Ponce Bank Employee Stock Ownership Plan with 401(k) Provisions (the “KSOP”). The KSOP is for eligible employees of Ponce Bank and those of its affiliates. The named executive officers are eligible to participate in the KSOP just like other employees. An employee must attain the age of 21 and will be eligible to participate in the 401(k) features of the KSOP in the quarter following thirty days of service and the Employee Stock Ownership Plan ("ESOP") feature of the KSOP upon the first entry date commencing on or after the eligible employee’s completion of one year of service. Employees are eligible to participate in the 401(k) Plan at the beginning of each quarter (January 1, April 1, July 1, or October 1).

Under the 401(k) features of the KSOP (“401(k) Component”), a participant may elect to defer, on a pre-tax basis, the maximum amount as permitted by the Internal Revenue Code. For 2023, the salary deferral contribution limit was $22,500; provided, however, that a participant over age 50 may contribute an additional $7,500 to the 401(k) for a total of $30,000. In addition to salary deferral contributions, Ponce Bank may make discretionary matching contributions, discretionary profit-sharing contributions or safe harbor contributions to the 401(k) Component. Discretionary matching contributions are allocated on the basis of salary deferral contributions. Discretionary profit-sharing contributions are based on three classifications set forth in the 401(k) feature (i) Class A — Chairman, President, and Executive Vice Presidents; (ii) Class B — Senior Vice Presidents, Vice Presidents and Assistant Vice Presidents; and (iii) Class C — all other eligible employees. The contribution for a class will be the same percentage of compensation for all participants in that class. If Ponce Bank decides to make a safe harbor contribution for a plan year, each participant will receive a contribution equal to 3% of his or her compensation for the plan year.

A participant is always 100% vested in his or her salary deferral contributions and safe harbor contributions. Discretionary matching and profit-sharing contributions are 20% vested after two years of service, plus an additional 20% for each additional year of service; so all participants are fully vested in such contributions after six years of service. Participants also will become fully vested in his or her account balance in the 401(k) Component automatically upon normal retirement, death or disability, a change in control, or termination of the KSOP. Generally, participants will receive distributions from the KSOP upon separation from service in accordance with the terms of the governing document.

On September 29, 2017, in connection with the Bank’s reorganization into the mutual holding company form of organization, the ESOP trustee purchased, on behalf of the ESOP, 723,751 shares of PDL Community Bancorp common stock. The ESOP funded its stock purchase with a loan (“First ESOP loan”) from PDL Community Bancorp in the amount of $7.2 million, which was equal to the aggregate purchase price of the common stock. The First ESOP loan is being repaid principally through Ponce Bank’s contributions to the ESOP over the 15-year term of such loan. The interest rate for the First ESOP loan is 2.60%.

On January 27, 2022, concurrent with the completion of the conversion and reorganization of Ponce Bank Mutual Holding Company from a mutual form to a stock form of organization and the merger of PDL Community Bancorp with and into Ponce Financial Group, Inc., the shares of PDL Community Bancorp common stock held by the KSOP were converted into 977,880 shares of Ponce Financial Group, Inc. common stock.

On January 27, 2022, the KSOP trustee purchased, on behalf of the ESOP feature of the KSOP (“ESOP Component”), an additional 1,097,353 shares of Ponce Financial Group, Inc. common stock, or 4.44% of the total number of shares of Ponce Financial Group, Inc. common stock outstanding on January 27, 2022 (including shares issued to the Foundation). The KSOP funded this stock purchase with a loan (“Second ESOP loan”) from Ponce Financial Group, Inc. in the amount of $11.0 million, which was equal to the aggregate purchase price of the common stock. The Second ESOP loan is being repaid principally through Ponce Bank’s contributions to the ESOP Component over the 15-year term of such loan. The interest rate for the Second ESOP loan is 1.82%.

The trustee of the trust funding the KSOP holds the shares of Ponce Financial Group, Inc. common stock purchased by the KSOP in an unallocated suspense account, and shares will be released from the suspense account on a pro-rata basis as the loans are repaid. The trustee will allocate the shares released among participants on the basis of each participant’s proportional share of qualifying compensation relative to all participants participating in the ESOP Component. A participant will become 100% vested in his or her account balance in the ESOP Component after three years of service. In addition, participants will become fully vested in his or her account balance in the ESOP Component automatically upon normal retirement, death or disability, a change in control, or termination of the KSOP. Generally, participants will receive distributions from the KSOP upon separation from service in accordance with the terms of the plan document. The KSOP reallocates any unvested shares of Ponce Financial Group, Inc. common stock forfeited upon termination of employment among the remaining participants in the ESOP Component.

Contributions to the ESOP are to be sufficient to pay principal and interest currently due under the loan agreement. Under applicable accounting requirements, Ponce Bank will record a compensation expense for the ESOP at the average market price of the shares as they are committed to be released from the unallocated suspense account to participants’ accounts, which may be more or less than the original issue price. The compensation expense resulting from the release of the common stock from the suspense account and allocation to plan participants will result in a corresponding reduction in the earnings of Ponce Financial Group, Inc. The ESOP shares become outstanding for earnings per share computations (see Note 12). As of September 30, 2023, the combined outstanding balance of both the First ESOP loan and Second ESOP loan was $13.3 million.

A summary of the ESOP shares as of September 30, 2023 and December 31, 2022 are as follows:


	September 30, 2023		December 31, 2022
	(Dollars in thousands)
Shares committed-to-be released		100,308		133,744
Shares allocated to participants		448,746		354,227
Unallocated shares		1,469,167		1,569,475
Total		2,018,221		2,057,446
Fair value of unallocated shares	$	11,489	$	14,628

The Company recognized ESOP related compensation expense, including ESOP equalization expense, of $0.3 million and $0.3 million for the three months ended September 30, 2023 and 2022, and $0.9 million and $1.0 million for the nine months ended September 30, 2023 and 2022, respectively.

The Bank maintains a non-qualified supplemental executive retirement plan (“SERP”) for the benefit of two key executive officers. The SERP expense recognized for the three months ended September 30, 2023 and 2022 was $0.02 million each and for the nine months ended September 30, 2023 and 2022 was $0.05 million each.

The Company’s stockholders approved the PDL Community Bancorp 2018 Long-Term Incentive Plan (the “2018 Incentive Plan”) at the Special Meeting of Stockholders on October 30, 2018. The maximum number of shares of common stock which can be issued under the 2018 Incentive Plan is 1,248,469. Of the 1,248,469 shares, the maximum number of shares that may be awarded under the 2018 Incentive Plan pursuant to the exercise of stock options or stock appreciation rights (“SARs”) is 891,764 shares (all of which may be granted as incentive stock options), and the number of shares of common stock that may be issued as restricted stock awards or restricted stock units is 356,705 shares. However, the 2018 Incentive Plan contains a flex feature that provides that awards of restricted stock and restricted stock units in excess of the 356,705 share limitation may be granted but each share of stock covered by such excess award shall reduce the 891,764 share limitation for awards of stock options and SARs by 3.0 shares of common stock. The Company converted 462,522 awards of stock options into 154,174 restricted stock units in 2018, 45,000 awards of stock options into 15,000 restricted stock units in 2020 and 191,145 awards of stock options into 63,715 restricted stock units in 2022.

Under the 2018 Incentive Plan, the Company made grants equal to 674,645 shares on December 4, 2018 which include 119,176 incentive options to executive officers, 44,590 non-qualified options to outside directors, 322,254 restricted stock units to executive officers, 40,000 restricted stock units to non-executive officers and 148,625 restricted stock units to outside directors. During the year ended December 31, 2020, the Company awarded 40,000 incentive options and 15,000 restricted stock units to non-executive officers under the 2018 Incentive Plan. Awards to directors generally vest 20% annually beginning with the first anniversary of the date of grant. Awards to a director with fewer than five years of service at the time of grant vest over a longer period and will not become fully vested until the director has completed ten years of service. Awards to the executive officer who is not a director vest 20% annually beginning on December 4, 2020. On April 1, 2022, the Company awarded 23,718 incentive options to an executive officer, 30,659 incentive options to non-executive officers and 13,952 non-qualified options to an outside director. In addition, on April 1, 2022 the Company awarded 40,460 restricted stock units to executive officers and 23,255 restricted stock units to outside directors. As of September 30, 2023 and December 31, 2022, the maximum number of stock options and SARs remaining to be awarded under the Incentive Plan for both periods was 4,883, after the conversion from PDL Community Bancorp common stock to Ponce Financial Group, Inc. common stock. As of September 30, 2023 and December 31, 2022, the maximum number of shares of common stock that may be issued as restricted stock or restricted stock units remaining to be awarded under the Incentive Plan was none, for both periods.

The product of the number of units granted and the grant date market price of the Company’s common stock determine the fair value of restricted stock units under the Company’s 2018 Incentive Plan. The Company recognizes compensation expense for the fair value of restricted stock units on a straight-line basis over the requisite service period for the entire award.

A summary of the Company’s restricted stock unit awards activity and related information for nine months ended September 30, 2023 and year ended December 31, 2022 are as follows:


	September 30, 2023
	Number of Shares			Weighted- Average Grant Date Fair Value Per Share
Non-vested, beginning of year		245,840		$	9.40
Granted		—			—
Vested		(4,147	)		9.27
Forfeited		—			—
Non-vested at March 31		241,693		$	9.40
Granted		—			—
Vested		(21,235	)		10.44
Forfeited		(697	)		9.15
Non-vested at June 30		219,761		$	9.30
Granted		—			—
Vested		(4,186	)		7.20
Forfeited		—			—
Non-vested at September 30		215,575		$	9.34

	December 31, 2022
	Number of Shares			Weighted- Average Grant Date Fair Value Per Share
Non-vested, beginning of year		237,687		$	12.65
Conversion and reorganization		93,933			—
Granted		63,715			10.44
Vested		(149,495	)		9.11
Forfeited		—			—
Non-vested at December 31		245,840		$	9.40

Compensation expense related to restricted stock units was $0.4 million each for the three months ended September 30, 2023 and 2022 and was $1.1 million and $1.0 million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, the total remaining unrecognized compensation cost related to restricted stock units was $1.0 million, which is expected to be recognized over the next 17 quarters.

A summary of the Company’s stock option awards activity and related information for nine months ended September 30, 2023 and year ended December 31, 2022 are as follows:


	September 30, 2023
	Options		Weighted- Average Exercise Price Per Share
Outstanding, beginning of year		352,621	$	8.97
Granted		—		—
Exercised		—		—
Forfeited		—		—
Outstanding at March 31 (1)		352,621		8.97
Granted		—		—
Exercised		—		—
Forfeited		—		—
Outstanding at June 30		352,621		8.97
Granted		—		—
Exercised		—		—
Forfeited		—		—
Outstanding at September 30 (1)		352,621	$	8.97
Exercisable at September 30 (1)		218,433	$	8.82


	December 31, 2022
	Options		Weighted- Average Exercise Price Per Share
Outstanding, beginning of year		203,766	$	12.02
Conversion and reorganization		80,526	$	—
Granted		68,329		10.44
Exercised		—		—
Forfeited		—		—
Outstanding at December 31 (1)		352,621	$	8.97
Exercisable at December 31 (1)		190,508	$	8.83

(1)

The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at respective periods and the stated exercise price of the underlying options, was $0 for outstanding options and $0 for exercisable options at September 30, 2023 and was $0.1 million for outstanding options and $0.1 million for exercisable options December 31, 2022.

The weighted-average exercise price for the options as of September 30, 2023 was $8.97 per share and the weighted average remaining contractual life is 5.9 years. The weighted average period over which compensation expenses are expected to be recognized is 2.9 years. There were 218,433 shares and 190,508 shares exercisable as of September 30, 2023 and December 31, 2022, respectively. Total compensation cost related to stock options recognized was $0.05 million both for the three months ended September 30, 2023 and 2022, and $0.1 million both for the nine months ended September 30, 2023 and 2022. As of September 30, 2023, the total remaining unrecognized compensation cost related to unvested stock options was $0.3 million, which is expected to be recognized over the next 17 quarters.

The fair value of each option grant is estimated on the date of grant using Black-Scholes option pricing model with the following weighted average assumptions:


	For the Nine Months Ended September 30,
	2023	2022
Dividend yield	N/A		0.00	%
Expected life	N/A	6.5 years
Expected volatility	N/A		41.34	%
Risk-free interest rate	N/A		2.65	%
Weighted average grant date fair value	N/A	$	3.85

The expected volatility is based on the Company’s historical volatility. The expected life is an estimate based on management’s review of the various factors and calculated using the simplified method for plain vanilla options. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

The Company’s stockholders approved the 2023 Long-Term Incentive Plan (the “Plan”) at the Special Meeting of Stockholders on June 15, 2023. The maximum number of shares of common stock which can be issued under the Plan is 1,920,368. Of the 1,920,368 shares, the maximum number of shares that may be awarded under the Plan pursuant to the exercise of stock options or stock appreciation rights (“SARs”) is 1,371,691 shares (all of which may be granted as incentive stock options), and the number of shares of common stock that may be issued as restricted stock awards or restricted stock units is 548,677 shares. There have been no grants of stock options and restricted stock awards or restricted stock units under the 2023 Long-Term Incentive Plan.

The Company adopted a share repurchase program effective May 16, 2023 which was completed in August of 2023. Under the repurchase program, the Company was authorized to repurchase up to 1,235,000 shares of the Company's stock or approximately 5% of the Company's then current issued and outstanding shares. During the nine months ended September 30, 2023, the Company repurchased a total of 1,235,000 shares of the Company's common stock. As of September 30, 2023 and December 31, 2022, 1,233,111 shares and 1,976 shares, respectively, were held as treasury stock as a result of share buy-backs and restricted stock units vested during 2023 and restricted stock units vested during 2022, respectively.