Blue Foundry Bancorp

first 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 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. Your line will be muted for the duration of the call. After the speaker's remarks, there will be a question and answer session. I will now turn the call over to President and CEO Jim Neske.

Please go ahead. Thank you, Operator.

Good morning, everyone, and welcome to our first quarter earnings call. I am joined by our Chief Financial Officer, Kelly Pecoraro. I'm going to provide a strategic update, and then Kelly will discuss the company's first quarter financial results in detail. We continue to focus on executing against our strategy and delivering value for all of Blue Foundry's stakeholders. Paramount to our success is our ability to leverage the company's strong capital position to fund asset and deposit growth. promising step in the right direction during the quarter we grew deposits by 46 million dollars this growth was driven by the execution of our strategic initiatives and resulted in a reduction in our loan to deposit ratio by 500 basis points continued deposit growth will allow us to generate interest earning assets and expand revenue while maintaining an appropriate amount of leverage given our strategy to become a more commercially oriented institution We have been selected in originating real estate loans while building our commercial pipeline. We expect to see production and commercial credits pick up as we move through 2024. As always, we are disciplined in underwriting strong credits for all of our loan product offerings. We are committed to continue being good stewards of capital. Our stock, along with many of our peers, is trading at a discount to tangible book value, We believe that repurchasing shares at these levels is a credit use of capital. In the first quarter, our board approved another repurchase program for us in less than two years. Under our repurchase programs, we repurchased 532,000 shares at a weighted average share price of $9.49 during the quarter. These repurchases, coupled with an improvement to our AOCI, helped increase tangible book value per share by 11 cents to $14.60. Our bank and holding company remain well capitalized with capital levels that are among the highest in the banking industry. Tangible equity to tangible common assets was 17.25% as of March 31st. 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 for $133 million at March 31st. This is approximately 10% of the company's total deposits. At the end of the first quarter, we had $418 million in untapped borrowing capacity and our unencumbered available for sale securities provided another $251 million of liquidity. We had $54 million of cash on the balance sheet, of which $38 million was unrestricted. Additionally, our available liquidity covers 5.3 times our uninsured and uncollateralized deposits to customers. 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 first quarter was $2.8 million, compared to a net loss of $2.9 million during the prior quarter. This improvement was driven by a release in the provision for credit losses and an improvement in net interest margin, partially offset by an increase in expenses, which was guided to last quarter. Our asset quality continues to remain strong in the current environment. During the quarter, we had a release of provision for credit losses of $535,000, driven by forecasted improvement to the economic drivers used to model our credit losses. A release occurred in all three categories, loans, lost balance sheet commitments, and held to maturity securities. 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. While non-accrual loans increased $793,000 due to a single small business credit, non-performing assets to total assets remained low, increasing four basis points. to 36 basis points. Our allowance to total loans decreased three basis points to 88 basis points due to the decrease in the allowance for credit losses on loans. And our allowance to non-equal loans decreased 205 percent from 240 percent the prior quarter due to the increase in non-equal loans coupled with a decrease in allowance for credit losses on loans. Net interest income increased by $221,000, leading to an eight basis point expansion in net interest margin. Interest income expanded $507,000 and interest expense increased $286,000. We may experience slight margin pressure over the next couple of quarters depending on interest rate activity and our ability to generate asset growth given the current macroeconomic environment. Yield on loans increased by 16 basis points to 4.45% and yields on all interest earning assets increased by 19 basis points to 4.25%. Cost of funds increased 11 basis points to 2.81%. We continue to remain competitive in deposit pricing. This resulted in the cost of interest-bearing deposits increasing 22 basis points to 2.74%. Conversely, borrowing costs decreased 14 basis points to 3.24% as we paid off higher cost short-term wholesale borrowing. Expenses increased by $699,000, primarily driven by compensation and benefits. While compensation and benefits increased as a result of variable compensation bonus accruals resetting for new performance targets in 2024, our headcount remained stable throughout the quarter. We continue to explore opportunities to optimize our expense base and we expect operating expenses for the second quarter 2024 to be in the mid to high $13 million range. Moving on to the balance sheet, gross loans declined by $6.6 million during the quarter as 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 is in New York City. Our debt securities portfolio has a duration of 4.8 years. As a result of maturities, calls, and scheduled pay downs, this portfolio was reduced by $18.6 million during the quarter. Deposits increased by $46.3 million for 3.7% during the quarter. Our frontline staff were able to grow retail time deposits by $50.2 million and grow core deposits by approximately $500,000. This growth was partially offset as we allowed wholesale deposits to mature. 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. During the quarter, commercial account balances increased $18.5 million, or 10%. As a result of our strong deposit growth and cash flow from the loan and securities portfolios, we were able to pay down $55 million of higher cost short-term borrowing. And with that, Jim and I are happy to take your questions.

If you'd like to queue for a question, you can do so by pressing star 1 on your telephone keypad. And if for any reason you'd like to remove your question, you can press star 2. Again, to queue for a question, please press star 1. We'll pause here briefly as questions are registered. Our first question is from Justin Crowley with Piper Sandler. Your line is now open.

Hey, good morning, guys. Just wanted to start off on the margin. You know, it's nice to see some inflection in the quarter. You know, as I think about your balance sheet, lower rates would, of course, be helpful. But as we face, you know, the idea of higher for longer, I was wondering if you could just unpack a little more what drives, perhaps, just the commentary on NIM pressure looking ahead versus what you saw in the current quarter.

Thank you, Justin. Good morning. So if we looked, we were very pleased with the quarter's expansion in NIMS. We are mindful, though, within our portfolio, we have about $230 million of time deposits that will reprice. So currently, they're at about a $470 rate. And given the pressure on deposit pricing in the market, that will probably reset to a higher price level given the current rate. So depending upon that, we could see some pressure. on deposit costs to go even higher.

Okay, gotcha. That's helpful. And then just as far as that deposit gathering side, you know, obviously a good quarter to start off the year, but, you know, how are you thinking about deposit generation going forward versus having to rely on, you know, more wholesale funding channels? You know, obviously you're able to reduce that in the quarter. Just curious your thoughts there. Obviously it's a competitive environment, so.

Good morning, Justin. It's Jim. We are out in the marketplace shaking all the bushes, working on small business, and putting our people forward, surrounding ourselves on the commercial side as much as possible. I think we have strong products, and we're going to keep driving towards organic growth on that deposit side.

lead us to a better market going forward okay i appreciate that and then just on credit um you touched on it but looked quite clean once again um and you mentioned the small pickup and non-performers um but you know obviously you're able to release some reserves in the quarter um you know seems just more the world we live in with cecil but you know what are you seeing under the hood when you look at your book in terms of any early signs of stress um if any at all yeah um

Justin, you know, we are pleased with our level of non-performing. While we did pick up, we do look forward to some resolution of some non-performings that are on our books. There's nothing right now at this point that's concerning besides what we disclosed in the non-performing. So, you know, pleased with the credit metrics. We have strong underwriting, and that has served us well.

Okay.

Um, and then I guess just my obligatory question on buybacks, but, you know, we think the desire to stay active is still there based on what we saw during quarter, uh, where capital levels stand and then, you know, just where activity got done at versus where the stock is now. Uh, just curious, any updated thoughts there, if there's possibly, uh, you know, room to get even more active, the balance sheet continues to kind of shrink in size or at least stay roughly where it is.

Yeah. The board and I and Kelly, we all strongly believe in buybacks. I think you'll see us remain active in buybacks. I don't know that there's any further comments that we have at this time, but we believe in buybacks. The board directors believe in buybacks, and we do believe it works given where the price of the shares are today.

Okay, great. Thanks, Jim and Kelly. I appreciate it. I'll leave it there. Thanks so much.

Great day.

Our next question is from Chris O'Connell with KBW. Your line is now open.

Hey, good morning. So I just want to start off on the loan side and, you know, how the pipeline is doing and, you know, where you guys are thinking about in terms of, you know, reaching growth for the full year of 2024.

Right, Chris. So, as you saw, we had a slight reduction in our loan portfolio this quarter. And really that's driven, there's a couple of things, you know, competition for loans, but we are, as Jen noted, being very selective in the assets that we're putting in our books. So, we look at the shift. We were pleased with the reduction in our multifamily and residential and the growth within the CNI and other commercial real estate. line items. So, we're looking to be prudent as we put those assets on. And our pipeline right now, while we sit at about $40 million in our pipeline, you know, those are in those asset classes that we're looking to focus on predominantly.

And what's the yield in the pipeline?

The yield in the pipeline is just right around 7.5, 7.6.

Great. And as, you know, absent any, you know, rate change impacts, you know, as you're looking at the next couple of quarters with the NIM pressure, any sense as to where you could see, you know, the level of bottoming?

I don't think we have a level where we bottom, you know, it's very dependent upon the word pricing, us being able to gather and put on the higher yielding assets. But we are mindful, as I had mentioned, with some of the repricing in our deposit book. This quarter, we benefited from our borrowing being paid down, both higher costs and being able to replace them with deposits. So, as that continues.

And where are those CDs, the $230 million, where do you see them repricing to?

But right now they're on the books at about a 470 and our current promotional rates out there are about a 525.

Okay, great.

That's helpful. And then just, you know, more broadly or strategically thinking, I mean, how are you guys thinking about, you know, the pace or the movement toward you know, kind of positive profitability, you know, is there any, you know, incentive targets that are linked to that? And, you know, do you see that happening, you know, over the course of the next few quarters? Do you think you need the yield curve to change? You know, what's the pathway there?

I'll start and I'll let Kelly finish. The goal is always to become profitable. The expense side, we continue to look for any expenses that we can cut or reduce or be more strategic about. We continue to consolidate vendors whenever possible. We are very mindful of our staffing and our salaries and benefits. So I think there's a lot being done when you look at the company over the course of the last three years. Much has been accomplished. But the curve, as you indicate, is changing. I mean, it's changed dramatically over the last 18, 24 months, and it's become more difficult for us as a liability-sensitive bank to produce a NIM that's efficient. We will continue to look for more organic retail deposits, and we're also more focused on commercial and industrial-type loans to get a higher-yielding asset onto the books. We think all of those things in time lead to greater profitability. That's the focus. That's the strategy. The compensation, I think, was a question you asked about. Our metrics are tied to things that lead to greater profitability in the long haul. Every employee at Lou Foundry Bank is focused on these items. We talk about them frequently. We have town halls. Every employee is invested in this company. So yeah, it's top of mind for all of us. I appreciate the question, but I don't know if Kelly wants to add anything to it.

No, I think, Jim, you covered off and we're looking to hit on those strategic initiatives and compensate relative to those targets as we look to profitability.

Great. And along those lines, I mean, is there anything that you've mapped out that maybe you don't quite have hard numbers around on the expense side as you get through the year and into 2025? Any projects or anything where you think you can cut out any significant costs?

I don't have any additional guidance at this time. I don't know of any, but I don't have any guidance in any event on that. topic. I would tell you right now, we're trying to be as lean as possible and to create a better bank every single day.

Great. Appreciate the time. Thanks for taking my questions.

Thank you, and have a great day.

We have no further questions at this time, so I'll pass the call back to the management team for any closing remarks.

Thank you, operator, and to everyone who is listening today, thank you very much for your interest in Blue Country Bank.

We look forward to speaking to you again in the next quarter. Have a great day.

That concludes today's call. Thank you all for your participation. You may now disconnect your line.