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Blue Foundry Bancorp (NASDAQ:BLFY)
Q3 2021 Earnings Call
Oct 22, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. My name is Daisy, and I'll be your conference operator today. I would like to welcome everyone to the Blue Foundry Bancorp Q3 2021 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 faces.

Such forward-looking statements reflect the 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 uncertainty. Any forward-looking statements made during this call represent management 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 or estimates change, 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. [Operator instructions] I'll now turn the call over to Jim Nesci, president and CEO. Jim, please go ahead.

Jim Nesci -- President and Chief Executive Officer

Great. Thanks, operator, and good morning to everyone. Thank you for joining us for the very first earnings call and Blue Foundry's over 140-year history. I am joined today by our controller and interim chief financial officer, Alex Agnoletto.

He will share the company's financial results and participate in the Q&A segment of the call. We are very excited to share our third-quarter results with you. We continue to build upon our long history of serving our communities and providing innovative and meaningful products and solutions. 2021 has been a year of tremendous change and progress.

During the first half of the year, our management team executed on the board's directive to complete our initial public offering. The IPO provided proceeds of over $277 million, which boosted our capital position. It was a pleasure to witness the energy and excitement felt across the bank as our team successfully prepared for the next chapter in our company's history. At the same time, we continue to invest in strategic transformation initiatives to modernize our technology for organic, scalable growth, and to deliver an excellent customer experience.

We are thankful that our elevated capital position allows us to bring an increased commitment to our local communities through the establishment of the Blue Foundry Charitable Foundation. Upon completion of our public offering, we donated $1.5 million in cash and 750,000 shares at an original value of $7.5 million. We are pleased that, as our company's success continues, that our foundation will continue to benefit our communities. In the third quarter of 2021, we reported a net loss of $14.9 million.

This was primarily driven by our planned termination of the pension plan and our establishment of our foundation. We also prepaid home loan bank borrowings and incurred a prepayment penalty of $1.4 million. Our core deposit balances continue to grow. We also continue to see a meaningful reduction in core deposit funding costs, which will contribute to our net interest margin expansion.

We remain focused on generating positive operating income through loan growth across our portfolios and believe the investments we are making today will prove to be accretive. The future is extremely bright for Blue Foundry, and we look forward to our continued growth. With that, I'd like to turn the call over to Alex Agnoletto for the company's financial results. Alex.

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Thank you, Jim, and good morning, everyone. We recognize the combination of the IPO, the foundation contribution, the pension withdrawal, and lack of history as a public company make these results more difficult to assess than they will be in the future. We've tried to provide information that we think will be useful to assess our earnings going forward, and we encourage everyone to read our disclosures including the non-GAAP tables at the back of the earnings release. In connection with the IPO, the company donated 1.5 million in cash and 7.5 million in stock to the Blue Foundry Charitable Foundation.

This created a large one-time expense during the quarter of $9 million. We also announced our intention to exit our defined benefit pension plan, which at the time of board resolution, was expected to cost $9.2 million. The exit of the pension is expected to occur in the fourth quarter when final pricing will be determined. It should be noted that this cost is lower than the cost estimated in our S-1, which gave an estimate of 12 million to 22 million.

Lastly, we announced to pay down the roughly 49 million of that FHLB borrowings in August, through which we incurred a $1.4 million prepayment penalty. The combination of all three items created at 19.6 million in one-time expenses, which contributed to our GAAP net loss for the quarter of $14.9 million, or $0.68 per share. For this quarter, in particular, we believe that our adjusted pre-provision net revenue or PPNR better demonstrates our core sustainable earnings compared to our GAAP results. Our adjusted PPNR was a loss of 647,000 for the quarter, compared to a loss of 1.9 million in the prior quarter.

This marks yet another quarter of improvement for us, and we look forward to returning to profitability in the next few quarters. Our net interest margin increased by 16 basis points to 2.15% for the three months ended September 30, 2021, as compared to the prior quarter. This increase is due to the combined effects of high-cost time deposits continuing to mature, the lower borrowing costs post paydown, and the prior quarter containing elevated deposit balances related to the IPO. These tailwinds continue to be offset by the current low-interest rate environment.

We continue to actively manage the funding portion of the balance sheet evidenced by a 17-basis-point reduction in our interest-bearing liability costs for the quarter. Interest income increased by 270,000, or 1.96% during the quarter, which was driven by a 136,000 increase in interest from securities, and a 145,000 increase in interest from cash. The increase in interest on cash was driven by the elevated cash position in connection with the IPO. Interest expense decreased significantly from last quarter by 23.7%, or 924,000.

This decrease was driven primarily by anticipated maturities of time deposits, as well as reduced FHLB borrowing balances. Quarter over quarter, net interest income increased by nearly 1.2 million, or 12%. Quarter over quarter, total loans excluding PPP, increased by 17.4 million, or 1.5%, primarily due to strong origination performance across our CRE portfolios amid continued higher-than-average prepayment levels. Total loans, including PPP, decreased by 2.2 million, or 0.2%, driven by an acceleration of PPP for loan forgiveness.

Our commercial pipeline was over 80 million as of September 30th, and we expect overall growth in that portfolio to persist. Our residential portfolio was bolstered by the beginning of a loan purchase program that was enacted in July. The bank purchased 28.5 million of high-quality residential loans originated to Fannie Mae standards and to borrowers within our principal market. This purchase program is expected to continue in Q4 to offset the higher-than-average prepayment levels and to assist us in deploying excess liquidity into interest-earning assets.

We believe we are very well-positioned for rising interest rates in the future. Our security portfolio grew by 39.9 million during the quarter, which was the result of utilizing some of our excess liquidity to harvest incremental yield. 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 and yield of roughly 1.4% to 1.7% over the past quarter.

And as rates rise, we plan to put more excess liquidity to work. We view our asset quality as stable. Our loans, 30 to 89 days past due, as a percentage of total loans decreased from 15 basis points to 10 basis points. Our allowance to total loans remained fairly consistent, decreasing 2 basis points from 1.24% to 1.22%.

And our nonaccrual loans to total loans increased slightly from 1.01% to 1.03%. As a reminder, we expect to adopt CECL as of January 1, 2023 and are currently operating under the incurred loss model. As we look to the future, we believe that the path to profitability will come from a growing loan portfolio, realizing a slight incremental reduction in our cost of funds, and continued control over expenses. We expect the roughly 12 million to 12.5 million in expenses incurred for Q1 through Q3 to remain fairly consistent into Q4 and may increase slightly in the first half of 2022 as we continue to invest in technology and higher lending compliance and support personnel.

Jim Nesci -- President and Chief Executive Officer

Thanks, Alex. The operator can now begin the Q&A session.

Questions & Answers:


Operator

Thank you very much. [Operator instructions] Our first question comes from Laurie Hunsicker from Compass Point. Laurie, your line is open. Please go ahead.

Laurie Hunsicker -- Compass Point -- Analyst

Great. Thanks. Good morning. 

Jim Nesci -- President and Chief Executive Officer

Good morning.

Laurie Hunsicker -- Compass Point -- Analyst

Alex, if you could go back to what you were talking about on the expense side. Just trying to get to the sort of 12 million and 12.5 million quarterly run rate, if I heard you right. So, if I'm taking your current 33 million and, obviously, I'm backing out the pension at 9.2, the foundation at nine, and the FHLB prepay at 14, I'm at 13.5. So, is there -- are there other things coming out? I mean, is data processing potentially going back? I mean, how should I be thinking about that? How do I -- 

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Hi, Laurie. Thanks for the question. 

Laurie Hunsicker -- Compass Point -- Analyst

In other words, where is -- yeah, go ahead. Thanks.

Alex Agnoletto -- Controller and Interim Chief Financial Officer

So, I think Q4 is going to return back to that 12.5 to 13 more long-term average. I think Q3, you know, with the IPO happening in July and so the transitions there, there was definitely some more discrete one-time items that weren't called out in that chart at the bottom of Page 10 of the press release. But we do think in the shorter term, the average is probably around 12.5.

Laurie Hunsicker -- Compass Point -- Analyst

OK, that's helpful. And then can you just update us on where you are with the headquarters sale, how that's progressing?

Alex Agnoletto -- Controller and Interim Chief Financial Officer

I'm sorry. I thought -- we still have a live contract with a -- an interested buyer. We continue to negotiate terms and try to bring it to a final closing, but the contract is still out there as of this time. We believe it's been marked to fair value, so we don't expect there to be any additional noise for any particular reason, but still going.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And is that likely to close this year? Are you thinking next year?

Alex Agnoletto -- Controller and Interim Chief Financial Officer

You know, we are pushing hard to close to this year. I can't tell you anything further than -- that's our objective. That's what we're trying to close out before year-end.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And then, again, your share count -- your diluted income statement share count with earnings per share that you reported, didn't include the first two weeks, I guess, in the quarter because you weren't public.

Alex Agnoletto -- Controller and Interim Chief Financial Officer

That's correct.

Laurie Hunsicker -- Compass Point -- Analyst

So, that number -- 

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Those days were -- correct.

Laurie Hunsicker -- Compass Point -- Analyst

OK.

Alex Agnoletto -- Controller and Interim Chief Financial Officer

So, the first two weeks were counted as zero in the weighted average GAAP, and then ESOP shares were reduced, also weighted average, as the participants earn those shares over the course of the quarter. So, the weighted average using that computation to get to the $0.68 per share is around 21.98 million shares outstanding for the quarter. Going forward, those abnormalities will be behind us and it'll just be the impact of the, you know, gross shares minus the unallocated ESOP.

Laurie Hunsicker -- Compass Point -- Analyst

OK. Right. So, closer to 26.5 give or take on the income statement?

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Correct.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And then just in terms of the CFO search, Jim, could you help us think about where you are with that and what the timing is, or what the board is looking?

Jim Nesci -- President and Chief Executive Officer

Sure. Absolutely. So, I've interviewed several candidates. There is a great field of CFOs in our metropolitan area I continue to meet with and try to discover who's the right fit for Blue Foundry.

There's no shortage. And I think more CFOs will become available in the next, you know, probably the next quarter, as well as it's been many mergers announced in our marketplace. So, we are patiently combing through the applicants, if you will, and I've had more than a half a dozen discussions with different parties. So, it's going well.

The board has been very accommodative, they're very patient. And I would also tell you that Alex is doing a great job as their interim CFO. It's closed out the quarter with extreme care and precision. So, it's all going well.

Laurie Hunsicker -- Compass Point -- Analyst

OK. Great. And then just one last question, Alex, actually back to you. If you could help us think about margin.

There's obviously a lot of moving parts, you're putting the proceeds to work, you know, I guess they greatly do the job. You have the FHLB borrowings per se. The 49 million, when in August did that occur, was that early in the month or late in the month?

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Right around the middle of the month. I think it was the 18th or 19th of the month. We actually just announced this morning. I'm not sure if you've caught it in the 8-K in connection with the press release, but we announced that yesterday.

We prepaid 62 million of additional borrowings, the weighted average life of about nine months. And we expect that that will further reduce our cost of funds by about 5 basis points. In the shorter term and more medium-term, our target NIM is right around that 2.5 to 2.7 range. We think 2.6 is relatively attainable in the medium term.

So, I think we're going to look, you know, a lot better than it had in Q2, just given that you'll see those higher-cost time deposits have continued to run off. And then those FHLB borrowings, you'll see a full quarter of impact of them being off the balance sheet.

Laurie Hunsicker -- Compass Point -- Analyst

OK. Perfect. And then -- I'm sorry, just one last thing. So, the higher cost in TD, how much actually matured this coming quarter, in the fourth quarter?

Alex Agnoletto -- Controller and Interim Chief Financial Officer

In the fourth quarter, it's beginning to taper off. I think our cost of funds we're probably nearing the bottom of that range on the deposit side. I think a Q3 we had over 200 million of time deposits mature. Some of that we kept, some of it we -- some stuff -- some of that we, you know, it had left the bank.

But I think, overall, the cost of deposits number will probably bottom in the 55-basis-point to 60-basis-point range into Q4.

Laurie Hunsicker -- Compass Point -- Analyst

OK. Great. Thank you. I'll leave it there.

Jim Nesci -- President and Chief Executive Officer

Thanks, Laurie.

Operator

Our next question -- I do apologize. Our next question comes from Ross Haberman from RLH Investments. Ross, your line is open. Please go ahead.

Ross Haberman -- RLH Investments -- Analyst

Good morning. How are you guys?

Jim Nesci -- President and Chief Executive Officer

Great.

Ross Haberman -- RLH Investments -- Analyst

I just had a final question regarding your loan growth, and you talked about buying residential loans. When are you actively looking for additional lenders? Have you brought any new ones on in the last couple of months? And will you continue to buy as opposed to self originate? And could you sort of talk about your backlog of loans? Thank you.

Jim Nesci -- President and Chief Executive Officer

Sure, and good morning. Thanks for dialing in. So, yes we are actively growing our book. We are actively looking for additional lenders.

We have not hired a lender in the last quarter. We are looking for an additional senior lender. We will continue to purchase on the one to four ready-size until we hit a number that we're comfortable where we're growing organically. So, it's a backfill until we grow one to four.

Hoping I'm answering your question and that's covering what you're looking for.

Ross Haberman -- RLH Investments -- Analyst

Are you buying commercial loans or are you buying multifamily as well, and what kind of yields are you getting on if you're buying any of those?

Jim Nesci -- President and Chief Executive Officer

So, on the purchase side, we're buying one to four families. We are participating with other banks in our area on the commercial side. But those are not purchases. Those are participations.

Ross Haberman -- RLH Investments -- Analyst

OK. I think that's about it. Thank you very much. Best of luck. 

Jim Nesci -- President and Chief Executive Officer

Thank you. Appreciate it.

Operator

[Operator instructions] We have a follow-up question from both Ross Haberman. Ross, your line is open. Please go ahead.

Ross Haberman -- RLH Investments -- Analyst

I'm sorry, I just left out one thing. Are you happy with your mix of loans today in terms of commercial residential and so forth? And if not, what are you sort of shooting for in terms of percentage mix, which you want to get to over the next couple -- on a year or two?

Jim Nesci -- President and Chief Executive Officer

So, thanks, that's a great question. I think the bank will become more commercial over time. And I think you'll find us driving into the C&I. That's where we'd like to grow.

As far as a specific target, we don't have a disclosure around the specific target, but I can tell you more commercial, more C&I over the coming quarters is really our direction.

Ross Haberman -- RLH Investments -- Analyst

And just one follow-up question, in terms of the huge gorilla within your market has been taken over. Is that going to be good for you in terms of personnel and customers in terms of gaining some business from that merger?

Jim Nesci -- President and Chief Executive Officer

It's hard to tell at this juncture. I think I understand the market participant you're speaking of. They're a very great competitor in our marketplace, and I know the folks that are acquiring them we're also going to be trying to defend their marketplace and all the key people that work for them. With that said, I believe there may be opportunities in our marketplace to see some additional customers and also some personnel may shake free from the institution over the coming months and quarters.

But they are a very great player in the marketplace.

Ross Haberman -- RLH Investments -- Analyst

OK. Thanks a lot again.

Jim Nesci -- President and Chief Executive Officer

Thank you.

Operator

We have no further questions at this point in time. So, I'll hand it back over to the management team.

Jim Nesci -- President and Chief Executive Officer

Well, thank you very much for dialing in today for our very first earnings call. We appreciate your participation, and we look forward to speaking with you again after we conclude our fourth-quarter and full-year results. Thank you, and have a great weekend.

Operator

[Operator signoff]

Duration: 22 minutes

Call participants:

Jim Nesci -- President and Chief Executive Officer

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Laurie Hunsicker -- Compass Point -- Analyst

Ross Haberman -- RLH Investments -- Analyst

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