase by any Person shall be 25 shares. The Holding Company shall determine in its sole discretion whether each prospective purchaser is a “resident,” “associate,” or “acting in concert” as defined in the Plan, and shall interpret all other provisions of the Plan in its sole discretion. All such determinations are in the sole discretion of the Holding Company, and may be based on whatever evidence the Holding Company chooses to use in making any such determination. In addition to the priorities set forth below, the Board of Directors may establish other priorities for the purchase of Common Stock, subject to the approval of the Bank Regulators. The priorities for the purchase of shares in the Stock Offering are as follows:

 

A.

Subscription Offering.

Priority 1: Eligible Account Holders. Each Eligible Account Holder shall receive non-transferable subscription rights to subscribe for shares of Common Stock offered in the Stock

 

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Offering in an amount equal to the greater of $300,000, one-tenth of one percent (0.1%) of the total shares offered in the Stock Offering, or 15 times the product (rounded down to the nearest whole number) obtained by multiplying the total number of shares of Common Stock to be issued in the Stock Offering by a fraction, of which the numerator is the Qualifying Deposit of the Eligible Account Holder and the denominator is the total amount of Qualifying Deposits of all Eligible Account Holders, in each case on the Eligibility Record Date and subject to the provisions of Section 13; provided that the Holding Company may, in its sole discretion and without further notice to or solicitation of subscribers or other prospective purchasers, increase such maximum purchase limitation to 5% of the maximum number of shares offered in the Stock Offering or decrease such maximum purchase limitation to 0.1% of the maximum number of shares offered in the Stock Offering, subject to the overall purchase limitations set forth in Section 13. If there are insufficient shares available to satisfy all subscriptions of Eligible Account Holders, shares will be allocated to Eligible Account Holders so as to permit each such subscribing Eligible Account Holder to purchase a number of shares sufficient to make his total allocation equal to the lesser of 100 shares or the number of shares subscribed for. Thereafter, unallocated shares will be allocated pro rata to remaining subscribing Eligible Account Holders whose subscriptions remain unfilled in the same proportion that each such subscriber’s Qualifying Deposit bears to the total amount of Qualifying Deposits of all subscribing Eligible Account Holders whose subscriptions remain unfilled. To ensure proper allocation of stock, each Eligible Account Holder must list on his subscription order form all accounts in which he had an ownership interest as of the Eligibility Record Date. Officers, directors, and their Associates may be Eligible Account Holders. However, if an Officer, director, or his or her Associate receives subscription rights based on increased deposits in the year before the Eligibility Record Date, subscription rights based upon these deposits are subordinate to the subscription rights of other Eligible Account Holders.

Priority 2: Tax-Qualified Employee Plans. The Tax-Qualified Employee Plans shall be given the opportunity to purchase in the aggregate up to 4.9% of the shares issued and outstanding following the completion of the Stock Offering. In the event of an oversubscription in the Stock Offering, subscriptions for shares by the Tax-Qualified Employee Plans may be satisfied, in whole or in part, out of authorized but unissued shares of the Holding Company subject to the maximum purchase limitations applicable to such plans as set forth herein, or may be satisfied, in whole or in part, through open market purchases by the Tax-Qualified Employee Plans subsequent to the closing the Stock Offering. If the final valuation exceeds the maximum of the Offering Range, up to 4.9% of the Common Stock issued and outstanding following the completion of the Stock Offering may be sold to the Tax-Qualified Employee Plans notwithstanding any oversubscription by Eligible Account Holders.

Priority 3: Supplemental Eligible Account Holders. To the extent there are sufficient shares remaining after satisfaction of subscriptions by Eligible Account Holders, and the Tax-Qualified Employee Plans, each Supplemental Eligible Account Holder shall receive non-transferable subscription rights to subscribe for shares of Common Stock offered in the Stock Offering in an amount equal to the greater of $300,000, one-tenth of one percent (0.1%) of the total shares offered in the Stock Offering, or 15 times the product (rounded down to the nearest whole number) obtained by multiplying the total number of shares of Common Stock to be issued in the Stock Offering by a fraction, of which the numerator is the Qualifying Deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of Qualifying

 

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Deposits of all Supplemental Eligible Account Holders, in each case on the Supplemental Eligibility Record Date and subject to the provisions of Section 13; provided that the Bank may, in its sole discretion and without further notice to or solicitation of subscribers or other prospective purchasers, increase such maximum purchase limitation to 5% of the maximum number of shares offered in the Stock Offering or decrease such maximum purchase limitation to 0.1% of the maximum number of shares offered in the Stock Offering, subject to the overall purchase limitations set forth in Section 13. In the event Supplemental Eligible Account Holders subscribe for a number of shares which, when added to the shares subscribed for by Eligible Account Holders and the Tax-Qualified Employee Plans, is in excess of the total shares offered in the Stock Offering, the subscriptions of Supplemental Eligible Account Holders will be allocated among subscribing Supplemental Eligible Account Holders so as to permit each subscribing Supplemental Eligible Account Holder to purchase a number of shares sufficient to make his total allocation equal to the lesser of 100 shares or the number of shares subscribed for. Thereafter, unallocated shares will be allocated to each subscribing Supplemental Eligible Account Holder whose subscription remains unfilled in the same proportion that such subscriber’s Qualifying Deposits on the Supplemental Eligibility Record Date bear to the total amount of Qualifying Deposits of all subscribing Supplemental Eligible Account Holders whose subscriptions remain unfilled.

Priority 4: Other Members. To the extent that there are sufficient shares remaining after satisfaction of subscriptions by Eligible Account Holders, the Tax-Qualified Employee Plans and Supplemental Eligible Account Holders, each Other Member shall have the opportunity to purchase an amount equal to the greater of $300,000 or one-tenth of one percent (0.1%) of the total shares offered in the Stock Offering, provided that the Bank may, in its sole discretion and without further notice to or solicitation of subscribers or other prospective purchasers, increase such maximum purchase limitation to 5% of the maximum number of shares offered in the Stock Offering, or decrease such maximum purchase limitation to 0.1% of the maximum number of shares offered in the Stock Offering, subject to the overall purchase limitations set forth in Section 13. In the event Other Members subscribe for a number of shares which, when added to the shares subscribed for by the Eligible Account Holders, Tax-Qualified Employee Plans and Supplemental Eligible Account Holders, is in excess of the total number of shares offered in the Stock Offering, the subscriptions of such Other Members will be allocated among subscribing Other Members on a pro rata basis based on the size of such Other Members’ orders.

 

B.

Community Offering.

Any shares of Common Stock not subscribed for in the Subscription Offering may be offered for sale in a Community Offering. This will involve an offering of all unsubscribed shares directly to the general public with a preference to those natural persons residing in the Community. The Community Offering, if any, shall be for a period of not more than 45 days unless extended by the Holding Company and the Bank, and shall commence concurrently with, during or promptly after the Subscription Offering. The Holding Company and the Bank may use one or more investment banking firms on a best efforts basis to sell the unsubscribed shares in the Subscription and Community Offering. The Holding Company and the Bank may pay a commission or other fee to such investment banking firm(s) as to the shares sold by such firm(s) in the Subscription and Community Offering and may also reimburse such firm(s) for expenses

 

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incurred in connection with the sale. No Person may purchase more than $300,000 of Common Stock in the Community Offering, subject to the overall purchase limitations set forth in Section 13. In the event orders for Common Stock in the Community Offering exceed the number of shares available for sale, shares will be allocated (to the extent shares remain available) first to cover orders of natural persons residing in the Community, and, thereafter, to the extent any shares remain available, to cover orders of other members of the general public on a basis that will promote a widespread distribution of stock. In the event orders for Common Stock in each of these categories exceed the number of shares available for sale within such category, orders shall first be filled up to a maximum of two percent (2%) of the shares sold in the Stock Offering, and thereafter remaining shares will be allocated on an equal number of shares basis per order.

The Bank and the Holding Company, in their sole discretion, may reject subscriptions, in whole or in part, received from any Person under this Section 12.B.

 

C.

Syndicated Community Offering or Firm Commitment Underwritten Offering.

If feasible, any shares of Common Stock not sold in the Subscription Offering or in the Community Offering, if any, may be offered for sale to the general public by a selling group of broker-dealers in a Syndicated Community Offering, subject to terms, conditions and procedures, including the timing of the offering, as may be determined by the Bank and the Holding Company subject to the rights of the Holding Company to accept or reject in whole or in part all orders in the Syndicated Community Offering. It is expected that the Syndicated Community Offering would commence as soon as practicable after termination of the Subscription Offering and the Community Offering, if any. The Syndicated Community Offering shall be completed within 45 days after the termination of the Subscription Offering, unless such period is extended as provided herein. No Person, Associate of such Person, or group of Persons acting in concert, may purchase more than $300,000 of Common Stock in the Syndicated Community Offering, subject to the overall purchase limitations set forth in Section 13.

Alternatively, if feasible, the Board of Directors may determine to offer any shares of Common Stock sold in the Subscription Offering and any Community Offering for sale in a Firm Commitment Underwritten Offering subject to such terms, conditions and procedures as may be determined by the Bank and the Holding Company, subject to the rights of the Holding Company to accept or reject in whole or in part any orders in the Firm Commitment Underwritten Offering. Provided the Subscription Offering has begun, the Holding Company may begin the Firm Commitment Underwritten Offering at any time.

If for any reason a Syndicated Community Offering or Firm Commitment Underwritten Offering of shares of Common Stock not sold in the Subscription Offering or any Community Offering cannot be effected and any shares remain unsold after the Subscription Offering and the Community Offering, if any, the Boards of Directors of the Holding Company and the Bank will seek to make other arrangements for the sale of unsubscribed shares aggregating at least the minimum of the Offering Range. Such other arrangements will be subject to the receipt of any required approval of the Bank Regulators.

 

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13.	Additional Limitations on Purchases of Common Stock.

Purchases of Common Stock in the Stock Offering will be subject to the following purchase limitations:

A. The aggregate amount of outstanding Common Stock of the Holding Company owned or controlled by persons other than the MHC at the close of the Stock Offering shall be less than 50% of the Holding Company’s total outstanding Common Stock.

B. The maximum purchase of Common Stock in the Subscription Offering by a Person or group of Persons through a single Deposit Account is $300,000. No Person by himself, with an Associate or group of Persons acting in concert, may purchase more than $500,000 of the Common Stock offered in the Stock Offering (or such lesser amount as shall equal 9.9% of the shares sold in the Stock Offering) except that: (i) the Holding Company may, in its sole discretion and without further notice to or solicitation of subscribers or other prospective purchasers, increase such maximum purchase limitation to 9.9% of the number of shares sold in the Stock Offering provided that the total number of shares purchased by Persons, their Associates and those Persons with which they are acting in concert, to the extent such purchases exceed 5% of the shares sold in the Stock Offering, shall not exceed, in the aggregate, 10% (or such higher percentage as may be determined by the Board of Directors with the approval of the Bank Regulators) of the total number of the shares sold in the Offering; (ii) the Tax-Qualified Employee Plans may purchase up to 10% of the shares offered in the Stock Offering; and (iii) for purposes of this subsection 13.B shares to be held by any Tax-Qualified Employee Plan and attributable to a person shall not be aggregated with other shares purchased directly by or otherwise attributable to such person.

C. The aggregate amount of Common Stock acquired in the Stock Offering, plus all prior issuances by the Holding Company, by any Non-Tax-Qualified Employee Plan or any Management Person and his or her Associates, exclusive of any shares of Common Stock acquired by such plan or Management Person and his or her Associates in the secondary market, shall not exceed 4.9% of the outstanding shares of Common Stock of the Holding Company at the conclusion of the Stock Offering. In calculating the number of shares held by any Management Person and his or her Associates under this paragraph, shares held by any Tax-Qualified Employee Plan or Non-Tax-Qualified Employee Plan of the Holding Company or the Bank that are attributable to such Person shall not be counted.

D. The aggregate amount of Common Stock acquired in the Stock Offering, plus all prior issuances by the Holding Company, by any Non-Tax-Qualified Employee Plan or any Management Person and his or her Associates, exclusive of any Common Stock acquired by such plan or Management Person and his or her Associates in the secondary market, shall not exceed 4.9% of the stockholders’ equity of the Holding Company at the conclusion of the Stock Offering. In calculating the number of shares held by any Management Person and his or her Associates under this paragraph, shares held by any Tax-Qualified Employee Plan or Non-Tax-Qualified Employee Plan of the Holding Company or the Bank that are attributable to such Person shall not be counted.

 

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E. The aggregate amount of Common Stock acquired in the Stock Offering, plus all prior issuances by the Holding Company, by any one or more Tax-Qualified Employee Plans, exclusive of any shares of Common Stock acquired by such plans in the secondary market, shall not exceed 4.9% of the outstanding shares of Common Stock of the Holding Company at the conclusion of the Stock Offering.

F. The aggregate amount of Common Stock acquired in the Stock Offering, plus all prior issuances by the Holding Company, by any one or more Tax-Qualified Employee Plans, exclusive of any shares of Common Stock acquired by such plans in the secondary market, shall not exceed 4.9% of the stockholders’ equity of the Holding Company at the conclusion of the Stock Offering

G. The aggregate amount of Common Stock acquired in the Stock Offering, plus all prior issuances by the Holding Company, by any one or more management recognition plans, exclusive of any shares of Common Stock acquired by such plans in the secondary market, shall not exceed, in the aggregate, either 1.47% of the outstanding shares of Common Stock of the Holding Company or 1.47% of the Holding Company’s stockholders’ equity at the conclusion of the Stock Offering, provided, however, if the Holding Company’s tangible capital is at least 10.0% at the time of the implementation of the plans, the Federal Reserve may permit the plans to acquire, in the aggregate, up to 1.96% of the outstanding shares of Common Stock of the Holding Company or 1.96% of the Holding Company’s stockholders’ equity at the conclusion of the Stock Offering.

H. The aggregate amount of Common Stock acquired in the Stock Offering, plus all prior issuances by the Holding Company, by any one or more Tax-Qualified Employee Plans and management recognition plans, exclusive of any shares of Common Stock acquired by such plans in the secondary market, shall not exceed, in the aggregate, either 4.9% of the outstanding shares of Common Stock of the Holding Company or 4.9% of the Holding Company’s stockholders’ equity at the conclusion of the Stock Offering, provided, however, if the Holding Company’s tangible capital is at least 10.0% at the time of the implementation of the plans, the Federal Reserve may permit the plans to acquire, in the aggregate, up to 5.88% of the outstanding shares of Common Stock of the Holding Company or 5.88% of the Holding Company’s stockholders’ equity at the conclusion of the Stock Offering.

I. A Tax-Qualified Employee Plan, a management recognition plan or a stock option plan modified or adopted no earlier than one year after the conclusion of the Stock Offering or any subsequent issuance that is made in substantial conformity with the purchase priorities set forth in 12 CFR Section 239.59(a) of the regulations of the Federal Reserve, may exceed the percentage limitations set forth in the foregoing sub-sections (plan expansion), subject to the following: (i) all Common Stock awarded in connection with any plan expansion must be acquired for such awards in the secondary market, and (ii) such acquisitions must begin no earlier than when such plan expansion is permitted to be made.

J. The aggregate amount of Common Stock acquired in the Stock Offering, plus all prior issuances by the Holding Company, by all stock benefit plans of the Holding Company or the Bank, other than employee stock ownership plans, shall not exceed 25% of the outstanding common stock of the Holding Company held by persons other than the MHC.

 

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K. The aggregate amount of Common Stock acquired in the Stock Offering, plus all prior issuances by the Holding Company, by all Non-Tax-Qualified Employee Plans or Management Persons and their Associates, exclusive of any Common Stock acquired by such plans or Management Persons and their Associates in the secondary market, shall not exceed 25% (or such higher percentage as may be set by the Board of Directors with the approval of the Bank Regulators) of the outstanding shares of Common Stock held by persons other than the MHC at the conclusion of the Stock Offering. In calculating the number of shares held by Management Persons and their Associates under this paragraph or paragraph I. below, shares held by any Tax-Qualified Employee Plan or Non-Tax-Qualified Employee Plan that are attributable to such persons shall not be counted.

L. The aggregate amount of Common Stock acquired in the Stock Offering, plus all prior issuances by the Holding Company, by all Non-Tax-Qualified Employee Plans or Management Persons and their Associates, exclusive of any Common Stock acquired by such plans or Management Persons and their Associates in the secondary market, shall not exceed 25% of the stockholders’ equity of the Holding Company held by persons other than the MHC at the conclusion of the Stock Offering.

M. Notwithstanding any other provision of this Plan, no person shall be entitled to purchase any Common Stock to the extent such purchase would be illegal under any federal law or state law or regulation or would violate regulations or policies of the Financial Industry Regulatory Authority, particularly those regarding free riding and withholding. The Holding Company and/or its agents may ask for an acceptable legal opinion from any purchaser as to the legality of such purchase and may refuse to honor any purchase order if such opinion is not timely furnished.

N. The Board of Directors of the Holding Company has the right in its sole discretion to reject any order submitted by a person whose representations the Board of Directors believes to be false or who it otherwise believes, either alone or acting in concert with others, is violating, circumventing, or intends to violate, evade or circumvent the terms and conditions of this Plan.

O. A minimum of 25 shares of Common Stock must be purchased by each Person purchasing shares in the Stock Offering to the extent those shares are available; provided, however, that in the event the minimum number of shares of Common Stock purchased times the price per share exceeds $500, then such minimum purchase requirement shall be reduced to such number of shares which when multiplied by the price per share shall not exceed $500, as determined by the Board.

Subscription rights afforded under this Plan and by Bank Regulator requirements are non-transferable. No person may transfer, offer to transfer, or enter into any agreement or understanding to transfer, the legal or beneficial ownership of any subscription rights under this Plan. No person may transfer, offer to transfer or enter into an agreement or understanding to transfer legal or beneficial ownership of any shares of Common Stock except pursuant to this Plan. Attempts to violate this prohibition are subject to prosecution.

 

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EACH PERSON PURCHASING COMMON STOCK IN THE STOCK OFFERING WILL BE DEEMED TO CONFIRM THAT SUCH PURCHASE DOES NOT CONFLICT WITH THE PURCHASE LIMITATIONS IN THIS PLAN. ALL QUESTIONS CONCERNING WHETHER ANY PERSONS ARE ASSOCIATES OR A GROUP ACTING IN CONCERT OR WHETHER ANY PURCHASE CONFLICTS WITH THE PURCHASE LIMITATIONS IN THIS PLAN OR OTHERWISE VIOLATES ANY PROVISION OF THIS PLAN SHALL BE DETERMINED BY THE BANK IN ITS SOLE DISCRETION. SUCH DETERMINATION SHALL BE CONCLUSIVE, FINAL AND BINDING ON ALL PERSONS, AND THE BANK MAY TAKE ANY REMEDIAL ACTION INCLUDING, WITHOUT LIMITATION, REJECTING THE PURCHASE OR REFERRING THE MATTER TO THE BANK REGULATORS OR OTHER LAW ENFORCEMENT AUTHORITY FOR ACTION, AS THE BANK MAY IN ITS SOLE DISCRETION DEEM APPROPRIATE.

 

14.	Payment for Stock.

All payments for Common Stock subscribed for or ordered in the Stock Offering must be delivered in full to the Bank, together with a properly completed and executed order form, or purchase order in the case of the Syndicated Community Offering, on or prior to the expiration date specified on the order form or purchase order, as the case may be, unless such date is extended by the Bank; provided, that if the Employee Plans subscribe for shares of Common Stock during the Subscription Offering, such plans may pay for such shares at the Actual Purchase Price upon consummation of the Stock Offering. The Holding Company or the Bank may make scheduled discretionary contributions to the ESOP provided such contributions from the Bank, if any, do not cause the Bank to fail to meet its regulatory capital requirement.

Payment for Common Stock shall be made either by personal check, bank draft or money order, or if a purchaser has a Deposit Account in the Bank, such purchaser may pay for the shares subscribed for by authorizing the Bank to make a withdrawal from the purchaser’s Deposit Account at the Bank in an amount equal to the purchase price of such shares. Such authorized withdrawal, whether from a savings passbook or certificate account, shall be without penalty as to premature withdrawal. If the authorized withdrawal is from a certificate account, and the remaining balance does not meet the applicable minimum balance requirements, the certificate shall be canceled at the time of withdrawal, without penalty, and the remaining balance will earn interest at the Bank’s passbook rate. Funds for which a withdrawal is authorized will remain in the purchaser’s Deposit Account but may not be used by the purchaser until the Common Stock has been sold or the 45-day period (or such longer period as may be approved by the Bank Regulators) following the Stock Offering has expired, whichever occurs first. Thereafter, the withdrawal will be given effect only to the extent necessary to satisfy the subscription (to the extent it can be filled) at the Actual Purchase Price per share. Interest will continue to be earned on any amounts authorized for withdrawal until such withdrawal is given effect.

Subscription funds received prior to the completion of the offering will be held in a segregated deposit account at the Bank or, in the Bank’s discretion, at another federally insured depository institution. Interest on subscription funds made by personal check, bank draft or money order will be paid by the Bank at a rate no less than the Bank’s passbook rate. Such interest will be paid from the date payment is received by the Bank until consummation or

 

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termination of the Stock Offering. If for any reason the Stock Offering is not consummated, all payments made by subscribers in the Stock Offering will be refunded to them with interest. In case of amounts authorized for withdrawal from Deposit Accounts, refunds will be made by canceling the authorization for withdrawal.

 

15.	Manner of Exercising Subscription Rights Through Order Forms.

As soon as practicable after the prospectus prepared by the Holding Company and the Bank has been declared effective by the SEC, and the Bank Regulators have approved the Reorganization, copies of the prospectus and order forms will be distributed to all Eligible Account Holders, Supplemental Eligible Account Holders, Other Members and the Tax-Qualified Employee Plans at their last known addresses appearing on the records of the Bank for the purpose of subscribing for shares of Common Stock in the Subscription Offering and will be made available for use by those other persons to whom a Prospectus is delivered.

Each order form will be preceded or accompanied by the prospectus describing the Holding Company, the Bank, the Common Stock and the Subscription and Community Offerings. Each order form will contain, among other things, the following:

A. A specified date by which all order forms must be received by the Bank, which date shall be not less than 20, nor more than 45 days, following the date on which the order forms are first mailed by the Bank, and which date will constitute the termination of the Subscription Offering;

B. The purchase price per share for shares of Common Stock to be sold in the Subscription and Community Offerings;

C. A description of the minimum and maximum number of shares of Common Stock that may be subscribed for pursuant to the exercise of Subscription Rights or otherwise purchased in the Community Offering;

D. Instructions as to how the recipient of the order form must indicate thereon the number of shares of Common Stock for which such Person elects to subscribe and the available alternative methods of payment therefor;

E. An acknowledgment that the recipient of the order form has received a final copy of the prospectus prior to execution of the order form;

F. A statement indicating the consequences of failing to properly complete and return the order form, including a statement to the effect that all subscription rights are nontransferable, will be void at the end of the Subscription Offering, and can only be exercised by delivering to the Bank within the subscription period such properly completed and executed order form, together with a personal check, bank draft or money order in the full amount of the purchase price as specified in the order form for the shares of Common Stock for which the recipient elects to subscribe in the Subscription Offering (or by authorizing on the order form that the Bank withdraw said amount from the subscriber’s Deposit Account at the Bank); and

 

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G. A statement to the effect that the executed order form, once received by the Bank, may not be modified or amended by the subscriber without the consent of the Bank.

Notwithstanding the above, the Bank and the Holding Company reserve the right in their sole discretion to accept or reject orders received on photocopied or facsimiled order forms.

 

16.	Undelivered, Defective or Late Order Form; Insufficient Payment.

In the event order forms (a) are not delivered and are returned to the Bank by the United States Postal Service or the Bank is unable to locate the addressee, (b) are not received back by the Bank or are received by the Bank after the expiration date specified thereon, (c) are defectively filled out or executed, (d) are not accompanied by the full required payment for the shares of Common Stock subscribed for (including cases in which Deposit Accounts from which withdrawals are authorized are insufficient to cover the amount of the required payment), or (e) are not mailed pursuant to a “no mail” order placed in effect by the account holder, the subscription rights of the Person to whom such rights have been granted will lapse as though such Person failed to return the completed order form within the time period specified thereon; provided, that the Bank may, but will not be required to, waive any immaterial irregularity on any order form or require the submission of corrected order forms or the remittance of full payment for subscribed shares by such date as the Bank may specify. The interpretation by the Bank of terms and conditions of this Plan and of the order forms will be final, subject to the authority of the Bank Regulators.

 

17.	Completion of the Stock Offering

The Stock Offering will be terminated if not completed within 90 days from the date on which the Plan is approved by the Federal Reserve, unless an extension is approved by the Federal Reserve.

 

18.	Market for Common Stock.

Upon completion of the Stock Offering, the Holding Company shall use its best efforts to:

A. Encourage and assist a market maker to establish and maintain a market for its common stock; and

B. List its common stock on a national or regional securities exchange, or on the Nasdaq quotation system.

 

19.	Stock Purchases by Management Persons After the Stock Offering.

For a period of three years after the Stock Offering, no Management Person or his or her Associates may purchase, without the prior written approval of the Bank Regulators, any Common Stock of the Holding Company, except from a broker-dealer registered with the SEC, except that the foregoing shall not apply to:

A. Negotiated transactions involving more than I% of the outstanding stock in the class of stock; or

 

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B. Purchases of stock made by and held by any Tax-Qualified or Non-Tax Qualified Employee Plan even if such stock is attributable to Management Persons or their Associates.

 

20.	Resales of Stock by Directors and Officers.

Common Stock purchased by Management Persons and their Associates in the Stock Offering may not be resold for a period of at least one year following the date of purchase, except in the case of death of a Management Person or an Associate.

 

21.	Stock Certificates.

To the extent there are actual stock certificates, each stock certificate shall bear a legend giving appropriate notice of the restrictions set forth in Section 20 above. Appropriate instructions shall be issued to the Holding Company’s transfer agent with respect to applicable restrictions on transfers of such stock. Any shares of stock issued as a stock dividend, stock split or otherwise with respect to such restricted stock, shall be subject to the same restrictions as apply to the restricted stock.

 

22.	Restriction on Financing Stock Purchases.

The Holding Company and the Bank will not loan funds to any Person to purchase Common Stock in the Stock Offering, and will not knowingly offer or sell any of the Common Stock to any Person whose purchase would be financed by funds loaned to the Person by the Holding Company, the Bank or any Affiliate.

 

23.	Stock Benefit Plans.

A. The Holding Company and the Bank are authorized to adopt Tax-Qualified Employee Plans in connection with the Reorganization, including without limitation, an ESOP. Existing as well as any newly created Tax-Qualified Employee Plans may purchase shares of Common Stock in the Stock Offering, to the extent permitted by the terms of such benefit plans and this Plan.

B. The Holding Company and the Bank are authorized to adopt stock option plans, restricted stock plans and other Non- Tax-Qualified Employee Plans no sooner than six months after the completion of the Reorganization and Stock Offering, provided that such stock plans conform to any applicable requirements of Federal regulations, and the Holding Company intends to implement such stock plans after the completion of the Reorganization and Stock Offering, subject to any necessary stockholder approvals.

 

24.	Post-Reorganization Filing and Market Making.

It is anticipated that upon completion of the Stock Offering, the Holding Company shall register its Common Stock with the SEC pursuant to the Exchange Act, and shall undertake not to deregister such Common Stock for a period of three years thereafter. Although the Holding

 

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Company will use its best efforts to obtain a market maker for its common stock, there are no assurances that there will be a market for the Common Stock sold in the Stock Offering, and purchasers must be prepared to hold the Common Stock for an indefinite period of time.

 

25.	Payment of Dividends and Repurchase of Stock.

The Holding Company may not declare or pay a cash dividend on its Common Stock if the effect thereof would cause the regulatory capital of the Holding Company to be reduced below any applicable regulatory capital requirement. Otherwise, the Holding Company may declare dividends or make other capital distributions subject to compliance with any applicable Regulations. Following completion of the Stock Offering, the Holding Company may repurchase its Common Stock consistent with § 239.8(c) of the Federal Reserve’s Regulations relating to stock repurchases, as long as such repurchases do not cause the regulatory capital of the Holding Company to be reduced below any applicable regulatory capital requirement. The MHC may from time to time purchase Common Stock of the Holding Company, subject to compliance with any applicable Regulations. Subject to any notice or approval requirements of the Federal Reserve, the MHC may waive its right to receive dividends declared by the Holding Company.

 

26.	Reorganization and Stock Offering Expenses.

In accordance with the regulations of the Federal Reserve, the expenses incurred by the Bank and the Holding Company in effecting the Reorganization and the Stock Offering will be reasonable.

 

27.	Employment and Other Severance Agreements.

Following or contemporaneously with the Reorganization, the Bank and/or the Holding Company may enter into employment and/or severance arrangements with one or more executive officers of the Bank and/or the Holding Company. It is anticipated that any employment contracts entered into by the Bank and/or the Holding Company will be for terms not exceeding three years and that such contracts will provide for annual renewals of the contracts, subject to approval by the Board of Directors. The Bank and/or the Holding Company also may enter into severance arrangements with one or more executive officers which provide for the payment of severance compensation in the event of a change in control of the Bank and/or the Holding Company. The terms of such employment and severance arrangements have not been determined as of this time, but will be described in any prospectus circulated in connection with the Stock Offering and will be subject to and comply with all applicable regulations of the Bank Regulators.

 

28.	Residents of Foreign Countries and Certain States.

The Holding Company will make reasonable efforts to comply with the securities laws of all States in the United States in which Persons entitled to subscribe for shares of Common Stock pursuant to this Plan reside. However, no such Person will be issued subscription rights or be permitted to purchase shares of Common Stock in the Subscription Offering if such Person resides in a foreign country or resides in a state of the United States with respect to which any of the following apply: (A) a small number of Persons otherwise eligible to subscribe for shares under this Plan reside in such state; (B) the issuance of subscription rights or the offer or sale of

 

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shares of Common Stock to such Persons would require the Holding Company, under the securities laws of such state, to register as a broker, dealer, salesman or agent or to register or otherwise qualify its securities for sale in such state; or (C) such registration or qualification would be impracticable for reasons of cost or otherwise.

 

29.	Interpretation.

All interpretations of this Plan and application of its provisions to particular circumstances by a majority of the Board of Directors of the Bank shall be final, subject to the authority of the Bank Regulators.

 

30.	Amendment or Termination of the Plan.

If necessary or desirable, the terms of the Plan may be substantially amended by a majority vote of the Bank’s Board of Directors, as a result of comments from regulatory authorities or otherwise, at any time prior to the solicitation of proxies and submission of the Plan and proxy materials to a vote of the Members. At any time after the solicitation of proxies and submission of the Plan and proxy materials to a vote of the Members, the terms of the Plan that relate to the Reorganization may be amended by a majority vote of the Board of Directors only with the concurrence of the Bank Regulators. Terms of the Plan relating to the Stock Offering including, without limitation, Sections 8 through 21, may be amended by a majority vote of the Bank’s Board of Directors as a result of comments from regulatory authorities or otherwise at any time prior to the approval of the Plan by the Bank Regulators, and at any time thereafter with the concurrence of the Bank Regulators. The Plan may be terminated by a majority vote of the Board of Directors at any time prior to the earlier of approval of the Plan by the Bank Regulators and the date of the Special Meeting, and may be terminated by a majority vote of the Board of Directors at any time thereafter with the concurrence of the Bank Regulators. In its discretion, the Board of Directors may modify or terminate the Plan upon the order of the regulatory authorities without a resolicitation of proxies or another meeting of the Members; however, any material amendment of the terms of the Plan that relate to the Reorganization which occur after the Special Meeting shall require a resolicitation of Members. Failure of the Members to approve the Plan will result in the termination of the Plan.

The Plan shall be terminated if the Reorganization is not completed within 24 months from the date upon which the Members of the Bank approve the Plan, and may not be extended by the Bank or the Bank Regulators.

 

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EXHIBIT A

Charter and Bylaws of Ponce Bank

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PONCE BANK

FEDERAL STOCK CHARTER

Section 1. Corporate title. The full corporate title of the savings bank is Ponce Bank (the “Savings Bank”).

Section 2. Office. The home office shall be located in Bronx, New York.

Section 3. Duration. The duration of the Savings Bank is perpetual.

Section 4. Purpose and powers. The purpose of the Savings Bank is to pursue any or all of the lawful objectives of a Federal savings bank chartered under section 5 of the Home Owners’ Loan Act and to exercise all of the express, implied, and incidental powers conferred thereby and by all acts amendatory thereof and supplemental thereto, subject to the Constitution and laws of the United States as they are now in effect, or as they may hereafter be amended, and subject to all lawful and applicable rules, regulations, and orders of the Office of the Comptroller of the Currency (the “OCC”).

Section 5. Capital stock. The total number of shares of all classes of the capital stock that the Savings Bank has the authority to issue is 60,000,000, of which 50,000,000 shares shall be common stock, par value $0.01 per share, and of which 10,000,000 shares shall be serial preferred stock, par value $0.01 per share. The shares may be issued from time to time as authorized by the board of directors without the approval of its shareholders, except as otherwise provided in this Section 5 or to the extent that such approval is required by governing law, rule, or regulation. The consideration for the issuance of the shares shall be paid in full before their issuance and shall not be less than the par value. Neither promissory notes nor future services shall constitute payment or part payment for the issuance of shares of the Savings Bank. The consideration for the shares shall be cash, tangible or intangible property (to the extent direct investment in such property would be permitted to the Savings Bank), labor, or services actually performed for the Savings Bank, or any combination of the foregoing. In the absence of actual fraud in the transaction, the value of such property, labor, or services, as determined by the board of directors of the Savings Bank, shall be conclusive. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, that part of the retained earnings of the Savings Bank that is transferred to common stock or paid-in capital accounts upon the issuance of shares as a stock dividend shall be deemed to be the consideration for their issuance.

Except for shares issued in the initial organization of the Savings Bank or in connection with the conversion of the Savings Bank from the mutual to stock form of capitalization, no shares of capital stock (including shares issuable upon conversion, exchange, or exercise of other securities) shall be issued, directly or indirectly, to officers, directors, or controlling persons of the Savings Bank other than as part of a general public offering or as qualifying shares to a director, unless the issuance or the plan under which they would be issued has been approved by a majority of the total votes eligible to be cast at a legal meeting.

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Nothing contained in this Section 5 (or in any supplementary sections hereto) shall entitle the holders of any class or series of capital stock to vote as a separate class or series or to more than one vote per share, and there shall be no cumulation of votes for the election of directors; provided, that this restriction on voting separately by class or series shall not apply:

 

(i)

To any provision which would authorize the holders of preferred stock, voting as a class or series, to elect some members of the board of directors, less than a majority thereof, in the event of default in the payment of dividends on any class or series of preferred stock;

 

(ii)

To any provision which would require the holders of preferred stock, voting as a class or series, to approve the merger or consolidation of the Savings Bank with another corporation or the sale, lease, or conveyance (other than by mortgage or pledge) of properties or business in exchange for securities of a corporation other than the Savings Bank if the preferred stock is exchanged for securities of such other corporation; provided, that no provision may require such approval for transactions undertaken with the assistance or pursuant to the direction of the OCC or the Federal Deposit Insurance Corporation;

 

(iii)

To any amendment which would adversely change the specific terms of any class or series of capital stock as set forth in this Section 5 (or in any supplementary sections hereto), including any amendment which would create or enlarge any class or series ranking prior thereto in rights and preferences. An amendment which increases the number of authorized shares of any class or series of capital stock, or substitutes the surviving savings bank in a merger or consolidation for the Savings Bank, shall not be considered to be such an adverse change.

A description of the different classes and series of the Savings Bank’s capital stock and a statement of the designations, and the relative rights, preferences and limitations of the shares of each class of and series of capital stock are as follows:

A. Common stock. Except as provided in this Section 5 (or in any supplementary sections thereto) the holders of common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote for each share held by such holder and there shall be no right to cumulate votes in an election of directors.

Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to payment of dividends, the full amount of dividends and of sinking fund, retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends out of any assets legally available for the payment of dividends.

 

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In the event of any liquidation, dissolution, or winding up of the Savings Bank, the holders of the common stock (and the holders of any class or series of stock entitled to participate with the common stock in the distribution of assets) shall be entitled to receive, in cash or in kind, the assets of the Savings Bank available for distribution remaining after: (i) payment or provision for payment of the Savings Bank’s debts and liabilities; (ii) distributions or provision for distributions in settlement of its liquidation account; and (iii) distributions or provisions for distributions to holders of any class or series of stock having preference over the common stock in the liquidation, dissolution, or winding up of the Savings Bank. Each share of common stock shall have the same relative rights as and be identical in all respects with all the other shares of common stock.

B. Preferred stock. The Savings Bank may provide in supplementary sections to its charter for one or more classes of preferred stock, which shall be separately identified. The shares of any class may be divided into and issued in series, with each series separately designated so as to distinguish the shares thereof from the shares of all other series and classes. The terms of each series shall be set forth in a supplementary section to the charter. All shares of the same class shall be identical, except as to the following relative rights and preferences, as to which there may be variations between different series:

 

(a)

The distinctive serial designation and the number of shares constituting such senes;

 

(b)

The dividend rate or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date(s), the payment date(s) for dividends, and the participating or other special rights, if any, with respect to dividends;

 

(c)

The voting powers, full or limited, if any, of shares of such series;

 

(d)

Whether the shares of such series shall be redeemable and, if so, the price(s) at which, and the terms and conditions on which, such shares may be redeemed;

 

(e)

The amount(s) payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution, or winding up of the Savings Bank;

 

(f)

Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price(s) at which such shares may be redeemed or purchased through the application of such fund;

 

(g)

Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes of stock of the Savings Bank and, if so, the conversion price(s) or the rate(s) of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange;

 

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(h)

The price or other consideration for which the shares of such series shall be issued; and

 

(i)

Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock.

Each share of each series of serial preferred stock shall have the same relative rights as and be identical in all respects with all the other shares of the same series.

The board of directors shall have authority to divide, by the adoption of supplementary charter sections, any authorized class of preferred stock into series and, within the limitations set forth in this section and the remainder of this charter, fix and determine the relative rights and preferences of the shares of any series so established.

Prior to the issuance of any preferred shares of a series established by a supplementary charter section adopted by the board of directors, the Savings Bank shall file with the OCC a dated copy of that supplementary section of this charter establishing and designating the series and fixing and determining the relative rights and preferences thereof.

Section 6. Preemptive rights. Holders of the capital stock of the Savings Bank shall not be entitled to preemptive rights with respect to any shares of the Savings Bank which may be issued.

Section 7. Directors. The Savings Bank shall be under the direction of a board of directors. The authorized number of directors, as stated in the Savings Bank’s bylaws, shall not be fewer than five nor more than fifteen except when a greater or lesser number is approved by the OCC.

Section 8. Certain Provisions Applicable for Five Years. Notwithstanding anything contained in the Savings Bank’s charter or bylaws to the contrary, for a period of five years from the date this charter first becomes effective, the following provisions shall apply:

A. Beneficial Ownership Limitation. No person shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10 percent of any class of an equity security of the Savings Bank. This limitation shall not apply to a transaction in which the Savings Bank forms a holding company without change in the respective beneficial ownership interests of its stockholders other than pursuant to the exercise of any dissenter and appraisal rights, the purchase of shares by underwriters in connection with a public offering, or the purchase of less than 25 percent of a class of stock by a tax-qualified employee stock benefit plan as defined in §192.25 of the OCC’s regulations.

In the event shares are acquired in violation of this Section 8, all shares beneficially owned by any person in excess of 10 percent shall be considered “excess shares” and shall not be counted as shares entitled to vote and shall not be voted by any person or counted as voting shares in connection with any matters submitted to the stockholders for a vote.

 

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B. Call for Special Meetings. Special meetings of stockholders relating to changes in control of the Savings Bank or amendments to its charter shall be called only upon direction of the board of directors.

For purposes of this Section 8, the following definitions apply:

1. The term “person” includes an individual, a group acting in concert, a corporation, a partnership, an association, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of the equity securities of the Savings Bank.

2. The term “offer” includes every offer to buy or otherwise acquire, solicitation of an offer to sell, tender offer for, or request or invitation for tenders of, a security or interest in a security for value.

3. The term “acquire” includes every type of acquisition, whether effected by purchase, exchange, operation of law or otherwise.

4. The term “acting in concert” means (a) knowing participation in a joint activity or conscious parallel action towards a common goal whether or not pursuant to an express agreement, or (b) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangements, whether written or otherwise.

Section 9. Amendment of charter. Except as provided in Section 5, no amendment, addition, alteration, change or repeal of this charter shall be made, unless such is proposed by the board of directors of the Savings Bank, approved by the shareholders by a majority of the votes eligible to be cast at a legal meeting, unless a higher vote is otherwise required, and approved or preapproved by the OCC.

 

PONCE BANK
ATTEST:
		Lissette Martinez
		Corporate Secretary
BY:
		Carlos Naudon
		President

 

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OFFICE OF THE COMPTROLLER OF THE CURRENCY

 

ATTEST:
		Deputy Comptroller for Licensing
BY:
		Comptroller of the Currency
Effective Date:

 

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PONCE BANK

BYLAWS

ARTICLE I - HOME OFFICE

The home office of Ponce Bank (the “Savings Bank”) shall be at 2244 Westchester Avenue, Bronx, Bronx County, New York.

ARTICLE II - SHAREHOLDERS

Section 1. Place of Meetings. All annual and special meetings of shareholders shall be held at the home office of the Savings Bank or at such other convenient place as the board of directors may determine.

Section 2. Annual Meeting. A meeting of the shareholders of the Savings Bank for the election of directors and for the transaction of any other business of the Savings Bank shall be held annually within 150 days after the end of the Savings Bank’s fiscal year.

Section 3. Special Meetings. Special meetings of the shareholders may be called at any time by the chairman of the board, the president, or a majority of the board of directors, and shall be called by the chairman of the board, the president, or the secretary upon the written request of the holders of 10% or more of the shares of the Savings Bank entitled to vote at the meeting. Such written request shall state the purpose or purposes of the meeting and shall be delivered to the home office of the Savings Bank addressed to the chairman of the board, the president, or the secretary.

Section 4. Conduct of Meetings. Annual and special meetings shall be conducted in accordance with the most current edition of Robert’s Rules of Order, unless otherwise prescribed by regulations of the Office of the Comptroller of the Currency (“OCC”) or these bylaws or the board of directors adopts another written procedure for the conduct of meetings. The board of directors shall designate, when present, either the chairman of the board or president to preside at such meetings.

Section 5. Notice of Meetings. Written notice stating the place, day, and hour of the meeting and the purpose(s) for which the meeting is called shall be delivered not fewer than 20 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, the president, or the secretary, or the directors calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the mail, addressed to the shareholder at the address as it appears on the stock transfer books or records of the Savings Bank as of the record date prescribed in Section 6 of this Article II with postage prepaid. When any shareholders’ meeting, either annual or special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than 30 days or of the business to be transacted at the meeting, other than an announcement at the meeting at which such adjournment is taken. Notwithstanding anything in this section, however, a federal stock savings bank that is wholly owned shall not be subject to the shareholder notice requirement.

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Section 6. Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of shareholders. Such date in any case shall be not more than 60 days and, in case of a meeting of shareholders, not fewer than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment.

Section 7. Voting Lists. At least 20 days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the Savings Bank shall make a complete list of the shareholders of record entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address and the number of shares held by each. This list of shareholders shall be kept on file at the home office of the Savings Bank and shall be subject to inspection by any shareholder of record or the shareholder’s agent at any time during usual business hours for a period of 20 days prior to such meeting. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder of record or any shareholder’s agent during the entire time of the meeting. The original stock transfer book shall constitute prima facie evidence of the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. Notwithstanding anything in this section, however, a federal stock savings bank that is wholly owned shall not be subject to the voting list requirements. In lieu of making the shareholder list available for inspection by shareholders as provided above, the board of directors may elect to follow the procedures prescribed in 12 CFR 5.22(k)(4)(ii) of the OCC’s regulations as now or hereafter in effect.

Section 8. Quorum. A majority of the outstanding shares of the Savings Bank entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If a quorum is present at a meeting of shareholders and the withdrawal of shareholders results in the presence of less than a quorum, the shareholders present may continue to transact business until adjournment. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the vote of a greater number of shareholders voting together or voting by classes is required by law or the charter. Directors, however, are elected by a plurality of the votes cast at an election of directors.

Section 9. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his or her duly authorized attorney in fact. Proxies may be given telephonically or electronically as long as the holder uses a procedure for verifying the identity of the shareholder. Proxies solicited on behalf of the management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the board of directors. No proxy shall be valid more than eleven months from the date of its execution except for a proxy coupled with an interest.

 

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Section 10. Voting of Shares in the Name of Two or More Persons. When ownership stands in the name of two or more persons, in the absence of written directions to the Savings Bank to the contrary, at any meeting of the shareholders of the Savings Bank anyone or more of such shareholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree.

Section 11. Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent, or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian, or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by him or her, either in person or by proxy, but no trustee shall be entitled to vote shares held by him or her without a transfer of such shares into his or her name. Shares held in trust in an IRA or Keogh Account, however, may by voted by the Savings Bank if no other instructions are received. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer into his or her name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred.

Neither treasury shares of its own stock held by the Savings Bank nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Savings Bank, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting.

Section 12. Cumulative Voting. Shareholders may not cumulate their votes for election of directors.

Section 13. Inspectors of Election. In advance of any meeting of shareholders, the board of directors may appoint any person other than nominees for office as inspectors of election to act at such meeting or any adjournment. The number of inspectors shall be either one or three. Any such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board or the president may, or on the request of not fewer than lO percent of the votes represented at the meeting shall, make such appointment at the meeting. If appointed at the meeting, the majority of the votes present shall determine whether one or three inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting or at the meeting by the chairman of the board or the president.

 

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Unless otherwise prescribed by regulations of the OCC, the duties of such inspectors shall include: determining the number of shares and the voting power of each share, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the rights to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders.

Section 14. Nominating Committee. The board of directors shall act as a nominating committee for selecting the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least 20 days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Savings Bank. No nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by shareholders are made in writing and delivered to the secretary of the Savings Bank at least five days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Savings Bank. Ballots bearing the names of all persons nominated by the nominating committee and by shareholders shall be provided for use at the annual meeting.

However, if the nominating committee shall fail or refuse to act at least 20 days prior to the annual meeting, nominations for directors may be made at the annual meeting by any shareholder entitled to vote and shall be voted upon.

Section 15. New Business. Any new business to be taken up at the annual meeting shall be stated in writing and filed with the secretary of the Savings Bank at least five days before the date of the annual meeting, and all business so stated, proposed, and filed shall be considered at the annual meeting; but no other proposal shall be acted upon at the annual meeting. Any shareholder may make any other proposal at the annual meeting and the same may be discussed and considered, but unless stated in writing and filed with the secretary at least five days before the meeting, such proposal shall be laid over for action at an adjourned, special, or annual meeting of the shareholders taking place 30 days or more thereafter. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors, and committees; but in connection with such reports, no new business shall be acted upon at such annual meeting unless stated and filed as herein provided.

Section 16. Informal Action by Shareholders. Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of shareholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be given by all of the shareholders entitled to vote with respect to the subject matter.

 

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ARTICLE III - BOARD OF DIRECTORS

Section 1. General Powers. The business and affairs of the Savings Bank shall be under the direction of its board of directors. The board of directors shall annually elect a chairman of the board from among its members and shall designate, when present, the chairman of the board to preside at its meetings.

Section 2. Number and Term. The board of directors shall consist of seven (7) members, and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. One class shall be elected by ballot annually.

Section 3. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this bylaw following the annual meeting of shareholders. The board of directors may provide, by resolution, the time and place, for the holding of additional regular meetings without other notice than such resolution. Directors may participate in a meeting by means of a conference telephone or similar communications device through which all persons participating can hear each other at the same time. Participation by such means shall constitute presence in person for all purposes.

Section 4. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president, or one-third of the directors. The persons authorized to call special meetings of the board of directors may fix any place, within the Savings Bank’s normal lending territory, as the place for holding any special meeting of the board of directors called by such persons. Members of the board of directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person for all purposes.

Section 5. Notice. Written notice of any special meeting shall be given to each director at least 24 hours prior thereto when delivered personally or at least five days prior thereto when delivered by mail to the address at which the director is most likely to be reached or transmitted electronically. Such notice shall be deemed to be delivered when deposited in the mail so addressed, with postage prepaid if mailed, or when the Savings Bank receives notice of delivery if electronically transmitted. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice of waiver of notice of such meeting.

Section 6. Quorum. A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the board of directors; but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 5 of this Article III.

 

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Section 7. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by regulation of the OCC or by these bylaws.

Section 8. Action Without a Meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors.

Section 9. Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the Savings Bank addressed to the chairman of the board or the president. Unless otherwise specified, such resignation shall take effect upon receipt by the chairman of the board or the president. More than three consecutive absences from regular meetings of the board of directors, unless excused by resolution of the board of directors, shall automatically constitute a resignation, effective when such resignation is accepted by the board of directors.

Section 10. Vacancies. Any vacancy occurring on the board of directors may be filled by the affirmative vote of a majority of the remaining directors although less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected to serve only until the next election of directors by the shareholders. Any directorship to be filled by reason of an increase in the number of directors may be filled by election by the board of directors for a term of office continuing only until the next election of directors by the shareholders.

Section 11. Compensation. Directors, as such, may receive a stated salary for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation for attendance at committee meetings as the board of directors may determine.

Section 12. Presumption of Assent. A director of the Savings Bank who is present at a meeting of the board of directors at which action on any Savings Bank matter is taken shall be presumed to have assented to the action taken unless his or her dissent or abstention shall be entered in the minutes of the meeting or unless he or she shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Savings Bank within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action.

Section 13. Removal of Directors. At a meeting of shareholders called expressly for that purpose, any director may be removed only for cause as defined in 12 CFR 5.21(j)(2)(x)(B) by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. Whenever the holders of the shares of any class are entitled to elect one or more directors by the provisions of the charter or supplemental sections thereto, the provisions of this section shall apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the outstanding shares as a whole.

 

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Section 14. Director Qualifications. A person is not qualified to serve as director if he or she: (l) is under indictment for, or has ever been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year, (2) is a person against whom a banking agency has, within the past ten years, issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal, or (3) has been found either by a regulatory agency whose decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty involving personal profit or (ii) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency.

Section 15. Age Limitations. No person not serving as a director at the time of the initial adoption of the Bylaws may serve as a director of the Savings Bank after attaining the age of ninety (90). Otherwise, no person may serve as a director of the Savings Bank after attaining the age of seventy-five (75). This age limitation does not apply to a director emeritus.

Section 16. Emeritus Directors. Emeritus directors may be appointed and their compensation for services (in an amount not to exceed those fees paid to voting directors) determined by resolution of the board of directors of the Savings Bank. Only former directors of the Savings Bank (including former directors of other savings and loan associations or savings banks that have been merged with, or otherwise acquired by the Savings Bank) shall be eligible to serve as emeritus directors. Emeritus directors shall be available for consultation with and advice to the management of the Savings Bank. Emeritus directors may attend meetings of the board of directors, at the discretion of the board of directors, but shall have no vote on any matter acted upon by such board.

ARTICLE IV - EXECUTIVE AND OTHER COMMITTEES

Section 1. Appointment. The board of directors, by resolution adopted by a majority of the full board, may designate the chairman of the board and two or more of the other directors to constitute an executive committee. The designation of any committee pursuant to this Article IV and the delegation of authority shall not operate to relieve the board of directors, or any director, of any responsibility imposed by law or regulation.

Section 2. Authority. The executive committee, when the board of directors is not in session, shall have and may exercise all of the authority of the board of directors except to the extent, if any, that such authority shall be limited by the resolution appointing the executive committee; and except also that the executive committee shall not have the authority of the board of directors with reference to: the declaration of dividends; the amendment of the charter or bylaws of the Savings Bank, or recommending to the shareholders a plan of merger, consolidation, or conversion; the sale, lease, or other disposition of all or substantially all of the property and assets of the Savings Bank otherwise than in the usual and regular course of its business; a voluntary dissolution of the Savings Bank; a revocation of any of the foregoing; or the approval of a transaction in which any member of the executive committee, directly or indirectly, has any material beneficial interest.

 

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Section 3. Tenure. Subject to the provisions of Section 8 of this Article IV, each member of the executive committee shall hold office until the next regular annual meeting of the board of directors following his or her designation and until a successor is designated as a member of the executive committee.

Section 4. Meetings. Regular meetings of the executive committee may be held without notice at such times and places as the executive committee may fix from time to time by resolution. Special meetings of the executive committee may be called by any member thereof upon not less than one day’s notice stating the place, date, and hour of the meeting, which notice may be written or oral. Any member of the executive committee may waive notice of any meeting and no notice of any meeting need to be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting.

Section 5. Quorum. A majority of the members of the executive committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of the executive committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present.

Section 6. Action Without a Meeting. Any action required or permitted to be taken by the executive committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the executive committee.

Section 7. Vacancies. Any vacancy in the executive committee may be filled by a resolution adopted by a majority of the full board of directors.

Section 8. Resignations and Removal. Any member of the executive committee may be removed at any time with or without cause by resolution adopted by a majority of the full board of directors. Any member of the executive committee may resign from the executive committee at any time by giving written notice to the chairman of the board, president or secretary of the Savings Bank. Unless otherwise specified, such resignation shall take effect upon its receipt; the acceptance of such resignation shall not be necessary to make it effective.

Section 9. Procedure. The executive committee shall elect a presiding officer from its members and may fix its own rules of procedure which shall not be inconsistent with these bylaws. It shall keep regular minutes of its proceedings and report the same to the board of directors for its information at the meeting held next after the proceedings shall have occurred.

Section 10. Other Committees. The board of directors may by resolution establish an audit, loan, or other committee composed of directors as they may determine to be necessary or appropriate for the conduct of the business of the Savings Bank and may prescribe the duties, constitution, and procedures thereof.

 

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ARTICLE V - OFFICERS

Section 1. Positions. The officers of the Savings Bank shall be a president, one or more vice presidents, a secretary, and a treasurer or comptroller, each of whom shall be elected by the board of directors. The board of directors may also designate the chairman of the board as an officer. The offices of the secretary and treasurer or comptroller may be held by the same person and a vice president may also be either the secretary or the treasurer or comptroller. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment of such other officers as the business of the Savings Bank may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices.

Section 2. Election and Term of Office. The officers of the Savings Bank shall be elected annually at the first meeting of the board of directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor has been duly elected and qualified or until the officer’s death, resignation, or removal in the manner hereinafter provided. Election or appointment of an officer, employee, or agent shall not of itself create contractual rights. The board of directors may authorize the Savings Bank to enter into an employment contract with any officer in accordance with regulations of the OCC; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V.

Section 3. Removal. Any officer may be removed by the board of directors whenever in its judgment the best interests of the Savings Bank will be served thereby, but such removal, other than for cause, shall be without prejudice to the contractual rights, if any, of the person so removed.

Section 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or otherwise may be filled by the board of directors for the unexpired portion of the term.

Section 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the board of directors.

ARTICLE VI - CONTRACTS AND CHECKS

Section 1. Contracts. To the extent permitted by regulations of the acc, and except as otherwise prescribed by these bylaws with respect to certificates for shares, the board of directors may authorize any officer, employee, or agent of the Savings Bank to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Savings Bank. Such authority may be general or confined to specific instances.

Section 2. Checks; Drafts, etc. All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the Savings Bank shall be signed by one or more officers, employees or agents of the Savings Bank in such manner as shall from time to time be determined by the board of directors.

 

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ARTICLE VII - CERTIFICATES FOR SHARES AND THEIR TRANSFER

Section 1. Certificates for Shares. Certificates representing shares of capital stock of the Savings Bank shall be in such form as shall be determined by the board of directors and approved by the OCC. Such certificates shall be signed by the chief executive officer or by any other officer of the Savings Bank authorized by the board of directors, attested by the secretary or an assistant secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar other than the Savings Bank itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Savings Bank. All certificates surrendered to the Savings Bank for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares has been surrendered and canceled, except that in the case of a lost or destroyed certificate, a new certificate may be issued upon such terms and indemnity to the Savings Bank as the board of directors may prescribe.

Section 2. Transfer of Shares. Transfer of shares of capital stock of the Savings Bank shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by his or her legal representative, who shall furnish proper evidence of such authority, or by his or her attorney authorized by a duly executed power of attorney and filed with the Savings Bank. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Savings Bank shall be deemed by the Savings Bank to be the owner for all purposes.

ARTICLE VIII - FISCAL YEAR

The fiscal year of the Savings Bank shall end on the 31^st day of December of each year. The appointment of accountants shall be subject to annual ratification by the shareholders.

ARTICLE IX - DIVIDENDS

Subject to the terms of the Savings Bank’s charter and the regulations and orders of the acc, the board of directors may, from time to time, declare, and the Savings Bank may pay, dividends on its outstanding shares of capital stock.

ARTICLE X - CORPORATE SEAL

The board of directors shall provide a Savings Bank seal which shall be two concentric circles between which shall be the name of the Savings Bank. The year of incorporation or an emblem may appear in the center.

ARTICLE XI - AMENDMENTS

These bylaws may be amended in a manner consistent with regulations of the OCC and shall be effective after: (i) approval of the amendment by a majority vote of the authorized board of directors, or by a majority vote of the votes cast by the shareholders of the Savings Bank at any legal meeting, and (ii) receipt of any applicable regulatory approval. When the Savings Bank fails to meet its quorum requirements, solely due to vacancies on the board, then the affirmative vote of a majority of the sitting board will be required to amend the bylaws.

 

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ARTICLE XII - INDEMNIFICATION

The Savings Bank shall indemnify its personnel, including directors, officers and employees, to the fullest extent authorized by applicable law and regulations, as the same exists or may hereafter be amended; provided, any indemnification by the Savings Bank of the Savings Bank’s personnel is subject to any applicable rules or regulations of the federal bank regulators.

ARTICLE XIII - RELIANCE UPON BOOKS, REPORTS AND RECORDS

Each director, each member of any committee designated by the board of directors, and each officer of the Savings Bank shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Savings Bank and upon such information, opinions, reports or statements presented to the Savings Bank by any of its officers or employees, or committees of the board of directors so designated, or by any other person as to matters which such director or committee member reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Savings Bank.

 

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EXHIBIT B

Charter and Bylaws of the Holding Company

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PDL COMMUNITY BANCORP

STOCK HOLDING COMPANY CHARTER

Section 1. Corporate title. The full corporate title of the mutual holding company subsidiary holding company is PDL Community Bancorp (the “Company”).

Section 2. Domicile. The domicile of the Company shall be in Bronx County, New York.

Section 3. Duration. The duration of the Company is perpetual.

Section 4. Purpose and powers. The purpose of the Company is to pursue any or all of the lawful objectives of a federal mutual’ holding company chartered under Section 10(0) of the Home Owners’ Loan Act, 12 U.S.C. 1467a(0), and to exercise all of the express, implied, and incidental powers conferred thereby and by all acts amendatory thereof and supplemental thereto, subject to the Constitution and laws of the United States as they are now in effect, or as they may hereafter be amended, and subject to all lawful and applicable rules, regulations, and orders of the Board of Governors of the Federal Reserve System (the “FRB”).

Section 5. Capital stock. The total number of shares of all classes of the capital stock that the Company has the authority to issue is 60,000,000, of which 50,000,000 shares shall be common stock, par value $0.01 per share, and of which 10,000,000 shares shall be serial preferred stock, par value $0.01 per share. The shares may be issued from time to time as authorized by the board of directors without the approval of its shareholders, except as otherwise provided in this Section 5 or to the extent that such approval is required by governing law, rule, or regulation. The consideration for the issuance of the shares shall be paid in full before their issuance and shall not be less than the par value. Neither promissory notes nor future services shall constitute payment or part payment for the issuance of shares of the Company. The consideration for the shares shall be cash, tangible or intangible property (to the extent direct investment in such property would be permitted to the Company), labor, or services actually performed for the Company, or any combination of the foregoing. In the absence of actual fraud in the transaction, the value of such property, labor, or services, as determined by the board of directors of the Company, shall be conclusive. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, that part of the retained earnings of the Company that is transferred to common stock or paid-in capital accounts upon the issuance of shares as a stock dividend shall be deemed to be the consideration for their issuance.

Except for shares issued in the initial organization of the Company, no shares of capital stock (including shares issuable upon conversion, exchange, or exercise of other securities) shall be issued, directly or indirectly, to officers, directors, or controlling persons (except for shares issued to the parent mutual holding company) of the Company other than as part of a general public offering or as qualifying shares to a director, unless the issuance or the plan under which they would be issued has been approved by a majority of the total votes eligible to be cast at a legal meeting.

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Nothing contained in this Section 5 (or in any supplementary sections hereto) shall entitle the holders of any class or series of capital stock to vote as a separate class or series or to more than one vote per share, and there shall be no cumulation of votes for the election of directors; provided, that this restriction on voting separately by class or series shall not apply:

(i) To any provision which would authorize the holders of preferred stock, voting as a class or series, to elect some members of the board of directors, less than a majority thereof, in the event of default in the payment of dividends on any class or series of preferred stock;

(ii) To any provision which would require the holders of preferred stock, voting as a class or series, to approve the merger or consolidation of the Company with another corporation or the sale, lease, or conveyance (other than by mortgage or pledge) of properties or business in exchange for securities of a corporation other than the Company if the preferred stock is exchanged for securities of such other corporation; provided, that no provision may require such approval for transactions undertaken with the assistance or pursuant to the direction of the FRB or the Federal Deposit Insurance Corporation;

(iii) To any amendment which would adversely change the specific terms of any class or series of capital stock as set forth in this Section 5 (or in any supplementary sections hereto), including any amendment which would create or enlarge any class or series ranking prior thereto in rights and preferences. An amendment which increases the number of authorized shares of any class or series of capital stock, or substitutes the surviving company in a merger or consolidation for the Company, shall not be considered to be such an adverse change.

A description of the different classes and series of the Company’s capital stock and a statement of the designations, and the relative rights, preferences and limitations of the shares of each class of and series of capital stock are as follows:

A. Common Stock. Except as provided in this Section 5 (or in any supplementary sections thereto) the holders of common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote for each share held by such holder and there shall be no cumulation of votes for the election of directors.

Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to payment of dividends, the full amount of dividends and of sinking fund, retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends out of any assets legally available for the payment of dividends.

In the event of any liquidation, dissolution, or winding up of the Company, the holders of the common stock (and the holders of any class or series of stock entitled to participate with the common stock in the distribution of assets) shall be entitled to receive, in cash or in kind, the assets of the Company available for distribution remaining after: (i) payment or provision for payment of the Company’s debts and liabilities; (ii) distributions or provision for distributions in settlement of its liquidation account; and (iii) distributions or provisions for distributions to

 

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holders of any class or series of stock having preference over the common stock in the liquidation, dissolution, or winding up of the Company. Each share of common stock shall have the same relative rights as and be identical in all respects with all the other shares of common stock.

B. Preferred stock. The Company may provide in supplementary sections to its charter for one or more classes of preferred stock, which shall be separately identified. The shares of any class may be divided into and issued in series, with each series separately designated so as to distinguish the Shares thereof from the shares of all other series and classes. The terms of each series shall be set forth in a supplementary section to the charter. All shares of the same class shall be identical, except as to the following relative rights and preferences, as to which there may be variations between different series:

(a) The distinctive serial designation and the number of shares constituting such series;

(b) The dividend rate or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date(s), the payment date(s) for dividends, and the participating or other special rights, if any, with respect to dividends;

(c) The voting powers, full or limited, if any, of shares of such series;

(d) Whether the shares of such series shall be redeemable and, if so, the price(s) at which, and the terms and conditions on which, such shares may be redeemed;

(e) The amount(s) payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution, or winding up of the Company;

(f) Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price(s) at which such shares may be redeemed or purchased through the application of such fund;

(g) Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes of stock of the Company and, if so, the conversion price(s) or the rate(s) of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange;

(h) The price or other consideration for which the shares of such series shall be issued; and

(i) Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock.

 

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Each share of each series of serial preferred stock shall have the same relative rights as and be identical in all respects with all the other shares of the same series.

The board of directors shall have authority to divide, by the adoption of supplementary charter sections, any authorized class of preferred stock into series and, within the limitations set forth in this section and the remainder of this charter, fix and determine the relative rights and preferences of the shares of any series so established.

Prior to the issuance of any preferred shares of a series established by a supplementary charter section adopted by the board of directors, the Company shall file with the appropriate Regional Bank of the FRB a dated copy of that supplementary section of this charter establishing and designating the series and fixing and determining the relative rights and preferences thereof.

C. Beneficial Ownership Limitation. No person other than Ponce Bank Mutual Holding Company may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10 percent of the outstanding stock of any class of voting stock of the Company held by persons other than Ponce Bank Mutual Holding Company. This limitation expires on the fifth anniversary of the date this federal stock charter first becomes effective and does not apply to a transaction in which an underwriter purchases stock in connection with a public offering, or the purchase of stock by an employee stock ownership plan or other tax-qualified employee stock benefit plan that is exempt from the approval requirements under § 238.12(a) of the FRB’s regulations.

In the event a person acquires stock in violation of this Subsection 5C, all stock beneficially owned by such person in excess of 10 percent of the stock held by shareholders other than Ponce Bank Mutual Holding Company shall be considered “excess shares” and shall not be counted as stock entitled to vote and shall not be voted by any person or counted as voting stock in connection with any matters submitted to the shareholders for a vote.

Section 6. Preemptive rights. Holders of the capital stock of the Company shall not be entitled to preemptive rights with respect to any shares of the Company which may be issued.

Section 7. Directors. The Company shall be under the direction of a board of directors. The authorized number of directors, as stated in the Company’s bylaws, shall not be fewer than five nor more than fifteen except when a greater or lesser number is approved by the FRB, or its delegate.

Section 8. Amendment of charter. Except as provided in Section 5, no amendment, addition, alteration, change or repeal of this charter shall be made, unless such is proposed by the board of directors of the Company, approved by the shareholders by a majority of the votes eligible to be cast at a legal meeting, unless a higher vote is otherwise required, and approved or preapproved by the FRB.

 

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PDL COMMUNITY BANCORP
ATTEST:
		Lissette Martinez
		Corporate Secretary

 

BY:
		Carlos Naudon
		President

BOARD OF GOVERNORS OF THE

FEDERAL RESERVE SYSTEM

 

BY:
		Secretary of Board of Governors
		of the Federal Reserve System

Effective Date:

 

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PDL COMMUNITY BANCORP BYLAWS

ARTICLE I - HOME OFFICE

The home office of PDL Community Bancorp (the “Company”) shall be at 2244 Westchester Avenue, Bronx, Bronx County, New York.

ARTICLE II - SHAREHOLDERS

Section 1. Place of Meetings. All annual and special meetings of shareholders shall be held at the home office of the Company or at such other convenient place as the board of directors may determine.

Section 2. Annual Meeting. A meeting of the shareholders of the Company for the election of directors and for the transaction of any other business of the Company shall be held annually within 150 days after the end of the Company’s fiscal year on the third Wednesday of April of each calendar year if not a legal holiday, and if a legal holiday, then on the next day following which is not a legal holiday, or at such other date and time within such ISO-day period as the board of directors may determine.

Section 3. Special Meetings. Special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by the regulations of the Board of Governors of the Federal Reserve System (the “FRB”), may be called at any time by the chairman of the board, the president, or a majority of the board of directors, and shall be called by the chairman of the board, the president, or the secretary upon the written request of the holders of not less than one-tenth of all of the outstanding capital stock of the Company entitled to vote at the meeting. Such written request shall state the purpose or purposes of the meeting and shall be delivered to the home office of the Company addressed to the chairman of the board, the president, or the secretary.

Section 4. Conduct of Meetings. Annual and special meetings shall be conducted in accordance with written procedures established by the board of directors, unless otherwise prescribed by regulations of the FRB or these bylaws. The board of directors shall designate, when present, either the chairman of the board or president to preside at such meetings.

Section 5. Notice of Meetings. Written notice stating the place, day, and hour of the meeting and the purpose(s) for which the meeting is called shall be delivered not fewer than 20 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the hoard, the president, or the secretary, or the directors calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the mail, addressed to the shareholder at the address as it appears on the stock transfer books or records of the Company as of the record date prescribed in section 6 of this Article II with postage prepaid. When any shareholders’ meeting, either annual or special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than 30 days or of the business to be transacted at the meeting, other than an announcement at the meeting at which such adjournment is taken.

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Section 6. Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of shareholders. Such date in any case shall be not more than 60 days and, in case of a meeting of shareholders, not fewer than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment.

Section 7. Voting Lists. At least 20 days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the Company shall make a complete list of the shareholders of record entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address and the number of shares held by each. This list of shareholders shall be kept on file at the home office of the Company and shall be subject to inspection by any shareholder of record or the shareholder’s agent at any time during usual business hours for a period of 20 days prior to such meeting. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder of record or any shareholder’s agent during the entire time of the meeting. The original stock transfer book shall constitute prima facie evidence of the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. In lieu of making the shareholder list available for inspection by shareholders as provided in the preceding paragraph, the board of directors may elect to follow the procedures prescribed in § 239.26(d) of the FRB’s regulations as now or hereafter in effect.

Section 8. Quorum. A majority of the outstanding shares of the Company entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If a quorum is present at a meeting of shareholders and the withdrawal of shareholders results in the presence of less than a quorum, the shareholders present may continue to transact business until adjournment. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the vote of a greater number of shareholders voting together or voting by classes is required by law or the charter. Directors, however, are elected by a plurality of the votes cast at an election of directors.

Section 9. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his or her duly authorized attorney in fact. Proxies may be given telephonically or electronically as long as the holder uses a procedure for verifying the identity of the shareholder. Proxies solicited on behalf of the management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the board of directors. No proxy shall be valid more than eleven months from the date of its execution except for a proxy coupled with an interest.

 

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Section 10. Voting of Shares in the Name of Two or More Persons. When ownership stands in the name of two or more persons, in the absence of written directions to the Company to the contrary, at any meeting of the shareholders of the Company anyone or more of such shareholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree.

Section 11. Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent, or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian, or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by him or her, either in person or by proxy, but no trustee shall be entitled to vote shares held by him or her without a transfer of such shares into his or her name. Shares held in trust in an IRA or Keogh Account, however, may by voted by the Company if no other instructions are received. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer into his or her name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. Neither treasury shares of its own stock held by the Company nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Company, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting.

Section 12. Cumulative Voting. Shareholders may not cumulate their votes for election of directors.

Section 13. Inspectors of Election. In advance of any meeting of shareholders, the board of directors may appoint any individual other than nominees for office as inspectors of election to act at such meeting or any adjournment. The number of inspectors shall be either one or three. Any such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board or the president may, or on the request of not fewer than 10 percent of the votes represented at the meeting shall, make such appointment at the meeting,. If appointed at the meeting, the majority’ of the votes present shall determine whether one or three inspectors are to be appointed. In case any individual appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting or at the meeting by the chairman of the board or the president. Unless otherwise prescribed by regulations of the FRB, the duties of such inspectors shall include: determining the number of shares and the voting power of each share, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the rights to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders.

 

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Section 14. Nominating Committee. The board of directors shall appoint a nominating committee for selecting the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least 20 days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Company. No nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by shareholders are made in writing and delivered to the secretary of the Company at least five days prior to the date of the annual meeting. Such shareholder’s notice shall set forth: (A) as to each person whom the shareholder proposes to nominate for election or reelection as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, and (iii) such person’s written consent to serve as a director, if elected; and (B) as to the shareholder giving the notice (i) the name and address of such shareholder and (ii) the class and number of shares of the Company that are owned of record by such shareholder. At the request of the board of directors, any person nominated by the board of directors for election as a director shall furnish to the secretary that information required to be set forth in a shareholder’s notice of nomination which pertains to the nominee together with the required written consents. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Company. Ballots bearing the names of all persons nominated by the nominating committee and by shareholders shall be provided for use at the annual meeting. However, if the nominating committee shall fail or refuse to act at least 20 days prior to the annual meeting, nominations for directors may be made at the annual meeting by any shareholder entitled to vote and shall be voted upon.

Section 15. New Business. Any new business to be taken up at the annual meeting shall be stated in writing and filed with the secretary of the Company at least five days before the date of the annual meeting, and all business so stated, proposed, and filed shall be considered at the annual meeting; but no other proposal shall be acted upon at the annual meeting. Any shareholder may make any other proposal at the annual meeting and the same may be discussed and considered, but unless stated in writing and filed with the secretary at least five days before the meeting, such proposal shall be laid over for action at an adjourned, special, or annual meeting of the shareholders taking place 30 days or more thereafter. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors, and committees; but in connection with such reports, no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. A shareholder’s notice to the secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (A) a brief description of the proposal desired to be brought before the annual meeting, and (B) the business, as well as the name and address of such shareholder and the class and number of shares of the Company that are owned of record by such shareholder.

Section 16. Informal Action by Shareholders. Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of shareholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be given by all of the shareholders entitled to vote with respect to the subject matter.

 

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ARTICLE III - BOARD OF DIRECTORS

Section 1. General Powers. The business and affairs of the Company shall be under the direction of its board of directors. The board of directors shall annually elect a chairman of the board from among its members and shall designate, when present, the chairman of the board to preside at its meetings.

Section 2. Number and Term. The board of directors shall consist of seven (7) members, and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. One class shall be elected by ballot annually.

Section 3. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this bylaw following the annual meeting of shareholders. The board of directors may provide, by resolution, the time and place, for the holding of additional regular meetings without other notice than such resolution. Directors may participate in a meeting by means of a conference telephone or similar communications device through which all individuals participating can hear each other at the same time. Participation by such means shall constitute presence in person for all purposes.

Section 4. Director Share Ownership. Each director shall at all times be the beneficial owner of not less than 100 shares of capital stock of the Company unless the Company is a wholly owned subsidiary of a holding company.

Section 5. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president, or one-third of the directors. The persons authorized to call special meetings of the board of directors may fix any place, within the Company’s normal lending territory, as the place for holding any special meeting of the board of directors called by such persons. Members of the board of directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person for all purposes.

Section 6. Notice. Written notice of any special meeting shall be given to each director at least 24 hours prior thereto when delivered personally or at least five days prior thereto when delivered by mail to the address at which the director is most likely to be reached or transmitted electronically. Such notice shall be deemed to be delivered when deposited in the mail so addressed, with postage prepaid if mailed, or when the Company receives notice of delivery if electronically transmitted. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice of waiver of notice of such meeting.

 

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Section 7. Quorum. A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the board of directors; but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 6 of this Article III.

Section 8. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by regulation of the FRB or by these bylaws.

Section 9. Action Without a Meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors.

Section 10. Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the Company addressed to the chairman of the board or the president. Unless otherwise specified, such resignation shall take effect upon receipt by the chairman of the board or the president. More than three consecutive absences from regular meetings of the board of directors, unless excused by resolution of the board of directors, shall automatically constitute a resignation, effective when such resignation is accepted by the board of directors.

Section 11. Vacancies. Any vacancy occurring on the board of directors may be filled by the affirmative vote of a majority of the remaining directors although less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected to serve only until the next election of directors by the shareholders. Any directorship to be filled by reason of an increase in the number of directors may be filled by election by the board of directors for a term of office continuing only until the next election of directors by the shareholders.

Section 12. Compensation. Directors, as such, may receive a stated salary for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation for attendance at committee meetings as the board of directors may determine.

Section 13. Presumption of Assent. A director of the Company who is present at a meeting of the board of directors at which action on any Company matter is taken shall be presumed to have assented to the action taken unless his or her dissent or abstention shall be entered in the minutes of the meeting or unless he or she shall file a written dissent to such action with the individual acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Company within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action.

Section 14. Removal of Directors. At a meeting of shareholders called expressly for that purpose, any director may be removed only for cause by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. Whenever the holders of the shares of any class are entitled to elect one or more directors by the provisions of the charter or supplemental sections thereto, the provisions of this section shall apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the outstanding shares as a whole.

 

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For purposes of this section, removal for cause includes, as defined in 12 C.F.R. Section 163.39, or any successor regulation, “personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, [or a] willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order.”

Section 15. Director Qualifications. A person is not qualified to serve as director if he or she: (l) is under indictment for, or has ever been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year, (2) is a person against whom a banking agency has, within the past ten years, issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal, or (3) has been found either by a regulatory agency whose decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty involving personal profit or (ii) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency.

Section 16. Age Limitations. No person not serving as a director at the time of the initial adoption of the Bylaws may serve as a director of the Company after attaining the age of ninety (90). Otherwise, no person may serve as a director of the Company after attaining the age of seventy-five (75). This age limitation does not apply to a director emeritus.

Section 17. Emeritus Directors. Emeritus directors may be appointed and their compensation for services (in an amount not to exceed those fees paid to voting directors) determined by resolution of the board of directors of the Company. Only former directors of the Company or Ponce Bank (including former directors of other savings and loan associations or savings banks that have been merged with, or otherwise acquired by the Company) shall be eligible to serve as emeritus directors. Emeritus directors shall be available for consultation with and advice to the management of the Company. Emeritus directors may attend meetings of the board of directors, at the discretion of the board of directors, but shall have no vote on any matter acted upon by such board.

ARTICLE IV - EXECUTIVE AND OTHER COMMITTEES

Section 1. Appointment. The board of directors, by resolution adopted by a majority of the full board, may designate the chairman of the board and two or more of the other directors to constitute an executive committee. The designation of any committee pursuant to this Article IV and the delegation of authority shall not operate to relieve the board of directors, or any director, of any responsibility imposed by law or regulation.

Section 2. Authority. The executive committee, when the board of directors is not in session, shall have and may exercise all of the authority of the board of directors except to the extent, if any, that such authority shall be limited by the resolution appointing the executive committee; and except also that the executive committee shall not have the authority of the board

 

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of directors with reference to: the declaration of dividends; the amendment of the charter or bylaws of the Company, or recommending to the shareholders a plan of merger, consolidation, or conversion; the sale, lease, or other disposition of all or substantially all of the property and assets of the Company otherwise than in the usual and regular course of its business; a voluntary dissolution of the Company; a revocation of any of the foregoing; or the approval of a transaction in which any member of the executive committee, directly or indirectly, has any material beneficial interest.

Section 3. Tenure. Subject to the provrsions of Section 8 of this Article IV, each member of the executive committee shall hold office until the next regular annual meeting of the board of directors following his or her designation and until a successor is designated as a member ofthe executive committee.

Section 4. Meetings. Regular meetings of the executive committee may be held without notice at such times and places as the executive committee may fix from time to time by resolution. Special meetings of the executive committee may be called by any member thereof upon not less than one day’s notice stating the place, date, and hour of the meeting, which notice may be written or oral. Any member of the executive committee may waive notice of any meeting and no notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting.

Section 5. Quorum. A majority of the members of the executive committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of the executive committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present.

Section 6. Action Without a Meeting. Any action required or permitted to be taken by the executive committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the executive committee.

Section 7. Vacancies. Any vacancy in the executive committee may be filled by a resolution adopted by a majority of the full board of directors.

Section 8. Resignations and Removal. Any member of the executive committee may be removed at any time with or without cause by resolution adopted by a majority of the full board of directors. Any member of the executive committee may resign from the executive committee at any time by giving written notice to the president or secretary of the Company. Unless otherwise specified, such resignation shall take effect upon its receipt; the acceptance of such resignation shall not be necessary to make it effective. No notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting.

Section 9. Procedure. The executive committee shall elect a presiding officer from its members and may fix its own rules of procedure, which shall not be inconsistent with these bylaws. It shall keep regular minutes of its proceedings and report the same to the board of directors for its information at the meeting held next after the proceedings shall have occurred.

 

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Section 10. Other Committees. The board of directors may by resolution establish an audit, loan, or other committee composed of directors as they may determine to be necessary or appropriate for the conduct of the business of the Company and may prescribe the duties, constitution, and procedures thereof.

ARTICLE V - OFFICERS

Section 1. Positions. The officers of the Company shall be a president, one or more vice presidents, a secretary, and a treasurer or comptroller, each of whom shall be elected by the board of directors. The board of directors may also designate the chairman of the board as an officer. The offices of the secretary and treasurer or comptroller may be held by the same individual and a vice president may also be either the secretary or the treasurer or comptroller. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment of such other officers as the business of the Company may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices.

Section 2. Election and Term of Office. The officers of the Company shall be elected annually at the first meeting of the board of directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor has been duly elected and qualified or until the officer’s death, resignation, or removal in the manner hereinafter provided. Election or appointment of an officer, employee, or agent shall not of itself create contractual rights. The board of directors may authorize the Company to enter into an employment contract with any officer in accordance with regulations of the FRB; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V.

Section 3. Removal. Any officer may be removed by the board of directors whenever in its judgment the best interests of the Company will be served thereby, but such removal, other than for cause, shall be without prejudice to the contractual rights, if any, of the officer so removed.

Section 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or otherwise may be filled by the board of directors for the unexpired portion of the term.

Section 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the board of directors.

 

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ARTICLE VI - CONTRACTS, LOANS, CHECKS, AND DEPOSITS

Section 1. Contracts. To the extent permitted by regulations of the FRB, and except as otherwise prescribed by these bylaws with respect to certificates for shares, the board of directors may authorize any officer, employee, or agent of the Company to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Company. Such authority may be general or confined to specific instances.

Section 2. Loans. No loans shall be contracted on behalf of the Company and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances.

Section 3. Checks; Drafts, etc. All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the Company shall be signed by one or more officers, employees or agents of the Company in such manner as shall from time to time be determined by the board of directors.

Section 4. Deposits. All funds of the Company not otherwise employed shall be deposited from time to time to the credit of the Company in any duly authorized depositories as the board of directors may select.

ARTICLE VII - CERTIFICATES FOR SHARES AND THEIR TRANSFER

Section 1. Certificates for Shares. The Board of Directors may determine to issue certificated or uncertificated shares of capital stock or other securities of the Company. For certificated stock, certificates representing shares of capital stock of the Company shall be in such form as shall be determined by the board of directors and approved by the FRB. Such certificates shall be signed by the chief executive officer or by any other officer of the Company authorized by the board of directors, attested by the secretary or an assistant secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar other than the Company itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Company. All certificates surrendered to the Company for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares has been surrendered and canceled, except that in the case of a lost or destroyed certificate, a new certificate may be issued upon such terms and indemnity to the Company as the board of directors may prescribe. Upon the issuance of uncertificated shares of capital stock, the Company and/or its transfer agent shall send the stockholder a written statement setting forth information with respect to the shares owned by the stockholder.

Section 2. Transfer of Shares. Transfer of shares of capital stock of the Company shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by his or her legal representative, who shall furnish proper evidence of such authority, or by his or her attorney authorized by a duly executed power of attorney and filed with the Company. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Company shall be deemed by the Company to be the owner for all purposes.

 

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ARTICLE VIII - FISCAL YEAR

The fiscal year of the Company shall end on the 31^st day of December of each year. The appointment of accountants shall be subject to annual ratification by the shareholders.

ARTICLE IX - DIVIDENDS

Subject to the terms of the Company’s charter and the regulations and orders of the FRB, the board of directors may, from time to time, declare, and the Company may pay, dividends on its outstanding shares of capital stock.

ARTICLE X - CORPORATE SEAL

The board of directors shall provide a Company seal, which shall be two concentric circles between which shall be the name of the Company. The year of incorporation or an emblem may appear in the center.

ARTICLE XI - AMENDMENTS

These bylaws may be amended in a manner consistent with regulations of the FRB and shall be effective after: (i) approval of the amendment by a majority vote of the authorized board of directors, or by a majority vote of the votes cast by the shareholders of the Company at any legal meeting, and (ii) receipt of any applicable regulatory approval. When a Company fails to meet its quorum requirements solely due to vacancies on the board, then the affirmative vote of a majority of the sitting board will be required to amend the bylaws.

ARTICLE XII - INDEMNIFICATION

The Company shall indemnify its personnel, including directors, officers and employees, to the fullest extent authorized by applicable law and regulations, as the same exists or may hereafter be amended; provided, any indemnification by the Company of the Company’s personnel is subject to any applicable rules or regulations of the FRB.

ARTICLE XIII - RELIANCE UPON BOOKS, REPORTS AND RECORDS

Each director, each member of any committee designated by the board of directors, and each officer of the Company shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Company and upon such information, opinions, reports or statements presented to the Company by any of its officers or employees, or committees of the board of directors so designated, or by any other person as to matters which such director or committee member reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Company.

 

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EXHIBIT C

Charter and Bylaws of the MHC

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PONCE BANK MUTUAL HOLDING COMPANY

FEDERAL MUTUAL HOLDING COMPANY CHARTER

Section 1. Corporate title. The name of the mutual holding company is Ponce Bank Mutual Holding Company (the “Mutual Holding Company”).

Section 2. Home Office. The home office of the Mutual Holding Company shall be located in Bronx County, New York.

Section 3. Duration. The duration of the Mutual Holding Company is perpetual.

Section 4. Purpose and powers. The purpose of the Mutual Holding Company is to pursue any or all of the lawful objectives of a federal mutual savings and loan holding company chartered under section 10(o) of the Home Owners’ Loan Act, 12 U.S.c. 1467a(o), and to exercise all of the express, implied, and incidental powers conferred thereby and all acts amendatory thereof and supplemental thereto, subject to the Constitution and the laws of the United States as they are now in effect, or as they may hereafter be amended, and subject to all lawful and applicable rules, regulations, and orders of the Federal Reserve Board (the “FRB”).

Section 5. Capital. The Mutual Holding Company shall have no capital stock.

Section 6. Section 6: Members. All holders of the savings, demand, or other authorized accounts of Ponce Bank (the “Savings Bank”) are members of the Mutual Holding Company. With respect to all questions requiring action by the members of the Mutual Holding Company, each holder of an account in the Savings Bank shall be permitted to cast one vote for each $100, or fraction thereof, of the withdrawal value of the member’s account. In addition, borrowers from the Savings Bank as of April 11, 1985 shall be entitled to one vote for the period of time during which such borrowings are in existence. No member, however, shall cast more than one thousand votes. All accounts shall be nonassessable.

Section 7. Directors. The Mutual Holding Company shall be under the direction of a board of directors. The authorized number of directors shall not be fewer than five nor more than fifteen, as fixed in the Mutual Holding Company’s bylaws, except that the number of directors may be decreased to a number less than five or increased to a number greater than fifteen with the prior approval of the FRB.

Section 8. Capital, surplus, and distribution of earnings. The Mutual Holding Company shall distribute net earnings to account holders of the Savings Bank on such basis and in accordance with such terms and conditions as may from time to time be authorized by the FRB, provided that the Mutual Holding Company may establish minimum account balance requirements for account holders to be eligible for distributions of earnings.

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All holders of accounts of the Savings Bank shall be entitled to equal distribution of the assets ofthe Mutual Holding Company, pro rata to the value of their accounts in the Savings Bank, in the event of voluntary or involuntary liquidation, dissolution, or winding up of the Mutual Holding Company.

Section 9. Amendment. Adoption of any pre-approved charter amendment shall be effective after such pre-approved amendment has been approved by the members by the affirmative vote of a majority of the total votes of the members of the Mutual Holding Company eligible to be cast at a legal meeting. Any other amendment, addition, change, or repeal of this charter must be approved by the FRB prior to approval by the members at a legal meeting and shall be effective upon filing with the FRB in accordance with regulatory procedures.

Section 10. Vote Required to Approve a Plan of Conversion and Reorganization and related Stock Issuance Plan. In addition to any voting requirement prescribed by applicable law or regulation, including 12 CFR 239.56 (or any successor regulation), any plan of conversion of the Mutual Holding Company providing for the issuance of securities pursuant to subscription right, shall be approved by the affirmative vote of at least two-thirds (2/3) of the total votes cast by the members of the Mutual Holding Company.

However, if Ponce Bank Mutual Holding Company, PDL Community Bancorp, Inc., Ponce Bank, or any of their affiliates (collectively, “Ponce”) receive a written notice from any regulatory authority indicating that Ponce should raise additional capital, modify the composition of its capital, or otherwise increase capital levels, this section shall not apply.

PONCE BANK MUTUAL HOLDING COMPANY

ATTEST:
		Lissette Martinez
		Corporate Secretary

 

BY:
		Carlos Naudon
		President

BOARD OF GOVERNORS OF THE

FEDERAL RESERVE SYSTEM

BY:
		Secretary of Board of Governors of the Federal Reserve System

 

Effective Date:

 

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PONCE BANK MUTUAL HOLDING COMPANY

BYLAWS

Section 1. Annual meeting of members. The annual meeting of the members of Ponce Bank Mutual Holding Company (the “Mutual Holding Company”) for the election of directors and for the transaction of any other business of the Mutual Holding Company shall be held, as designated by the board of directors, at a location within the state that constitutes the principal place of business of the Mutual Holding Company, or at any other convenient place the board of directors may designate, on the third Wednesday in April of each year, if not a legal holiday, or if a legal holiday then on the next succeeding day not a legal holiday. The annual meeting may be held at such other date and time as the board of directors may determine. At each annual meeting, the officers shall make a full report of the financial condition of the Mutual Holding Company and of its progress for the preceding year and shall outline a program for the succeeding year.

Section 2. Special meetings of members. Special meetings of the members of the Mutual Holding Company may be called at any time by the president or the board of directors and shall be called by the president, a vice president, or the secretary upon the written request of members of record, holding in the aggregate at least one-tenth of the voting capital of the Mutual Holding Company. Such written request shall state the purpose of the meeting and shall be delivered at the principal place of business of the Mutual Holding Company addressed to the president. For purposes of this section, “voting capital” means FDIC-insured deposits as of the voting record date. Annual and special meetings shall be conducted in accordance with written procedures agreed to by the board of directors.

Section 3. Notice of meeting of members. Notice of each meeting shall be either published once a week for the two successive calendar weeks (in each instance on any day of the week) immediately prior to the week in which such meeting shall convene, in a newspaper printed in the English language and of general circulation in the city or county in which the principal place of business of the Mutual Holding Company is located, or mailed postage prepaid at least 15 days and not more than 45 days prior to the date on which such meeting shall convene, to each of its members of record at the last address appearing on the books of the Mutual Holding Company. Such notice shall state the name of the Mutual Holding Company, the place of the meeting, the date and time when it shall convene, and the matters to be considered. A similar notice shall be posted in a conspicuous place in each of the offices of the Mutual Holding Company during the 14 days immediately preceding the date on which such meeting shall convene. If any member, in person or by authorized attorney, shall waive in writing notice of any meeting of members, notice thereof need not be given to such member. When any meeting is adjourned for 30 days or more, notice of the adjournment and reconvening of the meeting shall be given as in the case of the original meeting.

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Section 4. Fixing of record date. For the purpose of determining members entitled to notice of or to vote at any meeting of members or any adjournment thereof, or in order to make a determination of members for any other proper purpose, the board of directors shall fix in advance a record date for any such determination of members. Such date shall be not more than 60 days nor fewer than 10 days prior to the date on which the action, requiring such determination of members, is to be taken. The member entitled to participate in any such action shall be the member of record on the books of the Mutual Holding Company on such record date. The number of votes which each member shall be entitled to cast at any meeting of the members shall be determined from the books of the Mutual Holding Company as of such record date. Any member of such record date who ceases to be a member prior to such meeting shall not be entitled to vote at that meeting. The same determination shall apply to any adjourned meeting.

Section 5. Member quorum. Any number of members present and voting, represented in person or by proxy, at a regular or special meeting of the members shall constitute a quorum. A majority of all votes cast at any meeting of the members shall determine any question, unless otherwise required by regulation or Section 10 of the Mutual Holding Company’s Charter. Directors, however, are elected by a plurality of the votes cast at an election of directors. At any adjourned meeting any business may be transacted which might have been transacted at the meeting as originally called. Members present at a duly constituted meeting may continue to transact business until adjournment.

Section 6. Voting by proxy. Voting at any annual or special meeting of the members may be by proxy pursuant to the rules and regulations of the Board of Governors of the Federal Reserve System (the “FRB”), provided, that no proxies shall be voted at any meeting unless such proxies shall have been placed on file with the secretary of the Mutual Holding Company, for verification, prior to the convening of such meeting. Proxies may be given telephonically or electronically as long as the holder uses a procedure for verifying the identity of the member. All proxies with a term greater than eleven months or solicited at the expense of the Mutual Holding Company must run to the board of directors as a whole, or to a committee appointed by a majority of such board. Accounts held by an administrator, executor, guardian, conservator or receiver may be voted in person or by proxy by such person. Accounts held by a trustee may be voted by such trustee either in person or by proxy, in accordance with the terms of the trust agreement, but no trustee shall be entitled to vote accounts without a transfer of such accounts into the trustee name. Accounts held in trust in an IRA or Keogh Account, however, may be voted by the Mutual Holding Company if no other instructions are received. Joint accounts shall be entitled to no more than 1000 votes, and any owner may cast all the votes unless the Mutual Holding Company has otherwise been notified in writing.

Section 7. Communication between members. Communication between members shall be subject to any applicable rules or regulations of the FRB. No member, however, shall have the right to inspect or copy any portion of any books or records of the Mutual Holding Company containing: (i) a list of depositors in or borrowers from such Mutual Holding Company; (ii) their addresses; (iii) individual deposit or loan balances or records; or (iv) any data from which such information could reasonably be constructed.

Section 8. Number of directors, membership. The number of directors of the Mutual Holding Company shall be seven (7). Each director shall be a member of the Mutual Holding Company. The board of directors shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for terms of three (3) years and until their successors are elected and qualified. One class shall be elected annually.

 

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Section 9. Meetings of the board. The board of directors shall meet regularly without notice at the principal place of business of the Mutual Holding Company at least once per month at an hour and date fixed by resolution of the board, provided that the place of meeting may be changed by the directors. Special meetings of the board may be held at any place specified in a notice of such meeting and shall be called by the secretary upon the written request of the chairman or of three directors. All special meetings shall be held upon at least 24 hours written notice to each director unless notice is waived in writing before or after such meeting. Such notice shall state the place, date, time, and purposes of such meeting. A majority of the authorized directors shall constitute a quorum for the transaction of business. The act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board. Action may be taken without a meeting if unanimous written consent is obtained for such action. The board may also permit telephonic participation at meetings. The meetings shall be under the direction of a chairman, appointed annually by the board, or in the absence of the chairman, the meetings shall be under the direction of the vice chairman, if any, or the president.

Section 10. Officers, employees, and agents. Annually at the meeting of the board of directors of the Mutual Holding Company following the annual meeting of the members of the Mutual Holding Company, the board shall elect a president, one or more vice presidents, a secretary, and a treasurer or comptroller; provided, that the offices of president and secretary may not be held by the same person and a vice president may also be the treasurer or comptroller. The board may appoint such additional officers, employees, and agents as it may from time to time determine. The term of office of all officers shall be one year or until their respective successors are elected and qualified. Any officer may be removed at any time by the board with or without cause, but such removal, other than for cause, shall be without prejudice to the contractual rights, if any, of the person so removed. In the absence of designation from time to time of powers and duties by the board, the officers shall have such powers and duties as generally pertain to their respective offices. The Mutual Holding Company shall indemnify its personnel, including directors, officers and employees, to the fullest extent authorized by applicable law or regulation, as the same exists or may hereafter be amended; provided, any indemnification by the Mutual Holding Company of the Mutual Holding Company’s personnel is subject to any applicable rules or regulations of the FRB.

Section 11. Vacancies, resignation or removal of directors. Members of the Mutual Holding Company shall elect directors by ballot; provided, that in the event of a vacancy on the board between meetings of members, the board of directors may, by their affirmative vote, fill such vacancy, even if the remaining directors constitute less than a quorum. A director elected to fill a vacancy shall be elected to serve only until the next election of directors by the members. Any director may resign at any time by sending a written notice of such resignation to the Mutual Holding Company delivered to the secretary. Unless otherwise specified therein such resignation shall take effect upon receipt by the secretary. More than three consecutive absences from regular meetings of the board, unless excused by resolution of the board, shall automatically constitute a resignation, effective when such resignation is accepted by the board. At a meeting of members called expressly for that purpose, directors or the entire board may be removed, only with cause, by a vote of the holders of a majority of the shares then entitled to vote at an election of directors.

 

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Section 12. Powers of the board. The board of directors shall have the power:

(a) By resolution, to appoint from among its members and remove an executive committee, which committee shall have and may exercise the powers of the board between the meetings of the board, but no such committee shall have the authority of the board to amend the charter or bylaws, adopt a plan of merger, consolidation, dissolution, or provide for the disposition of all or substantially all the property and assets of the Mutual Holding Company. Such committee shall not operate to relieve the board, or any member thereof, of any responsibility imposed by law;

(b) To appoint and remove by resolution the members of such other committees as may be deemed necessary and prescribe the duties thereof;

(c) To fix the compensation of directors, officers, and employees; and to remove any officer or employee at any time with or without cause;

(d) To limit payments on capital which may be accepted; and

(e) To exercise any and all of the powers of the Mutual Holding Company not expressly reserved by the charter to the members.

Section 13. Execution of instruments, generally. All documents and instruments or writings of any nature shall be signed, executed, verified, acknowledged, and delivered by such officers, agents, or employees of the Mutual Holding Company or anyone of them and in such manner as from time to time may be determined by resolution of the board. All notes, drafts, acceptances, checks, endorsements, and all evidences of indebtedness of the Mutual Holding Company whatsoever shall be signed by such officer or officers or such agent or agents of the Mutual Holding Company and in such manner as the board may from time to time determine. Endorsements for deposit to the credit of the Mutual Holding Company in any of its duly authorized depositories shall be made in such manner as the board may from time to time determine. Proxies to vote with respect to shares or accounts of other mutual holding companies or stock of other corporations owned by, or standing in the name of, the Mutual Holding Company may be executed and delivered from time to time on behalf of the Mutual Holding Company by the president or a vice president and the secretary or an assistant secretary of the Mutual Holding Company or by any other persons so authorized by the board.

Section 14. Nominating committee. The chairman, at least 30 days prior to the date of each annual meeting, shall appoint a nominating committee of three individuals who are members of the Mutual Holding Company. Such committee shall make nominations for directors in writing and deliver to the secretary such written nominations at least 15 days prior to the date of the annual meeting, which nominations shall then be posted in a prominent place in the principal place of business for the IS-day period prior to the date of the annual meeting, except in the case of a nominee substituted as a result of death or other incapacity. Provided such committee is appointed and makes such nominations, no nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by members are made in writing and delivered to the secretary of the Mutual

 

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Holding Company at least 10 days prior to the date of the annual meeting, which nominations shall then be posted in a prominent place in the principal place of business for the 10-day period prior to the date of the annual meeting, except in the case of a nominee substituted as a result of death or other incapacity. Ballots bearing the names of all individuals nominated by the nominating committee and by other members prior to the annual meeting shall be provided for use by the members at the annual meeting. If at any time the chairman shall fail to appoint such nominating committee, or the nominating committee shall fail or refuse to act at least 15 days prior to the annual meeting, nominations for directors may be made at the annual meeting by any member and shall be voted upon.

Section 15. New business. Any new business to be taken up at the annual meeting, including any proposal to increase or decrease the number of directors of the Mutual Holding Company, shall be stated in writing and filed with the secretary of the Mutual Holding Company at least 30 days before the date of the annual meeting, and all business so stated, proposed, and filed shall be considered at the annual meeting; but no other proposal shall be acted upon at the annual meeting. Any member may make any other proposal at the annual meeting and the same may be discussed and considered; but unless stated in writing and filed with the secretary 30 days before the meeting, such proposal shall be laid over for action at an adjourned, special, or regular meeting of the members taking place at least 30 days thereafter. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of the reports of officers and committees, but in connection with such reports no new business shall be acted upon at such annual meeting unless stated and filed as herein provided.

Section 16. Seal. The seal shall be two concentric circles between which shall be the name of the Mutual Holding Company. The year of incorporation, the word “Incorporated” or an emblem may appear in the center.

Section 17. Amendment. Adoption of any bylaw amendment pursuant to § 239.15 of the FRB’s regulations, as long as consistent with applicable law, rules and regulations, and which adequately addresses the subject and purpose of the stated bylaw section, shall be effective after (i) approval of the amendment by a majority vote of the authorized board, or by a vote of the members of the Mutual Holding Company at a legal meeting; and (ii) receipt of any applicable regulatory approval. When the Mutual Holding Company fails to meet its quorum requirement solely due to vacancies on the board, the bylaws may be amended by an affirmative vote of a majority of the sitting board.

Section 18. Age limitations. No person not serving as a director at the time of the initial adoption of the Bylaws may serve as a director of the Mutual Holding Company after attaining the age of ninety (90). Otherwise, no person may serve as a director of the Mutual Holding Company after attaining the age of seventy-five (75). This age limitation does not apply to a director emeritus.

Section 19. Emeritus Directors. Emeritus directors may be appointed and their compensation for services (in an amount not to exceed those fees paid to voting directors) determined by resolution of the board of directors of the Mutual Holding Company. Only former directors of the Mutual Holding Company or Ponce Bank (including former directors of other savings and loan associations or savings banks that have been merged with, or otherwise

 

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acquired by the Mutual Holding Company or its subsidiaries) shall be eligible to serve as emeritus directors. Emeritus directors shall be available for consultation with and advice to the management of the Mutual Holding Company. Emeritus directors may attend meetings of the board of directors, at the discretion of the board of directors, but shall have no vote on any matter acted upon by such board.

 

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Exhibit 3.2

PDL COMMUNITY BANCORP

BYLAWS

ARTICLE I - HOME OFFICE

The home office of PDL Community Bancorp (the “Company”) shall be at 2244 Westchester Avenue, Bronx, Bronx County, New York.

ARTICLE II - SHAREHOLDERS

Section 1. Place of Meetings. All annual and special meetings of shareholders shall be held at the home office of the Company or at such other convenient place as the board of directors may determine.

Section 2. Annual Meeting. A meeting of the shareholders of the Company for the election of directors and for the transaction of any other business of the Company shall be held annually within 150 days after the end of the Company’s fiscal year on the third Wednesday of April of each calendar year if not a legal holiday, and if a legal holiday, then on the next day following which is not a legal holiday, or at such other date and time within such 150-day period as the board of directors may determine.

Section 3. Special Meetings. Special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by the regulations of the Board of Governors of the Federal Reserve System (the “FRB”), may be called at any time by the chairman of the board, the president, or a majority of the board of directors, and shall be called by the chairman of the board, the president, or the secretary upon the written request of the holders of not less than one-tenth of all of the outstanding capital stock of the Company entitled to vote at the meeting. Such written request shall state the purpose or purposes of the meeting and shall be delivered to the home office of the Company addressed to the chairman of the board, the president, or the secretary.

Section 4. Conduct of Meetings. Annual and special meetings shall be conducted in accordance with written procedures established by the board of directors, unless otherwise prescribed by regulations of the FRB or these bylaws. The board of directors shall designate, when present, either the chairman of the board or president to preside at such meetings.

Section 5. Notice of Meetings. Written notice stating the place, day, and hour of the meeting and the purpose(s) for which the meeting is called shall be delivered not fewer than 20 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the hoard, the president, or the secretary, or the directors calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the mail, addressed to the shareholder at the address as it appears on the stock transfer books or records of the Company as of the record date prescribed in section 6 of this Article II with postage prepaid. When any shareholders’ meeting, either annual or special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than 30 days or of the business to be transacted at the meeting, other than an announcement at the meeting at which such adjournment is taken.

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Section 6. Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of shareholders. Such date in any case shall be not more than 60 days and, in case of a meeting of shareholders, not fewer than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment.

Section 7. Voting Lists. At least 20 days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the Company shall make a complete list of the shareholders of record entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address and the number of shares held by each. This list of shareholders shall be kept on file at the home office of the Company and shall be subject to inspection by any shareholder of record or the shareholder’s agent at any time during usual business hours for a period of 20 days prior to such meeting. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder of record or any shareholder’s agent during the entire time of the meeting. The original stock transfer book shall constitute prima facie evidence of the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. In lieu of making the shareholder list available for inspection by shareholders as provided in the preceding paragraph, the board of directors may elect to follow the procedures prescribed in § 239.26(d) of the FRB’s regulations as now or hereafter in effect.

Section 8. Quorum. A majority of the outstanding shares of the Company entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If a quorum is present at a meeting of shareholders and the withdrawal of shareholders results in the presence of less than a quorum, the shareholders present may continue to transact business until adjournment. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the vote of a greater number of shareholders voting together or voting by classes is required by law or the charter. Directors, however, are elected by a plurality of the votes cast at an election of directors.

Section 9. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his or her duly authorized attorney in fact. Proxies may be given telephonically or electronically as long as the holder uses a procedure for verifying the identity of the shareholder. Proxies solicited on behalf of the management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the board of directors. No proxy shall be valid more than eleven months from the date of its execution except for a proxy coupled with an interest.

 

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Section 10. Voting of Shares in the Name of Two or More Persons. When ownership stands in the name of two or more persons, in the absence of written directions to the Company to the contrary, at any meeting of the shareholders of the Company any one or more of such shareholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree.

Section 11. Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent, or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian, or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by him or her, either in person or by proxy, but no trustee shall be entitled to vote shares held by him or her without a transfer of such shares into his or her name. Shares held in trust in an IRA or Keogh Account, however, may by voted by the Company if no other instructions are received. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer into his or her name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. Neither treasury shares of its own stock held by the Company nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Company, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting.

Section 12. Cumulative Voting. Shareholders may not cumulate their votes for election of directors.

Section 13. Inspectors of Election. In advance of any meeting of shareholders, the board of directors may appoint any individual other than nominees for office as inspectors of election to act at such meeting or any adjournment. The number of inspectors shall be either one or three. Any such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board or the president may, or on the request of not fewer than 10 percent of the votes represented at the meeting shall, make such appointment at the meeting,. If appointed at the meeting, the majority’ of the votes present shall determine whether one or three inspectors are to be appointed. In case any individual appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting or at the meeting by the chairman of the board or the president. Unless otherwise prescribed by regulations of the FRB, the duties of such inspectors shall include: determining the number of shares and the voting power of each share, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the rights to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders.

 

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Section 14. Nominating Committee. The board of directors shall appoint a nominating committee for selecting the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least 20 days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Company. No nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by shareholders are made in writing and delivered to the secretary of the Company at least five days prior to the date of the annual meeting. Such shareholder’s notice shall set forth: (A) as to each person whom the shareholder proposes to nominate for election or reelection as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, and (iii) such person’s written consent to serve as a director, if elected; and (B) as to the shareholder giving the notice (i) the name and address of such shareholder and (ii) the class and number of shares of the Company that are owned of record by such shareholder. At the request of the board of directors, any person nominated by the board of directors for election as a director shall furnish to the secretary that information required to be set forth in a shareholder’s notice of nomination which pertains to the nominee together with the required written consents. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Company. Ballots bearing the names of all persons nominated by the nominating committee and by shareholders shall be provided for use at the annual meeting. However, if the nominating committee shall fail or refuse to act at least 20 days prior to the annual meeting, nominations for directors may be made at the annual meeting by any shareholder entitled to vote and shall be voted upon.

Section 15. New Business. Any new business to be taken up at the annual meeting shall be stated in writing and filed with the secretary of the Company at least five days before the date of the annual meeting, and all business so stated, proposed, and filed shall be considered at the annual meeting; but no other proposal shall be acted upon at the annual meeting. Any shareholder may make any other proposal at the annual meeting and the same may be discussed and considered, but unless stated in writing and filed with the secretary at least five days before the meeting, such proposal shall be laid over for action at an adjourned, special, or annual meeting of the shareholders taking place 30 days or more thereafter. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors, and committees; but in connection with such reports, no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. A shareholder’s notice to the secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (A) a brief description of the proposal desired to be brought before the annual meeting, and (B) the business, as well as the name and address of such shareholder and the class and number of shares of the Company that are owned of record by such shareholder.

Section 16. Informal Action by Shareholders. Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of shareholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be given by all of the shareholders entitled to vote with respect to the subject matter.

 

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ARTICLE III - BOARD OF DIRECTORS

Section 1. General Powers. The business and affairs of the Company shall be under the direction of its board of directors. The board of directors shall annually elect a chairman of the board from among its members and shall designate, when present, the chairman of the board to preside at its meetings.

Section 2. Number and Term. The board of directors shall consist of seven (7) members, and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. One class shall be elected by ballot annually.

Section 3. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this bylaw following the annual meeting of shareholders. The board of directors may provide, by resolution, the time and place, for the holding of additional regular meetings without other notice than such resolution. Directors may participate in a meeting by means of a conference telephone or similar communications device through which all individuals participating can hear each other at the same time. Participation by such means shall constitute presence in person for all purposes.

Section 4. Director Share Ownership. Each director shall at all times be the beneficial owner of not less than 100 shares of capital stock of the Company unless the Company is a wholly owned subsidiary of a holding company.

Section 5. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president, or one-third of the directors. The persons authorized to call special meetings of the board of directors may fix any place, within the Company’s normal lending territory, as the place for holding any special meeting of the board of directors called by such persons. Members of the board of directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person for all purposes.

Section 6. Notice. Written notice of any special meeting shall be given to each director at least 24 hours prior thereto when delivered personally or at least five days prior thereto when delivered by mail to the address at which the director is most likely to be reached or transmitted electronically. Such notice shall be deemed to be delivered when deposited in the mail so addressed, with postage prepaid if mailed, or when the Company receives notice of delivery if electronically transmitted. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice of waiver of notice of such meeting.

 

5

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Section 7. Quorum. A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the board of directors; but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 6 of this Article III.

Section 8. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by regulation of the FRB or by these bylaws.

Section 9. Action Without a Meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors.

Section 10. Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the Company addressed to the chairman of the board or the president. Unless otherwise specified, such resignation shall take effect upon receipt by the chairman of the board or the president. More than three consecutive absences from regular meetings of the board of directors, unless excused by resolution of the board of directors, shall automatically constitute a resignation, effective when such resignation is accepted by the board of directors.

Section 11. Vacancies. Any vacancy occurring on the board of directors may be filled by the affirmative vote of a majority of the remaining directors although less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected to serve only until the next election of directors by the shareholders. Any directorship to be filled by reason of an increase in the number of directors may be filled by election by the board of directors for a term of office continuing only until the next election of directors by the shareholders.

Section 12. Compensation. Directors, as such, may receive a stated salary for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation for attendance at committee meetings as the board of directors may determine.

Section 13. Presumption of Assent. A director of the Company who is present at a meeting of the board of directors at which action on any Company matter is taken shall be presumed to have assented to the action taken unless his or her dissent or abstention shall be entered in the minutes of the meeting or unless he or she shall file a written dissent to such action with the individual acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Company within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action.

Section 14. Removal of Directors. At a meeting of shareholders called expressly for that purpose, any director may be removed only for cause by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. Whenever the holders of the shares of any class are entitled to elect one or more directors by the provisions of the charter or supplemental sections thereto, the provisions of this section shall apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the outstanding shares as a whole.

 

6

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For purposes of this section, removal for cause includes, as defined in 12 C.F.R. Section 163.39, or any successor regulation, “personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, [or a] willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order.”

Section 15. Director Qualifications. A person is not qualified to serve as director if he or she: (1) is under indictment for, or has ever been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year, (2) is a person against whom a banking agency has, within the past ten years, issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal, or (3) has been found either by a regulatory agency whose decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty involving personal profit or (ii) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency.

Section 16. Age Limitations. No person not serving as a director at the time of the initial adoption of the Bylaws may serve as a director of the Company after attaining the age of ninety (90). Otherwise, no person may serve as a director of the Company after attaining the age of seventy-five (75). This age limitation does not apply to a director emeritus.

Section 17. Emeritus Directors. Emeritus directors may be appointed and their compensation for services (in an amount not to exceed those fees paid to voting directors) determined by resolution of the board of directors of the Company. Only former directors of the Company or Ponce Bank (including former directors of other savings and loan associations or savings banks that have been merged with, or otherwise acquired by the Company) shall be eligible to serve as emeritus directors. Emeritus directors shall be available for consultation with and advice to the management of the Company. Emeritus directors may attend meetings of the board of directors, at the discretion of the board of directors, but shall have no vote on any matter acted upon by such board.

ARTICLE IV - EXECUTIVE AND OTHER COMMITTEES

Section 1. Appointment. The board of directors, by resolution adopted by a majority of the full board, may designate the chairman of the board and two or more of the other directors to constitute an executive committee. The designation of any committee pursuant to this Article IV and the delegation of authority shall not operate to relieve the board of directors, or any director, of any responsibility imposed by law or regulation.

Section 2. Authority. The executive committee, when the board of directors is not in session, shall have and may exercise all of the authority of the board of directors except to the extent, if any, that such authority shall be limited by the resolution appointing the executive committee; and except also that the executive committee shall not have the authority of the board

 

7

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of directors with reference to: the declaration of dividends; the amendment of the charter or bylaws of the Company, or recommending to the shareholders a plan of merger, consolidation, or conversion; the sale, lease, or other disposition of all or substantially all of the property and assets of the Company otherwise than in the usual and regular course of its business; a voluntary dissolution of the Company; a revocation of any of the foregoing; or the approval of a transaction in which any member of the executive committee, directly or indirectly, has any material beneficial interest.

Section 3. Tenure. Subject to the provisions of Section 8 of this Article IV, each member of the executive committee shall hold office until the next regular annual meeting of the board of directors following his or her designation and until a successor is designated as a member of the executive committee.

Section 4. Meetings. Regular meetings of the executive committee may be held without notice at such times and places as the executive committee may fix from time to time by resolution. Special meetings of the executive committee may be called by any member thereof upon not less than one day’s notice stating the place, date, and hour of the meeting, which notice may be written or oral. Any member of the executive committee may waive notice of any meeting and no notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting.

Section 5. Quorum. A majority of the members of the executive committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of the executive committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present.

Section 6. Action Without a Meeting. Any action required or permitted to be taken by the executive committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the executive committee.

Section 7. Vacancies. Any vacancy in the executive committee may be filled by a resolution adopted by a majority of the full board of directors.

Section 8. Resignations and Removal. Any member of the executive committee may be removed at any time with or without cause by resolution adopted by a majority of the full board of directors. Any member of the executive committee may resign from the executive committee at any time by giving written notice to the president or secretary of the Company. Unless otherwise specified, such resignation shall take effect upon its receipt; the acceptance of such resignation shall not be necessary to make it effective. No notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting.

Section 9. Procedure. The executive committee shall elect a presiding officer from its members and may fix its own rules of procedure, which shall not be inconsistent with these bylaws. It shall keep regular minutes of its proceedings and report the same to the board of directors for its information at the meeting held next after the proceedings shall have occurred.

 

8

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Section 10. Other Committees. The board of directors may by resolution establish an audit, loan, or other committee composed of directors as they may determine to be necessary or appropriate for the conduct of the business of the Company and may prescribe the duties, constitution, and procedures thereof.

ARTICLE V - OFFICERS

Section 1. Positions. The officers of the Company shall be a president, one or more vice presidents, a secretary, and a treasurer or comptroller, each of whom shall be elected by the board of directors. The board of directors may also designate the chairman of the board as an officer. The offices of the secretary and treasurer or comptroller may be held by the same individual and a vice president may also be either the secretary or the treasurer or comptroller. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment of such other officers as the business of the Company may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices.

Section 2. Election and Term of Office. The officers of the Company shall be elected annually at the first meeting of the board of directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor has been duly elected and qualified or until the officer’s death, resignation, or removal in the manner hereinafter provided. Election or appointment of an officer, employee, or agent shall not of itself create contractual rights. The board of directors may authorize the Company to enter into an employment contract with any officer in accordance with regulations of the FRB; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V.

Section 3. Removal. Any officer may be removed by the board of directors whenever in its judgment the best interests of the Company will be served thereby, but such removal, other than for cause, shall be without prejudice to the contractual rights, if any, of the officer so removed.

Section 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or otherwise may be filled by the board of directors for the unexpired portion of the term.

Section 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the board of directors.

 

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ARTICLE VI - CONTRACTS, LOANS, CHECKS, AND DEPOSITS

Section 1. Contracts. To the extent permitted by regulations of the FRB, and except as otherwise prescribed by these bylaws with respect to certificates for shares, the board of directors may authorize any officer, employee, or agent of the Company to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Company. Such authority may be general or confined to specific instances.

Section 2. Loans. No loans shall be contracted on behalf of the Company and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances.

Section 3. Checks; Drafts, etc. All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the Company shall be signed by one or more officers, employees or agents of the Company in such manner as shall from time to time be determined by the board of directors.

Section 4. Deposits. All funds of the Company not otherwise employed shall be deposited from time to time to the credit of the Company in any duly authorized depositories as the board of directors may select.

ARTICLE VII - CERTIFICATES FOR SHARES AND THEIR TRANSFER

Section 1. Certificates for Shares. The Board of Directors may determine to issue certificated or uncertificated shares of capital stock or other securities of the Company. For certificated stock, certificates representing shares of capital stock of the Company shall be in such form as shall be determined by the board of directors and approved by the FRB. Such certificates shall be signed by the chief executive officer or by any other officer of the Company authorized by the board of directors, attested by the secretary or an assistant secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar other than the Company itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Company. All certificates surrendered to the Company for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares has been surrendered and canceled, except that in the case of a lost or destroyed certificate, a new certificate may be issued upon such terms and indemnity to the Company as the board of directors may prescribe. Upon the issuance of uncertificated shares of capital stock, the Company and/or its transfer agent shall send the stockholder a written statement setting forth information with respect to the shares owned by the stockholder.

Section 2. Transfer of Shares. Transfer of shares of capital stock of the Company shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by his or her legal representative, who shall furnish proper evidence of such authority, or by his or her attorney authorized by a duly executed power of attorney and filed with the Company. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Company shall be deemed by the Company to be the owner for all purposes.

 

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ARTICLE VIII - FISCAL YEAR

The fiscal year of the Company shall end on the 31^st day of December of each year. The appointment of accountants shall be subject to annual ratification by the shareholders.

ARTICLE IX - DIVIDENDS

Subject to the terms of the Company’s charter and the regulations and orders of the FRB, the board of directors may, from time to time, declare, and the Company may pay, dividends on its outstanding shares of capital stock.

ARTICLE X - CORPORATE SEAL

The board of directors shall provide a Company seal, which shall be two concentric circles between which shall be the name of the Company. The year of incorporation or an emblem may appear in the center.

ARTICLE XI - AMENDMENTS

These bylaws may be amended in a manner consistent with regulations of the FRB and shall be effective after: (i) approval of the amendment by a majority vote of the authorized board of directors, or by a majority vote of the votes cast by the shareholders of the Company at any legal meeting, and (ii) receipt of any applicable regulatory approval. When a Company fails to meet its quorum requirements solely due to vacancies on the board, then the affirmative vote of a majority of the sitting board will be required to amend the bylaws.

ARTICLE XII - INDEMNIFICATION

The Company shall indemnify its personnel, including directors, officers and employees, to the fullest extent authorized by applicable law and regulations, as the same exists or may hereafter be amended; provided, any indemnification by the Company of the Company’s personnel is subject to any applicable rules or regulations of the FRB.

ARTICLE XIII - RELIANCE UPON BOOKS, REPORTS AND RECORDS

Each director, each member of any committee designated by the board of directors, and each officer of the Company shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Company and upon such information, opinions, reports or statements presented to the Company by any of its officers or employees, or committees of the board of directors so designated, or by any other person as to matters which such director or committee member reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Company.

 

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Exhibit 4.1

 

INCORPORATED UNDER THE LAWS OF THE UNITED STATES OF AMERICA
No.				Shares
		PDL COMMUNITY BANCORP Bronx, New York   FULLY PAID AND NON-ASSESSABLE PAR VALUE $0.01 PER SHARE
THIS CERTIFIES that				is the owner of
		SHARES OF COMMON STOCK OF

PDL COMMUNITY BANCORP

a federally chartered subsidiary savings and loan holding company

The shares evidenced by this certificate are transferable only on the books of PDL Community Bancorp by the holder hereof, in person or by attorney, upon surrender of this certificate properly endorsed.

The interest in PDL Community Bancorp evidenced by this certificate may not be retired or withdrawn except as provided in the Charter and Bylaws of PDL Community Bancorp.

The shares evidenced by this certificate are not a savings account or deposit, and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

IN WITNESS WHEREOF, PDL Community Bancorp has caused this certificate to be executed by its duly authorized officers and has caused its seal to be hereunto affixed this         day of         , 2017.

 

				By
LISSETTE MARTINEZ						CARLOS P. NAUDON
CORPORATE SECRETARY						PRESIDENT AND CHIEF EXECUTIVE OFFICER

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The shares of common stock evidenced by this certificate are subject to a limitation contained in the PDL Community Bancorp’s Charter to the effect that, for a period of five years from the date of the reorganization from mutual to stock form of Ponce De Leon Federal Bank, no person other than PDL Community Bancorp shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of any equity security of PDL Community Bancorp. This limitation shall not apply to the purchase of shares by underwriters in connection with a public offering or certain purchases of shares by a tax-qualified employee stock benefit plan or a subsidiary of PDL Community Bancorp and any trustee of such a plan or arrangement. In addition, during this five-year period, all shares owned over the 10% limit may not be voted in any matter submitted to stockholders for a vote.

For value received,                     hereby sells, assigns and transfers unto

PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER

(please print or typewrite name and address including postal zip code of assignee)

                 Shares of the Common Stock represented by the within Certificate, and does hereby irrevocably constitute and appoint

                         Attorney to transfer the said shares on the books of the within-named corporation with full power of substitution in the premises.

 

Dated,

 

In the presence of						Signature:

NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME OF THE STOCKHOLDER(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.

Exhibit 8.1

 

				Crowe Horwath LLP Independent Member Crowe Horwath International   488 Madison Avenue, Floor 3 New York, New York 10022-5722 Tel 212.572.5500 Fax 212.572.5572 www.crowehorwath.com

May 23, 2017

Board of Directors

Ponce Bank Mutual Holding Company

PDL Community Bancorp

Ponce De Leon Federal Bank

2244 Westchester Avenue

Bronx, New York 10462

Members of the Board of Directors:

Ponce De Leon Federal Bank (“PDL”) has requested the opinion (“Opinion”) of Crowe Horwath LLP (“Crowe”) regarding certain federal, New York State, and New Jersey income tax consequences for PDL’s reorganization (“Reorganization”) from a federally chartered mutual bank into a mutual holding company structure. We have not considered any non-income tax or foreign, or state and local income tax consequences other than those items specifically addressed in our opinion, and, therefore, do not express any opinion regarding the treatment that would be given the Reorganization by applicable authorities on any federal, state, or local tax issues not specifically addressed herein. We also express no opinion on non-tax issues such as matters of corporate law or securities law. We express no opinion other than that as stated immediately above, and neither this opinion nor any prior statements are intended to imply or to be an opinion on any other matters.

In rendering our opinion, we have relied upon the signed Letter of Representation and the facts, information, assumptions and representations as contained in Form S-1/A Registration Statement and the Plan of Reorganization as filed with the Securities and Exchange Commission (“SEC”) on May 22, 2017, including all exhibits attached thereto. We have assumed that these facts are complete and accurate and have not independently audited or otherwise verified any of these facts or assumptions. You have represented to us that we have been provided all of the facts necessary to render our opinion.

Statement of Facts

Corporate History and Current Organizational Structure

PDL is a federally chartered savings bank headquartered in Bronx, New York with thirteen branch offices located in Bronx, Manhattan, Queens, and Brooklyn, New York, as well as in Union City, New Jersey. PDL was originally chartered in 1960 as a federally chartered mutual savings and loan association under the name Ponce De Leon Federal Savings and Loan Association and became known as Ponce De Leon Federal Bank following a name change in 1997.¹

PDL’s business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations, in mortgage loans, consisting of one-to-four family residences (both investor-owned and owner-occupied), multi-family residences, non-residential property and construction and land, and, to a lesser extent, in business and consumer loans.

 

 

1	Between 1985 to 1997, PDL’s legal name was Ponce De Leon Federal Savings Bank.

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Crowe Horwath LLP

Ponce De Leon Federal Bank

Tax Opinion

 

Under the current mutual form of ownership, PDL does not have shareholders. Its depositors, and certain eligible borrowers,² currently have the right to vote on matters pertaining to PDL such as the election of directors and the contemplated Reorganization.

PDL currently accounts for bad debts under the specific charge-off method pursuant to Internal Revenue Code (IRC) §582(a). However, as PDL’s original charter dates back to 1960, it has remaining reserve balances relating to periods prior to the 1996 repeal of the reserve method of accounting under IRC §593 for savings institutions.

The Reorganization

On November 17, 2016, PDL’s board of directors unanimously adopted a plan of reorganization, which was subsequently amended on April 7, 2017 by unanimous action of the board.

The contemplated reorganization consists of a series of transactions by which PDL will reorganize its corporate structure from its current status as a mutual savings bank to a mutual holding company form of ownership pursuant to a plan of reorganization and a stock issuance plan. Under these plans, PDL will, in essence, reorganize from a federally chartered mutual savings bank into a two-tier federal mutual holding company structure.

More specifically, it is contemplated that the Reorganization will be completed as follows –

 

(1)

PDL will organize a stock savings bank as a wholly owned subsidiary (“Ponce Bank”).

 

(2)

After Ponce Bank receives FDIC-approval for insurance of accounts and the FDIC has issued it a certificate number, PDL will transfer pursuant to a purchase and assumption agreement all of its assets and liabilities to Ponce Bank, except for $200,000 in cash, solely in exchange for voting common stock of the stock bank. Ponce Bank will be the stock savings bank as a resulting from the reorganization.

 

It has been represented that the value of common stock received in exchange for accounts receivable will be equal to the net value of the accounts transferred – i.e., the face value of the accounts receivable previously included in income less the amount of the reserve for bad debts.

 

(3)

PDL will amend its charter and bylaws to read in the form of a federal mutual holding company to become Ponce Bank Mutual Holding Company (“PB Mutual”).

 

As a mutual holding company, PB Mutual will have no shareholders, and the members of PB Mutual will have exclusive voting authority as to all matters requiring a vote of members under the charter of PB Mutual.3 The initial Board of Directors for PB Mutual will consist of the existing PDL directors. Thereafter, approximately one-third of the directors of PB Mutual will be elected annually by its members.

 

(4)

PB Mutual will organize PDL Community Bancorp (“PDL Community”) as a wholly owned subsidiary, and PB Mutual will transfer $1,000 to PDL Community in exchange for 100 shares of PDL Community common stock.

 

2	Eligible borrowers include borrowers as of April 11, 1985 whose borrowings remain outstanding.

3

Persons who have membership rights with respect to PDL under its existing charter immediately prior to the Reorganization will continue to have such rights solely with respect to PB Mutual after the Reorganization so long as they remain members of the stock bank. In addition, all persons who become depositors of the stock bank following the Reorganization will have membership rights with respect to PB Mutual. The rights and powers of PB Mutual members will be defined by the charter and bylaws and by the statutory and regulatory provisions applicable to savings and loan holding companies and mutual holding companies.

 

Page 2 of 11

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Crowe Horwath LLP

Ponce De Leon Federal Bank

Tax Opinion

 

(5)

PB Mutual will transfer all of the initially issued stock of Ponce Bank to PDL Community in exchange for additional shares of PDL Community common stock,4 and Ponce Bank will become a wholly owned subsidiary of PDL Community.

 

(6)

Concurrently and in connection with the Reorganization, PDL Community will offer up to 7,224,663 shares of its common stock for sale at $10.00 per share5 in a “subscription offering” on a priority basis to depositors, eligible borrowers, and the tax-qualified employee stock ownership plans of PDL, with any remaining shares offered to the public in a community offering, a syndicated community offering, or a firm commitment underwritten offering, or some combination thereof.6

 

It is anticipated that, after the offering, subscribers in the offering, including PDL’s employee stock ownership plan, will own 45% of the outstanding PDL Community common stock, PB Mutual will own 51.7% of the outstanding PDL Community common stock, and a newly formed charitable foundation will own 3.3% of the outstanding PDL Community common stock.7

 

There is no established market for the common stock of PDL Community. However, it is expected that the PDL Community common stock will be traded on the Nasdaq Global Market under the symbol “PDLB” upon conclusion of the stock offering.

Collectively, the foregoing steps constitute the contemplated Reorganization.⁸ The Reorganization will not interrupt banking operations, and business will continue as usual following the Reorganization, operating as Ponce Bank.

It has been represented that PDL Community has no plan or intention to redeem or otherwise acquire any of the common stock issued in connection with the offering. It has been further represented that there is no plan or intention for PDL Community to be liquidated or merged with another corporation following the reorganization.

It has been represented that no person shall receive any payment, whether in money or property, in lieu of the issuance of subscription rights. In addition, it has been further represented that no shares of stock will be issued to or purchased by depositor-employees at a discount or as compensation in the proposed transaction.

It has been further represented that the subscription rights will be granted to historic PDL members at no cost to the recipients, will be legally non-transferable and of short duration, and will provide the recipient with the right only to purchase shares of PDL Community common stock at the same price to be paid by members of the general public in any community offering.

 

4	Note that because PB Mutual already owns 100% of PDL Community at the time of the contribution of the Ponce Bank shares, there may be no actual issuance of additional shares to PB Mutual, as it would effectively be a meaningless gesture.

5	The $10.00 per share price was selected primarily because it is the price most commonly used in mutual holding company reorganizations and stock offerings. See Form S-1 at p. 2 (citing Terms of the Offering).

6

A minimum of 5,339,969 shares must be sold in order to complete the offering. In addition, while the initial offering is for 7,224,663 shares, up to 8,308,362 shares may be sold to reflect demand for the shares or changes in market conditions following commencement of the offering without re-soliciting subscribers.

7

It is intended that a new charitable foundation will be established as part of the offering. Assuming final regulatory approval is received to establish and fund the charitable foundation, it is intended that $200,000 of the gross proceeds raised in the offering and 3.3% of the outstanding PDL Community common stock will be contributed to the new foundation following the offering.

8

Pursuant to the Plan of Reorganization and Form S-1 filed with the SEC, the Reorganization is intended to be completed through these steps. However, the plan allows alternatively for completion of the reorganization in any manner approved by regulators that is consistent with the purposes of the plan of reorganization and applicable laws and regulations. It is Crowe’s understanding that there have been no adjustments to the contemplated reorganization steps described in Form S-1 and in the Plan of Reorganization.

 

Page 3 of 11

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Crowe Horwath LLP

Ponce De Leon Federal Bank

Tax Opinion

 

Summary of Opinions

Based on the facts and representations set forth above and the analysis below, it is our opinion that:

Federal Tax Opinions

 

1.

The conversion of PDL, a federal mutual savings and loan bank, to PB Mutual, a federal mutual holding company will qualify as a tax-free reorganization under IRC §368(a)(1)(F), and no gain or loss will be recognized as a result of such conversion.

 

2.

The transfer of substantially all of the historic PDL assets and liabilities to Ponce Bank qualifies as an exchange under IRC §351. Consequently, PB Mutual (f/k/a PDL) will recognize no gain or loss upon the transfer of substantially all of the historic PDL assets and liabilities solely in exchange for the voting common stock of Ponce Bank (i.e. the stock bank).

 

3.

PB Mutual’s (f/k/a PDL) holding period in the Ponce Bank common stock received in the Reorganization will include the holding period during which the exchanged assets were held, in accordance with IRC §1223(1).

 

4.

PB Mutual (f/k/a PDL) will recognize no income with respect to its bad debt reserve established under IRC §593.

 

5.

Ponce Bank will recognize no gain or loss upon its receipt of substantially all of the historic PDL assets from PDL in exchange for Ponce Bank stock, in accordance with IRC §1032(a).

 

6.

Ponce Bank’s basis in the historic PDL assets will be the same as the basis of such assets in the hands of PDL immediately prior to the Reorganization, in accordance with IRC §362(a).

 

7.

Ponce Bank’s holding period for the historic PDL assets will include the period during which the assets were held by PDL prior to the conversion, in accordance with IRC §1223(2).

 

8.

Historic members of PDL will recognize no gain or loss by reason of the Reorganization.

 

9.

No gain or loss will be recognized by historic members of PDL on the issuance to them of withdrawable deposit accounts in Ponce Bank, plus liquidation rights with respect to PB Mutual, in exchange for their PDL deposit accounts or to the other depositors on the issuance to them of withdrawable deposit accounts, in accordance with IRC §354(a).

 

10.

It is more likely than not that the fair market value of the subscription rights to purchase PDL Community common stock is zero.9 Accordingly, no gain or loss will be recognized by eligible account holders, supplemental eligible account holders, or other members upon the distribution to them of the non-transferable subscription rights to purchase shares of PDL Community common stock, in accordance with IRC §305(a). Gain realized, if any, by the eligible account holders, supplemental eligible account holders, or other members on the distribution to them of the non-transferable subscription rights will be recognized, but only in an amount not in excess of the fair market value of such subscription rights, in accordance with IRC §356(a).

 

9

The IRS has not in the past concluded that subscription rights have value. Note, however, that if the subscription rights are subsequently found to have a fair market value, income may be recognized by various recipients of the subscription rights (in certain cases, whether or not the rights are exercised) and PDL Community and/or PB Mutual may be taxable on the distribution of the subscription rights.

 

Page 4 of 11

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Crowe Horwath LLP

Ponce De Leon Federal Bank

Tax Opinion

 

In addition, eligible account holders, supplemental eligible account holders will not realize any taxable income as a result of the exercise by them of the non-transferable subscription rights, consistent with Rev. Rul. 56-572.

 

11.

The basis of the deposit accounts in Ponce Bank received by eligible account holders, supplemental eligible account holders, and other historic members of PDL will be the same as the basis of the PDL deposit accounts surrendered in exchange therefor, in accordance with IRC §358(a)(1). Additionally, the basis of the interests in the liquidation rights in PDL to be received by eligible account holders, supplemental eligible account holders, and other historic members of PDL will be zero, consistent with Rev. Rul. 71-233.

 

12.

PB Mutual and the persons who purchase PDL Community common stock in the subscription and community offerings (“minority shareholders”) will recognize no gain or loss upon the transfer of Ponce Bank stock and cash, respectively, to PDL Community, in accordance with IRC §351(a).

 

13.

PDL Community will recognize no gain or loss on its receipt of Ponce Bank stock and cash, in accordance with IRC §1032(a).

 

14.

PB Mutual’s basis in its PDL Community common stock will be increased by its basis in the Ponce Bank stock transferred, in accordance with IRC §358(a)(1).

 

15.

PB Mutual’s holding period in the PDL Community common stock received will include the period during which it held the Ponce Bank common stock, provided that the property was a capital asset on the date of the exchange, in accordance with IRC §1223(1).

 

16.

PDL Community’s basis in the Ponce Bank stock received from PB Mutual will be the same as the basis of such stock in the hands of PB Mutual, in accordance with IRC §362(a).

 

17.

PDL Community’s holding period for the Ponce Bank stock received from PB Mutual will include the period during which the stock was held by PB Mutual, in accordance with IRC §1223(2).

 

18.

It is more likely than not that the basis of the PDL Community common stock to its shareholders will be the purchase price thereof, in accordance with IRC §1012.

 

19.

The holding period of the PDL Community common stock purchased pursuant to the exercise of subscription rights will commence on the date on which the right to acquire the stock was exercised, in accordance with IRC §1223(6).

New York State Tax Opinions

 

1.

It is more likely than not that the federal tax treatment of the Reorganization will be respected for purposes of the New York State Corporate Franchise Tax calculated on the basis of business income.

 

2.

It is more likely than not that the federal tax treatment of the subscription offering will be respected for purposes of computing the New York State Personal Income Tax of eligible account holders, supplemental eligible account holders and other members who are subject to the New York State Personal Income Tax as New York State residents.

 

Page 5 of 11

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Crowe Horwath LLP

Ponce De Leon Federal Bank

Tax Opinion

 

New Jersey Tax Opinions

 

1.

It is more likely than not that the federal tax treatment of the Reorganization will be respected in determining entire net income for purposes of the New Jersey Corporation Business Tax.

 

2.

It is more likely than not that the federal tax treatment of the subscription offering will be respected for purposes of computing the New Jersey Gross Income Tax of eligible account holders, supplemental eligible account holders and other members who are subject to the New Jersey Gross Income Tax as New Jersey residents.

Law and Analysis

 

I.

Federal Income Tax

IRC §368(a)(1)(F) provides that the term “reorganization” means a mere change in identity, form, or place of organization of one corporation, however effected. On numerous occasions, the Internal Revenue Service (IRS) has ruled that the conversion of a mutual savings and loan association into a stock savings and loan association qualifies as a Type (F) reorganization because the conversion transaction is a mere change in identity, form, or place of organization. See e.g., Revenue Ruling (Rev. Rul.) 80-105, GCM 38537; Rev. Rul. 2003-48; PLR 8430038. Accordingly, the conversion of PDL from a mutual savings and loan bank into a federal mutual holding company will qualify as a reorganization under IRC §368(a)(1)(F).

Pursuant to Treasury Regulation (Treas. Reg.) §1.368-2(m)(3)(i), a potential (F) reorganization consisting of a series of related steps or transactions that, collectively, result in a mere change of one corporation may qualify as a reorganization under IRC §368(a)(1)(F), whether or not certain steps within the series, viewed in isolation, could be subject to other IRC provisions, including IRC §351. Treas. Reg. §1.368-2(m)(3)(ii) further provides that a transaction that qualifies as a reorganization under IRC §368(a)(1)(F) may occur before, within, or after other transactions that effect more than a mere change, and related events that precede or follow the transaction generally will not cause the transaction to fail to qualify as a reorganization under IRC §368(a)(1)(F). As noted, the following related transactions will occur in connection with the conversion of PDL (a federally chartered mutual savings association) to PB Mutual (a federal mutual holding company): (1) the historic business assets of PDL will be transferred to Ponce Bank; and (2) the stock of Ponce Bank will be contributed by PB Mutual to PDL Community. As discussed below, it is anticipated that each of these transactions will qualify as a tax-free exchange under IRC §351. Under Treas. Reg. §1.368-2(m)(3), these related transactions will not affect the (F) reorganization qualification of the conversion transaction.

IRC §351(a) provides that no gain or loss will be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in IRC §368(c)) of the corporation.

IRC §368(c) provides that “control” means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.

IRC §351 requires a transfer of property in exchange for stock. The “transfer” requirement is satisfied so long as the transferor transfers all substantial rights associated with the transferred property. PB Mutual (f/k/a PDL) will not retain any significant power, right or continuing interest in the historic assets transferred to Ponce Bank. Because there will be a transfer of substantially all of the historic PDL assets, the initial transfer of substantially all of the historic PDL assets to Ponce Bank will qualify as a transfer for purposes of IRC §351. In addition, PB Mutual (f/k/a PDL) will own 100% of newly formed PDL Community following the initial asset transfer and will, therefore, satisfy the requisite requirement of being in IRC §368(c) control of PDL Community immediately following the asset transfer. Consequently, the initial transfer of substantially all of the historic PDL assets to Ponce Bank will qualify as a tax-free exchange under IRC §351.

 

Page 6 of 11

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Crowe Horwath LLP

Ponce De Leon Federal Bank

Tax Opinion

 

The IRS ruled in Rev. Rul. 2003-48 that a mutual holding company’s contribution of the stock of the stock bank to the stock holding company solely in exchange for shares of stock holding company’s voting common stock constitutes a transfer described in IRC §351. PB Mutual (f/k/a PDL) will contribute the stock of Ponce Bank to PDL Community in a constructive exchange for additional PDL Community. Note, however, that because PB Mutual already owns 100% of the outstanding shares of PDL Community at the time of the stock contribution, it is unlikely that additional PDL Community shares will actually be issued to PB Mutual, as an issuance of additional shares would be a meaningless gesture given the existing 100% ownership. Based on the foregoing, we believe that this secondary contribution transaction will also qualify as a tax-free exchange under IRC §351.

Further, in Rev. Rul. 2003-51, the IRS ruled that a transfer of assets to a corporation (the “first corporation”) in exchange for an amount of stock of the first corporation constituting control satisfies the control requirement of IRC §351, if pursuant to a binding agreement entered into by the transferor with a third party prior to the exchange, the transferor transfers the stock of the first corporation to another corporation (the “second corporation”) simultaneously with the transfer of assets by the third party to the second corporation and, immediately thereafter, the transferor and the third party are in control of the second corporation. As a result, we believe that the subsequent contribution of Ponce Bank stock to PDL Community will not adversely affect treatment of the initial contribution as a tax-free exchange under IRC §351.

In Nash v. United States, 398 U.S. 1 (1970), the U.S. Supreme Court held that a reserve for bad debts is not recaptured by a transferor of accounts receivable to a controlled corporation for its stock. The Court held that the transferors merely received stock and securities equal in value to the net worth of the receivables transferred – i.e., their face value less the reserve for bad debts. Because no gain or loss was realized, there was no reason to include the reserve in taxable income. See also Rev. Rul. 78-280. As noted in the Statement of Facts, it is Crowe’s understanding that the value of any common stock received in exchange for PDL accounts receivable will be equal to the net value of the accounts transferred. Consequently, there should be no income recapture related to previously recorded bad debt reserves.

 

II.

New York – Corporate Franchise Tax on Business Corporations

Effective for tax years beginning on or after January 1, 2015, the franchise tax on banking corporations under Tax Law Article 32 was repealed, and banking corporations became and now are subject to the franchise tax on general business corporations (“New York Corporate Franchise Tax”) under Tax Law Article 9-A. New York 2014-15 Budget Bill.

The New York Corporate Franchise Tax is imposed on a corporation for the privilege of exercising its corporate franchise, doing business, employing capital, owning or leasing property in New York in a corporate or organized capacity, maintaining an office in New York, or deriving receipts from activity in New York. N.Y. Tax Law §209(a). The term “corporation” includes: (a) an association within the meaning of IRC §7701(a)(3) (including a limited liability company), (b) a joint-stock company or association, (c) a publicly traded partnership treated as a corporation for purposes of the IRC §7704 and (d) any business conducted by a trustee or trustees wherein interest or ownership is evidenced by certificate or other written instrument.

A corporation’s tax liability is the highest of three alternative bases: (1) business income, (2) capital and (3) a fixed dollar minimum tax. N.Y. Tax Law §210(1). The scope of this opinion is limited to the consequences of the Reorganization on the computation of the business income and the fixed dollar minimum tax bases of the New York Corporate Franchise Tax.

 

Page 7 of 11

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Crowe Horwath LLP

Ponce De Leon Federal Bank

Tax Opinion

 

In general, the tax on business income is calculated by reference to federal taxable income reported to the United States Treasury (entire net income), reduced by investment income and other exempt income, multiplied by the applicable tax rate. N.Y. Tax Law §208(8) and §210(1)(a).

Entire net income, a starting-point for computing business income, is defined as “total net income from all sources which shall be presumably the same as the entire taxable income, which, except as hereinafter provided in this subdivision, the taxpayer is required to report to the United States treasury department.” N.Y. Tax Law §208(9).

N.Y. Tax Law §208(9)(a) and (b) provide modifications and adjustments required in computing entire net income. There are no modifications or adjustments to entire net income relating to the IRC sections cited above.

Investment income is defined as “income, including capital gains in excess of capital losses, from investment capital, to the extent included in computing entire net income” less interest deductions. N.Y. Tax Law §208(6)(a)(i). The term “other exempt income” means the sum of exempt controlled foreign corporation income and exempt unitary corporation dividends. In computing investment income, exempt controlled foreign corporation income and exempt unitary corporation dividends, there are no modifications or adjustments applicable to transactions relating to investment income relating to the IRC sections cited above.

Based on the foregoing, with respect to the New York Corporate Franchise Tax calculated on the basis of business income, it is more likely than not that the Reorganization should be treated in the same manner as it is treated for federal income tax purposes.

The fixed dollar minimum tax is calculated by reference to New York receipts, which are receipts included in the numerator of the apportionment factor determined under N.Y. Tax Law §210-A for the taxable year. N.Y. Tax Law §210(1)(d)(1)(E). The apportionment factor is “a fraction, determined by including only those receipts, net income, net gains, and other items that are included in the computation of the taxpayer’s business income for the taxable year.” N.Y. Tax Law §210-A(1). Accordingly, since there is no effect on the computation of business income as a result of the Reorganization, it is more likely than not that the Reorganization will have no effect on the New York Corporate Franchise Tax calculated on a fixed minimum tax basis.

 

III.

New York – Personal Income Tax

The personal income tax is imposed on New York taxable income of all resident individuals (“New York Personal Income Tax”). N.Y. Tax Law §601. The New York taxable income of a resident individual is New York adjusted income, reduced by New York deductions and exemptions. N.Y. Tax Law §611(a).

New York adjusted income is calculated by reference to federal adjusted gross income reported for the taxable year with certain modifications. N.Y. Tax Law §612(a). New York deductions and exemptions from federal adjusted gross income are provided in N.Y. Tax Law §613 through § 616. There are no modifications or adjustments applicable to transactions relating to the IRC sections cited above. Therefore, it is more likely than not that the federal tax treatment of the subscription offering will be respected for purposes of the New York Personal Income Tax.

 

IV.

New Jersey – Corporation Business Tax

The New Jersey corporation business tax (“New Jersey Corporation Business Tax”) is imposed on all domestic and foreign corporations that derive receipts from sources within New Jersey or engage in contacts within New Jersey, in addition to those that have or exercise a corporate franchise, do business, employ or own capital or property, or maintain an office in New Jersey. N.J. Rev. Stat. §54:10A-2. The

 

Page 8 of 11

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Crowe Horwath LLP

Ponce De Leon Federal Bank

Tax Opinion

 

term “corporation” is defined as any corporation, joint-stock company or association and any business conducted by a trustee or trustees wherein interest or ownership is evidenced by a certificate of interest or ownership or similar written instrument, any other entity classified as a corporation for federal income tax purposes, and any state or federally chartered building and loan association or savings and loan association. N.J. Rev. Stat. §54:10A-4(c). Banking corporations, including national banks and entities considered banks within Sec. 1 of the Banking Act of 1948, are subject to the New Jersey Corporation Business Tax. N.J. Rev. Stat. §54:10A-34; N.J. Rev. Stat. §54:10A-36.

In most cases, the gain or loss recognized on a reorganization for the New Jersey Corporation Business Tax purposes will be the same as the gain or loss recognized for federal income tax purposes. The starting point in computing the tax base of the New Jersey Corporation Business Tax is entire net income, which is defined as follows:

 

…total net income from all sources, whether within or without the United States, and shall include the gain derived from the employment of capital or labor, or from both combined, as well as profit gained through a sale or conversion of capital assets.

 

For the purpose of this act, the amount of a taxpayer’s entire net income shall be deemed prima facie to be equal in amount to the taxable income, before net operating loss deduction and special deductions, which the taxpayer is required to report, or, if the taxpayer is classified as a partnership for federal tax purposes, would otherwise be required to report, to the United States Treasury Department for the purpose of computing its federal income tax…

 

N.J. Rev. Stat. §54:10A-4(k), emphasis added.

Accordingly, the federal taxable income reported by the taxpayer generally is the starting point for determining the New Jersey Corporation Business Tax. The federal taxable income is then subject to various state-specific addition and subtraction modifications, which primarily appear within the definition of “entire net income.”Id. There are no modifications or adjustments applicable to transactions relating to the IRC sections cited above. N.J. Rev. Stat. §54:10A-4(k); N.J.A.C. § 18:7-5.2; N.J.A.C. § 18:7-5.4.

Based on the foregoing, with respect to the New Jersey Corporation Business Tax calculated on the basis of entire net income, it is more likely than not that the Reorganization should be treated in the same manner as it is treated for federal income tax purposes.

 

V.

New Jersey – Gross Income Tax

New Jersey imposes gross income tax on every resident, based on New Jersey gross income, subject to certain exclusions, deductions and exemptions (the “New Jersey Gross Income Tax”). N.J. Rev. Stat. §54A:2-1. New Jersey Gross Income Tax statutes list specific categories of income that should be included in gross income. N.J. Rev. Stat. §54A:5-1. Net gains or income derived from the sale, exchange or other disposition of property is a category of income. N.J. Rev. Stat. §54A:5-1(c).

However, the term “net gains or income” does not include gains or income from transactions to the extent that non-recognition is allowed for federal income tax purposes. Ibid. The relevant provision continues:

The term “sale, exchange or other disposition” shall not include the exchange of stock or securities in a corporation a party to a reorganization in pursuance of a plan of reorganization, solely for stock or securities in such corporation or in another corporation a party to the reorganization and the transfer of property to a corporation by one or more persons solely in exchange for stock or securities in such corporation if immediately after the exchange such person or persons are in control of the corporation.

 

Page 9 of 11

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Crowe Horwath LLP

Ponce De Leon Federal Bank

Tax Opinion

 

Ibid.

Accordingly, based on the foregoing, it is more likely than not that the federal treatment of the subscription offering will be respected for purposes of the New Jersey Gross Income Tax.

Limitations on Opinion

A misstatement or omission of any fact or a change or amendment in any of the facts, assumptions or representations we have relied upon may require a modification of all or a part of this opinion. Our opinion is as of the date of this letter, and we have no responsibility to update this opinion for events transactions, circumstances or changes in any of the facts, assumptions or representations occurring after this date. We have not been asked to, and we do not, render any opinion with respect to any matters other than those expressly set forth in this Opinion.

The discussion and conclusions set forth herein are based upon the Internal Revenue Code, Treasury Regulations, New York State income tax statutes and regulations, New Jersey income tax statutes and regulations and existing administrative and judicial interpretations thereof, as of the date of this Opinion all of which are subject to change. If there is a change, including a change having retroactive effect, in the Internal Revenue Code, Treasury Regulations, Internal Revenue Service rulings or releases, New York State income tax statutes and regulations, New Jersey income tax statutes and regulations, or in the prevailing judicial interpretation of the foregoing, the opinions expressed herein would necessarily have to be re-evaluated in light of any such changes. We have no responsibility to update this opinion for any such changes occurring after the date of this letter.

The opinions expressed herein are based solely upon our interpretation of the Internal Revenue Code, Treasury Regulations, New York State income tax statutes and regulations, New Jersey income tax statutes and regulations as interpreted by court decisions, and by rulings and procedures issued by the Internal Revenue Service, the New York State Department of Taxation and Finance, or the New Jersey Division of Taxation as of the date of this letter.

The opinions expressed herein are not binding on any court or on the Internal Revenue Service (IRS), the New York State Department of Taxation and Finance, or the New Jersey Division of Taxation, and there can be no assurance that contrary positions may not be taken by the IRS or that a court considering the issues would not hold contrary to such opinions.

The opinions expressed herein reflect our assessment of the probable outcome of litigation and other adversarial proceedings based solely on an analysis of the existing tax authorities relating to the issues. It is important, however, to note that litigation and other adversarial proceedings are frequently decided on the basis of such matters as negotiation and pragmatism upon the outcome of such potential litigation or other adversarial proceedings.

The opinions expressed herein reflect what we regard to be the material federal, New York State, and New Jersey income tax, effects of the transaction as described herein; nevertheless, they are opinions only and should not be taken as assurance of the ultimate tax treatment.

 

Page 10 of 11

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Crowe Horwath LLP

Ponce De Leon Federal Bank

Tax Opinion

 

Consent

We hereby consent to the filing of this Opinion as an exhibit to the Form S-1 Registration Statement filed with the SEC and as an exhibit to applications filed with respect to the Plan of Reorganization, as applicable. We also consent to the references to our firm in the prospectus contained in the Form S-1 Registration Statement and applications filed with respect to the Plan of Reorganization.

Very truly yours,

 

Crowe Horwath LLP

 

Page 11 of 11

Exhibit 23.3

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the use in the Prospectus constituting part of the Registration Statement on Pre-Effective Amendment No. 2 to the Form S-1 (No. 333-217275) of PDL Community Bancorp to be filed on July 27, 2017, of our report dated March 15, 2017, relating to the consolidated statements of financial condition of Ponce De Leon Federal Bank and Subsidiaries as of December 31, 2016 and 2015 and the related consolidated statements of income, comprehensive income, changes in capital accounts, and cash flows for the years then ended, which appears in such Prospectus. We also consent to the reference to our Firm under the caption “Experts” in such Prospectus.

/s/ Mazars USA LLP

New York, NY

July 27, 2017

Exhibit 99.4

Dear Member:

We are writing to request your vote on important matters, and just as importantly, to tell you of an investment opportunity.

Pursuant to a Plan of Reorganization from a Mutual Bank to a Mutual Holding Company and Stock Issuance Plan (the “Plan”), Ponce De Leon Federal Bank will reorganize from a mutual bank (meaning no stockholders) to the mutual holding company form of ownership. As a part of the reorganization, PDL Community Bancorp, a to-be-formed mid-tier stock holding company for the Bank, is conducting a minority offering of shares of its common stock. Also, in furtherance of our commitment to our local communities, a new charitable foundation, the Ponce De Leon Foundation, will be established in connection with the reorganization.

As a member of Ponce De Leon Federal Bank, you have the right to vote on approval of the Plan and the establishment and funding of the charitable foundation, and you have a priority right to subscribe for shares of PDL Community Bancorp common stock before the stock is offered to the local community and the general public. Enclosed are a prospectus, a stock order form, a proxy statement, and other materials further describing the Plan, the reorganization, the charitable foundation, and the offering.

THE PROXY VOTE – Approval of the Plan and the establishment and funding of the charitable foundation require the approval of our members. Your Board of Directors urges you to vote “FOR” approval of the Plan and “FOR” the establishment and funding of the charitable foundation.

Please note that the reorganization will not result in changes to account numbers, interest rates or other terms of your accounts with Ponce De Leon Federal Bank. Deposit accounts will not be converted to stock, and your deposit accounts will continue to be insured by the FDIC up to the maximum legal limits. In addition, voting for approval of the Plan and establishment and funding of the charitable foundation does not obligate you to purchase shares of our common stock.

You may have received more than one proxy card, depending on the number and ownership structure of your accounts. Please vote each proxy card you received. Not voting the enclosed proxy card(s) will have the same effect as voting against the Plan and the charitable foundation. You may cast your votes immediately by telephone or internet, by following the simple instructions on your proxy card. Alternatively, to vote by mail, please sign each proxy card and mail the card(s) in the proxy reply envelope provided.

THE STOCK OFFERING—As a member of Ponce De Leon Federal Bank, you have a priority right, but no obligation, to buy shares of PDL Community Bancorp common stock during our subscription offering before the shares are made available for sale to the local community and the general public. The common stock is being offered at $10.00 per share, and there will be no sales commission charged to purchasers during the offering. Please read the enclosed prospectus carefully before making any investment decision.

If you are interested in purchasing shares of PDL Community Bancorp common stock, please complete the enclosed stock order form and return it with full payment. You may submit your stock order form and payment in one of three ways: 1) by mail, using the stock order reply envelope provided; 2) by overnight delivery to the address indicated for that purpose on the stock order form; or 3) by hand-delivery to Ponce De Leon Federal Bank’s administrative office located at 2244 Westchester Avenue, Bronx, New York. However, please know that all stock order forms, with full payment, must be received (not postmarked) by 12:00 p.m., noon, Eastern Time, on September 6, 2017. Please do not mail stock order forms to Ponce De Leon Federal Bank. We encourage subscribers to consider in-person or overnight delivery to enhance the likelihood that your order is received before the deadline. If you are considering purchasing common stock with funds you have in an IRA or other retirement account, please call our Stock Information Center promptly for guidance, as these orders require additional processing time.

We invite you to consider this opportunity to share in our future and, together with our Board of Directors, we thank you for your continued support as a Ponce De Leon Federal Bank customer.

Sincerely,

 

Steven A. Tsavaris				Carlos P. Naudon
Chairman of the Board and Chief Executive Officer				President and Chief Operating Officer

Questions?—Please call our Stock Information Center, toll-free, at (888) 317-2811.

Monday – Friday, 10:00 a.m. – 4:00 p.m., Eastern Time, except bank holidays.

 

This letter is not an offer to sell or a solicitation of an offer to buy shares of common stock. The offer is made only by the prospectus. The shares of common stock being sold are not savings accounts or deposits, and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

M

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Dear Friend and Former Depositor:

We are writing to tell you of an investment opportunity.

Pursuant to a Plan of Reorganization from a Mutual Bank to a Mutual Holding Company and Stock Issuance Plan (the “Plan”), Ponce De Leon Federal Bank will reorganize from a mutual bank (meaning no stockholders) to the mutual holding company form of ownership. As a part of the reorganization, PDL Community Bancorp, a to-be-formed mid-tier stock holding company for the Bank, is conducting a minority offering of shares of its common stock. Also, in furtherance of our commitment to our local communities, a new charitable foundation, the Ponce De Leon Foundation, will be established in connection with the reorganization. Enclosed are a prospectus, a stock order form, and other materials further describing the Plan, the reorganization, the charitable foundation, and the offering.

Our records indicate that you were a depositor of Ponce De Leon Federal Bank as of the close of business on October 31, 2015 or June 30, 2017, with account(s) which were subsequently closed. As such, you have a priority right, but no obligation, to buy shares of PDL Community Bancorp common stock during our subscription offering, before the shares are made available for sale to the local community and the general public.

The common stock is being offered at $10.00 per share, and there will be no sales commission charged to purchasers during the offering. Please read the enclosed prospectus carefully before making any investment decision.

If you are interested in purchasing shares of PDL Community Bancorp common stock, please complete the enclosed stock order form and return it with full payment. You may submit your stock order form and payment in one of three ways: 1) by mail, using the stock order reply envelope provided; 2) by overnight delivery to the address indicated for that purpose on the stock order form; or 3) by hand-delivery to Ponce De Leon Federal Bank’s administrative office located at 2244 Westchester Avenue, Bronx, New York. However, please know that all stock order forms, with full payment, must be received (not postmarked) by 12:00 p.m., noon, Eastern Time, on September 6, 2017. Please do not mail stock order forms to Ponce De Leon Federal Bank. We encourage subscribers to consider in-person or overnight delivery to enhance the likelihood that your order is received before the deadline. If you are considering purchasing common stock with funds you have in an IRA or other retirement account, please call our Stock Information Center promptly for guidance, as these orders require additional processing time.

We invite you to consider this opportunity to share in our future and, together with our Board of Directors, we thank you for your past support as a Ponce De Leon Federal Bank customer.

Sincerely,

 

Steven A. Tsavaris				Carlos P. Naudon
Chairman of the Board and Chief Executive Officer				President and Chief Operating Officer

 

Questions?—Please call our Stock Information Center, toll-free, at (888) 317-2811.

Monday – Friday, 10:00 a.m. – 4:00 p.m., Eastern Time, except bank holidays.

 

This letter is not an offer to sell or a solicitation of an offer to buy shares of common stock. The offer is made only by the prospectus. The shares of common stock being sold are not savings accounts or deposits, and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

F

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Dear Prospective Investor:

We are writing to tell you of an investment opportunity.

Pursuant to a Plan of Reorganization from a Mutual Bank to a Mutual Holding Company and Stock Issuance Plan (the “Plan”), Ponce De Leon Federal Bank will reorganize from a mutual bank (meaning no stockholders) to the mutual holding company form of ownership. As a part of the reorganization, PDL Community Bancorp, a to-be-formed mid-tier stock holding company for the Bank, is conducting a minority offering of shares of its common stock. Also, in furtherance of our commitment to our local communities, a new charitable foundation, the Ponce De Leon Foundation, will be established in connection with the reorganization.

We believe you may have an interest in investing in PDL Community Bancorp common stock. Enclosed are a prospectus, a stock order form, and other materials further describing the Plan, the reorganization, the charitable foundation, and the offering.

The common stock is being offered at $10.00 per share, and there will be no sales commission charged to purchasers during the offering. Please read the enclosed prospectus carefully before making any investment decision.

If you are interested in purchasing shares of PDL Community Bancorp common stock, you must complete and return the enclosed stock order form and return it with full payment. You may submit your stock order form and payment in one of three ways: 1) by mail, using the stock order reply envelope provided; 2) by overnight delivery to the address indicated for that purpose on the stock order form; or 3) by hand-delivery to Ponce De Leon Federal Bank’s administrative office located at 2244 Westchester Avenue, Bronx, New York. However, please know that all stock order forms, with full payment, must be received (not postmarked) by 12:00 p.m., noon, Eastern Time, on September 6, 2017. Please do not mail stock order forms to Ponce De Leon Federal Bank. We encourage subscribers to consider in-person or overnight delivery to enhance the likelihood that your order is received before the deadline. If you are considering purchasing common stock with funds you have in an IRA or other retirement account, please call our Stock Information Center promptly for guidance, as these orders require additional processing time.

We invite you to consider this opportunity to share in our future.

Sincerely,

 

Carlos P. Naudon				Steven A. Tsavaris
President and Chief Executive Officer				Executive Chairman

 

Questions?—Please call our Stock Information Center, toll-free, at (888) 317-2811.

Monday – Friday, 10:00 a.m. – 4:00 p.m., Eastern Time, except bank holidays.

 

This letter is not an offer to sell or a solicitation of an offer to buy shares of common stock. The offer is made only by the prospectus. The shares of common stock being sold are not savings accounts or deposits, and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

C

---

 

Dear Member:

We are writing to request your vote on important matters.

Pursuant to a Plan of Reorganization from a Mutual Bank to a Mutual Holding Company and Stock Issuance Plan (the “Plan”), Ponce De Leon Federal Bank will reorganize from a mutual bank (meaning no stockholders) to the mutual holding company form of ownership. As a part of the reorganization, PDL Community Bancorp, a to-be-formed mid-tier stock holding company for the Bank, is conducting a minority offering of shares of its common stock. Also, in furtherance of our commitment to our local communities, a new charitable foundation, the Ponce De Leon Foundation, will be established in connection with the reorganization.

As a member of Ponce De Leon Federal Bank, you have the right to vote on approval of the Plan and the establishment and funding of the charitable foundation. Enclosed are a prospectus, a proxy statement, and other materials further describing the Plan, the reorganization, the charitable foundation, and the offering.

Approval of the Plan and the establishment and funding of the charitable foundation require the approval of our members. Your Board of Directors urges you to vote “FOR” approval of the Plan and “FOR” the establishment and funding of the charitable foundation.

Please note that the reorganization will not result in changes to account numbers, interest rates or other terms of your accounts with Ponce De Leon Federal Bank. Deposit accounts will not be converted to stock, and your deposit accounts will continue to be insured by the FDIC up to the maximum legal limits.

You may have received more than one proxy card, depending on the number and ownership structure of your accounts. Please vote each proxy card you received. Not voting the enclosed proxy card(s) will have the same effect as voting against the Plan and the charitable foundation. You may cast your votes immediately by telephone or internet, by following the simple instructions on your proxy card. Alternatively, to vote by mail, please sign each proxy card and mail the card(s) in the proxy reply envelope provided.

Unfortunately, although we are requesting that you vote on approval of the Plan and the establishment and funding of the charitable foundation, we regret that PDL Community Bancorp is unable to offer its common stock to you, because we are unable to offer the stock for sale to persons residing in foreign countries.

If you have any questions about the Plan of Reorganization or voting, please refer to the enclosed materials or call our Information Center.

Thank you for your continued support as a customer of Ponce De Leon Federal Bank.

Sincerely,

 

Steven A. Tsavaris				Carlos P. Naudon
Chairman of the Board and Chief Executive Officer				President and Chief Operating Officer

 

Questions?—Please call our Information Center, toll-free, at (888) 317-2811.

Monday – Friday, 10:00 a.m. – 4:00 p.m., Eastern Time, except bank holidays.

 

This letter is not an offer to sell or a solicitation of an offer to buy shares of common stock. The offer is made only by the prospectus. The shares of common stock being sold are not savings accounts or deposits, and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

B

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To Customers and Friends of Ponce De Leon Federal Bank

 

Raymond James & Associates, Inc., a member of the Financial Industry Regulatory Authority, has been hired by Ponce De Leon Federal Bank to assist it in reorganizing from a mutual savings bank to the mutual holding company form of ownership. As a part of the reorganization, PDL Community Bancorp, a to-be-formed mid-tier stock holding company for the Bank, is conducting a minority offering of shares of its common stock. Raymond James & Associates, Inc. is not affiliated with Ponce De Leon Federal Bank or PDL Community Bancorp.

At the request of PDL Community Bancorp, we are enclosing materials explaining the reorganization and common stock offering. Please read the enclosed Prospectus carefully for a complete description of the stock offering, including the section titled “Risk Factors.” PDL Community Bancorp has asked us to forward the Prospectus and accompanying documents to you in view of certain requirements of the securities laws in your state.

If you have questions regarding the reorganization and the stock offering, please call the Stock Information Center, toll free, at (888) 317-2811, Monday – Friday, 10:00 a.m. – 4:00 p.m., Eastern Time, except bank holidays.

Sincerely,

Raymond James & Associates, Inc.

This is letter not an offer to sell or a solicitation of an offer to buy shares of common stock. The offer is made only by the prospectus. The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

BD

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Questions and Answers

About our Reorganization and Stock Offering

 

 

 

This pamphlet answers questions about our reorganization and the related common stock offering. Investing in shares of common stock involves certain risks, including loss of principal. Before making an investment decision, please read the enclosed Prospectus carefully, including the section entitled “Risk Factors.”

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THE REORGANIZATION

What is the reorganization?

 

Under our Plan of Reorganization from a Mutual Bank to a Mutual Holding Company and Stock Issuance Plan (the “Plan”), Ponce De Leon Federal Bank (the “Bank”) will reorganize from a mutual bank (meaning no stockholders) to the mutual holding company form of ownership. Concurrently with the reorganization, PDL Community Bancorp, a to-be-formed mid-tier stock holding company, is offering for sale shares of its common stock. Upon completion of the reorganization, the common stock of PDL Community Bancorp will be 45% owned by stockholders who purchase shares in the offering, 3.3% will be contributed to a new charitable foundation, Ponce De Leon Foundation (the “Foundation”), which is being established in connection with the reorganization, and 51.7% will be owned by Ponce Bank Mutual Holding Company, our federally chartered mutual holding company. See “Summary – Our Reorganization into a Mutual Holding Company and the Offering” in the enclosed prospectus for additional details and a diagram of our corporate structure following the reorganization and offering.

What are the reasons for the reorganization and offering?

 

The primary purpose of the reorganization is to establish a holding company and to reorganize Ponce De Leon Federal Bank to the stock form of ownership in order to compete and expand more effectively in the financial services marketplace. The reorganization also will enable members, employees, management and directors to have an equity ownership interest in our company. The reorganization will permit us to issue and sell capital stock, which is a source of capital not available to mutual savings banks. In addition, the contribution to the Foundation will not only complement our existing charitable activities but also enable the communities that we serve to share in our long-term growth. See “The Reorganization and Offering—Reasons for the Reorganization” in the enclosed prospectus for additional discussion of the reasons for the reorganization and offering.

What is the Ponce De Leon Foundation and why is it being established?

 

In furtherance of our commitment to our local communities, a new charitable foundation, Ponce De Leon Foundation, will be established in connection with the reorganization. The Foundation will initially be funded with $200,000 in cash and 3.3% of our total outstanding shares of common stock. The purpose of the Foundation is to provide financial support to appropriate organizations in our communities and to enable our communities to share in our long-term growth. See “Our Charitable Foundation” in the enclosed prospectus for additional discussion of the charitable foundation.

Will the Ponce De Leon Foundation be established and funded if the reorganization is not approved and completed?

 

No. The charitable foundation will be established only if both the Plan and the Foundation are approved. However, if the Foundation is not approved and we receive all other necessary reorganization approvals, we may complete the reorganization without the Foundation.

Will members notice any change in the Bank’s day-to-day activities as a result of the reorganization and the offering?

 

No. It will be business as usual. The reorganization is a change in our corporate structure. There are no planned changes in our staffing or office locations as a result of the reorganization. Customers will continue to conduct business with the Bank as they have in the past.

Will the reorganization and offering affect members’ deposit accounts or loans with the Bank?

 

No. The reorganization and offering will not affect the balance or terms of deposits or loans, and deposits will continue to be federally insured by the Federal Deposit Insurance Corporation, up to the maximum legal limit. Deposit accounts will not be converted to stock.

THE PROXY VOTE

Why should I vote on the Plan and the establishment and funding of the Foundation?

 

Your votes “For” the Plan and “For” establishment and funding of the Foundation are very important to us. Our Board of Directors has determined that the reorganization is in the best interests of the Bank, our members and the communities we serve, for the reasons described above. In addition, the reorganization and the offering present us with a unique opportunity to provide a substantial and continuing benefit to the communities we serve, through the establishment and funding of the Foundation. The Plan cannot be implemented, and the Foundation cannot be established and funded, without receipt of member approval.

What happens if I don’t vote?

 

Not voting will have the same effect as voting “Against” the Plan and the establishment and funding of the Foundation. Approval requires the affirmative vote of the majority of all votes eligible to be cast. For this reason, failure to vote all of the proxy cards you receive will have the same effect as voting “Against” the Plan and the Foundation. Without sufficient favorable votes, we cannot proceed with the reorganization and the offering.

How do I vote?

 

You can vote by internet or telephone, or by mailing your signed proxy card(s) in the postage-paid envelope marked “PROXY RETURN”. Detailed voting instructions are included with your proxy card(s). However you choose to cast your vote, PLEASE VOTE PROMPTLY.

How many votes are available to me?

 

Depositors at the close of business on July 24, 2017 are entitled to one vote for each $100 or fraction thereof on deposit. Borrowers as of April 11, 1985 who maintained such borrowings as of July 24, 2017 are entitled to one vote in addition to any votes they may be entitled to as depositors. However, no member may cast more than 1,000 votes. Your proxy cards are not imprinted with your number of votes; however, votes will be automatically tallied by computer.

Why did I receive more than one proxy card?

 

If you had more than one deposit or loan account as of July 24, 2017, you may have received more than one proxy card, depending on the ownership structure of your accounts. These are not duplicate proxy cards. Please promptly vote each proxy card you receive. Your vote will not be counted twice.

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More than one name appears on my proxy card. Who must sign?

 

The names reflect the title of your accounts with the Bank. Proxy cards for joint accounts require the signature of only one of the accountholders. Proxy cards for trust or custodian accounts must be signed by the trustee or the custodian, not the listed beneficiary.

THE STOCK OFFERING AND PURCHASING SHARES

How many shares are being offered and at what price?

 

PDL Community Bancorp is offering for sale between 5,339,969 and 7,224,663 shares of common stock (subject to increase to 8,308,362 shares) at $10.00 per share. A minimum of 5,339,969 shares must be sold in order for us to complete the reorganization and stock offering.

Who is eligible to purchase stock during the offering?

 

Pursuant to the Plan, non-transferable rights to subscribe for shares of PDL Community Bancorp common stock in the Subscription Offering have been granted to eligible members and benefit plans of the Bank.

Subscription Offering purchase priorities are as follows:

Priority 1—Depositors of the Bank with aggregate deposit account balances of $50 or more at the close of business on October 31, 2015;

Priority 2—Our tax-qualified employee plans;

Priority 3—Depositors of the Bank with aggregate deposit account balances of $50 or more at the close of business on June 30, 2017; and

Priority 4—Depositors of the Bank at the close of business on July 24, 2017 and borrowers of the Bank as of April 11, 1985 who maintained such borrowings as of the close of business on July 24, 2017, who are not eligible in priorities 1 or 3, above.

Shares of common stock not purchased in the Subscription Offering may be offered for sale to the general public in a Community Offering, with a preference given first to natural persons (including trusts of natural persons) residing in the New York Counties of Bronx, New York, Queens and Kings and the New Jersey County of Hudson.

Shares not sold in the Subscription and Community Offerings may be offered for sale through a Syndicated Community Offering to the general public.

I am eligible to subscribe for shares of common stock in the subscription offering but I am not interested in investing. May I allow someone else to use my stock order form to take advantage of my priority as a member of the Bank?

 

No. Subscription rights are non-transferable! Federal regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to state that you are purchasing the common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights or the shares to others. On occasion, unscrupulous people attempt to persuade accountholders to transfer subscription rights, or to purchase shares in the offering based on an understanding that the shares will be subsequently transferred to others. Participation in such schemes is against the law and may subject involved parties to prosecution. If you become aware of any such activities, please notify our Stock Information Center promptly so that we can take the necessary steps to protect our eligible members’ subscription rights in the offering.

How may I buy shares during the subscription and community offerings?

 

Shares can be purchased by delivering a signed and completed original Stock Order Form, together with full payment payable to PDL Community Bancorp or authorization to withdraw funds from one or more of your deposit accounts with the Bank. You may submit your stock order form and payment in one of three ways: 1) by mail, using the stock order reply envelope provided; 2) by overnight delivery to the address indicated for that purpose on the stock order form; or 3) by hand-delivery to Ponce De Leon Federal Bank’s administrative office located at 2244 Westchester Avenue, Bronx, New York. However, please know that all stock order forms, with full payment, must be received (not postmarked) by 12:00 p.m., noon, Eastern Time, on September 6, 2017. Please do not mail stock order forms to Ponce De Leon Federal Bank. We encourage subscribers to consider in-person or overnight delivery to enhance the likelihood that your order is received before the deadline.

What is the deadline for purchasing shares?

 

The deadline for purchasing shares of common stock in the subscription and community offerings is 12:00 p.m., noon, Eastern Time, on September 6, 2017, unless we extend this deadline. If you wish to purchase shares of common stock, a properly completed and signed original Stock Order Form, together with full payment, must be received (not postmarked) by this time.

How may I pay for the shares?

 

Payment for shares can be remitted in two ways: 1.) Personal check, bank check or money order made payable to PDL Community Bancorp; or 2.) Authorizing us to withdraw available funds from the types of deposit accounts designated on the Stock Order Form. There is no penalty for early withdrawal from a certificate of deposit for the purpose of purchasing shares in the offering. Investors will not be charged a commission to purchase shares of common stock in the offering.

The Bank is not permitted to lend funds to anyone for the purpose of purchasing shares of common stock in the offering. Additionally, you may not use a Ponce De Leon Federal Bank line of credit check or any type of third party check to pay for shares of common stock. Please do not submit cash or wire transfers. You may not designate withdrawal from accounts with the Bank with check-writing privileges; instead, please submit a check. If you request that we directly withdraw funds from an account with check writing privileges, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and we will immediately withdraw the amount from your checking account. You may not authorize direct withdrawal from a Ponce De Leon Federal Bank retirement account. See information on IRAs below.

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Will I earn interest on my funds?

 

Yes. If you pay by personal check, bank check or money order, you will earn interest at 0.10% per annum from the day we process your payment until the completion or termination of the offering. At that time, you will be issued a check for interest earned on these funds. If you pay for shares by authorizing a withdrawal from your deposit account(s) with the Bank, your funds will continue earning interest within the account at the contract rate. The interest will remain in your account(s) when the designated withdrawal is made, upon completion or termination of the reorganization and offering. No penalty will be charged for early withdrawal from a Certificate of Deposit with the Bank for the purpose of paying for shares in the offering.

Are there limits to how many shares I can order?

 

Yes. The minimum order is 25 shares ($250). No individual, or individuals exercising subscription rights through a single qualifying deposit or loan account held jointly, may purchase more than 30,000 shares ($300,000) of common stock. If any of the following persons purchase shares of common stock, their purchases, in all categories of the offering combined, when combined with your purchases, cannot exceed 50,000 shares ($500,000) of common stock:

 

•

your spouse or relatives of you or your spouse living in your house;

 

•

most companies, trusts or other entities in which you are a trustee, have a substantial beneficial interest or hold a senior position; or

 

•

other persons who may be your associates or persons acting in concert with you.

May I use my Ponce De Leon Federal Bank individual retirement account (“IRA”) to purchase shares?

 

You may be able to use funds currently held in retirement accounts with the Bank. However, before you place your stock order, the funds you wish to use must be transferred to a self-directed retirement account maintained by an independent trustee or custodian, such as a brokerage firm. If you are interested in using IRA or any other retirement funds held at the Bank or elsewhere, please call our Stock Information Center as soon as possible for guidance, but preferably at least two weeks before September 6, 2017, the offering deadline. Your ability to use such funds for this purchase may depend on time constraints because this type of purchase requires additional processing time, and may be subject to limitations and fees imposed by the institution where the funds are held.

May I change my mind after I place my order?

 

No. After receipt, your executed Stock Order Form may not be modified, amended or rescinded without our consent, unless the offering is not completed by October 21, 2017.

Will the stock be insured?

 

No. Like any common stock, PDL Community Bancorp common stock will NOT be insured.

Will dividends be paid on the shares of common stock?

 

We have no current plan or intention to pay cash dividends to our stockholders. No assurances can be given that any dividends will be paid.

How will PDL Community Bancorp shares trade?

 

Following completion of the reorganization and offering, PDL Community Bancorp’s common stock is expected to trade on the Nasdaq Global Market under the symbol “PDLB.” Once the shares have begun trading, you may contact a firm offering investment services to buy or sell PDL Community Bancorp shares.

If I purchase shares in the offering, when will I receive my shares?

 

All shares of common stock sold will be issued in book entry form and held electronically on the books of our transfer agent. Stock certificates will not be issued. A statement reflecting ownership of shares sold in the subscription and community offerings will be mailed by our transfer agent to the persons entitled thereto at the registered address noted by them on their Stock Order Form as soon as practicable following consummation of the reorganization. We expect trading in the stock to begin on the day of completion of the stock offering or the next business day. Until a statement reflecting ownership of shares of common stock is available and delivered to purchasers, purchasers might not be able to sell the shares of common stock that they purchased, even though the common stock will have begun trading. Your ability to sell your shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.

HOW TO GET FURTHER INFORMATION

Where can I call to get more information?

 

For more information, refer to the enclosed Prospectus or call our Stock Information Center, toll-free, at (888) 317-2811, Monday –Friday, 10:00 a.m. – 4:00 p.m., Eastern Time, except bank holidays. Alternatively, if you have questions regarding the reorganization or offering, you may also discuss those questions in person with a representative of Raymond James & Associates, Inc., who is assisting us with the offering, by visiting the Bank’s administrative office located at 2244 Westchester Avenue, Bronx, NY, beginning the week of August 21, 2017, Monday 1:00 p.m. to 5:00 p.m., Tuesday through Thursday 9:00 a.m. to 5:00 p.m., and Friday 9:00 a.m. to 1:00 p.m.

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First Reminder

 

PLEASE VOTE THE ENCLOSED PROXY CARD TODAY.

If you haven’t yet voted the proxy card(s) we recently mailed to you in a large white package, please vote the enclosed replacement proxy card today. Please disregard this notice if you have already voted. If you received more than one of these reminders, please vote each proxy card received. Not voting will have the same effect as voting “Against” the Plan of Reorganization and “Against” the establishment and funding of the charitable foundation.

Your Board of Directors urges you to vote “FOR” approval of the Plan of Reorganization and “FOR” the establishment and funding of the charitable foundation.

Please note:

 

•

Implementation of the Plan of Reorganization will not have any effect on your deposit accounts or loans at Ponce De Leon Federal Bank.

 

•

Your deposit accounts will not be converted to common stock.

 

•

Voting will not require you to purchase common stock during the offering.

Please vote your proxy card by internet or telephone today, or sign and mail it in the envelope provided.

THANK YOU FOR YOUR SUPPORT!

Questions?—Call our Information Center, toll-free, at (888) 317-2811.

Monday – Friday, 10:00 a.m. – 4:00 p.m., Eastern Time, except bank holidays.

PG1

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Second Reminder

 

HAVE YOU VOTED YET? TIME IS RUNNING OUT.

The Special Meeting of Members of Ponce De Leon Federal Bank is on September 18, 2017. Your proxy vote is requested before that date. Our records indicate that you have not yet voted all of the proxy card(s) we mailed to you.

IF YOU ARE UNSURE WHETHER YOU VOTED,

PLEASE VOTE THE ENCLOSED REPLACEMENT PROXY CARD.

YOUR VOTES WILL NOT BE COUNTED TWICE.

Your Board of Directors urges you to vote “FOR” the Plan of Reorganization and “FOR” the establishment and funding of the charitable foundation.

Please note:

 

•

Implementation of the Plan of Reorganization will not have any effect on your deposit accounts or loans at Ponce De Leon Federal Bank.

 

•

Your deposit accounts will not be converted to common stock.

 

•

Voting will not require you to purchase common stock during the offering.

THANK YOU FOR YOUR SUPPORT!

Questions?—Call our Information Center, toll-free, at (888) 317-2811.

Monday – Friday, 10:00 a.m. – 4:00 p.m., Eastern Time, except bank holidays.

PG2

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Third Reminder

 

YOUR PROXY VOTE IS VERY IMPORTANT! PLEASE VOTE THE ENCLOSED PROXY CARD TODAY.

Depending on the ownership structure of your accounts, you may have been mailed multiple proxy cards. It is important to Ponce De Leon Federal Bank that you vote all of the proxy votes you are entitled to. If you are unsure whether you have voted ALL PROXY CARDS you have received, please vote the enclosed replacement proxy card today. Your votes cannot be counted twice. However, not voting will have the same effect as voting “Against” the Plan of Reorganization and “Against” the establishment and funding of the charitable foundation.

Please follow the instructions on your proxy card to vote by INTERNET or TELEPHONE today.

Your Board of Directors urges you to vote “FOR” the Plan of Reorganization and “FOR the establishment and funding of the charitable foundation.

Please note:

 

•

Implementation of the Plan of Reorganization will not have any effect on your deposit accounts or loans at Ponce De Leon Federal Bank.

 

•

Your deposit accounts will not be converted to common stock.

 

•

Voting will not require you to purchase common stock during the offering.

THANK YOU FOR YOUR SUPPORT!

Questions?—Call our Information Center, toll-free, at (888) 317-2811.

Monday – Friday, 10:00 a.m. – 4:00 p.m., Eastern Time, except bank holidays.

PG3

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READ THIS FIRST

Office of the Comptroller of the Currency Guidance for Account Holders

Your financial institution is in the process of selling stock to the public in a mutual bank to mutual holding company reorganization transaction. As an account holder at this institution, you have certain priority subscription rights to purchase stock in the offering. These priority subscription rights are non-transferable. If you subscribe for stock, you will be asked to sign a statement that the purchase is for your own account, and that you have no agreement or understanding regarding the subsequent sale or transfer of any shares you receive.

On occasion, unscrupulous people attempt to persuade account holders to transfer subscription rights, or to purchase shares in the offering based on the understanding that the shares will subsequently be transferred to others. Such arrangements violate federal regulations. If you participate in these schemes, you are breaking the law and may be subject to prosecution. If someone attempts to persuade you to participate in such a scheme, please contact the Office of the Comptroller of the Currency (OCC) Customer Assistance Group, toll-free, at 1 (800) 613-6743, or at www.helpwithmybank.gov. The OCC is very interested in ensuring that the prohibitions on transfer of subscription rights are not violated.

How will you know if you are being approached illegally? Typically, a fraudulent opportunist will approach you and offer to “loan” you money to purchase a significant amount of stock in the offering. In exchange for that “loan” you most likely will be asked either to transfer control of any stock purchased with that money to an account the other person controls, or sell the stock and give the majority of the profits to the other person. You may be told, untruthfully, that there is no risk to you, that the practice is common, and even if you are caught, that your legal expenses will be covered.

On the back of this page is a list of some key concepts that you should keep in mind when considering whether to participate in this stock offering. If you have questions, please contact the Stock Information Center at the telephone number listed elsewhere in the literature you are receiving. Alternatively, you can contact the OCC at: The Northeastern District Office located at 340 Madison Avenue, Fourth Floor, New York, NY 10173.

RTF

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(over)

What Investors Need to Know

Key concepts for investors to bear in mind when considering whether to participate in a reorganization offering include the following:

 

•

Know the Rules — By law, account holders cannot sell or transfer their priority subscription rights, or the stock itself, prior to the completion of a financial institution’s reorganization. Moreover, account holders cannot enter into agreements or arrangements to sell or transfer either their subscription rights or the underlying reorganization stock.

 

•

“Neither a Borrower nor a Lender Be” — If someone offers to lend you money so that you can participate — or participate more fully — in a reorganization, be extremely wary. Be even more wary if the source of the money is someone you do not know. The loan agreement may make you unable to certify truthfully that you are the true holder of the subscription rights and the true purchaser of the stock and that you have no agreements regarding the sale or transfer of the stock.

 

•

Watch Out for Opportunists — The opportunist may tell you that he or she is a lawyer — or a consultant or a professional investor or some similarly impressive tale — who has experience with similar reorganization transactions. The opportunist may go to extreme lengths to assure you that the arrangement you are entering into is legitimate. They might tell you that they have done scores of these transactions and that this is simply how they work. Or they might downplay the warnings or restrictions in the prospectus or stock order form, telling you that “everyone” enters into such agreements or that the deal they are offering is legitimate. They may also tell you that you have no risk in the transaction. The cold, hard truth is that these are lies, and if you participate, you are breaking the law.

 

•

Get the Facts from the Source — If you have any questions about the securities offering, ask your financial institution for more information. If you have any doubts about a transaction proposed to you by someone else, ask the financial institution whether the proposed arrangement is proper. You may be able to find helpful resources by visiting your financial institution.

The bottom line for investors is always to remember that if an opportunity sounds too good to be true, it probably is too good to be true.

RTF

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IMPORTANT NOTICE

THIS PACKAGE INCLUDES

A PROXY CARD

REQUIRING YOUR PROMPT ATTENTION.

YOU MAY RECEIVE MULTIPLE PACKAGES.

PLEASE VOTE EACH PROXY CARD RECEIVED.

THERE ARE NO DUPLICATE CARDS.

THANK YOU!

Exhibit 99.5

 

 

STOCK ORDER FORM SEND OVERNIGHT PACKAGES TO: Raymond James & Associates, Inc. PDL Community Bancorp Processing Center 222 S. Riverside Plaza, 7th Floor Chicago, IL 60606 1-(888) 317-2811 Deadline: The Subscription Offering ends at 12:00 p.m., noon, Eastern Time, on September 6, 2017. Your original Stock Order Form, properly executed and with the correct payment, must be received (not postmarked) by the deadline or it will be considered void. Orders may be delivered to the address on the top of this form or to the PO Box address on the business reply envelope provided. Faxes or copies of this form may not be accepted. PDL Community Bancorp reserves the right to accept or reject improperly completed stock order forms. PLEASE PRINT CLEARLY AND COMPLETE ALL AREAS. – READ THE ENCLOSED STOCK ORDER FORM INSTRUCTIONS AS YOU COMPLETE THIS FORM. (1) Number of Shares (2) Total Amount Due THE MINIMUM PURCHASE IS 25 SHARES ($250). No person may purchase more Price Per Share than 30,000 shares ($300,000). Also, no person together with an associate or group of $ persons acting in concert may purchase more than 50,000 shares ($500,000). X $10.00 = (4) Purchaser Priority (3a) Method of Payment – Check or Money Order Subscription Offering Enclosed is a personal check, bank check or money order made $ Check the one box that applies, as of the earliest date, to the purchaser(s) listed in Section 8: payable to PDL Community Bancorp in the amount of: a) Eligible Account Holders – Depositors of Ponce De Leon Federal Bank with aggregate deposit Checks will be cashed upon receipt. (3b) Method of Payment – Certificate or Savings Account Withdrawal ONLY account balances of $50 or more at the close of business on October 31, 2015. Enter information in Section 9 for all deposit accounts that you had at Ponce De Leon Federal Bank on this date. The undersigned authorizes withdrawal from the Ponce De Leon Federal Bank deposit account(s) b) Supplemental Eligible Account Holders – Depositors of Ponce De Leon Federal Bank with listed below. There will be no early withdrawal penalty applicable for withdrawals authorized on this aggregate deposit account balances of $50 or more at the close of business on [ form. Funds designated for withdrawal must be in the account(s) listed at the time this form is June 30, 2017,] who were not able to subscribe for shares under the Eligible Account Holders priority. received. Ponce De Leon Federal Bank IRAs or accounts with check-writing privileges may Enter information in Section 9 for all deposit accounts that you had at Ponce De Leon Federal NOT be listed for withdrawal below. Bank as of this date. Account Number(s) (Certificates or Savings Accounts Only) Withdrawal Amount(s) c) Other Members – Members of Ponce De Leon Federal Bank as of the close of business on July 24, 2017 who were not able to subscribe for shares under the Eligible or Supplemental $ Eligible Account Holder priorities, including borrowers as of April 11, 1985 who maintained such borrowings as of July 24, 2017. Enter information in Section 9 for all deposit or loan $ accounts that you had at Ponce De Leon Federal Bank as of this date. Community Offering $ d) Local Community – Residents of the New York Counties of Bronx, New York, Queens and King Total Withdrawal Amount and the New Jersey County of Hudson. $ e) General Public – Check here if none of the above priorities apply to you. (5) Management/Employee/Family Member: Check if you are a Ponce Bank Mutual Holding Company, PDL Community Bancorp, or Ponce De Leon Federal Bank: Director, Officer, Employee, or Immediate family member, as defined in the Stock Order Form Instructions. (6) Maximum Purchaser Identification: Check here if you, individually or together with others (see section 7), are subscribing for the maximum purchase allowed and are interested in purchasing more shares if the maximum purchase limitation is increased. See Item 1 of the Stock Order Form Instructions. (7) Associates/Acting in Concert: Check here if you, or any associates or persons acting in concert with you (as defined in the Prospectus dated July 31, 2017, have submitted other orders for shares. If you check this box, list below all other orders submitted by you or your associates or persons acting in concert with you. SEE THE STOCK ORDER FORM INSTRUCTIONS FOR FURTHER DETAILS. Name(s) listed in section 8 on other order forms Shares Ordered Name(s) listed in section 8 on other order forms Shares Ordered (8) Stock Registration: Please PRINT legibly and fill out completely: The stock ownership statement and all correspondence related to this stock order will be mailed to the address provided below. Do not include below the name(s) of any persons who do not have the same Purchaser Priority (section 4 above) as you. Check only one box below. See the Stock Order Form Instructions for further details. Individual Joint Tenants Tenants in Common Corporation (include Tax ID and name of corporation only) Partnership (include Tax ID and name of partnership only) Individual Retirement Account (include Tax ID of custodian and SS# of owner) Uniform Transfers to Minors Act (include SS# of minor only) Trust Under Agreement Dated Name SS# or Tax ID# Name SS# or Tax ID# Address Daytime Telephone # City State Zip Code County Evening Telephone # (9) Qualifying Accounts: You should list any accounts that you have or had with Ponce De Leon Federal Bank in the box below. SEE THE STOCK ORDER FORM INSTRUCTIONS FOR FURTHER DETAILS. All subscription orders are subject to the provisions of the stock offering as described in the prospectus. Attach a separate page if additional space is needed. Failure to list all of your accounts may result in the loss of part or all of your subscription rights if the offering is oversubscribed. Names on Accounts Account Numbers (10) Acknowledgement, Certification and Signature: I understand that to be valid, this form, properly completed, together with full payment or withdrawal authorization, must be received by PDL Community Bancorp (not postmarked) no later than 12:00 p.m., noon, Eastern Time, on September 6, 2017 otherwise this form and all of my subscription rights will be void. (continued on reverse) SEE THE STOCK ORDER FORM INSTRUCTIONS FOR STOCK ORDER DELIVERY OPTIONS. *** ORDER NOT VALID UNLESS SIGNED *** ONE SIGNATURE REQUIRED, UNLESS SECTION (3b) OF THIS FORM INCLUDES ACCOUNTS REQUIRING MORE THAN ONE SIGNATURE TO AUTHORIZE WITHDRAWAL Signature Date Signature Date Internal Use Only: Date Rec’d / Check# $ Check# $ Batch# Order # Priority

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(10)	Acknowledgement, Certification and Signature (continued from front side of Stock Order Form)

I agree that after receipt by PDL Community Bancorp this Stock Order Form may not be modified or cancelled without the consent of PDL Community Bancorp, and that if withdrawal from a deposit account has been authorized the authorized amount will not otherwise be available for withdrawal. Under penalty of perjury, I certify that: 1) I am purchasing shares solely for my account and there is no agreement or understanding regarding the sale or transfer of such shares, or my right to subscribe for shares, 2) the Social Security or Tax ID information and all other information provided hereon are true, correct and complete, and 3) I am not subject to backup withholding tax [cross out (3) if you have been notified by the IRS that you are subject to backup withholding.] I acknowledge that my order does not conflict with the maximum purchase limitation of $300,000 for any person, or $500,000 for any person together with associates of, or persons acting in concert with, such person, or entity, in all categories of the offering, combined as set forth in the Plan of Reorganization and the Prospectus dated July 31, 2017.

Subscription rights pertain to those eligible to place orders in the Subscription Offering. Federal regulations prohibit any person from transferring or entering into any agreement directly or indirectly to transfer the legal or beneficial ownership of subscription rights, or the underlying securities, to the account of another. I ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED, AND IS NOT GUARANTEED BY PONCE BANK MUTUAL HOLDING COMPANY, PDL COMMUNITY BANCORP, OR PONCE BANK OR BY THE FEDERAL GOVERNMENT. THE ENTIRE AMOUNT OF AN INVESTOR’S PRINCIPAL IS SUBJECT TO LOSS.

If anyone asserts that this security is federally insured or guaranteed, or is as safe as an insured deposit, I should call the Office of the Comptroller of the Currency at 1-(800) 613-6743. I further certify that, before purchasing the common stock of PDL Community Bancorp I received the Prospectus dated July 31, 2017 and that I have read the terms and conditions described in the Prospectus, including disclosure concerning the nature of the security being offered and the risks involved in the investment described in the “Risk Factors” section beginning on page 17, which risks include but are not limited to the following:

Risks Related to Our Business

 

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Multifamily, nonresidential and construction and land loans carry greater credit risk than loans secured by owner occupied one- to- four family real estate.

 

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The unseasoned nature of our multifamily, nonresidential and construction and land loans portfolio may result in changes to our estimates of collectability, which may lead to additional provisions or charge-offs, which could hurt our profits.

 

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Our business may be adversely affected by credit risk associated with residential property.

 

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The geographic concentration of our loan portfolio and lending activities makes us vulnerable to a downturn in the local economy.

 

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If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings and capital could decrease.

 

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A worsening of economic conditions in our market area could reduce demand for our products and services and/or result in increases in our level of nonperforming loans, which could adversely affect our operations, financial condition and earnings.

 

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Our business strategy includes growth, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively. Growing our operations could also cause our expenses to increase faster than our revenues.

 

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Adherence to our internal policies and procedures by management is critical to our performance and how we are perceived by our regulators.

 

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We depend on our management team to implement our business strategy and execute successful operations and we could be harmed by the loss of their services.

 

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Our efficiency ratio is high, and we anticipate that it may remain high, as a result of the ongoing implementation of our business strategy.

 

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A continuation of the historically low interest rate environment and the possibility that we may access higher-cost funds to support our loan growth and operations may adversely affect our net interest income and profitability.

 

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Future changes in interest rates could reduce our profits and asset values.

 

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Changes in the valuation of securities held could adversely affect us.

 

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Strong competition within our market areas may limit our growth and profitability.

 

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Our small size makes it more difficult for us to compete.

 

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Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.

 

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Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

 

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Our ability to originate loans could be restricted by recently adopted federal regulations.

 

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We face significant operational risks because the financial services business involves a high volume of transactions and increased reliance on technology, including risk of loss related to cyber-security breaches.

 

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We have become subject to more stringent capital requirements, which may adversely impact our return on equity, require

 

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The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.

 

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Changes in accounting standards could affect reported earnings.

 

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Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our financial condition or operating results.

 

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We intend to terminate our pension plan at some point following the completion of the reorganization and offering, although the time of the termination is uncertain, which will reduce our net income in the year of termination.

 

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Legal and regulatory proceedings and related matters could adversely affect us.

 

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We are subject to environmental liability risk associated with lending activities or properties we own.

 

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We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.

 

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Our historical markets, minority and immigrant individuals, may be threatened by gentrification and adverse political developments, which could decrease our growth and profitability.

Risks Related to the Offering

 

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The future price of our common stock may be less than the purchase price in the stock offering.

 

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The capital we raise in the stock offering may negatively impact our return on equity until we can fully implement our business plan. This could negatively affect the trading price of our shares of common stock.

 

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There may be a limited trading market in our common stock, which would hinder your ability to sell our common stock and may lower the market price of the stock.

 

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Our stock-based benefit plans will increase our costs, which will reduce our income.

 

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The implementation of one or more stock-based benefit plans may dilute your ownership interest.

 

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We have broad discretion in using the proceeds of the stock offering. Our failure to effectively deploy the net proceeds of the offering may have an adverse effect on our financial performance and the value of our common stock.

 

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Persons who purchase stock in the offering will own a minority of PDL Community Bancorp’s common stock and will not be able to exercise voting control over most matters put to a vote of stockholders.

 

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Our stock value may be negatively affected by our mutual holding company structure and federal regulations restricting takeovers.

 

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The corporate governance provisions in our charter and bylaws may prevent or impede the holders of a minority of our common stock from obtaining representation on our board of directors and may also prevent or impede a change in control.

 

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Our management team has limited experience managing a public company, and regulatory compliance may divert its attention from the day-to-day management of our business.

 

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You may not receive dividends on our common stock.

 

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Under current law, if we declare dividends on our common stock, Ponce Bank Mutual Holding Company will be restricted from waiving the receipt of dividends.

 

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You may not be able to sell your shares of common stock until you have received a statement reflecting ownership of shares, which will affect your ability to take advantage of changes in the stock price immediately following the offering.

 

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We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

 

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Provisions in the Ponce Bank Mutual Holding Company charter may impede our ability to raise additional capital and may negatively impact the trading value of our stock.

Risks Related to the Contribution to Our Charitable Foundation

 

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The contribution to our charitable foundation will adversely affect net income in the year we complete the offering.

 

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Our contribution to our charitable foundation may not be tax deductible, which could decrease our profits.

EXECUTION OF THIS CERTIFICATION FORM WILL NOT CONSTITUTE A WAIVER OF ANY RIGHTS THAT A PURCHASER MAY HAVE UNDER THE SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934, BOTH AS AMENDED.

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PDL Community Bancorp

Stock Order Form Instructions

Stock Order Form Instructions – All orders are subject to the provisions of the stock offering as described in the prospectus.

Item 1 and 2 – Number of Shares and Total Amount Due—Fill in the number of shares that you wish to purchase and the total payment due. The amount due is determined by multiplying the number of shares ordered by the subscription price of $10.00 per share. The minimum number of shares of common stock you may order is 25 shares. The maximum number of shares that can be ordered by any person in the offering, or persons exercising subscription rights through a single qualifying account held jointly, is 30,000 shares ($300,000), and no person together with an associate or group of persons acting in concert may purchase more than 50,000 shares ($500,000) in the offering. For additional information, see “The Reorganization and Offering – Offering of Common Stock – Limitations on Purchase of Shares” in the Prospectus dated July 31, 2017.

Item 3a – Payment by Check—Payment for shares may be made by personal check, bank check or money order payable to PDL Community Bancorp. DO NOT MAIL CASH. Funds received during the offering will be held in a segregated account at Ponce De Leon Federal Bank and will earn interest at 0.10% per annum until completion or termination of the offering.

Item 3b – Payment by Account Withdrawal—To pay by withdrawal from a savings account or certificate of deposit at Ponce De Leon Federal Bank, insert the account number(s) and the amounts(s) you wish to withdraw from each account. If more than one signature is required for a withdrawal, all signatories must sign in the signature box on the front of the Stock Order Form. To withdraw from an account with check writing privileges, please write a check. Ponce De Leon Federal Bank will waive any applicable penalties for early withdrawal from certificate of deposit accounts (CDs) for the purpose of purchasing stock in the offering. A hold will be placed on the account(s) for the amount(s) you indicate to be withdrawn. Payments will remain in account(s) until the offering closes and will earn their respective rate of interest, but will not be available for your use until the completion of the transaction.

Item 4 – Purchaser Priority—Check the appropriate box (a, b, or c) to tell us the earliest of the three dates that applies to you and any others subscribing for shares with this order form. If boxes a, b, and c do not apply to you, then check the Local Community or General Public box, as appropriate.

Item 5 – Management/Employee/Family Member—Check the appropriate box if you are a Ponce Bank Mutual Holding Company, PDL Community Bancorp, or Ponce De Leon Federal Bank: director, officer, employee, or immediate family member. “Immediate Family” includes the spouse, parents, siblings and children who live in the same house as the director, officer or employee.

Item 6 – Maximum Purchase—Check the box, if applicable. If you check the box but have not subscribed for the maximum amount and did not complete Item 7, you may not be eligible to purchase more shares in the event maximum purchase limitations are increased.

Item 7 –Associates/Acting in Concert—Check the box, if applicable, and provide the requested information. Attach a separate page, if necessary. The term “associate” of a person means: 1) any corporation or organization, other than Ponce Bank Mutual Holding Company, PDL Community Bancorp, Ponce De Leon Federal Bank or Ponce Bank or a majority-owned subsidiary of PDL Community Bancorp, Ponce De Leon Federal Bank or Ponce Bank, of which a person is a senior officer or partner, or beneficially owns, directly or indirectly, 10% or more of any class of equity securities of the corporation or organization; 2) any trust or other estate, if the person has a substantial beneficial interest in the trust or estate or is a trustee or fiduciary of the trust or estate except that for the purposes relating to subscriptions in the stock offering and the sale of common stock following the reorganization, a person who has a substantial beneficial interest in any non-tax-qualified employee plan or any tax-qualified employee plan, or who is a trustee or fiduciary of such plan, is not an associate of such plan, and except that for purposes of aggregating total shares that may be held by officers and directors, the term “associate” does not include any tax-qualified employee plan; or 3) any person who is related by blood or marriage to such person and (i) who lives in the same house as the person; or (ii) who is a director or senior officer of Ponce Bank Mutual Holding Company, PDL Community Bancorp, Ponce Bank or Ponce De Leon Federal Bank or a subsidiary thereof. The term “acting in concert” means: 1) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or 2) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. A person or company that acts in concert with another person or company (“other party”) shall also be deemed to be acting in concert with any person or company who is also acting in concert with that other party, except that any tax-qualified employee plan will not be deemed to be acting in concert with its trustee or a person who serves in a similar capacity solely for the purpose of determining whether stock held by the trustee and stock held by the plan will be aggregated. In the Prospectus dated July 31, 2017, please see the section entitled “The Reorganization and Offering – Offering of Common Stock – Limitations on Purchase of Shares” for more information regarding the definition of “associate” and “acting in concert.”

Item 8 – Stock Registration—The stock transfer industry has developed a uniform system of stockholder registrations that we will use in the issuance of PDL Community Bancorp common stock. See below and the reverse side of this form for further details regarding common forms of stock registration. Please complete this section as fully and accurately as possible, and be certain to supply your social security or Tax I.D. number(s) and your daytime and evening phone numbers. We will need to call you if we cannot execute your order as given. If you have any questions regarding the registration of stock, please consult your legal advisor or contact the Stock Information Center at (888) 317-2811. Subscription rights are not transferable. If you are an eligible or supplemental eligible account holder or other member, as defined in the Prospectus, to protect your priority rights over other purchasers as described in the Prospectus, you must take ownership in at least one of the account holder’s names.

Please check only the one box which corresponds to the ownership desired.

Individual – The stock is to be registered in one individual’s name only. Provide only this individuals information.

 

		(Continued on reverse side)		Side 1

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PDL Community Bancorp

Stock Order Form Instructions

Joint Tenants – Joint tenants with rights of survivorship identifies two or more owners. When stock is held by joint tenants with rights of survivorship, ownership automatically passes to the surviving joint tenant(s) upon the death of any joint tenant. All owners must agree to the transfer or sale of shares held by joint tenants.

Tenants in Common – Tenants in common may also identify two or more owners. However, when stock is held by tenants in common, upon the death of one co-tenant, ownership of the stock will be held by the surviving co-tenant(s) and by the heirs of the deceased co-tenant. All owners must agree to the transfer or sale of shares held by tenants in common.

Individual Retirement Accounts – Individual Retirement Account (“IRA”) holders may potentially make stock purchases from their existing IRA if it is a self-directed IRA, or through a prearranged “trustee-to-trustee” transfer if their IRA is currently at Ponce De Leon Federal Bank. The stock cannot be held in a Ponce De Leon Federal Bank account. Please contact your broker or self-directed IRA provider as quickly as possible to explore this option, as it may take a number of weeks to complete a trustee-to-trustee transfer and place a subscription in this manner. IRA Registration:

Name Line 1 – list the name of the custodian/brokerage firm holding your IRA, followed by “CUST”.

Name Line 2 – FBO (for benefit of) YOUR NAME [IRA a/c #             ].

Address will be that of the brokerage/trust department to where the ownership statement will be sent.

Include both the Tax I.D. Number of the custodian as well as your personal Social Security Number.

Please list your phone numbers, not the phone numbers of your broker / trust department.

Uniform Transfers to Minors Act (“UTMA”) – For residents of New York and many states, stock may be held in the name of a custodian For the Benefit Of (“FBO”) a minor under the Uniform Transfers to Minors Act. In this form of ownership, the minor is the actual owner of the stock with an adult custodian being responsible for the investment until the child reaches legal age. Only one custodian and one minor may be designated. UTMA Registration:

Name Line 1: print the name of the custodian followed by the abbreviation CUST

Name Line 2: FBO “name of the minor”, followed by UTMA- NY (or your state’s abbreviation)

List only the minor’s social security number on the form.

Corporation/Partnership – Corporations and partnerships may purchase stock. Please provide the corporation or partnership’s legal name and Tax I.D Number. To have subscription rights within a customer priority, the corporation or partnership must have an account in its legal name and Tax I.D Number. Please contact the Stock Information Center to verify customer rights and purchase limitations.

Fiduciary/Trust – Generally, fiduciary relationships (such as trusts, estates, guardianships, etc.) are established under a form of trust agreement or pursuant to a court order. Without a legal document establishing a fiduciary relationship, your stock may not be registered in a fiduciary capacity. To have subscription rights within a customer priority, the fiduciary or trust must have an account in its legal name and Tax I.D. Number. Please contact the Stock Information Center to verify customer rights and purchase limitations. Instructions: On the first name line, print the first name, middle initial, and last name of the fiduciary if the fiduciary is an individual. If the fiduciary is a corporation, list the corporate title on the first name line. Following the name, print the fiduciary title, such as trustee, executor, personal representative, etc. On the second name line, print the name of the maker, donor or testator or the name of the beneficiary. Following the name, indicate the type of legal document establishing the fiduciary relationship (agreement, court order, etc.) In the blank after “Under Agreement Dated,” fill in the date of the document governing the relationship. The date of the document need not be provided for a trust created by a will.

Item 9 – Qualifying Accounts—List all qualifying accounts that you had with Ponce De Leon Federal Bank as of the date corresponding to the box checked in Item 4. For example, if you are ordering stock in just your name, you should list all of your account numbers as of the earliest of the three dates that you were a qualifying customer of Ponce De Leon Federal Bank. Similarly, if you are ordering stock jointly with another customer, you should list all account numbers under which either of you are owners, i.e., individual accounts, joint accounts, etc. If you are ordering stock in your minor child’s or grandchild’s name under the Uniform Transfers to Minors Act, the minor must have had a qualifying account as of the date corresponding to the box checked in Item 4, and you should list only their account number(s). If you are ordering stock as a corporation, partnership or other legal business entity, you need to list just that entity’s account number(s), as your individual account number(s) do not qualify. Failure to list all of your qualifying account numbers may result in the loss of part or all of your subscription rights if the offering is oversubscribed.

Item 10 – Acknowledgment, Certification, and Signature—Sign and date the form where indicated. Before you sign please carefully review the information you have provided and read the acknowledgement and both sides of the Stock Order Form. Only one signature is required, unless any account listed in section 3b of this form requires more than one signature to authorize a withdrawal. Please review the Prospectus dated July 31, 2017 carefully before making an investment decision. You may submit your stock order form and payment in one of three ways: 1) by mail, using the stock order reply envelope provided; 2) by overnight delivery to the address indicated for that purpose on the stock order form; or 3) by hand-delivery to Ponce De Leon Federal Bank’s administrative office located at 2244 Westchester Avenue, Bronx, New York. However, please know that all stock order forms, with full payment, must be received (not postmarked) by 12:00 p.m., noon, Eastern Time, on September 6, 2017. Please do not mail stock order forms to Ponce De Leon Federal Bank. We encourage subscribers to consider in-person or overnight delivery to enhance the likelihood that your order is received before the deadline.

 

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