Blue Foundry Bancorp (BLFY) Q4 2021 Earnings Call Transcript

Blue Foundry Bancorp (BLFY -0.12%)
Q4 2021 Earnings Call
Jan 26, 2022, 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 Q4 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 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 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, 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. [Operator instructions] Thank you.

I'll now turn the call over to Jim Nesci, the 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 Blue Foundry's fourth quarter earnings call. I'm 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. 2021 was a year marked by change and progress. In January 2021, we announced our intention to convert from a mutual holding company. And in March, we released our prospectus.

In April, we participated in the third round of PPP, originating over $40 million of new loans. In May, we opened our new administrative headquarters in Parsippany and welcomed our employees back to utilize nearly 40,000 square feet of state-of-the-art office space and technology. In June, we released our first 10-Q. And in July, we completed our conversion and initial public offering, which provided proceeds of over $277 million.

In Q3, we announced our intention to withdraw from our pension plan and the extinguishment of $49.3 million of FHLB borrowings. And in Q4, the pension was exited, and an additional $62.1 million of FHLB debt was prepaid. In total, we extinguished $111.4 million worth of borrowings. The pension exit, debt paydown, and building sale removed over $4.5 million from the annual expense base as we head into 2022.

On the retail front, we closed 2 branches in Ridgewood and opened new branches in Chatham, Ridgewood, and Jersey City; and redesigned branches in Lynhurst and Glen Rock. More than 40% of our branches are new or have been refreshed to meet our customers' changing needs. These changes to our retail franchise position us to win new customers and enhance our brand exposure. Half of our ATMs are now operational as interactive teller machines.

This allows us to have a secure visual interaction with our customers from a centralized location. We can now provide a live banker for more hours at lower cost. Our digital marketing campaigns were seen over 80 million times and generated far above average click-through rates. We have been able to acquire new customers through digital advertising at a cost of roughly $68 per deposit account when advertising is paired with new branch openings.

Moving to lending efforts. Our team onboarded over $411.2 million of new loans in 2021. Looking back over the last decade, I believe this represents a record for the bank. Unfortunately, prepayments of $336.7 million continue to weigh on loan growth throughout the year.

Excluding PPP, loan growth came in at a net of $40 million. Our focus remains to originate high-quality assets and produce net loan growth for the bank in residential, commercial, C&I, and SBA areas. Despite all the changes we've experienced this year, our management team increased net interest income year over year by over $3.9 million or 9.9% and grew core deposits by over $134 million. We also continue to see a meaningful reduction in total funding costs, which will contribute to our expansion of net interest margin.

2021 was a landmark year for Blue Foundry Bank, and we are eager to carry the momentum into 2022. I'd now like to turn the call over to Alex Agnoletto to discuss the company's financial results. Alex?

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Thank you, Jim, and good morning, everyone. 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. Quarter over quarter, net interest income increased $1.2 million or 11% to $12.3 million. This increase was driven primarily by the continued reduction in our cost of funds, which was 48 basis points as of December 31.

This represents a 58% or 65-basis-point reduction year over year. Our net interest margin increased by 48 basis points to 2.63% for the three months ended December 31, 2021, as compared to the prior quarter. Net interest margin increased by 10 basis points year over year from 2.1% to 2.2%. The exit of the pension was completed in the fourth quarter.

The bank incurred a $2 million expense, in addition to the amount approved in the prior quarter, for a total exit cost of $11.2 million. This is $800,000 lower than the low side of the range estimated in our S-1, which noted $12 million to $22 million. The sale of our former headquarters was also completed in the quarter, which incurred a modest $60,000 loss, which was driven by closing settlement costs. As disclosed in our 8-K issued on October 22, we announced an additional paydown of roughly $62.1 million of FHLB borrowings.

The bank incurred a $754,000 prepayment penalty. The combination of these items created $2.8 million in one-time expenses this quarter. The company also reported a $16.7 million valuation allowance on its deferred tax assets, driven by the company's three-year cumulative net loss, as the company returns to profitability, and we'll continue to evaluate the timing of the removal of the valuation allowance and the reporting of any tax benefits associated with that removal. These items contributed to our GAAP net loss for the quarter of $19.6 million or $0.75 per share.

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 $1.4 million for the quarter, compared to a loss of $647,000 in the prior quarter. These results were impacted by the challenged labor market, which resulted in utilizing temporary and more costly personnel, as well as the continued investments in technology which will prove accretive as we scale. Additionally, due to the timing of the IPO, the quarter reflected roughly $350,000 of additional expense related to the ESOP, which will not be reflected in future periods.

We look forward to returning to profitability in the first half of 2022. Interest income increased by $162,000 or 1.2% during the quarter, which was driven primarily by a $313,000 increase in interest from loans, partially offset by a $151,000 decrease in interest from securities and cash. Interest expense decreased significantly from last quarter by 36% or $1.1 million. This decrease was driven primarily by anticipated maturities of time deposits, as well as reduced FHLB borrowing balances.

Quarter over quarter, total loans, excluding PPP, increased by $56 million or 4.6%, primarily due to strong origination performance across our CRE portfolios, coupled with the continuation of the residential loan purchase programs. Total loans, including PPP, increased by $31.6 million or 2.5%, which was weighed down by continued PPP loan forgiveness. Currently, we have $16.8 million of PPP loans remaining on our books and $600,000 of fees left to be realized. As of December 31, no loans remain on forbearance due to the pandemic.

Our total pipeline was over $130 million as of December 31 with an average yield of 3.4%. Our residential portfolio grew through a mixture of organic originations and the continuation of the loan purchase program that was enacted in July. During the quarter, the bank purchased $60.8 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 first half of 2022 to offset higher-than-average prepayment levels and to assist with the deployment of excess liquidity into interest-earning assets.

The loan purchase program allows us to obtain yields that are approximately 40 basis points higher than comparable mortgage-backed securities. The program also allows us to select individual loans to a pool already underwritten to Fannie Mae standards. We note we have reduced cash from $316.4 million at the end of last year to $193.4 million as of December 31. Currently, the bank has 10% of its assets in cash, 19% in investments, and 67% in loans.

Our securities portfolio grew by $7.9 million during the fourth quarter, which was the result of utilizing some of our excess liquidity to capture 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 in securities at a yield of roughly 1.1% over the past quarter. And as rates rise, we plan to put more excess liquidity to work.

We view our asset quality as stable. During the quarter, our allowance to total loans decreased 9 basis points from 1.22% to 1.13% as the economy continues to stabilize and improve. And our nonperforming loans to total loans decreased 6 basis points from 1% to 0.94%. As a reminder, we expect to adopt CECL 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.

Jim Nesci -- President and Chief Executive Officer

Thanks, Alex. Throughout 2021, I've been immensely proud of the progress we've made and how well-positioned we are for growth in 2022. We would also like to thank everyone for their time today and for their interest in Blue Foundry. We look forward to sharing our operating results as we progress into 2022.

The operator can begin the Q&A session now. Thank you.

Questions & Answers:

Operator

Thank you very much, Jim. [Operator instructions] We will take our first question from Laurie Hunsicker from Compass Point. Laurie, your line is open. Please go ahead. 

Laurie Hunsicker -- Compass Point -- Analyst

Yeah. Hi, thanks. Jim and Alex, Good morning. Hoping that we could start on expenses.

Obviously, you highlighted the two big ones: the prepaid fees and the pension withdrawal. And just to clarify, I know the pension was completed. There are no more residual inventors on that in 2022. Is that correct?

Alex Agnoletto -- Controller and Interim Chief Financial Officer

That's correct.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And then the headquarters sale that was completed, how much does that save in occupancy as we look forward? Or what -- maybe the better question is what should the occupancy expense be running?

Alex Agnoletto -- Controller and Interim Chief Financial Officer

That's a good question, Laurie. Thank you. I think it's around $150,000 per quarter that it should stay in a mixture of maintenance repairs, real estate taxes, and other general upkeep.

Laurie Hunsicker -- Compass Point -- Analyst

OK, great. And then it looks like your other other expense line was a little bit elevated at $1.2 million that's been running lower. Were there any one-time items in that number that that should come lower? And then maybe just sort of from a higher-level standpoint, can you help us think about with -- as you said, 40% of your branch is new or refreshed and what else is in the work, how we should think about core expense growth going forward into 2022 and 2023. Thanks.

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Sure. So other expenses in Q4 were elevated as a result of some newer expenses that we have been incurring related to the IPO around new state taxes related to Delaware, as well as some investor relations expenses. I do think that the expense base in Q1 will be closer to $13.5 million. I think it's going to come down a bit from Q4, which was a bit elevated from what we expect to see for the majority of 2022.

As far as branch expansions, I think Jim would be the best to speak to that.

Jim Nesci -- President and Chief Executive Officer

Good morning again, Laurie. So on the branch expansion front, yes, 40% have been recently renovated. We have a couple of branches being renovated right now. The goal is obviously to get as many of the existing branches to look and feel like Blue Foundry branches.

We're looking at -- construction delays are affecting everybody, so it's a little bit difficult to give you a solid number on how that cost is going to impact us. We've been doing brand foundations first on branches we own and then on branches we lease, and that's another factor on what the expense number will look like. Obviously, going forward, as we get more clarity, we'll be sharing more with you and other investors.

Laurie Hunsicker -- Compass Point -- Analyst

OK, great. And the $13.5 million core guidance for 1Q '22 is helpful. Can you help us think about maybe from that level what full year growth and expenses will look like for 2022 and even into 2023?

Alex Agnoletto -- Controller and Interim Chief Financial Officer

I think each quarter in 2022, Q1, we're projecting around 13.5%. I think Q2 may be slightly less to that -- less than that but not too far off. And then Q3 and Q4, in some ways, will depend on how quickly we're able to grow the loan book with various -- paying for growth compensation programs, but it shouldn't deviate too drastically from that level. I would be pretty confident with -- around the $14 million level into the second half.

Laurie Hunsicker -- Compass Point -- Analyst

OK. That's helpful. And then how should we be thinking about tax rate for full year 2022?

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Our effective rate remains right around that 27%, 28%. Obviously, the valuation allowance that was recently recorded on the deferred tax assets makes that tax expense a bit more lumpy this period than will be in the future or what has been in the past. As we continue to move toward profitability, I think that's something that we will continue to assess. But I think to answer your question, the 27% to 28% seems to be right around where we will land from the AETR's perspective.

Laurie Hunsicker -- Compass Point -- Analyst

OK, great. And then just quickly, total intangibles, are those, what, $300,000, $350,000? Or do you have a better exact number?

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Sure. So the exact number is right at $437,000. We try to put it in a footnote on Page 8 at the bottom of the chart. It's mostly related to the capitalized software for some of our new initiatives in the lending area.

Laurie Hunsicker -- Compass Point -- Analyst

Perfect. OK. And then just if you could help us think a little bit about forward net interest income. Obviously, you've got a lot of things going.

Maybe just for [inaudible], the FHLB prepay, when in the quarter did that occur?

Alex Agnoletto -- Controller and Interim Chief Financial Officer

That was on October 22.

Laurie Hunsicker -- Compass Point -- Analyst

OK. So that's -- OK. So we still have a little bit there. OK.

And then I guess, from the standpoint of PPP forgiveness, looks like it was probably higher than last quarter, maybe $1 million. I don't know if you've got a better number on that.

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Correct. PPP fees realized in Q4 was right about $1 million. Right now, we're expecting virtually all of the remaining PPP loans to be unforgiven or some form through the end of Q1. It could drag a little bit into Q2, but we expect the majority of that $600,000 of remaining deferred fees to be realized substantially in Q1.

Laurie Hunsicker -- Compass Point -- Analyst

OK, OK. So by my calculation, that's taking core margin to a sort of $220,000 or so starting point. Can you help us think about maybe other initiatives that you're taking? Obviously, you had mentioned the loan purchase program, but maybe some other pieces of that that we should be thinking about in terms of net interest margin for 2022.

Jim Nesci -- President and Chief Executive Officer

Yes. So from our perspective, we're looking to increase C&I, which should give us the expansion that I think you're looking for. And we're hopeful and we're excited to increase the C&I business and also through the utilization of the SBA. We've had some success.

And again, the rates are a little bit higher, and it should help us expand spreads and NIMs.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And then do you have a refreshed asset liability-sensitive stock? In terms of looking at rates up 100 basis points, what would that be? I mean, the one that we've got is pre-conversion. If you've got a refresh on that, that would be helpful.

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Yes. So up 100, we're looking at a 2.5% increase in net interest income.

Laurie Hunsicker -- Compass Point -- Analyst

Perfect. OK. Thanks. I'll leave it there.

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Thank you, Laurie.

Operator

Thank you very much, Laurie. Our next question comes from Julienne Cassarino from Sycamore Analytics. Julienne, Your line is open. Please go ahead.

Julienne Cassarino -- Sycamore Analytics -- Analyst

Hello. Good morning. You can hear me, right?

Jim Nesci -- President and Chief Executive Officer

Good morning. How are you? 

Julienne Cassarino -- Sycamore Analytics -- Analyst

OK, good. Just want to make sure you can hear me. The DTA valuation allowance, $16.7 million, is that the total valuation allowance? Or was there anything previous?

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Correct. There was virtually no previous valuation allowance recorded. It was very immaterial related to something from several years ago and not relevant anymore. But the entirety of the DTA is what the valuation allowance was reported on.

Julienne Cassarino -- Sycamore Analytics -- Analyst

OK. I find it interesting that whomever, auditors, regulators, whomever, is making you record this now when you're right on the threshold of profitability. Maybe just out of curiosity, why would they want you to do this now instead of previously?

Alex Agnoletto -- Controller and Interim Chief Financial Officer

So the accounting guidance points us to looking at historical data with probably more weight to it than our forecast in the future. And while we remain optimistic about the bank's opportunities in the future and potential for growth and income, the weight of the historical losses is something that's hard to overcome. And that ultimately what led us to recording the valuation allowance when we did it in the fourth quarter. I think the fourth quarter allowed us to see the full year with greater clarity as the pension became fully settled, and that's ultimately the conclusion that we, our tax counsel, and, auditors came to.

Jim Nesci -- President and Chief Executive Officer

But, Julienne, I just want to provide you a pretty --

Julienne Cassarino -- Sycamore Analytics -- Analyst

And so --

Jim Nesci -- President and Chief Executive Officer

Julienne, it's a three-year cumulative number. That's the other piece of it that I just don't want to lose sight of that. So it goes back from 2019.

Julienne Cassarino -- Sycamore Analytics -- Analyst

Right. And then so, going forward, is it -- do you have to show profits -- cumulative profits for three years going forward? or is that down to two years? Or -- I'm just curious what it is now. It's been a while since we've seen DTA valuation allowance reversals at this point, so I just want to know how are people -- how are the regulators thinking about it or the auditors thinking about it now.

Jim Nesci -- President and Chief Executive Officer

Fair enough, and it's auditors, not regulators, just to be clear. But Alex can definitely walk you through one more time.

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Sure. So as we grow toward profitability and as that profitability is recognized, incremental portions of the DTA will begin to fall off, so to speak, and begin to remain a benefit to the company. But as it stands today, the valuation allowance was placed on the GAAP side, not necessarily from a tax basis. That value doesn't go away.

To your point, the reversal is there for the future when those profits come.

Julienne Cassarino -- Sycamore Analytics -- Analyst

OK. So they'll let you bring it in piecemeal as opposed to waiting for a one-time reversal or one-time write-up. So when -- what's the earliest that that could start?

Alex Agnoletto -- Controller and Interim Chief Financial Officer

We're hopeful for profitability in the first half of this year, but there are a lot of rules around when you're allowed to recognize portions of that DTA, bringing that back against current tax expense. So it's hard to say exactly when. But I think bigger picture, over the next one to three years, we will see this to be a benefit to offset tax expense when that does come.

Julienne Cassarino -- Sycamore Analytics -- Analyst

OK, Ok. So it could happen within a year start to, anyway, and then within three years, possibly, the whole thing, unless I -- is that correct? That's accurate, right, to --

Jim Nesci -- President and Chief Executive Officer

It happens with profitability. So to give you a timing, it's a little bit hard. But how soon we can eat the whole thing up, that I can't tell you, but it's available to us to offset tax burden.

Julienne Cassarino -- Sycamore Analytics -- Analyst

Right, right. OK. And then on -- I guess, on the regulatory side, this won't have any impact on buybacks, right? The fact that you had to put up a meaningful DTA valuation allowance that is completely separate from any buyback approval program.

Jim Nesci -- President and Chief Executive Officer

Well, I'll remind you that you have to wait a year, anyway, before we could ask. I don't believe it has an impact on us in a year from the data going public, but we have some work to do to make sure that it doesn't. I can't tell you definitively, but I would suspect you are correct.

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Our capital ratios remain well above the well-capitalized limits. So --

Julienne Cassarino -- Sycamore Analytics -- Analyst

Right. Definitely. Just -- again, it's been a lot since we've seen one. OK, great.

Thank you so much. Appreciate it.

Jim Nesci -- President and Chief Executive Officer

Thanks, Julienne. 

Operator

[Operator instructions] We have no further questions, so I hand back for any closing remarks.

Jim Nesci -- President and Chief Executive Officer

Well, thank you, operator, I appreciate it. And to all of you who have dialed into the earnings call today, thank you for joining us, and we look forward to speaking to you again next quarter. Have a great day. 

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Jim Nesci -- President and Chief Executive Officer

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Laurie Hunsicker -- Compass Point -- Analyst

Julienne Cassarino -- Sycamore Analytics -- Analyst

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