Falling Interest Rates And Rising Credit Costs Will Pressure Long-Term Bank Earnings

Catalysts

About Blue Foundry Bancorp

Blue Foundry Bancorp operates as a community-focused bank providing commercial, consumer, and deposit services in its core markets.

What are the underlying business or industry changes driving this perspective?

• Expected declines in market interest rates could compress asset yields faster than deposit costs reprice lower. This may limit further net interest margin expansion and constrain future revenue and earnings growth.
• Ongoing strategic shift toward commercial and industrial lending and owner occupied commercial real estate increases sensitivity to a softer business credit cycle. This may elevate credit costs and pressure net margins if economic forecasts continue to deteriorate.
• Reliance on brokered deposits to fund loan growth, even while core deposits grow, may become more expensive or less available in a less favorable funding environment. This could tighten spread income and weaken net interest income trends.
• Rising nonperforming loans, including recent additions in multifamily, suggest that asset quality could normalize from unusually benign levels. This may drive higher provision expense and limit improvement in bottom line earnings.
• Persistent elevation in compensation and professional services expenses tied to strategic initiatives may prove sticky. This could create an unfavorable operating leverage backdrop if revenue growth moderates and compress future net margins.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Blue Foundry Bancorp's revenue will grow by 18.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -20.6% today to 3.9% in 3 years time.
• Analysts expect earnings to reach $2.9 million (and earnings per share of $0.19) by about December 2028, up from $-9.2 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 67.6x on those 2028 earnings, up from -23.5x today. This future PE is greater than the current PE for the US Banks industry at 11.5x.
• Analysts expect the number of shares outstanding to decline by 6.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.39%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Solid balance sheet strength, with tangible equity to tangible assets of 14.58% and capital ratios among the highest in the industry, provides a sizeable buffer to support growth, absorb credit costs, and ultimately sustain earnings and book value.
• Consistent improvement in core banking trends, including $77.1 million deposit growth, $41.9 million loan growth, and a 6 basis point expansion in net interest margin to 2.34%, suggests that revenue and net interest income may continue to trend higher rather than deteriorate.
• Management's focus on relationship-driven commercial and industrial and owner-occupied commercial real estate lending, alongside a healthy loan pipeline with anticipated rates around 7%, indicates potential for higher-yielding asset growth that could lift net interest margin and earnings over the long term.
• Expected downward movements in market interest rates, combined with management's active repricing of deposits and a coming wave of multifamily repricing in 2026 from sub-4% and sub-3.75% levels, could meaningfully lower funding costs and increase asset yields, supporting stronger net margins and earnings.
• Ongoing share repurchases at prices well below tangible book value, with 8.65 million shares already repurchased and additional authorization remaining, may enhance tangible book value per share and earnings per share over time, supporting shareholder returns even if headline profits improve gradually.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $10.0 for Blue Foundry Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $75.0 million, earnings will come to $2.9 million, and it would be trading on a PE ratio of 67.6x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $11.47, the analyst price target of $10.0 is 14.7% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.