UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended September 30, 2018

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

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, 2018, the registrant had 18,463,028 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 

---

Table of Contents

 

 

 

 

i

---

 

PART I—FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements.

PDL Community Bancorp and Subsidiaries

 

Consolidated Statements of Financial Condition

September 30, 2018 and December 31, 2017

(Dollars in thousands, except share data)

 

 

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

 

2

---

 

PDL Community Bancorp and Subsidiaries

 

Consolidated Statements of Income (Loss)

Three and Nine Months Ended September 30, 2018 and 2017

(Dollars in thousands, except share data)

 

 

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

 

3

---

 

PDL Community Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Three and Nine Months Ended September 30, 2018 and 2017

(In thousands)

 

 

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

 

4

---

 

PDL Community Bancorp and Subsidiaries

Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2018 and 2017

 

(Dollars in thousands, except share data)

 

 

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

 

5

---

 

PDL Community Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2018 and 2017

(In thousands)

 

 

 

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

 

 

6

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(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 and notes thereto for the year ended December 31, 2017 included in the Company’s annual report on Form 10-K.

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 8,308,362 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 609,279 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 Leon 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 the Bank, a federally chartered stock savings association, owned 100% by PDL Community Bancorp and known as and conducting business under the name “Ponce Bank.” The Bank will continue to be subject to comprehensive regulation and examination by the Office of Comptroller of the Currency (the “OCC”).

The Bank’s business is conducted through the administrative office and 13 branch offices.  The banking offices are located in the Bronx, 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 residential (both investor-owned and owner-occupied), multifamily residential, nonresidential properties and construction and land, and, to a lesser extent, in business and consumer loans. The Bank also invests in securities, which have historically consisted of U.S. government and federal agency securities and securities issued by government-sponsored or owned enterprises, as well as, mortgage-backed securities and Federal Home Loan Bank stock.   The Bank offers a variety of deposit accounts, including demand, savings, money markets and certificates of deposit accounts.

7

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(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 consolidated financial statements at September 30, 2018, and for the three and nine  months ended September 30, 2018 and 2017 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 and nine months ended September 30, 2018, are not necessarily indicative of the results to be achieved for the remainder of the year ending December 31, 2018, 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 that the Bank invests in. Notes 4 and 11 discuss the types of lending that the Bank engages in, and other concentrations.

Cash and Cash Equivalents:  Cash and cash equivalents include cash on hand and amounts due from banks (including items in process of clearing). For purposes of reporting cash flows, the Bank considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash flows from loans originated by the Bank, interest-bearing deposits in financial institutions, and deposits are reported net.

Securities:  Management determines the appropriate classification of securities at the date individual investment securities are acquired, and the appropriateness of such classification is reassessed at each statement of financial condition date.

Debt securities that management has the positive intent and ability to hold to maturity, if any, are classified as "held to maturity" and recorded at amortized cost. Trading securities, if any, are carried at fair value, with unrealized gains and losses recognized in earnings. Securities not classified as held to maturity or trading, are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of tax. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer.  Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the consolidated statement of income (loss) and 2) OTTI related to other factors, which is recognized in other comprehensive income (loss).

The credit loss is defined as the difference between the discounted present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. The sale of a held-to-maturity security within three months of its maturity date or after collection of at least 85% of the principal outstanding at the time the security was acquired is considered a maturity for purposes of classification and disclosure.

8

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

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

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

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

The allowance consists of specific and general components.  The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“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.  

9

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

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

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

Residential and Multifamily Mortgage Loans:  The majority of loans at the Bank 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 issuing letters of credit. These loans are secured by business assets or may be unsecured and repayment is directly dependent on the successful operation of the borrower’s business and the borrower’s ability to convert the assets to operating revenue.  They possess greater risk than most other types of loans because the repayment capacity of the borrower may become inadequate. Business loans generally have terms of five years to seven years or less and interest rates that float in accordance with a designated published index. Substantially all such loans are backed by the personal guarantees of the owners of the business.

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

10

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

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.

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.

 

11

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

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, 2018 and December 31, 2017, there are no liabilities recorded related to uncertain tax positions. Income tax returns filed for years before 2014 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 15 contains details regarding related party transactions.

 

Employee Benefit Plans:  The Company maintains Ponce Bank’s 401(K) Plan, the noncontributory defined benefit plan, as well as, the Supplemental Executive Retirement Plans (the “SERP’s”).  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 equity account at the average fair market value of the shares during the period and the shares become outstanding for earnings per share computations.  Compensation expense is recognized ratably over the service period based upon management’s estimate of the number of shares expected to be allocated by the ESOP.  The difference between the average fair market value and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in-capital. Unallocated common shares held by the Company’s ESOP are shown as a reduction in stockholders’ equity and are excluded from weighted-average common shares outstanding for both basic and diluted earnings per share calculations until they are committed to be released.

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

12

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

Loss Contingencies:  Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.  Management does not believe there are any such matters that will have a material effect on the operations and financial position of the Company.

Fair Value of Financial Instruments:  Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 12.  Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.  Changes in assumptions or in market conditions could significantly affect these estimates.

Segment Reporting:  While management monitors the revenue streams of the various products and services, the identifiable segments and operations are managed and financial performance is evaluated on a Company-wide basis.  Accordingly, all of the financial service operations are considered by management to be aggregate in one reportable operating segment.

Loan Commitments and Related Financial Instruments:   Financial instruments include off‑balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs.  The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay.  Such financial instruments are recorded when they are funded.  

Earnings 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 less unallocated ESOP shares.  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.  

 

Recent Accounting Pronouncements:

 

As an emerging growth company (“EGC”) as defined in Rule 12b-2 of the Exchange Act, the Company has elected to use the extended transition period to delay the adoption of new or reissued accounting pronouncements applicable to public business entities until such pronouncements are made applicable to nonpublic business entities.  As of September 30, 2018, there is no significant difference in the comparability of the consolidated financial statements as a result of this extended transition period.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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, 2017, including interim periods within that reporting period, for public business entities.  As the Company is taking advantage of the extended transition period for complying with new or revised accounting standards assuming it remains an EGC, it will adopt the amendments in this update beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.   The Bank’s primary source of revenue is interest income on financial assets and income from mortgage banking activities, which are explicitly excluded from the scope of the new guidance.  As a result, the adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.  However, the Company will continue to monitor developments and additional guidance up to the effective date of these amendments.

13

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities.” 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 the extended transition period for complying with new or revised accounting standards assuming it remains an EGC, it will adopt the amendments in this update beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. 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 the extended transition period for complying with new or revised accounting standards assuming it remains an EGC, it will adopt the amendments in this update beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

The Company has begun its evaluation of the amended guidance including the potential impact on its consolidated financial statements. To date, the Company has identified its leased office spaces as within the scope of the guidance. The Company currently leases six branches and the new guidance will result in the establishment of a right to use asset and corresponding lease obligations. The Company continues to evaluate the impact of the guidance, including determining whether other contracts exist that are deemed to be in scope and subsequent related accounting standard updates. The Company has established a project committee and has initiated training on ASU 2016-02.

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 statement of cash flows, 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 ASU 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 the extended transition period for complying with new or revised accounting standards assuming it remains an EGC, it will adopt the amendments in this update 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

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(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 the extended transition period for complying with new or revised accounting standards assuming it remains an EGC, it will adopt the amendments in this update beginning after December 15, 2020, including interim periods within fiscal years beginning after December 15, 2021. 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).

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. The Company is evaluating various CECL models and training is being provided. In both cases, the extent of the change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions and forecasts at that time.

In 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 statements 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 the extended transition period for complying with new or revised accounting standards assuming it remains an EGC, it will adopt the amendments in this update 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 March 2017, the FASB issued ASU 2017-07 “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.”  The ASU requires that an employer report the service cost component with other compensation cost arising from services rendered by the pertinent employees during the period.  The amendment also requires the components of net benefit cost to be presented separately in the income statement from the service cost component and not within income from operations.  ASU 2017-07 is effective for interim and annual reporting for public business entities beginning after December 15, 2017. As the Company is taking advantage of the extended transition period for complying with new or revised accounting standards assuming it remains an EGC, it will adopt the amendments in this update beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

15

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

In March 2017, the FASB issued ASU 2017-08 “Receivables – Non-Refundable Fees and Other Costs (Subtopic 310-20):  Premium Amortization on Purchased Callable Debt Securities.”  The ASU requires premiums on callable debt securities to be amortized to the earliest call date.  The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.  ASU 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018 for public business entities.  Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years.  As the Company is taking advantage of the extended transition period for complying with new or revised accounting standards assuming it remains an EGC, it will adopt the amendments in this update beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020.  ASU 2017-08 will not have a material impact on the Company’s consolidated financial position, results of operations or disclosures.

In February 2018, the Financial Accounting Standards Board issued Accounting Standards Update 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This amendment allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017.  This amendment is effective for years beginning after December 15, 2018.  Early adoption is permitted.  The Company has not elected to adopt this standard as of the date of these consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.”  This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements.  Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.  ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted.  The adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements.

The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The Bank had $5,012 in cash to cover its minimum reserve requirement of $4,487 at September 30, 2018, and $24,334  in cash to cover its minimum reserve requirements of $23,870 at December 31, 2017, respectively.

 

The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale securities at September 30, 2018 and December 31, 2017 are summarized as follows:

 

 

16

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

 

 

There were no investments classified as held to maturity as of September 30, 2018 and December 31, 2017. There was $3.7 million of securities sold in the three and nine months ended September 30, 2018. There were no sales in the three months ended September 30, 2017.  There were $20,411 of investment securities sold in the nine months ended September 30, 2017.   

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, 2018 and at December 31, 2017:

 

 

 

The Company’s investment portfolio had 13 investment securities at September 30, 2018 and 33 investment securities at December 31, 2017. At September 30, 2018 and December 31, 2017, the Company had 12 and 14 securities, with a gross unrealized loss position.  Management reviewed the financial condition of the entities underlying the securities at both September 30, 2018 and December 31, 2017 and determined that they are not other than temporary impaired because the unrealized losses in those securities relate to market interest rate changes. The Company has the ability to hold them and does not have the intent to sell these securities, and it is not more likely than not that the Company will be required to sell these securities, before recovery of the cost basis. In addition, management also considers the issuers of the securities to be financially sound and believes the Company will receive all contractual principal and interest related to these investments.

17

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

The following is a summary of maturities of securities at September 30, 2018 and December 31, 2017. 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, 2018 and December 31, 2017.

 

18

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

Loans at September 30, 2018 and December 31, 2017 are summarized as follows:

 

 

The Company’s lending activities are conducted principally in New York City. The Company primarily grants loans secured by real estate to individuals and businesses.  While collateral provides assurance as a secondary source of repayment, the Bank ordinarily requires the primary source of repayment to be based on the borrowers’ ability to generate continuing cash flows. The Company has established credit policies applicable to each type of lending activity, in which it engages. The Company evaluates the creditworthiness of each customer and, in most cases, extends credit 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.

For disclosures related to the allowance for loan losses and credit quality, the Company does not have any disaggregated classes of loans below the segment level.

Credit-Quality Indicators: Internally assigned risk ratings are used as credit-quality indicators, which are reviewed by management on a quarterly basis.

The objectives of the Company’s risk-rating system are to provide the Board of Directors and senior management with an objective assessment of the overall quality of the loan portfolio, to promptly and accurately identify loans with well-defined credit weaknesses so that timely action can be taken to minimize credit loss, to identify relevant trends affecting the collectability of the loan portfolio, to isolate potential problem areas and to provide essential information for determining the adequacy of the allowance for loan losses.

Below are the definitions of the internally assigned risk ratings:

 

19

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(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, 2018 and December 31, 2017:

 

 

 

20

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

 

An aging analysis of loans, as of September 30, 2018 and December 31, 2017, is as follows:

 

 

 

21

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(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, 2018, 2017 and December 31, 2017:

 

 

 

22

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

 

 

 

 

23

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(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.

24

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

The following information relates to impaired loans as of and for the nine months ended September 30, 2018 and 2017  and for the year ended December 31, 2017:

 

 

 

 

25

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(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, 2018, there were no loans restructured as a TDR. As of and for the year ended December 31, 2017, there was one loan restructured as a TDR.

 

 

At September 30, 2018, there were 43 troubled debt restructured loans, included in impaired loans, of $14,624.  At December 31, 2017, there were 49 troubled debt restructured loans, included in impaired loans, of $18,371. 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 $676 and $921 at September 30, 2018 and December 31, 2017, respectively.

 

26

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

A summary of premises and equipment at September 30, 2018 and December 31, 2017 is as follows:

 

 

 

Depreciation and amortization expense amounted to $454 and $402 for the three months ended September 30, 2018 and 2017, respectively, and $1,307 and $1,205, for the nine months ended September 30, 2018 and 2017, respectively, and are included in occupancy expense in the accompanying consolidated statements of income (loss). Leasehold improvements increased by $1,217, to $22,190 at September 30, 2018 mainly due to the investments made in branches and other delivery services. Equipment also increased by $1,815, to $6,690 at September 30, 2018, mainly as result of investments in new ATMs that are being installed in the branches.

 

Deposits at September 30, 2018 and December 31, 2017 are summarized as follows:

 

 

At September 30, 2018 scheduled maturities of certificates of deposit were as follows:

 

 

27

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

 

Overdrawn deposit accounts that have been reclassified to loans amounted to $1,424 and $174 as of September 30, 2018 and December 31, 2017, respectively.

FHLB Advances: The Bank is a member of the Federal Home Loan Bank of New York. At September 30, 2018, 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 $37,775 and $16,400 of outstanding advances from the FHLB on term basis and an overnight line of credit basis at September 30, 2018 and December 31, 2017, respectively.  The Bank also had a guarantee from the FHLB through a standby letter of credit of $7,639 and $6,614 at September 30, 2018 and December 31, 2017, respectively.  Additionally, the Bank had an unsecured fed funds line in the amount of $25,000 and $22,000 with a correspondent bank at September 30, 2018 and December 31, 2017, of which $0 and $20,000 were outstanding as of September 30, 2018 and December 31, 2017, respectively.

Borrowed funds at September 30, 2018 and December 31, 2017 consist of the following and are summarized by maturity and call date below:

 

 

 

Interest expense on advances totaled $276 and $66 for the three months ended September 30, 2018 and 2017, and $578 and $127 for the nine months ended September 30, 2018 and 2017, respectively.   

As of September 30, 2018 and December 31, 2017, the Bank has eligible collateral of approximately $269,175 and $66,254 in residential 1-4 and multifamily mortgage loans available to secure advances from the FHLB.

Securities Sold under Agreement to Repurchase: At September 30, 2018 and December 31, 2017, 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, 2018 and December 31, 2017. Interest expense on securities sold under repurchase agreements totaled $0 and $0 for the three and nine months ended September 30, 2018 and 2017, respectively.    

28

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

 

The provision (benefit) for income taxes for the three and nine months ended September 30, 2018 and 2017 consists of the following:

 

  

 

Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 21% and 34% for the three and nine months ended September 30, 2018 and 2017, respectively, to income before income taxes as a result of the following:

 

 

On December 22, 2017, the U.S. Government signed into law the “Tax Cuts and Jobs Act” (the “Tax Act”) which, beginning in 2018, reduced the Company’s corporate income tax rate from 34% to 21%, but eliminates or increases certain permanent differences.

 

 

Our annualized estimated effective tax rate (AETR) for the three and nine months period ended September 30, 2018 reflects our assumption that pre-tax income for the period is proportional to annual pre-tax income.  Our AETR may change in future periods as we revise our estimate of annual pre-tax income.

29

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

Management maintains a valuation allowance against its net New York State and New York City deferred tax assets when it is more likely than not that these deferred tax assets will not be realized. The valuation allowance increased by $304 and $588 for the three and nine months ended September 30, 2018, 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, 2018 and December 31, 2017, there are no unrecognized tax benefits recorded.  It is not expected that 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 2014.

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2018 and December 31, 2017 are presented below:

 

 

30

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

Defined Benefit Plan:

Effective January 1, 2007, the noncontributory defined benefit pension plan (the “Old Pension Plan”) of the Company 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.

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, 2018 and December 31, 2017 using a measurement date as of September 30, 2018 and December 31, 2017, respectively:

 

 

 

 

31

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

Pretax 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, 2018 and December 31, 2017:

 

 

The components of net periodic benefit cost are as follows for the nine months ended September 30, 2018 and 2017:

 

 

Weighted-average assumptions used to determine the net benefit obligations consisted of the following as of September 30, 2018 and December 31, 2017:

 

 

Weighted-average assumptions used to determine the net benefit cost consisted of the following for nine months ended September 30, 2018  and 2017:

 

 

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.

32

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

Pension assets consist solely of funds on deposit in a guaranteed deposit account. The fair value of the pension plan assets at September 30, 2018 and December 31, 2017 was $14,489 and $14,696, 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, 2018 and 2017 are as follows:

 

 

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

 

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.  Contributions for the three and nine months September 30, 2018 and 2017, if any, were not material to the consolidated financial statements. 

Employee Stock Ownership Plan:

In connection with the reorganization, the Company established an Employee Stock Ownership Plan (ESOP) for the exclusive benefit of eligible employees.  The ESOP borrowed $7,238 from the Company sufficient to purchase 723,751 shares (approximately 3.92% of the common stock issued 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.       

33

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(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.  

 

A summary of the ESOP shares is as follows:

 

 

At September 30, 2018 and December 31, 2017, we had $6,712 outstanding of funds borrowed for the ESOP.  We recognized $201 and $614 in compensation expense for the three and nine months ended September 30, 2018, respectively.  There were no ESOP related compensation expenses for the three and nine months ended September 30, 2017.

 

Supplemental Executive Retirement Plan:  

 

The Company maintains a non-qualified supplemental executive retirement plan (“SERP”) for the benefit of one key executive.   The SERP expense recognized in the books for the three and nine months ended September 30, 2018, were not material to the consolidated financial statements.

 

 

Earnings per share data is not applicable for the period ended September 30, 2017 because the Company had not yet been formed and had no shares outstanding at a Company or Bank level.  

 

The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share:

 

34

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

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, 2018 and December 31, 2017 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.

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, 2018, 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 $351 and $349 for the three months ended September 30, 2018 and 2017, respectively.  Net rental expenses under operating leases, included in occupancy expense, totaled $1,097 and $1,057 for the nine months ended September 30, 2018 and 2017, respectively.     

35

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

The projected minimum rental payments under the terms of the leases at September 30, 2018 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.

 

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

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

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

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

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

 

Cash and Cash Equivalents, Accrued Interest Receivable, Advance Payments by Borrowers for Taxes and Insurance, and Accrued Interest Payable: The carrying amount is a reasonable estimate of fair value. These assets and liabilities were not recorded at fair value on a recurring basis.

 

Available-for-Sale Securities: These financial instruments are recorded at fair value in the consolidated financial statements on a recurring basis. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted prices are not available, then fair values are estimated by using pricing models (e.g., matrix pricing) or quoted prices of securities with similar characteristics and are classified within Level 2 of the valuation hierarchy. Examples of such instruments include government agency bonds and mortgage-backed securities. Level 3 securities are securities for which significant unobservable inputs are utilized. There were no changes in valuation techniques used to measure similar assets during the period.

 

FHLB Stock: The carrying value of FHLB stock approximates fair value since the Bank can redeem such stock with FHLB at cost.  As a member of the FHLB, we are required to purchase this stock, which we carry at cost and classify as restricted equity securities.

 

36

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

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.

 

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, 2018 and December 31, 2017, and indicate the level within the fair value hierarchy utilized to determine the fair value:

 

 

37

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

 

Our assessment and classification of an investment within a level can change over time based upon maturity or liquidity of the investment and would be reflected at the beginning of the quarter in which the change occurred.

 

The following tables detail the assets carried at fair value and measured at fair value on a nonrecurring basis as of September 30, 2018 and December 31, 2017 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 and nine months ended September 30, 2018 and 2017, 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 2018 and 2017 have been measured as of their respective period-ends and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than amounts reported at each period.

 

The information presented should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company's assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other banks may not be meaningful.

38

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

As of September 30, 2018 and December 31, 2017, 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, 2018 and December 31, 2017.

 

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.

39

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

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, 2018 and December 31, 2017, 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 11.6% at September 30, 2018 and 12.7% at December 31, 2017.

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

 

The Company's and the Bank’s actual capital amounts and ratios as of September 30, 2018 and December 31, 2017 as compared to regulatory requirements are as follows:

 

 

40

---

PDL Community Bancorp and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

As of September 30, 2018 (Unaudited) and December 31, 2017, and Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

 

(Dollars in thousands, unless otherwise stated)

 

 

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

 

 

 

 

 

Note 15.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 and nine months ended September 30, 2018 and 2017 were as follows:

 

 

The Company held deposits in the amount of $6,354 and $5,959  from officers and directors at September 30, 2018 and December 31, 2017, respectively.

 

 

41

---

 

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, 2018 and December 31, 2017, and for the three and nine months ended September 30, 2018 and 2017, 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:

42

---

 

Additional factors that may affect our results are discussed in Form 10-K under the heading “Risk Factors” filed with the SEC on April 2, 2018.  As of September 30, 2018, the risk factors of the Company have not changed materially from those disclosed in Form 10-K.

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 consolidated financial statements, which are prepared in conformity with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed 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 non-public companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our consolidated 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.

43

---

 

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 un-collectability 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.  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, 2018.  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 periodically review the allowance for loan losses.

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.

44

---

 

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.

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.

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

Comparison of Financial Condition at September 30, 2018 and December 31, 2017

Total Assets. Total assets were $982.7 million at September 30, 2018, an increase of $57.2 million, or 6.2%, when compared to $925.5 million at December 31, 2017 primarily due to the continuation of our loan growth strategy.

Cash and Cash Equivalents. Cash and cash equivalents decreased $37.3 million, or 62.5%, to $22.4 million at September 30, 2018, when compared to $59.7 million at December 31, 2017. The decrease in cash and cash equivalents was primarily driven by the funding of the loan portfolio due to the increase in loan originations.

 

Net Loans Receivable. Net loans receivable increased $95.2 million, or 11.9%, to $893.9 million at September 30, 2018 from $798.7 million at December 31, 2017. During the nine months ended September 30, 2018, there were amounts disbursed totaling $195.8 million in loans, $33.4 million of which were one-to-four family residential loans, $53.2 million were non-residential loans, $41.3 million were multi-family loans, $66.5 million were land and construction loans (including $53.2 million of advances),  $565,000 were consumer loans, and business loans disbursed $841,000. Principal repayments and other credits to net loans receivable for the nine months ended September 30, 2018 were $100.6 million.

 

45

---

 

Available-for-sale securities. Available-for-sale securities, consisting primarily of U.S. Government agency sponsored securities, as well as mortgage-backed securities decreased $4.7 million, or 16.3% to $24.2 million at September 30, 2018 from $28.9 million at December 31, 2017. The decrease was primarily driven by securities sold totaling $3.7 million.

 

Deposits.  Total deposits increased $50.8 million, or 7.1%, to $764.8 million at September 30, 2018 from $714.0 million at December 31, 2017. The increase was primarily due to increases in certificates of deposits of $26.9 million, or 6.5%, to $436.9 million at September 30, 2018 from $410.1 million at December 31, 2017.  In addition, money market accounts increased $23.8 million, or 51.2%, to $70.3 million at September 30, 2018 from $46.5 million at December 31, 2017. The increase in certificates of deposits was primarily attributed to $17.8 million in brokered deposits and $21.1 million in listing service deposits, offset by $12.0 million in maturities and draws.  Savings and NOW accounts increased $1.3 million, or 0.8% to $155.7 million at September 30, 2018 from $154.4 million at December 31, 2017. Demand deposit accounts decreased $1.2 million, or 1.1%, to $101.8 million at September 30, 2018 from $103.0 million at December 31, 2017. 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, 2018 and December 31, 2017 of $37.8 million and $36.4 million, respectively.  These borrowings are in the form of advances from the Federal Home Loan Bank of New York (FHLB) and borrowings from our correspondent banking relationships. Historically, we have had limited reliance on borrowings to fund our operations.  However, we may utilize advances from the FHLB and borrowings from our correspondent bank relationships to supplement the supply of investable funds and further our organic loan growth.

 

Stockholders’ Equity. Total stockholders’ equity increased $2.3 million, or 1.4%, to $167.1 million at September 30, 2018 from $164.8 million at December 31, 2017. The increase was substantially due to net income of $2.0 million.

Comparison of Operating Results for the Three Months Ended September 30, 2018 and 2017

General. Net income increased $3.6 million, or 112.5%, to $402,000 for the three months ended September 30, 2018, compared to a net loss of $3.2 million for the three months ended September 30, 2017. The increase was due to an increase in net interest income after provision for loan losses of $535,000, or 6.6%, to $8.6 million for the three months ended September 30, 2018 from $8.1 million for the same period last year, and a reduction of non-interest expense of $4.9 million, or 36.1%, to $8.8 million for the three months ended September 30, 2018 from $13.7 million for the same period last year. Non-interest expense for the three months ended September 30, 2017 includes a one-time, pre-tax contribution of $6.3 million to establish the Ponce De Leon Foundation, that was made as part of the reorganization of Ponce De Leon Federal Bank, Ponce Bank’s predecessor. These changes were offset by a reduction in non-interest income of $54,000, or 7.0%, to $714,000 for the three months ended September 30, 2018 from $768,000 for the three months ended September 30, 2017, and an increase of $1.8 million in income tax expense, or 111.4%, to $188,000 for the three months ended September 30, 2018 from a net tax benefit of $1.6 million, for the three months ended September 30, 2017.  Excluding this one-time contribution, net income would have been $953,000 for the three months ended September 30, 2017.

Interest Income. Interest and dividend income increased $1.5 million, or 15.5%, to $11.7 million for the three months ended September 30, 2018 from $10.2 million for the same period last year. The increase was due primarily to a $1.6 million, or 16.1%, increase in interest income on loans, which is our primary source of interest income. Our average balance of loans increased $128.1 million, or 16.7%, to $890.1 million for the three months ended September 30, 2018 from $762.0 million for the three months ended September 30, 2017. The increase in average balance resulted primarily from increases in the multifamily residential and nonresidential mortgage loan portfolios. Our average yield on loans decreased 3 basis points to 5.12% for the three months ended September 30, 2018 from 5.15% for the same period last year, as higher-yielding loans have been repaid or refinanced.

Interest and dividends income on investment securities, FHLB stock and FHLB demand deposit account decreased $17,000, or 6.3%, to $254,000 for the three months ended September 30, 2018 from $271,000 for the same period last year. The average rate we earned on investment securities and FHLB stock increased 52 basis points to 1.65% for the three months ended September 30, 2018 from 1.13% for the same period last year. Our average balance of investment securities, FHLB stock and FHLB demand deposit account decreased $33.9 million, or 35.68%, to $61.1 million for the three months ended September 30, 2018 from $95.0 million for the three months ended September 30, 2017.

46

---

 

 

Interest Expense. Interest expense increased $674,000 or 37.1%, to $2.5 million for the three months ended September 30, 2018 from $1.8 million for the same period last year. The increase was the result of an increase in interest expense on borrowings, certificates of deposit, and other deposits.  Specifically, interest expense on certificates of deposits increased $368,000, or 23.2%, to $1.9 million for the three months ended September 30, 2018 from $1.6 million for the same period in 2017. The average balance of certificates of deposit increased $30.8 million, or 7.6%, to $435.2 million for the three months ended September 30, 2018 from $404.4 million for the same period last year, while the average rate we paid on certificates of deposit increased 23 basis points to 1.77% for the three months ended September 30, 2018 from 1.54% for the three months ended September 30, 2017.

Interest expense on other deposits and borrowings increased $306,000 to $548,000 for the three months ended September 30, 2018 from $242,000 for the three months ended September 30, 2017. The average balance of other deposits and borrowings increased $31.0 million, or 13.47%, to $261.5 million for the three months ended September 30, 2018 from $230.5 million for the same period last year, and the average rate we paid on other deposits and borrowings increased 42 basis points to 0.83% for the three months ended September 30, 2018  from 0.41% for the same period in 2017, reflecting higher market interest rates.

Net Interest Income. Net interest income increased $899,000, or 10.8%, to $9.2 million for the three months ended September 30, 2018 from $8.3 million for the three months ended September 30, 2017, primarily as a result of increasing loan volumes offset by lower average market yields on earning assets. Our average net interest-earning assets increased by $30.9 million, or 14.3%, to $247.1 million for the three months ended September 30, 2018 from $216.1 million for the same period in 2017, due primarily to our loan growth, described above. Our net interest rate spread decreased by 9 basis points to 3.49% for the three months ended September 30, 2018 from 3.58% for the three months ended September 30, 2017, and our net interest margin remained at 3.86% for both periods.

An increase in interest rates will present us with a challenge in managing our interest rate risk. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which can result in interest expense increasing more rapidly than increases in interest income as interest rates increase. Therefore, increases in interest rates may adversely affect our net interest income and net economic value, which in turn would likely have an adverse effect on our results of operations. We expect that our net interest income and our net economic value would decrease as a result of an instantaneous increase in interest rates. To help manage interest rate risk, we are promoting core deposit products while concurrently diversifying our loan portfolio by introducing new lending programs. See “—Management of Market Risk” for additional information.

Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. See “Summary of Significant Accounting Policies” and “—Allowance for Loan Losses” for additional information.

After an evaluation of these factors, we established a provision for loan losses for the three months ended September 30, 2018 of $602,000 as compared to $238,000 for the three months ended September 30, 2017. Our allowance for loan losses was $12.4 million at September 30, 2018 as compared to $11.1 million at December 31, 2017. The allowance for loan losses to total loans was 1.37% at three months ended September 30, 2018 as well as 1.37% at December 31, 2017, and the allowance for loan losses to non-performing loans increased to 186.4% at September 30, 2018 from 97.1% at December 31, 2017.

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at September 30, 2018. However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the 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.

47

---

 

Non-interest Income. The decrease in non-interest income for the three months ended September 30, 2018 compared to the same period in 2017 was due to the following changes:  

 

 

Non-interest Expenses. Non-interest expenses decreased $5.0 million, or 36.1% to $8.8 million for the three months ended September 30, 2018, compared to $13.7 million for the same period in 2017. The decrease is mainly attributed to a one-time contribution of $6.3 million to the Ponce De Leon Foundation that was made as part of the reorganization of Ponce De Leon Federal Bank, Ponce Bank’s predecessor, on September 29, 2017.  Compensation and benefits expense increased by $327,000 mainly due to our investment in our employee base, including the senior management team and our sales and relationship management personnel, to help support our continued growth strategy. Occupancy expenses increased $173,000 and office supplies, telephone and postage increased $58,000. Insurance and surety bond premiums increased $43,000; direct loan expenses increased $76,000; and data processing increased $26,000. Other operating expenses increased by $683,000, primarily due to legal expenses of $278,000; consultant fees of $181,000, audit fees of $121,000 and professional services of $154,000. In addition, losses on securities sold increased $20,000 and organizational dues and subscriptions increased $82,000.  These increases were partially offset by a decrease of $106,000 in loss on loans sold for the three months ended September 30, 2018 compared to the same period in 2017.

 

 

Income Tax Provision (Benefit). We incurred income tax expense of $188,000 and an income tax benefit of $1.6 million for the three months ended September 30, 2018 and 2017, respectively, resulting in effective rates of 31.9% and 33.9%, respectively. The results for the three months ended September 30, 2017 include a one-time pre-tax contribution of $6.3 million to establish the Ponce De Leon Foundation, with a corresponding tax benefit of $2.5 million.  At September 30, 2018, net deferred tax assets amounted to 4.1 million compared to $3.9 million at December 31, 2017.

 

Comparison of Operating Results for the Nine Months Ended September 30, 2018 and 2017

General. Net income increased $3.5 million, or 234.0%, to $2.0 million for the nine months ended September 30, 2018, compared to a net loss $1.5 million for the nine months ended September 30, 2017. The increase was due to an increase net interest income after provision for loan losses of $2.8 million, or 12.0%, to $26.0 million for the nine months ended September 30, 2018 from $23.2 million for the same period last year,  and a decrease in non-interest expense of $2.3 million, or 8.4%, to $25.5 million for the nine months ended September 30, 2018 from $27.8 million for the same period last year.  Non-interest expense for the nine months ended September 30, 2017 includes a one-time, pre-tax contribution of $6.3 million to establish the Ponce De Leon Foundation, that was made as part of the reorganization of Ponce De Leon Federal Bank.  These changes were offset by a decrease in non-interest income of $294,000, or 12.2%, to $2.1 million for the nine months ended September 30, 2018, from $2.4 million for the same period in 2017, and by an increase of $1.3 million, or 194.8%, to $623,000 in provision for income taxes for the nine months ended September 30, 2018 from a tax benefit of $657,000 for the same period last year.  Excluding this one-time contribution, net income would have been $2.8 million for the nine months ended September 30, 2017.

48

---

 

Interest Income. Interest and dividend income increased $5.2 million, or 18.0%, to $33.8 million for the nine months ended September 30, 2018 from $28.6 million for the same period last year. The increase was due primarily to a $4.9 million, or 17.3%, increase in interest income on loans receivable, which is our primary source of interest income. Our average balance of loans increased $139.1 million, or 19.6%, to $850.3 million for the nine months ended September 30, 2018 from $711.2 million for the nine months ended September 30, 2017. The increase in average balance resulted primarily from increases in the construction and land, multifamily residential and nonresidential properties mortgage loan portfolios. Our average yield on loans decreased 10 basis points to 5.18% for the nine months ended September 30, 2018 from 5.28% for the same period last year, as higher-yielding loans have been repaid or refinanced.

Interest and dividends income on investment securities, FHLB stock, and FHLB demand account increased $313,000, or 52.5%, to $909,000 for nine months ended September 30, 2018 from $596,000 for the same period last year. The average rate we earned on investment securities and FHLB stock increased 50 basis points to 1.67% for the nine months ended September 30, 2018 from 1.17% for the same period last year. Our average balance of investment securities and FHLB stock and FHLB demand deposit account increased $4.6 million, or 6.8%, to $72.5 million for the nine months ended September 30, 2018 from $68.0 million for the nine months ended September 30, 2017.

   

Interest Expense. Interest expense increased $1.8 million or 37.3%, to $6.8 million for the nine months ended September 30, 2018 from $5.0 million for the same period last year. The rise was the result of a growth in interest expense on borrowings, certificates of deposit, and other deposits.  Specifically, interest expense on certificates of deposits increased $1.2 million, or 28.2%, to $5.5 million for the nine months ended September 30, 2018 from $4.3 million for the same period in 2017. The average balance of certificates of deposit increased $55.5 million, or 14.5%, to $438.1 million for the nine months ended September 30, 2018 from $382.6 million for the same period last year, while the average rate we paid on certificates of deposit increased 18 basis points to 1.69% for the nine months ended September 30, 2018  from 1.51% for the nine months ended September 30, 2017.

Interest expense on other deposits and borrowings increased $620,000 to $1.2 million for the nine months ended September 30, 2018 from $613,000 for the nine months ended September 30, 2017. The average balance of other deposits and borrowings increased $21.5 million, or 9.8%, to $240.3 million for the nine months ended September 30, 2018 from $218.8 million for the same period last year, and the average rate we paid on other deposits and borrowings increased 31 basis points to 0.68% for the nine months ended September 30, 2018 from 0.37% for the same period in 2017, reflecting higher market interest rates.

Net Interest Income. Net interest income increased $3.3 million, or 14.0%, to $27.0 million for the nine months ended September 30, 2018 from $23.7 million for the nine months ended September 30, 2017, primarily as a result of increasing loan volumes offset by lower market yields on earning assets. Our average net interest-earning assets increased by $65.3 million, or 38.0%, to $237.1 million for the nine months ended September 30, 2018 from $171.8 million for the same period in 2017, due primarily to our loan growth, described above. Our net interest rate spread decreased by 25 basis points to 3.58% for the nine months ended September 30, 2018 from 3.83% for the nine months ended September 30, 2017, and our net interest margin decreased by 15 basis points to 3.92% for the nine months ended September 30, 2018 from 4.07% for the same period last year, reflecting primarily a higher cost of funds and lower market yields on earning assets.

Provision for Loan Losses.  The provision for loan losses increased $537,000, or 108.0%, to $1.0 million for the nine months ended September 30, 2018 from $497,000 for the same nine months period in 2017.  Our allowance for loan losses was $12.4 million at September 30, 2018 as compared to $11.1 million at December 31, 2017. The allowance for loan losses to total loans was 1.37% at nine months ended September 30, 2018 as well as 1.37% at December 31, 2017, and the allowance for loan losses to non-performing loans increased to 186.4% at September 30, 2018 from 97.1% at December 31, 2017.

Non-interest Income. The decrease in non-interest income for the nine months ended September 30, 2018 compared to the same period in 2017 was primarily due to decreases of $276,000, in late payments and charges and $57,000 in service charges and fees.

 

 

49

---

 

 

Non-interest Expenses. Non-interest expenses decreased $2.3 million, or 8.4% to $25.5 million for the nine months ended September 30, 2018 as compared to $27.8 million in the same period in 2017. The results for the nine months ended September 30, 2017 include a one-time, pre-tax contribution of $6.3 million to establish the Ponce De Leon Foundation, that was made as part of the reorganization of Ponce De Leon Federal Bank, Ponce Bank’s predecessor.   Compensation and benefits expense increased $1.5 million mainly due to our investment in our employee base, including the senior management team and our sales and relationship management personnel, to help support our continued growth strategy. Occupancy expenses increased $559,000 and office, telephone and postage increased $174,000. Other operating expenses increased by $1.8 million, primarily due to increases in legal and consultant fees of $1.0 million, audit and professional services of $442,000, loss on loans sold of $124,000, and in organizational dues and subscriptions of $176,000.

 

 

Income Tax Provision (Benefit). We incurred income tax expense of $623,000 and an income tax benefit of $657,000 for the nine months ended September 30, 2018 and 2017, respectively, resulting in effective rates of 23.4% and 30.1%, respectively. The results for the nine months ended September 30, 2017 includes a one-time, pre-tax contribution of $6.3 million to establish the Ponce De Leon Foundation, that was made as part of the reorganization of Ponce De Leon Federal Bank, Ponce Bank’s predecessor.  At September 30, 2018 net deferred tax assets amounted to $4.1 million compared to $3.9 million at December 31, 2017.

50

---

 

Average Balance Sheets

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

 

 

51

---

 

 

 

 

52

---

 

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.

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" in the net present value table below.

53

---

 

The table below sets forth, as of September 30, 2018, 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, 2018, in the event of an instantaneous 200 basis point increase in interest rates, we would experience a 3.58% decrease in net interest income, and in the event of an instantaneous 100 basis point decrease in interest rates, we would experience a 0.73% increase 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, 2018, the calculation of the estimated changes in our NPV that would result from the designated immediate changes in the United States Treasury yield curve.

 

 

The table above indicates that at September 30, 2018, in the event of an instantaneous 200 basis point increase in interest rates, we would experience an 11.68% decrease in net present value, and in the event of an instantaneous 100 basis point decrease in interest rates, we would experience a 4.57% increase in net present 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.

54

---

 

The following table sets forth our interest-earning assets and our interest-bearing liabilities at September 30, 2018, which are anticipated to reprice or mature in each of the future time periods shown based upon certain assumptions. The amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at September 30, 2018, on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and as a result of contractual rate adjustments on adjustable-rate loans.

 

At September 30, 2018, our asset/liability gap from zero days to one year was ($208.1 million), resulting in a gap/assets ratio of 50.52%.

55

---

 

The following table sets forth our interest-earning assets and our interest-bearing liabilities at December 31, 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 December 31, 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 December 31, 2017, our asset/liability gap from zero days to one year was ($144.9 million), resulting in a gap/assets ratio of 62.50%.

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.

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 FHLB of New York. At September 30, 2018 and December 31, 2017, we had $37.8 million and $16.4 million, respectively, of term and overnight outstanding advances from the FHLB, and also had a guarantee from the FHLB through a standby letter of credit of $7.6 million.  At September 30, 2018, we had eligible collateral of approximately $269.2 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 $25.0 million with one of our correspondent banks, of which we had none and $20.0 million outstanding at September 30, 2018 and December 31, 2017, respectively.  We did not have any securities sold under repurchase agreements with brokers as of September 30, 2018 and December 31, 2017.

56

---

 

Although maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and competition. 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 $6.7 million and $6.0 million for the nine months ended September 30, 2018 and 2017, 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 $(96.3) million and $(102.0) million for the nine months ended September 30, 2018 and 2017, respectively. Net cash provided by financing activities, consisting of activities in deposit accounts and advances, was $52.2 million and $140.6 million for the nine months ended September 30, 2018 and 2017, 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, 2018 and December 31, 2017, we exceeded all of our regulatory capital requirements, and we were categorized as well capitalized at September 30, 2018 and December 31, 2017. Management is not aware of any conditions or events that would change our category.

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, 2018 and December 31, 2017, we had outstanding commitments to originate loans and extend credit of $105.2 million and $94.8 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, 2018 totaled $194.6 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 FHLB 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.

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, 2018.  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, 2018, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

57

---

 

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, 2018, we were not involved in any legal proceedings the outcome of which we 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 in our Form 10-K under the heading “Risk Factors” filed with the SEC on April 2^nd, 2018.  The Company’s evaluation of the risk factors applicable to it has not changed materially from those disclosed in our Form 10-K.

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

58

---

 

Item 6. Exhibits

 

59

---

 

 

 

60

---

 

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.

 

 

 

61

 

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, 2018 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, 2018 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: