Blue Foundry Bancorp (BLFY) 2024 Q2 法說會逐字稿

Good morning, and welcome to Blue Foundry Bancorp's second 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. (Operator Instructions) I will now turn the call over to President and CEO, Jim Nesci.

Thank you, operator, and good morning, everyone. Thank you for joining us for our second quarter earnings call. I'm joined by our Chief Financial Officer, Kelly Pecoraro, who will discuss the company's second quarter financial results in detail, after I provide an update on our operations.

We are pleased by the progress we made in the second quarter and thus far in 2024. Despite the competitive environment and inverted yield curve, deposit growth continued in the second quarter and net interest margin expanded for a second consecutive quarter. This, coupled with our expense discipline helped to improve PPNR by $268,000 versus last quarter.

Our focus on attracting the full banking relationship of small to medium-sized businesses has resulted in a 9% increase in commercial deposits this year. Additionally, our branch network has delivered a 6% increase in consumer deposits. These successes have allowed us to reduce our reliance on wholesale deposits by 4% this year. Additionally, this deposit growth has improved our loan to deposits 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. We now have a healthy pipeline of commercial credits at attractive yields that will allow us to continue to expand our interest income and loan yields. We expect to continue to build this pipeline in the second half of the year.

As always, we are disciplined in underwriting strong credits across all our loan product offerings. During the quarter, we repurchased 386,000 shares at a weighted average share price of $8.84. Repurchasing shares at these levels continues to improve shareholder value. Tangible book value per share increased by $0.09 to $14.69. Our bank and holding company remain well-capitalized with capital levels that are among the highest in the banking industry. Tangible equity to tangible common assets was 16.9% at June 30. Blue Foundry continues to operate with robust liquidity and a low concentration risk to any single depositor.

At the end of the second quarter, we had $394 million in untapped borrowing capacity and are unencumbered available for sale securities unrestricted cash provided another $298 million of liquidity. This liquidity is 4.8 times larger than our uninsured and uncollateralized deposits with customers. These deposits represent only 12% of our deposit balances.

With that, I'd like to turn the call over to Kelly, then we'd be delighted to answer your questions. Kelly?

Thank you, Jim, and good morning, everyone. The net loss for the second quarter was $2.3 million compared to a net loss of $2.8 million during the prior quarter. This improvement was driven by an expansion of net interest income, an increase in non-interest income, and a relief in the provision for credit losses. Our asset quality remains strong in the current environment.

During the quarter, we had a release of provision for credit losses of $762,000, driven by forecasted improvements to economic drivers used to model our credit losses. A release occurred in all three categories, loans, off-balance sheet commitments, and held-to-maturity securities. As a reminder, the majority of our allowance for credit losses is derived from quantitative measures, and our allowance methodology places greater weighting on the baseline and adverse forecast.

Non-performing assets declined by $1.1 million due to the sale of our only real estate owned property and a $483,000 improvement to non-accrual loans. This resulted in a 6 basis points reduction non-performing assets to total assets and a 3 basis points reduction in non-performing loans to total loans. Our allowance to total loans decreased 4 basis points due to the decrease in the allowance for credit losses on loans. However, our allowance to non-accrual loans increased to 210% from 205% the prior quarter as the impact from the improvement in non-accrual loans outweighed the reduction in the allowance for credit losses on loans.

Net interest income increased by $156,000, leading to a 4 basis points expansion in net interest margin. Interest on have expanded $450,000, while [interest] expense only increased $294,000. We expect our net interest margin to stabilize around these current levels for the remainder of the year. However, it could move moderately in either direction, depending on interest rate activity and our ability to generate asset growth given the current macro-economic environment. Yield on loans increased by 11 basis points to 4.56%, and yield on all interest-earning assets increased by 12 basis points to 4.37%.

Cost of funds increased only 8 basis points to 2.89%. The cost of interest-bearing deposits increased 16 basis points to 2.90%. Conversely, borrowing costs decreased 15 basis points to 3.09% as average balances declined due to the payoff of higher costs short-term wholesale borrowings during the prior quarter. Expenses were substantially flat to prior quarter with minor variances in each category. We continue to promote expense discipline, and we expect operating expenses for the third quarter 2024 to be in the mid to high $13 million range.

Moving on to the balance sheet, gross loans declined by $6.8 million during the quarter. While amortization and payoffs outpaced new loan funding, our new fundings are yielding 8.6%, and that will benefit loan yields in future quarters. As a reminder, only approximately 2% of our loan portfolio is in office space and none is in New York City. Available-for-sale securities increased $32.6 million. During the quarter, we purchased $45 million of securities with a weighted average yield of 5.8%.

Our frontline staff were able to grow time deposits by $29.1 million. This was partially offset a $9.1 million outflow in core deposits, resulting in an increase in net deposits of $20 million or 1.5% during the quarter. Borrowings remained flat during the quarter as we funded the securities purchases with deposit growth and cash flow from our lending and securities portfolios.

And with that, Jim and I are happy to take you questions.

(Operator Instructions)

Justin Crowley, Piper Sandler.

Hey, good morning. I wanted to start off on the margin for the quarter. It looks like funding pressures continue to slow. And so wondering how you expect that to trend moving forward as you're trying to continue to grow deposits and move the loan to deposit ratio lower?

Good morning, Justin. Yes, thank you, we were pleased with the margin expansion that we had this quarter. We believe we'll be stable in this range as we work through the rest of the year. However, that could be impacted moderately by interest rate environment and assets classes that we put on the balance sheet.

Okay. And then what's embedded in that sort of guide for a stable margin in terms of like Fed rate cut activity this year?

And so as we look from a Fed rate perspective, we were not factoring in any cuts until later in the fourth quarter.

Okay, got you. And then as far as the other inputs into that sort of outlook, thinking about cuts, how soon after the first 25 basis points, do you envision being able to lower our deposit rates? I'm not sure if you've tested this already, but just given the focus on keeping a loan-to-deposit ratio in check?

Yes. I think as we look at the shift and the ability to move deposit costs lower, we're going to need to look at the activity in the market and the competition in our marketplace. As you know, there's strong competition for deposits. I'm not sure whether or not we will -- the market will respond similar to how it has in the past, but we will be monitoring that closely.

Okay, thanks, that's helpful. And then as far as overall growth, looking to get a sense of how loan origination activity booked in the quarter. I mean, I know you're being maybe a bit more selective, but what would need to happen or change to start thinking about that growth again?

So I think if you look at it for the quarter, we had fundings, probably about $20 million in fundings came on. We're looking for that to pick up in the latter half of the year. So our pipeline right now sits at about $32 million in our commercial pipeline. And we're continuing to focus, as Jim noted, being strategic in the credits that we're putting on and mindful of the environment we're operating in, the economic and the regulatory environment.

Okay. And then on credit, you had the reserve release for the second straight quarter here. Is underlying trends continue to look better, looking at things like nonaccruals? Curious if you could share a bit more on what you're seeing beneath the surface, particularly when you're seeing things like commercial real estate credit maturity repricing?

Right. So as we looked at our repricing, we don't have a significant amount of repricing activities that will take place through the end of the year. We probably have about $30 million in repricing through the end of 2024, so not significantly impacted by that. From a reserve perspective, again, our allowance methodology is primarily quantitative in nature and really are impacted by the forecasts, and our portfolios benefited from having the -- those drivers being favorable for the outlooks.

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

Thanks, Justin.

Thank you, Justin.

Chris O'Connell, KBW.

Hey, good morning.

Good morning.

Good morning, Chris.

I wanted to follow up on the NIM conversation. As far as the rest of the year and where CDs are being priced at now, if you have the current offering rates, and how much has left to reprice, it hasn't really already repriced to the market rate so far?

So our current offering is about a 5.25 for rates on the seven year -- of seven months maturity, not seven years. And a lot of that book has already repriced into the higher rates. We do still have some that will be coming due, but it's a smaller portion.

Okay, got it. And then as far as the FHLB advances, how much of that that's on balance sheet right now is overnight? And then, maybe if it is laddered out, just kind of a general sense of the maturity schedule?

And so we currently don't have any overnight. We've been keeping them short in terms of within a month. We have approximately, I would say, $30 million in shorter duration within the month to three-month term and then some longer dated within the portfolio.

Got it. And as far as is there a hedging impact on against the FHLB advances or is it just the fact that they're longer dated that is able to keep the cost pretty low?

While we do have the hedges out there, we have $204 million of those borrowings hedged. So that doesn't have an impact necessarily on some of the longer dated because it's locked in. We do have about a three-year maturity on our swap book.

Got it. I guess what I'm getting at is the borrowing rates are fairly low right now. And based on the maturity schedule, how much do you think that is going to move up over the course of the back half of the year closer to market rates, absent any major change in the level of borrowings?

Moving up to market rates. So there's not a tremendous amount that will move up to market rates. Again, we do have some of the $20 million to $30 million that's there that are and maturing at the back end of the year at a lower rate. But we'll continue to manage through that and look funding as we bring on deposits.

Got it. And then as far as the asset generation, it seems like a little bit bullish relative to the first half of the year and the second half of the year on loan growth. If loan growth is still slower to materialize, would you look to do any more securities purchases or no, because kind kept trying to keep kind of the loan-to-deposit ratio and funding profile intact?

Chris, I think we're always going to be strategic on how we grow the balance sheet. If there's an opportunity to make a loan, that's our first priority. And if that opportunity is not there, we certainly look to supplement with securities that makes sense for the balance sheet, looking at duration, and credit quality, and the yields that are available in the marketplace. But yeah, we're looking at a little bit dynamic fashion to answer that.

Got it. And then you guys have come in below the expense guiding, kept things pretty contained relative to expectations year to date. Anything in particular, that's shifting the expense up a bit for the back half of the year relative to where you guys have been for the first couple of quarters?

Yeah, I think the primary driver will be some hopefully increases in compensation that would be tied to some of our variable comp -- plans as we execute on our goals, and also some hiring that might impact that line as well.

Yeah, I think that's the way to think about that, the more success we see compensation takes up a little bit as we bring on producers, people who bring in loans or bring in deposits. So again, we're happy to pay for performance, and that's the focus. Keep bringing in loans, keep bringing in deposits. And guess, the couple but it is supposed to help with net interest margin and growing the balance sheet in a profitable manner. So we're overall looking forward to seeing that happen.

Got it. And what areas are you guys looking to make hires at this point?

I'm sorry, Chris, I didn't.

I think he said what areas --

You said, you were gearing some hiring in the back half of the year.

Sure. Deposit gathering, C&I producers, producers of loans, commercial deposit gatherers, we're looking for people that will help move the balance sheet forward. And then we're always being cognizant of regulatory requirements, making sure we have adequate staff and backup for all things related to regulation. So making sure that we're constantly training people to come up further ranks as needed.

Great. And then the pace of buyback has slowed a bit over the past couple of quarters on an incremental basis. I mean how are you guys feeling about the level of share repurchases going forward comparative to the past two or three quarters?

Chris, the volume recently has picked up, and Kelly will give you a more clear answer, but it's based on volume.

Yeah. So we strongly believe in buybacks. However, as you're aware, we're held to some rules based upon the prior month average daily trading volume as well as some additional SEC rules for the amount that we can purchase, but we are in the market every day looking to buy back as much as we can.

Got it. So nothing like strategic decision, just a volume-based kind of a outcome there.

We still -- Kelly got it, right. We still believe in buybacks.

Great. That's all I had for now, thanks for taking my questions.

Thank you.

Thank you, have a great day.

We have no further questions. So I'll turn the call back to the management team for any closing remarks.

Thank you, operator. We appreciate everyone's attendance and interest in our company, and we look forward to speaking with you again in the third quarter. Thanks, and have a wonderful day.

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