Ponce Financial Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless otherwise noted.
Business context
Ponce Financial Group is the holding company for Ponce Bank, a federally chartered savings association and certified Minority Depository Institution and Community Development Financial Institution. It operates primarily in the New York City metropolitan area, with banking, mortgage, and small-business lending activities. Its loan book is predominantly real-estate secured.
Financial and operating highlights
| Metric | Q2 2023 / June 30, 2023 | Comparison |
|---|---|---|
| Total assets | $2.672 billion | Up 15.6% from December 31, 2022 |
| Loans receivable, net | $1.695 billion | Up $202 million from year-end |
| Deposits | $1.442 billion | Up 15.1% from year-end |
| Borrowings | $682.1 million | Up from $517.4 million at year-end |
| Cash and cash equivalents | $243.8 million | Up from $54.4 million at year-end |
| Stockholders’ equity | $490.5 million | Down from $492.7 million at year-end |
- Q2 earnings: Net loss of $87,000, or approximately break-even per share, versus net income of $771,000, or $0.03 per share, in Q2 2022.
- Q2 revenue and margins: Interest and dividend income was $31.1 million, up 80.9%; interest expense rose 779.9% to $14.8 million. Net interest income increased 5.1% to $16.3 million. Net interest margin fell to 2.65% from 3.92%, and net interest rate spread fell to 1.66% from 3.67%.
- Q2 other results: Provision for credit losses was $987,000; non-interest income was $1.5 million, down 31.5%; non-interest expense was $17.1 million, up 3.2%. A $517,000 provision for contingencies was recorded.
- First-half earnings: Net income of $244,000, or $0.01 per share, versus a net loss of $6.0 million, or $0.27 per share, in the first half of 2022. Net interest income declined 4.0% to $31.5 million; credit-loss provision declined to $813,000 from $2.1 million.
- First-half cash flow: Operating cash flow was $285,000; investing activities used $160.0 million; financing activities provided $349.1 million. Cash increased $189.4 million to $243.8 million, with deposit growth and net borrowings among the main funding sources.
- Funding mix: Money-market deposits rose $220.7 million from year-end, while non-interest-bearing demand deposits declined $22.6 million. Average deposit cost for the first half rose to 2.80% from 0.51%; average borrowing cost was 3.97% versus 2.12%.
- Credit indicators: Gross loans were $1.722 billion. Nonaccrual loans were $17.0 million and loans 90 days or more past due and still accruing were $2.0 million. The allowance for credit losses on loans was $28.2 million. Construction and land loans grew 70.7% from year-end to $315.8 million.
- Capital: The Bank was reported well capitalized. At June 30, its total risk-based capital ratio was 26.30%, common equity Tier 1 ratio 25.05%, and Tier 1 leverage ratio 17.95%.
Material changes and unusual items
- First-half 2023 non-interest expense declined $11.2 million year over year, primarily because the 2022 comparison included a $9.6 million Grain-related write-off and a $5.0 million contribution to the Ponce De Leon Foundation. The 2023 period included $1.3 million of Grain-related recoveries.
- The Company adopted CECL on January 1, 2023. The filing reports a $662,000 initial allowance for held-to-maturity securities and a $948,000 adoption impact on the allowance for off-balance-sheet credit losses. Prior-period comparisons were not restated.
- The Company repurchased 615,948 shares during Q2 for $5.2 million, at a weighted-average price of $8.44. Its program authorized repurchases of up to 1,235,000 shares through May 15, 2024.
- The $225 million Treasury ECIP preferred-stock investment, issued in 2022, has a 0% dividend rate for its first two years; subsequent rates depend on program factors, within stated 0.50%–2.00% bounds. The eventual rate is not yet determinable.
Outlook, risks, and contingencies
- No specific earnings or margin guidance is provided. Management warns that further rate increases, inflation, deposit competition, and the timing of changes to funding costs and loan yields could pressure net interest margin and income; weaker loan demand is also a risk.
- The filing’s interest-rate simulation estimates a 13.02% reduction in year-one net interest income under an instantaneous +400-basis-point shock, and a 22.93% reduction in economic value of equity under that scenario. Management notes that model assumptions limit the predictive value of these estimates.
- Management identifies the New York metropolitan area as a geographic concentration and real estate as the principal collateral. Commercial real estate exposures, local economic conditions, property values, and borrowers’ ability to repay are key credit risks.
- Grain remains a material risk area: the Bank had $11.2 million of Grain-originated microloans, with a $9.8 million allowance and $1.4 million net exposure. The Bank had paused new originations pending further notice. Management warns that Grain’s startup viability, fraud controls, or servicing failure could lead to additional losses; the allowance could prove inadequate.
- Off-balance-sheet commitments totaled $450.5 million, including $387.0 million of mortgage-loan commitments and $63.5 million of unfunded lines of credit. The allowance for off-balance-sheet credit losses was $2.8 million. Management expects to meet current lending commitments.
- Certificates of deposit totaling $134.6 million were scheduled to mature in 2023. Management expects substantial renewal; otherwise, replacement funding or higher deposit rates could increase costs.
- The Bank expected a $3.7 million CDFI Equitable Recovery Program grant to be disbursed in Q3 2023, subject to eligible-use and reporting requirements. The filing reports no pending legal matter believed material and no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether deposit and borrowing costs continue to rise faster than asset yields, and the resulting trajectory of net interest margin.
- Deposit retention and concentration in money-market, brokered, and listing-service funding, together with the maturities and cost of replacement funding.
- Credit trends in construction, multifamily, and other commercial real estate loans, including delinquencies, nonaccruals, collateral values, and allowance adequacy.
- Grain’s loan performance, fraud remediation, servicing arrangements, and any further exposure or losses.
- Cash and liquidity needs against loan growth, $450.5 million of commitments, and the $682.1 million borrowing balance; confirm pledged collateral and available borrowing capacity.
- Actual dividend terms on the ECIP preferred stock, the use and timing of the expected $3.7 million grant, and the capital and per-share effects of ongoing repurchases.