Good morning and welcome to Blue Foundry Bancorp’s Third Quarter 2023 Earnings Call. My name is Jordan and I will be your conference operator today.

[Operator Instructions] 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. [Operator Instructions] I am now going to turn the call over to President and CEO, Jim Nesci..

Thank you, operator. Good morning and welcome to Blue Foundry Bancorp’s third 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 results we announced earlier today illustrate the impact that the higher-for-longer rate environment continues to have on our revenue. The highly competitive Northern New Jersey market, coupled with sustained higher short-term interest rates has had an adverse impact on our margin and cost of funds.

Despite this pressure on revenue, we remain focused on expense management and maintaining our robust capital base, strong liquidity and stable asset quality. My management team and I have been diligent in exploring opportunities to reduce our expense base to offset some of the top line pressure.

We have reduced staff by 10% this year and our investment in technology has allowed our employees to be more productive than ever. Earlier this year, we challenged our employees to further optimize our operations and we are appreciative of their contributions.

Their efforts resulted in increased productivity for a reduction in redundant tasks and cost saves. And most importantly, we continue to streamline delivery of customer services to provide a consistently better customer experience. Our expenses have steadily declined during the course of the year.

Expenses were $13.7 million in the first quarter, $13 million in the second quarter, and $12.4 million this quarter. Quarter-over-quarter, our operating expenses declined $574,000 or 4.2%. Both our bank and holding company have capital levels that are among the highest in the banking industry.

All of our capital ratios are more than 2x higher than the regulatory defined well-capitalized levels. Additionally, tangible equity to tangible common assets was 17.1% at September 30. Maintaining significant liquidity and reducing liquidity risk remain paramount when operating in the current environment.

At the end of the third quarter, we had over $369 million in untapped borrowing capacity and our unencumbered available for sale securities provided another $278 million of liquidity. Excluding teller cash, and counterparty cash collateral received from our swaps program, we had $33 million of cash on hand at quarter end.

Additionally, Blue Foundry continues to operate with a low percentage of uninsured deposits and low concentration risk to any single depositor. For customers who acquire FDIC coverage beyond the traditional $250,000, we are able to provide them with an additional coverage through our ICS and Cedar sweep account programs.

Uninsured deposits from customer accounts were $127 million at September 30th. This represents approximately 10% of the bank’s total deposits. Additionally, our available liquidity covers 5.4x our uninsured and uncollateralized deposits to customers.

While the prospective credit environment remains uncertain, we continue to be pleased with the resilience of our existing lending portfolio. Our credit quality remains strong. Our nonperforming loans remain at historically favorable levels and our underwriting standards on new production remain conservative.

Lastly, in July, we completed our second stock repurchase program and announced that our Board of Directors approved a third program authorizing the repurchase of an additional 5% of outstanding shares. During the quarter, we repurchased 298,000 shares at a weighted average cost of $9.51, a discounted tangible book value.

Tangible book value per share was $14.24 at September 30th, and we continue to believe that share repurchase programs represent a prudent use of capital. With that, I’d like to turn the call over to Kelly, and then we would be delighted to answer your questions.

Kelly?.

Thank you, Jim, and good morning, everyone. The net loss for the third quarter was $1.4 million compared to net loss of $1.8 million during the prior quarter.

This improvement was largely driven by lower operating expenses and the release of the provision for credit losses, partially offset by lower net interest income due to the funding pressures from the competitive rate environment. Our asset quality continues to remain strong in the current environment.

During the quarter, we had a provision for credit loss for lease of $717,000. The majority of our allowance for credit loss is derived from quantitative measures.

And although our allowance methodology placed greater weighting on the baseline and adverse forecast, our favorable credit metrics and composition of our loan portfolio, coupled with a slight decline in our loan portfolio and a decline in our unused credit line led to a reduction of our current expected credit loss reserve.

Nonperforming assets to total assets decreased 4 basis points to 33 basis points, primarily driven by a decline in non-accrual loans. Our allowance to total loans decreased 3 basis points to 88 basis points. However, our allowance to non-accrual loans increased to 226% from 186% in the prior quarter, also due to the decline in non-accrual loans.

While we realized a $408,000 expansion in interest income, our interest expense increased $1.1 million resulting in a reduction of $1 million in net interest income. Yields on loans increased by 3 basis points to 4.21% and yield on all interest-bearing assets increased by 4 basis points to 3.97%. Cost of funds increased 31 basis points to 2.46%.

Remaining competitive in deposit pricing, the cost of interest-bearing deposits increased 52 basis points to 2.25%. This was partially offset by a 15 basis point reduction in borrowing costs.

We still expect pressure on our margin to continue due to the competition for deposits, the current rate environment and the liability-sensitive nature of our balance sheet. During the quarter, we executed $50 million in interest rate hedges to manage our interest rate position.

This brings us to a total of $259 million of hedges against interest rate volatility. The weighted average duration of these hedges is 3.4 years. Expense refund $574,000, driven by a reduction in compensation and benefits expense and to a lesser extent, a reduction in occupancy and equipment data processing and professional services.

The reduction to compensation and benefits expense was driven by sustained lower headcount and a reduction in variable compensation. We continue to explore opportunities to optimize our expense base. We expect operating expenses for the fourth quarter to be below $13 million. Moving on to the balance sheet.

Gross loans declined by $10.8 million as amortization and payoffs outpaced new loan funding. As a reminder, less than 2% or $23 million of our loan portfolio is in office space and 9% is in New York City. With the duration of 4.5 years, our debt securities portfolio continues to provide cash flow that is deemed used to fund loans.

These securities declined $11.5 million due to maturity call and scheduled paydown as well as an additional $5.9 million increase in unrealized losses. Deposits decreased by $14 million or 1.1% during the quarter. We were able to increase retail time deposits by $51 million.

This growth in time deposits was more than offset by an outflow of $65 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 the number of business accounts by 2% during the third quarter. The number of business accounts were up 7% this year. During the quarter, borrowings increased marginally. And with that, Jim and I are happy to take your questions..

[Operator Instructions] Our first question comes from Justin Crowley of Piper Sandler. Justin, the line is yours..

Hey, good morning, guys..

Good morning..

Wanted to start on operating expenses. It was nice to see this continue to come down in the quarter. As I think the last update, at least this time last quarter was perhaps think about costs holding steady through the back half of the year. I was wondering if you could expand a little on exploring opportunities.

I think across the industry, you’ve seen a lot of banks formally come out with broader initiatives, some of which you’ve already done. It seems like you guys have also been able to do a decent job just trimming costs around the margin. But just curious if there could be even more to be done here. And then, I guess, sort of a loaded question.

But Kelly, if I heard you right, I think you mentioned below $13 million for the fourth quarter.

I’m not sure if you’re able to get a little more specific there, but does that sort of imply that the base could see a little bit of a tick up into the end of the year?.

Yes, Justin. So 13, we’re guiding to just below $13 million. We do have a little bit of additional expense. We do have one new branch coming on in the fourth quarter, which will have additional expense, but we continue to look at opportunities to reduce our expense base.

You asked, are we – do we have specific initiatives? I think the initiative and the mantra around here is to look at every contract, look at every expense line item, especially as we go into our strategic planning season, as renewals come up and see what we can do to lower that expense, eliminate redundancies and tests that vendors may be performing for us still extend paramounts in our operating models..

Okay. I appreciate that. And then sort of shifting gears and turning to loan growth. I saw balances decline again. Can you just talk a little bit about net growth expectations going forward? Not sure if there is any change in the thinking in terms of the size of the balance sheet looking ahead.

Just curious, your thoughts there?.

So Justin, I think, yes, we did see a reduction in our loan balances. We are very mindful in putting on high-quality, high-yielding loans using both our amortization from our loan book to redeploy that into higher-yielding assets as well as our paydowns and amortization of our securities book.

Some of the constraints on the deposit outflow has tampered that a little bit, but we’re in the market looking to lend and looking for the appropriate asset class to put on our balance sheet..

Okay.

So when I think about like the loan pipeline, how has that trended maybe as of now compared to this time last quarter?.

I think right now, we’re probably a little bit below where we were from an overall pipeline perspective, but the rates are higher. So as we look at that, as we said, putting on those higher-yielding assets and being mindful of our composition..

Okay. And do you feel comfortable sharing any sort of loan growth target just over the next perhaps year or so. I’m not sure if you’re in a position to be able to do that..

No, we’re not in a position right now, Justin, to do that..

Okay. Got it. And then just lastly, I wanted to touch on share repurchases. Obviously, capital levels are pretty healthy. So just curious if there is appetite to get quite a bit more active here, possibly.

Would seem that the math has gotten even more attractive when I think about where activity in the quarter got done at?.

Yes. I think we are very – we support buybacks. The Board and management believe that the purchase of our shares is a good investment. We were – if you think about where we were in the second quarter and the volume within the market, we were able to take advantage of that, the volume at that point.

As we headed into Q3, we saw volumes kind of trend downward. Also, the timing of the transition from our first stock – our second stock repurchase plan to the third plan had some impact on our purchases this quarter..

So Justin, this is Jim. Good morning, again. But to reiterate what Kelly is saying, we are still a firm believer in share buyback that expect to be back in the marketplace in Q4 as we go in, so again, no news..

Okay. Understood and I appreciate it. I will leave it there..

Thanks Justin..

Thank you, Justin..

Our next question comes from Chris O’Connell of KBW. Chris, please go ahead..

Hi. Good morning. Just circling back on the loan growth discussion.

So, I mean given where the pipelines are a bit lower than last quarter, I mean is it – does that imply that maybe for the next couple of quarters, net loan growth is kind of more of a flat line situation?.

I think it’s hard to tell, Chris, as we look at the market, the volume in the market, what we are looking to put on the balance sheet again, looking for those high-quality, higher-yielding assets. So, if it’s available and you have the funding as well, we are definitely looking to put loans on our balance sheet..

Just to again reiterate, it depends on the asset class. It depends on the price. So, those two go hand in glove, in my opinion. We are looking, we are actively looking, and we are building the pipeline. So, it’s hard to give you a specific number where we projected to be.

We are looking in the marketplace and we do think there will be activity in the coming quarters..

Okay.

And what is – are the origination yields on the loan pipeline?.

The pipeline right now we have just under 8.5 from....

Perfect.

And as far as the next 12 months, how much in the dollar amount or the loans set to mature?.

Give me half a second on that, and I will be able to get that for you..

One moment, $25 million are set to mature, but we do have amortization of the portfolio each month is about $5 million to $7 million that’s coming in from an amortization perspective as well as the securities portfolio that’s amortizing down.

And we have some pay-offs coming for maturities due in that book, probably about $12 million in the next quarter..

Okay. Great.

And as far as all the hedges that you guys have on the $259 million, can you remind us as to where each of those rates are locked in at?.

I think it’s a nice blend, Chris, as we put them on. Right now, we have our – the weighted average maturity is 3.4 years, and the weighted average rate of those hedges are below 3 years..

Okay. And that’s being kind of applied against the FHLB advances in terms of like the yield table..

Right. So, if we take a look at that, it does impact our interest expense. So, it’s offsetting interest expense on our financial statement..

Okay. Great.

And kind of putting it all together here, I mean do you guys have the September spot NIM, or any color as to how much NIM pressure you might see into the fourth quarter?.

So, we don’t normally share our spot NIM where we are at, but we do see some additional compression, but not at the pace we saw in the third quarter as the significant amount of our CDs had matured and went into those buckets. So, we don’t see that volume of activity in some of our maturing deposits..

Okay. Got it. And just taking a step back, I mean in order – do you have any idea of in the current rate environment and if that kind of persists as it is right now with the inverted yield curve, which I know makes things difficult.

Where the NIM could bottom and start to move back up in terms of timing and just what levers can be pulled to kind of get to a path to profitability from here?.

So, I don’t know that it’s a specific lever. What we continue to focus on is our core business strategy of banking small and medium-sized businesses. We continue to look for the lower cost deposits, obviously, that those businesses provide to banks like ours. But that’s where we are going to stay on the strategy.

We continue to increase the deposit base. The products are working well. Obviously, we want to see them scale up faster, but that’s where we are going to keep pushing our manpower into..

Okay.

And any sense of the timing as to where would you get to an inflection point in the margin?.

It’s too hard to say at this juncture. I don’t have any guidance on that point at this time..

Okay. Alright. That’s all I had. Thank you for taking my questions..

Chris thanks..

Thank you, Chris..

With that I will hand back to the team for any closing remarks..

Thank you, operator. Thank you again for joining us on our third quarter call, our earnings call. We look forward to speaking with you again next quarter. Thanks and have a great day..

Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines..