Blue Foundry Bancorp (NASDAQ:BLFY) Q4 2024 Earnings Call Transcript

Blue Foundry Bancorp (NASDAQ:BLFY) Q4 2024 Earnings Call Transcript January 29, 2025

Operator: Good morning, and welcome to Blue Foundry Bancorp’s Fourth 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 speakers’ remarks, there will be a question-and-answer session. I will now turn the call over to President and CEO, Jim Nesci.

James Nesci: Thank you, operator, and good morning, everyone. Thank you for joining us, for our fourth quarter earnings call. I am joined by our Chief Financial Officer, Kelly Pecoraro, who will discuss the company’s fourth quarter financial results in detail, after I provide an update on our operations. Earlier this morning, we reported a quarterly net loss of $2.7 million, and a quarterly pre-provision net loss of $3 million. Loans increased by $32 million predominantly in our commercial portfolios. Deposits grew $25 million, the majority of which came in core growth, including a 17% increase in non-interest bearing accounts. Despite the net loss, we were able to maintain tangible book value and both capital, and credit quality remain strong.

Additionally, our balance sheet remains well positioned, for the current environment. We are encouraged by the improvement in our yield on interest earning assets, as well as our cost of interest bearing liabilities. As this may indicate an inflection point in our net interest margin going forward. Continuing our transformation, into becoming a more commercially oriented institution. My management team and I, have set forth a strategic plan intent on attracting the full banking relationship, of small to medium sized businesses in our marketplace. Our bank has industry leading frictionless products, and we are focused on developing new relationships, and deepening our current relationships within the communities we serve. All employees have a portion of their compensation, aligned with achieving our strategic objectives.

We funded $59 million of loans during the quarter, yielding approximately 7.5%. We have executed letters of intent totaling over $60 million, for predominantly commercial credits at yields of approximately 7.7%. Given our demonstrated high pull through rate, we expect to deliver continued balance sheet, and interest income growth over the coming quarters, all while remaining disciplined in our underwriting standards. During the quarter, we repurchased 481,000 shares at a weighted average share price of $10.49. Repurchasing shares at this price, continues to improve shareholder value. To-date, we have repurchased share 6.9 million shares at a weighted average cost of $10.16. Tangible book value per share remained flat at $14.74 this quarter.

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 is 16.1%. Blue Foundry continues to operate, with robust liquidity and a low concentration risk, to any single depositor. At the end of the fourth quarter, we had $408 million in untapped borrowing capacity and our unencumbered available for sale securities, and unrestricted cash provided another $211 million of liquidity. This liquidity is 4.2 times larger than our uninsured, and uncollateralized deposits to customers, which represent only 11% of our deposit balances. With that, I’d like to turn the call over to Kelly. And then, we will be delighted to answer your questions.

Kelly?

Kelly Pecoraro: Thank you, Jim, and good morning everyone. The net loss for the fourth quarter was $2.7 million, compared to a net loss of $4 million during the prior quarter. This improvement was driven by an increase in net interest income, a decrease in expenses and a release of provision for credit losses, compared to a build in the prior quarter. Net interest income increased by $386,000, leading to a seven basis point improvement in net interest margin. Interest income expanded $253,000, while interest expense declined $133,000. We expect our net interest margin, to improve as we close loans at current rates and reprice deposits lower. Yield on loans improved by four basis points, to 4.57% as the improvement from originations was partially offset, by the reduction in yield on construction loans, due to the decrease in the prime rate.

The yield on all interest earning assets, improved by five basis points to 4.37%. Cost of funds decreased six basis points, to 2.93%. The cost of interest bearing deposits decreased 10 basis points, to 2.90% while borrowing costs increased 13 basis points, to 3.26%. Expenses improved by $386,000. Compensation expense was lower this quarter, driven by the lower than projected variable compensation expenses. As you will remember, we began releasing variable compensation accruals earlier this year, when the achievement of some goals became less probable. Our annual cash incentive plan has a potential payout of up to 150%. The plan payout is approximately 60% to 70% of targets, as the company did not achieve all corporate goals this year. While we continue to promote expense discipline, we expect operating expenses, to return to the mid to high $13 million range, as bonus accruals reset to 100% achievement, merit raises are realized and normal inflationary considerations, impact other contracts.

For the fourth quarter, we had a $301,000 release in the provision for credit losses. The majority of this release was in the allowance, for commitments and unused lines. As much of our loan growth this quarter, came from loans that were committed at the end of last quarter. The economic forecast scenarios, as well as the duration of our construction portfolio, contributed to a slight release in the allowance for credit losses on loans. We also had a small release in the allowance, for credit losses on health and maturity security. As a reminder, the majority of our allowance for credit loss, is derived from quantitative measures and our allowance methodology, still places greater weighting on the baseline and adverse forecast. Moving on to the balance sheet, gross loans increased by $32.5 million during the quarter, predominantly in owner occupied commercial real estate, and to a lesser extent commercial industrial and multifamily loans.

Only approximately 2% of our loan portfolio, is in office space and none is in New York City. Our available for sale security portfolio, with a duration of 4.2 years increased $6.2 million. This increase was driven by the purchase of $44.5 million of securities at current yields, partially offset by $20 million of maturing lower yielding treasuries, $13.8 million of amortization, and a $4.5 million deterioration in the unrealized loss position. Deposits grew by $24.7 million. We saw growth of $18.6 million in core accounts across all categories. Non-interest bearing deposits grew $3.7 million, checking accounts grew $12.1 million and savings accounts grew $2.8 million. Time deposits grew $6.1 million, as we replaced promotional customer time deposits, with $30 million of broker deposits.

Borrowings decreased by $9 million as the company funded loan growth, with deposit growth and cash on hand. Finally, asset quality remains strong in the current environment. Non-performing assets declined modestly, due to a slight improvement in non-accrual loans. Both non-performing assets to assets and non-performing loans to loans remains relatively flat at 25 basis points and 33 basis points respectively. Our allowance coverage ratios, remained relatively flat as well at 83 basis points to total loans, and 254% of non-performing loans. And with that, Jim and I are happy to take your questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Justin Crowley with Piper Sandler. Please go ahead.

Justin Crowley: Hi, good morning. Just want to start off on your commentary on loan growth. That one to four and then multifamily bucket have been kind of the two areas that have been a drag on net growth, for the past couple of years now. Is the expectation that that will continue to be the case looking forward?

Kelly Pecoraro: Yes. I think from a strategic perspective, Justin, we’re really looking at growing the commercial book, both in C&I as well as owner-occupied space. The decline in our residential book has been somewhat intentional, although quicker than we had envisioned. In multifamily, we believe we have a large concentration there. So we’re watching our concentration limits on the multifamily space.

Justin Crowley: Okay. Got it. And then you mentioned the $60 million pipeline. I can’t remember where maybe that stood last quarter. I’m not sure if you shared that. But just curious your just broader thoughts on just where activity stands, and if you see things starting to pick up as we head through the new year, and perhaps maybe more certainty following the election?

Kelly Pecoraro: Yes. I definitely think the pipeline has improved from where we were last quarter. And as we mentioned, we did see some pull-through of those that we had commitments, on at the end of Q3. As Jim mentioned in his remarks, we had about $60 million of commercial loans that, we have letters and intent out at a rate of around 750. So we are seeing some improvement in the pipeline and look for that to continue.

Justin Crowley: Okay. Got it. And then on the margin, I’m just looking to get a sense for how you’re thinking about deposit cost progression, over the course of the year. How much have you been able to move rates lower so far falling 100 basis points and cut out of the Fed. And to what extent, is that reflected in the 4Q margin?

Kelly Pecoraro: So I think, we did see improvement in deposit costs, as we mentioned, to 2.9% yield on that book. There’s been pressures Justin, on repricing. We have been able to bring prices down or cost down somewhat on that book. We do have probably $0.5 million – $0.5 billion, $500 million coming into the first half. We’ve intentionally kept our CD short. So we look for that with pricing, and hope that we can get benefits as rates trend lower.

Justin Crowley: Okay. And on that $0.5 billion, do you have the rate that that’s coming off of, and where that will reset at?

Kelly Pecoraro: Yes. So we – the rate currently on the first quarter, is probably around $475 million. So we’re looking – our promotional rate that we have out there right now is a 4% yielding CD. So we’re hoping to realize some improvement as those reprice. And then in the second half the, or second quarter, we’re seeing a little bit lower of a yield on that, so probably around the $450 million and hope that that can reprice as well.

Justin Crowley: All right. That’s helpful. And then just another input as far as the margin on the asset side with average loan yields around that mid-four level. Is the expectation that, that continues to move higher, regardless of whether we get another cut or two, just given where new production is coming on a, combined with back book repricing?

Kelly Pecoraro: Yes. I think we do anticipate that to trend higher, as things are coming on at market rates, and we have the amortization of our book at the lower rates. There are some challenges as well, though on the construction book. So I think it’s fair to say, while construction will reprice lower if prime rate goes down. We will see improvement as those other asset classes are being put on the books.

Justin Crowley: Okay, great. I’ll leave it there. Thanks so much for taking the questions.

James Nesci: Thank you.

Operator: The next question comes from Chris O’Connell with KBW. Please go ahead, Chris

Chris O’Connell: Hi. Yes, good morning. Just wanted to follow-up on the market discussion.

Kelly Pecoraro: Good morning.

Chris O’Connell: I was wondering if you guys had the spot margin handy for December, at the end of the quarter?

Kelly Pecoraro: I think we were around $190 million from a margin perspective at the end of the quarter, a little bit higher, like $190 million, $192 million.

Chris O’Connell: Okay. Great. And just given the dynamics here on the balance sheet, I mean, it seems like things are now moving in the right direction on the margin. And I’m sure a lot of it depends on how much growth on the loan portfolio side that, you guys are able to put on over the course of the year. But any sense of the magnitude of expansion that you could see over the course of 2025?

Kelly Pecoraro: I think as we look at 2025, of course, we’re looking to grow. We’re looking at probably high single-digit loan growth at this point. Given where we have some maturities coming in, as well as the pipeline. So factoring that in.

Chris O’Connell: Okay. And do you think like the margin, do you expect it can kind of pace over the course of the year, at a similar expansion rate that you saw in the fourth quarter? Or is that a little bit higher, or lower than what you think you’re going to achieve going forward?

Kelly Pecoraro: I think at this point, we’re anticipating a similar pace. Again, it’s all dependent upon the timing of putting those credit lines [ph], and also the ability to reprice deposits lower.

Chris O’Connell: Okay. Thanks. And then for the expense guide back to the mid-to-high $13 million range, is the expectation that, that holds as a pretty good level for the remainder of 2025 after Q1? Or do you expect to see growth thereafter?

Kelly Pecoraro: Yes. I think we’re looking at that mid-to-high $30 million range across the quarters. Again, as we look at our achievement and variable compensation, and how we’re attaining throughout the year, but that’s where we’re seeing things go out for 2025.

Chris O’Connell: Okay. And then I guess on – as far as like the variable compensation goes, is there like what are the specific metrics for 2025, to hit that 100%?

Kelly Pecoraro: So the goal that we – our compensation committee and Board have agreed, to really align to our growth, and it ties to loan growth, also deposit growth low cost deposit growth, and our net interest margin, really growing the balance sheet in a mindful way.

Chris O’Connell: Okay. Thanks. And then you mentioned the construction portfolio being potentially really the only headwind here on the loan yields. Like what are the yields coming off on that portfolio? And what are the new origination yields there?

Kelly Pecoraro: So the yields on a portfolio or applying fund, is either 50 basis points to 100 basis points within that range. So it’s dependent upon where prime rate is. The construction book is right around $85 million right now, and we see some of the pipeline as those are maturing coming on. So we have some of the construction in the pipeline.

James Nesci: I think that, that book is constantly recycle is the way to look at it. If construction project gets finished up, that loan pays off. A new one comes on board. We’ve got a good pipeline of construction loans.

Chris O’Connell: Got it. And then on the share repurchases, is it fair to assume that that can progress at a kind of a similar pace over the course of 2025 from here?

Kelly Pecoraro: Yes, I think as we look at share repurchases, we think it’s a good use of capital at these levels. So we’ll continue to be active in the market, again, always looking at the best use of capital as we move forward.

Chris O’Connell: Great. Thanks, Jim. Thanks, Kelly. Appreciate the time.

Kelly Pecoraro: Great. Thanks, Chris.

James Nesci: Thank you.

Operator: Thank you for your questions. I will now turn the call back over to Jim Nesci, for closing comments.

James Nesci: Thank you, operator. We’d like to thank everybody for participating today, and we look forward to updating you next quarter. Thanks so much.

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