Blue Foundry Bancorp - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 showed tangible operating progress despite a net loss: net interest margin expanded 27 bps to 2.16% on higher asset yields and lower deposit costs, net interest income rose 13% QoQ to $10.7M, and tangible book value per share increased to $14.81.
• Deposits grew $43.9M to $1.39B and loans grew $42.2M to $1.63B, with mix shifting toward commercial real estate and purchased, credit-enhanced consumer loans to improve yields; uninsured deposits remained modest at ~11%.
• Management guided to further NIM expansion of about 5–10 bps in Q2 and maintained an operating expense run-rate in the high-$13M to low-$14M range; share repurchases continued (464k shares at $9.52) at a discount to TBV.
• Credit quality remained strong: ACL/loans 0.81%, NPLs 0.35% of loans, NPA 0.27% of assets; allowance covers NPLs ~230%.
• Wall Street consensus estimates via S&P Global were unavailable for Q1 2025, so no beat/miss analysis is provided; investor narrative centers on continued NIM improvement, deposit mix optimization, and capital returns [GetEstimates errors].

What Went Well and What Went Wrong

What Went Well

• Net interest margin expanded 27 bps QoQ to 2.16% as asset yields rose and deposit costs fell; net interest income increased by $1.27M QoQ to $10.74M.
• Balanced growth and funding: deposits +$43.9M to $1.387B funded loans +$42.2M to $1.626B, with targeted growth in commercial real estate and construction and purchased consumer loans to augment yield.
• Strong capital and liquidity: tangible equity/tangible assets 15.61%, TBV/share $14.81, liquidity coverage 3.9x uninsured deposits; “both the bank and holding company remain well-capitalized”.
• Quote: “We are pleased with the improvement experienced in yields on assets and cost of liabilities… net interest margin [up] 27 basis points… increasing tangible book value to $14.81 per share.” — CEO James D. Nesci.

What Went Wrong

• Continued net loss: Q1 2025 net loss of $2.692M and diluted EPS of $(0.13), flat vs Q4 2024 and Q1 2024; efficiency ratio remained elevated at 122.36% despite improvement.
• Noninterest expense increased $748k QoQ, primarily compensation and benefits due to merit increases and resetting variable compensation accruals to target; occupancy also up on snow removal.
• Slight deterioration in asset quality optics (still strong): NPLs rose to $5.7M (0.35% of loans) vs $5.1M (0.33%); ACL/NPL coverage declined to ~230% from ~254%.

Transcript

Operator (participant)

Good morning, and welcome to the Blue Foundry Bancorp's first quarter 2025 earnings call. Comments made today 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 encourages all participants to refer to the full disclaimer contained in this morning's earnings release, which has been posted in 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. Your line will be muted for the duration of the call. After the speaker's remarks, there will be a question-and-answer session. I will now turn the call over to President and CEO, James Nesci, to begin. Please go ahead, Jim.

James D. Nesci (CEO)

Thank you, Operator, and good morning, everyone. We appreciate you joining us for our first quarter earnings call. As always, I'm joined by our Chief Financial Officer, Kelly Pecoraro, who will review our financial performance in detail following my remarks. Our strategic priorities for 2025 remain focused on driving loan growth in higher-yielding asset classes, maintaining strong credit quality, and continuing to grow and diversify low-cost funding sources. I am pleased to report that our first quarter results reflect solid progress on all fronts. We achieved 3% loan growth during the quarter while improving the yield on our loan portfolio by 15 basis points. This was supported by $44 million in deposit growth, accompanied by a 14 basis point reduction in our cost of deposits. Together, these results contributed to a 27 basis point expansion in our net interest margin, an important milestone in our efforts to enhance earnings.

While we reported a net loss for the quarter, we successfully increased tangible book value per share, supported by share repurchases and prudent capital management. Our capital and credit quality remained strong, and we are encouraged by the momentum in both our lending and deposit gathering activities. Loan production totaled $90 million during the quarter, at a weighted average yield of approximately 7.1%. This included $33 million in commercial real estate loans, primarily collateralized by owner-occupied properties, along with production of $9 million in residential mortgages and $7 million in construction loans. We also purchased $35 million in credit-enhanced consumer loans at attractive yields. As we continue to execute our strategy of portfolio diversification, we are deliberately emphasizing asset classes that deliver higher yields and better risk-adjusted returns.

The growth in commercial real estate, particularly owner-occupied properties, and construction lending reflects our ability to support local businesses while managing credit exposure. Additionally, our investment in credit-enhanced consumer loans enables us to capture attractive returns while maintaining a strong risk management framework. These shifts in portfolio composition support our broader objective of enhancing earnings and bringing long-term franchise value. Our loan pipeline remains healthy, with executed letters of intent totaling more than $40 million, primarily in commercial lending with anticipated yields above 7%. Tangible book value per share increased to $1,481, up 7 cents from the prior quarter. During the quarter, we repurchased 464,000 shares at a weighted average price of $9.52, a significant discount to tangible book value and adjusted tangible book value. These repurchases continue to enhance shareholder value.

Both the bank and holding company remain well-capitalized, with tangible equity to tangible common assets at 15.6%, among the highest in the industry. Liquidity remains robust, with $413 million in untapped borrowing capacity and an additional $208 million in liquidity from unencumbered available-for-sale securities and unrestricted cash. Importantly, this liquidity position is 3.9 times greater than our uninsured and uncollateralized deposits, which represent just 11% of our total deposits, demonstrating our strong liquidity coverage and low concentration risk. With that, I'll turn the call over to Kelly for a deeper look at our financials. After her remarks, we'll be happy to take your questions. Kelly?

Kelly Pecoraro (CFO)

Thank you, Jim, and good morning, everyone. For the first quarter, we reported a net loss of $2.7 million, or 13 cents per diluted share. While the bottom-line result was similar to the prior quarter, we were encouraged by meaningful improvement in net interest income. This top-line strength was offset by the increase in non-interest expense that we guided to last quarter, as well as a provision build related to loan growth. Net interest income increased by $1.3 million, or 13.4%, driven by a 27 basis point expansion in our net interest margin. Interest income rose $928,000, primarily due to loan growth, while interest expense declined by $343,000, reflecting lower deposit costs that more than offset the impact of 3% deposit growth. The yield on loans increased by 15 basis points to 4.72%, and the yield on total interest-earning assets improved by 14 basis points to 4.51%.

Our cost-to-fund declined by 8 basis points to 2.85%. The cost of interest-bearing deposits decreased 15 basis points to 2.75%, while the cost of borrowings rose 13 basis points to 3.39%. Non-interest expense increased by $748,000, driven by higher compensation and benefits. As discussed on our last call, this increase was expected and primarily reflects two factors. First, merit-based salary adjustments, which had less inflation in prior periods, and second, the reset of our variable compensation accrual. Last year's annual incentive compensation did not pay out of target as the company did not fully meet its performance target. For the first quarter, we accrued variable incentive compensation assuming target performance, in line with our expectations to meet those goals this year. While we remain committed to expense discipline, we expect operating expenses to stay in the high $13 million to low $14 million range.

We recorded a provision for credit losses of $201,000 for the quarter, attributable to loan growth and shifts in loan categories. The allowance for credit losses on off-balance sheet commitments and held-to-maturity securities declined slightly. As a reminder, the majority of our allowance is derived from quantitative models, and our methodology continues to assign greater weight to the baseline and adverse economic scenarios. Turning to the balance sheet, gross loans increased $42.2 million during the quarter, primarily in owner-occupied and non-owner-occupied commercial real estate, as well as construction loans. As Jim mentioned, we also purchased $35 million in credit-enhanced consumer loans and supplemented our residential production with $6.6 million in residential loan purchases. Our exposure to office space is limited, just 2% of the loan portfolio, and none of it is located in New York City.

Our available for sale securities portfolio, which has a duration of 4.3 years, declined by $10.4 million due to maturities, calls, and paydowns. This was partially offset by a $4.1 million improvement in unrealized losses. Deposits increased by $43.9 million, or 3.2%. We experienced $24.4 million, or 3.8%, of growth in core deposit counts. Importantly, growth in core deposits was fueled by full banking relationships with commercial customers, validating our strategic focus on deepening client engagement in a competitive market. Time deposits increased $19.6 million as we strategically repriced promotional CDs and backfilled runoff with $50 million in brokered deposits at lower rates. Borrowings decreased slightly as loan growth was primarily funded through deposit growth. Lastly, asset quality remained strong. Non-performing assets increased by $619,000 due to a slight rise in non-accrual loans.

Non-performing assets to total assets and non-performing loans to total loans each increased by 2 basis points but remained low at 27 basis points and 35 basis points, respectively. Allowance coverage decreased slightly, with the allowance for credit losses to total loans declining by 2 basis points to 81 basis points, and the ratio of allowance for credit losses to non-performing loans decreased from 254% to 230%. With that, Jim and I are happy to take your questions.

Operator (participant)

Thank you, Kelly. To ask a question, please press Star followed by 1 on your telephone keypad now. If you change your mind, please press Star followed by 2. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Justin Crowley from Piper Sandler. Your line is open. Please go ahead.

Justin Crowley (Vice President and Senior Research Analyst)

Hey, good morning. Just wanted to start off on the margin for the quarter. Kelly, do you have where that ended the period on a spot basis or perhaps for the month of March?

Kelly Pecoraro (CFO)

Good morning, Justin. How are you doing? I don't have the spot in front of me right now, but as we talk about where we think our margin is going, we were very pleased with the expansion we saw this quarter. We expect some additional expansion as we head into the second quarter, probably about 5-10 basis points from where we were.

Justin Crowley (Vice President and Senior Research Analyst)

Okay. Just thinking of unpacking the drivers there a little, can you remind us how much in loan maturities and resets through the end of the year you've got and just what the yield pickup is of those loans repriced?

Kelly Pecoraro (CFO)

Yeah. As Justin said, we look at our loan portfolio. We have about $220 million that is going to be either maturing or repricing within 2025. A lot of that product, though, happens to be in construction or a lot of set-to-current indices. That yield on that maturity and repricing sits just shy of 7%. We are not expecting a tremendous amount of pickup on that repricing. However, what we are seeing is in the latter years, 2026, 2027, that is really where you are seeing a lot of that multifamily book repricing that is sitting at those lower yields, the 4%, where we will see some of the pickup there.

Justin Crowley (Vice President and Senior Research Analyst)

Okay. I guess I'll ask a similar question just on the deposit side, specifically on the CD book. Maybe just for a second, putting potential rate cuts to the side, is there much from left there to lower rates, or are you largely through repricing at this point? What kind of gets you to the margin expansion through the balance of 2025?

Kelly Pecoraro (CFO)

Yeah. I think we are looking at—sorry, we strategically kept our CDs short. We have about $335 million maturing in the next quarter. That is sitting at a yield or a cost of 4.11% right now. As we look to transition really to core deposits, customer relationships, which has really been the focus of our customer deposits, we see some room there to pull those rates down as they shift into core. We have also taken advantage of going into the brokered market. As you saw, we did have an increase in broker deposits. On that, we are able to extend some of our duration and lower some of the rate there.

Justin Crowley (Vice President and Senior Research Analyst)

Okay. Got it. Just as far as the loan growth in the quarter, specifically on the purchase of unsecured consumer, can you talk through a little what kind of loan product that is, whether it's debt consolidation, payday loan, student debt, or something along those lines? Just give us a flavor of that. Just any detail on the yield you're getting on those assets, along with how those credit enhancements are structured.

Kelly Pecoraro (CFO)

Yeah. Those loans are really to professionals. The yield on that is around 7% that we're getting. It does come with credit reserves. As we look to transition our balance sheet, looking for a better risk-adjusted return, this was a good product for us to augment our organic growth.

Justin Crowley (Vice President and Senior Research Analyst)

Okay. How should we think about further loan purchases there? Do you expect to continue to grow this book to augment growth, or do you cap it as a certain percentage of the total portfolio? What's the thinking there?

Kelly Pecoraro (CFO)

I don't think we've come up with where our cap is. As we're looking at our organic growth, that is, of course, first and foremost as we continue to grow that commercial book. We will look to purchase additional to augment that in the coming quarters if necessary. That is not a long-term strategy of continuing being in that book to a large degree. I mean, we'll have a nice size portfolio potentially. Again, these are consumer loans at a higher yield with some credit reserves.

James D. Nesci (CEO)

Justin, this is James. Good morning. I think Kelly described it really well when she said it's an augmentation. It does help on the yield. The credit enhancement obviously helps. It helps us to transition into that higher yielding on a risk-adjusted basis. We think it makes a lot of sense to sort of push on getting better yields to get the NIM to expand as we make the transition. It is not going to continue forever. We are trying to right-size it to our balance sheet.

Justin Crowley (Vice President and Senior Research Analyst)

Okay. Great. I appreciate it. I'll leave it there. Thanks so much.

James D. Nesci (CEO)

Thanks.

Kelly Pecoraro (CFO)

Thanks, Justin.

Operator (participant)

Our next question comes from Chris O'Connell at KBW. Your line is open. Please go ahead.

Hey, good morning.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Just following up on the consumer loan purchases. When you say it's coming along with either credit enhancements or reserves, is that showing up in your allowance, or is it effectively coming on, I guess, as marked? What is the level of reserves that they're coming on at?

Kelly Pecoraro (CFO)

Those loans are incorporated into our detailed calculation. We look at what the loss rate is on a similar product. If the credit reserves are not sufficient to cover what a loss rate would be, we would apply an additional allowance on those credits. At the current quarter, there is not an additional necessary. Again, that changes quarterly as we do our analysis.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Okay. What are the reserve levels that they come on with?

Kelly Pecoraro (CFO)

They come on with a 3% reserve level.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Okay. Great. On these CDs, so they are coming off at 4.11 in 2Q. Obviously, if they move more into the core bucket, that shifts lower. If they kind of stick around to CDs, I guess, just what is the current offering rates at?

Kelly Pecoraro (CFO)

Yeah. Our current rate—and again, we're keeping short, giving us the opportunity to reprice quicker—so our current rate is a three-month at 4.20%. That is our promotional rate that's out there. If it's going longer, it's sub-4%.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Okay. Great. What are you guys able to get on the brokered that you brought on?

Kelly Pecoraro (CFO)

If we look at brokered, if we have an opportunity to place that out for a longer duration, we're coming in around 3.75 all in with a swap.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

What's the duration that you're getting?

Kelly Pecoraro (CFO)

Three years. Between two and three years is what we will look to place it.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Great. For the expense outlook from here, it sounds like a little bit of move up over the course of the year. Just any color around where that's coming from? Is that hiring? If so, what areas are you guys looking to add? I guess start there.

Kelly Pecoraro (CFO)

In terms of the expenses, as we look to quarter, we will have additional bankers potentially coming on to help with that organic loan growth and also making sure that we have the appropriate staffing within our branches and our network.

James D. Nesci (CEO)

If you look at it, Chris, it's the variable comp. We're constantly adjusting where we think we're going to be for the full year. That's that true-up that we go through here. If it looks like we're on track, we keep moving that number higher. Obviously, we want to pay sales commissions, variable compensation for new customers, for new loans, for new deposits. That's the goal, right? We're trying to drive the top-line growth. The expense comes out through variable compensation.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Okay. Thanks, James. Assuming, I guess, you hit your variable comp numbers, how should we think about the longer-term expense growth rate?

James D. Nesci (CEO)

I think a lot of it, you're going to see the real estate numbers move with inflation. That's not going to be a lot of movement. The technology, we're trying really hard to hold that as low as we can. Keeping it as flat as we can, it probably, again, moves up with inflation. The compensation number moves higher over time because you have inflation, and then you have hopefully additional people joining the team and pushing on the top-line revenue growth. So that's the number that's the more volatile number, that comp number. The other two big factors, technology and real estate, I see them moving along with inflation.

Kelly Pecoraro (CFO)

The variable comp, as James said, is dependent upon hitting our performance metrics. If we're exceeding those, you will see that cost go higher. Again, that will be a benefit to the top line.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Okay. Got it. Thinking just a little bit longer-term or more aspirational, I mean, absent further Fed cuts, I mean, where do you think the margin can get to as we move towards the back end of the year or kind of into early 2026, just on a little bit on the deposit side and then with the level of loan growth that you're looking at?

Kelly Pecoraro (CFO)

Yeah. I think, Chris, as I had said, we don't have a tremendous amount of repricing of the lower-yielding assets this year, right? I think we will see some expansion, probably the majority coming in the second quarter and then tapering a little bit as we normalize. Adding additional growth could potentially have additional expansion. Really, when we get to the first half of 2026, we're seeing that multifamily book reprice that's sitting at 4%. We really are looking for some expansion there as we're repricing those assets.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Okay. Understood.

James D. Nesci (CEO)

Chris, I think you hit it on the head, though, when you talked about what is the Fed going to do, right? That cuts both ways. We have variable-priced loans on the construction side. If they cut those, yields come down. We get to reprice our liabilities. Obviously, the CD rates should come down as well. That is what we are trying to balance on our projections. As Kelly stated, the vintage that seems really interesting to us is probably Q1, Q2 of next year. We should have favorable repricing if we stay relatively stable on interest rates.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Okay. Great. That's helpful. On the buyback, is the baseline assumption that continuing to kind of just continue at the same pace as the past two or three quarters?

Kelly Pecoraro (CFO)

Yeah. I think we definitely expect to continue to execute on the share buyback program, being mindful of deploying capital. We will support the stock.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Is there a timeline or a point in time down the line that would trigger a change in that, whether that be loan growth ramps up if you guys start growing at 12% plus instead of 8%-10%, or any change that would occur, I guess, in the pace of buybacks going forward?

James D. Nesci (CEO)

I think there are scenarios that could change the pace of the buyback. If there was extreme volatility that the board wanted to make sure we had ample cash on hand, if you saw really good opportunities on the loan side where we could get a really high return on equity. I think there are scenarios. I would not say it is a never. Right now, we believe the buyback is working. It is helping to increase our tangible book value per share. The board and I discuss it with Kelly very frequently. At the moment, we continue with the buyback. It seems to be working quite well.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Okay. Got it. All right. Thanks, Jim. Thanks, Kelly. That's all I had.

James D. Nesci (CEO)

Thank you.

Kelly Pecoraro (CFO)

Thanks, Chris.

Operator (participant)

We currently have no further questions. I'd like to hand back to James Nesci. Any closing remarks?

James D. Nesci (CEO)

Thank you, Operator. We remain confident in our strategy and the opportunities ahead for Blue Foundry. We want to thank our shareholders, our customers, and employees for their continued support as we build on this positive momentum throughout the year. Thanks so much, and we'll see you next quarter.

Operator (participant)

This has concluded today's call. Thank you very much for joining. You may now disconnect your lines.