Ponce Financial Group, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The filing also reports fourth-quarter results. Ponce Financial Group was formed as the holding company following a mutual-to-stock conversion completed January 27, 2022; accordingly, the 2021 statements largely reflect the predecessor PDL Community Bancorp. The company operates Ponce Bank, a New York City-area minority depository institution and community development financial institution, and, through year-end, Mortgage World.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Total assets, year-end | $1.654 billion | $1.355 billion |
| Gross loans, year-end | $1.322 billion | $1.172 billion |
| Deposits, year-end | $1.205 billion | $1.030 billion |
| Net interest income | $58.8 million | $42.0 million |
| Net interest margin | 4.13% | 3.69% |
| Net income | $25.4 million | $3.9 million |
| Diluted earnings per share | $1.51 | $0.23 |
| Cash and cash equivalents, year-end | $153.9 million | $72.1 million |
| Stockholders’ equity, year-end | $189.3 million | $159.5 million |
- Total interest and dividend income was $67.1 million, up 25.8%; non-interest income was $34.6 million, up from $13.2 million. Net interest income increased 40.2%, reflecting loan growth and lower funding costs.
- Reported earnings included a $20.3 million net gain from real-property sales. Excluding this gain, management’s non-GAAP net income was $9.4 million, or $0.56 per share, versus $0.6 million, or $0.03 per share, in 2020. Treat reported and adjusted results separately.
- Non-interest expense rose 20.2% to $57.1 million. The reported efficiency ratio improved to 61.13% from 86.09%, but management attributed much of the improvement to the one-time property-sale gains.
- Net cash provided by operating activities was $18.6 million; investing activities used $211.1 million and financing activities provided $274.4 million. Financing cash flow included deposit growth and $122.0 million received before the subsequent conversion closing.
- Year-end borrowings included $106.3 million of FHLBNY advances and $15.1 million of Mortgage World warehouse-line usage. Deposits were the principal funding source; cash and cash equivalents were $153.9 million. The Bank reported regulatory capital ratios of 17.23% total risk-based, 15.98% Tier 1 risk-based and 10.91% Tier 1 leverage, and was categorized as well capitalized.
Material changes versus the prior comparable period
- Gross loans grew 12.8%; deposits grew 17.0%; and total assets grew 22.0%. Multifamily, nonresidential, and construction-and-land loans totaled $722.6 million, or 54.7% of loans, compared with $632.2 million, or 53.9%, a year earlier.
- Available-for-sale securities increased to $113.3 million from $17.5 million, while cash and cash equivalents more than doubled. Premises and equipment declined to $19.6 million from $32.0 million, mainly reflecting property sales.
- The allowance for loan losses rose to $16.4 million from $14.9 million; it equaled 1.24% of gross loans versus 1.27%. Net charge-offs were $1.2 million, compared with net recoveries of $98,000 in 2020.
- Nonperforming loans were $11.4 million, or 0.87% of gross loans, versus $11.7 million, or 1.00%. Including accruing troubled debt restructurings, the filing reports $17.6 million of nonperforming assets and related categories, down from $18.3 million.
- Fourth-quarter 2021 net income was $15.0 million versus $1.6 million in fourth-quarter 2020. Fourth-quarter net interest income was $16.8 million; non-interest income was $19.2 million, including property-sale gains.
Outlook, commentary, risks and unusual items
- Conversion and capital: The January 2022 conversion and offering raised more than $132 million in additional capital, according to management. The $122 million received before year-end was recorded as a liability at December 31 and reclassified upon closing. The filing does not present the post-closing proceeds as 2021 earnings or year-end equity.
- Potential Treasury investment: Treasury notified the company it was eligible for up to $186.5 million under the Emergency Capital Investment Program. The investment was not reported as completed; terms remained under evaluation. Potential proceeds would be exchanged for preferred stock and would depend on final terms and qualifying lending.
- Grain exposure: The Bank held $33.9 million across 59,180 Grain-associated consumer loans. Following purchases of $13.0 million of loans that failed Bank standards, $10.4 million remained receivable from Grain at year-end. Repayment by December 31, 2022 was dependent on Grain obtaining funding. The Bank also reported $1.2 million in Grain-related charge-offs in 2021.
- PPP: At year-end, 1,606 PPP loans totaling $136.8 million remained outstanding. The Bank had $3.7 million of deferred PPP loan fees left to recognize; forgiveness, SBA guarantee compliance, and servicing remain relevant risks.
- Rates and economy: Management said the Bank was asset-sensitive and believed it was positioned to withstand near-term rate increases, while warning that deposit repricing, competition, inflation, weaker loan demand and borrower stress could pressure margins and credit quality. Its model estimated that an instantaneous 100-basis-point increase would reduce year-one net interest income by 0.82% and economic value of equity by 4.58%; these are model estimates, not forecasts.
- Credit and concentration risks: The loan book is heavily concentrated in New York-area real estate, including large, relatively unseasoned commercial and construction exposures. Investor-owned commercial real estate loans were 396.2% of risk-based capital, above the regulatory 300% guideline but within the Bank’s 400% internal limit. Rent regulation, property values, local economic conditions and construction execution are material sensitivities.
- Other items: The Bank had four renewed COVID-related forbearances totaling $8.0 million at year-end. CECL was expected to take effect January 1, 2023, with the eventual allowance impact undetermined. Mortgage World transferred its assets and liabilities to Ponce Bank and ceased operating separately on January 26, 2022. The auditor issued an unqualified opinion; management assessed disclosure controls and internal control over financial reporting as effective. The company reported no pending legal proceeding expected to have a material adverse effect.
Important facts for investors to verify
- Reconcile reported 2021 net income and efficiency-ratio improvement with the $20.3 million property-sale gain and management’s adjusted, non-GAAP results.
- Track collection of the $10.4 million Grain receivable, Grain’s funding and underwriting controls, and any resulting reserve or charge-off changes.
- Confirm the final amount, terms, timing and deployment of conversion proceeds and whether the potential ECIP investment is completed.
- Monitor commercial real estate and construction concentrations, loan seasoning, delinquencies, forbearances, charge-offs and allowance adequacy, including the effects of CECL adoption.
- Assess deposit stability and funding costs, upcoming certificate maturities, wholesale funding reliance, and actual margin performance as interest rates change.
- Review subsequent-period results and integration of Mortgage World’s mortgage-banking operations into Ponce Bank.