Ponce Financial Group in Bronx, N.Y., warned that its first-quarter earnings will be hurt by a “significant write-off and writedown” tied to its relationship with fintech startup Grain Technologies.
The $1.7 billion-asset company disclosed in a regulatory filing that Grain had been the victim of cyber fraud. About 25,000 microloans totaling $17 million have been deemed as fraudulent and put back to Grain.
As a result, Ponce said it will write-off about $6.3 million and provide an additional $1.7 million loan-loss reserve in the first quarter. Those moves are expected to reduce net income by about $5.7 million.
Ponce, which has paid Grain $1.9 million in origination and servicing fees since the partnership began in June 2020, has also invested $1 million in the fintech.
Ponce, through the partnership, uses nontraditional underwriting methods to provide microloans, in the form of revolving credit, to the underbanked, minorities and newer borrowers.
Ponce had about 54,000 performing microloans on March 31, net of putbacks, totaling $31 million.
Grain has filed a lawsuit against a third-party vendor seeking damages, Ponce said. The fintech is also conducting a private placement of securities to raise capital.
Ponce, which is closely monitoring its portfolio of Grain-originated consumer loans, has asked the fintech to stop making new microloans until further notice.
The company “may be at risk for future” writedowns and write-offs, given the potential for more putbacks and the status of its investment in Grain, Jake Civiello, an analyst at Janney Montgomery Scott, wrote in a note to clients.
“Fraud is obviously impossible to completely prevent, but banks can and are expected to minimize their risk and identify when and where risk-adjusted rates of return may not meet minimum thresholds despite eye-catching yields,” Civiello wrote.
“While the potential total loss associated with the Grain relationship can be absorbed by [Ponce], given the meaningful excess capital, shareholder confidence is clearly shaken,” he added.
The disclosure comes weeks after Ponce said it had hired Luis Gonzalez Jr., a former acting assistant deputy comptroller at the Office the Comptroller of the Currency, as its chief operating officer.