Ponce Financial Group, Inc. — Q3 2022 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2022; balance-sheet comparisons are with December 31, 2021. The company is a New York metropolitan-area bank holding company operating through Ponce Bank, with mortgage banking conducted as a Bank division. In January 2022, it completed its mutual-to-stock conversion and reorganized under Ponce Financial Group, Inc.
Financial results
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Interest and dividend income | $21.6 | $17.4 | $57.8 | $48.4 |
| Net interest income | $17.6 | $15.4 | $50.4 | $42.1 |
| Provision for loan losses | $9.3 | $0.6 | $11.4 | $1.8 |
| Non-interest income | $1.6 | $3.2 | $6.0 | $15.5 |
| Non-interest expense | $25.4 | $14.7 | $70.1 | $41.3 |
| Net income (loss) | $(14.7) | $2.1 | $(20.8) | $10.4 |
| Basic and diluted EPS | $(0.64) | $0.12 | $(0.92) | $0.62 |
| Net interest margin | 3.62% | 4.13% | 4.09% | 3.99% |
At September 30, 2022, total assets were $2.158 billion, up 30.5% from year-end 2021. Gross loans were $1.415 billion and loans net of allowance were $1.393 billion; the allowance was $25.1 million, versus $16.4 million at year-end. Deposits were $1.351 billion, up $146.5 million. Cash and cash equivalents fell to $62.5 million from $153.9 million. FHLBNY advances totaled $286.4 million, up from $106.3 million; warehouse-line balances were zero. Stockholders’ equity was $500.7 million, including $225 million of preferred stock issued to Treasury.
Nine-month operating cash flow was $14.2 million; investing cash flow was $(641.1) million, principally reflecting securities purchases and loan growth; financing cash flow was $535.5 million. Cash and cash equivalents declined $91.4 million over the period.
Material changes versus comparable periods
- Q3 net loss compared with prior-year income, principally reflecting a $9.3 million loan-loss provision and $8.9 million of Grain-related expense recorded in the quarter. Nine-month Grain write-off and write-down expense was $18.5 million, including the write-off of the company’s $1.0 million Grain investment.
- Net interest income grew, but Q3 net interest margin fell 51 basis points year over year as funding costs rose. The nine-month margin increased 10 basis points, partly reflecting loan growth and PPP fee amortization.
- Non-interest income declined year over year. The 2021 comparison included a $4.8 million gain on real-estate sales; 2022 included a $5.0 million Foundation contribution and a $436,000 equipment-sale loss.
- Assets and equity expanded following the conversion and the $225 million Treasury preferred-stock investment. The company invested substantially in held-to-maturity securities, which grew from $0.9 million at year-end 2021 to $494.3 million at September 30, 2022.
Outlook, risks, contingencies, and unusual items
- Grain credit and fraud exposure: Management reported that $25.5 million of loans had been put back to Grain as fraudulent since the relationship began. The company wrote down $17.5 million of the Grain receivable, received $6.2 million from Grain and security deposits, and applied a $1.8 million Treasury grant, leaving no net receivable. Remaining Grain-originated microloans were $21.5 million gross, with an $8.2 million allowance and $13.3 million net carrying value. A further $15.3 million of unused commitments remained available to borrowers. New originations were suspended; further extensions require confirmation a borrower is not fraudulent. Grain’s viability, servicing ability, and the adequacy of reserves remain risks.
- Credit quality: Nonaccrual loans increased to $21.2 million from $11.4 million at year-end 2021. Loans at least 90 days past due totaled $12.8 million, compared with $3.1 million. The loan portfolio is concentrated in the New York metropolitan area and heavily weighted toward real estate lending.
- Interest rates and funding: Management warned that rate increases, inflation, competition, deposit pricing, and weaker loan demand could pressure margins and earnings. It described the Bank as asset-sensitive and said it believed it was positioned to withstand rising rates in the near term. Its modeled scenarios estimated a 2.02% increase in year-one net interest income under an immediate 400-basis-point rate rise, but the filing cautions that model assumptions may not reflect actual results. Deposits included brokered and listing-service balances; management said wholesale and noncore funding remained within policy limits.
- Securities and liquidity: Available-for-sale securities had $23.2 million in gross unrealized losses; held-to-maturity securities had $15.1 million in gross unrealized losses. Management attributed losses primarily to interest-rate changes rather than credit deterioration. The fair value of held-to-maturity securities was $479.3 million against $494.3 million amortized cost. These valuation declines and the classification of securities may matter to liquidity and capital under stress.
- Capital, accounting, and other outlook: The Bank was reported well capitalized, with a 32.13% common equity Tier 1 ratio and 22.91% Tier 1 leverage ratio at quarter-end. Treasury preferred dividends are zero for the first two years; thereafter the annual rate is expected to be between 0.50% and 2.00%, depending on program factors. Management anticipated approximately $35 million of right-of-use assets and lease liabilities on adopting lease accounting at year-end 2022. It expected CECL adoption after 2022 could increase the allowance, particularly for longer-duration loans. No quantified earnings or revenue guidance was provided.
- Management cited potential effects from COVID-19, the Russia-Ukraine conflict, inflation, real-estate conditions, credit losses, funding costs, competition, and third-party and technology risks. It reported effective disclosure controls and no material change in internal controls during the quarter; it did not identify legal proceedings expected to materially affect the company.
Important facts for investors to verify
- Whether Grain-related fraud, servicing, and collection issues result in further loan losses, charge-offs, or reserve increases, including on unused commitments.
- Subsequent trends in delinquencies, nonaccrual loans, construction and commercial real-estate exposures, and the adequacy of the allowance.
- Deposit retention, funding mix and cost, FHLBNY borrowing capacity, and liquidity if deposits leave or borrowing costs rise.
- Interest-rate sensitivity and the effect of securities fair-value declines, especially the size and liquidity of the held-to-maturity portfolio.
- The terms and qualifying-lending requirements affecting Treasury preferred dividends, and the resulting impact of CECL and lease-accounting adoption.