Blue Foundry Bancorp (BLFY) 2022 Q3 法說會逐字稿

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 excludes 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. (Operator Instructions)

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 am joined by our Chief Financial Officer, Kelly Pecoraro. After my opening remarks, Kelly will share the company's financial results.

Earlier this morning, we reported 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 on 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 remained 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 our officers of the company. Not only will these grants help us to retain top talent, they will further align our officers with 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 then we would 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 late 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 margins 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 rate offers on select depository products. This, coupled with an increase in short-term borrowings, drove cost of funds to 66 basis points, a 19-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 commitment by $170,000 due to a change in mix of our loan portfolio. Our asset quality remained 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.

Non-performing loans to total loans decreased 14 basis points to 56 basis points. Our allowance to non-accrual loan 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 CSEL 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 date, and non-recurring 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 quarterly expense of approximately $300,000. We will continue to closely manage our operating expenses.

Moving onto 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 loan in our principal market, which were originated to Fannie Mae standards.

With the 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, [halt], 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, borrowings 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 cash 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. (Operator Instructions) Laurie Hunsicker, Compass Point.

Great. Hi, thanks. Jim and Kelly, good morning. Just hoping actually if we could start with the buyback. So I know in your release, you are saying $667,000 at $11.67. Was some of that for the benefit plan? Or was that all through the retired? I guess I'm just -- yeah, go ahead.

No. 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 jumped 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.

Sure, Laurie, yes. We had strong growth in the multifamily segment this quarter, which we think is a good asset class for us to be in at this point. From an overall perspective, the majority of that, about 60% is in the New Jersey State; 32% is in the New York space, not in the Manhattan area; and the LTV are about 60%, around 60% LTV.

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?

Yeah, 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 will continue to see growth in the multifamily. It's starting to slow down in the marketplace. We will continually look at industrial real estate as well, but the market is definitely tightening up from what we are seeing.

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

(multiple speakers) Directly originated.

Okay. Okay, great. And then I'm thinking about, Kelly, in your comments on margin pressure. Can you talk a little bit just about the funding side what you are seeing there in terms of price pressure? Just help us think about that a little bit. And then just specifically kind of a clean-up 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. Yes, Laurie. So the PPP for this quarter represented about 1 basis point. As we said, that really has come down in the recent quarters. We only have approximately $0.5 million left in PPP loans, with about $30,000 of fee income to be amortized, which will not be meaningful as we move forward. So this quarter was 1 basis point attributed to the NIM.

In terms of the pricing pressure -- sorry.

No, go ahead.

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

No. Yes, please. Yes, please. Thanks. 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 realized as our growth has outpaced our deposit growth, we continue to see pressure on those fundings. So we are hopeful that some of our initiatives in shifting the funding sources will be successful, but we are looking at compression in the margin.

Okay. And then I guess when I (multiple speakers)

Sorry, Laurie. I was going to say to you, what we are 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, new customer money. And that's the focus.

Got it, got it. Okay. Yeah. And so just obviously stripping out the PPP fees, so your headline margin contract -- or your headline margin, [wide the] basis point. But if I strip out the PPP fees, you are 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?

Yeah. Yeah, 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 some of the overall phase 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.

Got it, okay. And then non-interest income obviously is a nice little jump there in your fees and service charges. Can you remind us how much of that $650,000 is prepay income?

Yeah. 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, too, 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?

So the one-time charges really include legal expenses primarily. We've had some charges there as well as an increase in the -- we had a branch that we anticipate selling that was recognized there. So in total, that $240,000 of the expenses for the quarter, we believe to be non-recurring.

Got it, okay. And then on expenses, maybe just help us put it together a little bit. Obviously, you had your equity incentive plan for only part of this quarter. So really fully phased. That adds another, call it, $213,000-plus, your director's plan at $300,000. So even netting out that $240,000. Help us think about expenses. And especially as we look to next year, what that figure would look like.

And maybe also, Jim, if you could comment in terms of how you're thinking about de novos and any expenses around that, just to refresh on that. I'm just trying to put together (multiple speakers)

Sure. I'm now flipping over and I'll defer -- give Kelly a chance to pull our numbers together for you. As far as de novo branches in 2023, we continually look in the marketplace for areas that make sense for our bank to de novo. I would not be surprised if we added two to four branches in 2023. With that said, the process to add a branch takes months. Lease negotiations takes quite a few months these days. Fit out takes months.

So while we may have a plan to put them on in 2023, I don't think most of the expense will be incurred in the first or second quarter of 2023. I'm guessing that -- or forecasting that most of it is in Q3 or Q4. So I don't think there's going to be a pull through of a lot of expense for de novo branching next year.

Okay, great. And then just on -- okay.

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 have partial quarter of the equity grants for the directors. And in this quarter, we will have a partial for the equity grants that were granted to management. So we're looking at about a 13.6 in terms of expense run rate for Q4, inclusive of those new grants.

Okay. And then I guess looking ahead into the March quarter -- and maybe also just if you could comment on the new branch expense -- I mean, your new branches are probably $500,000, $600,000 in costs. Just how you think about 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 are operating in.

Okay, okay. And then just last one, just housekeeping. The AOCI -- what was the actual AOCI figure that was in tangible common equity or AOCL as opposed -- what's the actual loss there?

(multiple speakers) 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 cumulated loss position.

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

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

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

Thank you, operator, and to all of you who participated on the call today. Thank you for your interest in our company, and 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.