Table of Contents

As filed with the Securities and Exchange Commission on September 9, 2011

Registration No. 333-                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Polonia Bancorp, Inc.

Polonia Bank Retirement Plan

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   6035   45-3181577

State or other jurisdiction of

incorporation or organization

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification Number)

3993 Huntingdon Pike, 3rd Floor

Huntingdon Valley, Pennsylvania 19006

(215) 938-8800

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Anthony J. Szuszczewicz

Chairman, President and Chief Executive Officer

Polonia Bancorp, Inc.

3993 Huntingdon Pike, 3rd Floor

Huntingdon Valley, Pennsylvania 19006

(215) 938-8800

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Paul M. Aguggia, Esq.

Aaron M. Kaslow, Esq.

Joseph J. Bradley, Esq.

Kilpatrick Townsend & Stockton LLP

607 14th Street, N.W., Suite 900

Washington, DC 20005

(202) 508-5800

 

Kent M. Krudys, Esq.

Robert Lipsher, Esq.

Luse Gorman Pomerenk & Schick, P.C.

5335 Wisconsin Avenue, NW, Suite 780

Washington, DC 20015

(202) 274-2000

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, check the following box:  x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) 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(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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

 

 

Calculation of Registration Fee

 

Title of each class of

securities to be registered

 

Amount

to be

registered

 

Proposed

maximum

offering price

per unit

 

Proposed

maximum

Aggregate

offering price (1)

  Amount of
registration fee

Common Stock, $0.01 par value

  3,300,600 shares   $8.00   $26,404,800   $3,066

Participation Interests

  (2)     (2)   (3)

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Regulation 457(o) under the Securities Act.
(2) In addition, pursuant to Rule 416(c) under the Securities Act, this registration statement also covers an indeterminate amount of interests to be offered or sold pursuant to the employee benefit plan described herein.
(3) The securities of Polonia Bancorp, Inc. to be purchased by the Polonia Bank Retirement Plan are included in the common stock. Accordingly, no separate fee is required for the participation interests pursuant to Rule 457(h)(2) of the Securities Act.

 

 

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 Commission, acting pursuant to Section 8(a), may determine.

 

 

 


Table of Contents

PROSPECTUS

LOGO

(Proposed holding company for Polonia Bank)

Up to 1,653,125 Shares of Common Stock

(Subject to increase to 1,901,094 shares)

 

 

Polonia Bancorp, Inc., a newly formed Maryland corporation that is referred to as new Polonia Bancorp throughout this prospectus, is offering common stock for sale in connection with the conversion of Polonia Bank from the mutual holding company form of organization to the stock form of organization.

We are offering up to 1,653,125 shares of common stock for sale on a best efforts basis, subject to certain conditions. We must sell a minimum of 1,221,875 shares to complete the offering. All shares are offered at a price of $8.00 per share. Purchasers will not pay a commission to purchase shares of common stock in the offering. The amount of capital being raised is based on an independent appraisal of new Polonia Bancorp. Most of the terms of this offering are required by regulations of the Board of Governors of the Federal Reserve System. If, as a result of regulatory considerations, demand for the shares or changes in financial market conditions, the independent appraiser determines that our market value has increased, we may sell up to 1,901,094 shares without giving you further notice or the opportunity to change or cancel your order.

The shares we are offering represent the 57.6% ownership interest in Polonia Bancorp, a federal corporation that is referred to as old Polonia Bancorp throughout this prospectus, now owned by Polonia MHC. The remaining 42.4% interest in old Polonia Bancorp currently owned by the public will be exchanged for shares of common stock of new Polonia Bancorp. The 1,338,659 shares of old Polonia Bancorp currently owned by the public will be exchanged for between 899,494 shares and 1,216,962 shares of common stock of new Polonia Bancorp (subject to increase to 1,399,506 shares if we sell 1,901,094 shares in the offering) so that old Polonia Bancorp’s existing public shareholders will own approximately the same percentage of new Polonia Bancorp common stock as they owned of old Polonia Bancorp’s common stock immediately before the conversion. Old Polonia Bancorp and Polonia MHC will cease to exist upon completion of the conversion and offering.

We are offering the shares of common stock in a subscription offering to eligible depositors and borrowers of Polonia Bank and Polonia Bank’s tax-qualified employee stock ownership plan. 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 to natural persons residing in Montgomery and Philadelphia Counties, Pennsylvania and then to shareholders of old Polonia Bancorp. We also may offer for sale shares of common stock not purchased in the subscription offering or community offering in a syndicated community offering through a syndicate of selected dealers with Sandler O’Neill & Partners, L.P. serving as sole book-running manager. Sandler O’Neill & Partners, L.P. will use its best efforts to assist us in our selling efforts but is not required to purchase any shares of common stock that are being offered for sale.

The minimum order is 25 shares. The subscription offering will end at 4:00 p.m., Eastern time, on [DATE 1], 2011. We expect that the community offering, if held, will terminate at the same time, although it may continue without notice to you until [DATE 2], 2011 or longer if the Federal Reserve Board approves a later date. No single extension may exceed 90 days and the offering must be completed by [DATE 3], 2013. Once submitted, orders are irrevocable unless the offering is terminated or is extended beyond [DATE 2], 2011, or the number of shares of common stock to be sold is increased to more than 1,901,094 shares or decreased to less than 1,221,875 shares. If we extend the offering beyond [DATE 2], 2011, all subscribers will be notified and given the opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will promptly return your funds with interest calculated at Polonia Bank’s statement savings rate or cancel your deposit account withdrawal authorization. If we intend to sell fewer than 1,221,875 shares or more than 1,901,094 shares, we will promptly return all funds and set a new offering range. All subscribers will be notified and given the opportunity to place a new order. Funds received before the completion of the subscription and community offerings will be held in a segregated account at Polonia Bank and will earn interest at Polonia Bank’s statement savings rate, which is currently         %.

Old Polonia Bancorp’s common stock is currently quoted on the Over-the-Counter Bulletin Board under the symbol “PBCP.” After the offering, we intend to have the common stock of new Polonia Bancorp quoted on the Over-the-Counter Bulletin Board.

 

 

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

 

 

OFFERING SUMMARY

Price Per Share: $8.00

 

     Minimum      Maximum      Maximum,
as  Adjusted
 

Number of shares

     1,221,875         1,653,125         1,901,094   

Gross offering proceeds

   $ 9,775,000       $ 13,225,000       $ 15,208,752   

Estimated offering expenses, excluding selling agent fees and expenses

   $ 810,000       $ 810,000       $ 810,000   

Estimated selling agent fees and expenses (1)(2)

   $ 494,375       $ 580,625       $ 630,219   

Estimated net proceeds

   $ 8,470,625       $ 11,834,375       $ 13,768,533   

Estimated net proceeds per share

   $ 6.93       $ 7.16       $ 7.24   

 

(1) Includes: (i) a marketing agent fee of $150,000; (ii) a selling commission payable by us to Sandler O’Neill & Partners, L.P. and any other broker-dealers participating in the syndicated offering of 5% of the aggregate amount of common stock sold in the syndicated community offering, or approximately $380,219 at the adjusted maximum of the offering range, assuming that 50% of the offering is sold in the syndicated offering; and (iii) other expenses of the offering payable to Sandler O’Neill & Partners, L.P. as selling agent estimated to be $100,000. For information regarding compensation to be received by Sandler O’Neill & Partners, L.P. and the other broker-dealers that may participate in the syndicated community offering, including the assumptions regarding the number of shares that may be sold in the subscription offering and the syndicated community offering to determine the estimated offering expenses, see “Pro Forma Data” on page      and “The Conversion and Offering—Marketing Arrangements” on page     .
(2) If all shares of common stock are sold in the syndicated community offering, the maximum selling agent commissions and expenses would be $738,750 at the minimum, $825,000 at the midpoint, $911,250 at the maximum, and $1,010,438 at the adjusted maximum.

These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Neither the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

 

SANDLER O’NEILL + PARTNERS, L.P.

 

 

For assistance, please contact the Stock Information Center at (            )             –            .

The date of this prospectus is                     , 2011


Table of Contents

TABLE OF CONTENTS

 

     Page  

Summary

     1   

Risk Factors

     17   

A Warning About Forward-Looking Statements

     23   

Selected Consolidated Financial and Other Data

     24   

Use of Proceeds

     26   

Our Dividend Policy

     27   

Market for the Common Stock

     27   

Capitalization

     29   

Regulatory Capital Compliance

     31   

Pro Forma Data

     32   

Our Business

     37   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     42   

Our Management

     66   

Stock Ownership

     77   

Subscriptions by Executive Officers and Directors

     78   

Regulation and Supervision

     78   

Federal and State Taxation

     84   

The Conversion and Offering

     86   

Comparison of Shareholders’ Rights

     108   

Restrictions on Acquisition of New Polonia Bancorp

     114   

Description of New Polonia Bancorp Capital Stock

     117   

Transfer Agent and Registrar

     117   

Registration Requirements

     118   

Legal and Tax Opinions

     118   

Experts

     118   

Where You Can Find More Information

     118   

Index to Consolidated Financial Statements of Polonia Bancorp

     120   


Table of Contents

SUMMARY

This summary highlights material information from this prospectus and may not contain all the information that is important to you. To understand the conversion and offering fully, you should read this entire document carefully.

Our Company

Polonia Bank. Polonia Bank is headquartered in Huntingdon Valley, Pennsylvania and has provided community banking services to customers for almost 88 years. We currently operate seven full-service locations in Montgomery and Philadelphia Counties, Pennsylvania. At June 30, 2011, Polonia Bank exceeded all regulatory capital requirements, was considered a “well-capitalized” bank and was not a participant in any of the U.S. Treasury’s capital raising programs for financial institutions.

Polonia Bancorp, Inc. Old Polonia Bancorp is, and new Polonia Bancorp following the completion of the conversion and offering will be, the savings and loan holding company for Polonia Bank, a federally chartered savings bank. Old Polonia Bancorp’s common stock is traded on the Over-the-Counter Bulletin Board under the symbol “PBCP.” At June 30, 2011, old Polonia Bancorp had consolidated total assets of $279.5 million, net loans of $167.9 million, total deposits of $217.0 million and total stockholders’ equity of $27.7 million. As of the date of this prospectus, old Polonia Bancorp had 3,157,093 shares of common stock outstanding.

Polonia MHC. Polonia MHC is the federally chartered mutual holding company of old Polonia Bancorp. Polonia MHC’s sole business activity is the ownership of 1,818,437 shares of common stock of old Polonia Bancorp, or 57.6% of the common stock outstanding as of the date of this prospectus. After completion of the conversion, Polonia MHC will cease to exist.

Our principal executive offices are located at 3993 Huntingdon Pike, Third Floor, Huntingdon Valley, Pennsylvania 19006 and our telephone number is (215) 938-8800. Our web site address is www.poloniabank.com. Information on our web site should not be considered a part of this prospectus.

Recent Acquisition

General. On December 10, 2010, Polonia Bank assumed certain of the deposits and acquired certain assets of Earthstar Bank, a state chartered bank headquartered in Southampton, Pennsylvania, from the Federal Deposit Insurance Corporation (“FDIC”), as receiver for Earthstar Bank, pursuant to the terms of the Purchase and Assumption Agreement—Whole Bank; All Deposits, dated December 10, 2010, by and among the FDIC, as receiver, Polonia Bank and the FDIC.

We acquired approximately $67 million in assets, including approximately $42 million in loans (comprised primarily of single-family residential loans, home equity loans and commercial real estate loans) and approximately $8 million in investment securities (comprised primarily of government agency securities). We also assumed approximately $90 million in deposits.

The deposits were acquired without a premium and certain loans were acquired at a discount to Earthstar Bank’s historic book value, subject to customary adjustments. The terms of the agreement provide for the FDIC to indemnify Polonia Bank against claims with respect to liabilities and assets of Earthstar Bank or any of its affiliates not assumed or otherwise purchased by Polonia Bank and with respect to certain other claims by third parties.

In May 2011, Polonia Bank consolidated its Orthodox Street branch located at 2628 Orthodox Street, Philadelphia, Pennsylvania into Earthstar Bank’s Richmond Street branch located at 4800 Richmond Street, Philadelphia, Pennsylvania, and consolidated Earthstar Bank’s Southampton branch located at 376 Second Street Pike, Southampton, Pennsylvania into Polonia Bank’s main office location at 3993 Huntingdon Pike, Huntingdon Valley, Pennsylvania. Earthstar Bank’s banking offices now operate as branches of Polonia Bank. We are in the process of purchasing these branch offices from the FDIC.

Loss Sharing Arrangements. In connection with the transaction, we entered into loss sharing agreements with the FDIC that collectively cover all of the loans we acquired (referred to collectively as “covered loans”), except for approximately $1.2 million in consumer loans which are not subject to the loss sharing agreements. Certain other assets

 

 

1


Table of Contents

of Earthstar Bank were acquired by Polonia Bank that are not covered by loss sharing agreements with the FDIC. These assets include approximately $8 million of investment securities purchased at fair value.

Pursuant to the terms of the loss sharing agreements, the FDIC’s obligation to reimburse us for losses with respect to covered loans begins with the first dollar of loss incurred. The FDIC will reimburse us for 80% of losses with respect to covered loans. We will reimburse the FDIC for 80% of recoveries with respect to losses for which the FDIC paid us 80% reimbursement under the loss sharing agreements. The loss sharing agreements applicable to the single-family loans provides for FDIC loss sharing and our reimbursement to the FDIC for ten years. The loss sharing agreement applicable to the commercial loans provides for FDIC loss sharing for five years and our reimbursement to the FDIC for eight years, in each case, on the same terms and conditions as described above.

The above reimbursable losses and recoveries are based on the book value of the relevant loans as determined by the FDIC as of the effective date of the transaction. The amount that we realize on these assets could differ materially from the carrying value that will be reflected in any financial statements, based upon the timing and amount of collections and recoveries on the covered assets in future periods. See “Risk Factors—We are subject to certain risks in connection with our recent acquisition of Earthstar Bank.”

Our Market Area

We are headquartered in Huntingdon Valley, Pennsylvania, which is located in the northwest suburban area of metropolitan Philadelphia and is situated between Montgomery and Bucks Counties. In addition to our main office in Montgomery County, we operate from six additional locations in Philadelphia County. We generate deposits through our seven offices and conduct lending activities throughout the Greater Philadelphia metropolitan area, as well as in southeastern Pennsylvania and southern New Jersey. The Philadelphia metropolitan area is the fifth largest in the United States (based on United States Census data for 2010) with an estimated population of 6.0 million. The city of Philadelphia is the fifth most populous city in the United States and the largest in population and area in the Commonwealth of Pennsylvania.

The Greater Philadelphia metropolitan area’s economy is heavily based upon manufacturing, refining, food and financial services. The city is home to many Fortune 500 companies, including cable television and internet provider Comcast; insurance companies CIGNA and Lincoln Financial Group; energy company Sunoco; food services company Aramark; paper and packaging company Crown Holdings Incorporated; diversified producer Rohm and Haas Company; the pharmaceutical company Glaxo SmithKline; the helicopter division of Boeing Co.; and automotive parts retailer Pep Boys. The city is also home to many universities and colleges.

Demographic and economic growth trends provide key insight into the health of our market area. The following table sets forth information regarding certain demographic information for the counties in our market area and the United States. The demographic information is based on published statistics of the U.S. Census Bureau and the U.S. Bureau of Labor Statistics.

 

     Bucks
County
    Montgomery
County
    Philadelphia
County
    United
States
 

Unemployment rate (1)

     7.4     7.0     10.7     9.3

Median household income (2)

   $ 78,790      $ 80,500      $ 41,221      $ 54,442   

Population growth (decline) (3)

     5.4     4.8     (5.1 )%      10.6

 

(1) For June 2011
(2) For December 2010 (Source: ESRI)
(3) From 2000 to July 2010

Our Business

We operate as a community bank. Our primary business lines involve generating funds from deposits or borrowings and investing such funds in loans and investment securities. We currently operate seven retail banking locations in metropolitan Philadelphia.

 

   

Retail Lending. Our primary line of business is the origination of one- to four-family mortgage loans. We also offer home equity loans and consumer loans through our branch network.

 

 

2


Table of Contents
   

Commercial Lending. We offer multi-family and commercial real estate loans and commercial loans and lines of credit for property owners and businesses in our market area, although this is a smaller portion of our business.

 

   

Deposit Products and Services. We offer a full range of traditional deposit products for consumers and businesses, such as checking accounts, savings accounts, money market accounts and certificates of deposit. We provide features such as direct deposit, ATM and check card services.

Our Business Strategy

Our mission is to operate and grow a profitable, independent community-oriented financial institution serving primarily retail customers and small businesses in our market areas. The following are key elements of our business strategy:

 

   

Continuing our community-oriented focus. As a community-oriented financial institution, we emphasize providing exceptional customer service as a means to attract and retain customers. We believe that our community orientation is attractive to our customers and distinguishes us from the large banks that operate in our market area. Our ability to succeed in our communities is enhanced by the stability of our senior management. We intend to continue to leverage these strengths in our markets for the purpose of originating new deposits and loans, particularly through our branch offices, while continuing to focus on profitability.

 

   

Implementing a controlled growth strategy to prudently increase profitability and enhance stockholder value. Our primary lending activity is the origination of one- to four-family mortgage loans secured by homes in our local market area. We intend to pursue a controlled growth strategy for the foreseeable future until the local economy materially improves. As a result, we anticipate moderate growth in our one- to four-family residential mortgage loan portfolio and in our investment securities portfolio. Accordingly, we expect that our weighted average yield on interest-earning assets will decrease in future periods because one- to four-family mortgage loans and investment securities generally yield less than nonresidential and multi-family real estate loans that were acquired in the Earthstar Bank acquisition. We believe our existing infrastructure and our recent branch acquisition, along with the capital we expect to raise in this offering, will enable us to originate new loans, subject to the foregoing strategy, both to replace existing loans as they are repaid and to prudently grow our loan portfolio.

 

   

Improve our funding mix by attracting lower cost core deposits. Core deposits (demand, money market and savings accounts) comprised 45.3% of our total deposits at June 30, 2011. We value core deposits because they represent longer-term customer relationships and a lower cost of funding compared to certificates of deposit. Core deposits have continued to increase primarily due to the investments we have made in our branch network, new product offerings, competitive interest rates and the movement of customer funds out of riskier investments, including the stock market.

 

   

Use conservative underwriting practices to maintain asset quality. We have sought to maintain a high level of asset quality and moderate credit risk by using underwriting standards that we believe are conservative. While the delinquencies in our loan portfolio have increased during the recent economic recession, non-performing, non-covered loans were 0.78% of our non-covered loan portfolio at June 30, 2011. Although we intend to continue our efforts to originate commercial real estate and business loans after the offering, we intend to continue our philosophy of managing loan exposures through our conservative approach to lending.

 

 

3


Table of Contents

Description of the Conversion (page         )

In 2007, we reorganized Polonia Bank into a stock savings bank with a mutual holding company structure, formed old Polonia Bancorp as the mid-tier holding company for Polonia Bank and sold a minority interest in old Polonia Bancorp common stock to our depositors, our borrowers and our employee stock ownership plan in a subscription offering. The majority of old Polonia Bancorp’s shares were issued to Polonia MHC, a mutual holding company organized under federal law. As a mutual holding company, Polonia MHC does not have any shareholders, does not hold any significant assets other than the common stock of old Polonia Bancorp, and does not engage in any significant business activity. Our current ownership structure is as follows:

LOGO

The “second-step” conversion process that we are now undertaking involves a series of transactions by which we will convert our organization from the partially public mutual holding company form to the fully public stock holding company structure. In the stock holding company structure, all of Polonia Bank’s common stock will be owned by new Polonia Bancorp, and all of new Polonia Bancorp’s common stock will be owned by the public. We are conducting the conversion and offering under the terms of our plan of conversion and reorganization (which is referred to as the “plan of conversion”). Upon completion of the conversion and offering, old Polonia Bancorp and Polonia MHC will cease to exist.

As part of the conversion, we are offering for sale common stock representing the 57.6% ownership interest of old Polonia Bancorp that is currently held by Polonia MHC. At the conclusion of the conversion and offering, existing public shareholders of old Polonia Bancorp will receive shares of common stock in new Polonia Bancorp in exchange for their existing shares of common stock of old Polonia Bancorp, based upon an exchange ratio of 0.6719 to 0.9091 at the minimum and maximum of the offering range, respectively. If, as a result of regulatory considerations, demand for the shares or changes in financial market conditions, the independent appraiser determines that our market value has increased, we may sell up to 1,901,094 shares in the offering and the exchange ratio will be increased to 1.0455. The actual exchange ratio will be determined at the conclusion of the conversion and the offering based on the total number of shares sold in the offering, and is intended to result in old Polonia Bancorp’s existing public shareholders owning the same percentage interest, 42.4%, of new Polonia Bancorp common stock as they currently own of old Polonia Bancorp common stock, without giving effect to cash paid in lieu of issuing fractional shares or shares that existing shareholders may purchase in the offering.

After the conversion and offering, our ownership structure will be as follows:

LOGO

 

 

4


Table of Contents

We may cancel the conversion and offering with the concurrence of the Federal Reserve Board. If canceled, orders for common stock already submitted will be canceled, subscribers’ funds will be promptly returned with interest calculated at Polonia Bank’s statement savings rate and all deposit account withdrawal authorizations will be canceled.

The normal business operations of Polonia Bank will continue without interruption during the conversion and offering, and the same officers and directors who currently serve Polonia Bank in the mutual holding company structure will serve the new holding company and Polonia Bank in the fully converted stock form.

Reasons for the Conversion and Offering (page         )

Our primary reasons for the conversion and offering are the following:

 

   

While Polonia Bank currently exceeds all regulatory capital requirements, the proceeds from the sale of common stock will increase our capital, which will support our continued lending and operational growth. Our board of directors considered current market conditions, the amount of capital needed for continued growth, the amount of capital being raised in the offering and the interests of existing shareholders in deciding to conduct the conversion and offering at this time.

 

   

The larger number of shares that will be in the hands of public investors after completion of the conversion and offering is expected to result in a more liquid and active market than currently exists for old Polonia Bancorp common stock. See “Market for the Common Stock.”

 

   

The stock holding company structure is a more familiar form of organization, which we believe will make our common stock more appealing to investors, and will give us greater flexibility to access the capital markets through possible future equity and debt offerings and to acquire other financial institutions or financial service companies. Our current mutual holding company structure limits our ability to raise capital or issue stock in an acquisition transaction because Polonia MHC must own at least 50.1% of the shares of old Polonia Bancorp. However, we currently have no plans, agreements or understandings regarding any additional securities offerings or acquisitions.

 

   

Recently enacted financial regulatory reform legislation has resulted in changes to our primary bank regulator and holding company regulator, as well as changes in regulations applicable to us, which may include changes in capital requirements, changes in the ability of Polonia MHC to waive dividends and changes in the valuation of minority shareholder interests in a conversion to full stock form. While it is impossible to predict the ultimate effect of the reform legislation, our board of directors believes that the reorganization will eliminate some of the uncertainties associated with the legislation, and better position us to meet all future regulatory capital requirements.

Terms of the Offering

We are offering between 1,221,875 and 1,653,125 shares of common stock in a subscription offering to eligible depositors and borrowers of Polonia Bank and to our tax-qualified employee benefit plans, including our employee stock ownership plan. To the extent shares remain available, we may offer shares in a community offering to natural persons residing in Montgomery and Philadelphia Counties, Pennsylvania, to our existing public shareholders and to the general public. With regulatory approval, we may increase the number of shares to be sold up to 1,901,094 shares without giving you further notice or the opportunity to change or cancel your order. In considering whether to increase the offering size, the Federal Reserve Board will consider the level of subscriptions, the views of our independent appraiser, our financial condition and results of operations, and changes in financial market conditions. Once submitted, orders are irrevocable unless the offering is terminated or is extended beyond [DATE 2], 2011, or the number of shares of common stock to be sold is increased to more than 1,901,094 shares or decreased to less than 1,221,875 shares. If we extend the offering beyond [DATE 2], 2011, all subscribers will be notified and given the opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will promptly return your funds with interest calculated at Polonia Bank’s statement savings rate or cancel your deposit account withdrawal authorization. If we intend to sell fewer than 1,221,875 shares or more than 1,901,094 shares, we will promptly return all funds and set a new offering range. All subscribers will be notified and given the opportunity to place a new order.

Shares of our common stock not purchased in the subscription offering or the community offering may be offered for sale to the general public in a syndicated community offering through a syndicate of selected dealers on a best

 

 

5


Table of Contents

efforts basis. We may begin the syndicated community offering at any time following the commencement of the subscription offering. Sandler O’Neill & Partners, L.P. will act as sole book-running manager, which is also being conducted on a best efforts basis. Neither Sandler O’Neill & Partners, L.P. nor any other member of the syndicate is obligated to purchase any shares in the syndicated community offering.

The purchase price is $8.00 per share. All investors will pay the same purchase price per share. Investors will not be charged a commission to purchase shares of common stock in the offering. Sandler O’Neill & Partners, L.P., our conversion advisor and marketing agent in the offering, will use its best efforts to assist us in selling shares of our common stock. Sandler O’Neill & Partners, L.P. is not obligated to purchase any shares of common stock in the offering.

Risks Relating to the Offering and Our Business (page         )

An investment in the common stock of new Polonia Bancorp involves a degree of risk, including the possible loss of principal. You should carefully read and consider the information set forth in “Risk Factors” before purchasing shares of new Polonia Bancorp common stock.

How We Determined the Offering Range and Exchange Ratio (page         )

Federal regulations require that the aggregate purchase price of the securities sold in the offering be based upon our estimated pro forma market value after the conversion (i.e., taking into account the expected receipt of proceeds from the sale of securities in the offering), as determined by an independent appraisal. In accordance with the regulations of the Federal Reserve Board, a valuation range is established which ranges from 15% below to 15% above this pro forma market value. We have retained RP Financial, LC., which is experienced in the evaluation and appraisal of financial institutions, to prepare the appraisal. RP Financial has indicated that in its valuation as of August 12, 2011, new Polonia Bancorp’s common stock’s estimated full market value was $20.0 million, resulting in a range from $17.0 million at the minimum to $23.0 million at the maximum. Based on this valuation, we are selling the number of shares representing the 57.6% of old Polonia Bancorp currently owned by Polonia MHC. This results in an offering range of $9.8 million to $13.2 million, with a midpoint of $11.5 million. RP Financial will receive fees totaling $45,000 for its appraisal report, plus $7,500 for any appraisal updates (of which there will be at least one) and reimbursement of out-of-pocket expenses.

The appraisal was based in part upon old Polonia Bancorp’s financial condition and results of operations, the effect of the additional capital we will raise from the sale of common stock in this offering, and an analysis of a peer group of ten publicly traded savings and loan holding companies that RP Financial considered comparable to old Polonia Bancorp. The appraisal peer group consists of the companies listed below. Total assets are as of June 30, 2011.

 

Company Name and Ticker Symbol

   Exchange      Headquarters    Total Assets  
          (In millions)  

Elmira Savings Bank, FSB (ESBK)

     NASDAQ       Elmira, NY    $ 500   

First Capital, Inc. (FCAP)

     NASDAQ       Corydon, IN    $ 445   

First Clover Leaf Financial Corp. (FCLF)

     NASDAQ       Edwardsville, IL    $ 576 (1) 

First Savings Financial Group, Inc. (FSFG)

     NASDAQ       Clarksville, IN    $ 524   

Jacksonville Bancorp Inc. (JXSB)

     NASDAQ       Jacksonville, IL    $ 305   

LSB Financial Corp. (LSBI)

     NASDAQ       Lafayette, IN    $ 360   

OBA Financial Services, Inc. (OBAF)

     NASDAQ       Germantown, MD    $ 356 (1) 

River Valley Bancorp (RIVR)

     NASDAQ       Madison, IN    $ 387 (1) 

WVS Financial Corp. (WVFC)

     NASDAQ       Pittsburgh, PA    $ 247 (1) 

Wayne Savings Bancshares Inc. (WAYN)

     NASDAQ       Wooster, OH    $ 412   

 

(1) As of March 31, 2011.

 

 

6


Table of Contents

The peer group selected by RP Financial is comprised solely of companies traded on the Nasdaq Stock Market. Although new Polonia Bancorp’s common stock will not be listed for trading on the Nasdaq Stock Market, the Federal Reserve Board guidelines do not permit the use in appraisals of companies the stock of which is quoted on the Over-the-Counter Bulletin Board.

In preparing its appraisal, RP Financial considered the information in this prospectus, including our financial statements. RP Financial also considered the following factors, among others:

 

   

our historical and projected operating results and financial condition, including, but not limited to, net interest income, the amount and volatility of interest income and interest expense relative to changes in market conditions and interest rates, asset quality, levels of loan loss provisions, the amount and sources of non-interest income, and the amount of non-interest expense;

 

   

the economic, demographic and competitive characteristics of our market area, including, but not limited to, employment by industry type, unemployment trends, size and growth of the population, trends in household and per capita income, and deposit market share;

 

   

a comparative evaluation of our operating and financial statistics with those of other similarly-situated, publicly-traded savings associations and savings association holding companies, which included a comparative analysis of balance sheet composition, income statement and balance sheet ratios, credit and interest rate risk exposure;

 

   

the effect of the capital raised in this offering on our net worth and earnings potential, including, but not limited to, the increase in consolidated equity resulting from the offering, the estimated increase in earnings resulting from the investment of the net proceeds of the offering, and the estimated impact on consolidated equity and earnings resulting from adoption of the proposed employee stock benefit plans; and

 

   

the trading market for old Polonia Bancorp common stock and securities of comparable institutions and general conditions in the market for such securities.

Four measures that some investors use to analyze whether a stock might be a good investment are the ratio of the offering price to the issuer’s “book value” and “tangible book value” and the ratio of the offering price to the issuer’s earnings and “core earnings.” RP Financial considered these ratios in preparing its appraisal, among other factors. Book value is the same as total equity and represents the difference in value between the issuer’s assets and liabilities. Tangible book value is equal to total equity minus intangible assets. Core earnings, for purposes of the appraisal, was defined as net earnings after taxes, excluding the after-tax portion of income from non-recurring items.

In applying each of the valuation methods, RP Financial considered adjustments to our pro forma market value based on a comparison of new Polonia Bancorp with the peer group. RP Financial made downward adjustments for earnings, primary market area, liquidity of the stock and stock market conditions and made slight upward adjustments for financial condition and asset growth.

The following table presents a summary of selected pricing ratios for the peer group companies utilized by RP Financial in its appraisal and the pro forma pricing ratios for us as calculated by RP Financial in its appraisal report, based on financial data as of and for the twelve months ended June 30, 2011. The pricing ratios for new Polonia Bancorp are based on financial data as of or for the twelve months ended June 30, 2011.

 

     Price to
Earnings
Multiple (1)
     Price to Core
Earnings
Multiple (1)
     Price to Book
Value Ratio
    Price to
Tangible

Book Value
Ratio
 

New Polonia Bancorp (pro forma):

          

Minimum

     5.36x         221.73x         48.16     48.16

Midpoint

     6.31         277.67         54.31        54.31   

Maximum

     7.27         341.33         60.02        60.02   

Maximum, as adjusted

     8.37         426.31         66.06        66.06   

Pricing ratios of peer group companies as of August 12, 2011:

          

Average

     12.86x         15.78x         72.06     80.03

Median

     10.86         14.92         65.34        72.22   

 

(1) Net income for the twelve months ended June 30, 2011 included a nonrecurring gain of $4.6 million related to the acquisition of Earthstar Bank. The exclusion from core earnings of this acquisition-related gain accounts for the significant differences in the earnings and core earnings pricing multiples.

 

 

7


Table of Contents

Compared to the average pricing ratios of the peer group, at the maximum of the offering range our common stock would be priced at a discount of 43.5% to the peer group on a price-to-earnings basis, a premium of 2,063% to the peer group on a price-to-core earnings basis, a discount of 16.7% to the peer group on a price-to-book basis and a discount of 25.0% to the peer group on a price-to-tangible book basis. This means that, at the maximum of the offering range, a share of our common stock would be more expensive than the peer group on a core earnings basis and less expensive than the peer group on an earnings, book value and tangible book value basis.

Compared to the average pricing ratios of the peer group, at the minimum of the offering range our common stock would be priced at a discount of 58.3% to the peer group on a price-to-earnings basis, a premium of 1,305% on a price-to-core earnings basis, a discount of 33.2% to the peer group on a price-to-book basis and at a discount of 39.8% to the peer group on a price-to-tangible book basis. This means that, at the minimum of the offering range, a share of our common stock would be more expensive than the peer group on a core earnings basis and less expensive than the peer group on an earnings, book value and tangible book value basis.

Our board of directors reviewed RP Financial’s appraisal report, including the methodology and the assumptions used by RP Financial, and determined that the offering range was reasonable and adequate. Our board of directors has decided to offer the shares for a price of $8.00 per share. The purchase price of $8.00 per share was determined by us, taking into account, among other factors, the market price of our stock before adoption of the plan of conversion, the requirement under Federal Reserve Board regulations that the common stock be offered in a manner that will achieve the widest distribution of the stock, and desired liquidity in the common stock after the offering. Our board of directors also established the formula for determining the exchange ratio. Based upon such formula and the offering range, the exchange ratio will range from a minimum of 0.6719 to a maximum of 0.9091 shares of new Polonia Bancorp common stock for each current share of old Polonia Bancorp common stock, with a midpoint of 0.7905. Based upon this exchange ratio, we expect to issue between 899,494 and 1,216,962 shares of new Polonia Bancorp common stock to the holders of old Polonia Bancorp common stock outstanding immediately before the completion of the conversion and offering.

Because of differences in important factors such as operating characteristics, location, financial performance, asset size, capital structure and business prospects between us and other fully converted institutions, you should not rely on these comparative valuation ratios as an indication as to whether or not our common stock is an appropriate investment for you. The appraisal is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing our common stock. The appraisal does not indicate market value. You should not assume or expect that the appraisal described above means that our common stock will trade at or above the $8.00 purchase price after the offering.

Our board of directors makes no recommendation of any kind as to the advisability of purchasing shares of common stock in the offering.

After-Market Performance Information

 

                   Price Performance from Initial Offering Price    

Issuer (Market/Symbol)

   Closing
Date
   Gross
Proceeds
     1 Day     1 Week     1 Month     Through
August 12,
2011
 

Naugatuck Valley Financial Corp. – CT (NVSL)

   6/30/11    $ 33.4         (1.3 )%      (2.5 )%      1.9     (6.3 )% 

Rockville Financial, Inc. – CT (RCKB)

   3/4/11      171.1         6.0        6.5        5.0        (9.3

Eureka Financial Corp. – PA (EKFC)

   3/1/11      7.6         22.5        17.5        28.5        21.0   

Atlantic Coast Financial Corp. – GA (ACFC)

   2/4/11      17.1         0.5        0.0        2.0        (52.5

Alliance Bancorp, Inc. – PA (ALLB)

   1/18/11      32.6         10.0        6.8        11.9        6.7   

SI Financial Group, Inc. – CT (SIFI)

   1/13/11      52.4         15.9        12.9        17.5        16.9   

Minden Bancorp, Inc. – LA (MDNB)

   1/5/11      13.9         28.0        28.5        30.0        22.0   

Capitol Fed. Financial, Inc. – KS (CFFN)

   12/22/10      1,181.5         16.5        18.8        19.1        8.6   

Home Federal Bancorp, Inc. – LA (HFBL)

   12/22/10      19.5         15.0        17.0        15.0        35.0   

Heritage Financial Group, Inc. – GA (HBOS)

   11/30/10      65.9         2.5        8.5        21.7        13.1   

Kaiser Fed Financial Group, Inc. – CA (KFFG)

   11/19/10      63.8         (0.1     (4.0     (0.4     21.5   

 

 

8


Table of Contents
                   Price Performance from Initial Offering Price    

Issuer (Market/Symbol)

   Closing
Date
   Gross
Proceeds
     1 Day     1 Week     1 Month     Through
August 12,
2011
 

FedFirst Financial Corp. – PA (FFCO)

   9/21/10    $ 17.2         10.0     12.3     12.0     36.1

Jacksonville Bancorp, Inc. – IL (JXSB)

   7/15/10      10.4         6.5        5.8        1.3        31.0   

Colonial Fin. Services, Inc. – NJ (COBK)

   7/13/10      23.0         0.5        (3.5     (2.0     8.5   

Viewpoint Fin. Group – TX (VPFG)

   7/7/10      198.6         (5.0     (4.5     (3.0     18.4   

Oneida Financial Corp. – NY (ONFC)

   7/7/10      31.5         (6.3     (6.3     (1.3     6.3   

Fox Chase Bancorp, Inc. – PA (FXCB)

   6/29/10      87.1         (4.1     (4.0     (3.2     27.7   

Oritani Financial Corp. – NJ (ORIT)

   6/24/10      413.6         3.1        (1.4     (0.9     19.4   

Eagle Bancorp Montana – MT (EBMT)

   4/5/10      24.6         5.5        6.5        4.1        5.0   

Average

      $ 129.7         6.6     6.0     8.4  

Median

      $ 32.6         5.5     6.5     4.1  

Possible Change in Offering Range

RP Financial will update its appraisal before we complete the conversion and offering. If, as a result of regulatory considerations, demand for the shares or changes in financial market conditions, RP Financial determines that our estimated pro forma market value has increased, we may sell up to 1,901,094 shares without further notice to you. If our pro forma market value at that time is either below $17.0 million or above $26.4 million, then, after consulting with the Federal Reserve Board, we may: terminate the offering and promptly return all funds; promptly return all funds, set a new offering range and give all subscribers the opportunity to place a new order; or take such other actions as may be permitted by the Federal Reserve Board and the Securities and Exchange Commission.

The Exchange of Existing Shares of Old Polonia Bancorp Common Stock (page         )

If you are a shareholder of old Polonia Bancorp on the date we complete the conversion and offering, your existing shares will be canceled and exchanged for shares of new Polonia Bancorp. The number of shares you will receive will be based on an exchange ratio determined as of the completion of the conversion and offering that is intended to result in old Polonia Bancorp’s existing public shareholders owning approximately 42.4% of new Polonia Bancorp’s common stock, which is the same percentage of old Polonia Bancorp common stock currently owned by existing public shareholders. The following table shows how the exchange ratio will adjust, based on the number of shares sold in our offering. The table also shows how many shares a hypothetical owner of 100 shares of old Polonia Bancorp common stock would receive in the exchange, based on the number of shares sold in the offering.

 

     Shares to be Sold in the
Offering
   

 

Shares to be Exchanged
for Existing Shares of
Old Polonia Bancorp

    Total Shares
of Common
Stock to be
Outstanding
     Exchange
Ratio
     Equivalent
per Share
Value (1)
     Equivalent
Pro Forma
Book
Value per
Exchanged
Share (2)
     Shares to
be
Received
for 100
Existing
Shares (3)
 
     Amount      Percent     Amount      Percent                

Minimum

     1,221,875         57.6     899,494         42.4     2,121,369         0.6719       $ 5.38       $ 11.16         67   

Midpoint

     1,437,500         57.6     1,058,228         42.4     2,495,728         0.7905         6.32         11.64         79   

Maximum

     1,653,125         57.6     1,216,962         42.4     2,870,087         0.9091         7.27         12.12         90   

Maximum, as adjusted

     1,901,094         57.6     1,399,506         42.4     3,300,600         1.0455         8.36         12.66         104   

 

(1) Represents the value of shares of new Polonia Bancorp common stock received in the conversion by a holder of one share of old Polonia Bancorp common stock at the exchange ratio, assuming a market price of $8.00 per share.
(2) Represents the pro forma shareholders’ equity per share at each level of the offering range multiplied by the respective exchange ratio.
(3) Cash will be paid instead of issuing any fractional shares.

 

 

9


Table of Contents

No fractional shares of new Polonia Bancorp common stock will be issued in the conversion and offering. For each fractional share that would otherwise be issued, we will pay cash in an amount equal to the product obtained by multiplying the fractional share interest to which the holder would otherwise be entitled by the $8.00 per share offering price.

How We Intend to Use the Proceeds of this Offering (page         )

The following table summarizes how we intend to use the proceeds of the offering, based on the sale of shares at the minimum and maximum of the offering range.

 

     1,221,875
Shares at
$8.00 per
Share
    1,653,125
Shares at
$8.00 per
Share
 
     (In thousands)  

Offering proceeds

   $ 9,775      $ 13,225   

Less: offering expenses

     (1,304     (1,391

Net offering proceeds

     8,471        11,834   
  

 

 

   

 

 

 

Less:

    

Proceeds contributed to Polonia Bank

     4,236        5,917   

Proceeds used for loan to employee stock ownership plan

     661        894   
  

 

 

   

 

 

 

Proceeds remaining for new Polonia Bancorp

   $ 3,575      $ 5,022   
  

 

 

   

 

 

 

Initially, we intend to invest the proceeds of the offering in short-term investments. In the future, new Polonia Bancorp may use the funds it retains to invest in securities, pay cash dividends, repurchase shares of its common stock, subject to regulatory restrictions, or for general corporate purposes. Polonia Bank intends to use the portion of the proceeds that it receives to fund new loans and to invest in securities. We expect that much of the loan growth will occur in our one- to four-family residential mortgage portfolio, but we have not allocated specific dollar amounts to any particular area of our loan portfolio. The amount of time that it will take to deploy the proceeds of the offering into loans will depend primarily on the level of loan demand. Polonia Bank may also use the proceeds to finance the possible expansion of its business activities, including developing new branch locations, although there are no specific plans for these activities. We may also use the proceeds of the offering to diversify our business or acquire other companies as opportunities arise, primarily in or adjacent to our existing market areas, although we have no specific plans to do so at this time.

Purchases by Directors and Executive Officers (page         )

We expect that our directors and executive officers, together with their associates, will subscribe for approximately 46,250 shares, which is 3.2% of the midpoint of the offering. Our directors and executive officers will pay the same $8.00 per share price as everyone else who purchases shares in the offering. Like all of our depositors, our directors and executive officers have subscription rights based on their deposits and, in the event of an oversubscription, their orders will be subject to the allocation provisions set forth in our plan of conversion. Purchases by our directors and executive officers will count towards the minimum number of shares we must sell to close the offering. Following the conversion and offering, and including shares received in exchange for shares of old Polonia Bancorp, our directors and executive officers, together with their associates, are expected to own 234,331 shares of new Polonia Bancorp common stock, which would equal 9.4% of our outstanding shares if shares are sold at the midpoint of the offering range.

Benefits of the Conversion to Management (page         )

We intend to adopt the stock benefit plans described below. We will recognize additional compensation expense related to the expanded employee stock ownership plan and the new equity incentive plan. The actual expense will depend on the market value of our common stock and will increase as the value of our common stock increases. As reflected under “Pro Forma Data,” based upon assumptions set forth therein, the annual expense related to the employee stock ownership plan and the new equity incentive plan would have been $158,000 for the year ended December 31, 2010 on an after-tax basis, assuming shares are sold at the maximum of the offering range. If awards

 

 

10


Table of Contents

under the new equity incentive plan are funded from authorized but unissued stock, your ownership interest would be diluted by up to approximately 6.4%. See “Pro Forma Data” for an illustration of the effects of each of these plans.

Employee Stock Ownership Plan. Our employee stock ownership plan intends to purchase an amount of shares equal to 6.76% of the shares sold in the offering. The plan will use the proceeds from a 15-year loan from new Polonia Bancorp to purchase these shares. We reserve the right to purchase shares of common stock in the open market following the offering to fund all or a portion of the employee stock ownership plan. As the loan is repaid and shares are released from collateral, the shares will be allocated to the accounts of employee participants. Allocations will be based on a participant’s individual compensation as a percentage of total plan compensation. Non-employee directors are not eligible to participate in the employee stock ownership plan. We will incur additional compensation expense as a result of this plan. See “Pro Forma Data” for an illustration of the effects of this plan.

Equity Incentive Plan. We intend to implement a new equity incentive plan no earlier than six months after completion of the conversion and offering. We will submit this plan to our shareholders for their approval. Under this plan, we may grant stock options in an amount up to 8.45% of the number of shares sold in the offering and restricted stock awards in an amount equal to 3.38% of the shares sold in the offering. Stock options will be granted at an exercise price equal to 100% of the fair market value of our common stock on the option grant date. Shares of restricted stock will be awarded at no cost to the recipient. We will incur additional compensation expense as a result of this plan. See “Pro Forma Data” for an illustration of the effects of this plan. The new equity incentive plan will comply with all applicable Federal Reserve Board regulations. The new equity incentive plan will supplement awards granted under our 2007 Equity Incentive Plan which will continue as a plan of new Polonia Bancorp.

The following table summarizes, at the maximum of the offering range, the total number and value of the shares of common stock that the employee stock ownership plan expects to acquire and the total value of all restricted stock awards and stock options that are expected to be available under the new equity incentive plan. At the maximum of the offering range, we will sell 1,653,125 shares and have 2,870,087 shares outstanding. The number of shares reflected for the benefit plans in the table below assumes that Polonia Bank’s tangible capital will be 10% or more following the completion of the offering and the application of the net proceeds as described under “Use of Proceeds.”

 

     Number of Shares to be Granted or
Purchased
    Dilution
Resulting from
Issuance of
Additional
Shares
    Total
Estimated
Value
 
     At
Maximum
of Offering
Range
     As a % of
Common
Stock Sold
    As a % of
Common
Stock
Outstanding
     
     (Dollars in thousands)  

Employee stock ownership plan (1)

     111,751         6.76     3.89     —     $ 894   

Restricted stock awards (1)

     55,876         3.38        1.95        1.91        447   

Stock options (2)

     139,689         8.45        4.87        4.64        379   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

     307,316         18.59     10.71     6.38   $ 1,720   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Assumes the value of new Polonia Bancorp common stock is $8.00 per share for determining the total estimated value.
(2) Assumes the value of a stock option is $2.71, which was determined using the Black-Scholes option pricing formula. See “Pro Forma Data.”

We may fund our plans through open market purchases, as opposed to new issuances of common stock.

 

 

11


Table of Contents

The following table presents information regarding our former employee stock ownership plan, options and restricted stock previously awarded under our 2007 Equity Incentive Plan, additional shares purchased by our employee stock ownership plan, and our proposed new equity incentive plan. The table below assumes that 2,870,087 shares are outstanding after the offering, which includes the sale of 1,653,125 shares in the offering at the maximum of the offering range and the issuance of 1,216,962 shares in exchange for shares of old Polonia Bancorp using an exchange ratio of 0.9091. It is also assumed that the value of the stock is $8.00 per share.

 

Existing and New Stock Benefit Plans

   Eligible Participants    Number of
Shares at
Maximum of
Offering Range
    Estimated
Value of
Shares
    Percentage of
Shares
Outstanding After
the Conversion
and Offering
 
     (Dollars in thousands)  

Employee Stock Ownership Plan:

   Employees       

Shares purchased in 2007 offering (1)

        117,824 (2)    $ 943        4.11

Shares to be purchased in this offering

        111,751        894        3.89   
     

 

 

   

 

 

   

 

 

 

Total employee stock ownership plan

        229,575      $ 1,837        8.00

Restricted Stock Awards:

   Directors and employees       

2007 Equity Incentive Plan (1)

        58,910 (3)    $ 471 (4)      2.05

New shares of restricted stock

        55,876        447 (4)      1.95   
     

 

 

   

 

 

   

 

 

 

Total shares of restricted stock

        114,784      $ 918        4.00

Stock Options:

   Directors and employees       

2007 Equity Incentive Plan (1)

        147,277 (5)    $ 546 (6)      5.13

New stock options

        139,689        379 (7)      4.87   
     

 

 

   

 

 

   

 

 

 

Total stock options

        286,966      $ 925        10.00

Total stock benefit plans

        631,326      $ 3,680        22.00
     

 

 

   

 

 

   

 

 

 

 

(1) Number of shares has been adjusted for the 0.9091 exchange ratio at the maximum of the offering range.
(2) As of June 30, 2011, of these shares, 35,348 (38,882 before adjustment) have been allocated to the accounts of participants and 82,476 (90,723 before adjustments) remain unallocated.
(3) As of June 30, 2011, of these shares, 58,907 (64,800 before adjustment) have been awarded and no shares remain available for future awards. As of June 30, 2011, awards covering 40,176 shares have vested and the shares have been distributed.
(4) The actual value of restricted stock grants will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value is assumed to be the same as the offering price of $8.00 per share.
(5) As of June 30, 2011, of these shares, options for 139,913 shares (153,903 shares before adjustment) have been awarded and options for 7,364 shares (8,100 shares before adjustment) remain available for future grants. As of June 30, 2011, no options had been exercised.
(6) The fair value of stock options granted and outstanding under the 2007 Equity Incentive Plan has been estimated using the Black-Scholes option pricing model. Before the adjustment for the exchange ratio, there were 153,903 outstanding options with a weighted-average fair value of $2.91 per option. Using this value and adjusting for the exchange ratio at the maximum of the offering range, the fair value of stock options granted or available for grant under the 2007 Equity Incentive Plan has been estimated at $2.71 per option.
(7) For purposes of this table, the fair value of stock options to be granted under the new equity incentive plan has been estimated at $2.71 per option using the Black-Scholes option pricing model with the following assumptions: exercise price, $8.00; trading price on date of grant, $8.00; dividend yield, 0.0%; expected life, 10 years; expected volatility, 15.79%; and risk-free interest rate, 3.18%.

Persons Who Can Order Stock in the Subscription Offering (page 96)

We are offering shares of new Polonia Bancorp common stock in a subscription offering to the following persons in the following order of priority:

 

  1. Persons with aggregate balances of $50 or more on deposit at Polonia Bank as of the close of business on January 31, 2010 (including depositors of the former Earthstar Bank as of January 31, 2010).

 

 

12


Table of Contents
  2. Our employee stock ownership plan.

 

  3. Persons with aggregate balances of $50 or more on deposit at Polonia Bank as of the close of business on September 30, 2011 who are not eligible in category 1 above.

 

  4. Polonia Bank’s depositors as of the close of business on [RECORD DATE], who are not in categories 1 or 3 above and borrowers of Polonia Bank as of June 30, 2006 who continue to be borrowers as of [RECORD DATE].

If we receive subscriptions for more shares than are to be sold in this offering, we may be unable to fill or may only partially fill your order. Shares will be allocated in order of the priorities described above under a formula outlined in the plan of conversion. See “The Conversion and Offering—Subscription Offering and Subscription Rights” for a description of the allocation procedure.

Subscription Rights are Not Transferable

You are not allowed to transfer your subscription rights and we will act to ensure that you do not do so. You will be required to certify that you are purchasing shares solely for your own account and that you have no agreement or understanding with another person to sell or transfer subscription rights or the shares that you purchase. We will not accept any stock orders that we believe involve the transfer of subscription rights. Eligible depositors who enter into agreements to allow ineligible investors to participate in the subscription offering may be violating federal and state law and may be subject to civil enforcement actions or criminal prosecution.

Purchase Limitations (page             )

Pursuant to our plan of conversion, our board of directors has established limitations on the purchase of common stock in the offering. These limitations include the following:

 

   

The minimum purchase is 25 shares.

 

   

No individual (or individuals exercising subscription rights through a single qualifying account held jointly) may purchase more than $300,000 of common stock (which equals 37,500 shares) in the offering. In addition, if any of the following persons purchase shares of common stock, their purchases, in all categories of the offering combined, when aggregated with your purchases, cannot exceed $300,000 of common stock (which equals 37,500 shares):

 

   

Any person who is related by blood or marriage to you and who either lives in your home or who is a director or officer of Polonia Bank;

 

   

Companies or other entities in which you are an officer or partner or have a 10% or greater beneficial ownership interest; and

 

   

Trusts or other estates in which you have a substantial beneficial interest or as to which you serve as a trustee or in another fiduciary capacity.

Unless we determine otherwise, persons having the same address and persons exercising subscription rights through qualifying accounts registered to the same address will be subject to this overall purchase limitation. We have the right to determine, in our sole discretion, whether prospective purchasers are associates or acting in concert.

 

   

No individual, together with any associates, and no group of persons acting in concert may purchase shares of common stock so that, when combined with shares of new Polonia Bancorp common stock received in exchange for shares of old Polonia Bancorp common stock, such person or persons would hold more than 5.0% of the number of shares of new Polonia Bancorp common stock outstanding upon completion of the conversion and offering. This means that if you already own a significant number of shares, you may not be permitted to purchase the maximum number of shares in the offering. For example, if you currently own more than 102,050 shares of common stock (assuming we close the offering at the minimum of the offering range) or 116,603 shares of common stock (assuming we close the offering at the maximum of the offering range), you would not be able to purchase all of the 37,500 shares allowable under the plan of conversion. No

 

 

13


Table of Contents
 

person will be required to divest any shares of old Polonia Bancorp common stock or be limited in the number of shares of new Polonia Bancorp to be received in exchange for shares of old Polonia Bancorp common stock as a result of this purchase limitation.

Subject to the Federal Reserve Board’s approval, we may increase or decrease the purchase limitations at any time. If we increase the maximum purchase limitation to 5.0% of the shares of common stock sold in the offering, we may further increase the maximum purchase limitation to 9.99%, provided that orders for common stock exceeding 5.0% of the shares of common stock sold in the offering may not exceed in the aggregate 10.0% of the total shares of common stock sold in the offering. Our tax-qualified employee benefit plans, including our employee stock ownership plan, are authorized to purchase up to 10% of the shares sold in the offering, without regard to these purchase limitations.

Conditions to Completing the Conversion and Offering

We cannot complete the conversion and offering unless:

 

   

the plan of conversion is approved by at least a majority of votes eligible to be cast by members of Polonia MHC;

 

   

the plan of conversion is approved by at least two-thirds of the outstanding shares of old Polonia Bancorp, including shares held by Polonia MHC;

 

   

the plan of conversion is approved by at least a majority of the votes eligible to be cast by shareholders of old Polonia Bancorp, excluding shares held by Polonia MHC;

 

   

we sell at least the minimum number of shares offered; and

 

   

we receive the final approval of the Federal Reserve Board to complete the conversion and offering.

Polonia MHC, which owns 57.6% of the outstanding shares of old Polonia Bancorp, intends to vote these shares in favor of the plan of conversion. In addition, as of June 30, 2011, directors and executive officers of old Polonia Bancorp and their associates beneficially owned 239,909 shares of old Polonia Bancorp or 10.5% of the outstanding shares. They intend to vote those shares in favor of the plan of conversion.

Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares

We must sell a minimum of 1,221,875 shares to complete the conversion and offering. Purchases by our directors and executive officers and our employee stock ownership plan will count towards the minimum number of shares we must sell to complete the offering. If we do not receive orders for at least 1,221,875 shares of common stock in the subscription and community offerings, we may increase the purchase limitations and/or seek regulatory approval to extend the offering beyond [DATE 2], 2011 (provided that any such extension will require us to resolicit subscribers). Alternatively, we may terminate the offering, in which case we will promptly return your funds with interest calculated at Polonia Bank’s statement savings rate, which is currently         % per annum, and cancel all deposit account withdrawal authorizations.

How to Purchase Common Stock (page         )

In the subscription offering and the community offerings, you may pay for your shares by:

 

  1. personal check, bank check or money order made payable directly to “Polonia Bancorp” (Polonia Bank lines of credit checks and third-party checks of any type will not be accepted); or

 

  2. authorizing us to withdraw money from the types of Polonia Bank deposit accounts identified on the stock order form.

Polonia Bank is not permitted to lend funds (including funds drawn on a Polonia Bank line of credit) to anyone to purchase shares of common stock in the offering.

 

 

14


Table of Contents

You may not designate on your stock order form a direct withdrawal from a retirement account at Polonia Bank. Additionally, you may not designate on your stock order form a direct withdrawal from Polonia Bank accounts with check-writing privileges. Instead, a check must be provided. If you request a 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.

Personal checks will be immediately cashed, so the funds must be available within the account when your stock order form is received by us. Subscription funds submitted by check or money order will be held in a segregated account at Polonia Bank. We will pay interest calculated at Polonia Bank’s statement savings rate from the date those funds are received until completion or termination of the offering. Withdrawals from certificate of deposit accounts at Polonia Bank to purchase common stock in the offering may be made without incurring an early withdrawal penalty. All funds authorized for withdrawal from deposit accounts with Polonia Bank must be available within the deposit accounts at the time the stock order form is received. A hold will be placed on the amount of funds designated on your stock order form. Those funds will be unavailable to you during the offering; however, the funds will not be withdrawn from the accounts until the offering is completed and will continue to earn interest at the applicable contractual deposit account rate until the completion of the offering.

You may deliver your stock order form in one of three ways: by mail, using the stock order reply envelope provided; by overnight or hand-delivery to the Stock Information Center, which is located at our main office at 3993 Huntingdon Pike, Third Floor, Huntingdon Valley, Pennsylvania. Stock order forms will not be accepted at our other Polonia Bank offices and should not be mailed to Polonia Bank. Once submitted, your order is irrevocable. We are not required to accept copies or facsimiles of order forms.

Using IRA Funds to Purchase Shares in the Offering (page         )

You may be able to subscribe for shares of common stock using funds in your individual retirement account(s), or IRA. If you wish to use some or all of the funds in your Polonia Bank IRA or other retirement account, the applicable funds must first be transferred to a self-directed retirement account maintained by an unaffiliated institutional trustee or custodian, such as a brokerage firm. An annual fee may be payable to the new trustee. If you do not have such an account, you will need to establish one and transfer your funds before placing your stock order. Our Stock Information Center can give you guidance if you wish to place an order for stock using funds held in a retirement account at Polonia Bank or elsewhere. Because processing retirement account transactions takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the [DATE 1], 2011 offering deadline. Whether you may use retirement funds for the purchase of shares in the offering will depend on timing constraints and, possibly, limitations imposed by the institution where the funds are held.

Deadline for Ordering Stock in the Subscription and Community Offerings

The subscription offering will end at 4:00 p.m., Eastern time, on [DATE 1], 2011. If you wish to purchase shares, a properly completed and signed original stock order form, together with full payment for the shares of common stock, must be received (not postmarked) no later than this time. We expect that the community offering, if held, will terminate at the same time, although it may continue until [DATE 2], 2011, or longer if the Federal Reserve Board approves a later date. No single extension may be for more than 90 days. We are not required to provide notice to you of an extension unless we extend the offering beyond [DATE 2], 2011, in which case all subscribers in the subscription and community offerings will be notified and given the opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will promptly return your funds with interest calculated at Polonia Bank’s statement savings rate or cancel your deposit account withdrawal authorization. If we intend to sell fewer than 1,221,875 shares or more than 1,901,094 shares, we will promptly return all funds and set a new offering range. All subscribers will be notified and given the opportunity to place a new order.

Market for New Polonia Bancorp’s Common Stock (page         )

Old Polonia Bancorp’s common stock is quoted on the Over-the-Counter Bulletin Board under the symbol “PBCP.” After the offering, we intend to have the common stock of new Polonia Bancorp quoted on the Over-the-Counter Bulletin Board. Once shares of the common stock begin trading, you may contact a stock broker to

 

 

15


Table of Contents

buy or sell shares. There can be no assurance that persons purchasing the common stock in the offering will be able to sell their shares at or above the $8.00 offering price, and brokerage firms typically charge commissions related to the purchase or sale of securities.

Our Dividend Policy (page         )

Old Polonia Bancorp does not currently pay a cash dividend on its common stock. Assuming completion of the conversion and offering, our board of directors intends to adopt a policy of paying regular cash dividends. In determining the amount of any dividends, the board of directors will take into account our financial condition and results of operations, tax considerations, capital requirements and alternative uses for capital, industry standards and economic conditions. We cannot guarantee that we will pay dividends or that, if paid, we will not reduce or eliminate dividends in the future. See “Our Dividend Policy” in the prospectus for additional information.

Tax Consequences (page         )

As a general matter, the conversion will not be a taxable transaction for purposes of federal or state income taxes to us or persons who receive or exercise subscription rights. Existing shareholders of old Polonia Bancorp who receive cash in lieu of fractional share interests in shares of new Polonia Bancorp will recognize gain or loss equal to the difference between the cash received and the tax basis of the fractional share. Kilpatrick Townsend & Stockton LLP and S.R. Snodgrass, A.C. have issued us opinions to this effect, which are summarized on pages              through              of this prospectus.

Delivery of Prospectus

To ensure that each purchaser in the subscription and community offerings receives a prospectus at least 48 hours before the offering deadline, we may not mail prospectuses any later than five days before such date or hand-deliver prospectuses later than two days before that date. Stock order forms may only be delivered if accompanied or preceded by a prospectus. We are not obligated to deliver a prospectus or order form by means other than U.S. mail.

We will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights. The subscription offering and all subscription rights will expire at 4:00 p.m., Eastern time, on [DATE 1], 2011 whether or not we have been able to locate each person entitled to subscription rights.

Delivery of Stock Certificates (page         )

All shares of new Polonia Bancorp common stock being sold will be in book entry form. Paper stock certificates will not be issued. Information regarding shares of common stock sold in the subscription and community offerings will be mailed by regular mail to the persons entitled thereto at the certificate registration address noted on the stock order form, within five business days following completion of the conversion and offering.

Stock Information Center

Our banking office personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the offering, please call our Stock Information Center. The telephone number is (            )             -            . The Stock Information Center, which is located at our main office at 3993 Huntingdon Pike, Third Floor, Huntingdon Valley, Pennsylvania, is open Monday through Friday from 10:00 a.m. to 4:00 p.m., Eastern time. The Stock Information Center will be closed weekends and bank holidays.

 

 

16


Table of Contents

RISK FACTORS

You should consider carefully the following risk factors before purchasing shares of new Polonia Bancorp common stock.

Risks Related to Our Business

A return of recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.

Following a national home price peak in mid-2006, falling home prices and sharply reduced sales volumes, along with the collapse of the United States’ subprime mortgage industry in early 2007, significantly contributed to a recession that officially lasted until June 2009, although the effects continued thereafter. Dramatic declines in real estate values and high levels of foreclosures resulted in significant asset write-downs by financial institutions, which have caused many financial institutions to seek additional capital, to merge with other institutions and, in some cases, to fail. Concerns over the United States’ credit rating (which was recently downgraded by Standard & Poor’s), the European sovereign debt crisis, and continued high unemployment in the United States, among other economic indicators, have contributed to increased volatility in the capital markets and diminished expectations for the economy.

A return of recessionary conditions and/or continued negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Further declines in real estate values and sales volumes and continued high unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.

Changes in interest rates may hurt our profits and asset value.

Our net interest income is the interest we earn on loans and investments less the interest we pay on our deposits and borrowings. Our interest rate spread is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our borrowings. Changes in interest rates could adversely affect our interest rate spread and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our interest rate spread to expand or contract. Our liabilities are shorter in duration than our assets, so they will re-price faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs will rise faster than the yield we earn on our assets, causing our interest rate spread to contract – and our net interest income to decline—until the yield catches up. Additionally, an increase in interest rates may, among other things, reduce the demand for loans and our ability to originate loans and decrease loan repayment rates. We have benefited in recent periods from a favorable interest rate environment, but we believe that this environment cannot be sustained indefinitely and interest rates would be expected to rise as the economy improves.

Our policy is to originate for retention in our portfolio fixed-rate mortgage loans with maturities of up to 30 years. At June 30, 2011, $153.0 million, or 94.4% of our total loan portfolio maturing in more than one year, consisted of fixed-rate mortgage loans. This investment in fixed-rate mortgage loans exposes us to increased levels of interest rate risk.

Our cost of operations is high relative to our assets. Our failure to maintain or reduce our operating expenses could hurt our profits.

Our operating expenses, which consist primarily of salaries and employee benefits, occupancy, furniture and equipment expense, professional fees, federal deposit insurance premiums and other non-interest expenses totaled $4.4 million for the six months ended June 30, 2011 and $7.6 million and $6.6 million for the years ended December 31, 2010 and 2009, respectively. Our ratio of non-interest expense to average total assets was 3.16% for the six months ended June 30, 2011 (annualized) and 3.48% and 2.96% for the years ended December 31, 2010 and 2009, respectively. The increase in expenses during 2010 was primarily due to higher other operating expense and higher compensation and employee benefits expense. Our efficiency ratio was 62.26% for 2010 compared to 91.72% for 2009. The decrease in our efficiency ratio in 2010 was the result of a $4.6 million non-recurring gain related to the acquisition of Earthstar Bank.

Recently enacted regulatory reform may have a material impact on the Company’s operations.

On July 21, 2010, the President signed into law the Dodd-Frank Act. The Dodd-Frank Act restructures the regulation of depository institutions. Under the Dodd-Frank Act, the Office of Thrift Supervision, which formerly regulated the Bank, was

 

17


Table of Contents

merged into the Office of the Comptroller of the Currency. Savings and loan holding companies, including new Polonia Bancorp, will be regulated by the Board of Governors of the Federal Reserve Board System. Also included is the creation of a new federal agency to administer consumer protection and fair lending laws, a function that was formerly performed by the depository institution regulators. The federal preemption of state laws that was formerly accorded federally chartered depository institutions has been reduced as well and State Attorneys General now have greater authority to bring a suit against a federally chartered institution, such as Polonia Bank, for violations of certain state and federal consumer protection laws. The Dodd-Frank Act also imposes consolidated capital requirements on savings and loan holding companies effective in five years, which will limit our ability to borrow at the holding company and invest the proceeds from such borrowings as capital in Polonia Bank that could be leveraged to support additional growth. The Dodd-Frank Act contains various other provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased regulatory burden and compliance costs.

In addition to the enactment of the Dodd-Frank Act, the federal regulatory agencies recently have begun to take stronger supervisory actions against financial institutions that have experienced increased loan losses and other weaknesses as a result of the current economic crisis. The actions include the entering into of written agreements and cease and desist orders that place certain limitations on their operations. Federal bank regulators recently have also been using with more frequency their ability to impose individual minimal capital requirements on banks, which requirements may be higher than those imposed under the Dodd-Frank Act or which would otherwise qualify the bank as being “well capitalized” under the Office of the Comptroller of the Currency’s prompt corrective action regulations. If we were to become subject to a supervisory agreement or higher individual capital requirements, such action may have a negative impact on our ability to execute our business plans, as well as our ability to grow, pay dividends or engage in mergers and acquisitions and may result in restrictions in our operations.

If we conclude that the decline in value of any of our investment securities is other than temporary, we are required to write down the value of that security through a charge to earnings.

We review our investment securities portfolio at each quarter-end reporting period to determine whether the fair value is below the current carrying value. When the fair value of any of our investment securities has declined below its carrying value, we are required to assess whether the decline is other than temporary. If we conclude that the decline is other than temporary, we are required to write down the value of that security through a charge to earnings. As of June 30, 2011, our investment portfolio included securities with an amortized cost of $77.2 million and an estimated fair value of $78.6 million. Changes in the expected cash flows of these securities and/or prolonged price declines may result in our concluding in future periods that the impairment of these securities is other than temporary, which would require a charge to earnings to write down these securities to their fair value. Any charges for other-than-temporary impairment would not impact cash flow, tangible capital or liquidity.

Higher FDIC deposit insurance premiums and assessments will adversely affect our earnings.

The recent economic recession has caused a high level of bank failures, which has dramatically increased FDIC resolution costs and led to a significant reduction in the balance of the Deposit Insurance Fund. As a result, the FDIC has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. Increases in the base assessment rate have increased our deposit insurance costs and negatively impacted our earnings. In addition, in May 2009, the FDIC imposed a special assessment on all insured institutions. Our special assessment, which was reflected in earnings for the quarter ended June 30, 2009, was $103,000. In lieu of imposing an additional special assessment, the FDIC required all institutions to prepay their assessments for all of 2010, 2011 and 2012, which for us totaled $1,019,000. Additional increases in the base assessment rate or additional special assessments would negatively impact our earnings.

A significant percentage of our assets are invested in securities which typically have a lower yield than our loan portfolio.

Our results of operations are substantially dependent on our net interest income, which is the difference between the interest income earned on our interest-earning assets and the interest expense paid on our interest-bearing liabilities. At June 30, 2011, 27.9% of our assets were invested in investment and mortgage-backed securities. These investments yield substantially less than the loans we hold in our portfolio. While we have recently restructured our investment portfolio to increase our investment in higher yielding securities and, depending on market conditions, intend to invest a greater

 

18


Table of Contents

proportion of our assets in loans with the goal of increasing our net interest income, there can be no assurance that we will be able to increase the origination or purchase of loans acceptable to us or that we will be able to successfully implement this strategy.

We are dependent upon the services of key executives.

We rely heavily on our Chairman, President and Chief Executive Officer, Anthony J. Szuszczewicz, on our Chief Financial Officer and Corporate Secretary, Paul D. Rutkowski, and on our Senior Vice President, Kenneth J. Maliszewski. The loss of Messrs. Szuszczewicz, Rutkowski or Maliszewski could have a material adverse impact on our operations because, as a small company, we have fewer management-level personnel that have the experience and expertise to readily replace these individuals. Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition, and results of operations. We have employment agreements with Messrs. Szuszczewicz, Rutkowski and Maliszewski.

Strong competition within our market areas could hurt our profits and slow growth.

We face intense competition both in making loans and attracting deposits. This competition has made it more difficult for us to make new loans and at times has forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which would reduce net interest income. Competition also makes it more difficult to grow loans and deposits. As of June 30, 2011, we held less than 1.0% of the deposits in the Philadelphia metropolitan area. Competition also makes it more difficult to hire and retain experienced employees. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. 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. Our profitability depends upon our continued ability to compete successfully in our market areas. For more information about our market areas and the competition we face, see “Our Business—Market Areas” and “Our Business—Competition.”

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

We are subject to extensive regulation, supervision and examination by the Federal Reserve Board and the Office of the Comptroller of the Currency, our primary federal regulators, and by the FDIC, as insurer of our deposits. 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 insurance fund and the depositors and borrowers of Polonia Bank rather than for holders of Polonia Bancorp common stock. 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. 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.

We are subject to certain risks in connection with our recent acquisition of Earthstar Bank.

Our recent acquisition of certain assets and liabilities of Earthstar Bank in an FDIC-assisted transaction involves a number of risks and challenges, including:

 

   

Our ability to successfully retain and manage the loans we acquired;

 

   

Our ability to earn acceptable levels of interest and non-interest income from the acquired branches;

 

   

The diversion of management’s attention from existing operations; and

 

   

Our ability to address an increase in working capital requirements.

Additionally, no assurance can be given that the operation of the acquired branches would not adversely affect our existing profitability or that we would be able to manage any growth resulting from the transaction effectively.

Any of these factors, among others, could adversely affect our ability to achieve the anticipated benefits of the Earthstar Bank acquisition and could adversely affect our earnings and financial condition, perhaps materially.

 

19


Table of Contents

A significant portion of the loans acquired in the acquisition were commercial real estate loans. When these loans mature, the funds will likely be reinvested into our one- to four-family residential mortgage loan portfolio and our investment securities portfolio. We expect that our weighted average yield on interest-earning assets will decrease in future periods because one- to four-family mortgage loans and investment securities generally yield less than nonresidential mortgage loans and multi-family real estate loans.

The acquisition of assets and liabilities of financial institutions in FDIC-sponsored or assisted transactions involves risks similar to those faced when acquiring existing financial institutions, even though the FDIC might provide assistance to mitigate certain risks, e.g., by entering into loss sharing arrangements. However, because such acquisitions are structured in a manner that does not allow the time normally associated with evaluating and preparing for the integration of an acquired institution, we face the additional risk that the anticipated benefits of such an acquisition may not be realized fully or at all, or within the time period expected.

Risks Related to the Offering

Our share price may fluctuate, which may make it difficult for you to sell your common stock when you want or at prices you find attractive.

The market price of our common stock could be subject to significant fluctuations due to changes in sentiment in the market regarding our operations or business prospects. Factors that may affect market sentiment include:

 

   

operating results that vary from the expectations of our management or investors;

 

   

developments in our business or in the financial services sector generally;

 

   

regulatory or legislative changes affecting our industry generally or our business and operations;

 

   

operating and securities price performance of companies that investors consider to be comparable to us;

 

   

announcements of strategic developments, acquisitions, dispositions, financings and other material events by us or our competitors; and

 

   

changes in financial markets and national and local economies and general market conditions, such as interest rates and stock, commodity, credit or asset valuations or volatility.

Beginning in 2007 and through the present, the business environment for financial services firms has been extremely challenging. During this period, many publicly traded financial services companies have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance or prospects of such companies. We may experience market fluctuations that are not directly related to our operating performance but are influenced by the market’s perception of the state of the financial services industry in general and, in particular, the market’s assessment of general credit quality conditions, including default and foreclosure rates in the industry.

It is possible that further market and economic turmoil will occur in the near- or long-term, negatively affecting our business, financial condition and results of operations, as well as the price, trading volume and volatility of our common stock.

Additional expenses following the offering from new equity benefit plans will adversely affect our profitability.

Following the offering, we will recognize additional annual employee compensation expenses stemming from options and shares granted to employees, directors and executives under new benefit plans. Stock options and restricted stock may be granted under a new equity incentive plan adopted following the offering, if approved by shareholders. These additional expenses will adversely affect our profitability. We cannot determine the actual amount of these new stock-related compensation expenses at this time because applicable accounting practices generally require that these expenses be based on the fair market value of the options or shares of common stock at the date of the grant; however, they may be material. We recognize expenses for our employee stock ownership plan when shares are committed to be released to participants’ accounts and will recognize expenses for restricted stock awards and stock options over the vesting period of awards made to recipients. Pro forma benefits expenses for the six months ended June 30, 2011 were $79,000 at the maximum of the offering range on an after-tax basis, as set forth in the pro forma financial information under “Pro Forma Data” assuming the $8.00 per share purchase price as fair market value. Actual expenses, however, may be higher or lower, depending on the price of our common stock, the number of shares awarded under the plans and the timing of the implementation of the plans. For further discussion of these plans, see “Our Management—Benefit Plans.”

 

20


Table of Contents

Our stock price may decline when trading commences.

If you purchase shares in the offering, you might not be able to sell them later at or above the $8.00 purchase price. After the shares of our common stock begin trading, the trading price of the common stock will be determined by the marketplace, and will be influenced by many factors outside of our control, including prevailing interest rates, investor perceptions and general industry, geopolitical and economic conditions.

There may be a limited market for our common stock, which may adversely affect our stock price.

Although our common stock is traded on the Over-the-Counter Bulletin Board and will continue to be traded on the Over-the-Counter Bulletin Board following the conversion and offering, the shares are not currently actively traded and might not be actively traded in the future. If an active trading market for our common stock does not develop, you may not be able to sell all of your shares of common stock on short notice, and the sale of a large number of shares at one time could temporarily depress the market price. There also may be a wide spread between the bid and ask price for our common stock. When there is a wide spread between the bid and ask price, the price at which you may be able to sell our common stock may be significantly lower than the price at which you could buy it at that time.

Our return on equity will initially be low compared to other publicly traded financial institutions. A low return on equity may negatively impact the trading price of our common stock.

Net income divided by average equity, known as “return on equity,” is a ratio used by many investors to compare the performance of a financial institution with its peers. Following the offering, we expect that our return on equity will be low as a result of the additional capital that we will raise in the offering. Over time, we intend to use the net proceeds from the offering to increase earnings per share and book value per share, without assuming undue risk, with the goal of achieving a return on equity that is competitive with other similarly situated publicly held companies. This goal could take a number of years to achieve, and we might not attain it. Consequently, you should not expect a competitive return on equity in the near future. Failure to achieve a competitive return on equity might make an investment in our common stock unattractive to some investors and might cause our common stock to trade at lower prices than comparable companies with higher returns on equity. See “Pro Forma Data” for an illustration of the financial impact of the offering.

We have broad discretion in allocating the proceeds of the offering. Our failure to effectively utilize such proceeds would reduce our profitability.

We intend to contribute approximately 50% of the net proceeds of the offering to Polonia Bank and to use approximately 7.6% of the net proceeds at the maximum of the offering range to fund the loan to the employee stock ownership plan. We may use the proceeds retained by the holding company to, among other things, invest in securities, pay cash dividends or repurchase shares of common stock, subject to regulatory restrictions. Polonia Bank may use the portion of the proceeds that it receives to fund new loans, invest in securities and expand its business activities. We may also use the proceeds of the offering to open new branches, diversify our business and acquire other companies, although we have no specific plans to do so at this time. We have not allocated specific amounts of proceeds for any of these purposes, and we will have significant flexibility in determining how much of the net proceeds we apply to different uses and the timing of such applications. Our failure to utilize these funds effectively would reduce our profitability.

Issuance of shares for benefit programs may dilute your ownership interest.

We intend to adopt a new equity incentive plan following the offering, subject to shareholder approval. We may fund the equity incentive plan through the purchase of common stock in the open market (subject to regulatory restrictions) or by issuing new shares of common stock. If we fund the awards under the equity incentive plan with new shares of common stock, your ownership interest would be diluted by approximately 6.4%, assuming we award all of the shares and options available under the plan. See “Pro Forma Data” and “Our Management—Benefit Plans.”

The articles of incorporation and bylaws of new Polonia Bancorp and certain laws and regulations may prevent or make more difficult certain transactions, including a sale or merger of new Polonia Bancorp.

Provisions of the articles of incorporation and bylaws of new Polonia Bancorp, state corporate law and federal banking regulations may make it more difficult for companies or persons to acquire control of new Polonia Bancorp. As a result, our

 

21


Table of Contents

shareholders may not have the opportunity to participate in such a transaction and the trading price of our common stock may not rise to the level of other institutions that are more vulnerable to hostile takeovers. The factors that may discourage takeover attempts or make them more difficult include:

 

   

Articles of incorporation and bylaws. Provisions of the articles of incorporation and bylaws of new Polonia Bancorp may make it more difficult and expensive to pursue a takeover attempt that the board of directors opposes. Some of these provisions currently exist in the charter and bylaws of old Polonia Bancorp. These provisions also make more difficult the removal of current directors or management, or the election of new directors. These provisions include:

 

   

a limitation on the right to vote shares;

 

   

the election of directors to staggered terms of three years;

 

   

provisions regarding the timing and content of shareholder proposals and nominations;

 

   

provisions restricting the calling of special meetings of shareholders;

 

   

the absence of cumulative voting by shareholders in the election of directors;

 

   

the removal of directors only for cause; and

 

   

supermajority voting requirements for changes to some provisions of the articles of incorporation and bylaws.

 

   

Maryland anti-takeover statute. Under Maryland law, any person who acquires more than 10% of a Maryland corporation without prior approval of its board of directors is prohibited from engaging in any type of business combination with the corporation for a five-year period. Any business combination after the five-year period would be subject to supermajority shareholder approval or minimum price requirements.

 

   

Federal Reserve Board regulations. Federal Reserve Board regulations prohibit, for three years following the completion of a mutual-to-stock conversion, including a second-step conversion, the offer to acquire or the acquisition of more than 10% of any class of equity security of a converted institution without the prior approval of the Federal Reserve Board. See “Restrictions on Acquisition of New Polonia Bancorp.”

 

22


Table of Contents

A WARNING ABOUT FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which can be identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. 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 subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

 

   

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

 

   

changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

 

   

increased competitive pressures among financial services companies;

 

   

changes in consumer spending, borrowing and savings habits;

 

   

legislative or regulatory changes that adversely affect our business;

 

   

adverse changes in the securities markets; and

 

   

changes in accounting policies and practices, as may be adopted by bank regulatory agencies or the Financial Accounting Standards Board.

Any of the forward-looking statements that we make in this prospectus and in other public statements we make may later prove incorrect because of inaccurate assumptions, the factors illustrated above or other factors that we cannot foresee. Consequently, no forward-looking statement can be guaranteed.

Further information on other factors that could affect us are included in the section captioned “Risk Factors.”

 

23


Table of Contents

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The summary financial information presented below is derived in part from our consolidated financial statements. The following is only a summary and you should read it in conjunction with the consolidated financial statements and notes beginning on page F-1. The information at December 31, 2010 and 2009 and for the years then ended is derived in part from the audited consolidated financial statements that appear in this prospectus. The information at December 31, 2008 and for the year then ended is derived in part from the audited consolidated financial statements that do not appear in this prospectus. The information presented below does not include the financial condition, results of operations or other data of Polonia MHC. The information at June 30, 2011 and 2010 and for the six months ended June 30, 2011 and 2010 was not audited, but in the opinion of management, reflects all adjustments necessary for a fair presentation. All of these adjustments are normal and recurring. The results of operations for the six months ended June 30, 2011 are not necessarily indicative of results of operations that may be expected for the year ended December 31, 2011.

 

     At or
For the Six Months Ended
June 30,
    At
December 31,
 
     2011      2010     2010     2009      2008  
(In thousands, except per share data)                                 

Financial Condition Data:

            

Total assets

   $ 279,525       $ 215,215      $ 298,829      $ 218,071       $ 220,236   

Securities available-for-sale

     18,523         24,689        27,350        30,602         37,789   

Securities held-to-maturity

     59,400         16,621        26,128        13,780         —     

Loans receivable, net

     167,850         145,061        170,473        150,177         163,759   

Cash and cash equivalents

     13,595         13,839        54,005        8,427         4,671   

Deposits

     217,035         158,891        239,706        164,207         164,586   

FHLB Advances – short-term

     —           —          —          —           4,000   

FHLB Advances – long-term

     31,378         28,703        28,426        26,474         24,553   

Stockholders’ equity

     27,667         24,251        27,260        23,845         23,604   

Book value per common share

     8.76         7.68        8.63        7.55         7.40   

Operating Data:

            

Interest income

   $ 6,589       $ 5,059      $ 9,845      $ 10,707       $ 11,069   

Interest expense

     1,745         1,878        3,675        5,000         5,312   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income

     4,844         3,181        6,169        5,707         5,757   

Provision (credit) for loan losses

     720         (212     (115     252         85   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income after provision (credits) for loan losses

     4,124         3,393        6,285        5,455         5,672   

Non-interest income

     763         947        6,110        1,444         85   

Non-interest expense

     4,448         4,021        7,645        6,559         6,101   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Income (loss) before income taxes

     439         320        4,750        340         (344

Provision (benefit) for income taxes

     84         5        1,586        9         (98
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net income (loss)

   $ 355       $ 315      $ 3,164      $ 331       $ (246
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Basic and diluted earnings (loss) per share

   $ 0.12       $ 0.10      $ 1.04      $ 0.11       $ (0.08

 

24


Table of Contents
     At or
For the Six  Months Ended
June 30,
    At or
For the Year Ended
December 31,
 
(In thousands, except per share data)    2011     2010     2010     2009     2008  

Performance Ratios (1):

          

Return on average assets

     0.25     0.29     1.44     0.15     (0.12 )% 

Return on average equity

     2.84        2.61        13.00        1.60        (1.04

Interest rate spread (2)

     3.63        3.01        2.84        2.55        2.63   

Net interest margin (3)

     3.73        3.18        3.01        2.74        2.89   

Non-interest expense to average assets

     3.16        3.74        3.48        2.96        2.89   

Efficiency ratio (4)

     79.34        97.40        62.26        91.72        104.43   

Average interest-earning assets to average interest-bearing liabilities

     106.89        109.28        109.42        107.95        109.76   

Average equity to average assets

     8.90        11.22        11.07        9.36        11.15   

Capital Ratios (5):

          

Tangible capital

     9.68        9.63        8.92        9.34        9.06   

Core capital

     9.68        9.63        8.92        9.34        9.06   

Total risk-based capital

     20.33        20.35        18.18        19.78        18.73   

Asset Quality Ratios (Excluding Covered Assets):

          

Allowance for loan losses on non-covered loans as a percent of total non-covered loans

     0.63     0.62     0.60     0.74     0.52

Allowance for loan losses on non-covered loans as a percent of non-performing non-covered loans

     80.93        42.22        81.56        40.66        117.70   

Net charge-offs (recoveries) to average outstanding non-covered loans during the period

     (0.01     (0.01     0.11        (0.01     (0.03

Non-performing non-covered loans as a percent of total non-covered loans

     0.78        1.47        0.74        1.81        0.44   

Non-performing non-covered assets as a percent of total non-covered assets

     0.44        1.00        0.50        1.26        0.33   

Asset Quality Ratios (All Assets):

          

Allowance for loan losses as a percent of total loans

     0.92     0.62     0.49     0.74     0.52

Allowance for loan losses as a percent of non-performing loans

     78.72        42.22        39.68        40.66        117.70   

Net charge-offs (recoveries) to average outstanding loans during the period

     (0.01     (0.01     0.11        (0.01     (0.03

Non-performing loans as a percent of total loans

     1.17        1.47        1.23        1.81        0.44   

Non-performing assets as a percent of total assets

     0.71        1.00        0.81        1.26        0.33   

Other Data:

          

Number of:

          

Real estate loans outstanding

     1,392        943        1,368        968        1,082   

Deposit accounts

     10,635        8,320        12,131        8,729        9,468   

Full-service offices

     7        5        9        5        5   

 

(1) Performance ratios for the six-month periods have been annualized.
(2) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.
(3) Represents net interest income as a percent of average interest-earning assets.
(4) Represents non-interest expense divided by the sum of net interest income and non-interest income.
(5) Ratios are for Polonia Bank.

 

25


Table of Contents

USE OF PROCEEDS

The following table shows how we intend to use the net proceeds of the offering. The actual net proceeds will depend on the number of shares of common stock sold in the offering and the expenses incurred in connection with the offering. Payments for shares made through withdrawals from deposit accounts at Polonia Bank will reduce Polonia Bank’s deposits and will not result in the receipt of new funds for investment. See “Pro Forma Data” for the assumptions used to arrive at these amounts.

 

    Minimum of
Offering Range
    Midpoint of
Offering Range
    Maximum of
Offering Range
    15% Above Maximum of
Offering Range
 
    1,221,875
Shares at
$8.00 per
Share
    Percent of Net
Proceeds
    1,437,500
Shares at
$8.00 per
Share
    Percent of
Net Proceeds
    1,653,125
Shares at
$8.00 per
Share
    Percent of Net
Proceeds
    1,901,094
Shares at
$8.00 per
Share
    Percent of Net
Proceeds
 
    (Dollars in thousands)  

Offering proceeds

  $ 9,775        $ 11,500        $ 13,225        $ 15,209     

Less: offering expenses

    (1,304       (1,348       (1,391       (1,440  
 

 

 

     

 

 

     

 

 

     

 

 

   

Net offering proceeds

    8,471        100.0     10,152        100.0     11,834        100.0     13,769        100.0

Less:

               

Proceeds contributed to Polonia Bank

    4,236        50.0        5,076        50.0        5,917        50.0        6,884        50.0   

Proceeds used for loan to employee stock ownership plan

    661        7.8        777        7.7        894        7.6        1,028        7.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Proceeds remaining for new Polonia Bancorp

  $ 3,575        42.2   $ 4,299        42.3   $ 5,022        42.4   $ 5,856        42.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We initially intend to invest the proceeds retained from the offering at new Polonia Bancorp in short-term investments, such as U.S. treasury and government agency securities and cash and cash equivalents. The actual amounts to be invested in different instruments will depend on the interest rate environment and new Polonia Bancorp’s liquidity requirements. In the future, new Polonia Bancorp may liquidate its investments and use those funds:

 

   

to pay dividends to shareholders;

 

   

to repurchase shares of its common stock, subject to regulatory restrictions;

 

   

to finance the possible acquisition of financial institutions or other businesses that are related to banking as opportunities arise, primarily in or adjacent to our existing market areas; and

 

   

for general corporate purposes, including contributing additional capital to Polonia Bank.

Under current Federal Reserve Board regulations, we may not repurchase shares of our common stock during the first year following completion of the conversion and offering, except to fund equity benefit plans other than stock options or, with prior regulatory approval, when extraordinary circumstances exist. For a discussion of our dividend policy and regulatory matters relating to the payment of dividends, see “Our Dividend Policy.”

Polonia Bank initially intends to invest the proceeds it receives from the offering, which is shown in the table above as the amount contributed to Polonia Bank, in short-term investments. Over time, Polonia Bank may use the proceeds that it receives from the offering:

 

   

to fund new loans;

 

   

to invest in securities;

 

   

to finance the possible expansion of its business activities, including developing new branch locations; and

 

   

for general corporate purposes.

We may need regulatory approvals to engage in some of the activities listed above.

We currently do not have any specific plans for any expansion or diversification activities that would require funds from this offering. Consequently, we currently anticipate that the proceeds of the offering contributed to Polonia Bank will be used

 

26


Table of Contents

to fund new loans. We expect that much of the loan growth will occur in our one- to four-family residential mortgage portfolio, but we have not allocated specific dollar amounts to any particular area of our portfolio. The amount of time that it will take to deploy the proceeds of the offering into loans will depend primarily on the level of loan demand.

Except as described above, we have no specific plans for the investment of the proceeds of the offering and have not allocated a specific portion of the proceeds to any particular use. For a discussion of our business reasons for undertaking the offering, see “The Conversion and Offering—Reasons for the Conversion and Offering.”

OUR DIVIDEND POLICY

Old Polonia Bancorp does not currently pay a cash dividend on its common stock. After the conversion and offering, our board of directors intends to adopt a policy of paying regular cash dividends. In determining the amount of any dividends, the board of directors will take into account our financial condition and results of operations, tax considerations, capital requirements and alternative uses for capital, the number of shares issued in the offering, industry standards and economic conditions. We cannot guarantee that we will pay dividends or that, if paid, we will not reduce or eliminate dividends in the future.

New Polonia Bancorp is subject to Maryland law, which generally permits a corporation to pay dividends on its common stock unless, after giving effect to the dividend, the corporation would be unable to pay its debts as they become due in the usual course of its business or the total assets of the corporation would be less than its total liabilities. Pursuant to Federal Reserve Board regulations, new Polonia Bancorp will not be required to obtain prior Federal Reserve Board approval to pay a dividend unless the declaration and payment of a dividend could raise supervisory concerns about the safe and sound operation of new Polonia Bancorp and Polonia Bank, where the dividend declared for a period is not supported by earnings for that period, or where we plan to declare a material increase in our common stock dividend.

Our ability to pay dividends to shareholders may depend, in part, upon capital distributions we receive from Polonia Bank, earnings, if any, from our lending and investment portfolios and other assets and earnings from the investment of the net proceeds from the offering that we retain. We expect that Polonia Bank will make capital distributions to new Polonia Bancorp and that such funds will be utilized by new Polonia Bancorp to pay dividends, repurchase shares of its common stock and/or acquire other financial institutions or financial services companies. Office of the Comptroller of the Currency and Federal Reserve Board regulations limit dividends and other distributions from Polonia Bank to us. No insured depository institution may make a capital distribution if, after making the distribution, the institution would be undercapitalized or if the proposed distribution raises safety and soundness concerns. In addition, any payment of dividends by Polonia Bank to new Polonia Bancorp that would be deemed to be drawn out of Polonia Bank’s bad debt reserves would require the payment of federal income taxes by Polonia Bank at the then current income tax rate on the amount deemed distributed. See “Federal and State Taxation—Federal Income Taxation” and note 11 of the notes to consolidated financial statements included elsewhere in this prospectus. New Polonia Bancorp does not contemplate any distribution by Polonia Bank that would result in this type of tax liability.

MARKET FOR THE COMMON STOCK

The common stock of old Polonia Bancorp is currently quoted on the Over-the-Counter Bulletin Board under the symbol “PBCP.” Upon completion of the conversion and offering, the shares of common stock of new Polonia Bancorp will replace old Polonia Bancorp’s common stock. After the offering, we intend to have the common stock of new Polonia Bancorp quoted on the Over-the-Counter Bulletin Board. The shares of common stock of old Polonia Bancorp and those of new Polonia Bancorp represent different economic interests and will reflect the effects of different financial results of operations and financial condition.

The development of a public market having the desirable characteristics of depth, liquidity and orderliness 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 our common stock at any particular time may be limited, which may have an adverse effect on the price at which our common stock can be sold. There can be no assurance that persons purchasing the common stock will be able to sell their shares at or above the $8.00 price per share in the offering. Purchasers of our common stock should recognize that there are risks involved in their investment and that there may be a limited trading market in the common stock.

 

27


Table of Contents

The following table sets forth high and low sales prices for old Polonia Bancorp’s common stock for the periods indicated.

 

     High      Low  

Year Ending December 31, 2011:

     

Third Quarter

     

Second Quarter

   $ 6.05       $ 5.75   

First Quarter

     6.50         5.50   

Year Ended December 31, 2010:

     

Fourth Quarter

   $ 6.12       $ 5.00   

Third Quarter

     6.12         5.00   

Second Quarter

     6.49         5.30   

First Quarter

     7.00         4.80   

Year Ended December 31, 2009:

     

Fourth Quarter

   $ 7.75       $ 3.20   

Third Quarter

     7.50         6.10   

Second Quarter

     7.95         7.50   

First Quarter

     8.75         7.50   

At June 30, 2011, old Polonia Bancorp had approximately 184 shareholders of record, not including those who hold shares in “street name.” On the effective date of the conversion, all publicly held shares of old Polonia Bancorp common stock, including shares held by our officers and directors, will be converted automatically into and become the right to receive a number of shares of new Polonia Bancorp common stock determined pursuant to the exchange ratio. See “The Conversion and Offering—Share Exchange Ratio for Current Shareholders.” The above table reflects actual prices and has not been adjusted to reflect the exchange ratio. Options to purchase shares of old Polonia Bancorp common stock will be converted into options to purchase a number of shares of new Polonia Bancorp common stock adjusted pursuant to the exchange ratio, for the same aggregate exercise price.

 

28


Table of Contents

CAPITALIZATION

The following table presents the historical capitalization of old Polonia Bancorp at June 30, 2011 and the capitalization of new Polonia Bancorp reflecting the offering (referred to as “pro forma” information). The pro forma capitalization gives effect to the assumptions listed under “Pro Forma Data,” based on the sale of the number of shares of common stock indicated in the table. This table does not reflect the issuance of additional shares as a result of the exercise of options granted under the 2007 Equity Incentive Plan or the proposed new equity incentive plan. A change in the number of shares to be issued in the offering may materially affect pro forma capitalization. We must sell a minimum of 1,221,875 shares to complete the offering. The information presented in the table below should be read in conjunction with the consolidated financial statements and notes thereto beginning at page F-1.

 

           Pro Forma Capitalization Based Upon the Sale of  
     At June 30,
2011
    Minimum of
Offering
Range
1,221,875
Shares at
$8.00 per
Share
    Midpoint of
Offering
Range
1,437,500
Shares at
$8.00 per
Share
    Maximum of
Offering
Range
1,653,125
Shares at

$8.00 per
Share
    15% Above
Maximum of
Offering Range
1,901,094
Shares at

$8.00 per
Share
 
     (Dollars in thousands)  

Deposits (1)

   $ 217,035      $ 217,035      $ 217,035      $ 217,035      $ 217,035   

Borrowings

     31,378        31,378        31,378        31,378        31,378   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits and borrowed funds

   $ 248,413      $ 248,413      $ 248,413      $ 248,413      $ 248,413   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

          

Preferred stock:

          

1,000,000 shares, $0.01 par value per share authorized; none issued or outstanding

     —          —          —          —          —     

Common stock:

          

14,000,000 shares, $0.01 par value per share, authorized; specified number of shares assumed to be issued and outstanding (2)

   $ 33      $ 21      $ 25      $ 29      $ 33   

Additional paid-in capital

     13,949        22,432        24,109        25,787        27,718   

Retained earnings (3)

     15,357        15,357        15,357        15,357        15,357   

Mutual holding company capital consolidation

     —          102        102        102        102   

Accumulated comprehensive income, net

     498        498        498        498        498   

Less:

          

Treasury stock

     (1,262     (1,262     (1,262     (1,262     (1,262

Common stock acquired by employee stock ownership plan (4)

     (908     (1,569     (1,685     (1,802     (1,936

Common stock to be acquired by equity incentive plan (5)

     —          (330     (389     (447     (514
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

   $ 27,667      $ 35,249      $ 36,755      $ 38,262      $ 39,996   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity as a percentage of total assets

     9.90     12.28     12.74     13.19     13.71

 

(1) Does not reflect withdrawals from deposit accounts for the purchase of common stock in the offering. Withdrawals to purchase common stock will reduce pro forma deposits by the amounts of the withdrawals.
(2) Reflects total issued and outstanding shares of 2,121,369, 2,495,728, 2,870,087 and 3,300,600 at the minimum, midpoint, maximum, and 15% above the maximum of the offering range, respectively.
(3) Retained earnings are restricted by applicable regulatory capital requirements.
(4) Assumes that 6.76% of the common stock sold in the offering will be acquired by the employee stock ownership plan with funds borrowed from new Polonia Bancorp. Under U.S. generally accepted accounting principles, the amount of common stock to be purchased by the employee stock ownership plan represents unearned compensation and, accordingly, is reflected as a reduction of capital. As shares are released to plan participants’ accounts, a compensation expense will be charged, along with related tax benefit, and a reduction in the charge against capital will occur. Since the funds are borrowed from new Polonia Bancorp, the borrowing will be eliminated in consolidation and no liability or interest expense will be reflected in the financial statements of new Polonia Bancorp. See “Our Management—Benefit Plans—Employee Stock Ownership Plan.”

 

29


Table of Contents
(5) Assumes the purchase in the open market at $8.00 per share, for restricted stock awards under the proposed equity incentive plan, of a number of shares equal to 3.38 of the shares of common stock sold in the offering. The shares are reflected as a reduction of stockholders’ equity. The equity incentive plan will be submitted to shareholders for approval at a meeting following the offering. See “Risk Factors—Issuance of shares for benefit programs may dilute your ownership interest,” “Pro Forma Data” and “Our Management—Equity Plans—Future Equity Incentive Plan.”

 

30


Table of Contents

REGULATORY CAPITAL COMPLIANCE

At June 30, 2011, Polonia Bank exceeded all regulatory capital requirements and was considered a “well-capitalized” bank. The following table presents Polonia Bank’s capital position relative to its regulatory capital requirements at June 30, 2011, on a historical and a pro forma basis. The table reflects receipt by Polonia Bank of 50% of the net proceeds of the offering. For purposes of the table, the amount expected to be borrowed by the employee stock ownership plan has been deducted from pro forma regulatory capital. For a discussion of the assumptions underlying the pro forma capital calculations presented below, see “Use of Proceeds,” “Capitalization” and “Pro Forma Data.” The definitions of the terms used in the table are those provided in the capital regulations issued by the Office of the Comptroller of the Currency. For a discussion of the capital standards applicable to Polonia Bank, see “Regulation and Supervision—Federal Banking Regulation—Capital Requirements.”

 

          Pro Forma at June 30, 2011  
    Historical at
June 30, 2011
    Minimum of Offering Range
1,221,875 Share

at $8.00 per Share
    Midpoint of Offering Range
1,437,500 Share

at $8.00 per Share
    Maximum of Offering
Range 1,653,125
Share

at $8.00 per Share
    15% Above Maximum of
Offering Range
1,901,094 Shares at
$8.00 per Share
 
    Amount     Percent of
Assets (1)
    Amount     Percent of
Assets
    Amount     Percent of
Assets
    Amount     Percent of
Assets
    Amount     Percent of
Assets
 
    (Dollars in thousands)  

Total equity under generally accepted accounting principles

  $ 27,500        9.84   $ 30,846        10.86   $ 31,512        11.06   $ 32,178        11.26   $ 32,944        11.49
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Core capital:

                   

Actual

  $ 27,001        9.68   $ 30,348        10.72   $ 31,014        10.92   $ 31,680        11.12   $ 32,446        11.35

Requirement

    11,160        4.00        11,329        4.00        11,363        4.00        11,396        4.00        11,435        4.00   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

  $ 15,841        5.68   $ 19,019        6.72   $ 19,651        6.92   $ 20,284        7.12   $ 21,011        7.35
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tier 1 risk-based capital:

                   

Actual (2)

  $ 27,001        19.23   $ 30,348        21.48   $ 31,014        21.96   $ 31,680        22.37   $ 32,446        22.88

Requirement

    5,616        4.00        5,650        4.00        5,657        4.00        5,664        4.00        5,671        4.00   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

  $ 21,385        15.23   $ 24,698        17.48   $ 25,357        17.96   $ 26,016        18.37   $ 26,775        18.88
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total risk-based capital:

                   

Actual (2)

  $ 28,550        20.33   $ 31,884        22.57   $ 32,550        23.02   $ 33,216        23.46   $ 33,982        23.97

Requirement

    11,233        8.00        11,301        8.00        11,314        8.00        11,327        8.00        11,343        8.00   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

  $ 17,317        12.33   $ 20,583        14.57   $ 21,236        15.02   $ 21,889        15.46   $ 22,639        15.97
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of capital contributed to Polonia Bank:

        102          102          102          102     

Net proceeds contributed to Polonia Bank

        4,236          5,076          5,917          6,884     

Less common stock acquired by ESOP

        (661       (777       (894       (1,028  

Less common stock acquired by equity incentive plan

        (330       (389       (447       (514  
     

 

 

     

 

 

     

 

 

     

 

 

   

Pro forma increase in GAAP and regulatory capital

      $ 3,346        $ 4,012        $ 4,678        $ 5,444     
     

 

 

     

 

 

     

 

 

     

 

 

   

 

(1) Core capital levels are shown as a percentage of adjusted total assets of $279.0 million. Risk-based capital levels are shown as a percentage of risk-weighted assets of $140.4 million.
(2) Pro forma amounts and percentages include capital contributed to Polonia Bank from the offering and assume net proceeds are invested in assets that carry a 20% risk-weighting.

 

31


Table of Contents

PRO FORMA DATA

The following tables illustrate the pro forma impact of the conversion and offering on our net income and stockholders’ equity based on the sale of common stock at the minimum, the midpoint, the maximum and 15% 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. Net proceeds indicated in the following tables are based upon the following assumptions, although actual expenses may vary from these estimates:

 

   

50% of the shares of common stock will be sold in the subscription and community offerings and 50% of the shares will be sold in a syndicated community offering;

 

   

Our employee stock ownership plan will purchase a number of shares equal to 6.76% of the shares sold in the offering with a loan from new Polonia Bancorp that will be repaid in equal installments over 15 years;

 

   

Sandler O’Neill & Partners, L.P. will receive a management fee of $150,000 and will be reimbursed for all reasonable out of pocket expenses, including attorney’s fees, up to a maximum of $100,000;

 

   

The sales commission for shares sold in the syndicated community offering will be equal to 5.0% of the actual purchase price of each share sold in the syndicated community offering; and

 

   

Total expenses of the offering, excluding fees and reimbursable expenses paid to Sandler O’Neill & Partners, L.P., will be approximately $810,000.

Pro forma net income for the six months ended June 30, 2011 and the year ended December 31, 2010 has been calculated as if the offering were completed at the beginning of each period, and the net proceeds had been invested at 1.76%, which represents the rate of the five-year United States Treasury security at June 30, 2011. We believe that the rate of the two-year United States Treasury security represents a more realistic yield on the investment of the offering proceeds 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 required by Federal Reserve Board regulations.

A pro forma after-tax return of 1.06% is used for the six months ended June 30, 2011 and the year ended December 31, 2010, respectively, after giving effect to a combined federal and state income tax rate of 40.0%. The actual rate experienced by new Polonia Bancorp may vary. Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the number of shares of common stock indicated in the tables.

When reviewing the following tables you should consider the following:

 

   

Since funds on deposit at Polonia Bank may be withdrawn to purchase shares of common stock, those funds will not result in the receipt of new funds for investment. The pro forma tables do not reflect withdrawals from deposit accounts.

 

   

Historical per share amounts have been computed as if the shares of common stock expected to be issued in the offering had been outstanding at the beginning of the period covered by the table. However, neither historical nor pro forma stockholders’ equity has been adjusted to reflect the investment of the estimated net proceeds from the sale of the shares in the offering, the additional employee stock ownership plan expense or the proposed equity incentive plan.

 

   

Pro forma stockholders’ equity (“book value”) represents the difference between the stated amounts of our assets and liabilities. Book value amounts do not represent fair market values or amounts available for distribution to shareholders in the unlikely event of liquidation. The amounts shown do not reflect the federal income tax consequences of the restoration to income of Polonia Bank’s special bad debt reserves for income tax purposes or liquidation accounts, which would be required in the unlikely event of liquidation. See “Federal and State Taxation.”

 

   

The amounts shown as pro forma stockholders’ equity per share do not represent possible future price appreciation of our common stock.

The following pro forma data, which is based on old Polonia Bancorp’s stockholders’ equity at June 30, 2011 and December 31, 2010 and net income for the six months ended June 30, 2011, may not represent the actual financial effects of the offering or our operating results after the offering. The pro forma data relies exclusively on the assumptions outlined above and in the notes to the pro forma tables. The pro forma data does not represent the fair market value of our common stock, the current fair market value of our assets or liabilities, or the amount of money that would be available for distribution to shareholders if we were to be liquidated after the conversion.

 

32


Table of Contents

At or For the Six Months Ended June 30, 2011

 

    Minimum
of

Offering
Range
1,221,875
Shares at
$8.00 per
Share
    Midpoint
of

Offering
Range
1,437,500
Shares at
$8.00 per
Share
    Maximum
of

Offering
Range
1,653,125
Shares at
$8.00 per
Share
    15% Above
Maximum
of

Offering
Range
1,901,094
Shares at
$8.00 per
Share
 
    (Dollars in thousands, except per share amounts)  

Gross proceeds

  $ 9,775      $ 11,500      $ 13,225      $ 15,209   

Plus: shares issued in exchange for shares of old Polonia Bancorp

    7,196        8,466        9,736        11,196   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma market capitalization

  $ 16,971      $ 19,966      $ 22,961      $ 26,405   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross proceeds

    9,775        11,500        13,225        15,209   

Less: estimated expenses

    (1,304     (1,348     (1,391     (1,440
 

 

 

   

 

 

   

 

 

   

 

 

 

Estimated net proceeds

    8,471        10,152        11,834        13,769   

Less: common stock acquired by employee stock ownership plan (1)

    (661     (777     (894     (1,028

Less: common stock to be acquired by equity incentive plan (2)

    (330     (389     (447     (514

Assets acquired from mutual holding company

    102        102        102        102   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net proceeds

  $ 7,582      $ 9,088      $ 10,595      $ 12,329   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Net Income:

       

Pro forma net income:

       

Historical

  $ 355      $ 355      $ 355      $ 355   

Pro forma income on net proceeds

    40        48        56        65   

Pro forma income on assets from mutual holding company

    1        1        1        1   

Less: pro forma employee stock ownership plan expense (1)

    (13     (16     (18     (21

Less: pro forma restricted stock award expense (2)

    (20     (24     (27     (31

Less: pro forma stock option expense (3)

    (25     (30     (34     (39
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income

  $ 338      $ 335      $ 333      $ 330   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share:

       

Historical

  $ 0.17      $ 0.15      $ 0.13      $ 0.11   

Pro forma income on net proceeds

    0.02        0.02        0.02        0.02   

Less: pro forma employee stock ownership plan expense (1)

    (0.01     (0.01     (0.01     (0.01

Less: pro forma restricted stock award expense (2)

    (0.01     (0.01     (0.01     (0.01

Less: pro forma stock option expense (3)

    (0.01     (0.01     (0.01     (0.01
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share

  $ 0.16      $ 0.14      $ 0.12      $ 0.10   
 

 

 

   

 

 

   

 

 

   

 

 

 

Offering price as a multiple of pro forma net income per share

    25.00x        28.57x        33.33x        40.00x   

Number of shares used to calculate pro forma net income per share (4)

    2,041,523        2,401,792        2,762,061        3,176,370   

Pro Forma Stockholders’ equity:

       

Pro forma stockholders’ equity (book value):

       

Historical

  $ 27,667      $ 27,667      $ 27,667      $ 27,667   

Assets received from mutual holding company

    102        102        102        102   

Estimated net proceeds

    8,471        10,152        11,834        13,769   

Less: common stock acquired by employee stock ownership plan (1)

    (661     (777     (894     (1,028

Less: common stock to be acquired by equity incentive plan (2)

    (330     (389     (447     (514
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity

  $ 35,249      $ 36,755      $ 38,262      $ 39,996   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity per share:

       

Historical

  $ 13.04      $ 11.09      $ 9.64      $ 8.38   

Assets received from mutual holding company

    0.05        0.04        0.04        0.03   

Estimated net proceeds

    3.99        4.07        4.12        4.17   

Less: common stock acquired by employee stock ownership plan (1)

    (0.31     (0.31     (0.31     (0.31

Less: common stock to be acquired by equity incentive plan (2)

    (0.16     (0.16     (0.16     (0.16
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity per share

  $ 16.61      $ 14.73      $ 13.33      $ 12.11   
 

 

 

   

 

 

   

 

 

   

 

 

 

Offering price as a percentage of pro forma stockholders’ equity per share

    48.16     54.31     60.02     66.06

Number of shares used to calculate pro forma stockholders’ equity per share (4)

    2,121,369        2,495,728        2,870,087        3,300,600   

 

33


Table of Contents

At or For the Year Ended December 31, 2010

 

    Minimum
of

Offering
Range
1,221,875
Shares at
$8.00 per
Share
    Midpoint
of

Offering
Range
1,437,500
Shares at
$8.00 per
Share
    Maximum
of

Offering
Range
1,653,125
Shares at
$8.00 per
Share
    15% Above
Maximum
of

Offering
Range
1,901,094
Shares at
$8.00 per
Share
 
    (Dollars in thousands, except per share amounts)  

Gross proceeds

  $ 9,775      $ 11,500      $ 13,225      $ 15,209   

Plus: shares issued in exchange for shares of old Polonia Bancorp

    7,196        8,466        9,736        11,196   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma market capitalization

  $ 16,971      $ 19,966      $ 22,961      $ 26,405   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross proceeds

  $ 9,775      $ 11,500      $ 13,225      $ 15,209   

Less: estimated expenses

    (1,304     (1,348     (1,391     (1,440

Estimated net proceeds

    8,471        10,152        11,834        13,769   

Less: common stock acquired by employee stock ownership plan (1)

    (661     (777     (894     (1,028

Less: common stock to be acquired by equity incentive plan (2)

    (330     (389     (447     (514

Assets acquired from mutual holding company

    102        102        102        102   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net proceeds

  $ 7,582      $ 9,088      $ 10,595      $ 12,329   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Net Income:

       

Pro forma net income:

       

Historical (5)

  $ 3,164      $ 3,164      $ 3,164      $ 3,164   

Pro forma income on net proceeds

    79        95        111        129   

Pro forma income on assets from mutual holding company

    —          —          —          —     

Less: pro forma employee stock ownership plan expense (1)

    (26     (31     (36     (41

Less: pro forma restricted stock award expense (2)

    (40     (47     (54     (62

Less: pro forma stock option expense (3)

    (50     (59     (68     (78
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income

  $ 3,127      $ 3,122      $ 3,117      $ 3,112   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share:

       

Historical (5)

  $ 1.55      $ 1.32      $ 1.14      $ 0.99   

Pro forma income on net proceeds

    0.04        0.04        0.04        0.04   

Less: pro forma employee stock ownership plan expense (1)

    (0.01     (0.01     (0.01     (0.01

Less: pro forma restricted stock award expense (2)

    (0.02     (0.02     (0.02     (0.02

Less: pro forma stock option expense (3)

    (0.02     (0.02     (0.02     (0.02
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share

  $ 1.54      $ 1.31      $ 1.13      $ 0.98   
 

 

 

   

 

 

   

 

 

   

 

 

 

Offering price as a multiple of pro forma net income per share (5)

    5.19x        6.11x        7.08x        8.16x   

Number of shares used to calculate pro forma net income per share (4)

    2,044,277        2,405,031        2,765,786        3,180,654   

Pro Forma Stockholders’ equity:

       

Pro forma stockholders’ equity (book value):

       

Historical

  $ 27,260      $ 27,260      $ 27,260      $ 27,260   

Assets received from mutual holding company

    102        102        102        102   

Estimated net proceeds

    8,471        10,152        11,834        13,769   

Less: common stock acquired by employee stock ownership plan (1)

    (661     (777     (894     (1,028

Less: common stock to be acquired by equity incentive plan (2)

    (330     (389     (447     (514
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity

  $ 34,842      $ 36,348      $ 37,855      $ 39,589   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity per share:

       

Historical

  $ 12.85      $ 10.92      $ 9.50      $ 8.26   

Assets received from mutual holding company

    0.05        0.04        0.04        0.03   

Estimated net proceeds

    3.99        4.07        4.12        4.17   

Less: common stock acquired by employee stock ownership plan (1)

    (0.31     (0.31     (0.31     (0.31

Less: common stock to be acquired by equity incentive plan (2)

    (0.16     (0.16     (0.16     (0.16
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity per share

  $ 16.42      $ 14.56      $ 13.19      $ 12.00   
 

 

 

   

 

 

   

 

 

   

 

 

 

Offering price as a percentage of pro forma stockholders’ equity per share

    48.72     54.95     60.65     66.69

Number of shares used to calculate pro forma stockholders’ equity per share (4)

    2,121,369        2,495,728        2,870,087        3,300,600   

 

34


Table of Contents

 

(1) Assumes that the employee stock ownership plan will acquire a number of shares of stock equal to 6.76% of the shares sold in the offering (82,599, 97,175, 111,751 and 128,514 shares at the minimum, midpoint, maximum and 15% above the maximum of the offering range, respectively). The employee stock ownership plan will borrow the funds to acquire these shares from the proceeds retained by new Polonia Bancorp. The amount of this borrowing has been reflected as a reduction from gross proceeds to determine estimated net proceeds. This borrowing will have an interest rate equal to the prime rate as published in The Wall Street Journal, which is currently 3.25%, which will be fixed at the time of the offering and be for a term of 15 years. Polonia Bank intends to make contributions to the employee stock ownership plan in amounts at least equal to the principal and interest requirement of the debt. As the debt is paid down, shares will be released for allocation to participants’ accounts and stockholders’ equity will be increased.

 

     The adjustment to pro forma net income for the employee stock ownership plan reflects the after-tax compensation expense associated with the plan. Applicable accounting principles require that compensation expense for the employee stock ownership plan be based upon shares committed to be released and that unallocated shares be excluded from earnings per share computations. An equal number of shares 1/15 of the total, based on a 15-year loan) will be released each year over the term of the loan. The valuation of shares committed to be released would be based upon the average market value of the shares during the year, which, for purposes of the pro forma tables, was assumed to be equal to the $8.00 per share purchase price. If the average market value per share is greater than $8.00 per share, total employee stock ownership plan expense would be greater. See “Our Management—Benefit Plans—Employee Stock Ownership Plan.”
(2) Assumes that new Polonia Bancorp will purchase in the open market a number of shares of common stock equal to 3.38% of the shares sold in the offering (41,299, 48,588, 55,876 and 64,257 shares at the minimum, midpoint, maximum and 15% above the maximum of the offering range, respectively), that will be reissued as restricted stock awards under a new equity incentive plan to be adopted following the offering. Purchases will be funded with cash on hand at new Polonia Bancorp or with dividends paid to new Polonia Bancorp by Polonia Bank. The cost of these shares has been reflected as a reduction from gross proceeds to determine estimated net proceeds. In calculating the pro forma effect of the restricted stock awards, it is assumed that the required shareholder approval has been received, that the shares used to fund the awards were acquired at the beginning of the respective period and that the shares were acquired at the $8.00 per share purchase price. The issuance of authorized but unissued shares of the common stock instead of shares repurchased in the open market would dilute the ownership interests of existing shareholders by up to approximately 1.9%.
     The adjustment to pro forma net income for the restricted stock awards reflects the after-tax compensation expense associated with the awards. It is assumed that the fair market value of a share of new Polonia Bancorp common stock was $8.00 at the time the awards were made, that shares of restricted stock issued under the equity incentive plan vest 20% per year, that compensation expense is recognized on a straight-line basis over each vesting period so that 20% of the value of the shares awarded was an amortized expense during each year, and that the combined federal and state income tax rate was 40.0%. If the fair market value per share is greater than $8.00 per share on the date shares are awarded under the equity incentive plan, total equity incentive plan expense would be greater.
(3)

The adjustment to pro forma net income for stock options reflects the after-tax compensation expense associated with the stock options that may be granted under the new equity incentive plan to be adopted following the offering. If the new equity incentive plan is approved by shareholders, a number of shares equal to 8.45% of the number of shares sold in the offering (103,248, 121,469, 139,689 and 160,642 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively), will be reserved for future issuance upon the exercise of stock options that may be granted under the plan. Compensation cost relating to share-based payment transactions will be recognized in the financial statements over the period the employee is required to provide services for the award. The cost will be measured based on the fair value of the equity instruments issued. Applicable accounting standards do not prescribe a specific valuation technique to be used to estimate the fair value of employee stock options. For purposes of this table, the fair value of stock options to be granted under the new equity incentive plan has been estimated at $2.71 per option using the Black-Scholes option pricing model with the following assumptions: exercise price, $8.00; trading price on date of grant, $8.00; dividend yield, 0%; expected life, 10 years; expected volatility, 15.79%; and risk-free interest rate, 3.18%. It is assumed that stock options granted under the equity incentive plan vest 20% per year, that compensation expense is recognized on a straight-line basis over the vesting period so that 20% of the value of the options awarded was an amortized expense during each year, that all of the options awarded are non-qualified options and that the combined federal and state income tax rate was 40.0%. We plan to use the Black-Scholes option-pricing formula; however, if the fair market value per share is different than $8.00 per share on the date options are awarded under the equity incentive plan, or if the assumptions used in the option-pricing formula are different from those used in preparing

 

35


Table of Contents
  this pro forma data, the value of the stock options and the related expense would be different. The issuance of authorized but unissued shares of common stock to satisfy option exercises instead of shares repurchased in the open market would dilute the ownership interests of existing shareholders by up to approximately 4.6%.

 

(4) The number of shares used to calculate pro forma net income per share is equal to the number of shares sold in the offering less the number of shares purchased by the employee stock ownership plan not committed to be released within the one year period following the offering as adjusted to effect a weighted average over the period. The total number of shares to be outstanding upon completion of the conversion and offering includes the number of shares sold in the offering plus the number of shares issued in exchange for outstanding shares of old Polonia Bancorp common stock held by persons other than Polonia MHC. The number of shares used to calculate pro forma stockholders’ equity per share is equal to the total number of shares to be outstanding upon completion of the offering. Earnings per share calculations for the six months ended June 30, 2011 assume shares issued and outstanding of 2,121,369, 2,495,728, 2,870,087, 3,300,601 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, less the number of shares purchased by the employee stock ownership plan (82,599, 97,175, 111,751, 128,514 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively), excluding those that are released based on a straight line basis over a 15-year period (2,753, 3,239, 3,725, 4,284 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively), resulting in employee stock ownership plan shares that have not been committed to be released during the period of 79,846, 93,936, 108,026, 124,230 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. Earnings per share calculations for the year ended December 31, 2010 assume shares issued and outstanding of 2,121,369, 2,495,728, 2,870,087, 3,300,601 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, less the number of shares purchased by the employee stock ownership plan (82,599, 97,175, 111,751, 128,514 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively), excluding those that are released based on a straight line basis over a 15-year period (5,507, 6,478, 7,450, 8,568 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively), resulting in employee stock ownership plan shares that have not been committed to be released during the period of 77,092, 90,697, 104,301, 119,946 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively.

 

(5) Historical net income for the year end December 31, 2010 included a nonrecurring gain of $4.6 million related to the acquisition of Earthstar Bank. The existence of this gain accounts for the significant difference in the pro forma price-to-earnings ratios between the year ended December 31, 2010 and the six months ended June 30, 2011.

 

36


Table of Contents

OUR BUSINESS

General

We are headquartered in Huntingdon Valley, Pennsylvania and operate as a community-oriented financial institution dedicated to serving the financial services needs of consumers and businesses within our market areas. Polonia Bank is engaged primarily in the business of attracting deposits from the general public and using such funds to originate one- to four-family real estate and to a much lesser extent, multi-family and nonresidential real estate loans and home equity and consumer loans which we primarily hold for investment. Polonia Bank also maintains an investment portfolio. Polonia Bank’s primary federal regulator is the Office of the Comptroller of the Currency. The FDIC, through the Deposit Insurance Fund, insures the Bank’s deposit accounts up to the applicable legal limits. Polonia Bank is a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh.

Old Polonia Bancorp was organized as a federal corporation at the direction of Polonia Bank in connection with the reorganization of the Bank from the mutual form of organization to the mutual holding company form of organization. The reorganization was completed on January 11, 2007. As a result of the reorganization, old Polonia Bancorp’s business activities are the ownership of the outstanding capital stock of Polonia Bank. Old Polonia Bancorp neither owns nor leases any property, but instead uses the premises, equipment and other property of Polonia Bank and pays appropriate rental fees, as required by applicable law and regulations. Accordingly, the information set forth in this prospectus, including the consolidated financial statements and related financial data, relates primarily to Polonia Bank. As a federally chartered savings and loan holding company, old Polonia Bancorp is subject to the regulation of the Federal Reserve Board.

Polonia Bank’s website address is www.poloniabank.com. Information on our website should not be considered a part of this prospectus.

Market Areas

We are headquartered in Huntingdon Valley, Pennsylvania, which is located in the northwest suburban area of metropolitan Philadelphia and is situated between Montgomery and Bucks Counties. In addition to our main office in Montgomery County, we operate from six additional locations in Philadelphia County. We generate deposits through our seven offices and conduct lending activities throughout the Greater Philadelphia metropolitan area, as well as in southeastern Pennsylvania and southern New Jersey. The Philadelphia metropolitan area is the fifth largest in the United States (based on United States Census data for 2010) with an estimated population of 6.0 million. The city of Philadelphia is the fifth most populous city in the United States and the largest in population and area in the Commonwealth of Pennsylvania.

The Greater Philadelphia metropolitan area’s economy is heavily based upon manufacturing, refining, food and financial services. The city is home to many Fortune 500 companies, including cable television and internet provider Comcast; insurance companies CIGNA and Lincoln Financial Group; energy company Sunoco; food services company Aramark; paper and packaging company Crown Holdings Incorporated; diversified producer Rohm and Haas Company; the pharmaceutical company Glaxo SmithKline; the helicopter division of Boeing Co.; and automotive parts retailer Pep Boys. The city is also home to many universities and colleges.

Demographic and economic growth trends provide key insight into the health of our market area. The following table sets forth information regarding certain demographic information for the counties in our market area and the United States. The demographic information is based on published statistics of the U.S. Census Bureau and the U.S. Bureau of Labor Statistics.

 

     Bucks
County
    Montgomery
County
    Philadelphia
County
    United
States
 

Unemployment rate (1)

     7.4     7.0     10.7     9.3

Median household income (2)

   $ 78,790      $ 80,500      $ 41,221      $ 54,442   

Population growth (decline) (3)

     5.4     4.8     (5.1 )%      10.6

 

(1) For June 2011
(2) For 2010 (Source: ESRI)
(3) From 2000 to July 2010

 

37


Table of Contents

Competition

We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the several financial institutions operating in our market areas and, to a lesser extent, from other financial service companies such as brokerage firms, credit unions and insurance companies. We also face competition for investors’ funds from money market funds, mutual funds and other corporate and government securities. At June 30, 2011, we held less than 1% of the deposits in the Philadelphia metropolitan area. In addition, banks owned by large bank holding companies such as PNC Financial Services Group, Inc., Wells Fargo & Company, TD Bank and Citizens Financial Group, Inc. also operate in our market areas. These institutions are significantly larger than us and, therefore, have significantly greater resources.

Our competition for loans comes primarily from financial institutions in our market areas and from other financial service providers such as mortgage companies and mortgage brokers. Competition for loans also comes from the increasing number of non-depository financial service companies entering the mortgage market such as insurance companies, securities companies and specialty finance companies.

We expect competition to remain intense in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered the barriers to market entry, allowed banks and other lenders to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the origination of loans could limit our future growth.

Lending Activities

General. Our loan portfolio consists primarily of one- to four-family residential real estate loans. To a much lesser extent, our loan portfolio includes multi-family and nonresidential real estate loans, home equity loans, commercial loans and consumer loans. We originate loans primarily for investment purposes. Currently, we only offer fixed-rate mortgage products.

One- to Four-Family Residential Real Estate Loans. Our primary lending activity is the origination of mortgage loans to enable borrowers to purchase or refinance existing homes. We offer fixed-rate mortgage loans with terms up to 30 years. The loan fees, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.

While one- to four-family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.

We generally do not make conventional loans with loan-to-value ratios exceeding 80% at the time the loan is originated. Conventional loans with loan-to-value ratios in excess of 80% generally require private mortgage insurance or additional collateral. We require all properties securing mortgage loans to be appraised by a board-approved independent appraiser. We generally require title insurance on all first mortgage loans. All borrowers must obtain hazard insurance, and flood insurance is required for loans on properties located in a flood zone, before closing the loan. Generally, all loans are subject to the same stringent underwriting standards with the intention to hold in portfolio. We occasionally sell loans to (1) limit the Bank’s exposure to a single borrower or (2) in specific circumstances to manage the interest rate risk. All loans subject to sale are identified at the time of origination. Our online loans division generates loans through the Internet with rates that are generally lower than those that we offer at Polonia Bank. These loans are generated for sale to the FHLB of Pittsburgh through its Mortgage Partnership Finance program. During the year ended December 31, 2010, we generated $16.8 million in online loans for sale to the FHLB of Pittsburgh.

Multi-Family and Nonresidential Real Estate Loans. On a limited basis, we offer fixed-rate mortgage loans secured by multi-family and nonresidential real estate. Our multi-family and nonresidential real estate loans are generally secured by

 

38


Table of Contents

apartment buildings, small office buildings and owner-occupied properties. In addition to originating these loans, we also participate in loans with other financial institutions located primarily in the Commonwealth of Pennsylvania. Such participations include adjustable-rate mortgage loans originated by other institutions.

We originate fixed-rate multi-family and nonresidential real estate loans with terms up to 30 years. These loans are secured by first mortgages, and amounts generally do not exceed 80% of the property’s appraised value at the time the loan is originated.

Commercial Loans. Although we have not historically originated commercial business loans and have no plans to do so in the near future, we acquired commercial business loans with a fair value of $1.1 million as of June 30, 2011 as a result of the Earthstar Bank acquisition.

Home Equity Loans and Lines of Credit. We currently offer home equity loans with fixed interest rates for terms up to 15 years and maximum combined loan to value ratios of 80%. We offer loans with adjustable interest rates tied to a market index in our market area.

Consumer Loans. We currently offer consumer loans in the form of loans secured by savings accounts or time deposits.

The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.

We offer consumer loans secured by deposit accounts with fixed interest rates and terms up to five years.

Loan Underwriting Risks

Multi-Family and Nonresidential Real Estate Loans. Loans secured by multi-family and nonresidential real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in multi-family and nonresidential real estate 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 monitor cash flows on income properties, we generally require borrowers and loan guarantors, if any, to provide annual financial statements on multi-family and nonresidential real estate loans. In reaching a decision on whether to make a multi-family and nonresidential real estate loan, we consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. We have generally required that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.20x. Environmental surveys are obtained when circumstances suggest the possibility of the presence of hazardous materials.

We underwrite all loan participations to our own underwriting standards. In addition, we also consider the financial strength and reputation of the lead lender. To monitor cash flows on loan participations, we require the lead lender to provide annual financial statements for the borrower. We also conduct an annual internal loan review for all loan participations.

Commercial Loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property the value of which tends to be more easily ascertainable, commercial 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 underlying business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Loan Originations, Purchases and Sales. Loan originations come from a number of sources. The primary sources of loan originations are existing customers, walk-in traffic, advertising and referrals from customers. We advertise in newspapers that are widely circulated in Montgomery, Bucks and Philadelphia Counties. Accordingly, when our rates are competitive, we attract loans from throughout Montgomery, Bucks and Philadelphia Counties. We occasionally purchase loans and participation interests in loans. Generally, all loans are subject to the same stringent underwriting standards with the intention to hold in portfolio. We occasionally sell loans to (1) limit the Bank’s exposure to a single borrower or (2) in specific circumstances to manage the interest rate risk. All loans subject to sale are identified at the time of origination.

 

39


Table of Contents

Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by our board of directors and management. A loan committee consisting of officers of Polonia Bank has authority to approve all conforming one- to four-family loans and education loans. Designated loan officers have the authority to approve savings account loans. All other loans, generally consisting of non-conforming one- to four-family loans, jumbo loans, commercial real estate and employee loans must be approved by the board of directors.

Loans to One Borrower. The maximum amount that we may lend to one borrower and the borrower’s related entities generally is limited, by regulation, to 15% of our stated capital and reserves. At June 30, 2011, our general regulatory limit on loans to one borrower was $4.1 million. At that date, our largest lending relationship was $2.0 million and was secured by two one- to four-family properties. These loans were performing in accordance with their original terms at June 30, 2011.

Loan Commitments. We issue commitments for fixed-rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers. Generally, our mortgage loan commitments expire after 60 days.

Investment Activities

We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and municipal governments, mortgage-backed securities, deposits at the FHLB of Pittsburgh and time deposits of federally insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in mutual funds. We also are required to maintain an investment in FHLB of Pittsburgh stock. While we have the authority under applicable law to invest in derivative securities, our investment policy does not permit this investment. We had no investments in derivative securities at June 30, 2011.

At June 30, 2011 our investment portfolio totaled $77.9 million and consisted primarily of mortgage-backed securities.

Our investment objectives are to provide and maintain liquidity, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of low-risk investments when demand for loans is weak and to generate a favorable return. Our board of directors has the overall responsibility for the investment portfolio, including approval of our investment policy and appointment of the Asset/Liability and Investment Committee. Individual investment transactions are reviewed and ratified by our board of directors monthly.

Deposit Activities and Other Sources of Funds

General. Deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.

Deposit Accounts. Substantially all of our depositors are residents of the Commonwealth of Pennsylvania. Deposits are attracted, by advertising and through our website, from within our market areas through the offering of a broad selection of deposit instruments, including non-interest-bearing demand accounts (such as checking accounts), interest-bearing accounts (such as NOW and money market accounts), regular savings accounts and time deposits. Generally, we do not utilize brokered funds. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability to us, matching deposit and loan products and customer preferences and concerns. We generally review our deposit mix and pricing weekly. Our current strategy is to offer competitive rates and to be in the middle to high-end of the market for rates on all types of deposit products.

Borrowings. We utilize advances from the FHLB of Pittsburgh to supplement our supply of funds for lending and investment. The FHLB functions as a central reserve bank providing credit for its member financial institutions. As a member, we are required to own capital stock in the FHLB and are authorized to apply for advances on the security of such stock and certain of our whole first mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the FHLB’s assessment of the institution’s creditworthiness.

 

40


Table of Contents

Properties

We conduct our business through our main office and six branch offices in Montgomery and Philadelphia counties, Pennsylvania. We currently own all of our branch offices and of the three former Earthstar Bank branches continuing as branches of Polonia Bank, we expect to own two and lease one.

Personnel

As of June 30, 2011, we had 58 full-time employees and 8 part-time employees, none of whom is represented by a collective bargaining unit. We believe our relationship with our employees is good.

Legal Proceedings

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens and contracts, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Subsidiaries

Polonia Bank has two wholly-owned subsidiaries, Polonia Bank Mutual Holding Company (“PBMHC”), a Delaware corporation, and Community Abstract Agency LLC, a Pennsylvania limited liability company. PBMHC was formed in 1997 to hold certain assets and conduct certain investment activities of Polonia Bank. Community Abstract Agency LLC was formed in 1999 to provide title insurance services. Polonia Bank maintains a 49% ownership interest in Realty Capital Management, LLC, an entity formed to manage and dispose of real estate acquired through foreclosure. It is expected that this subsidiary will soon be inactive.

 

41


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The objective of this section is to help potential investors understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the consolidated balance sheets as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the years then ended and the unaudited consolidated interim financial statements as of June 30, 2011 and 2010 and for the six months periods then ended, that appear at the end of this prospectus.

Overview

FDIC-Assisted Acquisition. On December 10, 2010, Polonia Bank acquired certain assets and assumed certain liabilities of Earthstar Bank from the FDIC, as receiver of Earthstar Bank. Earthstar Bank operated four community banking branches within Chester and Philadelphia counties, Pennsylvania. Polonia Bank’s bid to purchase Earthstar Bank included the purchase of certain Earthstar assets at a discount of $7.0 million in exchange for assuming certain Earthstar Bank deposits and certain other liabilities. Based on the terms of this transaction, the FDIC paid Polonia Bank $30.5 million ($30.8 million less a settlement of approximately $324,000), resulting in a pre-tax gain of $4.6 million. No cash or other consideration was paid by Polonia Bank. Polonia Bank and the FDIC entered into loss sharing agreements regarding future losses incurred on loans existing at the acquisition date. Under the terms of the loss sharing agreements, the FDIC will reimburse Polonia Bank for 80 percent of net losses on covered assets during the term of the agreements.

Under the terms of the loss sharing agreements, the FDIC will reimburse the Bank for 80 percent of net losses on covered assets. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on nonresidential real estate loans is five years in respect to losses and eight years in respect to loss recoveries. The loss sharing agreements includes clawback provisions should losses not meet the specified thresholds and other conditions not be met. As a result of the loss sharing agreements with the FDIC, Polonia Bank recorded an indemnification asset, net of estimated clawback provisions, of $5.4 million at the time of acquisition. For additional information regarding the FDIC indemnification asset See Note 1 “Summary of Significant Accounting Policies – FDIC Indemnification Asset” in the consolidated financial statements included in this prospectus.

At June 30, 2011, covered loans were comprised of $17.2 million of one- to four-family mortgage loans, $11.8 million of multi-family and commercial real estate loans and $1.1 million of commercial loans.

Income. Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and securities, and interest expense, which is the interest that we pay on our deposits and FHLB borrowings. Other significant sources of pre-tax income are service charges on deposit accounts and other loan fees (including loan brokerage fees and late charges). In addition, we recognize income or losses from the sale of investments in years that we have such sales.

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 value of the portfolio, information about specific borrower situations, and estimated collateral values, economic conditions, and other factors. Allocation 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.

Expenses. The non-interest expenses we incur in operating our business consist of salaries and employee benefits expenses, occupancy and equipment expenses, marketing expenses and various other miscellaneous expenses.

Salaries and employee benefits consist primarily of: salaries and wages paid to our employees; payroll taxes; and expenses for health insurance and other employee benefits.

Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using the straight-line method based on the useful lives of the related assets, which range from three to 40 years.

 

42


Table of Contents

Marketing expenses include expenses for advertisements, promotions, third-party marketing services and premium items.

FDIC and regulatory assessments are a specified percentage of assessable deposits, depending on the risk characteristics of the institution. Due to losses incurred by the Deposit Insurance Fund in 2008 from failed institutions, and anticipated future losses, the FDIC increased its assessment rates for 2009 and charged a special assessment to increase the balance of the insurance fund. Our special assessment amounted to $103,000. We also are assessed by our banking regulators.

Other expenses include expenses for supplies, telephone and postage, data processing, contributions and donations, director and committee fees, insurance and surety bond premiums and other fees and expenses.

Our Business Strategy

Our mission is to operate and grow a profitable, independent community-oriented financial institution serving primarily retail customers and small businesses in our market areas. The following are key elements of our business strategy:

 

   

Continuing our community-oriented focus. As a community-oriented financial institution, we emphasize providing exceptional customer service as a means to attract and retain customers. We believe that our community orientation is attractive to our customers and distinguishes us from the large banks that operate in our market area. Our ability to succeed in our communities is enhanced by the stability of our senior management. We intend to continue to leverage these strengths in our markets for the purpose of originating new deposits and loans, particularly through our branch offices, while continuing to focus on profitability.

 

   

Implementing a controlled growth strategy to prudently increase profitability and enhance stockholder value. Our primary lending activity is the origination of one- to four-family mortgage loans secured by homes in our local market area. We intend to pursue a controlled growth strategy for the foreseeable future until the local economy materially improves. As a result, we anticipate moderate growth in our one- to four-family residential mortgage loan portfolio and in our investment securities portfolio. Accordingly, we expect that our weighted average yield on interest-earning assets will decrease in future periods because one- to four-family mortgage loans and investment securities generally yield less than nonresidential and multi-family real estate loans that were acquired in the Earthstar Bank acquisition. We believe our existing infrastructure and our recent branch acquisition, along with the capital we expect to raise in this offering, will enable us to originate new loans, subject to the foregoing strategy, both to replace existing loans as they are repaid and to prudently grow our loan portfolio.

 

   

Improve our funding mix by attracting lower cost core deposits. Core deposits (demand, money market and savings accounts) comprised 45.3% of our total deposits at June 30, 2011. We value core deposits because they represent longer-term customer relationships and a lower cost of funding compared to certificates of deposit.

 

   

Use conservative underwriting practices to maintain asset quality. We have sought to maintain a high level of asset quality and moderate credit risk by using underwriting standards that we believe are conservative. While the delinquencies in our loan portfolio have increased during the recent economic recession, non-performing, non-covered loans were 0.78% of our non-covered loan portfolio at June 30, 2011. Although we intend to continue our efforts to originate commercial real estate and business loans after the offering, we intend to continue our philosophy of managing loan exposures through our conservative approach to lending.

Critical Accounting Policies

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the following to be our critical accounting policies: allowance for loan losses, deferred income taxes and other-than-temporary impairment of securities.

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover probable incurred credit losses in the loan portfolio at the statement of financial condition date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; the value of collateral; and the determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to

 

43


Table of Contents

significant change. Management reviews the level of the allowance on a quarterly basis and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. 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. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings. For additional discussion, see note 6 of the notes to the consolidated financial statements included in this prospectus.

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes as prescribed by United States Generally Accepted Accounting Principles (U.S. GAAP). 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. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. 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. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance would result in additional income tax expense in the period, which would negatively affect earnings.

Other-Than-Temporary Impairment of Securities. U.S. GAAP requires companies to perform periodic reviews of individual securities in their investment portfolios to determine whether a decline in the value of a security is other than temporary. Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not limited to, the length of time and extent to which the market value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the security’s ability to recover any decline in its market value, management’s intent and ability to hold the security for a period of time sufficient to allow for a recovery in market value and whether or not we intend to sell the security or whether it is more likely than not that we would be required to sell the security before its anticipated recovery in market value. Among the factors that are considered in determining management’s intent and ability is a review of our capital adequacy, interest rate risk position, and liquidity. The assessment of a security’s ability to recover any decline in market value, the ability of the issuer to meet contractual obligations, and management’s intent and ability requires considerable judgment. A decline in value that is considered to be other than temporary is recorded as a loss within noninterest income.

Fair value of assets acquired and liabilities assumed pursuant to business combination transactions. Assets acquired and liabilities assumed in business combinations are recorded at estimated fair value on their purchase date. Purchased loans acquired in a business combination, including covered loans, are recorded at estimated fair value with no carryover of the related allowance for loan and lease losses. In determining the estimated fair value of purchased loans, management considers a number of factors including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, and net present value of cash flows expected to be received.

The estimated fair value of the FDIC indemnification asset is based on the net present value of expected future cash proceeds. See note 1 “Summary of Significant Accounting Policies—FDIC Indemnification Asset” in the consolidated financial statements included in this prospectus for more details. The discount rates used are derived from current market rates and reflect the level of inherent risk in the assets. The expected cash flows are determined based on contractual terms, expected performance, default timing assumptions, property appraisals and other factors.

The fair values of investment securities acquired in business combinations are generally based on quoted market prices, broker quotes, comprehensive interest rate tables or pricing matrices or a combination thereof.

The fair value of assumed liabilities in business combinations on their date of purchase is generally the amount payable by us necessary to completely satisfy the assumed obligation.

 

44


Table of Contents

Financial Condition

Total assets at June 30, 2011 were $279.5 million, a decrease of $19.3 million, or 6.5%, from total assets of $298.8 million at December 31, 2010. The decrease in assets resulted primarily from a $40.4 million decrease in cash and cash equivalents, partially offset by a $24.4 million increase in investment securities. The decrease in assets was part of a planned reduction to manage capital ratios. Total liabilities at June 30, 2011 were $251.9 million compared to $271.6 million at December 31, 2010, a decrease of $19.8 million, or 7.3%. The decrease in liabilities was primarily due to a $22.7 million decrease in deposits, partially offset by a $3.0 million increase in FHLB advances-long-term. Total stockholders’ equity increased to $27.7 million at June 30, 2011 from $27.3 million at December 31, 2010, an increase of $400,000, or 1.5%, primarily as a result of our operating profit.

Cash and cash equivalents decreased to $13.6 million from $54.0 million during the six months ended June 30, 2011, a decrease of $40.4 million, or 74.8%. The increased level of cash and cash equivalents was due to the receipt of $30.5 million from the FDIC as part of the Earthstar Bank acquisition. The decrease in cash and cash equivalents was attributable, in part, to the purchase of $36.5 million in investment securities held to maturity and the decrease of $22.7 million in deposits, partially offset by a $3.0 million increase in FHLB advances—long term.

Investment securities available for sale decreased to $18.5 million from $27.4 million during the six months ended June 30, 2011, a decrease of $8.9 million, or 32.5%. The decrease in investment securities available for sale was attributable to sales of securities of $6.0 million and payments received of $2.8 million.

Investment securities held to maturity increased to $59.4 million from $26.1 million during the six months ended June 30, 2011, an increase of $33.3 million, or 127.6%. The increase in investment securities held to maturity was attributable, in part, to the purchase of $36.5 million in mortgaged-backed securities, partially offset by $3.1 million in payments received.

Loans receivable, net, remained relatively unchanged at $167.9 million at June 30, 2011. The size of our one- to four-family mortgage loan portfolio increased during the six months ended June 30, 2011 due primarily to $9.0 million in loan originations during the six months, partially offset by $6.7 million in loan sales during this period.

Total deposits decreased to $217.0 million from $239.7 million during the six months ended June 30, 2011, a decrease of $22.7 million, or 9.5%. The decrease in deposits was attributable, in part, to the outflow of $11.0 million in time deposits, as rates offered on the maturity of time deposits were below rates offered in the marketplace as part of our asset reduction strategy, an $8.0 million decrease in money market accounts, and an $3.3 million decrease in noninterest bearing demand deposits.

We utilize borrowings from the FHLB of Pittsburgh to supplement our supply of funds for loans and investments. The $3.0 million increase in FHLB advances long-term was due to more attractive longer term funding opportunities available through advances. The proceeds of these borrowings were used to fund the outflow of higher interest earning certificates of deposit which matured during the period.

 

45


Table of Contents

The following table sets forth the composition of our loan portfolio at the dates indicated.

 

    At June 30,
2011
    2010     2009     At December 31,
2008
    2007     2006  
    Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in thousands)  

Real estate loans:

                       

One- to four-family

  $ 120,798        71.19   $ 119,085        69.40   $ 131,571        86.84   $ 144,508        87.68   $ 120,774        87.42   $ 100,152        88.84

Multi-family and commercial real estate

    9,770        5.76        10,272        5.99        10,214        6.74        12,020        7.29        9,803        7.09        5,212        4.62   

Home equity loans

    2,831        1.67        2,918        1.70        3,372        2.23        4,172        2.53        4,343        3.14        4,229        3.75   

Home equity lines of credit

    2,089        1.23        2,023        1.18        3,036        2.00        1,361        0.83        980        0.71        980        0.87   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans:

    135,488        79.85        134,298        78.27        148,193        97.81        162,061        98.33        135,900        98.36        110,573        98.08   

Consumer:

                       

Education

    2,950        1.74        3,179        1.85        3,281        2.17        2,690        1.63        2,170        1.57        2,137        1.90   

Other consumer

    1,128        .66        1,300        0.76        33        0.02        60        0.04        90        0.07        28        0.02   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer loans

    4,078        2.40        4,479        2.61        3,314        2.19        2,750        1.67        2,260        1.64        2,165        1.92   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans excluding covered loans

    139,566        82.25        138,777        80.88        151,507        100.00        164,811        100.00        138,160        100.00        112,738        100.00   

Covered loans

    30,112        17.75        32,808        19.12        —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    169,678        100.00     171,585        100.00     151,507        100.00     164,811        100.00     138,160        100.00     112,738        100.00
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Net deferred loan fees

    271          278          215          195          149          120     

Allowance for loan losses on non-covered loans

    878          834          1,115          857          731          695     

Allowance for loan losses on covered loans

    679          —            —            —            —            —       
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Loans, net

  $ 167,850        $ 170,473        $ 150,177        $ 163,759        $ 137,280        $ 111,923     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Loan Maturity

The following table sets forth certain information at June 30, 2011 and December 31, 2010 regarding the dollar amount of loan principal repayments becoming due during the periods indicated. The table does not include any estimate of prepayments, which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.

 

(In thousands)    One Year
or Less
     More than
one year
to five
years
     More than
five years
     Total  

At June 30, 2011

  

     

One- to four-family residential real estate

   $ 24       $ 2,222       $ 118,552       $ 120,798   

Multi-family and commercial real estate

     478         101         9,191         9,770   

Home equity and lines of credit

     1,310         452         3,158         4,920   

Consumer

     1,484         619         1,975         4,078   

Covered loans

     4,204         4,036         25,902         30,112   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,500       $ 7,430       $ 154,748       $ 169,678   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2010 (1)

           

One- to four-family residential real estate

   $ 38       $ 2,436       $ 116,611       $ 119,085   

Multi-family and commercial real estate

     194         963         9,115         10,272   

Home equity and lines of credit

     1,266         197         3,478         4,941   

Consumer

     1,217         953         2,309         4,479   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,715       $ 4,549       $ 131,513       $ 138,777   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The data at December 31, 2010 does not include information regarding covered loans as that information was not available for that period.

 

46


Table of Contents

The following table sets forth the dollar amount of all loans at June 30, 2011 and December 31, 2010 that are due after June 30, 2012 and December 31, 2011, respectively, and that have either fixed interest rates or adjustable interest rates. The amounts shown below exclude unearned interest on consumer loans and deferred loan fees.

 

     Fixed-rates      Floating or
Adjustable  Rates
     Total  
     (In thousands)  

At June 30, 2011

        

One- to four-family residential real estate

   $ 120,774       $ —         $ 120,774   

Multi-family and commercial real estate

     9,292         —           9,292   

Home equity and lines of credit

     2,811         799         3,610   

Consumer

     2,594         —