Ponce Financial Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results. The company completed its mutual-to-stock conversion in January 2022, and Mortgage World became a division of Ponce Bank; these changes affect period-to-period comparability. Unless stated otherwise, dollar amounts are in millions.
Business context and key financial metrics
Ponce is a Bronx-based savings and loan holding company operating primarily in the New York City metropolitan area. Its banking business focuses on real-estate lending and deposits; it also conducts residential mortgage banking. Ponce Bank is a certified CDFI and MDI.
| Metric | Q2 2022 / June 30, 2022 | Comparable period / change |
|---|---|---|
| Net income | $0.771; diluted EPS $0.03 | Q2 2021 net income $5.932; diluted EPS $0.35 |
| Six-month net income (loss) | $(6.049); diluted loss per share $(0.27) | First half 2021 net income $8.384; diluted EPS $0.50 |
| Net interest income | Q2 $15.488; first half $32.826 | Up 12.8% and 23.3%, respectively, year over year |
| Net interest margin | Q2 4.10%; first half 4.39% | Q2 3.84%; first half 3.92% in 2021 |
| Assets and loans | Total assets $2,042.3; net loans $1,324.3 | Assets up 23.5% from year-end 2021; gross loans up 1.3% |
| Deposits and cash | Deposits $1,148.7; cash and cash equivalents $274.8 | Deposits down $56.0 from year-end; cash up $120.9 |
| Borrowings | FHLBNY advances $334.4 | Up from $106.3 at year-end; includes $175.0 overnight borrowing |
| Equity | Stockholders’ equity $518.1 | Up from $189.3 at year-end, mainly reflecting Treasury preferred investment and conversion proceeds |
Q2 interest and dividend income was $17.167 million and interest expense was $1.679 million. Six-month net interest income after provision was $30.751 million. The first-half provision for loan losses was $2.075 million, versus $1.272 million in 2021. The allowance for loan losses was $17.535 million at June 30.
Six-month cash flow: operating activities provided $26.5 million; investing activities used $286.6 million, largely for securities purchases and loan growth; financing activities provided $381.0 million, principally reflecting preferred-stock proceeds and FHLBNY advances. The filing reports a first-half net loss, despite positive operating cash flow.
Material changes versus prior periods
- Q2 earnings fell by $5.2 million year over year, chiefly because Q2 2021 included a $4.2 million gain on sale of real estate, while mortgage-sale income declined and expenses and loan-loss provision increased. Higher net interest income and a tax benefit partly offset the decline.
- First-half results swung from $8.384 million net income to a $6.049 million net loss. Non-interest income fell $7.8 million, while non-interest expense rose $18.1 million. The 2021 comparison included $4.839 million of real-estate sale gains.
- First-half 2022 non-interest expense included a $9.574 million Grain receivable write-off/write-down and a $4.995 million contribution to the Ponce De Leon Foundation. Management’s non-GAAP first-half net loss, excluding the property gain and foundation contribution, was $2.103 million, compared with non-GAAP net income of $4.561 million in 2021.
- Gross loans rose $17.3 million overall, as $125.2 million growth in non-PPP loans was largely offset by a $106.0 million decline in PPP loans. Multifamily, nonresidential, and construction-and-land lending increased.
- Available-for-sale securities had $18.914 million of gross unrealized losses at June 30, versus $1.978 million at year-end. The resulting first-half after-tax other comprehensive loss was $13.576 million. Management attributed the unrealized losses to interest-rate changes and said it did not intend, and was not likely required, to sell the securities before recovery.
Outlook, risks, contingencies, and unusual items
- Grain exposure: The company reported $30.9 million of total Grain exposure: a $3.0 million net receivable, $26.9 million in microloans net of allowance, and a $1.0 million equity investment. It wrote down $9.6 million of the Grain receivable in the first half after fraud involving synthetic and other identities. Grain is a pre-profit startup; its ability to repay depends on its operations and possible financing, and additional fraudulent loans may be identified. Ponce halted new originations and says it assesses collectability monthly. Further losses could materially reduce earnings.
- Rates and economic conditions: Management cited inflation, rising interest rates, COVID-19 effects, the Russia-Ukraine conflict, local economic conditions, real-estate values, funding costs, and loan demand as risks. It said the Bank is asset-sensitive and believes it is positioned to withstand near-term rate increases, but warned that margins and loan demand could be pressured. Its model estimated a 6.14% decrease in year-one net interest income under an instantaneous 400-basis-point rate increase; the modeled EVE decline was 20.11%. Management cautioned that these models rely on assumptions and are not precise forecasts.
- Funding and liquidity: Certificates of deposit totaling $212.0 million were scheduled to mature within one year. Management expects substantial renewal; otherwise, it may use FHLBNY advances, correspondent credit, or higher deposit rates, potentially increasing interest expense. The Bank had $401.1 million of eligible mortgage collateral for FHLBNY advances and an unused $25.0 million unsecured correspondent line.
- Capital investment: In June, Treasury invested $225 million through the Emergency Capital Investment Program in senior non-cumulative perpetual preferred stock. The initial dividend rate is zero for two years; thereafter, the rate depends on qualifying lending, with a stated range of 0.50% to 2.00%. The company said the actual rate was not yet determinable. The Bank was categorized as well capitalized; its reported June 30 total risk-based capital ratio was 36.00% and Tier 1 leverage ratio was 28.79%.
- Other items: The company anticipates adopting lease accounting in December 2022 and estimated recognition of approximately $34.3 million in right-of-use assets and $35.5 million in operating lease liabilities. It expected CECL adoption in 2023 and anticipated a higher allowance, particularly for longer-duration loans, but said the amount was not yet determinable. Management reported no material legal proceedings and concluded disclosure controls were effective. No financial guidance was provided.
Important facts for investors to verify
- Grain receivable collections, any additional fraud losses, and the adequacy of the $1.4 million allowance on Grain microloans.
- Deposit retention and pricing, the use and cost of FHLBNY borrowing, and the effect of rising rates on net interest margin and liquidity.
- Credit trends in the growing commercial real-estate and construction portfolios, including delinquency and nonaccrual levels.
- The drivers of the first-half loss, including the Grain write-down, foundation contribution, higher compensation, and changes in mortgage banking revenue.
- The future preferred-stock dividend rate and the eventual effects of lease accounting and CECL adoption.