Q1 2023 Blue Foundry Bancorp Earnings Call
Good morning, and welcome to plead foundry Bancorp's first quarter 2023, adding coal mine.
My name is Lauren and I will be your conference operator today.
During today's call May include forward looking statements, which are based on management's current expectations subject to faculty and changes in circumstances.
The foundry encourage all participants to refer to the full disclaimer contained in this morning's earnings release, which has been posted to the Investor Relations page lead foundry backfill called.
During the call management will refer to non-GAAP measures, which exclude shocking quite since from reported results. Please refer to the earnings release for reconciliations of these non-GAAP measures.
As a reminder, this event is being recorded you long duration.
Duration of the call after the Speakers' remarks, there will be a question and ox session.
I will now turn the call over to President and CEO , Jim Murphy.
Thank you operator, good morning, and welcome to our first quarter earnings call I'm joined by our Chief Financial Officer, Kelly Pechora.
Sure the Companys 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.
We remain steadfast in maintaining our strong capital and liquidity positions.
Both our bank and holding company remained more than well capitalized at.
At the end of the first quarter, we had $736 million and liquidity sources, including $336 million and untapped borrowing capacity and 400 million in cash and securities. Thank.
90% of our debt Securities portfolio is held as available for sale and therefore, mark to market as of March 31.
Oh, Thanks subsidiary.
Uninsured deposits two customers totaling $180 million, representing 14% of total deposits.
Our liquidity sources at quarter end were three nine 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 <unk> C. D cash sweep 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, Northern New Jersey has had on both our deposit and borrowing costs.
We haven't been actively implementing measures to reduce the funding pressure as 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.
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 billion.
We'll 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 discount to tangible book value.
During the first quarter, we repurchased 871000 shares at a weighted average cost of $10 71.
As of March 31, we have repurchased a total of $2 million 169000 shares which is approximately 76% of the approved initial stock repurchase program.
Last week the board approved the company's second stock repurchase program.
Horizon, the repurchase of up to 5% of the outstanding shares at the conclusion of the initial stock repurchase program.
This will allow us to repurchase an additional one 3 million shares.
I believe this program represents a prudent use of capital and we are pleased to be able to continue to return value to shareholders.
With that I'd like to turn the call over to Kelly and then we will be delighted to answer your question Kelly.
Thank you Jim and good morning, everyone.
Net loss for the first quarter was $1 2 million compared to net income of 562000 during the linked quarter.
This reduction was largely related funding pressures from the competitive rate environment and seasonal deposit outflows.
While we realized a $1 3 million dollar expansion and interest income or 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.
Two 4.07% and yields on all interest bearing assets also increased by 27 basis points to 382%.
Remaining competitive on deposit pricing the cost of interest bearing deposits increased 56 basis points to 138%.
That coupled with an increase in short term borrowings drove the cost of funds for the quarter to 173%.
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 one 2023.
The adoption increased the reserve on loans by $660000.
Decrease the reserve for commitments and letters of credit by $811000.
And established a $170000 reserve on held to maturity securities.
As a result, the see saw adoption drove a net decrease of $18000 in retained earnings.
During the quarter, we recorded a net release of provisions for credit losses of $23000.
Driven by a reduction in commitments at quarter end, partially offset by growth in our commercial portfolios.
Our asset quality continues to remain strong in the current environment.
During the quarter nonperforming loans to total loans decreased three basis points to 47 basis points primarily.
Primarily driven by a reduction in nonperforming 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 $585000 driven by expenses related to stockholder approved equity awards.
Absent other technology services credit and an increase in legal fees.
We continue to explore opportunities to see to help offset the top line and inflationary pressures.
Moving on to the balance sheet gross loans grew by $41 million or two 7% sequentially.
Driven by originations of $65 million.
Primarily in the non residential multifamily and C&I segments.
During the quarter. The bank also purchased $7 million of high quality residential loans in our principal market, which were originated Fannie Mae standards.
With a duration of five one 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 call and schedule to take them.
Funding our balance sheet has been challenging in this environment.
Deposits declined 3% during the quarter.
While we experienced an overall outflows of deposits for the quarter primarily in savings accounts.
Our focus on attracting the full relationship of small to medium sized businesses.
Resulting in a 3% or $6 million increase in business account balances.
Additionally, we are 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 deposit outflow.
As Jim mentioned earlier, we enacted a swap 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.
Thank you.
If you would like to ask a question. Please press star one on your telephone keypad.
If you change your mind, Please press star two.
We're preparing to ask two questions. Please ensure that you are finding some muted lately.
As a reminder, the stocks I just always want to ask a question.
Our first question comes from Chris I called out in <unk>, Chris. Please go ahead.
Good morning.
I was hoping to get an update as to how deposit flows trended so far in the month of April since the end of the quarter.
Uh huh.
Chris.
Deposit flows we are seeing small outflows, but nothing that's concerning to us in terms of anything systemic.
As we noted.
Our outflows in March.
Like you know in terms of about $1 seven.
$7 million of the total outflows.
We're still seeing some decline, but I think really driven by the competitive rate environment.
Got it.
Could you maybe walk through the different offering rates that you have outstanding where you see the biggest opportunities.
The increase in deposits on a go forward basis.
Right now we're looking as we alluded to we were very happy this quarter that we were able to grow.
This accounts for really and that's it's been a focus of the team out driving those small and medium size.
Customers into the bank.
What we're seeing is an interest in C. D people looking to lock in some rates, we do have some specials out there.
In the 5% rate, we have some 4% rate for nine months product.
But we really are focusing on those business accounts.
Chris What I would add is you know on the savings account side.
Have product out there in the twos.
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 walk in with some Cds, our 5% special is a walk in rate requires.
Couple of battery products. So we are looking to expand our household relationship if we're going to put out a higher interest rate products.
We're.
Liability sensitive and as markets eventually come down in price, we expect that the rates will go back to normal over time.
Got it.
This accounts generally what are what kind of rates of those coming on it.
They are 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 products, we find that the fee.
The components of our small business customers that we attract.
Are more concerned with fees than they are with the interest rates. So we tend to focus more on no fee business products.
The interest rate as I said is around to something that's more.
All of it.
Got it.
And I guess just overall.
Loan to deposit ratio now up to 127%.
Do you see that rising further.
Next couple of quarters, given the competitive deposit environment and do you guys have any internal limits.
You don't want them to move pass.
And for them.
So Chris I think we are very mindful of our loan to deposit ratio a little bit higher probably than we'd like at this point, but we do have.
Variability within the brokerage market, we did not go into the brokerage market for any deposits. This quarter, we know that as 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.
On sheet, knowing that the funding is a little challenging at this point yes.
The other side of the equation as well.
One 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 of the pressure from the loan side will start to be relieved.
Yeah.
Got it do you guys have with the amount of brokered deposits.
In the quarter.
Broker deposits were about $75 million at the end of the quarter.
Okay.
Great.
And on the and on.
On the loan growth front.
I guess do you guys have where the pipeline is that now.
Pipeline yields are.
Maybe an updated outlook as to what you think.
We're looking to put on for 2023.
Okay.
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.
$60 million all of that is not fun.
SUNS again, but we are looking at the high sevens in terms of rate.
Alright.
Got it.
Yeah.
Yeah.
Okay.
So the margin do you guys have with the spot margin was at the end of the quarter or if not for the work.
We don't normally provide the monthly margin what we are.
Thanks without 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 AAV.
So we're looking that we'll take advantage of that in the second quarter NIM, but we do envision some continuing.
Continuing pressure.
Got it.
Yeah.
Any.
Way to quantify or.
Magnitude is that pressure either.
For the next quarter.
I know you have itself or.
Where do you think NIM could bottom in this environment.
The rate environment kind of speed.
Unchanged for the year.
Overall, I think when I look at March again, we were probably were lower than we went from an average of.
240, 10, then we are probably in the mid <unk>.
<unk> 30.
From a NIM perspective, so while I'm thinking there is compression it should be in line.
And not greater than where we saw for this quarter.
Yeah.
Okay.
And for us the swaps.
That were prior to this quarter can you just remind us as to what that amount was and at what rate those youll have got it.
So it's about a $109 million of swaps at a rate of about 147 50.
<unk> 50.
That's the first one that was the first program.
And.
Can you just remind us when.
Exactly those are put on and what the duration was.
Right. So it was initial seven year swaps.
Back in 2021, so about four years remaining on that duration in that.
Okay great.
And on the on the fee side.
You guys had some some some loan sale gains this quarter is that a strategy that you think that you will continue to pursue.
It.
If so.
Do you expect.
Yes.
The city pick up to be similar in the coming quarters, a trend kind of up or down from here.
So it is a strategy that we're looking at Chris and happy to have our sales this quarter.
It will be flat as we move forward. We do have if you noted on our balance sheet.
Loan held for sale there were.
Not sure whether or not we'll close that was in this quarter, but we're looking to continue to increase that line.
And look for opportunities to two.
To have loans held for sale.
Great.
Do you see any pickup coming in.
Service charge fee line.
As you know a little bit lower this quarter than it was trending over the course of 2022.
Chris I'll take that question I think what youre seeing in the industry overall is less reduction on <unk>.
<unk> business for banks like ours, I think how we attract customers is a no fee product.
We provide solid interest rates on deposits toward.
Liability side customers and make.
Decent spreads on our loans that we're trying to target.
<unk> hundred 83, 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.
And as we had announced two we are no longer charging are assessing fees on overdrafts, which didn't go into place until November one of.
2022, So 2022 had a lot within the overdraft component.
Yeah.
Got it.
And on the on the expense side.
Any update as to the opportunities that you're exploring.
Limit.
<unk> growth going forward.
And overall outlook as to where the expense run rate.
I'll begin to trend following Q1.
Yes. So we are constantly looking at our our manpower how we employ our people that work at Blue Foundry Bank.
We are focusing more on leveraging the technology that we've invested in.
In the earlier quarters, and it seems to be paying off quite well our overall head count has come down.
But we continue to look for opportunities to provide really high quality jobs for our employees.
I mean by that is better jobs.
Haps higher prices, but a fewer employees. So I think we're constantly trying to drive towards a better experience, which is better for the company overall.
Kelly and I and the management team constantly go through our accounts payable.
Hand, this back to Kelly for a second to answer yes. So.
<unk> said, we are extremely mindful all focused on it.
<unk>, our workforce and utilizing our technology I think as we look forward, Chris were probably guiding to around 14 from a run rate for Q2.
Which includes.
Quarter of the equity grants that were provided during the quarter.
Got it and from that 14 level in <unk> do you expect.
Kind of.
The things that Youre looking at to hold that level flat.
Following Q2 or do you expect that there is opportunities to bring that down a little bit.
I think there are opportunities in Q3, and Q4 to bring that number down so we're not taking that as a run rate for the remainder of the year.
That's where we see things falling out because I think a lot of that expense number, especially as it relates to compensation performance drives a lot of the comp expense, but around the edges around the margin I think that's what Kelly is alluding to.
If the performance is strong compensation goes out but for performance. This week, you'll see the compensation line come down because there is variable comp in our compensation line.
Got it.
Yeah.
Okay.
I appreciate the comments around the buyback and the new plan.
Given the overall.
Term loan.
Great economic environment.
Do you expect progressive.
Share repurchases going forward or do you expect that slows a bit until some of the uncertainty kind of plays out.
I think it will stay on the same trajectory as it has been.
We have a tenancy by program.
We continue to follow it and 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 and improving the plan and.
Again, I keep restating, we're in a strong capital position. So we are very thankful for that.
Great.
<unk>.
Yes.
And just overall.
The earnings outlook from here.
I mean do you guys see.
Path to get to kind of positive earnings and if so.
What do you expect that timeline might be.
Is there any kind of remain.
Negative going forward.
Versus positive can you just describe to us what the differences would be.
And the tax rate.
So I think as we look forward.
Growth is key to some of our success as we move forward.
We were pleased last year with being able to have 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 with very careful as our credit metrics show.
But a lot has to do with the interest rate environment right.
Profitability perspective, what we can borrow at.
Plus our deposit base versus what we're lending that will really drive where we fall out.
And we continue to look at controlling the expense line.
On another side, Chris, but I would add is.
The inversion on interest rates, specifically, if you look at three months and five year.
It's heavily inverted.
I would love to be able to forecast than say when.
The crossover is but it really is highly dependent on what three months at five year interest rates look like.
The best way I can answer the question today.
Great and just if.
If you could touch on the tax rate implications would be great.
Sure I think as you look at being in a loss position. This quarter. We currently because of our tax position don't get a benefit for that loss.
<unk>.
But we do have the valuation allowance.
We become profitable, we're able to offset the 80% of that the Nols that we have on our balance sheet against then reversed the valuation allowance on that question. So.
As I look at it when we're in a loss position, there's a zero benefit.
In a taxable position is around 10%.
Tax rate.
Great.
That's all I had thanks for taking my questions.
Great. Thanks, Chris Thank you Chris have a great day.
Thank you.
Nice to ask a question I will now have buckets Murphy for closing remarks.
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 Factory Bank story, Thanks, and I look forward to speaking with you again next quarter have a great day.
This concludes today's call. Thank you for joining you may now disconnect your lines.
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