BLUE FOUNDRY BANCORP This section is intended to assist in the understanding of the financial performance of the Company and its subsidiary through a discussion of our financial condition as ofDecember 31, 2022 , and our results of operations for the years endedDecember 31, 2022 and 2021. This section should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements that appear at the end of this report. COVID Update The COVID-19 pandemic has had, and may continue to have, an adverse impact on the Company, its clients and the communities it serves. Given its dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business. Business Strategy The Company's goal is to position ourselves to prosper in an evolving financial services landscape and enhance our position as one of the leading community banking institutions in our market. We intend to continue to provide a broad array of banking and other financial services to retail, commercial and small business customers while growing our presence in our markets and expanding our franchise. In recent years, we have focused on, and invested heavily in, our technology and infrastructure to improve our delivery channels and create competitive products and services, a strong workforce and an enhanced awareness of our banking brand in our market area.
As a result, we believe we are well positioned to capitalize on the opportunities available in our market by focusing on the following core strategies.
Repositioning our Business Mix: Focus on building commercial and small-business
relationships. We focus on understanding our customers' and potential customers'
financial needs and providing a wide variety of high-quality products and
solutions through a collaborative approach that intends to create long-term
relationships. Our goal is to continue to evolve from a traditional savings bank
focusing on residential lending to a full-service commercial bank with an
emphasis on providing products and services to commercial and small businesses
in our market area. We believe pursuing this strategy will allow us to both grow
and diversify our business mix while providing us with the best opportunities to
drive strong financial returns. We intend to pursue these commercial
relationships through the lending, retail branch, and the retail business
development personnel that we have recruited and continue to recruit, who have
the experience and relationships necessary to build this business as well as
through cultural changes that have been made across the organization that
emphasize our goal of pursuing this strategy. Further, our investment in
technology is intended to facilitate the delivery of consumer and business
solutions without the need for traditional sales channels.
We are approved by the SBA to provide loans under the 7(a) Loan Program, the
SBA's most common loan program. We believe providing 7(a) loans as well as
traditional commercial and industrial loans and lines of credit will allow us to
provide needed funding to our business communities, which will increase
deposits. These borrowers often also keep deposits at their loan providers.
Growing our Business: Developing new customer relationships and deepening
existing relationships. We seek to expand our market share in existing and
contiguous markets by leveraging our distinctive brand and delivering
high-quality solutions through a collaborative, relationship-based approach. Our
relationship-based approach has enabled us to achieve disciplined organic
growth, and we expect this trend to continue. Building our customer
relationships around low and no cost products is part of our relationship
expansion strategy. Our "Blue" products, including Blue Axis® Checking, Blue
Axis Connect®, Blue Axis® Savings, Blue Axis Edge™ Savings, Blue Axis® Club
Savings, Blue Carbon® Business Checking. Blue Carbon Edge™ Business Checking,
Blue Carbon® Business Money Market, and Blue Carbon® Business Savings, are
designed to be low cost to the consumer or business, while providing us with
lower interest rate deposits. Our consumer deposit products are designed to be
easy to open in person or online. Our commercial deposit products include many
features without fees that would customarily be charged.
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Leverage technology to enhance customer experience and drive operating efficiencies. We have made significant investments in our technology infrastructure to deliver high-quality, innovative products and services to our customers. For example, we continue to enhance our mobile banking platform for both consumer and commercial customers. New services, such as Early Pay, same day ACH, and "sweep" functionality, continue to be introduced to increase convenience and meet evolving customer financial needs. In addition, we have invested in our new commercial lending origination system and platform, and we intend to continue to improve our consumer lending origination platform. We are committed to continue investing in technology and data analytics. We believe these investments will differentiate us with our target customers, which will generate significant operating leverage as we grow. Continuing to invest and optimize our facilities and expand our branch network through selective de novo branching. We have been enhancing and optimizing both our facilities and branch network. We have optimized our branch footprint though the utilization of a new forward-thinking branch model and intend to continue this strategy in 2023 to broaden our existing branch network by expanding into new markets and extending our geographic footprint. In 2022, we opened a new branch in Hoboken, continuing our strategy of operating in high density areas with vibrant commercial corridors and main streets. Additionally, we renovated three existing locations, modernizing their appearance and upgrading their functionalities. New branches feature modern design elements focused on open and efficient use of space.
Branch efficiency has been built into our locations. All branches currently employ new multifunction automated teller machines that are designed to be compatible with new services as they become available. Further, all branches utilize teller cash recycling machines to further enhance efficiency.
Pursue opportunistic acquisitions and partnerships. We intend to prudently pursue opportunities to acquire banks in our existing and contiguous markets that create attractive financial returns. Our focus will primarily be on franchises that enhance our funding profile, product capabilities or geographic density, while maintaining an acceptable risk profile. We believe the vital need to make increasingly significant technological investments has greatly amplified the importance of scale in banking. In addition, we believe that the current economic climate will increase the rate of consolidation in the banking industry. We will evaluate potential partnerships with FinTech companies or other fee income generating businesses that align with our business strategy and are consistent with our desire to stay ahead of technological developments that we believe will continue to cause the banking industry to evolve.
Critical Accounting Policies
Certain of our accounting policies are important to the presentation of our
financial condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain. Estimates associated with these policies are susceptible to material
changes as a result of changes in facts and circumstances. Facts and
circumstances that could affect these judgments include, but are not limited to,
changes in interest rates, changes in the performance of the economy and changes
in the financial condition of borrowers. The Company has identified the
allowance for loan losses and income taxes to be a critical accounting policy.
These accounting policies and our significant accounting policies are discussed
in detail in Note 1 to our Consolidated Financial Statements included in Part
II, Item 8.
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Comparison of Operating Results for the Years Ended
General. Net income was$2.4 million for the year endedDecember 31, 2022 , compared to a net loss of$36.3 million for the year endedDecember 31, 2021 . The increase was driven by an increase of$8.9 million in net interest income and by the absence in the 2022 period of non-recurring expenses incurred in 2021 consisting of the establishment of a$16.7 million valuation allowance on the Company's deferred tax assets, an$11.2 million loss related to the withdrawal from the multi-employer defined-benefit pension plan, a$9.0 million contribution of cash and common stock of the Company to theBlue Foundry Charitable Foundation , and$2.2 million in debt extinguishment costs. Interest Income. Interest income increased$6.4 million , or 11.3%, to$62.4 million for the year endedDecember 31, 2022 from$56.1 million for the year endedDecember 31, 2021 . The increase was due to an increase of$3.6 million in interest income from loans and an increase of$2.9 million in interest income from cash and securities. The average balance of securities and loans increased$89.1 million and$132.6 million , respectively, while the average balance of cash decreased$267.8 million . Interest income and average balances of loans for the year endedDecember 31, 2022 as compared to the 2021 period increased due to growth in the multifamily and non-residential mortgage portfolios. The yield on average interest-earning assets increased 40 basis points to 3.28% for the year endedDecember 31, 2022 from 2.88% for the year endedDecember 31, 2021 . PPP fees recognized in interest income totaled$568 thousand and$2.8 million for the years endedDecember 31, 2022 and 2021, respectively. Interest Expense. Interest expense decreased$2.5 million , or 19.3%, to$10.6 million for the year endedDecember 31, 2022 compared to$13.1 million for the year endedDecember 31, 2021 . The decrease in interest expense was driven by a decrease of$2.1 million in interest expense on deposits, coupled with a decrease of$388 thousand in interest expense on borrowings. The average balance of interest-bearing deposits and FHLB advances decreased$61.6 million and$45.4 million , respectively. A decrease of$197.4 million in the average balance of higher cost time deposits partially offset by an increase of$135.8 million in the average balance of interest-bearing core deposits (checking, savings and money market accounts) drove a 12 basis point decrease in the cost of total deposits and a 8 basis point decrease in the cost of funds. The cost of average interest-bearing liabilities decreased 12 basis points to 0.72% for the year endedDecember 31, 2022 from 0.84% for the year endedDecember 31, 2021 .
Net Interest Income and Margin. For the year ended
Net interest margin for the year endedDecember 31, 2022 increased by 53 basis points to 2.73% from 2.20% for the year endedDecember 31, 2021 . The yield on average interest earning assets increased by 40 basis points as cash was invested into higher yielding loans and securities during the year endedDecember 31, 2022 while the overall cost of average interest bearing liabilities decreased 12 basis points for the year endedDecember 31, 2022 . Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb potential losses inherent in our loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management's ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. After an evaluation of these factors, the Company recorded a release of provision for loan losses of$1.0 million for the year endedDecember 31, 2022 compared to a release of$2.5 million for the year endedDecember 31, 2021 . The release for the year endedDecember 31, 2022 was primarily due to shifts in the loan portfolio driven 50
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by declines in balances within the construction portfolio partially offset by growth in the multifamily and non-residential portfolios and a generally improving economic environment, as well as improved credit metrics and low net charge-offs.
2022 and 2021 saw continued strengthening of credit quality, as seen in the
declining delinquency rates and balances of non-performing loans. Total
non-performing loans decreased by
Non-interest Income. Non-interest income of$2.7 million for the year endedDecember 31, 2022 represented an increase of$184 thousand , or 7.4%, from$2.5 million for the year endedDecember 31, 2021 . The fluctuations in non-interest income for the year endedDecember 31, 2022 were primarily related to loan prepayment fee activity. Prepayment fees increased$239 thousand to$982 thousand from$743 thousand for the year endedDecember 31, 2022 . Additionally, fees earned from point of sale transactions totaled$502 thousand during the year endedDecember 31, 2022 compared to$476 thousand for the 2021 period, income from bank owned life insurance totaled$490 thousand during the year endedDecember 31, 2022 compared to$476 thousand for the 2021 period, and overdraft fees recognized during the year endedDecember 31, 2022 totaled$255 thousand compared to$234 thousand for the 2021 period. Beginning inNovember 2022 , the Company ended its practice of charging overdraft fees to customers. Non-interest Expense. Non-interest expense was$52.8 million , a decrease of$21.9 million driven by the absence in 2022 of non-recurring expenses of: a$11.2 million loss on pension withdrawal, a$9.0 million charitable contribution, and$2.2 million in debt extinguishment costs. Excluding these non-recurring items, non-interest expense increased$464 thousand . An increase of$3.5 million in compensation and benefits costs was driven by salary increases, hiring of additional staff, an increase in cash incentive compensation expense, and costs associated with equity grants made under the shareholder-approved equity incentive plan. In addition, the costs associated with being a public company increased$1.0 million in 2022. These increases were partially offset by a reduction of$1.3 million in advertising and$1.2 million in data processing, and a lower provision for commitments and letters of credit of$1.0 million . Income Tax Expense. For the year endedDecember 31, 2022 , the Company recorded income tax expense of$338 thousand compared to$9.6 million for the year endedDecember 31, 2021 . The effective tax rate of 12.4% reflects the reversal of the valuation allowance from the usage of the federal and state net operating loss deferred tax assets to the extent permissible. The Company had previously established and continues to maintain a full valuation allowance on its deferred tax assets. Although the Company had a loss before income tax in the prior year, the tax expense recorded in that year reflects the impact of the initial recognition of the full valuation allowance on the Company's deferred tax assets. 51
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Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
on the relative amounts of interest-earning assets and interest-bearing
liabilities and the rates of interest earned on such assets and paid on such
liabilities.
Average Balances and Yields. The following table presents information regarding
average balances of assets and liabilities, the total dollar amounts of interest
income and dividends from average interest-earning assets, the total dollar
amounts of interest expense on average interest-bearing liabilities, and the
resulting annualized average yields and costs. The yields and costs for the
periods indicated are derived by dividing income or expense by the average
balances of assets or liabilities, respectively, for the periods presented.
Average balances have been calculated using daily balances. Non-accrual loans
are included in average balances only. Loan origination fees are included in
interest income on loans and are not material.
Year Ended December 31,
2022 2021
Average Average
Average Balance Interest Yield/Cost Average Balance Interest Yield/Cost
(Dollar in thousands)
Assets:
Loans (1) $ 1,407,502 $ 52,279 3.71 % $ 1,274,885 $ 48,719 3.82 %
Mortgage-backed securities 190,540 3,934 2.06 % 154,882 2,908 1.88 %
Other investment securities 203,002 4,820 2.37 % 147,853 3,237 2.19 %
FHLB stock 12,629 587 4.65 % 14,373 744 5.17 %
Cash and cash equivalents 88,703 793 0.89 % 356,458 445 0.12 %
Total interest earning assets 1,902,376 62,413 3.28 % 1,948,451 56,053 2.88 %
Non-interest earning assets 64,786 87,443
Total assets $ 1,967,162 $ 2,035,894
Liabilities and shareholders'
equity:
NOW, savings, and money market
deposits $ 812,473 2,959 0.36 % $ 676,697 1,091 0.16 %
Time deposits 412,734 2,779 0.67 % 610,092 6,793 1.11 %
Interest bearing deposits 1,225,207 5,738 0.47 % 1,286,789 7,884 0.61 %
FHLB advances 235,589 4,832 2.05 % 280,985 5,220 1.86 %
Total interest bearing liabilities 1,460,796 10,570 0.72 % 1,567,774 13,104 0.84 %
Non-interest bearing deposits 44,029 106,033
Non-interest bearing other 47,707 47,560
Total liabilities 1,552,532 1,721,367
Total shareholders' equity 414,630 314,527
Total liabilities and
shareholders' equity $ 1,967,162 $ 2,035,894
Net interest income $ 51,843 $ 42,949
Net interest rate spread (2) 2.56 % 2.04 %
Net interest margin (3) 2.73 % 2.20 %
(1) Average loan balances are net of deferred loan fees and costs, premiums and
discounts, and includes non-accrual loans.
(2) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
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Rate/Volume Table
The following table sets forth the effects of changing rates and volumes on net
interest income. The rate column shows the effects attributable to changes in
rate (changes in rate multiplied by prior volume). The volume column shows the
effects attributable to changes in volume (changes in volume multiplied by prior
rate). The net column represents the sum of the prior columns. Changes
attributable to changes in both rate and volume that cannot be segregated have
been allocated proportionally based on the changes due to rate and the changes
due to volume. There were no out-of-period items or adjustments excluded from
this table.
Years Ended December 31,
2022 vs. 2021
Increase (Decrease) Due to
Volume Rate Net
(In thousands)
Interest income:
Loans $ 5,068 $ (1,508) $ 3,560
Mortgage-backed securities 669 357 1,026
Other investment securities 1,207 376 1,583
FHLB stock (91) (66) (157)
Cash and cash equivalents (334) 682 348
Total interest-earning assets $ 6,519 $ (159) $ 6,360
Interest expense:
Deposits $ (1,977) $ (169) $ (2,146)
FHLB advances (843) 455 (388)
Total interest-bearing liabilities (2,820) 286 (2,534)
Net increase in net interest income $ 9,339 $ (445) $ 8,894
Comparison of Financial Condition at
Total Assets. Total assets increased
Cash and cash equivalents. Cash and cash equivalents decreased
Securities Available-For-Sale. Securities available-for-sale decreased$10.6 million , or 3.3%, to$314.2 million atDecember 31, 2022 from$324.9 million atDecember 31, 2021 . During the year endedDecember 31, 2022 , purchases of securities were more than offset by the fair value decline in the portfolio, as well as amortization and calls. The rising rate environment in the second half of 2022 contributed to a$37.3 million decline in the net unrealized position of the portfolio. No securities were sold during the year endedDecember 31, 2022 .
Securities Held-To-Maturity. Securities held-to-maturity increased
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Other investments. Other investments increased$5.9 million , or 57.8%, to$16.1 million atDecember 31, 2022 from$10.2 million atDecember 31, 2021 . The increase is related to the purchases ofFederal Home Loan Bank of New York stock made in conjunction with borrowings in the second half of 2022. Gross Loans. Gross loans held for investment increased$261.1 million , or 20.37%, to$1.542 billion atDecember 31, 2022 from$1.281 billion atDecember 31, 2021 . The most significant drivers were net increases in multifamily and non-residential loans. Multifamily loans increased$175.0 million , non-residential real estate loans increased$74.8 million , and residential loans increased$33.5 million . Originations totaled$488.2 million , including originations of$285.4 million in multifamily loans,$128.7 million in non-residential real estate loans, and$44.1 million in construction loans. In addition,$106.1 million of conforming residential mortgages inNew Jersey were purchased during the period.
The following table presents loans allocated by loan category:
December 31, 2022 December 31, 2021
(In thousands)
Residential one-to-four family $ 594,521 $ 560,976
Multifamily 690,278 515,240
Non-residential 216,394 141,561
Construction and land 17,990 23,419
Junior liens 18,477 18,464
Commercial and industrial (1) 4,682 21,563
Consumer and other 38 87
Total gross loans 1,542,380 1,281,310
Deferred fees, costs and premiums and discounts, net 2,747 6,299
Total loans 1,545,127 1,287,609
Allowance for loan losses (13,400) (14,425)
Loans receivable, net $ 1,531,727 $ 1,273,184
(1) At
The table below presents the balance of non-performing assets on the dates
indicated:
December 31, 2022 December 31, 2021
(In thousands)
Residential one-to-four family $ 7,498 $ 10,805
Multifamily 182 139
Non-residential - 857
Construction and land - -
Junior liens 52 182
Commercial and industrial (1) 35 -
Total $ 7,767 $ 11,983
Other real estate owned - -
Total non-performing assets $ 7,767 $ 11,983
(1) PPP loans 90 days past due and accruing totaled
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Other Assets. Other assets increased$13.6 million , or 158.0%, to$22.2 million atDecember 31, 2022 from$8.6 million atDecember 31, 2021 . This increase was primarily driven by the increase in fair value of the Company's interest rate swap agreements. See Note 10, Derivatives, of Notes to Consolidated Financial Statements in "Part II, Item 8- Financial Statements." Total Deposits. Total deposits increased$41.8 million or 3.4% to$1.29 billion atDecember 31, 2022 compared to$1.25 billion atDecember 31, 2021 as the Company executed its strategy to allow high-cost time deposits to mature. Time deposits decreased$57.5 million , or 12.1%, to$416.3 million with a weighted average rate of 1.79% atDecember 31, 2022 from$473.8 million with a weighted average rate of 0.58% atDecember 31, 2021 . The decrease in time deposits was partially offset by an increase in checking, savings, and money market accounts. These accounts increased$99.4 million , or 12.85%, to$872.6 million atDecember 31, 2022 from$773.2 million atDecember 31, 2021 . This shift resulted in the ratio of core deposits to total deposits increasing from 62.0% atDecember 31, 2021 to 67.7% atDecember 31, 2022 . The following table presents the totals of deposit accounts by account type, at the dates shown below: December 31, 2022 December 31, 2021 (In thousands) Non-interest bearing deposits $ 37,907 $ 44,894 NOW and demand accounts (1) 410,937 363,419 Savings (1) 423,758 364,932 Time deposits 416,260 473,795 Total Deposits$ 1,288,862 $ 1,247,040
(1) Money market accounts are included within the NOW and demand accounts and Savings captions.
Borrowings. The Company had$310.5 million of borrowings atDecember 31, 2022 , an increase of$125.0 million , or 67.4%, from$185.5 million atDecember 31, 2021 . The increase is related to the execution of short-term borrowings during the second half of 2022 to support loan growth. Our borrowings consisted solely ofFederal Home Loan Bank of New York advances.$109.0 million of which are associated with longer-dated swap agreements. See Note 10, Derivatives, of Notes to Consolidated Financial Statements in "Part II, Item 8- Financial Statements." Total Shareholders' Equity. Total shareholders' equity decreased by$35.8 million , or 8.3%, to$393.7 million atDecember 31, 2022 compared to$429.5 million atDecember 31, 2021 . The decrease was primarily driven by a$24.3 million reduction in accumulated other comprehensive income reflecting the net impact that the interest rate environment had on the Company's available-for-sale securities and the swap agreements used in its cash flow hedges. The Company also repurchased 1,298,762 of its shares at a cost of$15.6 million . 299,481 of the shares repurchased were used to fund the shareholder-approved restricted stock grants. These decreases were partially offset by net income of$2.4 million . 55
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Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities, borrowings from the FHLB and securities sold under agreements to repurchase. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, calls of investment securities and borrowed funds and prepayments on loans are greatly influenced by general interest rates, economic conditions and competition. Additionally, deposit flows are impacted by general deposit behavior. Our primary use of funds is for the origination and purchase of loans and the purchase of securities. Management regularly adjusts our investments in liquid assets based upon an assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our interest-rate risk and investment policies. The Bank is subject to various regulatory capital requirements administered by the NJDOBI and theFDIC . AtDecember 31, 2022 , the Bank exceeded all applicable regulatory capital requirements, and was considered "well capitalized" under regulatory guidelines. See "Item 1. Business-Supervision and Regulation-Federal Banking Regulation-Capital Requirements" and Note 17 of the Notes to the Consolidated Financial Statements. The Bank has entered into derivative financial instruments to reduce risk associated with interest rate volatility by matching repricing terms of assets and liabilities. These derivatives had an aggregate notional amount of$109.0 million as ofDecember 31, 2022 . See Note 10 of the Notes to the Consolidated Financial Statements. AtDecember 31, 2022 , we had outstanding commitments to originate loans of$8.0 million and unused lines of credit of$80.0 million . We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year fromDecember 31, 2022 totaled$294.9 million . Management expects, based on historical experience, that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLB advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense. Available borrowing capacity atDecember 31, 2022 was$328.1 million with FHLB. We also had a$30.0 million available line of credit with a correspondent bank and a$2.5 million available line of credit with theFederal Reserve Bank of New York atDecember 31, 2022 . Additionally, almost all of the Bank's investment securities are unencumbered and could be used as collateral for additional borrowing capacity. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to originate loans, unused lines of credit and standby letters of credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments that we do for on-balance sheet instruments. Management believes that our current sources of liquidity are more than sufficient to fulfill our obligations as ofDecember 31, 2022 pursuant to off-balance-sheet arrangements and contractual obligations.Blue Foundry Bancorp is a separate legal entity fromBlue Foundry Bank and must provide for its own liquidity to fund dividend payments, stock repurchases, and other corporate risk factors. The Company's primary source of liquidity is issuance of stock and the receipt of dividend payments from the Bank in accordance with applicable regulatory requirements. AtDecember 31, 2022 ,Blue Foundry Bancorp (unconsolidated) had liquid assets of$98.5 million .
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