UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-41255
Ponce Financial Group, Inc.
(Exact name of Registrant as specified in its Charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
2244 Westchester Avenue
Bronx, NY
(Address of principal executive offices)
87-1893965
(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
☐
☒
☐
Accelerated filer
Smaller reporting company
☐
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-
Oxley Act (15 U.S.C. 7262 (b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued
financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant
recovery period pursuant to §240.10D-1(b). ☐
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 June 30,
2022 was $228,452,292.
As of March 20, 2023, the registrant had 24,863,500 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, scheduled to be held on June 15, 2023, are incorporated into Part III
hereof.
Auditor Firm Id: 339 Auditor Name: Mazars USA LLP Auditor Location: New York, New York, USA
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. Reserved
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
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection
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
Item 16. Form 10-K Summary
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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,” “intend,” “anticipate,”
“assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “target” and words of similar meaning. These
forward-looking statements include, but are not limited to:
•statements of the Company’s goals, intentions and expectations;
•statements regarding our business plans, prospects, growth and operating strategies;
•statements regarding the quality of its loan and investment portfolios; and
•estimates of the risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations and are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's control. In addition, these forward-looking statements are subject to assumptions with respect
to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-
looking statements:
•the scope, duration and severity of rising interest rate and its effects on our business and operations, our customers, including their ability to make timely
payments on loans, our service providers, and on the economy and financial markets in general;
•changes in consumer spending, borrowing and savings habits;
•general economic conditions, either nationally or in the market areas, that are worse than expected;
•the Company’s ability to manage market risk, credit risk and operational risk in the current economic environment;
•changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
•the ability to access cost-effective funding;
•fluctuations in real estate values and real estate market conditions;
•demand for loans and deposits in the market area;
•the Company’s ability to implement and change its business strategies;
•competition among depository and other financial institutions;
•inflation and changes in the interest rate environment that reduce the Company’s margins and yields, its mortgage banking revenues, the fair value of financial
instruments or the level of loan originations, or increase the level of defaults, losses and prepayments on loans the Company have made and make;
•adverse changes in the securities or secondary mortgage markets;
•changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
•adverse changes related to the businesses of our partners, including Grain Technologies, LLC ("Grain") specifically (as defined herein);
•changes in the quality or composition of the Company’s loan or investment portfolios;
•technological changes that may be more difficult or expensive than expected;
•the inability of third party providers to perform as expected;
•the Company’s ability to enter new markets successfully and capitalize on growth opportunities;
•the Company’s ability to successfully integrate into its operations, any assets, liabilities, customers, systems and management personnel the Company may
acquire and management’s ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
ii
•changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and
Exchange Commission or the Public Company Accounting Oversight Board;
•the Company’s ability to retain key employees;
•the Company’s compensation expense associated with equity allocated or awarded to its employees; and
•changes in the financial condition, results of operations or future prospects of issuers of securities that the Company may own.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. The
Company is under no duty to and does not assume any obligation to update any forward-looking statements after the date they are made, whether as a result of new
information, future events or otherwise.
iii
Item 1. Business
Ponce Financial Group, Inc.
PART I
Ponce Financial Group, Inc., as the successor by merger with PDL Community Bancorp pursuant to the completion of the conversion and reorganization of
Ponce Bank Mutual Holding Company from the mutual holding company to the stock holding company form of organization that was effective on January 27, 2022
(hereafter referred to as “we,” “our,” “us,” “Ponce Financial Group, Inc.,” or the “Company”), is the holding company of Ponce Bank (“Ponce Bank” or the “Bank”), a
federally chartered stock savings association. The Company 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.
The Company’s cash flow is dependent on earnings from investments and any dividends received from Ponce Bank. Ponce Financial Group, Inc. does not own
nor lease any property, but instead uses the premises, equipment and furniture of Ponce Bank. At the present time, the Company employs only persons who are officers
of Ponce Bank to serve as officers of Ponce Financial Group, Inc. It uses the support staff of Ponce Bank from time to time. These persons are not separately
compensated by Ponce Financial Group, Inc. Ponce Financial Group, Inc. may hire additional employees, as appropriate, to the extent it so determines 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”), Ponce Financial Group, Inc. 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 Bank’s website, www.poncebank.com (within the Investor Relations section). The references to our website
address and the SEC’s website address do not constitute incorporation by reference of the information contained in those websites and should not be considered part of
this annual report.
The Company’s common stock is traded on The NASDAQ Stock Market, LLC 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 (“MDI”) and a Community Development Financial Institution (“CDFI”) under applicable regulations and is a
certified Small Business Administration (“SBA’) lender.
The Company’s business is conducted through the administrative office and 13 full service banking offices and 6 mortgage loan offices. The banking offices are
located in New York City – the Bronx (4 branches), Queens (3 branches), Brooklyn (3 branches), Manhattan (2 branches) and Union City (1 branch), New Jersey. The
mortgage loan offices are located in Queens (4) and Brooklyn (1), New York and Bergenfield (1), New Jersey. The Company’s 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, construction and land, and 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, corporate bonds and Federal
Home Loan Bank of New York (the “FHLBNY”) stock. The Bank offers a variety of deposit accounts, including demand, savings, money markets, NOW/IOLA
accounts, reciprocal deposits and certificates of deposit accounts.
1
Mortgage World Bankers, Inc.
On January 26, 2022, the assets and liabilities of Mortgage World Bankers, Inc. (“Mortgage World”), a wholly owned subsidiary of PDL Community Bancorp,
were transferred to the Bank. Except for the winding up of its operations, Mortgage World ceased to conduct business as a separate entity at that time. Mortgage World
was a mortgage banking entity subject to the comprehensive regulation and examination of the New York State Department of Financial Services. The primary business
of Mortgage World was the taking of applications from the general public for residential mortgage loans, underwriting them to investors’ standards, closing and funding
them and holding them until they were sold to investors. The Company intends that the Bank will continue this mortgage banking business as a division of the Bank.
Business Strategy
The Company’s goal is to provide long-term value to our stockholders, customers, employees and the communities we serve (collectively our “stakeholders”) by
executing a safe and sound business strategy that produces increasing value. The Company believes 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 and other similar communities.
Our current business strategy consists of the following:
•Achieve above average growth. Achieve above average growth in quality loans and deposits to support our $5 billion asset target. We aim to accomplish this
goal by maximizing profitable lending in current markets and products, entering new, nearby markets to expand real estate investor loan programs and
developing SBA-based business lending program to 10% of the loan portfolio. In addition, launching project "easy" to build lower cost $2.0 billion relation-
based deposit portfolio and become active participant in Community Development Bankers Association-Intrafi deposit gathering program.
•Invest in technology. Invest in technology and innovation to maximize efficiencies and effectiveness, expand distribution channels and enhance customer
experience by developing systematic workflow improvement processes to maximize efficiency and effectiveness across operations and launching Digital bank.
•Optimize the income statement and balance sheet. Optimize income statement and balance sheet through sound investment and financial management by
building out CDFI-based regional small business lending program, increase fee-based business products and services, employ capital management tools to return
value to shareholders and improve trading metrics and create formal program to optimize bank efficiency.
•Attract, develop and retain an engaged, high performing workforce. Refine performance management system to align with strategic initiatives and continue to
build and leverage Ponce culture.
•Build Ponce Bank 2.0. Ensure risk management and compliance controls are aligned with strategic priorities. Evaluate and select appropriate charter to support
strategy. Develop CDFI, MDI, and other government programs and expand our employees involvement in high impact programs.
For additional information related to our business strategies, see “Management's Discussion and Analysis of Financial Condition and Results of Operations—
Vision 2025 Evolves."
Employees and Human Capital Resources
As of December 31, 2022, the Company had 253 full time equivalent employees. None of the Company’s employees are represented by a labor union, and
management considers its relationship with employees to be good. The Company believes its ability to attract and retain employees is key to its success. Accordingly,
the Company strives to offer competitive salaries and employee benefits to all employees and monitors salaries and other compensation in its market area.
The Company encourages and supports the growth and development of our employees. Continual learning and career development is advanced through ongoing
performance and development conversations with employees, internally developed training programs and educational reimbursement programs.
The Company is responsible for creating an equitable workplace ensuring diversity at all management levels. The Company prides itself on establishing a diverse
workforce that serves our diverse customer base in the New York metro area. The Company’s inclusion and diversity program focuses on its workforce, workplace, and
community. The Company believes that its business is strengthened by a diverse workforce that reflects the communities in which it operates. The Company believes
that all of its team members should be treated with respect and equality, regardless of gender, ethnicity, sexual orientation, gender identity, religious beliefs, or other
2
characteristics. The Company has also broadened its focus on inclusion and diversity by including social and racial equity in its conversations and equipping and
empowering its team leaders with appropriate tools and training.
Market Area
The Bank is headquartered in the Bronx, New York, with a 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.
The Bank’s 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 of the Bank 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. 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 demand and money market funds of consumer, commercial and not-for-profit
entities, with a decreasing reliance on time deposits. Additionally, the Bank has been using alternative funding sources such as brokered deposits and FHLBNY advances
to support loan growth.
Competition
The Company faces significant competition within its market area both in originating loans and attracting deposits. There is a high concentration of financial
institutions in the market area, including national, regional and other locally-operated commercial banks, savings banks, savings associations and credit unions whose
activities include banking as well as mortgage lending. 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 and home mortgages. 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 Company 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 Radius Bank, Quicken Loans, Freedom
Mortgage and many internet financial service providers. The amount of competition facing the Company is extensive and can negatively impact its growth.
The market share of bank 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 1.67% (as of June 30, 2022) 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.
3
Lending Activities
General. The Bank’s principal lending activity is originating real estate-secured loans, including one-to-four family investor-owned and owner-occupied
residential, multifamily residential, nonresidential property, construction and land loans, and 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. During 2021 and 2020, the Bank focused on making SBA Paycheck Protection Program ("PPP") loans within its market area, to both customers and non-
customers. Subject to market conditions and its asset-liability analysis, the Bank looks to maintain its emphasis on multifamily residential and nonresidential property
loans while growing the overall loan portfolio and increasing the overall yield earned on loans.
Additionally, the Bank has entered into a partnership with Grain. Through Grain, the Bank provides a consumer line of credit using a mobile application geared
nationally to the underbanked and new generations entering the financial services market that uses non-traditional underwriting methodologies. In establishing these
lines of credit, the Company reserved the right to modify borrowers’ credit limits at its sole discretion. As discussed under Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, Factors Affecting the Comparability of Results, Write-off and Write-Down of this Annual Report on Form
10-K, the Company has taken a write-off and write-down relative to these loans due to cyber-fraud experienced by Grain. The Company has requested, and Grain has
agreed, that no new microloans be originated until further notice and that further extensions of credit to an existing microloan borrower only be made upon confirmation
that such borrower is not fraudulent. These Grain loans are reflected in the consumer loan portfolio.
Lending activities are conducted primarily by the Bank’s salaried loan officers operating at its main and branch office locations as well as remotely. It also
conducts lending activities through its subsidiary Ponce De Leon Mortgage Corporation. All loan originations are underwritten pursuant to the Bank’s policies and
procedures. The Bank currently intends that substantially all of its mortgage loan originations will have adjustable interest rates. For its non-PPP business loan
originations, variable rate pricing is offered based on prime rate plus a margin.
Loan Portfolio Composition. The following table sets forth the composition of the Bank’s loan portfolio by type of loan (excluding mortgage loans held for
sale) at the dates indicated. Loans in process at December 31, 2022 and 2021 were $205.6 million and $118.9 million, respectively.
2022
2021
2020
2019
2018
Amount
Percent
Amount
Percent
Amount
(Dollars in thousands)
Percent
Amount
Percent Amount
Percent
At December 31,
$
343,968
134,878
494,667
22.54 % $
8.84 %
32.42 %
317,304
96,947
348,300
24.01 % $
7.33 %
26.34 %
319,596
98,795
307,411
27.27 % $ 305,272
8.43 %
91,943
26.23 % 250,239
31.60 % $ 303,197
9.52 %
92,788
25.90 % 232,509
32.61 %
9.98 %
25.01 %
308,043
20.19 %
239,691
18.13 %
218,929
18.68 % 207,225
21.45 % 196,917
21.18 %
185,018
1,466,574
12.13 %
96.12 %
134,651
1,136,893
10.19 %
86.00 %
105,858
1,050,589
9.03 %
99,309
89.64 % 953,988
10.28 %
87,572
98.75 % 912,983
9.42 %
98.20 %
39,965
19,129
2.62 %
1.26 %
150,512
34,693
11.38 %
2.62 %
94,947
26,517
8.10 %
2.26 %
10,877
1,231
1.13 %
0.12 %
15,710
1,068
1.69 %
0.11 %
59,094
1,525,668
3.88 %
100.00 %
185,205
1,322,098
14.00 %
100.00 %
121,464
1,172,053
10.36 %
12,108
100.00 % 966,096
1.25 %
1.80 %
16,778
100.00 % 929,761 100.00 %
2,051
(34,592 )
(668 )
(16,352 )
1,457
(14,870 )
1,970
(12,329 )
1,407
(12,659 )
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
(1)
(2)
Total nonmortgage
loans
Total loans, gross
Net deferred loan
origination costs
Allowance for loan losses
Loans receivable, net
$ 1,493,127
$ 1,305,078
$ 1,158,640
$ 955,737
$ 918,509
(1)As of December 31, 2022 and 2021, business loans include $20.0 million and $136.8 million, respectively, of PPP loans.
(2)As of December 31, 2022 and 2021, consumer loans include $18.2 million and $33.9 million, respectively, of microloans originated by the Bank pursuant to its arrangement
with Grain.
4
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, 2022, excluding mortgage loans held for sale.
At December 31, 2022
Loan Type
# of Loans
Principal
Balance
(Dollars 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
Land loan
Nonmortgage loans:
Business loans
C&I lines of credit
C&I loans (term)
PPP loans
Consumer loans
(1)
Unsecured
Passbook
Grand Total
$
550
273
358
210
3
32
7
1
55
24
71
27,910
76
29,570
$
343,968
134,878
494,667
308,043
5,831
148,656
29,616
915
13,419
6,515
20,031
18,569
560
1,525,668
22.54 %
8.84 %
32.42 %
20.19 %
0.38 %
9.75 %
1.94 %
0.06 %
0.88 %
0.43 %
1.31 %
1.22 %
0.04 %
100.00 %
(1)Includes 27,886 microloans totaling $18.2 million which were outstanding and serviced by the Bank pursuant to its arrangement with Grain.
One-to-four Family Investor-Owned Loans. At December 31, 2022, one-to-four family investor-owned loans were $344.0 million, or 22.6% of the Bank’s total
loans. Investor-owned mortgage loans secured by non-owner-occupied one-to-four family residential property represents the Bank’s second largest lending
concentration. The majority of the portfolio, $301.0 million, or 87.5%, are two-to-four family properties (462 accounts), while the remaining $43.0 million, or 12.5%, are
primarily single family, non-owner-occupied investment properties (89 accounts). Of the three largest loans in this category, two loans had outstanding balances of $2.9
million each and one loan had an outstanding balance of $2.8 million. In this category, loans totaling $127.2 million, or 37.0%, are secured by properties located in
Queens County, $112.4 million, or 32.7%, in Kings County, $32.7 million, or 9.5%, in Bronx County, $12.9 million, or 3.8%, in New York County, $12.1 million, or
3.5%, in Westchester County, $10.2 million, or 3.0%, in Nassau County, $10.0 million, or 2.9%, in Hudson County and $7.5 million, or 2.2% in Suffolk County. The
rest of this category, 5.5%, is spread out in other counties and no other concentration exceeded $5.5 million, or 1.4%.
The Bank imposes prudent underwriting guidelines in the origination of such loans, including lower maximum loan-to-value ratios (“LTVs”) of 70% on
purchases and 65% on refinances, a required minimum debt service coverage ratio (“DSCR,” 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 origination of 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.
5
One-to-four Family Owner-occupied Loans. One-to-four family owner-occupied loans totaled $134.9 million, or 8.8% of the Bank’s total loan portfolio at
December 31, 2022. The three largest loans outstanding in this category had outstanding balances of $2.6 million, $2.2 million and $2.0 million. There are 28 loans with
an outstanding balance in excess of $1.0 million, totaling $39.1 million, or approximately 29.0% of this category. At December 31, 2022, approximately $43.4 million,
or 32.2%, of this category was secured by properties located in Queens County, $32.4 million, or 24.0%, in Kings County, $12.8 million, or 9.5%, in New York County,
$12.1 million, or 8.9%, in Bronx County, $12.0 million, or 8.9%, in Nassau County and $6.1 million, or 4.5%, in Westchester County. The rest of this category, less
than 12.0%, is spread out in other counties and no other concentration exceeded $3.7 million, or 2.7%.
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 or that meet non-qualified mortgage
standards. 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
qualified mortgage compliance. As a CDFI, the Bank is authorized to originate non-qualified mortgages. Non-qualified mortgages generally require greater down
payments and have higher yields.
The Bank generally limits one-to-four family loans 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. As a portfolio lender, the Bank 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 Loans. Multifamily loans totaled $494.7 million, or 32.4% of the Bank’s total loan portfolio at December 31, 2022. Loans secured by multifamily
properties represent the Bank’s largest real estate lending category. The three largest loans were $21.0 million, $17.6 million and $11.9 million. Of the total of $494.7
million in multifamily loans, 146 loans have balances in excess of $1.0 million and account for $386.3 million, or approximately 78.7%, of this lending concentration. In
terms of geographical concentrations, $219.4 million, or 44.4%, are secured by properties located in Queens County, $121.8 million, or 24.3%, in Kings County, $45.1
million, or 9.1%, in Bronx County, $39.3 million, or 7.9%, in Nassau County, $30.2 million, or 6.1%, in New York County, $20.7 million, or 4.2%, in Westchester
County, $8.0 million, or 1.3%, in Hudson County and $6.8 million, or 1.4%, in Bergen County. All other concentrations by county, which account for 0.7% of this
category, have balances of $1.0 million or less.
Nonresidential Loans. Nonresidential loans totaled $308.0 million, or 20.2% of the Bank’s total loan portfolio at December 31, 2022. Loans secured by
nonresidential properties that represent the Bank’s third largest concentration. The three largest loans were $24.8 million, $10.5 million and $10.0 million. Of the total of
$308.0 million in nonresidential loans, 78 loans have balances in excess of $1.0 million and account for $246.2 million, or approximately 79.9%, of this lending
concentration. In terms of geographical concentrations, $61.6 million, or 20.0%, are secured by properties located in Bronx County, $60.3 million, or 19.6%, in Kings
County, $55.2 million, or 17.9%, in Queens County, $40.3 million, or 13.1%, in Nassau County, $30.9 million, or 10.0%, in New York County, $12.7 million, or 4.1%,
in Westchester County, $10.8 million, or 3.5%, in Passaic county, $9.8 million, or 3.2%, in Suffolk county, $7.0 million, or 2.3%, in Marietta County and $4.9 million,
or 1.6%, in Bergen county. All other concentrations by county, which account for 4.2% of this category, have balances of $3.3 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 $105.3 million, or
34.2% of the portfolio, industrial and warehouse at $68.3 million, or 22.2%, offices at $44.0 million, or 14.3%, hotels and motels at $38.1 million, or 12.4%, service,
doctor, dentist, daycare and schools at $22.2 million, or 7.2%, restaurants at $8.6 million, or 2.8%, churches at $8.3 million, or 2.7%, medical, nursing home and
hospital at $7.8 million, or 2.5%, and the rest of the portfolio accounts for other property types, with none exceeding 1.0% as a portfolio concentration.
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 LTVs 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) and a DSCR of 1.20%.
The maximum
6
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 2.50% to 3.00% over the five-year FHLBNY rate.
Construction and Land Loans. Construction and land loans totaled $185.0 million, or 12.1%, of the Bank’s total loan portfolio at December 31, 2022, (43
projects), with $148.7 million consisting of multifamily residential (32 projects). In terms of geographical concentrations, $106.3 million, or 57.5%, are secured by
properties located in Queens County, $20.3 million, or 11.0%, in Kings County, $17.3 million, or 9.4%, in Chestnut Hill County, $9.7 million, or 5.2%, in Bronx
County, $7.0 million, or 3.8%, in Hudson county, $6.7 million, or 3.6%, in Nassau county, $6.2 million, or 3.4%, in Richmond county, $5.1 million, or 2.7%, in Suffolk
county, $4.1 million, or 2.2%, in Westchester county and $2.3 million, or 1.2%, in New York County. At December 31, 2022, loans in process related to construction
loans totaled $205.6 million.
The Bank’s typical construction loan has a term of up to 36 months and contains:
•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.
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.
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. In addition, during the term of our construction loans, no payment from the borrower is required since the accumulated interest is added to the principal of
the loan through an interest reserve. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds, with repayment
dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If we are forced to foreclose on a project
prior to completion, there is no assurance that we will be able to recover the entire unpaid portion of the loan. In addition, we may be required to fund additional amounts
to complete a project, and it may be necessary to hold the property for an indeterminate period of time subject to the regulatory limitations imposed by local, state or
federal laws. Loans on land under development or held for future construction also pose additional risk because of the lack of income being produced by the property and
the potential illiquid nature of the collateral.
C&I Loans and Lines of Credit. C&I loans (excluding PPP loans) and lines of credit represent 2.6% of the Bank’s total loan portfolio at December 31, 2022.
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.
7
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.
Paycheck Protection Program. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) appropriated $349.0 billion for the PPP. On April 24,
2020, the PPP received another $310.0 billion in funding. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the
“Economic Aid Act”) appropriated another $284 billion for both first and second draw PPP loans bringing the total appropriations for PPP loans to $943.0 billion. The
PPP ended on May 31, 2021. PPP loans that meet SBA requirements may be forgiven in certain circumstances, are fully guaranteed by the SBA, have an initial term of
up to five years and earn interest at rate of 1%. The Bank continues to expect a significant portion of these loans will ultimately be forgiven by the SBA in accordance
with the terms of the program. Over the course of the PPP, the Bank originated a total of 5,340 PPP loans in the amount of $261.4 million. As of December 31, 2022, the
Bank had 71 PPP loans outstanding totaling $20.0 million, or 1.3% of total loans. As of December 31, 2022, these loans had resulted in $11.7 million in deferred loan
fees to be recognized over the life of the respective loans. Of this amount, $11.6 million has been recognized as processing fee income and $0.1 million remains to be
recognized over the remaining life of the respective loans.
Consumer Loans. Consumer loans generally have higher interest rates than mortgage loans. The risk involved in consumer loans fluctuates based on 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. As of December 31, 2022, there were $19.1 million, or 1.3% of total loans, in unsecured consumer loans, of which $18.2
million comprised of 27,886 individual loans were outstanding and are held by the Bank pursuant to its arrangement with Grain. In addition, there were $0.5 million in
loans with passbook collateral.
8
Loan Originations, Purchases and Sales. The following table sets forth the Bank’s loan originations, sales, purchases and principal repayment activities,
excluding mortgage loans held for sale, during the periods indicated.
2022
2021
For the Years Ended December 31,
2020
(in thousands)
2019
2018
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:
(1)
Business
Consumer
(2)
Total nonmortgage loans
Total loans originated
Loans purchased:
Mortgage loans:
1-4 family residential
Investor-owned
Multifamily residential
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
Total loans sold
Principal repayments and other
Net loan activity
Total loans at end of year
$
1,322,098
$
1,172,053
$
966,096 $
929,761 $
808,754
58,333
54,001
181,227
89,370
231,334
614,265
6,325
3,898
10,223
624,488
—
—
—
42,631
15,346
73,128
65,463
109,294
305,862
122,254
59,760
182,014
487,876
5,845
5,540
11,385
36,522
15,090
90,481
34,154
81,465
257,712
89,110
30,050
119,160
376,872
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
—
—
—
—
—
—
—
—
—
(3,040 )
(311 )
—
(767 )
(5,734 )
(9,852 )
(9,852 )
(411,066 )
203,570
1,525,668
$
(5,661 )
—
(2,299 )
(2,713 )
(3,500 )
(14,173 )
(14,173 )
(335,043 )
150,045
1,322,098
$
(781 )
—
(2,748 )
(510 )
—
(4,039 )
(4,039 )
(166,876 )
205,957
1,172,053 $
(3,520 )
—
—
(196 )
—
(3,716 )
(3,716 )
(164,326 )
36,335
966,096 $
(1,759 )
(2,502 )
(535 )
(2,045 )
—
(6,841 )
(6,841 )
(118,013 )
121,007
929,761
$
(1)For the years ended December 31, 2021 and 2020, business loans originated include $117.3 million and $85.3 million, respectively, of PPP loans. There were no PPP loans
originated for the year ended December 31, 2022.
(2)For the years ended December 31, 2022, 2021 and 2020, consumer loans originated include $3.2 million, $59.3 million and $29.5 million, respectively, of microloans
pursuant to the Bank’s arrangement with Grain. No new loans were made by the Company after May 31, 2022.
9
Contractual Maturities. The following table sets forth the contractual maturities of the Bank’s total loan portfolio, excluding mortgage loans held for sale, at
December 31, 2022. 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:
(1)
Business loans
Consumer loans
(2)
Total nonmortgage loans
Total
One year
or less
More than
one year
to five years
At December 31, 2022
More than
five years
(in thousands)
Revolving
Total
$
$
5,699
430
3,209
128
135,548
145,014
16,032
40
16,072
161,086
$
$
6,961
1,469
20,109
52,436
49,470
130,445
21,869
931
22,800
153,245
$
$
331,308
132,979
471,349
255,479
—
1,191,115
2,064
—
2,064
1,193,179
$
$
$
—
—
—
—
—
—
—
18,158
18,158
18,158
$
343,968
134,878
494,667
308,043
185,018
1,466,574
39,965
19,129
59,094
1,525,668
(1)Includes $20.0 million of PPP loans at December 31, 2022.
(2)Includes $18.2 million of loans which were outstanding and serviced by the Bank pursuant to its arrangement with Grain at December 31, 2022.
The following table sets forth the Bank’s fixed and adjustable-rate loans at December 31, 2022 that are contractually due after December 31, 2023.
Mortgage loans:
1-4 family residential
Investor-owned
Owner-occupied
Multifamily residential
Nonresidential properties
Construction and land
Total mortgage loans
Nonmortgage loans:
(1)
Business loans
Consumer loans
(2)
Total nonmortgage loans
Total
Fixed
Due After December 31, 2023
Adjustable
(in thousands)
Total
$
$
62,929
35,068
87,158
57,191
49,470
291,816
12,125
19,089
31,214
323,030
$
$
275,340
99,380
404,300
250,724
—
1,029,744
11,808
—
11,808
1,041,552
$
$
338,269
134,448
491,458
307,915
49,470
1,321,560
23,933
19,089
43,022
1,364,582
(1)Includes $20.0 million of PPP loans at December 31, 2022.
(2)Includes $18.2 million of microloans which were outstanding and serviced by the Bank pursuant to its arrangement with Grain at December 31, 2022.
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, 2022 was $71.5 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, 2022, the Bank complied with these loans-to-
one borrower limitations.
At December 31, 2022, the Bank’s largest aggregate exposure to one borrower was $44.0 million with an outstanding balance of $8.5 million. The second and
third largest exposures were $35.0 million and $28.0 million with outstanding balances of $10.3 million and $0.9 million, respectively. No other loan or loans-to-one
borrower, individually or cumulatively, exceeded $25.0 million, or 35.0% of the lending limit.
10
The Bank’s real estate 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 checklists provided as part of the application package are evaluated by the loan underwriting department.
The real estate 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.
The Bank’s non-real estate lending is also subject to written policies, underwriting standards and operating procedures. Decisions on these loans requests are
made on the basis of applications submitted by the prospective borrowers credit histories that the Bank obtains where applicable, borrower cash flows, as obtained
directly from bank statements and predictive algorithms based on expected cash flows. Certain of these loans maybe wholly or partly collateralized by cash or business
assets.
Mortgage Loans Held for Sale, at Fair Value. At December 31, 2022 and 2021, Mortgage World loans held for sale, at fair value, was $2.0 million and $15.8
million, respectively, included residential mortgages that were originated in accordance with secondary market pricing and underwriting standards. Mortgage World’s
intent was to sell these loans on 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, 2022 and 2021, the Bank collected $0.1 million and $0.1 million, respectively, of interest income on non-accruing troubled
debt restructured loans, of which $0.01 million and $0.01 million, 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.
11
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
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
2022
60-89
Days
Past Due
90 Days
or More
Past Due
30-59
Days
Past Due
At December 31,
2021
60-89
Days
Past Due
(in thousands)
90 Days
or More
Past Due
30-59
Days
2020
60-89
Days
Past Due
Past Due
90 Days
or More
Past Due
$
$
1,530
2,553
4,643
4,246
—
—
1,466
1,267
15,705
$
$
78
—
—
607
4,100
—
7,869
1,119
13,773
$
$
1,865
815
—
—
7,567
—
2,973
—
13,220
$
$
321
2,961
1,704
934
—
4,036
2,570
12,526
$
$
2,969
471
187
1,168
—
544
1,759
7,098
$
$
1,096
1,947
—
—
—
$
2,222
1,572
1,140
—
—
$
1,507
348
—
—
—
13
5
3,061 $
100
497
5,531 $
—
316
2,171 $
$
1,907
1,100
946
3,272
—
—
175
7,400
30-59
Days
Past Due
2019
60-89
Days
Past Due
At December 31,
90 Days
or More
Past Due
30-59
Days
Past Due
(in thousands)
2018
60-89
Days
Past Due
90 Days
or More
Past Due
$
$
$
3,866
3,405
3,921
3
—
—
—
11,195
$
—
—
—
—
—
—
—
—
$
$
12
1,082
1,295
—
3,708
—
—
—
6,085
$
$
6,539 $
1,609
995
—
—
292
—
9,435 $
470 $
574
—
4
—
—
—
1,048 $
—
995
—
1,052
—
—
—
2,047
Non-Performing Assets. The following table sets forth information regarding non-performing assets excluding mortgage loans held for sale at fair value. Non-
performing assets are comprised of non-accrual loans and non-accrual troubled debt restructured loans. There was no other real estate owned at the dates indicated. Non-
accrual loans include non-accruing troubled debt restructured loans of $2.3 million, $2.5 million, $3.1 million, $3.6 million, and $3.6 million at December 31, 2022,
2021, 2020, 2019 and 2018, respectively. There were no accruing loans past due 90 days or more at the dates indicated.
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
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 and accruing troubled debt restructured loans
Total nonperforming loans to total gross loans
Total nonperforming assets to total assets
Total nonperforming assets and accruing troubled debt restructured loans to total assets
2022
2021
At December 31,
2020
(in thousands)
2019
2018
$
$
2,844
961
—
—
7,567
—
—
$
3,349
1,284
1,200
2,163
917
—
—
$
2,808
1,053
946
3,776
—
—
—
$
2,312
1,009
—
3,555
1,118
—
—
205
1,092
16
706
1,115
—
—
$
11,372
$
8,913
$
8,583
$
7,994
$
3,134
$
$
$
$
$
$
$
$
217
2,027
—
93
—
—
—
2,337
13,709
2,207
1,328
—
708
—
—
—
4,243
17,952
$
$
0.90 %
0.59 %
0.78 %
$
$
$
234
2,196
—
100
—
—
—
2,530
11,443
3,089
2,374
—
732
—
—
—
6,195
17,638
$
$
0.87 %
0.69 %
1.07 %
$
$
$
249
2,197
—
654
—
—
—
3,100
11,683
3,378
2,505
—
754
—
—
—
6,637
18,320
$
$
1.00 %
0.86 %
1.35 %
$
$
$
467
2,491
—
646
—
—
—
3,604
11,598
5,191
2,090
—
1,306
—
14
—
8,601
20,199
$
$
1.20 %
1.10 %
1.92 %
1,053
1,987
—
604
—
—
—
3,644
6,778
5,192
3,456
—
1,438
—
374
—
10,460
17,238
0.73 %
0.64 %
1.63 %
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.
13
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
2022
2021
At December 31,
2020
(in thousands)
2019
2018
$
$
21,499
21,499
9,735
31,234
$
$
17,317
17,317
13,798
31,115
$
$
20,508 $
20,508
19,546
40,054 $
22,787 $
22,787
17,355
40,142 $
18,665
18,665
14,394
33,059
Substandard loans increased $4.2 million, or 24.1%, to $21.5 million at December 31, 2022 compared to $17.3 million at December 31, 2021. The increase of
substandard loans was primarily attributable to increase of $10.8 million in construction and land loans, offset by decreases of $3.3 million in multifamily loans, $2.2
million in nonresidential loans and $1.1 million in 1-4 family loans.
Special mention loans decreased $4.1 million, or 29.4%, to $9.7 million at December 31, 2022 compared to $13.8 million at December 31, 2021. The decrease
was primarily attributable to decreases of $6.7 million in construction and land loans and $3.9 million in multifamily loans, offset by an increase of $5.9 in 1-4 family
loans and $0.6 million in nonresidential loans.
Troubled Debt Restructured Loans. 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, 2022, there were 23 loans modified as troubled debt restructured loans totaling $6.6 million. Of these, five troubled debt restructured loans,
totaling $2.3 million, were included in non-accrual loans and the remaining 18 troubled debt restructured loans, totaling $4.2 million, had been performing in accordance
with their modified terms for a minimum of six months since the date of restructuring and are accruing interest.
At December 31, 2021, there were 30 loans modified as troubled debt restructured loans totaling $8.7 million. Of these, six troubled debt restructured loans
totaling $2.5 million were included in non-accrual loans and the remaining 24 troubled debt restructured loans, totaling $6.2 million, had been performing in accordance
with their modified terms for a minimum of six months since the date of restructuring.
For the years ended December 31, 2022 and 2021, 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 (“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.
14
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 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 GAAP.
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.
15
•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 Bank’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
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
restructured loans 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.
16
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.
The Company has evaluated 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 might result in a decrease in the allowance for loan losses, particularly for longer
duration loan portfolios. The project team meets on a regular basis to determine the approach for implementation. This includes assessing the adequacy of existing loan
and loss data, assessing models for default and loss estimates, conducting limited trial runs and analytical review through December 31, 2022, and to complete
independent model valuation and documentation of processes and controls in the first quarter of 2023. Upon adoption, the Company anticipates that it would decrease
the allowance to approximately $31.5 million for the loan portfolio and add a $0.7 million allowance for the held-to-maturity securities portfolio.
17
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
(1)
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
(1)
Total recoveries
Net recoveries (charge-offs)
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 recoveries (charge-offs) to average loans
outstanding during the year
2022
2021
For the Years Ended December 31,
2020
(Dollars in thousands)
2019
2018
$
$
16,352
24,046
$
14,870
2,717
$
12,329
2,443
12,659 $
258
11,071
1,249
—
—
—
—
—
—
(6,659 )
(6,659 )
156
39
—
—
—
—
—
(38 )
—
—
—
(1,342 )
(1,380 )
8
45
—
—
—
—
—
—
—
—
—
(6 )
(6 )
—
—
—
4
—
94
564
853
(5,806 )
34,592
$
84
8
145
(1,235 )
16,352
$
95
5
104
98
14,870
$
$
(8 )
—
—
—
—
(724 )
—
(732 )
23
—
—
9
—
110
2
144
(588 )
12,329 $
—
—
—
—
—
(34 )
(14 )
(48 )
1
250
—
9
—
122
5
387
339
12,659
252.33 %
142.90 %
127.28 %
106.30 %
186.77 %
2.27 %
1.24 %
(0.42 %)
(0.09 %)
1.27 %
0.01 %
1.28 %
(0.06 %)
1.36 %
0.04 %
(1)At December 31, 2022 and 2021, includes $6.7 million and $1.2 million of charge-offs and $0.6 million and $0.01 million of recoveries related to loans associated with
Grain, respectively.
18
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
$
3,863
1,723
8,021
2,724
2,683
19,014
120
15,458
15,578
$ 34,592
2022
Percent of
Allowance
in Each
Category
to Total
Allocated
Allowance
Percent
of Loans
in Each
Category
to Total
Loans
At December 31,
2021
Percent of
Allowance
in Each
Category
to Total
Allocated
Allowance
(Dollars in thousands)
Allowance
for Loan
Losses
Percent
of
Loans in
Each
Category
to Total
Loans
2020
Percent of
Allowance
in Each
Category
to Total
Allocated
Allowance
Percent
of
Loans in
Each
Category
to Total
Loans
Allowance
for Loan
Losses
11.16 %
4.98 %
23.19 %
7.87 %
7.76 %
54.96 %
0.35 %
44.69 %
45.04 %
100.00 %
Allowance
for Loan
Losses
3,540
22.54 % $
1,178
8.84 %
5,684
32.42 %
2,165
20.19 %
12.13 %
2,024
96.12 % 14,591
2.62 %
1.26 %
3.88 %
306
1,455
1,761
100.00 % $ 16,352
21.65 %
7.20 %
34.76 %
13.24 %
12.38 %
89.23 %
1.87 %
8.90 %
10.77 %
100.00 %
3,850
24.01 % $
1,260
7.33 %
5,214
26.34 %
2,194
18.13 %
10.19 %
1,820
86.00 % 14,338
25.90 %
8.47 %
35.06 %
14.75 %
12.24 %
96.42 %
27.27 %
8.43 %
26.23 %
18.68 %
9.03 %
89.64 %
11.38 %
254
2.62 %
278
14.00 %
532
100.00 % $ 14,870
1.71 %
1.87 %
3.58 %
100.00 %
8.10 %
2.26 %
10.36 %
100.00 %
2019
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)
2018
Percent of
Allowance
in Each
Category
to Total
Allocated
Allowance
Percent of
Loans in
Each
Category
to Total
Loans
$
$
3,503
1,067
3,865
1,849
1,782
12,066
254
9
263
12,329
28.42 %
8.65 %
31.35 %
15.00 %
14.45 %
97.87 %
2.06 %
0.07 %
2.13 %
100.00 %
31.60 % $
9.52 %
25.90 %
21.45 %
10.28 %
98.75 %
1.13 %
0.12 %
1.25 %
100.00 % $
3,799
1,208
3,829
1,925
1,631
12,392
260
7
267
12,659
30.01 %
9.55 %
30.25 %
15.20 %
12.88 %
97.89 %
2.05 %
0.06 %
2.11 %
100.00 %
32.61 %
9.98 %
25.01 %
21.18 %
9.42 %
98.20 %
1.69 %
0.11 %
1.80 %
100.00 %
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, 2022, the allowance for loan and lease losses represented 2.27% of total gross loans and 252.33% of nonperforming loans compared to 1.24%
of total loans and 142.90% of nonperforming loans at December 31, 2021. The allowance for loan and lease losses increased to $34.6 million at December 31, 2022
from $16.4 million at December 31, 2021, of which $15.4 million related to Grain. There were $5.8 million and $1.2 million in net charge-offs during the year ended
December 31, 2022 and 2021, respectively.
19
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 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, 2022 and 2021, the investment portfolio consisted of available-for-sale and held-to-maturity securities and obligations issued by the U.S.
government and government-sponsored enterprises, corporate bonds and the FHLBNY stock. At December 31, 2022 and 2021, the Bank owned $24.7 million and $6.0
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.
Securities Portfolio Composition. The following table sets forth the amortized cost and estimated fair value of the available-for-sale and held-to-maturity
securities portfolios at the dates indicated, which consisted of U.S. government and federal agencies, corporate bonds, pass-through mortgage-backed securities and
certificates of deposit.
2022
2021
At December 31,
2020
2019
2018
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
(Dollars in thousands)
$
$
—
2,985
—
25,824
$
—
2,689
—
23,359
$
—
2,981
—
21,243
$
$
—
2,934
—
21,184
—
—
—
10,381
$
—
—
—
10,463
$
16,373
—
—
—
$
$
16,354
—
—
—
20,924
—
4,997
—
20,515
—
4,995
—
44,503
11,310
67,199
122
37,777
9,634
55,928
118
18,845
—
71,930
175
18,348
—
70,699
181
—
3,201
3,506
263
—
3,196
3,567
272
—
—
4,680
482
4,659
491
—
778
870
—
759
875
$
151,943
$
129,505
$
115,174
$
113,346
$
17,351
$
17,498
$
21,535
$
21,504
$
27,569
$
27,144
$
$
35,000
82,500
$
34,620
78,738
$
—
—
$
—
—
$
—
—
$
—
—
$
—
—
$
—
—
$
—
—
235,479
4,120
131,918
21,803
230,113
3,852
126,691
21,837
—
934
—
—
—
914
—
—
—
1,743
—
—
—
1,722
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
510,820
$
495,851
$
934
$
914
$
1,743
$
1,722
$
—
$
—
$
—
$
—
—
—
—
—
—
—
Available-for-Sale
Securities:
U.S. Government and
Federal Agencies
U.S. Government Bonds
US Treasury
Corporate Bonds
Mortgage-Backed
Securities
Collateralized Mortgage
(1)
Obligations
FHLMC Certificates
FNMA Certificates
GNMA Certificates
Total available-for-sale
securities
Held-to-Maturity
Securities:
U.S. Agency Bonds
Corporate Bonds
Mortgage-Backed Securities:
Collateralized Mortgage
(1)
Obligations
FHLMC Certificates
FNMA Certificates
SBA Certificates
Total held-to-maturity
securities
(1)Comprised of Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) and Ginnie Mae (“GNMA”) issued securities.
20
During the year ended December 31, 2022, the Company invested primarily in held-to-maturity securities utilizing the $225.0 million the Company received
from the issuance of preferred stock to the U.S. Treasury pursuant to its Emergency Capital Investment Program and from cash received from deposits made by its
customers.
At December 31, 2022 and 2021, there were no securities of which the amortized cost or estimated value exceeded 10% of total equity.
Mortgage-Backed Securities. At December 31, 2022 and 2021, the Bank had mortgage-backed securities with a carrying value of $516.5 million and $91.9
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 sell the
participation interests 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, 2022 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
More than Five Years
through Ten Years
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
More than Ten Years
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Total
Fair
Value
Weighted
Average
Yield
(Dollars in thousands)
Available-for-Sale
Securities:
U.S. Government Bonds
Corporate Bonds
Mortgage-Backed
Securities
Collateralized Mortgage
(1)
Obligations
FHLMC Certificates
FNMA Certificates
GNMA Certificates
Total available-for-sale
securities
Held-to-Maturity
Securities:
U.S. Agency Bonds
Corporate Bonds
Mortgage-Backed
Securities
Collateralized Mortgage
(1)
Obligations
FHLMC Certificates
FNMA Certificates
SBA Certificates
Total held-to-maturity
securities
$
$
$
$
$
—
—
—
—
40
—
40
—
—
—
—
—
—
$
—
—
2,985
4,000
0.90 %
0.80 %
$
—
21,824
$
—
4.20 %
—
—
$
—
—
2,985
25,824
$
2,689
23,359
—
—
1.48 %
—
—
—
—
—
—
—
—
—
—
—
3,334
—
—
—
1.99 %
—
44,503
11,310
63,825
122
1.60 %
1.60 %
1.60 %
1.60 %
44,503
11,310
67,199
122
37,777
9,634
55,928
118
1.48 % $
6,985
0.84 %
$
25,158
3.90 % $
119,760
1.60 % $
151,943
$ 129,505
$
—
—
35,000
75,000
4.66 % $
4.62 %
—
7,500
$
—
3.33 %
—
—
—
—
35,000
82,500
$ 34,620
78,738
—
—
—
3,497
3.44 %
—
$
—
—
—
—
$
9,402
—
3.45 %
—
$
231,982
4,120
122,516
21,803
3.77 %
4.39 %
4.49 %
5.06 %
235,479
4,120
131,918
21,803
230,113
3,852
126,691
$ 21,837
—
$ 113,497
4.60 %
$ 16,902
3.40 % $ 380,421
4.08 % $ 510,820
$ 495,851
0.90 %
3.67 %
1.60 %
1.60 %
1.62 %
1.60 %
1.95 %
4.66 %
4.50 %
2.88 %
4.39 %
4.42 %
5.06 %
3.77 %
(1)Comprised of Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA") and Ginnie Mae ("GNMA") issued securities.
21
Sources of Funds
General. Deposits have traditionally been the Bank’s primary source of funds for use in lending and investment activities. The Bank receives funds from large
deposits made from corporations, nonprofits, and large banks. The Bank also uses 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. In addition, the Bank receives funds from scheduled loan payments, investment principal and interest payments, 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,
NOW/IOLA accounts, money market accounts, reciprocal deposits, 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 also
provides 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.
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 economic and market conditions.
The following table sets forth the average balance and weighted average rate of deposits for the periods indicated.
Deposit type:
NOW/IOLA
Money market
Savings
Certificates of deposit
Interest-bearing deposits
Non-interest bearing demand
(1)
Total deposits
2022
2021
2020
For the Years Ended December 31,
Average
Balance
Percent
Weighted
Average
Rate
Average
Balance
Percent
(Dollars in thousands)
Weighted
Average
Rate
Average
Balance Percent
Weighted
Average
Rate
$
30,151
393,555
138,137
382,022
943,865
344,505
$ 1,288,370
2.34 %
30.55 %
10.72 %
29.65 %
73.26 %
26.74 %
100.00 %
0.22 % $
1.59 %
0.09 %
0.91 %
1.05 %
— %
30,851
310,611
133,244
430,164
904,870
287,008
0.77 % $ 1,191,878
2.59 %
26.06 %
11.18 %
36.09 %
75.92 %
24.08 %
100.00 %
0.35 % $ 29,792
0.38 % 207,454
0.11 % 118,956
0.99 % 379,276
0.63 % 735,478
— % 164,555
3.31 %
23.05 %
13.22 %
42.14 %
81.72 %
18.28 %
0.48 % $ 900,033 100.00 %
0.51 %
0.90 %
0.12 %
1.73 %
1.19 %
— %
0.97 %
(1)For the year ended December 31, 2021, includes $122.0 million of liabilities related to the deposit of funds for subscriptions for the Company’s common stock in connection
with its second-step conversion.
The following table sets forth deposit activities for the periods indicated.
At or For the Years Ended December 31,
2022
2021
2020
Beginning balance
Net deposits before interest credited
Interest credited
Net increase in deposits
Ending balance
$
$
1,204,716
37,746
9,950
47,696
1,252,412
22
$
(in thousands)
$
1,029,579 $
169,466
5,671
175,137
1,204,716 $
782,043
238,786
8,750
247,536
1,029,579
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
2022
At December 31,
2021
(in thousands)
2020
$
$
161,070
31,228
17,659
33,737
29,170
103,754
376,618
$
$
319,684 $
44,411
17,012
40,671
5,544
2,157
429,479 $
150,152
85,958
45,405
103,301
18,123
4,048
406,987
The following table sets forth the amount and maturities of certificates of deposit by interest rate at December 31, 2022.
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
Less Than
or Equal to
One Year
More
Than
One to
Two Years
Period to Maturity
More
Than
Two to
Three
Years
(Dollars in thousands)
More Than
Three Years
Total
Percent of
Total
$
$
55,189
21,472
10,593
24,648
14,352
33,532
159,786
$
$
20,099
984
4,160
4,148
8,741
20,095
58,227
$
$
38,461
6,582
2,906
4,863
5,980
9,916
68,708
$
$
47,321
2,190
—
78
97
40,211
89,897
$
$
161,070
31,228
17,659
33,737
29,170
103,754
376,618
42.76 %
8.29 %
4.69 %
8.96 %
7.75 %
27.55 %
100.00 %
At December 31, 2022, the aggregate amount of all certificates of deposit in amounts greater than or equal to $100,000 was $212.7 million. The following table
sets forth the maturity of those certificates as of December 31, 2022.
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,
(in thousands)
46,383
33,609
72,962
45,143
14,586
212,683
$
$
At December 31, 2022, certificates of deposit equal to or greater than $250,000 totaled $70.1 million of which $48.7 million matures on or before December 31,
2023. At December 31, 2022, passbook savings accounts and certificates of deposit with a passbook feature totaled $130.0 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, 2022 and
2021 the Bank had $517.4 million and $106.3 million of outstanding FHLBNY advances, respectively. Additionally, the Bank has two unsecured lines of credit in the
amount of $90.0 million and $25.0 million with two correspondent banks, under which there was nothing outstanding at December 31, 2022 and 2021, respectively. The
Bank also had a guarantee from the FHLBNY through letters of credit in an amount of up to $21.5 million each at December 31, 2022 and 2021.
Warehouse Line of Credit. Mortgage World had maintained two warehouse lines of credit with financial institutions for the purpose of funding the originations
and sale of residential mortgages. One of the warehouse line of credit had an unused line of credit of 10.0 million at December 31, 2022 and was terminated on February
7, 2023. The other warehouse line of credit was terminated on March 31, 2022. These loans are now funded by the Bank.
23
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
Warehouse Lines of Credit:
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
Subsidiaries
2022
At or For the Years
December 31,
2021
(Dollars in thousands)
2020
$
$
$
517,375
206,969
517,375
3.00 %
3.90 %
$
—
—
—
—
—
$
106,255
108,005
109,255
2.02 %
2.02 %
$
15,090
11,675
16,385
3.29 %
3.21 %
117,255
116,947
152,284
2.03 %
1.90 %
29,961
8,461
29,961
3.34 %
3.37 %
At December 31, 2022, the Company had one operating subsidiary, Ponce Bank, and Ponce Bank had one subsidiary, Ponce de Leon Mortgage Corp., a New
York State chartered mortgage brokerage entity, whose employees are registered in New York and New Jersey. Ponce Bank had another subsidiary, PFS Services,
Corp., which was merged into Ponce de Leon Mortgage Corp. on December 31, 2021.
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 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 a savings and loan holding company, the Company is subject to examination and supervision by, and is 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.
Mortgage World was a mortgage banking entity which primarily operated in the New York City metropolitan area. It was a Federal Housing Administration
(“FHA”) approved Title II lender. To maintain its license, Mortgage World needed to comply with certain regulations set forth by the U.S. Department of Housing and
Urban Development (“HUD”). Mortgage World was subject to the comprehensive regulation and examination of the New York State Department of Financial Services
("NYDFS"). The business operated by Mortgage World was integrated as a division of Ponce Bank effective January 26, 2022, and ceased to be separately regulated as
a mortgage banking entity by the NYDFS at that time. Mortgage World ceased to conduct business as a separate entity and is now operated as a division of the Bank.
Set forth below are certain material regulatory requirements that are applicable to the Company and the Bank. This description of statutes and regulations is not
intended to be a complete description of such statutes and regulations and their effects on the Company and the Bank. 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.
24
CARES Act
In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020. Among other things, the CARES Act includes provisions
impacting financial institutions like the Bank. The CARES Act allowed banks to elect to suspend requirements under GAAP for loan modifications related to the
COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a TDR, including
impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020. This relief was extended by
the Consolidated Appropriations Act enacted on December 27, 2020 to the earlier of January 1, 2022 or 60 days after the termination of the national emergency. This
relief was not extended beyond January 1, 2022 and the Bank has made appropriate adjustments which are not material. Federal banking agencies were required to defer
to the determination of the banks making such suspension.
The CARES Act created the PPP. The PPP authorized small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent
payments, utilities, and interest on certain debt. The loans were provided through participating financial institutions, such as Bank, that processed loan applications and
service the loans. The CARES Act appropriated $349.0 billion for PPP loans. On April 24, 2020, the PPP received another $310.0 billion in funding. On December 27,
2020, the Economic Aid Act appropriated another $284.0 billion for both first and second draw of PPP loans bringing the total appropriations for PPP loans to $943.0
billion. Loans under the PPP that meet SBA requirements may be forgiven in certain circumstances, and are 100% guaranteed by the SBA. The authorization for making
PPP loans expired on May 31, 2021.
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.
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 Wall Street Reform and Consumer Protection Act
(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,
25
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 is 2.5% of risk-weighted assets.
At December 31, 2022 and 2021, the Bank’s capital exceeded all applicable requirements. See Note 15, “Regulatory Capital Requirements” of the Notes to the
accompanying Consolidated Financial Statements for additional information.
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, 2022, 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.
At December 31, 2022, 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.
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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, 2022, 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.
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, the Bank’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:
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•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 money penalties (“CMP”) cover
a wide range of violations and actions. CMPs are classified into three tiers based on the actionable conduct and the level of culpability. The law sets maximum amounts
that the OCC may assess for each day the actionable conduct continues. 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 1.5 to 40 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.
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 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.
Federal Reserve System
Generally, Federal Reserve Board regulations require depository institutions to maintain reserves against their transaction accounts (primarily NOW and regular
checking accounts). In an effort to respond to the negative effects on the economy from the COVID-19 pandemic, effective March 26, 2020, the Federal Reserve Board
eliminated the reserve requirement for depository institutions in order to support lending to households and businesses.
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 the capital stock of the FHLBNY. As of December 31, 2022, the Bank was in compliance with this requirement. The Bank may
also utilize advances from the FHLBNY as a source 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;
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•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;
•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;
•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; and
•The Dodd-Frank Act made significant changes to the regulatory structure for depository institutions and their holding companies and also affected 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. 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.
Holding Company Regulations
General. The Company is a unitary savings and loan holding company within the meaning of the Home Owners’ Loan Act. As such, the Company is 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 and its 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 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,
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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’s predecessor was designated as a financial holding company. The Company anticipates that it will elect
financial holding company status and request Federal Reserve Board notification of effectiveness.
Federal law prohibits a savings and loan holding company, including the 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
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.
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, such as the Company, 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.
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.
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.
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Federal Securities Laws
The Company’s common stock is registered with the SEC under the Securities Exchange Act of 1934, as amended (“Exchange Act”). The Company is subject to
the public disclosure, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act.
Securities and Exchange Commission Proposal
On March 21, 2022, the SEC proposed new rules (the "Proposal") that, if finalized, will require reporting companies, such as the Company, to disclose climate-
related risks, metrics, and other information in their audited financial statements, registration statements, annual reports (such as Form 10-K) and other SEC filings. The
Proposal builds upon earlier SEC climate risk disclosure guidance and in many ways draws upon recommendations by the Task Force on Climate-Related Financial
Disclosures, as well as accounting and reporting standards from the Greenhouse Gas Protocol. Through these approaches, the SEC says it is seeking to provide a
"consistent, comparable, and reliable" structure for the measurement, tracking, and reporting of greenhouse gas ("GHG") risks and emissions. Even for companies
currently tracking GHG emissions, it is likely that the Proposal will not only materially increase requirements associated with tracking and quantification of GHGs, but
also impose further layers of disclosure obligations. For those companies that do not currently measure, track and report such metrics, the new rules likely will present a
significant and potentially costly new disclosure regime that could require major management and reporting changes. For all reporting companies, compliance with the
breadth of the Proposal will require significant coordination between a business's operational, financial, and environmental functions. The Proposal establishes different
levels of compliance and timing of the effectiveness of compliance for reporting companies. For SEC purposes, the Company is presently a smaller reporting company
which would currently give it the more time than larger issuers to comply with the Proposal if it is adopted in its current form. No assurance can be given what, if any,
form the final regulation may take.
Loss of Emerging Growth Company Status
The Company ceased to qualify as an emerging growth company under the Jumpstart Our Business Startups Act (the “JOBS Act”) effective December 31, 2022.
Although the Company is no longer an emerging growth company, 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) and a non-accelerated filer (annual revenues of less than $100 million), it is not subject to the
requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting and has the right to provide scaled disclosure in its
periodic reports and proxy statements with respect to a number of disclosure requirements.
Taxation
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 the Company and the Bank.
For the year ended December 31, 2022, the Company was subject to U.S. federal income tax, New York State income tax, Connecticut income tax, New Jersey
income tax, Florida income tax, Pennsylvania income tax and New York City income tax. The Company is generally no longer subject to examination by taxing
authorities for years before 2019.
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. For the year ended December 31, 2022, 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 NOLs to offset income is limited to 80%. The CARES Act allows NOLs generated in 2018, 2019 and 2020 to be carried back to each of the five
preceding tax years. The Bank, did not generate NOLs in 2018, 2019 or 2020 so no carryback is available. At December 31, 2022, the Bank has a federal NOL
carryforwards of $13.1 million.
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State Taxation
The Company is treated as a financial institution under Connecticut, New York, and New Jersey state income tax law. The states of Connecticut, 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 Connecticut, 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 $0.6 million for New York State purposes and $0.5 million for New York City purposes. Furthermore, there are post-2015 carryforwards
available of $60.9 million for New York State purposes and $33.9 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, 2022, the Bank has federal net operating loss carryforward of $13.1 million, Connecticut net
operation loss carryforward of $0.1 million and New Jersey net operating loss carryforward of $0.5 million.
Item 1A. Risk Factors.
Summary
Specific risks related to our business include, but are not limited to, those related to: (1) the Russia-Ukraine conflicts; (2) inflationary pressures; (3) our planned
increase in multifamily, nonresidential and construction and land lending and the unseasoned nature of these loans; (4) residential property and investor-owned
properties; (5) loans that we make through our FinTech partnerships, including Grain; (6) our allowance for loan losses; (7) local and national economic conditions,
including conditions specific to the banking industry; (8) environmental liability risks; (9) our SBA PPP lending; (10) our ability to achieve and manage our growth
strategy; (11) our minority investments in financial technology related companies; (12) competition within the financial services industry, nationally and within our
market area and that our small size makes it more difficult to compete; (13) our implementation of new lines of business or offering new products and services; (14) our
reliance on our management team; (15) changes in interest rates and the valuation of securities held by us; (16) changes in and compliance with laws and regulations;
(17) operational risks including technology, cybersecurity and reputational risks; (18) changes in accounting standards and in management’s estimates and assumptions;
(19) our liquidity management; (20) dilution of our stockholders’ ownership interests from our 2018 Equity Incentive Plan and likely new stock-based benefit plans;
(21) societal responses to climate change; and (22) the gentrification of our markets.
You should read this entire document carefully, including the Risk Factors below that discusses the above risks in further detail.
Risks Related to Russia—Ukraine Conflict.
The impact of the military action in Ukraine may affect our business.
On February 24, 2022, Russian forces launched significant military action against Ukraine, and sustained conflict and disruption in the region is possible. The
impact to Ukraine as well as actions taken by other countries, including new and stricter sanctions imposed by Canada, the United Kingdom, the European Union, the
U.S. and other countries and companies and organizations against officials, individuals, regions, and industries in Russia, and actions taken by Russia in response to such
sanctions, and each country’s potential response to such sanctions, tensions, and military actions could have a material adverse effect on our operations.
We have no way to predict the progress or outcome of the situation, as the conflict and government reactions are rapidly developing and beyond our control.
Prolonged unrest, military activities, or broad-based sanctions, could have a material adverse effect on the global, U.S. and local economics.
The information contained in this section is accurate as of the date hereof, but may become outdated due to changing circumstances beyond our present
awareness or control.
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Risks Related to our Lending Activities.
We have increased our multifamily, nonresidential and construction and land loans, and intend to continue to increase originations of these types of loans.
These loans may carry greater credit risk than loans secured by one-to-four family real estate that could adversely affect our financial condition and net
income.
Our focus is primarily on prudently growing our multifamily, nonresidential and construction and land loan portfolio. At December 31, 2022, $987.7 million, or
64.7%, of our loan portfolio consisted of multifamily, nonresidential and construction and land loans as compared to $722.6 million, or 54.7%, of our loan portfolio at
December 31, 2021. Because the repayment of multifamily, nonresidential and construction and land loans depends on the successful management and operation of the
borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. A downturn in the
real estate market or the local economy could adversely impact the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing
the risk of non-performing loans. In addition, many of our commercial real estate loans are not fully amortizing and require large balloon payments upon maturity. Such
balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or
nonpayment. Further, the physical condition of non-owner occupied properties may be below that of owner occupied properties due to lax property maintenance
standards, which have a negative impact on the value of the collateral properties. As our multifamily, nonresidential and construction and land loan portfolios increase,
the corresponding risks and potential for losses from these loans may also increase.
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, 2022, 40,473 loans with an aggregate balance of $1.37 billion
are to borrowers with only one loan. Another 190 loans are to borrowers with two loans each with a corresponding aggregate balance of $137.4 million. In addition,
there are 7 borrowers with three loans each with a corresponding aggregate balance of $18.3 million and two borrowers with four loans with an aggregate balance of
$1.1 million.
During periods of slower economic growth or challenging economic periods like those resulting from the COVID-19 pandemic, small to medium-sized
businesses, which make up the majority of our customers, may be impacted more severely and more quickly than larger businesses.
Inflationary Pressures and Rising Prices for Goods and Services, Including Energy.
Inflation rose sharply at the end of 2022 and has continued rising in 2023 at levels not seen for over 40 years. Inflationary pressures are currently expected to
remain elevated throughout 2022. Small to medium-sized businesses may be impacted more during periods of high inflation as they are not as able to leverage
economics of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of many of our business customers to repay their loans may
deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition
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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 $265.1 million, or 36.7%, to $987.7 million at December
31, 2022 from $722.6 million at December 31, 2021 and increased approximately $90.4 million, or 14.3%, to $722.2 million at December 31, 2021 from $632.2 million
at December 31, 2020. 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.
Our business may be adversely affected by credit risk associated with residential property.
At December 31, 2022 and 2021, one-to-four family residential real estate loans amounted to $478.8 million and $414.3 million, or 31.4% and 31.3%,
respectively, of our total loan portfolio. Of these amounts, $344.0 million and $317.3 million, or 71.8% 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. We have made initial and extended forbearances to one-to-four family residential
loans as short-term modifications made on a good faith basis in response to the COVID-19 pandemic and in furtherance of governmental policies. We actively monitor
borrowers in forbearance and seek to determine their capacity to resume payments as contractually obligated upon the termination of the forbearance period.
Loans secured by non-owner occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by owner occupied
properties because repayment of such loans depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property
owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-
owner occupied properties is often below that of owner occupied properties due to lax property maintenance standards, which has a negative impact on the value of the
collateral properties.
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The Company’s net income and earnings per share for the year ended December 31, 2022 have been adversely affected by a significant write-off and write-down
related to its relationship with Grain Technologies, Inc. The Company’s results may be further adversely affected as a result of its lending relationship with Grain.
As discussed under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Factors Affecting the Comparability of
Results, Write-off and Write-Down of this Annual Report on Form 10-K, the Company has taken a significant write-off and write-down related to microloans originated
by FinTech startup company Grain as a result of cyber fraud in the application for microloans originated by Grain. Under the terms of its agreement with Grain, if a
microloan originated by Grain is found to be fraudulent, becomes 90 days delinquent upon 90 days of origination or defaults due to a failure of Grain to properly service
the microloan, the Bank’s applicable standards for origination or servicing are deemed to have not been complied with and the microloan is put back to Grain, who then
becomes responsible for the microloan and any related losses. The microloans put back to Grain were accounted for as an “other asset,” specifically referred to herein as
the “Grain Receivable.” During the year ended December 31, 2022, the Company has assessed the collectability of the remaining Grain Receivable and has determined
that it is appropriate to write-off the receivable in its entirety for a total write-off of $16.9 million - $8.0 million during the first quarter, $1.5 million during the second
quarter, $7.9 million during the third quarter, offset by a recovery of $0.5 million during the fourth quarter of 2022. Additionally, the Company has written-off its equity
investment in Grain of $1.0 million.
The Company continues to closely monitor its portfolio of consumer loans originated by Grain as well as Grain’s refinement of solutions for detecting and
preventing cyber fraud in the application for microloans. The Company has requested, and Grain has agreed, that no new microloans be originated until further notice
and that further extensions of credit to an existing microloan borrower only be made upon confirmation that such borrower is not fraudulent. Further, like other start-up
companies, there is a higher level of risk that Grain may not be able to execute its business plan and may fail. In the event Grain were to cease operations, and although
it has considered contingency plans, the Bank may have greater difficulty in servicing and collecting the microloan portfolio. In such a case, the level the Bank has
provided for in its allowance for loan losses for its microloan portfolio may be inadequate and it may need to increase its provision for loan losses, which could
materially decrease the Company’s net income. As a consequence of such events the Bank may determine it appropriate to terminate its relationship with Grain.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings and capital could decrease.
At December 31, 2022 and 2021, our allowance for loan losses totaled $34.6 million and $16.4 million, which represented 2.27%, and 1.24% of total loans,
respectively. Included in the allowance for loan losses were $15.4 million and 1.4 million related to Grain at December 31, 2022 and 2021, respectively. 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.
Current Expected Credit Loss, or CECL, became effective for Ponce Financial and Ponce Bank on January 1, 2023. CECL requires financial institutions to
determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for credit losses.
In addition, our regulators, 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.
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.
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 could have a significant impact on the ability of our borrowers to repay loans and the value of
the collateral securing their loans, which could adversely impact our net interest income. Any deterioration in economic conditions, such as those that could resulted
from the Russia—Ukraine conflict, 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;
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•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, including the Russia—
Ukraine conflict, 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.
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.
Loans originated under the SBA Paycheck Protection Program subject us to credit, forgiveness and guarantee risk.
We originated 5,340 PPP loans, of which 71 loans totaling $20.0 million were outstanding at December 31, 2022. The PPP loans are subject to the provisions of
the CARES Act and to complex rules and guidance issued by the SBA and other government agencies. We expect that the great majority of our remaining PPP
borrowers will seek full or partial forgiveness of their loan obligations. We have credit risk on PPP loans if the SBA determines that there is a deficiency in the manner in
which we originated, funded or serviced loans, including any issue with the eligibility of a borrower to receive a PPP loan. We could face additional risks in our
administrative capabilities to service our PPP loans, and risk with respect to the determination of loan forgiveness, depending on the final procedures for determining
loan forgiveness. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which we
originated, funded or serviced a PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under
the guaranty, seek recovery of any loss related to the deficiency from us.
Risks Related to our Business Strategy.
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 may incur losses due to minority investments in other financial technology related companies.
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As part of our business strategy, we have made minority investments in technology related companies, and may from time to time make or consider making
similar additional investments. At December 31, 2022, the Company had written-off its entire $1.0 million investment in Grain. We may not be able to influence the
activities of companies in which we invest and may suffer additional losses in the future due to these activities.
New lines of business or new products and services may subject us to additional risks.
From time to time, we may implement new lines of business or offer new products and services within existing lines of business. In addition, we will continue to
make investments in research, development, and marketing for new products and services. There are substantial risks and uncertainties associated with these efforts,
particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services we may invest
significant time and resources. Initial timetables for the development and introduction of new lines of business and/or new products or services may not be achieved and
price and profitability targets may not prove feasible. Furthermore, if customers do not perceive our new offerings as providing significant value, they may fail to accept
our new products and services. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the
successful implementation of a new line of business or a new product or service. Furthermore, the burden on management and our information technology of introducing
any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully
manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business,
financial condition and results of operations.
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 $85.8 million and $57.1 million for the years ended December 31, 2022 and 2021, 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 117.53% and 61.13% for the years ended December 31, 2022 and 2021, respectively. Our efficiency ratio for
the year ended December 31, 2022 improved compared with prior year due to the inclusion of $17.9 million Grain write-off and write-down of Grain receivable and a
$5.0 million of contribution to the Ponce De Leon Foundation. Our efficiency ratio for the year ended December 31, 2021 improved compared with prior year due to the
inclusion of $20.3 million in one-time gains, net of expenses, as a result of the sale and leaseback of real property. If we are unable to successfully implement our
business strategy and increase our revenues, our profitability could be adversely affected.
We have received an investment under the Emergency Capital Investment Program (“ECIP”) from the U.S. Treasury, in exchange for the issuance of senior
perpetual preferred stock, which preferred stock has certain rights and preferences as compared to shares of our common stock. We are subject to certain
contractual and regulatory restrictions under the ECIP which may hinder our operations.
On June 7, 2022, the Company issued 225,000 shares of the Company’s Preferred Stock, par value $0.01 for an aggregate purchase price equal to $225,000,000
in cash to the Treasury, pursuant to the Treasury’s ECIP. Under the ECIP, Treasury provided investment capital directly to depository institutions that are CDFIs or
MDIs or their holding companies, to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, in low-income and
underserved communities. No dividends will accrue or be due for the first two years after issuance. For years three through ten, depending upon the level of qualified
and/or deep impact lending made in targeted communities, as defined in the ECIP guidelines, dividends will be at an annual rate of either 2.0%, 1.25% or 0.5% and,
thereafter, will be fixed at one of the foregoing rates. If we are unable to make qualified and/or deep impact loans at required levels, we will be required to pay dividends
at the higher annual rates. Additionally, we may make qualified and/or deep impact loans that are riskier than we otherwise would in an effort to meet the lending
requirements for the lower dividend rates.
Holders of Preferred Stock generally do not have any voting rights, with the exception of voting rights on certain matters as outlined in the Certificate of
Designations. The Treasury is the holder of the Preferred Stock and a governmental entity, and the Treasury may hold interests that are different from a private investor
in exercising its voting and other rights. In the event of a liquidation, dissolution or winding up of the Company, the Preferred Stock will be entitled to a liquidation
preference, subject to certain limitations, in the amount of the sum of $1,000 per share plus declared and unpaid dividends (without accumulation of undeclared
dividends) on each share.
As a participant in the ECIP, the Company must comply with certain operating requirements. Specifically, the Company must adopt the Treasury's standards for
executive compensation and luxury expenses for the period during which the Treasury holds equity issued under the ECIP. These restrictions may make it difficult to
adequately compensate our management team, which could impact
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our ability to retain qualified management. Additionally, under the ECIP regulations, the Company cannot pay dividends or repurchase its common stock unless it meets
certain income-based tests and has paid the required dividends on the Preferred Stock.
We may be dependent on borrowings from the FHLBNY to grow our lending activities, which may negatively impact our results of operations.
In recent periods, we have relied on non-core funding sources, primarily borrowings from the FHLBNY, to fund a portion of our lending activities when we do
not have sufficient core deposits. Borrowings from the FHLBNY are generally higher cost as compared to core deposits, which will generally lead to decreases in our
net interest margin and lower net revenues. Additionally, the Bank’s FHLBNY membership does not represent a legal commitment to extend credit to the Bank. The
amount that the Bank can potentially borrow is currently dependent on the amount of unencumbered eligible securities and loans that the Bank can use as collateral and
the collateral margins required by the lenders. The Bank’s borrowing capacity may be adjusted by the FHLBNY and may take into account factors such as the Bank’s
tangible common equity ratio, collateral margins required by the lender or other factors. A possible future downgrade of securities and loans pledged as collateral could
also impact the amount of available funding. If we are unable to obtain funding through the FHLBNY, we may be forced to seek additional alternative funding sources,
which may be higher cost, in order to fund our loan growth.
Risks Related to Competitive Matters
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.
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.
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Risks Related to Our Management.
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 “Management.”
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.
Risks Related to Interest Rates.
Interest rates are rising and expected to continue to rise 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 raised the target range for the federal funds rate by 25 basis points to 4.50%-4.75% during its January 31, 2023 to February 1, 2023 meeting,
the eighth consecutive rate hike since March 2022, and increasing borrowing costs. The Federal Reserve has signaled that there will likely be additional federal funds
interest rate increases. The recent increase and the anticipated increases are in response to inflation rising at a rate not seen in over 40 years. Because of this rising rate
environment, the speed with which it is anticipated to be implemented, the significant competitive pressures in our markets and the potential negative impact of these
factors on our deposit and loan pricing, our net interest margin may be negatively impacted. Our net interest income may also be negatively impacted if the demand for
loans decreases due to the rate increases, alone or in tandem with the concurrent inflationary pressures. We may be negatively impacted if we are unable to appropriately
time adjustments to our funding costs and the rates we earn on our loans.
An important component of our ability to mitigate pressures of a rising rate environment will be our ability to prudently increase the rates we pay on deposits,
including core deposits. If we were to increase these rates, because of competitive pricing pressures in our markets, liquidity purposes or otherwise, our net interest
margin may be negatively impacted. In addition, as our growth in earning 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 compelled to increase the rates we
pay on these funds which may limit our ability to maintain 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 reposition 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.
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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.
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 as the demand for
loans may decrease materially. 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, the recent rate increase of 425 basis points combined with the outlook of future rate increases in an attempt to curb inflation, can affect the average
life of loans and mortgage-backed and related securities. A rise in interest rates may result in lower demand for loans and mortgage-backed and related securities as
borrowers may reduce their debts due to the higher costs of borrowings.
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, 2022, in the event of an instantaneous 100 basis point increase in interest rates, we estimate that we would experience a 3.76% decrease in EVE and a
1.72% 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, 2022 and 2021, our securities portfolio totaled $640.3 million and $114.3 million, which represented 27.7% and 6.9% of total assets,
respectively. The securities portfolio as of December 31, 2022 and 2021 were classified as available-for-sale in the amount of $129.5 and $113.3 million and held-to-
maturity in the amount of $510.8 million and $0.9 million, respectively. A decline in the fair value of our available-for-sale 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
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 for all securities classified as available-for-sale. A decline in the market value of our securities portfolio could
adversely affect our earnings.
Risks Related to Laws and 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.
The 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 the Bank and the Company may engage and are intended
primarily for the protection of the Federal Deposit Insurance Fund, the depositors and borrowers of the Bank and consumers, rather than for our stockholders.
Regulatory authorities have extensive discretion
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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 Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) 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 various federal
agencies have adopted a broad range of rules and regulations in compliance with the Dodd-Frank Act. Compliance with the Dodd-Frank Act and its regulations and
policies has 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. Among other provisions recently enacted, the threshold to qualify for the Federal
Reserve Board’s Small Bank Holding Company Policy Statement was increased to $3.0 billion and federally-chartered savings banks and associations have been
provided flexibility to adopt the powers of a national bank.
Our New York State multi-family loan portfolio could be adversely impacted by changes in legislation or regulation.
On June 14, 2019, the New York State legislature passed the Housing Stability and Tenant Protection Act of 2019, impacting about one million rent regulated
apartment units. Among other things, the new legislation: (i) curtails rent increases from Material Capital Improvements and Individual Apartment Improvements; (ii) all
but eliminates the ability for apartments to exit rent regulation; (iii) does away with vacancy decontrol and high-income deregulation; and (iv) repealed the 20% vacancy
bonus. While it is difficult to measure the full impact of the legislation, in total, it generally limits a landlord's ability to increase rents on rent regulated apartments and
makes it more difficult to convert rent regulated apartments to market rate apartments. As a result, the value of the collateral located in New York State securing our
multi-family loans or the future net operating income of such properties could potentially become impaired.
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 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 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
41
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 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 requirements also establish a “capital conservation buffer” of 2.5%, which 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%.
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 these capital requirements, and the Bank meets all of these requirements, including the 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 Federal Reserve Board may require us to commit capital resources to support Ponce Bank.
Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such
subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve Board may require a holding company to make capital injections into a troubled subsidiary
bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may
be required at times when the holding company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by
a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a
holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital
of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the
institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the Company to make a required capital
injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations.
Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve Board. An important
function of the Federal Reserve Board is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement
these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against
bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and
deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and
are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.
42
We are a smaller reporting company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to
smaller reporting companies could make our common stock less attractive to investors.
The Company is a smaller reporting company. For as long as the Company continues to be a smaller reporting company, it may choose to take advantage of
exemptions from various reporting requirements applicable to other public companies but not to smaller reporting companies, including, but not limited to, reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements. As a smaller reporting company and a non-accelerated filer, the
Company is not subject to Section 404(b) of the Sarbanes-Oxley Act of 2002, which would require that our independent auditors review and attest as to the effectiveness
of our internal control over financial reporting.
Investors may find our common stock less attractive since we have chosen to rely on these exemptions. If some investors find our common stock less attractive
as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the price of our common stock may be more
volatile.
Risk Related to our Operations.
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. We are also subject to risks related to the cyber vulnerabilities of our partners. We may experience negative impacts to our financial condition and
results of operations if our partners are subject to cyber fraud or other security breaches, as we have experienced in our partnership with Grain.
43
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.
Negative developments in the U.S. in our primary markets may adversely impact our results in the future.
Our financial performance is highly dependent on the business environment in the markets where we operate and in the U.S. as a whole. Unfavorable or uncertain
economic and market conditions can be caused by declines in economic growth, business activity, investor or business confidence, consumer sentiment, limitations on
the availability or increases in the cost of credit and capital, increases in inflation or interest rates, natural disasters, international trade disputes and retaliatory tariffs,
supply chain disruptions, terrorist attacks, global pandemics, acts of war, or a combination of these or other factors. Inflation rose sharply at the end of 2021 and has
risen in 2022 at levels not seen for over 40 years. Inflationary pressures are currently expected to remain elevated throughout 2023. A worsening of business and
economic conditions, or persistent inflationary pressures or supply chain disruptions, generally or specifically in the principal markets in which we conduct business
could have adverse effects, including the following:
•a decrease in deposit balances or the demand for loans and other products and services we offer;
•an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to
us, which could lead to higher levels of nonperforming assets, net charge-offs and provisions for credit losses;
•a decrease in the value of loans and other assets secured by real estate; and
•a decrease in net interest income from our lending and deposit gathering activities.
Although economic conditions have improved in most of our markets, we continue to focus on growing earning assets, we believe that it is possible we will
continue to experience an uncertain and volatile economic environment during 2023, including as a result of issues of national security, international conflicts, inflation
and supply chain disruptions. There can be no assurance that these conditions will improve in the near term or that conditions will not worsen. Such conditions could
adversely affect our business, financial condition, and results of operations.
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 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. 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.
Risks Related to Accounting Matters
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.
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 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 and this could have an adverse effect on our earnings.
44
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, the valuation of loans held for sale, the valuation of deferred tax assets and investment securities, the estimates relating to the valuation for share-based awards,
and our determinations with respect to amounts owed for income taxes.
Other Risks Related to Our Business and Industry Generally
Financial challenges at other banking institutions could lead to depositor concerns that spread within the banking industry causing disruptive deposit outflows
and other destabilizing results.
In March 2023, certain specialized banking institutions with elevated concentrations of uninsured deposits experienced large deposit outflows coupled with
insufficient liquidity to meet withdrawal demands, resulting in the institutions being placed into FDIC receiverships. In the aftermath, there has been substantial market
disruption and indications that diminished depositor confidence could spread across the banking industry, leading to deposit outflows and other destabilizing results. The
Federal Reserve Board has announced that it will provide funding to ensure that banks have sufficient liquidity to meet the needs of their depositors, but there can be no
assurance whether such funding will be adequate to address these issues. The Company maintains a diversified deposit base and has a comparatively low level of
uninsured deposits. As of December 31, 2022, 61.1% of our deposits are estimated to be FDIC-insured, and an additional 1.1% of deposits were fully collateralized. The
average account size of our consumer deposits is less than $30,000, and the average account size of our business deposits is less than $60,000.
Ineffective liquidity management could adversely affect our financial results and condition.
Effective liquidity management is essential for the operation of our business. We require sufficient liquidity to meet customer loan requests, customer deposit
maturities/withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable
circumstances causing industry or general financial market stress. Our access to funding sources in amounts adequate to finance our activities on terms that are
acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally. Factors that could detrimentally impact
our access to liquidity sources include a downturn in the geographic markets in which our loans and operations are concentrated or difficult credit markets. Our access to
deposits may also be affected by the liquidity needs of our depositors. In particular, a majority of our liabilities are checking accounts and other liquid deposits, which
are payable on demand or upon several days’ notice, while by comparison, a substantial majority of our assets are loans, which cannot be called or sold in the same time
frame. Although we have historically been able to replace maturing deposits and advances as necessary, we might not be able to replace such funds in the future,
especially if a large number of our depositors seek to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could materially and
adversely affect our business, results of operations or financial condition.
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 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.
The Bank is 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.
45
Our 2018 Equity Incentive Plan has increased our expenses and reduced our income, and may dilute your ownership interests.
Stockholders previously approved the PDL Community Bancorp 2018 Long-Term Incentive Plan. During the years ended December 31, 2022 and 2021, the
Company recognized in $1.6 million and $1.4 million, respectively, in non-interest expense relating to this stock benefit plan, and we will recognize additional expenses
in the future as additional grants are made and awards vest.
The Company may fund the 2018 Long-Term Incentive Plan either through open market purchases or authorized but unissued shares of common stock. Our
ability to repurchase shares of common stock to fund this plan will be subject to many factors, including, but not limited to, applicable regulatory restrictions on stock
repurchases, the availability of stock in the market, the trading price of the stock, our capital levels, alternative uses for our capital and our financial performance.
Stockholders would experience a reduction in ownership interest in the event newly issued shares of our common stock are used to fund stock issuances under the plan.
New stock-based benefit plans will increase our expenses and reduce our income.
The Company intends to adopt one or more new stock-based benefit plans, subject to stockholder approval, which will increase our annual compensation and
benefit expenses related to the stock options and stock awards granted to participants under the stock-based benefit plan(s). The actual amount of these new stock-related
compensation and benefit expenses will depend on the number of options and stock awards actually granted, the fair market value of our stock or options on the date of
grant, the vesting period, and other factors which we cannot predict at this time.
The implementation of stock-based benefit plans may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.
The Company intends to adopt one or more new stock-based benefit plans. These plans may be funded either through open market purchases or from the
issuance of authorized but unissued shares of common stock. Our ability to repurchase shares of common stock to fund these plans will be subject to many factors,
including applicable regulatory restrictions on stock repurchases, the availability of stock in the market, the trading price of the stock, our capital levels, alternative uses
for our capital and our financial performance. Stockholders would experience dilution in ownership interest in the event newly issued shares of our common stock are
used to fund the stock-based benefit plan.
Although the implementation of the stock-based benefit plan will be subject to stockholder approval, historically, the overwhelming majority of stock-based
benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.
Societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers.
Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts.
Consumers and businesses also may change their behavior on their own as a result of these concerns. We and our customers will need to respond to new laws and
regulations as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases, asset value reductions
and operating process changes. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive
activities. Among the impacts to us could be a drop in demand for our products and services, particularly in certain sectors. In addition, we could face reductions in
creditworthiness on the part of some customers or in the value of assets securing loans. Our efforts to take these risks into account in making lending and other decisions,
including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or
changes in consumer or business behavior.
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.
46
Item 2. Properties.
As of December 31, 2022, the net book value of the Company’s office properties including leasehold improvements was $14.2 million, and the net book value of
its furniture, fixtures and other equipment and software was $3.3 million. The Company’s and Bank’s executive offices are located at 2244 Westchester Avenue, Bronx,
New York.
The following table sets forth information regarding the Company’s offices as of December 31, 2022.
Location
Leased or
Owned
Year Acquired
or Leased
Net Book Value of
Real Property
(in thousands)
Main Office:
2244 Westchester Avenue
Bronx, NY 10462
Other Properties:
980 Southern Blvd.
Bronx, NY 10459
37-60 82nd Street
Jackson Heights, NY 11372
51 East 170th Street
Bronx, NY 10452
169 Smith Street
Brooklyn, NY 11201
207 East 106th Street
New York, NY 10029
2244 Westchester Avenue
Bronx, NY 10462
5560 Broadway
Bronx, NY 10463
3405 Broadway
Astoria, NY 11106
3821 Bergenline Avenue
Union City, NJ 07087
1900 Ralph Avenue
Brooklyn, NY 11234
20-47 86th Street
Brooklyn, NY 11214
100-20 Queens Boulevard
Forest Hills, NY 11375
319 1st Avenue
New York, NY 10003
32-75 Steinway Street
Astoria, NY 11103
2612 East 16th Street
Brooklyn, NY 11235
42 South Washington Avenue
Bergenfield, NJ 07621
135-14 Northern Blvd.
Flushing, NY 11354
189-10 Hillside Avenue
Hollis, NY 11423
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Owned
Leased
47
2021
1990
2021
2018
2021
2006
2021
2021
2001
2021
2007
2010
2010
2010
2020
2020
2020
2020
2020
$
$
302
800
—
741
—
1,488
—
1,584
829
—
518
3,431
234
540
128
—
—
3,598
—
14,193
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.
48
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 Stock Market, LLC under the symbol “PDLB”.
The number of stockholders of record of the Company’s common stock as of March 16, 2023 was 379. 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 (or its predecessor PDL Community Bancorp) has not paid any dividends to its stockholders. We have no current plan or intention to pay
cash dividends to our common 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; and general economic conditions. No assurance
can be given that the Board of Directors will ever consider the payment of dividends, and common stockholders 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. 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.
Pursuant to our charter, we are authorized to issue preferred stock. The Company closed a private placement of 225,000 shares of the Company’s Senior Non-
Cumulative Perpetual Preferred Stock, Series A, par value $0.01 for an aggregate purchase price equal to $225.0 million in cash, to the Treasury pursuant to the ECIP.
The Preferred Stock will 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 “Regulation and Supervision—Holding Company Regulations—Dividends and Stock Repurchases.”
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 funds held 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.”
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
On June 7, 2022, the Company issued 225,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 for the capital investment
of $225.0 million from the Treasury under the ECIP. For additional information, see Note 2, “Preferred Stock Issuance; Plan of Conversion and Stock Offering,” to the
accompanying Financial Statements.
Item 6. Reserved.
49
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 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. Discussion and analysis of our 2021 fiscal year specifically, as
well as the year-over-year comparison of our 2021 financial performance to 2020, are located under Part II, Item 7 — Management's Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 31, 2022,
which is available on our investor relations website at poncebank.gcs-web.com and the SEC's website at sec.gov.
Overview
On January 26, 2022, the assets and liabilities of Mortgage World Bankers, Inc. (“Mortgage World”), a wholly owned subsidiary of PDL Community Bancorp,
were transferred to the Bank. Except for the winding up of its operations, Mortgage World ceased to conduct business as a separate entity and is now operated as a
division of the Bank.
On January 27, 2022, Ponce Financial Group, Inc. and PDL Community Bancorp announced that the conversion and reorganization of Ponce Bank Mutual
Holding Company from the mutual to stock form of organization and related stock offering was consummated at the close of business. As a result of the closing of the
conversion and reorganization and stock offering, Ponce Financial Group, Inc. is now the holding company for Ponce Bank. Ponce Bank’s former mutual holding
companies, PDL Community Bancorp and Ponce Bank Mutual Holding Company, have ceased to exist.
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, 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 maintaining a moderate risk profile 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. 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 effect 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.”
Non-GAAP Financial Measures
The following discussion contains certain non-GAAP financial measures in addition to results presented in accordance with GAAP. These non-GAAP measures
are intended to provide the reader with additional supplemental perspective on operating results, performance trends, and financial condition. Non-GAAP financial
measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company’s GAAP financial information. The Company’s non-
GAAP measures may not be comparable to similar non-GAAP information which may be presented by other companies. In all cases, it should be understood that non-
GAAP operating measures do not depict amounts that accrue directly to the benefit of shareholders. An item that management excludes when computing non-GAAP
adjusted earnings can be of substantial importance to the Company’s results and condition for any particular year. A reconciliation of non-GAAP financial measures to
GAAP measures is provided below.
The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP.
Management believes that these non-GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate comparisons with the
performance of other financial institutions. However, the information should be considered supplemental in nature and not as a substitute for related financial
information prepared in accordance with GAAP.
The table below includes references to the Company's net (loss) income and (loss) earnings per share for the years ended December 31, 2022 and 2021 before
loss (gain) on sale of premises and equipment and the Company’s contribution to the Ponce De Leon Foundation. In management's view, that information, which is
considered non-GAAP information, may be useful to investors as it will improve an understanding of core operations for the current and future periods. The non-GAAP
net (loss) income amount and
50
(loss) earnings per share reflect adjustments related to the non-recurring gain on sale of real property and the Company’s contribution to the Ponce De Leon Foundation,
net of tax effect. A reconciliation of the non-GAAP information to GAAP net (loss) income and (loss) earnings per share is provided below.
Non-GAAP Reconciliation – Net Income Before (Loss) Gain on Sale of Premises and Equipment and Contribution to the Ponce De Leon Foundation
(Unaudited)
Net (loss) income - GAAP
Loss (gain) on sale of premises and equipment
Contribution to the Ponce De Leon Foundation
Income tax (benefit) provision
Net (loss) income - non-GAAP
(Loss) earnings per common share (GAAP) (1)
(Loss) earnings per common share (non-GAAP) (1)
For the Years Ended December 31,
2022
2021
(Dollars in thousands,
except per share data)
(30,001 ) $
436
4,995
(1,141 )
(25,711 ) $
(1.32 ) $
(1.13 ) $
25,415
(20,270 )
—
4,257
9,402
1.52
0.56
$
$
$
$
(1)(Loss) earnings per share were computed (for the GAAP and non-GAAP basis) based on the weighted average number of shares outstanding during the years ended December 31, 2022 and
2021, (22,690,943 shares and 16,744,561 shares, respectively).
The CARES Act
On March 27, 2020, Congress passed, and the President signed, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to address the
economic effects of the COVID-19 pandemic.
The CARES Act appropriated $349.0 billion for PPP loans and on April 24, 2020, the U.S. Small Business Administration (“SBA”) received another $310.0 billion in
PPP funding. On December 27, 2020, the Economic Aid Act appropriated $284.0 billion for both first and second draw PPP loans, bringing the total appropriations for
PPP loans to $943.0 billion. PPP ended on May 31, 2021. Loans under the PPP that meet SBA requirements may be forgiven in certain circumstances, and are 100%
guaranteed by the SBA. The Company had received SBA approval and originated 5,340 PPP loans, of which 71 loans totaling $20.0 million were outstanding at
December 31, 2022. PPP loans have a two-year or five-year term, provide for fees of up to 5% of the loan amount and earn interest at a rate of 1% per annum. It is our
expectation that a significant portion of these remaining loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of December 31,
2022, the average authorized loan size was $282,000 and the median authorized loan size was $15,000. The Bank, which is designated as both a CDFI and a Minority
Depository Institution MDI, originated 5,340 PPP loans in the amount of $261.4 million, which, based upon information provided by the SBA, significantly exceeded
the reported average performance of banks in our peer group.
Federal Economic Relief Funds To Aid Lending to Small Businesses
On August 10, 2021, the Company through its subsidiary, the Bank, received from the United States Department of the Treasury (“Treasury”) a grant in the
amount of $1.8 million in federal Economic Relief Funds for Small Businesses under the Treasury’s Rapid Response Program for CDFIs. The Rapid Response Program
grants may be used to support eligible activities of CDFIs such as financial products, financial services, development services, and certain operational activities, and to
enable recipient CDFIs to build capital reserves and loan-loss reserves.
On June 7, 2022, the Company closed a private placement (the “Private Placement”) of 225,000 shares of the Company’s Senior Non-Cumulative Perpetual
Preferred Stock, Series A, par value $0.01 (the “Preferred Stock”) for an aggregate purchase price equal to $225,000,000 in cash, to the United States Department of the
Treasury (the “Treasury”) pursuant to the Emergency Capital Investment Program (“ECIP”). The holders of the Preferred Stock will be entitled to a dividend payable in
cash quarterly at an annual rate dependent on certain factors as reported by the Company to Treasury in a quarterly supplemental report. The initial dividend rate is zero
percent for the first two years after issuance, and thereafter the floor dividend rate is 0.50% and the ceiling dividend rate is 2.00%. After 10 years of issuance, the
perpetual dividend rate in effect, will be determined based on said floor and ceiling. The actual dividend rate that will be paid by the Company on the Preferred Stock
cannot be determined at this time.
51
The ECIP investment by the Treasury is part of a program to invest over $8.7 billion into CDFI or MDI, of which Ponce Bank is both. The ECIP is intended to
incentivize CDFIs and MDIs to provide loans, grants, and forbearance to small businesses, minority-owned businesses, and consumers in low-income and underserved
communities that may have been disproportionately impacted by the economic effects of the COVID-19 pandemic.
In the event of a liquidation, dissolution or winding up of the Company, the Preferred Stock will be entitled to a liquidation preference, subject to certain
limitations, in the amount of the sum of $1,000 per share plus declared and unpaid dividends (without accumulation of undeclared dividends) on each share.
Critical Accounting Policies
Accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical
accounting policies are defined as those involving significant judgments and assumptions by management and that could have a material impact on the carrying value of
certain assets, liabilities or on income under different assumptions or conditions. Management believes that the most critical accounting policy relates to the allowance
for loan losses.
The allowance for loan losses is established as probable incurred losses are estimated to have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited
to the allowance.
The discussion and analysis of the financial condition and results of operations are based on the Company’s consolidated financial statements, which are prepared
in conformity with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. The estimates and assumptions used
are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates
under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of
operations.
Factors Affecting the Comparability of Results
Purchase of Real Property. On January 22, 2021, the Bank completed the purchase of property located at 135-12/14 Northern Boulevard, Flushing, New York
through a qualified intermediary in an IRS Code 1031 like-kind exchange related to the previously disclosed sale of real property on July 27, 2020 that was owned by the
Bank. The purchase price of the property was $3.6 million.
Sale of Real Properties. On February 11, 2021, the Company completed the sale of real property located at 3821 Bergenline Avenue, Union City, New Jersey for
a sale price of $2.4 million. Concurrent with the sale, the Bank and the purchaser entered into a fifteen-year lease agreement whereby the Bank will lease back this real
property at an initial annual base rent of approximately $145,000 subject to annual rent increases of 1.5%. Under the lease agreement, the Bank has four (4) consecutive
options to extend the term of the lease by five (5) years for each such option. The sale lease-back resulted in a gain of approximately $623,000, net of expenses, which is
included in other non-interest income in the accompanying Consolidated Statements of Operations.
On June 4, 2021, the Company completed the sale of real property located at 5560 Broadway, Bronx, New York for a sale price of $5.7 million. Concurrent with
the sale, the Bank and the purchaser entered into a fifteen-year lease agreement whereby the Bank will lease back this real property at an initial annual base rent of
approximately $281,000 subject to annual rent increases of 1.75%. The sale lease-back resulted in a gain of approximately $4.2 million, net of expenses, which is
included in other non-interest income in the accompanying Consolidated Statements of Operations.
On November 10, 2021, the Company completed the sale of real property located at 2244 Westchester Avenue, Bronx, New York for a sale price of $16.1
million. Concurrent with the sale, the Bank and the purchaser entered into a seventeen-year lease agreement whereby the Bank will lease back this real property at an
initial annual base rent of approximately $926,000, subject to annual rent increases of 1.75%. The sale lease-back resulted in a gain of approximately $8.7 million, net of
expenses, which is included in other non-interest income in the accompanying Consolidated Statements of Operations.
On November 12, 2021, the Company completed the sale of real property located at 169-174 Smith Street, Brooklyn, New York for a sale price of $4.0 million.
Concurrent with the sale, the Bank and the purchaser entered into a fifteen-year lease agreement whereby the Bank will lease back this real property at an initial annual
base rent of approximately $200,000 subject to annual rent increases of 1.50%. The sale lease-back resulted in a gain of approximately $3.7 million, net of expenses,
which is included in other non-interest income in the accompanying Consolidated Statements of Operations.
52
On December 16, 2021, the Company completed the sale of real property located at 37-60 82nd Street, Jackson Heights, New York for a sale price of $11.8
million. Concurrent with the sale, the Bank and the purchaser entered into a seventeen-year lease agreement whereby the Bank will lease back this real property at an
initial annual base rent of approximately $530,000 subject to annual rent increases of 2.0%. The sale lease-back resulted in a gain of approximately $3.1 million, net of
expenses, which is included in other non-interest income in the accompanying Consolidated Statements of Operations.
Ponce De Leon Foundation.
On January 27, 2022, the Company made a $5.0 million contribution to the Ponce De Leon Foundation as part of the conversion and reorganization, which is
included in non-interest expense for the year ended December 31, 2022, in the accompanying Consolidated Statements of Operations.
Write-off and Write-Down.
In 2020, the Company entered into a business arrangement with the FinTech startup company Grain. Grain’s product is a mobile application geared to the
underbanked, minorities and new generations entering the financial services market. In employing this mobile application, the Bank uses non-traditional underwriting
methodologies to provide revolving credit to borrowers who otherwise may gravitate to using alternative non-bank lenders. Under the terms of its agreement with Grain,
the Bank is the lender for Grain-originated microloans with credit lines currently up to $1,500 and, where applicable, the depository for related security deposits. Grain
originates and services these microloans and is responsible for maintaining compliance with the Bank's origination and servicing standards, as well as applicable
regulatory and legal requirements. If a microloan is found to be fraudulent, becomes 90 days delinquent upon 90 days of origination or defaults due to a failure of Grain
to properly service the microloan, the Bank’s applicable standards for origination or servicing are deemed to have not been complied with and the microloan is put back
to Grain, who then becomes responsible for the microloan and any related losses. The microloans put back to Grain are accounted for as an “other asset,” specifically
referred to herein as the “Grain Receivable.” The Bank, pursuant to its agreement with Grain, at December 31, 2021, had 59,180 microloans outstanding, net of put
backs, with credit extensions aggregating $33.9 million. Of these microloans, the Bank estimates that 80 percent have been made in low- and low-to-moderate income
census tracts with an estimated 56 percent made to minority borrowers.
In establishing these lines of credit, the Company reserved the right to modify borrowers’ credit limits at its sole discretion. The Company continues to balance
its risks as needed and continue to support a wide base of customers. Based on the overall performance of the Grain portfolio, as well as current economic factors, the
Company reduced the amount of credit available to Grain application customers on a uniform and program-wide basis, with each borrower’s credit limit reduced to the
amount that was outstanding under that borrower’s line of credit. The Company also reserved the right to make further modifications to credit limits as it may deem
appropriate under the circumstances, whether on a program-wide or individual basis. No new loans were made by the Company after May 31, 2022.
At December 31, 2022, the Bank had 27,886 Grain microloans outstanding, net of put backs, with an aggregate balance totaling $18.2 million and which were
performing, in management’s opinion, comparably to similar portfolios, offset by a $15.4 million allowance for loan losses, resulting in $2.8 million in Grain
microloans, net of allowance for loan losses. Since the beginning of the Bank’s agreement with Grain and through December 31, 2022, 45,322 microloans amounting to
$25.5 million have been deemed to be fraudulent and put back to Grain. The Company has written-down a total of $17.5 million of the Grain Receivable for the year
ended December 31, 2022 and received $6.2 million in cash from Grain and through the application of security deposits connected to fraudulent loan accounts. The
Bank also opted to use the $1.8 million grant it received from the U.S. Treasury Department’s Rapid Response Program to defray the Grain Receivable. The application
of those amounts resulted in no net receivable. Additionally, the Company has also written-off its equity investment in Grain of $1.0 million. As of December 31, 2022,
the Company’s total remaining exposure to Grain was $2.8 million of the remaining microloans, net of allowance for loan losses excluding $0.4 million of unused
commitments available to Grain borrowers and $1.4 million of security deposits by Grain borrowers. The $16.9 million write-off and write-down, net of $0.5 million of
recoveries for the year ended December 31, 2022 is included in non-interest expense in the accompanying Consolidated Statements of Operations.
53
Grain Technologies, Inc. ("Grain") Total Exposure as of December 31, 2022
(in thousands)
Receivable from Grain
Microloans originated - put back to Grain (inception-to-December 31, 2022)
Write-downs, net of recoveries (year to date as of December 31, 2022)
Cash receipts from Grain (inception-to-December 31, 2022)
Grant/reserve (inception-to-December 31, 2022)
Net receivable as of December 31, 2022
Microloan receivables from Grain borrowers
Grain originated loans receivable as of December 31, 2022
Allowance for loan losses as of December 31, 2022
Microloans, net of allowance for loan losses as of December 31, 2022
Investments
Investment in Grain
Investment in Grain write-off
Investment in Grain as of December 31, 2022
(1)
Total exposure to Grain as of December 31, 2022
$
$
$
$
$
$
$
25,467
(17,455 )
(6,186 )
(1,826 )
—
18,158
(15,415 )
2,743
1,000
(1,000 )
—
2,743
(1) Includes $0.03 million for allowance for unused commitments on the $0.4 million of unused commitments available to Grain originated borrowers reported in
other liabilities in the accompanying Consolidated Statements of Financial Conditions. Excludes $1.4 million of security deposits by Grain originated borrowers.
Grain has been victimized by cyber fraud using synthetic and other forms of fraudulent identifications, a phenomenon that has become prevalent with Fintechs.
Grain remains a pre-profit startup highly dependent on earnings from its relationship with the Bank, a new relationship with another financial institution, and further
capital raises which may not materialize.
The Company continues to closely monitor its portfolio of consumer loans originated by Grain as well as Grain’s refinement of solutions for detecting and
preventing cyber fraud in the application for microloans. The Company has requested, and Grain has agreed, that no new microloans be originated until further notice
and that further extensions of credit to an existing microloan borrower only be made upon confirmation that such borrower is not fraudulent. Further, like other start-up
companies, there is a higher level of risk that Grain may not be able to execute its business plan and may fail. In the event Grain were to cease operations, and although
it has considered contingency plans, the Bank may have greater difficulty in servicing and collecting the microloan portfolio. In such a case, the level the Bank has
provided for in its allowance for loan losses for its microloan portfolio may be inadequate and it may need to increase its provision for loan losses, which could
materially decrease the Company’s net income. As a consequence of such events, the Bank may determine it appropriate to terminate its relationship with Grain.
Vision 2025 Evolves
The Company has deployed a Fintech-based small business automated lending technology in partnership with LendingFront Technologies, Inc. The technology
is a mobile application that digitizes the lending workflow from pre-approval to servicing and enables the Company to originate, close and fund small business loans
within very short spans of time, without requiring a physical presence within banking offices and with automated underwriting using both traditional and non-traditional
methods. The application has full loan origination and servicing capabilities and is integrated with Salesforce. All Commercial Relationship Officers and Business
Development Managers will utilize these capabilities. The Company is seeking to establish loan origination partnerships with non-profit and community-based
organizations to ensure penetration in underserved and underbanked markets.
The Company also established a relationship with SaveBetter, LLC, a fintech startup focusing on brokered deposits. As of December 31, 2022, the Company had
$156.7 million in such deposits. The recent regulatory easing of brokered deposit rules may enable the Company to classify such deposits as core deposits.
On October 1, 2022, Ponce Bank entered into a Membership Interest Purchase Agreement with Bamboo Payment Holding LLC ("Bamboo"). Under this
agreement, Ponce Bank purchased from Bamboo 180 Membership Interest Units representing an aggregate amount equal to up to 18% of total issued and outstanding
Membership Interest in Bamboo for a purchase price of $2.5 million. With over a decade processing payments in Latin America, Bamboo has a diverse network connects
Latin American local payment processing to global companies as well as domestic solutions to locally based organizations.
At December 31, 2018, the Company had approximately $1.06 billion in assets, $918.5 million in loans and $809.8 million in deposits. The Company has since
grown to $2.31 billion in assets, $1.49 billion in loans receivables, net of allowance for loan losses of
54
$34.6 million, and $1.25 billion in deposits at December 31, 2022, all while investing in infrastructure, implementing digital banking, acquiring Mortgage World,
adopting GPS, diversifying its product offering, partnering with Fintech companies and assisting its communities with 5,340 PPP loans totaling $261.4 million. The
Company raised over $132.0 million in additional capital through our conversion and reorganization and realized approximately $20.0 million in net gain while freeing
up approximately $40.0 million in investable funds through our sale-and-leaseback initiative. Now, the Company believes that it is poised to enhance its presence,
locally and in similar communities outside New York, as a leading CDFI and MDI financial institution holding company.
On June 7, 2022, the Company issued 225,000 shares of the Company’s Preferred Stock, par value $0.01 for an aggregate purchase price equal to $225.0 million
in cash to the Treasury, pursuant to the Treasury’s ECIP. Under the ECIP, Treasury provided investment capital directly to depository institutions that are CDFIs or
MDIs or their holding companies, to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, in low-income and
underserved communities. Treasury has indicated that the investment will qualify as Tier 1 capital. No dividends will accrue or be due for the first two years after
issuance. For years three through ten, depending upon the level of qualified and/or deep impact lending made in targeted communities, as defined in the ECIP guidelines,
dividends will be at an annual rate of either 2.0%, 1.25% or 0.5% and, thereafter, will be fixed at one of the foregoing rates. Holders of Preferred Stock generally do not
have any voting rights, with the exception of voting rights on certain matters as outlined in the Certificate of Designations. The Company has the option to redeem the
shares of Preferred Stock (i) in whole or in part on any dividend payment date on or after June 15, 2027, or (ii) in whole but not in part at any time within ninety days
following a Regulatory Capital Treatment Event, as defined below, in each case at a cash redemption price equal to the liquidation amount, with an amount equal to any
dividends that have been declared but not paid prior to the redemption date. The Company may not redeem shares of Preferred Stock without having received the prior
approval of the appropriate Federal banking agency for the Company, as defined in Section 3(q) of the Federal Deposit Insurance Act, to the extent required under
applicable capital rules. Such redemptions are subject to certain conditions and limitations. In the event of a liquidation, dissolution or winding up of the Company, the
Preferred Stock will be entitled to a liquidation preference, subject to certain limitations, in the amount of the sum of $1,000 per share plus declared and unpaid
dividends (without accumulation of undeclared dividends) on each share.
A “Regulatory Capital Treatment Event” means a good-faith determination that, as a result of (i) any amendment to, or change in, the laws, rules or regulations
of the United States or any political subdivision of or in the United States (including, for the avoidance of doubt, any agency or instrumentality of the United States,
including the Federal Reserve and other appropriate federal bank regulatory agencies) that is enacted or becomes effective after the initial issuance of any share of the
Preferred Stock; (ii) any proposed change in those laws, rules or regulations that is announced after the initial issuance of any share of the Preferred Stock; or (iii) any
official administrative or judicial decision or administrative action or other official pronouncement interpreting or applying those laws, rules or regulations or policies
with respect thereto that is announced or becomes effective after the initial issuance of the Preferred Stock, there is more than an insubstantial risk that we will not be
entitled to treat the full liquidation preferences of the shares of Preferred Stock then outstanding as “Additional Tier 1 Capital” (or its equivalent) for purposes of the
capital adequacy standards of Federal Reserve Regulation Q, 12 C.F.R. Part 217 (or, as and if applicable, the successor capital adequacy guidelines, rules or regulations
of the Federal Reserve or the capital adequacy guidelines, rules or regulations of any successor appropriate federal banking agency), as then in effect and applicable, for
as long as any share of Preferred Stock is outstanding.
Comparison of Financial Condition at December 31, 2022 and December 31, 2021
Total Assets. Total consolidated assets increased $658.5 million, or 39.8%, to $2.31 billion at December 31, 2022 from $1.65 billion at December 31, 2021. The
increase in total assets is largely attributable to an increase of $509.9 million resulting from the purchases in held-to-maturity securities utilizing the $225.0 million
received from the issuance of Preferred Stock to the Treasury pursuant to its ECIP. The increase in total assets is further impacted by increases of $188.0 million in net
loans receivable (inclusive of a $116.70 million net decrease in PPP loans) $33.4 million in right of use assets, $18.7 million in FHLBNY stock, $16.2 million resulting
from the purchase of available-for-sale securities and $12.3 million in deferred tax assets. This increase is partially offset by decreases of $99.5 million in cash and
equivalents, $13.9 million in mortgage loans held for sale, at fair value and $6.2 million in other assets.
Cash and Cash Equivalents. Cash and cash equivalents decreased $99.5 million, or 64.7%, to $54.4 million at December 31, 2022, compared to $153.9 million
at December 31, 2021. The decrease in cash and cash equivalents was primarily the result of purchases of securities, mostly held to maturity securities, net purchases of
FHLBNY stock, an increase in net loans, a contribution to the Ponce De Leon Foundation and a decrease in advances of warehouse lines of credit. The decrease in cash
and cash equivalents was offset from proceeds for the issuance of Preferred Stock to the Treasury, proceeds from advances from the FHLBNY, an increase in net
deposits, proceeds from maturities/calls of securities and the sale of loans.
Securities. The composition of securities at December 31, 2022 and 2021 and the amounts maturing of each classification are summarized as follows:
55
Available-for-Sale Securities:
U.S. Government Bonds:
Amounts maturing:
Three months or less
More than three months through one year
More than one year through five years
More than five years through ten years
Corporate Bonds:
Amounts maturing:
Three months or less
More than three months through one year
More than one year through five years
More than five years through ten years
Mortgage-Backed Securities
Total Available-for-Sale Securities
Held-to-Maturity Securities:
U.S. Agency Bonds:
Amounts maturing:
Three months or less
More than three months through one year
More than one year through five years
More than five years through ten years
Corporate Bonds:
Amounts maturing:
Three months or less
More than three months through one year
More than one year through five years
More than five years through ten years
Mortgage-Backed Securities
Total Held-to-Maturity Securities
December 31, 2022
December 31, 2021
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(in thousands)
$
$
$
$
$
— $
—
2,985
—
2,985
—
—
4,000
21,824
25,824
123,134
151,943 $
— $
—
35,000
—
35,000
— $
—
75,000
7,500
82,500
393,320
510,820 $
— $
—
2,689
—
2,689
—
—
3,710
19,649
23,359
103,457
129,505 $
$
—
—
34,620
—
34,620
$
—
—
71,328
7,410
78,738
382,493
495,851 $
— $
—
2,981
—
2,981
—
—
4,445
16,798
21,243
90,950
115,174 $
— $
—
—
—
—
— $
—
—
—
—
934
934 $
—
—
2,934
—
2,934
—
—
4,381
16,803
21,184
89,228
113,346
—
—
—
—
—
—
—
—
—
—
914
914
The Company securities portfolio increased $509.9 million in held-to-maturity and $16.2 million in available-for-sale during the year ended December 31, 2022.
The increase was mainly attributable to $528.9 million in held-to-maturity securities and $58.4 million in available-for-sale securities that were purchased during the year
ended December 31, 2022. The increase was offset primarily by $34.9 million in principal payments, $20.6 million in unrealized loss and two available-for-sale
securities in the amount of $5.4 million that matured and/or were called during the year ended December 31, 2022. There were no held-to-maturity securities and
available-for-sale securities sold during the years ended December 31, 2022.
During the year ended December 31, 2022, the Company invested primarily in held-to-maturity securities utilizing the $225.0 million the Company received
from the issuance of preferred stock to the Treasury pursuant to its ECIP and from cash received from deposits made by its customers.
Gross Loans Receivable. The composition of gross loans receivable at December 31, 2022 and 2021 and the percentage of each classification to total loans are
summarized as follows:
56
Mortgage loans:
1-4 Family residential
Investor-Owned
Owner-Occupied
Multifamily residential
Nonresidential properties
Construction and land
Total mortgage loans
Nonmortgage loans:
(1)
Business loans
Consumer loans
(2)
Total
December 31, 2022
Amount
Percent
December 31, 2021
Amount
(Dollars in thousands)
Percent
Increase (Decrease)
Dollars
Percent
$
$
343,968
134,878
494,667
308,043
185,018
1,466,574
39,965
19,129
59,094
1,525,668
22.6 % $
8.8 %
32.4 %
20.2 %
12.1 %
96.1 %
317,304
96,947
348,300
239,691
134,651
1,136,893
24.1 % $
7.3 %
26.3 %
18.1 %
10.2 %
86.0 %
26,664
37,931
146,367
68,352
50,367
329,681
2.6 %
1.3 %
3.9 %
100.0 % $
150,512
34,693
185,205
1,322,098
11.4 %
2.6 %
14.0 %
100.0 % $
(110,547 )
(15,564 )
(126,111 )
203,570
8.4 %
39.1 %
42.0 %
28.5 %
37.4 %
29.0 %
(73.5 %)
(44.9 %)
(68.1 %)
15.4 %
(1)As of December 31, 2022 and 2021, business loans include $20.0 million and $136.8 million, respectively, of PPP loans.
(2)As of December 31, 2022 and 2021, consumer loans include $18.2 million and $33.9 million, respectively, of microloans originated by the Bank pursuant to its arrangement
with Grain.
Allowance for loan losses were $34.6 million and $16.4 million at December 31, 2022 and 2021, respectively. Included in allowance for loan losses were $15.4 million and
1.4 million related to Grain at December 31, 2022 and 2021, respectively.
The following table presents the Company’s PPP loans outstanding as of December 31, 2022:
State
New York
New Jersey
Counties
Albany
Bronx
Kings
Nassau
New York
Queens
Suffolk
Westchester
Total New York
Bergen
Essex
Hudson
Monmouth
Union
Total New Jersey
Total
Number
of Loans
Aggregate
Amount
of Loans
Median
Amount
of Loans
(Dollars in thousands)
Average
Amount
of Loans
1
15
15
2
12
11
2
2
60
2
4
3
1
1
11
$
$
$
$
$
$
86
1,610
15,147
27
1,363
127
20
17
18,397
135
33
952
503
11
$
1,634
$
86 $
13
21
14
18
10
10
8
15 $
68 $
5
441
503
11
15
$
71
$
20,031
$
15 $
86
107
1,010
14
114
12
10
9
307
68
8
317
503
11
149
282
The $203.6 million increase in the gross loan portfolio was primarily the result of an increase of $320.3 million in non-PPP loans, offset by a $116.7 million
decrease in PPP loans at December 31, 2022 compared to December 31, 2021. Based on current internal loan reviews, the Company believes that the quality of our
underwriting, our weighted average loan-to-value ratio of 58.6% and our customer selection processes have served us well and provided us with a reliable base with
which to maintain a well-protected loan portfolio.
Commercial real estate loans, as defined by applicable banking regulations, include multifamily residential, nonresidential properties, and construction and land
mortgage loans. At December 31, 2022 and 2021, approximately 6.4% and 7.9%, respectively, of the outstanding principal balance of the Bank’s commercial real estate
mortgage loans were secured by owner-occupied commercial real estate. Owner-occupied commercial real estate is similar in many ways to commercial and industrial
lending in that these loans are generally made to businesses predominantly on the basis of the cash flows of the business rather than on valuation of the real estate.
Banking regulations have established guidelines relating to the amount of construction and land mortgage loans and investor- owned commercial real estate
mortgage loans of 100% and 300% of total risk-based capital, respectively. Should a bank’s ratios be in
57
excess of these guidelines, banking regulations generally require an increased level of monitoring in these lending areas by bank management. The Bank’s policy is to
operate within the 100% guideline for construction and land mortgage loans and up to 400% for investor owned commercial real estate mortgage loans. Both ratios are
calculated by dividing certain types of loan balances for each of the two categories by the Bank’s total risk-based capital. At December 31, 2022 and 2021, the Bank’s
construction and land mortgage loans as a percentage of total risk-based capital was 38.5% and 79.6%, respectively. Investor owned commercial real estate mortgage
loans as a percentage of total risk-based capital was 194.0% and 396.2% as of December 31, 2022 and 2021, respectively. At December 31, 2022, the Bank was within
the 100% guideline for construction and land mortgage loans and the 300% guideline for investor owned commercial real estate mortgage loans established by banking
regulators. Management believes that it has established the appropriate level of controls to monitor the Bank’s lending in these areas.
Mortgage Loans Held For Sale. Mortgage loans held for sale, at fair value, at December 31, 2022 decreased $13.9 million to $2.0 million from $15.8 million at
December 31, 2021.
Deposits. The composition of deposits at December 31, 2022 and 2021 and changes in dollars and percentages are summarized as follows:
December 31, 2022
December 31, 2021
Increase (Decrease)
Demand
Interest-bearing deposits:
NOW/IOLA accounts
Money market accounts
Reciprocal deposits
Savings accounts
Total NOW, money market, reciprocal and savings
Certificates of deposit of $250K or more
Brokered certificates of deposit
Listing service deposits
Certificates of deposit less than $250K
(1)
(1)
Total certificates of deposit
Total interest-bearing deposits
Total deposits
Amount
Percent
of Total
$
289,149
23.1 % $
Amount
(Dollars in thousands)
274,956
Percent
of Total
Dollars
Percent
22.8 % $
14,193
5.2 %
24,349
317,815
114,049
130,432
586,645
70,113
98,754
35,813
171,938
376,618
963,263
$ 1,252,412
35,280
186,893
143,221
134,887
500,281
78,454
79,320
66,411
205,294
429,479
1.9 %
25.4 %
9.1 %
10.4 %
46.8 %
5.6 %
7.9 %
2.9 %
13.7 %
30.1 %
76.9 %
100.0 % $ 1,204,716
929,760
2.9 %
15.5 %
11.9 %
11.2 %
41.5 %
6.5 %
6.6 %
5.5 %
17.1 %
35.7 %
77.2 %
100.0 % $
(10,931 )
130,922
(29,172 )
(4,455 )
86,364
(8,341 )
19,434
(30,598 )
(33,356 )
(52,861 )
33,503
47,696
(31.0 %)
70.1 %
(20.4 %)
(3.3 %)
17.3 %
(10.6 %)
24.5 %
(46.1 %)
(16.2 %)
(12.3 %)
3.6 %
4.0 %
(1)As of December 31, 2022 and 2021, there were $13.6 million and $29.0 million, respectively, in individual listing service deposits amounting to $250,000 or more. All
brokered certificates of deposit individually amounted to less than $250,000.
When wholesale funding is necessary to complement the Company's core deposit base, management determines which source is best suited to address both
liquidity risk and interest rate risk in line with management objectives. The Company’s Interest Rate Risk Policy imposes limitations on overall wholesale funding and
noncore funding reliance. The overall reliance on wholesale funding and noncore funding were within those policy limitations as of December 31, 2022 and 2021. The
Management Asset/Liability Committee generally meets on a bi-weekly basis to review funding needs, if any, and to ensure the Company operates within the approved
limitations.
Advances from FHLBNY. The Bank had outstanding borrowings at December 31, 2022 and 2021 of $517.4 million and $106.3 million, respectively. These
borrowings are in the form of advances from the FHLBNY.
Warehouse Lines of Credit. At December 31, 2021, Mortgage World had maintained two warehouse lines of credit with financial institutions for the purpose of
funding the origination and sale of residential mortgages. At December 31, 2021, Mortgage World utilized $15.1 million for funding of mortgage loans held for sale and
had unused lines of credit of $14.9 million. At December 31, 2022, there was no remaining balance on such lines of credit. During the first quarter of 2022, Mortgage
World became a division of the Bank and the Bank began funding these loans. At December 31, 2022, there was one warehouse line of credit with an unused
commitment of $10.0 million. This line of credit was terminated on February 7, 2023. The other warehouse line of credit was terminated on March 31, 2022.
Stockholders’ Equity. The Company’s consolidated stockholders’ equity increased $303.4 million, or 160.3%, to $492.7 million at December 31, 2022, from
$189.3 million at December 31, 2021. This increase in stockholders’ equity was largely attributable to the $225.0 million issuance of Preferred Stock to the Treasury
pursuant to its ECIP and the $118.0 million received as a result of the sale of common stock in the conversion of the mutual holding company to a stock company.
58
Comparison of Results of Operations for the Years Ended December 31, 2022 and 2021
The discussion of the Company’s results of operations for the years ended December 31, 2022 and 2021 are presented below. The results of operations for periods
may not be indicative of future results.
Ponce Financial Group, Inc., as the successor by merger with PDL Community Bancorp Consolidated
The following table presents the results of operations for the periods indicated:
For the Years Ended December 31,
Increase (Decrease)
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
(Loss) income before income taxes
(Benefit) provision for income taxes
Net (loss) income
(Loss) earnings per share:
Basic
Diluted
$
$
$
$
2022
$
82,752
16,149
66,603
24,046
42,557
6,419
85,822
(36,846 )
(6,845 )
(30,001 ) $
Dollars
$
2021
(Dollars in thousands)
67,098
8,252
58,846
2,717
56,129
34,637
57,142
33,624
8,209
25,415
$
15,654
7,897
7,757
21,329
(13,572 )
(28,218 )
28,680
(70,470 )
(15,054 )
(55,416 )
(1.32 ) $
(1.32 ) $
1.52 $
1.51 $
(2.84 )
(2.83 )
Percent
23.3 %
95.7 %
13.2 %
785.0 %
(24.2 %)
(81.5 %)
50.2 %
(209.6 %)
(183.4 %)
(218.0 %)
(187.1 %)
(187.4 %)
Net (Loss) Income. Net loss for the year ended December 31, 2022 was ($30.0) million compared to net income of $25.4 million for the year ended December
31, 2021. Loss per basic share and diluted share was ($1.32) for the year ended December 31, 2022 compared to earnings per basic share of $1.52 and earnings per
diluted share of $1.51 for the year ended December 31, 2021. This variance was largely due to charges related to Grain and a contribution to the Ponce De Leon
Foundation this year, gains on property sales last year versus a loss on equipment sale this year, higher compensation and occupancy expenses and a reduction on the
income on sale of mortgage loans.
Interest and Dividend Income. Interest and dividend income increased $15.7 million, or 23.3%, to $82.8 million for the year ended December 31, 2022 from
$67.1 million for the year ended December 31, 2021. Interest income on loans receivable, which is the Bank’s primary source of income, increased $4.3 million, or 6.6%
to $69.9 million for the year ended December 31, 2022 from $65.5 million for the year ended December 31, 2021. Interest and dividend income on securities, FHLBNY
stock and deposits due from banks increased $11.3 million, or 722.9%, to $12.9 million for the year ended December 31, 2022 from $1.6 million for the year ended
December 31, 2021.
The following table presents interest income on loans receivable for the periods indicated:
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
2022
2021
(Dollars in thousands)
Amount
Percent
$
$
21,406 $
17,696
11,963
10,443
4,860
3,497
69,865 $
20,650 $
14,472
9,743
8,256
9,444
2,967
65,532 $
756
3,224
2,220
2,187
(4,584 )
530
4,333
3.7 %
22.3 %
22.8 %
26.5
%
(48.5 %)
17.9 %
6.6 %
The following table presents interest and dividend income on securities and FHLBNY stock and deposits due from banks for the periods indicated:
59
Interest on deposits due from banks
Interest on securities
Dividend on FHLBNY stock
Total interest and dividend income
2022
$
$
713 $
11,709
465
12,887 $
Percent
Amount
2021
(Dollars in thousands)
20 $
1,267
279
1,566 $
693
10,442
186
11,321
3,465.0 %
824.2 %
66.7 %
722.9 %
For the Years Ended December 31,
Change
Interest Expense. Interest expense increased $7.9 million, or 95.7%, to $16.1 million for the year ended December 31, 2022 from $8.3 million for the year
ended December 31, 2021, primarily due to lower 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
2022
2021
Amount
Percent
$
$
3,477 $
6,275
128
65
5
6,199
16,149 $
(Dollars in thousands)
4,244 $
1,168
146
109
4
2,581
8,252 $
(767 )
5,107
(18 )
(44 )
1
3,618
7,897
(18.1 %)
437.2 %
(12.3 %)
(40.4 %)
25.0 %
140.2 %
95.7 %
Net Interest Income. Net interest income increased $7.8 million, or 13.2%, to $66.6 million for the year ended December 31, 2022 from $58.8 million for the
year ended December 31, 2021. The $7.8 million increase in net interest income for the year ended December 31, 2022 compared to the year ended December 31, 2021
was attributable to an increase of $15.7 million in interest and dividend income primarily due to increases in average loans receivable and interest and dividend on
securities and FHLBNY stock and deposits due from banks, offset by an increase of $7.9 million in interest expense due primarily to a higher average cost of funds on
interest bearing liabilities.
Net interest rate spread decreased by 63 basis point to 3.27% for the year ended December 31, 2022 from 3.90% for the year ended December 31, 2021. The
decrease in the net interest rate spread for the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily due to an increase in the
average rates paid on interest-bearing liabilities of 59 basis points to 1.39% for the year ended December 31, 2022 from 0.80% for the year ended December 31, 2021
and a decrease in the average yields on interest-earning assets of 4 basis points to 4.66% for the year ended December 31, 2022 from 4.70% for the year ended
December 31, 2021.
Net interest margin increased 38 basis points for the year ended December 31, 2022, to 3.75% from 4.13% for the year ended December 31, 2021, reflecting an
increase in interest and the decrease in amortization of fee income from our PPP lending offset by our organic loan growth.
The Federal Reserve raised the target range for the federal funds rate by 25 basis points to 4.50%-4.75% during its January 31, 2023 to February 1, 2023 meeting,
the eighth consecutive rate hike since March 2022, and pushing borrowing costs to the highest level since 2007. The Federal Reserve has signaled that there will likely
be additional federal funds interest rate increases. The recent increase and the anticipated increases are in response to inflation rising at a rate not seen in over 40 years.
Because of this rising rate environment, the speed with which it is anticipated to be implemented, the significant competitive pressures in our markets and the potential
negative impact of these factors on our deposit and loan pricing, our net interest margin may be negatively impacted. Our net interest income may also be negatively
impacted if the demand for loans decreases due to the rate increases, alone or in tandem with the concurrent inflationary pressures. We may be negatively impacted if we
are unable to appropriately time adjustments to our funding costs and the rates we earn on our loans. The Bank believes it is well positioned to withstand this rising
interest rate environment in the near term as it is asset sensitive.
60
Non-Interest Income. Non-interest income decreased $28.2 million, or 81.5%, to $6.4 million for the year ended December 31, 2022 from $34.6 million for the
year ended December 31, 2021.
The following table presents non-interest income for the periods indicated:
Service charges and fees
Brokerage commissions
Late and prepayment charges
Income on sale of mortgage loans
Loan origination
(Loss) gain on sale of premises and equipment
Other
Total non-interest income
For the Years Ended December 31,
Change
2022
2021
Amount
Percent
$
$
1,830 $
1,020
623
741
1,286
(436 )
1,355
6,419 $
(Dollars in thousands)
1,657 $
1,324
1,207
5,265
3,021
20,270
1,893
34,637 $
173
(304 )
(584 )
(4,524 )
(1,735 )
(20,706 )
(538 )
(28,218 )
10.4 %
(23.0 %)
(48.4 %)
(85.9 %)
(57.4 %)
(102.2 %)
(28.4 %)
(81.5 %)
Non-Interest Expense. Non-interest expense increased $28.7 million, or 50.2%, to $85.8 million for the year ended December 31, 2022 from $57.1 million for
the year ended December 31, 2021. The increase was primarily due to an aggregate $16.9 million write-off and write-down related to the Grain Receivable, net of
recoveries, $1.0 million write-off of the Company's investment in Grain, $5.0 million contribution to the Ponce De Leon Foundation and an increase of $4.7 million in
compensation and benefits related to new hires and a reduction of nonrecurring expense amortization related to PPP loans.
The following table presents non-interest expense for the periods indicated:
Compensation and benefits
Occupancy and equipment
Data processing expenses
Direct loan expenses
Insurance and surety bond premiums
Office supplies, telephone and postage
Professional fees
Contribution to the Ponce De Leon Foundation
Grain write-off and write-down
Marketing and promotional expenses
Directors fees
Regulatory assessment
Other operating expenses
Total non-interest expense
For the Years Ended
December 31,
2022
2021
(Dollars in thousands)
Amount
Change
Percent
$
$
27,914 $
13,968
3,779
2,487
870
1,555
5,904
4,995
17,940
593
368
337
5,112
85,822 $
23,262 $
11,328
3,015
3,888
585
2,054
7,629
—
—
206
4,652
2,640
764
(1,401 )
285
(499 )
(1,725 )
4,995
17,940
387
285
323
4,567
57,142 $
83
14
545
28,680
20.0 %
23.3 %
25.3 %
(36.0 %)
48.7 %
(24.3 %)
(22.6 %)
— %
— %
187.9 %
%
29.1
4.3 %
11.9 %
50.2 %
Income Tax Provision. The Company had a benefit for income taxes of ($6.8) million for the year ended December 31, 2022 compared to a provision for
income taxes of $8.2 million for the year ended December 31, 2021, resulting in effective tax rates of 18.6% and 24.4%, respectively. The decrease in the effective tax
rate is attributable to an increase of $5.6 million in the valuation allowance related to the unused non-deductible portion of the remaining charitable contribution
deduction.
61
Average Balance Sheets
The following table sets forth average outstanding balances, average yields and rates, and certain other information for the periods indicated. No tax-equivalent
yield adjustments have been made, as the effects would be immaterial. Average balances are derived from average daily balances. Non-accrual loans were included in
the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest
income or interest expense.
For the Years Ended December 31,
2022
2021
Average
Outstanding
Balance
Interest
Average
Yield/Rate
Average
Outstanding
Balance
Interest
Average
Yield/Rate
(1)
(Dollars in thousands)
(1)
Interest-earning assets:
Loans
Securities
Other
(2)
(3)
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
(4)
Net interest-earning assets
Net interest margin
Average interest-earning assets to interest-bearing liabilities
(6)
(5)
$ 1,375,723
357,446
44,160
1,777,329
164,324
$ 1,941,653
69,865
11,709
1,178
82,752
$
30,151 $
393,555
138,137
382,022
943,865
11,514
206,969
65
6,275
128
3,477
9,945
5
6,199
1,162,348
16,149
344,505
33,225
377,730
1,540,078
401,575
$ 1,941,653
$
$
614,981
—
—
—
16,149
66,603
5.08 % $ 1,312,505 $
62,908
3.28 %
2.67 %
51,156
4.66 % 1,426,569
89,152
$ 1,515,721
65,532
1,267
299
67,098
0.22 % $
1.59 %
0.09 %
0.91 %
1.05 %
0.04 %
3.00 %
1.39
30,851 $
310,611
133,244
430,164
904,870
10,106
121,319
% 1,036,295
287,008
17,763
304,771
1,341,066
174,655
1.39 % $ 1,515,721
109
1,168
146
4,244
5,667
4
2,581
8,252
—
—
—
8,252
$
58,846
3.27 %
$
3.75 %
152.91 %
390,274
4.99 %
2.01 %
0.58 %
4.70 %
0.35 %
0.38 %
0.11 %
0.99 %
0.63 %
0.04 %
2.13 %
0.80
%
0.80 %
3.90 %
4.13 %
137.66 %
(1)Loans include loans and mortgage loans held for sale, at fair value.
(2)Securities include available-for-sale securities and held-to-maturity securities.
(3)Includes FHLBNY demand account and FHLBNY stock dividends.
(4)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.
(5)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(6)Net interest margin represents net interest income divided by average total interest-earning assets.
62
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on the Company’s net interest income for the periods indicated. The volume column
shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate
(changes in rate multiplied by prior volume). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and
volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
For the Years Ended December 31,
2022 vs. 2021
Increase (Decrease) Due to
Volume
Rate
(In thousands)
Total Increase
(Decrease)
$
$
3,156 $
5,932
(41 )
9,047
(2 )
312
5
(475 )
(160 )
1,822
1,662
7,385 $
1,177 $
4,510
920
6,607
(42 )
4,795
(23 )
(292 )
4,438
1,796
6,234
373 $
4,333
10,442
879
15,654
(44 )
5,107
(18 )
(767 )
4,278
3,618
7,896
7,758
(1)
Interest-earning assets:
Loans
Securities
Other
(2)
Total interest-earning assets
Interest-bearing liabilities:
NOW/IOLA
Money market
Savings
Certificates of deposit
Total deposits
Borrowings
Total interest-bearing liabilities
Change in net interest income
(1)Loans include loans and mortgage loans held for sale, at fair value.
(2) Securities include available-for-sale securities and held-to-maturity securities.
63
Management of Market Risk
General. The most significant form of market risk is interest rate risk because, as a financial institution, the majority of the Bank’s assets and liabilities are
sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of its financial condition and
results of operations to changes in market interest rates. The Bank’s Asset/Liability Management Committee is responsible for evaluating the interest rate risk inherent in
the Bank’s assets and liabilities, for determining the level of risk that is appropriate, given the business strategy, operating environment, capital, liquidity and
performance objectives, and for managing this risk consistent with policies and guidelines approved by the Board of Directors. The Bank currently utilizes a third-party
modeling solution that is prepared on a quarterly basis, to evaluate its sensitivity to changing interest rates, given the Bank’s business strategy, operating environment,
capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.
The Bank does not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as
collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities. Mortgage World
did not engage in hedging activities to cover the risks of interest rate movements while it held mortgages for sale. The then low mortgage interest rates and their limited
volatility had effectively mitigated such risks.
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, 2022, in the event of an instantaneous upward and downward change in rates from management's interest rate forecast over the next
twelve months, assuming a static balance sheet, the following estimated changes are calculated:
Rate Shift (1)
+400
+300
+200
+100
Level
-100
Net Interest Income
Year 1 Forecast
(Dollars in thousands)
$
61,821
63,049
64,168
65,376
66,521
68,213
Year 1 Change
from Level
(7.07%)
(5.22%)
(3.54%)
(1.72%)
— %
2.54%
(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, 2022, 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, 2022, the EVE modeling calculated the following estimated changes in EVE
due to instantaneous upward and downward changes in rates:
64
Change in Interest
Rates (basis points) (1)
+400
+300
+200
+100
Level
-100
Estimated
EVE (2)
Estimated Increase (Decrease) in
EVE
Amount
Percent
$
$
406,087
425,907
445,802
465,702
483,903
526,663
(Dollars in thousands)
(77,816 )
(57,996 )
(38,101 )
(18,201 )
—
42,760
(16.08 %)
(11.99 %)
(7.87 %)
(3.76 %)
— %
8.84 %
EVE as a Percentage of Present
Value of Assets (3)
EVE
Ratio (4)
Increase
(Decrease)
(basis points)
19.67 %
20.17 %
20.63 %
21.08 %
21.43 %
22.56 %
(1,608 )
(1,199 )
(787 )
(376 )
—
884
(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 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, 2022, the EVE model indicated that the Bank was in compliance with the Board of Directors approved Interest Rate Risk Policy.
Most Likely Earnings Simulation Models. Management also analyzes a most-likely earnings simulation scenario that projects the expected change in rates
based on a forward yield curve adopted by management using expected balance sheet volumes forecasted by management. Separate growth assumptions are developed
for loans, investments, deposits, etc. Other interest rate scenarios analyzed by management may include delayed rate shocks, yield curve steepening or flattening, or
other variations in rate movements to further analyze or stress the balance sheet under various interest rate scenarios. Each scenario is evaluated by management and
weighted to determine the most likely result. These processes assist management to better anticipate financial results and, as a result, management may determine the
need to review other operating strategies and tactics which might enhance results or better position the balance sheet to reduce interest rate risk going forward.
Each of the above analyses may not, on its own, be an accurate indicator of how net interest income will be affected by changes in interest rates. Income
associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the
magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities
fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets,
such as adjustable rate mortgage loans, have features (generally referred to as interest rate caps and floors) which limit changes in interest rates. Prepayment and early
withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their
debts also may decrease during periods of rising interest rates. The Asset/Liability Committee reviews each of the above interest rate sensitivity analyses along with
several different interest rate scenarios as part of its responsibility to provide a satisfactory, consistent level of profitability within the framework of established liquidity,
loan, investment, borrowing and capital policies.
Management's model governance, model implementation and model validation processes and controls are subject to review in the Bank’s regulatory
examinations to ensure they are in compliance with the most recent regulatory guidelines and industry and regulatory practices. Management utilizes a respected,
sophisticated third party designed asset liability modeling software to help ensure implementation of management's assumptions into the model are processed as intended
in a robust manner. That said, there are numerous assumptions regarding financial instrument behaviors that are integrated into the model. The assumptions are
formulated by combining observations gleaned from the Bank’s historical studies of financial instruments and the best estimations of how, if at all, these instruments
may behave in the future given changes in economic conditions, technology, etc. These assumptions may prove to be
65
inaccurate. Additionally, given the large number of assumptions built into Bank’s asset liability modeling software, it is difficult, at best, to compare its results to other
banks.
The Asset/Liability Management Committee may determine that the Company should over time become more or less asset or liability sensitive depending on
the underlying balance sheet circumstances and its conclusions regarding interest rate fluctuations in future periods. The historically low benchmark federal funds
interest rate of the last several years implemented in response the turmoil resulting from COVID-19 pandemic has ended. The Federal Reserve Board increased the
benchmark federal funds interest rate by 25 basis points its January 31, 2023 to February 1, 2023 meeting. The Federal Reserve Board has signaled that there will likely
be additional federal funds interest rate increases. The recent increase and the anticipated increases are in response to inflation rising at a rate not seen in over 40 years.
Because of this rising rate environment, the speed with which it is anticipated to be implemented, the significant competitive pressures in our markets and the potential
negative impact of these factors on our deposit and loan pricing, our net interest margin may be negatively impacted. Our net interest income may also be negatively
impacted if the demand for loans decreases due to the rate increases, alone or in tandem with the concurrent inflationary pressures. We may be negatively impacted if we
are unable to appropriately time adjustments to our funding costs and the rates we earn on our loans. The Bank believes it is well positioned to withstand this rising
interest rate environment in the near term as it is asset sensitive.
GAP Analysis. In addition, management analyzes interest rate sensitivity by monitoring the Bank’s interest rate sensitivity "gap." The interest rate sensitivity gap
is the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest bearing-liabilities maturing
or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets maturing or repricing during a period exceeds the
amount of interest rate sensitive liabilities maturing or repricing during the same period, and a gap is considered negative when the amount of interest rate sensitive
liabilities maturing or repricing during a period exceeds the amount of interest rate sensitive assets maturing or repricing during the same period.
The following table sets forth the Company’s interest-earning assets and its interest-bearing liabilities at December 31, 2022, 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, 2022, on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments. The
loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and as a result of contractual rate
adjustments on adjustable-rate loans.
Zero to 90 Days
Zero to
180 Days
Zero Days
to One
Year
Zero Days
to Two
Years
Zero Days
to Five
Years
Five
Years Plus
(Dollars in thousands)
Total
Earning
Assets &
Costing
Liabilities
Non
Earning
Assets &
Non
Costing
Liabilities
December 31, 2022
Time to Repricing
$
$
20,286
21,817
1,494
146,397
24,665
—
$
20,286
56,680
1,494
239,265
24,665
—
$
20,286
87,373
1,494
372,573
24,665
—
$
$
20,286
185,290
1,494
560,220
24,665
—
20,286
442,280
1,494
1,400,720
24,665
—
$
—
224,760
—
111,402
—
—
20,286
667,040
1,494
1,512,122
24,665
—
$
$
34,074
(26,715 )
—
(17,016 )
(4 )
$
214,659
$
342,390
$
506,391
$
791,955
$
1,889,445
$
336,162
$
2,225,607
$
$
$
$
31,380
59,736
159,600
250,716
—
250,716
(36,057 )
$
$
$
85.62 %
62,760
103,461
177,375
343,596
—
343,596
(1,206 )
99.65 %
$
$
$
$
$
$
$
$
125,520
196,339
184,375
506,234
—
506,234
157
100.03 %
$
$
251,041
245,796
234,375
731,212
—
731,212
60,743
108.31 %
$
$
558,631
376,618
467,375
1,402,624
—
1,402,624
486,821
134.71 %
$
$
73,985
—
50,000
123,985
—
123,985
212,177
271.13 %
$
$
632,616
376,618
517,375
1,526,609
—
1,526,609
698,998
145.79 %
$
Total
54,360
640,325
1,494
1,495,106
24,661
96,043
96,043
86,382
243,178
—
49,502
292,680
492,700
785,380
$
2,311,989
$
$
875,794
376,618
566,877
1,819,289
492,700
2,311,989
(1)
Assets:
Interest-bearing deposits in banks
Securities
Placements with banks
Net loans (includes LHFS)
FHLBNY stock
Other assets
Total
Liabilities:
Non-maturity deposits
Certificates of deposit
Other liabilities
Total liabilities
Capital
Total liabilities and capital
Asset/liability gap
Gap/assets ratio
(1)Includes available-for-sale securities and held-to-maturity securities.
The following table sets forth the Company’s interest-earning assets and its interest-bearing liabilities at December 31, 2021, which are anticipated to reprice or
mature in each of the future time periods shown based upon certain assumptions. The amounts of assets and liabilities shown which reprice or mature during a particular
period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the
projected repricing of assets and liabilities at December 31, 2021, on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments.
66
The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and as a result of contractual
rate adjustments on adjustable-rate loans.
Zero to
90 Days
Zero to
180 Days
Zero Days
to One
Year
Zero Days
to Two
Years
Zero Days
to Five
Years
Five
Years Plus
Total
Earning
Assets &
Costing
Liabilities
Non
Earning
Assets &
Non
Costing
Liabilities
Total
December 31, 2021
Time to Repricing
Assets:
Interest-bearing deposits in banks
Securities (1)
Placement with banks
Net loans (includes LHFS)
FHLBNY stock
Other assets
Total
Liabilities:
Non-maturity deposits
Certificates of deposit
Other liabilities
Total liabilities
Capital
Total liabilities and capital
Asset/liability gap
Gap/assets ratio
$
$
$
$
$
153,894
4,993
2,490
166,991
6,005
—
334,373
$
$
153,894
8,939
2,490
276,112
6,005
—
447,440
$
$
153,894
16,365
2,490
446,737
6,005
—
625,491
$
$
$
$
$
17,858
73,838
12,880
104,576
—
104,576
229,797
319.74 %
$
$
35,716
143,956
12,880
192,552
—
192,552
254,888
232.37 %
$
$
71,433
255,074
47,880
374,387
—
374,387
251,104
167.07 %
$
$
(Dollars in thousands)
153,894
33,316
2,490
670,281
6,005
—
865,986
142,867
$
$
$
303,917
106,255
553,039
—
553,039
312,947
156.59 %
$
$
153,894
79,592
2,490
1,249,032
6,005
—
1,491,013
310,403
$
$
$
425,479
106,255
842,137
—
842,137
648,876
177.05 %
$
$
—
36,678
—
60,472
—
—
97,150
$
$
153,894
116,270
2,490
1,309,504
6,005
—
1,588,163
$
$
$
—
(1,990 )
—
11,410
(4 )
55,931
65,347
$
153,894
114,280
2,490
1,320,914
6,001
55,931
1,653,510
71,224
4,000
—
75,224
—
75,224
21,926
129.15 %
$
$
381,627
393,610
775,237
$
$
—
153,283
546,893
189,256
736,149
$
429,479
259,538
1,464,254
189,256
1,653,510
429,479
106,255
917,361
—
917,361
670,802
173.12 %
$
(1)Includes available-for-sale securities and held-to-maturity securities.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions
that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net interest income and EVE tables
presented assume that the composition of the interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured
and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities.
Accordingly, although the net interest income and EVE tables provide an indication of the interest rate risk exposure at a particular point 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.
67
Liquidity and Capital Resources
Liquidity describes the ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing
and deposit withdrawal requirements of the Company’s customers and to fund current and future planned expenditures. The primary sources of funds are deposits,
principal and interest payments on loans and available-for-sale securities and proceeds from the sale of loans. The Bank also has access to borrow from the FHLBNY. At
December 31, 2022 and 2021, the Bank had $517.4 million and $106.3 million, respectively, of term and overnight outstanding advances from the FHLBNY, and also
had a guarantee from the FHLBNY through letters of credit of up to $21.5 million, both as of December 31, 2022 and 2021. At December 31, 2022 and 2021, there was
eligible collateral of approximately $478.8 million and $362.3 million, respectively, in mortgage loans available to secure advances from the FHLBNY. The Bank also
has two unsecured lines of credit totaling $90.0 million and $25.0 million with two correspondent banks, under which there was nothing outstanding at December 31,
2022 and 2021, respectively. The Bank did not have any outstanding securities sold under repurchase agreements with brokers as of December 31, 2022 and 2021. As of
December 31, 2021, Mortgage World maintained two warehouse lines of credit with financial institutions for the purpose of funding the origination and sale of
residential mortgage loans, with maximum credit lines of $30.0 million, of which $15.1 million was utilized, with $14.9 million remaining unused. As of December 31,
2022, Mortgage World was a division of the Bank and the Bank was funding these loans.
Although maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by market interest rates, economic conditions, and competition. The most liquid assets are cash and interest-bearing deposits in banks. The levels of these
assets are dependent on operating, financing, lending, and investing activities during any given period.
Net cash provided by operating activities was $9.8 million and $18.6 million for the years ended December 31, 2022 and 2021, respectively. Net cash used in
investing activities, which consists primarily of disbursements for loan originations, purchases of new securities, and purchase of equipment offset by principal
collections on loans, proceeds from maturing securities and pay downs on mortgage-backed securities, and proceeds from the sale of real estate was ($777.1) million and
($211.1) million for the years ended December 31, 2022 and 2021, respectively. Net cash provided by financing activities, consisting of issuance of Preferred Stock,
activities in deposit accounts, advances, contribution to the Ponce De Leon Foundation and repurchase and sale of shares as treasury stock, was $667.7 million and
$274.4 million for the years ended December 31, 2022 and 2021, respectively.
Based on the Company’s current assessment of the economic impact of rising interest rates, the Russia-Ukraine conflict and current global and regional market
conditions on its borrowers, management has determined that these may be a detriment to borrowers’ ability to repay in the short-term and that the likelihood of long-
term detrimental effects will depend significantly on the resolution of these factors and the resumption of normalized economic activities, a factor not yet determinable.
The Bank’s management also took steps to enhance the Company’s liquidity position by increasing its on balance sheet cash and cash equivalents position in order to
meet unforeseen liquidity events and to fund upcoming funding needs.
At December 31, 2022 and 2021, all regulatory capital requirements were met, resulting in the Company and the Bank being categorized as well capitalized at
December 31, 2022 and 2021. Management is not aware of any conditions or events that would change this categorization.
Material Cash Requirements
Commitments. As a financial services provider, the Company routinely is a party to various financial instruments with off-balance-sheet risks, such as
commitments to extend credit and unused lines of credit. Although these contractual obligations represent the Company’s future cash requirements, a significant portion
of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to
loans originated. At December 31, 2022 and 2021, the Company had outstanding commitments to originate loans, and extend credit of $284.1 million and $220.5
million, respectively.
It is anticipated that the Company 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, 2022 totaled $196.3 million. Management expects that a substantial portion of the maturing time deposits will be
renewed. However, if a substantial portion of these deposits are not retained, the Company may utilize FHLBNY advances, unsecured credit lines with correspondent
banks, or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
Contractual Obligations. In the ordinary course of its operations, the Company enters into certain contractual obligations. Such obligations include data
processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
68
The following table summarizes our contractual obligations as of December 31, 2022 for the periods indicated below:
Total
2023
2024
2025
(in thousands)
2026
2027
Thereafter
For the Years Ending December 31,
Operating leases
Vendor obligations (1)
Advances from FHLBNY
Certificates of deposit
Total contractual obligation
$
47,211 $
30,363
511,375
376,618
3,785 $
6,860
178,375
196,342
3,833 $
5,645
50,000
49,457
3,635 $
4,492
50,000
41,169
3,422 $
4,462
—
42,165
3,495 $
4,452
—
47,485
$ 965,567 $ 385,362 $ 108,935 $ 99,296 $ 50,049 $ 55,432 $
29,041
4,452
233,000
—
266,493
(1) Amounts are for data processing services 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.
Other Material Cash Requirements. In addition to contractual obligations, the Company’s material cash requirements also includes compensation and benefits
expenses for its employees, which were $27.9 million the year ended December 31, 2022. The Company also has material cash requirements for occupancy and
equipment expenses, excluding depreciation and amortization of $1.8 million, related to rental expenses, general maintenance and cleaning supplies, guard services,
software licenses and other miscellaneous expenses, which were $12.1 million the year ended December 31, 2022.
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.”
69
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
Report of Independent Registered Public Accounting Firm (PCAOB ID 339)
Consolidated Statements of Financial Condition as of December 31, 2022 and 2021
Consolidated Statements of Operations for the Years Ended December 31, 2022, 2021 and 2020
Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2022, 2021 and 2020
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020
Notes to the Consolidated Financial Statements
70
71
73
74
75
76
77
79
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Ponce Financial Group, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial condition of Ponce Financial Group, Inc., as the successor by merger with PDL Community
Bancorp and Subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive (loss) income,
stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that were communicated or
required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit
matter or on the accounts or disclosures to which they relate.
Allowance for Loan Losses
Critical Audit Matter Description
As discussed in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for loan losses was approximately $34,592,000 as of December 31,
2022. The allowance for loan losses is a valuation allowance for probable incurred credit losses and consists of a specific and a general component for the allowance.
The general allowance for loan losses is evaluated by segregating loans into homogenous pools and calculating a reserve based on historical loss experience adjusted by
qualitative factors.
The qualitative factors are evaluated on a regular basis by management and are based upon management’s periodic review of items including: changes in the nature,
volume and terms of the portfolio; levels of and trends in delinquencies and impaired loans; effects of any changes in the quality of the loan review system; other
changes in lending policies, procedures and practices; experience, ability and depth of lending management and staff; national and local economic trends and business
conditions; industry conditions; change to the value of underlying collateral; and effects of changes in credit concentrations. Considering the significant estimation and
judgment required by management in determining adjustments for loan losses, our audit of the allowance for loan losses and the related disclosures required a high
degree of auditor judgment regarding the qualitative adjustments.
71
How the Critical Matter Was Addressed in the Audit
Our audit procedures related to the allowance for loan loss included the following, among others:
•We tested the effectiveness of controls over the Company’s allowance for loan loss analysis, controls over loan charge-off activity, loan risk ratings and
including additional considerations with respect to current economic conditions and management’s review of the adequacy of the allowance for loan loss.
•We substantively tested the accuracy and reliability of the underlying data on which the qualitative adjustments were based.
•We substantively tested the mathematical accuracy of (i) the historical charge-off activity, (ii) the quantitative measure of the qualitative loss factors, and (iii)
the overall calculation of the allowance for loan losses.
•We evaluated analytics and trends of the overall allowance loan loss analysis to assess for reasonableness.
•We evaluated management’s judgement and assumptions used in the development of the qualitative adjustments for reasonableness.
/s/ Mazars USA LLP
We have served as the Company’s auditor since 2013.
New York, New York
March 21, 2023
72
Ponce Financial Group, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, 2022 and 2021
(Dollars in thousands, except share data)
ASSETS
Cash and cash equivalents (Note 3):
Cash
Interest-bearing deposits in banks
Total cash and cash equivalents
Available-for-sale securities, at fair value (Note 4)
Held-to-maturity securities, at amortized cost (fair value 2022 $495,851; 2021 $914) (Note 4)
Placements with banks
Mortgage loans held for sale, at fair value
Loans receivable, net of allowance for loan losses - 2022 $34,592; 2021 $16,352 (Note 5)
Accrued interest receivable
Premises and equipment, net (Note 6)
Right of use assets (Note 7)
Federal Home Loan Bank of New York (FHLBNY) stock, at cost
Deferred tax assets (Note 10)
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 8)
Operating lease liabilities
Accrued interest payable
Advance payments by borrowers for taxes and insurance
Advances from the FHLBNY and others (Note 9)
Warehouse lines of credit (Note 9)
Mutual holding company conversion subscription liabilities
Other liabilities
Total liabilities
Commitments and contingencies (Note 13)
Stockholders' Equity:
Preferred stock, $0.01 par value; 100,000,000 shares authorized, 225,000 shares issued and outstanding as of December 31,
2022. None were issued and outstanding as of December 31, 2021
Common stock, $0.01 par value; 200,000,000 shares authorized; 24,861,329 shares issued and 24,859,353 shares outstanding
as of December 31, 2022 and 18,463,028 shares issued and 17,425,987 outstanding as of December 31, 2021
Treasury stock, at cost; 1,976 shares as of December 31, 2022 and 1,037,041 shares as of December 31, 2021 (Note 11)
Additional paid-in-capital
Retained earnings
Accumulated other comprehensive income (loss) (Note 16)
Unearned Employee Stock Ownership Plan (ESOP); 1,569,475 shares as of December 31, 2022 and 434,251 shares as of
December 31, 2021 (Note 11)
Total stockholders' equity
Total liabilities and stockholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
73
$
$
$
December 31,
2022
2021
34,074 $
20,286
54,360
129,505
510,820
1,494
1,979
1,493,127
15,049
17,446
33,423
24,661
16,137
13,988
2,311,989 $
1,252,412 $
34,532
1,390
9,724
517,375
—
—
3,856
1,819,289
98,954
54,940
153,894
113,346
934
2,490
15,836
1,305,078
12,362
19,617
—
6,001
3,820
20,132
1,653,510
1,204,716
—
228
7,657
106,255
15,090
122,000
8,308
1,464,254
225,000
—
249
(2 )
206,508
92,955
(17,860 )
185
(13,687 )
85,601
122,956
(1,456 )
(14,150 )
492,700
2,311,989 $
(4,343 )
189,256
1,653,510
$
Ponce Financial Group, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 2022, 2021 and 2020
(Dollars in thousands, except share and per share data)
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 5)
Net interest income after provision for loan losses
Non-interest income:
Service charges and fees
Brokerage commissions
Late and prepayment charges
Income on sale of mortgage loans
Loan origination
(Loss) gain on sale of premises and equipment
Other
Total non-interest income
Non-interest expense:
Compensation and benefits
Occupancy and equipment
Data processing expenses
Direct loan expenses
Insurance and surety bond premiums
Office supplies, telephone and postage
Professional fees
Contribution to the Ponce De Leon Foundation (Note 2)
Grain write-off and write-down (Note 5)
Marketing and promotional expenses
Directors fees
Regulatory assessment
Other operating expenses
Total non-interest expense
(Loss) income before income taxes
(Benefit) provision for income taxes (Note 10)
Net (loss) income
(Loss) earnings per share: (Note 12)
Basic
Diluted
Weighted average shares outstanding: (Note 12)
Basic
Diluted
The accompanying notes are an integral part of the consolidated financial statements.
74
$
$
$
$
For the Years Ended December 31,
2021
2022
2020
$
69,865
713
12,174
82,752
3,477
6,473
6,199
16,149
66,603
24,046
42,557
1,830
1,020
623
741
1,286
(436 )
1,355
6,419
27,914
13,968
3,779
2,487
870
1,555
5,904
4,995
17,940
593
368
337
5,112
85,822
(36,846 )
(6,845 )
(30,001 ) $
(1.32 ) $
(1.32 ) $
65,532
20
1,546
67,098
4,244
1,427
2,581
8,252
58,846
2,717
56,129
1,657
1,324
1,207
5,265
3,021
20,270
1,893
34,637
23,262
11,328
3,015
3,888
585
2,054
7,629
—
—
206
285
323
4,567
57,142
33,624
8,209
25,415
$
$
1.52
1.51
$
$
52,389
84
866
53,339
6,576
2,174
2,619
11,369
41,970
2,443
39,527
892
974
358
4,120
925
4,177
1,801
13,247
22,053
9,564
2,137
1,447
553
1,399
6,049
—
—
488
276
210
3,363
47,539
5,235
1,382
3,853
0.23
0.23
22,690,943
22,690,943
16,744,561
16,791,443
16,673,193
16,682,584
Ponce Financial Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income
For the Years Ended December 31, 2022, 2021 and 2020
(in thousands)
Net (loss) income
Net change in unrealized (losses) gains on securities:
Unrealized (losses) gain
Income benefit (tax) effect
Total other comprehensive (loss) income, net of tax
Total comprehensive (loss) income
The accompanying notes are an integral part of the consolidated financial statements.
75
For the Years Ended December 31,
2021
2020
2022
$
(30,001 ) $
25,415
$
3,853
(20,781 )
4,377
(16,404 )
(46,405 ) $
$
(1,971 )
380
(1,591
)
$
23,824
147
(32 )
115
3,968
Ponce Financial Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2022, 2021 and 2020
(Dollars in thousands, except share data)
Unearne
d
Employe
e
Accumulated
Treasury Additional
Other
Stock
Preferred Stock
Common Stock
Stock,
Paid-in
Retained Comprehensive
Shares
Amount
Amount At Cost
Capital
Earnings Income (Loss)
$
$
Balance, December 31, 2019
Net income
Other comprehensive income, net of tax
Release of restricted stock units
Treasury stock
ESOP shares committed to be released (48,250 shares)
Share-based compensation
Balance, December 31, 2020
Net income
Other comprehensive income, net of tax
Release of restricted stock units
Treasury stock
ESOP shares committed to be released (96,500 shares)
Share-based compensation
Balance, December 31, 2021
Net loss
Other comprehensive income, net of tax
Second-step conversion and reorganization:
Conversion and reorganization of PDL Community
Bancorp
Retirement of treasury stock
Purchase of shares by the Employee Stock
Ownership Plan (ESOP")
Issuance of shares to the Ponce De Leon
Foundation
Issuance of preferred shares
Release of restricted stock units
Treasury stock
ESOP shares committed to be released
(133,744 shares)
Share-based compensation
Balance, December 31, 2022
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
225,00
0
—
—
—
—
225,00
0
$
—
225,00
0
—
—
—
—
225,00
0
$
Shares
17,451,134
—
—
96,825
(421,990 )
—
—
17,125,969
—
—
98,232
201,786
—
—
17,425,987
—
—
$
$
$ (14,478 ) $
—
—
1,075
(4,711 )
—
—
$ (18,114 ) $
—
—
1,385
3,042
—
—
$ (13,687 ) $
185
—
—
—
—
—
—
185
—
—
—
—
—
—
185
—
—
84,777
—
—
(1,075 )
—
—
1,403
85,105
$
93,688
3,853
—
—
—
—
—
97,541
$
—
—
(1,385 )
94
380
1,407
85,601
25,415
—
—
—
—
—
$ 122,956
$
(30,001 )
—
—
—
—
5,788,972
—
1,097,353
399,522
—
149,495
(1,976 )
—
—
58
(11 )
—
13,687
117,952
(13,676 )
11
4
—
2
—
—
—
—
—
—
—
(2 )
—
—
10,963
3,991
—
(1 )
2
109
1,567
—
—
—
—
—
—
—
—
—
—
The accompanying notes are an integral part of the consolidated financial statements.
76
Ownersh
ip
Plan
(ESOP)
Total
20 $ (5,790 ) $ 158,402
3,853
—
—
115
—
115
—
—
—
(4,711 )
—
—
482
482
—
—
1,403
—
135 $ (5,308 ) $ 159,544
25,415
—
—
(1,591 )
—
(1,591 )
—
—
—
3,136
—
—
1,345
965
—
1,407
—
—
(1,456 ) $ (4,343 ) $ 189,256
(30,001 )
(16,404 )
—
—
—
(16,404 )
—
—
— 118,010
—
—
—
(10,974 )
—
—
—
3,995
—
—
—
—
—
— 225,000
—
1
—
—
1,167
—
1,276
1,567
24,859,353
$
249
$
(2 ) $
206,508
$
92,955
$
(17,860 ) $ (14,150 ) $ 492,700
Ponce Financial Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2022, 2021 and 2020
(in thousands)
Cash Flows From Operating Activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
For the Years Ended
December 31,
2021
2020
2022
$
(30,001 ) $
25,415
$
3,853
Amortization of premiums/discounts on securities, net
(Gain) loss on sale of loans
Loss (gain) on sale of real property
Gain on derivatives
Grain write-off and write-down
Provision for loan losses
Depreciation and amortization
ESOP compensation expense
Share-based compensation expense
Deferred income taxes
Changes in assets and liabilities:
Decrease (increase) in mortgage loans held for sale, at fair value
Increase in accrued interest receivable
Increase in other assets
Increase (decrease) in accrued interest payable
Decrease in operating lease liabilities
Increase in advance payments by borrowers
(Decrease) increase in mortgage loan funding payable
Net (decrease) increase in other liabilities
Net cash provided by (used in) operating activities
Cash Flows From Investing Activities:
Business acquisition, net of cash acquired
Proceeds from redemption of FHLBNY Stock
Purchases of FHLBNY Stock
Purchases of available-for-sale securities
Purchases of held-to-maturity securities
Proceeds from sale of available-for-sale securities
Proceeds from maturities, calls and principal repayments on securities
Placements with banks
Proceeds from sales of loans
Net increase in loans
Proceeds from sale of real property
Purchases of premises and equipment
Net cash used in investing activities
Cash Flows From Financing Activities:
Net increase in deposits
Funds received in connection with second-step conversion
Common stock issued from vesting of restricted stock units
Proceeds from issuance of preferred stock
Repurchase of treasury stock
Proceeds from the sale of treasury stock
Contribution to the Ponce De Leon Foundation
Net proceeds from advances from FHLBNY
Net advances on warehouse lines of credit
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and Cash Equivalents, including restricted cash:
Beginning
Ending
The accompanying notes are an integral part of the consolidated financial statements.
77
342
(184 )
436
(22 )
17,940
24,046
4,266
1,372
1,567
(7,939 )
13,857
(2,687 )
(11,774 )
1,162
(2,149 )
2,067
—
(2,500 )
9,799
—
213,416
(232,076 )
(58,383 )
(528,929 )
—
40,318
996
9,665
(221,576 )
—
(492 )
(777,061 )
47,696
—
2
225,000
—
—
(1,000 )
411,120
(15,090 )
667,728
(99,534 )
120
(69 )
(20,270 )
(172 )
—
2,717
2,473
1,395
1,405
1,260
18,759
(966 )
(10,579 )
168
—
638
(1,483 )
(2,258 )
18,553
—
1,111
(686 )
(109,878 )
—
3,641
9,251
249
14,382
(162,657 )
37,619
(4,171 )
(211,139 )
175,137
122,000
—
—
(1,607 )
4,743
—
(11,000 )
(14,871 )
274,402
81,816
$
153,894
54,360
$
72,078
153,894
$
7
62
(4,177 )
(166 )
—
2,443
2,519
540
1,403
(932 )
(23,827 )
(7,414 )
(10,045 )
(37 )
—
671
246
7,354
(27,500 )
(1,005 )
4,759
(5,450 )
(13,625 )
(1,743 )
—
17,769
(2,739 )
3,977
(209,385 )
4,743
(1,902 )
(204,601 )
247,536
—
—
—
(4,711 )
—
—
12,851
20,826
276,502
44,401
27,677
72,078
Ponce Financial Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 2022, 2021 and 2020
(In thousands)
Supplemental Disclosures:
Cash paid during the year:
Interest
Income taxes
Supplemental disclosure related to adoption of ASU 2016-02, detailed in Note 7:
ROU Assets
Operating lease liabilities
Supplemental Disclosures of Noncash Investing Activities:
Acquisitions
Non-cash assets acquired:
Mortgage loans held for sale, at fair value
Premises and equipment
Other assets
Total non-cash assets acquired
Liabilities assumed:
Warehouse lines of credit
Mortgage loan fundings payable
Other liabilities
Total liabilities assumed
Net non-cash assets acquired
Cash and cash equivalents acquired
Consideration paid
The accompanying notes are an integral part of the consolidated financial statements.
78
For the Years Ended
December 31,
2021
2020
2022
$
$
$
$
$
$
$
$
$
14,987
173
35,870
36,681
8,084
5,970
$
$
—
$
—
—
—
—
—
—
—
—
—
—
—
—
$
$
$
—
—
—
—
—
—
—
—
—
—
—
$
$
$
11,360
531
—
—
10,549
302
772
11,623
9,135
1,237
246
10,618
1,005
750
1,755
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Note 1. Nature of Business and Summary of Significant Accounting Policies
Basis of Presentation and Consolidation:
Ponce Financial Group, Inc., as the successor by merger with PDL Community Bancorp pursuant to the completion of the conversion and reorganization of Ponce Bank
Mutual Holding Company from the mutual holding company to the stock holding company form of organization that was effective on January 27, 2022 (hereafter
referred to as “we,” “our,” “us,” “Ponce Financial Group, Inc.,” or the “Company”), is the holding company of Ponce Bank (“Ponce Bank” or the “Bank”), a federally
chartered stock savings association. The Company’s Consolidated Financial Statements presented herein have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”).
The Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiary Ponce Bank (the “Bank”) and the Bank’s wholly-owned
subsidiary, Ponce De Leon Mortgage Corp., which is a mortgage banking entity. All significant intercompany transactions and balances have been eliminated in
consolidation.
Nature of Operations:
The Company is a savings and loan holding company. The Company is subject to the regulation and examination by the Board of Governors of the Federal Reserve. The
Company’s business is conducted through the administrative office and 13 full service banking and 6 mortgage loan offices. The banking offices are located in New
York City – the Bronx (4 branches), Queens (3 branches), Brooklyn (3 branches), Manhattan (2 branches) and Union City (1 branch), New Jersey. The mortgage loan
offices are located in Queens (2) and Brooklyn (1), New York and Bergenfield (1), New Jersey. The Company’s primary market area currently consists of the New York
City metropolitan area.
The Bank is a federally chartered stock 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, 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.” Upon the completion of its reorganization into a mutual holding company
structure in September of 2017, the assets and liabilities of Ponce De Leon Federal Bank were transferred to and assumed by the Bank. The Bank is a MDI, a CDFI, and
a certified SBA lender. The Bank is subject to comprehensive regulation and examination by the Office of Comptroller of the Currency (the “OCC”).
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, mortgage-backed securities and FHLBNY stock. The
Bank offers a variety of deposit accounts, including demand, savings, money markets and certificates of deposit accounts.
On July 10, 2020, the Company completed its acquisition of Mortgage World. During the year ended December 31, 2021, Mortgage World was a mortgage banking
entity subject to the regulation and examination of the New York State Department of Financial Services. The primary business of Mortgage World was the taking of
applications from the general public for residential mortgage loans, underwriting them to investors’ standards, closing and funding them and holding them until they
were sold to investors. Although Mortgage World was permitted to do business in various states (New York, New Jersey, Pennsylvania, Florida and Connecticut), it
primarily operated in the New York City metropolitan area. On January 26, 2022, Mortgage World transferred its assets and liabilities to Ponce Bank and ceased
operating as an independent mortgage banking entity. Mortgage World’s business is now conducted as a division of Ponce Bank.
Risks and Uncertainties:
On February 24, 2022, Russian forces launched significant military action against Ukraine, and sustained conflict and disruption in the region continues. The impact to
Ukraine as well as actions taken by other countries, including new and stricter sanctions imposed by Canada, the United Kingdom, the European Union, the U.S. and
other countries and companies and organizations against officials, individuals, regions, and industries in Russia, and actions taken by Russia in response to such
sanctions, and each country’s potential response to such sanctions, tensions, and military actions could have a material adverse effect on our operations.
79
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Inflation and interest rates may continue to adversely impact several industries within our geographic footprint and impair the ability of the Company’s customers to
fulfill their contractual obligations to the Company. This could cause the Company to experience adverse effects on its business operations, loan portfolio, financial
condition, and results of operations. During the year ended December 31, 2022, the provision for loan losses amounted to $24.0 million primarily due to reserves
related to loans originated by Grain (see Note 5 for additional information related to Grain reserves) as well as increases in the loan portfolio.
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 and the estimates relating to the valuation for share-based awards.
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 and the ability of Mortgage World, a division of the Bank, to sell originated loans in the secondary markets are
susceptible to changes in the local market conditions. Note 4 discusses the types of securities in which the Bank invests. Notes 5 and 13 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 Company 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 Company, interest-bearing deposits in financial institutions, and deposits are reported net. Included in cash and cash equivalents are
restricted cash from escrows and good faith deposits. Escrows consist of U.S. Department of Housing and Urban Development (“HUD”) upfront mortgage insurance
premiums and escrows on unsold mortgages that are held on behalf of borrowers. Good faith deposits consist of deposits received from commercial loan customers for
use in various disbursements relating to the closing of a commercial loan. Restricted cash are included in cash and cash equivalents for purposes of the consolidated
statement 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 statements of operations and 2) OTTI related to other
factors, which is recognized in other comprehensive income.
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,
80
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
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.
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 Company’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 90 days past due. Past due status is based on 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, 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. Accrued interest
receivable is closely monitored for collectability and will be charged-off in a timely manner if deemed uncollectable.
Allowance for Loan Losses: The allowance for loan losses (“ALLL”) 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 Company’s assessment of its loan portfolio, including Grain, and the economic impact of inflation
and increased interest rates on borrowers indicates that it is likely that such conditions will be a detriment to their ability to repay in the short-term and that the likelihood
of long-term detrimental effects depends significantly on the resumption of normalized economic activities, a factor not yet determinable.
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.
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
81
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
period, except for loans originated by Grain where the Bank uses one fiscal quarter. 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 are 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. Included in consumer loans are loans originated by Grain.
Mortgage Loans Held for Sale, at Fair Value: Mortgage loans held for sale, at fair value, include residential mortgages that were originated in accordance with
secondary market pricing and underwriting standards. These loans are loans originated by the Bank’s Mortgage World division and the Company intends to sell these
loans on the secondary market. Mortgage loans held for sale are carried at fair value under the fair value option accounting guidance for financial assets and financial
liabilities. The gains or losses for the changes in fair value of these loans are included in income on sale of mortgage loans on the consolidated statements of operations.
Interest income on mortgage loans held for sale measured under the fair value option is calculated based on the principal amount of the loan and is included in interest
loans receivable on the consolidated statements of operations.
82
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Derivative Financial Instruments: The Company, through the Bank’s Mortgage World division, uses derivative financial instruments as a part of its price risk
management activities. All such derivative financial instruments are designated as free-standing derivative instruments. In accordance with FASB ASC 815-25,
Derivatives and Hedging, all derivative instruments are recognized as assets or liabilities on the balance sheet at their fair value. Change in the fair value of these
derivatives is reported in current period earnings.
Additionally, to facilitate the sale of mortgage loans, the Bank, through its Mortgage World division, may enter into forward sale positions on securities, and mandatory
delivery positions. Exposure to losses or gains on these positions is limited to the net difference between the calculated amounts to be received and paid. As of December
31, 2022, the Company did not enter into any forward sale or mandatory delivery positions on their financial instruments.
Revenue from Contracts with Customers: The Company’s revenue from contracts with customers in the scope of ASC 606, Revenue from Contract with Customers, is
recognized within noninterest income. ASC 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with
customers. Management determined the revenue streams impacted by ASC 606 included those related to service charges on deposit accounts, ATM and card fees and
other services fees. The Company’s revenue recognition pattern for these revenue streams did not change from current practice. The Company's primary sources of
revenue are interest income on financial assets and income from mortgage banking activities, which are explicitly excluded from the scope of ASC 606.
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, 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.
Leases: The Company leases office space and certain equipment under non-cancellable operating lease agreements and determines if an arrangement is a lease at
inception. The Company does not currently have any financing lease arrangements.
Right of use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease
payments arising from the lease. Right of use assets are recognized on the commencement date based on the present value of lease payments over the lease term adjusted
for initial direct costs, if any, and lease incentives received or deemed probable of being received. The Company uses the rate implicit in the lease if it is readily
determinable or otherwise the Company uses its incremental borrowing rate. The implicit rates of Company leases are not readily determinable and accordingly, the
83
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Company uses its incremental borrowing rate based on the information available at the commencement date for all leases. The Company's incremental borrowing rate
for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms and in a similar
economic environment. The Company uses its FHLBNY borrowing rate based on the information available on the commencement date plus a spread of 2.50% in
determining the present value of lease payments.
Lease expense is recognized on a straight-line basis over the lease term and is included in “Occupancy and equipment” in the Consolidated Statement of Operations.
Some of the Company’s lease agreements include rental payments adjusted periodically for inflation which are accounted for as variable lease amounts but are not
reflected as a component of the Company’s lease liability. Certain leases also require the Company to pay real estate taxes, insurance, maintenance and other operating
expenses associated with the leased premises or equipment which are also not reflected as a component of the Company’s lease liability
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.
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
operations.
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 17 contains details regarding related party
transactions.
Employee Benefit Plans: The Company maintains a KSOP, an Employee Stock Ownership Plan with 401(k) provisions incorporated, a Long-Term Incentive Plan that
includes grants of restricted stock units and stock options, and a Supplemental Executive Retirement Plan (the “SERP”).
84
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
KSOP, the Employee Stock Ownership Plan with 401(k) Provisions: Compensation expense is recorded as shares are committed to be released with a corresponding
credit to unearned KSOP 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 KSOP. The difference between the average fair market value and the cost of the shares allocated by the KSOP is recorded as an adjustment to additional paid-in-
capital. Unallocated common shares held by the Company’s KSOP 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. The 401(k) provisions provide 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.
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: Comprehensive (loss) income consists of net (loss) income and other comprehensive (loss) income, which are both recognized as separate
components of stockholder’s equity. Other comprehensive (loss) income includes unrealized gains and losses on securities available-for-sale.
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 14. 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: Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief
Operating Decision Maker (the “CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s Chief Executive
Officer is the Company’s CODM. The CODM reviews financial information presented on a consolidated basis for purposes of making operating decisions, allocating
resources, and evaluating financial performance. As such, the Company has determined that it operates as one operating segment and one reportable 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 (loss) 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.
85
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Reclassification of Prior Year Presentation: Certain prior periods amounts have been reclassified for consistency with the current period presentation. These
reclassifications had no effect on the reporting results of operations and did not affect previously reported amounts in the Consolidated Statements of Operations.
Recently Adopted Accounting Standards Updates ("ASU")
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.
The Company took advantage of the extended transition period for complying with new or revised accounting standards as an EGC, and it adopted the amendments in
this update for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.
The Company has evaluated the amended guidance including the potential impact on its consolidated financial statements. The Company has identified its leased office
spaces and equipment as within the scope of the guidance. The Company currently leases its administrative office and 15 branches and mortgage offices and the new
guidance resulted in the establishment of a right to use asset of $36.2 million and corresponding lease obligations of $36.7 million. The Company is utilizing a new lease
accounting tool to assist in the computations of its right to use asset and corresponding lease obligations for the operating leases. The Company has adopted this standard
on December 31, 2022, effective January 1, 2022.
Recent Accounting Pronouncements Not Yet Adopted:
As an emerging growth company (“EGC”) as defined in Rule 12b-2 of the Exchange Act, the Company had 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. The Company has exited the EGC status as of December 31, 2022.
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. The Company took advantage of the extended transition
period for complying with new or revised accounting standard as an EGC, and adopted this accounting standards and applied the standard’s provisions as a cumulative-
effect adjustment to retained earnings as of January 1, 2023.
The Company has evaluated 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 might result in an increase in the allowance for loan losses, particularly for longer
duration loan portfolios. The Company also notes that the new guidance will result in an allowance for held-to-maturity debt securities. Upon adoption, the Company
anticipates that it would decrease the allowance to approximately $31.5 million for the loan portfolio and add a $0.7 million allowance to the held-to-maturity securities
portfolio.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848).” This ASU provides optional means and exceptions for applying GAAP to
contracts, hedging relationships and other transactions that reference LIBOR or other reference rates expected to be discontinued because of the reference rate reform.
The amendments in this ASU are effective for all entities as of March
86
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
12, 2020 through December 31, 2022. The Company believes this update will not have a material impact on the consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326).” This ASU eliminates troubled debt restructuring guidance for
organizations that adopted the amendments in ASU 2016-13 while providing for additional disclosures for loan modifications. This new guidance introduces new
disclosure requirements for modifications of receivables to borrowers experiencing financial difficulty. Creditors should evaluate all modifications as either a new loan
or continuation of an existing loan under the general guidance on loan refinancing and restructuring in ASC 310-20-35-9 through 35-11. The Company continues to
evaluate the impact of the guidance, including determining whether new modifications exist that are deemed to be in scope and subsequent related accounting standard
updates.
Note 2. Preferred Stock Issuance; Plan of Conversion and Stock Offering
Preferred Stock Issuance
On June 7, 2022, the Company closed a private placement (the “Private Placement”) of 225,000 shares of the Company’s Senior Non-Cumulative Perpetual Preferred
Stock, Series A, par value $0.01 (the “Preferred Stock”) for an aggregate purchase price equal to $225.0 million in cash, to the United States Department of the Treasury
(the “Treasury”) pursuant to the Emergency Capital Investment Program (“ECIP”). The holders of the Preferred Stock will be entitled to a dividend payable in cash
quarterly at an annual rate dependent on certain factors as reported by the Company to Treasury in a quarterly supplemental report. The initial dividend rate is zero
percent for the first two years after issuance, and thereafter the floor dividend rate is 0.50% and the ceiling dividend rate is 2.00%. After 10 years of issuance, the
perpetual dividend rate in effect, will be determined based on said floor and ceiling. The actual dividend rate that will be paid by the Company on the Preferred Stock
cannot be determined at this time.
The ECIP investment by the Treasury is part of a program to invest over $8.7 billion into Community Development Financial Institution (“CDFI”) or Minority
Depository Institution (“MDI”), of which Ponce Bank is both. The ECIP is intended to incentivize CDFIs and MDIs to provide loans, grants, and forbearance to small
businesses, minority-owned businesses, and consumers in low-income and underserved communities that may have been disproportionately impacted by the economic
effects of the COVID-19 pandemic.
In the event of a liquidation, dissolution or winding up of the Company, the Preferred Stock will be entitled to a liquidation preference, subject to certain limitations, in
the amount of the sum of $1,000 per share plus declared and unpaid dividends (without accumulation of undeclared dividends) on each share.
Plan of Conversion and Common Stock Offering
On May 25, 2021, Ponce Bank Mutual Holding Company and PDL Community Bancorp, the then holding company for Ponce Bank and Mortgage World Bankers, Inc.,
announced that their Boards of Directors had unanimously adopted a Plan of Conversion and Reorganization (the “Plan”) pursuant to which Ponce Bank Mutual Holding
Company and PDL Community Bancorp reorganized into a new stock holding company and conducted a second-step stock offering of new shares of common stock.
On January 26, 2022, Mortgage World transferred its assets and liabilities to Ponce Bank and ceased operating as an independent mortgage banking entity. Mortgage
World’s business is now conducted as a division of Ponce Bank.
On January 27, 2022, Ponce Financial Group, Inc. and PDL Community Bancorp announced that the conversion and reorganization of Ponce Bank Mutual Holding
Company from the mutual to stock form of organization and related stock offering was consummated at the close of business. As a result of the closing of the
conversion and reorganization and stock offering, Ponce Financial Group, Inc. is now the holding company for Ponce Bank. Ponce Bank’s former mutual holding
companies, PDL Community Bancorp and Ponce Bank Mutual Holding Company, have ceased to exist.
PDL Community Bancorp’s stock ceased trading at the close of the market on January 27, 2022. Ponce Financial Group, Inc.’s common stock began trading on the
Nasdaq Global Market under the same trading symbol “PDLB” on January 28, 2022.
As a result of the conversion and reorganization, each issued and outstanding share of PDL Community Bancorp common stock was converted into the right to receive
1.3952 shares of Ponce Financial Group, Inc. common stock. Cash was paid in lieu of any fractional shares based on the sale price in the offering of $10.00 per share.
Ponce Financial Group Inc.’s total issued and outstanding shares on January 28, 2022 was 24,711,834 shares. All shares of treasury stock of PDL Community Bancorp
were eliminated on January 27, 2022.
87
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
On January 27, 2022, the Company made $5.0 million in contributions to the Ponce De Leon Foundation as part of the conversion and reorganization, which is included
in the non-interest expense for the year ended December 31, 2022, in the accompanying Consolidated Statements of Operations.
At December 31, 2021, cash and cash equivalents included $122.0 million received in connection with the conversion and reorganization and was reflected as a separate
liability on the Company’s Consolidated Statements of Financial Condition. As of
January 27, 2022, these funds were reclassified as proceeds from the sale of the Company’s common stock.
Note 3. Restrictions on Cash and Due From Banks
The Bank was previously required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. Effective March
26, 2020, the Federal Reserve Board eliminated reserve requirement for depository institutions to support lending to households and businesses.
Note 4. Securities
The amortized cost, gross unrealized gains and losses, and fair value of securities at December 31, 2022 and 2021 are summarized as follows:
December 31, 2022
Available-for-Sale Securities:
U.S. Government Bonds
Corporate Bonds
Mortgage-Backed Securities:
Collateralized Mortgage Obligations
FHLMC Certificates
FNMA Certificates
GNMA Certificates
(1)
Total available-for-sale securities
Held-to-Maturity Securities:
U.S. Agency Bonds
Corporate Bonds
Mortgage-Backed Securities:
Collateralized Mortgage Obligations
FHLMC Certificates
FNMA Certificates
(1)
SBA Certificates
Total held-to-maturity securities
(1)Comprised of FHLMC, FNMA and GNMA issued securities.
88
Amortized
Cost
Gross
Gross
Unrealized
Unrealized
Gains
Losses
Fair Value
(in thousands)
$
2,985
25,824
$
44,503
11,310
67,199
122
151,943
35,000
82,500
235,479
4,120
131,918
21,803
510,820
$
$
$
$
$
$
—
—
—
—
—
—
—
—
57
192
—
—
34
283
$
(296 )
(2,465 )
$
2,689
23,359
(6,726 )
(1,676 )
(11,271 )
(4 )
(22,438 )
(380 )
(3,819 )
(5,558 )
(268 )
(5,227 )
—
(15,252 )
37,777
9,634
55,928
118
129,505
34,620
78,738
230,113
3,852
126,691
21,837
495,851
$
$
$
$
$
$
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Available-for-Sale Securities:
U.S. Government Bonds
Corporate Bonds
Mortgage-Backed Securities:
Collateralized Mortgage Obligations
FNMA Certificates
GNMA Certificates
(1)
Total available-for-sale securities
Held-to-Maturity Securities:
FHLMC Certificates
Total held-to-maturity securities
Amortized
Cost
$
2,981
21,243
$
18,845
71,930
175
115,174
934
934
$
$
$
$
$
$
December 31, 2021
Gross
Gross
Unrealized
Unrealized
Gains
Losses
Fair Value
(in thousands)
—
144
—
—
6
150
—
—
$
$
$
$
$
(47 )
(203 )
2,934
21,184
(497 )
(1,231 )
—
(1,978 )
(20 )
(20 )
18,348
70,699
181
113,346
914
914
$
$
$
(1)Comprised of FHLMC, FNMA and GNMA issued securities.
The Company’s securities portfolio had 42 and 29 available-for-sale securities and 34 and one held-to-maturity securities at December 31, 2022 and 2021, respectively.
There were no available-for-sale and held-to-maturity securities sold during the year ended December 31, 2022. There were two available-for-sale securities in the
amount of $3.6 million and no held-to-maturity securities sold during the year ended December 31, 2021. Two available-for-sale securities in the amount of $5.4 million
matured and/or were called during the year ended December 31, 2022 and one available-for-sale security in the amount of $2.7 million matured and/or was called during
the year ended December 31, 2021. The Company purchased $58.4 million in available-for-sale securities and $528.9 million in held-to-maturity securities during the
year ended December 31, 2022 and $109.9 million in available-for-sale securities during the year ended December 31, 2021. No held-to-maturity securities were
purchased during the year ended December 31, 2021.
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, 2022 and 2021:
Less Than 12 Months
Fair
Value
Unrealized
Losses
December 31, 2022
Securities With Gross Unrealized Losses
12 Months or More
Fair
Value
Unrealized
Losses
(in thousands)
Total
Fair
Value
Total
Unrealized
Losses
Available-for-Sale Securities:
U.S. Government Bonds
Corporate Bonds
Mortgage-Backed
Collateralized Mortgage Obligations
FHLMC Certificates
FNMA Certificates
GNMA Certificates
Total available-for-sale securities
Held-to-Maturity Securities:
U.S. Agency Bonds
Corporate Bonds
Collateralized Mortgage Obligations
FHLMC Certificates
FNMA Certificates
Total held-to-maturity securities
$
—
13,138
$
—
(1,186 )
$
2,689
10,221
$
(296 )
(1,279 )
$
2,689
23,359
$
(296 )
(2,465 )
4,537
—
12,111
118
29,904
$
(300 )
—
(1,230 )
(4 )
(2,720 )
$
$
24,620
75,181
215,300
3,177
126,691
$ 444,969
$
(380 )
(3,819 )
(5,558 )
(115 )
(5,227 )
$ (15,099 )
$
$
$
33,240
9,634
43,817
—
99,601
—
—
—
675
—
675
$
$
$
(6,426 )
(1,676 )
(10,041 )
—
(19,718 )
37,777
9,634
55,928
118
$ 129,505
(6,726 )
(1,676 )
(11,271 )
(4 )
$ (22,438 )
—
—
—
(153 )
—
(153 )
$
24,620
75,181
215,300
3,852
126,691
$ 445,644
$
(380 )
(3,819 )
(5,558 )
(268 )
(5,227 )
$ (15,252 )
89
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Less Than 12 Months
Fair
Value
Unrealized
Losses
December 31, 2021
Securities With Gross Unrealized Losses
12 Months or More
Fair
Value
Unrealized
Losses
(in thousands)
Total
Fair
Value
Total
Unrealized
Losses
Available-for-Sale Securities:
U.S. Government Bonds
Corporate Bonds
Mortgage-Backed
Collateralized Mortgage Obligations
FNMA Certificates
Total available-for-sale securities
Held-to-Maturity Securities:
FHLMC Certificates
Total held-to-maturity securities
$
2,934
15,297
16,034
70,699
$ 104,964
$
$
914
914
$
$
$
$
(47 )
(203 )
(419 )
(1,231 )
(1,900 )
(20 )
(20 )
$
$
$
$
—
—
2,314
—
2,314
—
—
$
$
$
$
$
—
—
2,934
15,297
(78 )
—
(78 )
18,348
70,699
$ 107,278
—
—
$
$
914
914
$
$
$
$
(47 )
(203 )
(497 )
(1,231 )
(1,978 )
(20 )
(20 )
At December 31, 2022 and December 31, 2021, the Company had 42 and 23 available-for-sale securities and 27 and one held-to-maturity securities with gross unrealized
loss positions, respectively. Management reviewed the financial condition of the entities underlying the securities at both December 31, 2022 and December 31, 2021.
The unrealized losses related to the Company debt securities were issued by U.S. government-sponsored entities and agencies. The Company does not believe that the
debt securities that were in an unrealized loss position as of December 31, 2022 represents a credit loss impairment. The gross unrealized loss positions related to
mortgage-backed securities and other obligations issued by the U.S government agencies or U.S. government-sponsored enterprises carry the explicit and/or implicit
guarantee of the U.S. government and have a long history of zero credit loss. Total gross unrealized losses were primarily attributable to changes in interest rates relative
to when the investment securities were purchased and not due to the credit quality of the investment securities.
90
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
The following is a summary of maturities of securities at December 31, 2022 and 2021. 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.
Available-for-Sale Securities:
U.S. Government Bonds:
Amounts maturing:
Three months or less
More than three months through one year
More than one year through five years
More than five years through ten years
Corporate Bonds:
Amounts maturing:
Three months or less
More than three months through one year
More than one year through five years
More than five years through ten years
Mortgage-Backed Securities
Total available-for-sale securities
Held-to-Maturity Securities:
U.S. Agency Bonds:
Amounts maturing:
Three months or less
More than three months through one year
More than one year through five years
More than five years through ten years
Corporate Bonds:
Amounts maturing:
Three months or less
More than three months through one year
More than one year through five years
More than five years through ten years
Mortgage-Backed Securities
Total held-to-maturity securities
91
December 31, 2022
Amortized
Cost
Fair
Value
(in thousands)
$
$
$
$
$
$
—
—
2,985
—
2,985
—
—
4,000
21,824
25,824
123,134
151,943
—
—
35,000
—
35,000
—
—
75,000
7,500
82,500
393,320
510,820
$
$
$
$
$
$
—
—
2,689
—
2,689
—
—
3,710
19,649
23,359
103,457
129,505
—
—
34,620
—
34,620
—
—
71,328
7,410
78,738
382,493
495,851
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Available-for-Sale Securities:
U.S. Government Bonds:
Amounts maturing:
Three months or less
More than three months through one year
More than one year through five years
More than five years through ten years
Corporate Bonds:
Amounts maturing:
Three months or less
More than three months through one year
More than one year through five years
More than five years through ten years
Mortgage-Backed Securities
Total available-for-sale securities
Held-to-Maturity Securities:
FHLMC Certificates
Total held-to-maturity securities
December 31, 2021
Amortized
Cost
Fair
Value
(in thousands)
$
$
$
$
$
—
—
2,981
—
2,981
—
—
4,445
16,798
21,243
90,950
115,174
934
934
$
$
$
$
$
—
—
2,934
—
2,934
—
—
4,381
16,803
21,184
89,228
113,346
914
914
At December 31, 2022, six held-to-maturity securities with an amortized costs totaling $194.9 million were pledged at the FHLBNY as collateral for borrowing
activities. No securities were pledged at December 31, 2021.
Note 5. Loans Receivable and Allowance for Loan Losses
Loans at December 31, 2022 and 2021 are summarized as follows:
Mortgage loans:
1-4 Family residential
Investor-Owned
Owner-Occupied
Multifamily residential
Nonresidential properties
Construction and land
Total mortgage loans
Nonmortgage loans:
(1)
Business loans
Consumer loans
Total non-mortgage loans
(2)
Total loans, gross
Net deferred loan origination costs
Allowance for loan losses
Loans receivable, net
December 31,
2022
2021
(in thousands)
$
$
343,968 $
134,878
494,667
308,043
185,018
1,466,574
39,965
19,129
59,094
1,525,668
2,051
(34,592 )
1,493,127 $
317,304
96,947
348,300
239,691
134,651
1,136,893
150,512
34,693
185,205
1,322,098
(668 )
(16,352 )
1,305,078
92
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
(1)As of December 31, 2022 and 2021, business loans include $20.0 million and $136.8 million, respectively, of SBA PPP loans.
(2)As of December 31, 2022 and 2021, consumer loans include $18.2 million and $33.9 million, respectively, pursuant to the Bank’s arrangement with Grain.
The Company’s lending activities are conducted principally in metropolitan New York City. The Company primarily grants loans secured by real estate to individuals
and businesses pursuant to an established credit policy applicable to each type of lending activity in which it engages. Although collateral provides assurance as a
secondary source of repayment, the Company ordinarily requires the primary source of repayment to be based on the borrowers’ ability to generate continuing cash
flows. The Company also evaluates the collateral and creditworthiness of each customer. The credit policy provides that depending on the borrowers’ creditworthiness
and type of collateral, credit may be extended up to predetermined percentages of the market value of the collateral or on an unsecured basis. Real estate is the primary
form of collateral. Other important forms of collateral are time deposits and marketable securities.
For disclosures related to the allowance for 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.
93
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Loans within the top four categories above are considered pass rated, as commonly defined. Risk ratings are assigned as necessary to differentiate risk within the
portfolio. Risk ratings are reviewed on an ongoing basis and revised to reflect changes in the borrowers’ financial condition and outlook, debt service coverage
capability, repayment performance, collateral value and coverage as well as other considerations.
The following tables present credit risk ratings by loan segment as of December 31, 2022 and 2021:
Mortgage Loans
Nonmortgage Loans
December 31, 2022
1-4 Family Multifamily Nonresidential
Business Consumer
Construction
and Land
(in thousands)
Total
Loans
Risk Rating:
Pass
Special mention
Substandard
Total
Risk Rating:
Pass
Special mention
Substandard
Total
$ 462,126 $ 492,556 $
7,692
9,028
1,437
674
$ 478,846 $ 494,667 $
307,307 $
606
130
308,043 $
173,351 $ 39,965 $ 19,129 $ 1,494,434
9,735
—
11,667
21,499
185,018 $ 39,965 $ 19,129 $ 1,525,668
—
—
—
—
Mortgage Loans
Nonmortgage Loans
December 31, 2021
1-4 Family Multifamily Nonresidential
Construction
and Land
Business
Consumer
Total
Loans
(in thousands)
$ 402,276 $ 339,047 $
1,820
10,155
5,328
3,925
$ 414,251 $ 348,300 $
237,371 $
—
2,320
239,691 $
127,084 $ 150,512 $ 34,693 $ 1,290,983
13,798
17,317
134,651 $ 150,512 $ 34,693 $ 1,322,098
6,650
917
—
—
—
—
An aging analysis of loans, as of December 31, 2022 and 2021, is as follows:
Mortgage loans:
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
60-89
Days
Past Due
Current
December 31, 2022
90 Days
or More
Past Due
(in thousands)
Total
Nonaccrual
Loans
90 Days
or More
Accruing
$
$
340,495
131,510
490,024
303,190
173,351
$
1,530
2,553
4,643
4,246
—
$
78
—
—
607
4,100
$
1,865
815
—
—
7,567
$
343,968
134,878
494,667
308,043
185,018
3,061 $
2,987
—
93
7,567
—
—
—
—
—
27,657
16,743
$ 1,482,970
1,466
1,267
$ 15,705
$
7,869
1,119
13,773
$
2,973
—
13,220
39,965
19,129
$ 1,525,668
$
—
—
13,708 $
2,973
—
2,973
94
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Mortgage loans:
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
60-89
Days
Past Due
Current
December 31, 2021
90 Days
or More
Past Due
(in thousands)
Total
Nonaccrual
Loans
90 Days
or More
Accruing
$
$
312,918
91,568
346,409
237,589
134,651
$
321
2,961
1,704
934
—
145,919
30,359
$ 1,299,413
4,036
2,570
$ 12,526
$
2,969
471
187
1,168
—
544
1,759
7,098
$
$
1,096
1,947
—
—
—
$
317,304
96,947
348,300
239,691
134,651
3,583 $
3,480
1,200
2,262
917
13
5
3,061
150,512
34,693
$ 1,322,098
$
—
—
11,442 $
$
—
—
—
—
—
—
—
—
The following schedules detail the composition of the allowance for loan losses and the related recorded investment in loans as of December 31, 2022, 2021, and 2020,
respectively.
Allowance 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
1-4
Family
Investor
Owned
1-4
Family
Owner
Occupied
For the Year Ended December 31, 2022
Mortgage Loans
Nonmortgage
Loans
Multifamily
Nonresidential
Construction
and Land
Business
Consumer
(in thousands)
Total
For the
Period
$
$
$
$
3,540
167
—
156
3,863
$
$
1,178
506
—
39
1,723
$
$
5,684
2,337
—
—
8,021
$
$
2,165
559
—
—
2,724
$
$
2,024 $
659
—
—
2,683 $
306 $
(280 )
—
94
120 $
1,455 $
20,098
(6,660 )
565
15,458 $
16,352
24,046
(6,660 )
854
34,592
63
$
96
$
—
$
37
$
— $
— $
— $
196
3,800
3,863
$
1,627
1,723
$
8,021
8,021
$
2,687
2,724
$
2,683
2,683 $
120
120 $
15,458
15,458 $
34,396
34,592
$
5,269
$
4,315
$
—
$
801
$
7,567
$
— $
— $
17,952
338,699
$ 343,968
130,563
$ 134,878
494,667
$ 494,667
$
307,242
308,043
177,451
$ 185,018 $
39,965
39,965 $
1,507,716
19,129
19,129 $ 1,525,668
95
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
1-4
Family
Investor
Owned
1-4
Family
Owner
Occupied
For the Year Ended December 31, 2021
Mortgage Loans
Nonmortgage Loans
Total
Multifamily
Nonresidential
Construction
and Land
Business
Consumer
For the
Period
(in thousands)
Allowance 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
Allowance 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
$
$
$
$
$
3,850
(318 )
—
8
3,540
$
$
1,260
(127 )
—
45
1,178
$
$
5,214
508
(38 )
—
5,684
$
2,194
$
(29 )
—
—
2,165
$
1,820
204
—
—
2,024
$
$
254 $
(32 )
—
84
306 $
278 $
2,511
(1,342 )
8
1,455 $
14,870
2,717
(1,380 )
145
16,352
91
$
114
$
—
$
38
$
—
$
— $
— $
243
3,449
3,540
$
1,064
1,178
$
5,684
5,684
$
2,127
2,165
$
2,024
2,024
$
306
306 $
1,455
1,455 $
16,109
16,352
$
6,672
$
5,854
$
1,200
$
2,995
$
917
$
13 $
— $
17,651
310,632
$ 317,304
$
91,093
96,947
347,100
$ 348,300
$
236,696
239,691
$
133,734
134,651
150,499
$ 150,512 $
34,693
1,304,447
34,693 $ 1,322,098
1-4
Family
Investor
Owned
1-4
Family
Owner
Occupied
For the Year Ended December 31, 2020
Mortgage Loans
Nonmortgage Loans
Total
Multifamily
Nonresidential
Construction
and Land
Business
Consumer
For the
Period
(in thousands)
$
$
$
$
$
3,503
347
—
$
1,067
193
—
$
3,865
1,349
—
$
1,849
341
—
1,782 $
38
—
—
3,850
$
—
1,260
$
—
5,214
$
4
2,194
$
—
1,820 $
254 $
(95 )
—
95
254 $
9 $
270
(6 )
5
278 $
12,329
2,443
(6 )
104
14,870
118
$
134
$
—
$
40
$
— $
— $
— $
292
3,732
3,850
$
1,126
1,260
$
5,214
5,214
$
2,154
2,194
$
1,820
1,820 $
254
254 $
278
278 $
14,578
14,870
$
7,468
$
5,754
$
946
$
5,184
$
— $
— $
— $
19,352
312,128
$ 319,596
$
93,041
98,795
306,465
$ 307,411
$
213,745
218,929
105,858
$ 105,858 $
94,947
94,947 $
26,517
1,152,701
26,517 $ 1,172,053
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.
96
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
The following information relates to impaired loans as of and for the years ended December 31, 2022, 2021, and 2020:
As of and For the Year Ended
December 31, 2022
Mortgage loans:
1-4 Family residential
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage loans:
Business
Consumer
Total
As of and For the Year Ended
December 31, 2021
Mortgage loans:
1-4 Family residential
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage loans:
Business
Consumer
Total
As of and For the Year Ended
December 31, 2020
Mortgage loans:
1-4 Family residential
Multifamily residential
Nonresidential properties
Construction and land
Nonmortgage loans:
Business
Consumer
Total
Unpaid
Contractual
Recorded
Investment
Recorded
Investment
Total
Average
Principal
With No
With
Recorded
Related
Recorded
Balance
Allowance
Allowance
Investment
(in thousands)
Allowance
Investment
Interes
t
Income
Recogn
ized
on a
Cash
Basis
$
$
9,986 $
—
843
7,567
—
—
18,396 $
7,827 $
—
457
7,567
—
15,851 $
1,757 $
—
344
—
—
—
2,101 $
9,584 $
—
801
7,567
—
—
17,952 $
159 $
—
37
—
—
—
196 $
11,072 $ 307
630 —
1,930
30
6,408 —
3 —
— —
20,043 $ 337
Unpaid
Contractual
Recorded
Investment
Recorded
Investment
Total
Average
Principal
With No
With
Recorded
Related
Recorded
Balance
Allowance
Allowance
Investment
(in thousands)
Allowance
Investment
Interes
t
Income
Recogn
ized
on a
Cash
Basis
$
$
13,333 $
1,200
3,494
917
10,535 $
1,200
2,637
917
1,991 $
—
358
—
13
—
18,957 $
13
—
15,302 $
—
—
2,349 $
12,526 $
1,200
2,995
917
13
—
17,651 $
205 $
—
38
—
—
—
243 $
12,145 $ 189
63
38
17
1,139
3,941
307
13 —
24 —
17,569 $ 307
Unpaid
Contractual
Recorded
Investment
Recorded
Investment
Total
Average
Principal
With No
With
Recorded
Related
Recorded
Balance
Allowance
Allowance
Investment
Allowance
Investment
(in thousands)
Interes
t
Income
Recogn
ized
on a
Cash
Basis
$
14,118 $
10,613 $
2,609 $
946
5,632
—
946
4,813
—
—
371
—
—
—
20,696 $
—
—
16,372 $
—
—
2,980 $
$
13,222 $
946
5,184
—
—
—
—
19,352 $
252 $
—
40
—
—
—
292 $
12,306 $ 321
34
33
405 —
231
5,339
8 —
— —
18,289 $ 388
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
97
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
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.
During the year ended December 31, 2022 and 2021, there were no loans restructured as a troubled debt restructuring.
At December 31, 2022, there were 23 troubled debt restructured loans totaling $6.6 million of which $4.2 million are on accrual status. At December 31, 2021, there
were 30 troubled debt restructured loans totaling $8.7 million of which $6.2 million are on accrual status. There were no commitments to lend additional funds to
borrowers whose loans have been modified in a troubled debt restructuring. The financial impact from the concessions made represents specific impairment reserves on
these loans, which aggregated to $0.2 million and $0.3 million at December 31, 2022 and 2021, respectively.
Mortgage Loans Held for Sale, at Fair Value
At December 31, 2022 and 2021, 4 loans and 27 loans related to Mortgage World in the amount of $2.0 million and $15.8 million, respectively, were held for sale and
accounted for under the fair value option accounting guidance for financial assets and financial liabilities.
Write-off and write-down of Microloans
In 2020, the Company entered into a business arrangement with the FinTech startup company Grain. Grain’s product is a mobile application geared to the underbanked,
minorities and new generations entering the financial services market. In employing this mobile application, the Bank uses non-traditional underwriting methodologies
to provide revolving credit to borrowers who otherwise may gravitate to using alternative non-bank lenders. Under the terms of its agreement with Grain, the Bank is the
lender for Grain-originated microloans with credit lines currently up to $1,500 and, where applicable, the depository for related security deposits. Grain originates and
services these microloans and is responsible for maintaining compliance with the Bank's origination and servicing standards, as well as applicable regulatory and legal
requirements. If a microloan is found to be fraudulent or defaults due to a failure of Grain to properly service the microloan, the Bank’s applicable standards for
origination or servicing are deemed to have not been complied with and the microloan is put back to Grain, who then becomes responsible for the microloan and any
related losses. The microloans put back to Grain are accounted for as an “other asset,” specifically referred to herein as the “Grain Receivable.” The Bank, pursuant to its
agreement with Grain, at December 31, 2021, had 59,180 microloans outstanding, net of put backs, with credit extensions aggregating $33.9 million. Of these
microloans, the Bank estimates that 80 percent have been made in low- and low-to-moderate income census tracts with an estimated 56 percent made to minority
borrowers.
In establishing these lines of credit, the Company reserved the right to modify borrowers’ credit limits at its sole discretion. The Company continues to balance its risks
as needed and continues to support a wide base of customers. Based on the overall performance of the Grain portfolio, as well as current economic factors, the Company
reduced the amount of credit available to Grain application customers on a uniform and program-wide basis, with each borrower’s credit limit reduced to the amount that
was outstanding under that borrower’s line of credit. The Company also reserved the right to make further modifications to credit limits as it may deem appropriate
under the circumstances, whether on a program-wide or individual basis. No new loans were made by the Company after May 31, 2022.
At December 31, 2022, the Bank had 27,886 Grain microloans outstanding, net of put backs, with an aggregate balance totaling $18.2 million and which were
performing, in management’s opinion, comparably to similar portfolios, offset by a $15.4 million allowance for loan losses, resulting in $2.8 million in Grain
microloans, net of allowance for loan losses. Since the beginning of the Bank’s agreement with Grain and through December 31, 2022, 45,322 microloans amounting to
$25.5 million have been deemed to be fraudulent and put back to Grain. The Company has written-down a total of $17.5 million of the Grain Receivable for the year
ended December 31, 2022 and received $6.2 million in cash from Grain and through the application of security deposits connected to fraudulent loan accounts. The
Bank also opted to use the $1.8 million grant it received from the U.S. Treasury Department’s Rapid Response Program to defray the Grain Receivable. The application
of those amounts resulted in no net receivable. Additionally, the Company has written-off its equity investment in Grain of $1.0 million. As of December 31, 2022, the
Company’s total exposure to Grain was $2.8 million of the remaining microloans, net of allowance for loan losses, excluding $0.4 million of unused commitments
available to Grain borrowers and $1.4 million of security deposits by Grain borrowers. The $16.9 million write-off and write-down net of $0.5 million of recoveries for
the year ended December 31, 2022 is included in non-interest expense in the accompanying Consolidated Statements of Operations.
98
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Grain Technologies, Inc. ("Grain") Total Exposure as of December 31, 2022
(in thousands)
Receivable from Grain
Microloans originated - put back to Grain (inception-to-December 31, 2022)
Write-downs, net of recoveries (year to date as of December 31, 2022)
Cash receipts from Grain (inception-to-December 31, 2022)
Grant/reserve (inception-to-December 31, 2022)
Net receivable as of December 31, 2022
Microloan receivables from Grain borrowers
Grain originated loans receivable as of December 31, 2022
Allowance for loan losses as of December 31, 2022
(1)
Microloans, net of allowance for loan losses as of December 31, 2022
Investments
Investment in Grain
Investment in Grain write-off
Investment in Grain as of December 31, 2022
Total exposure to Grain as of December 31, 2022
$
$
$
$
$
$
$
25,467
(17,455 )
(6,186 )
(1,826 )
—
18,158
(15,415 )
2,743
1,000
(1,000 )
—
2,743
(1) Includes $0.03 million for allowance for unused commitments on the $0.4 million of unused commitments available to Grain originated borrowers reported in other
liabilities in the accompanying Consolidated Statements of Financial Conditions. Excludes $1.4 million of security deposits by Grain originated borrowers reported in
deposits in the accompanying Consolidated Statements of Financial Conditions.
Note 6. Premises and Equipment
A summary of premises and equipment at December 31, 2022 and 2021 is as follows:
Land
Buildings and improvements
Leasehold improvements
Furniture, fixtures and equipment
Less: accumulated depreciation and amortization
Total premises and equipment
December 31,
2022
2021
(in thousands)
932 $
4,717
15,808
8,497
29,954
(12,508 )
17,446 $
932
4,327
16,462
9,661
31,382
(11,765 )
19,617
$
$
Depreciation and amortization expense amounted to $1.8 million for the year ended December 31, 2022, and $2.5 million for each of the years ended December 31,
2021 and 2020, respectively, and is included in occupancy expense in the accompanying consolidated statements of operations. Furniture, fixtures and equipment
decreased $1.2 million to $8.5 million at December 31, 2022, mainly as a result of sale of $1.3 million in equipment and $0.3 million in write-offs of obsolete equipment
and software, offset by $0.4 million in purchases of equipment. The Company recognized a one-time $0.4 million loss on sale of equipment as it moved to implement
ATMs as a service. Leasehold improvements decreased $0.7 million to $15.8 million primarily as a result of $0.9 million in assets disposal and $0.2 million in asset
additions. Buildings and improvements increased $0.4 million to $4.7 million at December 31, 2022 mainly due to renovations of real property.
Note 7. Leases
Effective January 1, 2022, the Company adopted the provisions of Topic 842 using the prospective transition approach. Therefore, prior period comparative information
has not been adjusted and continues to be reported under GAAP in effect prior to the adoption of Topic 842.
99
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
The Company has 15 operating leases for branches (including headquarters) and office spaces and five operating leases for equipment. Our leases have remaining lease
terms ranging from less than one year to approximately 17 years, none of which has a renewal option reasonably certain of exercise, which has been reflected in the
Company’s calculation of lease term.
Certain leases have escalation clauses for operating expenses and real estate taxes. The Company’s non-cancelable operating lease agreements expire through 2038.
Supplemental balance sheet information related to leases was as follows:
Operating lease ROU assets
Operating lease liabilities
Weighted-average remaining lease term-operating leases
Weighted average discount rate-operating leases
The components of lease expense and cash flow information related to leases were as follows:
December 31,
2022
2021
(Dollars in thousands)
$
33,423 $
34,532
13.5 years
4.9 %
—
—
—
—
Lease Cost
Operating lease cost
Operating lease cost
Short-term lease cost
Variable lease cost
Total lease cost
Occupancy and equipment
Other operating expenses
Other operating expenses
Occupancy and equipment
The Company’s minimum annual rental payments under the terms of the leases are as follows at December 31, 2022:
Years ended December 31:
2023
2024
2025
2026
2027
Thereafter
Total Minimum payments required
Less: implied interest
Present value of lease liabilities
For the Years Ended
December 31,
2022
2021
(Dollars in thousands)
$
$
4,416 $
7
11
155
4,589 $
2,158
3
7
177
2,345
Minimum Rental
(in thousands)
3,785
3,833
3,635
3,422
3,495
29,041
47,211
12,679
34,532
$
$
Lease Commitments: As of December 31, 2022, there are noncancelable operating leases for office space that expire on various dates through 2038. Certain of these
leases contains escalation clauses providing for increased rental based on pre-scheduled annual increases or on increases in real estate taxes.
On February 11, 2021, the Company completed the sale of real property located at 3821 Bergenline Avenue, Union City, New Jersey for a sale price of $2.4 million.
Concurrent with the sale, the Bank and the purchaser entered into a fifteen-year lease agreement whereby the Bank will lease back this real property at an initial annual
base rent of approximately $145,000 subject to annual rent increases of 1.5%. Under the lease agreement, the Bank has four (4) consecutive options to extend the term of
the lease by five (5) years for each
100
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
such option. The sale lease-back resulted in a gain of approximately $0.6 million, net of expenses, which is included in other non-interest income in the accompanying
Consolidated Statements of Operations.
On June 4, 2021, the Company completed the sale of real property located at 5560 Broadway, Bronx, New York for a sale price of $5.7 million. Concurrent with the
sale, the Bank and the purchaser entered into a fifteen-year lease agreement whereby the Bank will lease back this real property at an initial annual base rent of
approximately $281,000 subject to annual rent increases of 1.75%. The sale lease-back resulted in a gain of approximately $4.2 million, net of expenses, which is
included in other non-interest income in the accompanying Consolidated Statements of Operations.
On November 10, 2021, the Company completed the sale of real property located at 2244 Westchester Avenue, Bronx, New York for a sale price of $16.1 million.
Concurrent with the sale, the Bank and the purchaser entered into a seventeen-year lease agreement whereby the Bank will lease back this real property at an initial
annual base rent of approximately $926,000, subject to annual rent increases of 1.75%. The sale lease-back resulted in a gain of approximately $8.7 million, net of
expenses, which is included in other non-interest income in the accompanying Consolidated Statements of Operations.
On November 12, 2021, the Company completed the sale of real property located at 169-174 Smith Street, Brooklyn, New York for a sale price of $4.0 million.
Concurrent with the sale, the Bank and the purchaser entered into a fifteen-year lease agreement whereby the Bank will lease back this real property at an initial annual
base rent of approximately $200,000 subject to annual rent increases of 1.50%. The sale lease-back resulted in a gain of approximately $3.7 million, net of expenses,
which is included in other non-interest income in the accompanying Consolidated Statements of Operations.
On December 16, 2021, the Company completed the sale of real property located at 37-60 82nd Street, Jackson Heights, New York for a sale price of $11.8 million.
Concurrent with the sale, the Bank and the purchaser entered into a seventeen-year lease agreement whereby the Bank will lease back this real property at an initial
annual base rent of approximately $530,000 subject to annual rent increases of 2.0%. The sale lease-back resulted in a gain of approximately $3.1 million, net of
expenses, which is included in other non-interest income in the accompanying Consolidated Statements of Operations.
Note 8. Deposits
Deposits at December 31, 2022 and 2021 are summarized as follows:
Demand
Interest-bearing deposits:
NOW/IOLA accounts
Money market accounts
Reciprocal deposits
Savings accounts
Total NOW, money market, reciprocal and savings
Certificates of deposit of $250K or more
Brokered certificates of deposits
Listing service deposits
Certificates of deposit less than $250K
(1)
(1)
Total certificates of deposit
Total interest-bearing deposits
Total deposits
December 31,
2022
2021
(in thousands)
$
289,149 $
274,956
24,349
317,815
114,049
130,432
586,645
70,113
98,754
35,813
171,938
376,618
963,263
1,252,412
$
35,280
186,893
143,221
134,887
500,281
78,454
79,320
66,411
205,294
429,479
929,760
1,204,716
$
(1)As of December 31, 2022 and 2021, there were $13.6 million and $29.0 million, respectively, in individual listing service deposits amounting to $250,000 or more. All
brokered certificates of deposit individually amounted to less than $250,000.
101
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
At December 31, 2022, scheduled maturities of certificates of deposit were as follows:
December 31,
2023
2024
2025
2026
2027
(in thousands)
196,342
49,457
41,169
42,165
47,485
376,618
$
$
Overdrawn deposit accounts that have been reclassified to loans amounted to $0.1 million and $0.2 million as of December 31, 2022 and 2021, respectively.
Note 9. 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 $511.4 million and $106.3 million of outstanding term advances from FHLBNY at December 31, 2022 and 2021, respectively and $6.0 million of
overnight line of credit advance from the FHLBNY at December 31, 2022. The bank had no overnight line of credit advance from the FHLBNY at December 31, 2021.
Additionally, the Bank had two unsecured lines of credit in the amount of $90.0 million and $25.0 million with two correspondent banks, under which there was nothing
outstanding at December 31, 2022 and 2021, respectively. The Bank also had a guarantee from the FHLBNY through letters of credit of up to $21.5 million each at
December 31, 2022 and 2021.
Borrowed funds at December 31, 2022 and 2021 consist of the following and are summarized by maturity and call date below:
FHLBNY Overnight line of credit
advance
FHLBNY Term advances ending:
2022
2023
2024
2025
2026
Thereafter
December 31,
2022
December 31,
2021
Scheduled
Maturity
Redeemable
at Call Date
Weighted
Average
Rate
Scheduled
Maturity
Redeemable
at Call Date
Weighted
Average
Rate
(Dollars in thousands)
6,000
$
6,000
4.61 % $
—
$
—
— %
—
178,375
50,000
50,000
—
233,000
517,375
$
$
—
178,375
50,000
50,000
—
233,000
517,375
$
—
4.32
4.75
4.41
—
3.27
3.90 % $
77,880
28,375
—
—
—
—
106,255
$
$
77,880
28,375
—
—
—
—
106,255
1.73 %
2.82
—
—
—
—
2.02 %
$
$
$
Interest expense on FHLBNY term advances totaled $5.4 million, $2.2 million and $2.5 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Interest expense on FHLBNY overnight advances totaled $0.7 million and $0.2 million for the years ended December 31, 2022 and 2020. There was no interest expense
on FHLBNY overnight advances for the year ended December 31, 2021.
As of December 31, 2022 and 2021, the Bank had eligible collateral of approximately $478.8 million and $362.3 million, respectively, in residential 1-4 family and
multifamily mortgage loans available to secure advances from the FHLBNY.
102
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Warehouse Lines of Credit: Mortgage World maintained two warehouse lines of credit with financial institutions for the purpose of funding the originations and sale of
residential mortgages. The lines of credit were repaid with proceeds from the sale of the mortgage loans. The lines were secured by the assets collateralizing underlying
mortgages. The agreements with the warehouse lenders provided for certain restrictive covenants such as minimum net worth and liquidity ratios for Mortgage World.
As of December 31, 2021, Mortgage World was in full compliance with all financial covenants.
Warehouse Line of Credit #1
The interest rate is based on the 30-day LIBOR rate plus 3.25%. The effective rate at December 31, 2021 was 3.35%. On December 31, 2022, the unused line of credit
was $10.0 million. This warehouse line of credit was terminated on February 7, 2023.
Warehouse Line of Credit #2
The interest rate is based on the 30-day LIBOR rate plus 3.00% for loans funded. The effective rate at December 31, 2021 was 3.10%. The warehouse line of credit was
terminated on March 31, 2022.
Total interest expense on warehouse lines of credit totaled $0.1 million and $0.4 million for the years ended December 31, 2022 and 2021, respectively.
Warehouse Line of Credit #1
Warehouse Line of Credit #2
Total long-term debt
Credit Line
Maximum
December 31, 2021
Unused Line
of Credit
(in thousands)
Balance
$
$
15,000
15,000
30,000
$
$
$
8,636
6,274
14,910
$
$
$
6,364
8,726
15,090
Mortgage Loan Funding Payable: Mortgage loan funding payable consists of liabilities to borrowers in connection with the origination of residential loans originated
and intended for sale in the secondary market, that remain unfunded by the Company because there is typically a three day period from when the loans close to when
they are funded by the warehouse line of credit. This liability is presented at cost and fully offsets the principal balance of the related loans included in mortgage loans
held for sale, at fair value on the consolidated statement of financial condition. At December 31, 2022 and 2021, there were no mortgage loan funding payable for both
periods.
Note 10. Income Taxes
The provision (benefit) for income taxes for the years ended December 31, 2022, 2021 and 2020 consists of the following:
Federal:
Current
Deferred
State and local:
Current
Deferred
Valuation allowance
(Benefit) provision for income taxes
For the Years Ended December 31,
2022
2021
(in thousands)
2020
$
$
— $
(6,064 )
(6,064 )
1,094
(7,467 )
(6,373 )
5,592
(6,845 ) $
6,107
$
646
6,753
842
1,733
2,575
(1,119 )
8,209 $
2,065
(839 )
1,226
281
(353 )
(72 )
228
1,382
103
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 21% for the years ended December 31, 2022, 2021 and
2020 to income before income taxes as a result of the following:
Income tax, at federal rate
State and local tax, net of federal benefit
Valuation allowance, net of federal benefit
Other
(Benefit) provision for income taxes
2022
For the Years Ended December 31,
2021
(in thousands)
2020
$
$
(7,738 ) $
(5,035 )
5,592
336
(6,845 ) $
7,195 $
2,034
(1,119 )
99
8,209 $
1,099
(57 )
228
112
1,382
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 be utilized to
reduce the Company's tax liability in future years. For the years ended December 31, 2022 and 2020, the valuation allowance increased by $5.6 million and $0.2 million,
respectively, and decreased by $1.1 million for the year ended December 31, 2021. In 2021, Management recorded a valuation allowance against a portion of the
charitable contribution carryforward that will expire in 2022 as it is unlikely this deferred tax asset will be utilized. As of December 31, 2022, the charitable contribution
carryforward expired and the company reversed the deferred tax asset related to the carryforward. Accordingly, the valuation allowance that was established with regards
to the utilization of these carryforwards was also reversed. Moreover, during 2022 the Company generated significant net operating losses in New York State and New
York City which the Company does not believe it has the capacity to utilize and therefore has established a valuation allowance against the deferred tax asset related to
these NOL carryforwards.
Management has determined that it is not required to establish a valuation allowance against any other deferred tax assets 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.
For federal income tax purposes, a financial institution may carry net operating losses (“NOLs”) to forward tax years indefinitely. The use of NOLs to offset income is
limited to 80%. The CARES Act allows NOLs generated in 2018, 2019 and 2020 to be carried back to each of the five preceding tax years. The Company did not
generate NOLs in 2018, 2019 or 2020 so no carryback is available. At December 31, 2022, the Bank has a federal NOL carryforward of $13.1 million.
The state and city of New York allow for a three-year carryback period and carryforward period of twenty years on NOLs 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 $0.6 million for New
York State purposes and $0.5 million for New York City purposes. Furthermore, there are post-2015 carryforwards available of $60.9 million for New York State
purposes and $33.9 million for New York City purposes. For Connecticut purposes, losses may only be carried forward 20 years, with no allowable carryback period. At
December 31, 2022, the Bank has a Connecticut NOL carryforward of $0.1 million. Finally for New Jersey purposes, losses may only be carried forward 20 years, with
no allowable carryback period. At December 31, 2022, the Bank has a New Jersey NOL carryforward of $0.5 million.
At December 31, 2022 and 2021, the Company had no unrecognized tax benefits recorded. The Company does not expect the total amount of unrecognized tax benefits
will significantly increase in the next twelve months.
The Company is subject to U.S. federal income tax, New York State income tax, Connecticut income tax, New Jersey income tax, Florida income tax, Pennsylvania
income tax and New York City income tax. The Company is no longer subject to examination by taxing authorities for years before 2019.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2022 and 2021 are
presented below:
104
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Deferred tax assets:
Allowance for loan losses
Deferred loan fees
Interest on nonaccrual loans
Unrealized loss on available-for-sale securities
Amortization of intangible assets
Deferred rent payable
Operating lease liabilities
Net operating losses
Charitable contribution carryforward
Compensation and benefits
Other
Total gross deferred tax assets
Deferred tax liabilities:
Depreciation of premises and equipment
Right of use assets
Deferred loan fees
Other
Total gross deferred tax liabilities
Valuation allowance
Net deferred tax assets
At December 31,
2022
2021
(in thousands)
$
$
11,324 $
—
317
4,777
32
—
11,304
9,119
1,859
562
478
39,772
1,049
10,941
671
29
12,690
10,945
16,137 $
5,254
214
102
399
50
152
—
3,280
366
456
264
10,537
1,301
—
—
63
1,364
5,353
3,820
The deferred tax expense (benefit) has been allocated between operations and equity as follows:
Equity
Operations
2022
For the Years Ended December 31,
2021
(in thousands)
2020
$
$
(4,378 ) $
(7,939 )
(12,317 ) $
(424 ) $
1,260
836 $
32
(964 )
(932 )
105
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Note 11. Compensation and Benefit Plans
Ponce Bank Employee Stock Ownership Plan with 401(k) Provisions (the “KSOP”). Effective January 1, 2021, Ponce Bank amended and restated the terms of the Ponce
Bank Employee Stock Ownership Plan (the “ESOP”) and merged the Ponce Bank 401(k) Plan into the ESOP to form the KSOP. There were no changes to the provisions
of the ESOP as discussed below. The KSOP is for eligible employees of Ponce Bank and those of its affiliates. The named executive officers are eligible to participate in
the KSOP just like other employees. An employee must attain the age of 21 and will be eligible to participate in the 401(k) features of the KSOP in the quarter following
thirty days of service and the ESOP feature of the KSOP upon the first entry date commencing on or after the eligible employee’s completion of one year of service.
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).
401(k) Component:
Under the 401(k) features of the KSOP (“401(k) Component”), a participant may elect to defer, on a pre-tax basis, the maximum amount as permitted by the Internal
Revenue Code. For 2022, the salary deferral contribution limit was $20,500; provided, however, that a participant over age 50 may contribute an additional $6,500 to the
401(k) for a total of $27,000. In addition to salary deferral contributions, Ponce Bank may make discretionary matching contributions, discretionary profit sharing
contributions or safe harbor contributions to the 401(k) Component. Discretionary matching contributions are allocated on the basis of salary deferral contributions.
Discretionary profit sharing contributions are based on three classifications set forth in the 401(k) feature (i) Class A — Chairman, President, and Executive Vice
Presidents; (ii) Class B — Senior Vice Presidents, Vice Presidents and Assistant Vice Presidents; and (iii) Class C — all other eligible employees. The contribution for a
class will be the same percentage of compensation for all participants in that class. If Ponce Bank decides to make a safe harbor contribution for a plan year, each
participant will receive a contribution equal to 3% of his or her compensation for the plan year. The 401(k) expenses recorded in the Consolidated Statements of
Operations amounted to $0.4 million and $0.6 million for the years ended December 31, 2021 and 2020, respectively. There were no 401(k) expenses recorded in the
Consolidated Statements of Operations for the year ended December 31, 2022, as this is now part of the KSOP.
A participant is always 100% vested in his or her salary deferral contributions and safe harbor contributions. Discretionary matching and profit sharing contributions are
20% vested after two years of service, plus an additional 20% for each additional year of service; so all participants are fully vested in such contributions after six years
of service. Participants also will become fully vested in his or her account balance in the 401(k) Component automatically upon normal retirement, death or disability, a
change in control, or termination of the KSOP. Generally, participants will receive distributions from the KSOP upon separation from service in accordance with the
terms of the governing document.
ESOP Component:
On September 29, 2017, in connection with the Bank’s reorganization into the mutual holding company form of organization, the ESOP trustee purchased, on behalf of
the ESOP, 723,751 shares of PDL Community Bancorp common stock. The ESOP funded its stock purchase with a loan (“First ESOP loan”) from PDL Community
Bancorp in the amount of $7.2 million, which was equal to the aggregate purchase price of the common stock. The First ESOP loan is being repaid principally through
Ponce Bank’s contributions to the ESOP over the 15-year term of such loan. The interest rate for the First ESOP loan is 2.60%.
On January 27, 2022, concurrent with the completion of the conversion and reorganization of Ponce Bank Mutual Holding Company from a mutual form to a stock
form of organization and the merger of PDL Community Bancorp with and into Ponce Financial Group, Inc., the shares of PDL Community Bancorp common stock
held by the KSOP were converted into 977,880 shares of Ponce Financial Group, Inc. common stock.
On January 27, 2022, the KSOP trustee purchased, on behalf of the ESOP feature of the KSOP (“ESOP Component”), an additional 1,097,353 shares of Ponce Financial
Group, Inc. common stock, or 4.44% of the total number of shares of Ponce Financial Group, Inc. common stock outstanding on January 27, 2022 (including shares
issued to the Foundation). The KSOP funded this stock purchase with a loan (“Second ESOP loan”) from Ponce Financial Group, Inc. in the amount of $11.0 million,
which was equal to the aggregate purchase price of the common stock. The Second ESOP loan is being repaid principally through Ponce Bank’s contributions to the
ESOP Component over the 15-year term of such loan. The interest rate for the Second ESOP loan is 1.82%.
The trustee of the trust funding the KSOP holds the shares of Ponce Financial Group, Inc. common stock purchased by the KSOP in an unallocated suspense account,
and shares will be released from the suspense account on a pro-rata basis as the loans are repaid. The trustee will allocate the shares released among participants on the
basis of each participant’s proportional share of qualifying compensation relative to all participants participating in the ESOP Component. A participant will become
100% vested in his or her
106
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
account balance in the ESOP Component after three years of service. In addition, participants will become fully vested in his or her account balance in the ESOP
Component automatically upon normal retirement, death or disability, a change in control, or termination of the KSOP. Generally, participants will receive distributions
from the KSOP upon separation from service in accordance with the terms of the plan document. The KSOP reallocates any unvested shares of Ponce Financial Group,
Inc. common stock forfeited upon termination of employment among the remaining participants in the ESOP Component.
Contributions to the ESOP are to be sufficient to pay principal and interest currently due under the loan agreement. Under applicable accounting requirements, Ponce
Bank will record a compensation expense for the ESOP at the average market price of the shares as they are committed to be released from the unallocated suspense
account to participants’ accounts, which may be more or less than the original issue price. The compensation expense resulting from the release of the common stock
from the suspense account and allocation to plan participants will result in a corresponding reduction in the earnings of Ponce Financial Group, Inc. The ESOP shares
become outstanding for earnings per share computations (see Note 12). As of December 31, 2022, the combined outstanding balance of both the First ESOP loan and
Second ESOP loan was $14.2 million.
A summary of the ESOP shares as of December 31, 2022 and 2021 are as follows:
Shares committed-to-be released
Shares allocated to participants
Unallocated shares
Total
Fair value of unallocated shares
December 31, 2022
December 31, 2021
(Dollars in thousands)
133,744
354,227
1,569,475
2,057,446
14,628 $
96,500
170,145
434,251
700,896
6,297
$
The Company recognized ESOP related compensation expense, including ESOP equalization expense, of $1.4 million, $1.4 million and $0.5 million for the years ended
December 31, 2022, 2021 and 2020, respectively.
Supplemental Executive Retirement Plan:
The Bank maintains a non-qualified supplemental executive retirement plan (“SERP”) for the benefit of two key executive officers. The SERP expenses recognized for
the years ended December 31, 2022 and 2020 were $0.1 million each for the one key executive officer. The SERP expenses recognized for the year ended December 31,
2021 were $0.3 million for the two key executive officers.
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 flex 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,
45,000 awards of stock options into 15,000 restricted stock units in 2020 and 191,145 awards of stock options into 63,715 restricted stock units in 2022.
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, 322,254 restricted stock units to executive officers, 40,000 restricted stock units to non-executive officers and 148,625
restricted stock units to outside directors. During the year ended December 31, 2020, the Company awarded 40,000 incentive options and 15,000 restricted stock units
to non-executive officers under the 2018 Incentive Plan. 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. On April 1, 2022, the Company awarded
23,718 incentive options to an executive officer, 30,659 incentive options to non-executive officers and 13,952 non-qualified options to an outside director. In addition,
on April 1, 2022 the Company awarded 40,460 restricted stock units to executive officers and 23,255 restricted stock units to outside directors. As of December 31,
107
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
2021, the maximum number of stock options and SARs remaining to be awarded under the Incentive Plan was 189,476. As of December 31, 2022, the maximum
number of stock options and SARs remaining to be awarded under the Incentive Plan was 4,883, after the conversion from PDL Community Bancorp common stock to
Ponce Financial Group, Inc. common stock. As of December 31, 2022 and 2021, the maximum number of shares of common stock that may be issued as restricted
stock or restricted stock units remaining to be awarded under the Incentive Plan was none, for both periods.
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, 2022 and 2021 are as follows:
Non-vested, beginning of year
Conversion and reorganization
Granted
Vested
Forfeited
Non-vested at December 31
(1)
Non-vested, beginning of year
Granted
Vested
Forfeited
Non-vested at December 31
Weighted-
Average
Grant Date
Fair Value
Per Share
Weighted-
Average
Grant Date
Fair Value
Per Share
Number
of Shares
December 31, 2022
$
237,687
93,933
63,715
(149,495 )
—
245,840
$
December 31, 2021
Number
of Shares
335,919
—
(98,232 )
—
237,687
$
$
12.65
—
10.44
9.11
—
9.40
12.66
—
12.69
—
12.65
Compensation expense related to restricted stock units for the years ended December 31, 2022, 2021 and 2020 was $1.4 million, $1.3 million and $1.3 million,
respectively. As of December 31, 2022, the total remaining unrecognized compensation cost related to restricted stock units was $2.1 million, which is expected to be
recognized over the next 20 quarters.
108
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
A summary of the Company’s stock options awards activity and related information for the years ended December 31, 2022 and 2021 are as follows:
Outstanding, beginning of year
Conversion and reorganization
Granted
Exercised
Forfeited
Outstanding at December 31
Exercisable at December 31
(1)
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding at December 31
Exercisable at December 31
(1)
(1)
Weighted-
Average
Exercise
Price
Per Share
Weighted-
Average
Exercise
Price
Per Share
December 31, 2022
Options
203,766
80,526
68,329
—
—
352,621
190,508
$
$
December 31, 2021
Options
203,766
—
—
—
203,766
94,904
$
$
$
12.02
—
10.44
—
—
8.97
8.83
12.02
—
—
—
12.02
12.45
(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 $0.1 million for outstanding options and $0.1 million for exercisable options at December 31, 2022 and $0.5 million for
outstanding options and $0.2 million for exercisable options at December 31, 2021.
The weighted-average exercise price for outstanding options as of December 31, 2022 was $8.97 per share and the weighted-average remaining contractual life is 6.7
years. The weighted-average period over which it is expected to be recognized is 3.5 years. There were 190,508 and 94,904 shares exercisable as of December 31, 2022
and 2021. Total compensation costs related to stock options recognized was $0.2 million, $0.1 million and $0.1 million for the years ended December 31, 2022, 2021
and 2020, respectively. As of December 31, 2022, the total remaining unrecognized compensation cost related to unvested stock options was $0.4 million, which is
expected to be recognized over the next 20 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,
2022
2021
0.00 %
6.5 years
41.34 %
2.65 %
3.85
$
0.00 %
6.5 years
38.51 %
0.48 %
3.77
$
109
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
The expected volatility is based on the Company’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:
As of December 31, 2022, 1,976 shares were held as treasury stock as a result of restricted stock units vested during 2022. As of December 31, 2021, 1,037,041 shares
were held as treasury stock. As a result of the conversion and reorganization, all shares of treasury stock of PDL Community Bancorp were retired on January 27, 2022.
Note 12. 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:
Net (loss) income
$
(30,001 )
$
25,415
$
3,853
For the Years Ended December 31,
2022
2021
2020
(Dollars in thousands except share data)
Common shares outstanding for basic EPS:
Weighted average common shares outstanding
Less: Weighted average unallocated Employee Stock
Ownership Plan (ESOP) shares
Basic weighted average common shares outstanding
Basic (loss) earnings per common share
Potential dilutive common shares:
Add: Dilutive effect of restricted stock awards and stock options
Diluted weighted average common shares outstanding
Diluted (loss) earnings per common share
Note 13. Commitments, Contingencies and Credit Risk
24,246,912
17,256,837
17,233,901
1,555,969
22,690,943
(1.32 )
—
22,690,943
(1.32 )
$
$
512,276
16,744,561
1.52
46,882
16,791,443
1.51
$
$
560,708
16,673,193
0.23
9,391
16,682,584
0.23
$
$
Financial Instruments With Off-Balance-Sheet Risk: In the normal course of business, financial instruments with off-balance-sheet risk may be used to meet the
financing needs of customers. These financial instruments include commitments to extend credit and letters of credit. These instruments involve, to varying degrees,
elements of credit risk and interest rate risk in excess of the amounts recognized on the Consolidated Statements of Financial Condition. The contractual amounts of
these instruments reflect the extent of involvement in particular classes of financial instruments.
The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer
default, and the value of any existing collateral become worthless. The same credit policies are used in making commitments and contractual obligations as for on-
balance-sheet instruments. Financial instruments whose contractual amounts represent credit risk at December 31, 2022 and 2021 are as follows:
Commitments to grant mortgage loans
Commitments to sell loans at lock-in rates
Unfunded commitments under lines of credit
December 31,
2022
December 31,
2021
(in thousands)
207,105 $
1,676
72,530
281,311 $
127,159
13,321
80,033
220,513
$
$
110
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Commitments to Grant Mortgage Loans: Commitments to grant mortgage loans are agreements to lend to a customer as long as all terms and conditions are met as
established in the contract. Commitments generally have fixed expiration dates or other termination clauses, and may require payment of a fee by the borrower. Since
some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each
customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real
estate and income-producing commercial properties. Material losses are not anticipated as a result of these transactions.
Commitments to Sell Loans at Lock-in Rates: In order to assure itself of a marketplace to sell its loans, Mortgage World has agreements with investors who will commit
to purchase loans at locked-in rates. Mortgage World has off-balance sheet market risk to the extent that Mortgage World does not obtain matching commitments from
these investors to purchase the loans. This will expose Mortgage World to the lower of cost or market valuation environment.
Repurchases, Indemnifications and Premium Recaptures: Loans sold by Mortgage World under investor programs are subject to repurchase or indemnification if they
fail to meet the origination criteria of those programs. In addition, loans sold to investors are also subject to repurchase or indemnifications if the loan is two or three
months delinquent during a set period which usually varies from six months to a year after the loan is sold. There are no open repurchase or indemnification requests for
loans sold as a correspondent lender or where the Company acted as a broker in the transaction as of December 31, 2022.
Unfunded Commitments Under Lines of Credit: Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are
commitments for possible future extension of credit to existing customers. These lines of credit are uncollateralized and usually contain a specified maturity date and,
ultimately, may not be drawn upon to the total extent to which the Company is committed.
Unfunded Commitments with Bamboo: On October 1, 2022, the Bank entered into a Membership Interest Purchase Agreement with Bamboo. Under the agreement, the
Bank purchased from Bamboo 180 Membership Interest Units representing an aggregate amount equal to up to 18% of total issued and outstanding Membership Interest
in Bamboo for a purchase price of $2.5 million. The Bank is committed to make an additional contribution of $0.5 million. The additional contribution will be made
during the first quarter of 2023.
Unfunded Commitments with Oaktree: In December of 2021, the Bank committed to invest $5.0 million in Oaktree SBIC Fund, L.P. ("Oaktree"). As of December 31,
2022 and 2021, the total unfunded commitment was $2.8 million and $3.9 million.
Unfunded Commitments with Silvergate: In April of 2022, the Bank committed to invest $5.0 million in EJF Silvergate Ventures Fund LP ("Silvergate"). As of
December 31, 2022, the total unfunded commitment was $3.3 million.
Letters of Credit: Letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued
to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan
facilities to customers. Letters of credit are largely cash secured.
Concentration by Geographic Location: Loans, commitments to extend credit and letters of credit have been granted to customers who are located primarily in the New
York City metropolitan area. Generally, such loans most often are secured by one-to-four family residential properties. The loans are expected to be repaid from the
borrowers' cash flows.
Legal Matters: The Company is involved in various legal proceedings which have arisen in the normal course of business. Management believes that resolution of these
matters will not have a material effect on the Company’s financial condition or results of operations.
Note 14. 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.
111
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset
or liability.
The Company used the following methods and significant assumptions to estimate fair value:
Cash and Cash Equivalents, Placements with Banks, Accrued Interest Receivable, Advance Payments by Borrowers for Taxes and Insurance, and Accrued Interest
Payable: The carrying amount is a reasonable estimate of fair value. These assets and liabilities 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 Bank 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 classified as restricted equity securities.
Loans Receivable: For variable rate loans, which reprice frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values,
adjusted for credit losses inherent in the portfolios. The fair value of fixed rate loans is estimated by discounting the future cash flows using estimated market rates at
which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the portfolios.
Impaired loans are valued using a present value discounted cash flow method, or the fair value of the collateral. Loans are not recorded at fair value on a recurring basis.
Mortgage Loans Held for Sale: Mortgage loans held for sale, at fair value, consists primarily of mortgage loans originated for sale by Mortgage World and accounted
for under the fair value option. These assets are valued using stated investor pricing for substantially equivalent loans as Level 2. In determining fair value, such
measurements are derived based on observable market data, investor commitments, or broker quotations, including whole-loan transaction pricing and similar market
transactions adjusted for portfolio composition, servicing value and market conditions. Loans held for sale by the Bank are carried at the lower of cost or fair value as
determined by investor bid prices.
Under the fair value option, management has elected, on an instrument-by-instrument basis, fair value accounting for substantially all forms of mortgage loans originated
for sale on a recurring basis. The fair value carrying amount of mortgages held for sale under the fair value option was $2.0 million and the aggregate unpaid principal
balance amounted to $2.0 million.
Interest Rate Lock Commitments: Mortgage World enters into rate lock commitments to extend credit to borrowers for generally up to a 60 day period for origination
and/or purchase of loans. To the extent that a loan is ultimately granted and the borrower ultimately accepts the terms of the loan, these loan commitments expose the
Bank's Mortgage World division to variability in its fair value due to changes in interest rates.
The FASB determined that loan commitments related to the origination or acquisition of mortgage loans that will be held for sale must be accounted for as derivative
instruments. Such commitments, along with any related fees received from potential borrowers, are recorded at fair value in derivative assets or liabilities, with changes
in fair value recorded in net gain or loss on sale of mortgage loans. Fair value is based on active market pricing for substantially similar underlying mortgage loans
commonly referred to as best execution pricing or investment commitment pricing, if the loan is committed to an investor through a best efforts contract. In valuing
interest rate lock commitments, there are several unobservable inputs such as the fair value of the mortgage servicing rights, estimated remaining cost to originate the
loans, and the pull through rate of the open pipeline. Accordingly, such derivative is classified as Level 3.
The approximate notional amounts of Mortgage World’s derivative instruments was $1.7 million and $13.3 million at December 31, 2022 and 2021, respectively. The
fair value of derivatives related to interest rate lock commitments not subject to a forward loan sale commitment, amounted to $0.02 million and $0.2 million as of
December 31, 2022 and 2021, respectively, and is included in other assets on the Consolidated Statements of Financial Conditions.
112
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
The table below presents the changes in derivatives from interest rate lock commitments that are measured at fair value on a recurring basis:
Balance as of December 31, 2021
Change in fair value of derivative instrument reported in earnings
Balance as of December 31, 2022
(in thousands)
172
(150 )
22
$
$
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.
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.
Warehouse Lines of Credit: The carrying amounts of warehouse lines of credit approximate fair value and due to their short-term nature are classified as Level 2. One of
the warehouse lines of credit was terminated on March 31, 2022 and one was terminated on February 7, 2023.
Off-Balance-Sheet Instruments: Fair values for off-balance-sheet instruments (lending commitments and 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, 2022 and 2021, and indicate the
level within the fair value hierarchy utilized to determine the fair value:
Description
Available-for-Sale Securities, at fair value:
U.S. Government Bonds
Corporate bonds
Mortgage-Backed Securities:
Collateralized Mortgage Obligations
FHLMC Certificates
FNMA Certificates
GNMA Certificates
Mortgage Loans Held for Sale, at fair value
Derivatives from interest rate lock commitments
Total
Level 1
December 31, 2022
Level 2
Level 3
(in thousands)
$
2,689
23,359
$
2,689
730
$
—
22,629
$
37,777
9,634
55,928
118
1,979
22
131,506
$
$
—
—
—
—
—
3,419
37,777
9,634
55,928
118
1,979
—
128,065
$
$
—
—
—
—
—
—
22
22
113
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Description
Available-for-Sale Securities:
U.S. Government Bonds
Corporate bonds
Mortgage-Backed Securities:
Collateralized Mortgage Obligations
FNMA Certificates
GNMA Certificates
Mortgage Loans Held for Sale, at fair value
Derivatives from interest rate lock commitments
Total
Level 1
December 31, 2021
Level 2
Level 3
(in thousands)
$
$
2,934
21,184
$
18,348
70,699
181
15,836
172
129,354
$
—
—
—
—
—
—
—
—
$
2,934
16,255
$
18,348
70,699
181
15,836
—
124,253
$
$
—
4,929
—
—
—
—
172
5,101
Management’s assessment and classification of an investment within a level can change over time based upon maturity or liquidity of the investment and would be
reflected at the beginning of the quarter in which the change occurred.
The following tables detail the assets carried at fair value and measured at fair value on a nonrecurring basis as of December 31, 2022 and 2021 and indicate the fair
value hierarchy utilized to determine the fair value:
Impaired loans
Impaired loans
December 31, 2022
Total
Level 1
Level 2
Level 3
$
17,952
$
(in thousands)
—
$
—
$
17,952
December 31, 2021
Total
Level 1
Level 2
Level 3
$
17,651
$
(in thousands)
—
$
—
$
17,651
Losses on assets carried at fair value on a nonrecurring basis were de minimis for the years ended December 31, 2022 and 2021, respectively.
As of December 31, 2022 and 2021, the carrying values and estimated fair values of the Company's financial instruments were as follows:
114
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2022
Financial assets:
Cash and cash equivalents
Available-for-sale securities, at fair value
Held-to-maturity securities, at amortized cost
Placements with banks
Mortgage loans held for sale, at fair value
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, 2021
Financial assets:
Cash and cash equivalents
Available-for-sale securities, at fair value
Held-to-maturity securities, at amortized cost
Placements with banks
Mortgage loans held for sale, at fair value
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
Warehouse lines of credit
Accrued interest payable
Carrying
Amount
Fair Value Measurements
Level 1
Level 2
Level 3
Total
(in thousands)
$
54,360 $
129,505
510,820
54,360 $
3,419
—
126,086
495,851
— $
— $
—
—
54,360
129,505
495,851
1,494
1,979
1,493,127
15,049
24,661
—
—
—
—
24,661
1,494
1,979
—
15,049
—
—
—
1,430,864
—
—
1,494
1,979
1,430,864
15,049
24,661
289,149
586,645
376,618
9,724
517,375
1,390
289,149
586,645
—
—
—
—
—
—
370,005
9,724
503,406
1,390
—
—
—
—
—
—
289,149
586,645
370,005
9,724
503,406
1,390
Carrying
Amount
Fair Value Measurements
Level 1
Level 2
Level 3
Total
(in thousands)
— $
— $
$
153,894 $ 153,894 $
113,346
934
2,490
15,836
1,305,078
12,362
6,001
—
—
—
—
—
—
6,001
108,417
914
2,490
15,836
—
12,362
—
4,929
—
—
1,306,253
—
—
153,894
113,346
914
2,490
15,836
1,306,253
12,362
6,001
274,956
274,956
500,281
429,479
7,657
106,255
15,090
228
500,281
—
—
—
—
—
—
—
431,339
7,657
106,680
15,090
228
—
—
—
—
—
—
—
274,956
500,281
431,339
7,657
106,680
15,090
228
The following table reconciles, at December 31, 2022 and 2021, the beginning and ending balances for debt securities available-for-sale that are recognized at fair value
on a recurring basis, in the Consolidated Statements of Financial Condition, using significant unobservable inputs.
115
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Beginning balance
Total loss included in earnings
Securities sold
Transfer out of level 3
Ending balance
2022
December 31,
(in thousands)
4,929 $
(344 )
—
(4,585 )
— $
2021
6,016
(87 )
(1,000 )
—
4,929
$
$
The Company recognizes transfers between levels of the valuation hierarchy at the end of the applicable reporting periods. There was one transfer out of Level 3 assets
in the fair value hierarchy at December 31, 2022 due to more observability of the inputs and the comparability to other assets trading in the marketplace on valuation
date. There were no transfers into or out of Level 3 for the year ended December 31, 2021. Fair value for Level 3 securities was determined using a third-party pricing
service with limited levels of activity and price transparency.
Off-Balance-Sheet Instruments: There loan commitments on which the committed interest rate is less than the current market rate insignificant at December 31, 2022
and 2021.
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 2022 and 2021 have been measured as of their respective period-ends and have not been reevaluated or updated for purposes of these consolidated
financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates
may be different than amounts reported at each period.
The information presented should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited
portion of the Company's assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons
between the Company's disclosures and those of other banks may not be meaningful.
Note 15. Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board, the OCC and the U.S. Department of
Housing and Urban Development. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Company’s operations and financial statements. Under the regulatory capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation require the maintenance of minimum amounts and ratios (set forth in the table below) of total risk-based and Tier 1
capital to risk-weighted assets (as defined), common equity Tier 1 capital (as defined), and Tier 1 capital to adjusted total assets (as defined) adjusted total assets (as
defined). As of December 31, 2022 and 2021, the applicable capital adequacy requirements specified below have been met.
The below minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions including dividend payments and
certain discretionary bonus payments to executive officers. The applicable capital buffer for the Bank was 22.53% and 9.23% at December 31, 2022 and 2021.
The most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Company and the Bank must maintain minimum total risk-based, common equity risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the table below. There were no conditions or events since then that have changed the Bank's category.
116
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
The Company's and the Bank’s actual capital amounts and ratios as of December 31, 2022 and 2022 as compared to regulatory requirements are as follows:
December 31, 2022
Ponce Financial Group, Inc.
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, 2021
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
For Capital
Adequacy Purposes
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$ 530,241
510,537
510,537
510,537
33.72 % $ 125,791 8.00%
94,343 6.00%
32.47 %
70,757 4.50%
32.47 %
77,665 4.00%
26.29 %
$ 476,519
456,816
456,816
456,816
30.53 % $ 124,883 8.00%
93,662 6.00%
29.26 %
70,247 4.50%
29.26 %
89,264 4.00%
20.47 %
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
(Dollars in thousands)
Amount
$ 157,238
125,791
102,205
97,082
$ 156,104
124,883
101,468
111,580
10.00 %
8.00 %
6.50 %
5.00 %
10.00 %
8.00 %
6.50 %
5.00 %
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
$
$
204,216
190,714
190,714
190,714
18.96 % $ 86,169
64,627
17.71 %
48,470
17.71 %
60,629
12.58 %
8.00 % $ 107,711
6.00 %
4.50 %
4.00 %
86,169
70,012
75,786
10.00 %
8.00 %
6.50 %
5.00 %
184,689
171,253
171,253
171,253
17.23 % $ 85,735
64,301
15.98 %
48,226
15.98 %
62,784
10.91 %
8.00 % $ 107,168
6.00 %
4.50 %
4.00 %
85,735
69,659
78,481
10.00 %
8.00 %
6.50 %
5.00 %
Ponce Bank, through its Mortgage World division, is subject to various net worth requirements in connection with lending agreements that Ponce Bank has entered with
purchase facility lenders. Failure to maintain minimum capital requirements could result in the Bank’s Mortgage World division being unable to originate and service
loans, and, therefore, could have a direct material effect on the Company’s consolidated financial statements.
Mortgage World’s minimum net worth requirements as of December 31, 2022 and prior to becoming a division of Ponce Bank, December 31, 2021 are reflected
below:
December 31, 2022
HUD
117
Minimum
Requirement
(in thousands)
$
1,000
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2021
HUD
New York Department of Financial Services
Other State Banking Departments
As of December 31, 2022 and 2021, Mortgage World is in compliance with all minimum capital requirements as specified above.
Note 16. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) are as follows:
Minimum
Requirement
(in thousands)
$
1,000
250
250
Unrealized gains (losses) on available-for-sale securities, net
Total
Unrealized gains on available-for-sale securities, net
Total
Note 17. Transactions with Related Parties
December 31,
2021
December 31, 2022
Change
(in thousands)
December 31,
2022
(1,456 ) $
(1,456 ) $
(16,404 ) $
(16,404 ) $
(17,860 )
(17,860 )
December 31,
2020
December 31, 2021
Change
(in thousands)
December 31,
2021
135 $
135 $
(1,591 ) $
(1,591 ) $
(1,456 )
(1,456 )
$
$
$
$
Directors, executive officers and non-executive officers of the Company have been customers of and have had transactions with the Bank, and it is expected that such
persons will continue to have such transactions in the future. Aggregate loan transactions with related parties for the years ended December 31, 2022, 2021, and 2020
were as follows:
(1)
Beginning balance
Originations
Payments
(1)
Ending balance
(1)Includes loans held by James Perez who became a director on March 17, 2022.
$
$
2022
For the Years Ended December 31,
2021
(in thousands)
$
$
5,631
6,418
(3,731 )
8,318
424
10
(82 )
352
$
$
2020
1,260
197
(1,033 )
424
The Company held deposits in the amount of $8.0 million, $6.2 million and $6.8 million from officers and directors at December 31, 2022, 2021 and 2020, respectively.
118
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Note 18. Parent Company Only Financial Statements
The following are the condensed financial statements of the Parent as of and for the years ended December 31, 2022 and 2021.
ASSETS
Cash and cash equivalents
Investment in Ponce Bank
Investment in Mortgage World
Investment in Grain
Investment in Lending Front
Investment in Bamboo
Loan receivable - ESOP
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Funds due to Ponce Financial
Other liabilities and accrued expenses
Stockholders' equity
Total liabilities and stockholders' equity
Interest on ESOP loan
Interest on other deposits
Net interest income
Share-based compensation expense
Management fee expense
Office occupancy and equipment
Professional fees
Contribution to the Ponce De Leon Foundation
Other noninterest expenses
Total noninterest expense
Loss before income taxes
Benefit for income taxes
Equity in undistributed earnings of Ponce Bank and Mortgage World
Net (loss) income
119
December 31,
2022
2021
(in thousands)
28,318
438,975
—
—
1,000
2,500
14,377
7,702
492,872
$
$
—
172
492,700
492,872
$
$
For the Years Ended December 31,
2022
2021
(in thousands)
302
$
4
306
1,567
504
80
1,938
4,995
1,086
10,170
(9,864 )
(2,009 )
(22,146 )
(30,001 ) $
124,867
169,797
5,406
1,000
—
—
4,455
6,612
312,137
122,000
881
189,256
312,137
142
16
158
1,405
514
58
1,240
—
72
3,289
(3,131 )
(381 )
28,165
25,415
$
$
$
$
$
$
Ponce Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed earnings of subsidiaries
Investment in Grain write-off
Deferred income tax
Share-based compensation expense
Decrease (increase) in other assets
Net increase (decrease) in other liabilities
Net cash used in operating activities
Cash Flows from Investing Activities:
Investment in Grain
Investment in Lending Front
Investment in Bamboo
Investment in Ponce Bank
Loan to the ESOP
Repayment of ESOP Loan
Net cash (used in) provided by investing activities
Cash Flows from Financing Activities:
Funds due to Ponce Financial
Common stock issued from vesting of restricted stock units
Proceeds from issuance of preferred stock
Contribution to Ponce De Leon Foundation
Repurchase of treasury shares
Proceeds from the sale of treasury stock
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Note 19. Quarterly Financial Information (unaudited)
For the Years Ended December 31,
2022
2021
$
(30,001 )
$
22,146
1,000
239
1,567
(750 )
992
(4,807 )
—
(1,000 )
(2,500 )
(302,322 )
(10,974 )
1,052
(315,744 )
—
2
225,000
(1,000 )
—
—
224,002
(96,549 )
124,867
28,318
$
$
25,415
(28,165 )
—
(1,381 )
1,405
(2,193 )
366
(4,553 )
(500 )
—
—
—
1,014
514
122,000
—
—
(1,607 )
4,743
125,136
121,097
3,770
124,867
Fourth
Third
Second
First
Fourth
Third
Second
First
2022
2021
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)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Basic weighted average
common shares
Diluted weighted average
common shares
$
$
$
$
$
16,166
12,641
$
17,611
9,330
15,488
817
17,338
1,258
16,782
873
(Dollars in thousands except share data)
$
$
$
3,525
437
15,765
(11,803 )
(2,589 )
(9,214 ) $
8,281
1,577
25,416
(15,558 )
(820 )
(14,738 ) $
14,671
2,179
16,567
283
(488 )
$
771
16,080
2,226
28,074
(9,768 )
(2,948 )
(6,820 ) $
15,909
19,169
15,854
19,224
4,245
14,979
$
$
15,440
572
13,732 $
586
14,868
3,234
14,732
3,370
1,318
2,052
$
13,146
8,341
13,641
7,846
1,914
5,932 $
12,892
686
12,206
3,893
12,915
3,184
732
2,452
(0.40 ) $
(0.40 ) $
(0.64 ) $
(0.64 ) $
0.03
0.03
$
$
(0.31 ) $
(0.31 ) $
0.90
0.89
$
$
0.12
0.12
$
$
0.35 $
0.35 $
0.15
0.15
23,168,097
23,094,859
23,056,559
21,721,113
16,864,929
16,823,731
16,737,037 16,548,196
23,168,097
23,094,859
23,128,911
21,721,113
16,924,785
16,914,833
16,773,606 16,548,196
120
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, 2022. 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 GAAP.
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, 2022. 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, 2022, 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.
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,
2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection.
None.
121
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 2023 Annual Meeting of Stockholders (the “2023 Proxy Statement”) are incorporated herein by reference.
Item 11. Executive Compensation.
The “Proposal I – “Election of Directors – Executive Compensation” section of the 2023 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 “Proposal I – Election of Directors – Benefit Plans and Agreements – 2018 Long-Term Incentive Plan”
sections of the Company’s 2023 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 2023 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 2023 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, 2022 and 2021
(C) Consolidated Statements of Operations for the Years ended December 31, 2022, 2021, and 2020
(D) Consolidated Statements of Comprehensive (Loss) Income for the Years ended December 31, 2022, 2021, and 2020
(E) Consolidated Statements Stockholders’ Equity for the Years ended December 31, 2022, 2021, and 2020
(F) Consolidated Statements of Cash Flows for the Years ended December 31, 2022, 2021, and 2020
(G) Notes to the Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
None.
(a)(3) Exhibits
122
Exhibit
Number
Description
Exhibit Index
3.1
3.2
3.3
4.1
4.2
10.1†*
10.2†*
10.3†
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
Articles of Incorporation of Ponce Financial Group, Inc. (attached as Exhibit 3.1 to the Registrant’s Form S-1 (File No. 333-258394) filed with the
Commission on August 3, 2021).
Bylaws of Ponce Financial Group, Inc. (attached as Exhibit 3.2 to the Registrant’s Form S-1 (File No. 333-258394) filed with the Commission on
August 3, 2021).
Articles Supplementary to the Charter of Ponce Financial Group, Inc. (attached as Exhibit 3.1 to Ponce Financial Group, Inc.’s current report on
Form 8-K (File No. 001-41255) filed with the Commission on June 9, 2022).
Form of Common Stock Certificate of Ponce Financial Group, Inc. (attached as Exhibit 4.0 to the Registrant’s amendment No. 1 to the Form S-1
(File No, 333-258394) filed with the Commission on November 5, 2021).
Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.(attached as Exhibit 4.2 to Ponce
Financial Group’s Annual Report on Form 10-K for the year ended December 31, 2021 (File No. 001-41255) filed with the Commission on
March 31, 2022).
Ponce Bank Employee Stock Ownership Program with 401(k) provisions.
Amendment No.1 to the Ponce Bank Employee Stock Ownership Program with 401(k) provisions.
Ponce De Leon Federal Deferred Compensation Plan (attached as Exhibit 10.3 to the PDL Community Bancorp’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 PDL Community Bancorp’s Form S-1 (File No. 333-217275) filed with the Commission on April 12, 2017).
Employment Agreement entered into by and among Ponce Bank Mutual Holding Company, PDL Community Bancorp and Carlos P. Naudon
(attached as Exhibit 10.5 to the PDL Community Bancorp’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 PDL Community Bancorp’s Form S-1 (File No. 333-217275) filed with the Commission on April 12, 2017).
Employment Agreement entered into by and among Ponce Bank Mutual Holding Company, PDL Community Bancorp and Steven Tsavaris
(attached as Exhibit 10.7 to the PDL Community Bancorp’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
PDL Community Bancorp’s Form S-1 (File No. 333-217275) filed with the Commission on April 12, 2017).
Employment Agreement entered into by and among Ponce Bank Mutual Holding Company, PDL Community Bancorp and Frank Perez (attached
as Exhibit 10.9 to the PDL Community Bancorp’s Form S-1 (File No. 333-217275) filed with the Commission on April 12, 2017).
10.10†
Amendment to Employment Agreement of Frank Perez, dated May 25, 2022 (attached as Exhibit 10.1 to Ponce Financial Group, Inc.’s current
report on Form 8-K (File No. 001-41255) filed with the Commission on May 31, 2022).
123
10.11†
10.12†
10.13†
10.14†
10.15†
10.16
10.17
21.1
31.1*
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).
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).
PDL Community Bancorp 2018 Long-Term Incentive Plan (attached as Exhibit 99.1 to the Registrant’s Form S-8 (File No. 333-262674) filed
with the Commission on February 11, 2022).
Letter Agreement and Securities Purchase Agreement, dated June 7, 2022, by and among Ponce Financial Group and Treasury (attached as
Exhibit 10.1 to Ponce Financial Group, Inc.’s current report on Form 8-K (File No. 001-41255) filed with the Commission on June 9, 2022).
Registration Rights Agreement between Ponce Financial Group and the Treasury, dated June 7, 2022 (attached as Exhibit 10.2 to Ponce Financial
Group, Inc.’s current report on Form 8-K (File No. 001-41255) filed with the Commission on June 9, 2022).
Subsidiaries of the Registrant.
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2*
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
XBRL Instance Document (embedded within the Inline XBRL)
XBRL Taxonomy Extension Schema Document (embedded within the Inline XBRL)
XBRL Taxonomy Extension Calculation Linkbase Document (embedded within the Inline XBRL)
XBRL Taxonomy Extension Definition Linkbase Document (embedded within the Inline XBRL)
XBRL Taxonomy Extension Label Linkbase Document (embedded within the Inline XBRL)
XBRL Taxonomy Extension Presentation Linkbase Document (embedded within the Inline XBRL)
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed herewith.
† Management contract or compensatory plan.
Item 16. FORM 10-K Summary.
None.
124
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 21, 2023
Ponce Financial Group, Inc.
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/ Sergio J. Vaccaro
Sergio J. Vaccaro
/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
/s/ James Perez
James Perez
Name
Title
Date
President, Chief Executive Officer and Director
March 21, 2023
Executive Vice President and Chief Financial Officer
March 21, 2023
Executive Chairman and Director
Director
Director
Director
Director
Director
Director
125
March 21, 2023
March 21, 2023
March 21, 2023
March 21, 2023
March 21, 2023
March 21, 2023
March 21, 2023
Exhibit 10.1
Ponce Bank
Employee Stock Ownership Plan
With 401(k) Provisions
(Effective January 1, 2021)
1
Table of Contents
ARTICLE I INTRODUCTION
ARTICLE II DEFINITIONS
ARTICLE III ELIGIBILITY
ARTICLE IV VESTING
ARTICLE V CONTRIBUTIONS AND ALLOCATIONS
ARTICLE VI MAXIMUM LIMITATION ON CONTRIBUTIONS
ARTICLE VII INVESTMENT OF TRUST ASSETS
ARTICLE VIII COMPANY STOCK VALUATION AND INVESTMENTS IN COMPANY STOCK
ARTICLE IX PARTICIPANT LOANS
ARTICLE X IN-SERVICE WITHDRAWALS
ARTICLE XI DISTRIBUTIONS
ARTICLE XII RIGHT TO SELL COMPANY STOCK
ARTICLE XIII VOTING AND TENDER OF COMPANY STOCK
ARTICLE XIV ADMINISTRATION
ARTICLE XV AMENDMENTS
ARTICLE XVI TERMINATION
ARTICLE XVII MISCELLANEOUS
ARTICLE XVIII TOP-HEAVY PROVISIONS
ARTICLE XIX EXEMPT LOANS
2
3
3
12
13
15
18
24
25
25
27
29
33
35
36
39
39
40
41
44
Ponce Bank Employee Stock Ownership Plan
(with 401(k) Provisions)
WHEREAS, Ponce Bank, a federally chartered savings association (the “Bank”), previously adopted the Ponce Bank Employee
Stock Ownership Plan (the “Plan”), effective January 1, 2017; and
WHEREAS, the Bank desires to merge the Ponce Bank 401(k) Profit Sharing Plan (the “401(k) Plan”) into this Plan, such that this
Plan includes both: (1) a cash or deferred arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended (the
“Code”); (2) a discretionary employer contribution feature; (3) a qualified nonelective contribution feature to qualify as a safe harbor plan
under Section 401(k)(12)(C) of the Code; and (4) an employee stock ownership plan portion that is intended to qualify as both a stock
bonus plan under Section 401(a) of the Code and an employee stock ownership plan under Section 4975(e)(7) of the Code.
NOW, THEREFORE, in consideration of the foregoing, the Bank hereby amends and restates this Plan, effective as of January 1,
2021.
ARTICLE I
INTRODUCTION
1.1Purpose and Effective Date. The Plan is intended to be an employee stock ownership plan within the meaning of Section 4975(e)
(7) of the Code and is designed to invest primarily in Company Stock (as defined herein), which meets the requirements for qualifying
employer securities under Code Section 409(l). The purchase of Company Stock for the Plan may be made with the proceeds of exempt
loans meeting the requirements of Section 54.4975-7(b) of the Treasury Regulations (including any amendments thereto) and Section
2550.408(b)-3 of the Department of Labor Regulations (including any amendments thereto), employer contributions, dividends on
qualified employer securities or a combination thereof. The Plan also includes a cash or deferred arrangement under Section 401(k) of the
Code, a discretionary contribution employer contribution feature and a matching contribution feature under 401(m). In addition, the Plan is
intended to qualify as a safe harbor plan under Section 401(k)(12)(C) and provides for a qualified nonelective contributions as required
therein.
1.2History of the Plan. The Plan was originally effective on January 1, 2017 solely as an employee stock ownership plan within
the meaning of Section 4975(e)(7). As of the Effective Date, the 401(k) Plan merged into this Plan and the Plan was amended and restated
in its entirety. The Plan received a determination letter on June 27, 2018.
1.3Trust Agreement and Plan Administration. All contributions under the Plan will managed and controlled by the Trustee acting
under a Trust which forms a part of the Plan. The terms of the trust are set forth in the Trust Agreement. The authority to control and
manage the operation and administration of the Plan is vested in the Administrative Committee.
1.4Not an S-Corporation. The Employer is not an S-corporation and has never been an S- corporation such that the Plan is not
required to comply with Section 409(p) of the Code.
The following initially capitalized words and phrases when used in the Plan shall have the following meanings unless the context
clearly requires otherwise.
ARTICLE II
DEFINITIONS
3
2.1Account means the bookkeeping account established for each Participant which reflects the value of the Participant’s interest in
the Plan. This Account shall include a Company Stock Account, which reflects the number of shares of Company Stock allocated to the
Participant and an Investment Account which reflects other investments allocated to the Participant. The Account represents the
Participant’s total economic interest in the Plan.
2.2Actual Contribution Percentage means for each Plan Year the average of the ratios (calculated separately for each Eligible
Employee in such group, of (i) the amount of Matching Contributions actually paid to the Trust on behalf of each such Eligible Employee
for such Plan Year, to (ii) the Eligible Employee’s Compensation for that portion of the applicable Plan Year during which the Eligible Employee was
eligible to participate. The Actual Contribution Percentage for a Participant who has no Matching Contributions shall be 0%.
2.3Actual Deferral Percentage means for each Plan Year the average of the ratios (calculated separately for each Eligible Employee
in such group), of (i) the amount of Elective Contributions actually paid over to the Trust on behalf of each such Eligible Employee for such
Plan Year, to (ii) the Eligible Employee’s Compensation for that portion of the applicable Plan Year during which the Eligible Employee
was eligible to participate. In computing the Actual Deferral Percentage, Elective Contributions shall not include any amounts properly
returned to the Participant as excess Annual Additions under Section 6.5; any amounts properly returned to a Non-Highly Compensated
Employee as excess deferrals under Section 6.1; or any amounts properly characterized as Catch-Up Contributions. The Actual Deferral
Percentage for a Participant who makes no Elective Contributions during a Plan Year shall be 0%.
2.4Administrative Committee and Committee, used interchangeably, means the named fiduciary of the Plan, which is appointed
by the Board of Directors, as is more fully described in Article XIV. In the event the Board of Directors does not appoint an
Administrative Committee, Administrative Committee means the Board of Directors.
2.5Affiliate means the Bank and any corporation which is a member of a controlled group of corporations (as defined in Code
Section 414(b)) which includes the Bank; any trade or business (whether or not incorporated) which is under common control (as defined in
Code Section 414(c)) with the Bank; any organization (whether or not incorporated) which is a member of an affiliated service group (as
defined in Code Section 414(m)) which includes the Bank; and any other entity required to be aggregated with the Bank pursuant to
regulations under Code Section 414(o).
2.6Bancorp means PDL Community Bancorp, a savings and loan holding company, which is the parent company of the Bank.
2.7Bank means Ponce Bank and any Affiliate which adopts this Plan with the approval of the Board of Directors of the Bank and
any successor to the business of the Bank that agrees to assume the Bank’s obligations under the Plan.
2.8Beneficiary means the individual(s) or entities entitled to receive the Participant’s benefits under the Plan in the event of the
Participant’s death prior to receiving all benefits payable under the Plan.
2.9Board of Directors means the Board of Directors of the Bank as constituted from time to time.
4
2.10Break in Service means a Plan Year during which an Employee (a) has terminated employment or is no longer employed with
the Bank or an Affiliate, and (b) fails to complete more than 500 Hours of Service.
2.11Change in Control means an event involving Bancorp or the Bank that: (i) would be required to be reported in response to Item
5.01 of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 (the “Exchange Act”); or
(ii) results in a Change in Control of Bancorp within the meaning of the Bank Holding Company Act of 1956, as amended, or the Change
in Bank Control Act and the Rules and Regulations of the Board of Governors of the Federal Reserve System (“FRS”) promulgated
pursuant thereto (provided, that in applying the definition of change in control as set forth under the Rules and Regulations of the FRS, the
Board shall substitute its judgment for that of the FRS); or (iii) results in a Change in Control of the Bank within the meaning of the Home
Owners’ Loan Act, as amended, the Federal Deposit Insurance Act, or the Rules and Regulations promulgated by the Office of the
Comptroller of the Currency (the “OCC”), as in effect on the date hereof (provided, that in applying the definition of change in control as
set forth under the rules and regulations of the OCC, the Board shall substitute its judgment for that of the OCC); or (iv) without limitation
such a Change in Control shall be deemed to have occurred at such time as:
(a)any “person” (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting securities of Bancorp representing 25% or more
of Bancorp’s outstanding voting securities or right to acquire such securities except for any voting securities purchased by any
employee benefit plan of the Bank, by the Ponce De Leon Foundation or by Ponce Bank Mutual Holding Company;
(b)individuals who constitute the Board of Bancorp or the Bank on the date hereof (each an “Incumbent Board”) cease for any
reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination
for election by Bancorp’s or the Bank’s stockholders was approved by a Nominating Committee solely composed of members
which are Incumbent Board members, shall be, for purposes of this clause (b), considered as though he were a member of the
Incumbent Board;
(c)a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of Bancorp or the Bank or similar
transaction occurs or is effectuated in which Bancorp or the Bank is not the resulting entity; provided, however, that such an
event listed above will be deemed to have occurred or to have been effectuated upon the receipt of all required federal
regulatory approvals not including the lapse of any statutory waiting periods;
(d)a proxy statement has been distributed soliciting proxies from stockholders of Bancorp, by someone other than the current
management of Bancorp, seeking stockholder approval of a plan of reorganization, merger or consolidation of Bancorp with
one or more companies as a result of which the outstanding shares of the class of securities then subject to such plan or
transaction are exchanged for or converted into cash or property or securities not issued by Bancorp; or
(e)a tender offer is made for 20% or more of the voting securities of Bancorp then outstanding.
5
In no event, however, shall a Change in Control be deemed to have occurred as a result of (1) any acquisition of securities or
assets of Bancorp or the Bank, by any employee benefit plan maintained by the Bank, by the Ponce De Leon Foundation, or by Ponce
Bank Mutual Holding Company; or (2) the conversion of Ponce Bank Mutual Holding Company to stock form and/or a contemporaneous
stock offering of a newly-formed stock holding company.
2.12Code means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.
2.13Company Stock means shares of common stock issued by Bancorp that are readily tradable on an established securities market;
provided, however, if Bancorp common stock is not readily tradable on an established securities market, Company Stock means common
stock issued by Bancorp having a combination of voting power and dividend rates equal to or in excess of: (a) that class of common stock
of Bancorp having the greatest voting power and (b) that class of common stock of Bancorp having the greatest dividend rights. Non-
callable preferred stock shall be treated as Company Stock for purposes of the Plan if such stock is convertible at any time into stock that is
readily tradable on an established securities market (or, if applicable, that meets the requirements of (a) and (b) next above) and if such
conversion is at a conversion price that, as of the date of the acquisition by the Plan, is reasonable. For purposes of the immediately
preceding sentence, preferred stock shall be treated as non- callable if, after the call, there will be a reasonable opportunity for a conversion
that meets the requirements of the immediately preceding sentence. Company Stock shall be held under the Trust only if such stock
satisfies the requirements of Section 407(d)(5) of ERISA.
2.14Compensation means wages within the meaning of Code Section 3401(a) and all other payments of compensation to a
Participant by the Employer during a Plan Year for which the Employer is required to report on Form W-2. Compensation must be
determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or
location of the employment or the services performed. Compensation also includes any salary reduction contributions elected by a
Participant which is not includible in the gross income of the Participant pursuant to any plan maintained by the Bank in accordance with
Code Sections 125, 132(f)(4), 402(e)(3), 402(h) or 403(b), but shall exclude such forms of compensation as set forth below in this Section
2.14.
Payments made within 2-1/2 months after severance from employment (within the meaning of Code section 401(k)(2)(B)(i)(I)) will
be Compensation if they are payments that, absent a severance from employment, would have been paid to the Participant while the
Participant continued in employment with the Employer and are regular compensation for services during the Participant’s regular working
hours, compensation for services outside the Participant’s regular working hours (such as overtime or shift differential), commissions,
bonuses, or other similar compensation, and payments for accrued bona fide sick, vacation or other leave, but only if the Participant would
have been able to use the leave if employment had continued. Any payments not described above are not considered Compensation if paid
after severance from employment, even if they are paid within 2-1/2 months following severance from employment, except for payments to
an individual who does not currently perform services for the Employer by reason of qualified military service (within the meaning of Code
section 414(u)(1)) to the extent these payments do not exceed the amounts the individual would have received if the individual had
continued to perform services for the Employer rather than entering qualified military service.
Notwithstanding the foregoing, Compensation shall not include any amounts earned prior to becoming a Participant in the Plan. The
annual compensation for each Participant taken into account under the Plan shall not exceed $290,000, as adjusted by the Internal Revenue
Service at the same time and in the same manner as under Code Section 415(d).
6
Exclusions. Compensation excludes the following amounts as follows:
Elective Contributions; Qualified Nonelective Contributions
Source
Exclusion(s)
Bonuses, Commissions, Bonus 2; Car Allowance; Misc., Employee
Incentive, Rep Expense In/Out, Representative Expense, Retro Pay;
Differential Wages, Unused Leave
Matching Contributions
401(k) Safe Harbor Contributions
Other Discretionary Contributions
Differential Wages; Unused Leave
Differential Wages; Unused Leave
Differential Wages; Unused Leave
2.15Disability means a medically determinable physical or mental impairment which is of such permanence and degree that it can be
expected to result in death or that a Participant is unable, because of such impairment, to perform any substantial gainful activity for which
the Participant is suited by virtue of such Participant’s experience, training or education and which would entitle the Participant to benefits
under the Employer’s long-term disability plan, if any, or to Social Security disability benefits as evidenced by a disability award letter.
2.16Disqualified Person means a person defined in Code Section 4975(e), including but not limited to (i) a fiduciary of the Plan; (ii) a
person providing services to the Plan; (iii) an owner of 50% or more of the combined voting power or value of all classes of stock of the
Bank or Bancorp entitled to vote or the total value of shares of all classes of stock of the Bank and certain members of such owner’s family;
or (iv) an officer, director, 10% or greater shareholder or highly compensated employee (who earns 10% or more of the yearly wages) of the
Bank.
2.17Effective Date means January 1, 2021, which is the date on which the provisions of this Plan become effective.
2.18Elective Contribution means an Employer Contribution made to the Plan at the election of a Participant, in lieu of cash
compensation, including contributions made pursuant to a salary reduction agreement or some other deferral mechanism.
2.19Elective Contribution Sub-Account means the sub-account to which is credited a Participant’s Elective Contribution.
2.20Employee means an individual who is employed as a common law employee by the Bank or an Affiliate on a salaried or hourly
basis and with respect to whom the Bank or the Affiliate is required to withhold taxes from remuneration paid to such Employee by the
Bank or Affiliate for personal services rendered to the Bank, including any officer or director who shall so qualify. If an individual is not
considered to be an Employee in accordance with the preceding sentence for a Plan Year, a subsequent determination by the Bank, any
governmental agency or court that the individual is a common law employee of the Bank, even if such determination is applicable to prior
years, will not have a retroactive effect for purposes of eligibility to participate in the Plan.
2.21Employer means the Bank.
2.22Employer Contribution means cash contributions attributable solely to an Elective Contribution, Matching
Contribution, 401(k) Safe Harbor Nonelective Contribution and Qualified Nonelective Contribution.
2.23Entry Date shall be the first day of each Plan Year and the first day of the fourth, seventh and tenth months of each Plan Year.
7
2.24ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time, including any
regulations promulgated thereunder.
2.25ESOP means the “employee stock ownership plan” portion of the Plan.
2.26Exempt Loan means the issuance of notes, a series of notes or other installment obligations incurred by the Trustee, in
accordance with the Trust, in connection with the purchase of Company Stock, the terms of which shall satisfy the requirements of Treasury
Regulations Section 54.4975-7(b), including the requirements: (a) that the loan bear a reasonable rate of interest, be for a definite period
(rather than payable on demand), and be without recourse against the Plan, and (b) that the only assets of the Plan that may be given as
collateral are shares of Common Stock purchased with the proceeds of that loan or with the proceeds of a prior Exempt Loan.
2.27401(k) Safe Harbor Nonelective Contribution means an Employer Contribution made by the Employer pursuant to Section 5.5
of the Plan.
2.28401(k) Safe Harbor Nonelective Contribution Sub-Account means the subaccount to which the Employer’s 401(k) Safe
Harbor Nonelective Contributions are allocated to the Participant.
2.29Highly Compensated Employee
(a)Highly Compensated Employee means an Employee who performs service during the determination year and is described
in one or more of the following groups:
(i)An Employee who is a 5% owner, as defined in Code Section 416(i)(A)(iii), at any time during the determination
year or the look-back year.
(ii)An Employee who receives compensation in excess of $130,000 (indexed in accordance with Code section
415(d)) during the look-back year and is a member of the top-paid group for the look-back year.
(b)For purposes of the definition of Highly Compensated Employee, the following definitions and rules shall apply:
(i)The determination year is the Plan Year for which the determination of who is highly compensated is being made.
(ii)The look-back year is the 12-month period immediately preceding the determination year, or if the Employer
elects, the calendar year ending with or within the determination year.
(iii)The top-paid group consists of the top 20% of employees ranked on the basis of compensation received during the
year. For purposes of determining the number of employees in the top-paid group, employees described in Code
section 414(q)(8) and Treasury Regulations Section 1.414(q)-1T Q&A 9(b) are excluded.
(c)Compensation is compensation within the meaning of Code section 415(c)(3), plus, for purposes thereof, elective or salary
reduction contributions to a cafeteria plan, cash
8
or deferred arrangement under Code section 401(k) or tax-sheltered annuity under Code section 403(b) or made pursuant to
Code section 132(f)(4). Employers aggregated under Code sections 414(b), (c), (m), or (o) are treated as a single employer.
2.30Hours of Service means:
(a)Performance of Duties. The actual hours for which an Employee is paid or entitled to be paid by the Bank for the
performance of duties;
(b)Nonworking Paid Time. Each hour for which an Employee is paid or entitled to be paid by the Bank on account of a period
of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to
vacation, holiday, illness, incapacity, disability (to the extent not already included in Compensation), layoff, jury duty, military
duty or leave of absence; provided, however, no more than 501 Hours of Service shall be credited to an Employee under this
subsection for any single continuous period (whether or not such period occurs in a single computation period); and provided
further that no credit shall be given for payments made or due under a plan maintained solely for the purpose of complying with
applicable worker’s or unemployment compensation or disability insurance laws or for payments which solely reimburse an
Employee for medical or medically related expenses incurred by the Employee; and
(c)Maternity, Paternity and FMLA Leave. Solely for purposes of determining whether a one-year Break in Service has
occurred for purposes of determining eligibility to participate and vesting, each hour for which an Employee is absent from
employment by reason of (i) pregnancy of the Employee, (ii) birth of a child of the Employee, (iii) placement of a child in
connection with the adoption of the child by an individual, or
(iv) caring for the child during the period immediately following the birth or placement for adoption. Hours of Service
shall also, for these limited purposes, include each hour for which an Employee who has worked for the Bank or an
Affiliate for at least 12 months and for at least 1,250 Hours of Service during the year preceding the start of the leave,
is absent from employment on an unpaid family leave for up to 12 weeks, as provided for in the Family and Medical
Leave Act of 1993 (the “FMLA Leave”), by reason of (A) the birth or adoption of a child, (B) the care of a spouse,
child or parent with a serious health condition, or (C) the Employee’s own serious health condition, provided that such
an Employee provides the Bank with a 30-day advance notice if the leave is foreseeable, and/or medical certification
satisfactory to support the Employee’s request for leave because of a serious health condition. For purposes of
determining whether an Employee’s leave qualifies as a “FMLA Leave” in order to be credited with Hours of Service
under this Plan, the Family and Medical Leave Act of 1993 (“FMLA”) and the regulations promulgated thereunder
shall apply. During the period of absence, the Employee shall be credited with the number of hours that would be
generally credited but for such absence or if the general number of work hours is unknown, eight Hours of Service for
each normal workday during the leave (whether or not approved). These hours shall be credited to the computation
period in which the leave of absence commences if crediting of such hours is required to prevent the occurrence of a
one-year Break in Service in such computation period, and in other cases, in the immediately following computation
period. The computation period shall be the same as the relevant period for determining eligibility computation periods
and vesting computation periods. Unless otherwise required under the FMLA and the regulations promulgated
thereunder,
9
no more than 501 Hours of Service shall be credited under this paragraph for any single continuous period (whether or
not such period occurs in a single computationperiod).
(d)Back Pay. Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Bank;
provided, however, Hours of Service credited under paragraphs (a), (b) and (c) above shall not be recredited by operation of this
paragraph.
(e)Equivalencies. The Administrative Committee shall have the authority to adopt any of the following equivalency methods
for counting Hours of Service that are permissible under regulations issued by the Department of Labor: (i) Working Time; (ii)
Periods of Employment; (iii) Earnings; or (iv) Elapsed Time. The adoption of any equivalency method for counting Hours of
Service shall be evidenced by a certified resolution of the Committee, which shall be attached to and made part of the Plan.
Such resolution shall indicate the date from which such equivalency shall be effective.
(f)Miscellaneous. Unless the Administrative Committee directs otherwise, the methods of determining Hours of Service when
payments are made for other than the performance of duties and of crediting such Hours of Service to Plan Years set forth in
Department of Labor Regulations Sections 2530.200b-2(b) and (c), shall be used hereunder and are incorporated by reference
into the Plan.
Participants on military leaves of absence who are not directly or indirectly compensated or entitled to be compensated by
the Bank while on such leave shall be credited with Hours of Service as required by the Uniformed Services Employment and
Reemployment Rights Act.
Notwithstanding any other provision of this Plan to the contrary, an Employee shall not be credited with Hours of Service
more than once with respect to the same period of time.
2.31Investment Account means the accounts and sub-accounts established in the name of the Participants that reflect Rollover
Contributions and Employer Contributions made in cash, and any income, gains, losses, appreciation or depreciation attributable thereto.
2.32Investment Manager means an investment advisor, bank or insurance company, meeting the requirements of ERISA Section
3(38), appointed by the Bank to manage the Plans assets in accordance with the Trust Agreement.
2.33Leased Employee means any person who performs services for an Employer or an Affiliate (the “recipient”) (other than an
employee of the recipient) pursuant to an agreement between the recipient and any other person (the “leasing organization”) on a
substantially full-time basis for a period of at least one year, provided that such services are performed under primary direction of or control
by the “recipient.”
2.34Matching Contribution means a contribution to the Plan by the Employer which matches in whole or in part an Elective
Contribution on behalf of the Participant pursuant to Section 5.4 of the Plan.
2.35Matching Contribution Sub-Account means the subaccount to which the Employer’s Matching Contributions on behalf of
a Participant are credited.
2.36Non-Highly Compensated Employee means an Employee who is not a Highly Compensated Employee.
10
2.37Normal Retirement Date means the first day of the calendar month coincident with or following the date on which a
Participant attains age 65.
2.38Other Discretionary Contributions means a contribution to the Plan by the Employer pursuant to Section 5.6 of the Plan.
2.39Participant means an Employee of the Employer or any Affiliate of the Employer participating in the Plan in
accordance with Article III.
2.40Plan means the Ponce Bank Employee Stock Ownership Plan, with 401(k) Provisions, as set forth in this document and in the
Trust Agreement pursuant to which the Trust is maintained, in each case as amended from time to time.
2.41Plan Year means the calendar year.
2.42Qualified Domestic Relations Order has the meaning described in Code Section 414(p), which is any judgment, decree or
order (including approval of a property settlement agreement) which (a) relates to the provision of child support, alimony payments or
marital property rights to a spouse, child or other dependent of a Participant; (b) is made pursuant to State domestic relations law; (c)
creates or recognizes the existence of an Alternate Payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of
the benefits payable with respect to the Participant; (d) clearly specifies the name and last known mailing address, if any, of the
Participant and the name and mailing address of each alternate payee covered by the order, the amount and percentage of the Participant’s
benefits to be paid by the Plan to each alternate payee, or the manner in which such amount or percentage is to be determined, the number
of payments or period to which such order applies and each plan to which such order applies, and (e) does not require the Plan to provide
(i) any form or type of benefit, or any option, not otherwise provided under the Plan, (ii) increased benefits, or (iii) benefits to an alternate
payee which are required to be paid to another payee under another order previously determined by the Committee to be a Qualified
Domestic Relations Order.
2.43Qualified Nonelective Contribution means an Employer Contribution made pursuant to Section 5.3 of the Plan.
2.44Rollover Contribution means the contribution made to the Plan by a Participant in accordance with 5.2 of the Plan.
2.45Rollover Contribution Sub-Account means the subaccount to which the Employer’s Rollover contributions are allocated
to the Participant.
2.46Spouse means the person to whom an individual is married for purposes of Federal income taxes.
2.47Suspense Account means the account established and maintained to hold Company Stock acquired with the proceeds of an
Exempt Loan and held in the Trust, which Company Stock has not been allocated to the Accounts of Participants with respect to the year of
such acquisition.
2.48Trust or Trust Fund means all property held by the Trustee pursuant to the terms of the Trust Agreement and this Plan. Such
property shall be held for the exclusive benefit of Participants and Beneficiaries.
2.49Trust Agreement means the agreement of trust established by the Bank and the Trustee for purposes of holding title to the
assets of the Plan.
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2.50Trustee means the trustee as named in the Trust Agreement, or a successor thereto or substitute therefor, in any case as
appointed by the Board of Directors of the Bank in accordance with Article XII to hold legal title to the assets of the Trust and that
expressly agrees to be bound by the terms and conditions of the Trust Agreement.
2.51Valuation Date means the last business day of each calendar quarter, and such other more frequent dates as the Administrative
Committee may from time to time establish.
2.52Year of Service means a Plan Year during which a Participant is credited with at least 1,000 Hours of Service, or an
adopted equivalency method for determining Hours of Service.
ARTICLE III
ELIGIBILITY
3.1Eligibility Generally. An Employee of the Bank or any Affiliate that is an adopting employer for purposes of the Plan shall
become a Participant in the Plan as of the first day of the Plan Year nearest to the later of (a) the first anniversary of his date of hire (the first
day on which he completes an Hour of Service) or (b) the Employee’s 21st birthday. Notwithstanding the foregoing, (1) solely with respect
to Elective Contributions, Qualified Nonelective Contributions and 401(k) Safe Harbor Nonelective Contributions, an Employee shall
become a Participant in the Plan as of the later of: (a) the first day of the month coincident with or next following the Employee’s date of
hire; or (b) the Employee’s 21st birthday; and (2) solely with respect to Matching Contributions, an Employee shall become a Participant in
the Plan as of the completion of the Employee’s Eligibility Year and attainment of age 21.
“Eligibility Year” means an applicable eligibility period (as defined below) in which the Employee has completed 1,000 hours of
service or has worked at least 500 hours during three consecutive 12-month periods beginning on January 1, 2021. For this purpose, an
Eligible Employee’s first “eligibility period” is the 12-consecutive month period beginning on the first day on which the Participant has
completed an Hour of Service; and his or her subsequent eligibility periods will be 12-consecutive month periods beginning on each
January 1 after the first day of service.
Notwithstanding the foregoing, the following individuals shall not be eligible to participate in the
Plan:
(a)Leased Employees;
(b)Individuals whose employment with the Bank or an Affiliate is governed by a collective bargaining agreement between the
Bank and representatives of the employee bargaining unit if evidence exists that retirement benefits were a subject of good faith
bargaining between the parties, and provided such bargaining agreement does not provide for participation in this Plan; and
(c)Non-resident aliens who do not receive earned income from sources within the United States.
3.2Commencement of Participation. Each Employee who has satisfied the requirements of Section 3.1 of the Plan shall
commence participation in the Plan on the later of the Effective Date or the Entry Date concurrent with or next following the date on
which such requirements are satisfied.
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3.3Cessation of Participation. An Employee shall cease to be a Participant upon the earliest of (a) the date on which the Employee
retires under the Plan; (b) the date on which the Employee’s
employment with the Bank terminates for any reason, including death or Disability; (c) the date on which the Employee’s employment with
the Bank is governed by a collective bargaining agreement that does not provide for participation in this Plan; or (d) the date on which the
Employee becomes a “leased employee” as defined in Code section 414(n).
3.4Participation upon Reemployment. Upon the reemployment of any person after the Effective Date who had previously
been employed by the Bank on or after the Effective Date, the following rules shall apply in determining the Employee’s
participation in the Plan under the Plan:
(a)No Prior Participation. If the reemployed Employee was not a Participant in the Plan during the prior period of employment and
the reemployed Employee incurred a Break in Service, only Service with the Bank after reemployment will count for purposes of
meeting the requirements of Section 3.1 of the Plan. If the reemployed Employee was not a Participant in the Plan during the prior
period of employment and the reemployed Employee did not incur a Break in Service, all Service with the Bank (both before and
after the Break in Service) will be aggregated for purposes of meeting the requirements of Section 3.1 of the Plan.
(b)Prior Participation. If the reemployed Employee was a Participant in the Plan during the prior period of employment, the
reemployed Employee shall be entitled to resume participation in the Plan on the date of the Employee’s reemployment.
(c)Veterans Reemployment Rights. Notwithstanding any other provision of the Plan to the contrary, contributions, benefits, and
service credit with respect to qualified military service shall be provided in accordance with Code Section 414(u).
3.5Change in Control. Notwithstanding the provisions of this Article III or any other provisions of the Plan to the contrary, upon a
Change in Control, no additional Employee shall be eligible to become a Participant in the Plan.
ARTICLE IV
VESTING
4.1Full Vesting. A Participant shall be at all times 100% vested in his or her Account due to Elective Contributions, Rollover
Contributions, Qualified Nonelective Contributions and 401(k) Safe Harbor Nonelective Contributions.
4.2Two to Six Year Graded Vesting. A Participant shall vest in his or her Account due to Matching Contributions set forth in the
following schedule:
Years of Service
Less Than Two Years of Service
Two Years of Service
Three Years of Service
Four Years of Service
Five Years of Service
Six Years of Service or More
Vesting Percentage
0%
20%
40%
60%
80%
100%
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4.3Three Year Cliff Vesting. A Participant shall vest in his or her Company Stock Account (including any cash dividends on
Company Stock, i.e., the ESOP-portion of the Participant’s Account) as set forth in the following schedule:
Years of Service
Less Than Three Years of Service
Three or More Years of Service
Vesting Percentage
0%
100%
4.4Normal Retirement Date. Notwithstanding the provisions of Section 4.1 of the Plan, a Participant whose employment terminates
on or after such Participant’s Normal Retirement Date shall be 100% vested.
4.5Death or Disability. Notwithstanding the provisions of Section 4.1 of the Plan, a Participant whose employment is
terminated on account of death or Disability shall be 100% vested.
(a)Death while Performing Qualified Military Service. If a Participant dies while performing qualified military service for a
period longer than thirty (30) days, such Participant’s Beneficiary shall be eligible for additional benefits (other than benefit
accruals related to the period of qualified military service) that would have been provided under the Plan if the Participant had
resumed employment on the day prior to his or her death and then terminated employment due to death.
4.6Vesting upon Reemployment. Upon the reemployment of any person after the Effective Date who had previously been
employed by the Bank on or after the Effective Date, the following rules shall apply in determining the reemployed Employee’s vesting in
the Plan:
(a)Five Consecutive Breaks in Service. If a Participant has five consecutive Breaks in Service, all Years of Service after such
Breaks in Service will be disregarded for the purpose of vesting the Employer-derived Account balance that accrued before such
Breaks in Service. Both pre-Break and post-Break service, however, will count for the purposes of vesting the Employer-derived
Account balance that accrues after such Breaks in Service. Both Accounts will share in the earnings and losses of the fund.
(b)Fewer than Five Consecutive Breaks in Service. If a Participant does not have five consecutive Breaks in Service, both the
pre-Break and post-Break service will count in vesting all Account balances.
4.7Forfeiture of Account. If prior to being 100% vested, a Participant terminates employment for a reason other than death,
Disability or attainment of Normal Retirement Date, the nonvested portion will be treated as a forfeiture. Assets in the Participant’s
Account other than Company Stock acquired with the proceeds of an Exempt Loan will be forfeited before Company Stock acquired with
the proceeds of an Exempt Loan are forfeited. Forfeitures shall be allocated to the Accounts of Participants who were employed by the
Bank on the last day of the Plan Year or, in the Bank’s discretion, used to pay Plan administrative expenses. Forfeitures allocated to
Participants shall be allocated in the ratio that the Compensation of each Participant for such Plan Year bears to the total Compensation of
all such Participants for such Plan Year. For purposes of this Section 4.6, if the value of a Participant’s vested account balance is zero, the
Participant shall be deemed to have received a distribution of such vested account balance.
If any former Participant shall be reemployed by the Employer before incurring five consecutive Breaks in Service, and such former
Participant had received, or was deemed to have received, a distribution of the Participant’s entire vested interest prior to reemployment, the
forfeited account shall be
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reinstated upon the reemployment of such Participant. In the event of a deemed distribution, the undistributed portion of the Participant’s
account must be restored in full, unadjusted by any gains or losses occurring subsequent to the Valuation Date coinciding with or next
following the Participant’s termination of employment. The source for such reinstatement shall be any forfeitures occurring during the Plan
Year. If such source is insufficient, then the Employer shall contribute an amount which is sufficient to restore any such forfeited account
provided, however, that if a discretionary contribution is made for such Plan Year pursuant to Section 5.1, such contribution shall first be
applied to restoring such accounts and the remainder shall be allocated in accordance with Section 5.5.
4.8Change in Control. Notwithstanding the provisions of Sections 4.1 and 4.2 of the Plan, a Participant shall be 100% vested upon
a Change in Control.
ARTICLE V
CONTRIBUTIONS AND ALLOCATIONS
5.1Elective Contributions. A Participant may authorize his or her Employer to contribute to the Trust on his or her behalf Elective
Contributions by executing a salary reduction agreement with the Employer. Such Elective Contributions shall be specified as a percentage
of Compensation and shall not exceed 92%. A Participant may change or discontinue his or her Elective Contributions, on a prospective
basis, in his or her salary deferral agreement as of each Entry Date. The following types of special Elective Contributions may be made to
the Plan:
(a)Catch-Up Contributions. A Participant who has attained age 50 before the close of the taxable year shall be eligible to make
an Elective Contribution designated as a catch-up contribution in accordance with, and subject to the limitations of, Section
414(v) of the Code. Such catch-up contributions shall not be taken into account for purposes of the provisions of the Plan
implementing the required limitations of Sections 402(g) and 415 of the Code. The Plan shall not be treated as failing to satisfy
the provisions of the Plan implementing the requirements of Sections 401(k)(3), 401(k)(110, 401(k)(12), 410(b) or 416 of the
Code, as applicable, by reason of the making of such catch-up contributions.
(b)Roth 401(k) Contributions. A Participant may irrevocably designate all or a portion of his or her Elective Contributions as
Elective Contributions that are includible in the Participant’s gross income at the time deferred, pursuant to Section 402A of the
Code and applicable regulations issued thereunder (“Roth 401(k) Contributions”). A Participant may change his or her
designation prospectively with respect to future Elective Contributions as of each Entry Date.
(c)Automatic Enrollment Contributions. (1) Newly-eligible Employees on each such Employee’s Entry Date; (2) active
Participants who have not elected to make an Elective Contribution and were hired by the Employer on or after July 1, 2016; and
(3) eligible Employees who terminate employment with the Employer and then are rehired following such termination of
employment shall be deemed to have elected to make an Elective Contribution equal to 3% of Compensation. Such Employees
may affirmatively elect not to have his or her Compensation reduced (or alternative percentage reduction) in accordance with this
Subsection 5.1(c) by notice to the Administrative Committee within a reasonable period ending no later than the date
Compensation subject to reduction hereunder becomes available to the Employee.
5.2Rollover Contributions. A Participant who is or was entitled to receive a distribution that is eligible for rollover to a qualified plan
under Code Section 408(d)(3) or an eligible rollover distribution, as
15
defined in Code Section 402(c)(4) and the Treasury Regulations issued thereunder, may elect to contribute all or any portion of such
distribution to the Plan as a Rollover Contribution. Such Rollover Contributions may be designated as Roth 401(k) Contributions.
5.3Qualified Nonelective Contributions. The Employer may, in its discretion, make a Qualified Nonelective Contribution for the
Plan Year in any amount it deems necessary for a permissible purpose. Participants shall not be required to satisfy any Hours of Service or
Years of Service requirement for the Plan Year in order to receive an allocation of Qualified Nonelective Contributions. Such amount shall
only be allocated to Non-Highly Compensated Employees in order to satisfy the nondiscrimination requirements of Code Sections 401(k)
and 401(m) and shall otherwise satisfy the requirements for qualified nonelective employer contributions under Code Section 401(m)(4)
(C).
5.4Matching Contributions. The Employer may, in its discretion, make Matching Contributions to each Participant who is eligible
to receive a Matching Contribution. The amount of the Matching Contribution shall be determined by the Employer and shall be equal to a
percentage (as determined by the sole discretion of the Employer) of the Participant’s Elective Contributions (which shall include catch-up
contributions pursuant to Subsection 5.1(a)) made during the Plan Year, which shall be the contribution period for making Matching
Contributions. The Matching Contribution is allocated among eligible Participants so that each eligible Participant receives a percentage
of his or her Elective Contribution that is identical to the percentage received by all other Participants. Participants shall not be required to
satisfy any Hours of Service or Years of Service requirement for the Plan Year in order to receive an allocation of the Matching
Contributions. Notwithstanding the foregoing, in no event may the dollar amount of the Matching Contribution made on a Participant’s
behalf for the Plan Year exceed 4.0% of the Participant’s Compensation for the Plan Year.
5.5401(k) Safe Harbor Nonelective Contributions. For each Plan Year, the Employer shall contribute to each eligible Participant an
amount equal to 3.0% of such eligible Participant’s Compensation for such Plan Year (the “401(k) Safe Harbor Nonelective Contribution”).
Eligible Participants shall not be required to satisfy any Hours of Service or Years of Service requirement for the Plan Year in order to
receive the 401(k) Safe Harbor Nonelective Contribution. The contribution period for calculating each eligible Participant’s 401(k) Safe
Harbor Nonelective contribution is the Plan Year. The Employer may elect to use the 401(k) Safe Harbor Nonelective Contribution
allocated to the Participants’ Accounts to repay the principal and interest as they come due under the terms of the Exempt Loan.
5.6Other Bank Contributions/ESOP. For each Plan Year, the Bank may contribute cash or shares of Company Stock, or both, to the
Plan in such amounts as may be determined by the Board of Directors. The Bank may also contribute an amount, other than a 401(k) Safe
Harbor Nonelective contribution, sufficient to cover all payments of principal and interest as they come due under the terms of the Exempt
Loan in accordance with the provisions of Article XIX (“Other Discretionary Contributions”). The Participant shall be required to complete
1,000 Hours of Service and be actively employed on the last date of the Plan Year in order to receive any portion of the Other Discretionary
Contribution.
In the event shares of Company Stock are sold to the Trustee for a Plan Year, the fair market value of such Company Stock shall be
determined in accordance with the provisions of Article VIII.
5.7Time and Manner of Contributions. All Bank contributions shall be paid directly to the Trustee, and a contribution for any Plan
Year shall be made not later than the date prescribed by law for filing the Bank’s Federal income tax return (including extensions, if any)
for the Bank’s taxable year that ends within or with that Plan Year.
16
5.8Recovery of Contributions. The Bank may recover contributions to the Plan, only as set forth in this Section 5.8.
(a)Contributions made to the Plan shall be conditioned upon the initial and continuing qualification of the Plan. If the Plan is
determined to be disqualified, contributions made in respect of any period subsequent to the effective date of such
disqualification shall be returned to the Bank.
(b)Contributions made to the Plan shall be conditioned upon their deductibility under the Code. To the extent that a deduction is
disallowed for any contribution, such amount shall be returned to the Bank within one year after the disallowance of the
deduction.
(c)If a contribution, or any part thereof, is made on account of a mistake of fact, the amount of the contribution attributable to
such mistake shall be returned to the Bank within one year after it is made.
5.9Allocation of Contributions.
(a)Other Discretionary Contributions. Subject to the limitations set forth in Article VI, Employer contributions made to the Trust
in the form of cash or Company Stock for a Plan Year pursuant to Section 5.6 (which includes shares of Company Stock released
from the Suspense Account pursuant to Article XIX) shall be allocated to the Accounts of Participants in the ratio of the
Compensation of each Participant for the Plan Year to the total Compensation of all Participants for the Plan Year, provided that
the Participant has completed 1,000 Hours of Service and is actively employed on the last date of the Plan Year. The Company
Stock Account maintained for each Participant will be credited annually with his or her allocable share of Company Stock
(including fractional shares and any dividends paid thereon).
(b)Elective Contributions. Subject to the limitations set forth in Article VI, the Elective Contribution Sub-Account
maintained for a Participant shall be credited with any Elective Contributions made in accordance with Section 5.1.
(c)Rollover Contributions. The Rollover Contribution Sub-Account maintained for a Participant shall be credited with any
Rollover Contributions made in accordance with Section 5.2.
(d)Matching Contributions. The Matching Contribution Sub-Account maintained for a Participant shall be credited with any
Matching Contributions made in accordance with Section 5.4. There is no requirement for the Participant to be actively
employed on the last of the Plan Year with respect to any such contribution.
(e)401(k) Safe Harbor Nonelective Contributions. The 401(k) Safe Harbor Nonelective Contribution Sub-Account maintained for
a Participant shall be credited with any 401(k) Safe Harbor Nonelective Contributions made in accordance with Section 5.5. There
is no requirement for the Participant to be actively employed on the last day of the Plan Year with respect to any such
contribution. If 401(k) Safe Harbor Nonelective Contributions are used to repay the principal and interest due on the Exempt Loan
for a Plan Year, Company Stock released from the Suspense Account shall be credited to the individual Accounts of each
Participant, such that the number of shares credited to the Participant’s Account shall have a fair market value not less than the
amount of the Participant’s 401(k) Safe Harbor Nonelective Contribution.
17
5.10Income on Investments. The income, gains, and losses attributable to investments under the Plan shall be allocated as of each
Valuation Date or at such other times as the Administrative Committee may determine to the Accounts of Participants and Beneficiaries
who have undistributed balances in their Accounts on the Valuation Date, in proportion to the amounts in the Accounts immediately after
the preceding Valuation Date, but after first reducing each Account by any distributions, withdrawals or transfers from the Trust during
the interim period and increasing each Account by any transfers to the Trust and by contributions made to the Trust during the interim
period.
Distributions from the Plan shall include income, gains, and losses accrued as of the coincident or immediately preceding Valuation
Date and shall not be adjusted proportionately to reflect any income, gains, or losses accrued after that Valuation Date. All valuations shall
be based on the fair market value of the assets in the Trust on the Valuation Date.
5.11Certain Stock Transactions. Shares of Company Stock received by the Trustee as a result of a stock split, dividend, conversion,
or as a result of a reorganization or other recapitalization of the Bank shall be allocated as of the day on which such shares are received by
the Trustee in the same manner as the shares of Company Stock to which they are attributable are then allocated.
5.12Valuation of Trust Fund. As of each Valuation Date, the Trustee shall determine the fair market value of the Trust, after
deducting withdrawals, distributions, and any expenses of Plan administration paid out of the Trust, and including any contributions
allocated to Participants’ Accounts, for the valuation period ending on the Valuation Date. In determining value, the Trustee may use
such generally accepted methods as the Trustee, in its discretion, deems advisable, which, in the case of Company Stock shall be in
accordance with the provisions of Article VIII.
ARTICLE VI
MAXIMUM LIMITATION ON CONTRIBUTIONS
6.1Salary Reduction Contribution Limits.
(a)Notwithstanding anything herein to the contrary, no Participant shall be permitted to have the Elective Contributions made
under this Plan, or any other qualified plan maintained by the Employer during any taxable year, in excess of the dollar limitation
contained in Section 402(g) of the Code in effect for such taxable year, except to the extent permitted under Section 414(v) of the
Code, if applicable. Any amount that cannot be credited to the Participant’s Elective Contribution Sub-Account due to the
foregoing limit shall be contributed, subject to the Plan’s Elective Contribution election limitations set forth in Section 6.2, to the
Participant’s Elective Contribution Sub-Account, respectively, in accordance with Section 4.1; provided, however that any
amounts that exceed the limits applicable to Elective Contributions or Catch-Up Contributions shall be paid to the Participant in
cash. For purposes of the limitation of this Section 6.1, the amount contributed to a Participant’s Elective Contribution Sub-
Account shall not include any Elective Contribution Sub-Account properly returned to the Participant as excess Annual Additions
under Section 6.5.
If a Participant would exceed the limitation of this Section 6.1 when the amount the Participant elects to contribute to his
or her Elective Contribution Sub-Account is aggregated with the amounts deferred by the Participant under other plans or
arrangements described in Sections 401(k), 408(k), 408(p), 403(b), 457 or 501(c)(18) of the Code, the Participant may
request that the Committee distribute the excess deferrals to him. Such
18
excess deferrals and income or loss allocable thereto will be distributed no later than April 15 of the calendar year
following the calendar year in which any such excess deferrals are contributed to Participants who claim such allocable
deferral contributions for the preceding calendar year. The Participant’s claim shall be in writing; shall be submitted to the
Committee no later than April 1; shall specify the Participant’s deferral contribution amount for the preceding calendar
year; and shall be accompanied by the Participant’s written statement that if such amounts are not distributed, such
deferral contributions, when added to amounts deferred under other plans or arrangements described in Sections 401(k),
408(k), 408(p), 403(b), 457 or 501(c)(18) of the Code, exceed the limit imposed on the Participant in accordance with the
applicable provisions of the Code for the calendar year in which the deferral occurred. To the extent the excess deferral
arises under this Plan when combined with other plans of the Employer, the individual will be deemed to have notified the
Committee of the excess deferral and requested distribution of the excess deferral.
The income or loss allocable to the excess deferrals shall be calculated in accordance with Section 6.3(c). Excess
deferrals shall be treated as Annual Additions, unless such amounts are distributed to the Participant no later than April
15 of the calendar year following the year in which any such excess deferrals are contributed.
(b)In the event a Participant receives a distribution of excess Elective Contributions pursuant to subsection (a), the Participant
shall forfeit any Matching Contributions (plus income thereon determined as described in Section 6.3(c)) allocated to the
Participant by reason of the distributed Elective Contributions. Amounts forfeited shall be handled in accordance with Section 6.4.
6.2Additional Limits on Elective Contributions (ADP Test) and Matching Contributions (ACP Test).
(b)Elective Contributions. The Employer shall not permit a Participant to make an Elective Contribution that would cause the
Plan not to satisfy at least one of the following tests during any Plan Year:
(i)The Actual Deferral Percentage for a Plan Year for the group of Highly Compensated Employees shall not
exceed the current year’s Actual Deferral Percentage for all other Eligible Employees who were Non-Highly
Compensated Employees for the current Plan Year multiplied by 1.25; or
(ii)The Average Contribution Percentage for a Plan Year for the group of Highly Compensated Employees shall
not exceed the current year’s Average Contribution Percentage for all other Eligible Employees who were Non-
Highly Compensated Employees for the current Plan Year multiplied by 2.0; provided, that the Average
Contribution Percentage for the group of Highly Compensated Employees does not exceed the Average
Contribution Percentage for all other Eligible Employees who were Non-Highly Compensated Employees for the
current Plan Year by more than two (2) percentage points.
In the event the Elective Contributions (excluding amounts characterized as Catch-Up Contributions) are used to satisfy the
Average Contribution Percentage test under Section 6.3, the Actual Deferral Percentage test must be satisfied both with and
without the inclusion of such Elective Contributions.
19
(c)Matching Contributions. The Employer shall not make Matching Contributions to the Plan which would cause the Plan not
to satisfy at least one of the following tests in any Plan Year:
(i)The Average Contribution Percentage for a Plan Year for the group of Highly Compensated Employees shall
not exceed the current year’s Average Contribution Percentage for all other Eligible Employees who were Non-
Highly Compensated Employees for the current Plan Year multiplied by 1.25; or
(ii)The Average Contribution Percentage for a Plan Year for the group of Highly Compensated Employees shall
not exceed the current year’s Average Contribution Percentage for all other Eligible Employees who were Non-
Highly Compensated Employees for the current Plan Year multiplied by 2.0; provided, that the Average
Contribution Percentage for the group of Highly Compensated Employees does not exceed the Average
Contribution Percentage for all other Eligible Employees who were Non-Highly Compensated Employees for the
current Plan Year by more than two (2) percentage points.
In computing the Average Contribution Percentages, the Committee shall not include Matching Contributions that are
forfeited excess deferrals under Section 6.1, Excess Contributions under Section 6.3(a), or Excess Aggregate Contributions under
Section 6.3(b).
(d)Aggregation of Plans. For purposes of subsections (a) and (b), the Actual Deferral Percentage and Average Contribution
Percentage for any Participant who is a Highly Compensated Employee for the Plan Year and who has Elective Contributions or
Matching Contributions allocated to his or her accounts under two or more plans of the Employer, shall be determined as if all
such contributions were made under a single plan; provided, however that if such plans have different plan years, the Actual
Deferral Percentage and Average Contribution Percentage shall be calculated by accumulating all contributions under any cash or
deferred arrangements of the Employer (other than those plans described in Treasury Regulation Section 1.401(k)-2(a)(3)(ii)(B))
during the plan year of the plan that is being tested. In addition, the Participant’s Compensation shall be limited to Compensation
for the portion of the plan year of the plan being tested. In the event that this Plan satisfies the requirements of Sections 401(k),
401(m), 401(a)(4) or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the
requirements of Sections 401(k), 401(m), 401(a)(4) or 410(b) of the Code only if aggregated with this Plan, then this Section shall
be applied by determining the Actual Deferral Percentages and Average Contribution Percentages of Participants as if all such
plans were a single plan. Plans may be aggregated to satisfy Sections 401(k) and 401(m) of the Code only if they have the same
plan year and use the same Actual Deferral Percentage testing method.
(e)The determination and treatment of the Actual Deferral Percentage and Average Contribution Percentage amounts of any
Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Department of the Treasury.
20
6.3Correction of Discriminatory Contributions.
(a)Excess Contributions. If the nondiscrimination test of Section 6.2(a) is not satisfied with respect to Elective Contributions
(excluding amounts properly characterized as Catch-Up Contributions) for any Plan Year, the Committee shall (i) determine the
amount by which the Actual Deferral Percentage for the Highly Compensated Employee or Employees with the highest Actual
Deferral Percentage for the Plan Year would need to be reduced to comply with the limit in Section 6.2(a), (ii) convert the excess
percentage amount determined under clause (i) into a dollar amount (“Excess Contributions”), and (iii) reduce the Elective
Contributions of the Highly Compensated Employee or Employees with the greatest dollar amount of Elective Contributions by
the lesser of (A) the amount by which the Highly Compensated Employee’s Elective Contributions exceeds the Elective
Contributions of the Highly Compensated Employee with the next highest amount of Elective Contributions, or (B) the amount of
the Excess Contributions determined under clause (ii). This process shall be repeated until the Elective Contributions of Highly
Compensated Employees have been reduced by an amount equal to the Excess Contributions determined under clause (ii). The
Elective Contributions of any Highly Compensated Employee which must be reduced pursuant to this paragraph (a) shall be
reduced (i) first, by distributing Elective Contributions not taken into account in determining Matching Contributions under
Section 6.2, and (ii) then, by distributing Elective Contributions not described in (i), within 12 months after the close of the Plan
Year with respect to which the reduction applies, and the provisions of Section 6.1(b) regarding the forfeiture of related Matching
Contributions shall apply. For purposes of determining the necessary reduction, Elective Contributions previously distributed
pursuant to Section 6.1 shall be treated as distributed under this Section. Notwithstanding the foregoing, in lieu of distributing
amounts necessary to satisfy the Actual Deferral Percentage test for a Plan Year, the Committee may elect to recharacterize such
amounts in accordance with Section 6.3(d).
(b)Excess Aggregate Contributions. If the nondiscrimination test of Section 6.2(b) is not satisfied with respect to Matching
Contributions for any Plan Year, the Committee will (i) determine the amount by which the Average Contribution Percentage
for the Highly Compensated Employee or Employees with the highest Actual Contribution Percentage for the Plan Year would
need to be reduced to comply with the limit in Section 6.2(b), (ii) convert the excess percentage amount described under clause
(i) into a dollar amount (“Excess Aggregate Contributions”), and (iii) reduce the Excess Aggregate Contributions of the Highly
Compensated Employee or Employees with the greatest dollar amount of Matching Contributions by the lesser of (A) the
amount by which the dollar amount of the affected Highly Compensated Employee’s Matching Contributions exceeds the
dollar amount of the Matching Contributions of the Highly Compensated Employee with the next highest dollar amount of
Matching Contributions, or (b) the amount of the Excess Aggregate Contributions determined under clause (ii). This process
will be repeated until the Matching Contributions of the Highly Compensated Employees have been reduced by an amount
equal to the Excess Aggregate Contributions determined under clause (ii). The Matching Contributions of any Highly
Compensated Employee which must be reduced pursuant to this paragraph (b) will be reduced by distributing any Matching
Contributions, within 12 months of the close of the Plan Year with respect to which the reduction applies. Notwithstanding the
foregoing, in lieu of distribution amounts necessary to satisfy the Average Contribution Percentage test, the Committee may
elect to forfeit such amounts in accordance with Section 6.4.
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(c)Income. Any distribution, recharacterization or forfeiture of Elective Contributions or Matching Contributions necessary
pursuant to subsections (a) or (b) or Section 6.4 shall include a distribution, recharacterization or forfeiture of the income, if any,
allocable to such contributions for the Plan Year, determined by multiplying the income allocable to the Participant’s Elective
Contributions and Matching Contributions for the Plan Year, by a fraction, the numerator of which is the Participant’s excess
Elective Contributions, Matching Contributions, as applicable, for the Plan Year and the denominator of which is the Participant’s
Elective Contributions and Matching Contributions, as applicable, for the Plan Year.
(d)Recharacterization. Instead of distributing the Excess Contributions necessary to satisfy the Actual Deferral Percentage test in
Section 6.2(a), the Committee shall recharacterize such Excess Contributions (plus income thereon determined as described in
Section 6.3(c)) allocated to a Participant who has attained age 50 by the last day of the Plan Year as Catch-Up Contributions.
Recharacterized amounts will remain vested. Amounts shall not be recharacterized by the Committee to the extent that such
amount in combination with other Catch-Up Contributions made by that Participant would exceed the applicable dollar limit
under Section 414(v)(2)(B)(i) of the Code. The amount of any Excess Contributions which are recharacterized shall be reduced
by excess deferrals previously distributed to the Participant under Section 6.1 for the same Plan Year.
6.4Forfeiture of Matching Contributions. In order to satisfy Sections 6.1, 6.2 and 6.3, the Committee, in its discretion, may forfeit
non-vested Matching Contributions, and the income allocable thereto, in lieu of distributing such amounts. In the event a Matching
Contribution relates to an excess deferral under Section 6.1, or an excess Elective Contribution under Section 6.2(a), the Matching
Contribution and income allocable thereto shall be forfeited. The income allocable to a Matching Contribution shall be determined in
accordance with the procedure set forth in Section 6.3(c) for determining income allocable to Excess Aggregate Contributions. Forfeited
Matching Contributions and the income allocable thereto shall be used to offset future Matching Contributions to the Plan. The forfeited
amounts are treated as Annual Additions under the Plan for those Participants from whose Accounts the amounts are forfeited.
6.5Maximum Limitation on Allocations.
(b)Participation Solely in this Plan.
(i)If the Participant does not participate in, and has never participated in another plan qualified under Code section
401(a) that is maintained by the Employer, or a “welfare benefit fund” (as defined in Code section 419(e)) maintained by
the Employer, or an “individual medical account” (as defined in Code section 415(l)(2)) maintained by the Employer,
which provides an Annual Addition, the amount of Annual Additions which may be credited to the Participant’s
Account for any Limitation Year shall not exceed the lesser of the Maximum Permissible Amount or any other
limitation contained in the Plan. If the Bank’s contribution that would otherwise be contributed or allocated to the
Participant’s Account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible
Amount, the amount contributed or allocated will be reduced so that the Annual Additions for the Limitation Year will
equal the Maximum Permissible Amount.
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(ii)Prior to determining the Participant’s actual Compensation for the Limitation Year, the Bank may determine the
Maximum Permissible Amount for a Participant on the basis of a reasonable estimation of the Participant’s
Compensation for the Limitation Year, uniformly determined for all Participants similarly situated.
(iii)As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for
the Limitation Year will be determined on the basis of the Participant’s actual Compensation for the Limitation Year.
(c)Participation in Another Defined Contribution Plan. This Section 6.5(b) applies if a Participant is also covered under another
defined contribution plan or a “welfare benefit fund” (as defined in Code Section 419(e)), an “individual medical account” (as
defined in Code section 415(l)(2) or a “simplified employee pension” (as defined in Code Section 408(k)) maintained by the
Employer which provides an Annual Addition during any Limitation Year. If the Participant participates in one or more such
plans, all reductions in Annual Additions shall be made under such plans and not under this Plan. In the event that,
notwithstanding the preceding sentence, the Annual Additions to be credited under this Plan should exceed the Maximum
Permissible Amount, the Annual Additions which would otherwise be credited to the Participant’s Account under any other such
plan shall be reduced prior to making any reduction hereunder, which reduction shall be reduced in the manner set forth in Section
6.5(a) of the Plan.
(d)Definitions.
(i)An “Annual Addition” means the sum of the following amounts credited to the Participant’s Account for the
Limitation Year: (A) employer contributions; (B) employee contributions; (C) forfeitures; (D) amounts allocated to an
individual medical account (as defined in Code Section 415(l)(2)) which is part of a pension or annuity plan maintained
by the Employer which are treated as Annual Additions to a defined contribution plan; and (E) amounts derived from
contributions paid or accrued, which are attributable to post-retirement medical benefits, allocated to the separate
account of a key employee, as defined in Code Section 419A(d)(3), under a welfare benefit fund maintained by the
Employer which are treated as Annual Additions to a defined contribution plan. Excess amounts applied to reduce
Employer contributions under Sections 6.5(a) and 6.5(b) of the Plan in the Limitation Year will be Annual Additions for
such Limitation Year.
(ii)“Employer” means the Bank and all Affiliates.
(iii)“Excess Amount” means the excess of the Participant’s Annual Additions for the Limitation Year over the
Maximum Permissible Amount.
(iv)“Limitation Year” means the calendar year.
(v)“Maximum Permissible Amount” means the Maximum Annual Additions that may be contributed or allocated to
a Participant’s Account for any Limitation Year. Such amount shall not exceed the lesser of: (A) $59,000 (as
adjusted for increases in the cost-of-living under Code Section 415(d)); or (B) 100% of the Participant’s
Compensation for the Limitation Year. The Maximum Permissible amount shall be pro-rated in the case of any
Limitation Year of less than 12 months created by changing the Limitation year.
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If no more than one-third of Bank contributions to the Plan for a Plan Year which are deductible under Code
section 404(a)(9) are allocated to the Accounts of Participants who are Highly Compensated Employees, there
shall be excluded in determining the Maximum Permissible Amount of each Participant for such Plan Year
(A) the contributions applied to the payment of interest on an Exempt Loan; and (B) any forfeitures of Bank
contributions if the forfeited contributions were Company Stock acquired with the proceeds of an Exempt
Loan.
ARTICLE VII
INVESTMENT OF TRUST ASSETS
7.1Manner of Investment. All contributions made to the Accounts of Participants shall be held for investment by the Trustee. The
Accounts of Participants shall be invested and reinvested only in permissible investments designated by the Committee.
7.2Investment Decisions. Investments shall be directed by the Participant. The Participant shall file initial investment instructions
using procedures established by the Administrator, selecting the Permissible Investments in which amounts credited to his Account shall
be invested. If the Plan has in place a qualified default investment alternative as described in ERISA Section 404(c)(5) and the regulations
issued thereunder, the Trustee may be directed to change a Participant’s or Beneficiary’s investment election, with respect to amounts
already held under the Trust and/or future contributions, to the qualified default investment alternative if the Plan’s investment fiduciary
notifies the Participant or Beneficiary, in accordance with the aforementioned regulations, that the investment change will occur absent an
affirmative election and the Participant or Beneficiary fails to make such election after receiving notice.
(a)While any balance remains in the Account of a Participant after his or her death, the Beneficiary of the Participant shall make
decisions as to the investment of the Account as though the Beneficiary were the Participant. To the extent required by a
Qualified Domestic Relations Order as defined in Code Section 414(p), an alternate payee shall make investment decisions with
respect to any segregated account established in the name of the alternate payee.
(b)If the Trustee receives any contribution under the Plan to which investment instructions have not been provided, such
amount shall be invested in the permissible investment determined by the Committee.
The Plan is intended constitute a plan described in ERISA Section 404(c)(1) and the regulations issued thereunder. The fiduciaries
of the Plan shall be relieved of any liability of any losses that are the direct and necessary result of investment instructions given by the
Participant, his or her Beneficiary, or an alternate payee under a Qualified Domestic Relations Order.
Expenses attributable to the acquisition of investments shall be charged to the Account of the Participant for which such investment
is made. The Committee may appoint an investment advisor in accordance with ERISA.
7.3Participant Directions to Trustee. The method and frequency for change of investments shall be determined under the rules
applicable to permissible investments, including any additional rules limiting the frequency of investment changes, as applicable.
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ARTICLE VIII
COMPANY STOCK VALUATION AND INVESTMENTS IN COMPANY STOCK
8.1Fair Value of Company Stock. The fair market value of Company Stock shall be determined, on any relevant day, as follows: (a)
if such stock is then traded in the over-the-counter market, the closing sale price (as reported in the National Market System by NASDAQ
with respect to such stock) for the most recent date (including such relevant day) during which a trade in such stock has occurred, or (b) if
such stock is then traded on a national securities exchange, the closing sale price for the most recent date (including such relevant date)
during which a trade in such stock has occurred. In accordance with the provisions of Code Section 401(a)(28)(C), if Company Stock is not
actively traded in the over-the-counter market, or on a national securities exchange, a valuation of Company Stock required to be made
under this Plan shall be made by an independent appraiser who satisfies requirements similar to those contained in regulations issued under
Code Section 170(a)(1).
8.2Investments in Company Stock are Prohibited. A Participant, Beneficiary or alternate payee under Qualified Domestic
Relations Order may not direct that any portion of his or her Account balance attributable to contributions made to the Plan pursuant to
Sections 5.1, 5.2, 5.3, 5.4 and 5.5 (and any other discretionary cash contributions not attributable to the Exempt Loan) be used to invest
in, or purchase, Company Stock within the Plan.
ARTICLE IX
PARTICIPANT LOANS
9.1Participant Loans. The Committee shall allow a Participant (including the Participant’s Beneficiary and alternate payee under a
Qualified Domestic Relation Order) to apply for a loan from his or her Account (except for the Company Stock Account). For purposes of
this Article IX, references to a “Participant” shall include the Participant’s Beneficiary or alternate payee under a Qualified Domestic
Relations Order, as applicable. All loans from the Plan shall be administered in accordance with separate loan procedures as determined by
the Committee. The separate loan procedures shall describe the portions of the Participant’s Account from which loans may be taken.
9.2Limitation on Loan Amount. Loans shall be made available to all Participants on a reasonably equivalent basis. No loan to any
Participant shall be made to the extent that such loan when added to the outstanding balance of all other loans to the Participant would
exceed the lesser of (a)
$50,000 reduced by the excess (if any) of the highest outstanding balance of plan loans during the one- year period ending on the day
before the loan is made over the outstanding balance of plan loans on the date the loan is made, or (b) the present value of the Participant’s
vested interest in his or her Account. For purposes of the above limitation, plan loans include all loans from all plans maintained by the
Employer.
9.3Interest Rate. Subject to the requirements of the Servicemembers Civil Relief Act, all loans shall bear a reasonable rate of
interest as determined by the Committee based on the prevailing interest rates charged by persons in the business of lending money for
loans which would be made under similar circumstances. The determination of a reasonable rate of interest must be based on appropriate
regional factors unless the Plan is administered on a national basis in which case the Committee may establish a uniform reasonable rate
of interest applicable to all regions.
9.4Level Amortization. All loans shall by their terms require that repayment (principal and interest) be amortized in level payments,
not less frequently than quarterly, over a period not extending beyond five years from the date of the loan unless such loan is for the
purchase of a “participant’s” primary residence. Notwithstanding the foregoing, the amortization requirement may be waived while a
25
Participant is on a leave of absence from employment with the Employer either without pay or at a rate of pay which, after withholding for
employment and income taxes, is less than the amount of the installment payments required under the terms of the loan, provided that the
period of such waiver shall not exceed one year, unless the “participant” is absent because of military leave during which the “participant”
performs services with the uniformed services (as defined in chapter 43 of title 38 of the United States Code), regardless of whether such
military leave is a qualified military leave in accordance with the provisions of Code Section 414(u). Installment payments must resume
after such leave of absence ends or, if earlier, after the first year of such leave of absence, in an amount that is not less than the amount of
the installment payments required under the terms of the original loan. Unless a Participant is absent because of military leave, as discussed
below, no waiver of the amortization requirements shall extend the period of the loan beyond five years from the date of the loan, unless the
loan is for purchase of the Participant’s primary residence. If a Participant is absent because of military leave during which the Participant
performs services with the uniformed services (as defined in chapter 43 of title 38 of the United States Code), regardless of whether such
military leave is a qualified military leave in accordance with the provisions of Code Section 414(u), waiver of the amortization
requirements may extend the period of the loan to the maximum period permitted for such loan under the separate loan procedures
extended by the period of such military leave.
9.5. Security. Loans must be secured by the “participant’s” vested interest in his or her Account. If the qualified joint and
survivor annuity and qualified preretirement survivor annuity requirements pursuant to the Code apply to a Participant, a Participant must
obtain the consent of his or her Spouse, if any, to use his vested interest in his Account as security for the loan. Spousal consent shall be
obtained no earlier than the beginning of the 180-day period that ends on the date on which the loan is to be so secured. The consent must
be in writing, must acknowledge the effect of the loan, and must be witnessed by a Plan representative or notary public. Such consent shall
thereafter be binding with respect to the consenting Spouse or any subsequent Spouse with respect to that loan. Any revision of such a loan
permitted by Q & A 24(c) of Section 1.401(a)-20 of the Treasury Regulations and the Plan’s separate loan procedures shall be treated as a
new loan made on the date of such revision for purposes of spousal consent.
9.6 Loan Repayments. If a Participant’s loan is being repaid through payroll withholding, the Employer shall remit any such loan
repayment to the Trustee as of the earliest date on which such amount can reasonably be segregated from the Employer’s general assets,
but not later than the earlier of (a) the close of the period specified in the separate loan procedures for preventing a default or (b) the 15th
business day of the calendar month following the month in which such amount otherwise would have been paid to the Participant.
9.7. Default. The Committee shall treat a loan in default if: (a) any scheduled repayment remains unpaid at the end of the cure
period specified in the separate loan procedures (unless payment is not made due to a waiver of the amortization schedule for a Participant
who is on a leave of absence, as described in Section 9.4, or (b) there is an outstanding principal balance existing on a loan after the last
scheduled repayment date. Upon default, the entire outstanding principal and accrued interest shall be immediately due and payable. If a
distributable event (as defined by the Code) has occurred, the Committee shall direct the Trustee to foreclose on the promissory note and
offset the Participant’s vested interest in his Account by the outstanding balance of the loan. If a distributable event has not occurred, the
Committee shall direct the Trustee to foreclose on the promissory note and offset the Participant’s vested interest in his or her Account as
soon as a distributable event occurs.
9.8Effect of Termination Where Participant has Outstanding Loan Balance. If a Participant has an outstanding loan balance at
the time his or her employment terminates, the entire outstanding principal and accrued interest shall be due and payable by the end of the
cure period specified in the separate loan
26
procedures. Any outstanding loan amounts that are immediately due and payable hereunder shall be treated as if the Participant had
defaulted on the outstanding loan. Notwithstanding the foregoing, if a Participant with an outstanding loan balance terminates employment
with the Employer under circumstances that do not constitute a separation from service, such Participant may elect, within 60 days of such
termination, to roll over the outstanding loan to an eligible retirement plan, as defined in Section 11.6, that accepts such rollovers.
9.9Deemed Distributions under Code Section 72(p). Notwithstanding anything to the contrary, if the Participant’s loan is in
default, the Participant shall be treated as having a taxable “deemed distribution” for purposes of Code Section 72(p), whether or not a
distributable event has occurred. The tax treatment of that portion of a defaulted loan that is secured by Roth 401(k) Contributions shall be
determined in accordance with Code Section 402A and the guidance issued thereunder. The provisions of this Section 9.9 shall not apply to
loans made prior to January 1, 2002, except to the extent under the transition rules in Q&A 22(c)(2) of Section 1.72(p)-1 of the Treasury
Regulations.
9.10Determination of Vested Interest Upon Distribution When Plan Loan is Outstanding. Notwithstanding any other provision of
the Plan, the portion of a Participant’s vested interest in his or her Account that is held by the Plan as security for a loan outstanding to the
Participant in accordance with the provisions of this Article shall reduce the amount of the Account payable at the time of death or
distribution, but only if the reduction is used as repayment of the loan. If less than 100 percent of a Participant’s vested interest in his
Account (determined without regard to the preceding sentence) is payable to the Participant’s surviving Spouse or other Beneficiary, then
the Account shall be adjusted by first reducing the Participant’s vested interest in his Account by the amount of the security used as
repayment of the loan, and then determining the benefit payable to the surviving Spouse or other Beneficiary.
ARTICLE X
IN-SERVICE WITHDRAWALS
10.1Withdrawal of Rollover Contributions. A Participant may elect to withdraw Rollover Contributions up to 100 percent of
the amount then credited to the Participant’s Rollover Contribution Sub-Account. Such withdrawals may be made at any time.
10.2Withdrawals after Age 59½. A Participant who continues in employment as an Employee and who has attained the age of
59 1/2 is permitted to withdraw upon request all or any portion of the Participant’s vested Account, except the Company Stock Account.
10.3Hardship Withdrawals. A Participant who continues in employment as an Employee may apply for a hardship withdrawal in
accordance with this Section 10.3. Such a hardship withdrawal may include all or any portion of the Participant’s Account, except the
Company Stock Account, provided that: (1) the Participant has exhausted all other assets reasonably available to the Participant prior to
obtaining a hardship withdrawal, which includes obtaining any in-service withdrawals available from the Participant’s Account; (2) the
minimum hardship withdrawal is $500; and (3) the withdrawal is made on account of an immediate and heavy financial need of the
Participant.
(a)The following are the only financial needs considered immediate and heavy pursuant to this Section 10.3:
(i)expenses incurred or necessary for medical care (that would be deductible under Code Section 213(d), determined
without regard to whether the expenses exceed any applicable income limit) of the Participant, the Participant’s
Spouse, children, or dependents, or a primary beneficiary of the Participant;
27
(ii)costs directly related to the purchase (excluding mortgage payments) of a principal residence for the
Participant;
(iii)payment of tuition, related educational fees, and room and board for the next 12 months of postsecondary
education for the Participant, the Participant’s Spouse, children or dependents (as defined in Code Section 152,
without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), or a primary beneficiary of the Participant;
(iv)payments necessary to prevent the eviction of the Participant from, or a foreclosure on the mortgage on,
the Participant’s principal residence;
(v)payments for funeral or burial expenses for the Participant’s deceased parent, Spouse, child, or dependent (as
defined in Code Section 152, without regard to subsection (d)(1)(B) thereof) or a primary beneficiary of the
Participant;
(vi)expenses for the repair of damage to the Participant’s principal residence that would qualify for a casualty loss
deduction under Code Section 165 (determined without regard to whether the loss exceeds any applicable income
limit); or
(vii)any other financial need determined to be immediate and heavy under rules and regulations issued by the
Secretary of the Treasury or his delegate; provided, however, that any such financial need shall constitute an
immediate and heavy need under this paragraph (7) no sooner than administratively practicable following the date
such rule or regulation is issued.
For purposes of this Section, the term “primary beneficiary” means a Beneficiary under the Plan who has an unconditional right
to all or a portion of the Participant’s Account upon the death of the Participant.
(b)A distribution shall be considered as necessary to satisfy an immediate and heavy financial need of the Participant only if the
Participant suspends Elective Contributions to the Plan for the six-month period following receipt of his or her hardship
withdrawals. The suspension shall also apply to all elective contributions and employee contributions to all other qualified plans
and non-qualified plans maintained by the Employer, other than any mandatory employee contribution portion of a defined
benefit plan, including stock option, stock purchase, and other similar plans, but not including health and welfare benefit plans
(other than the cash or deferred arrangement portion of a cafeteria plan). In addition, the hardship withdrawal amount must not be
in excess of the amount of an immediate and heavy financial need (including amounts necessary to pay any Federal, state or local
income taxes or penalties reasonably anticipated to result from the distribution).
10.4Qualified Reservist Distribution. Notwithstanding anything to the contrary, a Participant ordered or called to active duty for a
period in excess of 179 days or for an indefinite period by reason of being a member of a reserve component (as defined in section 101 of
Title 37, United States Code), shall be eligible to elect to receive a “qualified reservist distribution.” A “qualified reservist distribution
means a distribution from the Participant’s Account of amounts attributable to Elective Contributions, provided such distribution is made
during the period beginning on the date of the order or call to active duty and ending at the close of the activity duty period.
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ARTICLE XI
DISTRIBUTIONS
11.1Termination of Employment. In the event of the Participant’s termination of employment for any reason (including attainment of
Normal Retirement Date or on account of death or Disability), a Participant shall be entitled to a distribution of all amounts that are credited
to the Participant’s Account at the times set forth in this Article XI.
11.2Death. Upon the death of a Participant, all amounts credited to the Participant’s Account shall be distributed to the Participant’s
Beneficiary, determined in accordance with this Section 11.2.
(a)The Administrative Committee may require such proof of death and such other evidence of the right of any person to receive
payment of the Account of a deceased Participant as the Administrative Committee deems necessary. The Administrative
Committee’s determination of death and of the right of any person to receive payment shall be conclusive and binding on all
parties.
(b)The Beneficiary upon the death of a Participant shall be the Participant’s Spouse; provided, however, that the Participant may
designate, on a form provided by the Administrative Committee for such purpose, a Beneficiary other than the Participant’s
Spouse, if: (i) the Spouse has waived the right to be the Participant’s Beneficiary in the manner set forth in subsection (c) of this
Section 11.2; or (ii) the Participant has established to the satisfaction of the Administrative Committee that the Participant has no
Spouse or that the Spouse cannot be located.
(c)Any consent by a Participant’s Spouse to waive a death benefit must be filed with the Administrative Committee in writing, in a
manner, and on a form provided by the Committee for such purpose. The Spouse’s consent must acknowledge the effect of the
consent and must be witnessed by a notary public or a Plan representative. The designation of a Beneficiary other than the Spouse
made by a married Participant must be consented to by the Participant’s Spouse and may be revoked by the Participant in writing
without the consent of the Spouse. Any new beneficiary designation must comply with the requirements of this subsection (c). A
former Spouse’s waiver shall not be binding on a new Spouse.
(d)In the event the designated Beneficiary fails to survive the Participant, or if such designation shall be ineffective for any
reason, the Participant’s Account shall be paid in the following order of priority: first to the Participant’s surviving spouse, if
any; second, if there is no surviving spouse, to the Participant’s surviving children, if any, in equal shares; third, if there is
neither a surviving spouse nor surviving children, to the legal representatives of the estate of the Participant.
11.3Time of Payment. Subject to Sections 11.8 and 11.9, the distribution of a Participant’s Account shall begin as soon as
administratively feasible. Unless a Participant elects otherwise, such distribution shall not be later than 60 days after the latest of the close
of the Plan Year in which occurs (i) the date on which the Participant attains Normal Retirement Date, (ii) the 10th anniversary of the year
in which the Participant commenced participation in the Plan, or (iii) the date the Participant terminates service with the Employer.
11.4Manner of Making Payments. A Participant’s Account will be distributed in one lump sum.
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11.5Form of Payment. Distributions of a Participant’s Account shall generally be made in the form of cash, except that distributions
from the Participant’s Company Stock Account shall be made in Company Stock. In the event the Participant’s Account includes securities
acquired with the proceeds of the Exempt Loan and such proceeds consist of more than one class of securities, the amount distributed shall
include substantially the same proportion of each class of securities acquired with the proceeds of the Exempt Loan.
Such distributions with respect to the Company Stock Account shall be the fair market value of each share multiplied by the number
of shares credited to the Participant’s Company Stock Account, with appropriate adjustments to reflect intervening stock dividends, stock
splits, stock redemptions, or similar changes to the number of outstanding shares. The fair market value of a share shall be determined as of
the Valuation Date coinciding with or immediately following the date of the distribution request or, in the case of a transaction between the
Plan and a Disqualified Person, determined as of the date of the transaction.
11.6Direct Rollover.
(a)Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee’s election under this Article
XI, a distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible
rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover.
(b)For purposes of this Section 11.6, the following definitions apply:
(i)“Eligible rollover distribution.” An eligible rollover distribution is any distribution of all or any portion of the balance
to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one
of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee’s
designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is
required under Code Section 401(a)(9); a distribution on account of hardship; or the portion of any distribution that is
not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect
to employer securities) and any other distribution(s) that is reasonably expected to total less than $200 during a year.
(ii)“Eligible retirement plan.” An eligible retirement plan is an eligible plan under Code Section 457(b) which is
maintained by a state, political subdivision of a state, or any agency or instrumentality of a state, or political
subdivision of a
state and which agrees to separately account for amounts transferred into such plan from this Plan, an
individual retirement account described in Code Section 408(a), an individual retirement annuity described in
Code section 408(b), an annuity plan described in Code Section 403(a), an annuity contract described in Code
Section 403(b), a qualified plan described in Code section 401(a), or a Roth IRA described in Code Section
408A, that accepts the distributee’s eligible rollover distribution. The definition of eligible retirement plan
shall also apply in the case of a distribution to a surviving spouse, or to a spouse or former spouse who is the
alternate payee under a Qualified Domestic Relations Order, as defined in Code Section 414(p).
30
(iii)“Distributee.” A distributee includes an employee or former employee. In addition, the employee’s or former
employee’s surviving spouse and the employee’s or former employee’s spouse or former spouse who is the alternate
payee under a Qualified Domestic Relations Order, as defined in Code section 414(p), are distributees with respect to
the interest of the spouse or former spouse. A distributee also includes the Participant’s nonspouse designated
Beneficiary, in which case, the direct rollover may be made only to an individual retirement account or annuity
described in Code Sections 408(a) or 408(b) that is established on behalf of the designated Beneficiary and that will be
treated as an inherited IRA pursuant to the provisions of Code Section 402(c)(11); provided, however, that the
determination of any required minimum distribution that is ineligible for rollover shall be made in accordance with
Notice 2007-7, Q&A 17 and 18.
(iv)“Direct rollover.” A direct rollover is a payment by the plan to the eligible retirement plan specified by the
distributee.
11.7Diversification of Company Stock. Notwithstanding any provision of this Article to the contrary, the Plan is intended to
comply with Code Section 401(a)(35) and the regulations thereunder. A Participant, Beneficiary or alternate payee under a Qualified
Domestic Relations Order may direct that all or any portion of the Company Stock Account be converted to cash and reinvested in the other
investment options then available under the Plan. The Plan shall offer no less than three investment options, other than Company Stock, to
which a Participant, Beneficiary or alternate payee may direct the proceeds from the divestment of the Company Stock. Each of the three
investment options must be diversified and have materially different risk and return characteristics. For this purpose, investment options
that constitute a broad range of investment alternative within the meaning of Department of Labor Regulation Section 2550.404c-1(b)(3)
are treated as being diversified and having materially different risk and return characteristics. Any such reinvestment shall be drawn from
the Company Stock Account of the various source accounts pro-rata based on the balance of such Company Stock Account. Any direction
to convert shares of Company Stock to cash and reinvest the proceeds in the other investment options then available under the Plan will be
effectuated as soon as administratively practicable after the direction is received, taking into account the time necessary to receive cash
upon settlement of a securities trade.
11.8Election to Retain Interests in Plan. Except for distributions in accordance with Section 11.9, no distribution shall be made to a
Participant before such Participant’s Normal Retirement Date unless (a) the Participant’s prior written consent to the distribution has been
obtained by the Administrative Committee, or (b) the value of the Participant’s vested Account does not exceed $1,000 as of the date of the
event giving rise to the distribution.
11.9Mandatory Distributions.
(a)Notwithstanding any provision of this Plan to the contrary, all amounts credited to a Participant’s Account shall commence to
be distributed not later than the later of (i) April 1 of the calendar year following the calendar year in which the Participant attains
age 72 or (ii) the date the Participant retires; except that distributions to a 5% owner (as defined in Code Section 416) must
commence by the April 1 of the calendar year following the calendar year in which such Participant attains age 72. Any and all
subsequent distributions shall be made in accordance with the rules set forth in Code Section 401(a)(9), including the minimum
distribution incidental death requirements of Code Section 401(a)(9)(G).
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(b)In the event the Participant dies after distributions have commenced under this Article XI but before the Participant’s entire
Account is distributed, the remaining portion of the Participant’s Account shall be distributed at least as rapidly as under the
method of distribution being used as of the date of the Participant’s death.
(c)In the event the Participant dies before distributions under this Article XI have commenced, then, unless the Beneficiary of the
Participant is the Participant’s spouse, the entire balance in the Account of the Participant shall be distributed on or before the
December 31 of the calendar year in which occurs the fifth anniversary of the death of such Participant.
(d)If the Participant’s designated Beneficiary is the surviving spouse of such Participant or former Participant, such distribution
shall not be required to begin prior to the date on which the Participant or former Participant would have attained age 72 (if the
surviving spouse dies prior to commencement of distributions to such spouse, then this subsection shall be applied as if the
surviving spouse were the Participant or former Participant).
Any amount payable to a child pursuant to the death of a Participant or former Participant shall be treated as if it were payable to
the Participant’s or former Participant’s surviving spouse if such amount would become payable to the surviving spouse upon such child
reaching majority (or other designated event permitted by regulations).
Any distribution required under the incidental death benefit requirements of Code section 401(a)(9) shall be treated as a
distribution required under this Section of 11.9.
11.10Dividend Distributions.
(a)Any cash dividends on Company Stock acquired with the proceeds of an Exempt Loan and held in the Suspense Account shall
be applied first to repay the principal and, at the Committee’s discretion, the interest, of the Exempt Loan. In addition, if any cash
dividends on shares of such Company Stock allocated to Participant’s Accounts are used to pay the principal and/or the interest of
the Exempt Loan at the Committee’s discretion, Company Stock with a fair market value not less than the amount of the
dividends so used must be allocated to the Participant’s Accounts to which such cash dividends would have been allocated.
(b)After the payment of the principal and the interest of the Exempt Loan, any remaining cash dividends on Company Stock may
be used to purchase Company Stock or allocated to Accounts of Participants in accordance with subsection (c) below.
(c)In the case of any cash dividends on Company Stock that are allocable to the Accounts of Participants with respect to vested
shares, they may be paid currently (or within 90 days after the end of the Plan Year in which the dividends are paid to the Trust)
as cash, or the Bank may pay such dividends directly to the Participants’ Accounts as the Administrative Committee may
determine.
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11.11Prohibited Allocations.
(a)No portion of the assets of the Plan attributable to (or allocable in lieu of) Company Stock acquired by the Plan in a sale to
which Code section 1042 applies may be allocated to the Account of (i) any Qualifying Selling Shareholder during the
Nonallocation Period, or (ii) any other person who owns more than 25% of (A) any class of outstanding stock of the Bank or any
of its Affiliates, or (B) the total value of any class of outstanding stock of the Bank or any of its Affiliates.
(b)For purposes of this Section 11.11, the following initially capitalized words shall carry the following meanings:
(i)“Affiliate” means Affiliate as defined in Article II of the Plan in accordance with Code Section 409(l)(4).
(ii)“Qualifying Selling Shareholder” means any shareholder of Company Stock who makes an election under Code
section 1042(a) with respect to Company Stock, or any individual who is related to (within the meaning of Code section
267(b)) the shareholder of Company Stock as defined above. The term shall not include any lineal descendant of such
shareholder or if the aggregate amount allocated to the benefit of all such lineal descendants during the Nonallocation
Period does not exceed more than 5% of Company Stock (or amounts allocated in lieu thereof) held by the Plan which
are attributable to a sale to the Plan by any person related to such descendants (within the meaning of Code section
267(c)(4)) in a transaction to which Code section 1042 applied.
(iii)“Nonallocation Period” means the period beginning on the date of the sale of Company Stock and ending on the
later of the date which is 10 years after the date of the sale, or the date of the Plan allocation attributable to the final
payment of acquisition indebtedness incurred in connection with such sale.
ARTICLE XII
RIGHT TO SELL COMPANY STOCK
12.1Put Requirements.
(a)In the event Company Stock is distributed and is not publicly traded in the over-the- counter market or on a national securities
exchange at the time of distribution, the Participant, former Participant, or Beneficiary shall have an option (the “Put”) to require
the Bank to purchase all of the shares actually distributed to such individual. The Put may be exercised at any time during the
Option Period (as defined in subsection (f) below) by giving the Administrative Committee and the Bank written notice of the
election to exercise the Put. The Put may be exercised by a former Participant or a Beneficiary only during the Option Period with
respect to which the former Participant or Beneficiary receives a distribution of Company Stock.
(b)The price paid for Company Stock sold to the Plan or the Bank pursuant to the Put shall be the fair market value of each share
multiplied by the number of shares to be sold under the Put, with appropriate adjustments to reflect intervening stock dividends,
stock splits, stock redemptions, or similar changes to the number of outstanding shares. The fair market value of a share shall be
determined (A) as of the Valuation Date concurrent
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with or immediately preceding the date the Put is exercised, or (B) in the case of a transaction between the Plan and a
Disqualified Person, determined as of the date of the transaction.
(c)If the distribution of Company Stock to a former Participant or Beneficiary constituted a distribution within one taxable year of
the balance of the Participant’s Account, the Bank reserves the right to establish guidelines to be exercised in a uniform and
nondiscriminatory manner, to make payment for the shares subject to the Put on an installment basis in substantially equal annual,
quarterly or monthly payments over a period not to exceed five years, such period beginning no later than 30 days after exercise of
the Put. The Bank shall pay reasonable interest at least annually on the unpaid balance of the price and shall provide to the former
Participant or Beneficiary adequate security with respect to the unpaid balance. If the distribution was part of an installment
distribution, the Bank shall pay the Participant in cash within 30 days after exercise of the Put.
(d)The Put shall not be assignable, except that the Participant’s or former Participant’s legal representative (in the event of a
Participant’s incapacity) or, the Participant’s Beneficiary (in the event of a Participant’s or former Participant’s death) shall be
entitled to exercise the Put during the Option Period for which it is applicable.
(e)The Trustee (on behalf of the Plan) in its discretion, may assume the Bank’s obligations under this Section at the time a
Participant, former Participant, or Beneficiary exercises the Put, with the Bank’s consent. If the Trustee assumes the Bank’s
obligations, the provisions of this Section that apply to the Bank shall also apply to the Trustee.
(f)The Administrative Committee shall notify each Participant, former Participant, and Beneficiary who is eligible to exercise
the Put of the fair market value of each share of Company Stock as soon as practicable following its determination. The
Administrative Committee shall send all notices required under this Section to the last known address of a Participant, former
Participant, or Beneficiary, and it shall be the duty of those persons to inform the Administrative Committee of any changes in
address.
(g)For purposes of this Section, the “Option Period” is the period of 60 days following the day on which a Participant, former
Participant, or Beneficiary receives a distribution. If such person does not exercise the Put during that 60-day period, the Option
Period shall also be the 60-day period beginning on the first anniversary of the day on which such person received a distribution.
Notwithstanding the preceding sentences, when Company Stock is acquired with the proceeds of an Exempt Loan, the Option
Period shall be the 15-month period beginning on the date such Company Stock is distributed to a Participant (or the
Participant’s Beneficiary). Such 15-month period shall be extended by a period equal to the number of days, if any, during which
the Bank is precluded from honoring the put option by reason of applicable federal or state law.
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ARTICLE XIII
VOTING AND TENDER OF COMPANY STOCK
13.1Voting.
(a)Except as otherwise provided in subsection (b), the Trustee is hereby authorized to vote upon the Company Stock and any
other securities comprising the Trust or otherwise consent to or request any action on the part of the issuer of such securities, and
to give general and special proxies or powers of attorney, with or without power of substitution, and to participate in
reorganizations, recapitalizations, consolidations, mergers and similar transactions with respect to such securities; to deposit such
securities (if any) in a voting trust, or with any protective or like committee, or with a Trustee, or with depositories designated
thereby; and generally to exercise any of the powers of an owner with respect to such securities which the Trustee deems to be
for the best interest of the Trust to exercise.
(b)Each Participant shall have the power to instruct the Trustee as to how the Company Stock (including any fractional shares)
held in his Account should be voted at all stockholders’ meetings. The Trustee shall vote such Company Stock in accordance with
such instructions. To facilitate such right, the Trustee, with the assistance of the Committee, shall deliver to each Participant a
copy of all proxies, notices and other information which Bancorp distributes to its shareholders generally and the Committee shall
establish such procedures for the collection of Participants’ instructions in the voting of such Company Stock and the timely
transmission of such instructions to the Trustee as it shall determine to be appropriate. Any such Company Stock with respect to
which voting instructions have been sought but have not been timely received by the Trustee shall not be voted by the Trustee.
Any Company Stock with respect to which the Trustee has the power to vote but which has not been allocated to the accounts of
any Participant shall be voted by the Trustee in the same proportion as the Trustee is directed to vote the Company Stock with
respect to which instructions have been received up to 24 hours before the commencement of the shareholders’ meeting. In the
event no shares have been allocated, the Trustee shall vote all shares of unallocated Company Stock as directed by the
Committee. Participants do not acquire ownership of Company Stock held by the Trustee for their account unless and until the
Trustee delivers to them Company Stock certificates which have been registered in their names on the books of Bancorp.
13.2Tender Offer or Exchange Offer. In the event of a tender offer or exchange offer by any person (including the Bank or Bancorp)
for any or all shares of Company Stock held in the Trust, each Participant shall have the right and shall be afforded the opportunity to direct
in writing whether the Company Stock (including any fractional shares) allocable to his Account shall be tendered or exchanged in
response to such offer. The Trustee shall act with respect to such Company Stock in accordance with such written instructions. Any
Company Stock held by the Trustee which is not yet allocable to any Participant’s Account and dividend subaccount and any Company
Stock with respect to which written instructions have been sought but have not been timely received by the Trustee shall be tendered or
exchanged in the same proportion as the Company Stock which is allocable to the Participants’ Accounts and Dividend Accounts and with
respect to which written instructions have been timely received is being tendered or exchanged. To facilitate the foregoing right of the
Participants, the Committee shall distribute or cause to be distributed to each Participant substantially the same information as may be
distributed to Bancorp’s stockholders in connection with such offer and the Committee shall establish such procedures for the collection of
Participants’ instructions with respect to such Company Stock and the timely transmission of such instructions to the Trustee as it shall
determine to be appropriate.
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13.3Fiduciary Responsibilities. Each Participant shall be a “named fiduciary”, within the meaning of ERISA Section 402(a), with
respect to the voting and tender of Company Stock pursuant to this Article.
13.4Confidentiality. Voting instructions received from Participants and Beneficiaries shall be held in confidence by the Trustee or
its delegate for this purpose and shall not be divulged to the Bank or to any officer or employee of the Bank or to any other person.
ARTICLE XIV
ADMINISTRATION
14.1Fiduciary Responsibilities. A fiduciary shall have only those specific powers, duties, responsibilities and obligations as are
specifically given to such person under the Plan or the Trust. The Bank shall have sole responsibility to make the contributions provided
for under the Plan and, by action of the Board of Directors, to amend or terminate, in whole or in part, the Plan or the Trust. The Board of
Directors shall have sole responsibility to appoint and remove members of the Administrative Committee and the Trustees of the Plan. The
Administrative Committee shall have sole responsibility for the general administration of this Plan and for the investment policies of the
Plan, for the selection of the Plan’s investment funds pursuant to the Plan, and for the appointment and removal of any Investment
Manager. Subject to the provisions of the Plan and the Trust Agreement, the Trustee shall have sole responsibility for the administration of
the Trust and the management of the assets held in the Trust, as set forth in the Plan and the Trust. It is intended that each fiduciary shall be
responsible for the proper exercise of such fiduciary’s own powers, duties, responsibilities, and obligations and, except as otherwise
provided by law, shall not be responsible for any act or failure to act by another fiduciary. A fiduciary may serve in more than one
fiduciary capacity with respect to the Plan. A fiduciary of the Plan who is also an Employee shall not be compensated in such individual’s
capacity as fiduciary.
14.2The Administrative Committee. Any member of the Administrative Committee may resign with 60 days advance written notice
to the Board of Directors. The Administrative Committee shall select a Chairman and a Secretary to keep records or to assist it in the
discharge of its responsibilities. The Administrative Committee shall have such duties and powers as are necessary to discharge its
responsibilities under the Plan, including, but not limited to, the following:
(a)To require any person to furnish such information as it requests for the purpose of the proper administration of the Plan;
(b)To require any person to furnish such information as it requests for the purpose of the proper administration of the Plan;
(c)To construe and interpret the Plan, including the right to determine eligibility for participation, eligibility for payment, the
amount of benefits payable, the timing of distributions and all other issues arising under the Plan as well as the right to remedy
possible ambiguities, inconsistencies or omissions; provided, however, that all such interpretations and decisions shall be applied
in a uniform manner to all similarly situated Participants and Beneficiaries;
(d)To employ and rely upon such advisors (including attorneys, independent public accountants, investment advisors and
enrolled actuaries) as it deems appropriate or helpful in connection with the operation and administration of the Plan;
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(e)To maintain complete records of the administration of the Plan;
(f)To prepare and file with the appropriate governmental agencies such reports as required from time to time with respect to the
Plan under ERISA, the Code, or other laws and regulations governing the administration of the Plan;
(g)To furnish or disclose to Participants, Employees who may become Participants, and Beneficiaries information about the
Plan and statements of accrued benefits under the Plan in accordance with ERISA, the Code, or other laws and regulations
governing administration of the Plan.
(h)To delegate to one or more members of the Administrative Committee, or to persons other than Administrative Committee
members, any authority, duty or responsibility pertaining to the administration or operation of the Plan; provided, however, that
each such delegation shall be made by a written instrument authorized by the Administrative Committee and maintained with the
records of the Plan. If any person other than an Employee is so designated, such person must acknowledge, in writing,
acceptance of the duties and responsibilities delegated. All such instruments and acknowledgments shall be considered a part of
the Plan;
(i)To determine, pursuant to procedures adopted by it, whether a state domestic relations order served upon the Plan is a
“qualified domestic relations order” (as defined in Code section 414(p)); to place in escrow any benefits payable in the period
during which the Administrative Committee determines the status of an order; and to take any necessary action to administer
distributions under the terms of a qualified domestic relations order; and
(j)To discharge any responsibilities which are allocated to the Administrative Committee elsewhere in this Plan.
All decisions and interpretations of the Administrative Committee shall be binding and shall be entitled to the maximum deference
permitted under the law.
14.3Plan Expenses. All expenses authorized and incurred by the Administrative Committee shall be from the assets of the Plan,
except to the extent such expenses are paid by the Bank.
14.4Meetings and Voting. The Administrative Committee shall act by a majority vote of its respective members at a meeting or, by
written consent of a majority of its members, without a meeting. The Administrative Committee shall hold meetings, as deemed necessary
by them, although any member may call a special meeting of the committee by giving reasonable notice to the other members. The
Secretary of the Administrative Committee shall have authority to give certified notice in writing of any action taken by the committee.
14.5Compensation. The members of the Administrative Committee, if Employees, shall serve without compensation.
14.6Claims Procedures.
(a)Any Participant or Beneficiary (“Claimant”) may file a written claim for a benefit under the Plan with the Administrative
Committee or with a person named by the Administrative Committee to receive such claims;
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(b)In the event of a denial or limitation of any benefit or payment due or requested by any Claimant, such Claimant shall be given a
written notification containing specific reasons for the denial or limitation of the benefit. The written notification shall contain
specific reference to the pertinent Plan provisions on which the denial or limitation is based. In addition, it shall contain a description
of any additional material or information necessary for the Claimant to perfect a claim and an explanation of why such material or
information is necessary. Further, the notification shall provide appropriate information as to the steps to be taken if the Claimant
wishes to submit such claim for review. This written notification shall be given to a Claimant within 90 days after receipt of the claim
by the Administrative Committee (or its delegatee to receive such claims) unless special circumstances require an extension of time
for processing the claim. If such an extension of time is required, written notice of the extension shall be furnished to the Claimant
prior to the termination of the 90-day period and such notice shall indicate the special circumstances which make the postponement
appropriate;
(c)In the event of a denial or limitation of benefits, the Claimant or the Claimants duly authorized representative shall be permitted to
review pertinent documents and to submit issues and comments in writing to the Administrative Committee. In addition, the
Claimant or the Claimant’s duly authorized representative may make a written request for a full and fair review of the claim and its
denial by the Administrative Committee; provided, however, that such written request must be received by the Administrative
Committee (or its delegatee to receive such requests) within 60 days after receipt by the Claimant of written notification of the denial
or limitation. The 60-day requirement may be waived by the Administrative Committee in appropriate cases; and
(d)A decision shall be rendered by the Administrative Committee within 60 days after the receipt of the request for review; provided,
however, that where special circumstances require an extension of time for processing the decision, it may be postponed, on written
notice to the Claimant (prior to the expiration of the initial 60-day period) for an additional 60 days, but in no event shall the decision
be rendered more than 120 days after the receipt of such request for review. However, if the Administrative Committee holds
regularly scheduled meetings at least quarterly to review such appeals, a Claimant’s request for review shall be acted upon at the
meeting immediately following the receipt of the Claimant’s request unless such request is filed within 30 days preceding such
meeting. In such instance, the decision shall be made no later than the date of the second meeting following the receipt of such
request by the Administrative Committee (or its delegatee to receive such requests). If special circumstances require a further
extension of time for processing a request, a decision shall be rendered not later than the third meeting of the Administrative
Committee following the receipt of such request for review, and written notice of the extension shall be furnished to the Claimant
prior to the commencement of the extension.
(e)Any decision by the Administrative Committee shall be furnished to the Claimant in writing and in a manner calculated to be
understood by the Claimant and shall set forth the specific reason(s) for the decision and the specific Plan provision(s) on which
the decision is based.
14.7Liabilities. The Administrative Committee, each member or former member of such Committee, and each person to whom
duties and responsibilities have been delegated under the Plan shall be indemnified and held harmless by the Bank, to the fullest extent
permitted by ERISA, other applicable laws, and the charter and By-laws of the Bank.
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ARTICLE XV
AMENDMENTS
15.1Right to Amend. Except as otherwise set forth in this Article XV or as may be required by law, the Board of Directors reserves
the right to amend the Plan at any time and in any manner, without prior notification, consultation, or bargaining with any Employee or
representative of Employees by written resolution of the Board of Directors adopted at a duly convened meeting of the Board of Directors
in accordance with the By-Laws of the Bank and the laws of the State of New York. To the extent required by the Code or ERISA, no
amendment to the Plan shall decrease a Participant’s benefit or eliminate an optional form of distribution. No amendment shall make it
possible for any assets of the Plan to be used for or diverted to any purposes other than for the exclusive benefit of Participants and
Beneficiaries.
15.2Amendment by Administrative Committee. The Administrative Committee may adopt any ministerial and nonsubstantive
amendment it deems necessary or appropriate to (a) facilitate the administration, management and interpretation of the Plan, (b) conform
the Plan to current practice, or (c) cause the Plan and its related Trust to qualify under Code sections 401(a)(1), 501(a) and 4975(e)(7) or to
comply with ERISA or any other applicable laws; provided that such amendment does not have any material effect on the estimated cost to
the Bank of maintaining the Plan.
15.3Plan Merger and Asset Transfers. No assets of the Trust shall be merged or consolidated with, nor shall any assets or liabilities
be transferred to any other plan, unless the benefits payable to each Participant or Beneficiary, if this Plan were terminated immediately
after such action, would be equal to or greater than the benefits such individuals would have been entitled to receive if this Plan had been
terminated immediately before such action.
15.4Amendment of Vesting Schedule. Notwithstanding anything to the contrary, no amendment to the Plan shall have the effect of
decreasing a Participant’s nonforfeitable percentage determined without regard to such amendment as of the later of the date such
amendment is adopted or the date it becomes effective. If the Plan’s vesting schedule is amended, or the Plan is amended in any way that
directly or indirectly affects the computation of a Participant’s nonforfeitable percentage, each Participant with at least 3 Years of Service
may elect, within a reasonable period after the adoption of the amendment, to have the nonforfeitable percentage computed under the Plan
without regard to such amendment. The Participant’s election may be made at any time during the period ending on the latest of:
(a)60 days after the amendment is adopted;
(b)60 days after the amendment become effective; or
(c)60 days after the Participant is issued written notice of the amendment by the Bank or the Administrative Committee.
ARTICLE XVI
TERMINATION
16.1Right to Terminate. While the Bank intends the Plan to be permanent, the Board of Directors reserves the right to terminate
the Plan at any time, without prior notification, consultation, or bargaining with any Employee or representative of Employees by written
resolution of the Board of Directors adopted at a duly convened meeting of the Board of Directors in accordance with the By-laws of the
Bank and the laws of the State of New York.
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16.2Effect of Termination. If the Plan is terminated, contributions shall cease, and the assets remaining in the Trust, after payment
of any expenses, including expenses of administration or liquidation, shall be retained in the Trust for distribution in accordance with the
terms of the Plan. Upon termination (including a partial termination), or upon the complete discontinuance of contributions by the Bank,
all Participants shall be 100% vested in their Accounts.
ARTICLE XVII
MISCELLANEOUS
17.1Non-alienation of Benefits. Except as provided in Code section 401(a)(13) (relating to qualified domestic relations orders), Code
section 401(a)(13)(C) and (D) (relating to offsets ordered or required under a criminal conviction involving the Plan, a civil judgment in
connection with a violation or alleged violation of fiduciary responsibilities under ERISA, or a settlement agreement between the
Participant and the Department of Labor in connection with a violation or alleged violation of fiduciary responsibilities under ERISA),
Section 1.401(a)-13(b)(2) of Treasury regulations (relating to Federal tax levies and judgments), or as otherwise required by law, no benefit
under the Plan at any time shall be subject in any manner to anticipation, alienation, assignment (either at law or in equity), encumbrance,
garnishment, levy, execution, or other legal or equitable process; and no person shall have power in any manner to anticipate, transfer,
assign (either at law or in equity), alienate or subject to attachment, garnishment, levy, execution, or other legal or equitable process, or in
any way encumber the Participant’s benefits under the Plan, or any part thereof, and any attempt to do so shall be void.
17.2Appointment of Guardian. Where it is established to the satisfaction of the Administrative Committee that a guardian has been
duly appointed on behalf of a person entitled to a distribution under the Plan, the Administrative Committee may cause payment to be
made to the guardian for the benefit of the entitled person. The Administrative Committee shall have no responsibility with respect to the
application of amounts so paid.
17.3Satisfaction of Benefit Claims. The assets of the Trust shall be the sole source of benefits under this Plan, and each Participant or
any other person who shall claim the right to any payment or benefit under this Plan shall be entitled to look only to the Trust for such
payment or benefit, and shall not have any right, claim or demand against the Bank or any officer or director of the Bank. Such Participant
or person shall not have a right to or interest in any assets of the Trust, except as provided from time to time under this Plan.
17.4Controlling Law. The provisions of the Plan shall be construed, administered and enforced under the laws of the
United States and the State of New York.
17.5Non-Guarantee of Employment. Nothing contained in this Plan shall be construed as a contract of employment between the
Bank and any Employee, or as a right of any Employee to be continued in the employment of the Bank or as a limitation of the right of the
Bank to discharge any of its Employees, with or without cause.
17.6Severability and Construction of the Plan.
(a)If any provision of the Plan or the application of it to any circumstance(s) or person(s) is invalid, the remainder of the Plan and
the application of such provision to other circumstances or persons shall not be affected thereby.
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(b)Unless the context otherwise indicates, the masculine wherever used shall include the feminine and neuter; the singular
shall include the plural; and words such as herein, hereof, hereby, hereunder and words of similar import shall refer to the Plan as a
whole and not any particular part of it.
17.7No Requirement of Profits. Contributions may be made to the Plan without regard to current or accumulated profits of the
Bank.
17.8All Risk on Participants and Beneficiaries. Each Participant and Beneficiary shall assume all risk in connection with any
decrease in the value of the assets of the Trust and the Participants’ and Beneficiaries’ Accounts.
18.1Determination of Top-Heavy Status.
ARTICLE XVIII
TOP-HEAVY PROVISIONS
(a)Any provision of this Plan to the contrary notwithstanding, for any Plan Year in which the Plan is a Top-Heavy Plan, the
provisions of this Article shall apply. The provisions of this Article shall have effect only to the extent required under Code
Section 416. This Plan shall be deemed a Top-Heavy Plan only with respect to any Plan Year in which, as of the Determination
Date, the Top-Heavy Ratio exceeds 60%.
(b)If the Plan is not included in a Required Aggregation Group with other plans, then it shall be Top-Heavy only if (i) when
considered by itself it is a Top-Heavy Plan and (ii) it is not included in a Permissive Aggregation Group that is not a Top-Heavy
Group.
(c)If the Plan is included in a Required Aggregation Group with other plans, it shall be Top- Heavy only if the Required
Aggregation Group, including any permissively aggregated plans, is Top-Heavy.
18.2Top-Heavy Definitions. Solely for purposes of this Article, the following words and phrases shall have the following
meaning:
(a)“Aggregation Group or Top Heavy Group” means either a Required Aggregation Group or a Permissive Aggregation Group.
(b)“Bank” means the Bank and all members of a controlled group of corporations (as defined in Code section 414(b) as modified
by Code section 415(h)), all commonly controlled trades or businesses (as defined in Code section 414(c) as modified by Code
section 415(h)), or affiliated service groups (as defined in Code section 414(m)) of which the Bank is a part.
(c)“Determination Date” means, with respect to any Plan Year, the last day of the preceding Plan Year or in the case of the first
Plan Year of any plan, the last day of such Plan Year or such other date as permitted under rules issued by the U.S. Department
of the Treasury.
(d)“Key Employee” means any employee or former employee (including any deceased employee) who at any time during the
Plan Year that includes the Determination Date was an officer of the Bank having annual compensation greater than $130,000
(as adjusted under Code section 416(i)(1)), a five percent owner of the Bank, or a one
41
percent owner of the Bank having annual compensation of more than $150,000. For this purpose, annual compensation means
compensation within the meaning of Code section 415(c)(3). The determination of who is a Key Employee will be made in
accordance with Code section 416(i)(1) and the applicable regulations and other guidance of general applicability issued
thereunder.
(e)“Non-Key Employee” means any Employee who is not a Key Employee.
(f)“Permissive Aggregation Group” means a Required Aggregation Group plus any other plans maintained and selected by the
Bank, provided that all such plans when considered together satisfy the requirements of Code sections 401(a)(4) and 410.
(g)“Required Aggregation Group” means each qualified plan of the Bank in which at least one Key Employee participates, or
which enables any plan in which a Key Employee participates to meet the requirements of Code sections 401(a)(4) or 410.
(h)“Top-Heavy Ratio” means:
(i)If the Bank maintains one or more defined contribution plans (including any Simplified Employee Pension Plan) and
the Bank has not maintained any defined benefit plan which during the 5-year period ending on the Determination
Date(s) has or has had accrued benefits, the Top-Heavy Ratio is a fraction, the numerator of which is the sum of the
Account balances of all Key Employees as of the Determination Date(s) (including any part of any Account balance
distributed in the 1-year period (5-year period in the case of a distribution made for a reason other than severance from
employment, death or disability) ending on the Determination Date(s)), and the denominator of which is the sum of all
Account balances (including any part of any Account balance distributed in the 1-year period (5-year period in the case
of a distribution made for a reason other than severance from employment, death or disability) ending on the
Determination Date(s)), both computed in accordance with Code section 416 and the regulations thereunder. Both the
numerator and denominator of the Top-Heavy Ratio are increased to reflect any contribution not actually made as of the
Determination Date, but which is required to be taken into account on that date under Code section 416 and the
regulations thereunder.
(ii)If the Bank maintains or has maintained one or more defined benefit plans which during the 5-year period ending on
the Determination Date(s) has or has had any accrued benefits, the Top-Heavy Ratio for any required or permissive
aggregation group as appropriate is a fraction, the numerator of which is the sum of Account Balances under the
aggregated defined contribution plan or plans for all Key Employees, determined in accordance with (i) above, and the
present value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees as of the
Determination Date(s), and the denominator of which is the sum of the Account balances under the aggregated defined
contribution plan or plans for all Participants, determined in accordance with (i) above, and the present value of accrued
benefits under the defined benefit plan or plans for all Participants as of the Determination Date(s), all determined in
accordance with Code section 416 and the regulations thereunder. The accrued benefits under a defined benefit plan in
both the numerator and denominator of the Top-Heavy Ratio are increased for any distribution of an accrued benefit
made in the 1-year period (5-year period in the case of a distribution made for a reason other than severance from
employment, death or disability) ending on the Determination Date.
42
(iii)For purposes of (i) and (ii) above the value of Account balances and the present value of accrued benefits will be
determined as of the most recent Valuation Date that falls within or ends with the 12-month period ending on the
Determination Date, except as provided in Code section 416 and the regulations thereunder for the first and second plan
years of a defined benefit plan. The Account balances and accrued benefits of a Participant (1) who is not a Key
Employee but who was a Key Employee in a prior year, or (2) who has not been credited with at least one hour of
service with any Employer maintaining the plan at any time during the 1-year period ending on the Determination Date
will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and
transfers are taken into account will be made in accordance with Code section 416 and the regulations thereunder.
Deductible employee contributions will not be taken into account for purposes of computing the Top- Heavy Ratio.
When aggregating plans the value of Account balances and accrued benefits will be calculated with reference to the
Determination Dates that fall within the same calendar year.
The accrued benefit of a Participant other than a Key Employee shall be determined under (1) the method, if any, that
uniformly applies for accrual purposes under all defined benefit plans maintained by the employer, or (2) if there is no
such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule
of Code section 411(b)(1)(C).
(iv)“Valuation Date” means, for purposes of determining if the Plan is Top Heavy, the most recent Valuation Date in
the period of twelve months ending on the Determination Date.
18.3Top-Heavy Rules. For any year in which a Plan is determined to be a Top-Heavy Plan the following rules shall apply:
(a)For each Plan Year in which the Plan is Top-Heavy, minimum contributions for a Participant who is a Non-Key Employee
shall be required to be made on behalf of each Participant who is employed by the Bank on the last day of the Plan Year. The
amount of the minimum contribution shall be the lesser of the following percentage of compensation:
(i)3%; or
(ii)the highest percentage at which Contributions are made under the Plan for the Plan Year on behalf of any Key
Employee.
(A)For purposes of this paragraph (ii), all defined contribution plans included in a Required
Aggregation Group shall be treated as one plan.
(B)This paragraph (ii) shall not apply if the Plan is included in a Required Aggregation Group and the Plan
enables a defined benefit plan included in the Required Aggregation Group to meet the requirements of
Code sections 401(a)(4) or 410.
43
(C)If the highest percentage at which Contributions are made under the Plan for a top-heavy Plan Year on
behalf of Key Employees is less than 3%, the amounts contributed as a result of a salary reduction agreement
must be included in determining Contributions made on behalf of Key Employees.
(b)Any contributions that must be made under subsection (a) shall be made under the 401(k) plan-portion of the Plan.
(c)The vesting schedule when the Plan is Top-Heavy is as follows:
Years of Service After the Effective Date
0-1 Years of Service
2 Years of Service
3 or more Years of Service
Vesting Percentage
0%
20%
100%
ARTICLE XIX
EXEMPT LOANS
19.1General. The Trustee shall have the authority and discretion to borrow money from a Disqualified Person, or another source
which is guaranteed by a Disqualified Person for the purpose of (a) purchasing Company Stock, or (b) repaying a prior Exempt Loan. Any
Exempt Loan shall satisfy all of the requirements of this Article XIX.
19.2Terms of Exempt Loan Agreements. All Exempt Loans shall satisfy the following requirements:
(a)The loan shall be primarily for the benefit of Participants and their Beneficiaries.
(b)The loan shall be for a specified term and shall bear no more than a reasonable rate of interest.
(c)The proceeds of an Exempt Loan shall be used to purchase Company Stock within a reasonable period of time following
receipt.
(d)The collateral pledged by the Trustee shall consist only of the Company Stock purchased with the borrowed funds, or
Company Stock that was pledged as collateral in connection with a prior Exempt Loan that was repaid with the proceeds of the
current Exempt Loan.
(e)Under the terms of the agreement, the lender shall have no recourse against the Trust, or any of its assets, except with respect
to the collateral and contributions (other than contributions of Company Stock) by the Bank that are made to satisfy its
obligations under the loan agreement and earnings attributable to such collateral and such contributions.
(f)The payments made on the loan during a Plan Year shall not exceed an amount equal to the sum of such contributions and
the earnings received during or prior to the year less such payments on the exempt loan in prior years.
(g)In the event of default, the value of the assets transferred in satisfaction of the loan shall not exceed the amount of default;
moreover, if the lender is a Disqualified Person, the loan agreement shall provide for a transfer of assets upon default only upon
and to the extent of the failure of the Plan to meet the payment schedule of the loan.
44
19.3Prohibition on Purchase Arrangements. Except as provided in Article XII and as hereinafter provided in this Article XIX, no
Company Stock shall be subject to a put, call, or other option, or buy-sell or similar arrangement while held by and when distributed from
the Trust, whether or not at the time of distribution the Plan is an employee stock ownership plan. These protections and rights which attach
to Company Stock acquired with the proceeds of an Exempt Loan shall not be terminable.
19.4Suspense Account.
(a)Bank contributions made to the Trust in the form of Company Stock purchased with the proceeds of an Exempt Loan shall
be held in the Suspense Account as the collateral for that Exempt Loan. Such stock shall be released from the Suspense
Account shall be determined in the following manner below.
First, there shall be released from the Suspense Account a number of shares of Company Stock with an aggregate cost
basis equal to the 401(k) Safe Harbor Nonelective Contributions, if any, of the Participants, that have been applied to
the repayment of principal and interest due on the Exempt Loan for each Plan Year. Thereafter, such the Company
Stock shall be released from the Suspense Account on a pro rata basis according to the amount of the payment on the
Exempt Loan for the Plan Year, determined under one of the following two alternative formulas in the discretion of the
Administrative Committee:
(i)for each Plan Year during the duration of the Exempt Loan, the number of shares of Company Stock released shall
equal the number of such shares held in the Suspense Account immediately before release for the current Plan Year
multiplied by a fraction, the numerator of which is the amount of principal and interest paid for the year and the
denominator of which is the sum of the numerator plus the remaining principal and interest to be paid for all future
years. The number of future years under the Exempt Loan must be definitely ascertainable and must be determined
without taking into account any possible extensions or renewal periods. If the interest rate under the loan is variable, the
interest to be paid in future years must be computed by using the interest rate applicable as of the end of the Plan Year.
If the collateral includes more than one class of Company Stock, the number of shares of each class to be released for a
Plan Year must be determined by applying the same fraction to each class; or
(ii)for each Plan Year during the duration of the Exempt Loan, the number of shares of Company Stock released is
determined solely with reference to the principal payment of the Exempt Loan. If Company Stock in the Suspense
Account is released in accordance with this subsection (ii), (A) the Exempt Loan must provide for annual payments of
principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts
for 10 years; and (B) interest included in any payment is disregarded only to the extent that it would be determined to be
interest under standard loan amortization tables. This subsection (ii) will not be applicable if by reason of a renewal,
extension, or refinancing, the sum of the expired duration of the Exempt Loan, the renewal period, the extension period,
and the duration of a new Exempt Loan exceeds 10 years.
45
(b)Shares of Company Stock released in accordance with Section 19.4(a) of the Plan shall then be allocated to the Accounts of
Participants first, in an amount equal in value to any dividends paid on shares previously allocated to Participant’s Accounts that
are used to repay the Exempt Loan. The remaining shares of such stock shall be allocated to the Accounts of Participants in the
same manner as described in Section 5.9.
19.5Sale of Financed Shares. In the event the Plan receives an offer to participate in a corporate transaction (i.e., a stock sale, asset
sale, merger or consolidation) before all the shares of Company Stock have been released from the Suspense Account, the Trustee may
enter into an agreement for the sale of all Company Stock which is not allocated to the accounts of Participants and use the proceeds
thereof to repay an Exempt Loan. Any proceeds of the sale of unallocated Company Stock, which is not required to repay the Exempt
Loan, will be allocated as earnings to Participant’s Accounts.
[Signature Page to Follow]
46
IN WITNESS WHEREOF, Ponce Bank has caused this Plan to be duly executed on its behalf this 27day of April , 2021 .
Ponce Bank
By:
/s/Carlos P. Naudon
Name: Carlos P. Naudon
President
Title:
47
PONCE BANK
EMPLOYEE STOCK OWNERSHIP PLAN WITH 401(k)
PROVISIONS
Amendment Number One
Exhibit 10.2
This Amendment (this “Amendment”) to the Ponce Bank Employee Stock Ownership Plan with 401(k) Provisions (the “Plan”)
is made by Ponce Bank (the “Bank”), effective January 1, 2021.
WHEREAS, the Bank maintains the Plan; and
WHEREAS, the Bank wishes to amend the Plan to provide that only participants who have completed least three years of
service may direct that all or any portion of their Company Stock Account (as defined in the Plan) be converted to cash and reinvested in
the other investment options then available under the Plan; and
WHEREAS, the Bank is permitted to amend the Plan pursuant to Section 15.1 thereof.
NOW, THEREFORE, BE IT RESOLVED, that the Plan is hereby amended as follows, effective as of January 1, 2021:
1.The second sentence of Section 11.7 shall be deleted in its entirety and replaced with the following:
“A Participant who has completed at least three (3) Years of Service, a Beneficiary of a deceased Participant, or an alternate
payee under a Qualified Domestic Relations Order who has an account under the Plan with respect to a Participant who has completed at
least three (3) Years of Service may direct that all or any portion of the Company Stock Account be converted to cash and reinvested in
the other investment options then available under the Plan.”
2.Except and to the extent modified by this Amendment, the provisions of the Plan shall remain in full force and effect
and are hereby incorporated into and made a part of this Amendment.
[Signature Page to Follow]
IN WITNESS WHEREOF, this Amendment has been executed by the Bank’s duly authorized officer on the date set forth
below.
5/25/2021
Date
PONCE BANK EMPLOYEE STOCK OWNERSHIP PLAN
WITH 401(k)
PROVISIONS
By:
Name
Title:
/s/Carlos Naudon
Carlos Naudon
President/ CEO
2
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.I have reviewed this annual report on Form 10-K of Ponce Financial Group, Inc.;
2.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;
3.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;
4.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)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;
(b)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;
(c)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
(d)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)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
(b)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 21, 2023
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, Sergio J. Vaccaro, certify that:
1.I have reviewed this annual report on Form 10-K of Ponce Financial Group, Inc.;
2.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;
3.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;
4.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)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;
(b)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;
(c)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
(d)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)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
(b)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 21, 2023
By:
/s/ Sergio J. Vaccaro
Sergio J. Vaccaro
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 Ponce Financial Group, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2022 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)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: March 21, 2023
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 Ponce Financial Group, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2022 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)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: March 21, 2023
By:
/s/ Sergio J. Vaccaro
Sergio J. Vaccaro
Executive Vice President and Chief Financial Officer