Q2 2023 Blue Foundry Bancorp Earnings Call

Good morning, and welcome T. D play 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 play foundry encourages all participants to our thoughts for the full disclaimer contained in this morning's earnings release, which has been posted to the investor really.

<unk> page on believe foundry banks don't call them during the call management will refer to normal G. W. P measures, which exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non G. A a P measures as a reminder, this event is.

Being recorded your line will be muted for the jewelry action at the cool after the Speakers' remarks, there will be a question and answer session. I will now turn the call over to President and CEO Jim Murphy.

Thank you operator.

Morning, everyone and welcome to our second quarter earnings call.

And by our Chief Financial Officer Kelly.

Oh sure the company's financial results in greater detail after my opening remarks.

The competition for deposits for both depository and non depository institutions, along with the inverted yield curve.

To have an adverse impact on our margin and cost of funds.

This top line pressure, we have been pleased to see our investments in technology result in productivity saves.

Quarter over quarter, our operating expenses declined 689000 or five 1%.

Driven primarily by lower compensation and benefits expense.

Headcount is 9% lower than it was at the end of 2022 and employees have increased productivity by optimizing redundant paths through the use of technology, allowing us to focus on more impactful projects.

We have been keenly focused on managing down variable expenses, we have reduced our reliance on consultants and our advertising costs were 71% below 2020 twos quarterly average.

During the second quarter, we repurchased $1 892000 shares at a weighted average cost of $9 68.

Discount to tangible book value.

Tangible book value per share increased 29 to <unk> 35 at June 30.

We continue to believe that share repurchase program represents a prudent use of capital.

We are still active in the lending markets during the second quarter, we originated $41 million in loans, primarily in our commercial portfolios.

Our underwriting standards remain conservative in 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 and holding company remained more than well capitalized.

At the end of the second quarter, we had over $395 million and under.

Cash borrowing capacity. Additionally, our available for sale securities portfolio, which represents 90% of the debt securities. We hold provided an additional $301 billion.

Liquidity.

Blue foundry continues to operate with a low percentage.

Uninsured deposits and low concentration risk to any single depositor.

Our bank subsidiary and uninsured deposits totaling approximately $293 million at the end of the second quarter.

This total includes approximately $69 million of deposits from the Blue factory Bancorp $20 million.

Deposits from its subsidiary glue factory investment company and $32 million from 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 at Cedar sweep account products.

Additionally, our available.

<unk> liquidity covers four four times our uninsured.

Collateralized deposits the customers with that I'd like to turn the call over to Kelly and then we'd be delighted to answer your questions.

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 933000 dollar expansion and interest income.

Interest expense increased $2 million, resulting in a reduction of $1 million and net interest income.

Yield on loans increased by 11 basis points to 418% and yields on all interest bearing assets also increased by 11 basis points to 393%.

Remaining competitive and deposit pricing our cost of interest bearing deposits increased 35 basis points to 173%.

This coupled with an increase in average short term borrowings drove the cost of funds to one 5%.

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.

Current rate environment, and the liability sensitive nature of our balance sheet.

During the quarter, we recorded a provision for credit losses of $143000 for the quarter ended June 32023.

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 nonperforming 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 $689000, 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 of amortization.

Amortization and payoff outpaced fundings.

As a reminder, less than 2% of our loan portfolio is in office space.

None is in the New York City market.

With a duration of four eight 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, Paul and scheduled takedown.

One thing our balance sheet has been challenging in this environment.

<unk> increased $23 million or one 8% during the quarter.

We were able to increase retail time deposits by $48 million and the <unk>.

Executed $50 million of new brokerage Cds.

This growth in time deposits was partially offset by an outflow of $75 million from non maturity accounts.

Our focus remains on the tracking 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 32023 balances were up 8% and accounts were up 5%.

During the quarter borrowings decreased $23 million as we replaced short term borrowings with time deposits.

And with that Jim and I are happy to take your questions.

Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad now tariff hike. Your question. Please press star followed by <unk>.

When preparing for your question. Please ensure your phone is on mute it locally.

Our first question is from Justin Crowley from Piper Sandler. Your line is now open. Please go ahead.

Hey, good morning, guys.

So it's certainly nice to see some of the.

<unk> expense reduction this quarter.

Two sort of holding this rate through the end of the year.

Im curious it sounds like maybe that was a little bit more of a pull forward.

I was looking for more of some of these reductions towards the back half of the year, but on some of the FERC.

<unk> that you've taken a look at.

What does that sort of entail does.

It go beyond simply head count, which you've done a strong job on.

So Justin Yeah, I think we're guiding at this point to low <unk> for the third quarter and into the fourth quarter, driven primarily by the reduction in head count and variable compensation were also continually looking at ways of reducing costs whether it.

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 save initiatives as we move forward.

Adjusted just to add onto that a little bit we go through a vendor analysis on a quarterly basis, where we can.

Consolidated number of vendors or extract better contract pricing, but thats something that we do on a regular basis. So expense management is definitely a focus of the management team.

Okay I appreciate that.

And then yes switching over to growth I think you guys had previously talked about.

A little bit more judicious on loan growth I'm curious, how the slowdown that we saw this quarter, how that sort of compares to expectations. As you look through the balance of the year how much of that is predicated on what you see on the deposit generation side.

Perhaps managing that loan to deposit ratio.

So I think you hit it spot on we are constantly looking at our funding sources, whether it's on <unk>.

Ganic deposit generation or through wholesale funding.

We are definitely opportunistic.

Match funding, we have excessive why is successful to us where we can still make a decent spreads. So we are still in the market still lending, but again. It is definitely we'd look at funding first and then we look at the opportunity and we look at the credit quality of what the market will give us.

I think Kelly may want to add to that is yes, no I think.

Jim is correct in terms of how we look at it also 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.

Are able to originate in this market and look for opportunistic.

Okay, and where are you seeing the most opportunity is it going to be more like the C&I side, but less so real estate.

Just as you look out here.

So I think we're seeing it in a couple of different segments, you did see our construction pick up.

<unk> have originated some construction loans.

Two well seasoned sponsors and building on the multifamily product also we are seeing some additional increases in C&I as we move into second half of the year.

Okay. That's helpful. And then I guess just quickly just back to the funding side of things.

The weighing of putting on brokered money versus borrowings.

Can you just unpack a little bit what drives that decision as 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 flushes out again just versus.

Looking at the costs between those two funding channels.

So we've looked at pace funding curve.

We go through wholesale funding first then we looked at our retail funding.

All laid out on the curve for us to consider some types of swap markets provide better value, but we we.

We are diligent in looking at taking where on the curve, we want to be as far as duration and then the type of funding we wanted to take on our balance sheet, where we can get a fuller relationship from a customer that does incentivize us to possibly pay up for a rate, but in general we look at the funding sources.

Yes.

Between wholesale and retail.

And then okay got it.

Sorry go ahead.

No just I was just saying in terms of our wholesale funding looking at the difference between whether we are borrowing from the federal home loan bank are going into the brokerage market. We take the metrics into consideration. We are sure about 40% of our wholesale funding book is under a year in terms of duration.

Still looking to be opportunistic as we.

At least the funding.

Okay, and then do you I mean at 10%.

Is there a limit on how much further you can lean into the brokerage market.

So it's a combination in terms of what our policy when a tab at this point.

But we still have some room in the brokerage side.

Okay got it.

Alright, guys I appreciate it I'll leave it there. Thank you for taking my question.

Thank you Justin Thanks Joseph.

Thank you Justin we have no further questions at this time, so I'll now hand back to Jim Murphy for any final remarks.

I'd like to thank all the participants who dialed in today I. Appreciate your interest in Blue Factory Bank and we look forward to speaking with you again next quarter. Thank you.

This concludes today's call. Thank you for joining you may now disconnect your lines.

[music].

This concludes today's call. Thank you for joining you may now disconnect your lines.