UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
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 001-38224
PDL Community Bancorp
(Exact name of Registrant as specified in its Charter)
Federal
(State or other jurisdiction of
incorporation or organization)
2244 Westchester Avenue
Bronx, NY
(Address of principal executive offices)
82-2857928
(I.R.S. Employer
Identification No.)
10462
(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
Common stock, par value $0.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Trading
Symbol(s)
PDLB
Name of each exchange on which registered
The NASDAQ Stock Market, LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)of the Act. YES ☐ NO ☒
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
Non-accelerated filer
Emerging growth company
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Accelerated filer
Smaller reporting company
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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 ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The NASDAQ Stock Market on March
16, 2020 was $67,950,046.
As of March 16, 2020, the registrant had 17,323,759 shares of common stock, $0.01par value per share, outstanding.
Documents Incorporated by Reference
Portions of the Registrant’s Definitive Proxy Statement relating to the Annual Meeting of Stockholders, schedule to be held on May 12, 2020.
Table of Contents
PART I
Item 1. Business
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accounting Fees and Services.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
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31
40
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66
67
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “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:
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statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions
with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-
looking statements after the date of this annual report.
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:
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general economic conditions, either nationally or in our market areas, that are worse than expected;
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;
our ability to access cost-effective funding;
fluctuations in real estate values and real estate market conditions;
demand for loans and deposits in our market area;
our ability to implement and change our business strategies;
competition among depository and other financial institutions;
inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial
instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we 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,
including as a result of Basel III;
the impact of the Dodd-Frank Act and the implementing regulations;
changes in the quality or composition of our loan or investment portfolios;
technological changes that may be more difficult or expensive than expected;
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the inability of third party providers to perform as expected;
our ability to manage market risk, credit risk and operational risk in the current economic environment;
our ability to enter new markets successfully and capitalize on growth opportunities;
our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and
our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
changes in consumer spending, borrowing and savings habits;
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;
our ability to retain key employees;
our compensation expense associated with equity allocated or awarded to our employees; and
changes in the financial condition, results of operations or future prospects of issuers of securities that we may own.
iii
Item 1. Business
PDL Community Bancorp
PART I
PDL Community Bancorp (hereafter referred to as “we,” “our,” “us,” “PDL Community Bancorp,” or the “Company”), is the majority-owned subsidiary
of Ponce Bank Mutual Holding Company. PDL Community Bancorp, as the holding company of Ponce Bank (“Ponce Bank” or the “Bank”), a federal stock
savings association subsidiary of PDL Community Bancorp, is authorized to pursue other business activities permitted by applicable laws and regulations for
savings and loan holding companies, which may include the acquisition of banking and financial services companies. On February 21, 2019, the Federal
Reserve Board approved the Company as a Financial Holding Company to exercise such powers as are permitted by applicable laws and regulations. The
Company is designated a Community Development Financial Institution.
The Company’s cash flow is dependent on earnings from investments and any dividends received from Ponce Bank. PDL Community Bancorp does not
own nor lease any property, but instead uses the premises, equipment and furniture of Ponce Bank. At the present time, we employ only persons who are
officers of Ponce Bank to serve as officers of PDL Community Bancorp. We use the support staff of Ponce Bank from time to time. These persons are not
separately compensated by PDL Community Bancorp. PDL Community Bancorp may hire additional employees, as appropriate, to the extent it expands its
business in the future.
The Company’s executive office is located at 2244 Westchester Avenue, Bronx, New York 10462, and the telephone number at that address is (718) 931-
9000.
Available Information
Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), PDL Community Bancorp is required to file
annual, quarterly, and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). The Company
electronically files its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other reports as required
with the SEC. The SEC website, www.sec.gov, provides access to all Company filings which have been filed electronically. Additionally, the Company’s SEC
filings and additional shareholders’ information are available free of charge on the Company’s website, www.poncebank.com (within the Investor Relations
section). Information on our website is not and should not be considered part of this annual report.
The Company’s common stock is traded on the NASDAQ Global Market under the symbol “PDLB.”
Ponce Bank
Ponce Bank is a federally-chartered stock savings association headquartered in the Bronx, New York. Ponce Bank was originally chartered in 1960 as a
federally-chartered mutual savings and loan association under the name Ponce De Leon Federal Savings and Loan Association. In 1985, the Bank changed its
name to “Ponce De Leon Federal Savings Bank.” In 1997, the Bank changed its name again to “Ponce De Leon Federal Bank.” In 2017, the Bank adopted its
current name. The Bank is designated as a Minority Depository Institution and a Community Development Financial Institution under applicable regulations.
The Bank’s business is conducted through its administrative office and 13 branch banking offices. The banking offices are located in Bronx (4 branches),
Manhattan (2 branches), Queens (3 branches) and Brooklyn (3 branches), New York, and Union City (1 branch), New Jersey.
The Bank’s business primarily consists of taking deposits from the general public and investing those deposits, together with funds generated from
operations and borrowings in mortgage loans, consisting of one-to-four family residential (both investor-owned and owner-occupied), multifamily residential,
nonresidential properties, construction and land, and, to a lesser extent, in business and consumer loans. The Bank also invests in securities, which have
historically consisted of U.S. government and federal agency securities and securities issued by government-sponsored or owned enterprises, as well as,
mortgage-backed securities and Federal Home Loan Bank of New York (the “FHLBNY”) stock. The Bank offers a variety of deposit accounts, including
demand, savings, money markets and certificates of deposit accounts.
1
Market Area
The Bank is headquartered in the Bronx, New York, with our primary market in the other boroughs of New York City (excluding Staten Island) and
Hudson County, New Jersey. The size and complex nature of the geographic footprint makes for diverse demographics that continue to undergo significant
changes, in terms of economic, racial, ethnic and age parameters, all with potentially substantial long-term institutional ramifications.
Our primary deposit base includes a large and stable base of locally employed blue-collar workers with low-to-medium income, middle-aged, and with
limited investment funds. Within the base of locally employed blue-collar workers there is a significant, and growing, portion of recently immigrated, younger,
lower-skilled laborers. The influx of immigrant lower-skilled workers, however, has been hampered by the increases in rental rates in the rental housing market
within the New York City metropolitan area.
Another significant customer segment consists of middle aged and older white-collar, high-income individuals, many of whom are self-employed real
estate investors and developers. They constitute a large percentage of the borrowing base of the Bank and, increasingly, are becoming the source of a significant
percentage of commercial deposits.
The Bank has historically been funded through local community deposits. Today, the Bank continues to rely primarily on community deposits from its
market areas to fund investments and loans. However, the mix of community deposits now includes consumer and commercial deposits with a strong reliance
on time deposits.
Competition
The Bank faces significant competition within its market area both in originating loans and attracting deposits. There is a high concentration of financial
institutions in the Bank’s market area, including national, regional and other locally-operated commercial banks, savings banks, savings associations and credit
unions. Several “mega” banks exist in the market, such as JPMorgan Chase, Citibank and Capital One, many of whom are continuing to push for retail deposits.
A number of the Bank’s competitors offer non-deposit products and services that the Bank does not currently offer, such as trust services, private banking,
insurance services and asset management. Additionally, the Bank faces an increasing level of competition from non-core financial service providers that do not
necessarily maintain a physical presence in the Bank’s market area, such as Quicken Loans, Freedom Mortgage and many internet financial service providers.
The amount of competition facing the Bank is extensive and can negatively impact the Bank’s growth.
The market share of deposits in the New York area can be difficult to quantify, as some “mega” banks will include large scale deposits from around the
world as held at headquarters. However, in Bronx County, New York, where the Bank maintains four branches, it holds 1.95% (June 30, 2019) of the market’s
deposits. This represents the Bank’s largest market share in a county-level area. The Bank continues to work to improve its market position by expanding its
brand within its current market area, and building its capacity to provide more products and services to its customers.
Lending Activities
General. The Bank’s principal lending activity is originating one-to-four family real estate, including residential investor-owned and owner-occupied,
multifamily residential, nonresidential property, construction and land, and, to a lesser extent, commercial and industrial (“C&I”) business loans and consumer
loans. It originates real estate and other loans through its loan officers, marketing efforts, customer base, walk-in customers and referrals from real estate
brokers, builders and attorneys. Subject to market conditions and our asset-liability analysis, it seeks to increase its emphasis on multifamily residential and
nonresidential property loans in an effort to grow the overall loan portfolio and increase the overall yield earned on loans.
Lending activities are conducted primarily by the Bank’s salaried loan officers operating at its main and branch office locations. It also conducts lending
activities through its subsidiary Ponce De Leon Mortgage Corporation. All loans originated by the Bank are underwritten pursuant to its policies and
procedures. The Bank currently intends that substantially all of its mortgage loan originations will have adjustable interest rates. For our business loan
originations, variable rate pricing is offered based on prime rate plus a margin.
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Loan Portfolio Composition. The following table sets forth the composition of the Bank’s loan portfolio by type of loan (excluding loans held-for-sale)
at the dates indicated. Loans in process at December 31, 2019 and December 31, 2018 were $58.1 million and $46.5 million, respectively.
2019
2018
Amount
Percent
Amount
Percent
At December 31,
2017
Amount
Percent
(Dollars in thousands)
2016
2015
Amount
Percent
Amount
Percent
$ 305,272
91,943
250,239
31.60% $ 303,197
92,788
232,509
9.52%
25.90%
32.61% $ 287,158
9.98% 100,854
25.01% 188,550
35.51% $ 227,409
97,631
12.47%
23.31% 158,200
34.90% $ 203,239
14.98% 106,053
24.28% 122,836
207,225
99,309
953,988
21.45%
10.28%
98.75%
196,917
87,572
912,983
21.18% 151,193
67,240
98.20% 794,995
9.42%
18.70% 121,500
8.31%
30,340
98.30% 635,080
18.64% 106,462
4.67%
22,883
97.46% 561,473
10,877
1,231
1.13%
0.13%
15,710
1,068
1.69%
0.11%
12,873
886
1.59%
0.11%
15,719
843
2.41%
0.13%
14,350
788
35.25%
18.39%
21.30%
18.46%
3.97%
97.37%
2.49%
0.14%
12,108
966,096
1.25%
100.00%
16,778
929,761
1.80%
13,759
100.00% 808,754
1.70%
16,562
100.00% 651,642
2.54%
15,138
100.00% 576,611
2.63%
100.00%
1,970
1,407
1,020
711
535
(12,329)
(12,659)
(11,071)
(10,205)
(9,484)
Mortgage loans:
1-4 family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential
properties
Construction and land
Total mortgage loans
Nonmortgage loans:
Business loans
Consumer loans
Total nonmortgage
loans
Net deferred loan
origination costs
Allowance for losses
on loans
Loans, net
$ 955,737
$ 918,509
$ 798,703
$ 642,148
$ 567,662
The Bank had one loan held for sale in the amount of $1.0 million at December 31, 2019 and had no loans held for sale at December 31, 2018.
Loan Products Offered by the Bank. The following table provides a breakdown of the Bank’s loan portfolio by product type and principal balance
outstanding at December 31, 2019:
At December 31, 2019
Loan Type
# of Loans
Principal
Balance
(In thousands)
% of Portfolio
Mortgage loans:
1-4 Family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Construction 1-4 Investor
Construction Multifamily
Construction Nonresidential
Nonmortgage loans:
Business loans
C&I lines of credit
C&I loans (term)
Consumer loans
Unsecured
Passbook
Grand Total
535 $
251
273
204
1
23
4
58
17
41
126
1,533 $
305,272
91,943
250,239
207,225
522
91,814
6,973
8,812
2,065
475
756
966,096
31.60%
9.52%
25.90%
21.45%
0.05%
9.51%
0.72%
0.91%
0.21%
0.05%
0.08%
100.00%
3
One-to-four Family Investor-Owned Loans. At December 31, 2019, one-to-four family investor-owned loans were $305.3 million, or 31.6% of the
Bank’s total loans. Investor-owned mortgage loans secured by non-owner-occupied one-to-four family residential property represent the Bank’s largest lending
category. The majority of the portfolio, $265.6 million, or 86.9%, are two-to-four family properties (442 accounts), while the remaining $40.0 million, or
13.1%, are primarily single family, non-owner-occupied investment properties (93 accounts). The three largest loans in this category are $4.7 million, $3.1
million and $3.0 million. In this category, loans totaling $120.7 million, or 39.5%, are secured by properties located in Queens County, $113.1 million, or
36.9%, in Kings County, $29.4 million, or 9.6%, in Bronx County, and $15.6 million, or 5.1%, in New York County. The rest of this category, less than 9.0%, is
spread out in other counties and no other concentration exceeded $6.0 million, or 1.9%.
The Bank imposes strict underwriting guidelines in the origination of such loans, including lower maximum loan-to-value ratios of 70% on purchases
and 65% on refinances, a required minimum debt service coverage ratio (net operating income divided by debt service requirement) of 1.20x that must be met
by either the property on a standalone basis or by the inclusion of the owner(s) as co-borrower(s). In addition, all such loans currently require that the
transaction exhibit a global debt service coverage ratio (net operating income divided by debt service requirement) of no less than 1.0x. This coverage ratio
indicates that the owner has the capacity to support the loan along with all personal obligations. On occasion, the Bank has required that the borrower establish a
cash reserve to be held at the Bank in order to provide additional security. The maximum term on such loans is 30 years, typically with five-year adjustable
rates.
One-to-four family investor-owned real estate loans involve a greater degree of risk than one-to-four family owner-occupied real estate loans. Rather
than depending on the borrower’s repayment ability from employment or other income, the borrower’s repayment ability is primarily dependent on ensuring
that a tenant occupies the investor property and has the financial capacity to pay sufficient rent to cover the borrower’s debt. In addition, if an investor borrower
has several loans secured by properties in the same market, the loans have risks similar to a multifamily real estate loan and repayment of those loans is subject
to adverse conditions in the rental market or the local economy.
One-to-four Family Owner-occupied Loans. One-to-four family owner-occupied loans totaled $91.9 million, or 9.5% of the Bank’s total loan portfolio
at December 31, 2019. The three largest loans outstanding in this category had outstanding balances of $2.2 million, $2.0 million and $1.7 million. There are
only 18 loans with an outstanding balance in excess of $1.0 million, which in total account for less than 26.0% of this category. At December 31, 2019,
approximately $34.7 million, or 37.7%, of this category was secured by properties located in Queens County, $10.0 million, or 10.9%, in Kings County, $8.8
million, or 9.6%, in Bronx County, and $8.8 million, or 9.6%, in New York County. None of the other geographical concentrations exceeded 8% of this
category.
It is the Bank’s policy to underwrite loans secured by one-to-four family owner-occupied residential real estate in a manner that ensures strict
compliance with Dodd-Frank regulatory requirements. This includes underwriting only mortgages that have a debt-to-income ratio of 43% or less. That is the
highest ratio a borrower can have and still receive a qualified mortgage. A qualified mortgage is presumed to meet the borrower’s ability to repay the loan. As
part of this effort, the Bank employs software that tests each loan for compliance.
The Bank generally limits loans in this category to a maximum loan-to-value ratio of 90% for a purchase and 80% for a refinance, based on the lower of
the purchase price or appraised value. The maximum loan term is 30 years, self-amortizing. Being that the Bank is a portfolio lender, it presently does not offer
a fixed-rate product. The Bank currently offers mostly 5/1 and 5/5 adjustable rate loans that adjust based on a spread ranging between 2.75% to 3.00% over the
one or five-year FHLBNY rate. The maximum amount by which the interest rate may increase generally is limited to 2% for the first two adjustments and 5%
for the life of the loan.
Multifamily and Nonresidential Loans. At $250.2 million, or 25.9% of the Bank’s total loan portfolio at December 31, 2019, loans secured by
multifamily properties represent the Bank’s second largest lending concentration. The nonresidential portfolio accounts for $207.2 million, or 21.4% of the total
loan portfolio, and represents the third largest concentration. Combined, the multifamily and nonresidential loan portfolios amount to $457.5 million, or 47.3%
of the Bank’s total loan portfolio at December 31, 2019. The three largest loans were $11.4 million, $9.8 million and $7.8 million, with the largest being a
nonresidential building, and the other two being multifamily residential and nonresidential, respectively. Of the total of $457.5 million, 141 loans have balances
in excess of $1.0 million and account for $304.3 million, or approximately 66.5%, of this lending concentration. In terms of geographical concentrations, $192.1
million, or 42.0%, are secured by properties located in Queens County, $101.8 million, or 22.3%, in Kings County, $66.1 million, or 14.4%, in Bronx County,
$27.2 million, or 6.0%, in New York County and $20.7 million, or 4.5%, in Westchester County. All other concentrations by county, which account for less than
11.0% of this category, have balances of $14.0 million or less. In the nonresidential portfolio, the overall mix is diverse in terms of property types, with the
largest concentration being retail and wholesale at $67.2 million, or 32.4% of the portfolio, industrial and warehouse at $42.0 million, or 20.3%, service, doctor,
dentist, beauty, etc. at $26.9 million, or 13.0%, offices at $18.1 million, or 8.7%, hotels and motels at $15.7 million, or 7.6%, restaurants at $17.2 million, or
8.3%, and churches at $10.4 million, or 5.0%. The rest of the portfolio accounts for other property types, with none exceeding 4.0% as a portfolio concentration.
4
The Bank considers a number of factors when originating multifamily and nonresidential mortgages. Loans secured by multifamily and nonresidential
real estate generally have larger balances and involve a greater degree of risk than one-to-four family residential real estate loans. The primary concern in this
type of lending is the borrower’s creditworthiness and the viability and cash flow potential of the property. Payments on loans secured by income-producing
properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be more subject to adverse
conditions in the real estate market or the economy as compared to residential real estate loans. To address the risks involved, the Bank evaluates the
qualifications and financial resources of the underlying principal(s) of the borrower, including credit history, profitability and expertise, as well as the value of
cash flows and condition of the property securing the loan. When evaluating the qualifications of the borrower, the Bank considers the financial resources of the
borrower, the experience of the underlying principal(s) of the borrower in owning or managing similar properties and the borrower’s payment history with the
Bank and other financial institutions. In evaluating the property securing the loan, the factors considered include the net operating income of the mortgaged
property before debt service and depreciation, the ratio of the loan amount to the appraised value or purchase price of the mortgaged property (whichever is
lower), and the debt service coverage ratio. All multifamily and nonresidential loans are supported by appraisals that conform to the Bank’s appraisal policy.
The Bank generally limits the maximum loan-to-value ratio on these loans to 75%, based on the lower of the purchase price or appraised value of the subject
property (70% on the refinance of nonresidential properties such as retail spaces, office buildings, and warehouses). The maximum loan term ranges between 25
and 30 years. As is the Bank’s general policy, the Bank offers only adjustable rates on its multifamily and nonresidential mortgages - with adjustments based on
a spread currently ranging between 2.75% to 3.00% over the five-year FHLBNY rate.
Construction and Land Lending. Construction and land lending totaled $99.3 million, or 10.3%, of the Bank’s total loan portfolio at December 31,
2019, (28 projects) with the majority consisting of multifamily residential projects (23 projects). Out of the $99.3 million, $91.8 million are multifamily, of
which $49.7 million, or 54.1%, are secured by properties located in Queens County, $35.7 million, or 38.9%, in Kings County, $4.6 million, or 5.0%, in New
York County and $1.9 million, or 2.0%, in Bronx County. At December 31, 2019, loans in process related to construction loans totaled $58.1 million.
The Bank’s typical construction loan has a term of up to 24 months and contains:
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a minimum of 5% contingency;
a minimum of 5% retainage;
a loan-to-cost ratio of 70% or less;
an end loan loan-to-value ratio of 65% or less;
an interest reserve;
guarantees of all owners / partners / shareholders of a closely held organization owning 20% or more of company stock or entity ownership; and
an option to convert to a permanent mortgage loan upon completion of the project.
Construction lending involves additional risks when compared with permanent lending because funds are advanced upon the security of the project,
which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the
completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete
a project and the related loan-to-value ratio. The Bank’s approach to the underwriting of construction loans is driven by five factors: analysis of the developer;
analysis of the contractor; analysis of the project; valuation of the project; and evaluation of the source of repayment.
The developer’s character, capacity and capital are analyzed to determine that the individual or entity has the ability to first complete the project and then
either sell it or carry permanent financing. The general contractor is analyzed for reputation, sufficient expertise and capacity to complete the project within the
allotted time. The project is analyzed in order to ensure that the project will be completed within a reasonable period of time according to the plans and
specifications, and can either be sold, rented or refinanced once completed. All construction loans are supported by appraisals which conform to the Bank’s
appraisal policy and affirm the value of the project both “As Is” and “As Completed.” Lastly, the Bank reviews the developer’s cash flow estimations for the
project on an “As Completed” basis. These projections are compared to the appraiser’s estimates. Debt service coverage using projected rental net income must
be at least 1.2x the estimated debt service when operating at stabilized levels.
Upon closing of the construction loan, the Bank begins monitoring the project and funding requisitions for completed stages upon inspection and
confirmation by third party firms, such as engineers, of the work performed and its value and quality. Conversion to permanent financing usually occurs upon a
conversion underwriting and receipt of certificates of occupancy, as applicable.
5
C&I Loans and Lines of Credit. C&I loans and lines of credit represent less than 2.0% of the Bank’s total loan portfolio at December 31, 2019. Unlike
real estate loans, which are secured by real property, and whose collateral value tends to be more easily ascertainable, commercial and industrial loans are of
higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. The collateral, such
as accounts receivable, securing these loans may fluctuate in value.
Although the Bank’s loan policy allows for the extension of secured and unsecured financing, the Bank usually seeks to obtain collateral when in initial
discussions with potential borrowers. Unsecured credit facilities are made only to strong borrowers that possess established track records with the Bank (or
come highly recommended) and are supported by guarantors. Guarantees are required of any individual or entity owning or controlling 20% or more of the
borrowing entity, with exceptions requiring approval from the Board of Directors. When credits are not secured by a specific lien on an asset, the Bank usually
requires a general lien on all business assets as evidenced by a UCC filing. Pricing is typically based on the Wall Street Journal prime rate plus a spread driven
by risk-rating variables.
Underwriters are required to identify at least two sources of repayment, usually recommend that loans contain covenants, such as minimum debt service
coverage ratios, minimum global debt service coverage ratios, maximum leverage ratios, 30-day “cleanups” or “clean-downs,” as applicable, and must require
periodic financial reporting. In addition, every effort is made to set up borrowers with auto-debit for loan payments and strongly encourage them to maintain
operating accounts at the Bank.
Lines of credit are typically short-term facilities (12 months) that are provided for occasional or seasonal needs. They are extended to only qualifying
borrowers who have established cash flow from operations and a clean credit history. At a minimum, a bi-annual 30-day clean-up, or 75% bi-annual pay-down
period is required, although annually is preferred. A clean-up period generally is not required on amortizing secured lines. Guarantors, which are usually
required, must have clean credit histories and a substantial outside net worth. Most lines contain an option to convert to a term loan upon maturity.
Secured term loans are long-term facilities extended typically for the purpose of financing the purchase of a long term asset. At a minimum, they will be
collateralized by the asset being purchased. They may also be secured by an existing long term business asset or outside collateral pledged by the guarantor or
borrower. Unsecured term loans are usually extended only to well-known borrowers who have established strong cash flow from operations and a clean credit
history. Although Bank policy allows term loans for up to ten years, the preference is to offer self-amortizing term loans based on a term of no more than five-
to-seven years.
6
Loan Originations, Purchases and Sales. The following table sets forth the Bank’s loan originations, sales, purchases and principal repayment activities
during the periods indicated.
Total loans at beginning of year
Loans originated:
Mortgage loans:
1-4 family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Total mortgage loans
Nonmortgage loans:
Business
Consumer
Total nonmortgage loans
Total loans originated
Loans purchased:
Mortgage loans:
1-4 family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Total mortgage loans
Nonmortgage loans:
Business
Consumer
Total nonmortgage loans
Total loans purchased
Loans sold:
Mortgage loans:
1-4 family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Total mortgage loans
Nonmortgage loans:
Business
Consumer
Total nonmortgage loans
Total loans sold
Principal repayments and other
Net loan activity
Total loans at end of year
2019
2018
Years Ended December 31,
2017
(in thousands)
2016
2015
$
929,761 $
808,754 $
651,642 $
576,611 $
552,259
32,827
9,117
53,288
37,975
69,240
202,447
1,175
755
1,930
204,377
38,738
6,430
66,674
72,926
55,295
240,063
5,101
697
5,798
245,861
85,333
15,278
51,451
56,327
69,011
277,400
17,873
597
18,470
295,870
57,167
14,741
51,876
31,408
5,693
160,885
1,222
718
1,940
162,825
39,309
12,555
34,048
18,365
3,497
107,774
7,451
692
8,143
115,917
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,759)
(2,502)
(535)
(2,045)
—
(6,841)
—
—
—
(6,841)
(118,013)
121,007
929,761 $
(139)
(819)
—
(2,010)
—
(2,968)
—
—
—
(2,968)
(135,790)
157,112
808,754 $
(3,520)
—
—
(196)
—
(3,716)
—
—
—
(3,716)
(164,326)
36,335
966,096 $
7
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(87,794)
75,031
651,642 $
—
—
—
—
(91,565)
24,352
576,611
Contractual Maturities. The following table sets forth the contractual maturities of the total loan portfolio at December 31, 2019. Demand loans, loans
having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The table presents contractual maturities and
does not reflect repricing or the effect of prepayments. Actual maturities may differ.
Mortgage loans:
1-4 family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Total mortgage loans
Nonmortgage loans:
Business loans
Consumer loans
Total nonmortgage loans
Total
December 31, 2019
One year
or less
More than
one year
to five years
More than
five years
Total
(In thousands)
$
$
4,907 $
322
32
1,936
72,329
79,526
7,886
115
8,001
87,527 $
12,971 $
2,127
6,083
15,045
26,980
63,206
2,991
1,116
4,107
67,313 $
287,394 $
89,494
244,124
190,244
—
811,256
—
—
—
811,256 $
305,272
91,943
250,239
207,225
99,309
953,988
10,877
1,231
12,108
966,096
The following table sets forth the Bank’s fixed and adjustable-rate loans at December 31, 2019 that are contractually due after December 31, 2020.
Mortgage loans:
1-4 family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Total mortgage loans
Nonmortgage loans:
Business loans
Consumer loans
Total nonmortgage loans
Total
Fixed
Due After December 31, 2020
Adjustable
(In thousands)
Total
$
$
34,629 $
15,234
23,855
22,978
—
96,696
—
—
—
96,696 $
265,736 $
76,387
226,352
182,311
26,980
777,766
2,991
1,116
4,107
781,873 $
300,365
91,621
250,207
205,289
26,980
874,462
2,991
1,116
4,107
878,569
Loan Approval Procedures and Authority. The Bank’s total loans or extensions of credit to a single borrower or group of related borrowers cannot
exceed, with specified exemptions, 15% of its total regulatory capital. The Bank’s lending limit as of December 31, 2019 was $22.0 million, with the ability to
lend additional amounts up to 10% if the loans or extensions of credit are fully secured by readily-marketable collateral. At December 31, 2019, the Bank
complied with these loans-to-one borrower limitations. At December 31, 2019, the Bank’s largest aggregate exposure to one borrower was $20.5 million with an
outstanding balance of $8.4 million. The second and third largest exposures were $15.0 million and $14.5 million with outstanding balances of $5.1 million and
$13.7 million, respectively. No other loan or loans-to-one borrower, individually or cumulatively, exceeded $14.0 million, or 63.6% of the lending limit.
8
The Bank’s lending is subject to written policies, underwriting standards and operating procedures. Decisions on loan requests are made on the basis of
detailed applications submitted by the prospective borrower, credit histories that the Bank obtains and property valuations, consistent with the appraisal policy.
The appraisals are prepared by outside independent licensed appraisers and reviewed by third parties, all approved by the Board of Directors. The Loan
Committee usually reviews appraisals in considering a loan application. The performance of the appraisers is also subject to internal evaluations using
scorecards and are assessed periodically. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and all
information provided with the application and provided checklists as part of the application package are evaluated by the loan underwriting department.
The lending approval process starts with the processing of the application package, which is reviewed for completeness and then all necessary agency
reports are ordered. Upon initial review and preparation of preliminary documents by the processors in the underwriting department, the file is assigned to an
underwriter. The underwriters are responsible for presenting the loan request along with a recommendation, to the Loan Committee, and to the Board of
Directors when the credit exposure is greater than the Loan Committee’s authority or there are exceptions to the loan policy. If approved, closed and booked, the
loan reviewers then undertake the responsibility of monitoring the credit file for the life of the loan by assessing the borrower’s creditworthiness periodically,
given certain criteria and following certain operating procedures. An independent third party also performs loan reviews following similar criteria and scope
under the oversight of the Audit Committee of the Board of Directors.
At this time, the Bank does not originate loans with the intent of selling them into the secondary market.
Delinquencies and Non-Performing Assets
Delinquency Procedures. Collection efforts commence the day following the grace period, normally on the 17th of the month. Those loans that have
experienced sporadic late payments over the previous 12 months are reviewed with a greater degree of diligence. Late notices are generated and distributed on
the 17th and 30th day of the month. The Collection Department pursues collection efforts up until the 90th day past due. At that time, the Bank usually will
initiate legal proceedings for collection or foreclosure unless it is in the best interest of the Bank to work further with the borrower to arrange a suitable workout
plan.
Prior to acquiring property through foreclosure proceedings, the Bank will obtain an updated appraisal to determine the fair market value and proceed
with net adjustments according to accounting principles. Board of Directors approval is required to pursue a foreclosure.
For the years ended December 31, 2019 and 2018, the Bank collected $162,000 and $207,000, respectively, of interest income on non-accruing troubled
debt restructured loans, of which $24,000 and $135,000, respectively, was recognized into income. The remaining interest collected on non-accruing troubled
debt restructured loans for these periods was applied as a principal reduction for the remaining life of the loan, or until the loan is deemed performing.
Delinquent Loans. The following table sets forth the Bank’s loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.
Mortgages:
1-4 Family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage Loans:
Business
Consumer
Total
30-59
Days
2019
60-89
Days
Past Due
Past Due
90 Days
or More
Past Due
30-59
Days
Past Due
At December 31,
2018
60-89
Days
Past Due
(In thousands)
90 Days
or More
Past Due
30-59
Days
2017
60-89
Days
Past Due
Past Due
90 Days
or More
Past Due
$
3,866 $
3,405
3,921
3
—
—
—
11,195 $
$
— $
—
—
—
—
—
—
— $
1,082 $
1,295
—
3,708
—
—
—
6,085 $
9
6,539 $
1,609
995
—
—
292
—
9,435 $
470 $
574
—
4
—
—
—
1,048 $
— $
995
—
1,052
—
—
—
2,047 $
1,201 $
585
46
11
—
239
—
2,082 $
— $
—
—
—
—
—
—
— $
472
3,391
—
1,882
—
51
—
5,796
Mortgages:
1-4 Family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage Loans:
Business
Consumer
Total
30-59
Days
Past Due
2016
60-89
Days
Past Due
At December 31,
90 Days
or More
Past Due
30-59
Days
Past Due
(In thousands)
2015
60-89
Days
Past Due
90 Days
or More
Past Due
$
$
2,716 $
2,562
819
41
—
25
—
6,163 $
— $
557
—
—
—
—
—
557 $
325 $
1,734
—
1,994
—
22
—
4,075 $
2,306 $
1,023
84
680
—
—
—
4,093 $
659 $
311
—
55
—
—
—
1,025 $
805
1,712
—
859
—
—
—
3,376
Owner-occupied, one-to-four family residential loans 30-59 days past due increased $1.8 million, or 111.67%, to $3.4 million at December 31, 2019
compared to $1.6 million at December 31, 2018. The increase was mainly attributed to increases of five relationships consisting of five loans totaling $3.0
million offset by decreases of four relationships consisting of four loans totaling $1.2 million.
Multifamily residential loans 30-59 days past due increased $2.9 million, or 294.03%, to $3.9 million at December 31, 2019 compared to $1.0 million at
December 31, 2018. The increase was mainly attributed to increases of three relationships consisting of three loans totaling $3.9 million offset by decreases of
two relationships consisting of two loans totaling $1.0 million.
Investor-owned, one-to-four family residential loans 30-59 days past due decreased $2.6 million, or 40.88%, to $3.9 million at December 31, 2019
compared to $6.5 million at December 31, 2018. The decrease was mainly attributed to decreases of seven relationships consisting of seven loans totaling $6.1
million offset by increases of five relationships consisting of five loans totaling $3.5 million.
Investor-owned, one-to-four family residential loans past due 90 days or more increased $1.1 million, or 100.00%, to $1.1 million at December 31, 2019
compared to no loans at December 31, 2018. The increase was mainly attributed to two relationships consisting of two loans totaling $1.1 million.
Nonresidential properties loans past due 90 days or more increased $2.6 million, or 252.50%, to $3.7 million at December 31, 2019 compared to $1.1
million at December 31, 2018. The increase was mainly attributed to increases of two relationships consisting of two loans totaling $3.2 million offset by
decreases of two relationships consisting of two loans totaling $569,000.
10
Non-Performing Assets. The following table sets forth information regarding non-performing assets. Non-performing assets are comprised of non-
accrual loans, non-accrual troubled debt restructurings, and real estate owned. Non-accrual loans include non-accruing troubled debt restructurings of $3.6
million, $3.6 million, $4.6 million, $2.7 million, and $4.5 million at December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
Nonaccrual loans:
Mortgage loans:
1-4 family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage loans:
Business
Consumer
Total nonaccrual loans (not including non-accruing troubled debt
restructured loans)
Non-accruing troubled debt restructured loans:
Mortgage loans:
1-4 family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage loans:
Business
Consumer
Total non-accruing troubled debt restructured loans
Total nonaccrual loans
Real estate owned:
Mortgage loans:
1-4 family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage loans:
Business
Consumer
Total real estate owned
Total nonperforming assets
Accruing loans past due 90 days or more:
Mortgage loans:
1-4 family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage loans:
Business
Consumer
Total accruing loans past due 90 days or more
Accruing troubled debt restructured loans:
Mortgage loans:
1-4 family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage loans:
Business
Consumer
Total accruing troubled debt restructured loans
Total nonperforming assets, accruing loans past due 90 days or more
and accruing troubled debt restructured loans
Total nonperforming loans to total loans
Total nonperforming assets to total assets
Total nonperforming assets, accruing loans past due 90 days or more and
accruing troubled debt restructured loans to total assets
2019
2018
At December 31,
2017
(Dollars in thousands)
2016
2015
$
2,312
1,009
—
3,555
1,118
—
—
$
205
1,092
16
706
1,115
—
—
$
1,034
2,624
521
1,387
1,075
147
—
$
809
1,463
—
1,614
1,145
22
—
1,635
1,078
—
1,660
637
13
—
7,994
$
3,134
$
6,788
$
5,053
$
5,023
467
2,491
—
646
—
—
—
3,604
11,598
$
$
1,053
1,987
—
604
—
—
—
3,644
6,778
$
$
1,144
2,693
—
783
—
—
—
4,620
11,408
$
$
1,240
646
—
783
—
—
—
2,669
7,722
$
$
—
$
—
$
—
$
—
$
—
—
—
—
—
—
11,598
—
—
—
—
—
—
—
—
5,191
2,090
—
1,306
—
14
—
8,601
$
$
$
$
$
—
—
—
—
—
—
6,778
—
—
—
—
—
—
—
—
5,192
3,456
—
1,438
—
$
$
$
$
—
—
—
—
—
—
11,408
7
—
—
—
—
—
—
7
6,559
4,756
—
1,958
—
$
$
$
$
—
—
—
—
—
—
7,722
—
—
—
—
—
—
—
—
6,422
7,271
—
4,066
—
$
$
$
$
374
—
10,460
$
477
—
13,750
$
593
—
18,352
$
20,199
$
17,238
$
25,165
$
26,074
$
1.20 %
1.10 %
1.92 %
0.73 %
0.64 %
1.63 %
1.41 %
1.23 %
2.72 %
1.20 %
1.04 %
3.50 %
2,599
1,055
—
828
—
—
—
4,482
9,505
—
—
—
76
—
—
76
9,581
—
—
—
—
—
—
—
—
6,579
8,326
—
4,186
—
814
—
19,905
29,486
1.65 %
1.35 %
4.19 %
$
$
$
$
$
$
$
$
$
$
$
11
Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities, considered by the Office
of the Comptroller of the Currency (“OCC”) to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is
inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those
characterized by the “distinct possibility” that the Bank will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of
the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on
the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered
“uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do
not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as
“special mention” by our management.
Under OCC regulations, when an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an
amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover
probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an
insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so
classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject
to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.
In connection with the filing of the Bank’s periodic reports with the OCC and in accordance with its classification of assets policy, it regularly reviews
the loans in its portfolio to determine whether any loans require classification in accordance with applicable regulations.
On the basis of this review of loans, the Bank’s classified and special mention loans at the dates indicated were as follows:
Classified Loans:
Substandard
Total classified loans
Special mention loans
Total classified and special mention loans
2019
2018
At December 31,
2017
(Dollars in thousands)
2016
2015
$
$
22,787 $
22,787
17,355
40,142 $
18,665 $
18,665
14,394
33,059 $
22,999 $
22,999
5,317
28,316 $
19,225 $
19,225
2,549
21,774 $
17,786
17,786
6,469
24,255
Special mention loans increased $3.0 million, or 20.57%, to $17.4 million at December 31, 2019 compared to $14.4 million at December 31, 2018. The
increase was primarily attributable to two construction multi-family loans which increased in the aggregate by $6.9 million to $14.9 million offset by decreases
of $1.3 million in 1-4 family investor owned loans, $1.4 million in commercial lines of credit and loans, $500,000 in 1-4 family construction loans and
$800,000 for multifamily residential loans.
Troubled Debt Restructurings. The Bank occasionally modifies loans to help borrowers stay current on their loans and to avoid foreclosure. The Bank
considers modifications only after analyzing a borrower’s current repayment capacity, evaluating the strength of any guarantors based on documented current
financial information, and assessing the current value of any collateral pledged. The Bank generally does not forgive principal or interest on loans, but may do
so if it is in its best interest and increases the likelihood that it can collect the remaining principal balance. The Bank may modify the terms of loans to lower
interest rates, which may be at below market rates, to provide for fixed interest rates on loans where fixed rates are otherwise not available, or to provide for
interest-only terms. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and is in
the Bank’s best interests.
At December 31, 2019, there were 36 loans modified as troubled debt restructured loans totaling $12.2 million. Of these, 10 troubled debt restructured
loans, totaling $3.6 million, were included in non-accrual loans and the remaining 26 troubled debt restructured loans, totaling $8.6 million, had been
performing in accordance with their modified terms for a minimum of six months since the date of restructuring.
12
At December 31, 2018, there were 40 loans modified as troubled debt restructured loans totaling $14.1 million. Of these, 8 troubled debt restructured
loans totaling $3.6 million were included in non-accrual loans and the remaining 32 troubled debt restructured loans, totaling $10.5 million, had been
performing in accordance with their modified terms for a minimum of six months since the date of restructuring.
For the year ended December 31, 2019, there was one troubled debt restructured loan amounting to $275,000 and for the year ended December 31, 2018,
there were no loans modified to troubled debt restructured.
Allowance for Loan and Lease Losses
The Bank has approved and maintained an appropriate, systematic and consistently applied process to determine the dollar amounts of the allowance for
loan and lease losses (“ALLL”) that is adequate to absorb inherent losses in the loan portfolio and other held financial instruments. An inherent loss, as defined
by U.S. Generally Accepted Accounting Principles (“U.S.GAAP”), and applicable banking regulations, is an unconfirmed loss that probably exists based on the
information that is available as of the evaluation date. It is not a loss that may arise from events that might occur as a result of a possible future event. Arriving
at an appropriate allowance involves a high degree of management’s judgment, is inevitably imprecise, and results in a range of possible losses.
The determination of the dollar amounts of the ALLL is based on management’s current judgments about the credit quality of the loan portfolio taking
into consideration all known relevant internal and external factors that affect loan payments at the end of each month. The dollar amounts reported each month
for the ALLL are reviewed at least quarterly by the Board of Directors. To ensure that the methodology remains appropriate for the Bank, the Board of Directors
periodically has the methodology validated externally and causes revisions to be made when appropriate. The Audit Committee of the Board of Directors
oversees and monitors the internal controls over the ALLL determination process. The Bank adheres to a safe and sound banking practice by maintaining,
analyzing, and supporting an adequate ALLL in accordance with U.S.GAAP and supervisory guidance.
The Bank’s ALLL methodology consists of a system designed and implemented to estimate loan and lease losses. The Bank’s ALLL methodology
incorporates management’s current judgments about the credit quality of the loan and lease portfolio through a disciplined and consistently applied process.
The Bank’s loan policy requires the following when the Bank calculates the level of ALLL:
•
•
•
•
•
•
•
•
•
•
All loans shall be taken into consideration in the ALLL methodology whether on an individual or group basis.
The Bank shall identify all loans to be evaluated for impairment on an individual basis under ASC 310 and segment the remainder of the loan
portfolio into groups (pools) of loans with similar risk characteristics for evaluation and analysis under ASC 450.
All known relevant internal and external factors that may affect the collection of the loan shall be taken into consideration.
All known relevant internal and external factors that may affect loan collectability shall be considered and applied consistently; however, when
appropriate, these factors may be modified for new factors affecting loan collectability.
The particular risks inherent in different kinds of lending shall be taken into consideration.
The current collateral values, less the costs to sell, shall be taken into consideration when applicable.
The Bank shall require that competent and well-trained personnel perform the analysis, estimates, reviews and other ALLL methodology functions.
The ALLL methodology shall be based on current and reliable information.
The ALLL methodology shall be well documented, in writing, with clear explanations of the supporting analyses and rationale.
The ALLL methodology shall include a systematic and logical method to consolidate the loss estimates and ensure the ALLL balance is recorded in
accordance with U.S. GAAP.
13
Loan pools with similar risk characteristics. Loss histories are the starting point for the calculation of ALLL balances. Loss histories are calculated for
each of the pools by aggregating the historical losses less recoveries within the respective pools and annualizing the number over the determined length of time.
The length of time may vary according to the relevance of past periods’ experience to the current period, among other considerations. The Bank currently uses a
prior twelve quarter rolling average for its historical loss rates.
Each pool’s historical loss rate is adjusted for the effects of the qualitative or environmental factors. The factors analyzed include:
•
•
•
•
•
•
•
•
•
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices.
Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the
portfolio, including the condition of various market segments.
Changes in the nature and volume of the portfolio and in the terms of loans.
Changes in the experience, ability and depth of lending management and other relevant staff.
Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or
graded loans.
Changes in the quality of the Bank’s loan review system.
Changes in the value of underlying collateral for collateral-dependent loans.
The existence and effect of any concentration of credit, and changes in the level of such concentrations.
The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the
institution’s existing portfolio.
The Bank utilizes a risk-based approach to determine the appropriate adjustments for each qualitative factor. A matrix containing definitions of low,
medium, and high risk levels is used to assess the individual factors to determine their respective directional characteristics. These risk levels serve as the
foundation for determining the individual adjustments for each factor for each pool of loans.
The qualitative factor adjustments are supported by applicable reports, graphs, articles and any other relevant information to evidence and document
management’s judgment as to the respective levels of risk and adjustment requirements.
Each of the qualitative adjustment factors is applied to each of the loan pools to reflect adjustments that increase or decrease the historical loss rates
applied to each loan pool. Each of these adjustment factors is individually supported and justified, and a discrete narrative for each loan pool reflects current
information, events, circumstances and conditions influencing the adjustment. The narratives include descriptions of each factor, management’s analysis of how
each factor has changed over time, which loan pool’s loss rates have been adjusted, the amount by which loss estimates have been adjusted for changes in
conditions, an explanation of how management estimated the impact, and other available data that support the reasonableness of the adjustments.
Once these qualitative adjustment factors are determined for each pool of loans, they are added to the historical loss numbers for each corresponding
pool of loans to arrive at a loss factor for each pool based on historical loss experience and qualitative or environmental influences. These loss factors are
adjusted to appropriately reflect the respective risk rating categories within each pool by applying the weighting factors described above to those loans within
the respective pool’s risk rates.
The series of calculations described above can be expressed as the following equation:
[(H*P) + (Q*P)] = R, where
H = Historical loss factor for the pool
Q = Qualitative/Environmental aggregate adjustment for the pool
P = Total loans within the pool
R = Required reserve amount for the risk rating category within the pool
14
Specific allowances for identified problem loans. The Bank considers a loan to be impaired when, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan
agreement. All troubled debt restructurings and loans on non-accrual status are deemed to be impaired. A specific valuation allowance is established for the
impairment amount of each loan, calculated using the present value of expected cash flows, observable market price, or the fair value of the collateral, in
accordance with the most likely means of recovery.
Factors evaluated in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest
payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The Bank determines
the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and
the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the
principal and interest owed.
An unallocated component may be maintained to cover uncertainties that could affect our estimate of probable losses. The unallocated component of the
allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in
the portfolio.
Validation of the ALLL. The Bank considers its ALLL methodology valid when it accurately estimates the amount of probable loss contained in the loan
portfolio. The Bank has employed procedures, including the following, when validating the reasonableness of its ALLL methodology and determining whether
there may be deficiencies in its overall methodology or loan grading process:
•
•
•
•
A review of trends in loan volume, delinquencies, loan restructurings and concentrations.
A review of previous charge-offs and recovery history, including an evaluation of the timeliness of the entries to record both the charge-offs and the
recoveries.
At a minimum, an annual review by a third party that is independent of the ALLL estimation process.
An evaluation of the appraisal process of the underlying collateral.
The Bank supports the independent validation process with the work papers from the ALLL review function and may include the summary findings of
an independent reviewer. The Board reviews the findings and acknowledges its review in the minutes of its meeting. If the methodology is changed based upon
the findings of the validation process, the documentation that describes and supports the changes is maintained.
As an integral part of its examination process, the OCC will periodically review the Bank’s allowance for loan losses. Following such review, the Bank
may determine that it is appropriate to recognize additions to the allowance based on its judgment and information available to it at the time of such
examination.
Current expected credit losses. On June 16, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update 2016-13,
Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, the current expected credit losses (“CECL”)
standard. In October 2019, the FASB voted to defer implementation of the standard for non-public business entities and smaller reporting companies, such as
the Company, to fiscal years beginning after December 15, 2022. In response to the new model, the Bank has reassessed its risk management policies and
procedures in order for it to successfully implement CECL. Once adopted, the Bank will have to estimate the allowance for loan losses on expected losses rather
than incurred losses.
15
The following table sets forth activity in the allowance for loan losses for the periods indicated.
Allowance at beginning of year
Provision (recovery) for loan losses
Charge-offs:
Mortgage loans:
1-4 family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage loans:
Business
Consumer
Total charge-offs
Recoveries:
Mortgage loans:
1-4 family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage loans:
Business
Consumer
Total recoveries
Net (charge-offs) recoveries
Allowance at end of year
Allowance for loan losses as a percentage for
nonperforming loans
Allowance for loan losses as a percentage
of total loans
Net (charge-offs) recoveries to average loans
outstanding during the year
2019
2018
For the Years Ended December 31,
2017
(Dollars in thousands)
2016
2015
$
12,659
258
$
$
11,071
1,249
10,205
1,716
$
9,484
$
(57)
9,449
353
(8)
—
—
—
—
(724)
—
(732)
23
—
—
9
—
—
—
—
—
—
—
—
—
—
—
(34)
(14)
(48)
(1,423)
(6)
(1,429)
1
250
—
9
—
25
176
2
9
2
(38)
—
(3)
—
(85)
—
(13)
(139)
18
142
1
9
5
110
2
144
(588)
12,329
$
122
5
387
339
12,659
$
359
6
579
(850)
11,071
$
733
9
917
778
10,205
$
$
(142)
(140)
(257)
(19)
(77)
—
(8)
(643)
53
10
—
31
—
224
7
325
(318)
9,484
106.30%
186.77%
97.05%
132.15%
99.78%
1.28%
1.36%
1.37%
1.57%
1.64%
(0.06%)
0.04%
(0.12%)
0.13%
(0.06%)
16
Allowance for Loan and Lease Losses. The following table sets forth the allowance for loan and lease losses by loan category and the percent of the
allowance in each category to the total allowance at the dates indicated. The allowance for loan and lease losses of each category is not necessarily indicative of
future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
Allowance
for Loan
Losses
$
$
3,503
1,067
3,865
1,849
1,782
12,066
254
9
263
12,329
2019
Percent of
Allowance
in Each
Category
to Total
Allocated
Allowance
Percent
of Loans
in Each
Category
to Total
Loans
At December 31,
2018
Percent of
Allowance
in Each
Category
to Total
Allocated
Allowance
Percent
of
Loans in
Each
Category
to Total
Loans
Allowance
for Loan
Losses
(Dollars in thousands)
2017
Percent of
Allowance
in Each
Category
to Total
Allocated
Allowance
Percent
of
Loans in
Each
Category
to Total
Loans
Allowance
for Loan
Losses
28.42%
8.65%
31.35%
15.00%
14.45%
97.87%
31.60% $
9.52%
25.90%
21.45%
10.28%
98.75%
3,799
1,208
3,829
1,925
1,631
12,392
30.01%
9.55%
30.25%
15.20%
12.88%
97.89%
32.61% $
9.98%
25.01%
21.18%
9.42%
98.20%
3,716
1,402
3,109
1,424
1,205
10,856
33.57%
12.66%
28.08%
12.86%
10.89%
98.06%
35.51
12.47
23.31
18.70
8.31
98.30
2.06%
0.07%
2.13%
100.00%
1.13%
0.13%
1.25%
100.00% $
260
7
267
12,659
2.05%
0.06%
2.11%
100.00%
1.69%
0.11%
1.80%
100.00% $
209
6
215
11,071
1.89%
0.05%
1.94%
100.00%
1.59
0.11
1.70
100.00
2016
Percent of
Allowance
in Each
Category
to Total
Allocated
Allowance
At December 31,
Percent of
Loans in
Each
Category
to Total
Loans
Allowance
for Loan
Losses
(Dollars in thousands)
2015
Percent of
Allowance
in Each
Category
to Total
Allocated
Allowance
Percent of
Loans in
Each
Category
to Total
Loans
30.83%
17.69%
26.51%
12.92%
6.03%
93.98%
5.85%
0.17%
6.02%
100.00%
34.90% $
14.98%
24.28%
18.64%
4.66%
97.46%
2.41%
0.13%
2.54%
100.00% $
2,843
2,126
1,994
1,298
502
8,763
709
12
721
9,484
29.98%
22.42%
21.02%
13.69%
5.29%
92.40%
7.47%
0.13%
7.60%
100.00%
35.25%
18.39%
21.30%
18.46%
3.97%
97.37%
2.49%
0.14%
2.63%
100.00%
Allowance
for Loan
Losses
$
$
3,146
1,805
2,705
1,320
615
9,591
597
17
614
10,205
Mortgage loans:
1-4 family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Total mortgage loans
Nonmortgage loans:
Business
Consumer
Total nonmortgage loans
Total
Mortgage loans:
1-4 family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Total mortgage loans
Nonmortgage loans:
Business
Consumer
Total nonmortgage loans
Total
At December 31, 2019, the allowance for loan and lease losses represented 1.27% of total loans and 106.30% of nonperforming loans compared to
1.36% of total loans and 186.77% of nonperforming loans at December 31, 2018. The allowance for loan and lease losses decreased to $12.3 million at
December 31, 2019 from $12.7 million at December 31, 2018. There were $588,000 in net charge-offs and $339,000 in net loan recoveries during the years
ended December 31, 2019 and 2018, respectively.
17
Although the Bank believes that it uses the best information available to establish the ALLL, future adjustments to the allowance may be necessary and
results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore,
although the Bank believes that it has established the ALLL in conformity with U.S. GAAP, after a review of the loan portfolio by regulators, the Bank may
determine it is appropriate to increase the ALLL. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, the
existing ALLL may not be adequate and increases may be necessary should the quality of any loan or lease deteriorate as a result of the factors discussed above.
Any material increase in the ALLL may adversely affect the Bank’s financial condition and results of operations.
Investment Activities
General. The Bank’s investment policy was adopted and is reviewed annually by the Board of Directors. The Chief Financial Officer (designated as the
Chief Investment Officer) will plan and execute investment strategies consistent with the policies approved by the Board of Directors. The Chief Financial
Officer provides an investment schedule detailing the investment portfolio which is reviewed at least quarterly by the Bank’s asset-liability committee and the
Board of Directors.
The current investment policy permits, with certain limitations, investments in United States Treasury securities; securities issued by the U.S.
government and its agencies or government-sponsored enterprises including mortgage-backed and collateralized mortgage obligations (“CMO”) issued by
Fannie Mae, Ginnie Mae and Freddie Mac; and corporate bonds and obligations, and certificates of deposit in other financial institutions.
At December 31, 2019 and 2018, the investment portfolio consisted of available-for-sale securities and obligations issued by the U.S. government and
government-sponsored enterprises and the FHLBNY stock. At December 31, 2019 and 2018, the Bank owned $5.7 million and $2.9 million, respectively, of
FHLBNY stock. As a member of FHLBNY, the Bank is required to purchase stock from the FHLBNY which is carried at cost and classified as restricted equity
securities.
Available-for-sale Securities Portfolio Composition. The following table sets forth the amortized cost and estimated fair value of the available-for-sale
securities portfolio at the dates indicated, which consisted of U.S. government and federal agencies, pass-through mortgage-backed securities and certificates of
deposit.
2019
2018
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
At December 31,
2017
Amortized
Cost
(Dollars in thousands)
Fair Value
Amortized
Cost
2016
2015
Fair Value
Amortized
Cost
Fair Value
$
16,373
—
—
$
16,354 $
—
20,924 $
4,997
20,515
4,995
—
—
—
$
24,911
$
—
—
24,552 $
—
41,906
—
—
500
$
41,559
$
—
500
71,899 $
—
71,166
—
—
—
U.S. Government and
Federal Agencies
US Treasury
Certificates of Deposit
Mortgage-Backed
Securities
FHLMC Certificates
FNMA Certificates
GNMA Certificates
$
Total
—
4,680
482
21,535
—
4,659
491
21,504 $
—
778
870
27,569 $
$
—
759
875
27,144
$
—
1,118
3,205
29,234
—
1,103
3,242
28,897 $
192
3,600
6,744
52,942
$
216
3,606
6,809
52,690
202
4,411
6,084
82,596 $
222
4,432
6,214
82,034
$
$
At December 31, 2019 and 2018, there were no securities of which the amortized cost or estimated value exceeded 10% of total equity.
18
Mortgage-Backed Securities. At December 31, 2019 and 2018, there were mortgage-backed securities with a carrying value of $5.2 million and
$1.6 million, respectively. Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages. Certain types
of mortgage-backed securities are commonly referred to as “pass through” certificates because the underlying loans are “passed through” to investors, net of
certain costs, including servicing and guarantee fees. Mortgage-backed securities typically are collateralized by pools of one-to-four family residential or
multifamily residential mortgages, although the Bank invests primarily in mortgage-backed securities backed by one-to-four family residential mortgages. The
issuers of such securities pool and resell the participation interests in the form of securities to investors such as the Bank. The interest rate of the security is
lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. All of the Bank’s mortgage-backed securities are
backed by Freddie Mac and Fannie Mae, which are government-sponsored enterprises, or Ginnie Mae, which is a government-owned enterprise.
Residential mortgage-backed securities issued by U.S. government agencies and government-sponsored enterprises are more liquid than individual
mortgage loans because there is an active trading market for such securities. In addition, residential mortgage-backed securities may be used to collateralize
borrowings. Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated
at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby
affecting the net yield on the securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization
or accretion adjustments.
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2019 are summarized in the
following table. Maturities are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or
early redemptions that may occur. Adjustable-rate mortgage-backed securities are included in the period in which interest rates are next scheduled to adjust.
One Year or Less
Amortized
Cost
Weighted
Average
Yield
More than One Year
through Five Years
Amortized
Cost
Weighted
Average
Yield
More than Five Years
through Ten Years
More than Ten Years
Total
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
(Dollars in thousands)
Weighted
Average
Yield
Amortized
Cost
Fair
Value
Weighted
Average
Yield
1.38 % $
—
—
$
—
— $
—
—
$
16,373
—
$
16,354
—
500
1.79 %
—
500
—
1.79 %
—
—
—
$
—
4,180
2.85 %
4,680
4,659
—
— $
482
4,662
2.88 %
2.85 % $
482
21,535
$
491
21,504
1.38 %
—
2.74 %
2.88 %
1.71 %
U.S. Government and
Federal Agencies
US Treasury
$
16,373
—
Mortgage-Backed
Securities
FNMA
Certificates
GNMA
Certificates
—
—
—
—
—
Total
$
16,373
1.38 % $
Sources of Funds
General. Deposits have traditionally been the Bank’s primary source of funds for use in lending and investment activities. The Bank may also use
borrowings, primarily from the FHLBNY, brokered and listing service deposits, and unsecured lines of credit with correspondent banks, to supplement cash
flow needs, lengthen the maturities of liabilities for interest rate risk and manage the cost of funds. At December 31, 2019, the amount available to the Bank to
borrow from the FHLBNY was $124.3 million. In addition, the Bank receives funds from scheduled loan payments, investment maturities and calls, loan
prepayments and income on earning assets. Although scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit
inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.
Deposits. Deposits are generated primarily from the Bank’s primary market area. The Bank offers a selection of deposit accounts, including demand
accounts, savings accounts and certificates of deposit to individuals, business entities, non-profit organizations and individual retirement accounts. Deposit
account terms vary, with the primary differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest
rate.
Interest rates paid, maturity terms, service fees and premature withdrawal penalties are established on a periodic basis. Deposit rates and terms are based
primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. The Bank relies upon
personalized customer service, long-standing relationships with customers and the favorable image of the Bank in the community to attract and retain deposits.
The Bank recently implemented a fully functional electronic banking platform, including mobile applications, remote deposit capture and online bill pay, among
others, as a service to retail and business customers.
The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and
competition. In January 2019, the Bank implemented targeted marketing campaigns and give-aways to increase retail
19
and commercial demand and money market accounts. During 2019, the Bank opened 3,144 of such accounts with aggregate balances of $39.5 million at
December 31, 2019. The ability to attract and maintain these and other interest-bearing deposits, and the rates paid on them, have been, and will continue to be,
significantly affected by competition and market conditions.
The following table sets forth the average balance and weighted average rate of deposits for the periods indicated.
2019
Average
Balance Percent
Weighted
Average
Rate
For the Years Ended December 31,
2018
2017
Average
Balance Percent
Weighted
Average
Rate
Average
Balance Percent
Weighted
Average
Rate
(Dollars in thousands)
Deposit type:
NOW/IOLA
Money market
Savings
Certificates of deposit
Interest-bearing deposits
Non-interest bearing demand
Total deposits
$
27,539
124,729
119,521
403,010
674,799
110,745
3.50%
15.88%
15.22%
51.30%
85.90%
14.10%
$ 785,544 100.00%
0.44% $
2.04%
0.13%
1.90%
1.56%
—
28,182
60,113
125,395
439,737
653,427
100,628
1.34% $ 754,055
3.74%
7.97%
16.63%
58.32%
86.66%
13.34%
100.00%
0.36% $ 26,818
1.17% 48,006
0.61% 128,282
1.73% 387,232
1.31% 590,338
112,113
1.14% $ 702,451
—
3.82%
6.83%
18.26%
55.13%
84.04%
15.96%
100.00%
0.36%
0.81%
0.39%
1.53%
1.11%
—
0.94%
The following table sets forth deposit activities for the periods indicated.
Beginning balance
Net deposits (withdrawals) before interest credited
Interest credited
Net increase (decrease) in deposits
Ending balance
2019
At or For the Years Ended December 31,
2018
(Dollars in thousands)
2017
$
$
809,758 $
(38,219)
10,504
(27,715)
782,043 $
713,985 $
87,185
8,588
95,773
809,758 $
643,078
64,338
6,569
70,907
713,985
The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.
Interest Rate:
0.05% - 0.99%
1.00% - 1.49%
1.50% - 1.99%
2.00% - 2.49%
2.50% - 2.99%
3.00% and greater
Total
2019
At December 31,
2018
(Dollars in thousands)
2017
$
$
8,452 $
62,492
94,020
172,596
44,961
6,977
389,498 $
11,749 $
84,484
103,423
187,453
31,338
5,639
424,086 $
33,438
136,865
107,324
127,556
4,878
—
410,061
20
The following table sets forth the amount and maturities of certificates of deposit by interest rate at December 31, 2019.
Interest Rate Range:
0.05% - 0.99%
1.00% - 1.49%
1.50% - 1.99%
2.00% - 2.49%
2.50% - 2.99%
3.00% and greater
Total
Period to Maturity
More
Than
One to
Two Years
More
Than
Two to
Three
Years
Less Than
or Equal to
One Year
More Than
Three Years
Total
Percent
of
Total
(Dollars in thousands)
$
$
8,452 $
46,191
56,181
75,613
27,704
3,018
— $
13,815
23,377
58,097
12,767
1,898
217,159 $ 109,954 $
$
—
2,209
7,365
33,405
1,247
—
44,226
$
— $
277
7,097
5,481
3,243
2,061
18,159 $
8,452
62,492
94,020
172,596
44,961
6,977
389,498
2.17%
16.05%
24.14%
44.31%
11.54%
1.79%
100.00%
At December 31, 2019, the aggregate amount of all certificates of deposit in amounts greater than or equal to $100,000 was $293.6 million. The
following table sets forth the maturity of those certificates as of December 31, 2019.
Maturity Period:
Three months or less
Over three months through six months
Over six months through one year
Over one year to three years
Over three years
Total
At December 31,
(Dollars in thousands)
57,599
32,348
74,170
119,052
10,434
293,603
$
$
At December 31, 2019, certificates of deposit equal to or greater than $250,000 totaled $84.3 million of which $48.1 million matures on or before
December 31, 2020. At December 31, 2019, passbook savings accounts and certificates of deposit with a passbook feature totaled $174.6 million, reflecting
depositors’ preference for traditional banking services.
Borrowings. The Bank may obtain advances from the FHLBNY by pledging as security its capital stock at the FHLBNY and certain of its mortgage
loans and mortgage-backed securities. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and
range of maturities. To the extent such borrowings have different terms to repricing than the Bank’s deposits, they can change the Bank’s interest rate risk
profile. At December 31, 2019 and 2018, the Bank had $104.4 million and $44.4 million of outstanding FHLBNY advances, respectively. Additionally, the
Bank has an unsecured line of credit in the amount of $25.0 million with a correspondent bank of which $0.0 million and $25.0 million were outstanding at
December 31, 2019 and 2018, respectively. The Bank also had a guarantee from the FHLBNY through a standby letter of credit of $3.5 million and $7.6 million
at December 31, 2019 and 2018, respectively.
21
The following table sets forth information concerning balances and interest rates on borrowings at the dates and for the periods indicated.
FHLBNY Advances:
Balance outstanding at end of period
Average amount outstanding during the period
Maximum outstanding at any month-end during the period
Weighted average interest rate during the period
Weighted average interest rate at the end of the period
Correspondent Borrowings:
Balance outstanding at end of period
Average amount outstanding during the period
Maximum outstanding at any month-end during the period
Weighted average interest rate during the period
Weighted average interest rate at the end of the period
Personnel
2019
At or For the Years
December 31,
2018
(Dollars in Thousands)
2017
$
$
$
104,404
81,404
169,404
2.32%
2.21%
$
—
—
—
—
—
$
44,404
32,157
44,404
1.87%
2.72%
$
25,000
2,729
25,000
2.26%
2.64%
16,400
9,738
55,000
1.08%
2.02%
20,000
548
20,000
1.64%
1.64%
At December 31, 2019 and 2018, the Bank had 183 and 181 full-time equivalent employees, respectively. Employees are not represented by any
collective bargaining group.
Subsidiaries
The Company has a subsidiary, Ponce Bank, which itself has two subsidiaries, Ponce de Leon Mortgage Corp., a New York State chartered mortgage
brokerage entity, whose employees are registered in New York and New Jersey, and PFS Services, Corp., which owns two of the Bank’s properties.
Regulation and Supervision
General
As a federally-chartered, stock savings association, the Bank is subject to examination, supervision and regulation, primarily by the OCC, and,
secondarily, by the Federal Deposit Insurance Corporation (“FDIC”) as the insurer of deposits. The federal system of regulation and supervision establishes a
comprehensive framework of activities in which the Bank is engaging and is intended primarily for the protection of depositors and the FDIC’s Deposit
Insurance Fund.
The Bank is regulated to a lesser extent by the Board of Governors of the Federal Reserve System, or the “Federal Reserve Board,” which governs the
reserves to be maintained against deposits and other matters. In addition, the Bank is a member of and owns stock in the FHLBNY, which is one of the 11
regional banks in the Federal Home Loan Bank System. The Bank’s relationship with its depositors and borrowers is also regulated, to a great extent, by federal
law and, to a lesser extent, state law, including in matters concerning the ownership of deposit accounts and the form and content of loan documents.
As savings and loan holding companies, the Company and Ponce Bank Mutual Holding Company, are subject to examination and supervision by, and
are required to file certain reports with, the Federal Reserve Board. The Company is subject to the rules and regulations of the SEC under the federal securities
laws.
Set forth below are certain material regulatory requirements that are applicable to the Bank and the Company. This description of statutes and regulations
is not intended to be a complete description of such statutes and regulations and their effects on the Bank and the Company. Any change in these laws or
regulations, whether by Congress or the applicable regulatory agencies, could have a material adverse impact on the Company and the Bank and their respective
operations.
22
Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act“), made significant changes to the regulatory structure for
depository institutions and their holding companies. However, the Dodd-Frank Act’s changes go well beyond that and affect the lending, investments and other
operations of all depository institutions. The Dodd-Frank Act required the Federal Reserve Board to set minimum capital levels for both bank holding
companies and savings and loan holding companies that are as stringent as those required for their insured depository subsidiaries, and restricted the
components of Tier 1 capital for holding companies to capital instruments that were then currently considered to be Tier 1 capital for insured depository
institutions. Subsequent regulations issued by the Federal Reserve Board generally exempted from these requirements bank and savings and loan holding
companies with less than $3 billion of consolidated assets. The legislation also established a floor for capital of insured depository institutions that cannot be
lower than the standards in effect before its passage and directed the federal banking regulators to implement new leverage and capital requirements that take
into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.
The Dodd-Frank Act created a new regulator, the Consumer Financial Protection Bureau (“CFPB”), and gave it broad powers to supervise and enforce
consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings
institutions, such as Ponce Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and
enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in
assets continue to be examined for compliance by their applicable bank regulators. The legislation also weakened the federal preemption available for national
banks and federal savings associations, and gave state attorneys general the ability to enforce applicable federal consumer protection laws.
The Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are based on the average consolidated total assets less tangible
equity capital of a financial institution. The legislation also permanently increased the maximum amount of deposit insurance for banks, savings institutions and
credit unions to $250,000 per separately insured depositor. The Dodd-Frank Act increased stockholder influence over boards of directors of certain publicly
traded companies by requiring them to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The
legislation also directed the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to holding company executives, regardless of
whether the company is publicly traded. Further, the legislation requires that originators of securitized loans retain a percentage of the risk for transferred loans,
directs the Federal Reserve Board to regulate pricing of certain debit card interchange fees and contains a number of reforms related to mortgage origination.
Many provisions of the Dodd-Frank Act involve delayed effective dates and/or require implementing regulations. The implementation of the legislation
is an ongoing process and the impact on operations cannot yet fully be assessed. The Dodd-Frank Act has resulted in an increased regulatory burden and
compliance, operating and interest expenses for most financial institutions, including the Bank and the Company. In February 2017, the President of the United
States issued an executive order stating that a policy of his administration would be to make regulations efficient, effective and appropriately tailored. The
executive order directed certain regulatory agencies to review and identify laws and regulations that inhibit federal regulation of the U.S. financial system in a
manner inconsistent with the policies stated in the executive order. Any changes in laws or regulation as a result of this review could result in a repeal of,
amendment to, or delayed implementation of the Dodd-Frank Act. In May 2018, a bipartisan regulatory reform bill was enacted into law. Among other
provisions, the law increased the threshold to qualify for the Federal Reserve Board’s Small Bank Holding Company Policy Statement from $1.0 billion to $3.0
billion and provided for charter flexibility for federally-chartered savings banks and associations to adopt the powers of a national bank. The Bank has not
elected to adopt this provision.
Federal Bank Regulations
Business Activities. A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and
applicable federal regulations. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate,
commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. The Bank may also establish,
subject to specified investment limits, service corporation subsidiaries that may engage in certain activities not otherwise permissible for Ponce Bank, including
real estate investment and securities and insurance brokerage.
23
Examinations and Assessments. The Bank is primarily supervised by the OCC. The Bank is required to file reports with and is subject to periodic
examination by the OCC. The Bank is required to pay assessments to the OCC to fund the agency’s operations. The Company is required to file reports with
and is subject to periodic examination by the Federal Reserve Board. It is also required to pay assessments to the Federal Reserve Board to fund the agency’s
operations.
Capital Requirements. Federal regulations require FDIC-insured depository institutions, including federal savings associations, to meet several
minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets
and a Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing
regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
The capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%,
6.0% and 8.0%, respectively. The regulations also establish a minimum required leverage ratio of at least 4.0% Tier 1 capital. Common equity Tier 1 capital is
generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and Additional Tier 1
capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts
of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital
is comprised of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term perpetual
preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan
and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of
Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair
market values. In 2015, Ponce De Leon Federal Bank, the predecessor of Ponce Bank, made a one-time, permanent election to opt-out regarding the treatment
of AOCI. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and
losses on available-for-sale-securities). Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, an institution’s assets, including certain off-
balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests), are multiplied by a risk weight factor assigned by the regulations
based on the risk deemed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a
risk weight of 0.0% is assigned to cash and U.S. government securities, a risk weight of 50.0% is generally assigned to prudently underwritten first lien one-to-
four family residential mortgages, a risk weight of 100.0% is assigned to commercial and consumer loans, a risk weight of 150.0% is assigned to certain past
due loans and a risk weight of between 0.0% to 600.0% is assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus
payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted
assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement began phasing in starting
January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.
24
At December 31, 2019, 2018 and 2017, the Bank’s capital exceeded all applicable requirements.
Tier 1 leverage capital
Requirement
Excess
$
Tier 1 risk-based
Requirement
Excess
Total Risk Based
Requirement
Excess
Common equity Tier 1
Risk-Based Requirement
Excess
$
2019
2018
(Dollars in thousands)
2017
Amount
Ratio
Amount
Ratio
Amount
Ratio
136,584
52,843
83,740
136,584
62,923
73,661
146,451
78,654
67,797
136,584
51,125
85,459
12.92% $
5.00%
7.92%
17.37%
8.00%
9.37%
18.62%
10.00%
8.62%
17.37%
6.50%
10.87% $
138,872
50,815
88,057
138,872
61,261
77,611
148,486
76,577
71,909
138,872
49,775
89,097
13.66% $
5.00%
8.66%
18.14%
8.00%
10.14%
19.39%
10.00%
9.39%
18.14%
6.50%
11.64% $
132,577
45,190
87,387
132,577
54,447
78,130
141,120
68,059
73,061
132,577
44,238
88,339
14.67%
5.00%
9.67%
19.48%
8.00%
11.48%
20.73%
10.00%
10.73%
19.48%
6.50%
12.98%
Loans-to-One Borrower. Generally, a federal savings association may not make a loan or extend credit to a single or related group of borrowers in
excess of 15.0% of unimpaired capital and surplus. An additional amount may be lent, equal to 10.0% of unimpaired capital and surplus, if secured by “readily
marketable collateral,” which generally includes certain financial instruments (but not real estate). As of December 31, 2019, the Bank was in compliance with
the loans-to-one borrower limitations.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository
institutions. These standards relate to, among other things, internal controls, information systems, audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency
pronouncements set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the
pronouncements, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. Failure to
implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Prompt Corrective Action Regulations. Under the Federal Prompt Corrective Action statute, the OCC is required to take supervisory actions against
undercapitalized institutions under its jurisdiction, the severity of which depends upon the institution’s level of capital. A savings institution that has a total risk-
based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a common equity Tier 1 ratio of less than 4.5% or a leverage ratio of less
than 4.0% is considered to be “undercapitalized.” A savings institution that has total risk-based capital of less than 6.0%, a Tier 1 risk-based capital ratio of less
than 4.0%, a common equity Tier 1 ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be “significantly undercapitalized.” A
savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be “critically undercapitalized.”
Generally, the OCC is required to appoint a receiver or conservator for a federal savings association that becomes “critically undercapitalized” within
specific time frames. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date that a federal savings
association is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding
company of a federal savings association that is required to submit a capital restoration plan must guarantee performance under the plan in an amount of up to
the lesser of 5.0% of the savings association’s assets at the time it was deemed to be undercapitalized by the OCC or the amount necessary to restore the savings
association to adequately capitalized status. This guarantee remains in place until the OCC notifies the savings association that it has maintained adequately
capitalized status for each of four consecutive calendar quarters. Institutions that are undercapitalized become subject to certain mandatory measures such as
restrictions on capital distributions and asset growth. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized
federal savings associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.
25
At December 31, 2019, the Bank met the criteria for being considered “well capitalized,” which means that its total risk-based capital ratio exceeded
10.0%, its Tier 1 risk-based ratio exceeded 8.0%, its common equity Tier 1 ratio exceeded 6.5% and its leverage ratio exceeded 5.0%.
Qualified Thrift Lender Test. As a federal savings association, the Bank must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, the
Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including
mortgage-backed securities) in at least nine months of every 12-month period. “Portfolio assets” generally means total assets of a savings association, less the
sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings
association’s business.
Alternatively, the Bank may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.
A savings association that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The
Dodd-Frank Act made noncompliance with the QTL test subject to agency enforcement action for a violation of law. At December 31, 2019, the Bank satisfied
the QTL test.
Capital Distributions. Federal regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases
and other transactions charged to the savings association’s capital account. A federal savings association must file an application with the OCC for approval of a
capital distribution if:
•
•
•
•
the total capital distributions for the applicable calendar year exceeds the sum of the savings association’s net income for that year to date plus the
savings association’s retained net income for the preceding two years;
the savings association would not be at least adequately capitalized following the distribution;
the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or
the savings association is not eligible for expedited treatment of its filings.
Even if an application is not otherwise required, every savings association that is a subsidiary of a savings and loan holding company, such as the Bank,
must file a notice with the Federal Reserve Board at least 30 days before its board of directors declares a dividend.
An application or notice related to a capital distribution may be disapproved if:
•
•
•
the federal savings association would be undercapitalized following the distribution;
the proposed capital distribution raises safety and soundness concerns; or
the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution if, after making such
distribution, the institution would fail to meet any applicable regulatory capital requirement. A federal savings association also may not make a capital
distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock
form.
Community Reinvestment Act and Fair Lending Laws. All federal savings associations have a responsibility under the Community Reinvestment Act
and related regulations to help meet the credit needs of their communities, including low and moderate-income borrowers. In connection with its examination of
a federal savings association, the OCC is required to assess the federal savings association’s record of compliance with the Community Reinvestment Act. A
savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate
applications, such as branches or mergers, or in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit
lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit
Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of
Justice.
26
The Community Reinvestment Act requires all institutions insured by the FDIC to publicly disclose their rating. Ponce Bank, received a “satisfactory”
Community Reinvestment Act rating in its most recent federal examination.
Transactions with Related Parties. As a federal savings association’s authority to engage in transactions with its affiliates is limited by Sections 23A and
23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control with an insured depository
institution such as the Bank. The Company is an affiliate of the Bank because of its control of the Bank. In general, transactions between an insured depository
institution and its affiliates are subject to certain quantitative limits and collateral requirements. In addition, federal regulations prohibit a savings association
from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any
affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the purchase of low-
quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates.
The Bank’s authority to extend credit to its directors, executive officers and 10.0% stockholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other
things, these provisions generally require that extensions of credit to insiders:
•
•
be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable
features; and
not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part,
on the amount of the Bank’s capital.
In addition, extensions of credit in excess of certain limits must be approved by the Bank’s Board of Directors. Extensions of credit to executive officers
are subject to additional limits based on the type of extension involved.
Enforcement. The OCC has primary enforcement responsibility over federal savings associations and has authority to bring enforcement action against
all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on a federal savings association. Formal enforcement action by the OCC may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or directors of the institution and to the appointment of a receiver or conservator. Civil
penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties
may be as high as $1.0 million per day. The FDIC also has the authority to terminate deposit insurance or recommend to the OCC that enforcement action be
taken with respect to a particular federal savings association. If such action is not taken, the FDIC has authority to take the action under specified circumstances.
Insurance of Deposit Accounts. The Deposit Insurance Fund of the FDIC insures deposits at FDIC insured financial institutions such as the Bank.
Deposit accounts in the Bank are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of
$250,000 for self-directed retirement accounts.
The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund. The Dodd-Frank Act required the FDIC to base its
assessments upon each insured institution’s total assets less tangible equity. The FDIC has set the assessment range at 2.5 to 45 basis points of total assets less
tangible equity. Assessments for most institutions are based on financial measures and supervisory ratings derived from statistical modeling estimating the
probability of failure within three years. In conjunction with the Deposit Insurance Fund reserve ratio achieving 1.36%, the assessment range (inclusive of
possible adjustments) was reduced for most banks and savings associations to anywhere from 1.5 basis points to 40 basis points.
In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC,
assessments for anticipated payments, issuance costs and custodial fees on bonds issued by FICO in the 1980s to recapitalize the former Federal Savings and
Loan Insurance Corporation. The bonds issued by FICO were due to mature in 2017 through 2019. For the year ended December 31, 2019, the annualized FICO
assessment was equal to 0.48 basis points of total assets less tangible capital.
The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results
of operations of the Bank. Management cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law, regulation, rule, order or
27
condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of the Bank’s deposit insurance.
OTHER REGULATIONS
Federal Reserve System
Federal Reserve Board regulations require depository institutions to maintain reserves against their transaction accounts (primarily NOW and regular
checking accounts). The regulations generally require that reserves be maintained against aggregate transaction accounts, as follows: for that portion of
transaction accounts aggregating $124.2 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0% and the amounts
greater than $124.2 million require a 10.0% reserve (which may be adjusted annually by the Federal Reserve Board between 8.0% and 14.0%). The first $16.3
million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. The Bank is in
compliance with these requirements.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank
System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the
FHLBNY, the Bank is required to acquire and hold shares of capital stock in the FHLBNY. As of December 31, 2019, the Bank was in compliance with this
requirement and may utilize advances from the FHLBNY as a supply of investable funds.
Other Regulations
Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s
operations are also subject to federal laws applicable to credit transactions, such as the:
•
•
•
•
•
•
•
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine
whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
Truth in Savings Act, mandating certain disclosures to depositors; and
Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The operations of the Bank are subject to the:
•
•
•
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records;
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit
accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies
made from that image, the same legal standing as the original paper check;
28
•
•
The USA PATRIOT Act, which requires financial institutions to, among other things, establish broadened anti-money laundering compliance
programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs
are intended to supplement existing compliance requirement that also apply to financial institutions under the Bank Secrecy Act and the Foreign
Assets Control regulations; and
The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated
third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers
to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of
certain personal financial information with unaffiliated third parties.
Holding Company Regulations
General. The Company and Ponce Bank Mutual Holding Company are non-diversified savings and loan holding companies within the meaning of the
Home Owners’ Loan Act. As such, the Company and Ponce Bank Mutual Holding Company are registered with the Federal Reserve Board and are subject to
the regulation, examination, supervision and reporting requirements applicable to savings and loan holding companies. In addition, the Federal Reserve Board
has enforcement authority over the Company, Ponce Bank Mutual Holding Company and their non-savings association subsidiaries, if any. Among other things,
this authority permits the Federal Reserve Board to restrict or prohibit activities of those entities that are determined to be a serious risk to the subsidiary savings
institution.
Permissible Activities. Under present law, the business activities of the Company and Ponce Bank Mutual Holding Company are generally limited to
those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, provided certain
conditions are met and financial holding company status is elected, or for multiple savings and loan holding companies. A financial holding company may
engage in activities that are financial in nature, including underwriting equity securities and insurance, as well as activities that are incidental to financial
activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act, subject to regulatory approval, and certain additional activities authorized by federal
regulations. The Company and Ponce Bank Mutual Holding Company each elected financial holding company status and received applicable clearance on
February 21, 2019.
Federal law prohibits a savings and loan holding company, including the Company and Ponce Bank Mutual Holding Company, directly or indirectly, or
through one or more subsidiaries, from acquiring more than 5.0% (“control”) of another savings institution or savings and loan holding company, without prior
Federal Reserve Board approval. The Federal Reserve Baord adopted a final rule on January 30, 2020, effective April 1, 2020, providing further guidance
regarding under what circumstances “control” will be found to exist. In evaluating applications by holding companies to acquire savings institutions, the Federal
Reserve Board considers factors such as the financial and managerial resources, future prospects of the company and institution involved, the effect of the
acquisition on the risk to the Federal Deposit Insurance Fund, the convenience and needs of the community and competitive factors.
The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling
savings institutions in more than one state, subject to two exceptions:
•
•
the approval of interstate supervisory acquisitions by savings and loan holding companies; and
the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.
Capital. Savings and loan holding companies had historically not been subjected to consolidated regulatory capital requirements. The Dodd-Frank Act
required the Federal Reserve Board to establish minimum consolidated capital requirements that are as stringent as those required for the insured depository
subsidiaries. However, pursuant to legislation passed in December 2014, the Federal Reserve Board extended to savings and loan holding companies the
applicability of its “Small Bank Holding Company” exception to its consolidated capital requirements and, pursuant to a law enacted in May 2018, increased the
threshold for the exception to $3.0 billion. As a result, savings and loan holding companies with less than $3.0 billion in consolidated assets are generally not
subject to the capital requirements unless otherwise advised by the Federal Reserve Board.
Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board
has issued regulations requiring that all savings and loan holding companies serve as a source of strength to their subsidiary depository institutions.
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Dividends and Stock Repurchases. The Federal Reserve Board has issued a policy statement regarding the payment of dividends by holding companies.
In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding
company appears consistent with the organization’s capital needs, asset quality and overall supervisory financial condition. Separate regulatory guidance
provides for prior consultation with Federal Reserve Bank staff concerning dividends in certain circumstances such as where the company’s net income for the
past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention
is inconsistent with the company’s capital needs and overall financial condition. The ability of a savings and loan holding company to pay dividends may be
restricted if a subsidiary savings association becomes undercapitalized. The regulatory guidance also states that a savings and loan holding company should
inform Federal Reserve Bank supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the savings and loan holding
company is experiencing financial weaknesses or the repurchase or redemption would result in a net reduction, at the end of a quarter, in the amount of such
equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may
affect the ability of the Company to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Waivers of Dividends by Ponce Bank Mutual Holding Company. The Company may pay dividends on its common stock to public stockholders. If it
does, it is also required to pay dividends to Ponce Bank Mutual Holding Company, unless Ponce Bank Mutual Holding Company elects to waive the receipt of
dividends. Under the Dodd-Frank Act, Ponce Bank Mutual Holding Company must receive the approval of the Federal Reserve Board before it may waive the
receipt of any dividends from the Company. The Federal Reserve Board has issued an interim final rule providing that it will not object to dividend waivers
under certain circumstances, including circumstances where the waiver is not detrimental to the safe and sound operation of the savings association and a
majority of the mutual holding company’s members have approved the waiver of dividends by the mutual holding company within the previous twelve months.
In addition, for a “non-grandfathered” mutual holding company such as Ponce Bank Mutual Holding Company, each officer or director of the Company and the
Bank, and any tax-qualified stock benefit plan or non-tax-qualified stock benefit plan in which such individual participates that holds any shares of stock to
which the waiver would apply, must waive the right to receive any such dividend declared. In addition, any dividends waived by Ponce Bank Mutual Holding
Company must be considered in determining an appropriate exchange ratio in the event of a conversion of the mutual holding company to stock form.
Acquisition. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a
company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company. Under certain circumstances, a
change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company’s outstanding voting stock, unless the Federal
Reserve Board has found that the acquisition will not result in control of the company. A change in control definitively occurs upon the acquisition of 25% or
more of the company’s outstanding voting stock. Under the Change in Bank Control Act, the Federal Reserve Board generally has 60 days from the filing of a
complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of
the acquisition. The Federal Reserve Board adopted a final rule on January 30, 2020, effective April 1, 2020, providing further guidance regarding under what
circumstances “control” will be found to exist.
Federal Securities Laws
The Company’s common stock is registered with the SEC under the Securities Exchange Act of 1934, as amended. The Company is subject to the public
disclosure, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934, as amended.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in April 2012, has made numerous changes to the federal securities laws
to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.07 billion during its most recently
completed fiscal year qualifies as an “emerging growth company.” The Company qualifies as an emerging growth company under the JOBS Act.
An “emerging growth company” may choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as
“say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An
emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial
reporting, and can provide scaled disclosure regarding executive compensation. The Company will also not be subject to the auditor attestation requirement or
additional executive compensation disclosure so long as it remains a “smaller reporting company” under SEC regulations (public float less than $250 million of
voting and non-voting equity held by non-affiliates). Finally, an emerging growth company may elect to comply with new or amended accounting
pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such
an election is irrevocable during the period a company is an emerging growth company. The Company has elected to comply with new or amended accounting
pronouncements in the same manner as a private company.
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A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual
gross revenues of $1.07 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common
equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has,
during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large
accelerated filer” under SEC regulations (public float at least $700 million of voting and non-voting equity held by non-affiliates).
Taxation
Ponce Bank Mutual Holding Company, the Company and the Bank are subject to federal and state income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of federal and state taxation is intended only to summarize material income tax
matters and is not a comprehensive description of the tax rules applicable to Ponce Bank Mutual Holding Company, the Company and the Bank.
The Company is subject to U.S. federal income tax, New York State income tax, New Jersey income tax and New York City income tax. The Company
is no longer subject to examination by taxing authorities for years before 2016.
Federal Taxation
Method of Accounting. For federal income tax purposes, the Bank currently reports its income and expenses on the accrual method of accounting and
uses a tax year ending December 31 for filing its federal income tax returns. The Company and the Bank file a consolidated federal income tax return. The
Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for income taxes on bad debt reserves by savings institutions. For
taxable years beginning after 1995, Ponce De Leon Federal Bank, the predecessor of Ponce Bank, and Ponce Bank have been subject to the same bad debt
reserve rules as commercial banks. The Bank currently utilizes the specific charge-off method under Section 582(a) of the Internal Revenue Code.
Net Operating Loss Carryovers. A financial institution may not carry back net operating losses (“NOL”) to earlier tax years. The NOL can be carried
forward indefinitely. The use of NOL to offset income is limited to 80%. At December 31, 2019, the Bank had no federal NOL carryforwards.
State Taxation
The Bank is treated as a financial institution under New York and New Jersey state income tax law. The states of New York and New Jersey subject
financial institutions to all state and local taxes in the same manner and to the same extent as other business corporations in New York and New Jersey.
Additionally, depository financial institutions are subject to local business license taxes and a special occupation tax.
Consolidated Group Return. With tax years beginning after January 1, 2015, New York State and New York City require unitary combined reporting for
all entities engaged in a unitary business that meet certain ownership requirements. All applicable entities meet the ownership requirements in the Bank filing
group and a combined return is appropriately filed. Furthermore, New Jersey changed its tax laws and now requires combined reporting for tax years that end on
or after July 31, 2019 for entities that engage in a unitary business.
Net Operating Loss Carryovers. The state and city of New York allow for a three-year carryback period and carryforward period of twenty years on net
operating losses generated on or after tax year 2015. For tax years prior to 2015, no carryback period is allowed. Ponce De Leon Federal Bank, the predecessor
of Ponce Bank, has pre-2015 carryforwards of $1.9 million for New York State purposes and $1.8 million for New York City purposes. Furthermore, there are
post-2015 carryforwards available of $39.2 million for New York State purposes and $22.0 million for New York City purposes. Finally, for New Jersey
purposes, losses may only be carried forward 20 years, with no allowable carryback period. At December 31, 2019, the Bank had no New Jersey net operating
loss carryforwards.
Item 1A. Risk Factors.
The effects of the outbreak of coronavirus disease 2019 ("COVID-19") has negatively affected the global economy, United States economy, our local
economy and our markets and may disrupt our operations, which could have an adverse effect on our business, financial condition and results of
operations.
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and
financial markets. Further spread of COVID-19 could cause additional quarantines, cancellation of events and travel, business and school shutdowns, reduction
in business activity and financial transactions, labor shortages, supply chain
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interruptions and overall economic and financial market instability. The COVID-19 outbreak in the United States may disrupt our operations through its impact
on our employees, customers and their businesses, and certain industries in which our customers operate. Disruptions to our customers may impair their ability
to fulfill their obligations to the Bank and result in increased risk of delinquencies, defaults, foreclosures, declining collateral values associated with our existing
loans, and losses on our loans. Further, the spread of the COVID-19 outbreak has caused severe disruptions in the United States economy and may materially
disrupt banking and other financial activity generally and in the areas in which the Company operates. This would likely result in a decline in demand for our
products and services, including loans and deposits which would negatively impact our liquidity position and our growth strategy. Any one or more of these
developments could have a material adverse effect on our business, operations, consolidated financial condition, and consolidated results of operations. The
Company is taking precautions to protect the safety and well-being of our employees and customers. However, no assurance can be given that the steps being
taken will be deemed to be adequate or appropriate, nor can we predict the level of disruption which will occur to our employee’s ability to provide customer
support and service.
Multifamily, nonresidential and construction and land loans may carry greater credit risk than loans secured by one-to-four family real estate.
Our focus is primarily on prudently growing our multifamily, nonresidential and construction and land loan portfolio. At December 31, 2019, $556.8
million, or 57.6%, of our loan portfolio consisted of multifamily, nonresidential and construction and land loans as compared to $517.0 million, or 55.6%, of our
loan portfolio at December 31, 2018. Given their larger balances and the complexity of the underlying collateral, multifamily, nonresidential and construction
and land loans generally expose a lender to greater credit risk than loans secured by one-to-four family real estate.
Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to
an adverse development with respect to a one-to-four family residential real estate loan. In addition, any adverse developments with respect to borrowers or
groups of borrowers that have more than one of these types of loans outstanding can expose us to significantly greater risk of loss compared to borrowers or
groups of borrowers that only have one type of these loans. If loans that are collateralized by real estate or other business assets become troubled and the values
of the underlying collateral have been significantly impaired, we may not be able to recover the full contractual amounts of principal and interest that we
anticipated at the time we originated the loans, which could cause us to increase our provision for loan losses which would, in turn, adversely affect our
operating results and financial condition. Further, if we foreclose on this type of collateral, our holding period for that collateral may be longer than for one-to-
four family real estate loans because there are fewer potential purchasers of that collateral, which can result in substantial holding costs.
Some of our borrowers have more than one of these types of loans outstanding. At December 31, 2019, 1,439 loans with an aggregate balance of $860.1
million are to borrowers with only one loan. Another 176 loans are to borrowers with two loans each with a corresponding aggregate balance of $89.4 million.
In addition, 30 loans are to borrowers with three loans each and another 12 loans to borrowers with four loans each with a corresponding aggregate balance of
$13.5 million and $1.8 million, respectively. One borrower accounts for 8 loans with an aggregate balance of $1.3 million.
The unseasoned nature of our multifamily, nonresidential and construction and land loans portfolio may result in changes to our estimates of
collectability, which may lead to additional provisions or charge-offs, which could hurt our profits.
Our multifamily, nonresidential and construction and land loan portfolio has increased approximately $39.8 million, or 7.7%, from $517.0 million at
December 31, 2018 to $556.8 million at December 31, 2019 and increased approximately $110.0 million, or 27.0%, from $407.0 million at December 31, 2017
to $517.0 million at December 31, 2018. A large portion of our multifamily, nonresidential and construction and land loan portfolio is unseasoned and does not
provide us with a significant payment or charge-off history pattern from which to judge future collectability. Currently, we estimate potential charge-offs using a
rolling 12 quarter average and peer data adjusted for qualitative factors specific to us. As a result, it may be difficult to predict the future performance of this
part of our loan portfolio. These loans may have delinquency or charge-off levels above our historical experience or current estimates, which could adversely
affect our future performance. Further, these types of loans generally have larger balances and involve a greater risk than one-to-four family owner-occupied
residential mortgage loans. Accordingly, if we make any errors in judgment in the collectability of our multifamily, nonresidential and construction and land
loans, any resulting charge-offs may be larger on a per loan basis than those incurred historically with our residential mortgage loans.
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Our business may be adversely affected by credit risk associated with residential property.
At December 31, 2019 and 2018, one-to-four family residential real estate loans amounted to $397.2 million and $396.0 million, or 41.2% and 42.6%,
respectively, of our total loan portfolio. Of these amounts, $305.3 million and $303.2 million, or 76.9% and 76.6%, respectively, is comprised of one-to-four
family residential investor-owned properties. One-to-four family residential mortgage lending, whether owner-occupied or non-owner occupied is generally
sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations. Declines in real
estate values could cause some of our one-to-four family residential mortgages to be inadequately collateralized, which would expose us to a greater risk of loss
if we seek to recover on defaulted loans by selling the real estate collateral.
One-to-four family residential mortgage lending, whether owner-occupied or non-owner-occupied, with higher combined loan-to-value ratios are more
sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and
severity of losses. In addition, if the borrowers sell their properties, they may be unable to repay their loans in full from the sale proceeds. For those home equity
loans and lines of credit secured by a second mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan proceeds in the event of
default unless we are prepared to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the
property. In addition, the current judicial and legal climate makes it difficult to foreclose on residential properties expeditiously and with reasonable costs. For
these reasons, we may experience higher rates of delinquencies, default and losses on our one-to-four family residential mortgage loans.
The geographic concentration of our loan portfolio and lending activities makes us vulnerable to a downturn in the local economy.
Although there is not a single employer or industry in our market area on which a significant number of our customers are dependent, a substantial
portion of our loan portfolio is composed of loans secured by property located in the greater New York metropolitan area. This can make us vulnerable to a
downturn in the local economy and real estate markets. Adverse conditions in the local economy, such as unemployment, recession, a catastrophic event or
other factors beyond our control, could impact the ability of our borrowers to repay their loans, which could adversely impact our net interest income. Decreases
in local real estate values caused by economic conditions or other events could adversely affect the value of the property used as collateral for our loans, which
could cause us to realize a loss in the event of a foreclosure. See “Business - Market Area and - Competition.”
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings and capital could decrease.
At December 31, 2019 and 2018, respectively, our allowance for loan losses totaled $12.3 million and $12.7 million, which represented 1.27%, and
1.36% of total loans at such dates. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of
our borrowers and the value of the real estate and other assets serving as collateral for many of our loans. In determining the amount of the allowance for loan
losses, we review our loans, loss and delinquency experience, and business and commercial real estate peer data, and we evaluate other factors including, but
not limited to, current economic conditions. If our assumptions are incorrect, or if delinquencies or non-performing loans increase, our allowance for loan losses
may not be sufficient to cover losses inherent in our loan portfolio, which would require additions to our allowance, which in turn, could materially decrease our
net income.
In addition, our regulators, as well as auditors, as an integral part of their examination process, periodically review the allowance for loan losses and, as a
result of such reviews, we may determine that it is appropriate to increase the allowance for loan losses by recognizing additional provisions for loan losses
charged to income, or to charge off loans, which, net of any recoveries, would decrease the allowance for loan losses. Any such additional provisions for loan
losses or charge-offs could have a material adverse effect on our financial condition and results of operations.
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A worsening of economic conditions in our market area could reduce demand for our products and services and/or result in increases in our level of
nonperforming loans, which could adversely affect our operations, financial condition and earnings.
Local economic conditions have a significant impact on the ability of our borrowers to repay loans and the value of the collateral securing their loans.
Any deterioration in economic conditions could have the following consequences, any of which could have a material adverse effect on our business, financial
condition, liquidity and results of operations:
•
•
•
•
demand for our products and services may decline;
loan delinquencies, problem assets and foreclosures may increase;
collateral for loans, especially real estate, may decline in value, thereby reducing customers’ future borrowing power, and reducing the value of
assets and collateral associated with existing loans; and
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.
Moreover, a significant decline in general economic conditions caused by inflation, recession, acts of terrorism, an outbreak of hostilities, a pandemic or
other international or domestic calamities, unemployment or other factors beyond our control could further impact these local economic conditions and could
further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could
have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing their loans, which could
negatively affect our financial performance.
Our business strategy includes growth, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to
manage our growth effectively. Growing our operations could also cause our expenses to increase faster than our revenues.
Our business strategy includes growth in assets, loans, deposits and the scale of our operations. Achieving such growth will require us to attract
customers that currently bank at other financial institutions in our market area. Our ability to successfully grow will depend on a variety of factors, including our
ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, competition from other financial institutions in
our market area and our ability to manage our growth. Growth opportunities may not be available or we may not be able to manage our growth successfully. If
we do not manage our growth effectively, our financial condition and operating results could be negatively affected. Furthermore, there can be considerable
costs involved in expanding deposit and lending capacity that generally require a period of time to generate the necessary revenues to offset their costs,
especially in areas in which we do not have an established presence and require alternative delivery methods. Accordingly, any such business expansion can be
expected to negatively impact our earnings for some period of time until certain economies of scale are reached. Our expenses could be further increased if we
encounter delays in modernizing existing facilities, opening of new branches or deploying new services.
We depend on our management team to implement our business strategy and execute successful operations and we could be harmed by the loss of
their services.
We are dependent upon the services of the members of our senior management team who direct our strategy and operations. Members of our senior
management team, or lending personnel who possess expertise in our markets and key business relationships, could be difficult to replace. Our loss of these
persons, or our inability to hire additional qualified personnel, could impact our ability to implement our business strategy and could have a material adverse
effect on our results of operations and our ability to compete in our markets. See “Directors, Executives Officers, and Corporate Governance.”
Adherence to our internal policies and procedures by management is critical to our performance and how we are perceived by our regulators.
Our internal policies and procedures are a critical component of our corporate governance and, in some cases, compliance with applicable regulations.
We adopt internal policies and procedures to guide management and employees regarding the operation and conduct of our business. We may not always
achieve absolute compliance with all of our policies and procedures. Any deviation or non-adherence to these internal policies and procedures, whether
intentional or unintentional, could have a detrimental effect on our management, operations or financial condition.
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Our efficiency ratio is high, and we anticipate that it may remain high, as a result of the ongoing implementation of our business strategy.
Our non-interest expense totaled $46.6 million and $34.6 million for the years ended December 31, 2019 and 2018, respectively. Although we continue
to analyze our expenses and pursue efficiencies where available, our efficiency ratio remains high as a result of the implementation of our business strategy
combined with operating in an expensive market. Our efficiency ratio was 114.19% and 87.26% for the years ended December 31, 2019 and 2018, respectively.
If we are unable to successfully implement our business strategy and increase our revenues, our profitability could be adversely affected.
The historically low interest rate environment and the possibility that we may access higher-cost funds to support our loan growth and operations may
adversely affect our net interest income and profitability.
The Federal Reserve Board increased the benchmark federal funds rate starting in December 2016 to December 2018 by an aggregate of 200 basis
points. Thereafter, the Federal Reserve Board reduced the benchmark federal funds rate by a total of 75 basis points through three rate cuts during the second-
half of 2019. On March 3, 2020, and March 15, 2020, the Federal Reserve Board, in emergency actions, decreased the targeted federal funds rate by an
aggregate of 150 basis points. These rate cuts were in response to unprecedented market turmoil. Because of significant competitive pressures in our markets
and the negative impact of these pressures on our deposit and loan pricing, our net interest margin was and is being negatively impacted by these rate cuts and
additional rate cuts may further negatively impact our net interest margin. These rate cuts and further rate cuts in 2020 could also negatively impact our net
interest income, particularly if we are unable to lower our funding costs as quickly as the rates we earn on our loans declines.
An important component of our ability to mitigate pressures of a down rate environment will be our ability to reduce the rates we pay on deposits,
including core deposits. If we are unable to reduce these rates, because of competitive pricing pressures in our markets, liquidity purposes or otherwise, our net
interest margin will be negatively impacted. In addition, as our growth in earnings assets has outpaced growth in our core deposits in recent quarters, we have
had to increase our reliance on noncore funding. These funding sources may be more rate sensitive than our core depositors, and, accordingly, we may be
limited in our ability to reduce the rates we pay on these funds while maintaining on-balance sheet liquidity levels consistent with our policies, which would
negatively impact our net interest margin. We seek to limit the amount of non-core funding we utilize to support our growth. If we are unable to grow our core
funding at rates that are sufficient to match or exceed our loan growth we may be required to slow our loan growth.
As interest rates change, we expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that
either our interest-bearing liabilities (usually deposits and borrowings) will be more sensitive to changes in market interest rates than our interest-earning assets
(usually loans and investment securities), or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” may work
against us, and our results of operations and financial condition may be negatively affected. We attempt to manage our risk from changes in market interest rates
by adjusting the rates, maturity, repricing characteristics, and balances of the different types of our interest-earning assets and interest-bearing liabilities. Interest
rate risk management techniques are not exact. From time to time we have repositioned a portion of our investment securities portfolio in an effort to better
position our balance sheet for potential changes in short-term rates. We employ the use of models and modeling techniques to quantify the levels of risks to net
interest income, which inherently involve the use of assumptions, judgments, and estimates. While we strive to ensure the accuracy of our modeled interest rate
risk profile, there are inherent limitations and imprecisions in this determination and actual results may differ.
Future changes in interest rates could reduce our profits and asset values.
Net income (loss) is the amount by which net interest income and non-interest income exceeds (or does not exceed) non-interest expense and the
provisions for loan losses and taxes. Net interest income makes up a majority of our income and is based on the difference between:
•
•
the interest income we earn on interest-earning assets, such as loans and securities; and
the interest expense we pay on interest-bearing liabilities, such as deposits and borrowings.
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The rates we earn on our assets and the rates we pay on our liabilities are generally fixed for a contractual period of time. Like many savings institutions,
our liabilities generally have shorter contractual maturities than our assets. This imbalance can create significant earnings volatility because market interest rates
change over time. In a period of rising interest rates, the interest income we earn on our assets may not increase as rapidly as the interest we pay on our
liabilities. In a period of declining interest rates, the interest income we earn on our assets may decrease more rapidly than the interest we pay on our liabilities,
as borrowers prepay mortgage loans, and mortgage-backed securities and callable investment securities are called, requiring us to reinvest those cash flows at
lower interest rates.
In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A decline in interest rates results in
increased prepayments of loans and mortgage-backed and related securities as borrowers refinance their debt to reduce their borrowing costs. This creates
reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or
securities. Furthermore, an inverted interest rate yield curve, where short-term interest rates (which are usually the rates at which financial institutions borrow
funds) are higher than long-term interest rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans), can reduce a financial
institution’s net interest margin and create financial risk for financial institutions who originate and hold longer-term, fixed rate mortgage loans.
Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and
results of operations. Changes in the level of interest rates also may negatively affect the value of our assets and ultimately affect our earnings.
We monitor interest rate risk through the use of simulation models, including estimates of the amounts by which the economic value of our assets and
liabilities (the Economic Value of Equity Model “EVE”) and our net interest income would change in the event of a range of assumed changes in market interest
rates. At December 31, 2019, in the event of an instantaneous 100 basis point decrease in interest rates, we estimate that we would experience a 2.03% increase
in EVE and a 0.03% decrease in net interest income. For further discussion of how changes in interest rates could impact us, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Management of Market Risk—Net Interest Income Simulation Models and—Economic Value of
Equity Model .”
Changes in the valuation of securities held could adversely affect us.
At December 31, 2019 and 2018, our securities portfolio totaled $21.5 million and $27.1 million, which represented 2.0% and 2.6% of total assets,
respectively. All of the securities in our portfolio are classified as available-for-sale. Accordingly, a decline in the fair value of our securities could cause a
material decline in our reported equity and/or net income. At least quarterly, and more frequently when warranted by economic or market conditions,
management evaluates all securities classified as available-for-sale with a decline in fair value below the amortized cost of the investment to determine whether
the impairment is deemed to be other-than-temporary impairment (“OTTI”). For impaired debt securities that are intended to be sold, or more likely than not
will be required to be sold, the full amount of market decline is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities
is recognized through earnings. Non-credit related OTTI for debt securities is recognized in other comprehensive income net of applicable taxes. A decline in
the market value of our securities portfolio could adversely affect our earnings.
Strong competition within our market areas may limit our growth and profitability.
Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions,
mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms and unregulated or
less regulated non-banking entities, operating locally and elsewhere. Many of these competitors have substantially greater resources and higher lending limits
than we have and offer certain services that we do not or cannot provide. In addition, some of our competitors offer loans with lower interest rates on more
attractive terms than loans we offer. Competition also makes it increasingly difficult and costly to attract and retain qualified employees. Our profitability
depends upon our continued ability to successfully compete in our market area. If we must raise interest rates paid on deposits or lower interest rates charged on
our loans, our net interest margin and profitability could be adversely affected.
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The financial services industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued
consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type
of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered
barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic
payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many
competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those
products and services than we can. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the
continuing trend of consolidation in the financial services industry. For additional information see “Business —Market Area and—Competition.”
Our small size makes it more difficult for us to compete.
Our small asset size makes it more difficult to compete with other financial institutions that are larger and can more easily afford to invest in the
marketing and technologies needed to attract and retain customers. Because our principal source of income is the net interest income we earn on our loans and
investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance
such investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new products and services as quickly
as our competitors. Our lower earnings may also make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base may
make it difficult to generate meaningful non-interest income from such activities as securities and insurance brokerage. Finally, as a smaller institution, we are
disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.
Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or
increase our costs of operations.
Ponce Bank is subject to extensive regulation, supervision and examination by the OCC, and the Company is subject to extensive regulation, supervision
and examination by the Federal Reserve Board. Such regulation and supervision governs the activities in which our institution and its holding company may
engage and are intended primarily for the protection of the Federal Deposit Insurance Fund and the depositors and borrowers of Ponce Bank, rather than for our
stockholders. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our
operations, the classification of our assets and influencing the level of our allowance for loan losses. These regulations, along with existing tax, accounting,
securities, insurance and monetary laws, rules, standards, policies, and interpretations, control the methods by which financial institutions conduct business,
implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the
form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards
can be both difficult to predict and involve judgment and discretion in interpretation by us. These changes could materially impact, potentially even
retroactively, how we report our financial condition and results of operations.
The Dodd-Frank Act has significantly changed the regulation of banks and savings institutions and affects the lending, deposit, investment, trading and
operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new
rules and regulations and to prepare numerous studies and reports for Congress. The federal agencies have been given significant discretion in drafting the
implementing rules and regulations, many of which are not in final form. As a result, we cannot at this time predict the full extent to which the Dodd-Frank Act
will impact our business, operations or financial condition. However, compliance with the Dodd-Frank Act and its regulations and policies has already resulted
in changes to our business and operations, as well as additional costs, and has diverted management’s time from other business activities, all of which have
adversely affected our financial condition and results of operations. Moreover, in February 2017, the President issued an Executive Order stating that a policy of
his administration would be to make regulations efficient, effective, and appropriately tailored. The Executive Order directed certain regulatory agencies to
review and identify laws and regulations that inhibit federal regulation of the U.S. financial system in a manner consistent with the policies stated in the
Executive Order. Any changes in laws or regulation as a result of this review could result in a repeal, amendment to or delayed implementation of the Dodd-
Frank Act. On May 24, 2018, President Trump signed into law a bipartisan regulatory reform bill. Among other provisions, the bill increased the threshold to
qualify for the Federal Reserve Board’s Small Bank Holding Company Policy Statement from $1.0 billion to $3.0 billion and also provide for charter flexibility
for federally-chartered savings banks and associations to adopt the powers of a national bank.
37
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for
money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S.
Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the
identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions, including restrictions
on conducting acquisitions or establishing new branches. The policies and procedures we have adopted that are designed to assist in compliance with these laws
and regulations may not be effective in preventing violations of these laws and regulations.
Our ability to originate loans could be restricted by recently adopted federal regulations.
The CFPB has issued a rule intended to clarify how lenders can avoid legal liability under the Dodd-Frank Act, which holds lenders accountable for
ensuring a borrower’s ability to repay a mortgage loan. Under the rule, loans that meet the “qualified mortgage” definition will be presumed to have complied
with the new ability-to-repay standard. Under the rule, a “qualified mortgage” loan must not contain certain specified features, including:
•
•
•
•
excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);
interest-only payments;
negative amortization; and
terms of longer than 30 years.
Also, to qualify as a “qualified mortgage,” a loan must be made to a borrower whose total monthly debt-to-income ratio does not exceed 43%. Lenders
must also verify and document the income and financial resources relied upon to qualify a borrower for the loan and underwrite the loan based on a fully
amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments.
In addition, the CFPB has adopted rules and published forms that combine certain disclosures that consumers receive in connection with applying for
and closing on certain mortgage loans under the Truth in Lending Act and the Real Estate Settlement Procedures Act.
We face significant operational risks because the financial services business involves a high volume of transactions and increased reliance on
technology, including risk of loss related to cyber security breaches.
We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions and to collect, process,
transmit and store significant amounts of confidential information regarding our customers, employees and others and concerning our own business, operations,
plans and strategies. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons
outside our company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, systems failures or
interruptions, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. Insurance coverage may
not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could
arise as a result of operational deficiencies or as a result of non-compliance with applicable regulatory standards or customer attrition due to potential negative
publicity. In addition, we outsource some of our data processing to certain third-party providers. If these third-party providers encounter difficulties, including
as a result of cyber-attacks or information security breaches, or if we have difficulty communicating with them, our ability to adequately process and account for
transactions could be affected, and our business operations could be adversely affected.
38
In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, or a breach of our security
systems, including if confidential or proprietary information were to be mishandled, misused or lost, we could suffer financial loss, face regulatory action, civil
litigation and/or suffer damage to our reputation.
We are subject to stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or limit our
ability to pay dividends or repurchase shares.
The Bank’s minimum capital requirements are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6.0%;
(iii) a total capital ratio of 8.0%; and (iv) a Tier 1 leverage ratio of 4.0%. The capital rule also establishes a “capital conservation buffer” of 2.5%, and, now that
it is fully phased in, results in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of
8.5%; and (iii) a total capital ratio of 10.5%. The capital conservation buffer requirement which began phasing in January of 2016 at 0.625% of risk-weighted
assets and which increased each year until fully implemented in January, 2019, to 2.5%. An institution will be subject to limitations on paying dividends,
engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount.
We have analyzed the effects of these capital requirements, and we believe that Ponce Bank meets all of these new requirements, including the full 2.5%
capital conservation buffer.
The application of more stringent capital requirements could, among other things, result in lower returns on equity, and result in regulatory actions if we
are unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of the requirements
of the Basel Committee on Banking Supervision (“Basel III”) could result in our having to lengthen the term of our funding sources, change our business
models or increase our holdings of liquid assets. Ponce Bank’s ability to pay dividends to the Company will be limited if it does not have the capital
conservation buffer required by the capital rules, which may further limit the Company’s ability to pay dividends to stockholders. See “Regulation and
Supervision—Federal Banking Regulation—Capital Requirements.”
The cost of finance and accounting systems, procedures and controls in order to satisfy our public company reporting requirements increases our
expenses.
The obligations of being a public company, including the substantial public reporting obligations, require significant expenditures and place additional
demands on our management team. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and
accounting systems to meet our reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our
obligations as a public company. Section 404 of the Sarbanes-Oxley Act of 2002 requires annual management assessments of the effectiveness of our internal
control over financial reporting. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our
business and stock price. In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience
and technical knowledge, and we may not be able to do so in a timely fashion. As a result, we may need to rely on outside consultants to provide these services
for us until qualified personnel are hired. These obligations will increase our operating expenses and could divert our management’s attention from our
operations.
Changes in accounting standards could affect reported earnings.
The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, the SEC and other regulatory bodies,
periodically change the financial accounting and reporting guidance that governs the preparation of our consolidated financial statements. These changes can be
hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to
apply new or revised guidance retroactively.
Changes in management’s estimates and assumptions may have a material impact on our consolidated financial statements and our financial condition
or operating results.
Our management is and will be required under applicable rules and regulations to make estimates and assumptions as of a specified date to file periodic
reports under the Securities and Exchange Act of 1934, including our consolidated financial statements. These estimates and assumptions are based on
management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty. Materially different results may occur as
circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management include our evaluation
of the adequacy of our allowance for loan losses and our determinations with respect to amounts owed for income taxes.
39
Legal and regulatory proceedings and related matters could adversely affect us.
We have been and may in the future become involved in legal and regulatory proceedings. We consider most of the proceedings to be in the normal
course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and we may not prevail in any
proceedings or litigation. There could be substantial cost and management diversion in such litigation and proceedings, and any adverse determination could
have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.
We are subject to environmental liability risk associated with lending activities or properties we own.
A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more
of these properties, or with respect to properties that we own in operating our business. During the ordinary course of business, we may foreclose on and take
title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous
conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil
fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may
require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell
the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure
to environmental liability. Our policies, which require us to perform an environmental review before initiating any foreclosure action on non-residential real
property, may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an
environmental hazard could have a material adverse effect on us.
We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially
adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to
rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and
prospective customers in our market area and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is
done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior
service to our customers and caring about our customers and associates. If our reputation is negatively affected by the actions of our employees, by our inability
to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may
be materially adversely affected.
Our historical markets, minority and immigrant individuals, may be threatened by gentrification and adverse political developments, which could
decrease our growth and profitability.
We believe that our historical strength has been our focus on the minority and immigrant markets. The continuing displacement of minorities due to
gentrification of our communities may adversely affect us unless we are able to adapt and increase the acceptance of our products and services by non-minority
customers. We may also be unfavorably impacted by political developments unfavorable to markets that are dependent on immigrant populations.
Item 1B. Unresolved Staff Comments.
Not applicable.
40
Item 2. Properties.
As of December 31, 2019, the net book value of the Bank’s office properties including leasehold improvements was $28.0 million, and the net book
value of its furniture, fixtures and other equipment and software was $4.7 million. The Company’s and Bank’s executive offices are located in an owned facility
at 2244 Westchester Avenue, Bronx, New York.
The following table sets forth information regarding the Bank’s offices as of December 31, 2019.
Location
Leased or
Owned
Year Acquired
or Leased
Main Office:
2244 Westchester Avenue
Bronx, NY 10462
Other Properties:
980 Southern Blvd.
Bronx, NY 10459
37-60 82nd Street
Jackson Heights, NY 11372
30 East 170th Street
Bronx, NY 10452
51 East 170th Street
Bronx, NY 10452
169-174 Smith Street
Brooklyn, NY 11201
1925 Third Avenue
New York, NY 1996
2244 Westchester Avenue
Bronx, NY 10462
5560 Broadway
Bronx, NY 10463
3405-3407 Broadway
Astoria, NY 11106
3821 Bergenline Avenue
Union City, NJ 07087
1900-1960 Ralph Avenue
Brooklyn, NY 11234
20-47 86th Street
Brooklyn, NY 11214
100-20 Queens Blvd
Forest Hills, NY 11375
319 First Avenue
New York, NY 10003
1995
1990
2006
1987
2018
1988
1996
1995
1998
2001
2001
2007
2010
2010
2010
Owned
Leased
Owned
Owned
Leased
Owned
Leased
Owned
Owned
Leased
Owned
Leased
Owned
Leased
Leased
41
Net Book Value of
Real Property
(In thousands)
$
6,540
1,182
8,336
—
1,016
50
1,901
863
1,162
478
1,113
222
3,704
481
922
$
27,970
Item 3. Legal Proceedings.
Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which
we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any
pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.
42
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s shares of common stock are traded on the NASDAQ Global Market under the symbol “PDLB”.
The number of stockholders of record of the Company’s common stock as of March 16, 2020 was 243. The number of record-holders may not reflect
the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees.
To date, the Company has not paid any dividends to its stockholders. We have no current plan or intention to pay cash dividends to our stockholders.
However, if in the future the Board of Directors considers the payment of dividends, the amount of any dividend payments will be subject to statutory and
regulatory limitations, and will depend upon a number of factors, including the following: regulatory capital requirements; our financial condition and results of
operations; our other uses of funds for the long-term value of stockholders; tax considerations; the Federal Reserve Board’s current regulations restricting the
waiver of dividends by mutual holding companies; and general economic conditions. No assurance can be given that the Board of Directors will ever consider
the payment of dividends, and shareholders should have no expectation of such. The Federal Reserve Board has issued a policy statement providing that
dividends should be paid only out of current earnings and only if our prospective rate of earnings retention is consistent with our capital needs, asset quality and
overall financial condition. Regulatory guidance also provides for prior regulatory consultation with respect to capital distributions in certain circumstances
such as where the holding company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the
dividend or the holding company’s overall rate of earnings retention is inconsistent with its capital needs and overall financial condition. In addition, the
Company’s ability to pay dividends will be limited if it does not have the capital conservation buffer required by the capital rules, which may limit our ability to
pay dividends to our stockholders. See “Regulation and Supervision—Federal Bank Regulation—Capital Requirements.” No assurances can be given that any
dividends will be paid or that, if paid, will not be reduced or eliminated in the future.
We will file a consolidated federal tax return with Ponce Bank. Accordingly, it is anticipated that any cash distributions that we make to our stockholders
would be treated as cash dividends and not as a non-taxable return of capital for federal and state tax purposes. Additionally, pursuant to regulations of the
Federal Reserve Board, during the three-year period following the Company’s stock offering on September 29, 2017, we may not take any action to declare an
extraordinary dividend to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.
Pursuant to our charter, we are authorized to issue preferred stock. If we issue preferred stock, the holders thereof may have a priority over the holders of
our shares of common stock with respect to the payment of dividends. For a further discussion concerning the payment of dividends on our shares of common
stock, see “Dividends and Stock Repurchase.” Dividends we can declare and pay will depend, in part, upon receipt of dividends from Ponce Bank, because
currently we will have no source of income other than dividends from Ponce Bank and earnings from the investment of the net proceeds from the sale of shares
of common stock retained by the Company and interest payments received in connection with the loan to the employee stock ownership plan. Regulations of the
Federal Reserve Board and the OCC impose limitations on “capital distributions” by savings institutions. See “Regulation and Supervision—Federal Bank
Regulation—Capital Requirements.”
Any payment of dividends by Ponce Bank to the Company that would be deemed to be drawn out of Ponce Bank’s bad debt reserves, if any, would
require a payment of taxes at the then-current tax rate by Ponce Bank on the amount of earnings deemed to be removed from the reserves for such distribution.
Ponce Bank does not intend to make any distribution to the Company that would create such a federal tax liability. See “Taxation.”
If the Company should ever pay dividends to its stockholders, it will likely pay dividends to Ponce Bank Mutual Holding Company. The Federal Reserve
Board’s current regulations significantly restrict the ability of mutual holding companies to waive dividends declared by their subsidiaries. Accordingly, we do
not anticipate that, should a dividend ever be paid, Ponce Bank Mutual Holding Company will waive dividends paid by the Company. See “Regulation and
Supervision-Other Regulations- Waivers of Dividends by Ponce Bank Mutual Holding Company.”
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
There were no sales of registered securities during the year ended December 31, 2019. The Company has made no sales of unregistered securities.
43
Issuer Purchases of Equity Securities
The following table sets forth information regarding the shares of common stock repurchased by the Company during the three months ended
December 31, 2019.
Period
October 1, 2019 - October 31, 2019
November 1, 2019 -November 30, 2019
December 1, 2019 - December 31, 2019
Total
Total Number
of Shares Purchased(1)
Average Price
Paid per
Share(2)
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
Maximum Number of
Shares That May Yet Be
Purchased Under the
Plans or Programs
— $
23,194 $
192,510 $
215,704 $
—
14.25
14.39
14.37
—
23,194
215,704
878,835
855,641
663,131
(1) The Company repurchased 215,704 shares of its common stock at an aggregate cost $3.1 million during the three months ended December 31, 2019.
(2) This number is not inclusive of the brokerage commission fee of $0.05 per share.
The Company adopted a share repurchase program effective March 25, 2019 through September 24, 2019. Under the repurchase program, the Company
could repurchase up to 923,151 shares of its common stock, or approximately 5% of the Company’s then current issued and outstanding shares. On November
13, 2019, the Company adopted a second share repurchase program. Under this program, the Company could repurchase up to 878,835 shares of its common
stock, or approximately 5% of the Company’s then outstanding common shares. The repurchase program may be suspended or terminated at any time without
prior notice, and will expire on May 12, 2020.
As of December 31, 2019, the Company had repurchased a total of 1,102,029 shares of common stock at a weighted average price of $14.30. These
shares are reported as treasury stock in the consolidated statements of financial condition. Of the 1,102,029 shares of treasury stock, 90,135 shares were reissued
as a result of restricted stock units that vested on December 4, 2019.
Item 6. Selected Financial Data.
The summary information presented below at or for each of the periods presented is derived in part from, and should be read in conjunction with, the
consolidated financial statements of the Company presented in Item 8.
Selected Financial Condition Data:
Total assets
Cash and cash equivalents
Available-for-sale securities
Loans held for sale
Loans receivable, net
Other real estate owned
Premises and equipment, net
FHLBNY stock, at cost
Deposits
Borrowings
Total stockholders' equity
2019
2018
At December 31,
2017
(In thousands)
2016
2015
$
1,053,756 $
27,677
21,504
1,030
955,737
—
32,746
5,735
782,043
104,404
158,402
1,059,901 $
69,778
27,144
—
918,509
—
31,135
2,915
809,758
69,404
169,172
925,522 $
59,724
28,897
—
798,703
—
27,172
1,511
713,985
36,400
164,785
744,983 $
11,716
52,690
2,143
642,148
—
26,028
964
643,078
3,000
92,992
703,157
12,694
82,034
3,303
567,662
76
27,177
1,162
599,506
8,000
91,062
44
Selected Operating Data:
Interest and dividend income
Interest expense
Net interest income
Provision (credit) for loan losses
Net interest income after provision
for loan losses
Noninterest income
Noninterest expense
Income (loss) before provision for income taxes
Provision (benefit) for income taxes
Net income (loss)
Performance Ratios:
Return on average assets
Return on average equity
Net interest rate spread (1)
Net interest margin (2)
Noninterest expense to average assets
Efficiency ratio (3)
Average interest-earning assets to average
interest- bearing liabilities
Average equity to average assets
Capital Ratios:
Total capital to risk weighted assets (bank only)
Tier 1 capital to risk weighted assets (bank only)
Common equity Tier 1 capital to risk-weighted
assets ( bank only)
Tier 1 capital to average assets (bank only)
Asset Quality Ratios:
Allowance for loan losses as a percentage of total loans
Allowance for loan losses as a percentage of
nonperforming loans
Net (charge-offs) recoveries to average outstanding
loans during the year
Non-performing loans as a percentage of total loans
Non-performing loans as a percentage of total assets
Total non-performing assets as a percentage of total assets
Total non-performing assets, accruing loans past due 90
days or more, and accruing troubled debt restructured
loans as a percentage of total assets
Other:
Number of offices
Number of full-time equivalent employees
2019
2018
For the Years Ended December 31,
2017
(In thousands)
2016
$
50,491 $
12,358
38,133
258
46,156 $
9,490
36,666
1,249
38,989 $
6,783
32,206
1,716
33,741 $
5,936
27,805
(57)
37,875
2,683
46,607
(6,049)
(924)
(5,125)
35,417
2,938
34,557
3,798
1,121
2,677
30,490
3,104
36,557
(2,963)
1,424
(4,387)
27,862
2,431
27,863
2,430
1,005
1,425
2015
33,590
5,650
27,940
353
27,587
2,462
26,216
3,833
1,315
2,518
2019
At or For the Years Ended December 31,
2016
2017
2018
2015
(0.49%)
(3.08%)
3.40%
3.79%
4.47%
114.19%
132.25%
15.96%
18.62%
17.37%
17.37%
12.92%
0.28%
1.60%
3.57%
3.92%
3.56%
87.26%
134.52%
17.26%
19.39%
18.14%
18.14%
13.66%
(0.51%)
(3.52%)
3.76%
4.02%
4.28%
103.53%
130.35%
14.58%
20.73%
19.48%
19.48%
14.67%
0.20%
1.53%
3.82%
4.02%
3.84%
92.15%
0.35%
2.76%
3.96%
4.14%
3.67%
86.23%
123.84%
12.81%
121.66%
12.78%
19.21%
17.96%
17.96%
13.32%
20.72%
19.46%
19.46%
13.67%
1.28%
1.36%
1.37%
1.57%
1.64%
106.30%
186.77%
97.05%
132.15%
99.78%
(0.06%)
1.20%
1.10%
1.10%
0.04%
0.73%
0.64%
0.64%
(0.12%)
1.41%
1.23%
1.23%
0.13%
1.19%
1.04%
1.04%
(0.06%)
1.65%
1.35%
1.36%
1.92%
1.63%
2.72%
3.50%
4.19%
14
183
14
181
14
177
14
174
14
175
(1) Net interest rate spread represents the difference between the weighted average yield on average interest-earning assets and the weighted average rate
of average interest-bearing liabilities.
(2) Net interest margin represents net interest income divided by average total interest-earning assets.
(3) Efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income.
45
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following management’s discussion and analysis of the financial condition and results of our operations should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from those described below. Such risks and uncertainties include, but
are not limited to, those identified below and those described in Part I, Item 1A. “Risk Factors,” within this Annual Report on Form 10-K.
Overview
We have made significant investments over the last several years in adding experienced bankers, expanding our lending and relationship staff, absorbing
the costs of being a public company and upgrading technology and facilities. These investments have increased our operating expenses during those periods.
However, during those same periods, we have been able to significantly grow the Bank’s loan portfolio while improving its asset quality and strengthening its
capital.
Abrupt changes in interest rates will present us with a challenge in managing our interest rate risk. As a general matter, our interest-bearing liabilities
reprice or mature more quickly than our interest-earning assets, which can result in interest expense increasing more rapidly than increases in interest income as
interest rates increase and lowering our interest expense faster than lowering our interest income as interest rates decrease. Therefore, increases in interest rates
may adversely affect our net interest income and net economic value, which in turn would likely have an adverse effect on our results of operations. Conversely,
decreases in interest rates may have a favorable affect on our net interest income and net economic value, which in turn would likely have a positive effect on
our results of operations. As described in “—Management of Market Risk,” we expect that our net interest income and our net economic value would react
inversely to instantaneous changes in interest rates. To help manage interest rate risk, we promote core deposit products and we are diversifying our loan
portfolio by introducing new lending programs. See “—Business Strategy”, “—Management of Market Risk” and “Risk Factors—Future changes in interest
rates could reduce our profits and asset values.”
Business Strategy
Our goal is to provide long-term value to our stakeholders, our stockholders, customers, employees and the communities we serve by executing a safe
and sound business strategy that produces increasing value. We believe there is a significant opportunity for an immigrant community-focused, minority
directed bank to provide a full range of financial services to commercial and retail customers in our market area. The additional capital we obtained from the
stock offering of September 29, 2017, continues to enabled us to compete more effectively in the financial services marketplace.
Our current business strategy consists of the following:
•
•
•
Continue to expand our multifamily and nonresidential loans. The additional capital raised in the stock offering increased our capacity to
originate multifamily and nonresidential loans. Under our current board approved loan concentration policy, such loans, including construction and
land loans, shall not exceed 400% of our total risk-based capital. Most multifamily and nonresidential loans are originated with adjustable rates and,
as a result, these loans are expected to change loan yields due to their shorter repricing terms compared to longer-term fixed-rate loans.
Community lending programs. The Bank is an authorized direct lender under the Small Business Administration (SBA) and a Community
Development Financial Institution (CDFI). Both of these programs, combined with our pre-existing products, bolster the Bank’s commitment to
continue to serve the communities that it has supported over the past sixty years.
Continue to increase core deposits, with an emphasis on low cost commercial demand deposits, and add non-core funding sources. Deposits are
the major source of balance sheet funding for lending and other investments. Certificates of deposits, brokered deposits, and listing service deposits
supplement the Bank’s funding base. We have made significant investments in new products and services, marketing programs, personnel, branch
distribution system as well as enhancing our electronic delivery solutions in an effort to become more competitive in the financial services
marketplace and attract more core deposits. Core deposits are our least costly source of funds and represent our best opportunity to develop
customer relationships that enable us to cross-sell our enhanced products and services.
46
•
Manage credit risk to maintain a low level of nonperforming assets. We believe strong asset quality is a key to our long-term financial success.
Our strategy for credit risk management focuses on having an experienced team of credit professionals, well-defined policies and procedures,
appropriate loan underwriting criteria and active credit monitoring. The majority of our non-performing assets have been related, largely, to one-to-
four family residential loans and, to a lesser extent, construction and land loans. We continue to focus on our credit review function, adding both
personnel and ancillary systems, in order to be able to evaluate more complex loans and better manage credit risk, to further support our intended
loan growth.
•
Expand our employee base to support future growth. We have already made significant investments in our employee base. However, we will
continue to work to attract and retain the necessary talent to support increased lending, deposit activities and enhanced information technology.
•
Grow organically and through opportunistic bank or branch acquisitions. We focus primarily on organic growth as a lower-risk means of
deploying our capital. We will fund improvements in our operating facilities and customer delivery services in order to enhance our
competitiveness. Opportunistic acquisition possibilities are explored if we believe they would enhance the value of our franchise and yield potential
financial benefits for our stakeholders. Although we believe opportunities exist to increase our market share in our current banking locations, we
will not be adverse to expanding into nearby markets, enlarging our current branch network, or adding loan production offices, provided we believe
such efforts would enhance our competitive standing. Consequently, in 2019 the Company announced entering into a definitive agreement to
acquire Mortgage World Bankers, Inc.; we are awaiting regulatory approval.
Non-U.S. GAAP Financial Measures
The following discussion contains certain non-U.S. GAAP financial measures in addition to results presented in accordance with U.S. GAAP. These
non-U.S. GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial
condition. Non-U.S. GAAP financial measures are not a substitute for U.S. GAAP measures; they should be read and used in conjunction with the Company’s
U.S. GAAP financial information. The Company’s non-U.S. GAAP measures may not be comparable to similar non-U.S. GAAP information which may be
presented by other companies. In all cases, it should be understood that non-U.S. GAAP operating measures do not depict amounts that accrue directly to the
benefit of shareholders. An item that management excludes when computing non-U.S. GAAP adjusted earnings can be of substantial importance to the
Company’s results and condition for any particular year. A reconciliation of non-U.S. GAAP financial measures to U.S. GAAP measures is provided below.
The SEC has exempted from the definition of non-U.S. GAAP financial measures certain commonly used financial measures that are not based on U.S.
GAAP. Management believes that these non-U.S. GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate
comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute
for related financial information prepared in accordance with U.S. GAAP.
The table below includes references to the Company's net income and earnings per share for the year ended December 31, 2019 before deduction of
expenses related to termination of the Company’s Defined Benefit Pension Plan (Defined Benefit Plan”). In management's view, that information, which is
considered non-U.S. GAAP information, may be useful to investors as it will improve comparability of core operations year over year and in future periods. The
non-U.S. GAAP net income amount and earnings per share reflect adjustments of the non-recurring charges associated with termination of the Defined Benefit
Plan, net of tax effect. A reconciliation of the non-U.S. GAAP information to U.S. GAAP net income and earnings per share is provided below.
47
Non-U.S. GAAP Reconciliation – Net Income Before Loss on Termination of Defined Benefit Plan (Unaudited)
Net loss - U.S. GAAP
Loss on termination of pension plan
Income tax benefit
Net income before loss on termination of pension plan - non-U.S. GAAP
Earnings Per
Year Ended
December 31, 2019
Common Share (1)
(Dollars in thousands, except per share data)
$
$
(5,125) $
9,930
(2,086)
2,719 $
(0.29)
0.16
(1) Basic earnings per share were computed (for the U.S. GAAP and non-U.S. GAAP basis) based on the weighted average number of shares outstanding
during the year ended December 31, 2019 (17,432,318 shares). The assumed exercise of outstanding stock options and vesting of restricted stock
units were included in computing the non-U.S. GAAP diluted earnings per share and do not result in material dilution.
Critical Accounting Policies
Critical 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 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 losses are estimated to 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 our consolidated financial statements, which are prepared in
conformity with U.S. 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. We consider the
accounting policies discussed to be significant accounting policies. The estimates and assumptions that we use 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 the Company’s assets and liabilities and results of operations.
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 significant accounting policies.
Factors Affecting the Comparability of Results
Defined Benefit Plan. As has previously been disclosed, on May 31, 2007, the Company’s Defined Benefit Plan was frozen and replaced with a
qualified defined contribution plan. On May 31, 2019, the Company’s Board of Directors approved the termination of the Defined Benefit Plan which was
liquidated on December 1, 2019. During 2019, we offered participants in the Defined Benefit Plan with vested qualified benefits the option of receiving their
benefits in a lump sum payment in lieu of receiving monthly annuity payments. Approximately 115 participants elected to receive the lump sum payments
aggregating approximately $6.4 million which were paid from plan assets to these participants during the fourth quarter of 2019. Also, during the fourth quarter
of 2019, the Company transferred the remainder of the Defined Benefit Plan’s pension obligations to a third party insurance provider by purchasing annuity
contracts aggregating approximately $7.4 million which was fully funded directly by plan assets. The benefit obligations settled by the lump sum payments and
annuity contracts resulted in payments from plan assets of approximately $13.9 million. The remaining previously unrecognized losses in accumulated other
comprehensive loss relating to the Defined Benefit Plan were recognized as an expense and a pre-tax charge of approximately $9.9 million ($7.8 million after-
tax) was recorded in other income (expense), net, in our consolidated statements of operations during the fourth quarter of 2019.
Share Repurchases. The Board of Directors approved two repurchase programs of the Company’s stock, the first on March 25, 2019 and the second
on November 13, 2019. See Note 9, “Compensation and Benefit Plans,” of the Notes to Consolidated Financial Statements included herein for additional
information on our stock repurchase programs. For the year ended December 31, 2019, the
48
Company repurchased approximately 1.1 million shares at an average price of $14.30 per share for a total value of $15.8 million pursuant to open market
repurchases.
Basis of Presentation. Certain prior period amounts have been reclassified to conform to the current period presentation.
Financial Conditions
Comparison of Financial Condition at December 31, 2019 and December 31, 2018
Total Assets. Total assets remained essentially unchanged at $1.1 billion at December 31, 2019 and 2018.
Cash and Cash Equivalents. Cash and cash equivalents decreased $42.1 million, or 60.3%, to $27.7 million at December 31, 2019, compared to $69.8
million at December 31, 2018. The decrease in cash and cash equivalents was primarily driven by a repayment of $25.0 million of short-term advances from a
correspondent bank, $15.8 million of repurchases of common stock, a decrease of $27.7 million in deposits, an increase of $42.2 million in gross loans and
$34.0 million of purchases of available-for-sale securities, offset by an increase of $60.0 million in net advances from FHLBNY, $39.6 million of maturities of
available-for-sale securities and $3.6 million from the sale of loans.
Available-for-Sale Securities. The composition of available-for-sale securities at December 31, 2019 and 2018 and the amounts maturing of each
classification are summarized as follows:
U.S. Government and Federal Agency Securities:
Amounts maturing:
Three months or less
After three months through one year
After one year through five years
Mortgage-Backed Securities
Total
December 31, 2019
December 31, 2018
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(Dollars in thousands)
$
$
2,000 $
14,373
—
16,373
5,162
21,535 $
2,000 $
14,354
—
16,354
5,150
21,504 $
4,997 $
4,554
16,370
25,921
1,648
27,569 $
4,995
4,497
16,018
25,510
1,634
27,144
Gross Loans Receivable. The composition of gross loans receivable at December 31, 2019 and 2018 and the percentage of each classification to total
loans are summarized as follows:
Mortgage loans:
1-4 Family residential
Investor-Owned
Owner-Occupied
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage loans:
Business loans
Consumer loans
Total
December 31, 2019
December 31, 2018
Increase (Decrease)
Amount
Percent
of Total
Amount
(Dollars in thousands)
Percent
of Total
Dollars
Percent
$ 305,272
91,943
250,239
207,225
99,309
31.6% $ 303,197
92,788
232,509
196,917
87,572
9.5%
25.9%
21.4%
10.3%
32.6% $
10.0%
25.0%
21.2%
9.4%
2,075
(845)
17,730
10,308
11,737
0.7%
(0.9%)
7.6%
5.2%
13.4%
10,877
1,231
$ 966,096
1.1%
0.1%
15,710
1,068
100.0% $ 929,761
1.7%
0.1%
100.0% $
(4,833)
163
36,335
(30.8%)
15.3%
3.9%
The composition of the loan portfolio increased $36.3 million, or 3.9%, to $966.1 million at December 31, 2019 from $929.8 million at December 31,
2018.
49
Commercial real estate mortgage loans, as defined by applicable banking regulations, include multifamily residential, nonresidential properties, and
construction and land mortgage loans. At December 31, 2019, approximately 8.0% of the outstanding principal balance of the Bank’s commercial real estate
mortgage loans was secured by owner-occupied commercial real estate, compared to 10.1% at December 31, 2018. 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 cash flows and 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 pronouncements, banking
guidelines 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 December 31, 2019 and 2018, the Bank’s
construction and land mortgage loans as a percentage of total risk-based capital was 67.4% and 58.6%, respectively. Investor-owned commercial real estate
mortgage loans as a percentage of total risk-based capital was 349.7% and 313.1% as of December 31, 2019 and 2018, respectively. At December 31, 2019, the
Bank was within the 100% ratio for construction and land mortgage loans established by banking guidelines, 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 and is, accordingly, within the monitoring
guidelines.
Deposits. The composition of deposits at December 31, 2019 and 2018 and changes in dollars and percentages are summarized as follows:
December 31,
December 31,
Increase (Decrease)
Demand
Interest-bearing deposits:
NOW/IOLA accounts
Money market accounts
Reciprocal deposits
Savings accounts
Total savings, NOW, reciprocal and money market
Certificates of deposit of $250K or more
Brokered certificates of deposit
Listing service deposits
All other certificates of deposit less than $250K
Total certificates of deposit
Total interest-bearing deposits
Total deposits
2019
$
109,548 $
2018
(Dollars in thousands)
115,923 $
Dollars
Percent
(6,375)
(5.5%)
32,866
86,721
47,659
115,751
282,997
84,263
76,797
32,400
196,038
389,498
672,495
782,043
$
30,783
64,262
51,913
122,791
269,749
90,195
67,157
39,065
227,669
424,086
693,835
809,758
$
2,083
22,459
(4,254)
(7,040)
13,248
(5,932)
9,640
(6,665)
(31,631)
(34,588)
(21,340)
(27,715)
6.8%
34.9%
(8.2%)
(5.7%)
4.9%
(6.6%)
14.4%
(17.1%)
(13.9%)
(8.2%)
(3.1%)
(3.4%)
$
When wholesale funding is necessary to complement the Bank'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 Bank’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 December 31, 2019 and
2018. The Management Asset/Liability Committee generally meets on a weekly basis to review needs, if any, and to ensure that the Bank is operating within the
approved limitations.
Borrowings. The Bank had outstanding borrowings at December 31, 2019 and 2018 of $104.4 million and $69.4 million, respectively. These borrowings
are in the form of advances from the FHLBNY and borrowings from our correspondent banking relationships. The net increase in borrowings was due to new
FHLBNY term advances of $90.0 million for a term of three years, at an average rate of 2.0%, offset by the repayment of $30.0 million of FHLBNY term
advances (excluding overnight advances) and $25.0 million in short-term advances from a correspondent bank.
Stockholders’ Equity. Total stockholders’ equity decreased $10.8 million, or 6.4%, to $158.4 million at December 31, 2019, from $169.2 million at
December 31, 2018. The decrease in stockholders’ equity was mainly attributable to $15.8 million of stock repurchases, a net loss of $5.1 million offset by a net
$7.8 million adjustment to accumulated other comprehensive loss related to the termination of the Defined Benefit Plan, $1.2 million of expenses related to
restricted stock units, $707,000 of expenses related to the Company’s Employee Stock Ownership Plan, $311,000 related to unrealized loss on available-for-sale
securities and $101,000 of expenses related to stock options.
50
Results of Operations
Comparison of Operating Results for the Years Ended December 31, 2019 and 2018
The following table presents the results of operations for the periods indicated:
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Earnings (loss) per share for the period
Basic
Diluted
$
$
$
$
For the Years Ended
December 31,
2019
2018
Increase (Decrease)
Dollars
Percent
(Dollars in thousands, except per share data)
46,156 $
9,490
36,666
1,249
35,417
2,938
34,557
3,798
1,121
2,677 $
4,335
2,868
1,467
(991)
2,458
(255)
12,050
(9,847)
(2,045)
(7,802)
50,491 $
12,358
38,133
258
37,875
2,683
46,607
(6,049)
(924)
(5,125) $
9.4%
30.2%
4.0%
(79.3%)
6.9%
(8.7%)
34.9%
(259.3%)
(182.4%)
(291.4%)
(0.29) $
(0.29) $
0.15 $
0.15 $
(0.44)
(0.44)
(293.3%)
(293.3%)
General. Consolidated net loss for the year ended December 31, 2019, was ($5.1 million) compared to a net income of $2.7 million for the year ended
December 31, 2018. The decrease was primarily attributable to an increase of $12.1 million in noninterest expense, mainly due to a $9.9 million ($7.8 million,
net of tax effect) loss incurred from the termination of the Company’s Defined Benefit Plan, and a decrease of $255,000 in non-interest income offset by an
increase of $2.5 million in net interest income after the provision for loan losses and a decrease of $2.0 million in provision for income taxes. Excluding the
one-time charge, the Company would have reported net income of $2.7 million, or $0.16 per share.
Interest Income. Interest and dividend income increased $4.3 million, or 9.4%, to $50.5 million for the year ended December 31, 2019, from
$46.2 million for the year ended December 31, 2018. The increase was primarily due to a $4.4 million, or 9.7%, increase in interest income on loans, which is
our primary source of interest income, offset by a decrease of $0.1 million of other interest and dividend income. Average loan balances increased $79.1
million, or 9.0%, to $946.2 million for the year ended December 31, 2019 from $867.0 million for the year ended December 31, 2018. The increase in average
loan balances was mainly driven by increases in the multifamily residential, nonresidential, one-to-four family residential, and construction and land mortgage
loan portfolios. The average yield on loans increased 3 basis point to 5.21% for the year ended December 31, 2019 from 5.18% for the year ended
December 31, 2018.
For the Years Ended December 31,
Change
1-4 Family residential
Multifamily residential
Nonresidential properties
Construction and land
Business loans
Consumer loans
Total interest income on loans receivable
2019
20,339 $
12,053
9,621
6,374
824
96
49,307 $
$
$
Amount
2018
(Dollars in thousands)
19,799 $
10,699
8,485
5,042
852
71
44,948 $
540
1,354
1,136
1,332
(28)
25
4,359
Percent
2.7%
12.7%
13.4%
26.4%
(3.3%)
35.2%
9.7%
Interest income on deposits due from banks and available-for-sale securities and dividend income from FHLBNY stock remained unchanged at $1.2
million for the years ended December 31, 2019 and 2018. The average balance of deposits due from banks, available-for-sale securities and FHLBNY stock
decreased $9.1 million, or 13.1%, to $60.3 million for the year ended December 31, 2019, from $69.4 million for the year ended December 31, 2018. The
average rate earned on deposits due from banks, available-for-sale securities and FHLBNY stock increased 23 basis points to 1.97% for the year ended
December 31, 2019 from 1.74% for the year ended December 31, 2018.
51
Interest on deposits due from banks
Interest on available-for-sale securities
Dividend on FHLBNY stock
Total interest and dividend
2019
$
$
617 $
362
206
1,185 $
Amount
2018
(Dollars in thousands)
679 $
381
148
1,208 $
(62)
(19)
58
(23)
Percent
(9.1%)
(5.0%)
39.2%
(1.9%)
For the Years Ended December 31,
Change
Interest Expense. Interest expense increased $2.9 million, or 30.2%, to $12.4 million for the year ended December 31, 2019, from $9.5 million for the
year ended December 31, 2018. Interest expense on money market accounts increased $1.8 million to $2.5 million for the year ended December 31, 2019 from
$701,000 for the same period in 2018. The average balance of money market accounts increased $64.6 million to $124.7 million for the year ended
December 31, 2019 from $60.1 million for the same period last year, while the average rate paid on money market accounts increased 87 basis points to 2.04%
for the year ended December 31, 2019 from 1.17% for the year ended December 31, 2018.
Interest expense on certificates of deposit remained essentially unchanged at $7.6 million for the years ended December 31, 2019 and 2018. The average
balance on certificates of deposit decreased $36.7 million, or 8.4%, to $403.0 million for the year ended December 31, 2019 from $439.7 million for the same
period last year, and the average rate the Bank paid on certificates of deposit increased 17 basis points to 1.90% for the year ended December 31, 2019 from
1.73% for the same period in 2018.
Interest expense on borrowings increased $955,000, or 106.2%, to $1.9 million for the year ended December 31, 2019 from $899,000 for the year ended
December 31, 2018. The average balance on borrowings increased $42.7 million, or 122.5%, to $77.6 million for the year ended December 31, 2019 from $34.9
million for the same period last year, and the average rate the Bank paid on borrowings decreased 19 basis points to 2.39% for the year ended December 31,
2019 from 2.58% for the same period in 2018.
Increased funding costs were primarily driven by management’s efforts to retain high balance customers in higher yielding liquid deposits and higher
market interest rates being offered by the Bank’s competitors, combined with a resulting shift towards alternative funding during the year ended December 31,
2019.
Certificates of deposit
Money market
Savings
NOW/IOLA
Advance payments by borrowers
Borrowings
Total interest expense
For the Years Ended December 31,
Change
2019
2018
Amount
Percent
(Dollars in thousands)
$
$
7,677 $
2,549
152
122
4
1,854
12,358 $
7,617 $
701
168
102
3
899
9,490 $
60
1,848
(16)
20
1
955
2,868
0.8%
263.6%
(9.5%)
19.6%
33.3%
106.2%
30.2%
Net Interest Income. Net interest income increased $1.5 million, or 4.0%, to $38.1 million for the year ended December 31, 2019 from $36.7 million for
the year ended December 31, 2018, primarily as a result of organic loan growth offset by higher average cost of funds on interest bearing liabilities. Average net
interest-earning assets increased by $5.1 million, or 2.1%, to $245.4 million for the year ended December 31, 2019 from $240.3 million for the same period in
2018, due primarily to increases of $64.6 million in average money market accounts and $42.7 million in borrowings offset by a decrease of $36.7 million in
certificates of deposit and an increase of $79.1 million in loans. The net interest rate spread decreased by 17 basis points to 3.40% for the year ended
December 31, 2019 from 3.57% for the year ended December 31, 2018, and the net interest margin was 3.79% and 3.92% for the years ended December 31,
2019 and 2018, respectively. The compression on the net interest margin was primarily caused by organic loan growth being offset by higher market interest
rates due to increased competition for deposits and increased funding costs attributed to increased alternative funding.
52
Management continued in 2019 to deploy various asset and liability management strategies to manage the Bank’s risk of interest rate fluctuations. Net
interest margin decrease 13 basis points in 2019, reflecting that pricing for creditworthy borrowers and meaningful depositors remained very competitive. The
Federal Reserve Board reduced the federal funds interest rate by 25 basis points on each of July 31, September 18, and October 30, 2019. Further, on March 3,
2020, and March 15, 2020, the Federal Reserve Board, in emergency actions, decreased the targeted federal funds rate by an aggregate of 150 basis points.
These rate cuts were in response to severe market turmoil. As a result of these rate cuts and in the event that short-term interest rates were to be cut further in
2020 or beyond, the Bank’s net interest margin will likely be negatively impacted as management’s ability to lower funding costs on interest-bearing deposits
would more than likely not exceed the pace with which these cuts would impact the Bank’s yields on its earning assets. Although it could be anticipated that the
Bank’s net interest margin may continue to decrease in 2020, we believe net interest income should continue to increase compared to 2019 primarily due to
increased average earning asset volumes, primarily loans. Management will continue to seek to fund these increased loan volumes by growing its core deposits,
but will utilize funding alternatives, as needed.
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 and market conditions and
other qualitative and quantitative factors which could affect potential credit losses. See “—Summary of Significant Accounting Policies” and “Business—
Allowance for Loan and Lease Losses” for additional information.
After an evaluation of these factors, the Bank established a provision for loan losses for the year ended December 31, 2019 of $258,000 compared to
$1.2 million for the year ended December 31, 2018.
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 allowance for loan losses. However, regulatory agencies are not directly involved in
establishing the allowance for loan losses as the process is management’s responsibility and any increase or decrease in the allowance is the responsibility of
management. The Bank has selected a CECL model and has begun assessing plausible 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 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 Company 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. Total non-interest income decreased $255,000, or 8.7%, to $2.7 million for the year ended December 31, 2019 from $2.9 million
for the year ended December 31, 2018. The decrease in non-interest income for the year ended December 31, 2019 compared to the year ended December 31,
2018 was primarily due to decreases of $530,000 in brokerage commissions and other non-interest income offset by increases of $275,000 in late and
prepayment charges and service charges and fees.
Service charges and fees
Brokerage commissions
Late and prepayment charges
Other
Total non-interest income
For the Years Ended December 31,
Change
2019
2018
Amount
Percent
$
$
971 $
212
755
745
2,683 $
(Dollars in thousands)
845 $
533
606
954
2,938 $
126
(321)
149
(209)
(255)
14.9%
(60.2%)
24.6%
(21.9%)
(8.7%)
53
Non-interest Expense. Total non-interest expense increased $12.1 million, or 34.9%, to $46.6 million for the year ended December 31, 2019, compared
to $34.6 million for the year ended December 31, 2018. The $12.1 million increase for the year ended December 31, 2019 compared to the year ended
December 31, 2018, is primarily attributable to a one-time charge of $9.9 million for the termination of the Defined Benefit Plan, of which $7.8 million was
previously recognized in accumulated other comprehensive income (loss), a $2.1 million charge-off related to the deferred tax asset associated with the Defined
Benefit Plan, an increase of $944,000 in compensation and benefits expense largely as a result of expenses related to restricted stock units and stock options and
an increase of $939,000 in occupancy and equipment expense due to the rebranding and branch network renovation initiatives. Other contributing factors were a
$208,000 increase in other operating expenses as a result of increases in recruiting fees of $112,000 and $55,000 in expenses related to the repurchase of
common shares, a $168,000 increase in data processing expenses as a result of system enhancements and implementation charges related to software upgrades
and additional product offerings, a $83,000 increase in professional fees associated with public reporting requirements and a $45,000 increase in insurance and
surety bond premium expense. The increase in non-interest expense was partially offset by decreases of $96,000 for direct loan expense, $124,000 for office
supplies, telephone and postage and $57,000 for marketing and promotional expenses.
Compensation and benefits
Loss on termination of pension plan
Occupancy and equipment
Data processing expenses
Direct loan expenses
Insurance and surety bond premiums
Office supplies, telephone and postage
Professional fees
Marketing and promotional expenses
Directors fees
Regulatory dues
Other operating expenses
Total noninterest expense
For the Years Ended December 31,
Change
2019
2018
Amount
Percent
$
$
18,883 $
9,930
7,612
1,576
692
414
1,185
3,237
158
294
231
2,395
46,607 $
(Dollars in thousands)
17,939 $
—
6,673
1,408
788
369
1,309
3,154
215
277
238
2,187
34,557 $
944
9,930
939
168
(96)
45
(124)
83
(57)
17
(7)
208
12,050
5.3%
—
14.1%
11.9%
(12.2%)
12.2%
(9.5%)
2.6%
(26.5%)
6.1%
(2.9%)
9.5%
34.9%
Income Tax Expense. The Company incurred an income tax benefit of ($924,000) for the year ended December 31, 2019 and $1.1 million in income tax
expense for the year ended December 31, 2018, resulting in effective tax rates of 15.3% and 29.5%, respectively. At December 31, 2019 and 2018, net deferred
tax assets amounted to $3.7 million and $3.8 million, respectively.
54
Comparison of Operating Results for the Years Ended December 31, 2018 and 2017
The following table presents the results of operations for the periods indicated:
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Earnings per share for the period
Basic
Diluted
For the Years Ended
December 31,
2018
2017
Increase (Decrease)
Dollars
Percent
(Dollars in thousands, except per share data)
46,156 $
9,490
36,666
1,249
35,417
2,938
34,557
3,798
1,121
2,677 $
38,989 $
6,783
32,206
1,716
30,490
3,104
36,557
(2,963)
1,424
(4,387) $
7,167
2,707
4,460
(467)
4,927
(166)
(2,000)
6,761
(303)
7,064
18.4%
39.9%
13.8%
(27.2%)
16.2%
(5.3%)
(5.5%)
228.2%
(21.3%)
161.0%
0.15 $
(0.16) $
0.15 $
(0.16) $
0.31
0.31
193.8%
193.8%
$
$
$
$
General. Consolidated net income increased $7.1 million, or 161.0%, to $2.7 million for the year ended December 31, 2018, compared to net loss of
($4.4 million) for the year ended December 31, 2017. The increase was primarily attributable to an increase of $4.9 million in net interest income after the
provision for loan losses and by decreases of $2.0 million in non-interest expense offset by a decrease of $166,000 in non-interest income.
Interest Income. Interest and dividend income increased $7.2 million, or 18.4%, to $46.2 million for the year ended December 31, 2018, from
$39.0 million for the year ended December 31, 2017. The increase was primarily due to a $6.8 million, or 17.8%, increase in interest income on loans, which is
our primary source of interest income. Average loan balances increased $131.5 million, or 17.9%, to $867.0 million for the year ended December 31, 2018 from
$735.6 million for the year ended December 31, 2017. The increase in average loan balances was mainly driven by increases in the multifamily residential
mortgage, nonresidential mortgage, one-to-four family residential mortgage, and construction and land loan portfolios. The average yield on loans decreased 1
basis point to 5.18% for the year ended December 31, 2018 from 5.19% for the year ended December 31, 2017.
1-4 Family residential
Multifamily residential
Nonresidential properties
Construction and land
Business loans
Consumer loans
Total interest income on loans receivable
For the Years Ended December 31,
Change
2018
2017
Amount
Percent
$
$
19,799 $
10,699
8,485
5,042
852
71
44,948 $
(Dollars in thousands)
18,322 $
8,908
7,193
2,843
846
60
38,172 $
1,477
1,791
1,292
2,199
6
11
6,776
8.1%
20.1%
18.0%
77.3%
0.7%
18.3%
17.8%
55
Interest and dividend income on deposits due from banks, available-for-sale securities and FHLBNY stock increased $391,000, or 47.9%, to $1.2 million
for the year ended December 31, 2018, from $817,000 for the year ended December 31, 2017. The yield on deposits due from banks, available-for-sale
securities and FHLBNY stock increased 42 basis points to 1.74% for the year ended December 31, 2018, from 1.33% for the year ended December 31, 2017.
The average balance of deposits due from banks, available-for-sale securities and FHLBNY stock increased $3.8 million, or 5.8%, to $69.4 million for the year
ended December 31, 2018, from $65.5 million for the year ended December 31, 2017.
For the Years Ended December 31,
Change
Interest on deposits due from banks
Interest on available-for-sale securities
Dividend on FHLBNY stock
Total interest and dividend
2018
$
$
679 $
381
148
1,208 $
Amount
2017
(Dollars in thousands)
259 $
480
78
817 $
420
(99)
70
391
Percent
162.2%
(20.6%)
89.7%
47.9%
Interest Expense. Interest expense increased $2.7 million, or 39.9%, to $9.5 million for the year ended December 31, 2018, from $6.8 million for the
year ended December 31, 2017. The increase was the result of an overall increase in interest expense on certificates of deposit, savings, money markets,
NOW/IOLA and borrowings. Specifically, interest expense on certificates of deposit increased $1.7 million, or 28.7%, to $7.6 million for the year ended
December 31, 2018, from $5.9 million for the year ended December 31, 2017. This increase resulted from increases in both the average balance of certificates
of deposit and the average rate we paid on certificates of deposit. The average balance of certificates of deposit increased $52.5 million, or 13.6%, to
$439.7 million for the year ended December 31, 2018 from $387.2 million for the year ended December 31, 2017, and the average rate we paid on certificates
of deposit increased 20 basis points to 1.73% for the year ended December 31, 2018, from 1.53% for the year ended December 31, 2017.
Interest expense on savings, money markets, NOW/IOLA and borrowings increased $1.0 million to $1.9 million for the year ended December 31, 2018,
from $866,000 for the year ended December 31, 2017. This increase resulted from an increase in the average rate we paid on other deposits and borrowings.
The average balance of savings, money markets, savings, NOW/IOLA and borrowings increased $28.6 million, or 12.8%, to $256.3 million for the year ended
December 31, 2018, from $227.4 million for the year ended December 31, 2017, and the average rate we paid on savings, money markets, savings, NOW/IOLA
and borrowings increased 33 basis points to 0.73% for the year ended December 31, 2018, from 0.40% for the year ended December 31, 2017, reflecting higher
market interest rates.
Certificates of deposit
Money market
Savings
NOW/IOLA
Advance payments by borrowers
Borrowings
Total interest expense
For the Years Ended December 31,
Change
2018
2017
Amount
Percent
(Dollars in thousands)
$
$
7,617 $
701
168
102
3
899
9,490 $
5,917 $
390
165
97
4
210
6,783 $
1,700
311
3
5
(1)
689
2,707
28.7%
79.7%
1.8%
5.2%
(25.0%)
328.1%
39.9%
Net Interest Income. Net interest income increased $4.5 million, or 13.8%, to $36.7 million for the year ended December 31, 2018 from $32.2 million
for the year ended December 31, 2017, primarily as a result of higher market yields on earning assets. Our average net interest-earning assets increased by
$53.8 million, or 28.9%, to $240.3 million for the year ended December 31, 2018, from $186.5 million for the year ended December 31, 2017, due primarily to
our loan growth, described above. Our net interest rate spread decreased by 19 basis points, to 3.57%, for the year ended December 31, 2018, from 3.76% for
the year ended December 31, 2017, and our net interest margin was 3.92% and 4.02% for the years ended December 31, 2018 and 2017, respectively.
A material change in interest rates will present us with a challenge in managing our interest rate risk. As a general matter, our interest-bearing liabilities
reprice or mature more quickly than our interest-earning assets, which can result in interest expense increasing more rapidly than increases in interest income if
interest rates were to increase. Therefore, increases in interest rates may adversely affect our net interest income and net economic value, which in turn would
likely have an adverse effect on our results of
56
operations. We expect that our net interest income and our net economic value would decrease as a result of a significant increase in interest rates. Conversely,
decreases in interest rates may favorably affect our net interest income and net economic value, which in turn would likely have a favorable effect on our results
of operations. We expect that our net interest income and our net economic value would increase as a result of a significant decrease in interest rates. To help
manage interest rate risk, we are promoting core deposit products while concurrently diversifying our loan portfolio by introducing new lending programs.
Provision for Loan Losses. Provision for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb
known and inherent losses that are both probable and reasonably estimable at the date of the consolidated financial statements. In evaluating the level of the
allowance for loan losses, 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 “—Summary of Significant Accounting Policies” and “Business—Allowance for Loan Losses” for
additional information.
After an evaluation of these factors, the Bank decreased the provision for loan losses for the year ended December 31, 2018 by $467,000, or 27.2%, to
$1.2 million compared to $1.7 million for the year ended December 31, 2017. The allowance for loan losses was $12.7 million at December 31, 2018 compared
to $11.1 million at December 31, 2017. The allowance for loan losses to gross loans decreased to 1.36% at December 31, 2018 from 1.37% at December 31,
2017, and the allowance for loan losses to non-performing loans increased to 186.77% at December 31, 2018 from 97.05% at December 31, 2017.
To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at December 31, 2018. However, future
changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases
in our provision for loan losses. In addition, the OCC, as an integral part of its examination process periodically reviews our allowance for loan losses and as a
result of such reviews, we may determine to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the
allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.
Non-interest Income. Total non-interest income decreased $166,000, or 5.3%, to $2.9 million for the year ended December 31, 2018 from $3.1 million
for the year ended December 31, 2017. The decrease in non-interest income for the year ended December 31, 2018 compared to the year ended December 31,
2017 was primarily due to a decrease of $204,000 in late and prepayment charges.
Service charges and fees
Brokerage commissions
Late and prepayment charges
Other
Total non-interest income
For the Years Ended December 31,
Change
2018
2017
Amount
Percent
$
$
845 $
533
606
954
2,938 $
(Dollars in thousands)
909 $
547
810
838
3,104 $
(64)
(14)
(204)
116
(166)
(7.0%)
(2.6%)
(25.2%)
13.8%
(5.3%)
Non-interest Expense. Total non-interest expense decreased $2.0 million, or 5.5%, to $34.6 million for the year ended December 31, 2018, from $36.6
million for the year ended December 31, 2017. For the year ended December 31, 2018 compared to the year ended December 31, 2017, compensation and
employee benefits expense increased by $830,000 mainly due to our investment in our employee base, including the senior management team and our sales and
relationship management personnel, to help support our continued growth strategy. Occupancy expense increased $848,000, due to the rebranding and
improvements of our branches. Professional fees, which primarily include legal and audit expenses, increased $2.1 million. Other operating expenses increased
$357,000. Office supplies, telephone and postage increased $206,000. In addition, there was an increase $100,000 in insurance and surety bond expenses for the
year ended December 31, 2018. Direct loan expense increased $49,000. These increases were partially offset by a decrease of $6.3 million, which resulted from
the absence of the contribution of 609,279 shares of Company common stock, valued at $6.1 million, and $200,000 in cash to the Ponce De Leon Foundation in
2017. In addition, data processing expenses, decreased by $62,000 mainly due to contractual provisions and the level of new products and services that were
introduced during 2018.
57
Compensation and benefits
Occupancy and equipment
Data processing
Direct loan expense
Insurance and surety bond premiums
Office supplies, telephone and postage
Charitable foundation contributions
Professional fees
Marketing and promotional expenses
Directors fees
Regulatory dues
Other operating expenses
Total non-interest expense
For the Years Ended December 31,
Change
2018
2017
Amount
Percent
$
$
17,939 $
6,673
1,408
788
369
1,309
—
3,154
215
277
238
2,187
34,557 $
(Dollars in thousands)
17,109 $
5,825
1,470
739
269
1,103
6,293
1,060
308
289
262
1,830
36,557 $
830
848
(62)
49
100
206
(6,293)
2,094
(93)
(12)
(24)
357
(2,000)
4.9%
14.6%
(4.2%)
6.6%
37.2%
18.7%
(100.0%)
197.5%
(30.2%)
(4.2%)
(9.2%)
19.5%
(5.5%)
Income Tax Expense. We incurred income tax expense of $1.1 million and $1.4 million for the years ended December 31, 2018 and 2017, respectively,
resulting in effective tax rates of 29.5% and 48.1%, respectively. At December 31, 2018 and 2017, net deferred tax assets amounted to $3.8 million and
$3.9 million, respectively.
58
Average Balance Sheet
The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-
equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are monthly average 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.
Average
Outstanding
Balance
2019
Interest
For the Years Ended December 31,
Average
Yield/Rate
Average
Outstanding
Balance
(Dollars in thousands)
2018
Interest
Average
Yield/Rate
Interest-earning assets:
Loans (1)
Available-for-sale securities
Other (2)
Total interest-earning assets
Non-interest-earning assets
Total assets
Interest-bearing liabilities:
NOW/IOLA
Money market
Savings
Certificates of deposit
Total deposits
Advance payments by borrowers
Borrowings
Total interest-bearing liabilities
Non-interest-bearing liabilities:
Non-interest-bearing demand
Other non-interest-bearing liabilities
Total non-interest-bearing liabilities
Total liabilities
Total equity
Total liabilities and total equity
Net interest income
Net interest rate spread (3)
Net interest-earning assets (4)
$
946,159 $
24,778
35,517
1,006,454
35,504
$ 1,041,958
$
27,539 $
124,729
119,521
403,010
674,799
8,608
77,621
761,028
110,745
3,900
114,645
875,673
166,285
$ 1,041,958
49,306
362
823
50,491
122
2,548
153
7,677
10,500
4
1,854
12,358
—
—
—
12,358
$
38,133
5.21% $
1.46%
2.32%
5.02%
$
0.44% $
2.04%
0.13%
1.90%
1.56%
0.05%
2.39%
1.62%
1.62% $
3.40%
44,948
381
828
46,157
102
702
167
7,617
8,588
4
899
9,491
—
—
—
9,491
867,030 $
26,424
42,937
936,391
33,610
970,001
28,182 $
60,113
125,395
439,737
653,427
7,762
34,886
696,075
100,628
5,859
106,487
802,562
167,439
970,001
$
36,666
$
245,426
$
240,316
Net interest margin (5)
Average interest-earning assets to interest-bearing liabilities
3.79%
132.25%
5.18%
1.44%
1.93%
4.93%
0.36%
1.17%
0.13%
1.73%
1.31%
0.05%
2.58%
1.36%
1.36%
3.57%
3.92%
134.52%
(1)
(2)
Includes a loan held for sale for the year ended December 31, 2019. There were no loans held for sale for the year ended December 31, 2018.
Includes FHLBNY demand account and FHLBNY stock dividends.
(3) 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.
(4) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average total interest-earning assets.
59
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on the Bank’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.
Interest-earning assets:
Loans (1)
Available-for-sale securities
Other
Total interest-earning assets
Interest-bearing liabilities:
NOW/IOLA
Money Market
Savings
Certificates of deposit
Total deposits
Advance payment by borrowers
Borrowings
Total interest-bearing liabilities
Change in net interest income
For the Years Ended December 31,
2019 vs. 2018
Increase (Decrease) Due to
Volume
Rate
Total Increase
(Decrease)
(Dollars in thousands)
$
$
4,102
(24)
(143)
3,935
(2)
755
(8)
(636)
109
—
1,101
1,210
2,725
$
$
256
5
138
399
22
1,091
(6)
696
1,803
—
(146)
1,657
(1,258)
$
$
4,358
(19)
(5)
4,334
20
1,846
(14)
60
1,912
—
955
2,867
1,467
(1)
Includes a loan held for sale for the year ended December 31, 2019. There were no loans held for sale for the year ended December 31, 2018.
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 Bank’s business strategy, operating
environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy 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 the sensitivity to changing interest rates,
based on the foregoing considerations.
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.
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 of December 31, 2019, in the event of an instantaneous upward and downward change in rates from
management's level interest rate forecast over the next twelve months, assuming a static balance sheet, the following estimated changes are calculated:
60
Rate Shift (basis points) (1)
+200
+100
Level
-100
-200
$
Net Interest Income
Year 1 Forecast
(Dollars in thousands)
37,851
38,473
38,709
38,697
37,945
Year 1 Change
from Level
(2.22%)
(0.61%)
0.00%
(0.03%)
(1.97%)
(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 December 31, 2019, 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 December 31, 2019, the EVE modeling
calculated the following estimated changes in EVE due to instantaneous upward and downward changes in rates:
Change in Interest
Rates (basis points) (1)
Estimated
EVE (2)
Estimated Increase (Decrease) in
EVE
Amount
Percent
(Dollars in thousands)
EVE as a Percentage of Present
Value of Assets (3)
EVE
Ratio (4)
Increase
(Decrease)
(basis points)
+200
+100
Level
-100
-200
$
$
162,852
170,126
175,366
178,922
184,968
(12,514)
(5,240)
—
3,556
9,602
(7.14%)
(2.99%)
0.00%
2.03%
5.48%
15.67%
16.06%
16.25%
16.29%
16.56%
(58)
(19)
—
4
31
(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.
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
61
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 December 31, 2019, 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
based thereon, 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 and external professionals to help ensure that the implementation of
management's assumptions into the model are processed as intended and 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 Committee may determine that the Bank should over time become more or less asset or liability sensitive depending on the
underlying balance sheet circumstances and its conclusions as to anticipated interest rate fluctuations in future periods. The Federal Reserve Board decreased
the targeted federal funds interest rate by 25 basis points in each of July 2019, September 2019 and October 2019. On March 3, 2020, and March 15, 2020 the
Federal Reserve Board, in emergency actions, decrease this targeted federal funds rate by an aggregate of 150 basis points. These rate cuts were in response to
unprecedented market turmoil. We cannot make any representation as to whether, or how many times, the Federal Reserve Board will decrease or increase the
targeted federal funds rate in the future.
62
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 our interest-earning assets maturing or repricing within a specific time period and the amount of our
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 Bank’s interest-earning assets and its interest-bearing liabilities at December 31, 2019, 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, 2019, 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.
December 31, 2019
Time to Repricing
Zero to
90 Days
Zero to
180 Days
Zero Days
to One
Year
Zero Days
to Two
Years
Zero Days
to Five
Years
(Dollars in thousands)
Zero Days
to Five
Years
Plus
Total
Earning
Assets &
Costing
Liabilities
Non
Earning
Assets &
Non
Costing
Liabilities
$
20,915
8,345
$
20,915
14,289
$
20,915
17,317
$
20,915
17,780
$
20,915
18,971
$
20,915
21,535
$
20,915
21,535
$
6,762
$
(31)
$
$
89,160
5,735
—
124,155
282,997
73,784
—
356,781
—
$
$
150,369
5,735
—
191,308
282,997
119,986
—
402,983
—
$
$
252,643
5,735
—
296,610
282,997
216,963
—
499,960
—
$
$
449,840
5,735
—
494,270
282,997
327,082
11,029
621,108
—
$
$
916,284
5,735
—
961,905
282,997
389,499
104,404
776,900
—
$
$
957,901
5,735
—
1,006,086
282,997
389,498
104,404
776,899
—
$
$
957,901
5,735
—
1,006,086
282,997
389,498
104,404
776,899
—
$
$
(1,134)
—
42,073
47,670
$
$
109,548
—
8,907
118,455
158,402
Total
27
21
956
5
42
1,053
392
389
113
895
158
$
$
356,781
(232,626)
$
$
34.80%
402,983
(211,675)
$
$
47.47%
499,960
(203,350)
$
$
59.33%
621,108
(126,838)
$
$
79.58%
776,900
185,005
$
$
123.81%
776,899
229,187
129.50%
$
$
$
776,899
229,187
129.50%
276,857
$
1,053
Assets:
Interest-bearing deposits
in banks
Securities
Net loans (includes
LHFS)
FHLBNY Stock
Other assets
Total
Liabilities:
Non-maturity deposits
Certificates of deposit
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
stockholders' equity
Asset/liability gap
Gap/assets ratio
63
The following table sets forth the Bank’s interest-earning assets and its interest-bearing liabilities at December 31, 2018, 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, 2018, 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.
December 31, 2018
Time to Repricing
Zero to
90 Days
Zero to
180 Days
Zero Days
to One
Year
Zero Days
to Two
Years
Zero Days
to Five
Years
(Dollars in thousands)
Zero Days
to Five
Years
Plus
Total
Earning
Assets &
Costing
Liabilities
Non
Earning
Assets &
Non
Costing
Liabilities
Total
$
24,553
5,121
$
24,553
5,997
$
24,553
10,675
$
24,553
26,397
$
24,553
26,698
$
24,553
27,568
$
24,553
27,568
$
45,225
$
(424)
69,778
27,144
$
$
103,967
—
—
133,641
269,749
65,267
25,000
360,016
—
$
$
137,999
—
—
168,549
269,749
107,838
25,000
402,587
—
$
$
206,712
—
—
241,940
269,749
189,720
25,000
484,469
—
$
$
371,288
—
—
422,238
269,749
283,655
33,029
586,433
—
$
$
856,529
2,915
4
910,699
269,749
424,086
69,404
763,239
—
$
$
924,906
2,915
4
979,946
269,749
424,086
69,404
763,239
—
$
$
$
$
360,016
(226,375)
$
$
37.12%
402,587
(234,038)
$
$
41.87%
484,469
(242,529)
$
$
49.94%
586,433
(164,195)
$
$
72.00%
763,239
147,460
$
$
119.32%
763,239
216,707
$
$
128.39%
924,906
2,915
4
979,946
269,749
424,086
69,404
763,239
—
763,239
216,707
$
$
(6,397)
—
41,551
79,955
$
918,509
2,915
41,555
1,059,901
$
115,923
—
11,567
127,490
169,172
385,672
424,086
80,971
890,729
169,172
$
296,662
$
1,059,901
128.39%
Assets:
Interest-bearing deposits
in banks
Securities
Net loans (includes
LHFS)
FHLBNY Stock
Other assets
Total
Liabilities:
Non-maturity deposits
Certificates of deposit
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
stockholders' equity
Asset/liability gap
Gap/assets ratio
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 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.
64
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 Bank’s customers and to fund current and planned expenditures. The primary sources of funds are
deposits, principal and interest payments on loans and available-for-sales securities and proceeds from the sale of loans. The Bank also has access to borrow
from the FHLBNY. At December 31, 2019 and 2018, we had $104.4 million and $44.4 million, respectively, of term and overnight outstanding advances from
the FHLBNY, and also had a guarantee from the FHLBNY through a standby letter of credit of $3.5 million and $7.6 million, respectively. At December 31,
2019, there was eligible collateral of approximately $301.8 million 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 $0 and $25.0 million outstanding at December 31, 2019 and 2018,
respectively. The Bank did not have any outstanding securities sold under repurchase agreements with brokers as of December 31, 2019 and 2018.
Although maturities and scheduled amortization of loans and available-for-sale securities are predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general 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.
Net cash provided by operating activities was $5.0 million and $7.9 million for the years ended December 31, 2019 and 2018, respectively.
Net cash used in investing activities, which consists primarily of disbursements for loan originations, offset by principal collections on loans, purchases
of available-for-sale securities, proceeds from maturing of available-for-sale securities and pay downs on mortgage-backed available-for-sale securities, was
$(38.7 million) and $(126.6 million) for the years ended December 31, 2019 and 2018, respectively.
Net cash (used in) provided by financing activities, consisting of activities in deposit accounts and advances, was $(8.5 million) and $128.8 million for
the years ended December 31, 2019 and 2018, respectively.
The Bank is committed to maintaining an adequate liquidity position. The liquidity position is monitored on a daily basis and it is anticipated that there
will be sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, it is anticipated that a
significant portion of maturing time deposits will be retained.
At December 31, 2019 and 2018, all regulatory capital requirements were met, resulting in the Company and the Bank being categorized as well
capitalized at December 31, 2019 and 2018. Management is not aware of any conditions or events that would change the Company’s and the Bank’s well
capitalized category.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, the Bank 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 Bank’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
December 31, 2019 and 2018, the Bank had outstanding commitments to originate loans, commitments under lines of credit, and standby letters of credit totaling $96.1
million and $104.5 million, respectively. It is anticipated that the Bank will have sufficient funds available to meet its current lending commitments. Certificates of
deposits that are scheduled to mature in less than one year from December 31, 2019 total $217.2 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 Bank 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 Bank 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. The following table
summarizes our contractual obligations for the periods indicated as of December 31, 2019:
65
Operating leases
Vendor obligations (1)
Advances from FHLBNY
Certificates of deposit
Total contractual obligation
Total
2020
2021
2022
(in thousand)
2023
2024
Thereafter
For the Years Ending December 31,
$
12,467 $
16,616
104,404
389,498
$ 522,985 $ 229,910 $ 117,334 $ 113,164 $
1,380 $
3,000
3,000
109,954
1,340 $
3,382
8,029
217,159
1,289 $
2,649
65,000
44,226
1,276 $
2,638
28,375
8,512
40,801 $
1,310 $
2,636
—
9,647
13,593 $
5,872
2,311
—
—
8,183
(1) Amounts are for data processing services, leases of equipment and service implementation.
The obligations related to our uncertain tax positions, which are not considered material, have been excluded from the table above because of the
uncertainty surrounding the timing and final amounts of settlement, if any.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information regarding quantitative and qualitative disclosures about market risk appears under Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Management of Market Risk.”
66
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of December 31, 2019 and 2018
Consolidated Statements of Income (Loss) for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
Notes to the Consolidated Financial Statements
67
68
69
70
71
72
73
74
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of PDL Community Bancorp
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of PDL Community Bancorp and Subsidiaries (the "Company") as of
December 31, 2019 and 2018, the related consolidated statements of income (loss), comprehensive income (loss), stockholders’ equity, and cash flows, for each
of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "consolidated financial statements"). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018,
and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles
generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Mazars USA LLP
We have served as the Company’s auditor since 2013.
New York, New York
March 17, 2020
68
PDL Community Bancorp and Subsidiaries
Consolidated Statements of Financial Condition
December 31, 2019 and 2018
(Dollars in thousands, except share data)
ASSETS
Cash and due from banks (Note 2):
Cash
Interest-bearing deposits in banks
Total cash and cash equivalents
Available-for-sale securities, at fair value (Note 3)
Loans held for sale
Loans receivable, net of allowance for loan losses - 2019 $12,329; 2018 $12,659 (Note 4)
Accrued interest receivable
Premises and equipment, net (Note 5)
Federal Home Loan Bank of New York Stock (FHLBNY), at cost
Deferred tax assets (Note 8)
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 6)
Accrued interest payable
Advance payments by borrowers for taxes and insurance
Advances from the Federal Home Loan Bank of New York and others (Note 7)
Other liabilities
Total liabilities
Commitments and contingencies (Note 11)
Stockholders' Equity:
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued
Common stock, $0.01 par value; 50,000,000 shares authorized; 18,463,028 shares issued and 17,451,134 shares
outstanding as of December 31, 2019 and 18,463,028 shares issued and outstanding as of December 31, 2018
Treasury stock, at cost; 1,011,894 shares as of December 31, 2019 and no shares as of December 31, 2018 (Note 9)
Additional paid-in-capital
Retained earnings
Accumulated other comprehensive income (loss) (Note 14)
Unearned Employee Stock Ownership Plan (ESOP); 579,001 shares as of December 31, 2019 and 627,251 shares as of
December 31, 2018 (Note 9)
Total stockholders' equity
Total liabilities and stockholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
69
December 31,
2019
2018
$
$
6,762 $
20,915
27,677
21,504
1,030
955,737
3,982
32,746
5,735
3,724
1,621
1,053,756 $
45,225
24,553
69,778
27,144
—
918,509
3,795
31,135
2,915
3,811
2,814
1,059,901
$
782,043 $
97
6,348
104,404
2,462
895,354
809,758
63
6,037
69,404
5,467
890,729
—
—
185
(14,478)
84,777
93,688
20
185
—
84,581
98,813
(8,135)
(5,790)
158,402
1,053,756 $
(6,272)
169,172
1,059,901
$
PDL Community Bancorp and Subsidiaries
Consolidated Statements of Income (Loss)
For the Years Ended December 31, 2019, 2018 and 2017
(Dollars in thousands, except share data)
For the Years Ended December 31,
2018
2017
2019
Interest and dividend income:
Interest on loans receivable
Interest on deposits due from banks
Interest and dividend on available-for-sale securities and FHLBNY stock
Total interest and dividend income
Interest expense:
Interest on certificates of deposit
Interest on other deposits
Interest on borrowings
Total interest expense
Net interest income
Provision for loan losses (Note 4)
Net interest income after provision for loan losses
Noninterest income:
Service charges and fees
Brokerage commissions
Late and prepayment charges
Other
Total noninterest income
Noninterest expense:
Compensation and benefits
Loss on termination of pension plan
Occupancy expense
Data processing expenses
Direct loan expenses
Insurance and surety bond premiums
Office supplies, telephone and postage
Charitable foundation contributions
Professional fees
Marketing and promotional expenses
Directors fees
Regulatory dues
Other operating expenses
Total noninterest expense
Income (loss) before income taxes
Provision (benefit) for income taxes (Note 8)
Net income (loss)
Earnings (loss) per share: (Note 10)
Basic
Diluted
The accompanying notes are an integral part of the consolidated financial statements.
70
$
49,306 $
617
568
50,491
44,948 $
679
529
46,156
7,677
2,827
1,854
12,358
38,133
258
37,875
971
212
755
745
2,683
18,883
9,930
7,612
1,576
692
414
1,185
—
3,237
158
294
231
2,395
46,607
(6,049)
(924)
(5,125) $
7,617
974
899
9,490
36,666
1,249
35,417
845
533
606
954
2,938
17,939
—
6,673
1,408
788
369
1,309
—
3,154
215
277
238
2,187
34,557
3,798
1,121
2,677 $
(0.29) $
(0.29) $
0.15
0.15
$
$
$
$
$
38,172
259
558
38,989
5,917
656
210
6,783
32,206
1,716
30,490
909
547
810
838
3,104
17,109
—
5,825
1,470
739
269
1,103
6,293
1,060
308
289
262
1,830
36,557
(2,963)
1,424
(4,387)
(0.16)
(0.16)
PDL Community Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2019, 2018 and 2017
(In thousands)
For the Years Ended December 31,
2018
2017
2019
Net income (loss)
Net change in unrealized gains (losses) on securities available-for-sale:
Unrealized gain (losses)
Expense (benefit) due to enactment of federal tax reform
Income tax effect
Unrealized gain (losses) on securities, net
Pension benefit liability adjustment:
Net gain (loss) during the period
Expense (benefit) due to the enactment of federal tax reform
Reclassification of stranded income tax effects from accumulated other comprehensive income
Income tax effect
Pension liability adjustment, net of tax
Total other comprehensive income (loss), net of tax
Total comprehensive income (loss)
The accompanying notes are an integral part of the consolidated financial statements.
$
(5,125) $
2,677 $
(4,387)
395
—
(84)
311
9,930
—
—
(2,086)
7,844
8,155
3,030 $
(89)
—
19
(70)
1,368
—
(1,281)
(301)
(214)
(284)
2,393 $
(85)
44
(14)
(55)
(2,006)
1,192
—
(732)
(1,546)
(1,601)
(5,988)
$
71
PDL Community Bancorp and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2019, 2018 and 2017
(Dollars in thousands, except share data)
Treasury
Additional
Stock,
At Cost
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Balance, December 31, 2016
Net loss
Other comprehensive loss, net of tax
Issuance of common stock, $0.01 par value; to the
mutual
holding company
Issuance of common stock, $0.01 par value; for
initial
public offering, net of costs of $4,988
Issuance of common stock, $0.01 par value; to The
Ponce De Leon Foundation
Unallocated ESOP- 723,751 shares , $0.01 par
value
ESOP shares committed to be released (48,250
shares)
Balance, December 31, 2017
Net income
Other comprehensive income, net of tax
Reclassification of stranded income tax effects from
accumulated other comprehensive income
ESOP shares committed to be released (48,250
shares)
Restricted stock awards
Stock options
Balance, December 31, 2018
Net loss
Other comprehensive income, net of tax
Release of restricted stock units
Treasury stock
ESOP shares committed to be released (48,250
shares)
Restricted stock awards
Stock options
Balance, December 31, 2019
Common Stock
Shares
Amount
—
$
—
—
—
—
—
$
9,545,387
8,308,362
609,279
—
—
18,463,028
—
—
$
—
—
—
—
18,463,028
—
—
90,135
(1,102,029)
$
—
—
—
17,451,134
$
96
83
6
—
—
185
—
—
—
—
—
—
185
—
—
—
—
—
—
—
185
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
$
—
—
—
—
—
—
1,285
(15,763)
—
—
—
(14,478) $
$
—
—
—
—
78,012
6,087
—
252
84,351
—
—
—
$
$
132
91
7
84,581
—
—
(1,285)
—
225
1,155
101
84,777
$
$
99,242
(4,387)
—
—
—
—
—
$
—
94,855
2,677
—
1,281
—
—
—
98,813
(5,125)
—
$
—
—
—
—
93,688
$
The accompanying notes are an integral part of the consolidated financial statements.
72
Unearned
Employee
Stock
Ownership
Plan (ESOP)
—
—
—
(6,250) $
—
(1,601)
$
Total
92,992
(4,387)
(1,601)
—
—
—
—
—
—
—
96
78,095
6,093
(7,238)
(7,238)
—
(7,851) $
—
997
483
(6,755) $
—
—
735
164,785
2,677
997
(1,281)
—
—
—
—
—
(8,135) $
—
8,155
—
—
—
—
20
$
483
—
—
(6,272) $
—
—
—
482
—
—
(5,790) $
615
91
7
169,172
(5,125)
8,155
—
(15,763)
707
1,155
101
158,402
PDL Community Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2019, 2018 and 2017
(In thousands)
Cash Flows From Operating Activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
For the Years Ended
December 31,
2018
2017
2019
$
(5,125) $
2,677
$
(4,387)
Amortization of premiums/discounts on securities, net
Loss on sale of loans
(Gain) loss on sale of available-for-sale securities
Loss on termination of pension plan
Provision for loan losses
Depreciation and amortization
Amortization of core deposit intangible assets
ESOP compensation expense
Share-based compensation expense
Charitable foundation contribution expense
Deferred income taxes
Changes in assets and liabilities:
Increase in accrued interest receivable
Decrease (increase) in other assets
Increase in accrued interest payable
Increase in advance payments by borrowers
Net (decrease) increase in other liabilities
Net cash provided by operating activities
Cash Flows From Investing Activities:
Proceeds from redemption of FHLBNY Stock
Purchases of FHLBNY Stock
Purchases of available-for-sale securities
Proceeds from sale of available-for-sale securities
Proceeds from maturities, calls and principal repayments on available-for-sale securities
Proceeds from sales of loans
Net increase in loans
Purchases of premises and equipment
Net cash used in investing activities
Cash Flows From Financing Activities:
Net increase in deposits
Repurchase of treasury stock
Proceeds from issuance of common stock
Funds loaned to the ESOP
Proceeds from advances
Repayments of advances
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and Cash Equivalents:
Beginning
Ending
Supplemental Disclosures:
Cash paid during the year:
Interest
Income taxes
Supplemental Disclosures of Noncash Investing Activities:
Transfer of loans held for sale from loans
Transfer of loans held for sale to loans
Supplemental Disclosure of Noncash Financing Activities:
Issuance of common stock to the Ponce De Leon Foundation
42
102
—
9,930
258
2,222
—
766
1,256
—
(2,099)
(187)
1,450
34
311
(2,884)
6,076
11,565
(14,385)
(34,000)
—
39,555
3,614
(42,232)
(3,816)
(39,699)
$
(27,715) $
(15,763)
—
—
699,498
(664,498)
(8,478)
(42,101)
69,778
27,677 $
10
54
(12)
—
1,249
1,798
—
615
98
—
(184)
(460)
(371)
21
1,012
1,378
7,885
—
(1,404)
(4,996)
3,760
2,902
6,885
(127,994)
(5,761)
(126,608)
$
95,773
—
—
—
271,027
(238,023)
128,777
10,054
59,724
69,778
$
12,324
1,178
$
$
9,469
549
$
$
1,030
—
$
$
—
$
—
—
$
$
—
$
$
$
$
$
$
$
73
52
106
6
—
1,716
1,625
3
735
—
6,093
(40)
(628)
38
14
1,143
2,170
8,646
9,364
(9,909)
—
20,374
3,276
2,967
(159,201)
(2,769)
(135,898)
70,907
—
78,191
(7,238)
646,400
(613,000)
175,260
48,008
11,716
59,724
6,821
1,474
—
2,143
6,093
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 1. Nature of Business and Summary of Significant Accounting Policies
Basis of Presentation and Consolidation:
The Consolidated Financial Statements of PDL Community Bancorp (the “Company”) 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 subsidiaries. The Bank’s subsidiaries consist of PFS Service Corp., which owns some of the Bank’s real property, and Ponce De Leon Mortgage Corp.,
which is a mortgage banking entity.
Inter-company transactions and balances are eliminated in consolidation.
Nature of Operations:
The Bank is a federally chartered savings association headquartered in the Bronx, New York. It was originally chartered in 1960 as a federally chartered mutual
savings and loan association under the name Ponce De Leon Federal Savings and Loan Association. In 1985, it changed its name to “Ponce De Leon Federal
Savings Bank.” In 1997, it changed its name again to “Ponce De Leon Federal Bank.” Upon the completion of its reorganization into the MHC, the assets and
liabilities of Ponce De Leon Federal Bank were transferred to and assumed by the Bank, a federally chartered stock savings association, owned 100% by PDL
Community Bancorp and known as and conducting business under the name “Ponce Bank.” The Bank will continue to be subject to comprehensive regulation
and examination by the Office of Comptroller of the Currency (the “OCC”).
The Bank’s business is conducted through the administrative office and 13 branch offices. The banking offices are located in the Bronx (4 branches), Manhattan
(2 branches), Queens (3 branches) and Brooklyn (3 branches), New York and Union City (1 branch), New Jersey. The primary market area currently consists of
the New York City metropolitan area.
The Bank’s business primarily consists of taking deposits from the general public and investing those deposits, together with funds generated from operations
and borrowings, in mortgage loans, consisting of one-to-four family residential (both investor-owned and owner-occupied), multifamily residential,
nonresidential properties and construction and land, and, to a lesser extent, in business and consumer loans. The Bank also invests in securities, which have
historically consisted of U.S. government and federal agency securities and securities issued by government-sponsored or owned enterprises, as well as,
mortgage-backed securities and Federal Home Loan Bank of New York (the “FHLBNY”) stock. The Bank offers a variety of deposit accounts, including
demand, savings, money markets and certificates of deposit accounts.
Summary of Significant Accounting Policies:
Use of Estimates: In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the consolidated statement of financial condition, and
revenues and expenses for the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans, the valuation of loans held for sale, the valuation of deferred tax assets and investment securities, the determination of
pension benefit obligations and the estimates relating to the valuation for share-based awards.
74
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 1. Nature of Business and Summary of Significant Accounting Policies (Continued)
Significant Group Concentrations of Credit Risk: Most of the Bank's activities are with customers located within New York City. Accordingly, the ultimate
collectability of a substantial portion of the Bank's loan portfolio is susceptible to changes in the local market conditions. Note 3 discusses the types of securities
that the Bank invests in. Notes 4 and 11 discuss the types of lending that the Bank engages in, and other concentrations.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand and amounts due from banks (including items in process of clearing). For purposes
of reporting cash flows, the Bank considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash
flows from loans originated by the Bank, interest-bearing deposits in financial institutions, and deposits are reported net in the consolidated statements of cash
flows.
Securities: Management determines the appropriate classification of securities at the date individual investment securities are acquired, and the appropriateness
of such classification is reassessed at each statement of financial condition date.
Debt securities that management has the positive intent and ability to hold to maturity, if any, are classified as "held to maturity" and recorded at amortized cost.
Trading securities, if any, are carried at fair value, with unrealized gains and losses recognized in earnings. Securities not classified as held to maturity or
trading, are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other
comprehensive income (loss), net of tax. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the
securities.
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market
conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and
the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be
required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell
is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the
aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the
consolidated statement of income (loss) and 2) OTTI related to other factors, which is recognized in other comprehensive income (loss).
The credit loss is defined as the difference between the discounted present value of the cash flows expected to be collected and the amortized cost basis. For
equity securities, the entire amount of impairment is recognized through earnings.
Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. The sale of a held-to-
maturity security within three months of its maturity date or after collection of at least 85% of the principal outstanding at the time the security was acquired is
considered a maturity for purposes of classification and disclosure.
Federal Home Loan Bank of New York Stock: The Bank is a member of the FHLBNY. Members are required to own a certain amount of stock based on the
level of borrowings and other factors, and may invest in additional amounts. FHLBNY stock is carried at cost, classified as a restricted security, and periodically
evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
75
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 1. Nature of Business and Summary of Significant Accounting Policies (Continued)
Loans Receivable: Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at current
unpaid principal balances, net of the allowance for loan losses and including net deferred loan origination fees and costs.
Interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in
interest income using the interest method without anticipating prepayments.
A loan is moved to nonaccrual status in accordance with the Bank’s policy, typically after 90 days of non-payment. The accrual of interest on mortgage and
commercial loans is generally discontinued at the time the loan becomes 90 days past due unless the loan is well-secured and in process of collection. Consumer
loans are typically charged off no later than 120 days past due. Past-due status is based on the contractual terms of the loan. In all cases, loans are placed on
nonaccrual status or charged off if collection of principal or interest is considered doubtful. All nonaccrual loans are considered impaired loans.
All interest accrued but not received for loans placed on nonaccrual are reversed against interest income. Interest received on such loans is accounted for on the
cash-basis or recorded against principal balances only, until qualifying for return to accrual. Cash-basis interest recognition is only applied on nonaccrual loans
with a sufficient collateral margin to ensure no doubt with respect to the collectability of principal. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and remain current for a period of time (typically six months) and future payments are reasonably
assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. 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.
Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific
borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management’s judgment, should be charged-off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired when, based on
current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered
troubled debt restructurings and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in
relation to the principal and interest owed.
Impaired loans are measured for impairment using the fair value of the collateral, present value of cash flows, or the observable market price of the note.
Impairment measurement for all collateral dependent loans, excluding accruing troubled debt restructurings, is based on the fair value of collateral, less costs to
sell, if necessary. A loan is considered collateral dependent if repayment of the loan is expected to be provided solely by the sale or the operation of the
underlying collateral.
When a loan is modified to troubled debt restructuring, management evaluates for any possible impairment using either the discounted cash flows method,
where the value of the modified loan is based on the present value of expected cash flows, discounted at the contractual interest rate of the original loan
agreement, or by using the fair value of the collateral less selling costs, if repayment under the modified terms becomes doubtful.
76
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 1. Nature of Business and Summary of Significant Accounting Policies (Continued)
The general component covers non‑impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is
determined by portfolio segment and is based on the actual loss history experienced over a rolling 12 quarter average period. This actual loss experience is
supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the
following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans;
effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of
lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and, effects of changes in credit
concentrations.
When establishing the allowance for loan losses, management categorizes loans into risk categories reflecting individual borrower earnings, liquidity, leverage
and cash flow, as well as the nature of underlying collateral. These risk categories and relevant risk characteristics are as follows:
Residential and Multifamily Mortgage Loans: Residential and multifamily mortgage loans are secured by first mortgages. These loans are typically
underwritten with loan-to-value ratios ranging from 65% to 90%. The primary risks involved in residential mortgages are the borrower’s loss of employment, or
other significant event, that negatively impacts the source of repayment. Additionally, a serious decline in home values could jeopardize repayment in the event
that the underlying collateral needs to be liquidated to pay off the loan.
Nonresidential Mortgage Loans: Nonresidential mortgage loans are primarily secured by commercial buildings, office and industrial buildings, warehouses,
small retail shopping centers and various special purpose properties, including hotels, restaurants and nursing homes. These loans are typically underwritten at
no more than 75% loan-to-value ratio. Although terms vary, commercial real estate loans generally have amortization periods of 15 to 30 years, as well as
balloon payments of 10 to 15 years, and terms which provide that the interest rates is adjusted on a 5 year schedule,
Construction and Land Loans: Construction real estate loans consist of vacant land and property that is in the process of improvement. Repayment of these
loans can be dependent on the sale of the property to third parties or the successful completion of the improvements by the builder for the end user. In the event
a loan is made on property that is not yet improved for the planned development, there is the risk that government approvals will not be granted or will be
delayed. Construction loans also run the risk that improvements will not be completed on time or in accordance with specifications and projected costs.
Construction real estate loans generally have terms of six months to two years during the construction period with fixed rates or interest rates based on a
designated index.
Business Loans: Business loans are loans for commercial, corporate and business purposes, including issuing letters of credit. These loans are secured by
business assets or may be unsecured and repayment is directly dependent on the successful operation of the borrower’s business and the borrower’s ability to
convert the assets to operating revenue. They possess greater risk than most other types of loans because the repayment capacity of the borrower may become
inadequate. Business loans generally have terms of five to seven years or less and interest rates that float in accordance with a designated published index.
Substantially all such loans are backed by the personal guarantees of the owners of the business.
Consumer Loans: Consumer loans generally have higher interest rates than mortgage loans. The risk involved in consumer loans is the type and nature of the
collateral and, in certain cases, the absence of collateral. Consumer loans include passbook loans and other secured and unsecured loans that have been made for
a variety of consumer purposes.
Loans Held for Sale: Loan sales occur from time to time as part of strategic business or regulatory compliance initiatives. Loans held for sale, including
deferred fees and costs, are reported at the lower of cost or fair value as determined by expected bid prices from potential investors. Loans are sold without
recourse and servicing released. When a loan is transferred from portfolio to held-for-sale and the fair value is less than cost, a charge-off is recorded against the
allowance for loan loss. Subsequent declines in fair value, if any, are charged against earnings.
77
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 1.
Nature of Business and Summary of Significant Accounting Policies (Continued)
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when all of the components meet the definition of a participating interest
and when control over the assets has been surrendered. A participating interest generally represents (1) a proportionate (pro rata) ownership interest in an entire
financial asset, (2) a relationship where from the date of transfer all cash flows received from the entire financial asset are divided proportionately among the
participating interest holders in an amount equal to their share of ownership, (3) the priority of cash flows has certain characteristics, including no reduction in
priority, subordination of interest, or recourse to the transferor other than standard representation or warranties, and (4) no party has the right to pledge or
exchange the entire financial asset unless all participating interest holders agree to pledge or exchange the entire financial asset. Control over transferred assets
is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets
through either (a) an agreement to repurchase them before their maturity or (b) the ability to unilaterally cause the holder to return specific assets, other than
through a clean-up call.
Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed and charged to operations using the straight-line method over the estimated useful lives of the respective assets as follows:
Building
Building improvements
Furniture, fixtures, and equipment
Years
39
15 - 39
3 - 10
Leasehold improvements are amortized over the shorter of the improvements’ estimated economic lives or the related lease terms, including extensions
expected to be exercised. Gains and losses on dispositions are recognized upon realization. Maintenance and repairs are expensed as incurred and improvements
are capitalized. Leasehold improvements in process are not amortized until the assets are placed in operation.
Impairment of Long-Lived Assets: Long-lived assets, including premises and leasehold improvements are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment is indicated by that review, the asset is written down to its
estimated fair value through a charge to noninterest expense.
Other Real Estate Owned: Other Real Estate Owned ("OREO") represents properties acquired through, or in lieu of, loan foreclosure or other proceedings.
OREO is initially recorded at fair value, less estimated disposal costs, at the date of foreclosure, which establishes a new cost basis. After foreclosure, the
properties are held for sale and are carried at the lower of cost or fair value, less estimated costs of disposal. Any write-down to fair value, at the time of transfer
to OREO, is charged to the allowance for loan losses. Properties are evaluated regularly to ensure that the recorded amounts are supported by current fair values
and charges against earnings are recorded as necessary to reduce the carrying amount to fair value, less estimated costs to dispose. Costs relating to the
development and improvement of the property are capitalized, subject to the limit of fair value of the OREO, while costs relating to holding the property are
expensed. Gains or losses are included in operations upon disposal.
78
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 1. Nature of Business and Summary of Significant Accounting Policies (Continued)
Income Taxes: The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all
or some portion of the deferred tax assets will not be realized.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized
in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated
with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than
50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the
amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be
payable to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits, if any, would be classified as additional provision for income taxes in the consolidated
statements of income (loss).
Related Party Transactions: Directors and officers of the Company and their affiliates have been customers of and have had transactions with the Company, and
it is expected that such persons will continue to have such transactions in the future. Management believes that all deposit accounts, loans, services and
commitments comprising such transactions were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other customers who are not directors or officers. In the opinion of management, the
transactions with related parties did not involve more than normal risk of collectability, nor favored treatment or terms, nor present other unfavorable features.
Note 15 contains details regarding related party transactions.
Employee Benefit Plans: The Company maintains Ponce Bank’s 401(k) Plan, and a Supplemental Executive Retirement Plan (the “SERP”). The 401(k) Plan
provides for elective employee/participant deferrals of income. Discretionary matching, profit-sharing, and safe harbor contributions, not to exceed 4% of
employee compensation and profit-sharing contributions may be provided.
Employee Stock Ownership Plan: Compensation expense is recorded as shares are committed to be released with a corresponding credit to unearned ESOP
equity account at the average fair market value of the shares during the period and the shares become outstanding for earnings per share
computations. Compensation expense is recognized ratably over the service period based upon management’s estimate of the number of shares expected to be
allocated by the ESOP. The difference between the average fair market value and the cost of the shares allocated by the ESOP is recorded as an adjustment to
additional paid-in-capital. Unallocated common shares held by the Company’s ESOP are shown as a reduction in stockholders’ equity and are excluded from
weighted-average common shares outstanding for both basic and diluted earnings per share calculations until they are committed to be released.
79
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 1. Nature of Business and Summary of Significant Accounting Policies (Continued)
Stock Options: The Company recognizes the value of shared-based payment transactions as compensation costs in the financial statements over the period that
an employee provides service in exchange for the award. The fair value of the share-based payments for stock options is estimated using the Black-Scholes
option-pricing model. The Company accounts for forfeitures as they occur during the period.
Restricted Stock Units: The Company recognizes compensation cost related to restricted stock units based on the market price of the stock units at the grant
date over the vesting period. The product of the number of units granted and the grant date market price of the Company’s common stock determines the fair
value of restricted stock units. The Company recognizes compensation expense for the fair value of the restricted stock units on a straight-line basis over the
requisite service period.
Comprehensive Income (Loss): Comprehensive income (loss) consists of net income and other comprehensive income (loss) which are both recognized as
separate components of equity. Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale and unrecognized gains
and losses on actuarial loss and prior service cost of the defined benefit plan.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will
have a material effect on the operations and financial position of the Company.
Fair Value of Financial Instruments: Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair values of financial
instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 12. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets
for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Segment Reporting: Although management monitors the revenue streams of the various products and services, the identifiable segments and operations are
managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered by management
to be aggregate in one reportable operating segment.
Loan Commitments and Related Financial Instruments: Financial instruments include off‑balance sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Earnings (Loss) per Share (“EPS”): Basic EPS represents net income (loss) attributable to common shareholders divided by the basic weighted average
common shares outstanding. Diluted EPS is computed by dividing net income attributable to common shareholders by the basic weighted average common
shares outstanding, plus the effect of potential dilutive common stock equivalents outstanding during the period. Basic weighted common shares outstanding is
weighted average common shares outstanding less weighted average unallocated ESOP shares.
Treasury Stock: Shares repurchased under the Company’s share repurchase programs were purchased in open-market transactions and are held as treasury
stock. The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity.
Reclassification of Prior Year Presentation: Certain prior year amounts have been reclassified for consistency with the current year presentation. These
reclassifications had no effect on the reporting results of operations and did not affect previously reported amounts in the Consolidated Statements of Income.
80
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 1. Nature of Business and Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements:
As an emerging growth company (“EGC”) as defined in Rule 12b-2 of the Exchange Act, the Company has elected to use the extended transition period to
delay the adoption of new or reissued accounting pronouncements applicable to public business entities until such pronouncements are made applicable to
nonpublic business entities. As of December 31, 2019, there is no significant difference in the comparability of the consolidated financial statements as a result
of this extended transition period.
Accounting Pronouncements Not Yet Adopted:
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU requires all lessees to recognize a lease liability and a right-of-use asset,
measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the
new guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, for
public business entities. As the Company is taking advantage of the extended transition period for complying with new or revised accounting standards
assuming it remains an EGC, it will adopt the amendments in this update for fiscal years beginning after December 15, 2020, and interim periods within fiscal
years beginning after December 15, 2021.
The Company has begun its evaluation of the amended guidance including the potential impact on its consolidated financial statements. To date, the Company
has identified its leased office spaces as within the scope of the guidance. The Company currently leases seven branches and the new guidance will result in the
establishment of a right to use asset and corresponding lease obligations. The Company continues to evaluate the impact of the guidance, including determining
whether other contracts exist that are deemed to be in scope and subsequent related accounting standard updates. The Company has established a project
committee and has initiated training on ASU 2016-02. The Company is performing preliminary computations of its right to use asset and corresponding lease
obligations for the operating leases of its seven branches.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will
measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard is to replace
today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, is to apply to:
(1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to,
loans, leases, held-to-maturity securities, loan commitments and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt
securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses
will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated
credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also reportedly simplifies the accounting model for
purchased credit-impaired debt, securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models and
methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial
asset by credit quality indicator, disaggregated by the year of origination. ASU 2016-13 is effective for annual reporting periods beginning after December 15,
2019, including interim periods within those fiscal years, for public business entities, that are not deemed to be smaller reporting companies as defined by the
SEC as of November 15, 2019. As the Company is taking advantage of the extended transition period for complying with new or revised accounting standards
assuming it remains an EGC, it will adopt the amendments in this update for fiscal years beginning after December 15, 2022, including interim periods within
those fiscal years. Entities have to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first
reporting period in which the guidance is effective (i.e., modified retrospective approach).
81
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 1. Nature of Business and Summary of Significant Accounting Policies (Continued)
Although early adoption is permitted, the Company does not expect to elect that option. The Company has begun its evaluation of the amended guidance
including the potential impact on its consolidated financial statements. As a result of the required change in approach toward determining estimated credit losses
from the current “incurred loss” model to one based on estimated cash flows over a loan’s contractual life, adjusted for prepayments (a “life of loan” model), the
Company expects that the new guidance will result in an increase in the allowance for loan losses, particularly for longer duration loan portfolios. The Company
also expects that the new guidance may result in an allowance for available-for-sale debt securities. The Company has selected the CECL model and has begun
running scenarios. In both cases, the extent of the change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at
the adoption date, as well as economic conditions and forecasts at that time.
In March 2017, the FASB issued ASU 2017-08 “Receivables – Non-Refundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased
Callable Debt Securities.” The ASU requires premiums on callable debt securities to be amortized to the earliest call date. The amendments do not require an
accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for interim and annual
reporting periods beginning after December 15, 2018 for public business entities. Early adoption is permitted beginning after December 15, 2018, including
interim periods within those fiscal years. As the Company is taking advantage of the extended transition period for complying with new or revised accounting
standards assuming it remains an EGC, it will adopt the amendments in this update for fiscal years beginning after December 15, 2019, and interim periods
within fiscal years beginning after December 15, 2020. ASU 2017-08 is not expected to have a material impact on the Company’s consolidated financial
position, results of operations or disclosures.
In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU
eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose
the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but will be required to disclose the range and weighted average
used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods
beginning after December 15, 2019, and early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Company’s
consolidated financial statements.
Note 2.
Restrictions on Cash and Due From Banks
The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The Bank had
$5,935 and $44,717 in cash to cover its minimum reserve requirements of $4,927 and $4,375 at December 31, 2019 and 2018, respectively.
Note 3. Available-for-Sale Securities
The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale securities at December 31, 2019 and 2018 are summarized as follows:
U.S. Government and Federal Agencies
Mortgage-Backed Securities:
FNMA Certificates
GNMA Certificates
December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Fair Value
$
16,373
$
—
$
(19)
$
16,354
4,680
482
21,535
$
—
9
9
$
(21)
—
(40)
$
4,659
491
21,504
$
82
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 3. Available-for-Sale-Securities (Continued)
U.S. Government and Federal Agencies
U.S. Treasury
Mortgage-Backed Securities:
FNMA Certificates
GNMA Certificates
December 31, 2018
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Fair Value
$
$
20,924
4,997
778
870
27,569
$
$
—
—
—
5
5
$
$
(409)
(2)
(19)
—
(430)
$
$
20,515
4,995
759
875
27,144
There were no securities that were classified as held-to-maturity as of December 31, 2019 and 2018. There were no securities sold during the year ended
December 31, 2019. The Company sold $3,760 of available-for-sale securities during the year ended December 31, 2018. The Company purchased $30,000 of
U.S. Treasury securities and $4,000 of mortgage-backed securities during the year ended December 31, 2019. A total of $39,555 of available-for-sale securities
matured during the year ended December 31, 2019.
The following tables present the Company's securities' gross unrealized losses and fair values, aggregated by the length of time the individual securities have
been in a continuous unrealized loss position, at December 31, 2019 and 2018:
December 31, 2019
Securities With Gross Unrealized Losses
U.S. Government and Federal Agencies
Mortgage-Backed
FNMA Certificates
Fair
Value
$
—
—
—
$
83
Less Than
12 Months
Unrealized
Loss
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Total
Unrealized
Loss
$
$
—
$ 16,354
$
(19)
$ 16,354
$
(19)
—
—
4,659
$ 21,013
$
(21)
(40)
4,659
$ 21,013
$
(21)
(40)
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 3. Available-for-Sale-Securities (Continued)
Less Than
12 Months
U.S. Government and Federal Agencies
U.S. Treasury
Mortgage-Backed
FNMA Certificates
Fair
Value
$
—
4,995
—
4,995
$
December 31, 2018
Securities With Gross Unrealized Losses
Unrealized
Loss
12 Months or More
Fair
Value
Unrealized
Loss
Total
Fair
Value
Total
Unrealized
Loss
$
$
—
(2)
$ 20,515
—
—
(2)
759
$ 21,274
$
$
(409)
—
$ 20,515
4,995
(19)
(428)
759
$ 26,269
$
$
(409)
(2)
(19)
(430)
The Company’s investment portfolio had 10 and 12 available-for-sale securities at December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018,
the Company had 9 and 11 available-for-sale securities, respectively, with gross unrealized losses. Management reviewed the financial condition of the entities
underlying the securities at both December 31, 2019 and 2018 and determined that they are not other than temporary impaired because the unrealized losses in
those securities relate to market interest rate changes. The Company has the ability to hold them and does not have the intent to sell these securities, and it is not
more likely than not that the Company will be required to sell these securities, before recovery of the cost basis. In addition, management also considers the
issuers of the securities to be financially sound and believes the Company will receive all contractual principal and interest related to these investments.
84
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 3. Available-for-Sale-Securities (Continued)
The following is a summary of maturities of securities at December 31, 2019 and 2018. 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 and Federal Agency Securities:
Amounts maturing:
Three months or less
After three months through one year
After one year through five years
Mortgage-Backed Securities
Total
U.S. Government and Federal Agency Securities:
Amounts maturing:
Three months or less
After three months through one year
After one year through five years
Mortgage-Backed Securities
Total
There were no securities pledged at December 31, 2019 and 2018.
Note 4. Loans Receivable and Allowance for Loan Losses
Loans at December 31, 2019 and 2018 are summarized as follows:
Mortgage loans:
1-4 family residential
Investor-Owned
Owner-Occupied
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage loans:
Business loans
Consumer loans
Net deferred loan origination costs
Allowance for loan losses
Loans receivable, net
85
December 31, 2019
Available-for-Sale
Amortized
Cost
Fair
Value
2,000 $
14,373
—
16,373
5,162
21,535 $
December 31, 2018
Available-for-Sale
Amortized
Cost
Fair
Value
4,997 $
4,554
16,370
25,921
1,648
27,569 $
2,000
14,354
—
16,354
5,150
21,504
4,995
4,497
16,018
25,510
1,634
27,144
December 31,
2019
December 31,
2018
305,272 $
91,943
250,239
207,225
99,309
10,877
1,231
966,096
1,970
(12,329)
955,737 $
303,197
92,788
232,509
196,917
87,572
15,710
1,068
929,761
1,407
(12,659)
918,509
$
$
$
$
$
$
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 4. Loans Receivable and Allowance for Loan Losses (Continued)
The Company's lending activities are conducted principally in 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. 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 loan 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 loan losses.
Below are the definitions of the Company's internally assigned risk ratings:
Strong Pass – Loans to new or existing borrowers collateralized at least 90 percent by an unimpaired deposit account at the Company.
Good Pass – Loans to a new or existing borrower in a well-established enterprise in excellent financial condition with strong liquidity and a history of
consistently high level of earnings, cash flow and debt service capacity.
Satisfactory Pass – Loans to a new or existing borrower of average strength with acceptable financial condition, satisfactory record of earnings and
sufficient historical and projected cash flow to service the debt.
Performance Pass – Loans that evidence strong payment history but document less than average strength, financial condition, record of earnings, or
projected cash flows with which to service debt.
Special Mention – Loans in this category are currently protected but show one or more potential weaknesses and risks which may inadequately protect
collectability or borrower’s ability to meet repayment terms at some future date if the weakness or weaknesses are not monitored or remediated.
Substandard – Loans that are inadequately protected by the repayment capacity of the borrower or the current sound net worth of the collateral pledged, if
any. Loans in this category have well defined weaknesses and risks that jeopardize their repayment. They are characterized by the distinct possibility that
some loss may be sustained if the deficiencies are not remedied.
Doubtful – Loans that have all the weaknesses of loans classified as “Substandard” with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable.
86
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 4. Loans Receivable and Allowance for Loan Losses (Continued)
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. They 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 December 31, 2019 and 2018:
Risk Rating:
Pass
Special mention
Substandard
Total
Risk Rating:
Pass
Special mention
Substandard
Total
Mortgage Loans
Nonmortgage Loans
Construction
Multifamily Nonresidential
and Land Business
Consumer
1-4
Family
Total
Loans
December 31, 2019
$
$
386,022 $
2,412
8,781
397,215 $
249,066 $
—
1,173
250,239 $
202,761 $
—
4,464
207,225 $
75,997 $
14,943
8,369
99,309 $
10,877 $
—
—
10,877 $
1,231 $
—
—
1,231 $
925,954
17,355
22,787
966,096
Mortgage Loans
Nonmortgage Loans
Construction
Multifamily Nonresidential
and Land Business
Consumer
1-4
Family
Total
Loans
December 31, 2018
$
$
383,123 $
3,728
9,134
395,985 $
231,422 $
775
312
232,509 $
195,327 $
—
1,590
196,917 $
71,438 $
8,505
7,629
87,572 $
14,324 $
1,386
—
15,710 $
1,068 $
—
—
1,068 $
896,702
14,394
18,665
929,761
An aging analysis of loans, as of December 31, 2019 and 2018, is as follows:
Mortgages:
1-4 Family
Investor-Owned
Owner-Occupied
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage Loans:
Business
Consumer
Total
30-59
Days
Past Due
60-89
Days
Past Due
Over
90 Days
Past Due
Total
Nonaccrual
Loans
Over
90 Days
Accruing
Current
December 31, 2019
$
$
300,324
87,243
246,318
203,514
99,309
$
3,866
3,405
3,921
3
—
10,877
1,231
948,816
$
—
—
11,195
$
$
—
—
—
—
—
—
—
—
$
$
1,082
1,295
—
3,708
—
—
—
6,085
$
$
305,272
91,943
250,239
207,225
99,309
$
1,749
3,500
—
4,201
1,118
10,877
1,231
966,096
$
—
—
10,568
$
$
—
—
—
—
—
—
—
—
87
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 4. Loans Receivable and Allowance for Loan Losses (Continued)
Mortgages:
1-4 Family
Investor-Owned
Owner-Occupied
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage Loans:
Business
Consumer
Total
30-59
Days
Past Due
60-89
Days
Past Due
Over
90 Days
Past Due
Total
Nonaccrual
Loans
Over
90 Days
Accruing
Current
December 31, 2018
$
296,188 $
89,610
231,514
195,861
87,572
15,418
1,068
917,231 $
$
6,539 $
1,609
995
—
—
292
—
9,435 $
470 $
574
—
4
—
— $
995
—
1,052
—
303,197 $
92,788
232,509
196,917
87,572
—
—
1,048 $
—
—
2,047 $
15,710
1,068
929,761 $
1,258 $
3,079
16
1,310
1,115
—
—
6,778 $
—
—
—
—
—
—
—
—
The following schedules detail the composition of the allowance for loan losses and the related recorded investment in loans as of December 31, 2019, 2018,
and 2017, respectively.
For the Year Ended December 31, 2019
Mortgage Loans
Nonmortgage Loans
Total
1-4
Family
Investor
Owned
1-4
Family
Owner
Occupied
Multifamily
Nonresidential
Construction
and Land
Business
Consumer
For the
Period
Allowances for loan losses:
Balance, beginning of period
Provision charged to expense
Losses charged-off
Recoveries
Balance, end of period
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Total
Loans:
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Total
$
$
$
$
$
$
3,799
(311 )
(8 )
23
3,503
$
$
1,208
(141 )
—
—
1,067
$
$
3,829
36
—
—
3,865
$
$
1,925
$
(85 )
—
9
1,849
$
1,631
151
—
—
1,782
$
$
260
608
(724 )
110
254
$
$
265
$
149
$
—
$
31
$
—
$
14
$
3,238
3,503
$
918
1,067
$
3,865
3,865
$
1,818
1,849
$
1,782
1,782
$
240
254
$
7
—
—
2
9
$
$
—
$
9
9
$
12,659
258
(732 )
144
12,329
459
11,870
12,329
6,973
$
5,572
$
—
$
5,548
$
1,125
$
14
$
—
$
19,232
298,299
305,272
$
86,371
91,943
$
250,239
250,239
$
201,677
207,225
$
98,184
99,309
$
10,863
10,877
$
1,231
1,231
$
946,864
966,096
88
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 4. Loans Receivable and Allowance for Loan Losses (Continued)
For the Year Ended December 31, 2018
Mortgage Loans
Nonmortgage Loans
Total
1-4
Family
Investor
Owned
1-4
Family
Owner
Occupied
Multifamily
Nonresidential
Construction
and Land
Business
Consumer
For the
Period
Allowances for loan losses:
Balance, beginning of period
Provision charged to expense
Losses charged-off
Recoveries
Balance, end of period
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Total
Loans:
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Total
$
$
$
$
$
$
3,716
82
—
1
3,799
$
$
1,402
(444 )
—
250
1,208
$
$
3,109
720
—
—
3,829
$
$
1,424
492
—
9
1,925
$
$
1,205
426
—
—
1,631
$
$
209
(37 )
(34 )
122
260
$
$
6
10
(14 )
5
7
$
$
349
$
234
$
—
$
35
$
—
$
—
$
3,450
3,799
$
974
1,208
$
3,829
3,829
$
1,890
1,925
$
1,631
1,631
$
260
260
$
—
$
7
7
$
11,071
1,249
(48 )
387
12,659
618
12,041
12,659
6,452
$
6,525
$
16
$
2,750
$
1,108
$
374
$
—
$
17,225
296,745
303,197
$
86,263
92,788
$
232,493
232,509
$
194,167
196,917
$
86,464
87,572
$
15,336
15,710
$
1,068
1,068
$
912,536
929,761
For the Year Ended December 31, 2017
Mortgage Loans
Nonmortgage Loans
Total
1-4
Family
Investor
Owned
1-4
Family
Owner
Occupied
Multifamily
Nonresidential
Construction
and Land
Business
Consumer
For the
Period
$
3,147
$
1,804
$
2,705
$
1,320
$
615
$
597
$
17
$
10,205
544
—
25
3,716
$
(578 )
—
176
1,402
$
402
—
2
3,109
$
95
—
9
1,424
$
588
—
2
1,205
$
676
(1,423 )
359
209
$
506
$
375
$
—
$
39
$
—
$
2
$
3,210
3,716
$
1,027
1,402
$
3,109
3,109
$
1,385
1,424
$
1,205
1,205
$
207
209
$
$
$
$
(11 )
(6 )
6
6
$
—
$
6
6
$
1,716
(1,429 )
579
11,071
922
10,149
11,071
$
8,738
$
10,074
$
520
$
4,128
$
1,075
$
625
$
—
$
25,160
$
278,420
287,158
$
90,780
100,854
$
188,030
188,550
$
147,065
151,193
$
66,165
67,240
$
12,248
12,873
$
886
886
$
783,594
808,754
Allowances for loan losses:
Balance, beginning of year
Provision charged to
expense
Losses charged-off
Recoveries
Balance, end of year
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Total
Loans:
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated
for impairment
Total
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, including troubled debt restructurings, are identified by applying normal loan review procedures in accordance with the
allowance for loan 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.
89
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 4. Loans Receivable and Allowance for Loan Losses (Continued)
The following information relates to impaired loans as of and for the years ended December 31, 2019, 2018, and 2017:
December 31, 2019
Mortgages:
1-4 Family
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage Loans:
Business
Consumer
Total
December 31, 2018
Mortgages:
1-4 Family
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage Loans:
Business
Consumer
Total
December 31, 2017
Mortgages:
1-4 Family
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage Loans:
Business
Consumer
Total
Unpaid
Contractual
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Average
Interest
Income
Recorded Related Recorded Recognized
Investment Allowance Investment on Cash Basis
$
13,566 $
—
5,640
1,465
8,390 $
—
5,173
1,125
4,155 $
—
375
—
12,545 $
—
5,548
1,125
16
—
20,687 $
—
—
14,688 $
$
14
—
4,544 $
14
—
19,232 $
414 $
—
31
—
14
—
459 $
12,995 $
6
3,988
1,219
195
1
18,404 $
361
—
121
6
—
—
488
Unpaid
Contractual
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Average
Interest
Income
Recorded Related Recorded Recognized
Investment Allowance Investment on Cash Basis
$
12,985 $
16
2,748
1,115
7,080 $
16
2,270
1,107
5,898 $
—
480
—
12,978 $
16
2,750
1,107
374
—
17,238 $
374
—
10,847 $
$
—
—
6,378 $
374
—
17,225 $
583 $
—
35
—
—
—
618 $
15,163 $
36
3,230
1,094
454
—
19,977 $
758
3
172
—
22
—
955
Unpaid
Contractual
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Average
Interest
Income
Recorded Related Recorded Recognized
Investment Allowance Investment on Cash Basis
$
20,036 $
533
4,729
1,233
10,651 $
520
3,633
1,075
8,161 $
—
495
—
18,812 $
520
4,128
1,075
667
—
27,198 $
529
—
16,408 $
$
96
—
8,752 $
625
—
25,160 $
506 $
375
—
39
2
—
922 $
18,512 $
166
5,231
1,042
594
—
25,545 $
890
—
166
—
24
—
1,080
90
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 4. Loans Receivable and Allowance for Loan Losses (Continued)
The loan portfolio also includes certain loans that have been modified to troubled debt restructurings. Under applicable standards, loans are modified to troubled
debt restructurings when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not
otherwise consider, unless it results in a delay in payment that is insignificant. These concessions could include a reduction of interest rate on the loan, payment
and maturity extensions, forbearance, or other actions intended to maximize collections. When a loan is modified to a troubled debt restructuring, management
evaluates for any possible impairment using either the discounted cash flows method, where the value of the modified loan is based on the present value of
expected cash flows, discounted at the contractual interest rate of the original loan agreement, or by using the fair value of the collateral less selling costs if
repayment under the modified terms becomes doubtful. If management determines that the value of the modified loan in a troubled debt restructuring is less
than the recorded investment in the loan, impairment is recognized through a specific allowance estimate or charge-off to the allowance for loan losses.
For the year ended December 31, 2019, there was one troubled debt restructuring and for the year ended December 31, 2018, there were no loans modified to
troubled debt restructuring.
Loans Restructured During
Year Ended December 31, 2019
Pre-
Post-
Modification Modification
Number
of Loans
Recorded
Balance
Recorded
Balance
Number
of Loans
All TDRs with a payment
default within 12 months
following the
modification
Balance
of Loans
at the Time
of Default
Mortgages:
1-4 Family
Total
Combination of rate, maturity, other
Total
1 $
1 $
1 $
1 $
275 $
275 $
275 $
275 $
283
283
283
283
— $
— $
— $
— $
—
—
—
—
Loans Restructured During
Year Ended December 31, 2018
Pre-
Post-
Modification Modification
Number
of Loans
Recorded
Balance
Recorded
Balance
Number
of Loans
All TDRs with a payment
default within 12 months
following the
modification
Balance
of Loans
at the Time
of Default
Mortgages:
1-4 Family
Total
Combination of rate, maturity, other
Total
— $
— $
— $
— $
— $
— $
— $
— $
—
—
—
—
1 $
1 $
1 $
1 $
176
176
176
176
At December 31, 2019, there were 36 troubled debt restructured loans totaling $12,204 of which $8,601 are on accrual status. At December 31, 2018, there
were 40 troubled debt restructured loans totaling $14,104 of which $10,460 were on accrual status. There were no commitments to lend additional funds to
borrowers whose loans have been modified to troubled debt restructuring. The financial impact from the concessions made represents specific impairment
reserves on these loans, which aggregated to $459 and $618 at December 31, 2019 and 2018, respectively.
At December 31, 2019, there was one loan in the amount of $1,030 held for sale and no loans held for sale at December 31, 2018. The one loan held for sale is a
nonaccrual loan and is over 90 days past due.
91
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 5. Premises and Equipment
A summary of premises and equipment at December 31, 2019 and 2018 is as follows:
Land
Buildings and improvements
Leasehold improvements
Furniture, fixtures and equipment
Less accumulated depreciation and amortization
December 31,
2019
2018
3,979
17,350
25,534
8,513
55,376
(22,630)
32,746
$
$
3,979
16,423
23,430
7,728
51,560
(20,425)
31,135
$
$
Depreciation and amortization expense amounted to $2,222, $1,798 and $1,625 for the years ended December 31, 2019, 2018, and 2017, respectively, and are
included in occupancy expense in the accompanying consolidated statements of income. Leasehold improvements increased by $2,104 to $25,534 and buildings
and improvements increased by $927 to $17,350 at December 31, 2019 mainly due to investments made to the branch network and other product delivery
services as part of branch renovation initiative. Furniture, fixtures and equipment also increased by $785 to $8,513 at December 31, 2019, mainly as a result of
investments in new Teller Cash Recyclers (TCRs) that were installed in the branches.
Note 6. Deposits
Deposits at December 31, 2019 and 2018 are summarized as follows:
Demand
Interest-bearing deposits:
NOW/IOLA accounts
Money market accounts
Reciprocal deposits (1)
Savings accounts
Total NOW, money market, and savings
Certificates of deposit of $250K or more
Brokered certificates of deposit (3)
Listing service deposits (3)
Certificates of deposit less than $250K (2)
Total certificates of deposit
Total interest-bearing deposits
Total deposits
December 31,
2019
2018
$
109,548
$
115,923
32,866
86,721
47,659
115,751
282,997
84,263
76,797
32,400
196,038
389,498
672,495
782,043
$
30,783
64,262
51,913
122,791
269,749
90,195
67,157
39,065
227,669
424,086
693,835
809,758
$
Included in reciprocal deposits are money market accounts and certificates of deposit.
(1)
(2) Brokered certificates of deposit in the amount of $76,797 and $67,157 and listing service deposits in the amount of $32,400 and $39,065 for the years ended
December 31, 2019 and 2018, respectively, are excluded from the certificates of deposit of less than $250K.
(3) There were no individual brokered certificates of deposit or listing service deposits amounting to $250K or more.
92
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 6. Deposits (Continued)
At December 31, 2019, scheduled maturities of certificates of deposit were as follows:
December 31,
2020
2021
2022
2023
2024
$
$
217,159
109,954
44,226
8,512
9,647
389,498
Overdrawn deposit accounts that have been reclassified to loans amounted to $199 and $241 as of December 31, 2019 and 2018, respectively.
Note 7. Borrowings
FHLBNY Advances: As a member of 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 FHLBNY Statement of Credit Policy, at the time of the borrowing. In accordance with an agreement with FHLBNY, the
qualified collateral must be free and clear of liens, pledges and encumbrances.
The Bank had $104,404 and $44,404 of outstanding advances from FHLBNY at December 31, 2019 and 2018, respectively. Additionally, the Bank has an
unsecured line of credit in the amount of $25,000 with a correspondent bank of which $0 and $25,000 were outstanding at December 31, 2019 and 2018,
respectively. The Bank also had a guarantee from the FHLBNY through a standby letter of credit of $3,455 and $7,639 at December 31, 2019 and 2018,
respectively.
Borrowed funds at December 31, 2019 and 2018 consist of the following and are summarized by maturity and call date below:
Correspondent bank overnight line of
credit advance
FHLBNY term advances ending :
2020
2021
2022
2023
$
$
December 31,
2019
Redeemable
at Call
Date
Scheduled
Maturity
Weighted
Average
Rate
Scheduled
Maturity
December 31,
2018
Redeemable
at Call
Date
Weighted
Average
Rate
—
$
—
—% $
25,000
$
25,000
2.64%
8,029
3,000
65,000
28,375
104,404
$
8,029
3,000
65,000
28,375
104,404
2.86
1.84
1.89
2.82
2.21% $
8,029
3,000
5,000
28,375
69,404
$
8,029
3,000
5,000
28,375
69,404
2.86
1.84
1.97
2.82
2.69%
Interest expense on advances totaled $1,854, $899, and $210 for the years ended December 31, 2019, 2018 and 2017, respectively.
As of December 31, 2019 and 2018, the Bank has eligible collateral of approximately $301,753 and $280,457, respectively, in mortgage loans available to
secure advances from the FHLBNY.
93
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 8. Income Taxes
The provision (benefit) for income taxes for the years ended December 31, 2019, 2018, and 2017 consists of the following:
Federal:
Current
Deferred
State and local:
Current
Deferred
Changes in valuation allowance
Provision (benefit) for income taxes
For the Years Ended December 31,
2018
2019
2017
$
$
878
(1,436)
(558)
296
(3,002)
(2,706)
2,340
(924)
$
$
972
37
1,009
333
(1,011)
(678)
790
1,121
$
$
1,062
24
1,086
402
(1,670)
(1,268)
1,606
1,424
Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 21% for 2019 and 2018
and 34% for 2017 to income before income taxes as a result of the following:
Income tax, at federal rate
State and local tax, net of federal taxes
Valuation allowance, net of the federal benefit
Expense due to enactment of federal tax reform
Other
Provision (benefit) for income taxes
For the Years Ended December 31,
2018
2019
2017
$
$
(1,270)
(2,128)
2,340
—
134
(924)
$
$
799
(536)
790
—
68
1,121
$
$
(1,007)
(1,340)
1,606
2,113
52
1,424
On December 22, 2017, the U.S. Government signed into law the “Tax Cuts and Jobs Act” (the “Tax Act”) which, starting in 2018, reduced the Company’s
corporate income tax rate from 34% to 21%, but eliminates or increases certain permanent differences. As of the date of enactment, the Company has adjusted
its deferred tax assets and liabilities for the new statutory rate, which resulted in $2,113 income tax expense for the year ended December 31, 2017.
On December 22, 2017, the U.S. Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 118 (“SAB 118”) to address any
uncertainty or diversity of views in practice in accounting for the income tax effects of the Act in situations where a registrant does not have the necessary
information available, prepared, or analyzed in reasonable detail to complete this accounting in the reporting period that includes the enactment date. SAB 118
allows for a measurement period, not to extend beyond one year from the Act’s enactment date, to complete the necessary accounting. All these matters were
finalized in 2018 with no material impact to the Company’s federal income tax expense.
Management maintains a valuation allowance against its net New York State and New York City deferred tax as it is unlikely these deferred tax assets will
impact the Company's tax liability in future years. The valuation allowance increased by $2,340, $790 and $1,606 for the years ended December 31, 2019, 2018
and 2017, respectively.
Management has determined that it is not required to establish a valuation allowance against any other deferred tax assets in accordance with GAAP since it is
more likely than not that the deferred tax assets will be fully utilized in future periods. In assessing the need for a valuation allowance, management considers
the scheduled reversal of the deferred tax liabilities, the level of historical taxable income, and the projected future taxable income over the periods that the
temporary differences comprising the deferred tax assets will be deductible.
94
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 8. Income Taxes (Continued)
At December 31, 2019 and 2018, the Company had no unrecognized tax benefits recorded. The Company does not expect the total amount of unrecognized tax
benefits to significantly increase in the next twelve months.
The Company is subject to U.S. federal income tax, New York State income tax, New Jersey income tax, and New York City income tax. The Company is no
longer subject to examination by taxing authorities for years before 2016.
In 2018, the Company elected to early adopt ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain
Tax Effects from Accumulated Other Comprehensive Income.” The Company reclassified the income tax effects of Tax Cuts and Jobs Act of approximately
$1,281 from accumulated other comprehensive income to retained earnings as presented in the consolidated statements of stockholders’ equity.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2019 and
2018 are presented below:
Deferred tax assets:
Allowance for losses on loans
Pension obligations
Interest on nonaccrual loans
Unrealized loss on available-for-sale securities
Amortization of intangible assets
Deferred rent payable
Depreciation of premises and equipment
Net operating losses
Charitable contribution carryforward
Compensation and benefits
Other
Total gross deferred tax assets
Deferred tax liabilities:
Cumulative contribution in excess of net periodic
benefit costs, net
Depreciation and amortization of premises and equipment
Deferred loan fees
Other
Total gross deferred tax liabilities
Valuation allowance
Net deferred tax assets
At December 31,
2019
2018
$
$
3,990
—
338
7
88
—
30
4,258
1,675
182
130
10,698
85
—
638
7
730
6,244
3,724
$
$
3,939
2,102
74
91
102
153
—
3,111
1,694
129
106
11,501
3,120
222
438
6
3,786
3,904
3,811
The deferred tax expense (benefit) has been allocated between operations and equity as follows:
Equity
Operations
For the Years Ended December 31,
2018
2017
2019
$
$
2,186
(2,099)
87
$
$
282
(184)
98
$
$
746
(1,276)
(530)
95
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 9. Compensation and Benefit Plans
Defined Benefit Plan:
As has previously been disclosed, on May 31, 2007, the Company’s defined benefit pension plan (“Defined Benefit Plan”) was frozen and replaced with
a qualified defined contribution plan. On May 31, 2019, the Company’s Board of Directors approved the termination of the Defined Benefit Plan which was
liquidated on December 1, 2019. During 2019, the Company offered participants in the Defined Benefit Plan with vested qualified benefits the option of
receiving their benefits in a lump sum payment in lieu of receiving monthly annuity payments. Approximately 115 participants elected to receive lump sum
payments aggregating approximately $6,427 which were paid from plan assets to these participants during the fourth quarter of 2019. Also, during the fourth
quarter of 2019, the Company transferred the remainder of the Defined Benefit Plan’s pension obligations to a third party insurance provider by purchasing
annuity contracts aggregating approximately $7,431 which was fully funded directly by plan assets. The benefit obligations settled by the lump sum payments
and annuity contracts resulted in payments from plan assets of approximately $13,858. The remaining previously unrecognized losses in accumulated other
comprehensive loss relating to the Defined Benefit Plan were recognized as an expense and a pre-tax charge of approximately $9,930 ($7,844 after-tax) was
recorded in other income (expense), net, in our consolidated statements of operations during the fourth quarter of 2019.
The following table sets forth the Defined Benefit Plan’s funded status and amounts recognized in the consolidated statements of financial condition as of
December 31, 2019 and 2018 using a measurement date as of December 31, 2019 and 2018, respectively:
Projected benefit obligation
Fair value of plan assets
Funded status
Accumulated benefit obligation
Changes in benefit obligation:
Beginning of period
Service cost
Interest cost
Lump sum and annuity purchase
Interest rate change
Mortality change
(Gain)/ Loss
Administrative cost
Benefits paid
End of period
Changes in plan assets:
Fair value of plan assets, beginning of year
Actual return on plan assets
Lump sum and annuity purchase
Benefits paid
Administrative expenses paid
Fair value of plan assets, end of year
December 31,
2019
2018
— $
261
261 $
— $
December 31,
2019
2018
14,244 $
39
589
(13,858)
2,787
—
(3,130)
(39)
(632)
— $
December 31,
2019
2018
14,416 $
374
(13,858)
(632)
(39)
261 $
(14,244)
14,416
172
(14,244)
15,883
39
542
—
(1,691)
(41)
243
(39)
(692)
14,244
14,732
415
(692)
(39)
14,416
$
$
$
$
$
$
$
96
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 9. Compensation and Benefit Plans (Continued)
Pretax amounts recognized in accumulated other comprehensive loss, which will be amortized into net periodic benefit cost over the coming years, were $0 and
$9,856 at December 31, 2019 and 2018, respectively.
The components of net periodic benefit cost are as follows for the years ended December 31, 2019, 2018, and 2017:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of loss
Net periodic benefit cost
For the Years Ended December 31,
2018
2017
2019
$
$
39 $
589
(842)
25
259
70 $
39 $
542
(860)
25
299
45 $
39
581
(839)
25
234
40
Weighted-average assumptions used to determine the net benefit obligations consisted of the following as of December 31, 2019 and 2018:
Discount rate
Rate of compensation increase
December 31,
2019
N/A
N/A
2018
4.25%
0.00%
Weighted-average assumptions used to determine the net benefit cost consisted of the following for the years ended December 31, 2019 and 2018:
Discount rate
Rate of compensation increase
Expected long-term rate of return on assets
December 31,
2019
4.25%
0.00%
6.00%
2018
3.50%
0.00%
6.00%
The expected rate of return on plan assets is estimated based on the plan’s historical performance of return on assets.
The investment policy for plan assets is to manage the portfolio to preserve principal and liquidity while maximizing the return on the plan’s investment
portfolio through the full investment of available funds. Plan assets are currently maintained in a guaranteed deposit account with Prudential Retirement
Insurance and Annuity Company, earning interest at rates that are determined at the beginning of each year.
Pension assets consist solely of funds on deposit in a guaranteed deposit account. The fair value of the pension plan assets at December 31, 2019 and 2018 was
$261 and $14,416, respectively.
The guaranteed deposit account is valued at fair value by discounting the related cash flows based on current yields of similar instruments with comparable
durations considering the creditworthiness of the issuer. Such fair value measurement is considered a Level 3 measurement.
97
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 9. Compensation and Benefit Plans (Continued)
401(k) Plan:
The Company also provides a qualified defined contribution retirement plan adopted under Section 401(k) of the Internal Revenue Code. The 401(k) Plan
qualifies under the Internal Revenue Service safe harbor provisions, as defined. Employees are eligible to participate in the 401(k) Plan at the beginning of each
quarter (January 1, April 1, July 1 or October 1). The 401(k) Plan provides for elective employee/participant deferrals of income. Discretionary matching,
profit-sharing, and safe harbor contributions, not to exceed 4% of employee compensation and profit-sharing contributions may be provided. The Company is
currently making a safe harbor contributions of 3%. The 401(k) expenses recorded in the consolidated statements of income (loss) amounted to $331, $363 and
$317 for the years ended December 31, 2019, 2018 and 2017, respectively.
Employee Stock Ownership Plan:
In connection with the reorganization, the Company established an Employee Stock Ownership Plan (ESOP) for the exclusive benefit of eligible
employees. The ESOP borrowed $7,238 from the Company, sufficient to purchase 723,751 shares (approximately 3.92% of the common stock sold in the stock
offering). The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Company and dividends
received by the ESOP. Contributions will be applied to repay interest on the loan first, and then the remainder will be applied to principal. The loan is expected
to be repaid over a period of 15 years. Shares purchased with the loan proceeds are held by the trustee in a suspense account for allocation among participants as
the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their
compensation, relative to total compensation of all active participants, subject to applicable regulations.
Contributions to the ESOP are to be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from
collateral, compensation expense equal to the average market price of the shares for the respective period are recognized, and the unallocated shares are taken
into consideration when computing earnings per share (see Note 10).
A summary of the ESOP shares is as follows:
Shares committed-to-be released
Shares to be allocated to participants
Unallocated shares
Total
Fair value of unearned shares
December 31, 2019
December 31, 2018
48,250
96,500
579,001
723,751
$
8,511 $
48,250
48,250
627,251
723,751
7,991
The Company recognized $766, $615 and $526 in compensation expense for the years ended December 31, 2019, 2018 and 2017, respectively.
Supplemental Executive Retirement Plan:
The Bank maintains a non-qualified supplemental executive retirement plan (“SERP”) for the benefit of one key executive. SERP expenses recognized were
$62, $61, and $166 for the years ended December 31, 2019, 2018 and 2017, respectively.
98
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 9. Compensation and Benefit Plans (Continued)
2018 Incentive Plan
The Company’s stockholders approved the PDL Community Bancorp 2018 Long-Term Incentive Plan (the “2018 Incentive Plan”) at the Special Meeting of
Stockholders on October 30, 2018. The maximum number of shares of common stock which can be issued under the 2018 Incentive Plan is 1,248,469. Of the
1,248,469 shares, the maximum number of shares that may be awarded under the 2018 Incentive Plan pursuant to the exercise of stock options or stock
appreciation rights (“SARs”) is 891,764 shares (all of which may be granted as incentive stock options), and the number of shares of common stock that may be
issued as restricted stock awards or restricted stock units is 356,705 shares. However, the 2018 Incentive Plan contains a flexible feature that provides that
awards of restricted stock and restricted stock units in excess of the 356,705 share limitation may be granted but each share of stock covered by such excess
award shall reduce the 891,764 share limitation for awards of stock options and SARs by 3.0 shares of common stock. The Company converted 462,522 awards
of stock options into 154,174 restricted stock units in 2018.
Under the 2018 Incentive Plan, the Company made grants equal to 674,645 shares on December 4, 2018 which include 119,176 incentive options to executive
officers, 44,590 non-qualified options to outside directors, 40,000 restricted stock units to officers, 322,254 restricted stock units to executive officers and
148,625 restricted stock units to outside directors. Awards to directors generally vest 20% annually beginning with the first anniversary of the date of grant.
Awards to a director with fewer than five years of service at the time of grant vest over a longer period and will not become fully vested until the director has
completed ten years of service. Awards to the executive officer who is not a director vest 20% annually beginning on December 4, 2020. As of December 31,
2019 and 2018, the maximum number of stock options and SARs and the maximum number of shares of common stock that may be issued as restricted stock
awards or restricted stock units remaining to be awarded under the Incentive Plan was 265,476 and 0, respectively, for both years. If the 2018 Incentive Plan’s
flex feature described above were fully utilized, the maximum number of shares of common stock that may be awarded as restricted stock awards or restricted
stock units would be 88,492, but would eliminate the availability of stock options and SARs available for award.
The product of the number of units granted and the grant date market price of the Company’s common stock determine the fair value of restricted stock units
under the Company’s 2018 Incentive Plan. Management recognizes compensation expense for the fair value of restricted stock units on a straight-line basis over
the requisite service period for the entire award.
A summary of the Company’s restricted stock units activity and related information for the years ended December 31, 2019 and 2018 are as follows:
Non-vested, beginning of year
Granted
Forfeited
Vested
Non-vested at December 31
99
December 31, 2019
Weighted-
Average
Grant Date
Fair Value
Per Share
12.77
12.93
12.77
12.77
12.78
Number
of Shares
510,879 $
29,725
(29,725)
(90,135)
420,744 $
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 9. Compensation and Benefit Plans (Continued)
Non-vested, beginning of year
Granted
Forfeited
Vested
Non-vested at December 31
December 31, 2018
Weighted-
Average
Grant Date
Fair Value
Per Share
Number
of Shares
— $
510,879
—
—
510,879 $
Compensation expense related to restricted stock units for the years ended December 31, 2019 and 2018 was $1,155 and $91, respectively.
A summary of the Company’s stock options activity and related information for the years ended December 31, 2019 and 2018 are as follows:
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year (1)
Exercisable, end of year (1)
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year (1)
Exercisable, end of year (1)
December 31, 2019
Weighted-
Average
Exercise
Price
Per Share
Options
163,766 $
8,918
—
(8,918)
163,766 $
24,788 $
December 31, 2018
Weighted-
Average
Exercise
Price
Per Share
Options
— $
163,766
—
—
163,766 $
— $
—
12.77
—
—
12.77
12.77
12.93
—
12.77
12.78
12.77
—
12.77
—
—
12.77
—
(1) The aggregate intrinsic value, which represents the difference between the price of the Company’s common stock at respective periods and the stated
exercise price of the underlying options, was $315 and $0 for outstanding options and $48 and $0 for exercisable options at December 31, 2019 and
2018, respectively.
100
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 9. Compensation and Benefit Plans (Continued)
The weighted-average exercise price for outstanding options as of December 31, 2019 was $12.78 per share and the weighted-average remaining contractual life
is 8.9 years. The weighted-average period over which it is expected to be recognized is 5.4 years. There were 24,788 shares exercisable as of December 31,
2019. Total compensation costs related to stock options recognized was $101 and $7 for the years ended December 31, 2019 and 2018, respectively. As of
December 31, 2019, the total remaining unrecognized compensation cost related to unvested stock options and restricted stock units was $5,757, which is
expected to be recognized over the next 32 quarters.
The fair value of each option grant is estimated on the date of grant using Black-Scholes option pricing model with the following weighted average
assumptions:
Dividend yield
Expected life
Expected volatility
Risk-free interest rate
Weighted average grant date fair value
For the Years Ended December 31,
2018
2019
0.00%
6.5 years
16.94%
2.51%
4.01
$
0.00%
6.5 years
20.15%
2.74%
3.53
$
The expected volatility is based on the stock’s historical volatility. The expected life is an estimate based on management’s review of the various factors and
calculated using the simplified method for plain vanilla options. The dividend yield assumption is based on the Company’s history and expectation of dividend
payouts.
Treasury Stock:
The Company adopted a share repurchase program effective March 25, 2019 which expired on September 24, 2019. Under this program, the Company was
permitted to repurchase up to 923,151 shares of the Company’s stock, or approximately 5% of the Company’s then current issued and outstanding shares. On
November 13, 2019, the Company adopted a second share repurchase program. Under this second program, the Company may repurchase up to 878,835 shares
of the Company’s stock, or approximately
5% of the Company’s then current issued and outstanding shares. The repurchase program may be suspended or terminated at any time without prior notice, and
it will expire no later than May 12, 2020.
As of December 31, 2019, the Company had repurchased a total of 1,102,029 shares under the repurchase programs at a weighted average price of $14.30 per
share, which are reported as treasury stock in the consolidated statements of financial condition. Of the 1,102,029 shares of treasury stock, 90,135 shares were
reissued as a result of restricted stock units that vested on December 4, 2019.
101
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 10. Earnings Per Common Share
The following table presents a reconciliation of the number of common shares used in the calculation of basic and diluted earnings per common share:
For the Years Ended December 31,
2019
2018
For the Period
September 29,
through
December 31,
2017
Net Income (loss)
Common shares outstanding for basic EPS:
Weighted average common shares outstanding (1)
Less: Weighted average unallocated Employee Stock Ownership
Plan (ESOP) shares
Basic weighted average common shares outstanding
Basic earnings (loss) per common share
Dilutive potential common shares:
Add: Dilutive effect of restricted stock awards
Diluted weighted average common shares outstanding
Diluted earnings (loss) per common share
$
(Dollars in thousands except share data)
(5,125) $
2,677
$
(2,864)
18,039,640
18,463,028
18,463,028
607,322
17,432,318
657,159
17,805,869
$
(0.29) $
0.15
$
—
17,432,318
6,337
17,812,206
$
(0.29) $
0.15
$
723,232
17,739,796
(0.16)
—
17,739,796
(0.16)
(1) The weighted average shares outstanding are calculated for the full periods presented and factor zero shares outstanding for the days prior to the
conversion on September 29, 2017.
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 standby 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.
102
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 11. Commitments, Contingencies and Credit Risk (Continued)
Financial instruments whose contractual amounts represent credit risk at December 31, 2019 and 2018 are as follows:
Commitments to grant mortgage loans
Unfunded commitments under lines of credit
Standby letters of credit
December 31,
2019
2018
$
$
64,829 $
27,833
3,455
96,117 $
52,017
44,752
7,759
104,528
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.
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 both 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.
Standby Letters of Credit: Standby 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. Standby letters of credit are largely cash secured.
Concentration by Geographic Location: Loans, commitments to extend credit and standby letters of credit have been granted to customers who are located
primarily in New York City. The majority of such loans most often are secured by one-to-four family residential. The loans are expected to be repaid from the
borrowers' cash flows.
Lease Commitments: At December 31, 2019, there were noncancelable operating leases for office space that expire on various dates through 2034. One such
lease contains an escalation clause providing for increased rental based primarily on increases in real estate taxes. Rental expenses under operating leases,
included in occupancy expense, totaled $1,490, $1,440, and $1,488 for the years ended December 31, 2019, 2018, and 2017, respectively.
The projected minimum rental payments under the terms of the leases at December 31, 2019 are as follows:
December 31,
2020
2021
2022
2023
2024
Thereafter
$
$
1,340
1,380
1,289
1,276
1,310
5,872
12,467
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.
103
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
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, 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 were 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 Company can redeem such stock with FHLBNY at cost. As a member
of the FHLBNY, the Company is required to purchase this stock, which we carry at cost and classify as restricted equity securities.
Loans: 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 are carried at the lower of cost or fair value. The fair value of loans held for sale is determined from actual bids from
bona fide investors. These assets are classified as Level 2.
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, reciprocal deposits 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.
104
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 12. Fair Value (Continued)
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.
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 December 31, 2019 and 2018, and
indicate the level within the fair value hierarchy utilized to determine the fair value:
Description
Total
Level 1
December 31, 2019
Level 2
Level 3
Available-for-Sale Securities:
U.S. government and federal agencies
Mortgage-Backed Securities:
FNMA Certificates
GNMA Certificates
Description
Available-for-Sale Securities:
U.S. government and federal agencies
U.S. Treasury
Mortgage-Backed Securities:
FNMA Certificates
GNMA Certificates
$
16,354 $
— $
16,354 $
4,659
491
21,504 $
—
—
— $
4,659
491
21,504 $
Total
Level 1
December 31, 2018
Level 2
Level 3
20,515 $
4,995
759
875
27,144 $
— $
4,995
—
—
4,995 $
20,515 $
—
759
875
22,149 $
$
$
$
—
—
—
—
—
—
—
—
—
Our 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 December 31, 2019 and 2018 and indicate the
fair value hierarchy utilized to determine the fair value:
Impaired loans
Total
Level 1
Level 2
Level 3
$
19,232
$
—
$
—
$
19,232
December 31, 2019
105
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 12. Fair Value (Continued)
Impaired loans
Total
Level 1
Level 2
Level 3
$
17,225
$
—
$
—
$
17,225
December 31, 2018
Losses on assets carried at fair value on a nonrecurring basis were de minimis for the years ended December 31, 2019 and 2018, respectively.
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 2019 and 2018 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.
106
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 12. Fair Value (Continued)
As of December 31, 2019 and 2018, the book balances and estimated fair values of the Company's financial instruments were as follows:
December 31, 2019
Financial assets:
Cash and cash equivalents
Investment securities
Loans held for sale
Loans receivable, net
Accrued interest receivable
FHLBNY stock
Financial liabilities:
Deposits:
Demand deposits
Interest-bearing deposits
Certificates of deposit
Advance payments by borrowers for taxes and insurance
Advances from FHLBNY
Accrued interest payable
December 31, 2018
Financial assets:
Cash and cash equivalents
Investment securities
Loans receivable, net
Accrued interest receivable
FHLBNY stock
Financial liabilities:
Deposits:
Demand deposits
Interest-bearing deposits
Certificates of deposit
Advance payments by borrowers for taxes and insurance
Advances from FHLBNY
Accrued interest payable
Carrying
Amount
Level 1
Fair Value Measurements
Level 3
Level 2
Total
$
$
27,677 $
21,504
1,030
955,737
3,982
5,735
109,548
282,997
389,498
97
6,348
782,043
69,778 $
27,144
918,509
3,795
2,915
115,923
269,749
424,086
6,037
69,404
63
27,677 $
—
—
—
—
5,735
— $
21,504
—
—
3,982
—
— $
—
1,035
959,942
—
—
109,548
282,997
—
—
6,348
—
—
—
393,254
97
—
782,043
—
—
—
—
—
—
69,778 $
4,995
—
—
2,915
— $
22,149
—
3,795
—
— $
—
926,867
—
—
115,923
269,749
—
—
69,404
—
—
—
425,564
6,037
—
63
—
—
—
—
—
—
27,677
21,504
1,035
959,942
3,982
5,735
109,548
282,997
393,254
97
6,348
782,043
69,778
27,144
926,867
3,795
2,915
115,923
269,749
425,564
6,037
69,404
63
Off-Balance-Sheet Instruments: There were no loan commitments on which the committed interest rate is less than the current market rate at December 31,
2019 and 2018.
107
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 13. Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board and the OCC, respectively.
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 consolidated 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 to adjusted total assets (as defined). As of
December 31, 2019 and 2018, all applicable capital adequacy requirements 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 capital conservation buffer is being phased in from 0% for 2015 to 2.5% by
2019. The applicable capital buffer was 10.6% and 11.4% at December 31, 2019 and 2018, respectively.
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, 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 management believes have changed the Bank's category.
108
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 13. Regulatory Capital Requirements (Continued)
The Company's and the Bank’s actual capital amounts and ratios as of December 31, 2019 and 2018 as compared to regulatory requirements are as follows:
December 31, 2019
PDL Community Bancorp
Total Capital to Risk-Weighted Assets
Tier 1 Capital to Risk-Weighted Assets
Common Equity Tier 1 Capital Ratio
Tier 1 Capital to Total Assets
Ponce Bank
Total Capital to Risk-Weighted Assets
Tier 1 Capital to Risk-Weighted Assets
Common Equity Tier 1 Capital Ratio
Tier 1 Capital to Total Assets
December 31, 2018
PDL Community Bancorp
Total Capital to Risk-Weighted Assets
Tier 1 Capital to Risk-Weighted Assets
Common Equity Tier 1 Capital Ratio
Tier 1 Capital to Total Assets
Ponce Bank
Total Capital to Risk-Weighted Assets
Tier 1 Capital to Risk-Weighted Assets
Common Equity Tier 1 Capital Ratio
Tier 1 Capital to Total Assets
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
$ 168,268
158,382
158,382
158,382
$ 146,451
136,584
136,584
136,584
21.35%
20.10%
20.10%
14.97%
$ 63,044
47,283
35,462
42,334
18.62%
17.37%
17.37%
12.92%
$ 62,923
47,192
35,394
42,275
8.00%
6.00%
4.50%
4.00%
8.00%
6.00%
4.50%
4.00%
$
$
78,805
63,044
51,223
52,917
78,654
62,923
51,125
52,843
10.00%
8.00%
6.50%
5.00%
10.00%
8.00%
6.50%
5.00%
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
24.36%
23.11%
23.11%
18.13%
$ 61,385
46,038
34,529
39,114
19.39%
18.14%
18.14%
13.66%
$ 61,261
45,946
34,459
40,652
$
$
8.00%
6.00%
4.50%
4.00%
8.00%
6.00%
4.50%
4.00%
76,731
61,385
49,875
48,892
76,577
61,261
49,775
50,815
10.00%
8.00%
6.50%
5.00%
10.00%
8.00%
6.50%
5.00%
$ 186,940
177,307
177,307
177,307
$ 148,486
138,872
138,872
138,872
109
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 14. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) are as follows:
Unrealized losses on securities available for sale, net
Realized losses on pension benefits, net
Total
Unrealized losses on securities available for sale, net
Unrealized losses on pension benefits, net
Total
Note 15. Transactions with Related Parties
December 31, 2019
Change
December 31, 2018
$
(291) $
$
(7,844)
(8,135) $
December 31, 2019
20
—
20
311 $
7,844
8,155 $
December 31, 2018
Change
December 31, 2017
$
(221) $
$
(7,630)
(7,851) $
December 31, 2018
(291)
(7,844)
(8,135)
(70) $
(214)
(284) $
Directors and officers of the Company have been customers of and have had transactions with the Company, and it is expected that such persons will continue
to have such transactions in the future. Aggregate loan transactions with related parties for the years ended December 31, 2019, 2018, and 2017 were as follows:
Beginning balance
Originations
Payments
Ending balance
For the Years Ended December 31,
2018
2017
2019
$
$
1,278 $
60
(78)
1,260 $
1,351 $
400
(473)
1,278 $
1,573
—
(222)
1,351
The Company held deposits in the amount of $8,302 and $6,943 from officers and directors at December 31, 2019 and 2018, respectively.
Note 16. Parent Company Only Financial Statements
The following are the financial statements of the Parent as of and for the years ended December 31, 2019 and 2018.
ASSETS
Cash and cash equivalents
Investment in Ponce Bank
Loan receivable - ESOP
Loan receivable - Foundation
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities and accrued expenses
Stockholders' equity
Total liabilities and stockholders' equity
110
December 31,
2019
2018
$
$
$
$
13,363 $
136,603
5,894
606
2,409
158,875 $
473 $
158,402
158,875 $
30,867
130,737
6,308
—
1,523
169,435
263
169,172
169,435
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 16. Parent Company Only Financial Statements (Continued)
Interest on ESOP loan
Interest on certificates of deposit
Interest on other deposits
Net interest income
Share-based compensation expense
Management fee expense
Office occupancy and equipment
Contribution to Ponce De Leon Foundation
Professional fees
Other noninterest expenses
Total noninterest expense
Income (loss) before income tax (benefit)
Income tax (benefit)
Equity in undistributed earnings of Ponce Bank
Net income (loss)
Cash Flows from Operating Activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Equity in undistributed earnings of subsidiaries
Deferred income tax
Share-based compensation expense
Increase in other assets
Net (decrease) increase in other liabilities
Net cash used in operating activities
Cash Flows from Investing Activities:
Loan to Foundation
Repayment of ESOP Loan
Net cash (used in) provided by investing activities
Cash Flows from Financing Activities:
Repurchase of treasury shares
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
For the Years Ended December 31,
2019
2018
$
$
164 $
90
182
436
1,256
411
60
—
1,255
115
3,097
(2,661)
(533)
(2,997)
(5,125) $
For the Years Ended December 31,
2019
2018
$
(5,125)
$
2,997
598
1,256
(918)
(357)
(1,549)
(606)
414
(192)
(15,763)
(15,763)
(17,504)
30,867
13,363
$
$
111
175
—
404
579
98
411
20
—
1,823
171
2,523
(1,944)
(221)
4,400
2,677
2,677
(4,400)
83
98
(257)
202
(1,597)
—
404
404
—
—
(1,193)
32,060
30,867
PDL Community Bancorp and Subsidiaries
Notes to the Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
(Dollars in thousands, unless otherwise stated)
Note 17. Quarterly Financial Information (unaudited)
Net interest income
Provision for loan losses
Net interest income after
provision for loan losses
Noninterest income
Noninterest expense
Income (loss) before taxes
Provision (benefit) for income taxes
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Basic weighted average
common shares
Diluted weighted average
common shares
Fourth
Third
Second
First
Fourth
Third
Second
First
2019
2018
$
9,562 $
95
9,765 $
14
9,344 $
—
9,462 $
149
9,607 $
215
9,247 $
602
9,133 $
337
(Dollars in thousands except share data)
9,467
665
19,475
(9,343)
(1,891)
(7,452) $
9,751
579
9,334
996
287
709 $
9,344
686
8,707
1,323
373
950 $
9,313
753
9,091
975
307
668 $
9,392
815
9,074
1,133
498
635 $
8,645
714
8,769
590
188
402 $
8,796
524
8,455
865
166
699 $
(0.43) $
(0.43) $
0.04
0.04
$
$
0.05
0.05
$
$
0.04
0.04
$
$
0.04 $
0.04 $
0.02
0.02
$
$
0.04
0.04
$
$
$
$
$
8,677
94
8,583
885
8,259
1,209
268
941
0.05
0.05
17,145,970 17,185,993 17,565,934 17,835,295 17,823,847 17,811,784 17,799,723 17,787,661
17,145,970 17,297,054 17,655,664 17,864,327 17,830,184 17,811,784 17,799,723 17,787,661
112
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure
a) Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief
Executive Officer and Executive Vice President and 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) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31,
2019. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and
Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
b) Management’s Annual Report
The management of the Company is responsible for establishing and maintaining adequate internal control (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended) over financial reporting. The Company’s internal control over financial reporting is a process designed to
provide reasonable assurance to the Company’s Chief Executive Officer and Chief Financial Officer regarding the reliability of financial reporting and
preparation of the Company’s financial statements in accordance with accounting principles generally accepted in the U.S.
In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and
procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and
management was required to apply its judgment in evaluating and implementing possible controls and procedures. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation and may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. In making
this assessment, management used the criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on management’s assessment, the Company believes that, as of December 31, 2019, the
Company’s internal control over financial reporting is effective based on the criteria established by Internal Control—Integrated Framework (2013)
issued by COSO.
c) Attestation Report of the Registered Public Accounting Firm
Not applicable because the Company is an emerging growth company.
d) Changes in Internal Control Over Financial Reporting
There were no significant changes made in the Company’s internal control over financial reporting during the fourth quarter of the year ended
December 31, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
113
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The “Proposal I - Election of Directors – Directors, and – Executive Officer who is not a Director” sections of the Company’s definitive proxy statement
for the Company’s 2019 Annual Meeting of Stockholders (the “2019 Proxy Statement”) are incorporated herein by reference.
Item 11. Executive Compensation.
The “Proposal I – “Election of Directors – Executive Compensation” section of the 2019 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The “Voting Securities and Principal Holders” and “Proposed I – Election of Directors – Benefit Plans and Agreements – 2018 Long-Term Incentive
Plan” sections of the Company’s 2019 Proxy Statement are incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The “Proposal I – Election of Directors - Transactions with Certain Related Persons, - Board Independence and -Meetings and Committees of the Board
of Directors” sections of the Company’s 2019 Proxy statement are incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The “Proposal II - Ratification of Appointment of Independent Registered Public Accounting Firm” section of the 2019 Proxy Statement is incorporated
herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)(1)
Financial Statements
The following are filed as a part of this Form 10-K under Item 8:
(A) Report of Independent Registered Public Accounting Firm
(B) Consolidated Statements of Financial Condition as of December 31, 2019 and 2018
(C) Consolidated Statements of Income (Loss) for the Years ended December 31, 2019, 2018, and 2017
(D) Consolidated Statements of Comprehensive Income (Loss) for the Years ended December 31, 2019, 2018, and 2017
(E) Consolidated Statements Stockholders’ Equity for the Years ended December 31, 2019, 2018, and 2017
(F) Consolidated Statements of Cash Flows for the Years ended December 31, 2019, 2018, and 2017
(G) Notes to the Consolidated Financial Statements.
(a)(2)
Financial Statement Schedules
None.
(a)(3)
Exhibits
114
Exhibit
Number
Description
Exhibit Index
3.1
3.2
4.1
4.2*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Charter of PDL Community Bancorp (attached as Exhibit 3.1 to the Registrant’s amendment No. 1 to the Form S-1 (File No. 333-217275)
filed with the Commission on May 22, 2017).
Bylaws of PDL Community Bancorp (attached as Exhibit 3.2 to the Registrant’s amendment No. 2 to the Form S-1 (File No. 333-217275)
filed with the Commission on July 27, 2017).
Form of Common Stock Certificate of PDL Community Bancorp (attached as Exhibit 4.1 to the Registrant’s amendment No. 2 to the
Form S-1 (File No, 333-217275) filed with the Commission on July 27, 2017).
Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.
Ponce Bank Employee Stock Ownership Plan (attached as Exhibit 10.1 to the Registrant’s Form S-1 (File No. 333-217275) filed with the
Commission on April 12, 2017).
Ponce Bank ESOP Equalization Plan (attached as Exhibit 10.2 to the Registrant’s Form S-1 (File No. 333-217275) filed with the
Commission on April 12, 2017).
Ponce De Leon Federal Deferred Compensation Plan (attached as Exhibit 10.3 to the Registrant’s Form S-1 (File No. 333-217275) filed
with the Commission on April 12, 2017).
Employment Agreement, dated as of March 23, 2017, by and between Ponce de Leon Federal Bank and Carlos P. Naudon (attached as
Exhibit 10.4 to the Registrant’s Form S-1 (File No. 333-217275) filed with the Commission on April 12, 2017).
Form of Employment Agreement to be entered into by and among Ponce Bank Mutual Holding Company, PDL Community Bancorp and
Carlos P. Naudon (attached as Exhibit 10.5 to the Registrant’s Form S-1 (File No. 333-217275) filed with the Commission on April 12,
2017).
Employment Agreement, dated March 23, 2017, by and between Ponce De Leon Federal Bank and Steven Tsavaris (attached as Exhibit
10.6 to the Registrant’s Form S-1 (File No. 333-217275) filed with the Commission on April 12, 2017).
Form of Employment Agreement to be entered into by and among Ponce Bank Mutual Holding Company, PDL Community Bancorp and
Steven Tsavaris (attached as Exhibit 10.7 to the Registrant’s Form S-1 (File No. 333-217275) filed with the Commission on April 12,
2017).
Employment Agreement, dated March 31, 2017, by and between Ponce De Leon Federal Bank and Frank Perez (attached as Exhibit 10.8
to the Registrant’s Form S-1 (File No. 333-217275) filed with the Commission on April 12, 2017).
Form of Employment Agreement to be entered into by and among Ponce Bank Mutual Holding Company, PDL Community Bancorp and
Frank Perez (attached as Exhibit 10.9 to the Registrant’s Form S-1 (File No. 333-217275) filed with the Commission on April 12, 2017).
Specimen Form of Restricted Stock Unit Award Agreement for Employees (attached as Exhibit 10.1 to the Registrant’s Form 8-K (File
No. 001-38224) filed with the Commission on December 12, 2018).
Specimen Form of Restricted Stock Unit Award Agreement for Non-Employee Directors (attached as Exhibit 10.2 to the Registrant’s
Form 8-K (File No. 001-38224) filed with the Commission on December 12, 2018).
115
10.12
10.13
21.1
31.1*
31.2*
32.1*
32.2*
Specimen Form of Stock Option Agreement for Employees (attached as Exhibit 10.3 to the Registrant’s Form 8-K (File No. 001-38224)
filed with the Commission on December 12, 2018).
Specimen Form of Stock Option Agreement for Non-Employee Directors (attached as Exhibit 10.4 to the Registrant’s Form 8-K (File No.
001-38224) filed with the Commission on December 12, 2018).
Subsidiaries of the Registrant (attached as Exhibit 21.1 to the Registrant’s Form S-1 (File No. 333-217275) filed with the Commission on
April 12, 2017).
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.
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.
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.
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
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
*
Filed herewith.
116
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 17, 2020
Company Name
By: /s/ Carlos P. Naudon
Carlos P. Naudon
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf
of the Registrant in the capacities and on the dates indicated.
/s/ Carlos P. Naudon
Carlos P. Naudon
/s/ Frank Perez
Frank Perez
/s/ Steven A. Tsavaris
Steven A. Tsavaris
/s/ James Demetriou
James Demetriou
/s/ William Feldman
William Feldman
/s/ Julio Gurman
Julio Gurman
/s/ Maria Alvarez
Maria Alvarez
/s/ Nick Lugo
Nick Lugo
Name
Title
Date
President, Chief Executive Officer and Director
March 17, 2020
Executive Vice President and Chief Financial Officer
March 17, 2020
Executive Chairman and Director
Director
Director
Director
Director
Director
117
March 17, 2020
March 17, 2020
March 17, 2020
March 17, 2020
March 17, 2020
March 17, 2020
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF
THE SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.2
As of December 31, 2019, PDL Community Bancorp (the “Company”) had only one class of securities registered under Section 12 of the Securities
Exchange Act of 1934, as amended: its common stock, par value $0.01 per share. The following summary description of the common stock of the Company
does not purport to be complete and is qualified in its entirety by reference to the Company's Charter and Bylaws (the “Bylaws”), each of which is incorporated
by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.2 is a part, as well as the regulations promulgated by the Board of
Governors of the Federal Reserve System (“FRB”).
General
Pursuant to the Company’s Charter, the Company has the authority to issue up to 50 million shares of common stock, par value $0.01 per share, and an
additional 10 million shares of preferred stock, par value $0.01 per share. Each share of the Company’s common stock has the same relative rights, and is
identical in all respects, with each other share of the Company’s common stock. The Company’s common stock is traded on NASDAQ under the symbol
"PDLB."
Voting Rights
Holders of the Company’s common stock are entitled to one vote per share on all matters requiring stockholder action, including, but not limited to, the
election of directors. Cumulative voting is not permitted for the election of directors. If the Company issues preferred stock, holders of the preferred stock may
also possess voting rights.
Dividends
Holders of the Company’s common stock may, from time to time, receive dividends when, as and if declared by the Company’s board of directors (the
“Board”), out of funds legally available for payment of dividends, subject to any restrictions imposed by Federal regulators and the payment of any preferential
amounts to which any class of preferred stock may be entitled. Other restrictions on the Company’s ability to pay dividends are described below under
"Restrictions on Dividends."
Liquidation Preference
Holders of common stock are not entitled to a liquidation preference in respect of their shares. Upon liquidation, dissolution or the winding up of the
Company, holders of the Company’s common stock will be entitled to share ratably in all assets remaining after (i) the payment or provision for payment of all
debts and liabilities of the Company; and (ii) the distribution or provision for distribution to holders of any class or series of stock having preference over the
common stock in the liquidation, dissolution, or winding up of the Company.
Other Matters
The holders of the Company’s common stock have no preemptive or other subscription rights. The Company’s common stock is not subject to call or
redemption.
Restrictions on Dividends
The Company’s ability to pay dividends or to repurchase its common stock are restricted by several factors. The Company is a federally chartered
savings and loan holding company and is supervised by the FRB. The FRB has issued a policy statement regarding the payment of dividends by holding
companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by
the holding company appears consistent with the organization’s capital needs, asset quality and overall supervisory financial condition. Separate regulatory
guidance provides for prior consultation with FRB staff concerning dividends in certain circumstances such as where the Company’s net income for the past
four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the Company’s overall rate of earnings retention is
inconsistent with the Company’s capital needs and overall financial condition. The ability of a savings and loan holding company to pay dividends may be
restricted if a subsidiary savings association becomes undercapitalized. The regulatory guidance also states that a savings and loan holding company should
inform FRB supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the savings and loan holding company is
experiencing financial weaknesses or the repurchase or redemption would result in a net reduction, at the end of a quarter, in the amount of such equity
instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the
ability of the Company to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
The Company may pay dividends on its common stock to public stockholders. If it does, it is also required to pay dividends to Ponce Bank Mutual
Holding Company, unless Ponce Bank Mutual Holding Company elects to waive the receipt of dividends. Under the Dodd-Frank Act, Ponce Bank Mutual
Holding Company must receive the approval of the FRB before it may waive the receipt of any dividends from the Company. The FRB has issued an interim
final rule providing that it will not object to dividend waivers under certain circumstances, including where the waiver is not detrimental to the safe and sound
operation of the savings association and a majority of the mutual holding company’s members have approved the waiver of dividends by the mutual holding
company within the previous 12 months. In addition, for a “non-grandfathered” mutual holding company such as Ponce Bank Mutual Holding Company, each
officer or director of the Company and Ponce Bank, and any tax-qualified stock benefit plan or non-tax-qualified stock benefit plan in which such individual
participates that holds any shares of stock to which the waiver would apply, must waive the right to receive any such dividend declared. In addition, any
dividends waived by Ponce Bank Mutual Holding Company must be considered in determining an appropriate exchange ratio in the event of a conversion of the
mutual holding company to stock form.
Restrictions on Ownership of the Company's Common Stock
Under the Home Owner’s Loan Act (the “HOLA”), any person or entity is required to obtain the approval of the FRB before acquiring control of the
Company, which, among other things, includes the acquisition of ownership of or control over 25% or more of any class of voting securities of the Company or
the power to exercise a “controlling influence” over the Company. Federal regulations establish a rebuttable presumption of control upon ownership, control, or
holding with power to vote, of 10% or more of any class of the Company’s voting securities if (i) the Company has registered securities under Section 12 of the
Securities Exchange Act of 1934, or (ii) no other person will own, control, or hold the power to vote a greater percentage of that class of voting securities
immediately after the transaction. In the case of an acquirer that is a savings and loan holding company or saving association, the HOLA requires approval of
the FRB for the acquisition of ownership or control of any voting securities of the Company, if the acquisition results in the savings and loan holding company
or savings association controlling more than 5% of the outstanding shares of any class of the Company's voting securities. The Change in Bank Control Act
prohibits a
person, entity, or group of persons or entities acting in concert, from acquiring "control" of a savings and loan holding company, such as the Company, unless
the FRB has been given prior notice and has not objected to the transaction.
As a result of the Company’s formation on September 29, 2017, until September 29, 2020, FRB regulations generally prohibit any person from
acquiring or making an offer to acquire beneficial ownership of more than 10% of the stock of the Company or Ponce Bank without the FRB’s prior approval.
Anti-Takeover Provisions in the Company’s Charter and Bylaws
Certain provisions of the Company's Charter and Bylaws could make it less likely that the Company's management would be changed or someone
would acquire voting control of the Company without the consent of the Company’s Board. These provisions could delay, deter or prevent tender offers or
takeover attempts that stockholders might believe are in their best interests, including tender offers or takeover attempts that could allow stockholders to receive
premiums over the market price of their common stock.
Preferred Stock
The Company’s Board can, under the Company's Charter and without stockholder approval, issue one or more series of preferred stock with such
preferences and designations as the Board may from time to time determine. The issuance of preferred stock must be approved by a majority of the Company’s
independent directors who do not have an interest in the transaction and who have access, at the Company’s expense, to legal counsel. In some cases, the
issuance of preferred stock could discourage or make more difficult attempts to take control of the Company through a merger, tender offer, proxy context or
otherwise.
Nomination Procedures
Holders of the Company’s common stock can nominate candidates for the Company’s Board. A stockholder must follow the advance notice procedures
described in the Bylaws. In general, to nominate a person for election to the Company’s Board at the annual meeting of Company stockholders, a stockholder
must submit a written notice of the proposed nomination to the Company's corporate secretary at least five days prior to the date of the annual meeting.
Amendment of Bylaws
Under the Bylaws, the Company’s Board, upon a majority vote of the authorized directors, or the Company’s stockholders, upon a majority vote of
the votes cast by the Company’s stockholders at any legal meeting, can amend the Bylaws so long as the amendments are consistent with the regulations of the
FRB.
CERTIFICATION 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
Exhibit 31.1
I, Carlos P. Naudon, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of PDL Community Bancorp;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the small business issuer and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
5.
The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the
equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: March 17, 2020
By: /s/ Carlos P. Naudon
Carlos P. Naudon
President, Chief Executive Officer & Director
CERTIFICATION 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
Exhibit 31.2
I, Frank Perez, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of PDL Community Bancorp;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the small business issuer and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
5.
The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the
equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: March 17, 2020
By: /s/ Frank Perez
Frank Perez
Executive Vice President and Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the annual report of PDL Community Bancorp (the “Company”) on Form 10-K for the period ending December 31, 2019 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: March 17, 2020
By: /s/ Carlos P. Naudon
Carlos P. Naudon
President, Chief Executive Officer and Director
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the annual report of PDL Community Bancorp (the “Company”) on Form 10-K for the period ending December 31, 2019 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: March 17, 2020
By: /s/ Frank Perez
Frank Perez
Executive Vice President and Chief Financial Officer