Blue Foundry Bancorp

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 foresees. 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 captioned 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. If you would like to register a question, please press star followed by 1 on your telephone keypad. I'll now turn the call over to Jim Nessie, President and CEO. Jim, please go ahead.

Great. Thanks, Operator, and good morning to everyone. Thank you for joining us for the very first earnings call in 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 borrowers 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 Factory, 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?

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 to $22 million. Lastly, we announced a paydown of roughly $49 million of FHLB borrowings in August, through which we incurred a $1.4 million prependent bounty. The combination of all three items created a $19.6 million in or $0.68 per share. For this quarter in particular, we believe that our adjusted pre-provisioned 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 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 FHLV 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 amidst continued higher than average prepayment levels. Total loans including PPP decreased by 2.2 million or 0.2%. 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 securities 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 over the coming quarters. We have been reinvesting at a yield of roughly 1.4% to 1.7% total 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 two basis points from 1.24% to 1.22%, and our non-accrual loans to total loans increased slightly from 1.01% to 1.03%. As a reminder, we expect to adopt CECL as of January 1st, 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 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.