PONCE FINANCIAL GROUP, INC. General
Management's discussion and analysis of financial condition and results of operations atMarch 31, 2021 andDecember 31, 2020 , and for the three months endedMarch 31, 2021 and 2020, is intended to assist in understanding the financial condition and results of operations of 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:
• statements of the Company's goals, intentions and expectations;
• statements regarding its business plans, prospects, growth and operating
strategies;
• statements regarding the quality of its loan and investment portfolios; and
• estimates of the risks and future costs and benefits.
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. Management is under no duty to and does not assume any obligation to update any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
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:
• the scope, duration and severity of the COVID-19 pandemic and its effects
on our business and operations, our customers, including their ability to
make timely payments on loans, our service providers, and on the economy
and financial markets in general;
• changes in consumer spending, borrowing and savings habits;
• general economic conditions, either nationally or in the market areas, that
are worse than expected;
• the Company's ability to manage market risk, credit risk and operational
risk in the current economic environment;
• changes in the level and direction of loan delinquencies and write-offs and
changes in estimates of the adequacy of the allowance for loan losses;
• the ability to access cost-effective funding; • fluctuations in real estate values and real estate market conditions; • demand for loans and deposits in the market area;
• the Company's ability to implement and change its business strategies;
• competition among depository and other financial institutions;
• inflation and changes in the interest rate environment that reduce the
Company's margins and yields, its mortgage banking revenues, the fair value
of financial instruments or the level of loan originations, or increase the
level of defaults, losses and prepayments on loans the Company have made
and make;
• adverse changes in the securities or secondary mortgage markets;
• changes in laws or government regulations or policies affecting financial
institutions, including changes in regulatory fees and capital
requirements;
• the impact of the Dodd-Frank Act and the implementing regulations;
• changes in the quality or composition of the Company's loan or investment
portfolios;
• technological changes that may be more difficult or expensive than expected;
47
--------------------------------------------------------------------------------• the inability of third party providers to perform as expected;
• the Company's ability to enter new markets successfully and capitalize on
growth opportunities;
• the Company's ability to successfully integrate into its operations,
management personnel the Company may acquire and management's ability to
realize related revenue synergies and cost savings within expected time
frames, and any goodwill charges related thereto;
• changes in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the Financial Accounting Standards Board , the
Securities and Exchange Commission or the Public Company Accounting
Oversight Board ;
• the Company's ability to retain key employees;
• the Company's compensation expense associated with equity allocated or
awarded to its employees; and
• changes in the financial condition, results of operations or future
prospects of issuers of securities that the Company may own.
Additional factors that may affect the Company's results are discussed in our
Annual Report on Form 10-K for the year ended
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 assumes no obligation to update any forward-looking statements except as may be required by applicable law or regulation.
Employees and
As ofMarch 31, 2021 , the Company had 236 full time equivalent employees. None of the Company's employees are represented by a labor union, and management considers its relationship with employees to be good. The Company believe its ability to attract and retain employees is key to its success. Accordingly, the Company strives to offer competitive salaries and employee benefits to all employees and monitor salaries in its market area. The Company encourages and supports the growth and development of its employees. Continual learning and career development is advanced through ongoing performance and development conversations with employees, internally developed training programs and educational reimbursement programs. A significant focus of the Company is the health and well-being, physical and financial, of staff. Recognizing the increasing stress levels of the staff understandably resulting from personal health concerns, the demise of friends, relatives and co-workers, childcare pressures amid telecommuting and increasing costs of food and supplies, to name a few. The Company paid every staff member regardless of work status, provided recurring town hall and mental health sessions, instituted additional compensation for branch personnel, subsidized branch personnel commuting using non-public transportation, facilitated paid-time-off for childcare and ensured staff suffering from the COVID-19 pandemic symptoms had ample paid-time-off. To ensure the proper enforcement of safe distancing rules, the Company retained security guards at all branches, in many cases multiple guards. Non-GAAP Financial Measures The following discussion contains a certain non-GAAP financial measure in addition to results presented in accordance with GAAP. The non-GAAP measure is intended to provide the reader with additional supplemental perspective on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company's GAAP financial information. The Company's non-GAAP measures may not be comparable to similar non-GAAP information which may be presented by other companies. In all cases, it should be understood that non-GAAP operating measures do not depict amounts that accrue directly to the benefit of shareholders. An item that management excludes when computing non-GAAP adjusted earnings can be of substantial importance to the Company's results and condition for any particular year. A reconciliation of non-GAAP financial measures to GAAP measures is provided below. TheSEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. Management believes that these non-GAAP financial measures are useful in evaluating the Company's financial performance and facilitate comparisons with the performance of other financial institutions. However, the information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP. The table below includes references to the Company's net income and earnings per share for the three months endedMarch 31, 2021 before gain on sale of real property. In management's view, that information, which is considered non-GAAP information, may be useful to investors as it will improve an understanding of core operations for the current and future periods. The non-GAAP net 48 --------------------------------------------------------------------------------
income amount and earnings per share reflect adjustments of the non-recurring gain on sale of real property, net of tax effect. A reconciliation of the non-GAAP information to GAAP net income and earnings per share is provided below.
Non-GAAP Reconciliation - Net Income before Gain on Sale of Real Property
(Unaudited)
Three Months Ended
March 31, 2021
(Dollars in thousands,
except per share data)
Net income (loss) - GAAP $ 2,452
Gain on sale of real property (663 )
Income tax benefit 139
Net income - non-GAAP $ 1,928
Earnings per common share (GAAP) (1) $ 0.15
Earnings per common share (non-GAAP) (1) $ 0.12
(1) Basic earnings per share were computed (for the GAAP and non-GAAP basis)
based on the weighted average number of shares outstanding for the three
months ending
outstanding stock options and vesting of restricted stock units were
included in computing the non-GAAP diluted earnings per share and do not
result in material dilution.
COVID-19 Pandemic and the CARES Act
OnMarch 27, 2020 ,Congress passed, and the President signed, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") to address the economic effects of the COVID-19 pandemic. The CARES Act appropriated$349.0 billion for PPP loans and onApril 24, 2020 , the SBA received another$310.0 billion in PPP funding. OnDecember 27, 2020 , the Economic Aid Act appropriated$284.0 billion for both first and second draw PPP loans, bringing the total appropriations for PPP loans to$943.0 billion . PPP is scheduled to end onMay 31, 2021 , unless extended by further legislation. Loans under the PPP that meet SBA requirements may be forgiven in certain circumstances, and are 100% guaranteed by the SBA. The Company had received SBA approval and originated 1,992 PPP loans, of which 1,708 loans totaling$132.5 million were outstanding atMarch 31, 2021 . PPP loans have a two-year or five-year term, provide for fees of up to 5% of the loan amount and earn interest at a rate of 1% per annum. It is our expectation that a significant portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. The average authorized loan size is$78,000 and the median authorized loan size is$16,000 . We have estimated that approximately 16,208 jobs have been positively impacted. The Bank, both an MDI and a CDFI, originated 1,992 PPP loans in the amount of$144.6 million significantly exceeding the reported average MDI/CDFI performance. In conjunction with the PPP, theBoard of Governors of theFederal Reserve System (the "Federal Reserve") has created a lending facility for qualified financial institutions. The Paycheck Protection Program Liquidity Facility will extend credit to depository institutions untilJune 30, 2021 , unless the Board and theDepartment of Treasury determine to extend the Facility at an interest rate of 0.35%. Only loans issued under the PPP can be pledged as collateral to access the facility. AlthoughNew York is no longer the hotbed of the COVID-19 pandemic inthe United States , the Company continues to alter the way it has historically provided services to its deposit customers while seeking to maintain normal day-to-day back-office operations and lending functions. To that end, all back-office and lending personnel continue to work in a remote work environment while the branch network continues to provide traditional banking services to its communities and has for the most part returned to normal operating hours while continuing to shift service delivery to electronic and web-based products. The Company continues its extensive and intensive communications program geared to informing customers of the alternative resources provided by the Company for retaining access to financial services, closing loans and conducting banking transactions, such as ATM networks, online banking, mobile applications, remote deposits and the Company's Contact Center. The Company proactively manages its day-to-day operations by using video and telephonic conferencing. ThroughMarch 31, 2021 , 406 loans aggregating$376.1 million had received forbearance primarily consisting of the deferral of principal, interest, and escrow payments for at least a period of three months. Of those 406 loans, 337 loans aggregating$303.6 million are no longer in deferment and continue performing pursuant to their terms and 69 loans in the amount of$72.4 million remained in deferment and are in renewed forbearance. All of these loans had been performing in accordance with their contractual obligations prior to the granting of the initial forbearance. The Company actively monitors the business activities of borrowers in forbearance and seeks to determine their capacity to resume payments as contractually obligated upon the termination of the 49 --------------------------------------------------------------------------------
forbearance period. The initial and extended forbearances are short-term modifications made on a good faith basis in response to the COVID-19 pandemic and in furtherance of governmental policies.
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 loan losses. The allowance for loan losses is established as probable incurred losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan 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. 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
Purchase of Real Property. OnJanuary 22, 2021 , the Bank completed the purchase of property located at 135-12/14 Northern Boulevard ,Flushing, New York through a qualified intermediary in anIRS Code 1031 like-kind exchange related to the previously disclosed sale of real property onJuly 27, 2020 that was owned by the Bank. The purchase price of the property was$3.6 million . Sale of Real Property. OnFebruary 11, 2021 ,PFS Service Corp. ("PFS"), a service company subsidiary of the Bank, completed the sale of real property that was owned by PFS, located at3821 Bergenline Avenue ,Union City, New Jersey (the "Real Property"). The purchase price of the Real Property was$2.4 million . Concurrent with the sale of the Real Property, the Bank and the purchaser entered into an initial fifteen-year lease agreement whereby the Bank will lease back the Real Property at an initial base annual rent of approximately$145,000 subject to annual rent increases of 1.5%. Under the lease agreement, the Bank has four (4) consecutive options to extend the term of the lease by five (5) years for each such option. Vision 2025 Evolves The Company is now in the later stages of its multi-pronged effort to upgrade its infrastructure, adopt electronic banking services and restructure its retail business model. Dubbed internally "Vision 2020," the effort has had significant beneficial results, continues to involve significant investments and has served to ameliorate the otherwise detrimental effects of the COVID-19 pandemic. As part of Vision 2020, the Company partnered with Sales Force to deploy applications throughout the organization, including retail services, lending processes, back-office operations, digital banking and loan underwriting. Although the full implementation of the applications, dubbed internally as "GPS, a Guided Path to Success," has been somewhat delayed due to the COVID-19 pandemic, phase 1 is operational throughout the Bank. The remaining phases are expected to be implemented by year end 2021. The infrastructure upgrade has focused primarily on implementing technology, cybersecurity and network progression while establishing a Virtual Private Network ("VPN"). Centered largely on the Bank and its core processor, to date the infrastructure upgrade has resulted in relocating and migrating network and in-house servers, replacing outdated PCs, enhancing internet capabilities, purchasing and deploying VPN-enabled laptops to a significant majority of the Bank's personnel and the redeployment of disaster recovery capabilities. The infrastructure upgrade is now focused onMortgage World's operations. The Company has achieved certain manpower-related cost savings and enabled the uninterrupted continuity of operations by its staff working remotely during the COVID-19 pandemic and the virtual emptying of its operations and headquarters premises using its newly deployed disaster recovery capabilities. The infrastructure upgrade has added resiliency, capacity and redundancies to the Company's technology structures and will enhance the capability of the Company to increase its flexibility with alternate locations of personnel. The Company has adopted over 48 new electronic banking services, products and applications since late 2018. These services range from on-line banking, mobile banking, bill pay, positive pay, remote deposit capture, cash management services, e-statements, data storage and management, ACH services, electronic document storage, a paperless environment, dual-language telephone banking 50 -------------------------------------------------------------------------------- service and VoIP telecommunications with an automation-based, dual-language Customer Contact Center. These services have not only enabled the Company to continue serving its customers as they, and the Company, switched to remote work environments; the services have served to increase the product penetration and deepening relationships with customers. The Company has also added to its social media capabilities and has begun to use them in coordination with new targeted marketing campaigns now enabled by GPS and its Marketing Cloud platform. The combination of social media and targeted marketing campaigns has been particularly effective with PPP loan originations using many partnerships established with non-profit groups and community-based organizations. Such efforts enabled the Company to more than triple the number of second round PPP loan applications compared to the first round, and has resulted in significant growth in retail deposits and new relationships. In 2020, the Company rolled out its first Fintech-based product in partnership with the startup companyGrain Technologies, Inc. The product, Grain, is a mobile application geared to the underbanked and new generations entering the financial services market that uses non-traditional underwriting methodologies. Under the terms of its agreement with Grain, the Bank is the lender and depository for Grain-originated microloans and, where applicable, security deposits, to consumers, with credit lines currently up to$1,000 . Grain services the loans and is responsible for maintaining compliance with the Bank's origination and servicing standards. To the extent such standards are not maintained, Grain is responsible for any related losses. The Company, pursuant to its partnership with Grain, has originated 63,712 consumer loans with balances totaling$35.9 million and 15,885 deposit accounts totaling$3.3 million atMarch 31, 2021 . The Company is seeking to provide additional digital banking services to these customers and to extend Grain to its retail facilities. The Company is an investor in Grain and is integrating Grain and GPS. The Company is also in the final stages of deploying a Fintech-based small business automated lending technology in partnership withLendingFront 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 Sales Force. All Commercial Relationship Officers and Business Development Managers will utilize these capabilities upon the easing of the COVID-19 pandemic. 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 withSaveBetter, LLC , a fintech startup focusing on broker deposits. As ofMarch 31, 2021 , the Company had$14.5 million in such deposits. The recent regulatory easing of broker deposit rules may enable the Company to classify such deposits as core deposits. The Company's on-going adoption of a new retail business model has been all-encompassing. It has involved the redesign of its retail branches, the shift of branch operations to a centralized back office, the deployment of smart ITM-enabled ATMs and Teller Cash Recyclers, the automation of manual processes and, importantly, the adoption of universal bankers and retail sales. In 2019, the Company earned national recognition as Branch Innovators of the Year for its retail banking model at the 2019 Future Branches Retail Banking Summit inAustin, Texas . The Company anticipates renovating most, if not all of its branches over the next 18 months, at costs significantly less than previous efforts largely as a result of economies of scale, design modifications and adoption of buildout techniques used by non-bank retail organizations. The project to fully renovate our Flatlands branch was completed in lateNovember 2020 on time and within the original budget of$356,000 despite modifications made to the original design and construction process related to the COVID-19 pandemic. Bidding to renovate the Bank'sRiverdale branch into a new flagship recapturing space that had previously been subleased is complete and the project has been awarded for a contract cost of$1.5 million . Construction commenced on this project onMarch 1, 2021 and has a target completion date of early in the third quarter of 2021. A bid has also been accepted for renovation of theAstoria banking branch. The awarded contract is$315,000 and construction is scheduled to start inMay 2021 with a completion target date ofmid-June 2021 . Architectural drawings have begun for theSmith Street ,Brooklyn ,Union City, NJ , andSouthern Boulevard ,Bronx , banking branches with completion target dates within the next 18 months. Bidding for these three locations is targeted for the end of second quarter of 2021. The Company expects to incorporate into its retail branchesMortgage World loan origination personnel and is contemplating creating kiosk branches in certain ofMortgage World's current locations while creating a full service branch at the site of aMortgage World mortgage office located inFlushing ,Queens, New York .The Mortgage World office located inFlushing ,Queens has been purchased usingIRS code section 1031 provisions, thus expanding the Company's reach into one of the most underserved areas ofQueens according to recently reported PPP loan penetration data. Vision 2020 already has had a transformational effect on the Company. Since its inception in late 2018 as the Company was reaching$1.06 billion in assets,$918.5 million in loans,$809.8 million in deposits,$2.7 million net income and$0.15 in earnings per share for the year 2018, the Company has grown to a$1.43 billion in assets,$1.23 billion in loans and$1.14 billion in deposits atMarch 31, 2021 ,$2.5 million in net income and$0.15 in earnings per share for the quarter endingMarch 31, 2021 , all while investing in infrastructure, implementing digital banking, acquiringMortgage World , adopting GPS, diversifying its product offering, meeting the challenges of the COVID-19 pandemic, partnering with Fintech companies and assisting its communities with over 3,300 requests for PPP loans totaling approximately$198.5 million . Now, the Company is poised to enhance its presence, locally and nationally, as a 51 -------------------------------------------------------------------------------- leading MDI/CDFI financial holding company. As the Company's application for available funding from theCDFI Fund is being considered and as it prepares its application to theU.S. Treasury for its fair share of funding under the Emergency Capital Investment Program, the Company is cementing its Vision 2025, its roadmap to acquiring the resources needed to lead efforts to remediate the disparate effects of the COVID-19 pandemic, and the wealth and financial gaps present, in its communities and similar communities outside theNew York City metropolitan area. The Company traces its roots to the foundation in 1960 of thePonce De Leon Federal Savings and Loan Association by Latino leaders concerned that theBronx and its Latino population were being abandoned. True to its roots, the Company remains committed to ensure that the disparate effects of the COVID-19 pandemic, and the wealth and financial gaps present, in minority communities are addressed in earnest.
The following table presents as of
Aggregate Median Average No. of
Number Amount Amount Amount Jobs
State Counties of Loans of Loans of Loans of Loans Affected
(Dollars in Thousands)
New York Kings 214 $ 46,394 $ 19 $ 217 4,106
Bronx 402 22,965 11 57 3,314
Queens 428 24,916 21 58 2,927
New York 302 17,704 15 59 2,447
Nassau 91 6,432 16 71 847
Westchester 56 2,021 14 36 273
Suffolk 28 877 16 31 138
Richmond 17 704 16 41 140
Albany 1 129 129 129 11
Rockland 4 101 15 25 13
Dutchess 5 545 21 109 26
Sullivan 2 22 11 11 2
Orange 1 10 10 10 3
Putnam 1 8 8 8 6
Ulster 4 73 13 18 13
Greene 1 20 20 20 2
Total New York 1,557 $ 122,921 $ 16 $ 79 14,268
New Jersey Monmouth 10 $ 2,173 52 217 408
Essex 17 1,729 21 102 392
Hudson 30 1,599 20 53 311
Passaic 10 1,024 23 102 238
Union 15 776 31 52 88
Bergen 17 895 34 53 224
Morris 6 266 20 44 60
Middlesex 4 25 6 6 5
Burlington 1 21 21 21 1
Mercer 2 69 34 35 19
Sussex 1 12 12 12 1
Warren 1 9 9 9 1
Ocean 2 22 11 11 3
Total New Jersey 116 $ 8,620 $ 24 $ 74 1,751
Pennsylvania Berks 1 16 16 16 1
Pike 1 7 7 7 1
Total Pennsylvania 2 $ 23 $ 12 $ 12 2
Arizona Pima 1 $ 21 21 21 1
California Los Angeles 1 164 164 164 45
Connecticut Fairfield 4 150 16 38 13
District of
Columbia District of Columbia 1 5 5 5 1
Delaware New Castle 1 253 253 253 26
Illinois Cook 2 30 15 15 10
Indiana Lake 17 $ 238 10 14 65
Kentucky Jefferson 2 10 5 5 5
Nevada Clark 1 11 11 11 7
North
Carolina Forsyth 1 27 27 27 4
Rhode Island Providence 2 41 20 21 10
Total 1,708 $ 132,514 $ 16$ 78 16,208 52
-------------------------------------------------------------------------------- SinceMarch 31, 2021 and throughMay 07, 2021 , the Company has received SBA approval for and has funded 1,397 PPP loans totaling$53.9 million , bringing the total PPP loans made by the Company since inception of the PPP to 3,389 loans totaling$198.5 million
Comparison of Financial Condition at
Total Assets. Total consolidated assets increased$78.5 million , or 5.8%, to$1.43 billion atMarch 31, 2021 from$1.36 billion atDecember 31, 2020 . The increase in total assets is attributable to increases in net loans receivable of$71.8 million , including$57.7 million in PPP loans, cash and cash equivalents of$18.0 million , available-for-sale securities of$13.4 million , premises and equipment, net, of$1.6 million and accrued interest receivable of$1.2 million . The increase in total assets was reduced by decreases in mortgage loans held for sale, at fair value, of$21.7 million , other assets of$5.4 million , FHLBNY stock of$369,000 and deferred taxes of$87,000 . Cash and Cash Equivalents. Cash and cash equivalents increased$18.0 million , or 25.0%, to$90.1 million atMarch 31, 2021 , compared to$72.1 million atDecember 31, 2020 . The increase in cash and cash equivalents was primarily the result of increases of$109.0 million in net deposits, of which$10.9 million is related to net PPP funding, a decrease of$20.6 million of mortgage loans held for sale, at fair value, related toMortgage World , increases of$2.4 million in proceeds from the sale of real property and$2.2 million related to advance payments by borrowers. The increase in cash and cash equivalents was offset by an increase of$72.5 million in net loans receivable, including$57.7 million in PPP loans, an$18.3 million decrease in advances of warehouse lines on credit related toMortgage World ,$14.1 million in purchases of available-for-sale securities,$8.0 million in net repayment of advances from FHLBNY,$3.7 million in purchases of premises and equipment, primarily related to the purchase of real property and$1.2 million in purchases of shares held as treasury stock.
March 31, 2021 December 31, 2020
Amortized Fair Amortized Fair
Cost Value Cost Value
(Dollars in thousands)
Available-for-Sale Securities :
U.S. Government Bonds:
Amounts maturing:
Three months or less $ - $ - $ - $ -
More than three months through one year - - - -
More one year through five years 2,978 2,988 - -
More than five years through ten years - - - -
2,978 2,988 - -
Corporate Bonds:
Amounts maturing:
Three months or less - - - -
More than three months through one year - - - -
More one year through five years 2,656 2,715 2,651 2,728
More than five years through ten years 10,752 10,842 7,730 7,735
13,408 13,557 10,381 10,463
Mortgage-Backed Securities 14,446 14,384 6,970 7,035
Total Available-for-Sale Securities $ 30,832 $ 30,929 $ 17,351 $ 17,498
Held-to-Maturity Securities :
Mortgage-Backed Securities 1,732 1,661 1,743 1,722
Total Held-to-Maturity Securities $ 1,732 $ 1,661 $ 1,743 $ 1,722
The $13.4 million increase in available-for-sale securities was due to $14.1
million in available-for-sale securities that were purchased during the three
months ended March 31, 2021 . The increase was offset primarily by principal
payments of $624,000 during the three months ended March 31, 2021 . No securities
matured and/or were called during the three months ended March 31, 2021 .
53
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Loans. The composition of gross loans receivable at
March 31, 2021 December 31, 2020 Increase (Decrease)
Amount Percent Amount Percent Dollars Percent
(Dollars in thousands)
Mortgage loans:
1-4 Family residential
Investor-Owned $ 317,895 25.5 % $ 319,596 27.3 % $ (1,701 ) (0.5 %)
Owner-Occupied 99,985 8.0 % 98,795 8.4 % $ 1,190 1.2 %
Multifamily residential 315,078 25.3 % 307,411 26.2 % $ 7,667 2.5 %
Nonresidential properties 215,340 17.3 % 218,929 18.7 % $ (3,589 ) (1.6 %)
Construction and land 119,339 9.6 % 105,858 9.0 % $ 13,481 12.7 %
Total mortgage loans 1,067,637 85.7 % 1,050,589 89.6 % 17,048 1.6 %
Nonmortgage loans:
Business loans (1) 142,135 11.4 % 94,947 8.1 % $ 47,188 49.7 %
Consumer loans (2) 36,706 2.9 % 26,517 2.3 % $ 10,189 38.4 %
178,841 14.3 % 121,464 10.4 % 57,377 47.2 %
Total $ 1,246,478 100.0 % $ 1,172,053 100.0 % $ 74,425 6.3 %
(1) As of
million and
(2) As of
million and
arrangement with Grain.
The increase in the composition of the loan portfolio was aided by $57.7 million
related to PPP loans at March 31, 2021 when compared to December 31, 2020 . Based
on current internal loan reviews, the Company remains confident that the quality
of our underwriting, our weighted average loan-to-value ratio of 56.0% 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.
Commercial real estate loans, as defined by applicable banking regulations,
include multifamily residential, nonresidential properties, and construction and
land mortgage loans. At March 31, 2021 and December 31, 2020 , approximately 7.9%
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.
Through March 31, 2021 , 406 loans aggregating $376.1 million had received
forbearance primarily consisting of the deferral of principal, interest, and
escrow payments for periods of at least three months. Of those 406 loans, 337
loans aggregating $303.6 million are no longer in deferment and continue
performing pursuant to their terms and 69 loans in the amount of $72.4 million
remained in deferment and are in renewed forbearance. All of these loans had
been performing in accordance with their contractual obligations prior to the
granting of the initial forbearance. The Company actively monitors the business
activities of borrowers in forbearance and seeks to determine their capacity to
resume payments as contractually obligated upon the termination of the
forbearance period. The initial and extended forbearances are short-term
modifications made on a good faith basis in response to the COVID-19 pandemic
and in furtherance of governmental policies. Under the CARES Act, none of these
loans are currently classified as TDR.
54
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The following table presents the loans modified as a result of the COVID-19
pandemic through
Weighted Percentage
Number Loan Average of Total
of Loans Amount Loan-to-Value Modifications
(Dollars in Thousands)
Mortgage loans:
1-4 Family residential
Investor-Owned 184 $ 131,289 57.6% 45.3%
Owner-Occupied 64 35,327 55.9% 15.8%
Multifamily residential 61 74,213 53.8% 15.0%
Nonresidential properties 79 92,121 48.8% 19.5%
Construction and land 7 40,978 57.9% 1.7%
Nonmortgage loans:
Business loans 6 2,058 -% 1.5%
Consumer loans 5 65 -% 1.2%
Total 406 $ 376,051 54.6% 100.0%
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 100%
guideline for construction and land mortgage loans and up to 400% 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 March 31, 2021 and December 31, 2020 , the
Bank's construction and land mortgage loans as a percentage of total risk-based
capital was 75.5% and 68.3%, respectively. Investor owned commercial real estate
mortgage loans as a percentage of total risk-based capital was 381.0% and 379.8%
as of March 31, 2021 and December 31, 2020 , respectively. At March 31, 2021 , the
Bank was within the 100% guideline for construction and land mortgage loans
established by banking regulations, but exceeded the 300% guideline for investor
owned commercial real estate mortgage loans. However, the Bank was within its
400% policy limit established by the Bank's internal loan policy. Management
believes that it has established the appropriate level of controls to monitor
the Bank's lending in these areas.
Mortgage Loans Held For Sale. Mortgage loans held for sale, at fair value, at
March 31, 2021 decreased $21.7 million to $13.7 million from $35.4 million at
December 31, 2020 .
Deposits. The composition of deposits at
March 31, 2021 December 31, Increase (Decrease)
Percent Percent
Amount of Total 2020 of Total Dollars Percent
(Dollars in thousands)
Demand (1) $ 242,255 21.3 % $ 189,855 18.5 % $ 52,400 27.6 %
Interest-bearing deposits:
NOW/IOLA accounts 32,235 2.8 % 39,296 3.8 % (7,061 ) (18.0 %)
Money market accounts 157,271 13.8 % 136,258 13.2 % 21,013 15.4 %
Reciprocal deposits 137,402 12.1 % 131,363 12.8 % 6,039 4.6 %
Savings accounts 130,211 11.4 % 125,820 12.2 % 4,391 3.5 % Total NOW, money market, reciprocal and savings
457,119 40.2 %
432,737 42.0 % 24,382 5.6 %
Certificates of deposit of
77,418 6.8 % 78,435 7.6 % (1,017 ) (1.3 %)
Brokered certificates of deposit 86,004 7.6 % 52,678 5.1 % 33,326 63.3 %
Listing service deposits (2) 61,133 5.4 % 39,476 3.8 % 21,657 54.9 %
Certificates of deposit less than
236,398 23.0 % (21,781 ) (9.2 %) Total certificates of deposit
439,172 38.6 % 406,987 39.5 % 32,185 7.9 % Total interest-bearing deposits
896,291 78.7 % 839,724 81.5 % 56,567 6.7 %
Total deposits $ 1,138,546 100.0 % $ 1,029,579 100.0 % $ 108,967 10.6 %
55
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(1) As of
deposits related to net PPP funding.
(2) As of
amounting to
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 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 ofMarch 31, 2021 andDecember 31, 2020 . The Management Asset/Liability Committee generally meets on a weekly basis to review needs, if any, and to ensure the Company operates within the approved limitations.
Advances from FHLBNY. The Bank had outstanding borrowings at
Warehouse Lines of Credit.
Stockholders' Equity. The Company's consolidated stockholders' equity increased$1.7 million , or 1.0%, to$161.2 million atMarch 31, 2021 from$159.5 million atDecember 31, 2020 . The$1.7 million increase in stockholders' equity was mainly attributable to$2.5 million in net income,$352,000 related to restricted stock units and stock options,$134,000 related to the Company's Employee Stock Ownership Plan offset by$1.2 million in stock repurchases and$107,000 related to unrealized loss on available-for-sale securities.
Results of Operations
The discussion of the Company's results of operations for the three months endedMarch 31, 2021 and 2020 are presented below. Included in the results of operations of the Company for the three months endedMarch 31, 2021 are the results of operations ofMortgage World which was acquired onJuly 10, 2020 . The results of operations for interim periods may not be indicative of future results. 56
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Comparison of Results of Operations for the Three Months Ended
PDL Community Bancorp Consolidated
Overview. Net income for the three months endedMarch 31, 2021 was$2.5 million compared to net loss of ($1.2 million ) for the three months endedMarch 31, 2020 . Earnings per basic and diluted share was$0.15 for the three months endedMarch 31, 2021 compared to loss per basic and diluted share of ($0.07 ) for three months endedMarch 31, 2020 . Interest and Dividend Income. Interest and dividend income increased$2.1 million , or 16.5%, to$15.2 million for the three months endedMarch 31, 2021 from$13.0 million for the three months endedMarch 31, 2020 . Interest income on loans receivable, which is the Bank's primary source of income, increased$2.1 million , or 16.8%. Interest Expense. Interest expense decreased$821,000 , or 26.4%, to$2.3 million for the three months endedMarch 31, 2021 from$3.1 million for the three months endedMarch 31, 2020 . Net Interest Income. Net interest income increased$3.0 million , or 29.9%, to$12.9 million for the three months endedMarch 31, 2021 from$9.9 million for the three months endedMarch 31, 2020 , primarily as a result of organic loan growth and a lower average cost of funds on interest bearing liabilities. Income Tax Provision. The Company had an income tax expenses of$732,000 for the three months endedMarch 31, 2021 and had an income tax benefit of ($209,000 ) for three months endedMarch 31, 2020 , resulting in effective tax rates of 23.0% and 14.7%, respectively. Segments. The Company has two reportable segments: the Bank andMortgage World . Income from the Bank consists primarily of interest and fees earned on loans and investment securities and service charges on deposit accounts. Income fromMortgage World consists primarily of taking of applications from the general public for residential mortgage loans, underwriting them to investors' standards, closing and funding them and holding them until they are sold to investors. The table below shows the results of operations for the Company's segments, the Bank andMortgage World , for the three months endedMarch 31, 2021 and 2020. The results of operations forMortgage World was not included for the three months endedMarch 31, 2020 , asMortgage World was acquired by the Company onJuly 10, 2020 . Ponce Bank Mortgage World For the Three Months EndedMarch 31 , Increase (Decrease) For the Three Months EndedMarch 31 , Increase (Decrease) 2021 2020 Dollars Percent 2021 2020 Dollars Percent (Dollars in thousands) Interest and dividend income $ 15,027 $ 13,030$ 1,997 15.3 % $ 150 $ - $ 150 - % Interest expense 2,186 3,174 (988 ) (31.1 %) 140 - 140 - % Net interest income 12,841 9,856 2,985 30.3 % 10 - 10 - % Provision for loan losses 686 1,146 (460 ) (40.1 %) - - - - % Net interest income after provision for loan losses 12,155 8,710 3,445 39.6 % 10 - 10 - % Non-interest income 1,804 750 1,054 140.5 % 2,358 - 2,358 - % Non-interest expense 10,000 10,094 (94 ) (0.9 %) 2,291 - 2,291 - % Income (loss) before income taxes 3,959 (634 ) 4,593 * 77 - 77 - % Provision (benefit) for income taxes 1,105 (58 ) 1,163 * 40 - 40 - % Net income (loss) $ 2,854 $ (576 )$ 3,430 * $ 37 $ - $ 37 - %
* Represents more than 500%.
57
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Average Balance Sheets
The following tables set 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.
For the Three Months Ended
2021 2020
Average Average
Outstanding Average Outstanding Average
Balance Interest Yield/Rate (1) Balance Interest Yield/Rate (1)
(Dollars in thousands)
Interest-earning assets:
Loans (2) $ 1,239,127 $ 14,925 4.88 % $ 975,499 $ 12,782 5.27 %
Securities (3) 22,516 176 3.17 % 18,218 83 1.83 %
Other (4) 46,581 76 0.66 % 38,220 165 1.73 %
Total interest-earning assets 1,308,224 15,177 4.70 % 1,031,937 13,030 5.07 %
Non-interest-earning assets 63,951 37,467
Total assets $ 1,372,175 $ 1,069,404
Interest-bearing liabilities:
NOW/IOLA $ 33,085 $ 38 0.47 % $ 29,026 $ 38 0.53 %
Money market 277,104 304 0.44 % 160,471 618 1.54 %
Savings 126,961 39 0.12 % 113,710 35 0.12 %
Certificates of deposit 405,980 1,219 1.22 % 379,154 1,827 1.93 %
Total deposits 843,130 1,600 0.77 % 682,361 2,518 1.48 %
Advance payments by borrowers 8,899 1 0.05 % 7,980 1 0.05 %
Borrowings 129,755 684 2.14 % 108,640 587 2.17 %
Total interest-bearing liabilities 981,784 2,285 0.94 % 798,981 3,106 1.56 %
Non-interest-bearing liabilities:
Non-interest-bearing demand 215,116 - 108,646 -
Other non-interest-bearing liabilities 13,754 - 2,968 -
Total non-interest-bearing liabilities 228,870 - 111,614 -
Total liabilities 1,210,654 2,285 910,595 3,106
Total equity 161,521 158,809
Total liabilities and total equity $ 1,372,175 0.94 % $ 1,069,404 1.56 %
Net interest income $ 12,892 $ 9,924
Net interest rate spread (5) 3.76 % 3.51 %
Net interest-earning assets (6) $ 326,440 $ 232,956
Net interest margin (7) 4.00 % 3.87 %
Average interest-earning assets to
interest-bearing liabilities 133.25 % 129.16 %
(1) Annualized where appropriate.
(2) Loans include loans and mortgage loans held for sale, at fair value.
(3) Securities include available-for-sale securities and held-to-maturity
securities.
(4) Includes FHLBNY demand account and FHLBNY stock dividends.
(5) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average rate of
interest-bearing liabilities.
(6) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(7) Net interest margin represents net interest income divided by average total
interest-earning assets.
58
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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.
For the Three Months Ended March 31,
2021 vs. 2020
Increase (Decrease) Due to Total Increase
Volume Rate (Decrease)
(Dollars in thousands)
Interest-earning assets:
Loans (1) $ 6,916 $ (4,773 ) $ 2,143
Securities (2) (208 ) 301 93
Other 412 (501 ) (89 )
Total interest-earning assets 7,120 (4,973 ) 2,147
Interest-bearing liabilities:
NOW/IOLA 20 (20 ) -
Money market 2,718 (3,032 ) (314 )
Savings 3 1 4
Certificates of deposit 2,276 (2,884 ) (608 )
Total deposits 5,017 (5,935 ) (918 )
Borrowings 143 (46 ) 97
Total interest-bearing liabilities 5,160 (5,981 ) (821 )
Change in net interest income $ 1,960 $ 1,008 $ 2,968
(1) Loans include loans and mortgage loans held for sale, at fair value.
(2) Securities include available-for-sale securities and held-to-maturity securities.
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 the Bank's 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 Management Committee 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 does not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.Mortgage World currently is not engaged in hedging activities to cover the risks of interest rate movements while it holds mortgages for sale. The current low mortgage interest rates and their limited volatility has effectively mitigated such risks. Should the mortgage interest rate environment change,Mortgage World may consider renewed hedging strategies. 59 -------------------------------------------------------------------------------- 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 rates. As ofMarch 31, 2021 , in the event of an instantaneous upward and downward change in rates from management's flat 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 (Dollars in thousands) +400 $ 47,318 (7.74%) +300 48,888 (4.68%) +200 50,095 (2.33%) +100 50,933 (0.69%) Level 51,289 -% -100 50,316 (1.90%)
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
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
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 March 31, 2021 , 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 EVE (Decrease)
Rates (basis points) (1) EVE (2) Amount Percent Ratio (4) (basis points)
(Dollars in thousands)
+400 $ 153,943 $ (19,157 ) (11.07 %) 11.39 % (1,107 )
+300 160,540 (12,560 ) (7.26 %) 11.68 % (726 )
+200 166,189 (6,911 ) (3.99 %) 11.89 % (399 )
+100 170,914 (2,186 ) (1.26 %) 12.02 % (126 )
Level 173,100 - - % 11.98 % -
-100 184,496 11,396 6.58 % 12.56 % 658
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
(2) EVE is the discounted present value of expected cash flows from assets,
liabilities and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of incoming
cash flows on interest-earning assets.
(4) EVE Ratio represents EVE divided by the present value of assets.
60
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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 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
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 Asset/Liability 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 Asset/Liability Management 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. TheFederal Reserve Board decreased the targeted federal funds interest rate by an aggregate of 225 basis points during the second half of 2019 and the first quarter of 2020. The 2020 rate cuts were in response to unprecedented market turmoil as a result of the onset of the COVID-19 pandemic. TheFederal Reserve Board has stated that its federal funds interest rate policy will remain accommodative at least through 2023. The Company cannot make any representation as to whether, or how many times, theFederal Reserve Board will decrease or increase the targeted federal funds rate in the future. GAP Analysis. In addition, management analyzes interest rate sensitivity by monitoring the Company'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. 61 -------------------------------------------------------------------------------- The following table sets forth the Company's interest-earning assets and its interest-bearing liabilities atMarch 31, 2021 , 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 atMarch 31, 2021 , 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. March 31, 2021 Time to Repricing Non Total Earning Earning Assets & Zero Days Zero Days Zero Days Assets & Non Zero to 90 Zero to to One to Two to Five Five Years Costing Costing Days 180 Days Year Years Years Plus Liabilities Liabilities Total (Dollars in thousands) Assets: Interest-bearing deposits in banks$ 76,571 $ 76,571 $ 76,571 $ 76,571 $ 76,571 $ 76,571 $ 76,571 $ 13,551 $ 90,122 Securities (1) 2,055 3,969 9,020 12,139 28,887 32,661 32,661 - 32,661 Placements with banks 2,739 2,739 2,739 2,739 2,739 2,739 2,739 - 2,739 Net loans (includes LHFS) 177,106 299,460 453,893 711,739 1,205,374 1,249,140 1,249,140 (4,957 ) 1,244,183 FHLBNY stock 6,061 6,057 6,057 6,057 6,057 6,057 6,057 - 6,057 Other assets - - - - - - - 57,945 57,945 Total$ 264,532 $ 388,796 $ 548,280 $ 809,245 $ 1,319,628 $ 1,367,168 $ 1,367,168 $ 66,539 $ 1,433,707 Liabilities: Non-maturity deposits$ 13,478 $ 46,978 $ 197,731 $ 261,323 $ 412,277 $ 480,668 $ 480,668 $ 218,706 $ 699,374 Certificates of deposit 76,592 142,725 250,184 321,507 435,172 439,172 439,172 - 439,172 Other liabilities - 15,340 28,220 121,595 121,595 121,595 121,595 12,362 133,957 Total liabilities 90,070 205,043 476,135 704,425 969,044 1,041,435 1,041,435 231,068 1,272,503 Capital - - - - - - - 161,204 161,204 Total liabilities and capital$ 90,070 $ 205,043 $ 476,135 $ 704,425 $ 969,044 $ 1,041,435 $ 1,041,435 $ 392,272 $ 1,433,707 Asset/liability gap$ 174,462 $ 183,753 $ 72,145 $ 104,820 $ 350,584 $ 325,733 $ 325,733 Gap/assets ratio 293.70 % 189.62 % 115.15 % 114.88 % 136.18 % 131.28 % 131.28 %
(1) Includes available-for-sale securities and held-to-maturity securities.
The following table sets forth the Company's interest-earning assets and its interest-bearing liabilities atDecember 31, 2020 , 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 atDecember 31, 2020 , 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. 62 --------------------------------------------------------------------------------
December 31, 2020
Time to Repricing
Non
Total Earning
Earning Assets &
Zero Days Zero Days Zero Days Five Assets & Non
Zero to Zero to to One to Two to Five Years Costing Costing
90 Days 180 Days Year Years Years Plus Liabilities Liabilities Total
(Dollars in thousands)
Assets:
Interest-bearing deposits in banks$ 72,078 $ 72,078 $ 72,078 $ 72,078 $ 72,078 $ 72,078 $ 72,078 $ -$ 72,078 Securities (1) 802 1,514 6,183 7,865 10,883 19,094 19,094 147 19,241 Placement with banks 2,739 2,739 2,739 2,739 2,739 2,739 2,739 - 2,739 Net loans (includes LHFS) 182,337 273,469 451,205 710,938 1,147,028 1,195,099 1,195,099 (1,053 ) 1,194,046 FHLBNY stock 6,426 6,426 6,426 6,426 6,426 6,426 6,426 - 6,426 Other assets - - - - - - - 60,701 60,701 Total$ 264,382 $ 356,226 $ 538,631 $ 800,046 $ 1,239,154 $ 1,295,436 $ 1,295,436 $ 59,795 $ 1,355,231 Liabilities: Non-maturity deposits$ 16,445 $ 30,887 $ 59,771 $ 117,545 $ 256,222 $ 449,570 $ 449,570 $ 173,022 $ 622,592 Certificates of deposit 103,737 168,744 271,229 353,272 402,987 406,987 406,987 - 406,987 Other liabilities 8,000 8,000 8,000 120,324 148,699 148,699 148,699 17,409 166,108 Total liabilities 128,182 207,631 339,000 591,141 807,908 1,005,256 1,005,256 190,431 1,195,687 Capital - - - - - - - 159,544 159,544 Total liabilities and capital$ 128,182 $ 207,631 $ 339,000 $ 591,141 $ 807,908 $ 1,005,256 $ 1,005,256 $ 349,975 $ 1,355,231 Asset/liability gap$ 136,200 $ 148,595 $ 199,631 $ 208,905 $ 431,246 $ 290,180 $ 290,180 Gap/assets ratio 206.26 % 171.57 % 158.89 % 135.34 % 153.38 % 128.87 % 128.87 %
(1) Includes available-for-sale securities and held-to-maturity securities.
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 economic value tables of equity 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 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.
Ponce Bank Segment
Results of Operations for the Three Months Ended
Net Income.Ponce Bank net income was$2.9 million for the three months endedMarch 31, 2021 compared to net loss of ($576,000 ) for the three months endedMarch 31, 2020 . Interest Income. Interest and dividend income increased$2.0 million , or 15.3%, to$15.0 million for the three months endedMarch 31, 2021 from$13.0 million for the three months endedMarch 31, 2020 . Interest income on loans receivable, which is the Bank's primary source of income, increased$2.0 million , or 15.6% year over year. 63
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The following table presents interest income on loans receivable for the periods
indicated:
For the Three Months Ended March 31, Change
2021 2020 Amount Percent
(Dollars in thousands)
1-4 Family residential $ 5,136 $ 5,005 $ 131 2.6 %
Multifamily residential 3,507 3,057 450 14.7 %
Nonresidential properties 2,412 2,457 (45 ) (1.8 %)
Construction and land 1,891 2,083 (192 ) (9.2 %)
Business loans 905 153 752 491.5 %
Consumer loans 924 27 897 *
Total interest income on loans receivable $ 14,775 $ 12,782 $ 1,993 15.6 %
Interest Expense. Interest expense decreased $988,000 , or 31.1%, to $2.2 million
for the three months ended March 31, 2021 from $3.2 million for the three months
ended March 31, 2020 .
The following table presents interest expense for the periods indicated:
For the Three Months Ended March 31, Change
2021 2020 Amount Percent
(Dollars in thousands)
Certificates of deposit $ 1,219 $ 1,827 $ (608 ) (33.3 %)
Money market 308 648 (340 ) (52.5 %)
Savings 39 35 4 11.4 %
NOW/IOLA 38 38 - 0.0 %
Advance payments by borrowers 1 1 - - %
Borrowings 581 625 (44 ) (7.0 %)
Total interest expense $ 2,186 $ 3,174 $ (988 ) (31.1 %)
Net Interest Income. Net interest income increased $3.0 million , or 30.3%, to
$12.8 million for the three months ended March 31, 2021 from $9.9 million for
the three months ended March 31, 2020 , primarily as a result of organic loan
growth and a lower average cost of funds on interest bearing liabilities.
Provision for loan losses. The provision for loan losses represents a charge to
earnings necessary to establish ALLL that, in management's opinion, should be
adequate to provide coverage for the inherent losses on outstanding loans.
In evaluating the level of the ALLL, management analyzes several qualitative
loan portfolio risk factors including, but not limited to, management's ongoing
review and grading of loans, facts and issues related to specific loans,
historical loan loss and delinquency experience, trends in past due and
non-accrual loans, existing risk characteristics of specific loans or loan
pools, the fair value of underlying collateral, current economic conditions and
other qualitative and quantitative factors which could affect potential credit
losses. See Note 1, "Nature of Business and Summary of Significant Accounting
Policies -Allowance for Loan Losses" of the Notes to the accompanying
Consolidated Financial Statements for additional information.
After an evaluation of these factors, the Bank established a provision for loan
losses for the three months ended March 31, 2021 of $686,000 compared to $1.1
million for the three months ended March 31, 2020 . The Bank's assessment of the
economic impact of the COVID-19 pandemic on borrowers indicated that it would
likely be a detriment to their ability to repay in the short-term and that the
likelihood of long-term detrimental effects depends significantly on the
resumption of normalized economic activities, a factor not yet determinable.
Factoring in the uncertainty about the COVID-19 pandemic and to the best of
management's knowledge, the Bank recorded all loan losses that are both probable
and reasonably expected. However, future changes in the factors described above,
including, but not limited to, actual loss experience with respect to the Bank's
loan portfolio, could result in material increases in the Bank's provision for
loan losses. In addition, the OCC, as an integral part of its examination
process, periodically reviews the Bank's allowance for loan losses and as a
result of such reviews, the Bank may determine to adjust the ALLL. However,
regulatory agencies are not directly involved in establishing the ALLL as the
process is management's responsibility and any increase or decrease in the
allowance is the responsibility of management. The Bank has selected the CECL
model and has begun running scenarios. The extent of the change to ALLL is
indeterminable at this time as it will be dependent upon the portfolio
composition and credit quality at the adoption date, as
64
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well as economic conditions and forecasts at that time. The Company is taking
advantage of the extended transition period for complying with this new
accounting standard. Assuming it remains a smaller reporting company, the Bank
will adopt the CECL standard for fiscal years beginning after December 15, 2022 .
See Note 1, "Nature of Business and Summary of Significant Accounting Policies"
of the Notes to the accompanying Consolidated Financial Statements for a
discussion of the CECL standard.
Non-interest Income. Non-interest income increased $1.1 million , or 140.5%, to
$1.8 million for the three months ended March 31, 2021 from $750,000 for the
three months ended March 31, 2020 . The increase in non-interest income was
primarily due to a $663,000 gain, net of expenses, from sale of real property.
The following table presents non-interest income for the periods indicated:
For the Three Months Ended March 31, Change
2021 2020 Amount Percent
(Dollars in thousands)
Service charges and fees $ 329 $ 248 $ 81 32.7 %
Brokerage commissions - 50 (50 ) (100.0 %)
Late and prepayment charges 244 119 125 105.0 %
Gain on sale of real property 663 - 663 100.0 %
Other 568 333 235 70.6 %
Total non-interest income $ 1,804 $ 750 $ 1,054 140.5 %
Non-interest Expense. Non-interest expense decreased $94,000 , or 0.9%, to $10.0
million for the three months ended March 31, 2021 from $10.1 for the three
months ended March 31, 2020 . Included in non-interest expense for the three
months ended March 31, 2021 was $479,000 of expenses incurred as a result of the
COVID-19 pandemic.
The following table presents non-interest expense for the periods indicated:
For the Three Months Ended March 31, Change
2021 2020 Amount Percent
(Dollars in thousands)
Compensation and benefits $ 4,072 $ 4,656 $ (584 ) (12.5 %)
Occupancy and equipment 2,498 2,004 494 24.7 %
Data processing expenses 581 467 114 24.4 %
Direct loan expenses 462 212 250 117.9 %
Insurance and surety bond premiums 146 121 25 20.7 %
Office supplies, telephone and postage 352 316 36 11.4 %
Professional fees 777 1,277 (500 ) (39.2 %)
Marketing and promotional expenses 29 234 (205 ) (87.6 %)
Directors fees 69 69 - - %
Regulatory dues 60 46 14 30.4 %
Other operating expenses 954 692 262 37.9 %
Total non-interest expense $ 10,000 $ 10,094 $ (94 ) (0.9 %)
Mortgage World Segment
Total Assets. Mortgage World's total assets decreased $18.7 million , or 48.7%,
to $19.7 million at March 31, 2021 from $38.4 million at December 31, 2020 . The
decrease in Mortgage World's total assets was primarily due to decreases in
mortgage loans held for sale, at fair value, of $20.6 million and other assets
of $1.6 million , offset by an increase in cash and cash equivalents of $3.4
million .
Results of Operations for the Three Months Ended
The Company acquired 100% of the common stock ofMortgage World as ofJuly 10, 2020 . The results of operations ofMortgage World for the three months endedMarch 31, 2020 are not included for comparison purposes.
Net Income.
65
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Non-interest Income. Non-interest income was
The following table presents non-interest income for the period indicated:
For the Three Months Ended March 31,
2021
(Dollars in thousands)
Brokerage commissions $ 223
Gain on sale of mortgage loans 1,508
Loan origination 539
Other 88
Total non-interest income $ 2,358
Non-interest Expense. Non-interest expense was
The following table presents non-interest expense for the period indicated:
For the Three Months Ended March 31,
2021
(Dollars in thousands)
Compensation and benefits $ 1,241
Occupancy and equipment 122
Data processing 13
Direct loan expense 547
Office supplies, telephone and postage 57
Professional fees
244
Marketing and promotional expenses 9 Other operating expenses 58 Total non-interest expense $ 2,291
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. The primary sources of funds are deposits, principal and interest payments on loans and securities and proceeds from the sale of loans. The Bank also has access to borrow from the FHLBNY. AtMarch 31, 2021 andDecember 31, 2020 , the Bank had$109.3 million and$117.3 million , respectively, of term and overnight outstanding advances from the FHLBNY, and also had a guarantee from the FHLBNY through letters of credit of up to$61.5 million . AtMarch 31, 2021 andDecember 31, 2020 , there was eligible collateral of approximately$358.6 million and$336.8 million , respectively, in mortgage loans available to secure advances from the FHLBNY. The Bank also has an unsecured line of credit of$25.0 million with a correspondent bank, of which there was none outstanding atMarch 31, 2021 andDecember 31, 2020 . The Bank did not have any outstanding securities sold under repurchase agreements with brokers as ofMarch 31, 2021 andDecember 31, 2020 .Mortgage World maintains two warehouse lines of credit with financial institutions for the purpose of funding the origination and sale of residential mortgage loans. As ofMarch 31, 2021 , the maximum credit line of$25.0 million , of which$11.7 million was utilized, with$13.3 million remaining unused. As ofDecember 31, 2020 , the maximum credit line of$34.9 million , of which$30.0 million was utilized, with$4.9 million remaining unused. 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. 66 -------------------------------------------------------------------------------- Net cash provided by operating activities was$22.6 million and$1.3 million for the three months endedMarch 31, 2021 and 2020, respectively. Net cash (used in) investing activities, which consists primarily of disbursements for loan originations and purchases of new securities, offset by principal collections on loans, proceeds from maturing securities and pay downs on mortgage-backed securities, was$(86.1 million) and$(18.5 million) for the three months endedMarch 31, 2021 and 2020, respectively. Net cash provided by financing activities, consisting of activities in deposit accounts, advances, and repurchase of treasury stock, was$81.5 million and$93.6 million for the three months endedMarch 31, 2021 and 2020, respectively. Based on the Company's current assessment of the economic impact of the COVID-19 pandemic on its borrowers, management has determined that it will likely be a detriment to borrowers' ability to repay in the short-term and that the likelihood of long-term detrimental effects will depend significantly on the resumption of normalized economic activities, a factor not yet determinable. The Bank's management also 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. AtMarch 31, 2021 andDecember 31, 2020 , all regulatory capital requirements were met, resulting in the Company and the Bank being categorized as well capitalized atMarch 31, 2021 andDecember 31, 2020 . Management is not aware of any conditions or events that would change this categorization.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
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. AtMarch 31, 2021 andDecember 31, 2020 , the Company had outstanding commitments to originate loans and extend credit of$164.3 million and$151.3 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 less than one year fromMarch 31, 2021 totaled$250.4 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.
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