Blue Foundry Bancorp

NASDAQ:BLFY

Earnings Call Analysis

Blue Foundry Bancorp's Strategic Growth Amid Challenges

In 2023, Blue Foundry Bancorp faced an economic maelstrom marked by bank failures and rapid rate hikes, but still ended the year on a slightly positive note with its strategic focus on capital growth and discipline in underwriting. While the bank saw its deposits shrink by $8 million in Q4 due to reduced cash collateral and wholesale deposits, retail deposits modestly improved by about $4 million, indicating resilience. The bank's net loss in Q4 was $2.9 million, worsening from a $1.4 million net loss in the previous quarter, due to narrowing net interest margin (NIM) and increased credit loss provisions. Yet, asset quality remained strong and liquidity was robust with over $354 million in untapped borrowing capacity. For 2024, they aim to keep operating expenses below $14 million in Q1 while grappling with deposit competition and interest rate dynamics.

Navigating a Challenging Economic Landscape

The year 2023 was especially challenging for financial institutions, including Blue Foundry Bancorp, which faced bank failures, a slowing economy, and historic rate hikes. Despite predictions of a mild recession, the resilience of the economy was evident even in the face of escalating interest rates. However, higher rates did result in a flight of deposits from depository institutions, a trend that did not spare Blue Foundry’s markets. The fourth quarter, however, signaled an improvement as the company saw a modest annualized increase of 1.3% in retail deposits, despite an overall decline of $8 million in deposits due to strategic reductions. Blue Foundry remains committed to disciplined underwriting and efficiency, and it plans to grow its balance sheet in 2024, funded by organic deposit acquisition.

Strengthening Capital Position and Shareholder Returns

Blue Foundry prides itself on its strong capital position, which significantly exceeds regulatory thresholds, with capital ratios effectively 2x the regulatory minimums and tangible equity to tangible assets at a robust 17.4%. The company continued its share repurchase program, buying back 657,000 shares in the fourth quarter at a price below tangible book value, leading to an increase in the tangible book value per share to $14.49. In total, Blue Foundry has bought back 18% of its shares since its conversion, resulting in a tangible benefit to shareholders.

Liquidity and Deposit Base Stability

Throughout 2023, Blue Foundry maintained significant financial flexibility with over $354 million in unused borrowing capacity and $46 million in unrestricted cash. The company's liquidity is robust, and it operates with a low risk profile, exhibiting a low percentage of uninsured deposits and minimal concentration risk to any single depositor. The ample liquidity can cover 5.1 times the uninsured, uncollateralized deposits, indicating a strong safety net for the institution's depositors.

Financial Performance Amidst Margin Pressures

Blue Foundry posted a net loss of $2.9 million in the fourth quarter, widening from a $1.4 million net loss in the previous quarter, which was attributed to net interest margin (NIM) contraction and increased credit loss provisions. Despite the loss, the company notes strong asset quality and a strategic holding of available-for-sale securities that could potentially resume gains as they near maturation. Interest income saw a modest rise, but this was overshadowed by rising interest expenses, leading to a net interest income decrease and continued NIM pressure expected due to deposit competition and current rate conditions. Operating expenses rose slightly by $149,000, but the company actively seeks to optimize expenses and expects them to be below $14 million for Q1 2024.

Growth in Business Deposits

A significant strategic move for Blue Foundry is the expansion of business accounts, which grew by 8% over the year, including a 1% increase in the fourth quarter. By offering a suite of low-cost deposit products tailored for small to medium-sized businesses, the company is successfully attracting full banking relationships and thereby reducing its reliance on wholesale funding. This strategic growth helps bolster the company's deposit base and diversify its revenue streams.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, everyone, and welcome. My name is Drew, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Blue Foundry Bancorp Fourth Quarter and Year-end 2023 Earnings Call. [Operator Instructions]. I will now turn the call over to your host, Jim Nesci. Please go ahead.

[James Nesci, executive]

Thank you, operator. Good morning, and happy New Year to everyone. Welcome to our fourth quarter earnings call. I'm joined by our Chief Financial Officer, Kelly Pecoraro, who will share the company's financial results in greater detail after my opening remarks.

2023 was a challenging year, especially for financial institutions. We navigated bank failures, a slowing economy and the impact of rate hikes at historic speed. When we entered the year, economists predicted a mild recession, but 2023 showcased economic resilience despite higher interest rates. Higher rates caused a flight of deposits out of depository institutions across the United States. Our markets were not excluded from this trend.

While this was tough to circumvent throughout the year, our fourth quarter proved to be a promising step in the right direction. Deposits did decline $8 million during the quarter, but this was largely driven by a $7 million reduction in cash collateral tied to our swap program and a $5 million reduction in the wholesale deposits.

Deposits within our resell network increased modestly, 1.3% on an annualized basis during the quarter. In 2024, we are focused on leveraging our capital to grow our balance sheet and funding it through organic deposit acquisition.

We continue to be disciplined in our underwriting, strong credits and bringing efficiency to the institution. Given the liability-sensitive nature of our balance sheet, we are encouraged by the potential improvements in short-term rates.

To us, our capital is king. Both our bank and holding companies have capital levels that are among the highest in the banking industry. All of our capital ratios are more than 2x higher than the regulatorily defined well-capitalized levels. Tangible equity to tangible common assets was 17.4% at December 31.

We continue to execute on our share repurchase program. During the quarter, we repurchased 657,000 shares at a weighted average cost of $8.72, a discount to tangible book value. These repurchases, coupled with the improvement in our AOCI helped increase tangible book value per share by $0.25 to $14.49 at December 31. To date, we have repurchased over 5 million shares, which represents nearly 18% of the shares issued during our conversion.

Over the course of 2023, our capital was adversely impacted by the unprecedented speed in FOMC rate hikes. Our accumulating other comprehensive loss position currently accounts for approximately $0.93 per share. To reiterate, while the securities in an unrealized loss position are held as available for sale, we currently intend to hold them until their contractual maturity and realize the reversal of the unrealized loss as the securities get closer to maturity.

We have maintained significant liquidity throughout the year. At the end of the fourth quarter, we had over $354 million in untapped borrowing capacity and our unencumbered available-for-sale securities provided another $278 million of liquidity. Additionally, we had $46 million of cash on the balance sheet, of which $36 million was unrestricted.

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 were $131 million at December 31. This is approximately 10% of the company's total deposits. Additionally, our available liquidity covers 5.1x our uninsured, uncollateralized deposits to customers. And with that, I'd like to turn the call over to Kelly, and then we'd be delighted to answer your questions. Kelly?

[Kelly Pecoraro, executive]

Thank you, Jim, and good morning, everyone. The net loss for the fourth quarter was $2.9 million, compared to net loss of $1.4 million during the prior quarter. This deterioration was largely driven by NIM contraction and an increase in the provision for credit losses.

Our asset quality continues to remain strong in the current environment. During the quarter, we had a provision for credit loss of $156,000. Although our loan portfolio declined slightly during the quarter, the impact of prepayments slowing partially offset by improvements in our forecast, resulted in allowance for credit losses on loans of $298,000, partially offsetting the increase in the provision for credit losses on loans, with a reduction in the provision for credit losses on off-balance sheet commitments and held-to-maturity securities of $132,000 and $10,000, respectively.

As a reminder, the majority of our allowance for credit loss is derived from quantitative measures and our allowance methodology places greater waiting on the baseline and adverse forecast.

Nonperforming assets to total assets decreased 1 basis point to 32 basis points primarily driven by a decline in nonaccrual loans. Our allowance to total loans increased 3 basis points to 91 basis points due to the increase in the allowance for credit losses on loans and our allowance to nonaccrual loans increased to 240% from 226% the prior quarter due to the decline in nonaccrual loans and the increase in allowance for credit losses on loans.

While we realized a $152,000 expansion in interest income, our interest expense increased $842,000 resulting in a reduction of $680,000 in net interest income. While still unfavorable, we are pleased to see the quarter-over-quarter contraction slow.

Yield on loans increased by 8 basis points to 4.29% and yields on all interest-bearing assets increased by 9 basis points to 4.06%. Cost of funds increased 23 basis points to 2.69%. Remaining competitive in deposit pricing, the cost of interest-bearing deposits increased 27 basis points to 2.52%, and borrowing costs increased 11 basis points to 3.38%. We still expect pressure on our margin to continue due to competition for deposits and the current rate environment.

Expenses increased modestly by $149,000, driven by compensation and benefit expense, partially offset by a reduction to other expenses. The increase to compensation and benefits expense was driven by the absence of adjustments to variable compensation that we recorded in the third quarter.

We continue to explore opportunities to optimize our expense base. We expect operating expenses for the first quarter of 2024 to be below $14 million.

Moving on to the balance sheet. Gross loans declined by $10.3 million during the quarter and 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 increased slightly. Given the limited benefit considering the company's current tax position, we sold the majority of our obligations issued by U.S. state and their political subdivisions at a slight gain. We used these proceeds and excess cash to purchase $15.5 million of higher-yielding securities picking up approximately 5% in yields.

Additionally, during the quarter, our unrealized loss position improved by $11.2 million or 27%. And with the duration of 4.5 years, our debt securities portfolio continues to provide cash flow that is used to invest in higher-yielding assets. Deposits decreased by $8.2 million or 0.7% during the quarter.

As Jim mentioned earlier, we were able to modestly increase our retail deposits by approximately $4 million, which allowed us to slightly reduce our reliance on wholesale funding. Additionally, cash held as collateral tied to our swaps program declined $7 million.

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. Despite the competition for deposits, we were able to grow the number of business accounts by 1% during the fourth quarter. The number of business accounts is up 8% for this full year. During the quarter, borrowings decreased by $5 million. And with that, Jim and I are happy to take your questions.

[Operator]

[Operator Instructions] Our first question today comes from Justin Crowley from Piper Sandler.

[Justin Crowley, analyst]

Hey, good morning. Wanted to start off on the net interest margin. It seems like things are leveling off to a degree on the funding side. Curious if you could speak to that side of things and how we should be thinking about the NIM trajectory through at least the first half of the year? And then maybe just a little detail on how if and when we get rate cuts, how that plays into the margin as we head into the back half of 2024?

[Kelly Pecoraro, executive]

Yes. Great. Thanks, Justin. We worked through this quarter, as I said, with the slowdown in the contraction on the NIM. We do look for that trend to continue as we head into the first half of the year. We are mindful, though, that we do have a book of CDs that have some repricing that will come in the quarter. So after some cuts, we might see a slight uptick in the cost of CDs. But again, those are short maturity, about 5 months' maturity. So we look -- with rate cuts, we look to benefit from that if we're able to reset those lower.

[Justin Crowley, analyst]

Okay. And you're able to quantify just how much of those CDs are coming due?

[Kelly Pecoraro, executive]

So there is a weighted average maturity of 5 months, and it's about $460 million of retail CDs with excluding brokerage.

[Justin Crowley, analyst]

Okay. Got it. And then just maybe more thematically, when we do get rate cuts, how quickly do you think you'll be able to move rates lower? I'm not sure if you have any embedded beta assumptions on the way down?

[Kelly Pecoraro, executive]

No. I think, Justin, it's going to be an interesting market. We will look to reduce those rates, of course, but we're mindful of the competition within our market and also the pressures from the national and regional players for that funding.

[Justin Crowley, analyst]

Okay. Got it. Appreciate that. And then just wondering if you could detail expense expectations a little further. I mean, that sub-$14 million you alluded to for the first quarter, what drives the pickup there? And what's the right way to think about growth through the duration of the year?

[Kelly Pecoraro, executive]

Yes. I think the primary driver for that pickup is in our compensation line item. As we talked about during this year, we had eliminated our variable compensation expense due to the current environment and where we were in aligning to our targets. So that came in at zero for 2023. As we head into 2024, we reset those variable comp plans. So that increase $1 million -- around $1 million of that is driven by the reset of those plans.

Again, we reevaluate that on a quarterly basis. So we're baking in a full 100% achievement, but that gets adjusted as we go through the year and where we are in our targets.

[Justin Crowley, analyst]

Okay. I appreciate it. And then lastly for me on buybacks. I saw a nice pickup of activity in the quarter. How would you describe the appetite here, shares back around that $10 level, with what's left on the existing authorization? And then also just, Jim, alluding to your comments at the top, just leveraging capital through growing the balance sheet. How do you weigh those 2 against each other?

[James Nesci, executive]

Good morning. What I think about is what's the best opportunity for the bank and its capital. We're trading below tangible book value. We continue to believe in the buyback, and we'll continue to execute against the buyback. With that said, I think there's opportunity to make loans. We're looking to shift more into C&I, for instance, and we believe we can gain good return on our capital there as well. Kelly, I don't know if you want to add anything.

[Kelly Pecoraro, executive]

Yes. No, I think we are a firm believer in buybacks and continue to buy back what we can in the market.

[Justin Crowley, analyst]

Okay. And then just as far as the balance sheet, so is net growth a decent expectation maybe beyond sort of what you saw this year, some of the mix shift within the loan portfolio?

[Kelly Pecoraro, executive]

Yes. I think on both fronts, we will look to continue to shift. As Jim mentioned, into C&I, some higher-yielding assets, we are looking for growth probably in the mid-single digit at this point. But again, we will respond to the market and the availability to continue on our strategy.

[Justin Crowley, analyst]

Okay. Perfect. I will leave it there.

[Operator]

Our next question today comes from Chris O'Connell.

[Christopher O'Connell, analyst]

Maybe just following back on the loan growth. How are the pipelines compared quarter-over-quarter, and what is like the blended origination yield that you guys are putting on?

[Kelly Pecoraro, executive]

So I think, yes, at 12.31%, our pipeline was strong. We had about $25 million in our pipeline, $20 million of that in the C&I space, which we were pleased with. The yield on that is just around 8%, 8.2% on that pipeline.

[Christopher O'Connell, analyst]

Great. And so for the mid-single-digit loan growth, are you expecting that to be more back weighted and for the pipeline to pick up over the course of the year?

[Kelly Pecoraro, executive]

I think as we look at it, having $25 million in our pipeline right now, we continue to respond to the market and what's available to meet the strategy of shifting to C&I. So if deals become available, we're actively looking at that. We are hoping to have the growth come in sooner as we benefit from that throughout the year, but we will be cautious in terms of extending our price.

[Christopher O'Connell, analyst]

Got it. And for the securities portfolio, I appreciate the color on the duration. For the next few quarters, do you think that you'll let that run off to the extent that you have stuff maturing? Or do you expect to keep it fairly stable from here?

[James Nesci, executive]

I think there's a couple of opportunities in the marketplace with some higher-yielding securities as some of our securities roll off due to maturities. We are seeing some opportunities to reinvest at higher rates sort of letting the natural maturity to take place and then reinvesting as I said, in a higher interest rate.

[Kelly Pecoraro, executive]

We look for opportunities and look for the highest and best use of the proceeds as they mature where we can put them into higher yielding, is it going to be securities? Or is it going to be loans.

[Christopher O'Connell, analyst]

Got it. And as far as gain on sale going forward, given the level of resi that you guys have been producing, I mean, do you expect that to tick down a little bit near term? Or do you think it could stay in a relatively similar range?

[Kelly Pecoraro, executive]

Well, I think we'll be in a similar range. The majority of that gain on sale was in the FA product, not in the resi product. And as we look to the future, depending on what the markets do, we will look to be an active participant when the opportunity is present.

[Christopher O'Connell, analyst]

Great. And on the expenses for the sub-$14 million just to start off the first quarter, I know you guys have been kind of looking for efficiencies and ways to help keep that relatively contained. How do you think overall expenses will play out over the course of the year? Do you think it will be fairly flattish from that sub-$14 million after the first quarter? Or...

[Kelly Pecoraro, executive]

Yes, Chris, we think that $14 million is probably or just below $14 million is a good run rate number from a fully baked in. We continue to look at our contracts, professional fees, where we're spending money and driving the institutions being efficient.

[Christopher O'Connell, analyst]

Okay. And then asset quality seems pretty stable, quiet this quarter. Anything that you guys are seeing within your portfolio that gives you any concern?

[James Nesci, executive]

Not at this juncture. We keep coming through it. And so far, it's been very good. Nothing has popped up as of today, everything looks good.

[Operator]

That concludes the Q&A portion of today's call. I'd now like to turn the session back over to Jim Nesci for any closing remarks.

[James Nesci, executive]

Thank you, operator, and I'd like to thank all of our shareholders and customers who have joined us today. I look forward to speaking with you again next quarter. Thanks, and have a great day.

[Operator]

That concludes today's Blue Foundry Bancorp Fourth Quarter and Year-end 2023 Earnings Call. You may now disconnect your lines.