Earnings Call Transcript - BLFY Q4 2023

Operator, Operator

Hello, everyone, and welcome. My name is Drew, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Blue Foundry Bancorp Fourth Quarter and Year-End 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. I will now turn the call over to your host, Jim Nesci. Please go ahead.

Jim Nesci, CEO

Thank you, operator. Good morning, and happy New Year to everyone. Welcome to our fourth-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. 2023 was a challenging year, especially for financial institutions. We navigated bank failures, a slowing economy, and the impact of rate hikes at historic speed. When we entered the year, economists predicted a mild recession, but 2023 showcased economic resilience despite higher interest rates. Higher rates caused a flight of deposits out of depository institutions across the United States. Our markets were not excluded from this trend. While this was tough to circumvent throughout the year, our fourth quarter proved to be a promising step in the right direction. Deposits did decline $8 million during the quarter, but this was largely driven by a $7 million reduction in cash collateral tied to our swap program and a $5 million reduction in wholesale deposits. Deposits within our resale network increased modestly, 1.3% on an annualized basis during the quarter. In 2024, we are focused on leveraging our capital to grow our balance sheet and funding it through organic deposit acquisition. We continue to be disciplined in our underwriting, strong credits, and bringing efficiency to the institution. Given the liability-sensitive nature of our balance sheet, we are encouraged by the potential improvements in short-term rates. To us, our capital is king. Both our bank and holding companies have capital levels that are among the highest in the banking industry. All of our capital ratios are more than two times higher than the regulatorily defined well-capitalized levels. Tangible equity to tangible common assets was 17.4% at December 31. We continue to execute on our share repurchase program. During the quarter, we repurchased 657,000 shares at a weighted average cost of $8.72, a discount to tangible book value. These repurchases, coupled with the improvement in our AOCI, helped increase tangible book value per share by $0.25 to $14.49 at December 31. To date, we have repurchased over 5 million shares, which represents nearly 18% of the shares issued during our conversion. Over the course of 2023, our capital was adversely impacted by the unprecedented speed in FOMC rate hikes. Our accumulating other comprehensive loss position currently accounts for approximately $0.93 per share. To reiterate, while the securities in an unrealized loss position are held as available for sale, we currently intend to hold them until their contractual maturity and realize the reversal of the unrealized loss as the securities get closer to maturity. We have maintained significant liquidity throughout the year. At the end of the fourth quarter, we had over $354 million in untapped borrowing capacity and our unencumbered available-for-sale securities provided another $278 million of liquidity. Additionally, we had $46 million of cash on the balance sheet, of which $36 million was unrestricted. Blue Foundry continues to operate with a low percentage of uninsured deposits and a low concentration risk to any single depositor. Uninsured and uncollateralized deposits from customer accounts were $131 million at December 31. This is approximately 10% of the company's total deposits. Additionally, our available liquidity covers 5.1 times our uninsured, uncollateralized deposits to customers. And with that, I'd like to turn the call over to Kelly, and then we'd be delighted to answer your questions.

Kelly Pecoraro, CFO

Thank you, Jim, and good morning, everyone. The net loss for the fourth quarter was $2.9 million, compared to a net loss of $1.4 million during the prior quarter. This deterioration was largely driven by NIM contraction and an increase in the provision for credit losses. Our asset quality continues to remain strong in the current environment. During the quarter, we had a provision for credit loss of $156,000. Although our loan portfolio declined slightly during the quarter, the impact of prepayments slowing, partially offset by improvements in our forecast, resulted in an allowance for credit losses on loans of $298,000, partially offsetting the increase in the provision for credit losses on loans, with a reduction in the provision for credit losses on off-balance sheet commitments and held-to-maturity securities of $132,000 and $10,000, respectively. As a reminder, the majority of our allowance for credit loss is derived from quantitative measures, and our allowance methodology places greater weight on the baseline and adverse forecast. Nonperforming assets to total assets decreased by 1 basis point to 32 basis points, primarily driven by a decline in nonaccrual loans. Our allowance to total loans increased by 3 basis points to 91 basis points due to the increase in the allowance for credit losses on loans, and our allowance to nonaccrual loans increased to 240% from 226% the prior quarter due to the decline in nonaccrual loans and the increase in allowance for credit losses on loans. While we realized a $162,000 expansion in interest income, our interest expense increased by $842,000, resulting in a reduction of $680,000 in net interest income. While still unfavorable, we are pleased to see the quarter-over-quarter contraction slow. Yield on loans increased by 8 basis points to 4.29% and yields on all interest-bearing assets increased by 9 basis points to 4.06%. Cost of funds increased by 23 basis points to 2.69%. Remaining competitive in deposit pricing, the cost of interest-bearing deposits increased by 27 basis points to 2.52%, and borrowing costs increased by 11 basis points to 3.38%. We still expect pressure on our margin to continue due to competition for deposits and the current rate environment. Expenses increased modestly by $149,000, driven by compensation and benefit expenses, partially offset by a reduction in other expenses. The increase to compensation and benefits expense was driven by the absence of adjustments to variable compensation that we recorded in the third quarter. We continue to explore opportunities to optimize our expense base. We expect operating expenses for the first quarter of 2024 to be below $14 million. Moving on to the balance sheet. Gross loans declined by $10.3 million during the quarter and amortization and payoffs outpaced new loan funding. As a reminder, less than 2% or $22 million of our loan portfolio is in office space, and none in New York City. Our debt securities portfolio increased slightly. Given the limited benefit considering the company's current tax position, we sold the majority of our obligations issued by U.S. state and their political subdivisions at a slight gain. We used these proceeds and excess cash to purchase $15.5 million of higher-yielding securities, picking up approximately 5% in yields. Additionally, during the quarter, our unrealized loss position improved by $11.2 million or 27%. And with a duration of 4.5 years, our debt securities portfolio continues to provide cash flow that is used to invest in higher-yielding assets. Deposits decreased by $8.2 million or 0.7% during the quarter. As Jim mentioned earlier, we were able to modestly increase our retail deposits by approximately $4 million, which allowed us to slightly reduce our reliance on wholesale funding. Additionally, cash held as collateral tied to our swaps program declined by $7 million. 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 the number of business accounts by 1% during the fourth quarter. The number of business accounts is up 8% for this full year. During the quarter, borrowings decreased by $5 million. And with that, Jim and I are happy to take your questions.

Operator, Operator

Thank you. We will now start today’s Q&A session. Our first question today comes from Justin Crowley from Piper Sandler. Your line is now open. Please go ahead.

Justin Crowley, Analyst

Hey, good morning. Wanted to start off on the net interest margin. It seems like things are leveling off to a degree on the funding side. Curious if you could speak to that side of things and how we should be thinking about the NIM trajectory through at least the first half of the year? And then maybe just a little detail on how if and when we get rate cuts, how that plays into the margin as we head into the back half of 2024?

Kelly Pecoraro, CFO

Yes, thank you, Justin. This quarter, we've seen a slowdown in the contraction of the net interest margin. We anticipate this trend will continue into the first half of the year. However, we are aware that we have a portfolio of certificates of deposit that will experience some repricing this quarter. Following some rate cuts, we may observe a slight increase in the cost of CDs. These CDs have a short maturity of about five months, so we expect to benefit from lower rates if we can adjust them downwards.

Justin Crowley, Analyst

Okay. And you're able to quantify just how much of those CDs are coming due?

Kelly Pecoraro, CFO

So there is a weighted average maturity of five months, and it's about $460 million of retail CDs, which excluding brokerage.

Justin Crowley, Analyst

Okay. Got it. And then just maybe more thematically, when we do get rate cuts, how quickly do you think you'll be able to move rates lower? I'm not sure if you have any embedded beta assumptions on the way down?

Kelly Pecoraro, CFO

No. I think, Justin, it's going to be an interesting market. We will look to reduce those rates, of course, but we're mindful of the competition within our market and also the pressures from the national and regional players for that funding.

Justin Crowley, Analyst

Okay. Got it. Appreciate that. And then just wondering if you could detail expense expectations a little further. I mean, that sub-$14 million you alluded to for the first quarter, what drives the pickup there? And what's the right way to think about growth through the duration of the year?

Kelly Pecoraro, CFO

Yes. I believe the main reason for the increase is in our compensation line item. As we mentioned earlier this year, we had removed our variable compensation expense due to the current environment and our alignment with targets. Therefore, it was recorded as zero for 2023. As we move into 2024, we have reset those variable compensation plans. Approximately $1 million of the increase is attributed to this reset. We will reassess this quarterly, aiming for full 100% achievement, but it will be adjusted throughout the year based on our performance against targets.

Justin Crowley, Analyst

Okay. I appreciate it. And then lastly for me on buybacks. I saw a nice pickup of activity in the quarter. How would you describe the appetite here, shares back around that $10 level, with what's left on the existing authorization? And then also just, Jim, alluding to your comments at the top, just leveraging capital through growing the balance sheet. How do you weigh those two against each other?

James Nesci, CEO

Good morning. What I think about is, what's the best opportunity for the bank and its capital. We're trading below tangible book value. We continue to believe in the buyback, and we'll continue to execute against the buyback. With that said, I think there's opportunity to make loans. We're looking to shift more into C&I, for instance, and we believe we can gain good returns on our capital there as well. Kelly, I don't know if you want to add anything.

Kelly Pecoraro, CFO

Yes. No, I think we are a firm believer in buybacks and continue to buy back what we can in the market.

Justin Crowley, Analyst

Okay. And then just as far as the balance sheet, so is net growth a decent expectation maybe beyond sort of what you saw this year, some of the mix shift within the loan portfolio?

Kelly Pecoraro, CFO

Yes. I think on both fronts, we will look to continue to shift. As Jim mentioned, into C&I, some higher-yielding assets, we are looking for growth probably in the mid-single digit at this point. But again, we will respond to the market and the availability to continue on our strategy.

Justin Crowley, Analyst

Okay. Perfect. I will leave it there. Thanks so much for taking my questions.

Operator, Operator

Our next question today comes from Chris O'Connell. Your line is now open. Please go ahead.

Chris O’Connell, Analyst

Hey, good morning. Maybe just following back on the loan growth. How are the pipelines compared quarter-over-quarter? And what is like the blended origination yield that you guys are putting on?

Kelly Pecoraro, CFO

So I think, at 12.31%, our pipeline was strong. We had about $25 million in our pipeline, $20 million of that in the C&I space, which we were pleased with. The yield on that is just around 8%, 8.2% on that pipeline.

Chris O’Connell, Analyst

Great. And so for the mid-single-digit loan growth, are you expecting that to be more back weighted and for the pipeline to pick up over the course of the year?

Kelly Pecoraro, CFO

I think as we look at it, having $25 million in our pipeline right now, we continue to respond to the market and what's available to meet the strategy of shifting to C&I. So if deals become available, we're actively looking at that. We are hoping to have the growth come in sooner as we benefit from that throughout the year, but we will be cautious in terms of extending our price.

Chris O’Connell, Analyst

Got it. And for the securities portfolio, I appreciate the color on the duration. For the next few quarters, do you think that you'll let that run off to the extent that you have stuff maturing? Or do you expect to keep it fairly stable from here?

James Nesci, CEO

I think there's a couple of opportunities in the marketplace with some higher-yielding securities as some of our securities roll off due to maturities. We are seeing some opportunities to reinvest at higher rates, sort of letting the natural maturity take place and then reinvesting as I said, in a higher interest rate.

Chris O’Connell, Analyst

Okay. Great. Sorry. Go ahead.

Kelly Pecoraro, CFO

We look for opportunities and look for the highest and best use of the proceeds as they mature where we can put them into higher yielding, whether it’s going to be securities or loans.

Chris O’Connell, Analyst

Got it. And as far as gain on sale going forward, given the level of resi that you guys have been producing, I mean, do you expect that to tick down a little bit near term? Or do you think it could stay in a relatively similar range?

Kelly Pecoraro, CFO

Well, I think we'll be in a similar range. The majority of that gain on sale was in the FHA product, not in the resi product. And as we look to the future, depending on what the markets do, we will look to be an active participant when the opportunity is present.

Chris O’Connell, Analyst

Great. And on the expenses for the sub-$14 million, just to start off the first quarter. I know you guys have been kind of looking for efficiencies and ways to help keep that relatively contained. How do you think overall expenses will play out over the course of the year? Do you think it will be fairly flattish from that sub-$14 million after the first quarter? Or…

Kelly Pecoraro, CFO

Yes, Chris. We think that $14 million or just below $14 million is a good run rate number from a fully baked-in. We continue to look at our contracts, professional fees, where we're spending money and driving the institution to be efficient.

Chris O’Connell, Analyst

Okay. And then asset quality seems pretty stable, quiet this quarter. Anything that you guys are seeing within your portfolio that gives you any concern?

James Nesci, CEO

Not at this juncture. We keep coming through it. And so far, it's been very good. Nothing has popped up as of today; everything looks good.

Chris O’Connell, Analyst

Great. That’s all I had. Thanks for taking my questions.

James Nesci, CEO

Thank you.

Kelly Pecoraro, CFO

Thanks, Chris.

Operator, Operator

That concludes the Q&A portion of today's call. I'd now like to turn the session back over to Jim Nesci for any closing remarks.

Jim Nesci, CEO

Thank you, operator, and I'd like to thank all of our shareholders and customers who have joined us today. I look forward to speaking with you again next quarter. Thanks, and have a great day.

Operator, Operator

That concludes today's Blue Foundry Bancorp Fourth Quarter and Year-End 2023 Earnings Call. You may now disconnect your line.