Ponce Financial Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Amounts are in U.S. dollars. The unaudited consolidated results cover Ponce Financial Group and its subsidiaries.
Business context and reporting period
Ponce is a savings and loan holding company serving primarily the New York City metropolitan area through Ponce Bank and its mortgage business. On January 27, 2022, the company completed its second-step conversion and stock offering, becoming the holding company for Ponce Bank; Mortgage World’s assets and liabilities had been transferred to the Bank the prior day, and it now operates as a Bank division. These changes affect comparability with prior periods.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Prior comparable / December 31, 2021 |
|---|---|---|
| Net interest income | $17.3 million; up 34.5% | $12.9 million in Q1 2021 |
| Net interest margin | 4.68% | 4.00% in Q1 2021 |
| Net income (loss) | $(6.8) million; $(0.31) per basic and diluted share | $2.5 million; $0.15 per share in Q1 2021 |
| Provision for loan losses | $1.3 million | $0.7 million in Q1 2021 |
| Total assets | $1.595 billion | $1.654 billion |
| Loans receivable, net | $1.300 billion | $1.305 billion |
| Deposits | $1.181 billion | $1.205 billion |
| Stockholders’ equity | $299.6 million | $189.3 million |
| Cash and cash equivalents | $69.3 million | $153.9 million |
| FHLBNY advances and warehouse lines | $93.4 million and $0.8 million | $106.3 million and $15.1 million |
Interest and dividend income was $19.0 million, up 25.3%; interest expense fell 26.5% to $1.7 million. Net interest rate spread was 4.48%, versus 3.76% a year earlier. The filing attributes improved net interest income primarily to higher average loan balances and a lower average funding cost.
Operating cash flow was $12.0 million, compared with $22.6 million in Q1 2021. Investing activities used $44.8 million and financing activities used $51.8 million; cash and cash equivalents declined by $84.6 million during the quarter. The company purchased $53.4 million of available-for-sale securities. Their fair value was $154.8 million at quarter-end, with $8.9 million of gross unrealized losses; the company attributed those losses to market interest-rate changes and reported a $5.6 million after-tax other comprehensive loss.
The Bank reported regulatory capital ratios of 23.27% total risk-based capital, 22.02% Tier 1 risk-based capital, 22.02% common equity Tier 1, and 14.88% Tier 1 leverage. It was categorized as well capitalized. The Bank also reported $377.2 million of eligible collateral for FHLBNY advances, an unused $25 million unsecured correspondent-bank line, and an FHLBNY letter-of-credit facility of up to $21.5 million.
Material changes versus prior periods
- The quarterly net loss contrasts with Q1 2021 net income, principally because of an $8.1 million Grain receivable write-off and write-down and a $5.0 million contribution to the Ponce De Leon Foundation. Non-interest expense rose 117.4% to $28.1 million; non-interest income fell 42.8% to $2.2 million.
- Management’s non-GAAP reconciliation reports a Q1 2022 net loss of $2.9 million, or $(0.13) per share, excluding the Foundation contribution; the comparable Q1 2021 figure, excluding the prior-year real-property sale gain, was net income of $1.9 million, or $0.12 per share. These are supplemental, non-GAAP measures.
- Gross loans declined $6.4 million from year-end. Mortgage loans increased $46.7 million, while nonmortgage loans fell $53.1 million, largely reflecting a $50.8 million decrease in outstanding PPP loans. Deposits decreased $23.6 million.
- Equity rose $110.3 million, primarily due to the conversion and offering. The quarter-end share count was 24,724,274.
Outlook, commentary, risks and unusual items
- Grain credit and fraud risk: After assessing $11.8 million of remaining Grain receivables, the company recorded an approximately $6.3 million write-off and $1.7 million additional reserve, applied a $1.6 million security-deposit set-off, and reported a $2.2 million net Grain receivable at March 31. Grain is a pre-profit startup; further fraud, collection shortfalls, or business failure could result in additional losses. New Grain-originated microloans were paused, and the company says it reassesses collectability monthly. The Bank also has a $1.0 million equity investment in Grain.
- Interest rates and markets: Management said the Bank was asset sensitive and believed it was positioned to withstand near-term rate increases, but warned that rapid rate changes, competition, inflation, deposit pricing, and weaker loan demand could pressure margins and earnings. Its model estimated a 5.15% decline in year-one net interest income under an instantaneous 400-basis-point increase; estimated economic value of equity declined 25.68% in that scenario. Management cautions that model assumptions limit predictive value.
- Credit and concentration: The loan portfolio is concentrated in the New York metropolitan area and heavily weighted to real estate; commercial real estate, economic conditions, inflation, and borrower repayment capacity remain relevant risks. The $1.3 million provision reflected higher qualitative reserves amid COVID-19, inflation, and rate increases. Management expects adoption of CECL to increase the allowance, particularly for longer-duration loans, but says the impact cannot yet be determined.
- Funding and liquidity: Certificates of deposit totaling $242.1 million were scheduled to mature within one year. Management expects substantial renewal, but could use FHLBNY borrowing, correspondent credit, or higher deposit rates if retention is weaker. Liquidity is also affected by deposit flows and loan prepayments.
- Potential ECIP funding: Treasury determined the company was eligible for an investment of up to $185.6 million, potentially increasing to $225 million, and anticipated closing on June 7, 2022. The proposed investment would be in senior perpetual noncumulative preferred stock. The company stated that final terms were under evaluation and that closing and acceptable terms were not assured; this was not completed as of the reporting date.
- Other context: Management discussed continuing technology, digital-banking, and branch-renovation initiatives. It provided no formal earnings guidance and cautioned that interim results are not necessarily indicative of full-year results. The filing identifies COVID-19 and the Russia-Ukraine conflict as sources of economic uncertainty. Management reported no pending legal matter it believed would materially affect financial condition or results.
Important facts for investors to verify
- Whether Grain makes the expected payments, whether further fraudulent loans are identified, and whether the $2.2 million remaining receivable is collectible.
- The final ECIP amount, preferred-stock terms, timing, and whether the transaction closes.
- Deposit retention and funding costs, particularly as $242.1 million of certificates mature within a year and interest rates rise.
- Credit quality, allowance adequacy, and exposure to local real estate markets, PPP runoff, and the Grain-linked microloan portfolio.
- How unrealized securities losses, future CECL adoption, and interest-rate sensitivity affect capital, liquidity, and earnings.