Blue Foundry Bancorp (BLFY) Q1 2022 Earnings Call Transcript

Blue Foundry Bancorp (BLFY -1.73%)
Q1 2022 Earnings Call
Apr 27, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Simona, 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 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 together materially from those expressed or implied in such forward-looking statements.

Listeners are referred to the disclosure 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 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.

All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. Thank you. I'll now turn the call over to Jim Nesci, president and CEO.

Jim Nesci -- President and Chief Executive Officer

Great. Thanks, operator. And good morning, 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 Agnoletto. 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 toward 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 both 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, I've seen group core business deposits by over $40 million.

New branches open 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 growth loan came in at a net of $64.1 million with strong performance within our commercial lending base. We are and we will continue to benefit from the rising rate environment as we put excess liquidity to work and as we find new loan growth with low cost quarter deposits.

Total cash was 101.6 million at the end of the first quarter, which represents our management team put in over 90 million to work during the quarter. The first quarter showed evidence of our poor strategy and capability 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 Pecoraro. Kelly joined Blue Foundry Bank from Investors Bank, where she most recently served as the chief accounting officer. She began her career in KPMG audit practice and brings a wealth of accounting, finance, and regulatory knowledge from her 30- plus 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 his appointment. I'd like to turn the call over to Alex Agnoletto to discuss the company's financial results.

Alex Agnoletto -- Controller and Interim Chief Financial Officer

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 expenses of 276,000, and a reduction 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 a continued reduction in our cost of funds. Our net interest margin decreased by one basis point to 2.6% for the three months ended March 31st, 2022. As compared to the prior quarter, net interest margin increased by 54 basis points year over year, and 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 break even 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 PPPV 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 continued security subsiding deposits as well as slightly reduced average [Inaudible]. 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 54.1 million or 5%, primarily due to strong origination performance across our CRE portfolios, coupled with a 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 loads remaining on our books and $251,000 of fees left to be realized. Our total pipeline was over $130 million as of March 31st, with an average expected yield of 3.9%. Our real estate portfolios experienced strong growth of order, 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 that was enacted last year. During the quarter, the bank purchased approximately 45 million of high-quality residential loans originated to Fannie Mae standards and 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 security 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've been reinvesting in securities that yield over 2.65% over the past quarter.

And as rates rise, we plan to put more excess liquidity toward. Our current portfolio has a weighted average length of 4.7 years. We view our asset quality as stable and improving. Our non-performing 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 this current quarter. During the quarter, our allowance to total loans decreased 30 basis points from 1.13% to 1%. As the economy continues to stabilize and improve. As a reminder, we expect to adopt CECL as of January 1, 2023, and are currently operating under the incurred loss model. I would like to turn it back to Jim for concluding remarks.

Jim Nesci -- President and Chief Executive Officer

Thanks, Alex. The first quarter marks significant progress positioning our balance sheet to deliver strong Q4 results. I am encouraged by the continued improvement in our core operating cost. We recognize the work ahead of u,  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.

Questions & Answers:

Operator

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

Laurie Hunsicker -- Compass Point Research and Trading -- Analyst

Yeah. Hi. Thanks. Good morning Jim and Alex.

And, Kelly, congratulations to you. I was hoping that you could go back to loan growth. Looks like your commercial real estate loan growth was very, very strong. What's going on there and how are you thinking about that? And is that also purchased?

Jim Nesci -- President and Chief Executive Officer

So. Good morning. And just to clarify, Kelly will be starting with us in a couple of weeks. And I think you can refer back to that case that we released that gives the exact dates and times.

But she is -- we're excited to have her joining the team shortly. On loan growth, it's been an exciting quarter. It's been a lot of CRE deals coming in at good prices. It's a lot of non residential CRE deals as well, but I'm happy to answer questions on it if you want to be more specific in the question.

Laurie Hunsicker -- Compass Point Research and Trading -- Analyst

Yeah. So I'm just looking quarter you went from 142 million to 187 million, a really 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?

Jim Nesci -- President and Chief Executive Officer

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

Laurie Hunsicker -- Compass Point Research and Trading -- Analyst

Got it. And sorry, what -- I mean, I can follow up with you, but this very high level, what type of CRE you adding?

Jim Nesci -- President and Chief Executive Officer

It's a mix. It's industrial.

Laurie Hunsicker -- Compass Point Research and Trading -- Analyst

You know what? I'll --

Jim Nesci -- President and Chief Executive Officer

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

Laurie Hunsicker -- Compass Point Research and Trading -- Analyst

OK. OK. Yeah. And so onto onto net interest income.

I just wanted to verify that the amount of PPP gains realized this quarter was 265. Is that -- did I get that right?

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Right. Right around there, Laurie. It's actually just a nick higher right around 320,000. We're about 250 left to go in Q2, but I don't think all of it will be realized in Q2.

I think it's going to take a few quarters for all of that to to come to fruition.

Laurie Hunsicker -- Compass Point Research and Trading -- Analyst

Got it. OK. So so just stripping that out very back of the envelope. You were Q6, Q2 margin.

So acting that your 255 core, can you can you help us think a little bit as you talked about putting that to work, purchasing more resi, more securities that looks like your interest rate sensitivity as of December 31 than a 100 basis points, that is a 3% on NII. Can you just help us quantify that a little bit more? In other words, what is margin going to look like as we head into this rising rate environment? Do you have any sort of data point you can give us on every 25-basis-point hike, yield x. Is there any more color you can give us around that? Maybe even thoughts on your deposit?

Jim Nesci -- President and Chief Executive Officer

Sure. So in a 100 scenario out 12 months, we're seeing NII at up 4.4, 5%. I think we still have some bits of cash left to deploy. Q1 was deployed at a mix for our purchases, a mix of lower yielding investments that were shorter duration, high credit quality.

As we go into Q2. Those rates are obviously going to be priced a bit higher as rates have moved a lot in the last few months. So I think in the short term, margins will continue to expand slightly. And then as we get into Q3, the cost of funds will be challenged slightly as we will move off of where we are right now in the forties and move up toward up a higher number. 

Alex Agnoletto -- Controller and Interim Chief Financial Officer

And just to clarify, Laurie, the the purchases, I think you will see us slowing down on investment purchases over the next quarter. But as far as one day for residential, high quality residential 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.

Laurie Hunsicker -- Compass Point Research and Trading -- Analyst

Right. OK. That is helpful. And then can you can you talk a little bit about the loan provision line? Obviously, very, very strong loan growth.

You're now sitting at a 1% reserves to loans or one to one extra PPP. How should we be thinking about that in terms of provision normalizing and I realized CECL isn't coming until 2023. But can you just help us think about how that looks going forward? Were you have a reserve still on target?

Jim Nesci -- President and Chief Executive Officer

Sure. So I don't know at this time that we're willing to put out a necessary target. I think each quarter we consider the economic factors relative each portfolio. What I can say about the current quarter is that a lot of the reserve was related to reductions in the construction portfolio, and those loans are riskier assets and they come with higher reserve ratios.

But our underlying credit quality across the rest of our portfolios remain strong. We've not had any charge offs in the last few quarters, let alone years. So I think of strengthening credit quality in our broader portfolio mixed with some good fundamentals in collateral values and broader economic fact patterns for portfolio type has led us to where we are today. It's hard to say exactly where that lands in the future, but you're right in that it's hard to compare us to some of our peers because a lot of our public peers are all on the CECL model, which we will not be on until later into a few quarters from now.

Laurie Hunsicker -- Compass Point Research and Trading -- Analyst

Got it. OK. OK. And then your non-interest income obviously strong, your fees and service charges up nicely linked quarter.

You know, maybe just some color around how we should be thinking about that. And also, will you refresh us in terms of what your overdraft and NSPs are, and any plans to become a little bit more consumer friendly there, just how that would impact your fee income, how you're thinking about that?

Jim Nesci -- President and Chief Executive Officer

Sure. So I don't think our business model is very consumer driven. I think a lot of our products are built around low-cost models, and I think that's reflected in how much of those fees are currently included in our non-interest income. So on a quarterly basis, we have under 100,000, in the 10-Q, we will put out an exact number for that, but it's not overly significant to the numbers that you're seeing here. And I don't think that it will be in the next quarter or two. 

Alex Agnoletto -- Controller and Interim Chief Financial Officer

And again, to add on that, you'll continue to see us become more consumer friendly. I think those are your words that you're using. So you will see us following along with others on items like overdraft fees. So it's not a big line item at that balance has suggested, but it'll continue to improve for consumers.

Laurie Hunsicker -- Compass Point Research and Trading -- Analyst

Got it. OK. And that 100,000, met annual or that's for the quarter?

Jim Nesci -- President and Chief Executive Officer

It's under that number, the exact number I will publish in the 10-Q. But that is a quarterly number.

Laurie Hunsicker -- Compass Point Research and Trading -- Analyst

Quarterly. OK, great. OK. And then last question for me.

Can you comment a little bit on expenses? Obviously, that came down nicely. There's a lot of one time items, certainly compelling quarter. But you need us to refresh us on your thoughts around expenses if you happen to have with the seasonal payroll tax was in this quarter versus how it looks next? And then also, any any plans we should be thinking about in terms of turnover, branching either for this year or next, and how we should think about expenses around that? Thanks.

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Sure. So I'll let Jim speak to the noble branching. But as far as expenses go, I think next quarter we're looking to see expenses relatively flat. I think the reduction that's come at the at the way of a lot of our consulting costs rolling off the book.

But I don't see a significant continued reduction there. I think it's going to be fairly stable as we look into the next quarter or two, just continue to build out our products and services and higher numbers.

Laurie Hunsicker -- Compass Point Research and Trading -- Analyst

OK. And what about any de novo branching plans they should be aware of? Or how are you thinking about that?

Jim Nesci -- President and Chief Executive Officer

We continue to look for opportunities in the marketplace where we --

Duration: 19 minutes

Call participants:

Jim Nesci -- President and Chief Executive Officer

Alex Agnoletto -- Controller and Interim Chief Financial Officer

Laurie Hunsicker -- Compass Point Research and Trading -- Analyst

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