Blue Foundry Bancorp - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 showed continued sequential improvement: net loss narrowed to $2.0M ($0.10) from $2.7M ($0.13) in Q1, driven by 12 bps NIM expansion to 2.28% and stable expenses; credit quality remained strong with NPLs at 0.38% of loans.
• Against S&P Global consensus, BLFY beat EPS by $0.02 (actual -$0.10 vs -$0.12*) but modestly missed “Revenue” (SPGI revenue proxy) by ~$0.22M (actual $11.58M* vs $11.80M*), reflecting timing of funding costs and asset yield progression (company-reported NII was $11.64M).
• Balance sheet mix shifted as planned: loans +$47.4M QoQ to $1.67B with growth in owner-occupied CRE and construction, and purchases of credit-enhanced consumer loans; deposits +$29.1M QoQ with core deposits +$25.2M, while brokered deposits funded part of growth.
• Management expects only “a couple of bps” of NIM expansion in Q3 with more meaningful margin improvement in 2026 as ~$75M of loans at ~3.75% reprice; OpEx is guided to remain in the mid-to-high $13M range per quarter near-term.
• Capital return: 406K shares repurchased at $9.42; a new 5% program (up to 1.08M shares) commenced June 20; tangible equity/TA remains robust at 15.10%.

What Went Well and What Went Wrong

• What Went Well

  • Net interest margin expanded 12 bps QoQ to 2.28% (third consecutive quarter of expansion), lifting NII by $0.9M QoQ to $11.64M.
  • Core deposit growth (+$25.2M QoQ; +$49.6M YTD) and lower deposit costs (-13 bps QoQ to 2.62%) supported spread improvement despite competitive markets.
  • Credit quality remained solid: NPLs at 0.38% of loans; ACL/NPL coverage >200%; net recoveries in Q2 were de minimis.
  • Management quote: “We are encouraged by the continued improvement this quarter, highlighted by net interest margin expansion, stable expenses, and continued strong credit metrics.” — CEO James Nesci.

• What Went Wrong

  • Still loss-making: Q2 net loss of $2.0M due in part to provision on off-balance-sheet commitments and lack of tax benefit given the DTA valuation allowance.
  • Efficiency ratio, while improving, remains elevated at 112.4% (down from 122.4% in Q1), highlighting the need for further operating leverage.
  • Mix headwinds and timing: brokered deposits increased YTD to $225M to fund loan growth; NIM expansion in 2H25 expected to be limited before larger 2026 repricing wave.

Transcript

Speaker 1

Good morning and welcome to Blue Foundry Bancorp's second quarter 2025 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 circumstances. 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. Your line will be muted for the duration of the call, and after the speaker's remarks, there will be a question and answer session. I will now turn the call over to our President and CEO, James D. Nesci, to begin. Please go ahead, James.

Speaker 2

Thank you, Operator, and good morning, everyone. We appreciate you joining us for our second 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 update. Earlier today, we reported a net loss of $2 million or $0.10 per diluted share. We are pleased with the progress made toward our strategic objectives in the second quarter and thus far in 2024. Despite the competitive environment, we were able to grow core deposits and expand the net interest margin for the third consecutive quarter. This, coupled with our expense discipline, resulted in a pre-provision net revenue improvement of approximately $1 million versus last quarter. Our strong capital and liquidity position continue to support our transformation into a more commercially focused institution.

This quarter's increase in core deposits reflects the deepening of our relationships with the businesses and communities we serve and marks continued progress in expanding efficient funding sources. We achieved approximately 3% loan growth during the quarter while improving the yield on our loan portfolio by 8 basis points. This was supported by $29 million in deposit growth, including an almost 4% increase in core deposits and a 13 basis point reduction in our cost of deposits. Together, these results contributed to a meaningful 12 basis point expansion in our net interest margin. Loan production year to date totaled $180 million, with $90 million produced during the second quarter at a weighted average yield of approximately 7%. Year to date, our diversification efforts have led to a $22 million increase in commercial and industrial loans, including owner-occupied commercial real estate.

Additionally, construction loans increased $12 million, while we thoughtfully decreased our multifamily portfolio by $37 million. We also saw a $76 million increase in consumer loans through June 30, primarily driven by purchases of credit-enhanced consumer loans at attractive yields. As we continue to execute our strategy of portfolio diversification, we remain focused on prioritizing asset classes that deliver higher yields and better risk-adjusted returns. Growth in our owner-occupied commercial real estate and construction lending reflects our disciplined approach to supporting local businesses while managing credit exposure. Additionally, our investment in credit-enhanced consumer loans further enhances returns while maintaining a strong risk management framework. These portfolio shifts are aligned with our goal of driving earnings and long-term value creation. Our loan pipeline remains healthy, with executed letters of intent totaling more than $40 million at quarter end, primarily in commercial lending, with anticipated yields above 7%.

We expect this momentum to continue in the coming quarters. Tangible book value per share increased to $14.87, up six steps from the prior quarter. We remain committed to enhancing shareholder value through disciplined capital management. During the quarter, we repurchased 406,000 shares at a weighted average price of $9.42, a significant discount to our tangible book value and adjusted tangible book value. Both the bank and holding company remain well capitalized, with tangible equity to tangible common assets among the highest in the industry at 15.1%. Our capital position and credit quality remain strong, and we are encouraged by the sustained momentum across both lending and deposit trusts. We believe these efforts will continue to support balance sheet and income growth in the coming quarters. With that, I'll turn the call over to Kelly for a deeper look at our financials.

After her remarks, we will be happy to answer your questions. Kelly?

Speaker 3

Thank you, Jim, and good morning, everyone. Net loss for the second quarter was $2 million. This is a $735,000 improvement to the prior quarter. We are encouraged by the positive momentum in net interest income, which was partially offset by higher provision expense driven by unfunded loan commitments. Net interest income increased by $896,000 or 8.3%, driven by a 12 basis point expansion in our net interest margin. Interest income expanded $725,000, primarily due to loan growth. Interest expense declined by $171,000, reflecting lower deposit costs. The yield on loans increased by 8 basis points to 4.80%, and the yield on total interest earning assets improved by 7 basis points to 4.58%. Our cost of funds declined by 13 basis points to 2.72%. The cost of interest bearing deposits decreased 13 basis points to 2.62%, and the cost of borrowing decreased 9 basis points to 3.30%.

Net interest expense decreased by $90,000 compared to prior quarter, driven primarily by seasonal occupancy expense. Year-over-year, expenses have remained relatively stable over the past several quarters and we continue to expect them to stay within the mid to high $13 million range. As we progress toward our growth targets and achieve corporate goals, we anticipate a modest increase in compensation expense in the second half of the year due to higher variable compensation costs. For the quarter, we recorded a provision for credit losses of $463,000, primarily attributed to reserves required on unfunded commitments that are scheduled to close in Q3. 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. From a balance sheet perspective, gross loans increased $47.4 million during the quarter.

Organic growth was primarily in owner-occupied commercial real estate and construction. We also purchased $45 million in credit-enhanced consumer loans and $19 million in residential loans to support our residential portfolio. Our available for sale securities portfolio, with a duration of 4.1 years, declined by $2.4 million due to maturities, calls, and paydown. This was partially offset by purchases and a $1.7 million improvement in unrealized loss. Deposits increased $29.1 million or 2%. We experienced $25.2 million or approximately 4% growth in core deposit accounts. Importantly, growth in core deposits was fueled by full banking relationships with commercial customers, emphasizing our strategic focus on deepening client engagement in a competitive market. Time deposits increased $3.9 million as we strategically reinvest in emotional safety and backfill runoff with $20 million in broker deposits at lower rates. Borrowing increased slightly to help fund loan growth. Lastly, asset quality remains strong.

Non-performing assets increased due to a slight rise in non-approved loans. Non-performing assets to total assets ticked up by 3 basis points, and non-performing loans to total loans also ticked up by 3 basis points. Both remain low at 30 basis points and 38 basis points, respectively. Allowance coverage decreased slightly with the allowance for credit losses to total loans declining by 1 basis point to 80 basis points, and the ratio of allowance for credit losses to non-performing loans decreased from 230% to 211%. With that, Jim and I are happy to answer your questions.

Speaker 1

Thank you very much. To ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Justin Frank Crowley and Piper Sandler. Your line is open. Please go ahead.

Speaker 4

Good morning. Just wanted to start off on the margin and some of the drivers as you look ahead here. Can you quantify for us what loan repricing looked like through the back half of this year and then as you get into 2026? Is there any detail on volume and then what the rate pickup looks like? I think you've mentioned previously that it's really next year when you see a lot of that multifamily portfolio start to turn, but just wondering if you could put the numbers around that for us.

Speaker 3

Yeah, sure. No problem, Justin. You're right. 2026 is really where we see a lot of the repricing taking place. In 2026, we have about $75 million that's standing at a rate of about 3.75%. That's due to reprice, not exactly equally during the year, but spread over the year in 2026. For the remainder of 2025, we have just about $23 million that's sitting at a rate of 4.75% that's going to reprice throughout Q3 and Q4. Important to keep in mind, we also have maturities that are coming in. Those maturities, the majority of them sit in the construction portfolio and are at our current market rate. While we have a nice pipeline of construction coming in, as you know, those don't fund all upfront. We'll see a little lag in terms of the construction portfolio having maturities.

Speaker 4

Okay, got it. I guess on the CD side, maybe just assuming flat rates for a moment through the year-end, who knows what we'll get out of the Fed. Has the pricing opportunity there largely run its course? Would it really just take lower rates from here to see funding costs move appreciably lower? What's the thinking there?

Speaker 3

From a CD perspective, we were keeping the book relatively short, right around that three-month time frame, but we did introduce an eight-month CD that has extended that maturity. We won't see that repricing of that book until January or February as those CDs will mature.

Speaker 2

Justin, I think there's also a market component to that question. It depends what our competitors do in the marketplace. We're obviously working through the market competition just like everybody else, and we're keeping an eye on our deposit base and trying to make sure we produce products that our customers are interested in purchasing.

Speaker 4

Okay, that's helpful. I guess just sort of putting it all together, obviously a decent step up in the net interest margin through the first half of this year. Given kind of all the puts and takes, would you kind of expect expansion to be more limited through the back half of this year with 2026 really being when we start to see kind of more significant improvement in margin?

Speaker 3

Yeah, Justin, you have it absolutely right. We're only looking at a couple of basis points of expansion probably in the third quarter. When we get to the fourth quarter, you know, that will depend upon a pipeline and what's coming on and what happens in the market. The expansion will be limited in the back half of the year.

Speaker 4

Okay, I appreciate that. In terms of the consumer purchases, I know in the past you said there's not necessarily a magic number in mind, but with the book at 5% of loans today, can you just give us a sense for the thinking on adding to that portfolio from here, how that fits in?

Speaker 3

Yeah, Justin. Right, it stands right now at about 5% of the loan portfolio. Right now, we're comfortable going to about 7% to 8% of the loan portfolio over the next couple of quarters.

Speaker 4

Okay. Can you just remind us, as far as the credit enhancements that come along with those, can you just boil down the exact structure of these credits and how much in the way of potential loss you're protected from?

Speaker 3

These come with a 3% reserve against these credits. They do run through our normal allowance calculation. We look to see if there's any additional exposure there, but we have a 3% credit reserve against them.

Speaker 4

Okay. Maybe just one last one, a bigger picture question. Profitability is obviously still strained here, but at least moving closer to being in the black. It seems like particularly next year, there's some margin tailwind that'll help over time. Is there anything else behind the scenes that you're looking into or weighing, whether that be from an expense standpoint? I know you gave guide there. Either there or just wherever else that could help accelerate that progress.

Speaker 2

What I can tell you is we're looking at everything constantly, especially expenses. I noticed some of the early notes mentioned expense discipline. Kelly and I are very focused on looking for any dollars we can find. It's expensive to run a bank in today's age. It just takes people to run the bank. We've kept a close eye on our headcount. We have our people working as efficiently as we can, but with AI, we're always looking to gain new efficiencies. Those are the things that we're working through. What else can we do, with fewer people and getting a greater output from our existing staff? I can't give you a timing of when that happens, but I can tell you that's the type of stuff that we're constantly looking at.

Speaker 4

Okay, got it. I appreciate everything. I'll leave it there. Thanks so much.

Speaker 2

Thanks, guys.

Speaker 1

Our next question comes from David Konrad in Keefe, Bruyette & Woods. Your line is open. Please go ahead.

Speaker 0

Yeah, hey, good morning. Justin kind of went through the quarter pretty good there. I really just have a very longer-term picture question, kind of looking at regarding, you know, the asset generation, but also kind of tied to the non-interest bearing deposit levels. I think it's kind of early days on CNI, but are you kind of thinking about, you know, how can we get that mix up and thinking about what type of assets you can generate maybe to grow the non-interest bearing deposits?

Speaker 2

Good morning, David, and thanks for joining our call today.

Speaker 0

Good morning.

Speaker 2

Yes, we are looking at it. The non-interest bearing is obviously a key point for us to focus on. We're not just looking at CNI. We're looking at our commercial real estate borrowers, and we're trying to make sure that we get a full relationship from all borrowers, regardless of what asset class they may be borrowing in. That has been working really well. We believe by providing good products to our customers, commercial or consumer, that we will get more of that core type deposit. It seems to be working. We're encouraged by that pathway, and we'll keep reaching out to our existing customers on the loan side to say, we really like your full banking relationship. Yes, that is clearly part of the strategy, and we think it is working, and we'll continue to work going forward.

Speaker 0

Great. Perfect. Thank you.

Speaker 1

We currently have no further questions, so I'd like to hand back to James Nesci with some closing remarks.

Speaker 2

Thank you, Operator. I wanted to thank everybody who dialed in today, who listened to the earnings call. Again, we're encouraged by the quarter and what we're starting to see, and it all stems from our dedicated employees out on the line working hard every single day. I want to acknowledge all of our customers and shareholders that have been with us, some of you for a very long time, and shareholders that have stuck with us as we recreate our strategy and try to drive it towards profitability. With that, I just want to say thanks again and hope to speak with all of you again next quarter. Thank you.

Speaker 1

This concludes today's call. We thank everyone for joining. You may now disconnect your lines.