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spk00: Good morning and welcome to Blue Foundry Bancorp's first quarter 2023 earnings call. My name is Lauren 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 speaker's remarks, there will be a question and answer session. I will now turn the call over to President and CEO Jim Nessie.
spk02: Thank you, Operator. Good morning, and welcome to our first quarter earnings call. I'm joined by our Chief Financial Officer, Kelly Pecoraro, who will share the company's financial results in greater detail after my opening remarks. Our management team continues to monitor the macroeconomic environment and liquidity challenges being experienced throughout the banking industry. We remain steadfast in maintaining our strong capital and liquidity positions. Both our bank and holding company remain more than well-capitalized. At the end of the first quarter, we had $736 million in liquidity sources, including $336 million in untapped borrowing capacity and $400 million in cash and securities. 90% of our debt securities portfolio is held as available for sale and therefore marked to market as of March 31st. Our bank subsidiary, had uninsured deposits to customers totaling $180 million, representing 14% of total deposits. Our liquidity sources at quarter end were 3.9 times larger than our uninsured deposits to customers. Only 1.7 million, or 4% of our deposit outflows for the quarter were experienced in March. We are able to offer our customers enhanced FDIC coverage through intrafis, CD, and cash suite programs. These programs provide over $100 million in additional FDIC insurance coverage. Our performance during the quarter reflects the pressure that the competitive rate environment in northern New Jersey has had on both our deposit and borrowing costs. We have been actively implementing measures to reduce the funding pressure and the uncertain rate environment. For example, we enacted a second interest rate swap program during the quarter where we executed 100 million of interest rate hedges with duration ranging between three and five years. This allowed us to reduce our reliance on short-term advances while lowering interest expense. We are still active in the lending markets, During the first quarter, we originated 65 million in loans, which resulted in loan growth of $41 million. We still maintain our conservative underwriting standards that have resulted in strong credit quality. Tangible book value was $14.06 per share at quarter end. We continue to repurchase stock at a discounted tangible book value. During the first quarter, we repurchased 871,000 shares at a weighted average cost of $10.71. As of March 31st, we have repurchased a total of 2,169,000 shares, which is approximately 76% of the approved initial stock repurchase program. Last week, the Board approved the company's second stock repurchase program, authorizing the repurchase of up to at the conclusion of the initial stock repurchase program. This will allow us to repurchase an additional 1.3 million shares. We believe this program represents a prudent use of capital, and we are pleased to be able to continue to return value to shareholders. And with that, I'd like to turn the call over to Kelly, and then we will be delighted to answer your questions. Kelly.
spk01: Thank you, Jim. And good morning, everyone. The net loss for the first quarter was 1.2 million compared to net income of $562,000 during the linked quarter. This reduction was largely related to funding pressures from the competitive rate environment and seasonal deposit outflows. While we realized a $1.3 million expansion in interest income, our interest expense also increased by $2.2 million, resulting in a $1 million reduction in net interest income. Yield on loans increased by 27 basis points to 4.07% and yield on all interest-bearing assets also increased by 27 basis points to 3.82%. Remaining competitive in deposit pricing, the cost of interest-bearing deposits increased 56 basis points to 1.38%. This coupled with an increase in short-term borrowing drove the cost of funds for the quarter to 1.73%, a 56 basis point increase compared with the prior quarter. We expect pressure on our margin to continue due to the liability sensitive nature of our balance sheet. The company adopted the current expected credit loss methodology for accounting for credit losses, effective January 1st, 2023. The adoption increased the reserve on loans by $660,000, decreased the reserve for commitments and letters of credit by $811,000, and established a $170,000 reserve on health and maturity securities. As a result, the CESA adoption drove a net decrease of $18,000 in retained earnings. During the quarter, we recorded a net release of provision for credit losses of $23,000, driven by a reduction in commitments at quarter ends, partially offset by growth in our commercial portfolios. Our asset quality continues to remain strong in the current environment. During the quarter, non-performing loans to total loans decreased three basis points to 47 basis points. primarily driven by a reduction in non-performing loans. Our allowance to total loans increased two basis points to 89 basis points, and our allowance to non-accrual loans increased to 189% from 173% the prior quarter due to a reduction in non-accrual loans. Expenses, excluding the provision for commitments increased $585,000 driven by expenses related to stockholder approved equity awards, the absence of a technology services credit, and an increase in legal fees. We continue to explore opportunities to save to help offset the top line and inflationary pressures. Moving on to the balance sheet, gross loans grew by $41 million or 2.7% sequentially, driven by originations of 65 million, primarily in the non-residential, multifamily, and CNI segments. During the quarter, the bank also purchased 7 million of high-quality residential loans in our principal market, which were originated to Fannie Mae standards. With a duration of 5.1 years, Our debt securities portfolio continues to provide cash flow that is being used to fund loans. These securities declined $9.4 million due to maturities, calls, and scheduled pay zams. Funding our balance sheet has been challenging in this environment. Deposits declined 3% during the quarter. While we experienced an overall outflow with deposits for the quarter, primarily in savings accounts, our focus on attracting the full relationship of small to medium-sized businesses resulted in a 3% or $6 million increase in business account balances. Additionally, we were able to attract and retain maturing CDs, resulting in a $7 million increase in retail time deposits. Borrowings during the quarter increased by $112 million to help fund loan growth and replace the deposit outflow. As Jim mentioned earlier, we enacted a SWOT program in the first quarter. We were able to execute 100 million of interest rate hedges with maturities ranging from three to five years. These hedges allowed us to fund the balance sheet at a lower cost than short-term borrowings and also help reduce our exposure to changes in interest rates. And with that, Jim and I are happy to take your questions.
spk00: Thank you. If you would like to ask a question, then please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. Just as a reminder, that is staffed by one to ask a question. Our first question comes from Chris O'Connell from KBW. Chris, please go ahead.
spk03: Morning. I was hoping to get an update as to how deposit flows have trended so far in the month of April since the end of the quarter.
spk01: So, Chris, deposit flows, we are seeing small outflows, but nothing that's concerning to us in terms of anything systemic. You know, as we noted that our outflows in March were light, you know, in terms of about 1.7 million of the total outflows. You know, we're still seeing some declines, but I think really driven by the competitive rate environment.
spk03: Got it. Could you maybe walk through the different, you know, offering rates that you have outstanding and where you see the biggest opportunities to increase deposits on a go-forward basis?
spk01: Right now, we're looking, you know, as we alluded to, we were very happy this quarter that we were able to grow in our business accounts, really, and that has been a focus of the team out driving those small and medium-sized customers into the bank. What we're seeing is an interest in CDs, you know, people looking to lock in some rates. We do have some specials out there in a 5% rate. We have some 4% rates for a nine-month product. But we really are focusing on those business accounts.
spk02: Chris, what I would add is, you know, on the savings account side, we have product out there in the twos. You know, it seems to be competitive in the marketplace, but people are, as Kelly said, looking to extend duration. So I do think in this quarter we're going to see people lock in with some CDs. Our 5% special is a walk in rate requires a complimentary product. So we are looking to expand our household relationship if we're going to put out a higher interest rate product where liability sensitive And as markets eventually come down in price, we expect that the rates will go back to normal over time.
spk03: Got it. And for the business accounts, generally, what kind of rates are those coming on at?
spk02: They're probably in the twos. Our business account strategy is mostly around no fees for small businesses. the interest rate component is a smaller part of the product. We find that the fee component, the small business customers that we attract are more concerned with fees than they are with the interest rate. So we tend to focus more on no fee business products. The interest rate, as I said, is around two something at the moment.
spk03: Got it. I guess just overall, you know, with the loan deposit ratio now up to, you know, 127%, I mean, do you see that rising further, you know, over the next couple of quarters given, you know, the competitive deposit environment? And do you guys have any, you know, internal limits, you know, that you don't want to, you know, move past on the high end for them?
spk01: So, Chris, I think, you know, we are very mindful Of our loans deposit ratio, you know, a little bit higher, probably than we like at this point. But we do have availability within the brokered market. We did not go into the brokered market for any deposits this quarter. We know that is a lever we're going to be prudent and very selective in our lending as we move forward, taking advantage of opportunities for high rate, high quality products put on the balance sheet. knowing that the funding is a little challenging at this point.
spk02: Yeah, what I would say, the other side of the equation is on the loan side. I do think that loans will start to slow down a little bit in Q2, perhaps picking up in Q3. But that loan-to-deposit ratio, again, should come back into a normal range because the pressure from the loan side will start to be relieved.
spk03: Got it. And do you guys have what the amount of broker deposits were at the end of the quarter?
spk01: Broker deposits were about 75 million at the end of the quarter.
spk03: Great. And on the loan growth front, I guess, do you guys have where the pipeline's at now and what the pipeline yields are and maybe an updated outlook as to what you think you're looking to put on for 2023?
spk01: So, I think overall for 2023, we're looking at high single-digit annualized loan growth. In our pipeline now, again, not all closing in the second quarter, we have about five All of that will not fund again, but we are looking at the high sevens in terms of rates, overall rates.
spk03: Got it. And for the margin, do you guys have what the spot margin was at the end of the quarter or, you know, if not for the month of March?
spk01: We don't normally provide the monthly margin. What we are not thankful for, but pleased with, is that we were able to do some swaps within the quarter, as we mentioned in our remarks. Most of those came on later in March. So that came on at about a rate of 380. So we're looking that we'll take advantage of that in the second quarter NIM. But we do envision some continuing pressure.
spk03: I mean, any, you know, way to quantify or, you know, the magnitude of that pressure either, you know, for next quarter, you know, in and of itself or, you know, where you think NIM could bottom in this environment if the rate environment kind of stayed unchanged from here?
spk01: Overall, you know, I think when I look at March, again, we were probably lower than we were from an average, the 242 NIM. We were probably in the mid-230s from a NIM perspective. So, while I'm thinking there's compression, it should be in line and not greater than where we saw it for this quarter.
spk03: Okay. um and for the swaps uh that were you know prior to this quarter can you just remind us as to you know what that amount was and at what uh rate those were locked in it so it's about 109 million of swaps at a rate of about 147 150. that's the first one that was the first program And could you just remind us when exactly those were put on and what the duration was?
spk01: Seven years. Right. So, it was initial seven-year swap. They were put on back in 2021. So, about four years remaining on that duration in that. Great.
spk03: And on the fee side, you guys had some loan sale gains this quarter. Is that a strategy that you think that you'll continue to pursue? And, you know, if so, do you expect the, you know, the fee pickup to be, you know, similar in the coming quarters or trend kind of up or down from here?
spk01: So, it is a strategy that we're looking at Chris and happy to have our sales this quarter. I think it will be flat as we move forward. We do have, if you noted on our balance sheet alone held for sale there. We're not sure whether or not we'll close that within this quarter, but we're looking to. Continue to increase that line and look for opportunities to. To have loans held for sale.
spk03: Great. And do you see any pickup coming in the service charge fee line, which is a little bit lower this quarter than it was trending over the course of 2022?
spk02: Chris, I'll take that question. I think what you're seeing in the industry overall is less reduction on fee business for banks like ours. I think how we attract customers is a no fee product. We provide solid interest rates on deposits to our liability side customers and make a decent spread on our loans. And we're trying to target, you know, $283,300 on our spreads. Today, it's a little bit difficult, but I think the fee business is going to be challenged for the near term.
spk01: And as we had announced too, we are no longer charging or assessing fees on overdrafts, which didn't go into place until November 1st of 2022. So 2022 had a lot within the overdraft component.
spk03: Got it. And on the expense side, Any updates as to, you know, the opportunities that you're exploring to, you know, limit expense growth going forward? And do you have an overall outlook as to, you know, where the expense run rate will begin to trend following Q1?
spk02: Yes. So we are constantly looking at our van power, how we employ our people that work at Blue Foundry Bank. We are focusing more on levering the technology that we've invested in in earlier quarters, and it seems to be paying off quite well. Our overall headcount has come down, but we continue to look for opportunities to provide really high-quality jobs for our employees. What I mean by that is better jobs, perhaps higher prices, but fewer employees. So I think we're constantly trying to drive towards a better experience better for the company overall. I know Kelly and I and the management team constantly go through our accounts payable, and I'm going to hand this back to Kelly for a second to answer.
spk01: Yes, so as Jim said, we are extremely mindful, focused on enhancing our workforce and utilizing our technology. I think as we look forward, Chris, we're probably guiding to around 14 from a run rate for Q2.
spk03: um which includes a full quarter of the equity grants that were provided during the quarter got it and and from that 14 level and 2q do you expect the kind of you know the things that you're looking at to hold that level flat uh following q2 or do you expect that there's opportunities to you know bring that down a little bit
spk01: I think there are opportunities in Q3 and Q4 to bring that number down. So, we're not tagging that as our run rate for the remainder of the year, but for Q2, that's where we see things falling out.
spk02: Chris, I think a lot of that expense number, especially as it relates to compensation, performance drives a lot of the comp expense around the edges, around the margin. I think that's what Kelly's alluding to. So, if the performance is strong, compensation goes up, if performance is weak, you'll see the compensation line come down because there is variable count in our compensation line.
spk03: Got it. And I appreciate the comments around the buyback and the new plan. Given the overall turmoil and the bank and macroeconomic environment, you know, do you expect to be as aggressive on the share purchases going forward, or do you expect that slows a bit until, you know, some of the uncertainty kind of plays out?
spk02: I think it'll stay on the same trajectory as it has been. We have a 10 program. We'll continue to follow it unless something dynamically or dramatically changes. But we were very pleased with our ability to execute against another plan. Very pleased with our board of directors in approving the plan. And again, I keep restating we're in a strong capital position, so we are very thankful for that.
spk03: Great. And just overall, on the kind of earnings outlook from here, I mean, do you guys see a path to get to kind of positive earnings? And if so, what do you expect that timeline might be? And if earnings kind of remain negative going forward versus positive, can you just describe to us what the differences would be in the tax rate?
spk01: So, I think, as we look forward, you know, growth is key to some of our success as we move forward. We were pleased last year with being able to have, you know, 20% loan growth. Given the market, we've kind of come down in terms of that and being more prudent and carefully selecting what we're putting on our balance sheet. Not that we weren't last year very careful as our credit metrics show. But a lot has to do with the interest rate environment, right? From a profitability perspective, you know, what we can borrow at and offer our deposit base versus what we're lending at will really drive where we fall out. And we continue to look at controlling the expense line, so from another side.
spk02: Chris, what I would add is the inversion on interest rates, specifically if you look at three-month and five-year, It's heavily inverted. I would love to be able to forecast and say when the crossover is, but it really is highly dependent on what three-month and five-year interest rates look like. So that's the best way I can answer the question today.
spk03: Great. And just if you could touch on the tax rate implications, that'd be great.
spk01: Sure. I think as you look at being in a lost position this quarter, We currently, because of our tax position, don't get a benefit for that loss, but we do have the valuation allowance. As we become profitable, we're able to offset the 80% of that, the NOLs that we have on our balance sheet against and reverse the valuation allowance on that portion. So, you know, as I look at it, when we're in a loss position, there's a zero benefit, but in a taxable position, it's around the 10% tax rate.
spk03: Great. That's all I had. Thanks for taking my questions.
spk01: Great. Thanks, Chris.
spk02: Thank you, Chris. Have a great day.
spk00: Thank you. We have no further questions, so I'll now hand back over to Jim Nessie for closing remarks.
spk02: Thank you, Operator, and I would like to thank everybody who participated in our call today and thank all of our shareholders and employees for being part of the Blue Country Bank story. Thanks and I look forward to speaking with you again next quarter. Have a great day.
spk00: This concludes today's call. Thank you for joining. You may now disconnect your line.
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