Blue Foundry Bancorp Q3 FY2022 Earnings Call

Good morning, and welcome to Blue Foundry Bancorp's Third Quarter 2022 Earnings Call. My name is Harry, and I will be your conference operator today. Comments made during today's call may include forward-looking statements, which are based on management's current expectations and are subject to uncertainty and changes in circumstances. Blue Foundry encourages all participants to refer to the full disclaimer contained in this morning's earnings release, which has been posted to the Investor Relations page on bluefoundrybank.com. During the call, management 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. As a reminder, this event is being recorded. Your line will be muted for the duration of the call. After the speakers’ remarks, there will be a question-and-answer session. I would now like to turn the call over to President and CEO, Jim Nesci.

Thank you, operator. Good morning, everyone, and welcome to our third quarter earnings call. I'm joined by our Chief Financial Officer, Kelly Pecoraro. After my opening remarks, Kelly will share the company's financial results. Earlier this morning, we recorded third quarter net income of $1.2 million or $0.05 per diluted share and a pre-provision net revenue of $1.1 million. Our performance was largely driven by continued growth in commercial loans. Our lending team had another remarkable quarter, originating $172 million of loans. During the quarter, we focused on production in the multifamily segment, which we feel is a stable asset class during times of potential economic uncertainty. While our retail markets are beginning to show higher deposit costs, our loan growth has helped to expand net interest income by 5%. As of September 30, loans totaled $1.49 billion, up $67 million from the prior quarter. This represents loan growth of 5% quarter-over-quarter, the fourth consecutive quarter we grew our loan portfolio by more than 4%. While our loan pipeline remains healthy, given supply and the current environment, we do not expect to continue growing at this record pace. We decreased our reliance on certificates of deposit by $65 million for the quarter while growing our core deposits by $35 million. Core deposit growth remains strong across both consumer and business segments. Our focus on attracting the full banking relationship of small to medium-sized businesses led to an increase in business accounts by 4%. Business-related deposits increased 7% to $179 million. Additionally, the company added $18 million in consumer core deposits. Beginning in August, we repurchased 667,000 shares at a weighted average cost of $11.67, a significant discount to tangible book value. This represents 23% of the approved stock repurchase program. Additionally, last week, the Board of Directors approved stock option grants for officers of the company. Not only will these grants help us to retain top talent, they will further align our officers with the long-term interests of our shareholders. These options granted have a strike price of $11.69 and will vest ratably over the next seven years. On behalf of our Board of Directors and the officers of our company, I would like to thank our shareholders for their support and approval of the Blue Foundry Bancorp 2022 equity incentive plan. With that, I'd like to turn the call over to Kelly, and we'd be delighted to answer your questions. Kelly?

Thank you, Jim, and good morning, everyone. Our financial results were highlighted by net income of $1.2 million compared to $40,000 during the linked quarter. This improvement was largely related to pre-provision net revenue, which increased $586,000. Despite funding pressure from the rising rate environment, net interest margin remained relatively flat, expanding 1 basis point to 2.84%. Interest income increased $1.5 million and net interest income increased 5% or $653,000, driven by a $96 million increase in average loan balances. Remaining competitive in pricing, we have increased rates offered on select depository products. This, coupled with an increase in short-term borrowings, drove cost of funds to 66 basis points, a 9 basis point increase compared with the prior quarter. We expect pressure on our margin due to our balance sheet being liability-sensitive. During the quarter, we released provision of loan losses of $419,000 and increased our provision for commitments by $170,000 due to a change in the mix of our loan portfolio. Our asset quality remains strong. During the quarter, our allowance to total loans decreased 7 basis points to 91 basis points. This was partially driven by the changing mix of our portfolio, as well as the improvement in our credit metrics. Nonperforming loans to total loans decreased 14 basis points to 56 basis points. Our allowance to nonaccrual loans increased to 162% from 141% the prior quarter. As a reminder, we are currently operating under the incurred loss model and are on track to adopt CECL by the required implementation date. In terms of expenses, excluding our provision for commitment, we saw a $372,000 increase. This is due to a combination of director equity grants, an increase in working days, and nonrecurring expenses from investor-related activity and the potential branch sale. As Jim mentioned in his remarks, stock option grants for officers were approved this month. We expect these grants to add a quarterly expense of approximately $300,000. We will continue to closely manage our operating expenses. Moving on to the balance sheet. Gross loans, excluding PPP, grew by $68 million or 4.8% sequentially, driven by originations of $172 million, primarily in the multifamily segment. During the quarter, the bank also purchased $15 million of high-quality residential loans in our principal market, which were originated to Fannie Mae standards. With a duration of 4.1 years, our securities portfolio continues to provide cash flow that is being used to fund loans. $17.6 million of the decline in the securities portfolio was attributed to maturities, calls, and scheduled paydowns. We continue to grow our core deposits through a variety of initiatives. During the quarter, core deposits increased 4% or $35 million and now represent 71% of total deposits. Additionally, during the quarter, borrowing increased $90 million. Tangible book value declined $0.34 to $14.09 per share, driven primarily by the negative impact that interest rates had on our available-for-sale securities portfolio. Given our current tax position, most of the change in fair value flows through to equity with little tax benefit for the unrealized loss. Therefore, the rising rate environment has a more profound impact on our equity than it would have if we were operating with a more normalized tax position. As we mentioned last quarter, we currently intend to hold these securities through their contractual maturity, which will allow us to recoup the unrealized losses we have experienced to date. As Jim mentioned earlier, we repurchased shares at a discount, which had a positive impact on tangible book value. And with that, Jim and I are happy to take your questions.

Thank you. And our first question of the day comes from Laurie Hunsicker at Compass Point. Laurie, your line is now open.

Great. Hi. Thanks, Jim and Kelly, good morning. I was hoping we could start with the buyback. I saw in your release that you bought back 667,000 shares at 11.67. Was some of that for the benefit plans or was it all? I'm just curious.

Sorry, Laurie. Good morning. Yes, so we did use 299,000 of those shares to fund the equity portion of the Director's grants.

Great. Perfect. Okay. And then just in terms of your loan growth, can you help us think a little bit about how loan growth will look going forward? And then specifically that multifamily jump by almost 100 million, just where that multifamily is located? Any details you can give us, LTVs on that growth, just how you're thinking about that? Thanks.

We experienced strong growth in the multifamily segment this quarter, which we believe is a beneficial asset class for us at this time. Overall, approximately 60% of that growth is in the New Jersey area, while 32% is in New York, excluding Manhattan. The loan-to-value ratios are around 60%.

Okay. And then when you think about growth going forward, how are you looking at that book?

At the multifamily book or just commercial real estate overall?

Yes, exactly. At the multifamily book because your growth was 69% annualized this quarter. And that's on the top of your loan book. So just how should we be thinking about that going forward?

I think you'll continue to see growth in the multifamily. It's starting to slow down in the marketplace. We'll continue to look at industrial real estate as well. But the market is definitely tightening up from what we're seeing.

Okay. And with that multifamily, was that purchased or your team originated that?

Directly originated.

Okay, great. And then thinking about, Kelly, in your comments on margin pressure, can you talk a little bit just about the funding side, what you're seeing there in terms of price pressure, just help us think about that a little bit? And then just specifically, kind of a cleanup item, within your net interest income, I know there was probably a very, very small amount of PPP forgiveness. Do you have that figure?

Yes, Laurie. For this quarter, the PPP accounted for about 1 basis point. As you mentioned, that has decreased in recent quarters. We have roughly $0.5 million remaining in PPP loans, with about $30,000 of fee income left to be amortized, which will not be significant going forward. Therefore, this quarter reflected a 1 basis point contribution to the NIM.

Go ahead.

No, I was going to move on. If you had another question on that, I was going to move on to the funding pressure question.

Yes, please. Thanks, Kelly.

So we have a number of initiatives going on at the institution. I think not unlike others, we are experiencing pressure on our funding sources. We are pleased with our shift to core deposits. But realize as our growth has outpaced our deposit growth, we continue to see pressure on those funding. So we're hopeful that some of our initiatives in shifting the funding sources will be successful. But we're looking at compression in the margin.

Sorry, Laurie. I was going to say what we're really focused on is introducing new customers to the bank, so most of those initiatives will be focused on bringing new funds to the bank, new customer money. That's the focus.

Got it. Okay. Yes, and so just obviously stripping out the PPP fees, so your headline margin contracted or your headline margin 1 basis point. But if I strip out the PPP fees, you were actually 4 basis points wider. So I guess putting everything together in terms of margin contraction, can you help us think about that a little bit more with what you're seeing on the funding side?

Yes, I think as we had said last quarter, we benefited from some late deposit growth in Q2 that was fully realized in Q3. So that did help to expand the core margin a little more than we were seeing from the overall face of the financial number. But again, as you took a look, we do have currently increased borrowings, which in the current rate environment, is putting pressure on those assets that we put on and the spreads we're realizing.

Okay. And then non-interest income I would say saw a nice little jump there in your fees and service charges. Can you remind us how much of that $650,000 is prepay income?

Yes, so approximately $300,000 to $350,000 is prepay and exit fee loan-related income that was realized during the quarter.

Got it. Okay. And then on expenses you mentioned in your press release, you mentioned in your prepared comments to the one-time charges. I just didn't see how much the one-time charges were this quarter. What was that figure and can you tell us what's in that number?

The one-time charges primarily consist of legal expenses, along with an increase related to a branch we plan to sell. In total, we consider the $240,000 of expenses for the quarter to be nonrecurring.

Okay. Regarding expenses, could you help us clarify a few things? Your equity incentive plan was only in effect for part of this quarter. Once fully implemented, it adds approximately $213,000, along with your Director’s grant of $300,000. Even after accounting for the $240,000, can you provide insights on expenses moving forward, especially for next year? Additionally, Jim, could you share your thoughts on de novos and any related expenses? I'm trying to piece it all together.

Sorry for the delay in getting Kelly's numbers together. Regarding new branches in 2023, we are consistently exploring locations that would be suitable for our bank to establish new branches. It's reasonable to expect that we could open two to four branches this year. However, the process of adding a branch usually spans several months. Lease negotiations take considerable time, and the fitting out of the branches also requires several months. Therefore, while we plan to open these branches in 2023, the majority of the associated expenses are unlikely to occur in the first or second quarter. We anticipate that most expenses will take place in the third or fourth quarter. Consequently, we do not expect significant costs for new branch openings in the upcoming year.

Okay, great. And then just to clarify.

I'll turn it over to Kelly for the second part of your question.

Great. Thanks, Jim. Yes, Laurie, on the expense front, from the equity awards on an annualized basis for those that have been granted to date, we're looking at around $2.4 million, $2.5 million in expense on an annualized basis. As I look at next quarter, as you mentioned, we had a partial quarter of the equity grants for the Directors, and this quarter we will have a partial for the equity grants that were granted to management. So we're looking at about a $1.36 million in terms of expense run rate for Q4, inclusive of those new grants.

Okay. Looking ahead to the March quarter, could you comment on the new branch expenses? Your new branches probably cost around $500,000 to $600,000. How do you view that?

I think as Jim mentioned, Laurie, those expenses we don't anticipate coming until later in the year. And currently, based upon our grants that had been granted, provided that guidance, there's no other guidance relative to an expense spend, as we look forward. We're going through the process of looking at our budget now and addressing some of those initiatives that the teams will embark to really be mindful of the operating expenses in the environment we're operating in.

Okay. And then just one last thing regarding housekeeping. What was the actual AOCI figure that was included in tangible common equity or AOCI?

Yes.

What’s the actual loss there?

So the loss is at $27.5 million. The majority of that is made up of the loss in the securities portfolio. The unrealized loss in that portfolio is around $43 million. We do have a positive impact for the mark on the swap portfolio. But we are in an unrealized cumulative loss position.

Okay, got it. Great. Thank you for taking my questions.

Thank you, Laurie. Thanks for being engaged with us. We really appreciate the questions every quarter.

Thank you. And we have no further questions. So it'll be my pleasure to hand back to Jim Nesci for any closing remarks.

Thank you, operator. And to all of you who participated in the call today, thank you for your interest in our company. I look forward to speaking with all of you again in the fourth quarter. Thanks and have a great day.

Thank you to everyone who has joined us today. This concludes the call, and you may now disconnect your lines.