UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-41255
Ponce Financial Group, Inc.
(Exact Name of Registrant as Specified in its Charter)
Maryland
87-1893965
(State or other jurisdiction of
incorporation or organization)
(I.R.S. EmployerIdentification No.)
2244 Westchester Avenue
Bronx, NY
10462
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (718) 931-9000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.01 per share
PDLB
The NASDAQ Stock Market, LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 7, 2024, the registrant had 23,811,732 shares of common stock, $0.01 par value per share, outstanding.
Auditor Firm Id: 686
Auditor Name: Forvis Mazars, LLP
Auditor Location: New York, New York, USA
Table of Contents
Page
PART I.
FINANCIAL INFORMATION
1
Item 1.
Consolidated Financial Statements
Consolidated Statements of Financial Condition (Unaudited)
Consolidated Statements of Operations (Unaudited)
2
Consolidated Statements of Comprehensive Income (Unaudited)
3
Consolidated Statements of Stockholders’ Equity (Unaudited)
4
Consolidated Statements of Cash Flows (Unaudited)
5
Notes to Consolidated Financial Statements (Unaudited)
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
53
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
54
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
55
Signatures
56
i
PART I—FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
Ponce Financial Group, Inc. and Subsidiaries
June 30, 2024 and December 31, 2023
(Dollars in thousands, except share data)
June 30,
December 31,
2024
2023
(unaudited)
ASSETS
Cash and due from banks:
Cash
$
23,128
28,930
Interest-bearing deposits
80,038
110,260
Total cash and cash equivalents
103,166
139,190
Available-for-sale securities, at fair value (Note 3)
113,125
119,902
Held-to-maturity securities, net of allowance for credit losses of $218 at June 30, 2024 and $398 at December 31, 2023; at amortized cost (fair value 2024 $425,645; 2023 $450,042) (Note 3)
442,113
461,748
Placements with banks
249
Mortgage loans held for sale, at fair value (Note 4)
37,764
9,980
Loans receivable, net of allowance for credit losses of $24,061 at June 30, 2024 and $26,154 at December 31, 2023 (Note 5)
2,022,173
1,895,886
Accrued interest receivable
17,441
18,010
Premises and equipment, net
16,976
16,053
Right of use assets (Note 6)
30,349
31,272
Federal Home Loan Bank of New York (FHLBNY) stock, at cost
23,972
19,377
Deferred tax assets
13,172
14,332
Other assets
21,507
24,723
Total assets
2,842,007
2,750,722
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 7)
1,606,097
1,507,620
Operating lease liabilities
31,861
32,684
Accrued interest payable
6,820
11,965
Advance payments by borrowers for taxes and insurance
10,838
10,778
Borrowings (Note 8)
680,421
684,421
Other liabilities
8,313
11,859
Total liabilities
2,344,350
2,259,327
Commitments and contingencies (Note 11)
Stockholders' Equity:
Preferred stock, $0.01 par value; 100,000,000 shares authorized, 225,000 shares issued and outstanding as of June 30, 2024 and as of December 31, 2023.
225,000
Common stock, $0.01 par value; 200,000,000 shares authorized; 24,886,711 shares issued and 23,811,732 shares outstanding as of June 30, 2024 and 24,886,711 shares issued and 23,785,520 shares outstanding as of December 31, 2023
Treasury stock, at cost; 1,074,979 shares as of June 30, 2024 and 1,101,191 shares as of December 31, 2023
(9,519
)
(9,747
Additional paid-in-capital
207,934
207,106
Retained earnings
102,951
97,420
Accumulated other comprehensive loss (Note 14)
(16,557
(15,649
Unearned compensation ─ ESOP; 1,368,860 shares as of June 30, 2024 and 1,435,732 shares as of December 31, 2023
(12,401
(12,984
Total stockholders' equity
497,657
491,395
Total liabilities and stockholders' equity
The accompanying notes are an integral part of the consolidated financial statements (unaudited).
Three Months and Six Months Ended June 30, 2024 and 2023
For the Three Months Ended June 30,
For the Six Months Ended June 30,
Interest and dividend income:
Interest on loans receivable
31,281
23,015
61,945
42,715
Interest on deposits due from banks
1,542
1,817
4,453
2,014
Interest and dividend on securities and FHLBNY stock
5,969
6,223
12,060
12,682
Total interest and dividend income
38,792
31,055
78,458
57,411
Interest expense:
Interest on certificates of deposit (1)
6,358
3,881
12,738
7,106
Interest on other deposits (1)
7,389
4,413
13,929
7,225
Interest on borrowings
7,141
6,479
15,064
11,553
Total interest expense
20,888
14,773
41,731
25,884
Net interest income
17,904
16,282
36,727
31,527
(Benefit) provision for credit losses (Note 3) (Note 5)
(374
987
(554
813
Net interest income after (benefit) provision for credit losses
18,278
15,295
37,281
30,714
Non-interest income:
Service charges and fees
492
481
965
972
Brokerage commissions
9
35
17
50
Late and prepayment charges
426
372
785
1,101
Income on sale of mortgage loans
274
82
576
181
Other
1,057
522
1,622
1,007
Total non-interest income
2,258
1,492
3,965
3,311
Non-interest expense:
Compensation and benefits
7,724
7,425
15,568
14,871
Occupancy and equipment
3,564
3,724
7,231
7,294
Data processing expenses
1,013
1,208
2,140
2,400
Direct loan expenses
633
345
1,365
757
(Benefit) provision for contingencies
(493
517
(329
1,502
Insurance and surety bond premiums
263
248
516
513
Office supplies, telephone and postage
233
489
482
888
Professional fees
1,369
1,904
3,092
3,359
Grain recoveries (Note 5)
(65
(346
(118
(1,260
Marketing and promotional expenses
145
303
245
431
Directors' fees and regulatory assessment
176
160
355
315
Other operating expenses
1,585
1,112
2,550
2,380
Total non-interest expense
16,147
17,089
33,097
33,450
Income (loss) before income taxes
4,389
(302
8,149
575
Provision (benefit) for income taxes
1,197
(215
2,543
331
Net income (loss)
3,192
(87
5,606
244
Dividends on preferred shares
75
—
Net income (loss) available to common stockholders
3,117
5,531
Earnings per common share (Note 10):
Basic
0.14
(0.00
0.25
0.01
Diluted
Weighted average common shares outstanding (Note 10):
22,409,803
23,208,168
22,381,647
23,250,357
22,419,309
22,393,018
23,275,201
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three and Six Months Ended June 30, 2024 and 2023
(In thousands)
Net change in unrealized gain (losses) on securities:
Unrealized gain (losses)
42
(1,284
(1,154
280
Income (tax) benefit effect
(9
316
246
(17
Total other comprehensive income (loss), net of tax
33
(968
(908
Total comprehensive income (loss)
3,225
(1,055
4,698
507
Less: Dividends on preferred shares
Total comprehensive income (loss) available to common stockholders
3,150
4,623
Six Months Ended June 30, 2024 and 2023
Accumulated
Unallocated
Treasury
Additional
Common
Preferred Stock
Common Stock
Stock,
Paid-in
Retained
Comprehensive
Stock
Shares
Amount
At Cost
Capital
Earnings
Loss
of ESOP
Total
Balance, December 31, 2023
23,785,520
Net income
2,414
Other comprehensive loss, net of tax
(941
Release of restricted stock units
4,977
45
(45
ESOP shares committed to be released (33,436 shares)
291
297
Share-based compensation
Balance, March 31, 2024
23,790,497
(9,702
207,584
99,834
(16,590
(12,693
493,682
Preferred Stock Dividend
(75
Other comprehensive income, net of tax
21,235
183
(183
14
292
306
519
Balance, June 30, 2024
23,811,732
Balance, December 31, 2022
24,859,353
(2
206,508
92,955
(17,860
(14,150
492,700
1,231
Impact of CECL adoption, net of tax
1,113
4,147
(29
262
404
Balance, March 31, 2023
24,863,500
206,883
94,399
(16,629
(13,859
496,041
Net loss
Repurchases of common stock
(615,948
(5,200
Balance, June 30, 2023
24,268,787
(5,202
207,287
94,312
(17,597
(13,567
490,482
Six Months Ended
Cash Flows From Operating Activities:
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization of premiums/discounts on securities, net
(73
(57
(Gain) loss on sale of loans
(576
13
(Benefit) provision for credit losses
(555
Depreciation and amortization
2,260
2,278
ESOP compensation expense
626
554
Share-based compensation expense
1,036
808
Deferred income taxes
1,406
196
Changes in assets and liabilities:
Increase in mortgage loans held for sale, fair value
(4,651
(8,091
Decrease (increase) in accrued interest receivable
569
(1,005
Decrease (increase) in other assets
3,216
(1,919
(Decrease) increase in accrued interest payable
(5,145
3,314
Decrease in operating lease liabilities
(1,249
(1,190
Increase in advance payments by borrowers
60
2,678
(Decrease) increase in other liabilities
(3,622
1,649
Net cash (used in) provided by operating activities
(1,092
285
Cash Flows From Investing Activities:
Net (purchase) and redemption of FHLBNY stock
(4,580
5,455
Proceeds from maturities, calls and principal repayments on securities
25,511
33,848
498
Proceeds from sales of loans
1,862
Net increase in loans
(142,513
(201,319
Purchase of loans
(5,956
Purchases of premises and equipment
(1,846
(326
Net cash used in investing activities
(129,384
(159,982
Cash Flows From Financing Activities:
Net increase in deposits
98,477
189,601
Repurchase of treasury stock
Net (repayments) proceeds from borrowings
(4,000
164,725
Dividends paid on preferred stock
(25
Net cash provided by financing activities
94,452
349,126
Net (decrease) increase in cash and cash equivalents
(36,024
189,429
Cash and cash equivalents at beginning of period
54,360
Cash and cash equivalents at end of period
243,789
Supplemental disclosures of cash flow information:
Cash paid for interest on deposits and borrowings
46,876
22,570
Cash paid for income taxes
305
414
Supplemental Disclosures of Noncash Investing Activities:
Transferred from loans receivable to mortgage loans held for sale, at fair value
22,557
4,100
Note 1. Nature of Business
Basis of Presentation and Consolidation:
Ponce Financial Group, Inc. (hereafter referred to as “we,” “our,” “us,” “Ponce Financial Group, Inc.,” or the “Company”) is the holding company of Ponce Bank (“Ponce Bank” or the “Bank”), a federally chartered stock savings association. The Company’s Consolidated Financial Statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiary Ponce Bank (the “Bank”) and the Bank’s wholly-owned subsidiary, Ponce De Leon Mortgage Corp., which is a mortgage banking entity. All significant intercompany transactions and balances have been eliminated in consolidation.
For further information, refer to the audited Consolidated Financial Statements and Notes included in the Company' Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 19, 2024 (the "2023 Form 10-K").
Reclassification of Prior Periods Presentation: Certain prior periods amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reporting results of operations and did not affect previously reported amounts in the Consolidated Statements of Operations. Refer to Deposits (Note 7) for the Three and Six Months Ended June 30, 2023 for details on the reclassification.
Recent Accounting Pronouncements Not Yet Adopted:
In November 2023, FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." The amendments in this ASU require improved reportable segment information on an annual and interim basis, primarily through enhanced disclosures about significant segment expenses. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2023, and interim periods for fiscal years beginning after December 15, 2024. Early adoptions is permitted. The Company does not expect this standard to have an impact on the consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, "Improvements to Income Tax Disclosures (Topic 740)." The amendment to this update addresses investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. This update also includes certain other amendments to improve the effectiveness of income tax disclosures. The amendments in this update are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance.
Note 2. Preferred Stock
On June 7, 2022, the Company closed a private placement (the “Private Placement”) of 225,000 shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 (the “Preferred Stock”) for an aggregate purchase price equal to $225.0 million in cash, to the United States Department of the Treasury (the “Treasury”) pursuant to the Emergency Capital Investment Program (“ECIP”). The holders of the Preferred Stock will be entitled to a dividend payable in cash quarterly at an annual rate dependent on certain factors as reported by the Company to Treasury in a quarterly supplemental report. The initial dividend rate is zero percent for the first two years after issuance, and thereafter the floor dividend rate is 0.50% and the ceiling dividend rate is 2.00%, based on achievement of certain qualified lending targets. After 10 years of issuance, the perpetual dividend rate in effect, will be determined based on said floor and ceiling.
The Company began paying dividends on its Preferred Stock during the quarter ended June 30, 2024, as required by the terms thereof. The Bank exceeded the dividend rate reduction threshold for qualified lending targets designated by the U.S. Treasury Department pursuant to the ECIP. The Bank's “qualified lending” as measured pursuant to ECIP totaled $1.162 billion from June 8, 2023 through March 31, 2024. This reduces the dividend obligation on the Preferred Stock to 0.50% for the quarterly dividends payable through June 15, 2025.
The ECIP investment by the Treasury is part of a program to invest over $8.7 billion into Community Development Financial Institution (“CDFI”) or Minority Depository Institution (“MDI”), of which Ponce Bank is both. The ECIP is intended to incentivize CDFIs and
MDIs to provide loans, grants, and forbearance to small businesses, minority-owned businesses, and consumers in low-income and underserved communities that may have been disproportionately impacted by the economic effects of the COVID-19 pandemic.
In the event of a liquidation, dissolution or winding up of the Company, the Preferred Stock will be entitled to a liquidation preference, subject to certain limitations, in the amount of the sum of $1,000 per share plus declared and unpaid dividends (without accumulation of undeclared dividends) on each share.
Note 3. Securities
The amortized cost, gross unrealized gains and losses, and fair value of securities at June 30, 2024 and December 31, 2023 are summarized as follows:
June 30, 2024
Gross
Amortized
Unrealized
Cost
Gains
Losses
Fair Value
(in thousands)
Available-for-Sale Securities:
U.S. Government Bonds
2,992
(196
2,796
Corporate Bonds
25,773
(1,859
23,914
Mortgage-Backed Securities:
Collateralized Mortgage Obligations (1)
36,886
(6,280
30,606
FHLMC Certificates
9,611
(1,523
8,088
FNMA Certificates
58,797
(11,174
47,623
GNMA Certificates
99
(1
98
Total available-for-sale securities
134,158
(21,033
Held-to-Maturity Securities:
U.S. Agency Bonds
25,000
(253
24,747
82,500
(2,230
80,270
200,684
(8,533
192,151
3,664
(274
3,390
112,925
(5,565
107,360
SBA Certificates
17,558
169
17,727
Allowance for Credit Losses
(218
Total held-to-maturity securities
(16,855
425,645
7
December 31, 2023
2,990
(206
2,784
25,790
(2,122
23,668
39,375
(6,227
33,148
10,163
(1,482
8,681
61,359
(9,842
51,517
104
139,781
(19,879
(181
24,819
(2,691
79,809
212,093
(5,170
207,027
3,897
(244
3,653
118,944
(4,088
114,856
19,712
166
19,878
(398
270
(12,374
450,042
The Company’s securities portfolio had 40 available-for-sale securities and 33 held-to-maturity securities at both June 30, 2024 and December 31, 2023. There were no available-for-sale and held-to-maturity securities sold during the six months ended June 30, 2024 and for the year ended December 31, 2023. One held-to-maturity security in the amount of $10.0 million matured and/or was called during the year ended December 31, 2023. There were no securities that matured and/or were called during the six months ended June 30, 2024. The Company did not purchase any available-for-sale securities and held-to-maturity securities during the six months ended June 30, 2024 and during the year ended December 31, 2023.
8
The following table presents the Company's gross unrealized losses and fair values of its securities, aggregated by the length of time the individual securities have been in a continuous unrealized loss position, at June 30, 2024 and December 31, 2023:
Securities With Gross Unrealized Losses
Less Than 12 Months
12 Months or More
Fair
Value
Collateralized Mortgage Obligations
3,235
(265
77,035
(1,965
11,696
(52
180,455
(8,481
14,931
(317
392,987
(16,538
407,918
119,798
3,288
(212
76,521
(2,479
81,875
(725
112,339
(4,445
194,214
85,163
(937
332,188
(11,437
417,351
At June 30, 2024 and December 31, 2023, the Company had 40 available-for-sale securities, for both periods, and 30 and 31 held-to-maturity securities at June 30, 2024 and December 31, 2023, respectively, with gross unrealized loss positions. Management reviewed the financial condition of the entities underlying the securities at both June 30, 2024 and December 31, 2023. The unrealized losses related to the Company debt securities were issued by U.S. government-sponsored entities and agencies and corporate bonds. The
Company does not believe that the debt securities that were in an unrealized loss position as of June 30, 2024 represents a credit loss impairment. The gross unrealized loss positions related to mortgage-backed securities and other obligations issued by the U.S. government agencies or U.S. government-sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. Total gross unrealized losses were primarily attributable to changes in interest rates relative to when the investment securities were purchased and not due to the credit quality of the investment securities.
Management reviewed the collectability of the corporate bonds taking into consideration of such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting date. Management believes the unrealized losses on the corporate bonds are primarily attributable to changes in the interest rates and not changes in the credit quality of the issuers of the corporate bonds.
The following is a summary of maturities of securities at June 30, 2024 and December 31, 2023. Amounts are shown by contractual maturity. Because borrowers for mortgage-backed securities have the right to prepay obligations with or without prepayment penalties, at any time, these securities are included as a total within the table.
U.S. Government Bonds:
Amounts maturing:
Three months or less
More than three months through one year
More than one year through five years
More than five years through ten years
Corporate Bonds:
4,000
3,960
1,000
598
20,773
19,356
Mortgage-Backed Securities
105,393
86,415
U.S. Agency Bonds:
35,000
34,529
40,000
39,081
7,500
6,660
334,831
320,628
10
3,863
536
20,790
19,269
111,001
93,450
24,650
50,000
48,265
6,894
354,646
345,414
At June 30, 2024, 20 available-for-sale securities with a fair value totaling $63.9 million and 11 held-to-maturity securities with an amortized cost totaling $132.9 million were pledged at the Federal Reserve Bank of New York ("FRBNY") as collateral for borrowing activities. At December 31, 2023, 26 available-for-sale securities with a fair value totaling $93.3 million and 17 held-to-maturity securities with an amortized cost totaling $193.3 million were pledged at the FRBNY as collateral for borrowing activities.
The following table presents the activity in the allowance for credit losses for held-to-maturity securities:
For the Six
Months Ended
For the Year Ended
Allowance for credit losses on securities at beginning of period
398
Impact on CECL adoption
662
Benefit for credit losses
(180
(264
Allowance for credit losses on securities at end of period
218
At June 30, 2024 and December 31, 2023, the entire allowance for credit losses on securities was allocated to corporate bonds.
11
Note 4. Mortgage Loans Held for Sale
The following table provides the fair value and contractual principal balance outstanding of loans held for sale accounted for under the fair value options:
Mortgage loans held for sale, at fair value
Mortgage loans held for sale, contractual principal outstanding
37,654
9,864
Fair value less unpaid principal balance
110
116
At June 30, 2024 and December 31, 2023, the Bank had 23 loans and 19 loans in the amount of $37.8 million and $10.0 million, respectively, that were classified as held for sale and accounted for under the fair value option accounting guidance for financial assets and financial liabilities.
At June 30, 2024 and December 31, 2023, there were $4.4 million, for both periods, in loans held for sale that were greater than 90 days past due and non-accrual with a substandard risk rating.
As of June 30, 2024 and December 31, 2023, total nonaccrual loans held for sale were $4.4 million for both periods.
12
Note 5. Loans Receivable and Allowance for Credit Losses
Loans receivable at June 30, 2024 and December 31, 2023 are summarized as follows:
Mortgage loans:
1-4 Family residential
Investor-Owned
337,292
343,689
Owner-Occupied
147,485
152,311
Multifamily residential
545,323
550,559
Nonresidential properties
337,583
342,343
Construction and land
641,879
503,925
Total mortgage loans
2,009,562
1,892,827
Nonmortgage loans:
Business loans
30,222
19,779
Consumer loans (1)
5,305
8,966
Total non-mortgage loans
35,527
28,745
Total loans, gross
2,045,089
1,921,572
Net deferred loan origination costs
1,145
468
(24,061
(26,154
Loans receivable, net
The Company’s lending activities are conducted principally in metropolitan New York City. The Company primarily grants loans secured by real estate to individuals and businesses pursuant to an established credit policy applicable to each type of lending activity in which it engages. Although collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment to be based on the borrowers’ ability to generate continuing cash flows. The Company also evaluates the collateral and creditworthiness of each customer. The credit policy provides that depending on the borrowers’ creditworthiness and type of collateral, credit may be extended up to predetermined percentages of the market value of the collateral or on an unsecured basis. Real estate is the primary form of collateral. Other important forms of collateral are time deposits and marketable securities.
For disclosures related to the allowance for credit losses and credit quality, the Company does not have any disaggregated classes of loans below the segment level.
Credit-Quality Indicators: Internally assigned risk ratings are used as credit-quality indicators, which are reviewed by management on a quarterly basis.
The objectives of the Company’s risk-rating system are to provide the Board of Directors and senior management with an objective assessment of the overall quality of the loan portfolio, to promptly and accurately identify loans with well-defined credit weaknesses so that timely action can be taken to minimize credit loss, to identify relevant trends affecting the collectability of the loan portfolio, to isolate potential problem areas and to provide essential information for determining the adequacy of the allowance for credit losses.
Below are the definitions of the internally assigned risk ratings:
Loans within the top four categories above are considered pass rated, as commonly defined. Risk ratings are assigned as necessary to differentiate risk within the portfolio. Risk ratings are reviewed on an ongoing basis and revised to reflect changes in the borrowers’ financial condition and outlook, debt service coverage capability, repayment performance, collateral value and coverage as well as other considerations.
The following tables present credit risk ratings by loan segment as of June 30, 2024 and December 31, 2023:
Mortgage Loans
Nonmortgage Loans
Construction
1-4 Family
Multifamily
Nonresidential
and Land
Business
Consumer
Loans
Risk Rating:
Pass
475,570
539,570
334,287
637,072
29,722
2,021,526
Special mention
1,843
2,428
250
4,521
Substandard
7,364
5,753
868
4,807
19,042
484,777
485,747
546,471
339,726
497,266
19,759
1,897,935
2,150
1,109
2,527
5,786
8,103
2,979
90
6,659
20
17,851
496,000
An aging analysis of loans, as of June 30, 2024 and December 31, 2023, is as follows:
30-59
60-89
90 Days
Days
or More
Nonaccrual
Current
Past Due
Accruing
336,856
436
145,614
1,871
539,569
5,754
334,327
828
29,628
29
396
4,740
287
278
2,027,806
2,884
307
14,092
342,896
793
150,181
2,130
19,240
366
165
7,423
1,905,820
2,011
1,015
12,726
The following schedules detail the composition of the allowance for credit losses on loans and the related recorded investment in loans as of and for the six months ended June 30, 2024 and 2023, and as of and for the year ended December 31, 2023:
For the Six Months Ended June 30, 2024
NonmortgageLoans
1-4 Family Investor Owned
1-4 Family Owner Occupied
Constructionand Land
For thePeriod
Allowance for Credit Losses:
Balance, beginning of period
4,415
2,012
4,365
3,176
531
6,848
26,154
Provision (benefit) charged to expense
(227
(66
(879
1,989
500
(1,512
(375
Charge-offs
(2,049
(2,101
Recoveries
375
383
Balance, end of period
4,188
1,946
4,185
2,297
6,796
3,662
24,061
Ending balance: individually evaluated for impairment
81
477
Ending balance: collectively evaluated for impairment
1,865
591
23,584
Loans:
1,870
14,091
145,615
336,755
29,826
2,030,998
For the Three Months Ended June 30, 2024
Allowance for loan losses:
4,257
1,963
4,214
2,236
6,403
561
5,030
24,664
(69
61
393
418
(877
(120
Losses charged-off
(747
256
264
15
For the Six Months Ended June 30, 2023
1,723
8,021
2,724
2,683
120
15,458
34,592
147
283
679
(64
1,417
94
(1,943
613
Impact of CECL adoption
766
146
(3,962
578
(911
236
57
(3,090
(4,500
558
4,776
2,152
4,738
3,238
3,189
450
9,630
28,173
73
2,079
28,100
296
2,692
1,435
7,621
12,044
351,458
151,424
548,598
317,416
308,222
21,041
11,958
1,710,117
351,754
154,116
550,033
315,843
1,722,161
For the Three Months Ended June 30, 2023
4,764
2,051
4,514
3,318
2,522
357
11,449
28,975
101
224
(80
667
93
(83
934
(1,931
195
16
For the Year Ended December 31, 2023
Balance, beginning of year
(214
143
(126
3,035
235
(2,142
1,237
(63
(7,227
(7,290
702
705
Balance, end of year
72
161
1,940
370
25,921
547,580
19,614
1,908,846
Loans are considered impaired when current information and events indicate all amounts due may not be collectable according to the contractual terms of the related loan agreements. Impaired loans are identified by applying normal loan review procedures in accordance with the allowance for credit losses methodology. Management periodically assesses loans to determine whether impairment exists. Any loan that is, or will potentially be, no longer performing in accordance with the terms of the original loan contract is evaluated to determine impairment.
The following information relates to impaired loans as of and for the six months ended June 30, 2024 and 2023 and as of and for the year ended December 31, 2023:
UnpaidContractual
RecordedInvestment
Average
Interest Income
Principal
With No
With
Recorded
Related
Recognized
As of and For the Six Months Ended June 30, 2024
Balance
Allowance
Investment
on a Cash Basis
2,286
1,858
448
2,306
2,501
5,703
4,277
824
423
5,881
1,059
277
14,016
13,247
844
13,359
1,146
As of and For the Six Months Ended June 30, 2023
2,533
455
2,988
7,794
43
958
7,567
9,031
11,992
11,589
18,334
As of and for the Year Ended December 31, 2023
2,906
2,475
2,923
4,812
2,966
1,463
151
198
6,650
8,211
12,687
12,113
14,788
The Company adopted Accounting Standards Update (“ASU”) 2022-02 on January 1, 2023. Since adoption, the Company has not modified any loans with borrowers experiencing financial difficulty. These modifications may include a reduction in interest rate, an extension in term, principal forgiveness and/or other than insignificant payment delay. At June 30, 2024, and December 31, 2023, there were no loans with modifications to borrowers experiencing financial difficulty.
Prior to the adoption of ASU 2022-02 on January 1, 2023, the Company classified certain loans as troubled debt restructuring (“TDR”) loans when credit terms to a borrower in financial difficulty were modified, in accordance with ASC 310-40. With the adoption of ASU
18
2022-02 as of January 1, 2023, the Company has ceased to recognize or measure for new TDRs but those existing at December 31, 2022 will remain until settled.
At June 30, 2024 and December 31, 2023, there were 19 and 21 troubled debt restructured loans totaling $5.4 million and $5.9 million of which $4.7 million and $5.2 million are on accrual status, respectively. There were no commitments to lend additional funds to borrowers whose loans have been modified in a troubled debt restructuring.
Write-off and write-down of Microloans
In 2020, the Company entered into a business arrangement with the FinTech startup company Grain. Grain’s product is a mobile application geared to the underbanked, minorities and new generations entering the financial services market. In employing this mobile application, the Bank uses non-traditional underwriting methodologies to provide revolving credit to borrowers who otherwise may gravitate to using alternative non-bank lenders. Under the terms of its former agreement with Grain, the Bank was the lender for Grain-originated microloans with credit lines currently up to $1,500 and, where applicable, the depository for related security deposits. Grain originated and serviced these microloans and is responsible for maintaining compliance with the Bank's origination and servicing standards, as well as applicable regulatory and legal requirements. If a microloan was found to be fraudulent, became 90 days delinquent upon 90 days of origination or defaulted due to a failure of Grain to properly service the microloan, the Bank’s applicable standards for origination or servicing were deemed to have not been complied with and the microloan was put back to Grain, who then became responsible for the microloan and any related losses. The microloans put back to Grain were accounted for as an “other asset,” specifically referred to herein as the “Grain Receivable.”
On November 1, 2023, Ponce Financial Group, Inc. and Grain signed a Perpetual Software License Agreement in order for the Bank to assume the servicing of the remaining Grain loans. In order to facilitate the transfer of the servicing responsibilities to the Bank, Grain granted the Bank a perpetual right and license to use the Grain software, including the source code to service the remaining loans.
At June 30, 2024, the Bank had 10,098 Grain microloans outstanding with an aggregate balance totaling $4.3 million and which were performing, in management’s opinion, comparably to similar portfolios, offset by an $3.6 million allowance for credit losses, resulting in $0.7 million in Grain microloans. Since the beginning of the Bank’s agreement with Grain and through June 30, 2024, 45,322 microloans amounting to $24.0 million have been deemed to be fraudulent and put back to Grain. The Company has written-down a total of $15.3 million, net of recoveries, of the Grain Receivable and received $6.8 million in cash from Grain and through the application of security deposits connected to fraudulent loan accounts. The Bank also opted to use the $1.8 million grant it received from the U.S. Treasury Department’s Rapid Response Program to defray the Grain Receivable. The application of those amounts resulted in no net receivable. Additionally, the Company wrote-off its equity investment in Grain of $1.0 million during the year ended December 31, 2022. As of June 30, 2024, the Company’s total exposure to Grain was $0.7 million of the remaining microloans, net of allowance for credit losses, excluding $1.6 million of security deposits by Grain borrowers. The $0.1 million of recoveries for the six months ended June 30, 2024 and the $1.3 million recoveries for the six months ended June 30, 2023 related to Grain is included in non-interest expense in the accompanying Consolidated Statements of Operations.
Grain Technology, Inc. ("Grain") Total Exposure as of June 30, 2024
Receivable from Grain
Microloans originated - put back to Grain (inception-to-June 30, 2024)
23,986
Write-downs, net of recoveries (inception-to-date as of June 30, 2024)
(15,341
Cash receipts from Grain (inception-to-June 30, 2024)
(6,819
Grant/reserve (inception-to-June 30, 2024)
(1,826
Net receivable as of June 30, 2024
Microloan receivables from Grain borrowers
Grain originated loans receivable as of June 30, 2024
Allowance for credit losses as of June 30, 2024 (1)
(3,623
Microloans, net of allowance for credit losses as of June 30, 2024
654
Investments
Investment in Grain
Investment in Grain write-off
(1,000
Investment in Grain as of June 30, 2024
Total exposure to Grain as of June 30, 2024 (2)
19
(1) Excludes $1.6 million of security deposits by Grain originated borrowers reported in deposits in the accompanying Consolidated Statements of Financial Conditions.
(2) Total remaining exposure to Grain borrowers. These loans are now serviced by the Bank.
Off-Balance Sheet Credit Losses
Also included within the scope of the CECL standard are off-balance sheet loan commitments, which includes the unfunded portion of committed lines of credit and construction loans.
The Company estimates expected credit losses over the contractual period in which the company is exposed to credit risk through a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet exposures is adjusted as a provision for credit loss expense. The Company uses similar assumptions and risk factors that are developed for collectively evaluated financing receivables. This estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments to be funded over its estimated life.
At June 30, 2024 and December 31, 2023, the allowance for off-balance sheet credit losses was $3.3 million and $3.6 million, respectively, which is included in the "Other liabilities" on the Consolidated Statements of Financial Condition. During the three months ended June 30, 2024 and 2023, the Company had $0.5 million in benefit for credit losses and $0.5 million in provision for credit losses, respectively, and $0.3 million in benefit for credit losses and $1.5 million in provision for credit losses for the six months ended June 30, 2024 and 2023, respectively, for off-balance-sheet items, which are included in "(Benefit) provision for contingencies" on the Consolidated Statements of Operations.
The following table presents the activity in the allowance for off-balance-sheet credit losses:
Allowance for credit losses on unfunded commitment at beginning of period
3,613
354
948
2,311
Allowance for credit losses on unfunded commitment at end of period
3,284
Note 6. Leases
The Company has 17 operating leases for branches (including headquarters) and office spaces and six operating leases for equipment. Our leases have remaining lease terms ranging from less than one year to approximately 14.5 years, none of which has a renewal option reasonably certain of exercise, which has been reflected in the Company’s calculation of lease term.
Certain leases have escalation clauses for operating expenses and real estate taxes. The Company’s non-cancelable operating lease agreements expire through 2038.
Supplemental balance sheet information related to leases was as follows:
(Dollars in thousands)
Operating lease ROU assets
Weighted-average remaining lease term-operating leases
12.2 years
12.6 years
Weighted average discount rate-operating leases
4.9
%
The components of lease expense and cash flow information related to leases were as follows:
For the Three Months Ended
For the Six Months Ended
Lease Cost
Operating lease cost
1,021
1,079
2,047
2,094
22
Short-term lease cost
Variable lease cost
36
76
62
Total lease cost
1,081
1,120
2,155
2,176
The Company’s minimum annual rental payments under the terms of the leases are as follows at June 30, 2024:
Minimum Rental
Years ended December 31:
Remainder of 2024
1,956
2025
3,864
2026
3,716
2027
3,561
2028
3,594
Thereafter
25,474
Total Minimum payments required
42,165
Less: implied interest
10,304
Present value of lease liabilities
Note 7. Deposits
Deposits at June 30, 2024 and December 31, 2023 are summarized as follows:
Demand (1)
178,125
185,151
Interest-bearing deposits:
NOW/IOLA accounts (1)
81,178
77,909
Money market accounts
502,255
432,735
Reciprocal deposits
109,945
96,860
Savings accounts
109,694
114,139
Total NOW, money market, reciprocal and savings
803,072
721,643
Certificates of deposit of $250K or more
156,224
132,153
Brokered certificates of deposits (2)
94,614
98,729
Listing service deposits (2)
9,361
14,433
Certificates of deposit less than $250K
364,701
355,511
Total certificates of deposit
624,900
600,826
Total interest-bearing deposits
1,427,972
1,322,469
Total deposits
21
At June 30, 2024 scheduled maturities of certificates of deposit were as follows:
324,564
201,905
46,918
46,968
3,212
1,333
Overdrawn deposit accounts that have been reclassified to loans amounted to $0.1 million as of both June 30, 2024 and December 31, 2023.
Note 8. Borrowings
The Bank had outstanding term advances from the FHLBNY and the FRBNY at June 30, 2024 and December 31, 2023 as indicated below.
FHLBNY Advances: As a member of the FHLBNY, the Bank has the ability to borrow from the FHLBNY based on a certain percentage of the value of the Bank's qualified collateral, as defined in the FHLBNY Statement of Credit Policy, at the time of the borrowing. In accordance with an agreement with the FHLBNY, the qualified collateral must be free and clear of liens, pledges and encumbrances.
The Bank had $480.4 million and $380.4 million of outstanding term advances from the FHLBNY at June 30, 2024 and December 31, 2023, respectively. The Bank had no overnight line of credit advance from the FHLBNY at June 30, 2024 and December 31, 2023.
FRBNY Advances: The Bank also has additional borrowing capacity under a secured line with the FRBNY secured by 36.7% of our total securities portfolio with amortized cost of $211.3 million at June 30, 2024. The Bank had $200.0 million and $304.0 million of outstanding term advances from the FRBNY at June 30, 2024 and December 31, 2023, respectively.
Borrowed funds at June 30, 2024 and December 31, 2023 consist of the following and are summarized by maturity and call date below:
ScheduledMaturity
Redeemableat Call Date
WeightedAverageRate
Term advances ending:
109,321
4.69
363,321
4.55
250,000
4.41
4.83
212,000
3.44
9,100
3.84
3.35
4.20
4.10
Interest expense on term advances totaled $7.1 million and $6.5 million for the three months ended June 30, 2024 and 2023 and $15.1 million and $10.6 million for the six months ended June 30, 2024 and 2023, respectively.
Note 9. Derivatives and Hedging
During 2023, the Company entered into two derivative financial instruments contracts to enhance its ability to manage interest rate risk that exist as part of its ongoing operations. The Company manages these risks as part of its asset and liability management process. The Company utilized derivative financial instruments to accommodate the business needs and to hedge the exposure that this creates for
the Company. All derivatives are recognized as either assets or liabilities on the balance sheet and are measured at fair value. The Company does not use derivative financial instruments for trading purposes.
Interest Rate Swaps
The Bank is a party to two interest rate swap transactions designated as fair value hedges. One interest rate swap is for a period of two years effective October 12, 2023 and terminates on November 1, 2025 with a notional amount of $150.0 million. The Bank will pay a fixed rate of interest of 4.885% and receive the Secured Overnight Financing Rate ("SOFR") rate. The other interest rate swap is for a period of three years effective October 12, 2023 and terminates on November 1, 2026 with a notional amount of $100.0 million. The Bank will pay a fixed rate of interest of 4.62% and receive the SOFR rate.
The tables present the notional amount and fair value of derivatives designated as hedging instruments, as well as their location on the Consolidated Statements of Financial Condition.
Notional
Loans Receivable
Other Liabilities
As of June 30, 2024
Derivatives Designated as Hedging Instruments
Interest rate swap contracts
790
Total Derivatives
As of December 31, 2023
4,435
Note 10. Earnings Per Share
The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share:
(Dollars in thousands except share data)
Common shares outstanding for basic EPS:
Weighted average common shares outstanding
24,743,843
23,800,294
24,802,654
Less: Weighted average unallocated Employee Stock Ownership Plan (ESOP) shares
1,401,929
1,535,675
1,418,647
1,552,297
Basic weighted average common shares outstanding
Basic earnings per common share
Potential dilutive common shares:
Add: Dilutive effect of restricted stock awards and stock options
9,506
11,371
24,844
Diluted weighted average common shares outstanding
Diluted earnings per common share
23
Note 11. Commitments, Contingencies and Credit Risk
Financial Instruments With Off-Balance-Sheet Risk: In the normal course of business, financial instruments with off-balance-sheet risk may be used to meet the financing needs of customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized on the Consolidated Statements of Financial Condition. The contractual amounts of these instruments reflect the extent of involvement in particular classes of financial instruments.
The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless. The same credit policies are used in making commitments and contractual obligations as for on-balance-sheet instruments. Financial instruments whose contractual amounts represent credit risk at June 30, 2024 and December 31, 2023 are as follows:
Commitments to grant mortgage loans
467,799
529,768
Unfunded commitments under lines of credit
54,398
61,739
522,197
591,507
Commitments to Grant Mortgage Loans: Commitments to grant mortgage loans are agreements to lend to a customer as long as all terms and conditions are met as established in the contract. Commitments generally have fixed expiration dates or other termination clauses, and may require payment of a fee by the borrower. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. Material losses are not anticipated as a result of these transactions.
Commitments to Sell Loans at Lock-in Rates: In order to assure itself of a marketplace to sell its loans, The Bank has agreements with investors who will commit to purchase loans at locked-in rates. The Bank has off-balance sheet market risk to the extent that the Bank does not obtain matching commitments from these investors to purchase the loans. This will expose the Bank to the lower of cost or market valuation environment.
Repurchases, Indemnifications and Premium Recaptures: Loans sold by the Bank under investor programs are subject to repurchase or indemnification if they fail to meet the origination criteria of those programs. In addition, loans sold to investors are also subject to repurchase or indemnifications if the loan is two or three months delinquent during a set period which usually varies from six months to a year after the loan is sold. There are no open repurchase or indemnification requests for loans sold as a correspondent lender or where the Company acted as a broker in the transaction as of June 30, 2024.
Unfunded Commitments Under Lines of Credit: Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extension of credit to existing customers. These lines of credit are uncollateralized and usually contain a specified maturity date and, ultimately, may not be drawn upon to the total extent to which the Company is committed.
Unfunded Commitments with Oaktree: In December of 2021, the Bank committed to invest $5.0 million in Oaktree SBIC Fund, L.P. ("Oaktree"). As of June 30, 2024, the total unfunded commitment was $2.2 million.
Unfunded Commitments with Silvergate: In April of 2022, the Company committed to invest $5.2 million in EJF Silvergate Ventures Fund LP ("Silvergate"). As of June 30, 2024, the total unfunded commitment was $1.9 million.
Letters of Credit: Letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Letters of credit are largely cash secured.
Concentration by Geographic Location: Loans, commitments to extend credit and letters of credit have been granted to customers who are located primarily in the New York City metropolitan area. Generally, such loans most often are secured by residential properties. The loans are expected to be repaid from the borrowers' cash flows.
Legal Matters: The Company is involved in various legal proceedings which have arisen in the normal course of business. Management believes that resolution of these matters will not have a material effect on the Company’s financial condition or results of operations.
24
Note 12. Fair Value
The following fair value hierarchy is used based on the lowest level of input significant to the fair value measurement. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate fair value:
Cash and Cash Equivalents, Placements with Banks, Accrued Interest Receivable, Advance Payments by Borrowers for Taxes and Insurance, and Accrued Interest Payable: The carrying amount is a reasonable estimate of fair value. These assets and liabilities are not recorded at fair value on a recurring basis.
Available-for-Sale Securities: These financial instruments are recorded at fair value in the consolidated financial statements on a recurring basis. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted prices are not available, then fair values are estimated by using pricing models (e.g., matrix pricing) or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. Examples of such instruments include government agency bonds and mortgage-backed securities. Level 3 securities are securities for which significant unobservable inputs are utilized. There were no changes in valuation techniques used to measure similar assets during the period.
FHLBNY Stock: The carrying value of FHLBNY stock approximates fair value since the Bank can redeem such stock with FHLBNY at cost. As a member of the FHLBNY, the Company is required to purchase this stock, which is carried at cost and classified as restricted equity securities.
Loans Receivable: For variable rate loans, which reprice frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values, adjusted for credit losses inherent in the portfolios. The fair value of fixed rate loans is estimated by discounting the future cash flows using estimated market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the portfolios. Impaired loans are valued using a present value discounted cash flow method, or the fair value of the collateral. Loans are not recorded at fair value on a recurring basis.
Loans Held for Sale: Loans held for sale, at fair value, consists of loans originated for sale by the Bank and accounted for under the fair value option. These assets are valued using stated investor pricing for substantially equivalent loans as Level 2. In determining fair value, such measurements are derived based on observable market data, including whole-loan transaction pricing and similar market transactions adjusted for portfolio composition, servicing value and market conditions. Loans held for sale by the Bank are carried at the lower of cost or fair value as determined by investor bid prices.
Under the fair value option, management has elected, on an instrument-by-instrument basis, fair value for substantially all forms of mortgage loans originated for sale on a recurring basis. The fair value carrying amount of mortgages held for sale measured under the fair value option was $37.8 million and the aggregate unpaid principal amounted to $37.7 million.
Other Real Estate Owned: Other real estate owned represents real estate acquired through foreclosure, and is recorded at fair value less estimated disposal costs on a nonrecurring basis. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the asset is classified as Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the asset is classified as Level 3.
Deposits: The fair values of demand deposits, savings, NOW and money market accounts equal their carrying amounts, which represent the amounts payable on demand at the reporting date. Fair values for fixed-term, fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on certificates of deposit to a schedule of aggregated expected monthly maturities on such deposits. Deposits are not recorded at fair value on a recurring basis.
FHLBNY Advances: The fair value of the advances is estimated using a discounted cash flow calculation that applies current market-based FHLBNY interest rates for advances of similar maturity to a schedule of maturities of such advances. These borrowings are not recorded at fair value on a recurring basis.
25
Derivatives: The Company works directly with a third-party vendor to provide periodic valuations for its interest-rate risk-management agreements to determine fair value of its interest rate swaps executed for interest-rate risk management. The vendor utilizes standard valuation methodologies applicable to interest rate derivatives based on readily observable market data and are therefore considered Level 2 valuations.
Off-Balance-Sheet Instruments: Fair values for off-balance-sheet instruments (lending commitments and standby letters of credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. Off-balance-sheet instruments are not recorded at fair value on a recurring basis.
The following tables detail the assets that are carried at fair value and measured at fair value on a recurring basis as of June 30, 2024 and December 31, 2023, and indicate the level within the fair value hierarchy utilized to determine the fair value:
Description
Level 1
Level 2
Level 3
Available-for-Sale Securities, at fair value:
Corporate bonds
Mortgage Loans Held for Sale, at fair value
Interest rate swap
151,679
148,883
23,132
134,317
3,320
130,997
Management’s assessment and classification of an investment within a level can change over time based upon maturity or liquidity of the investment and would be reflected at the beginning of the quarter in which the change occurred.
The following tables detail the assets carried at fair value and measured at fair value on a nonrecurring basis as of June 30, 2024 and December 31, 2023 and indicate the fair value hierarchy utilized to determine the fair value:
Impaired loans
26
Losses on assets carried at fair value on a nonrecurring basis were de minimis for the three and six months ended June 30, 2024 and 2023, respectively.
As of June 30, 2024 and December 31, 2023, the carrying values and estimated fair values of the Company's financial instruments were as follows:
Carrying
Fair Value Measurements
Financial assets:
Cash and cash equivalents
Available-for-sale securities, at fair value
110,329
Held-to-maturity securities, at amortized cost, net
1,980,112
FHLBNY stock
Financial liabilities:
Deposits:
Demand deposits
Certificates of deposit
618,206
Borrowings
667,493
27
116,582
Held-to-maturity securities, at amortized cost
1,844,507
Demand deposits (1)
Interest-bearing deposits (1)
594,234
674,155
The Company recognizes transfers between levels of the valuation hierarchy at the end of the applicable reporting periods. There were no transfers of Level 3 assets in the fair value hierarchy at June 30, 2024 and December 31, 2023. Fair value for Level 3 securities was determined using a third-party pricing service with limited levels of activity and price transparency.
Off-Balance-Sheet Instruments: Loan commitments on which the committed interest rate is less than the current market rate are insignificant at June 30, 2024 and December 31, 2023.
The fair value information about financial instruments are disclosed, whether or not recognized in the consolidated statements of financial condition, for which it is practicable to estimate that value. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The estimated fair value amounts for 2024 and 2023 have been measured as of their respective period-ends and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than amounts reported at each period.
The information presented should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company's assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other banks may not be meaningful.
Note 13. Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board, the OCC and the U.S. Department of Housing and Urban Development. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s operations and financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation require the maintenance of minimum amounts and ratios (set forth in the table below) of total risk-based and Tier 1 capital to risk-weighted assets (as defined), common equity Tier 1 capital (as defined), and Tier 1 capital
28
to adjusted total assets (as defined) adjusted total assets (as defined). As of June 30, 2024 and December 31, 2023, the applicable capital adequacy requirements specified below have been met.
The below minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions including dividend payments and certain discretionary bonus payments to executive officers. The applicable capital buffer for the Bank was 14.5% at June 30, 2024 and 15.3% at December 31, 2023.
The most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and the Bank must maintain minimum total risk-based, common equity risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There were no conditions or events since then that have changed the Bank's category.
The Company's and the Bank’s actual capital amounts and ratios as of June 30, 2024 and December 31, 2023 as compared to regulatory requirements are as follows:
To Be Well
Capitalized Under
For Capital
Prompt Corrective
Actual
Adequacy Purposes
Action Provisions
Ratio
Total Capital to Risk-Weighted Assets
542,647
23.86
181,979
8.00%
227,474
10.00
Tier 1 Capital to Risk-Weighted Assets
514,213
22.61
136,485
6.00%
8.00
Common Equity Tier 1 Capital Ratio
289,213
12.71
102,363
4.50%
147,858
6.50
Tier 1 Capital to Total Assets
17.88
115,007
4.00%
143,759
5.00
Ponce Bank
501,657
22.47
178,613
223,266
474,313
21.24
133,959
100,470
145,123
16.70
113,638
142,047
533,513
25.06
170,302
212,878
507,042
23.82
127,727
6.00
282,042
13.25
95,795
4.50
138,371
19.71
102,911
4.00
128,639
492,622
23.30
169,153
211,441
466,151
22.05
126,865
95,149
137,437
17.49
106,591
133,239
Ponce Bank, through its Mortgage World division, is subject to various net worth requirements in connection with lending agreements that Ponce Bank has entered with purchase facility lenders. Failure to maintain minimum capital requirements could result in the Bank’s Mortgage World division being unable to originate and service loans, and, therefore, could have a direct material effect on the Company’s consolidated financial statements.
As of June 30, 2024 and December 31, 2023, the Bank was in compliance with the applicable minimum capital requirements specified above.
Note 14. Accumulated Other Comprehensive Loss
The accumulated other comprehensive loss is as follows:
December 31,2023
Change
June 30,2024
Unrealized losses on available-for-sale securities, net
December 31,2022
2,211
Note 15. Transactions with Related Parties
Directors, executive officers and non-executive officers of the Company have been customers of and have had transactions with the Bank, and it is expected that such persons will continue to have such transactions in the future. Aggregate loan transactions with related parties for the three and six months ended June 30, 2024 and 2023 were as follows:
(in thousand)
Beginning balance
9,942
8,829
8,810
8,318
Originations
410
1,592
627
Payments
(1,049
(1,099
(331
Ending balance
9,303
8,614
The Company held deposits in the amount of $8.9 million and $8.4 million from directors, executive officers and non-executive officers at June 30, 2024 and December 31, 2023, respectively.
30
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
Management’s discussion and analysis of the financial condition at June 30, 2024 and December 31, 2023, and results of operations for the three and six months ended June 30, 2024 and 2023, is intended to assist in understanding the financial condition and results of operations of Ponce Financial Group, Inc. (the “Company”). The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto appearing in Part I, Item 1, of this quarterly report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "intend," "anticipate," "assume," "plan," "seek," "expect," "will," "may," "should," "indicate," "would," "believe," "contemplate," "continue," "target" and words of similar meaning. These forward-looking statements include, but are not limited to:
These forward-looking statements are based on current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
Additional factors that may affect the Company’s results are discussed in our Annual Report on Form 10-K for the year ended December 31, 2023 under the heading “Risk Factors” filed with the Securities and Exchange Commission (“SEC”) on March 19, 2024.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. The Company is under no duty to and does not assume any obligation to update any forward-looking statements after the date they were made, whether as a result of new information, future events or otherwise.
Federal Economic Relief Funds To Aid Lending
Emergency Capital Investment Program
On June 7, 2022, the Company closed a private placement (the “Private Placement”) of 225,000 shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 (the “Preferred Stock”) for an aggregate purchase price equal to $225.0 million in cash, to the United States Department of the Treasury (the “Treasury”) pursuant to the Emergency Capital Investment Program (“ECIP”). The holders of the Preferred Stock will be entitled to a dividend payable in cash quarterly at an annual rate dependent on certain factors as reported by the Company to Treasury in a quarterly supplemental report. The initial dividend rate is zero percent for the first two years after issuance, and thereafter the floor dividend rate is 0.50% and the ceiling dividend rate is 2.00%, based on achievement of certain qualified lending targets. After 10 years of issuance, the perpetual dividend rate in effect, will be determined based on said floor and ceiling.
The Company began paying dividends on its Preferred Stock during the quarter ended June 30, 2024, as required by the terms thereof. The Bank exceeded the dividend rate reduction threshold for qualified lending targets designated by the U.S. Treasury Department pursuant to the ECIP. The Bank's “qualified lending” as measured pursuant to ECIP totaled $1.162 billion from June 8, 2023 through March 31, 2024. This reduces the dividend obligation on the Preferred Stock to 0.50% for the quarterly dividends payable through June 2025.
The ECIP investment by the Treasury is part of a program to invest over $8.7 billion into Community Development Financial Institution (“CDFI”) or Minority Depository Institution (“MDI”), of which Ponce Bank is both. The ECIP is intended to incentivize CDFIs and MDIs to provide loans, grants, and forbearance to small businesses, minority-owned businesses, and consumers in low-income and underserved communities that may have been disproportionately impacted by the economic effects of the COVID-19 pandemic.
CDFI Equitable Recovery Program
On September 26, 2023, the Bank received a $3.7 million grant from the U.S. Treasury as part of the CDFI Equitable Recovery Program ("ERP") which aims to help CDFI's further their mission of helping low and low-to-moderate income communities recover from the impact of the COVID-19 pandemic.
Bank Enterprise Award Program
32
On November 6, 2023, the Bank received a $0.5 million grant as part of the Bank Enterprise Award Program from the CDFI. Awards under the Bank Enterprise Award Program are subject to the program terms and must be used for qualified activities, which include providing loans, investments and financial services to residents and businesses in distressed communities.
Derivatives and Hedging
During 2023, the Company entered into two derivative financial instruments contracts to enhance its ability to manage interest rate risk that exist as part of its ongoing operations. The Company manages these risks as part of its asset and liability management process. The Company utilized derivative financial instruments to accommodate the business needs and to hedge the exposure that this creates for the Company. The Company does not use derivative financial instruments for trading purposes.
The Bank is a party to two interest rate swap transactions. One interest rate swap is for a period of two years effective October 12, 2023 and terminates on November 1, 2025 with a notional amount of $150.0 million. The Bank will pay a fixed rate of interest of 4.885% and receive the Secured Overnight Financing Rate ("SOFR") rate. The other interest rate swap is for a period of three years effective October 12, 2023 and terminates on November 1, 2026 with a notional amount of $100.0 million. The Bank will pay a fixed rate of interest of 4.62% and receive the SOFR rate.
Critical Accounting Policies
Accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management and that could have a material impact on the carrying value of certain assets, liabilities or on income under different assumptions or conditions. Management believes that the most critical accounting policy relates to the allowance for credit losses.
The allowance for credit losses is established as probable incurred losses are estimated to have occurred through a provision for credit losses charged to earnings. Credit losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. If our loss rate factor was to increase 10 basis points, our reserve would increase by approximately $2.0 million. Likewise, if our loss rate factor was to decrease 10 basis points, our reserve would decrease by approximately $2.0 million.
The discussion and analysis of the financial condition and results of operations are based on the Company’s consolidated financial statements, which are prepared in conformity with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. The estimates and assumptions used are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
See Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to the accompanying Financial Statements for a discussion of significant accounting policies.
Factors Affecting the Comparability of Results
Write-off and Write-Down.
In 2020, the Company entered into a business arrangement with the FinTech startup company Grain. Grain’s product is a mobile application geared to the underbanked, minorities and new generations entering the financial services market. In employing this mobile application, the Bank uses non-traditional underwriting methodologies to provide revolving credit to borrowers who otherwise may gravitate to using alternative non-bank lenders. Under the terms of its former agreement with Grain, the Bank was the lender for Grain-originated microloans with credit lines currently up to $1,500 and, where applicable, the depository for related security deposits. Grain originated and serviced these microloans and is responsible for maintaining compliance with the Bank's origination and servicing standards, as well as applicable regulatory and legal requirements. If a microloan was found to be fraudulent, became 90 days delinquent upon 90 days of origination or defaulted due to a failure of Grain to properly service the microloan, the Bank’s applicable standards for origination or servicing were deemed to have not been complied with and the microloan was put back to Grain, who then became responsible for the microloan and any related losses. The microloans put back to Grain were accounted for as an “other asset,” specifically referred to herein as the “Grain Receivable.” Grain was victimized by cyber fraud using synthetic and other forms of fraudulent identifications, a phenomenon that has become prevalent with Fintechs. Pursuant to the terms of its arrangement with Grain, loans found to be fraudulent were put back to Grain and the Company discontinued originating new loans with Grain after May 31, 2022.
Vision 2025 Evolves
The Company has deployed a Fintech-based small business automated lending technology in partnership with LendingFront Technologies, Inc. The technology is a mobile application that digitizes the lending workflow from pre-approval to servicing and enables the Company to originate, close and fund small business loans within very short spans of time, without requiring a physical presence within banking offices and with automated underwriting using both traditional and non-traditional methods. The application has full loan origination and servicing capabilities and is integrated with Salesforce. All Commercial Relationship Officers and Business Development Managers will utilize these capabilities. The Company is seeking to establish loan origination partnerships with non-profit and community-based organizations to ensure penetration in underserved and underbanked markets.
The Company also established a relationship with Raisin Solutions US LLC ("Raisin") (formerly known as SaveBetter, LLC), a fintech startup focusing on deposits. As of June 30, 2024, the Company had $433.7 million in such deposits. The recent regulatory easing of brokered deposit rules enables the Company to classify such deposits as core deposits.
On October 1, 2022, the Company entered into a Membership Interest Purchase Agreement with Bamboo Payment Holding LLC ("Bamboo"), pursuant to which the Company purchased from Bamboo 180 Membership Interest Units representing 19.84% of the total issued and outstanding Membership Interest in Bamboo for an investment of $4.4 million. With over a decade processing payments in
34
Latin America, Bamboo has a diverse network connects Latin American local payment processing to global companies as well as domestic solutions to locally based organizations.
At December 31, 2018, the Company had approximately $1.06 billion in assets, $918.5 million in loans and $809.8 million in deposits. The Company has since grown to $2.84 billion in assets, $2.02 billion in loans receivables, net of allowance for credit losses of $24.1 million, and $1.61 billion in deposits at June 30, 2024, all while investing in infrastructure, implementing digital banking, diversifying its product offering and partnering with Fintech companies. Now, the Company believes that it is poised to enhance its presence, locally and in similar communities outside New York, as a leading CDFI and MDI financial institution holding company.
On June 7, 2022, the Company issued 225,000 shares of the Company’s Preferred Stock, par value $0.01 for an aggregate purchase price equal to $225.0 million in cash to the Treasury, pursuant to the Treasury’s ECIP. Under the ECIP, Treasury provided investment capital directly to depository institutions that are CDFIs or MDIs or their holding companies, to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, in low-income and underserved communities. Treasury has indicated that the investment will qualify as Tier 1 capital. No dividends will accrue or be due for the first two years after issuance. For years three through ten, depending upon the level of qualified and/or deep impact lending made in targeted communities, as defined in the ECIP guidelines, dividends will be at an annual rate of either 2.0%, 1.25% or 0.5% and, thereafter, will be fixed at one of the foregoing rates. The Company began paying dividends on its Preferred Stock during the quarter ended June 30, 2024, as required by the terms thereof. The Bank exceeded the dividend rate reduction threshold for qualified lending targets designated by the U.S. Treasury Department pursuant to the ECIP. The Bank's “qualified lending” as measured pursuant to ECIP totaled $1.162 billion from June 8, 2023 through March 31, 2024. This reduces the dividend obligation on the Preferred Stock to 0.50% for the quarterly dividends payable through June 2025.
Holders of Preferred Stock generally do not have any voting rights, with the exception of voting rights on certain matters as outlined in the Certificate of Designations. The Company has the option to redeem the shares of Preferred Stock (i) in whole or in part on any dividend payment date on or after June 15, 2027, or (ii) in whole but not in part at any time within ninety days following a Regulatory Capital Treatment Event, as defined below, in each case at a cash redemption price equal to the liquidation amount, with an amount equal to any dividends that have been declared but not paid prior to the redemption date. The Company may not redeem shares of Preferred Stock without having received the prior approval of the appropriate Federal banking agency for the Company, as defined in Section 3(q) of the Federal Deposit Insurance Act, to the extent required under applicable capital rules. Such redemptions are subject to certain conditions and limitations. In the event of a liquidation, dissolution or winding up of the Company, the Preferred Stock will be entitled to a liquidation preference, subject to certain limitations, in the amount of the sum of $1,000 per share plus declared and unpaid dividends (without accumulation of undeclared dividends) on each share.
A “Regulatory Capital Treatment Event” means a good-faith determination that, as a result of (i) any amendment to, or change in, the laws, rules or regulations of the United States or any political subdivision of or in the United States (including, for the avoidance of doubt, any agency or instrumentality of the United States, including the Federal Reserve and other appropriate federal bank regulatory agencies) that is enacted or becomes effective after the initial issuance of any share of the Preferred Stock; (ii) any proposed change in those laws, rules or regulations that is announced after the initial issuance of any share of the Preferred Stock; or (iii) any official administrative or judicial decision or administrative action or other official pronouncement interpreting or applying those laws, rules or regulations or policies with respect thereto that is announced or becomes effective after the initial issuance of the Preferred Stock, there is more than an insubstantial risk that we will not be entitled to treat the full liquidation preferences of the shares of Preferred Stock then outstanding as “Additional Tier 1 Capital” (or its equivalent) for purposes of the capital adequacy standards of Federal Reserve Regulation Q, 12 C.F.R. Part 217 (or, as and if applicable, the successor capital adequacy guidelines, rules or regulations of the Federal Reserve or the capital adequacy guidelines, rules or regulations of any successor appropriate federal banking agency), as then in effect and applicable, for as long as any share of Preferred Stock is outstanding.
Comparison of Financial Condition at June 30, 2024 and December 31, 2023
Total Assets. Total consolidated assets increased $91.3 million, or 3.3%, to $2.84 billion at June 30, 2024 from $2.75 billion at December 31, 2023. The increase in total assets is largely attributable to increases of $126.3 million in net loans receivable, $27.8 million in mortgage loans held for sale and $4.6 million in Federal Home Loan Bank of New York stock, partially offset by decreases of $36.0 million in cash and cash equivalents, $19.6 million in held-to-maturity securities, $6.8 million in available-for-sale securities, $3.2 million in other assets, $1.2 million in deferred tax assets and $0.6 million in accrued interest receivable.
Cash and Cash Equivalents. Cash and cash equivalents decreased $36.0 million, or 25.9%, to $103.2 million at June 30, 2024, compared to $139.2 million at December 31, 2023. The decrease in cash and cash equivalents was primarily the result of an increase of $142.5 million in net loans, $6.0 million in purchase of loans, $5.1 million decrease in accrued interest payable, an increase of $4.7 million in loans held for sale, $4.6 million in purchase of FHLB stock and $4.0 million repayment of borrowings. The decrease in cash
and cash equivalents was offset by an increase of $98.5 million in net deposits, $25.5 million in principal repayment on securities and $3.2 million decrease in other assets.
Securities. The composition of securities at June 30, 2024 and December 31, 2023 and the amounts maturing of each classification are summarized as follows:
Total Available-for-Sale Securities
Total Held-to-Maturity Securities
The Company securities portfolio decreased $6.8 million in available-for-sale and $19.6 million in held-to-maturity during the six months ended June 30, 2024. The decrease in the securities portfolio was primarily due to changes in principal amount of the securities.
Gross Loans Receivable. The composition of gross loans receivable at June 30, 2024 and at December 31, 2023 and the percentage of each classification to total loans are summarized as follows:
Increase (Decrease)
Percent
Dollars
16.5
17.9
(6,397
(1.9
%)
7.2
7.9
(4,826
(3.2
26.7
28.7
(5,236
(1.0
17.8
(4,760
(1.4
31.4
26.2
137,954
27.4
98.3
98.5
116,735
6.2
1.5
1.0
10,443
52.8
0.3
0.5
(3,661
(40.8
1.7
6,782
23.6
100.0
123,517
6.4
Based on current internal loan reviews, the Company believes that the quality of our underwriting, our weighted average loan-to-value ratio of 58.3% and our customer selection processes have served us well and provided us with a reliable base with which to maintain a well-protected loan portfolio.
The majority of the $138.0 million growth in construction and land mortgage loans is related to funding of existing commitments prior to 2024 as opposed to new originations in 2024. Our commitments to grant new mortgage loans decreased by $62.0 million as of June 30, 2024 compared to December 31, 2023. See Note 11 ("Commitments, Contingencies and Credit Risk") of Notes to the Consolidated Financial Statements.
Within the construction and land mortgage loans, as indicated in the composition of gross loans receivable table above, there are 22 loans at 100% completion, with balances of $161.4 million as of June 30, 2024. Of these 22 projects, 14 have been issued a temporary certificate of occupancy, six have a final certificate of occupancy and two are pending certificate of occupancy.
Commercial real estate loans, as defined by applicable banking regulations, include multifamily residential, nonresidential properties, and construction and land mortgage loans. At June 30, 2024 and December 31, 2023, approximately 4.8% and 5.3%, respectively, of the outstanding principal balance of the Bank’s commercial real estate mortgage loans were secured by owner-occupied commercial real estate. Owner-occupied commercial real estate is similar in many ways to commercial and industrial lending in that these loans are generally made to businesses predominantly on the basis of the cash flows of the business rather than on valuation of the real estate.
Banking regulations have established guidelines relating to the amount of construction and land mortgage loans and investor- owned commercial real estate mortgage loans of 100% and 300% of total risk-based capital, respectively. Should a bank’s ratios be in excess of these guidelines, banking regulations generally require an increased level of monitoring in these lending areas by bank management. The Bank’s policy is to operate within the 150% guideline for construction and land mortgage loans and up to 450% for investor-owned commercial real estate mortgage loans. Both ratios are calculated by dividing certain types of loan balances for each of the two categories by the Bank’s total risk-based capital. At June 30, 2024 and December 31, 2023, the Bank’s construction and land mortgage loans as a percentage of total risk-based capital was 132.8% and 102.5%, respectively. Investor-owned commercial real estate mortgage loans as a percentage of total risk-based capital was 294.3% and 269.1% as of June 30, 2024 and December 31, 2023, respectively. At June 30, 2024, the Bank was above the 100% guidelines established by the banking regulations but under the 150% guidelines set by the Bank for construction and land mortgage loans and within the 300% guideline established by banking regulators for investor owned commercial real estate mortgage loans. Management believes that it has established the appropriate level of controls to monitor the Bank’s lending in these areas.
Loans Held For Sale. Loans held for sale, at fair value, at June 30, 2024 increased $27.8 million, or 278.4%, to $37.8 million from $10.0 million at December 31, 2023. The increase in loans held for sale, at fair value, was mainly attributable to one loan that was transferred from loans held for investment to loans held for sale. The loan was subsequently sold in July of 2024 with no losses.
37
Deposits. The composition of deposits at June 30, 2024 and December 31, 2023 and changes in dollars and percentages are summarized as follows:
of Total
11.1
12.3
(7,026
(3.8
5.1
5.2
3,269
4.2
31.3
69,520
16.1
6.9
13,085
13.5
6.8
7.6
(3.9
50.0
47.9
81,429
11.3
9.7
8.7
24,071
18.2
Brokered certificates of deposit (2)
5.9
6.6
(4,115
(4.2
0.6
(5,072
(35.1
Certificates of deposit less than $250K (1)
22.7
23.5
9,190
2.6
38.9
39.8
24,074
4.0
88.9
87.7
105,503
8.0
6.5
When wholesale funding is necessary to complement the Company's core deposit base, management determines which source is best suited to address both liquidity risk and interest rate risk in line with management objectives. The Company’s Interest Rate Risk Policy imposes limitations on overall wholesale funding and noncore funding reliance. The overall reliance on wholesale funding and noncore funding were within those policy limitations as of June 30, 2024 and December 31, 2023. The Management Asset/Liability Committee generally meets on a bi-weekly basis to review funding needs, if any, and to ensure the Company operates within the approved limitations.
Borrowings. The Bank had outstanding borrowings at June 30, 2024 and December 31, 2023 of $680.4 million and $684.4 million, respectively, in term advances from the FHLBNY and FRBNY. Additionally, the Bank had two unsecured lines of credit in the amount of $75.0 million with two correspondent banks for both periods at June 30, 2024 and December 31, 2023, under which there was nothing outstanding at both June 30, 2024 and December 31, 2023. The Bank had no overnight line of credit advance at June 30, 2024 and December 31, 2023.
Stockholders’ Equity. The Company’s consolidated stockholders’ equity increased $6.3 million, or 1.27%, to $497.7 million at June 30, 2024 from $491.4 million at December 31, 2023. This increase in stockholders’ equity was largely attributable to $5.5 million in net income available to common stockholders, $1.0 million impact to additional paid in capital as a result of share-based compensation and $0.6 million from release of ESOP shares, offset by $0.9 million in other comprehensive loss.
Comparison of Results of Operations for the Three Months Ended June 30, 2024 and 2023
The discussion of the Company’s results of operations for the three months ended June 30, 2024 and 2023 are presented below. The results of operations for interim periods may not be indicative of future results.
Overview. Net income available to common stockholders was $3.1 million for the three months ended June 30, 2024 compared to net loss available to common stockholders of $0.1 million for the three months ended June 30, 2023. Earnings per basic and diluted share was $0.14 for the three months ended June 30, 2024 compared to earnings per basic and diluted share of $0.00 for the three months ended June 30, 2023. The $3.2 million increase of net income available to common stockholders for the three months ended June 30, 2024 was due to increases of $7.7 million in interest and dividend income and $1.4 million in benefit for credit losses, a decrease of $0.9 million in non-interest expense and an increase of $0.8 million in non-interest income, offset by $6.1 million in interest expense and $0.1 million in payments and accrued dividends on preferred shares. Net income for the three months ended June 30, 2024, which excludes $0.1 million in dividend payments and accruals on preferred shares, was $3.2 million. The Company began paying dividends on its preferred stock during the quarter ended June 30, 2024, as required by the terms thereof.
38
The following table presents the results of operations for the periods indicated:
Interest and dividend income
7,737
24.9
Interest expense
6,115
41.4
10.0
(1,361
(137.9
2,983
19.5
Non-interest income
51.3
Non-interest expense
(942
(5.5
4,691
(1,553.3
1,412
(656.7
3,279
(3,769.0
0.0
(3,582.8
Earnings per share:
(3,810.4
(3,808.9
Interest and Dividend Income. Interest and dividend income increased $7.7 million, or 24.9%, to $38.8 million for the three months ended June 30, 2024 from $31.1 million for the three months ended June 30, 2023. Interest income on loans receivable, which is the Company’s primary source of income, increased $8.3 million, or 35.9%, to $31.3 million for the three months ended June 30, 2024 from $23.0 million for the three months ended June 30, 2023. Interest and dividend income on securities and FHLBNY stock and deposits due from banks decreased $0.5 million, or 6.6%, to $7.5 million for the three months ended June 30, 2024 from $8.0 million for the three months ended June 30, 2023.
The following table presents interest income on loans receivable for the periods indicated:
7,407
7,594
(187
(2.5
6,975
6,726
3.7
4,449
3,783
666
17.6
11,701
4,196
7,505
178.9
593
350
243
69.4
Consumer loans
156
(210
(57.4
Total interest income on loans receivable
8,266
35.9
The following table presents interest and dividend income on securities and FHLBNY stock and deposits due from banks for the periods indicated:
(275
(15.1
Interest on securities
5,486
5,731
(245
(4.3
Dividend on FHLBNY stock
483
(1.8
7,511
8,040
(529
(6.6
Interest Expense. Interest expense increased $6.1 million, or 41.4%, to $20.9 million for the three months ended June 30, 2024 from $14.8 million for the three months ended June 30, 2023, primarily due to an increase in the average cost of funds.
39
The following table presents expense for the periods indicated:
2,477
63.8
Money market
7,209
4,077
3,132
76.8
Savings
(6.9
NOW/IOLA
(154
(50.5
Advance payments by borrowers
10.2
Net Interest Income. Net interest income increased $1.6 million, or 10.0%, to $17.9 million for the three months ended June 30, 2024 from $16.3 million for the three months ended June 30, 2023. The $1.6 million increase in net interest income for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was attributable to an increase of $8.3 million in interest and dividend income primarily due to increases in average loans receivable, offset by an increase of $6.1 million in interest expense due primarily to a higher average cost of funds on interest bearing liabilities and a $0.5 million decrease in interest and dividend income on securities and FHLBNY stock and deposits due from banks,.
Net interest rate spread decreased by 3 basis point to 1.72% for the three months ended June 30, 2024 from 1.75% for the three months ended June 30, 2023. The decrease in the net interest rate spread for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was primarily due to an increase in the average rates paid on interest-bearing liabilities of 66 basis points to 3.97% for the three months ended June 30, 2024 from 3.31% for the three months ended June 30, 2023 and an increase in the average yields on interest-earning assets of 63 basis points to 5.69% for the three months ended June 30, 2024 from 5.06% for the three months ended June 30, 2023.
Net interest margin decreased 3 basis points for the three months ended June 30, 2024 to 2.62% from 2.65% for the three months ended June 30, 2023.
In 2023, the Federal Reserve raised the target range for the federal funds rate to 5.25%-5.50%, pushing borrowing costs to the highest level in 23 years. The Federal Reserve has kept the federal funds interest rate steady and signaled that there will likely be a rate cut at its September 2024 meeting. The decrease in federal funds rate will be in response to lower inflation as well as a cooler job market. In a lower rate environment, the significant competitive pressures in our markets and the potential positive impact of these factors on our deposit and loan pricing, our net interest margin may be positively impacted. Our net interest income may also be positively impacted if the demand for loans increases due to the lower rates, alone or in tandem with lower inflation.
Non-Interest Income. Non-interest income increased $0.8 million, or 51.3% to $2.3 million for the three months ended June 30, 2024 from $1.5 million for the three months ended June 30, 2023. The increase in non-interest income for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was attributable to increases of $0.5 million in other non-interest income related to the mark to market adjustments on a private equity fund investment made by the Company, $0.2 million in income on sale of mortgage loans and $0.1 million in late and prepayment charges.
The following table presents non-interest income for the periods indicated:
2.3
(26
(74.3
14.5
192
234.1
535
102.5
Non-Interest Expense. Non-interest expense decreased $0.9 million, or 5.5%, to $16.1 million for the three months ended June 30, 2024 from $17.1 million for the three months ended June 30, 2023. The $0.9 million decrease in non-interest expense for the three months ended June 30, 2024, compared to the three months ended June 30, 2023 was attributable to decreases of $1.0 million in provision for contingencies, $0.5 million in professional fees, $0.3 million in office supplies, telephone and postage, $0.2 million in
40
occupancy and equipment, $0.2 million in data processing expenses and $0.2 million in marketing and promotional expenses, partially offset by increases of $0.5 million in other operating expense, $0.3 million in direct loan expenses, $0.3 million in compensation and benefits and a decrease of $0.3 million in Grain recoveries.
The following table presents non-interest expense for the periods indicated:
299
(160
(195
(16.1
288
83.5
(1,010
(195.4
6.0
(256
(52.4
(535
(28.1
Grain recoveries
281
(81.2
(158
(52.1
Directors fees and regulatory assessment
473
42.5
Income Tax (Benefit) Provision. The Company had provision for income taxes of $1.2 million for the three months ended June 30, 2024 compared to a benefit for income taxes of $0.2 million for the three months ended June 30, 2023.
41
Average Balance Sheets
The following table sets forth average outstanding balances, average yields and rates, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. Average balances are derived from average daily balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense.
Outstanding
Interest
Yield/Rate (1)
Interest-earning assets:
Loans (2)
2,040,149
6.17
1,683,117
5.48
Securities (3)
562,560
3.92
614,598
3.74
Other (4) (5)
141,368
2,025
5.76
164,509
2,309
5.63
Total interest-earning assets
2,744,077
5.69
2,462,224
5.06
Non-interest-earning assets (5)
105,774
121,169
2,849,851
2,583,393
Interest-bearing liabilities:
NOW/IOLA (6) (7)
72,932
0.83
66,314
1.84
Money market (7) (8)
599,209
4.84
408,329
111,859
0.10
122,802
0.09
Certificates of deposit (8)
635,850
4.02
524,445
2.97
1,419,850
13,745
3.89
1,121,890
8,292
2.96
14,948
0.05
16,967
4.22
649,652
Total interest-bearing liabilities
2,115,219
3.97
1,788,509
3.31
Non-interest-bearing liabilities:
Non-interest-bearing demand (6)
188,920
255,673
Other non-interest-bearing liabilities
49,437
42,906
Total non-interest-bearing liabilities
238,357
298,579
2,353,576
2,087,088
Total equity
496,275
496,305
Total liabilities and total equity
Net interest rate spread (9)
1.72
1.75
Net interest-earning assets (10)
628,858
673,715
Net interest margin (11)
2.62
2.65
Average interest-earning assets to interest-bearing liabilities
129.73
137.67
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on the Company’s net interest income for the periods indicated. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
2024 vs. 2023
Increase (Decrease) Due to
Total Increase
Volume
Rate
(Decrease)
Loans (1)
4,806
3,460
Securities (2)
(500
255
(330
46
(284
3,976
3,761
(184
1,890
1,242
(3
812
1,665
2,729
5,453
374
3,017
3,098
Change in net interest income
959
663
Comparison of Results of Operations for the Six Months Ended June 30, 2024 and 2023
The discussion of the Company’s results of operations for the six months ended June 30, 2024 and 2023 are presented below. The results of operations for interim periods may not be indicative of future results.
Overview. Net income available to common stockholders was $5.5 million for the six months ended June 30, 2024 compared to net income available to common stockholders of $0.2 million for the six months ended June 30, 2023. Earnings per basic and diluted share was $0.25 for the six months ended June 30, 2024 compared to earnings per basic and diluted share of $0.01 for six months ended June 30, 2023. The $5.3 million increase of net income available to common stockholders from the six months ended June 30, 2023, was due to increases of $5.2 million in net interest income, $1.4 million in benefit for credit losses and $0.7 million in non-interest income and a decrease of $0.4 million in non-interest expense, partially offset by an increase of $2.2 million in provision for income taxes and $0.1 million in dividends on preferred shares. Net income for the six months ended June 30, 2024, which excludes $0.1 million in dividend payments and accruals on preferred shares, was $5.6 million.
21,047
36.7
15,847
61.2
5,200
(1,367
(168.1
6,567
21.4
19.8
(353
(1.1
Income before income taxes
7,574
1,317.2
Provision for income taxes
2,212
668.3
5,362
2,197.5
Net income available to common stockholders
5,287
2,166.8
0.24
2,286.7
2,288.1
Interest and Dividend Income. Interest and dividend income increased $21.0 million, or 36.7%, to $78.5 million for the six months ended June 30, 2024 from $57.4 million for the six months ended June 30, 2023. Interest income on loans receivable, which is the Company’s primary source of income, increased $19.2 million, or 45.0%, to $61.9 million for the six months ended June 30, 2024 from $42.7 million for the six months ended June 30, 2023.
Total interest and dividend income increased $1.8 million, or 12.4%, to $16.5 million for the six months ended June 30, 2024 from $14.7 million for the six months ended June 30, 2023. The increase was primarily attributable to $2.4 million increase in interest on deposits due from banks, offset by $0.7 million in dividend on FHLYNY stock.
14,953
13,647
1,306
9.6
13,896
12,822
1,074
8.4
8,808
7,456
1,352
18.1
22,925
6,958
15,967
229.5
1,005
938
67
7.1
358
894
(536
(60.0
19,230
45.0
2,439
121.1
11,105
11,806
(701
(5.9
955
876
79
9.0
16,513
14,696
12.4
Interest Expense. Interest expense increased $15.8 million, or 61.2%, to $41.7 million for the six months ended June 30, 2024 from $25.9 million for the six months ended June 30, 2023, primarily due to an increase in the average cost of funds.
44
The following table presents interest expense for the periods indicated:
5,632
79.3
13,501
6,169
7,332
118.9
59
(4
(6.8
369
993
(624
(62.8
3,511
30.4
Net Interest Income. Net interest income increased $5.2 million, or 16.5%, to $36.7 million for the six months ended June 30, 2024 from $31.5 million for the six months ended June 30, 2023. The $5.2 million increase in net interest income for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was attributable to an increase of $19.2 million in interest and dividend income primarily due to increases in average loans receivable and $2.4 million in deposits due from banks, partially offset by an increase of $15.8 million in interest expense due primarily to a higher average cost of funds on interest bearing liabilities and a decrease of $0.6 million in interest and dividend income on securities and FHLBNY stock.
Net interest rate spread decreased by 2 basis points to 1.77% for the six months ended June 30, 2024 from 1.79% for the six months ended June 30, 2023. The decrease in the net interest rate spread for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was primarily due to an increase in the average rates paid on interest-bearing liabilities of 82 basis points to 3.93% for the six months ended June 30, 2024 from 3.11% for the six months ended June 30, 2023 and an increase in the average yields on interest-earning assets of 79 basis points to 5.70% for the six months ended June 30, 2024 from 4.91% for the six months ended June 30, 2023.
Net interest margin decreased 3 basis points for the six months ended June 30, 2024, to 2.67% from 2.70% for six months ended June 30, 2023.
Non-Interest Income. Non-interest income increased $0.7 million, or 19.8%, to $4.0 million for the six months ended June 30, 2024 from $3.3 million for the six months ended June 30, 2023. The $0.7 million increase in non-interest income for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was attributable to increases of $0.6 million in other non-interest income and $0.4 million in income on sale of mortgage loans, partially offset by a decrease $0.3 million in late and prepayment charges.
(7
(0.7
(33
(66.0
(316
(28.7
395
218.2
615
61.1
Non-Interest Expense. Non-interest expense decreased $0.4 million, or 1.1%, to $33.1 million for the six months ended June 30, 2024 from $33.5 million for the six months ended June 30, 2023. The $0.4 million decrease in non-interest expense for the six months ended June 30, 2024, compared to the six months ended June 30, 2023 was attributable to decreases of $1.8 million in provision for contingencies, $0.4 million in office supplies, telephone and postage, $0.3 million in professional fees, $0.3 million in data processing expenses, $0.2 million in other operating expenses and $0.1 million in occupancy and equipment, partially offset by a decrease of $1.1 million in Grain recoveries, and increases of $0.7 million in compensation and benefits and $0.6 million in direct loan expenses and $0.2 million in marketing and promotional expenses.
697
4.7
(0.9
(260
(10.8
608
80.3
(1,831
(121.9
(406
(45.7
(267
(7.9
1,142
(90.6
(186
(43.2
12.7
170
Income Tax Provision. The Company had a provision for income taxes of $2.5 million for the six months ended June 30, 2024 compared to a provision for income taxes of $0.3 million for six months ended June 30, 2023.
2,009,706
6.20
1,627,939
5.29
569,397
622,822
3.82
189,899
5,408
5.73
106,812
2,890
5.46
2,769,002
5.70
2,357,573
4.91
106,172
122,083
2,875,174
2,479,656
77,891
0.95
69,024
2.90
571,886
4.75
361,557
6,168
112,680
125,823
632,689
4.05
520,420
2.75
1,395,146
26,663
1,076,824
14,326
2.68
13,917
0.06
14,954
0.07
725,745
4.17
587,026
2,134,808
3.93
1,678,804
3.11
193,891
261,988
51,749
42,451
245,640
304,439
2,380,448
1,983,243
494,726
496,413
1.77
1.79
634,194
678,769
2.67
2.70
129.71
140.43
47
10,164
9,066
(983
282
2,262
2,518
11,443
9,604
131
(755
3,615
3,718
7,333
(6
1,557
4,075
5,297
7,040
12,337
2,770
741
8,067
7,781
15,848
3,376
1,823
5,199
Management of Market Risk
General. The most significant form of market risk is interest rate risk because, as a financial institution, the majority of the Bank’s assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of its financial condition and results of operations to changes in market interest rates. The Bank’s Asset/Liability Committee ("ALCO") is responsible for evaluating the interest rate risk inherent in the Bank’s assets and liabilities, for determining the level of risk that is appropriate, given the business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with policies and guidelines approved by the Board of Directors. The Bank currently utilizes a third-party modeling solution that is prepared on a quarterly basis, to evaluate its sensitivity to changing interest rates, given the Bank’s business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.
The Bank engages in hedging activities, such as swap transactions. The Bank is a party to two interest rate swap transactions. One interest rate swap is for a period of two years effective October 12, 2023 and terminates on November 1, 2025 with a notional amount of $150.0 million. The Bank will pay a fixed rate of interest of 4.885% and receive the Secured Overnight Financing Rate ("SOFR") rate. The other interest rate swap is for a period of three years effective October 12, 2023 and terminates on November 1, 2026 with a notional amount of $100.0 million. The Bank will pay a fixed rate of interest of 4.62% and receive the SOFR rate (see Note 9 of the Notes to the Consolidated Financial Statements).
Net Interest Income Simulation Models. Management utilizes a respected, sophisticated third party designed asset liability modeling software that measures the Bank’s earnings through simulation modeling. Earning assets, interest-bearing liabilities and off-balance sheet financial instruments are combined with forecasts of interest rates for the next 12 months and are combined with other factors in order to produce various earnings simulations over that same 12-month period. To limit interest rate risk, the Bank has policy guidelines for earnings risk which seek to limit the variance of net interest income in both gradual and instantaneous changes to interest
48
rates. As of June 30, 2024, in the event of an instantaneous upward and downward change in rates from management's interest rate forecast over the next twelve months, assuming a static balance sheet, the following estimated changes are calculated:
Net Interest Income
Year 1 Change
Rate Shift (1)
Year 1 Forecast
from Level
+400
71,565
(8.65%)
+300
73,350
(6.37%)
+200
75,106
(4.13%)
+100
76,778
(1.99%)
Level
78,338
— %
-100
80,370
2.59%
-200
82,653
5.51%
-300
83,687
6.83%
-400
84,933
8.42%
Although an instantaneous and severe shift in interest rates was used in this analysis to provide an estimate of exposure under these scenarios, management believes that a gradual shift in interest rates would have a more modest impact. Further, the earnings simulation model does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, and changing product spreads that could alter any potential adverse impact of changes in interest rates.
The behavior of the deposit portfolio in the baseline forecast and in alternate interest rate scenarios set out in the table above is a key assumption in the projected estimates of net interest income. The projected impact on net interest income in the table above assumes no change in deposit portfolio size or mix from the baseline forecast in alternative rate environments. In higher rate scenarios, any customer activity resulting in the replacement of low-cost or noninterest-bearing deposits with higher-yielding deposits or market-based funding would reduce the benefit in those scenarios.
At June 30, 2024, the earnings simulation model indicated that the Bank was in compliance with the Board of Directors approved Interest Rate Risk Policy.
Economic Value of Equity Model. While earnings simulation modeling attempts to determine the impact of a changing rate environment to net interest income, the Economic Value of Equity Model (“EVE”) measures estimated changes to the economic values of assets, liabilities and off-balance sheet items as a result of interest rate changes. Economic values are determined by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base case EVE. Rates are then shocked as prescribed by the Interest Rate Risk Policy to measure the sensitivity in EVE values for each of those shocked rate scenarios versus the base case. The Interest Rate Risk Policy sets limits for those sensitivities. At June 30, 2024, the EVE modeling calculated the following estimated changes in EVE due to instantaneous upward and downward changes in rates:
EVE as a Percentage of Present
Value of Assets (3)
Estimated Increase (Decrease) in
Increase
Change in Interest
Estimated
EVE
Rates (basis points) (1)
EVE (2)
Ratio (4)
(basis points)
345,991
(148,971
(30.10
13.57
(3,010
383,466
(111,496
(22.53
14.69
(2,253
418,631
(76,331
(15.42
15.69
(1,542
456,296
(38,666
(7.81
16.72
(781
494,962
17.72
532,363
37,401
7.56
18.62
756
570,087
75,125
15.18
19.47
1,518
606,235
111,273
22.48
20.23
2,248
658,873
163,911
33.12
21.35
3,312
Although an instantaneous and severe shift in interest rates was used in this analysis to provide an estimate of exposure under these scenarios, management believes that a gradual shift in interest rates would have a more modest impact. Since EVE measures the
49
discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships, and changing product spreads that could alter the adverse impact of changes in interest rates.
At June 30, 2024, the EVE model indicated that the Bank was in compliance with the Board of Directors’ approved Interest Rate Risk Policy.
Most Likely Earnings Simulation Models. Management also analyzes a most-likely earnings simulation scenario that projects the expected change in rates based on a forward yield curve adopted by management using expected balance sheet volumes forecasted by management. Separate growth assumptions are developed for loans, investments, deposits, etc. Other interest rate scenarios analyzed by management may include delayed rate shocks, yield curve steepening or flattening, or other variations in rate movements to further analyze or stress the balance sheet under various interest rate scenarios. Each scenario is evaluated by management and weighted to determine the most likely result. These processes assist management to better anticipate financial results and, as a result, management may determine the need to review other operating strategies and tactics which might enhance results or better position the balance sheet to reduce interest rate risk going forward.
Each of the above analyses may not, on its own, be an accurate indicator of how net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as interest rate caps and floors) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates. The ALCO Committee reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios as part of its responsibility to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing and capital policies.
Management's model governance, model implementation and model validation processes and controls are subject to review in the Bank’s regulatory examinations to ensure they are in compliance with the most recent regulatory guidelines and industry and regulatory practices. Management utilizes a respected, sophisticated third party designed asset liability modeling software to help ensure implementation of management's assumptions into the model are processed as intended in a robust manner. That said, there are numerous assumptions regarding financial instrument behaviors that are integrated into the model. The assumptions are formulated by combining observations gleaned from the Bank’s historical studies of financial instruments and the best estimations of how, if at all, these instruments may behave in the future given changes in economic conditions, technology, etc. These assumptions may prove to be inaccurate. Additionally, given the large number of assumptions built into Bank’s asset liability modeling software, it is difficult, at best, to compare its results to other banks.
The ALCO Committee may determine that the Company should over time become more or less asset or liability sensitive depending on the underlying balance sheet circumstances and its conclusions regarding interest rate fluctuations in future periods. The historically low benchmark federal funds interest rate of the last several years implemented in response the turmoil resulting from COVID-19 pandemic has ended. In 2023, the Federal Reserve raised the target range for the federal funds rate to 5.25%-5.50%, pushing borrowing costs to the highest level in 23 years. The Federal Reserve has kept the federal funds interest rate steady and signaled that there will likely be a rate cut at its September 2024 meeting. The decrease in federal funds rate will be in response to lower inflation as well as a cooler job market. In a lower rate environment, the significant competitive pressures in our markets and the potential positive impact of these factors on our deposit and loan pricing, our net interest margin may be positively impacted. Our net interest income may also be positively impacted if the demand for loans increases due to the lower rates, alone or in tandem with lower inflation
GAP Analysis. In addition, management analyzes interest rate sensitivity by monitoring the Bank’s interest rate sensitivity "gap." The interest rate sensitivity gap is the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest bearing-liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets maturing or repricing during a period exceeds the amount of interest rate sensitive liabilities maturing or repricing during the same period, and a gap is considered negative when the amount of interest rate sensitive liabilities maturing or repricing during a period exceeds the amount of interest rate sensitive assets maturing or repricing during the same period.
The following table sets forth the Company’s interest-earning assets and its interest-bearing liabilities at June 30, 2024, which are anticipated to reprice or mature in each of the future time periods shown based upon certain assumptions. The amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing
or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at June 30, 2024, on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and as a result of contractual rate adjustments on adjustable-rate loans.
Time to Repricing
Zero to 90 Days
Zero to180 Days
Zero Daysto OneYear
Zero Daysto TwoYears
Zero Daysto FiveYears
Five YearsPlus
TotalEarningAssets &CostingLiabilities
NonEarningAssets &NonCostingLiabilities
Assets:
Interest-bearing deposits in banks
Securities (1)
34,447
80,881
118,586
202,139
335,544
241,061
576,605
(21,367
555,238
Net loans (includes LHFS)
231,328
410,845
672,412
1,176,722
1,958,952
105,731
2,064,683
(4,746
2,059,937
99,445
346,062
572,013
871,285
1,459,148
2,374,783
346,792
2,721,575
120,432
Non-maturity deposits
50,210
100,418
200,834
401,668
739,273
74,364
813,637
167,560
981,197
190,715
324,539
503,301
567,898
309,321
409,321
630,421
57,832
290,925
474,957
1,013,456
1,378,887
1,994,594
124,364
2,118,958
225,392
Total liabilities and capital
723,049
Asset/liability gap
55,137
97,056
(142,171
80,261
380,189
222,428
602,617
Gap/assets ratio
118.95
120.43
85.97
105.82
119.06
278.85
128.44
The following table sets forth the Company’s interest-earning assets and its interest-bearing liabilities at December 31, 2023, which are anticipated to reprice or mature in each of the future time periods shown based upon certain assumptions. The amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at December 31, 2023, on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and as a result of contractual rate adjustments on adjustable-rate loans.
Zero to90 Days
FiveYearsPlus
26,981
68,513
116,391
208,107
359,754
242,162
601,916
(20,266
581,650
Placement with banks
192,336
295,027
500,951
982,210
1,797,535
111,445
1,908,980
(3,114
1,905,866
19,392
(15
104,390
349,218
493,441
747,243
1,320,218
2,287,190
353,607
2,640,797
109,925
43,026
86,052
172,104
344,208
647,511
69,506
717,017
189,777
906,794
220,322
291,437
449,484
508,888
204,000
304,000
413,321
634,421
67,286
467,348
681,489
984,909
1,266,417
1,882,758
119,506
2,002,264
257,063
748,458
(118,130
(188,048
(237,666
53,801
404,432
234,101
638,533
74.72
72.41
75.87
104.25
121.48
295.89
131.89
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net interest income and EVE tables presented assume that the composition of the interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net interest income and EVE tables provide an indication of the interest rate risk exposure at a particular point
51
in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and EVE and will differ from actual results. Furthermore, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates both on a short-term basis and over the life of the asset.
In the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the gap table.
Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of loans, deposits and borrowings.
Liquidity and Capital Resources
Liquidity describes the ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the Company’s customers and to fund current and future planned expenditures.
Although maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and competition. The most liquid assets are cash and interest-bearing deposits in banks. The levels of these assets are dependent on operating, financing, lending, and investing activities during any given period. The Bank had $480.4 million and $380.4 million of outstanding term advances from FHLBNY at June 30, 2024 and December 31, 2023, respectively. The Bank had no overnight line of credit advance from the FHLBNY at June 30, 2024 and December 31, 2023. The Bank also has additional borrowing capacity of $218.1 million with the FHLBNY secured by the Bank's loans portfolio at June 30, 2024.
The Bank had $200.0 million and $304.0 million of outstanding term advances from the FRBNY at June 30, 2024 and December 31, 2023, respectively.
Net cash (used in) provided by operating activities was ($1.1) million and $0.3 million for the six months ended June 30, 2024 and 2023, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations, purchase of loans, net purchase and redemption of FHLBNY stock and purchase of equipment offset by principal collections on loans and proceeds from maturities, calls and principal repayments on securities was ($129.4) million and ($160.0) million for the six months ended June 30, 2024 and 2023, respectively. Net cash provided by financing activities, consisting of activities in borrowing, deposit accounts and dividends paid on preferred stock, was $94.5 million and $349.1 million for the six months ended June 30, 2024 and 2023, respectively.
The Bank’s management took steps to enhance the Company’s liquidity position by increasing its on balance sheet cash and cash equivalents position in order to meet unforeseen liquidity events and to fund upcoming funding needs.
At June 30, 2024 and December 31, 2023, all regulatory capital requirements were met, resulting in the Company and the Bank being categorized as well capitalized at June 30, 2024 and December 31, 2023. Management is not aware of any conditions or events that would change this categorization.
Material Cash Requirements
Commitments. As a financial services provider, the Company routinely is a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. Although these contractual obligations represent the Company’s future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans originated. At June 30, 2024 and December 31, 2023, the Company had outstanding commitments to originate loans and extend credit of $522.2 million and $591.5 million, respectively.
It is anticipated that the Company will have sufficient funds available to meet its current lending commitments. Certificates of deposit that are scheduled to mature in 2024 totaled $324.6 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits are not retained, the Company may utilize FHLBNY advances, unsecured credit lines with correspondent banks, or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
Contractual Obligations. In the ordinary course of its operations, the Company enters into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities. There have been no material changes in the Company’s material cash requirements under its contractual obligations as discussed in its most recent annual report on Form 10-K.
52
Dividend on Preferred Stock. Pursuant to the terms of its Preferred Stock, the Company is required to pay a quarterly dividend on its Preferred Stock, beginning during the quarter ended June 30, 2024. The floor dividend rate is 0.50% and the ceiling dividend rate is 2.00%, based on achievement of certain qualified lending targets. For quarterly dividends through June 15, 2025, the Company is required to pay quarterly dividends on the Preferred Stock at a rate of 0.50%..
Other Material Cash Requirements. In addition to contractual obligations, the Company’s material cash requirements also includes compensation and benefits expenses for its employees, which were $15.6 million for the six months ended June 30, 2024. The Company also has material cash requirements for occupancy and equipment expenses, excluding depreciation and amortization of $0.9 million, related to rental expenses, general maintenance and cleaning supplies, guard services, software licenses and other miscellaneous expenses, which were $6.3 million for the six months ended June 30, 2024.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is included in Part I, Item 2 of this report under “Management of Market Risk”.
Item 4. Controls and Procedures.
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2024. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.
During the six months ended June 30, 2024, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not involved in any pending legal proceedings as a plaintiff or a defendant other than routine legal proceeding occurring in the ordinary course of business. At June 30, 2024, the Company was not involved in any legal proceedings the outcome of which management believes would be material to its financial condition or results of operations.
Item 1A. Risk Factors.
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” included in our 2023 Form 10-K and the risk factors and other cautionary statements contained in our other SEC filings, which could materially affect our businesses, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. There have been no material changes in our Risk Factors from those disclosed in Item 1A of our 2023 Form 10-K or our other SEC filings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits
Exhibit
Number
3.1
Articles of Incorporation of Ponce Financial Group, Inc. (attached as Exhibit 3.1 to the Registrant’s Form S-1 (File No. 333-258394) filed with the Commission on August 3, 2021).
3.2
Bylaws of Ponce Financial Group, Inc. (attached as Exhibit 3.2 to the Registrant’s Form S-1 (File No. 333-258394) filed with the Commission on August 3, 2021).
3.3
Articles Supplementary to the Charter of Ponce Financial Group, Inc. (attached as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-41255) filed with the Commission on June 9, 2022).
31.1*
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: August 8, 2024
By:
/s/ Carlos P. Naudon
Carlos P. Naudon
President and Chief Executive Officer
/s/ Sergio J. Vaccaro
Sergio J. Vaccaro
Executive Vice President and Chief Financial Officer