The first quarter of 2024 saw Blue Foundry Bancorp (NASDAQ: BLFY) grapple with familiar challenges – a volatile interest rate environment, margin pressure, and the struggle to find the elusive path to consistent profitability. While analysts focused on familiar metrics like net interest margin and loan growth, a subtle shift in the company's deposit base might be signaling a more significant transformation than previously recognized.

Blue Foundry's leadership has been vocal about their strategy to transition from a predominantly residential lender to a more commercially oriented institution. This strategy is evidenced by their focus on originating commercial real estate loans and building a robust commercial pipeline. But the true marker of their success isn't just in the loan book; it's quietly taking shape on the deposit side.

While overall deposit growth was a healthy $46 million in the first quarter, a deeper dive reveals a fascinating trend: commercial account balances surged by $18.5 million, a remarkable 10% jump. This is not merely an anomaly. Examining the previous quarter's transcript reveals a consistent pattern – the number of business accounts increased by 1% in Q4 2023, culminating in an 8% growth for the full year.

This consistent growth in business customers paints a very different picture than the one focused solely on the company's loan portfolio and NIM pressure. It suggests that Blue Foundry is successfully attracting the full banking relationship of small to medium-sized businesses, not just their loan needs.

Why This Matters

Here's why this is a potential game-changer:

Stickier Deposits: Business deposits are generally considered stickier than retail deposits. Businesses tend to maintain larger balances for operational needs, making them less likely to chase higher rates offered by competitors. This stability can help dampen the volatility in Blue Foundry's cost of funds, a key factor in mitigating margin pressure.

Cross-selling Opportunities: Attracting business customers opens doors to a wider range of cross-selling opportunities. In addition to loans, businesses require treasury management services, merchant processing, and other fee-based products. This can diversify Blue Foundry's revenue streams, reducing their reliance on net interest income.

Lower Cost of Acquisition: Acquiring a business customer can be more cost-effective than acquiring individual retail customers. The larger deposit balances and potential for multiple product relationships justify a higher initial investment.

Resilience in a Downturn: Businesses tend to be more resilient during economic downturns compared to individual consumers. Their continued need for banking services can provide a buffer for Blue Foundry's overall performance during periods of economic stress.

Hypothesis

The steady growth in business customers points to a strategic shift that may not be fully reflected in Blue Foundry's current financial performance. As these relationships mature, we hypothesize that the company will experience:

Stabilized Cost of Funds: The stickier nature of business deposits will lessen the impact of interest rate volatility, potentially leading to a quicker recovery in net interest margin when rate cuts materialize.

Expanded Revenue Sources: Cross-selling opportunities will create new fee-based revenue streams, diversifying the company's revenue and reducing reliance on net interest income.

Improved Profitability Trajectory: The combination of stabilized funding costs and diversified revenue will accelerate Blue Foundry's path to profitability, potentially surpassing current analyst expectations.

The Numbers

Q1 2024: 10% growth in commercial account balances (source).

Full Year 2023: 8% growth in the number of business accounts (source).

These figures, while seemingly small in the grand scheme of the company's balance sheet, might be the early indicators of a larger, more sustainable growth engine that is just starting to rev up.

Visualizing the Shift

The chart below compares the growth in commercial account balances with the overall deposit growth for Blue Foundry in Q1 2024. It highlights the disproportionate contribution of business customers to the company's deposit growth.

Earnings Call Transcripts

Q1 2024 Earnings Call Transcript

Source: Seeking Alpha

[Paste the Q1 2024 transcript here]

Q4 2023 Earnings Call Transcript

Source: Seeking Alpha

[Paste the Q4 2023 transcript here]

Conclusion

While the transition to a commercially focused institution will take time, the consistent growth in business customers suggests that Blue Foundry is laying the groundwork for a more stable and profitable future. This under-the-radar trend might be the key to unlocking the company's true potential, offering investors a compelling opportunity to get in on the ground floor of a compelling transformation story.

"Fun Fact: Blue Foundry's name is a nod to its hometown of Rutherford, New Jersey, which was once a hub for ironworks and foundries, highlighting its commitment to the local community and its entrepreneurial spirit."