Blue Foundry Bancorp

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. 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 Nessie.

Thank you, Operator, and good morning, everyone. Thank you for joining us for our third quarter earnings call. I am joined by our Chief Financial Officer, Kelly Pecoraro, who will discuss the company's third quarter financial results in detail after I provide an update on our operations. Earlier this morning, we reported a quarterly net loss of $4 million and a quarterly pre-provision net loss of $3.8 million. Deposits increased by $7.5 million. and loans grew $3.6 million. 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 fourth quarter and for the next year. We have a healthy commercial loan pipeline and believe we will deliver sustained loan growth in the coming quarters. Further, based on how we positioned 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 markets. 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. 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 continues to improve shareholder value. Tangible book value per share increased by $0.05 to $14.74. Our bank and holding company remain 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 30th. Blue Foundry continues to operate with robust liquidity and a low concentration risk to any single depositor. At the end of the third quarter, we had $334 million in untapped borrowing capacity and our unencumbered available for sale securities and unrestricted cash provided another $300 million of liquidity. This liquidity is four times larger than our uninsured and uncollateralized deposits to customers, which represents only 12% of our 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 thank you jim and good morning everyone the net loss for the third quarter was four million dollars compared to a net loss of 2.3 million dollars 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 million of commercial lines of credit. Our unused lines of credit increased by $12.8 million, and we had $26 million 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 $1.1 million due to improvement in non-accrual loans. This resulted in a five basis point reduction in non-performing assets to total assets and a seven 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 210% 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 three basis points to 4.53% and yield on all interest earning assets decreased by five basis points to 4.32%. 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 four 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. 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 fourth quarter of 2024 to be in the mid to high $13 million range. Moving on to the balance sheet, gross loans increased by $3.6 million during the quarter. 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 million. This decrease was driven by $16 million of amortization, partially offset by an $8.6 million or 27% improvement to the unrealized loss position. Our frontline staff was able to grow customer deposits by $15.4 million. This growth was offset by $7.5 million 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 million as the company borrowed ahead of anticipated loan funding to lock in term rates at attractive levels. And with that, Jen and I are happy to take your questions.

Thank you. If you would like to ask a question today, please do so now by pressing star followed by the number one on your telephone keypad. If you change your mind and would like to be removed from the queue, please press star and then two. Our first question today comes from Justin Crowley with Piper Sandler. Justin, please go ahead.

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.

Good morning, Justin. Yes, if we looked at NIM for the quarter, what we saw on the loan yields coming in, it has to do with the timing of the fundings that are taking place on some of our loan products. As we look to diversify and 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 funds. On some of the other components that drove the decrease in NIM for the quarter, 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's Great cut. We had some individuals walk in with our higher priced CDs. During the quarter, our high CD rate that we were offering was at $5.25. So we did see some reprice into that product, which drove that.

Okay. Got it. And then I was about to hit on that next, but as far as, um, lowering deposit rates from here, um, I suppose specifically promotional feeder CD rates, um, just looking at that 437 months compared to that, the 5 25, you had alluded to, um, not sure how much of that might be a pull forward, but just curious, you know, um as we continue to get further rate decreases um how you think about being able to move rates lower um considering things like i guess the loan to deposit ratio and just the competitive environment yeah so we're we are looking at the competitive rate environment and we meet frequently with our teams and just as we did lower our our offering down to the 440 on our cd we'll look to

Lisa Chavez- 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 a different pace.

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, can you give us a sense of 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.

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. They don't have right off the top of my head the average FICO, but they are strongly underwritten credits that our team looked at, and they were at a attractive rate, so we took advantage of that opportunity.

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

You know, I think we will take a look at all opportunities in the market, and if that's something that 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.

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

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

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

Thank you.

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

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

Yeah, 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 aren't immediate. So the pipeline stood at just over $60 million at rates of around 8.7%. Again, the fundings will be dependent on the needs of the borrower.

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

you know 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 and variable and having a little bit more control over pricing and I think that's where the marketplace will go we've got

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

We've moved it a little bit. We meet frequently. Our ALCO team and pricing team meets very regularly. And wherever 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. So it's really the repricing of the CD book and our more institutional borrowings, you know, with Federal Home Loan Bank as they come down.

Got it. And as far as, you know, the margin, you know, maybe as of, you know, today or, you know, 930 or whatever the most recent date is, do you guys have a spot margin?

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 fourth quarter, We're seeing improvement to the NIMS coming in in the low 190 range for the fourth quarter based upon, you know, shift in deposit costs as well as fundings on our loan books.

Got it. That's helpful. And, you know, as you guys kind of, you know, look out and, you know, if we move to, you know, 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?

The way we're looking at it is the curve gets back to what I would describe as more normal. The bank results tend to improve. 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 we're trying to position. 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.

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

For the coming cycle, as we're looking, as Jim mentioned, you know, it will be dependent upon our customers and 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.

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

Great. And last one for me, just... Do you guys have the next, you know, couple quarters of how much of the CD portfolio is, you know, set to turn over and mature?

So we have kept the CD portfolio short from a consumer and brokered CD base. We're looking at about 300 million will reprice in the fourth quarter.

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

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

Thank you.

We have no further questions.

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

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