Blue Foundry Bancorp Q3 FY2024 earnings call

• Jim Nesci mentioned the company reported a net loss, but deposits and loans grew, with tangible book value per share growth. There's a positive outlook for the fourth quarter and next year, with a healthy commercial loan pipeline and expectation that Fed rate cuts will positively impact net interest income. The company focuses on small to medium-sized businesses, repurchased 522,000 shares, and remains well capitalized with strong liquidity.
• Kelly Pecoraro discussed the net loss change due to provision for credit losses, interest income vs expense, net interest income decrease, net interest margin, loan origination of $22 million in commercial lines of credit, balance sheet changes including loan growth and securities changes, and expense discipline with operating expenses expected in the mid to high $13 million range for Q4 2024.

During the third quarter, Blue Foundry Bancorp 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. Tangible book value per share increased. Commercially, there was an 11% increase in commercial deposits, and the branch network saw a 7% increase in consumer deposits. The loan to deposit ratio improved, and the company reduced reliance on wholesale deposits by 4%. In terms of revenue contribution, commercial deposits and consumer deposits contributed to the overall deposit growth, while loan growth contributed to the asset side.

• Positive outlook for the fourth quarter and next year. Expect net interest margin to improve as loans close and deposits reprice lower. The commercial loan pipeline is healthy and expected to drive sustained loan growth in coming quarters. Anticipates the Federal Reserve's rate cuts will positively impact net interest income.

• Uncertainty regarding the impact of interest rate changes on net interest income. Competitive deposit environment could affect funding costs. Potential impact of economic changes on loan quality and origination.

Q: 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?

A: Good morning, Justin. Yes, if we look at NIM for the quarter, what we saw on the loan yields coming in, it has to do with the timing of the funding that are taking place on some of our loan products. As we look to diversify and become more commercialized, 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 front. On some of the other components that drove the decrease in NIM for the quarter, we did see some of the re-pricing of our deposits earlier in the quarter to higher levels in anticipation. I'm sure of the Fed rate cut, we had some individual block in with our higher-priced CDs -- during the quarter, our CD rate -- our high rate that we were offering was at 5.25%. So we did see some re-pricing to that product, which drove that.

Q: Okay, got it. And then I was about to hit on that next. But as far as lowering deposit rates from here, I suppose, specifically promotional CD rates, just looking at that 437 month compared to that 525 you had alluded to, I'm not sure how much of that might be a pull forward, but just curious as we continue to get further rate decreases, how you think about being able to move rates lower considering things like, I guess, the loan-to-deposit ratio and just the competitive environment?

A: Yes. So we are looking at the competitive rate environment and we meet frequently with our teams. And just this week we did lower our offering down to the 440 on our CD. We'll look to 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.

Q: 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, FICO scores or whatever else might be relevant?

A: 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 write-offs that might have the average FICO, but they are strongly underwritten credits that our team looked at and they were at an attractive rate. So we took advantage of that opportunity.

Q: Okay. And so I guess that would be the resi purchases we've seen that before, but just back to the consumer, is that something that you continue to look at? Just to what extent would that be a tool going forward to supplement growth?

A: 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.

Q: Okay. Understood. And then here goes my buyback question, but it was nice to see activity in the quarter. Could this be a pace that you sustainably run at just considering share liquidity or is there perhaps room to get even more active with the stock now trading below where repurchases got done in the quarter?

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

Q: Good morning. Just talking to start off just on another one on the loan side. Maybe just are the pipelines, how are they looking relative to last quarter about the same or are they up? And then what the origination yields are coming on at now?

A: Yes. 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 are 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.

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

A: It really depends on what's happening in the marketplace and consumer preference. So 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 in variable and having a little bit more control over pricing. And I think that's where the marketplace will go. We've got built out a higher rate savings product, and I believe our customers and future customers will start moving into that savings product that we have built out. And again, it's just part of the cycle, at least that's how we see it.

Q: And then on the deposit side, the drop down in the CD rate is obviously attractive and a positive. For the remainder of the interest-bearing portion of the book, have you guys moved deposit rates on that yet? And if so, maybe what portion of that book?

A: We've moved it a little bit. We meet frequently. Our ALCO team and pricing teams very regularly. And where 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 with Federal Home Loan Bank as they come down in price, I think you start to see the pickup and it starts to become constructive.

Q: And as far as the margin, maybe as of today or 9/30 or whatever the most recent date is, do you guys have a spot margin?

A: 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 NIM coming in, in the low 190 range for the fourth quarter based upon shift in deposit costs as well as funding on our loan book.

Q: That's helpful. And as you guys kind of look out and if we move to a situation where we're getting more normal 25 basis point type of cuts here. And any sense of how much you guys think the margin will benefit on a per cut basis?

A: The way we're looking at it as the curve gets back to what I would describe as more normal. The bank results tend to improve. And that's -- we're waiting to see how fast can we shift from CDs 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 that's -- 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.

Q: And I mean, do you guys have assumptions around either the interest-bearing or the total deposit beta for the cutting cycle?

A: For the coming cycle, as we're looking -- as Jam mentioned, it will be dependent upon our customers and meeting those needs and being responsive to the competition in the market as well. So will look, but we need to fund the balance sheet and we'll be pricing appropriately.

Q: What I would add, not so much data, but our customer base has been a very loyal customer base today. So I believe they will stay with the bank and they will continue to move into different products with us as we shift they've 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.

Q: Great. And last one for me. Just do you guys have the next couple of quarters of how much of the CD portfolio is set to turnover mature?

A: 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.

Q: Just think about our first special that's been 7 months, so we keep building that 7 month special CD. It burns off rather quickly when you look at it.

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