Start Time: 11:00 January 1, 0000 11:22 AM ET
Blue Foundry Bancorp (NASDAQ:BLFY)
Q3 2022 Earnings Conference Call
October 26, 2022, 11:00 AM ET
Company Participants
James Nesci – President and CEO
Kelly Pecoraro – EVP and CFO
Conference Call Participants
Laurie Hunsicker – Compass Point
Operator
Good morning, and welcome to Blue Foundry Bancorp’s Third Quarter 2022 Earnings Call. My name is Harry, and I will be your conference operator today.
Comments made during today’s call may include forward-looking statements, which are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Blue Foundry encourages all participants to refer to the full disclaimer contained in this morning’s earnings release, which has been posted to the Investor Relations page on bluefoundrybank.com.
During the call, management will refer to non-GAAP measures, which exclude certain items from reported results. Please refer to today’s earnings release for reconciliations of these non-GAAP measures. As a reminder, this event is being recorded. Your line will be muted for the duration of the call. After the speakers’ remarks, there will be a question-and-answer session.
I would now like to turn the call over to President and CEO, Jim Nesci.
James Nesci
Thank you, operator. Good morning, everyone, and welcome to our third quarter earnings call. I’m joined by our Chief Financial Officer, Kelly Pecoraro. After my opening remarks, Kelly will share the company’s financial results.
Earlier this morning, we recorded third quarter net income of $1.2 million or $0.05 per diluted share and a pre-provision net revenue of $1.1 million. Our performance was largely driven by continued growth in commercial loans. Our lending team had another remarkable quarter, originating 172 million of loans. During the quarter, we focused on production on the multifamily segment, which we feel is a stable asset class during times of potential economic uncertainty. While our retail markets are beginning to show higher deposit costs, our loan growth has helped to expand net interest income by 5%.
As of September 30, loans totaled 1.49 billion, up 67 million from the prior quarter. This represents loan growth of 5% quarter-over-quarter, the fourth consecutive quarter we grow our loan portfolio by more than 4%. While our loan pipeline remains healthy, given supply and the current environment, we do not expect to continue growing at this record pace.
We decreased our reliance on certificates of deposit by 65 million for the quarter while growing our core deposits by 35 million. Core deposit growth remains strong across both consumer and business segments. Our focus on attracting the full banking relationship of small to medium-sized businesses led to an increase in business accounts by 4%. Business-related deposits increased 7% to 179 million. Additionally, the company added 18 million in consumer core deposits.
Beginning in August, we repurchased 667,000 shares at a weighted average cost of $11.67, a significant discount to tangible book value. This represents 23% of the approved stock repurchase program. Additionally, last week, the Board of Directors approved stock option grants for officers of the company. Not only will these grants help us to retain top talent, they will further align our officers with long-term interest of our shareholders.
These options granted have a strike price of $11.69 and will vest ratably over the next seven years. On behalf of our Board of Directors and the officers of our company, I would like to thank our shareholders for their support and approval of the Blue Foundry Bancorp 2022 equity incentive plan.
With that, I’d like to turn the call over to Kelly, and we’d be delighted to answer your questions. Kelly?
Kelly Pecoraro
Thank you, Jim, and good morning, everyone. Our financial results were highlighted by net income of 1.2 million compared to 40,000 during the linked quarter. This improvement was largely related to pre-provision net revenue, which increased 586,000. Despite funding pressure from the rising rate environment, net interest margin remained relatively flat, expanding 1 basis point to 2.84%.
Interest income increased 1.5 million and net interest income increased 5% or 653,000 driven by a 96 million increase in average loan balances. Remaining competitive in pricing, we have increased rates offered on select depository products. This, coupled with an increase in short-term borrowings, drove cost of funds to 66 basis points, a 9 [ph] basis point increase compared with the prior quarter. We expect pressure on our margin due to our balance sheet being liability sensitive.
During the quarter, we released provision of loan losses of 419,000 and increased our provision for commitment by 170,000 due to a change in mix of our loan portfolio. Our asset quality remains strong. During the quarter, our allowance to total loans decreased 7 basis points to 91 basis points. This was partially driven by the changing mix of our portfolio, as well as the improvement in our credit metrics.
Nonperforming loans to total loans decreased 14 basis points to 56 basis points. Our allowance to nonaccrual loans increased to 162% from 141% the prior quarter. As a reminder, we are currently operating under the incurred loss model and are on track to adopt CECL by the required implementation date.
In terms of expenses, excluding our provision for commitment, we saw $372,000 increase. This is due to a combination of director equity grants, an increase in working days and nonrecurring expenses from investor related activity and the potential branch sale. As Jim mentioned in his remarks, stock option grants for officers were approved this month. We expect these grants to add quarterly expense of approximately 300,000. We will continue to closely manage our operating expenses.
Moving on to the balance sheet. Gross loans, excluding PPP, grew by 68 million or 4.8% sequentially, driven by originations of 172 million, primarily in the multifamily segment. During the quarter, the bank also purchased 15 million of high quality residential loans in our principal market, which were originated to Fannie Mae standards. With a duration of 4.1 years, our securities portfolio continues to provide cash flow that is being used to fund loans. 17.6 million of the decline in the securities portfolio was attributed to maturities, calls and scheduled pay downs.
We continue to grow our core deposits through a variety of initiatives. During the quarter, core deposits increased 4% or 35 million and now represent 71% of total deposits. Additionally, during the quarter, borrowing increased 90 million. Tangible book value declined $0.34 to $14.09 per share, driven primarily by the negative impact that interest rates had on our available for sale securities portfolio.
Given our current tax position, most of the change in fair value flows through to equity with little tax benefit for the unrealized loss. Therefore, the rising rate environment has a more profound impact on our equity than it would have if we were operating with a more normalized tax position. As we mentioned last quarter, we currently intend to hold these securities through their contractual maturity, which will allow us to recoup the unrealized losses we have experienced to date. As Jim mentioned earlier, we repurchased shares at a discount, which had a positive impact on tangible book value.
And with that, Jim and I are happy to take your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. And our first question of the day comes from the line of Laurie Hunsicker, Compass Point. Laurie, your line is now open.
Laurie Hunsicker
Great. Hi. Thanks. Jim and Kelly, good morning. Just hoping actually we could start with the buyback. So I know in your release, you’re saying 667,000 at 11.67. Was some of that for the benefit plans or was that all — I guess I’m just — go ahead?
Kelly Pecoraro
Sorry, Laurie. Good morning. Yes, so we did use 299,000 of those shares to fund the equity portion of the Director’s grants.
Laurie Hunsicker
Great. Perfect. Okay. And then just in terms of your loan growth, can you help us think a little bit about how loan growth will look going forward? And then specifically that multifamily jump by almost 100 million, just where that multifamily is located? Any details you can give us, LTVs on that growth, just how you’re thinking about that? Thanks.
Kelly Pecoraro
Sure, Laurie. We had strong growth in the multifamily segment this quarter, which we think is a good asset class for us to be in at this point. From an overall perspective, the majority of that, about 60% is in the New Jersey space, 32% is in the New York space, not in the Manhattan area. And the LTV are about 60% — around 60% LTV.
Laurie Hunsicker
Okay. And then when you think about growth going forward, how are you looking at that book?
James Nesci
At the multifamily book or just commercial real estate overall?
Laurie Hunsicker
Yes, exactly. At the multifamily book because your growth was 69% annualized this quarter. And that’s on the top of your loan book. So just how should we be thinking about that going forward?
James Nesci
I think you’ll continue to see growth in the multifamily. It’s starting to slow down in the marketplace. We’ll continue to look at industrial real estate as well. But the market is definitely tightening up from what we’re seeing.
Laurie Hunsicker
Okay. And with that multifamily, was that purchased or your team originated that?
James Nesci
Directly originated.
Laurie Hunsicker
Okay, great. And then thinking about, Kelly, in your comments on margin pressure, can you talk a little bit just about the funding side, what you’re seeing there in terms of price pressure, just help us think about that a little bit? And then just specifically, kind of a cleanup item, within your net interest income, I know there was probably a very, very small amount of PPP forgiveness. Do you have that figure?
Kelly Pecoraro
Yes, Laurie. So the PPP for this quarter represented about 1 basis point. As you said, that really has come down in the recent quarters. We only have approximately 0.5 million left in PPP loans, with about 30,000 of fee income to be amortized, which will not be meaningful, as we move forward. So this quarter was 1 basis point attributed to the NIM. In terms of —
Laurie Hunsicker
Go ahead.
Kelly Pecoraro
No, I was going to move on. If you had another question on that, I was going to move on to the funding pressure question.
Laurie Hunsicker
Yes, please. Thanks, Kelly.
Kelly Pecoraro
So we have a number of initiatives going on at the institution. I think not unlike others, we are experiencing pressure on our funding sources. We are pleased with our shift to core deposits. But realize as our growth has outpaced our deposit growth, we continue to see pressure on those funding. So we’re hopeful that some of our initiatives in shifting the funding sources will be successful. But we’re looking at compression in the margin.
Laurie Hunsicker
Okay. I guess what I —
James Nesci
Sorry, Laurie. I was going to say what we’re really focused on is introducing new customers to the bank, so most of those initiatives will be focused on bringing new funds to the bank, new customer money. That’s the focus.
Laurie Hunsicker
Got it. Okay. Yes, and so just obviously stripping out the PPP fees, so your headline margin contract or your headline margin 1 basis point. But if I strip out the PPP fees, you were actually 4 basis points wider. So I guess putting everything together in terms of margin contraction, can you help us think about that a little bit more with what you’re seeing on the funding side?
Kelly Pecoraro
Yes, I think as we had said last quarter, we benefited from some late deposit growth in Q2 that was fully realized in Q3. So that did help to expand the core margin a little more than we were seeing from the overall face of the financial number. But again, as you took a look, we do have currently increased borrowings, which in the current rate environment, is putting pressure on those assets that we put on and the spreads we’re realizing.
Laurie Hunsicker
Okay. And then non-interest income I would say saw a nice little jump there in your fees and service charges. Can you remind us how much of that 650,000 is prepay income?
Kelly Pecoraro
Yes, so approximately 300 to 350 is prepay and exit fee loan related income that was realized during the quarter.
Laurie Hunsicker
Got it. Okay. And then on expenses you mentioned in your press release, you mentioned in your prepared comments to the one-time charges. I just didn’t see how much the one-time charges were this quarter. What was that figure and can you tell us what’s in that number?
Kelly Pecoraro
So the one-time charges really include legal expenses, primarily we’ve had some charges there as well as an increase in the — we had a branch that we anticipate selling that was recognized there. So in total, that 240,000 of the expenses for the quarter we believe to be nonrecurring.
Laurie Hunsicker
Okay. And then on expenses maybe just help us put it together a little bit. Obviously, you had your equity incentive plan for only part of this quarter. So really fully phased, that adds another call it 213,000 plus, your Director’s grant at 300,000. So even netting out that 240, help us think about expenses, and especially as we look to next year, what that figure will look like? And maybe also, Jim, if you could comment in terms of how you’re thinking about de novos and any expenses around that just to refresh on that? Just trying to put together —
James Nesci
Sorry, [indiscernible] Kelly a chance to put her numbers together for you. As far as de novo branches in 2023, we continually look in the marketplace for areas that make sense for our bank to de novo. I would not be surprised if we added two to four branches in 2023. With that said the process to add a branch takes months. Lease negotiation takes quite a few months these days. Fit out takes months. So while we may have a plan to put them on in 2023, I don’t think most of the expense will be incurred in the first or second quarter of 2023. I’m guessing that we’re forecasting that most of it is in Q3 or Q4. So I don’t think there’s going to be a pull through of a lot of expense for de novo branching next year.
Laurie Hunsicker
Okay, great. And then just —
James Nesci
I’ll turn it over to Kelly for the second part of your question.
Kelly Pecoraro
Great. Thanks, Jim. Yes, Laurie, on the expense front, from the equity awards on an annualized basis for those that have been granted to date, we’re looking at around 2.4 million, 2.5 million in expense on an annualized basis. As I look at next quarter, as you mentioned, we had a partial quarter of the equity grants for the Directors, and this quarter we will have a partial for the equity grants that were granted to management. So we’re looking at about a 13.6 in terms of expense run rate for Q4, inclusive of those new grants.
Laurie Hunsicker
Okay. And then I guess looking ahead into the March quarter, and maybe just if you could comment on the new branch expense — I mean your new branches are probably $500,000, $600,000 in costs. Just how you think about that?
Kelly Pecoraro
I think as Jim mentioned, Laurie, those expenses we don’t anticipate coming until later in the year. And currently, based upon our grants that had been granted, provided that guidance, there’s no other guidance relative to an expense spend, as we look forward. We’re going through the process of looking at our budget now and addressing some of those initiatives that the teams will embark to really be mindful of the operating expenses in the environment we’re operating in.
Laurie Hunsicker
Okay. And then just last one, just housekeeping. The AOCI — what was the actual AOCI figure that was in tangible common equity or AOCL?
Kelly Pecoraro
Yes.
Laurie Hunsicker
What’s the actual loss there?
Kelly Pecoraro
So the loss is at 27.5 million. The majority of that is made up of the loss in the securities portfolio. The unrealized loss in that portfolio is around 43 million. We do have a positive impact for the mark on the swap portfolio. But we are in an unrealized cumulated loss position.
Laurie Hunsicker
Okay, got it. Great. Thank you for taking my questions.
James Nesci
Thank you, Laurie. Thanks for being engaged with us. We really appreciate the questions every quarter.
Operator
Thank you. And we have no further questions. So it’ll be my pleasure to hand back to Jim Nesci for any closing remarks.
James Nesci
Thank you, operator. And to all of you who participated on the call today, thank you for your interest in our company. And I look forward to speaking with all of you again in the fourth quarter. Thanks and have a great day.
Operator
Thank you to everyone who has joined us today. This concludes the call and you may now disconnect your lines.
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