Ponce Financial Group, Inc. — Q1 2023 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. The company is a savings and loan holding company operating Ponce Bank and its Mortgage World division, primarily in the New York City metropolitan area. Ponce Bank is a CDFI and MDI.
Key financial metrics
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net income (loss) | $0.331 million | $(6.820) million in Q1 2022 |
| Basic and diluted EPS | $0.01 | $(0.31) in Q1 2022 |
| Net interest income | $15.245 million | $17.338 million in Q1 2022 |
| Net interest margin | 2.75% | 4.68% in Q1 2022 |
| Total assets | $2.540 billion | $2.312 billion at December 31, 2022 |
| Net loans | $1.614 billion | $1.493 billion at December 31, 2022 |
| Deposits | $1.337 billion | $1.252 billion at December 31, 2022 |
| Borrowings | $648.4 million | $517.4 million at December 31, 2022 |
| Cash and cash equivalents | $184.7 million | $54.4 million at December 31, 2022 |
| Stockholders’ equity | $496.0 million | $492.7 million at December 31, 2022 |
Operating cash flow was $6.1 million, investing cash outflow was $91.3 million, and financing cash inflow was $215.5 million. The company reported a $0.2 million benefit for credit losses. The loan allowance was $29.0 million; allowances for held-to-maturity securities and off-balance-sheet credit exposures were $0.8 million and $2.3 million, respectively.
Material changes versus comparable periods
- Net income improved by $7.2 million year over year, principally as non-interest expense declined $11.7 million. The prior-year quarter included a $5.0 million Foundation contribution and an $8.1 million Grain-related write-off; Q1 2023 included $0.9 million of Grain recoveries.
- Interest income rose 38.6% to $26.4 million, but interest expense increased 561.4% to $11.1 million. Net interest income fell 12.1%; the net interest spread narrowed to 1.79% from 4.48%.
- Net loans rose $121.3 million from year-end, with gross mortgage lending growth concentrated in multifamily and construction and land loans. Gross loans increased 7.6%.
- Deposits increased $84.5 million and borrowings increased $131.0 million from year-end. Cash and cash equivalents rose $130.3 million.
- Available-for-sale securities had $20.9 million of gross unrealized losses at March 31; held-to-maturity securities had a $9.0 million difference between reported carrying value and fair value. Management attributed securities unrealized losses primarily to interest-rate changes, not credit deterioration.
Outlook, risks, contingencies, and unusual items
- No specific earnings or financial guidance is provided. Management says the Bank is asset sensitive and believes it is positioned to withstand rising rates in the near term, while warning that higher funding costs, competition, inflation, and weaker loan demand could pressure margins and earnings.
- Interest-rate models estimate year-one net interest income declines of 0.21% under an instantaneous +400-basis-point shock and 0.26% under +100 basis points. The EVE model estimates a 13.45% decline under +400 basis points. Management cautions that models depend on assumptions and are not precise forecasts.
- Credit, real-estate, funding, and geographic concentration risks are material. At quarter-end, $19.4 million of loans were nonaccrual and $19.8 million were 90 or more days past due. Multifamily, nonresidential, and construction/land lending form a substantial share of the portfolio.
- Grain remains a notable operational and credit risk. The company had $1.8 million of net exposure to Grain-originated microloans, excluding unused commitments and borrower security deposits. Grain has experienced synthetic-identity and other fraud, remains a pre-profit startup, and may have difficulty continuing or servicing the portfolio. The Bank suspended new originations pending further notice and requires fraud checks for further credit extensions.
- Certificates of deposit totaling $160.1 million mature during 2023. Management expects substantial renewals but says replacement funding or higher deposit rates may be needed if retention is weak. Reported off-balance-sheet commitments to originate loans and extend credit totaled $378.8 million.
- The company adopted CECL on January 1, 2023, changing credit-loss measurement and recording a cumulative transition adjustment. The filing reports the Bank as well capitalized and says it met applicable regulatory capital requirements.
- Treasury’s $225 million ECIP preferred investment has no dividends for its first two years; the eventual dividend rate depends on program factors and is not yet determinable. The Bank also expects a $3.7 million CDFI grant, with disbursement indicated for June 2023 and use restricted to eligible activities.
- Management reported no material legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls. It did not identify a material effect from routine legal matters.
Important facts for investors to verify
- Whether deposit costs and borrowing reliance continue to rise, and how that affects net interest margin and earnings.
- The composition, renewal rates, and actual cost of deposits, including the filing’s $152.9 million figure for SaveBetter-related deposits versus deposit-category amounts in the financial statements.
- Credit performance and collateral trends in multifamily, nonresidential, and construction and land loans, including nonaccruals, past dues, and allowance adequacy under CECL.
- Further Grain loan performance, fraud recoveries, servicing arrangements, and any additional exposure or losses.
- Whether the $160.1 million of 2023 certificate maturities renew, and the availability and cost of alternative funding.
- The future ECIP preferred dividend rate, the timing and conditions of the CDFI grant, and their effects on capital and cash flows.