Blue Foundry Bancorp - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 loss narrowed sequentially as net interest income rose, NIM expanded 7 bps to 1.89%, and operating expenses fell; credit quality remained strong with NPLs at 0.33% and ACL coverage at 254%.
• Management signaled continued NIM improvement into 2025 as higher-yield originations flow through and CDs reprice lower; ~$500M of CDs roll in 1H with a promotional 4% offering, supporting deposit cost relief.
• Balance sheet momentum: loans +$32.5M QoQ (to $1.58B) led by commercial, and deposits +$24.7M QoQ (to $1.34B); uninsured/unsecured deposits ~11% and substantial liquidity headroom remain.
• Capital return continues: 480,851 shares repurchased at $10.49 avg; TBV per share held at $14.74; capital ratios well above “well-capitalized”.
• Potential 2025 catalysts: sustained NIM expansion at a similar quarterly pace, high single-digit loan growth, expense normalization, and ongoing buybacks; estimate comparisons were unavailable via S&P Global this quarter (see Estimates Context).

What Went Well and What Went Wrong

What Went Well

• Sequential NIM and earnings trajectory improved: NIM +7 bps QoQ to 1.89% on higher asset yields and lower deposit costs; net loss improved to $(2.7)M from $(4.0)M in Q3.
• Commercial pivot gaining traction: loans +$32.5M QoQ; new production funded at ~7.5% in the quarter; LOIs of >$60M at ~7.7% yield support forward interest income growth.
• Liquidity, credit, and capital remained strong: NPLs 0.33%, ACL coverage 254%, uninsured deposits ~11%, with ~$408M untapped borrowing capacity plus ~$211M of unencumbered AFS/cash liquidity; TBV/share steady at $14.74.

What Went Wrong

• Still loss-making and efficiency remains elevated: Q4 net loss $(2.7)M; non-interest expense $12.9M; efficiency ratio 130%+ underscores operating leverage work ahead.
• Non-interest income softness YoY: down 27% vs Q4’23 on absence of gains and lower fees/service charges.
• Mix shift pressure to time deposits: core deposits 47.3% (down from 48.8% YoY) as time deposits rose; although cost relief is expected, deposit mix remains a margin headwind until repricing flows through.

Transcript

Operator (participant)

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 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 Nesci.

James D. Nesci (CEO)

Thank you, Operator, and good morning, everyone. Thank you for joining us for our fourth quarter earnings call. I'm 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 remained 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 fold-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 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 (CFO)

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 origination 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 ten 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 planned payout is approximately 60%-70% of target, 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 commitments 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 held-to-maturity securities.

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 forecasts. 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 and 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 a 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. Borrowing decreased by $9 million as the company-funded loan growth with deposit growth and cash on hand. Finally, asset quality remained 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 remained 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.

Operator (participant)

Thank you. We will now begin the question and answer session. If you would like to ask a question, please do so now by pressing star followed by the number one on your telephone keypad. Please ensure that your device and your microphone are unmuted locally before proceeding with your question. Our first question comes from the line of Justin Crowley with Piper Sandler. Please go ahead.

Justin Crowley (Senior Research Analyst)

Hey, good morning. Just wanted 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'll continue to be the case looking forward?

Kelly Pecoraro (CFO)

Yeah, 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 (Senior Research Analyst)

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 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 (CFO)

Yeah, 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 have about $60 million of commercial loans that we have letters of 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 (Senior Research Analyst)

Okay, got it. And then on the margin, 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 following the 100 basis points and cuts out of the Fed? And to what extent is that reflected in the forward Q margin?

Kelly Pecoraro (CFO)

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 costs down somewhat on that book. We do have probably $500,000, $500 million, $500 million coming into the first half. We've intentionally kept our CD short, so we look for that repricing and hope that we can get benefits as rates trend lower.

Justin Crowley (Senior Research Analyst)

Okay, and on that $500 million, do you have the rate that that's coming off of and where that'll reset at?

Kelly Pecoraro (CFO)

Yeah, so the rate currently on the first quarter, it's probably around $475. 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 the second half or the second quarter, we're seeing a little bit lower of a yield on that, so probably around the $450, and hope that that can reprice as well.

Justin Crowley (Senior Research Analyst)

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 at combined with backbook repricing?

Kelly Pecoraro (CFO)

Yeah, 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 (Senior Research Analyst)

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

James D. Nesci (CEO)

Thank you.

Operator (participant)

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

Chris O'Connell (Director)

Hey, yeah. Good morning. Just wanted to follow up on the margin discussion. Was wondering if you guys had the spot margin handy for December, the end of the quarter?

Kelly Pecoraro (CFO)

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

Chris O'Connell (Director)

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 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 (CFO)

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 (Director)

Okay, and do you think 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 (CFO)

I think at this point, we're anticipating a similar pace. Again, it's all dependent upon the timing of putting those credits on and also the ability to reprice deposits lower.

Chris O'Connell (Director)

Okay, thanks. And then for the expense guide back to the mid to high $13 million range, is the expectation that holds as a pretty good level for the remainder of 2025 after Q1, or do you expect to see growth thereafter?

Kelly Pecoraro (CFO)

Yes, I think we're looking at that mid to high $13 million range across the quarters. Again, as we look at our achievement, variable compensation, and how we're attaining throughout the year, but that's where we're seeing things fall out for 2025.

Chris O'Connell (Director)

Okay, and then I guess as far as the variable compensation goes, what are the specific metrics for 2025 to hit that 100%?

Kelly Pecoraro (CFO)

The goals that 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 (Director)

Okay, thanks and then you mentioned the construction portfolio being potentially really the only headwind here on the loan yields. What are the yields coming off on that portfolio, and what are the new origination yields there?

Kelly Pecoraro (CFO)

So the yields on the portfolio are prime plus. It's either 50-100 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 D. Nesci (CEO)

Yeah, I think that book is constantly recycled is the way to look at it. If a 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 (Director)

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

Kelly Pecoraro (CFO)

Yeah, 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 (Director)

Great. Thanks, Jim. Thanks, Kelly. Appreciate the time.

Kelly Pecoraro (CFO)

Great.

James D. Nesci (CEO)

Thank you.

Kelly Pecoraro (CFO)

Thanks, Chris.

Operator (participant)

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

James D. Nesci (CEO)

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 (participant)

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