UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended September 30, 2017

OR

For the transition period from                     to                    

Commission File Number: 001-38224

 

PDL Community Bancorp

(Exact Name of Registrant as Specified in its Charter)

 

 

Registrant’s telephone number, including area code: (718) 931-9000

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of November 14, 2017, the registrant had 18,463,028 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 

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Table of Contents

 

 

 

 

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PART I—FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements.

PDL Community Bancorp and Subsidiaries

 

Consolidated Statements of Financial Condition

September 30, 2017 (Unaudited) and December 31, 2016

(Dollars in thousands, except for share data)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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PDL Community Bancorp and Subsidiaries

 

Consolidated Statements of Income (Loss)

Three Months and Nine Months Ended September 30, 2017 and 2016 (Unaudited)

(Dollars in thousands)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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PDL Community Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Three Months and Nine Months Ended September 30, 2017 and 2016 (Unaudited)

(Dollars in thousands)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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PDL Community Bancorp and Subsidiaries

Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2017 and 2016 (Unaudited) and Year Ended December 31, 2015

(Dollars in thousands, except share data)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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PDL Community Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2017 and 2016 (Unaudited)

(Dollars in thousands)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

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PDL Community Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2017 and 2016 (Unaudited)

(Dollars in thousands)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

Basis of Presentation and Consolidation:

The unaudited interim Consolidated Financial Statements of PDL Community Bancorp (the “Company”) presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10Q and do not include all of the information and note disclosures required by the U.S. generally accepted accounting principles (“GAAP”).  In the opinion of management, all adjustments and disclosures considered necessary for the fair presentation of the accompanying Consolidated Financial Statements have been included.  Interim results are not necessarily reflective of the results of the entire year.  The accompanying unaudited Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements for the years ended December 31, 2016 and 2015 and notes thereto included in the Company’s prospectus, filed with the SEC pursuant to Rule 424(b)(3) under the Securities Act of 1933, on August 10, 2017.

The unaudited interim Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiary Ponce Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries.  The Bank’s subsidiaries consist of PFS Service Corp., which owns some of the Bank’s real property, and Ponce De Leon Mortgage Corp., which is a mortgage banking entity.  All significant intercompany transactions and balances have been eliminated in consolidation.

Reorganization and Stock Offering:

On September 29, 2017, Ponce De Leon Federal Bank reorganized into a two-tier mutual holding company structure with a mid-tier stock holding company.  The Company sold 8,308,361 shares of common stock at $10.00 per share, including 723,751 shares purchased by the Company’s Employee Stock Ownership Plan (“ESOP”).  In addition, the Company issued 9,545,387 shares to Ponce Bank Mutual Holding Company, the Company’s mutual holding company parent (the “MHC”) and 609,280 shares to The Ponce De Leon Foundation (“Foundation”), a charitable foundation that was formed in connection with the stock offering and is dedicated to supporting charitable organizations operating in the Bank’s local community.  A total of 18,463,028 shares of common stock were outstanding following the completion of the stock offering. As a result of the reorganization, the reporting entity changed from Ponce De Federal Bank to PDL Community Bancorp.

The direct costs of the Company’s stock offering of $4,988 were deferred and deducted from the proceeds of the offering.

Nature of Operations:

The Bank is a federally chartered savings association headquartered in the Bronx, New York.  Ponce De Leon Federal 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.”   Upon the completion of its reorganization into the MHC, the assets and liabilities of Ponce De Leon Federal Bank were transferred to and assumed by a federally chartered stock savings bank, owned 100% by PDL Community Bancorp and known as and conducting business under the name “Ponce Bank.” The Bank will continue to be subject to comprehensive regulation and examination by the Office of Comptroller of the Currency (the “OCC”).

The Bank’s business is conducted through the administrative office and 13 branch offices.  The banking offices are located in the Bronx, Manhattan, Queens and Brooklyn, New York and Union City, New Jersey.  The primary market area currently consists of the New York City metropolitan area.

The Bank’s business primarily consists of taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in mortgage loans, consisting of one-to-four family residences (both investor-owned and owner-occupied), multifamily residences, nonresidential properties and construction and land, and, to a lesser extent, in business and consumer loans. The Bank also invests in securities, which have historically consisted of U.S. Government and federal agency securities and securities issued by government-sponsored or owned enterprises, as well as, mortgage-backed securities and Federal Home Loan Bank stock.   The Company offers a variety of deposit accounts, including demand, savings, money markets and certificates of deposit accounts.

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

The following is a summary of the Company’s 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 determination of pension benefit obligations.

Interim Financial Statements:

The interim financial statements at September 30, 2017, and for the three months and nine months ended September 30, 2017 and 2016 are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.  The results of operations for the three months and nine months ended September 30, 2017, are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2017, or any other period.

 

Significant Group Concentrations of Credit Risk:

Most of the Bank’s activities are with customers located within New York City. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio is susceptible to changes in the local market conditions. Note 3 discusses the types of securities in which the Bank invests in. Notes 4 and 10 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.

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 taxes. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer.  Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the consolidated statement of income 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.

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

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 Stock:

The Bank is a member of the Federal Home Loan Bank of New York (the “FHLB”).  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.  FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.  Both cash and stock dividends are reported as income.  

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 typically after 90 days of non-payment. The accrual of interest on mortgage and commercial loans is generally discontinued at the time the loan becomes 90 days past due unless the loan is well-secured and in process of collection. Consumer loans are typically charged-off no later than 120 days past due.  Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged-off if collection of principal or interest is considered doubtful.  All nonaccrual loans are considered impaired loans.  

All interest accrued but not received for loans placed on nonaccrual are reversed against interest income.  Interest received on such loans is accounted for on the cash basis or recorded against principal balances only, until qualifying for return to accrual.  Cash basis interest recognition is only applied on nonaccrual loans with a sufficient collateral margin to ensure no doubt with respect to the collectability of principal.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and remain current for a period of time (typically six months) and future payments are reasonably assured.

Allowance for Loan Losses:

The allowance for loan losses is a valuation allowance for probable incurred credit losses.  Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.  Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

The allowance consists of specific and general components.  The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Company 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 (“TDR”) 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.

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

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 TDR’s 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 in a TDR, 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.   As of September 30, 2017, the historical loss experience is determined by portfolio segment and is based on the actual loss experienced over a rolling 12 quarter average period. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.  These economic factors include consideration of the following:  levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.  

When establishing the allowance for loan losses, management categorizes loans into risk categories reflecting individual borrower earnings, liquidity, leverage and cash flow, as well as the nature of underlying collateral. These risk categories and relevant risk characteristics are as follows:

Residential and Multifamily Mortgage Loans:

The majority of loans are secured by first mortgages. Residential and multifamily mortgage 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 rate is adjusted on a 5 year schedule.

Construction and Land Loans:

Construction real estate loans consist of vacant land and property that is in the process of improvement. Repayment of these loans can be dependent on the sale of the property to third parties or the successful completion of the improvements by the builder for the end user. In the event a loan is made on property that is not yet improved for the planned development, there is the risk that government approvals will not be granted or will be delayed. Construction loans also run the risk that improvements will not be completed on time or in accordance with specifications and projected costs. Construction real estate loans generally have terms of six months to two years during the construction period with fixed rates or interest rates based on a designated index.                                                                                                                                                                                          

Business Loans:

Business loans are loans for commercial, corporate and business purposes, including issuance of letters of credit. These loans are secured by business assets or may be unsecured. Repayment of these loans is directly dependent on the successful operation of the borrower’s business and the borrower’s ability to convert acquired assets to operating revenue. They possess greater risk than most other types of loans should the repayment capacity of the borrower not be adequate. Business loans generally have terms of five years to seven years or less and interest rates that float in accordance with a designated published index. Substantially all such loans are secured and backed by the personal guarantees of the owners of the businesses.

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

Consumer Loans:

Consumer loans generally have higher interest rates than mortgage loans. The risk involved in consumer loans is the type and nature of the collateral and, in certain cases, the absence of collateral. Consumer loans include passbook loans and other secured and unsecured loans that have been made for a variety of consumer purposes.

Loans Held for Sale:

Loan sales occur from time to time as part of strategic business or regulatory compliance initiatives.  Loans held for sale, including deferred fees and costs, are reported at the lower of cost or fair value as determined by expected bid prices from potential investors. Loans are sold without recourse and servicing released. When a loan is transferred from portfolio to held-for-sale and the fair value is less than cost, a charge-off is recorded against the allowance for loan losses. Subsequent declines in fair value, if any, are charged against earnings.

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 Company, (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 Company 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:

 

 

Leasehold improvements are amortized over the shorter of the improvements’ estimated economic lives or the related lease terms, including extensions expected to be exercised. Gains and losses on dispositions are recognized upon realization. Maintenance and repairs are expensed as incurred and improvements are capitalized.  Leasehold improvements in process are not amortized until the assets are placed in operation.  

Impairment of Long-Lived Assets:

Long-lived assets, including premises and equipment, 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.

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

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.

As of September 30, 2017 and December 31, 2016, there are no liabilities recorded related to uncertain tax positions. Income tax returns filed for years before 2013 are no longer subject to income tax examinations by U.S. federal, state or local tax authorities.

Interest and penalties associated with unrecognized tax benefits, if any, would be classified as additional provision for income taxes in the consolidated statements of income (loss).

Related Party Transactions:

Directors and officers of the Company and their affiliates have been customers of and have had transactions with the Company, and it is expected that such persons will continue to have such transactions in the future. Management believes that all deposit accounts, loans, services and commitments comprising such transactions were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers who are not directors or officers. In the opinion of management, the transactions with related parties did not involve more than normal risk of collectability, nor favored treatment or terms, nor present other unfavorable features. Note 14 contains details regarding related party transactions.

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

Compensation and Benefit Plans:

Defined Benefit Plan:

The noncontributory defined benefit pension plan was effectively frozen on May 31, 2007. The funding policy is to contribute annually the amounts sufficient to meet the minimum funding standards established by the Employee Retirement Income Security Act (“ERISA”) and such additional amounts as determined by management based on actuary recommendations.

Employee Stock Ownership Plan:

Compensation expense is recorded as shares are committed to be released with a corresponding credit to unearned ESOP shares at the average fair market value of the shares during the year.  Compensation expense is recognized ratably over the service period based upon the management’s estimate of the number of shares expected to be allocated by the ESOP.  The difference between the average fair market value and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in-capital.

Comprehensive Income (Loss):  

Comprehensive income (loss) consists of net income and other comprehensive income (loss).  Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, unrecognized gains and losses on actuarial experience and prior service cost of the defined benefit plan, which are also recognized as separate components of equity.

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 11.  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.

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 Per Share (“EPS”):  

Basic EPS represents net income attributable to common shareholders divided by the weighted-average number of common shares outstanding during the period.  Diluted EPS is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding, plus the effect of potential dilutive common stock equivalents outstanding during the period. The conversion and reorganization from a mutual to a stock entity became effective as of September 29, 2017, one day prior to the end of the 3rd Quarter of 2017. The EPS for one day is de minimis, hence no EPS is reported for the nine months period ended September 30, 2017.

Recent Accounting Pronouncements

As an emerging growth company (“EGC”) as defined in Rule 12b-2 of the Exchange Act, the Company has elected to use the extended transition period to delay the adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to nonpublic companies.  As of September 30, 2017, there is no significant difference in the comparability of the financial statements as a result of this extended transition period.

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities.” The FASB reported that the main objective in developing this new ASU was to enhance the reporting model for financial instruments, to provide users of financial statements with more useful information. The update requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. It addresses the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The amendment eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. It requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Financial assets and financial liabilities are to be presented separately by measurement category and form of financial asset and the need for a valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated with the entity’s other deferred tax assets. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, for public business entities. As the Company is taking advantage of extended transition period for complying with new or revised accounting standards assuming it remains an emerging growth company (“EGC”), it will adopt the amendments in this update beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company expects to apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption through retained earnings. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that reporting period, for public business entities. As the Company is taking advantage of extended transition period for complying with new or revised accounting standards assuming it remains an EGC, it will adopt the amendments in this update beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. A modified retrospective approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently assessing the impact that the guidance will have on the Company’s consolidated financial statements.

The Company has begun its evaluation of the amended guidance including the potential impact on its consolidated financial statements. To date, the Company has identified its leased office spaces as within the scope of the guidance. The Company continues to evaluate the impact of the guidance, including determining whether other contracts exist that are deemed to be in scope. As such, no conclusions have yet been reached regarding the potential impact of adoption on the Company’s consolidated financial statements. Further, to date, no guidance has been issued by either the Company’s or the Company’s primary regulator with respect to how the impact of the amended standard is to be treated for regulatory capital purposes.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718).” The reported objective of this ASU is to simplify accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the update, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current accounting) or account for forfeitures when they occur. Within the Cash Flow Statement, excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. The amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, for public business entities. As the Company is taking advantage of extended transition period for complying with new or revised accounting standards assuming it remains an EGC, it will adopt the amendments in this update beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Company expects to apply the amendments in this update by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted, or prospectively, as applicable.  The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

14

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU reportedly 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 No. 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, for public business entities. As the Company is taking advantage of extended transition period for complying with new or revised accounting standards assuming it remains an EGC, we will adopt the amendments in this update beginning after December 15, 2020, including interim periods within those fiscal years. Entities have to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

Although early adoption is permitted, the Company does not expect to elect that option. The Company has begun its evaluation of the amended guidance including the potential impact on its consolidated financial statements. As a result of the required change in approach toward determining estimated credit losses from the current “incurred loss” model to one based on estimated cash flows over a loan’s contractual life, adjusted for prepayments (a “life of loan” model), the Company expects that the new guidance will result in an increase in the allowance for loan losses, particularly for longer duration loan portfolios. The Company also expects that the new guidance may result in an allowance for debt securities. In both cases, the extent of the change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions and forecasts at that time. Further, to date, no guidance has been issued by the Company’s primary regulator with respect to how the impact of the amended standard is to be treated for regulatory purposes.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.”  This ASU reportedly is intended to reduce diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, for public business entities. As the Company is taking advantage of extended transition period for complying with new or revised accounting standards assuming it remains an EGC, it will adopt the amendments in this update beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. A retrospective transition method should be applied to each period presented, unless it is impracticable to apply the amendments retrospectively for some of the issues, then the amendments for those issues would be applied prospectively as of the earliest date practicable.  The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, that amended guidance on revenue recognition from contracts with customers. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most contract revenue recognition guidance, including industry-specific guidance. The core principle of the amended guidance reportedly is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amended guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, for public business entities.  As the Company is taking advantage of extended transition period for complying with new or revised accounting standards assuming it remains an EGC, it will adopt the amendments in this update beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.  The Company expects to apply the amendments in this update by means of a cumulative-effect adjustment as of the beginning of the period in which the guidance is adopted. The Company is in its preliminary stages of evaluating the impact of these amendments, although it does not expect the amendments to have a significant impact to the Company’s financial position or

15

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

results of operations. The amendments could potentially impact accounting procedures and processes over the recognition of certain revenue sources, including, but not limited to, non-interest income. The Company has begun to develop processes and procedures during 2017 to ensure it is fully compliant with these amendments at the date of adoption. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The Bank had $4,225 in cash to cover its minimum reserve requirement of $3,227 at September 30, 2017, and $4,516  in cash to cover its minimum reserve requirements of $2,349 at December 31, 2016, respectively.

The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale securities at September 30, 2017 and December 31, 2016 are summarized as follows:

 

 

 

There were no investments classified as held to maturity as of September 30, 2017 and December 31, 2016. There were no sales in the three months ended September 30, 2017. There were $20,411 in sales of investment securities in the nine months ended September 30, 2017 and no sales of investments for the year ended December 31, 2016.

16

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

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 September 30, 2017 and at December 31, 2016:

 

 

 

The Company’s investment portfolio had 33 investment securities at September 30, 2017 and 52 investment securities at December 31, 2016. Management believes that the unrealized losses on 14 of its investment securities at September 30, 2017, and 25 of its investment securities at December 31, 2016 are not other than temporary because the unrealized losses in those securities relate to market interest rate changes and the Company has the ability to hold, and does not have the intent to sell, these securities and it is not more likely than not that the Company will be required to sell these securities, before recovery of the cost basis. In addition, management also considers the issuers of the securities to be financially sound and believes the Company will receive all contractual principal and interest payments related to these investments.

17

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

The following is a summary of maturities of securities at September 30, 2017 and December 31, 2016. Amounts are shown by contractual maturity. Because borrowers for mortgage-backed securities have the right to prepay obligations with or without prepayment penalties, these securities are not included within the maturity summary.

 

 

There were no securities pledged at September 30, 2017 and December 31, 2016.

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

Loans at September 30, 2017 and December 31, 2016 are summarized as follows:

 

 

Lending activities are conducted principally in New York City, primarily granting loans secured by real estate to individuals and businesses.  There are established credit policies applicable to each type of lending activity. The creditworthiness of each customer is evaluated and, in most cases, credit is extended up to 75% of the market value of the collateral at the date of the credit extension, depending on the borrowers' creditworthiness and the type of collateral. The market value of collateral is monitored on an ongoing basis and additional collateral is obtained when warranted. Real estate is the primary form of collateral. Other important forms of collateral are time deposits and marketable securities. Although collateral provides assurance as a tertiary source of repayment, loan terms ordinarily require the primary source of repayment to be based on the borrowers' ability to generate continuing cash flows and the secondary form repayment to be guarantors’ guarantees.

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 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 internally assigned risk ratings:

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

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 September 30, 2017 and December 31, 2016:

 

 

 

20

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

An aging analysis of loans, as of September 30, 2017 and December 31, 2016, is as follows:

 

 

 

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

The following schedules detail the composition of the allowance for loan losses and the related recorded investment in loans as of September 30, 2017, 2016 and December 31, 2016:

 

 

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

 

 

23

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

 

 

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 TDR’s, are identified by applying normal loan review procedures in accordance with the Allowance for Loan Loss methodology. Management periodically assesses loans to determine whether impairment exists. Any loan that is, or will potentially be, no longer performing in accordance with the terms of the original loan contract is evaluated to determine impairment.

The following information relates to impaired loans as of and for the nine months ended September 30, 2017 and as of and for the year ended December 31, 2016:

 

24

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

 

 

The loan portfolio also includes certain loans that have been modified in a TDR. Under applicable standards, TDRs occur 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 in a TDR, management evaluates for any possible impairment using either the discounted cash flows method, where the value of the modified loan is based on the present value of expected cash flows, discounted at the contractual interest rate of the original loan agreement, or by using the fair value of the collateral less selling costs if repayment under the modified terms becomes doubtful. If management determines that the value of the modified loan in a TDR 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.

As of and for the nine months ended September 30, 2017, there was one loan that was restructured as a TDR. As of and for the year ended December 31, 2016, there were no loans restructured as TDRs.  For the nine months ended September 30, 2017 and year ended December 31, 2016, there were no outstanding TDR loans that had a payment default within 12 months following its modification.

 

 

25

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

At September 30, 2017, there were 49 troubled debt restructured loans, included in impaired loans, of $18,344.  At December 31, 2016, there were 58 troubled debt restructured loans, included in impaired loans, of $21,021. 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 $937 and $1,373 at September 30, 2017 and December 31, 2016, respectively.

A summary of premises and equipment at September 30, 2017 and December 31, 2016 is as follows:

 

 

Depreciation and amortization expense amounted to $402 and $411 for the three months ended September 30, 2017 and 2016, respectively, and $1,205 and $1,251 for the nine months ended September 30, 2017 and 2016, respectively, and are included in occupancy expense.

26

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

 

Deposits at September 30, 2017 and December 31, 2016 are summarized as follows:

 

 

At September 30, 2017 and December 31, 2016, scheduled maturities of certificates of deposit were as follows:

 

 

 

Overdrawn deposit accounts that have been reclassified to loans amounted to $137 and $149 as of September 30, 2017 and December 31, 2016, respectively.

FHLB Advances: The Bank is a member of the Federal Home Loan Bank of New York. At September 30, 2017, the Bank had the ability to borrow from the FHLB based on a certain percentage of the value of the Bank's qualified collateral, as defined in the FHLB Statement of Credit Policy, at the time of the borrowing. In accordance with an agreement with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances.

The Bank had $15,000 and $3,000 of outstanding advances from the FHLB on term basis and an overnight line of credit basis at September 30, 2017 and December 31, 2016, respectively.  The Bank also had a guarantee from the FHLB through a standby letter of credit of $7,887 and $3,583 at September 30, 2017 and December 31, 2016, respectively.  Additionally, the Bank had an unsecured fed funds line in the amount of $22,000 with a correspondent bank at September 30, 2017.

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

Borrowed funds at September 30, 2017 and December 31, 2016 consist of FHLB advances and are summarized by maturity and call date below:

 

 

Interest expense on FHLB advances totaled $66 and $1 for the three months ended September 30, 2017 and 2016, respectively. Interest expense on FHLB advances totaled $126 and $7 for the nine months ended September 30, 2017 and 2016, respectively.

As of September 30, 2017 and December 31, 2016, the Bank has eligible collateral of approximately $190,546 and $164,843 in mortgage loans available to secure advances from the FHLB.

Securities Sold under Agreement to Repurchase: At September 30, 2017 and December 31, 2016, the Bank had the ability to borrow up to $25,000 under repurchase agreements with three brokers. The Bank had no securities sold under repurchase agreements with brokers as of September 30, 2017 and December 31, 2016. Interest expense on securities sold under repurchase agreements totaled $0 and $0 for the three months and nine months ended September 30, 2017 and 2016, respectively.    

The provision (benefit) for income taxes for the three months and nine months ended September 30, 2017 and 2016 consists of the following:

 

 

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

For the three and nine months ended September 30, 2017, there was a benefit of $1,643 and $657, respectively, due to the $2,479 tax benefit for the Foundation expense.

 

Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% for the three months and nine months ended September 30, 2017 and 2016 to income before income taxes as a result of the following:

 

 

Management maintains a valuation allowance against its net New York State and New York City deferred tax assets as it is more likely than not that these deferred tax assets will impact the tax liability in future years.The change in the valuation allowance amounted to $579 and $460 during the three months ended September 30, 2017 and 2016, respectively, and $830 and $907 during the nine months ended September 30, 2017 and 2016, respectively.

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.

At September 30, 2017 and December 31, 2016, there are no unrecognized tax benefits recorded.  It is not expected the total amount of unrecognized tax benefits will significantly increase in the next twelve months. Interest and penalties are recognized on unrecognized tax benefits as a component of income tax expense.

The Company is subject to U.S. federal income tax, New York State income tax, New Jersey income tax, and New York City income tax.  The Company is no longer subject to examination by taxing authorities for years before 2013.

29

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2017 and December 31, 2016 are presented below:

 

 

Defined Benefit Plan:

Effective January 1, 2007, the noncontributory defined benefit pension plan (the “Old Pension Plan”) was replaced with a qualified defined contribution plan (the “401(k) Plan”) as noted in more detail below. The Old Pension Plan covered substantially all employees. Employees were eligible to participate after one year of service. Normal retirement age was 65, with an early retirement provided for at age 55. The Old Pension Plan was effectively frozen on May 31, 2007 (the curtailment date) and this resulted in an actuarial reassessment of the Old Pension Plan’s future estimated obligations. All participants that are presently vested with the Old Pension Plan will remain in the Old Pension Plan and will receive the full accrued benefit, as defined, upon retirement, in accordance with the plan document.

30

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

In May of 2015, the Old Pension Plan was amended to provide an early retirement window from February 19, 2015 to July 1, 2015, for individuals who met certain criteria with regards to age and years of service.  Participants who met the criteria were essentially able to receive their expected retirement benefits three years earlier if they chose to exercise the early retirement option.  The amendment also gave participants the option of receiving their vested pension benefits via a lump sum payment upon retirement.  

The following table sets forth the Old Pension Plan’s funded status and amounts recognized in the consolidated statements of financial condition as of September 30, 2017 and December 31, 2016 using a measurement date as of September 30, 2017 and December 31, 2016, respectively:

 

 

Amounts recognized in accumulated other comprehensive loss, which will be amortized into net periodic benefit cost over the coming years, consisted of the following components at September 30, 2017 and September 30, 2016:

 

 

The components of net periodic benefit cost are as follows for the nine months ended September 30, 2017 and 2016:

 

 

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

Weighted-average assumptions used to determine the net benefit obligations consisted of the following as of September 30, 2017 and December 31, 2016:

 

 

Weighted-average assumptions used to determine the net benefit cost consisted of the following for the nine months ended September 30, 2017 and for the year ended December 31, 2016:

 

 

The expected rate of return on plan assets is estimated based on the plan’s historical performance of return on assets.

The investment policy for plan assets is to manage the portfolio to preserve principal and liquidity while maximizing the return on the plan’s investment portfolio through the full investment of available funds. Plan assets are currently maintained in a guaranteed deposit account with Prudential Retirement Insurance and Annuity Company, earning interest at rates that are determined at the beginning of each year.

Pension assets consist solely of funds on deposit in a guaranteed deposit account. The fair value of the pension plan assets at September 30, 2017 and December 31, 2016 was $14,814 and $15,296, respectively.

The guaranteed deposit account is valued at fair value by discounting the related cash flows based on current yields of similar instruments with comparable durations considering the creditworthiness of the issuer. Such fair value measurement is considered a Level 3 measurement.

Employer contributions and benefit payments for the nine months ended September 30, 2017 and for the year ended December 31, 2016 are as follows:

 

 

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

Employee benefit payments expected to be paid in the future are as follows:

 

 

 

401(k) Plan: Following is a summary of the provisions of the 401(k) Plan:

On January 1, 2007, a qualified defined contribution retirement plan under Section 401(k) of the Internal Revenue Code was adopted. The 401(k) Plan also qualifies under the Internal Revenue Service safe harbor provisions, as defined. Employees are eligible to participate in the 401(k) Plan after completing one year of service. The 401(k) Plan provides for elective employee/participant deferrals of income. Discretionary matching, profit-sharing, and safe harbor contributions, not to exceed 4% of employee compensation and profit-sharing contributions may be provided. No such contributions were made for the nine months ended September 30, 2017. Contributions were approximately $339 for the year ended December 31, 2016.

Employee Stock Ownership Plan:

In connection with the reorganization, the Bank established an Employee Stock Ownership Plan (ESOP) for the exclusive benefit of eligible employees.  The ESOP borrowed $7,238 from the Company sufficient to purchase 723,751 shares (approximately 3.92% of the common stock sold in the stock offering).  The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Bank and dividends received by the ESOP. Contributions will be applied to repay interest on the loan first, and then the remainder will be applied to principal.  The loan is expected to be repaid over a period of 15 years.  Shares purchased with the loan proceeds are held by the trustee in a suspense account for allocation among participants as the loan is repaid.  Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation of all active participants, subject to applicable regulations.       

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

Contributions to the ESOP are to be sufficient to pay principal and interest currently due under the loan agreement.  As shares are committed to be released from collateral, compensation expense equal to the average market price of the shares for the respective period are recognized, and the shares become outstanding for earnings per share computations.  

 

 

Financial Instruments With Off-Balance-Sheet Risk: In the normal course of business, financial instruments with off-balance-sheet risk may be used to meet the financing needs of customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized on the consolidated statements of financial condition. The contractual amounts of these instruments reflect the extent of involvement in particular classes of financial instruments.

The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless. The same credit policies are used in making commitments and contractual obligations as for on-balance-sheet instruments. Financial instruments whose contractual amounts represent credit risk at September 30, 2017 and December 31, 2016 are as follows:

 

 

Commitments to Grant Mortgage Loans: Commitments to grant mortgage loans are agreements to lend to a customer as long as all terms and conditions are met as established in the contract. Commitments generally have fixed expiration dates or other termination clauses, and may require payment of a fee by the borrower. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. Material losses are not anticipated as a result of these transactions.

Unfunded Commitments Under Lines of Credit: Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extension of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and, ultimately, may not be drawn upon to the total extent to which the Company is committed.

Standby Letters of Credit: Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances deem necessary.

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

Concentration by Geographic Location: Loans, commitments to extend credit and standby letters of credit have been granted to customers who are located primarily in New York City. Generally, such loans most often are secured by one-to-four family residences. The loans are expected to be repaid from the borrowers' cash flows.

Lease Commitments: At September 30, 2017, there are noncancelable operating leases for office space that expire on various dates through 2031. One such lease contains an escalation clause providing for increased rental based primarily on increases in real estate taxes. Net rental expenses under operating leases, included in occupancy expense, totaled $348 and $330 for the three months ended September 30, 2017 and 2016, respectively.  Net rental expenses under operating leases, included in occupancy expense, totaled $1,057 and $1,001 for the nine months ended September 30, 2017 and 2016, respectively.

The projected minimum rental payments under the terms of the leases at September 30, 2017 and December 31, 2016 are as follows:

 

 

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.

Regulatory Agreement: In July 2013, Ponce De Leon Federal Bank entered into a formal written agreement (the “Supervisory Agreement”) with the OCC which required Ponce De Leon Federal Bank to take certain actions related to its management and operations, including internal controls. Ponce De Leon Federal Bank achieved full compliance with all articles of the formal written agreement.  As a result, the OCC terminated its enforcement action with Ponce De Leon Federal Bank as of May 25, 2016.

Note 11.Fair Value

 

The following fair value hierarchy is used based on the lowest level of input significant to the fair value measurement. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate fair value:

 

Cash and Cash Equivalents, Accrued Interest Receivable, Advance Payments by Borrowers for Taxes and Insurance, Short-Term Borrowings Under Repurchase Agreements 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.

 

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

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 year.

 

FHLB Stock: The carrying value of FHLB stock approximates fair value since the Bank can redeem such stock with FHLB at carrying amount.

 

Loans: For variable rate loans, which reprice frequently and have no significant change in credit risk, carrying values are a reasonable estimate of fair values, adjusted for credit losses inherent in the portfolios. The fair value of fixed rate loans is estimated by discounting the future cash flows using estimated market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, adjusted for credit losses inherent in the portfolios. Impaired loans are valued using a present value discounted cash flow method, or the fair value of the collateral. Loans are not recorded at fair value on a recurring basis.

 

Loans Held for Sale:  Loans held for sale are carried at the lower of cost or fair value.  The fair value of loans held for sale is determined from actual bids from bona fide investors.  These assets are classified as Level 2.  

 

Other Real Estate Owned: Other real estate owned represents real estate acquired through foreclosure, and is recorded at fair value less estimated disposal costs on a nonrecurring basis. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the asset is classified as Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the asset is classified  as Level 3.

 

Deposits: The fair values of demand deposits, savings, NOW 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.

 

Advances From the Federal Home Loan Bank: The fair value of the advances is estimated using a discounted cash flow calculation that applies current market-based FHLB interest rates for advances of similar maturity to a schedule of maturities of such advances. These borrowings are not recorded at fair value on a recurring basis.

 

Off-Balance-Sheet Instruments: Fair values for off-balance-sheet instruments (lending commitments and standby letters of credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. Off-balance-sheet instruments are not recorded at fair value on a recurring basis.

 

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

The following tables detail the assets that are carried at fair value and measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, and indicate the level within the fair value hierarchy utilized to determine the fair value:

 

 

 

The following tables detail the assets carried at fair value and measured at fair value on a nonrecurring basis as of September 30, 2017 and December 31, 2016 and indicate the fair value hierarchy utilized to determine the fair value:

 

 

 

Losses on assets carried at fair value on a nonrecurring basis were de minimis for the three months and nine months ended September 30, 2017 and 2016, respectively.

 

The fair value information about financial instruments are disclosed, whether or not recognized in the consolidated statements of financial condition, for which it is practicable to estimate that value. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The estimated fair value amounts for 2017 and 2016 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.

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

 

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.

As of September 30, 2017 and December 31, 2016, the book balances and estimated fair values of the Company's financial instruments were as follows:

 

 

Off-Balance-Sheet Instruments: Loan commitments on which the committed interest rate is less than the current market rate are insignificant at September 30, 2017 and December 31, 2016.

 

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

Pension Plan Asset: The pension plan asset included above represents the guaranteed deposit account on the Old Pension Plan. The guaranteed deposit account is valued at fair value by discounting the related cash flows based on current yields of similar instruments with comparable durations considering the creditworthiness of the issuer. Such fair value measurement is considered a Level 3 measurement.

The Company and the Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board and the OCC, respectively. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s operations and 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). Management believes that, as of September 30, 2017 and December 31, 2016, all applicable capital adequacy requirements have been met.

The below minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions including dividend payments and certain discretionary bonus payments to executive officers.  The capital conservation buffer is being phased in from 0% for 2015 to 2.5% by 2019.  The applicable capital buffer was 13.4% at September 30, 2017 and 11.2% at December 31, 2016.

The most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There were no conditions or events since then that management believes have changed the Bank's category.

The Company's and the Bank’s actual capital amounts and ratios as of September 30, 2017 and December 31, 2016 as compared to regulatory requirements are as follows:

 

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PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2017 (Unaudited) and December 31, 2016, and Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited), and Year Ended December 31, 2016

(Dollars in thousands, unless otherwise stated)

 

 

 

 

The components of accumulated other comprehensive income (loss) are as follows:

 

 

 

Note 14.Transactions With Related Parties

Directors and officers of the Company have been customers of and have had transactions with the Bank, and it is expected that such persons will continue to have such transactions in the future. Aggregate loan transactions with related parties for the three months ended September 30, 2017 and 2016 and for the nine months ended September 30, 2017 and 2016 were as follows:

 

 

The Company held deposits in the amount of $5,632 and $6,856  from officers and directors at September 30, 2017 and December 31, 2016, respectively.

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

Management’s discussion and analysis of financial condition and results of operations at September 30, 2017 and December 31, 2016, and for the three and nine months ended September 30, 2017 and 2016 is intended to assist in understanding the financial condition and results of operations of the Company.  The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto appearing in Part I, Item 1, of this quarterly report on Form 10Q.

Cautionary Note Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "assume," "plan," "seek," "expect," "will," "may," "should," "indicate," "would," "believe," "contemplate," "continue," "target" and words of similar meaning. These forward-looking statements include, but are not limited to:

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

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Additional factors that may affect our results are discussed in the Prospectus under the heading “Risk Factors” filed with the SEC pursuant to Rule 424(b)(3) on August 10, 2017. As of September 30, 2017, the risk factors of the Company have not changed materially from those disclosed in the Prospectus.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Summary of Significant Accounting Policies

The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an "emerging growth company" we intend to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

The following represent our significant accounting policies:

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 typically after 90 days of non-payment. The accrual of interest on mortgage and business loans is generally discontinued at the time the loan becomes 90 days past due unless the loan is well-secured and in process of collection. Consumer loans are typically charged-off no later than 120 days past due.  Past-due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged-off if collection of principal or interest is considered doubtful.  All nonaccrual loans are considered impaired loans.  

All interest accrued but not received for loans placed on nonaccrual are reversed against interest income.  Interest received on such loans is accounted for on the cash-basis or recorded against principal balances only, until qualifying for return to accrual.  Cash-basis interest recognition is only applied on nonaccrual loans with a sufficient collateral margin to ensure no doubt with respect to the collectability of principal.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and remain current for a period of time (typically six months) and future payments are reasonably assured.

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Allowance for Loan Losses.  The allowance for loan losses is a valuation allowance for probable incurred credit losses.  Loan losses are charged against the allowance when management believes the uncollectability of a loan balance, or portion thereof, is confirmed.  Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.  Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

The allowance consists of specific and general components.  The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that we 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 (“TDR”) 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 TDR’s 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 in a TDR, 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.

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. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors.  As of September 30, 2017, the historical loss experience is determined by portfolio segment and is based on the actual losses experienced over a rolling 12 quarter average.  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.  

Management believes that the allowance for loan losses is appropriate at September 30, 2017.  The allowance for loan losses is reviewed by the board of directors on a quarterly basis in compliance with regulatory requirements. In addition, various regulatory agencies and audit and accounting firms periodically review the allowance for loan losses. As a result of these reviews, we may be required to make additions to the allowance for loan losses based on their judgments of collectability based on information available to them at the time of their review.  

Refer to Note 1 to the Financial Statements for management’s assessment of recently issued accounting pronouncements.

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 taxes. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

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Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer.  Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the consolidated statement of income 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.

Income Taxes. Income taxes are recognized 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.

At September 30, 2017 and December 31, 2016, there were no liabilities recorded related to uncertain tax positions. Income tax filings for tax years prior to 2013 are no longer subject to examinations by U.S. federal, state or local tax authorities for years before 2013.

Interest and penalties associated with unrecognized tax benefits, if any, would be classified as additional provision for income taxes in the consolidated statements of income.

Comparison of Financial Condition at September 30, 2017 and December 31, 2016

Total Assets. Total assets were $892.3 million at September 30, 2017, an increase of $147.3 million, or 19.8%, when compared to $745.0 million at December 31, 2016 as we continued our commercial loan growth strategy combined with an increase in cash and cash equivalents as a result of the capital raise offset by a decrease in the securities investment portfolio.

Cash and Cash Equivalents. Cash and cash equivalents increased $44.6 million, or 380.9%, to $56.3 million at September 30, 2017, when compared to $11.7 million at December 31, 2016. The increase in cash and cash equivalents was primarily driven by the proceeds received net of expenses from the stock offering.

 

Net Loans Receivable. Net loans receivable increased $125.6 million, or 19.6%, to $767.7 million at September 30, 2017 from $642.1 million at December 31, 2016. During the nine months ended September 30, 2017, we originated $255.3 million of loans, $96.6 million of which were one-to-four family residential loans, $102.7 million were non-residential loans, of which $43.7 million were multi-family loans, $52.2 million were land and construction loans of which $40.4 million were advances, $3.3 million were business loans and the remaining $519,000 were consumer loans. Principal repayments and other credits to net loans receivable for the nine months ended September 30, 2017 were $130.1 million.

 

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One-to-four family investor-owned residential real estate loans increased $51.9 million, or 22.8%, to $279.3 million at September 30, 2017 from $227.4 million at December 31, 2016; one-to-four family owner-occupied residential real estate loans increased $2.1 million or 2.2%, to $99.7 million at September 30, 2017 from $97.6 million at December 31, 2016; multi-family loans increased $19.0 million, or 12.0%, to $177.2 million at September 30, 2017 from $158.2 million at December 31, 2016; nonresidential mortgages increased $31.2 million, or 25.7%, to $152.7 million at September 30, 2017 from $121.5 million at December 31, 2016; construction and land loans increased $22.2 million, or 73.3%, to $52.5 million at September 30, 2017 from $30.3 million at December 31, 2016. Business and consumer loans remained relatively unchanged.

 

Loans Held for Sale.  There were no loans classified as loans held for sale as of September 30, 2017, compared to $2.1 million at December 31, 2016.  There were three loans classified as held-for-sale which were fully reinstated in terms of payment and transferred back to the loan portfolio. Out of the three loans classified as held for sale, two were brought current.    

 

Available-for-sale securities. Available-for-sale securities, consisting primarily of U.S. Government agency sponsored securities, as well as mortgage-backed securities decreased $23.4 million, or 44.4% to $29.3 million at September 30, 2017 from $52.7 million at December 31, 2016. The decrease was primarily driven by $20.4 million of securities sold, with the funds used to fund, in part, the growth in the loan portfolio.

 

Deposits.  Total deposits increased $55.6 million, or 8.6%, to $698.7 million at September 30, 2017 from $643.1 million at December 31, 2016. The increase was primarily due to increases in certificates of deposits of $31.9 million, or 8.6%, to $400.6 million at September 30, 2017 from $368.7 million at December 31, 2016 and demand accounts of $14.3 million, or 18.2%, to $93.1 million at September 30, 2017 from $78.8 million at December 31, 2016. In addition, money market accounts increased $7.7 million, or 18.1%, to $50.5 million at September 30, 2017 from $42.8 million at December 31, 2016. The increase in certificates of deposits was $39.3 million in brokered deposits and $20.2 million in listing service deposits while the increase in demand deposits is mainly due to an increase of $10.7 million in commercial checking accounts, each offset by maturities and draws during the period. Brokered and listing service deposits are alternative funding sources that have previously been available, but have not historically been used as a funding source. Deposits obtained through a listing service are not considered brokered because the listing service does not engage in the business of placing deposits; it simply compiles information about interest rates offered on certificates of deposits by other insured depository institutions, then makes the list available to subscribing financial institutions. The brokered and listing service certificates of deposits provide an alternative funding source to fund loan growth and to lock in interest rates and complementary maturity structures in a rising rate environment.

 

Borrowings. We had outstanding borrowings at September 30, 2017 and December 31, 2016 were $15.0 million and $3.0 million, respectively.  These borrowings are in the form of advances from the Federal Home Loan Bank of New York (FHLBNY).  The $15.0 million outstanding at September 30, 2017 are term borrowings that we entered into during the quarter related to the FHLBNY Community Investment Program (CIP). These advances are priced below regular FHLBNY advance rates and are used to finance the purchase, construction, rehabilitation, refinancing, and/or pre-development of housing that meets FHLBNY criteria.  

 

Stockholders’ Equity. Total stockholders’ equity increased $75.5 million, or 81.2%, to $168.5 million at September 30, 2017 from $93.0 million at December 31, 2016. The increase reflects the reorganization of Ponce De Leon Federal Bank to a mutual holding company and the Company’s related issuance of stock that was completed on September 29, 2017. As part of the reorganization, an ESOP was established; it purchased 3.92% of the total outstanding shares, including shares issued to the MHC and shares contributed to the Foundation. The $7.2 million related to the ESOP is shown as a reduction to stockholders’ equity on the consolidated statements of financial condition.

Comparison of Operating Results for the Three Months Ended September 30, 2017 and September 30, 2016

 

General. Consolidated net loss for the three months ended September 30, 2017 was $3.2 million compared to net income of $282,000 for the three months ended September 30, 2016, a decrease of $3.4 million. The results for the three months ended September 30, 2017 include a one-time, pre-tax contribution of $6.3 million to establish the Foundation. Excluding this non-recurring expense, net income would have been $953,000 for the three months ended September 30, 2017.

 

Interest Income.  Interest and dividend income increased $1.8 million, or 21.4%, to $10.2 million for the three months ended September 30, 2017 compared to $8.4 million for the three months ended September 30, 2016. Interest income on loans increased $1.8 million primarily due to an increase of $148.3 million in the average balance of loans during the third quarter of 2017 compared to the same quarter in 2016. Interest income on investment securities available for sale decreased $123,000 primarily due to a decrease of $35.4 million in the average balance of the investment securities portfolio during the third quarter of 2017 compared to the same quarter in 2016. The decrease is mainly attributed to $20.4 million of securities that were sold of which the proceeds were used to support the funding of growth in the loan portfolio.      

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Interest Expense.  Total interest expense increased $325,000 or 21.8%, to $1.8 million for the three months ended September 30, 2017 from $1.5 million for the three months ended September 30, 2016. Interest expense on certificates of deposits increased $188,000 or 13.6%, to $1.6 million for the three months ended September 30, 2017 from $1.4 million for the three months ended September 30, 2016 mainly due to an increase of $33.0 million in certificates of deposits average balances during the third quarter of 2017 compared to the same quarter in 2016. Interest expense on savings accounts increased $53,000 during the three months ended September 30, 2017, and interest expense on checking and money market accounts increased $18,000 from the comparable quarter in 2016. The increase in interest expense in the deposit portfolio is indicative of a rising rate environment combined with increased competition   for deposits in the markets we serve.

 

Interest expense on FHLB advances increased $66,000 mainly due to the $15.0 million of term advances obtained from the FHLB during the quarter and carried a weighted average yield of 2.01%. These advances provide another cost-effective funding source to support the loan growth.

 

Net Interest Income.  Net interest income increased $1.4 million, or 20.3%, to $8.3 million for the three months ended September 30, 2017 compared to $6.9 million for the three months ended September 30, 2016, primarily as a result of an increase in average loan balances which contributed $1.8 million of additional loan interest income over the comparable period. Interest expense on interest-bearing deposits increased by $259,000 for the three months ended September 30, 2017 as average balances and yields increased across all interest-bearing deposit categories. Average interest-earning assets increased $162.8 million primarily due to a $148.3 million increase in average outstanding loans during the quarter. Interest-bearing liabilities increased $82.5 million primarily due to average balance increases of $33.0 million in certificates of deposits, $24.6 million in interest-bearing demand deposits, and $20.8 million in borrowings. The interest rate spread decreased 15 basis points to 3.58% for the three months ended September 30, 2017 from 3.73% for the comparable quarter in 2016. The net interest margin decreased 8 basis points for the three months ended September 30, 2017 to 3.86% from 3.94% for the comparable quarter in 2016.

 

Provision for Loan Losses.  The provision for loan losses increased $122,000, or 105.2%, to $238,000 for the three months ended September 30, 2017 from $116,000 for the comparable quarter in 2016. The increase in the provision for loan losses was primarily due to loan growth. To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at September 30, 2017. However, future changes in the risk factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses and as a result of such reviews we may determine to adjust our allowance for loan losses. However, regulatory agencies are not directly involved in establishing the allowance for loan losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.

 

Non-interest Income. Non-interest income increased $130,000, or 20.4%, to $768,000 for the three months ended September 30, 2017 from $638,000 for the comparable quarter in 2016. Other noninterest income increased $57,000 to $213,000 for the three months ended September 30, 2017 from $156,000 for the comparable quarter in 2016 mainly due to increases in miscellaneous income of $36,000, debit card commissions of $11,000, and other non-operating income of $6,000. Late and prepayment fees increased $46,000 for the three months ended September 30, 2017 to $157,000 from $111,000 for the comparable quarter in 2016 due to an increase of $27,000 in other charges and fees related to mortgage loans and  an increase of $17,000 in prepayment fees. Brokerage commissions also increased $34,000 to $167,000 for the three months ended September 30, 2017 from $133,000 for the comparable quarter in 2016.

 

 

Non-interest Expenses. Non-interest expense increased $6.8 million or 99.5%, to $13.7 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. The increase is mainly attributable to a one-time, pre-tax contribution of $6.3 million to establish the Foundation. The increase in compensation and benefits expense of $585,000 is mainly

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due to an increase of $243,000 in compensation expense largely as a result of staffing demands and salary adjustments, an increase of $173,000 in social security expense, and an increase of $101,000 in medical and dental expense. Data processing expenses decreased $174,000 or 35.5%, to $316,000 during the quarter ended September 30, 2017 from $490,000 for the quarter ended September 30, 2016, mainly due to cost reductions negotiated with our core processor as part of our new contract. Direct loan expense decreased $25,000, or 11.7%, to $189,000 during the three months ended September 30, 2017 from $214,000 for the three months ended September 30, 2016, mainly attributed to a reduction of required annual appraisals of classified loans and improvement in loan performance.  Insurance and surety bond premiums decreased $53,000, or 54.6%, to $44,000 for the three months ended September 30, 2017 from $97,000 for the three months ended September 30, 2016, mainly due to switching carriers and entering into a three-year agreement instead of a one-year agreement. FDIC deposit insurance premiums increased $20,000, or 19.6%, to $122,000 for the three months ended September 30, 2017 from $102,000 for the three months ended September 30, 2016 mainly due to deposit growth. Other operating expenses increased $230,000 or 35.2%, to $884,000 for the three months ended September 30, 2017 from $654,000 for the three months ended September 30, 2016 mainly due to losses on loans sold of $106,000 and losses on other assets of $76,000.

 

 

Income Tax Provision (Benefit). The results for the three months ended September 30, 2017 include a one-time, pre-tax contribution of $6.3 million to establish the Foundation with a corresponding tax benefit of $2.5 million. As a result, the income tax provision decreased by $1.8 million for the three months ended September 30, 2017 to a benefit of $1.6 million from an expense of $239,000 for the three months ended September 30, 2016.  The effective income tax rate was 33.9% and 45.9% for the three months ended September 30, 2017 and 2016, respectively.

Comparison of Operating Results for the Nine Months Ended September 30, 2017 and September 30, 2016

 

General.  Consolidated net loss for the nine months ended September 30, 2017 was $1.5 million compared to net income of $1.2 million for the nine months ended September 30, 2016, a decrease of $2.7 million. The results for the nine months ended September 30, 2017 include a one-time, pre-tax contribution of $6.3 million to establish the Foundation. Excluding this non-recurring expense, net income would have been $2.8 million for the nine months ended September 30, 2017.

 

Interest Income.  Interest and dividend income increased $3.5 million, or 13.9%, to $28.7 million for the nine months ended September 30, 2017 compared to $25.2 million for the nine months ended September 30, 2016. The increase was primarily due to interest income on loans which increased $3.8 million primarily due to an increase of $114.0 million in the average balance of loans during the nine months ended September 30, 2017 compared to the same period in 2016. Interest income on investment securities available for sale decreased $444,000 primarily due to a decrease of $36.2 million in the average balance of the investment securities portfolio during nine months ended September 30, 2017 compared to the same period in 2016. The decrease is mainly attributed to $20.4 million of securities that were sold in 2017 of which the proceeds were used to support the funding of growth in the loan portfolio.      

 

Interest Expense.  Total interest expense increased $520,000 or 11.8%, to $4.9 million for the nine months ended September 30, 2017 from $4.4 million for the nine months ended September 30, 2016. Interest expense on certificates of deposits increased $201,000 or 4.9%, to $4.3 million for the nine months ended September 30, 2017 from $4.1 million for the nine months ended September 30, 2016 mainly due to an increase of $10.9 million in certificates of deposits average balances during the nine months ended September 30, 2017 compared to the same quarter in 2016. Interest expense on savings accounts increased $162,000 or 76.1% during the nine months ended September 30, 2017, and interest expense on checking and money market accounts increased $37,000 or 52.1% from the comparable period in 2016 mainly due to higher costs for these deposits. The increase in interest expense in the deposit portfolio is indicative of a rising rate environment combined with increased competition for deposits in the markets we serve.

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Interest expense on FHLB advances increased $119,000 mainly due to the $15.0 million of term advances obtained from the FHLB during the period and carried a weighted average yield of 2.01%. These advances provide another cost-effective funding source to support the loan growth.

 

Net Interest Income. Net interest income increased $2.9 million, or 14.1%, to $23.7 million for the nine months ended September 30, 2017 compared to $20.8 million for the nine months ended September 30, 2016, primarily as a result of an increase in average loan balances which contributed $3.7 million of additional loan interest income over the comparable periods. Interest expense on interest-bearing deposits increased by $400,000 for the nine months ended September 30, 2017 as average balances and yields increased across all interest-bearing deposit categories. The increase in average balances contributed $162,000 of additional interest expense and the increase in yields contributed $238,000. Average interest-earning assets increased $92.1 million primarily due to a $114.0 million increase in average outstanding loans during the comparable periods. The interest rate spread decreased 1 basis point to 3.83% for the nine months ended September 30, 2017 from 3.84% for the comparable period in 2016. The net interest margin increased 3 basis points for the nine months ended September 30, 2017 to 4.07% from 4.04% for the comparable quarter in 2016.

 

Provision for Loan Losses. The provision for loan losses increased $693,000 to $497,000 for the nine months ended September 30, 2017 from a recovery of $196,000 for the same nine month period in 2016.

 

Non-Interest Income. Non-interest income increased $567,000, or 30.7%, to $2.4 million for the nine months ended September 30, 2017 from $1.8 million for the comparable period in 2016. Late and prepayment fees increased $346,000 to $603,000 for the nine months ended September 30, 2017 from $257,000 for the comparable period in 2016 mainly due to increases of $173,000 in prepayment fees, $100,000 in other charges and fees related to mortgage loans. Brokerage commissions increased $71,000 to $453,000 for the nine months ended September 30, 2017 from $382,000 for the comparable period in 2016 mainly due to increased brokerage activity. Other noninterest income increased $170,000 to $676,000 for the nine months ended September 30, 2017 from $506,000 for the comparable period in 2016 mainly due to increases in letter of credit fees of $81,000, miscellaneous operating income of $33,000, and debit card commissions of $54,000.

 

Non-Interest Expense. Non-interest expense increased $7.0 million or 33.8%, to $27.8 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increase is mainly attributable to a one-time, pre-tax contribution of $6.3 million to establish the Foundation. The increase in compensation and benefits expense of $1.0 million is mainly due to an increase of $776,000 in compensation expense mainly as a result of staffing demands and salary adjustments, an increase of $235,000 in social security expense, and an increase of $70,000 in medical and dental expense. Direct loan expense decreased $120,000, or 17.7%, to $558,000 during the nine months ended September 30, 2017 from $678,000 for the nine months ended September 30, 2016, mainly due improvement in loan performance, reducing the amount of annual appraisals.  FDIC deposit insurance premiums decreased $300,000 mainly as a result of a change to the Bank’s assessment rate due to the improvement of the FDIC’s Deposit Insurance Fund Reserve Ratio. Insurance and surety bond premiums decreased $164,000 to $205,000 for the nine months ended September 30, 2017 from $369,000 for the nine months ended September 30, 2016, mainly due to switching carriers and entering into a three-year agreement instead of a one-year agreement. Other operating expenses increased $337,000 or 17.0%, to $2.3 million for the nine months ended September 30, 2017 from $2.0 million for the nine months ended September 30, 2016 mainly due to increases in audit and accounting service fees of $182,000, employment agency fees of $63,000, OCC general assessment fees of $53,000, and $31,000 in pension plan administration fees.

 

Income Tax Provision (Benefit). The results for the nine months ended September 30, 2017 include a one-time, pre-tax contribution of $6.3 million to establish the Foundation with a corresponding tax benefit of $2.5 million. As a result, the income tax provision decreased by $1.5 million for the nine months ended September 30, 2017 to a benefit of $657,000 compared with an expense of $846,000 for the nine months ended September 30, 2016.  The effective income tax rate was 30.1% and 41.6% for the nine months ended September 30, 2017 and 2016.

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Average Balance Sheets

The following tables set forth average balance sheets, average yields and costs, and certain other information at the dates and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are monthly average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Loan balances exclude loans held for sale.

 

 

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Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our 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.

 

 

Management of Market Risk

General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our 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 our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Management Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. We currently utilize a third-party modeling solution that is prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.

We do 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.

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Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 100 basis point increments, with changes in interest rates representing immediate and permanent shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the "Change in Interest Rates" column below.

The table below sets forth, as of September 30, 2017, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.

 

 

The table above indicates that at September 30, 2017, in the event of an instantaneous 200 basis point increase in interest rates, we would experience a 0.57% decrease in net interest income, and in the event of an instantaneous 100 basis point decrease in interest rates, we would experience a 2.03% decrease in net interest income.

Net Present Value. We also compute amounts by which the net present value of our assets and liabilities ("NPV") would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 100 basis point increments, with changes in interest rates representing immediate and permanent shifts in the yield curve.

The table below sets forth, as of September 30, 2017, the calculation of the estimated changes in our NPV that would result from the designated immediate changes in the United States Treasury yield curve.

 

 

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The table above indicates that at September 30, 2017, in the event of an instantaneous 200 basis point increase in interest rates, we would experience a 7.68% decrease in net economic value, and in the event of an instantaneous 100 basis point decrease in interest rates, we would experience a 2.34% increase in net economic value.

GAP Analysis. In addition, we analyze our interest rate sensitivity by monitoring our interest rate sensitivity "gap." Our interest rate sensitivity gap is the difference between the amount of our interest-earning assets maturing or repricing within a specific time period and the amount of our interest bearing-liabilities maturing or repricing within that same time period.  A gap is considered positive when the amount of interest rate sensitive assets maturing or repricing during a period exceeds the amount of interest rate sensitive liabilities maturing or repricing during the same period, and a gap is considered negative when the amount of interest rate sensitive liabilities maturing or repricing during a period exceeds the amount of interest rate sensitive assets maturing or repricing during the same period.

The following table sets forth our interest-earning assets and our interest-bearing liabilities at September 30, 2017, 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 September 30, 2017, 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.

 

 

At September 30, 2017, our asset/liability gap from zero days to one year was ($130.1) million, resulting in a gap/assets ratio of 65.14%.

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The following table sets forth our interest-earning assets and our interest-bearing liabilities at December 31, 2016, 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, 2016, 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.

 

 

At December 31, 2016, our asset/liability gap from zero days to one year was ($187.8 million), resulting in a gap/assets ratio of 48.84%.

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 net economic value tables presented assume that the composition of our 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 NPV tables provide an indication of our 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 NPV 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 our loans, deposits and borrowings.

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Liquidity and Capital Resources

Liquidity describes our 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 our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities and proceeds from the sale of loans. We also have the ability to borrow from the Federal Home Loan Bank of New York. At September 30, 2017 and December 31, 2016, we had $15.0 million and $3.0 million, respectively, of term and overnight outstanding advances from the Federal Home Loan Bank of New York, and also had a guarantee from the Federal Home Loan Bank of New York through a standby letter of credit of $7.9 million.  At September 30, 2017, we had eligible collateral of approximately $190.5 million in mortgage loans available to secure advances from the Federal Home Loan Bank of New York.  We also have an unsecured line of credit of $22.0 million with one of our correspondent banks.  We did not have any securities sold under repurchase agreements with brokers as of September 30, 2017 and December 31, 2016.

Although maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and interest-bearing deposits in banks. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Net cash provided by operating activities was $6.0 million and $3.3 million for the nine months ended September 30, 2017 and 2016, respectively. Net cash (used in) investing activities, which consists primarily of disbursements for loan originations and the purchases of securities, offset by principal collections on loans, proceeds from maturing securities and pay downs on mortgage-backed securities, was $(102.0) million and $(25.7) million for the nine months ended September 30, 2017 and 2016, respectively. Net cash provided by financing activities, consisting of activities in deposit accounts and proceeds from the stock offering, was $140.6 million and $30.1 million for the nine months ended September 30, 2017 and 2016, respectively.

We are committed to maintaining an adequate liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.

At September 30, 2017 and December 31, 2016, we exceeded all of our regulatory capital requirements, and we were categorized as well capitalized at September 30, 2017 and December 31, 2016. Management is not aware of any conditions or events since the most recent notification that would change our category. See "Historical and Pro Forma Regulatory Capital Compliance."

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our 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 we make. At September 30, 2017 and December 31, 2016, we had outstanding commitments to originate loans of $89.7 million and $63.7 million, respectively. We anticipate that we will have sufficient funds available to meet our current lending commitments. Certificates of deposit that are scheduled to mature in less than one year from September 30, 2017 totaled $155.1 million and from December 31, 2016 totaled $168.9 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank 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 our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The information required by this item is included in Part I, Item 2 of this report under “Management of Market Risk”.

Item 4. Controls and Procedures.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2017.  Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2017, there have been no changes in the Company’s internal control over financial reporting.  The Company did migrate to a new general ledger reporting system during the quarter ended September 30, 2017.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are not involved in any pending legal proceedings as a plaintiff or a defendant other than routine legal proceeding occurring in the ordinary course of business.  At September 30, 2017, we were not involved in any legal proceedings the outcome of which we be believe would be material to our financial condition or results of operations.

Item 1A. Risk Factors.

In addition to the other information set forth in this quarterly report, you should carefully consider the factors discussed under the heading “Risk Factors” contained in the Prospectus.  The Company’s evaluation of the risk factors applicable to it has not changed materially from those disclosed in the Prospectus.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

None

Item 5. Other Information.

None.

Item 6. Exhibits

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

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Exhibit 31.1

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

I, Carlos P. Naudon, certify that:

 

 

 

 

Exhibit 31.2

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

I, Frank Perez, certify that:

 

 

 

 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of PDL Community Bancorp (the “Company”) on Form 10-Q for the period ending September 30, 2017 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:

 

 

 

 

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of PDL Community Bancorp (the “Company”) on Form 10-Q for the period ending September 30, 2017 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: