Blue Foundry Bancorp Q1 FY2022 Earnings Call

Good morning. My name is Simon, and I'll be your conference operator today. I would like to welcome everyone to the Blue Foundry Bancorp Q1 2022 Earnings Call. Today's call will include forward-looking statements, including statements about Blue Foundry's future financial and operating results, outlook, business strategies and plans as well as other opportunities and potential risks that management foresees. Such forward-looking statements reflect management's current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward-looking statements. Listeners are referred to the disclosures set forth under the caption forward-looking statements in the earnings press release as well as the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission for more information about such risks and uncertainties. Any forward-looking statements made during this call represent management's views and estimates only as of today. While the company may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so, even if management's views change, and you should not rely on such statements as representing management views as of any date subsequent to today. During the call, the company will refer to non-GAAP measures, which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures. Please note this event is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Thank you. I will now turn the call over to Jim Neste, President and CEO.

Great. Thanks, operator, and good morning to everyone. Thank you for joining us for Blue Foundry's First Quarter Earnings Call. I'm joined today by our Controller and Interim Chief Financial Officer, Alex Angeleno. He will share the company's financial results and participate in the Q&A segment of the call. In the first quarter of 2022, we made great progress towards our goals of growing core deposits and growing higher interest earning assets. Our core deposits increased by $64.8 million in the quarter. Gross loans increased by $55 million, and our investment book grew by $57.3 million. We also worked diligently to reduce our core operating expenses, which decreased by over $1 million in the quarter. This will position us well for Q2 when our asset growth produces a full quarter of interest income. On the retail front, we continue to grow our deposit franchise, specifically within our business customers. In the quarter, our team grew core business deposits by over $40 million. New branches opened within the last year have seen strong growth and new customer acquisition success as our refreshed brick-and-mortar locations provide an inviting and exciting customer experience. Moving to our lending efforts. Our team onboarded over $147 million of new loans in the first quarter. Excluding PPP, quarterly gross loan growth came in at a net of $64.1 million with strong performance within our commercial lending teams. We are, and we will continue to benefit from the rising rate environment as we put excess liquidity to work and as we fund new loan growth with low-cost core deposits. Total cash was $101.6 million at the end of the first quarter, which represents our management team putting up over $90 million to work during the quarter. The first quarter shows evidence of our core strategy and capabilities beginning to come to fruition with our migration to becoming a larger, more commercial bank funded by core deposits. I'm also pleased to announce the appointment of our new Chief Financial Officer, Kelly Siperaro; Kelly joins Blue Foundry Bank from Investors Bank, where she most recently served as the Chief Accounting Officer. She began her career in KPMG's audit practice and brings a wealth of accounting, finance, and regulatory knowledge from her 35-year career that will support our growth objectives. Kelly will be formally appointed in mid-May and will work to transition responsibilities with our interim CFO, Alex. Alex will return to serving as our controller following Kelly's onboarding. I'd like to turn the call over to Alex Angeleno to discuss the company's financial results.

Thank you, Jim, and good morning, everyone. Our GAAP net income for the quarter was $553,000 or $0.02 per share. Core operating expenses decreased $1.4 million or 7% quarter-over-quarter to $13.4 million. This decrease was driven by a $418,000 reduction in professional fees, combined with the reduction in advertising expense of $276,000 and a reduction in occupancy expense of $199,000. This marks a significant reduction in our operating costs and will enable us to return to profitability in the coming months as we previously announced. Quarter-over-quarter, net interest income decreased $397,000 or 3% to $11.9 million. This decrease was driven primarily by a reduction in PPP fees realized, which was offset by loan and investment growth and the continued decrease in our cost of funds. Our net interest margin decreased by 1 basis point to 2.62% for the three months ended March 31, 2022, compared to the prior quarter. Net interest margin increased by 54 basis points year-over-year from 2.08% to 2.62%, representing a 26% increase. Our adjusted PPNR was a loss of $520,000 for the quarter compared to a loss of $1.4 million in the prior quarter. These results represent progress of nearly $900,000 toward our breakeven point, which we expect will come in the next few months. Interest income decreased by $641,000 or 5% during the quarter, which was driven primarily by $600,000 lower realization of PPP income in the quarter, coupled with the timing of loan and investment portfolio growth being later in the quarter. Interest expense continued to decrease from last quarter by 13% or $244,000 to $1.7 million. This decrease was driven primarily by the continued maturity of time deposits as well as slightly reduced average Federal Home Loan Bank borrowing. The fourth quarter contained a partial month of higher balances prior to the October FHLB paydown. Quarter-over-quarter, gross loans, excluding PPP, increased by $64.1 million or 5%, primarily due to strong origination performance across our commercial real estate portfolios, coupled with the continuation of the residential loan purchase program. Gross loans, including PPP, increased by $55 million or 4.3%. Currently, we have $8.1 million of PPP loans remaining on our books and $251,000 of fees left to be realized. Our total pipeline was over $130 million as of March 31, with an average expected yield of 3.9%. Our real estate portfolio has experienced strong growth this quarter, driven by originations of over $147 million. Our residential portfolio grew through a mixture of organic originations and the continuation of the loan purchase program enacted last year. During the quarter, the bank purchased approximately $45 million of high-quality residential loans originated to Fannie Mae standards and to borrowers in our principal market. This purchase program is expected to continue through the next two quarters to offset higher than average prepayment levels. Our securities portfolio grew by $57.3 million during the quarter, which was the result of utilizing excess liquidity to capture incremental yield as rates rose. We plan to continue to reinvest excess liquidity into a mixture of loans and shorter duration securities over the coming quarters. We have been reinvesting in securities at a yield of roughly 2.5% over the past quarter. As rates rise, we plan to put more excess liquidity to work. Our current portfolio has a weighted average life of 4.7 years. We view our asset quality as stable and improving. Our nonperforming loans to total loans decreased 16 basis points from 0.94% to 0.78%. Loans 90 days or more past due decreased by $2 million or over 20% from $9.6 million at year-end to $7.6 million as of the current quarter. During the quarter, our allowance to total loans decreased 13 basis points from 1.13% to 1% as the economy continues to stabilize and improve. As a reminder, we expect to adopt the Current Expected Credit Loss (CECL) standard as of January 1, 2023, and are currently operating under the incurred loss model. Now, I'd like to turn it back to Jim for concluding remarks.

Thanks, Alex. The first quarter marks significant progress positioning our balance sheet to deliver strong future results, and I'm encouraged by the continued improvement in our core operating costs. We recognize the work ahead of us, and we believe we are well-positioned to return to profitability in the coming months. We also would like to thank everyone for their time today and for their interest in Blue Foundry Bank. We look forward to sharing our operating results next quarter. The operator can begin the Q&A session now. Thank you.

Our first question comes from Laurie Hunsicker of Compass Point. Laurie, your line is open. Please go ahead.

Yes, hi, thanks. Good morning, Jim, and Alex. And Kelly, congratulations to you. I was hoping that you could go back to loan growth. It looks like your commercial real estate loan growth was very strong. What's going on there? And how are you thinking about that? And is that also purchased?

And just to clarify, Kelly will be starting with us in a couple of weeks, and I think you could refer back to the K that we released to give the exact date and time, but we are excited to have her joining the team shortly. On loan growth, it's been an exciting quarter. We've had a lot of CRE deals coming in at good prices. There are a lot of non-residential CRE deals as well. But I'm happy to answer questions on it if you have more specific inquiries.

Yes. So I'm just looking at linked quarter, you went from $142 million to $187 million. That's really a pretty big jump. What type of CRE are you adding? And are you originating that? Or are you working with other banks? How are you thinking about that?

So it is our originations. They are not purchased. Some are with other banks and some are direct from our lenders.

Got it. Sorry, but at a high level, what type of commercial real estate are you adding?

It's a mix. It's industrial.

You know what…

It's just a mix of industrial and other spaces in New Jersey. It's a good mix is what I would tell you.

Okay. Yes. I just wanted to confirm that the amount of PPP gains you realized this quarter was $265 million. Did I get that right?

Right around there, Laurie. It's actually just a little higher, right around $320,000. We have about $250 million left to go in Q2. But I don't think all of it really realized in Q2. I think it's going to take a few quarters for all of that to come to fruition.

Got it. Okay. So just to clarify, your margin was at 262, so exiting that your core is $255. Can you help us understand how you intend to utilize that, particularly in acquiring more residential properties and securities? It appears that your interest rate sensitivity as of December 31, with a 100 basis point increase, indicates a 3% change in net interest income. Could you provide more details on this? Specifically, what will the margin look like as we enter this rising rate environment? Do you have any data points regarding the impact of a 25 basis point increase on yields? Any additional insights you can share about your deposits would also be appreciated.

Sure. So in an up 100 scenario over 12 months, we're seeing NII at up 4.45%. I think we still have some bits of cash left to deploy. Q1 was deployed at a mix for our purchases and a mix of some lower yielding investments that were shorter duration and high credit quality. As we go into Q2, those rates are obviously going to be priced a bit higher as rates have moved significantly in the last two months. So I think in the short term, margins will continue to expand slightly. And then as we get into Q3, cost of funds will be slightly challenged as we will adjust from where we are now in the 40s and move up toward a higher number.

And just to clarify, Laurie. The purchases, I think you will see us slowing down on investment purchases over the next quarter. But as far as 1 to 4 residential high-quality loans, we'll probably still fill in with a few more tranches of those in the next quarter. That's where I think we will be. It just depends on what the market is doing.

Right. Okay. That's helpful. And then can you talk a little bit about the Lomas provision line? Obviously, you had very, very strong loan growth. You're now sitting at a 1% reserve to loans or 101 ex to PPP. How should we be thinking about that in terms of provision normalizing? And I realize CECL isn't coming until 2023. But can you just help us think about how that looks going forward where you have a reserves-to-loans target?

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.