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spk01: Good morning and welcome to the Blue Foundry Bancorp's second quarter 2023 earnings call. My name is Carla 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 Nesse.
spk02: Thank you, Operator. Good morning, everyone, and welcome to our second 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 competition for deposits from both depository and non-depository institutions, along with the inverted yield curve, continues to have an adverse impact on our margin and cost of funds. Despite this top-line pressure, we have been pleased to see our investments in technology results and productivity saves. Quarter over quarter, our operating expenses declined $689,000, or 5.1%, driven primarily by lower compensation and benefits expense. 2022, and employees have increased productivity by optimizing redundant tasks through the use of technology, allowing them to focus on more impactful projects. Additionally, we have been keenly focused on managing down variable expenses. We have reduced our reliance on consultants and our advertising costs were 71% below 2022's quarterly average. During the second quarter, We repurchased 1,892,000 shares at a weighted average cost of $9.68, a discount to tangible book value. This helped tangible book value per share increase 29 cents to $14.35 at June 30th. We continue to believe that share repurchase programs represent accrued use of capital. We are still active in the lending market. During the second quarter, we originated $41 million in loans, primarily in our commercial portfolios. Our underwriting standards remain conservative, and our credit quality remains strong. Our management team continues to monitor the macroeconomic environment and liquidity challenges being experienced throughout the banking industry. We remain steadfast in maintaining strong capital and liquidity positions, both our bank of the second quarter, we had over $395 million in uncapped borrowing capacity. Additionally, our available for sale securities portfolio, which represents 90% of the debt securities we hold, provided an additional $301 million of liquidity. Blue Foundry continues to operate with a low percentage of uninsured deposits and low concentration risk to any single depositor. Our bank subsidiary, had uninsured deposits totaling approximately $293 million at the end of the second quarter. This total includes approximately $69 million of deposits from the Blue Foundry Bank Corp., $20 million of deposits from its subsidiary, Blue Foundry Investment Company, and $32 million of municipal deposits, which are insured under New Jersey's Governmental Unit Deposit Protection Act. Excluding these three items, Uninsured deposits from customer accounts represented only 13.6% of the bank's total deposits. This improved from the prior quarter as some of our larger relationships took advantage of the increased FDIC coverage that we provide through our ICS and Cedars-Sweep account products. Additionally, our available liquidity covers 4.4 times our uninsured and uncollateralized deposits to customers. With that, I'd like to turn the call over to Kelly, and then we'd be delighted to answer your questions.
spk04: Thank you, Jim, and good morning, everyone. The net loss for the second quarter was $1.8 million, compared to net loss of $1.2 million during the prior quarter. This change was largely related to funding pressures from the competitive rate environment. While we realized a $933,000 expansion in interest income, our interest expense increased $2 million, resulting in a reduction of $1 million in net interest income. Yield on loans increased by 11 basis points to 4.18%, and yield on all interest bearing assets also increased by 11 basis points to 3.93%. Remaining competitive in deposit pricing the cost of interest-bearing deposits increased 35 basis points to 1.73%. This, coupled with an increase in average short-term borrowings, drove the cost of funds to 2.15%, a 42 basis point increase compared with the prior quarter. While the increase in the cost of interest-bearing liabilities and cost of funds has slowed since last quarter, We still expect pressure on our margin to continue due to competition for deposits, the current rate environment, and the liability-sensitive nature of our balance sheet. During the quarter, we recorded a provision for credit loss of $143,000 for the quarter ended June 30th, 2023, driven by an increase in the allowance for loans, partially offset by a decrease in the allowance for commitments. Our asset quality remains strong in the current environment. During the quarter, non-performing loans to total loans increased two basis points to 49 basis points, primarily driven by a slight increase in non-accrual loans. Our allowance to total loans increased two basis points to 91 basis points, and our allowance to non-accrual loans decreased to 186%. from 189% the prior quarter, also due to the slight increase in non-accrual loans. Expenses declined $689,000, largely driven by a reduction in compensation and benefit expense. This reduction was driven by a full quarter of sustained lower headcount and a reduction in variable compensation. We continue to explore opportunities to reduce our expense base. Additionally, while there were one-time items in operating expenses this quarter, they largely offset each other. Therefore, we expect operating expenses for the remainder of the year to remain relatively in line with the second quarter. Moving on to the balance sheet, gross loans declined by $4.6 million as amortization and payoffs outpaced loan funding. As a reminder, less than 2% of our loan portfolio is in office space and none is in the New York City market. With a duration of 4.8 years, our debt securities portfolio continues to provide cash flow that is being used to fund loans. These securities declined 8.2 million due to maturities calls, and scheduled takedowns. Funding our balance sheet has been challenging in this environment. Deposits increased $23 million, or 1.8% during the quarter. We were able to increase retail time deposits by $48 million, and we executed $50 million of new brokered CDs. This growth in time deposits was partially offset by an outflow of $75 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 business customers. Despite the competition for deposits, we were able to grow both business balances and the number of business accounts by 2% during the second quarter. For the six months ended June 30, 2023, balances were up 8% and accounts were up 5%. During the quarter, borrowings decreased $23 million as we replaced short-term borrowing with time deposits. And with that, Jim and I are happy to take your questions.
spk01: Thank you. If you would like to ask a question, please press start followed by one on your telephone keypad now. To revoke your question, please press start followed by two. When preparing for your question, please ensure your phone is unmuted locally. Our first question is from Justin Crowley from Piper Sandler. Your line is now open. Please go ahead.
spk03: Hey, good morning, guys. So, you know, it's certainly nice to see some of the expense reduction this quarter. And you spoke to sort of holding this rate through the end of the year. You know, curious, it sounds like maybe that was a little bit more of a pull forward. You know, I was looking for more of some of these reductions towards the back half of the year. But, you know, on some of the further strategies that you've taken a look at, You know, what does that sort of entail? You know, does it go beyond simply headcount, you know, which you've done a strong job on?
spk04: So, Justin, yeah, I think we're guiding at this point to low 13s for the third quarter and into the fourth quarter, you know, driven primarily by the reduction headcount and variable compensation. We're also continually looking at ways of reducing costs whether it's through our advertising initiatives or other initiatives throughout the bank, being able to leverage the technology we already have in place as opposed to putting new things on. So we continue to look for all of those cost-safe initiatives as we move forward.
spk02: Justin, just to add on to that a little bit, we go through a vendor analysis on a quarterly basis where we can consolidate number of vendors or extract better a focus of the management team.
spk03: Okay, I appreciate that. And then, you know, switching over to growth, you know, I think you guys had previously talked about, you know, being a little bit more judicious on loan growth. You know, curious how, you know, the slowdown that we saw this quarter, how that sort of compares to
spk02: expectations as you look through the balance of the year you know how much of that is predicated on what you see on the deposit generation side and you know perhaps managing that loan to deposit ratio so i think you hit it you know spot on we're constantly looking at our funding sources whether it's on organic deposit generation or through wholesale funding we are definitely opportunistic On match funding, we have lines accessible to us where we can still make a decent spread. So we are still in the market, still lending. But again, it is definitely, we look at funding first, and then we look at the opportunity, and we look at the credit quality and what the market will give us. But I think Kelly may want to add to that.
spk04: Yeah, no, I think Jim was correct in terms of how we look at it. Also, you know, what's available in the market, remaining disciplined on our credit standards, you know, as we are walking into this market. So that's how we look at it. We do envision growth. You know, we are able to originate in this market and look for opportunistic growth.
spk03: Okay. And where are you seeing the most opportunity? Is it going to be more like the CNI side, less so real estate, just as you look out here?
spk04: So, I think we're seeing it in a couple of different segments. You did see our construction pick up. We are, you know, have originated some construction loans to well-seasoned sponsors and building on the multifamily product. Also, we are seeing some additional increases in CNI as we move into the second half of the year.
spk03: Okay, that's helpful. And then I guess just quickly, just back to the funding side of things. you know, weighing of, you know, putting on brokered money versus borrowings. Can you just unpack a little bit, you know, what drives that decision? Is it the pure economics of it? And how do you balance that with, again, just sort of going back to the loan to deposit ratio where that fleshes out, again, just versus, you know, looking at the cost between those two funding channels?
spk02: So we look at a funding curve. We go through wholesale funding first then we look at our retail funding and they're all laid out on a curve for us to consider sometimes the swap markets provide better value but we we are diligent in looking and picking where on the curve we want to be as far as duration and then the type of funding we want to take on our balance sheet where we can get a fuller relationship from a customer between wholesale and retail.
spk03: Okay, got it. Sorry, go ahead.
spk04: No, Justin, I was just saying, in terms of our wholesale funding, looking at the difference between whether we're borrowing from the federal home loan bank or going into the brokered market, we take the metrics into consideration. We are short about 40% of our Wholesale funding book is under a year in terms of duration, so looking to be opportunistic as we place the funding.
spk03: Okay. And then do you – I mean, at 10%, is there a limit on how much further you can lean into the brokered market?
spk04: So, it's a combination in terms of what our policy limits have at this point. but we still have some room in the brokered spot.
spk03: Okay, got it. All right, guys, I appreciate it. I'll leave it there. Thank you for taking my questions.
spk02: Thank you, Justin. Thanks, Justin.
spk01: Thank you, Justin. We have no further questions at this time, so I will now hand back to Jim Nesse for any final remarks.
spk02: I'd like to thank all the participants who dialed in today. I appreciate your interest in Blue Foundry Bank, and we look forward to speaking with you again next quarter. Thank you.
spk00: This concludes today's call. Thank you for joining. You may now disconnect your lines.
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