Executive Summary / Key Takeaways

• Blue Foundry Bancorp is actively transforming from a traditional savings bank into a commercially oriented institution, focusing on higher-yielding commercial real estate, construction, and C&I loans, while strategically managing residential and multifamily exposure.
• The strategic pivot is yielding tangible results, with net interest margin expanding by 27 basis points in Q1 2025 to 2.16%, driven by improving asset yields and a managed decrease in funding costs.
• Deposit strategy emphasizes attracting full banking relationships from small to medium-sized businesses, successfully growing core deposits and reducing reliance on higher-cost wholesale funding, which is critical for future margin improvement.
• Asset quality remains strong with low levels of non-performing assets (0.27% of total assets) and robust allowance coverage (230% of non-performing loans), despite increased provision expense tied to loan growth and portfolio mix shifts.
• The company maintains a strong capital position (15.6% tangible equity to tangible common assets) and robust liquidity, actively enhancing shareholder value through share repurchases at a discount to tangible book value.

Setting the Scene: A Strategic Transformation Underway

Founded in 1939, Blue Foundry Bancorp operates as a regional savings bank rooted in northern New Jersey communities. Historically focused on traditional residential mortgage and consumer banking products, the company, formerly known as Boiling Springs Bancorp, rebranded to Blue Foundry Bancorp in 2019, signaling an evolution. Today, BLFY is in the midst of a deliberate strategic transformation aimed at becoming a more commercially oriented institution.

This strategic pivot is a direct response to the competitive dynamics within the banking sector and the prevailing interest rate environment. Regional banks like BLFY face intense competition from larger national players such as JPMorgan Chase (JPM), PNC Financial Services Group (PNC), and U.S. Bancorp (USB), as well as other regional banks like Fifth Third Bancorp (FITB), all vying for market share in lending and deposits. These larger competitors often benefit from greater scale, more diversified product offerings, and significant investments in technology, leading to potentially lower operating costs and higher efficiency. For instance, PNC demonstrates greater operational efficiency and faster loan processing due to advanced digital platforms compared to BLFY's estimated higher costs and processing times. Similarly, U.S. Bancorp offers lower operating costs per unit due to automation, and JPMorgan Chase's platforms are significantly more efficient in areas like digital onboarding.

In this competitive landscape, BLFY seeks to differentiate itself through a community-focused approach and personalized service, which has historically fostered customer loyalty and retention. While specific, quantifiable details on BLFY's proprietary "frictionless products" or other technological differentiators are not extensively detailed, management has highlighted a focus on digital aspects and aims to leverage technology to enhance customer experience, particularly for small to medium-sized businesses. However, compared to the substantial R&D investments and rapid technological advancements of larger peers, BLFY faces a challenge in matching the scale and speed of digital innovation. Its competitive moat currently relies more heavily on its local market presence and relationship banking model than on a distinct technological advantage that provides quantifiable performance benefits over rivals.

The overarching strategy driving BLFY's transformation is centered on optimizing its balance sheet for improved profitability and risk-adjusted returns. This involves a dual focus: shifting the asset mix towards higher-yielding commercial loans and enhancing the funding mix by growing lower-cost core deposits. This strategic direction is crucial for BLFY to improve its financial performance and enhance shareholder value in a challenging market.

Executing the Commercial Pivot and Funding Strategy

Blue Foundry's strategic priorities for 2025 explicitly target driving loan growth in higher-yielding asset classes and continuing to grow and diversify low-cost funding sources. On the asset side, the company is deliberately emphasizing commercial real estate, particularly owner-occupied properties, construction lending, and commercial and industrial (C&I) loans. This focus is intended to deliver higher yields and better risk-adjusted returns compared to its historical concentration in residential and multifamily mortgages.

Recent performance demonstrates progress in this shift. In the first quarter of 2025, gross loans increased by $42.2 million, reaching $1.63 billion. This growth was primarily fueled by increases in consumer loans ($34.3 million, including purchases), commercial real estate ($28.5 million), and construction loans ($7.3 million). Conversely, multifamily loans decreased by $25.7 million and residential loans by $5.5 million, reflecting the strategic intent to manage concentration and shift the portfolio mix. Loan production in Q1 2025 totaled $90 million at a weighted average yield of approximately 7.1%, significantly above the overall portfolio yield. This included $33 million in commercial real estate, $9 million in residential mortgages, and $7 million in construction loans.

To augment organic growth and accelerate the transition to higher yields, BLFY strategically purchased $35 million in credit-enhanced consumer loans and $6.6 million in residential loans during Q1 2025. Management noted that the purchased consumer loans came with a credit enhancement providing a 3% reserve level and offered attractive yields around 7%. While this tactic helps enhance yields and improve risk-adjusted returns in the near term, it is not intended to be a long-term strategy for a large portion of the balance sheet, but rather a tool to facilitate the balance sheet transition. The loan pipeline remains healthy, with executed letters of intent exceeding $40 million, predominantly in commercial lending with anticipated yields above 7%.

On the funding side, the strategy focuses on attracting the full banking relationship of small to medium-sized businesses to drive core deposit growth. This approach is proving effective, with core deposits representing 47.6% of total deposits at March 31, 2025, up slightly from 47.3% at December 31, 2024. Total deposits increased by $43.9 million, or 3.3%, in Q1 2025, largely driven by increases in NOW and demand accounts ($28.8 million) and time deposits ($19.6 million). The growth in core deposits is explicitly linked by management to deepening client engagement and validating the strategic focus on commercial relationships.

The company is also actively managing its time deposit book. While time deposits increased, BLFY strategically repriced promotional CDs and utilized brokered deposits to backfill runoff and manage funding costs. Brokered deposits increased by $50 million to $205 million in Q1 2025, used to fund loan originations and replace retail time deposit outflows. Management noted that brokered deposits were brought on at lower rates (around 3.75% all-in with swaps) with durations of 2-3 years, providing funding stability. The company has intentionally kept its consumer CD maturities relatively short (e.g., a 7-month special), with approximately $335 million maturing in Q2 2025 at a cost of 4.11%, offering an opportunity to reprice lower or shift customers to core products. Borrowings, consisting solely of FHLB advances, decreased slightly by $5.5 million in Q1 2025, as deposit growth helped fund loan originations.

Financial Performance and Balance Sheet Strength

Blue Foundry Bancorp reported a net loss of $2.7 million, or $0.13 per diluted share, for the first quarter of 2025. This result was similar to the net loss in the prior quarter ($2.7 million) and the same period in the prior year ($2.8 million). While the bottom line remained a loss, management highlighted meaningful improvement in net interest income, indicating progress on the top line.

Net interest income increased by $1.3 million, or 13.4%, to $10.7 million for the three months ended March 31, 2025, compared to $9.4 million for the same period in 2024. This improvement was driven by a significant 27 basis point expansion in the net interest margin, which rose from 1.92% in Q1 2024 to 2.16% in Q1 2025. The yield on average interest-earning assets increased by 26 basis points to 4.51%, primarily due to loan growth and higher yields on the asset portfolio. Interest expense increased by $544,000, but the cost of average interest-bearing liabilities increased by only 3 basis points to 2.89%, reflecting the managed approach to deposit costs.

Non-interest income decreased slightly by $57,000 to $394,000 in Q1 2025, partly due to a gain on sale of loans in the prior year period that did not recur. Non-interest expense increased by $748,000 to $13.6 million, primarily driven by higher compensation and benefits ($289,000 increase), occupancy and equipment ($111,000 increase), and data processing ($100,000 increase). The increase in compensation and benefits was attributed to merit-based salary adjustments and the reset of variable compensation accruals to assume target performance for 2025 goals, following a year where incentive compensation did not pay out at target. Management expects operating expenses to remain in the high $13 million to low $14 million range going forward, reflecting these factors and normal inflationary considerations.

The balance sheet remains robust. Total assets stood at $2.09 billion at March 31, 2025. The company maintains strong liquidity, with cash and cash equivalents totaling $46.2 million. Available borrowing capacity is substantial, including $275.6 million with the FHLB, $107.5 million with the Federal Reserve Bank, and a $30 million unsecured line, totaling 2.6 times uninsured and uncollateralized deposits. The estimated fair market value of unencumbered securities was $196.6 million, representing 62.2% of the portfolio.

Capital levels exceed all applicable regulatory requirements, with the Bank considered well capitalized. The tangible equity to tangible common assets ratio was 15.6% at March 31, 2025, a level management notes is among the highest in the industry. Total shareholders equity decreased slightly to $326.7 million, primarily influenced by share repurchases and the net loss, partially offset by favorable changes in accumulated other comprehensive income.

Credit Quality and Risk Management

Asset quality remains a point of strength for Blue Foundry. Non-performing assets increased slightly by $619,000 to $5.7 million in Q1 2025, primarily due to a rise in non-accrual loans. However, non-performing assets to total assets and non-performing loans to total loans remain low at 0.27% and 0.35%, respectively, at March 31, 2025. The allowance for credit losses on loans stood at $13.2 million, representing 0.81% of total loans. Allowance coverage for non-performing loans decreased slightly from 254% to 230%, but remains at a healthy level.

The company recorded a provision for credit losses of $201,000 in Q1 2025, compared to a release of $535,000 in the same period of 2024. This increase in provision was primarily driven by the growth in loan balances and the shift in the composition of the loan portfolio towards commercial and consumer segments, which carry different risk profiles than traditional residential mortgages. The allowance methodology is primarily quantitative, influenced by economic forecasts, with greater weighting assigned to baseline and adverse scenarios.

BLFY's exposure to office space loans is limited to just 2% of the total loan portfolio, with none located in New York City, mitigating a key risk factor facing many banks. Unrealized losses in the securities portfolio are primarily attributed to changes in interest rates and liquidity rather than credit quality, and management does not intend to sell these securities before recovery or maturity. Interest rate risk remains the most significant market risk, managed through strategies like growing target deposits, utilizing the investment portfolio, and employing interest rate swaps as cash flow hedges for FHLB advances and brokered deposits.

Outlook and Shareholder Value

Management is optimistic about continued progress on its strategic objectives. They anticipate further net interest margin expansion in the second quarter of 2025, projecting an increase of approximately 5 to 10 basis points. This outlook is supported by the expectation of higher-yielding assets coming onto the books and the opportunity to reprice maturing CDs lower. While loan repricing in 2025 is not expected to provide a significant yield boost, more favorable repricing opportunities, particularly within the multifamily book, are anticipated in the first half of 2026.

Operating expenses are expected to remain within the high $13 million to low $14 million range, reflecting ongoing investments in personnel to drive growth and manage regulatory requirements, alongside inflationary pressures. Management links variable compensation directly to key performance metrics, including loan growth, low-cost deposit growth, and NIM expansion, signaling that expense increases tied to variable pay would correspond with achieving strategic goals that benefit the top line.

Enhancing shareholder value remains a focus. Tangible book value per share increased to $14.81 at March 31, 2025, up $0.07 from the prior quarter. The company continues to execute its share repurchase program, having repurchased 464,000 shares at a weighted average price of $9.52 in Q1 2025. Repurchasing shares at a significant discount to tangible book value is viewed as a key driver of tangible book value per share growth and is expected to continue, although the pace is influenced by trading volume and SEC rules. Management retains flexibility to adjust the buyback pace based on market conditions or compelling investment opportunities.

Conclusion

Blue Foundry Bancorp is actively executing a strategic transformation to become a more commercially focused bank, aiming to improve profitability and enhance shareholder value. The first quarter of 2025 demonstrated tangible progress, particularly in net interest margin expansion driven by a favorable shift in asset yields and disciplined management of funding costs. The focus on attracting commercial relationships is successfully fueling core deposit growth, strengthening the balance sheet and reducing reliance on wholesale funding.

While the company continues to report net losses, the underlying trends in net interest income and margin are positive, supported by a healthy commercial loan pipeline and opportunities to lower deposit costs. Asset quality remains strong, providing a solid foundation for growth. Management's outlook anticipates further margin expansion and continued execution of the strategic plan, including share repurchases to boost tangible book value. The success of this transformation hinges on the continued ability to originate high-yielding commercial assets, attract and retain low-cost core deposits in a competitive environment, and manage operating expenses effectively while investing for future growth. Investors should monitor the pace of loan growth, deposit mix shifts, and the trajectory of the net interest margin as key indicators of the strategy's effectiveness.