Good morning, and welcome to Blue Foundry Bancorp's Fourth Quarter 2022 Earnings Call. My name is Graham, and I will be your conference operator today. 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 encourage all participant 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 measure, 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 speakers' remarks, there will be a question-and-answer session. I will now turn the call over to President and CEO, Jim Nesci..

Thank you, operator. Good morning, everyone, and welcome to our fourth quarter earnings call. And once again, joined by our Chief Financial Officer, Kelly Pecoraro. After my opening remarks, Kelly will share the company's financial results.

Earlier this morning, we reported fourth quarter net income of $562,000 or $0.02 per diluted share and a pre-provision net revenue of $299,000. Our performance was largely driven by continued growth in commercial loans. Our lending team originated $68 million of loans, primarily in non-residential and multifamily.

While this origination activity was not as robust as in previous quarters, net loan growth remained strong as pay offs slowed. In 2022, we generated net income of $2.4 million or $0.09 per diluted share and pre-provision net revenue of $1.4 million. These financial results reflect the execution of our strategic priorities.

Our lending team produced $594 million of loans, which drove 20% net loan growth during the year. Core deposit growth remained strong in 2022. Core deposits grew by $99 million or 13%. Our focus on attracting and retaining the full banking relationship of small- to medium-sized businesses led to an increase in core business deposits.

Business balances increased by 56%. As of December 31, loans totaled $1.54 billion, up $51 million from the prior quarter. This represents loan growth of 3% quarter-over-quarter. Deposits totaled $1.29 billion, increasing $22 million sequentially.

While the competitive rate environment in our primary market has put pressure on our ability to retain deposits, we are committed to attracting low-cost core deposits within our customer-friendly suite of consumer and business products. We continue to repurchase stock at a discount tangible book value.

During the fourth quarter, we repurchased 632,000 shares at a weighted average cost of $12.40. We have now repurchased a total of 1,299,000 shares, which is approximately 46% of the approved stock repurchase program. Tangible book value per share was $14.28 at year-end.

This increased $0.19 during the quarter as the aforementioned share repurchases were executed at a discount in tangible book. With that, I'd like to turn the call over to Kelly, and then we will be delighted to answer your questions.

Kelly?.

Thank you, Jim, and good morning, everyone. Our financial results were highlighted by net income of $562,000 compared to $1.2 million during the linked quarter. This reduction was largely related to funding pressures from the competitive rate environment.

While we realized a $1.2 million expansion in interest income, our interest expense also increased $2.1 million, resulting in an $888,000 reduction in net interest income. Yield on loans increased by 9 basis points to 3.80%, and yields on all interest-bearing assets increased by 18 basis points to 3.55%.

Remaining competitive in deposit pricing, the cost of interest-bearing deposits increased 36 basis points to 82 basis points. This coupled with an increase in short-term borrowings drove the cost of funds to 1.17%, a 51 basis point increase compared with the prior quarter.

We expect pressure on our margin to continue due to the liability sensitive nature of our balance sheet. During the quarter, we released $224,000 from the allowance for loan losses and $203,000 from the allowance for commitments due to positive credit metrics and the continued change in the mix of our loan portfolio.

Our asset quality continues to remain strong in the current environment. During the quarter, non-performing loans to total loans decreased 6 basis points to 50 basis points, primarily driven by a reduction in non-performing loans.

While our allowance to total loans decreased 4 basis points to 87 basis points, our allowance to non-accrual loans increased to 173% from 162% the prior quarter due to a reduction in non-accrual loans. As a reminder, we are currently operating under the incurred loss model and will adopt CECL as of January 01, 2023.

Expenses, excluding our provision for commitments, declined $427,000. Management continues to be focused on expense management. This quarter, we reduced our reliance on temporary personnel and consultants, continued to focus on our advertising spend and successfully negotiated a credit for technology services.

As we move into 2023, we will continue to explore opportunities to save to offset the pressure we expect from inflation. Moving on to the balance sheet. Gross loans grew by $51 million or 3.4% sequentially, driven by originations of $68 million, primarily in the non-residential and multifamily segments.

During the quarter, the bank also purchased $18 million of high-quality residential loans in our principal market, which were originated to Fannie Mae standards. With the duration of 4.3 years, our securities portfolio continues to provide cash flow that is being used to fund loans.

$9.3 million of the quarterly decline in the securities portfolio was attributed to maturities, calls and scheduled paydowns. Funding our balance sheet has been challenging as rates continue to rise.

While we experienced an outflow of $28 million from non-maturity accounts, we more than offset this with $51 million of growth in time deposits through both retail and wholesale channels. This drove an increase in total deposits of $22 million during the quarter.

Additionally, during the quarter, borrowings increased $15 million to help fund loan growth. And with that, Jim and I are happy to take your questions..

Thank you. [Operator Instructions] First question comes from Christopher O'Connell from KBW. Christopher, your line is now open..

Hi. Good morning..

Good morning..

So, just wanted to start off on some of the margin components.

I guess first, where are you guys originating loan yields at in recent weeks or periods?.

So, in recent periods, our loan originations have been in the high 6, in our pipeline, mid to high 6..

Okay. I guess, I'm just surprised it seems like the -- I mean, you guys have put on quite a bit of loan growth in the past two to three quarters, and really, I mean, the loan yields have gone up less than 20 basis points over that time period.

Any particular reason for that? Or anything that's -- you guys originating -- was there lower pools or rates of some chunkier stuff coming on at some point in the past couple of quarters? It just seems like it would have moved up more given the pace of growth..

I think if you look at what we put on in the second and third quarter, they were lower rates. Also, in the beginning of the quarter, our originations lag a little bit in terms of the pricing..

Okay.

And then, as far as the deposit side of the business, I mean, how are you guys thinking about kind of overall deposit growth over the next couple of quarters? And how much of that can be generated by core deposits versus reliance on more wholesale funding channels?.

Chris, in this market, we are definitely seeing pressure on attracting deposits and retaining those on our balance sheet. We are very focused on driving the business relationship into the bank and hope that, that will be successful as we move forward.

We are also looking at alternative funding sources as we move into the quarter, knowing that there's the pressure on the deposit front..

Okay, got it.

And what are you guys targeting for your deposit beta for over the course of this cycle?.

Over the course of this cycle, it's difficult to say where we're going to be based upon the pressures that we're seeing in the market. From industry perspective, betas are around 30% as we look forward. Are they going to be more difficult to manage at that level? They could be.

We need to be responsive to our market and see where we're going to land on that. But we are fluid and able to be reactive and responsive..

Okay, got it. And I mean, will the level of success on the deposit inflow side or the overall kind of funding efforts, would that change your loan growth outlook at all as you move through '23? I mean, I think you guys are generally targeting kind of double digit -- low double digit pace on loans.

Does that change if it becomes increasingly difficult on the funding side?.

Yes, Chris, I think you're right, that does change our outlook. Cognizant of how we fund our balance sheet, looking for those core deposits to help fund. As we look forward, loan growth, we don't envision to be as robust as it was this year, at the 20% growth rate.

We are tagging low -- high single to low double digit loan growth for 2023, knowing that there are other pressures on the deposit side..

Got it. And I guess just kind of putting it all together on the margin outlook, I think you mentioned in the commentary some continued compression expected.

Any way to frame that or kind of characterize that in any type of range even just over the near term, the next quarter or two, given how big the jump was this quarter?.

Yes. I think as we look out to Q1, we're looking for the range to be in the low 2.50% range from a NIM perspective. Definitely challenges. We don't have any guidance for any further out than that, but we continue to closely monitor and manage -- try to manage that NIM..

Okay. Great. I'll step out for now. Thank you..

Thank you, Chris..

Thanks, Chris..

Thank you, Chris. We have our next question that comes from Laurie Hunsicker from Compass Point. Laurie, your line is now open..

Yes. Hi, thanks, Jim and Kelly. Good morning. Just wanted to stay where Chris was thinking about margin here, you mentioned on the funding side, thinking about alternative, I assume you're talking federal home loan bank. Can you take us through a little bit -- I mean, obviously, we saw an increase there.

Can you take us through a little bit of how you're thinking about adding in that category? And just also from the standpoint that your mix is shifting and we're seeing this challenge across the board, but as funding headwinds continue to weigh on deposits, just maybe help us think a little bit about that.

And certainly, appreciate the guide that you gave for the first quarter margin. But thinking a little bit further out, just trying to put all of those pieces together..

Sure, Laurie. I'll try my best to answer that. We're looking at things other than just FHLB straight borrowings now. We've looked at swaps. Right now, the swap market has a positive spread to a straight up FHLB borrowing. Those are coming in the mid-3%-s for instance.

We will look at corporate deposits from time to time, listing agencies that we can buy, what I'll call, wholesale CDs. There's a lot of different funding sources. And then, we're exploring some of the digital avenues for opportunities where we may be able to find some wholesale funding at lower cost.

But there's a multitude of options that we are working through and we're always focused on what's our best source of funding and trying to get the mix correct obviously..

Got it. Okay. And then, your brokered CDs, I had that at $5.7 million last quarter.

Do you have a current number on that?.

That is up this quarter to $75 million..

$75 million, okay. Great.

And then, can you share with us where your spot margin is for the month of December?.

Laurie, we normally don't share monthly guidance. However, we provided what we think the outlook is going to be for Q1..

Okay. And then, on expenses, obviously, with CECL, that provision for letters of credit moves up. So, obviously, thinking about that, adding that back, we're already over $13 million in a quarterly run rate for noninterest expenses.

Can you help us think about how that's going to look for 2023? And then, specifically, can you remind us in terms of the benefit plan expense, is that all fully baked for this quarter? Or is there anything still that's going to come online on the expenses there?.

So, from the equity plan perspective, Q4 was shy by about $50,000, knowing that the management awards went out late in October. A full quarter, we're looking at right around $590,000 in equity plan expense for what's been issued to date.

Relative to the overall range of what we're looking at from an expense on -- for an operating expense, we're looking at the mid to high $13 million range, as we continue to look at avenues to optimize our business model and being laser-focused on managing those operating expenses..

Okay.

And was there anything outside non-recurring and noninterest expense? In other words, did you have embedded in there, I don't know, CECL professional fee help? Or is there anything that potentially is coming out of that $12.9 million reported number outside of the provision recovery on letters of credit?.

While there are some professional fees that will be reduced next quarter, there are always additional initiatives. So, the guidance that we provided includes those ins and outs relative to our professional fee..

Got it. Okay. And then, on provision, maybe you could just help us think a little bit about that, more generally, your reserves to loans sitting here at 87 basis points. Obviously, you'll be at CECL. Just any color you can give us there would be super helpful..

Yes, I think, Laurie, under the incurred methodology, we came in at an 87 basis points coverage ratio. We're looking, as we adapt CECL, for there to be an adjustment, it's not material.

We're looking at a couple of basis points increase in the reserve coverage, again, forward looking at CECL [Technical Difficulty] looking at it, not a material change that will come through equity..

Okay. And then, maybe, Kelly, can you comment a little bit the outsized loan growth that we saw in commercial real estate? It looks like 17%. This quarter, 67% annualized is a really big number.

Can you help us think about what's in that? And then, I know some of the hot button loan categories you really had de minimis exposure to, but if you could provide a refresh on what you've got in office, in hotel, and in restaurants, that would be super helpful.

And any color you could give us around those, if you have LTVs or whatever detail you've got would be great. Thanks..

Sure, Laurie. So, yes, we had loan originations of $68 million this quarter, which were strong. $24 million of that was in the multifamily space. $35 million was in the CRE space. Again, there were two large credits in there that are in retail, anchored by investment-grade tenant, so feel comfortable relative to that exposure.

In regards to office, our portfolio, our commercial loan portfolio contains around 3% of office. None of that office is in New York City. And the LTVs on that portfolio are around 50%, on the LTV. We have no hotels in our portfolio and we have no direct exposure to restaurants..

Great. Okay. And just to clarify, the 3%, it's the 3% of commercial real estate that's in office or 3% of all loans….

Yes, of the commercial portfolio, less than of our total portfolio. So, it's 3% of the commercial portfolio..

Okay.

And then, the commercial portfolio, are you adding multifamily and CRE together? Or just the straight 3% of the CRE only, the $216 million?.

No, it's the combination..

The combination. Okay. Great. Okay. Love seeing the buybacks.

I assume with the stock here, you're still thinking about it the same way, Jim, or any forward comments on that?.

Sure. I mean, as we're trading today, I think everyone around the table is thinking about it exactly the same way. That's about all the guidance I can provide. But yes, we believe in stock buybacks, so, yes..

Okay, great. And then, just one last question.

Assuming you're profitable, even minimally profitable next year, how should we be thinking about the tax rate? And then, take us through if you're not profitable, what that may look like?.

All right. So, for minimal profitability, our tax rate we're pegging at the 10% to 12% as we are able to utilize the valuation allowance as we have earnings. If we are in a loss position, there is no tax benefit recorded or a tax expense recorded..

Great. Tim and Kelly, thanks for taking my questions..

Thank you, Laurie..

Thank you. Have a great day..

Thank you, Laurie. We have no further questions on the line. I will now hand back for Jim -- to Jim for closing remarks..

Thank you very much, operator. I'd like to thank everybody who joined us today on our call. Look forward to speaking to everybody next quarter. Thanks, and have a great day..

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines..