Q2 2022 Blue Foundry Bancorp Earnings Call

Operator: Good morning, and welcome to Blue Foundry Bancorp's second quarter 2022 earnings call. My name is Melissa and I'll 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 disclaimers contained in this morning's earnings release, which has been posted to the Investor Relations page on bluefoundrybank.com.

Hum.

During the call, management will refer to non-GAAP measures, which exclude certain items from reported results. Please refer to today's earning 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 will now turn over the call to President and CEO James Nesci.

I will now turn over the cool to President and C I Jim Murphy.

James Nesci: Thank you, operator. Good morning, everyone and welcome to our second quarter earnings call. Today I'm joined for the first time by our newly appointed Chief Financial Officer, Kelly Pecoraro. Kelly comes to us from Investors Bank, where she was the Executive Vice President and Chief Accounting  Officer. Since Kelly's arrival in early May, we have benefited from her leadership and we are excited to leverage her experience and knowledge to help guide Blue Foundry. After a few opening remarks, Kelly will share the company's financial results.

Officer. Since Kelly's arrival in early May, we have benefited from her leadership and we are excited to leverage her experience and knowledge to help guide Blue Foundry.

After a few opening remarks, Kelly will share the company's financial results.

I'm encouraged by the progress we have made in our core operating results. Earlier this morning, we reported second quarter net income of $40,000 and a pre-provision net revenue of $529,000. During the quarter, we had significant growth in both our lending and retail franchises. At June 30th we reported total loans of $1.42 billion, up $88 million from the prior quarter. This represents loan growth of 6.6% quarter over quarter. This is the second consecutive quarter we grew our loan portfolio by more than 4%.

Earlier. This morning, we reported second quarter net income of $40000 on a pre provision net revenue of $529000. During the quarter, we had significant growth in both our lending and retail franchises.

At June 30, we reported total loans of one point or $2 billion.

$88 million.

Prior quarter. This represents loan growth of six 6% quarter over quarter.

This is the second consecutive quarter, we grew our loan portfolio by more than 4%.

Our lending team onboarded $175 million of new loans during the quarter. Organic originations totaled $147 million, the largest quarterly originations achieved in Blue Foundry's history. This record growth came from strong production in multifamily and commercial real estate. Our loan pipeline remains robust in the near term totaling $223 million with a weighted rate of 4.4% as of June 30th. So you can expect to continue with healthy originations in the third quarter, but given economic uncertainties later this year, our longer-term outlook is more conservative.

Organic originations totaled $147 million, the largest quarterly originations achieved and blue foundries history.

This record growth came from strong production in multifamily and commercial real estate.

Our loan pipeline remains robust in the near term totaling $223 million with a weighted rate of four 4% as of June 30.

So you can expect to continue with healthy originations in the third quarter, but given economic uncertainties. Later this year our longer term outlook is more conservative.

Deposit growth remains strong, especially with our business customers. Our retail team grew core deposits by $28 million during the quarter. Business accounts drove $25 million of that growth. To attract and retain customers, our retail team is constantly exploring new initiatives to best serve our clients.

During the quarter, we relaunched our mobile application with a simplified, modern, user-friendly interface. We partnered with a financial services technology company to initiate the implementation of an online channel for opening business accounts, and we enhanced our cash management product suite to allow business customers to initiate [inaudible].

Partnered with a financial services technology company to initiate the implementation of an online channel for opening business accounts, and we enhanced our cash management product suite to allow business customers to initiate bar and wire.

We opened our 18th branch in Hoboken, a historic district in May. This branch exemplifies our vision to open inviting environmentally conscious and architecturally efficient branches located in the center of town.

The second quarter evidenced the positive impact that the successful execution of our strategy has already had on our franchise. Additionally, July 15th marked the one-year anniversary of our initial public offering, and last week, our board of directors authorized a share repurchase program of 10% or up to 2.8 million shares.

We feel strongly that a repurchase program allows us to return capital to shareholders in an economically rational manner and we plan to begin execution of this plan once our blackout period concludes. With that, I'd like to turn the call over to Kelly, and then we'd be delighted to answer your questions.

Kelly Pecoraro: Thank you James, and good morning, everyone. I'm thrilled to have joined Blue Foundry at such a pivotal juncture in their extensive history and I am equally as excited to work alongside the management team and James to help guide the company through its bright and exciting future.

I'm thrilled to have joined <unk> foundry at such a pivotal juncture and their extensive history.

I am equally as excited to work alongside the management team and Jim to help guide the company through its bright and biting future.

Our financial results were highlighted by pre-provision net revenue of 529,000 for the quarter, an improvement of $1 million compared to the linked quarter.

Improvement of $1 million compared to the linked quarter.

Income was positive for the quarter at $40,000 of net income. However, tangible book value declined 29 cents per share for the quarter to $14.43. The entire decline was due to the higher rate environment, which had a negative impact on our available for sale securities portfolio, partially offset by our interest rate swap position, which is reflected in other comprehensive income.

However, tangible book value declined 29 per share for the quarter to $14 43.

The entire decline was due to the higher rate environment, which had a negative impact on our available for sale securities portfolio.

Partially offset by our interest rate swap position, which is reflected other comprehensive income.

Since September 30th, 2021, the first reported quarter after going public, tangible book value has declined to $1.27 per share. 97% or $1.23 of this reduction is primarily related to items that we believe to be primarily temporary in nature.

Tangible book value has declined to $1 27 per share.

97% or $1 23 of this reduction is primarily related to items that we believe to be primarily temporary in nature.

Breaking it down further, 64 cents is due to temporary unrealized losses reflected in AOCI, and 59 cents is from the valuation allowance established on our deferred tax assets.

While the majority of our securities are held as available for sale, requiring mark-to-market adjustments, we currently do not intend to sell those securities. Therefore, we expect to receive the full value of the securities as principal payments are received. With sustained profitability, we expect to be able to continue reversing the majority of the previously established valuation allowance.

Currently do not intend to sell those securities.

Therefore, we expect to receive the full value of the securities as principal payments are received.

With sustained profitability, we expect to be able to continue reversing the majority of the previously established valuation allowance.

During the quarter, net interest margin expanded 21 basis points versus the trailing quarter to 2.83%, despite funding pressure from the rising rate environment.

Despite funding pressure from the rising rate environment.

Throughout the quarter, we successfully deployed our excess cash through the substantial loan growth Jim highlighted earlier. Net interest income increased $1.2 million or 10.2% to $13.2 million as loan balances grew quarter over quarter.

Net interest income increased $1 2 million or 10, 2%.

To $13 2 million as loan balances grew quarter over quarter.

While interest expense increased 61,000 compared to the prior quarter, our cost of funds remained flat at 46 basis points. We have benefited from a shift in our liability mix as our time deposits continue to run off.

We have benefited from a shift in our liability mix as our time deposits continue to run off.

In regards to expenses, we continue to closely manage our operating expenses, which resulted in a sequential decline of 1.9%, or 259,000 to $13.1 million, excluding the impact of the provision for commitments and letters of credit. Variable expenses within professional services and advertising drove the decline.

This resulted in a sequential decline of one 9%.

Our 259000.

To $13 1 million, excluding the impact of the provision for commitments and letters of credit.

Variable expenses within professional services and advertising drove the decline.

Gross loans, excluding PPP, grew by $94.3 million or 7.1% sequentially.

Through by $94 3 million or seven 1% sequentially.

Our commercial real estate portfolios experienced strong growth in the quarter, driven by originations of $140 million. During the quarter, the bank also purchased $28 million of high-quality residential loans in our principal market, which were originated from Fannie Mae standards, compared to $46 million of purchases in the previous quarter.

Given by originations of $140 million.

During the quarter. The bank also purchased $28 million up high quality residential loans in our principal market, which were originated Fannie Mae standards.

Compared to $46 million of purchases in the previous quarter.

We will selectively use the purchase program in the near term to supplement residential originations. Our securities portfolio is well positioned to provide supplemental cash flow that will be used to fund loans as demand remains high. During the quarter, the portfolio declined by $23.4 million due to maturities, calls, scheduled pay downs, and mark-to-market adjustments.

Our securities portfolio is well positioned to provide supplemental cash flow that will be used to fund loans as demand remains high.

During the quarter the portfolio declined by $23 4 million due to maturities calls scheduled pay downs and mark to market adjustments.

Our asset quality remains strong as non-performing loans and total loans decreased eight basis points to 70 basis points. During the quarter, our allowance to total loans decreased two basis points to 98 basis points. However, our allowance to non-accrual loans increased to 140.5% from 128.5% the prior quarter.

Nonperforming loans to total loans decreased eight basis points to 70 basis points during the quarter, our allowance to total loans decreased two basis points to 98 basis points.

However, our allowance to non accrual loans increased to 145% from 128, 5% the prior quarter.

As a reminder, we are currently operating under the incurred loss model and are on track to adopt [inaudible] by the required implementation date. And with that, Jim and I are happy to take your questions.

On track to adopt Cecil by the required implementation date.

And with that Jim and I are happy to take your questions.

Operator: Thank you. If you would like to ask a question, we invite you to press star followed by one on your telephone keypad. If you change your mind or feel that your question has already been answered, you can press star followed by two to withdraw your question. Please ensure that you have unmuted when preparing to ask your question.

Operator: We will take our first question today from Ross Haberman of RLH Investors. Ross, over to you.

Yeah.

We will take our first question today.

From Ross Haberman of all relate to investors Ross I N T E.

Ross Haberman: Good morning, thanks for having the call. Two questions: could you discuss your average duration or the average maturity of your investment held for sale? That's my first question, please and thank you.

Thanks for having the call to.

Two questions could you discuss your average duration or the average maturity of your investment held held for sale.

That's my first question. Please thank you.

Kelly Pecoraro: Sure Ross, this is Kelly Pecoraro. The average duration is right around four years, four and a half years on our held to maturity portfolio.

Ross Haberman: And what portion of the portfolio is mortgage backs and have they been extending and could that four years, if you do have a lot extend out quite a bit further beyond the four years? Thank you.

Kelly Pecoraro: Give me a moment, I'm just looking for the breakout on the mortgage book and the health to maturity portfolio. So they are all in our available for sale portfolio.

Uh huh.

Okay.

Give me a moment.

Looking for the breakout on the mortgage book and the health to maturity portfolio.

Yes.

So hopefully that helps.

Yeah.

Our available for sale.

Ross Haberman: And I guess the question is, is that extended and could that four years end up being five to six because of the amount of mortgage backs you have in that held for sale?

Is that extended and could that four years ended up being five to six because.

The amount of mortgage backs you havent that held for sale.

Kelly Pecoraro: When you look at the interest rate environment, I think the expansion that we're seeing these are short-lived investments so there's a potential for extension, but we're not projecting it to be very material at this point.

Investments so there's a potential for extension, but we're not projecting it to be.

Very material at this point.

Ross Haberman: Again, those are the mortgage backs in the held for sale and that's before the average, the four years for the held for sale. I just want to clarify that.

And that's before the averages the four years for the held for sale I just want to clarify that.

Kelly Pecoraro: Yeah, the held for sale when they are available for sale so the mortgage-backed securities.

Well the held for sale.

They are available for sale so the mortgage backed securities.

Ross Haberman: Okay, thank you very much.

Thank you very much.

Operator: Thank you, Ross. We'll take our next question today from Laurie Hunsicker of Compass Point. Laurie, please go ahead.

Thank you Brooks will take our next question today from Laurie Hunsicker Compass point Laurie. Please go ahead.

Laurie Hunsicker: Great. Hi, thanks, good morning. And Kelly welcome. Hoping that we can go back Jim to the comments that you made in the prepared remarks when you talked about the longer-term outlook for loan growth. Can you help us quantify that? Obviously, as you referenced very good 7% overall, 26% annualized, how we should be thinking about that as we look to next year and then I have another question related to that too.

And Kelly welcome them.

Hoping that we can go back Jim to the comments that you made in the prepared remarks, when you talked about the longer term outlook for loan growth can you help us quantify that obviously as you referenced very good.

You know, 7% overall, 26% annualized.

How we should be thinking about that is as we look to next year and then I have another question related to that too.

Kelly Pecoraro: So Laurie it's Kelly, thank you very much for welcoming me, very happy to be here at Blue Foundry. As we look at our pipeline as of 630, we have about 220 million in the pipeline as we went into Q3. We believe loan growth is strong as demonstrated in Q2. We hope and believe that it will continue to be strong in Q3. We're not prepared at this point to provide really any guidance on Q4 as you know we continue to look at the market.

But welcome me very happy to be here at Blue foundry.

As we look at our pipeline as of 630, we have about 220 million in the pipeline as we went into Q3 you.

We believe loan growth is strong as demonstrated in Q2, we hope and believe that it will continue to be strong in Q3, we're not prepared at this point to provide really any guidance on Q4 as you know we continue to look at the market.

Laurie Hunsicker: Okay, and then just drilling down a little bit into your buckets here. Your multifamily book sitting at 579 million, huge growth in the quarter, 48% annualized; was any of that purchased or was that your own team originating? And then same question on Cree huge growth in that 52% annualized, same thing, are you participating that are or how are you getting that book? What is that?

You know your multifamily book sitting at 579 million huge growth in the quarter.

48% annualized was there any of that purchased or was that your own team originating and then same question on Mercury.

You know huge growth in that 52% annualized same thing was that was that are you participating that are or how how are you getting that Bob.

What is that.

Kelly Pecoraro: So in the multifamily space, all originations are from team. They've been working really hard and crushing it in that market. We think the multifamily product is a good product, it diversifies our cash flow risk as we're looking at the portfolio. In terms of our Cree, it was a 100% direct as we saw growth within that portfolio.

In the multifamily space.

Paul originations.

Our team they've been working really hard and crushing it in that market.

Thank the multifamily product is a good product diversifies, our cash flow risk.

We're looking at the portfolio.

In terms of our Cree you know it was a 100% direct.

As we saw growth within that portfolio.

Laurie Hunsicker: Okay, and are you adding within the categories of office? Can you just remind us where you guys sit in terms of office today? I mean, I know, you had the minimum exposure previously and threat of the hotter categories of hotel restaurant, retail, and office, but are you starting to add in any of those hotter categories, or what's in that growth?

I know I mean, I know, it's a de minimis exposure previously and threat of the hotter categories of hotel restaurant retail and office, but.

Didn't know if are you are you starting to add in any of those hotter categories or what what's in that growth.

Kelly Pecoraro: So no really our office portfolio Laurie as of 6/30 sat at 3% of our commercial book, so really we have about $24 million in exposure in the office. We don't have really concerns about that, they're all performing. If you look at our [inaudible] this quarter, we did have one large credit that was to a retail space that was anchored with quality tenants and investment grade and borrowers that we're very comfortable with.

So no really our office portfolio Laurie as of 630 set at 3% of our commercial book, So really we have about $24 million in exposure in the office, we don't have really concerns about that theyre all performing.

And if you look at our <unk>. This quarter you know we did have one large credit that was too a retail space that was.

Anchored with quality tenants and investment grade and borrowers that were very comfortable with.

Laurie Hunsicker: Okay. And then just switching over to the income statement, net interest margin, obviously very, very strong and your PPP loans are almost gone. Within your 13.162 million of net interest income, how much of that was the PPP forgiveness?

And then just switching over to the income statement you know net interest margin, obviously very very strong and your P. P. P loans are almost gone do you have within your 13.162 million of net interest income how much of that was the P. P. P forgiveness.

Kelly Pecoraro: So in the PPP for the quarter, it was about 170,000 including what's in the net interest income. 8000 was in the fees that are remaining on that book, it's a very small book that's remaining on the PPP.

80, 880000 was in the fees that are remaining on that book its a very small book that's remaining on the P. P C.

Laurie Hunsicker: Okay, alright. So four basis points on your margin versus seven last quarter. So tremendous obviously core margin expansion and it looks like on the funding side you're really holding your cost of deposits down. How should we be thinking about margin here as we look out to the next two quarters?

It really holding your your cost of deposits down how should we be thinking about margin here as we look out to the next two quarters.

Kelly Pecoraro: So Laurie I think as you will notice within the quarter, we were able to deploy our excess cash that we had on our balance sheet that partially responsible for us keeping that cost of funds down and then also having the shifts in the CPDs. We do anticipate increased pressure on the margin as we move into the third and fourth quarter with the continuous increase in interest rates.

We do anticipate increased pressure on the margin as we move into the third and fourth quarter with the continuous increase in interest rates.

Laurie Hunsicker: Okay, great. And then on the expense side, obviously, the 18 branch was added. How should we be thinking both about how you're gonna grow core expenses, any framework you can give us there? And then also Jim maybe any comments on De Novo branch plans as we look forward? Thanks.

On the expense side, obviously, the 18 branch was added.

How should we be thinking both about you know how you're gonna grow core expenses any framework you can give us there and then also Jim maybe any comments on de.

De Novo branch plans as we look forward.

James Nesci: Sure, maybe I'll take the De Novo branch question first. We continue to experience really strong loan growth, obviously, that has to be funded. Our business plan has to stay focused on our small business customer which we'll keep building smaller branches. So I think the large branches of yesteryear are not in our future. We'll keep our size probably 2000 square feet and less in highly populated dense areas filled with lots of small businesses. As we mentioned earlier in the call, we find that customer to be really good for our bank. We're able to provide a lot of service to that customer and they provided back low-cost funds to us, so it's working really well. We're not trying to grow by five branches a year, but I think it's a couple few branches and very strategically placed, we look at rents, we look at location, we you look at a lot of demographic studies, we've tried to be as strategic as possible when taking a new branch. That's what I can give you on the branches, but I'll turn it back to Kelly.

We continue to experience really strong loan growth, obviously that has to be funded our business plan, we stay focused on.

Small business customer.

Well keep building.

Smaller branches. So I think the large branches of yesteryear are not in our future well keep our size, probably 2000 square feet and Wes.

In highly populated dense areas filled with lots of small business as we mentioned earlier in the call we find that customer to be really good for our bank.

We're able to provide a lot of service to that customer and they provided back low cost funds to us so it's working really well.

We're not we're not trying to grow by five branches a year, but I think it's a couple few branches and very strategically placed we look at risks we look at location. When you look at a lot of demographic studies, we've tried to be a strategic as possible when taking a new branch.

That's what I can give you on the branches, but I'll turn it back to Kelly.

Kelly Pecoraro: Thanks, Jim. Yes, Lori in terms of spend, as we move forward, we're very conscious about our expense and trying to keep that in line. We were very pleased with the reduction in our use of professional services, which led to a lot of the decline within the quarter. I think as we look forward, we're looking at staying within that 13.5 quarterly run rate from an expense spend perspective.

Yes, Lori in terms of spend spend.

As we move forward, we're very conscious about our expense than trying to keep that in in line. We were very pleased with the reduction.

And our use of professional services, which led to a lot of the decline within the quarter.

I think as we look forward, we're looking at staying within that $13 five quarterly run rate from an expense spend perspective.

Laurie Hunsicker: Okay, and does that $13.5 million guide, does that include the benefit plan expense, which presumably is going to start in the fourth quarter or is that exclusive of that?

Kelly Pecoraro: So currently that includes what has been disclosed in our proxy if approved and the expense rate that we would have for the quarter based upon the awards disclosed currently now.

Laurie Hunsicker: Okay, great. I love seeing the buyback, I'll leave it there. Thanks for taking my questions.

Great I love seeing the buyback I'll leave it there thanks for taking my questions.

James Nesci: Thanks for your time today. I appreciate it, Laurie. Thanks for the questions.

Operator: Thank you for your question, Laurie. I will now hand back to Jim and Kelly for any concluding remarks.

James Nesci: Thank you, operator. It's been an interesting fun quarter. It's been really busy and before we leave I know I have a lot of employees listening to the call today. I'd like to thank all of our employees and all of their hard work should be acknowledged; a tremendous effort put forth with all of the loan growth in all of the deposit gathering, so thank you very much. To our shareholders, thanks for sticking with us and we appreciate all of your support. We'll be back online with you next quarter and look forward to reporting some more great news to you. Thanks again.

A tremendous effort put forth with all of the loan growth in all of the deposit gathering. So thank you very much to our shareholders.

So sticking with us and we appreciate all of your support.

We'll be back online with you next quarter and look forward to reporting some more great news to you. Thanks again.

Operator: Thank you. This concludes the call today, you may now disconnect your lines.

Thank you. This concludes the call today you may now disconnect your lines.

Uh huh. Oh. Uh huh. Right. Okay. Yes. Yeah. Yeah. Yeah. Yeah. Okay. Okay. Uh huh. [music].

Oh.

Uh huh.

Right.

Okay.

Yes.

Yeah.

Yeah.

Yeah.

Yeah.

Okay.

Okay.

Uh huh.

[music].