Q4 2022 Blue Foundry Bancorp Earnings Call

Operator: 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.

Operator: I will now turn the call over to President and CEO, Jim Nesci.

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

Jim Nesci: 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.

Speaker 6: Our performance was largely driven by continued growth in commercial loans. Our lending team originated 68 million of loans, primarily in nonresidential and multifamily.

Jim Nesci: 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.

Speaker 8: In 2022, we generated net income of $2.4 million, or nine cents per diluted share, and preprovision net revenue of $1.4 million.

Speaker 9: These financial results reflect the execution of our strategic priorities.

Jim Nesci: 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%.

Speaker 11: Core deposit growth remained strong. In 2022, core deposits grew by 99 million more to 13%.

Speaker 12: Our focus on attracting and retaining the full banking relationship of small to medium-sized businesses led to an increase in core business deposits.

Speaker 13: Business balances increased by 56%.

Jim Nesci: As of December 31, loans totaled $1.54 billion, about $51 million from the prior quarter. This represents loan growth of 3% quarter over quarter.

Speaker 15: Deposits totaled $1.29 billion, increasing $22 million sequentially.

Speaker 16: 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.

Multiple: We continue to repurchase stock at a discount to potential book value. During the fourth quarter, we repurchased 632,000 shares at a weighted average cost of $12.40.

Speaker 18: We have now repurchase a total O one point two nine nine million shares, which is approximately 46% of the approved stock repurchase program. Tangible book value per share was $14 and 28 cents at year-end. This increased 19 cents during the quarter as the aforementioned share repurchases were executed at a discount potangible book. With that, I'd like to turn the call over to Kelly, and then we will be delighted to answer your questions, Kelly.

Speaker 19: Have now repurchase a total of one point two nine nine million shares, which is approximately 46% of the apcruved stock repurchase program. Tangible book value per share was $14 and 28 cents at year end. This increased 19 cents during the quarter as the aforementioned share repurchases were executed at a discount potangible 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.

Kelly Pecoraro: Our financial results were highlighted by net income of $562,000 compared to $1.2 million during the last quarter.

Speaker 21: This reduction was largely related to funding pressures from the competitive rate environment.

Speaker 22: While we realized a one point two million expansion in interest income, our interest expense also increased two point one million, resulting in an 888 thousand reduction in net interest income.

Kelly Pecoraro: 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.

Speaker 24: Remaining competitive and deposit pricing. The cost of interest-bearing deposits increased 36 basis points.

Speaker 25: The 82 basis points.

Speaker 26: This coupled with an increase in short-term borrowings.

Speaker 27: Drove the cost of funds to 1%.

Speaker 28: A 51 basis point increase compared with the prior quarter.

Kelly Pecoraro: With that pressure on our margins continuing due to the liability-sensitive nature of our balance sheet.

Speaker 30: During the quarter we released 224 thousand from the allowance for loan losses.

Speaker 31: And 203 thousandin from the allowance for commitments due to positive credit metrics and the continued change in the mix of our loan portfolio.

Kelly Pecoraro: 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.

During the quarter, nonperforming loans to total loans decreased six basis points.

The 50 basis point.

Primarily driven by a reduction in nonperforming loans.

While our allowance took total loans decreased four basis points.

two 87 basis points.

Are allowed to nonaccrual loans increased.

To 173% from 162% the prior quarter.

Each to a reduction in nonical loans.

As a reminder, we are currently operating under the incurrent loss model and will adopt ceccl as of January first 20 and twenty-three.

Kelly Pecoraro: 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.

Management continues to be focused on expense management.

This quarter reduced our reliines on temporary personnel consums.

Continue 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.

Kelly Pecoraro: 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.

Gross loans grew by 51 million or 3% sequentially.

Driven by origination of Sixty eight million.

Primarily in the nonresidential and multifamily segment.

During the quarter, the bank also purchased 18 million of high-quality residential loans in our principal market, which were originated to banning may standards.

Kelly Pecoraro: With a duration of 4.3 years, our securities portfolio continues to provide cash flow that is being used to fund loans.

nine point three million of the quarterly decline in the securities portfolio was attributed to maturities calls and scheduled paydown.

Kelly Pecoraro: 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.

While we experienced an outflow of 28 million from nonmaturity 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.

Kelly Pecoraro: And with that, Jim and I are happy to take your questions.

Operator: Thank you. Yes. Ladies and gentlemen, if you would like to ask a question, please press star, followed by one on your telephone keypad now. When preparing to ask your question, please ensure your phone is unmute locally.

Yes. Ladies and gentlemen, if you would like to ask a question, please press star, followed by one on your telephone keypad now.

Ladies and gentlemen, if you like to ask a question, please press star. followlo ban one UH telephone key back now.

When preparing to ask your question, please ensure your phone is unmute locally.

Operator: We have our first question coming from Christopher O'Connor from KVW. Christopher, your line is now open.

Christopher O'Connell: Hi, 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 just want want to start up on some of the margin components.

I guess first, where are you guys originating loan yields at?

In recent, you know weeks or periods.

Kelly Pecoraro: In recent periods, our loan originations have been in the high sixes.

In our typeline meant high six.

Christopher O'Connell: 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 guess I'm just surprised. It seems like the I mean you guys have put on quite a bit of loan growth that you know two to three quarters, and really you know I mean the low yields have gone up. You know less than 20 basis points over that time period. Any particular reason for that or or anything that's you know W you guys originating? You know.

Was there lower pools or you rates of some trunktier stuff coming on at some point in the past couple of quarters? Just seems like it would have moved up. You more've been given the basic growth.

Kelly Pecoraro: I think if you look at what we put on in the second and third quarters, they were at a lower rate. Also, you know, at the beginning of the quarter, our originations lagged a little bit in terms of pricing.

Christopher O'Connell: Okay. And then, as far as you know, the deposits 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?

And then, as far as you know, the deposits 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?

Kelly Pecoraro: Chris, in this market, we are definitely experiencing pressure on attracting deposits and retaining them on our balance sheet. We are very focused on driving business relationships into the bank and hope that this will be successful.

Christopher O'Connell: What are you guys targeting for your deposit beta over the course of this cycle?

Multiple: Over the course of the cycle, it's difficult to say where we're going to be. They propose the pressures that we're seeing in the market. You know, from an industry perspective, data is around 30 percent as we look forward. Will it be more difficult to manage at that level? It could be. We need to be responsive to it.

You know inflow side or you know the overall kind of funding efforts. Well, would that change? You know your loan growth outlook at all as as you move through 23 I mean, I think you guys are generally targeting kind of you know double digit, you know low double digit, you know a pace on unloans.

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

Kelly Pecoraro: Yeah, Chris, I think you're right. That does change our outlook. We should be cognizant of how we fund our balance sheet, looking for those core deposits to help fund it. You know, as we look forward, we don't envision loan growth to be as robust as it was this year at a 20% growth rate.

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

Multiple: [Christopher O'Connell] 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? [Kelly Pecoraro] 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.

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.

From a newim perspective, definitely challenges. We don't have any guidance for any further out on that, but we continue to closely monitor and manage, trying to manage that.

Christopher O'Connell: Okay, great. I'll start that for now.

Multiple: Thank you, Chris. Thanks, Chris. Thanks. Thank you, Chris. Thank you, Chris.

Operator: We have our next question, coming from Laurie Hunsinger from Compass Point. Laurie, your lines are open.

Laurie Hunsicker: Yeah, hi, thanks, Tim and Kelly, good morning. Just one of the day where Chris was thinking about margin, here you mentioned on the funding side, thinking about alternative by a similar talking federal home loan bank. Can you?

Can you take us through a little bit? I mean, obviously we saw an increased there. Can you take us through a little bit of how you're thinking about adding in that category?

And just also. You know also from the standpoint that that you're your mix of shifting and we're seeing this challenge across the Board. But you know, as as funding headwinds continue to weigh on deposits.

Just maybe help us think a little bit about that. And certainly certainly appreciate the the guy that you gave for the first quarter margin, but thinking a little bit further out, just kind of put all of those pieces together.

Jim Nesci: 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.

We've looked at swaps. Right now. The swap Mark has.

A posive spread to a straight up fhlp borrowing. Those are coming in in the mid 3, for instance. We will look at berford deposits from time to time, listing agencies that we can buy what I'll call wholesale cdss. 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 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.

Laurie Hunsicker: Got it. Okay. And then for your brokerage CDs, I had that at $5.7 million last quarter. Do you have a current number on that?

Kelly Pecoraro: That is up this quarter to $75 million.

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

Kelly Pecoraro: Lori, we normally don't share monthly guidance. However, we have provided what we think the outlook will be for Q1.

Laurie Hunsicker: 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?

And then.

On expense, on expenses, obviously with ceasonal that that provision for letters of credit moves up.

You know. So obviously, thinking about that, adding that back, you know we're already over thirteen million.

In a quarterly run rate for noninterest expenses. Can you help us think about how that going to look?

For 2023? And then specifically, can you remind us in terms of of the benefit plan expense? Is that all fully baked for this quarter or is there? Is there anything still that that's going to come online on the expenses there?

Kelly Pecoraro: 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. 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 knowing that the management awards went out late in October .

Kelly Pecoraro: Relative to the overall range of what we're looking at from an operating expense, we're considering the

Of what we're looking at from an expense on non for an operating expense. We're looking at the.

Mid to high 13 range.

As we continue to look at avenues to optimize our business model and being later focused on managing those operating expenses.

Laurie Hunsicker: 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?

Outside non recurring and noninterest expense, in other words that you have embedded in there. I don't know, Cecil professional fee help or is there anything that potentially is? Is coming out of that T nine thousand reported number outside of the the provision recovery on letters of credits.

Kelly Pecoraro: While there are some professional fees that will be reduced next quarter, there are always additional initiatives. So the guidance we provided includes both increases and decreases related to our professional fees.

Laurie Hunsicker: Got it. Got it. Okay. And then I'm provisioned. Then I'm.

Maybe you could just help us think a little bit about that. You know more generally your reserves to loan sitting here at 87 basis points. Obviously you'll be at Cecil.

Just any, any color you can give us there would be super helpful.

Kelly Pecoraro: Yeah, I think, Lori, you know, under the incurred methodology, we came in at an 87 basis points coverage ratio. We're looking, as we adopt CECL, for there to be an adjustment, not material. We're looking at a couple of basis points increase in the reserve coverage.

Again we looking as D sign.

Into account the our importantket part eics but.

Looking at.

And it is not of material change that will come through equity.

Laurie Hunsicker: 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.

outsidez loan growth that we saw in commercial real estate looked like 17%.

This quarter, 67% annualized, the 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 to minimist exposure to. But if you could provide a refresh.

On what you've got in office, in hotel and in restaurant.

That would be super helpful in in any color you could give us around those if you have LT V's or or whatever do youtatell you ve got would be great Thank.

Kelly Pecoraro: Sure, Laurie. So yes, we had one origination of $68 million this quarter, which was strong. Twenty-four of that was in the multi-family space.

35 was in the CRE space. Again, there were two large credit in there that are in retail anchored by investment grid 10, So feel comfortable relative to that exposure in regards to office.

Our portfolio, or 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 fifty.

Percent on LTV. We have no Ho hotel in our portfolio and we have no direct exposure to restaurants.

Multiple: Great, okay, and just to clarify, the 3%, is it 3% of commercial real estate that's in offices or 3%?

Of all that I have, that structctional portfoli less than of our total portfolio, So it's 3% of the commercial portfolio.

Laurie Hunsicker: Okay, and then for the commercial portfolio, are you adding multifamily and CRE together, or just the straight 3% of the CRE only, the 216 million?

Kelly Pecoraro: No, it's the combination.

Laurie Hunsicker: 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?

Great, 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? More Let's Step purchase via Co Helper and

Jim Nesci: I think everyone around the table is thinking about it in exactly the same way.

Sen about all the guidance they can provide. But yes, we.

Laurie Hunsicker: 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?

ok ok great, and then just from that question you know, assuming your profitability even.

Minimally profitable next year? How should we be thinking about the tax rate and then pick it through if you're not profitable, what that may look like?

Kelly Pecoraro: So, for minimal profitability, you know, our tax rate, we're pegging at the 10 to 12 percent 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.

Multiple: [Laurie Hunsicker] Great. Jim and Kelly, thanks for taking my questions. [Kelly Pecoraro]  Thank you, Laurie. [Jim Nesci] Thank you. Have a great day.

Great great. Jim Kelly, thanks for seeking my questionions.

Operator: 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, laorry.

We have no further questions for the line. I will now hand back to James for closing remarks.

Jim Nesci: 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 door. Thanks and have a great day.

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