Ponce Financial Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results. Ponce operates Ponce Bank and a mortgage banking division, primarily in the New York City metropolitan area.
Financial performance and position
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q3 2023 | Comparable period / balance |
|---|---|---|
| Interest and dividend income | $33.5 | $21.6 in Q3 2022 |
| Net interest income | $16.5 | $17.6 in Q3 2022 |
| Net income (loss) | $2.6; $0.12 per diluted share | $(14.7); $(0.64) per diluted share in Q3 2022 |
| Net interest margin | 2.58% | 3.59% in Q3 2022 |
| Total assets | $2,623.9 | $2,312.0 at December 31, 2022 |
| Net loans | $1,787.6 | $1,493.1 at December 31, 2022 |
| Deposits | $1,401.1 | $1,252.4 at December 31, 2022 |
| Borrowings | $675.1 | $517.4 at December 31, 2022 |
| Cash and cash equivalents | $117.0 | $54.4 at December 31, 2022 |
| Stockholders’ equity | $485.1 | $492.7 at December 31, 2022 |
- For the first nine months, net income was $2.8 million, or $0.12 per diluted share, versus a net loss of $20.8 million, or $0.92 per diluted share, in 2022. Net interest income was $48.1 million versus $50.4 million; net interest margin was 2.65% versus 3.96%.
- Interest expense rose sharply: $17.0 million in Q3 versus $4.0 million a year earlier and $42.8 million for nine months versus $7.4 million. The nine-month increase was 480%, reflecting higher funding costs and greater borrowings.
- Q3 non-interest income included a $3.7 million U.S. Treasury CDFI Equitable Recovery Program grant. Nine-month non-interest expense was $50.8 million, down from $70.1 million, substantially reflecting prior-year Grain microloan write-offs and a $5.0 million Foundation contribution in 2022.
- For nine months, operating cash flow was negative $25.4 million, investing cash flow was negative $207.3 million and financing cash flow was positive $295.4 million. Cash increased $62.7 million to $117.0 million, supported by deposit growth and net borrowings.
- Regulatory capital remained well above minimums: at September 30, the Bank reported a 25.10% total risk-based capital ratio and a 17.51% Tier 1 leverage ratio. The filing states the Bank was categorized as well capitalized.
Material changes and notable items
- Total assets increased 13.5% from year-end 2022. Net loans grew $294.5 million; construction and land loans rose $226.4 million, to $411.4 million. Construction and land loans were 85.1% of Bank total risk-based capital, compared with 38.5% at year-end.
- Deposits increased 11.9%. Certificates of deposit rose to $541.7 million; money-market balances increased to $370.5 million. The company also reported $350.2 million in SaveBetter-related deposits. Borrowings increased to $675.1 million, including $304.0 million from the FRBNY.
- Net interest spread and margin contracted as funding costs repriced faster than asset yields. Q3 average cost of interest-bearing liabilities was 3.64%, compared with 1.33% a year earlier; average earning-asset yield was 5.22%, compared with 4.41%.
- Available-for-sale securities had $26.0 million in gross unrealized losses; held-to-maturity securities had $27.0 million. Management attributed losses primarily to interest rates, not credit deterioration. HTM fair value was $444.9 million versus $471.1 million amortized cost.
- The company completed repurchases of 1.235 million shares under a program representing approximately 5% of shares outstanding, at a weighted-average price of $8.91. Nine-month repurchase cash outflow was $11.0 million.
- Effective January 1, 2023, the company adopted CECL. The ending loan allowance was $27.4 million; it also recorded a $3.2 million allowance for off-balance-sheet credit exposures.
Outlook, risks and contingencies
- No specific earnings or financial guidance is provided. Management cautions that rising rates, inflation, competition for deposits and weaker loan demand may pressure net interest income and margins. Its interest-rate simulation estimated a 20.48% decline in year-one net interest income under an instantaneous 400-basis-point rate increase; management notes that model results are assumption-dependent and not a precise forecast.
- After quarter-end, the Bank entered into two swaps with $250 million total notional: it will pay fixed rates of 4.885% and 4.62% and receive SOFR, to manage interest-rate risk.
- Grain-related risk remains material. The Bank had $9.3 million of Grain-originated microloans, offset by an $8.1 million allowance, leaving $1.2 million net exposure. Grain has experienced synthetic-identity fraud and is a pre-profit startup; the Bank paused new originations pending fraud controls. The filing warns that Grain’s failure could impair servicing and collections and require additional provisions.
- Loan and funding concentration risks include the New York metropolitan market, significant commercial real estate and construction exposure, and $203.7 million of certificates of deposit scheduled to mature in 2023. Management expects substantial renewal but notes that replacement funding could cost more.
- Commitments to grant mortgage loans and unfunded lines totaled $507.3 million. Management expects sufficient funds to meet current lending commitments. The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether deposit pricing, borrowing costs and the mix of funding further compress net interest margin.
- Credit performance and collateral values in the rapidly growing construction and commercial real estate portfolios, and trends in delinquencies and nonaccrual loans.
- Grain’s fraud remediation, recoveries, remaining portfolio losses and the adequacy of the related allowance.
- Liquidity after certificate maturities, reliance on wholesale/brokered funding and continued availability of secured borrowing capacity.
- Interest-rate exposure and the impact of the post-quarter swaps; compare model scenarios with subsequent actual results.
- How much reported earnings depend on grants, recoveries and other nonrecurring or volatile items; Q3 included a $3.7 million grant.