Blue Foundry Bancorp Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 23, 2024

There are 5 speakers on the call.

Operator

Good morning, and welcome to Blue Foundry Bancorp's Third Quarter 2024 Earnings Call. 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 circumstance. BlueFoundry 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.

Operator

As a reminder, this event is being recorded. Your line will be muted for the duration of the call. After the speakers' remarks, there will be a question and answer session. I will now turn the call over to President and CEO, Jim Nesi.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining us for our Q3 earnings call. I am joined by our Chief Financial Officer, Kelly Pecoraro, who will discuss the company's Q3 financial results in detail after I provide an update on our operations. Earlier this morning, we reported a quarterly net loss of $4,000,000 and a quarterly pre provision net loss of $3,800,000 Deposits increased by $7,500,000 and loans grew $3,600,000 We were able to deliver tangible book value per share growth, while capital and credit quality remained strong. Additionally, we have a positive outlook for both the Q4 and for the next year.

Speaker 1

We have a healthy commercial loan pipeline and believe we will deliver sustained loan growth in the coming quarters. Further, based on how we position the balance sheet, we expect the Federal Reserve's recent 50 basis point rate cut and any subsequent rate cuts to have a positive impact on our net interest income. With our industry leading consumer friendly products, we continue to focus on developing new relationships and deepening our current relationships within the communities we serve. Specifically, we are dedicated to attracting the full banking relationship of small to medium sized businesses in our market. So far this year, this strategy has resulted in an 11% increase in commercial deposits and our branch network has delivered a 7% increase in consumer deposits.

Speaker 1

These successes have allowed us to reduce our reliance on wholesale deposits by 4% and improved our loan to deposit ratio. Given our strategy to become a more commercially oriented institution, we have been selective in originating real estate loans while building our commercial pipeline. Our pipeline of commercial credits at attractive yields continues to expand and this should drive an expansion in our interest income and loan yield. We remain disciplined in underwriting strong credits across all of our loan product offerings. During the quarter, we repurchased 522,000 shares at a weighted average price of $10.52 Repurchasing shares at these levels continue to improve shareholder value.

Speaker 1

Tangible book value per share increased by $0.05 to $14.74 Our bank and holding company remained well capitalized with capital levels that are among the strongest in the banking industry. Tangible equity to tangible common assets was 16.5% as of September 30. Blue Foundry continues to operate with robust liquidity and a low concentration risk to any single depositor. At the end of the Q3, we had $334,000,000 in untapped borrowing capacity and our unencumbered available for sale securities and unrestricted cash provide another $300,000,000 of liquidity. This liquidity is 4 times larger than our uninsured and uncollateralized deposits to customers, which represents only 12% of our deposit balances.

Speaker 1

With that, I'd like to turn the call over to Kelly, and then we'd be delighted to answer your questions. Kelly?

Speaker 2

Thank you, Jim, and good morning, everyone. The net loss for the Q3 was $4,000,000 compared to a net loss of $2,300,000 during the prior quarter. This change was driven by a build in the provision for credit losses compared to a release in the prior quarter. Additionally, the increase in interest income was outpaced by the increase in interest expense. During the quarter, we originated $22,000,000 of commercial lines of credit.

Speaker 2

Our unused lines of credit increased by $12,800,000 and we had $26,000,000 of unfunded commitments at the end of the quarter. This drove the $248,000 increase in the provision for credit losses. As a reminder, the majority of our allowance for credit loss is derived from quantitative measures and our allowance methodology places greater weighting on the baseline and adverse forecast. Asset quality remains strong in the current environment. Non performing assets declined by $1,100,000 due to an improvement in non accrual loans.

Speaker 2

This resulted in a 5 basis point reduction in non performing assets to total assets and a 7 basis point reduction in non performing loans to total loans. Our allowance to total loans remained flat at 84 basis points, while our allowance to non accrual loans increased to 253% from 2 10% the prior quarter due to the improvement in non accrual loans. Net interest income decreased by $486,000 leading to a 14 basis point reduction in net interest margin. Interest income expanded $240,000 but interest expense increased $726,000 We expect our net interest margin to improve as we close loans and reprice deposits lower. Yield on loans contracted by 3 basis points to 4.53% and yield on all interest earning assets decreased by 5 basis points to 4.32 percent.

Speaker 2

Cost of funds increased 10 basis points to 2.99%. The cost of interest bearing deposits increased 10 basis points to 3%. Borrowing costs increased 4 basis points to 3.13% as longer dated borrowings at lower interest rates matured. In addition, borrowing balances increased slightly as the company took action to lock in longer term funding at attractive rates. Expenses were substantially flat to prior quarter.

Speaker 2

Compensation expense was lower this quarter, driven by lower salaries and variable compensation accruals. This was offset by idiosyncratic items in professional services and small increases in data processing and other expenses. We continue to promote expense discipline and we expect operating expenses for the Q4 of 2024 to be in the mid to high $13,000,000 range. Moving on to the balance sheet. Gross loans increased by $3,600,000 during the quarter.

Speaker 2

As a reminder, only approximately 2% of our loan portfolio is in office space and none is in New York City. Our available for sale securities with a duration of 4.4 years decreased $7,000,000 This decrease was driven by $16,000,000 of amortization, partially offset by an $8,600,000 or 27% improvement to the unrealized loss position. Our frontline staff was able to grow customer deposits by $15,400,000 This growth was offset by $7,500,000 resulting from a reduction in wholesale deposits and the decrease in the deposit held for cash received as collateral for our swap position. Borrowings increased by $6,000,000 as the company borrowed ahead of anticipated loan funding to lock in term rates at attractive levels. And with that, Jim and I are happy to take your questions.

Operator

Thank you.

Speaker 1

The company remains well capitalized with capital levels that are among the strongest in the banking industry. Tangible equity to tangible common assets was 16.5% as of September 30. Blue Foundry continues to operate with robust liquidity and a low concentration risk to any single depositor.

Operator

Our first question today comes from Justin Crowley with Piper Sandler. Justin, please go ahead.

Speaker 3

Hey, good morning. Just wanted to start on the NIM for the quarter. And then just like even looking at some of the inputs on loan yields specifically, which were down in the quarter, just curious what drove that dynamic?

Speaker 2

Good morning, Justin. Yes, if we looked at NIM for the quarter, what we saw on the loan yields coming in has to do with the timing of the fundings that are taking place on some of our loan products. As we look to diversify become more commercial like, a lot of those fundings don't take place immediately and are done over the life of the loan. So that's on the loan front. On some of the other components that drove the decrease in NIM for the quarter.

Speaker 2

We did see some of the repricing of our deposits earlier in the quarter to higher levels in anticipation, I'm sure, of the Fed rate cut. We had some individuals walk in with our higher priced CD. During the quarter, our CD rate our high CD rate that we were offering was at 5.25. So we did see some reprice into that product, which drove that.

Speaker 3

Okay, got it. And then I was about to hit on that next, but as far as lowering deposit rates from here, I suppose specifically promotional CD rates, just looking at that 4.37 month compared to that, the 5.25 you had alluded to, I'm not sure how much of that might be a pull forward, but just curious, as we continue to get further rate decreases, how you'd think about being able to move rates lower, considering things like, I guess, the loan to deposit ratio and just the competitive environment?

Speaker 2

Yes. So we are looking at the competitive rate environment and we meet frequently with our teams. And just this week, we did lower our offering down to the 4.40 on our CD. We'll look to see the impact that that has from a funding perspective being cognizant of that loan to deposit ratio. But we're also trying to shift our customers back into core products, which gives us an ability to move rates at different pace.

Speaker 3

Okay, got it. That's helpful. And then I guess just shifting gears a little. As far as some of the loan purchases in the quarter, I guess specifically on the consumer participation,

Speaker 4

Can you give us a sense of

Speaker 3

what exactly that type of lending consists of? And I'm not sure if you're able to provide anything like average FICO scores or whatever else might be relevant.

Speaker 2

So we had an opportunity to take advantage of participating in a consumer loan pool during the quarter. We did look at that from a credit perspective and we do have credit enhancements on that. I don't have write off the top of my head, the average cycle, but they are strongly underwritten credits that our team looked at, and they were at an attractive rate. So we took advantage of that opportunity.

Speaker 3

Okay. And so I guess that with the resi purchases, we've seen that before, but just back to the consumers, is that something that you'd continue to look at? Just to what extent would that be a tool going forward to supplement growth?

Speaker 2

I think we will take a look at all opportunities in the market and if that's something that it has the appropriate credit that we're comfortable with as well as rates, we will take a look at every opportunity that comes before us.

Speaker 3

Okay, understood. And then here goes my buyback question, but it's nice to see activity in the quarter. Could this be a pace that you sustainably run at just considering share liquidity? Or is there perhaps room to get even more active with the stock now trading below where repurchases got done in the quarter?

Speaker 2

So Justin, as you're aware, we are a whole net to the SEC rule on buybacks. So, we are buying as much as we can, based upon the average trading volume, all of those metrics. We don't control how much this is bought in a day. It's maximum that's available to us that we're buying on a daily basis.

Speaker 3

Great. All right. I'll leave it there. I appreciate it.

Speaker 2

Thank you. Thank you.

Operator

The next question comes from Chris O'Connor with KBW. Chris, please go ahead.

Speaker 4

Good morning. Just wanted to start off just on the loan side. Maybe just are the pipelines, how are they looking relative to last quarter about the same or are they up? And then what the origination yields are coming on at now?

Speaker 2

Yes. So the pipeline we're seeing is a little bit stronger than where we were or where we ended on Q2. Again, remember, we're transitioning the balance sheet to more commercial like. So some of those fundings are immediate. So the pipeline stood at just over $60,000,000 at rates of around 8.7%.

Speaker 2

Again, the fundings will be dependent upon the needs of the borrower.

Speaker 4

Okay, got it. And going forward, on the funding side, assuming this growth kind of begins to pick up from here on the loan side of things, CDs, I think, are now just over half of the deposit base. Is there a level that you guys want to cap that at? Or are you comfortable bringing that higher?

Speaker 1

It really depends on what's happening in the marketplace and consumer preference. So in the last time we saw a cycle like this a few years ago, CDs get up to a higher level and then we start moving into savings or money market products and then moving back down in variable and having a little bit more control over pricing. And I think that's where the marketplace will go. We've got built out a higher rate savings product and I believe our customers and future customers will start moving into that savings product that we have built out. And again, it's just part of the cycle, at least that's how we see it.

Speaker 4

Got it. And then on the deposit side, the drop down in the CD rate is obviously attractive and a positive. For the remainder of the interest bearing portion of the book, have you guys moved deposit rates on that yet? And if so, maybe what portion of that book?

Speaker 1

We've moved it a little bit. We meet frequently. Our alco team and pricing team meets very regularly. And where there's an opportunity to move that pricing down, we do. Most of the core products don't have really high pricing in it to begin with.

Speaker 1

So it's really the repricing of the CD book and our more institutional borrowings with Federal Home Loan Bank as they come down in price, I think you start to see the pickup and it starts to become constructive.

Speaker 4

Got it. And as far as the margin maybe as of today or ninethirty or whatever the most recent date is, do you guys have a spot margin?

Speaker 2

So we normally don't provide a spot margin. What I can say is some of the activities later in the quarter as well as actions we're taking in the Q4, we're seeing improvement to the NIM coming in, in the low $190,000,000 range for the Q4 based upon shift in deposit costs as well as fundings on our loan book.

Speaker 4

Got it. That's helpful. And as you guys kind of look out and if we move to a situation where we're getting more normal 25 basis point type of cuts here, any sense of how much you guys think the margin will benefit on a per cut basis?

Speaker 1

That'd be the way we're looking at it as the curve gets back to what I would describe as more normal, the bank results tend to improve. I mean that's we're waiting to see how fast can we shift from CDs to core products and then have the commercial customers start utilizing those lines. It's the economy, right? That's what it's based on, but our bank is well positioned for a drop in rates from the Fed. So that's we're trying to position.

Speaker 1

We're trying to make sure we're there for our customers. And I think we'll be able to show additional value to our shareholders.

Speaker 4

Got it. And I mean do you guys have assumptions around either the interest bearing or the total deposit beta for the cutting cycle?

Speaker 2

For the coming cycle, as we're looking, as Jim mentioned, it will be dependent upon our customers and from meeting those needs and being responsive to the competition in the market as well. So we'll look, but we need to fund the balance sheet and we'll be pricing appropriately.

Speaker 1

What I would add, not so much data, but our customer base has been a very loyal customer base to

Speaker 4

the

Speaker 1

bank. So I believe they will stay with the bank and they will continue to move into different products with us as we shift. They've historically shifted with us from CDs to high rate money markets and then into savings accounts. They've been with us for a very long time.

Speaker 4

Great. And last one for me. Just do you guys have the next couple of quarters of how much of the CD portfolio is set to turn over or mature?

Speaker 2

So we have kept the CD portfolio short from a consumer and broker CD base. We're looking at about $300,000,000 will reprice in the Q4.

Speaker 1

Just think about our special has been 7 months, so we keep building that 7 month special CV. It burns off rather quickly when you look at it.

Speaker 4

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

Speaker 1

Thank you.

Operator

We have no further questions.

Speaker 1

I appreciate everybody joining us today for our 3rd quarter earnings call. We look forward to speaking to you again after the Q4. Thanks and have a great day.

Operator

Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.

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Earnings Conference Call
Blue Foundry Bancorp Q3 2024
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