Q3 2023 Blue Foundry Bancorp Earnings Call

Participants

Jim Nesci; President and CEO; Blue Foundry Bancorp

Kelly Pecoraro; EVP and CFO; Blue Foundry Bancorp

Justin Crowley; Analyst; Piper Sandler Companies

Chris O'Connell; Analyst; Keefe, Bruyette & Woods, Inc.

Presentation

Operator

Good morning, and welcome to Blue Foundry Bancorp's third-quarter 2023 earnings call. My name is Jordan, and I'll be your conference operator today. (Operator Instructions) 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. (Operator Instructions) I'm now going to turn the call over to President and CEO, Jim Nesci.

Jim Nesci

Thank you, operator. Good morning and welcome to Blue Foundry Bancorp's third-quarter earnings call. I am joined by our Chief Financial Officer, Kelly Pecoraro, who will share the company's financial results in greater detail after my opening remarks. The results we announced earlier today illustrate the impact that the higher-for-longer rate environment continues to have on our revenue. The highly competitive Northern New Jersey market, coupled with sustained higher short-term interest rates, has had an adverse impact on our margin and cost of funds. Despite this pressure on revenue, we remain focused on expense management and maintaining our robust capital base, strong liquidity, and stable asset quality.
My management team and I have been diligent in exploring opportunities to reduce our expense base to offset some of the top line pressure. We have reduced staff by 10% this year, and our investment in technology has allowed our employees to be more productive than ever. Earlier this year, we challenged our employees to further optimize our operations and we are appreciative of their contributions. Their efforts resulted in increased productivity for a reduction in redundant tasks and cost saves. And most importantly, we continue to streamline delivery of customer services to provide a consistently better customer experience.
Our expenses have steadily declined during the course of the year. Expenses were $13.7 million in the first quarter, $13 million in the second quarter, and $12.4 million this quarter. Quarter-over-quarter, our operating expenses declined $574,000 or 4.2%. Both our bank and holding company have capital levels that are among the highest in the banking industry. All of our capital ratios are more than 2 times higher than the regulatorily defined well-capitalized level. Additionally, tangible equity to tangible common assets was 17.1% at September 30.
Maintaining significant liquidity and reducing liquidity risk remain paramount when operating in the current environment. At the end of the third quarter, we had over $369 million in untapped borrowing capacity and our unencumbered, available for sale securities provided another $278 million of liquidity. Excluding teller cash and counterparty cash collateral received from our swaps program, we had $33 million of cash on hand at quarter end.
Additionally, Blue Foundry continues to operate with a low percentage of uninsured deposits and low concentration risk to any single depositor. For customers who require FDIC coverage beyond the traditional $250,000, we are able to provide them with an additional coverage through our ICS and CDAR Sweep account programs. Uninsured deposits from customer accounts were $127 million at September 30. This represents approximately 10% of the bank's total deposits. Additionally, our available liquidity covers 5.4 times our uninsured and uncollateralized deposits to customers.
While the prospective credit environment remains uncertain, we continue to be pleased with the resilience of our existing lending portfolio. Our credit quality remains strong, our nonperforming loans remain at historically favorable levels, and our underwriting standards on new production remain conservative.
Lastly, in July, we completed our second stock repurchase program and announced that our Board of Directors approved a third program, authorizing the repurchase of an additional 5% of outstanding shares. During the quarter, we repurchased 298,000 shares at a weighted average cost of $9.51, a discounted tangible book value. Tangible book value per share was $14.24 at September 30, and we continue to believe that share repurchase programs represent a prudent use of capital.
With that, I'd like to turn the call over to Kelly, and then we would be delighted to answer your questions. Kelly?

Kelly Pecoraro

Thank you, Jim, and good morning, everyone. The net loss for the third quarter was $1.4 million compared to net loss of $1.8 million during the prior quarter. This improvement was largely driven by lower operating expenses and the release of the provision for credit losses, partially offset by lower net interest income due to the funding pressures from the competitive rate environment.
Our asset quality continues to remain strong in the current environment. During the quarter, we had a provision for credit loss for lease of $717,000. The majority of our allowance for credit loss is derived from quantitative measures. And although our allowance methodology placed greater weighting on the baseline and adverse forecast, our favorable credit metrics and the composition of our loan portfolio, coupled with a slight decline in our loan portfolio and a decline in our unused credit lines, led to a reduction of our current expected credit loss reserves.
Nonperforming assets to total assets decreased 4 basis points to 33 basis points, primarily driven by a decline in nonaccrual loans. Our allowance to total loans decreased 3 basis points to 88 basis points. However, our allowance to nonaccrual loans increased to 226% from 186%, the prior quarter, also due to the decline in nonaccrual loans.
While we realized a $408,000 expansion in interest income, our interest expense increased $1.1 million resulting in a reduction of $1 million in net interest income. Yield on loans increased by 3 basis points to 4.21% and yield on all interest-bearing assets increased by 4 basis points to 3.97%.
Cost of funds increased 31 basis points to 2.46%. Remaining competitive in deposit pricing, the cost of interest-bearing deposits increased 52 basis points to 2.25%. This was partially offset by a 15 basis point reduction in borrowing costs. We still expect pressure on our margin to continue due to the competition for deposits, the current rate environment, and the liability-sensitive nature of our balance sheet.
During the quarter, we executed $50 million in interest rate hedges to manage our interest rate positions. This brings us to a total of $259 million of hedges against interest rate volatility. The weighted average duration of these hedges is 3.4 years.
Expenses declined $574,000, driven by a reduction in compensation and benefits expense, and to a lesser extent, a reduction in occupancy and equipment, data processing, and professional services. The reduction to compensation and benefits expense was driven by sustained lower headcount and a reduction in variable compensation. We continue to explore opportunities to optimize our expense base. We expect operating expenses for the fourth quarter to be below $13 million.
Moving on to the balance sheet. Gross loans declined by $10.8 million as amortizations and payoffs outpaced new loan funding. As a reminder, less than 2% or $23 million of our loan portfolio is in office space and [none] is in New York City. With a duration of 4.5 years, our debt securities portfolio continues to provide cash flow that is being used to fund loans. These securities declined $11.5 million due to maturity call and scheduled paydown, as well as an additional $5.9 million increase in unrealized losses.
Deposits decreased by $14 million or 1.1% during the quarter. We were able to increase retail time deposits by $51 million. This growth in time deposits was more than offset by an outflow of $65 million from non-maturity accounts.
Our focus remains on attracting the full banking relationship of small to medium-sized businesses. We offer an extensive suite of low-cost deposit products to our [fit] customers. Despite the competition for deposits, we were able to grow the number of business accounts by 2% during the third quarter. The number of business accounts are up 7% this year. During the quarter, borrowings increased marginally.
And with that, Jim and I are happy take your questions.

Question and Answer Session

Operator

(Operator Instructions) Justin Crowley, Piper Sandler.

Justin Crowley

Hey, good morning, guys.

Jim Nesci

Good morning.

Kelly Pecoraro

Good morning.

Justin Crowley

Wanted to start on operating expenses. It's nice to see it's continue to come down in the quarter. I think the last update, at least this time last quarter was to perhaps think about costs holding steady through the back half of the year. I was wondering if you could expand a little on exploring opportunities. I think across the industry, you've seen a lot of banks formally come out with broader initiatives, some of which you've already done. It seems like you guys have also been able to do a decent job, just trimming costs around the margin. But just curious if there could be even more to be done here? And then, I guess, sort of a loaded question, but Kelly, if I heard you right, I think you mentioned below $13 million for the fourth quarter. I'm not sure if you're able to get a little more specific there, but does that sort of imply that the base could see a little bit of a tick-up into the end of the year?

Kelly Pecoraro

Yeah, Justin. We're guiding to just below $13 million. We do have a little bit of additional expense. We do have one new branch coming on in the fourth quarter, which will have additional expense. But we continue to look at opportunities to reduce our expense base. You asked, do we have specific initiatives? I think the initiative and the mantra around here is to look at every contract, look at every expense line item, especially as we go into our strategic planning season, as renewals come up and see what we can do to lower that expense, eliminate redundancies, and test that vendors may be performing for us, so it's been paramount in our operating model.

Justin Crowley

Okay, I appreciate that. And then, sort of shifting gears, and turning to loan growth. I saw balances decline again. Can you talk a little bit about net growth expectations going forward? I'm not sure if there's any change in the thinking in terms of the size of the balance sheet looking ahead. Just curious, your thoughts there.

Kelly Pecoraro

So Justin, I think, yes, we did see a reduction in our loan balances. We are very mindful in putting on high-quality, high-yielding loans using both our amortization from our loan book to redeploy that into a higher-yielding asset, as well as our paydowns and amortization of our securities book. Some of the constraints on the deposit outflow has tampered that a little bit, but we're in the market looking to lend and looking for the appropriate asset class to put on our balance sheet.

Justin Crowley

Okay. So when I think about the loan pipeline, how has that trended maybe, as of now compared to this time last quarter?

Kelly Pecoraro

I think right now we're probably a little bit below where we were from an overall pipeline perspective, but the rates are higher. So we look at that, as you said, putting on those higher-yielding assets and being mindful of our competition.

Justin Crowley

Okay. And do you feel comfortable to share any sort of loan growth target just over the next perhaps year or so? I'm not sure if you're in a position to be able to do that.

Kelly Pecoraro

No, we're not in the position right now, Justin, to do that.

Justin Crowley

Okay. Got it. And then just lastly, wanted to touch on share repurchases. Obviously, capital levels are pretty healthy. So just curious if there's appetite to get quite a bit more active here, possibly. Would seem that the math has gotten even more attractive when I think about where our activity in the quarter got done at?

Kelly Pecoraro

Yeah. I think we are very -- we support buybacks. The Board and management believe that the purchase of our shares is a good investment. We were -- if you think about where we were in the second quarter and the volume within the market, we were able to take advantage of that, the volume at that point. As we headed into Q3, we saw volumes trend downward. Also the timing of the transition from our first stock -- our second stock repurchase plan to the third plan had some impact on our purchases this quarter.

Jim Nesci

So Justin, this is Jim. Good morning, again. To reiterate what Kelly is saying, we are still a firm believer in share buybacks and expect to be back in the marketplace in Q4 as we go in. So again, no news.

Justin Crowley

Okay. Understood. Great, I appreciate it. I'll leave it there.

Jim Nesci

Thanks, Justin.

Kelly Pecoraro

Thank you, Justin.

Operator

Chris O'Connell, KBW.

Chris O'Connell

Hi. Morning. Just circling back on the loan growth discussion. So I mean, given where the pipelines are a bit lower than last quarter, I mean, does that imply that maybe for the next couple of quarters, net loan growth is kind of more of a flat line situation?

Kelly Pecoraro

I think it's hard to tell, Chris, as we look at the market, the volume in the market, what we're looking to put on the balance sheet, again, looking for those high-quality, higher-yielding assets. So if it's available and you have a funding as well, we are definitely looking to put loans on our balance sheet.

Jim Nesci

Just to again, reiterate, it depends on the asset class, it depends on the price. So those two go hand in glove, in my opinion. We're looking, we're actively looking and we are building the pipeline. So it's hard to give you a specific number where we projected to date. We're looking in the marketplace and we do think there'll be activity in the coming quarters.

Chris O'Connell

Okay. And what is the -- are the origination yields on the loan pipeline?

Kelly Pecoraro

The pipeline right now, we have just under 8.5 from a weighted average weight.

Chris O'Connell

And as far as the next 12 months, how much in a dollar amount are the loans set to mature?

Jim Nesci

Give me a half a second on that, then I will be able to get that out for you.

Kelly Pecoraro

One moment. $25 million are set to mature, but we do have amortization of the portfolio, each month is about $5 million to $7 million that's coming in from an amortization perspective, as well as the securities portfolio that's amortizing down. And we have some payoffs coming for maturities due in that book, probably about $12 million in the next quarter.

Chris O'Connell

Okay. Great. And as far as all the hedges that you guys have on the $259 million, can you remind us as to where each of those rates are locked in at?

Kelly Pecoraro

I think it's a nice blend, Chris, as we put them on. Right now, we have our weighted average maturity is 3.4 years, and the weighted average rate of those hedges are absolute below (inaudible)

Chris O'Connell

Okay. And that's being kind of applied against the FHLB advances in terms of like the yield table?

Kelly Pecoraro

Right. So, if we take a look at that, it does impact our interest expense. So it's offsetting interest expense on our financial statement.

Chris O'Connell

Okay. Great. And kind of putting it all together here, I mean, do you guys have the September spot NIM or any color as to how much NIM pressure you might see into the fourth quarter?

Kelly Pecoraro

So we don't normally share our spot NIM where we're at, but we do see and some additional compression but not at the pace we saw in the third quarter. As the significant amount of our CDs had matured and went into those buckets. So we don't see that volume of activity in some of our maturing deposits.

Chris O'Connell

Okay. Got it. And just taking a step back, I mean, in order -- do you have any idea in the current rate environment and if that kind of persists as it is right now with the inverted yield curve, which I know makes things difficult. Where the NIM could bottom and start to move back up in terms of timing and just what levers can be pulled to kind of get to a path to profitability from here?

Jim Nesci

So I don't know if that is a specific lever. What we continue to focus on is our core business strategy of banking small and medium-sized businesses. We continue to look for the lower cost deposits, obviously, that those businesses provide to banks like ours. But that's where we're going to stay on the strategy. We continue to increase the deposit base. The products are working well. Obviously, we want to see them scale up faster. But that's where we're going to keep pushing now or our manpower into.

Chris O'Connell

Okay. And any sense is the timing as to where would you get to an inflection point in the margin?

Jim Nesci

It's too hard to say at this juncture. I don't have many guidance on that point at this time.

Chris O'Connell

Okay. Alright. That's all I had. Thank you for taking my questions.

Jim Nesci

Of course. Thanks.

Kelly Pecoraro

Thank you, Chris.

Operator

With that, I'll hand back to the team for any closing remarks.

Jim Nesci

Thank you, operator. Thank you again for joining us on our third quarter call, our earnings call. We look forward to speaking with you again next quarter. Thanks and have a great day.

Operator

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.