Blue Foundry Bancorp Q2 2024 Earnings Call Transcript

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Provided by Quartr
July 24, 2024

There are 5 speakers on the call.

Operator

Good morning, and welcome to Blue Foundry Bancorp's Second 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. 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.

Operator

Please refer to today's earnings release for reconciliations of these non GAAP measures. 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 Q2 earnings call. I am joined by our Chief Financial Officer, Kelly Pecoraro, who will discuss the company's 2nd quarter financial results in detail after I provide an update on our operations. We are pleased by the progress we made in the Q2 and thus far in 2024. Despite the competitive environment and inverted yield curve, deposit growth continued in the 2nd quarter and net interest margin expanded for a 2nd consecutive quarter.

Speaker 1

This coupled with our expense discipline helped to improve PP and R by $268,000 versus last quarter. Our focus on attracting the full banking relationship of small to medium sized businesses has resulted in a 9% increase in commercial deposits this year. Additionally, our branch network has delivered a 6% increase in consumer deposits. These successes have allowed us to reduce our reliance on wholesale deposits by 4% this year. Additionally, this deposit growth has improved our loan to deposits ratio.

Speaker 1

Given our strategy to become a more commercially oriented institution, we have been selective in originating real estate loans while building our commercial pipeline. We now have a healthy pipeline of commercial credits at attractive yields that will allow us to continue to expand our interest income and loan yield. We expect to continue to build this pipeline in the second half of the year. As always, we are disciplined in under earning strong credits across all our loan product offerings. During the quarter, we repurchased 386,000 shares at a weighted average share price of $8.84 Repurchasing shares at these levels continues to improve shareholder value.

Speaker 1

Tangible book value per share increased by $0.09 to $14.69 Our bank and holding company remained well capitalized with capital levels that are among the highest in the banking industry. Tangible equity to tangible common assets was 16.9% at June 30. Blue Foundry continues to operate with robust liquidity and a low concentration risk to any single depositor. At the end of the Q2, we had $394,000,000 in untapped borrowing capacity and our unencumbered available for sale securities, unrestricted cash provided another $298,000,000 of liquidity. This liquidity is 4.8 times larger than our uninsured and un collateralized deposits to customers.

Speaker 1

These deposits represent only 12% for deposit balances. 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 Q2 was $2,300,000 compared to a net loss of $2,800,000 during the prior quarter. This improvement was driven by an expansion of net interest income and increase in non interest income and the release in the provision for credit losses. Our asset quality remains strong in the current environment. During the quarter, we had a release of provision for credit losses of $762,000 driven by forecasted improvement to economic drivers used to model our credit losses.

Speaker 2

A relief occurred in all three categories: loans, off balance sheet commitments and held to maturity security. As a reminder, the majority of our allowance for credit losses is derived from quantitative measures and our allowance methodology places greater weighting on the baseline and adverse forecast. Non performing assets declined by $1,100,000 due to the sale of our only real estate owned property and a $483,000 improvement to non accrual loans. This resulted in a 6 basis point reduction in non performing assets to total assets and a 3 basis point reduction in non performing loans to total loans. Our allowance to total loans decreased 4 basis points due to the decrease in the allowance for credit losses on loans.

Speaker 2

However, our allowance to non accrual loans increased to 2 10% from 2 0 5% the prior quarter as the impact from the accretivement in non accrual loans outweigh the reduction in the allowance for credit losses on loans. Net interest income increased by $156,000 leading to a 4 basis point expansion in net interest margin. Interest income expanded $450,000 while interest expense only increased $294,000 We expect our net interest margin to stabilize around these current levels for the remainder of the year. However, it could move moderately in either direction depending on interest rate activity and our ability to generate asset growth given the current macroeconomic environment. Yield on loans increased by 11 basis points to 4.56 percent and yield on all interest earning assets increased by 12 basis points to 4.37%.

Speaker 2

Cost of funds increased only 8 basis points to 2.89%. The cost of interest bearing deposits increased 16 basis points to 2.90%. Conversely, our NPOS decreased 15 basis points to 3.09 percent as average balances declined due to the payoff of higher cost short term wholesale borrowings during the prior quarter. Expenses were substantially flat to prior quarter with minor variances in each category. We continue to promote expense discipline and we expect operating expenses for the Q3 of 2024 to be in the mid to high $13,000,000 range.

Speaker 2

Moving on to the balance sheet. Gross loans declined by $6,800,000 during the quarter. While amortization and payoff outpaced new loan funding, our new fundings are yielding 8.6% and that will benefit loan yield in future quarters. As a reminder, only approximately 2% of our loan portfolio is in office space and none is in New York City. Available for sale securities increased $32,600,000 During the quarter, we purchased $45,000,000 of securities with a weighted average yield of 5.8%.

Speaker 2

Our frontline staff were able to grow time deposits by $29,100,000 This was partially offset by a $9,100,000 outflow in core deposits, resulting in an increase in net deposits of $20,000,000 or 1.5% during the quarter. Borrowings remained flat during the quarter as we funded the security purchases with deposit growth and cash flow from our lending and securities portfolios. And with that, Jim and I are happy to take your questions.

Operator

Thank Our first question today comes from the line of Justin Crowley with Piper Sandler. Justin, your line is now open. Please go ahead.

Speaker 3

Hey, good morning. I wanted to start off on the margin for the quarter. It looks like funding pressures continue to slow. And so wondering how you expect that to trend moving forward as try to continue to grow deposits, and move the loan to deposit ratio lower?

Speaker 2

Good morning, Justin. Yes, thank you. We were pleased with the margin expansion that we had this quarter. We believe we'll be stable in this range as we work through the rest of the year. However, that could be impacted moderate by interest rate environment and asset classes that we put on the balance sheet.

Speaker 3

Okay. And then what's embedded in that sort of guide for a stable margin in terms of like Fed rate cut activity this year?

Speaker 2

So as we look from a fed rate perspective, we were not factoring in any cuts until later in Q4.

Speaker 3

Okay, got you. And then as far as the other inputs into that sort of outlook, thinking about cuts, how soon after the first 25 basis points do you envision being able to lower deposit rates? Not sure if you've tested this already, but just given the focus on keeping the loan to deposit ratio in check.

Speaker 2

Yes. I think as we look at the shift and the ability to move deposit costs lower, we're going to need to look at the activity in the market it has in the past, but we will be monitoring that closely. Okay. And then, I'll just add on to that. It has in the past, but we will be monitoring that closely.

Speaker 3

Okay, thanks. That's helpful. And then as far as overall growth, looking to get a sense of how loan origination activity looked in the quarter. I know you're being maybe a bit more selective, but what would need to happen or change to start thinking about net growth again?

Speaker 2

Right. So I think if you look at it for the quarter, we had fundings probably about $20,000,000 in fundings came on. We're looking for that to pick up in the latter half of the year. So our pipeline right now sits at about 30 $2,000,000 in our commercial pipeline. We're continuing to focus, as Jen noted, being strategic in the credits that we're putting on and mindful of the environment we're operating in, the economic and the regulatory environment.

Speaker 3

Okay. And then on credit, you had the reserve release for the 2nd straight quarter here. As underlying trends continue to better, looking at things like non accruals. Just if you could share a bit more on what you're seeing beneath the surface, particularly when you're seeing things like commercial real estate credit maturity or repricing?

Speaker 2

Right. So as we look at our pricing, we don't have a significant amount of re pricing activity that will take place through the end of the year. We probably have about $30,000,000 in repricing through the end of 2024, so not significantly impacted by that. From a reserve perspective, again, our allowance methodology is primarily quantitative in nature and really are impacted by the forecast. And our portfolios benefited from having the those drivers being favorable for the outlooks.

Speaker 3

Okay, great. I'll leave it there. Thanks so much for taking the questions.

Speaker 2

Thanks, Justin.

Speaker 1

Thank you, Justin.

Operator

Our next question comes from the line of Chris O'Connell with KBW. Please go ahead. Your line is now open.

Speaker 4

Hey, good morning. Good morning, Simon. I wanted to follow-up on the NIM conversation. As far as the rest of the year and where CDs are being priced at now if you have the current offering rates and how much has left to reprice that hasn't really already repriced the market rate so far?

Speaker 2

So our current offering is a 5.25 rate of 7 year 7 month maturity, not 7 year. And a lot of that book has already repriced into the higher rates. We do still have some that will be coming due, but it's a smaller portion.

Speaker 4

Okay, got it. And then, as far as the FHLB advances, how much of that that's on balance sheet right now is overnight? And then maybe if it is laddered out, just kind of a general sense of the maturity schedule?

Speaker 2

So we currently don't have any overnight. We've been keeping them short in terms of within a month. We have approximately, I would say, dollars 30,000,000 in shorter duration within the month to 3 months term and then some longer dated within the portfolio.

Speaker 4

Got it. And as far as is there a hedging impact on against the FHLB advances? Or is it just the fact that they're longer dated that is able to keep the cost pretty low?

Speaker 2

Well, we do have the hedges out there. We have $204,000,000 of that those borrowings hedged. So that doesn't have an impact necessarily on some of the longer dated because it's locked in. We do have about a 3 year maturity on our swap

Speaker 4

book. Got it. I guess what I'm getting at is the borrowing rates fairly low right now and based on the maturity schedule, how much do you think that is going to move up over the course of the back half of the year closer to market rates absent any major change in the level of borrowings?

Speaker 2

Moving up to market rates. So there's not a tremendous amount that will move up to market rates. Again, we do have some of the $20,000,000 to $30,000,000 that's there that are maturing at the back end of the year at a lower rate. But we'll continue to manage through that and look at funding as we bring on deposits.

Speaker 4

Got it. And then as far as the asset generation, it seems like a little bit bullish relative to the first half of the year and the second half of the year on loan growth. If loan growth is still slower to materialize, would you look to do any more securities purchases or no because trying to keep kind of the loan to deposit ratio and funding profile intact?

Speaker 1

Chris, I think we're always going to be strategic on how we grow the balance sheet. If there's an opportunity to make a loan, that's our first priority. And if that opportunity is not there, we certainly look to supplement securities that makes sense for the balance sheet, looking at duration and credit quality and the yields that are available in the marketplace. But yes, we're looking at it in a dynamic fashion as time I answer that.

Speaker 4

Got it. And then you guys have come in below the expense guide and kept things pretty contained relative to expectations year to date. Anything in particular that's shifting the expense level up a bit for the back half of the year relative to where you guys have been for the 1st couple of quarters?

Speaker 2

Yes. I think the primary driver will be some, hopefully increases in compensation that would be tied to some of our variable plans as we execute on our goals and also some hiring that might impact that line as well.

Speaker 1

Yes. I think that's the way to think about that. The more success we see, compensation takes up a little bit as we bring on producers, people who bring in loans or bring in deposits. So again, we're happy to pay for performance. That's the focus, keep bringing in loans, keep bringing in deposits and yes, the comp will, but it's supposed to help with net interest margin and growing the balance sheet in a profitable manner.

Speaker 1

So we're all looking forward to seeing that happen.

Speaker 4

Got it. And what areas are you guys like looking to make hires at this point?

Speaker 2

I'm sorry, first I didn't.

Speaker 1

I think you said what area? You said you were doing some hiring in

Speaker 4

the back half of the year?

Speaker 1

Sure. Deposit gathering, C and I producers and producers of loans, commercial deposit gatherers, looking for people that will help move the balance sheet forward. And then we're always being cognizant of regulatory requirements, making sure we have adequate staff and backup for all things related to regulation. So making sure that we're constantly training people to come up through the ranks as needed.

Speaker 4

Great. And then the pace of buyback has slowed a bit over the past couple of quarters on an incremental basis. I mean, how are you guys feeling about the level of share repurchases going forward comparative to the past 2 or 3 quarters?

Speaker 1

Chris, the volume recently has picked up, and Kelly will give you a more clear answer, but it's based on volume.

Speaker 2

Yes. So we strongly believe in buybacks. However, as you're aware, we're held to some rules. It's based upon the prior month average daily trading volume as well as some additional SEC rules for the amount that we can purchase. But we are in the market every day looking to buy back as much as we can.

Speaker 4

Got it. So nothing like strategic decision, just a volume based kind of outcome there?

Speaker 1

We still Kelly got it right. We still believe in buybacks.

Speaker 4

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

Speaker 1

Thank you. Have a great day.

Operator

We have no further questions. So I'll turn the call back to the management team for any closing remarks.

Speaker 1

Thank you, operator. We appreciate everyone's attendance and interest in our company. And we look forward to speaking with you again in the 3rd quarter. Thanks and have a wonderful day.

Operator

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

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Key Takeaways

  • Deposit growth: continued with a 9% increase in commercial deposits and a 6% rise in consumer deposits, reducing reliance on wholesale funding by 4% and improving the loan-to-deposit ratio.
  • Net interest margin: expanded by 4 basis points to 3.09%, driven by a $156,000 rise in net interest income, and is expected to remain stable absent major rate shifts.
  • Loan pipeline: stands at $32 million in commercial credits at attractive yields, with new fundings generating an 8.6% yield as the bank pursues selective real estate originations.
  • Asset quality: strengthened with a $762,000 release of provision for credit losses and reductions in nonperforming assets and nonaccrual loans, reflecting favorable economic forecasts in the allowance methodology.
  • Capital and liquidity: remain robust with tangible equity to assets at 16.9%, $394 million of untapped borrowing capacity, $298 million in unencumbered liquidity, and 386,000 shares repurchased at an $8.84 average price.
AI Generated. May Contain Errors.
Earnings Conference Call
Blue Foundry Bancorp Q2 2024
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