BCB Bancorp (NASDAQ:BCBP) Q3 2026 Earnings Call

0:00 Hello, everyone. Thank you for joining us and welcome to the BCB Bancorp, Inc.'s 2026 Third Quarter Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Thomas O'Brien, President and Chief Executive Officer. Thomas, please go ahead.

0:31 Thank you, and good morning all. Appreciate you joining the third quarter earnings call for the company. Obviously, before I begin, I encourage you to read the forward-looking statement as contained in our press release. So, I guess I can begin by stating the obvious. I've never quite reported a quarter like this in my career. It was momentous for the company in many ways. But I think it's fair to say we successfully accomplished everything that was set out on my June 1st call when I joined the bank, and actually more than that.

1:16 I also believe that the results of the quarter pretty closely followed the guidance we provided, and all of the recent filings and announcements around the capital issuance and Loan Sales. For this call, I don't see much value in discussing these telephone book numbers for net income. To the extent you want to, it's certainly too odd. We'll be able to give you as much color as you want on that. But honestly, the numbers are so big as to disappear, I'm not sure I can even count that high. As I said, I think the numbers, while admitted to be huge, hopefully are self-explanatory given our previous disclosures on the strategic plan, capital, and asset quality.

2:09 So, I thought I'd just confine my quick remarks here on the outcomes and the expectations for the period ahead. I think it's probably worthwhile to focus some initial attention on our Margins came in at $303, slightly higher than the estimated range of $290 to $3 that we had previewed. And this was in spite of the reversal of several interest receivable accruals approximating around $1 million. Deposit costs trended lower, further supporting than them. Not surprisingly, ASSET QUALITY IMPROVED ALONG WITH THE RESERVE COVERAGE RATIOS.

3:02 THE FAIL OF MOSTLY CRITICIZED AND CLASSIFIED LOANS AGGREGATING OVER $200 MILLION, ALONG WITH THE RIGHT DOWN TO FAIR MARKET VALUE OF ANOTHER $100 MILLION, HAVE GONE A LONG WAY TO CLEANING UP THE LOAN QUALITY PROBLEMS THAT HAVE DOGGED BCB IN THE RECENT PAST. We begin the fourth quarter with a $70 million ACL over 3% of loans and a low $22 million in NPLs. We continue to forecast the sale of our remaining cannabis portfolio of loans and deposits in the fourth quarter. All of the loans were marked to market at September 30th. During the third quarter and in anticipation of the capital raise, Our team went through the loan book to identify any needed risk rating changes to more properly align our enhanced process with potential future problems.

4:03 And so doing, we identified another 77 million of previously passed rated loans that were subsequently downgraded to either special mention or substandard. We believe that this discipline will continue to focus our attention and our disclosures on the residual credit risk. We believe that the loan by loan process that we followed has properly surfaced residual credit risk and accounted for the potential for loss. In the fourth quarter, we anticipated additional problem loans being favorably resolved in a few one-off type transactions, individual loans being resolved I should also point out that two larger problem loans were paid in full during the quarter.

4:55 As a consequence of the restructuring and prior year losses, we established a 100% valuation allowance against our deferred tax asset, so that was $60 million. That is reversible when we have determined that our profitability over the next several quarters and prospectively support a change. Our capital raise was very successful and the stock price has reacted favorably since. While dilution is something that I would never take likely, the alternative for BCEB was much more pessimistic. We believe the interest of all shareholders is best served by protecting the bank and the company with a strong capital structure and by confronting legacy problems head on.

5:44 Welcome our new investors and appreciate your support. You, together with our existing shareholders, will find us to be working tirelessly in our collective best interests, transparently and proactively. I've strengthened the executive ranks of the bank and welcome two new directors, both with extensive public company experience. I'm confident that the painful decisions that we have made will yield the kind of results of the coming quarters that fully validate our expectations. It's probably more than enough of my thoughts here and then as typical I suspect the questions are going to be more focused and you know we're going to be happy to take those jawads on the call with me and so operator we're ready to take questions.

6:40 We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Justin Crowley with Piper Sandler. Your line is open. Please go ahead.

7:20 Hey, good morning, everyone.

7:22 Good morning, Justin.

7:24 Now, obviously, a lot accomplished in the quarter, you know, with the loan sales and still a fair amount sitting in criticized and classified. But, you know, as you called out, a pretty healthy allowance to go along with it. So just kind of curious a little more for your thoughts on on how exactly you see that level trending into the end of the year with the potential for more sale activity and just overall comfort with any further loss being reflected in the reserve, which, Tom, I know you touched on a little.

7:52 Yeah, sure. You know, that, I mean, going back to my June 1st call, you know, asset quality was kind of, you know, job one through 10. The process we went through in the quarter, we, did a pretty deep dive on every single loan over about a million dollars. And some we, as I mentioned in my remarks, re-risk rated. We have, I think in total, Joad can correct me if I'm wrong, but about almost $100 million in loans that we have marked to market. And if you look in the, you know, the remaining criticized loans, that's, you know, the lion's share of it.

8:43 So I would say, you know, several of these loans we expect to be cleaned up in the quarter, especially in the substandard category, which is, you know, relatively low anyhow, but, and in the NPL category, which is down to 22 million. So, you know, it's a risk business, but I, you know, so I can never say Never, but I don't know what else we could have done to identify and price the credits that we have, you know, concern of potential loss. The classified loans saw a 70% reduction, pretty meaningful, from $160 million to $46 million, and our reserve coverage went up from 28% to 150%, so, you know, fairly strong progress in reducing our exposure to classified loans.

9:44 No, I hear you on that. That's helpful. And then maybe just wanted to confirm how you're thinking about, you know, ultimately the mechanics of the DTA and the valuation allowance. You know, I assume the bank returns profitability, let's just say, in the fourth quarter, and that can be maintained. You know, what could the timing of that recapture look like and would you expect full recapture just all in one fell swoop as opposed to kind of occurring piecemeal?

10:12 Yeah. No, it's kind of binary, Justin. It's either in or out. So, I would, and again, you know, I guess I'd probably reflect on my experience at Stun National Bank with the DTA. I would think by the end of 27, assuming both quantity and quality of earnings in each of the next five quarters support the decision, I think that's probably the first opportunity we'd have to reconsider.

10:49 Okay, great. And maybe just one last one. Just on the level of expenses from here, you know, obviously some added costs in the third quarter, just given everything that was going on. And, you know, how much of that falls over the run rate as we think about the fourth quarter and then as we get into the next year? I'm sure there'll be some elevated expenses, but just kind of in comparison to what we saw this quarter.

11:11 Yeah, I think that's absolutely to be expected. You know, professional fees, legal fees, will continue to be a little bit higher in this fourth quarter because of just some of the remaining things that we have going on, including the cannabis transaction. And if I recall, I think we had, it was about $5 million of higher expenses this quarter. And I think the lion's share of that should start to drop away. And we also have the reincorporation into Delaware which is coming up in the middle of November. So those are all expenses of kind of the restructure of the entire institution.

11:57 Okay, so you can drop off. Yeah, go ahead.

12:01 Yeah, yeah. Tawad, you feel free to. Yeah, I think just echoing what Tom said, I would size probably two and a half to three million dollars of elevated expenses in the quarter. to a number of transactions that we executed. Our fourth quarter would still see some elevation in inflation and expenses. We should be able to give you better guidance, Justin, when we talk about our fourth quarter results for the full year 2027. When we come back, we should be able to give you better guidance.

12:36 Okay, but that's two and a half.

12:37 Go ahead. Now, Justin, I would say too, and again, this just kind of goes back to my experience, but I mentioned this to the board of directors yesterday also, that, you know, typically when you go through, you know, the work that we have in this context, you start to see some of the proofs of your labor, you start to see some recoveries, and, you know, there's, you know, some I would say positive volatility in that likely or, you know, wouldn't be a surprise. But I think in terms of, you know, the negative part of that, I think we took a pretty sharp pencil to the numbers.

13:26 Right. Okay, and then draw that two and a half or 3 million call it that you called out, you would expect that at least that, you know, portion of the increase in expenses to maybe fall back out in the fourth quarter. Is that a reasonable assumption? The fourth quarter, you know, good portion of that should fall back Justin, but we are still pursuing our cannabis sale transaction. We are still cleaning up the balance sheet for some leftover trades that are sitting in our hand for sale. So it's difficult to give you a precise estimate for the fourth quarter, but yes, it's a fair statement that a good portion should fall off, and we'll provide better guidance when we come back to talk about our fourth quarter results.

14:08 Okay, perfect. I will leave it there. Thanks so much. Thanks, Justin. Your next question comes from the line of Ross Haberman with RLH Investments. Your line is open. Please go ahead.

14:23 Good morning, guys. Thank you for taking the call. Just a couple of very brief numbers questions. Criticized loans of $200 million, does that include the cannabis loans? The cannabis loans were marked to market.

14:54 But I would say, too, that those loans were performing. And, Ross, just to, you know, just to comment on the number that you quoted, our criticized loans that we had reported for the second quarter were $207 million. For the third quarter, that number is $153 million. So it's not $200 million. Okay.

15:20 And could you give us a little update on the Business Express loans? I think as of last quarter, they're around $69 or $70 million. What's the balance and what are you seeing as the current default rate and what's your quarterly allowance against that?

15:42 Sure. Thank you. Go ahead. Business Express. Sure. The Business Express Loan Portfolio balance is approximately $65 million now, Ross. The portfolio continues to behave well. You may recall in the last call we had talked about, you know, we were seeing an average of $3.7 million of quarterly losses through middle of last year. Since then, the portfolio has behaved much better. Our reserve coverage that we had reported for the second quarter for the portfolio was approximately 15 percent, one-five. And during the third quarter, the portfolio once again behaved well. We only saw close to $1 million of losses, but we still did a little bit of a reserve build, so the reserve coverage increased from 15% to close to 18%. And you will see that detail when we publish our 10Q.

16:40 And just one final question, Tom. Are you optimistic that you're going to sell or have a deal with the cannabis loans and deposits in the fourth quarter? Yes, I think so.

17:02 I'm trying to pull the numbers out of my head here. It's about 70 to 80 million deposits and about 70 million loans. But yeah, I think we're pretty far along. So there's nothing that's come up that stops this deadness track. I feel pretty good about it.

17:29 And just one final question. Any further deterioration in any of the loans since you first made your initial swipe or cut or everything else basically is performing as you expected and at least at the moment you're not going to feel the necessity to make any further larger allowances.

17:58 No, absolutely. I think, as I mentioned, the process we went through, I guess starting after I'd been at the bank for about a month of looking at the pass rate of loans, was really driven by one particular loan that presented with problems and I looked at the existing risk rating and in my view it was kind of too strong for the risk and the credit. I just said at that point, okay, let's go through all of them and see.

18:45 So, again, it's hard to predict what the legacy portfolio is. They've all been touched. Most of them have been visited. There are no further questions at this time. I will now turn the call back to Thomas O'Brien for closing remarks. Well, okay, that was easier than I expected.

19:34 So our next call will be in the fourth quarter, the earnings release in probably late January. So I'm expecting a much better announcement at that time. And I think both for internal consumption within BCB and our investor base and others, you'll start to see the Again, the fruits of our labor and the process we went through. It's obviously pretty complex right now with all these very large numbers being presented, but the diligence in the process and the carefulness that we exercised in terms of assigning risk and potential for loss, I think, is going to give us the protection that we all expect and demand from the bank. And I think, again, I think the fourth quarter will be a very good look for all of us at that process.

20:44 But at this point, we're pretty optimistic. So with that, thank you for joining the last couple of months of the year. Hope it's all a good one for you and we'll be in touch in early 27. Thank you. This concludes today's call. Thank you for attending. You may now disconnect.