Blue Foundry Bancorp

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 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. After the speaker's remarks, there will be a question and answer session. I will now turn the call over to President and CEO, Jem Nessie, to begin. Please go ahead, Jim.

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 and 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 remains strong, and we are encouraged by the momentum in both our lending and deposit gathering activities. Low 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. 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 $14.81, 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 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?

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 trend was offset by the increase in non-interest expense that we guided to last quarter, as well as a provision bill 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 offsets 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 of funds 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 last inflation in prior periods. And second, the reset of our variable compensation accruals. 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 shift in loan categories. The allowance for credit losses on off-balance sheet commitments and health and 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 pay down. 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 count. 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 broker deposits at lower rates. Borrowings decreased slightly as loan growth was primarily funded through deposit growth. Lastly, asset quality remains 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 two 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 two basis points, the 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.

Thank you, Kelly. 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 Crowley from Piper Sadler. Your line is open. Please go ahead.

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

Good morning, Justin. How are you doing? I don't have the spot in front of me right now, but, you know, as we talk about where we think our margin is going, you know, 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 five to 10 basis points from where we work.

Okay. And then can you just thinking, you know, 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 reprice?

yeah so you know just as we look at our loan portfolio we have about 220 million that's going to be either maturing or repricing within 2025. a lot of that product though happens to be in construction or a lot of um set to current indices so that yields on that maturity and repricing sits just shy of seven percent so we're not expecting a tremendous amount of pickup on that repricing however What we are seeing is in the latter years, the 26, 27, that's really where you're seeing a lot of that multifamily book repricing that's sitting at those lower yields, the 4%, where we'll see some of the pickup there.

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

Yeah, so I think, you know, we are looking at these – I'm sorry. We've strategically kept our CD short. So we have about 335 million maturing in the next quarter. You know, that's sitting at a yield or cost of 411 right now. And as we look to transition, really the core deposit 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've also taken advantage of going into the broker market. As you saw, we did have an increase in brokerage departments. And on that, we're able to extend some of our duration and lower some of the weight there.

Okay, I got it. And then 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. And then just any detail on the yield you're getting on those assets, along with how those credit enhancements are structured.

Yeah, so those loans are really professional. The yield on that is around 7% that we're getting, and it does come with credit reserves. So, you know, as we look to

transition our balance sheet you know looking for a better risk adjusted return this was a good product for us to augment our organic growth okay and how should we think about further loan purchases there do you expect to continue to grow this book to augment growth um or do you cap it as a certain percentage of the total portfolio what's the thinking there

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

Justin, this is Jim DeMora. 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. And 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. But it's not going to continue forever. We're trying to right-size it to our balance sheet.

Okay, great. Well, I appreciate it. I'll leave it there. Thanks so much.

Thanks. Thanks, Dustin.

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

Hey, good morning. Just following up on the... On the consumer loan purchases, when you say, you know, it's coming along with either, you know, credit enhancements or reserves, is that showing up in your allowance or is it like effectively coming on, I guess, as marked? And then, you know, what is the level of reserves that they're coming on at?

So we do, those loans are incorporated into our CECL calculations. We look at what the loss rate is on a similar product, and if the credit reserves aren't sufficient to cover what a loss rate would be, we would apply an additional allowance on those credits. At the current quarter, there isn't an additional necessary, but again, that changes quarterly as we do our analysis.

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

So they come out with a 3% reserve level.

Okay, great. And then, you know, on these CDs, so they're coming off at, you know, 411 and 2Q. If, you know, obviously if they move, you know, 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?

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 420. That is our promotional rate that's out there. If it's going longer, it's step four.

Okay, great. And what are you guys able to get on, you know, the brokered that you brought on?

So if we look at brokered, if we have an opportunity to place that out for a longer duration, we're coming in around 375, all in with a swap.

And what's the duration that you're getting?

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

Okay, great. so for the expense outlook from here um it sounds like you know a little bit of uh you know move up over the course of the year it just you know any color around you know where that's coming from is that you know hiring if so you know what areas are you guys looking to add um and i guess you know start there um in terms of the expenses you know 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.

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

Okay. Thanks, Jim. And, you know, assuming, you know, I guess you hit the, you know, your variable numbers, how should we think about

the you know longer term expense growth rate i think a lot of it you know you're going to see the real estate numbers move like with inflation that's not going to be a lot of movement the technology we're 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 that's the more volatile numbers that cost number but the other two big factors technology and real estate i i see them moving along with inflation and the variable competition said it depended upon hitting our performance metrics and if we're exceeding those you will see that costs go higher

But again, that would be a benefit for the top one.

Okay, got it. I'm thinking, you know, just a little bit, you know, longer term or more aspirational. I mean, you know, absent Fed, further Fed cuts, I mean, where do you think the margin can get to? know as we move towards you know the back end of the year or kind of into you know early 26 um you know just you know on a little bit on the uh you know deposit side and then you know with with the level of loan growth that you're looking at yeah so i think chris as i had said you know we don't have a tremendous amount of repricing of the lower yielding assets this year right so i think

We will see some expansion, probably the majority coming in the second quarter and then tapering a little bit as we normalize. But adding additional growth could potentially have additional expansion. But really, when we get to the first half of 26, we're seeing that multifamily book reprice that's sitting at 4%. So we really are looking for some expansion there as we're repricing those assets.

Okay.

Chris, I think you hit it on the head, though, when you talk about what is the Fed going to do. So that cuts both ways. We have variable price loans on the construction side. If they cut, those yields come down. But then we get to reprice our liabilities. Obviously, the CD rates should come down as well. So that's what we're trying to balance on our projections. But 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 okay great it's helpful um and on the uh you know buyback um is the baseline assumption you know that continuing to you know kind of you know just continue at the same pace as the past two or three quarters?

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

And is there a timeline or a point in time down the line you know, what that would trigger a change in that, whether that be, you know, loan growth ramps up, you know, if you guys start growing at, you know, 12 plus percent instead of, you know, 8 to 10 percent or, you know, any change, you know, that would occur, I guess, in the pace of buybacks going forward.

I think there are scenarios that could change the pace. TAB, Mark McIntyre:" Of the buyback you know if there was extreme volatility that the board wanted to make sure we had ample cash on and. TAB, Mark McIntyre:" 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 wouldn't say it's never. But right now, we believe the buyback is working. It's helping to increase our tangible book value per share. The board and I discuss it with Kelly very frequently. And at the moment, we continue with the buyback. And it seems to be working quite well.

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

Thank you. Thanks, Ben.

We currently have no further questions, so I'd like to hand back to Jim Nessie for any closing remarks.

Thank you, operator. We remain confident in our strategy and the opportunities ahead for Blue Factory. 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.

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