On Monday, BCB Bancorp (NASDAQ:BCBP) discussed second-quarter financial results during its earnings call. The full transcript is provided below.
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The full earnings call is available at https://investorrelations.bcbcommunitybank.com/corporate-information/corporate-profile/default.aspx
Summary
BCB Bancorp reported a slight improvement in its net interest margin, up by 8 basis points, now exceeding 3%.
The company suspended dividends on common and preferred shares to retain liquidity and bolster bank capital.
A $5.3 million goodwill write-off impacted the quarter's loss, with equity compensation affecting diluted shares.
The board plans to change the state of incorporation to Delaware to modernize its corporate structure.
Ongoing financial restructuring is expected to be completed by the third quarter, with a focus on reviewing credit portfolios.
Management is committed to keeping the bank well-capitalized despite challenges related to double leverage at the holding company.
Credit issues stem from aggressive growth starting in 2020, with ongoing efforts to reassess and mitigate risks.
The company anticipates clarity on capital and credit position by Labor Day, aiming to cleanse financial statements of uncertainty.
Consultants have been engaged to aid in the restructuring process, with an emphasis on thoroughness and transparency.
C&I loan portfolios faced significant charge-offs, with a focus on Business Express loans as a source of losses.
Future operating expenses are expected to remain elevated due to consultant and legal fees.
The company is evaluating potential capital strategies, including shrinking the balance sheet and exploring market options.
Full Transcript
OPERATOR (Moderator)
Thank you for standing by and welcome to the BCB Bancorp second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, press star, then the number one on your telephone keypad. To withdraw your question, press star one again. Thank you. I'd now like to turn the call over to our President and CEO, Thomas O'Brien.
You may begin.
Thomas O'Brien, President & CEO
Great. Thank you. Good morning everyone and welcome to the second quarter call. My first 60 days here at the bank. But before we begin, I need to encourage you to read in great exquisite detail the forward-looking statements that are always attached to our earnings releases. And enjoy those. So anyhow, as you know, my first 60 days here, we're engaged in a major undertaking, but we're making good progress and consistent with what I said in my June 1 call.
I think you know, the schedule that I laid out at that time continues to be what we operate under. I'll make the assumption for today's call that we don't want to spend a lot of time on the typical ratios and earnings per share. And I'll allow plenty of time for questions. From my perspective, the highlights for the quarter concern a lot of the actions that you're probably already aware of. But we did suspend the dividends on the common and the preferred shares to both retain liquidity at the holding company and build capital at the bank.
In the quarter, the margin had a little uptick of about 8 basis points over 3% now. And you should note, I guess the loss included about $5.3 million in a goodwill write-off. And that's the only intangible on our balance sheet, the tangible book value impacted by the loss in the quarter and by the inclusion of the equity compensation that I received on joining that's earned over five years but accounted in the fully diluted shares on day one. Some governance matters.
The board has determined to change the state of incorporation to Delaware and thereby will also eliminate the standard terms of office for directors. Both of these are designed to bring BCB into a more contemporary corporate structure. The financial restructure work is ongoing. Our goal is to have everything done and announced wrapped up in the third quarter. We're taking a very critical look at each credit portfolio. And I'm sure you understand this level of transparency cannot be completed within 60 days.
But we have, you know, continued to work and make progress. I'm sure you'll want to ask about capital. I can repeat what I said on June 1, that we'll always err on the side of keeping the bank well capitalized. That said, you know, the bank continues to have a healthy capital base with challenge, as I mentioned previously, is the absolute level of double leverage at the holding company. The credit issues in the bank really seem to stem from a period beginning maybe in 2020 and probably terminating towards the end of 23 or very early 24.
The growth at that time was just too aggressive and we got into some businesses that we didn't fully understand. And these two months we have worked to double check risk ratings. And candidly, we've had some good surprises, a couple of negative ones, but on average, no huge changes. I can't predict the third quarter at this time, and I haven't gone to the board with any capital recommendations or projections. I do think we will be in a position to have some meaningful clarity around Labor Day.
And again, consistent with what I said in my expectations that I outlined on June 1. But the ultimate goal is to, you know, essentially cleanse the financial statements of the uncertainty that has existed for a few years. As I said at the outset, it's a major undertaking. We've got everybody in the bank working diligently on this, brought in a few consultants to help us with that process. And those of you that know me, you probably know some of the consultants that we brought in.
But again, we're making very good progress. We want to be as thorough and comprehensive as we possibly can to again end this uncertainty and provide a clear path forward for going into the fourth quarter and most importantly for the calendar and fiscal year 27. So with that, operator, it's probably best if we just take some questions here and start with those, certainly.
OPERATOR (Moderator)
We will now begin the question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. If you'd like to withdraw your question, simply press star one again. Your first question today comes from the line of Justin Crowley from Piper Sandler. Your line is open.
Justin Crowley, Analyst at Piper Sandler
Hey, good morning.
Thomas O'Brien, President & CEO
Morning, Justin.
Justin Crowley, Analyst at Piper Sandler
You know, with the provisioning and charge-offs this quarter, you know, all coming in C&I, you know, does that reflect just a partial review of that loan category or is that reflective of most of the work to do in de-risking that book?
Thomas O'Brien, President & CEO
Most of it was in what the bank has called Business Express loans. And then in C&I, there were a couple of loans on the books when I joined the bank that got charged off that were pure C&I. One of the challenges, we've had several loans that were, if not total write-offs, essentially total write-offs. So that's, as you know, for a bank, that's kind of unusual. So that's what you're seeing in the charge-offs in the quarter. Both Business Express and I think it was two loans that were in the charge-off category that we're trying to see what we can recover.
But it didn't look too promising at the moment we made the charge-off. So there's more to do on C&I and commercial real estate we're actively going through right now. But we did on the Business Express, we did make a pretty comprehensive review. We did site visits, looked at FICO degradation, payment histories, pretty much everything else that gave us some insight into what is a relatively small individual loan portfolio, but has been the source of a lot of loss over the last, I guess, the last two years.
Jawad Chaudhry, CFA — EVP, Chief Financial Officer
Hey, Justin, this is Jawad. I would like to just add a little bit more detail in terms of the reserve build that you saw in the second quarter. It was primarily done in the C&I loan portfolio, excluding the Business Express loans, sort of the 19 million in loan loss provisioning that you saw. 16.7 million was dedicated to the C&I loan portfolio. And three things to note with respect to that portfolio as we cycle through 2026. Previously we had shared that we were expecting a major recovery in the portfolio and we no longer have that expectation.
Secondly, the portfolio losses dipped in the first quarter to 0.8 million, but as Tom said, in the second quarter they went up again to approximately 5.8 million. And thirdly, the new consultants that Tom brought in came through the portfolio and their feedback was used to analyze it under a qualitative framework.
Justin Crowley, Analyst at Piper Sandler
Okay, gotcha, that's helpful. And so I guess as you know, we kind of think about as you move over to the commercial real estate side, and I know it's going to be hard to put specific numbers around it now, but is there any way for you to help frame for us just what that review process could potentially mean for provisioning and reserve levels. Are there certain areas of that portfolio that you're most concerned about from a credit standpoint?
Thomas O'Brien, President & CEO
Well, the areas that I would be concerned about are as I learn, as I go along and honestly, some have been, as I mentioned, I mean, some have been more pleasant surprises that, you know, the concerns weren't as, you know, large or well defined as I thought they were early on. And a couple of negative surprises. It's hard for me to frame at this point, what it would look like. The real estate portfolio, at least in my prior experience, has, you know, more, I guess I'd say more value than a C&I loan that goes bad because of the nature of the collateral.
And both Sterling and Spun national, we had kind of similar situations with the real estate portfolio. And you know, they worked out predictably well. We sold some in those cases. Worked out some. But, you know, the absolute level of the criticized and classified, while it's down a little bit, is still, you know, pretty shockingly high. So I think you have to take that into account also.
Justin Crowley, Analyst at Piper Sandler
And does that, you know, how much of that commercial real estate portfolio needs to be kind of re-underwritten. Is that not really reflected at all in kind of the criticized classified numbers we see as of June 30, you know, recognizing that they still already are pretty high?
Thomas O'Brien, President & CEO
Yeah, I would say the vast majority continue to be reviewed. Some of the larger ones have been done already, but the vast majority, we still have more analytics to go through.
Justin Crowley, Analyst at Piper Sandler
Okay, got you. And then just pivoting, you know, just on the expense side, if we exclude the goodwill charge and some of the severance, you know, you called out in the release, do you have a sense for what operating expenses could look like in the quarters ahead?
Thomas O'Brien, President & CEO
I think they'll be elevated because we have, as I mentioned, we have consultants, we have legal expenses. We, you know, so I. Hard for me to put a number on it now, but they'll be higher for a couple of quarters and then if we're doing this right by 27, they should normalize. If we're not, they'll stay higher. But I think pretty confident we'll spend money wisely here to get the right answers and then deal with, you know, more normal levels. But it's real hard.
Justin Crowley, Analyst at Piper Sandler
Gotcha. And then maybe just one last one, I'll take a stab at it. You know, you mentioned shoring up capital in your prepared remarks, you know, staying well capitalized. And you know, even with the quarter's loss, just given the size of the balance sheet, you know, capital levels are able to kind of stay flat. And you know, I know there's a lot more work to do here and you mentioned nothing subsided, but just any early thoughts on to what extent you think you can continue accomplishing that through shrinking versus possibly pursuing a raise? Do you think the buffer now is sufficient and that there are enough levers to pull without having to tap the market for additional capital? Just anything there.
And I realize there might not be a great answer at this stage.
Thomas O'Brien, President & CEO
No, you're exactly right. There's no great answer. I just don't know. And as I said, it's complicated by the holding company structure, too. So I've got to kind of look at every angle here. We're modeling a whole bunch of different things. Deferred tax assets have to come into play. So I just don't know. But we'll do it. Whatever we need to do, we'll do it in a way that we get out the information as quickly as we can and as accurately try to have no surprises,
Justin Crowley, Analyst at Piper Sandler
I guess, from what you've seen on the credit side so far. I mean, do you feel better or worse from when you first walked in the door in terms of, you know, how that could potentially necessitate that?
Thomas O'Brien, President & CEO
Well, I've had good days and bad days. I would say on average my first couple of weeks, not so good in the last couple of weeks, actually a little. A little better. And it really is getting to understand what's here. And, you know, some of the issues, frankly, were just poor pricing, some were just poor structure. And as I said in the beginning, we got into businesses we didn't understand. And I would say in some of that context, we, you know, we didn't structure or price things as, as smartly as we could have. And I think one of the lessons for any bank is, you know, you get into a new business which is always, you know, always fine, worth looking at, but you really need to talk to the experts and test the market and, you know, test your assumptions before you get too deep. And I would say we got a little too deep.
Justin Crowley, Analyst at Piper Sandler
Okay, great. I will leave it there. Thank you guys so much.
OPERATOR (Moderator)
Your next question comes from the line of Christopher Marinak from Breen Capital. Your line is open.
Christopher Marinak, Analyst at Breen Capital
Good morning, Tom, can you talk about when you will be taking the C&I charge-offs, given the big C&I reserve that's now in place?
Thomas O'Brien, President & CEO
Not so much.
Jawad Chaudhry, CFA — EVP, Chief Financial Officer
Yeah, the C&I reserve. Chris, this is Jawad. The C&I reserve that you saw in the second quarter was primarily due to, you know, us attaching some high-risk factors using our qualitative framework. So they're not assigned specifically to some credits. It's just the general sense that the portfolio has shown enough tick in losses and preliminary feedback from the consultants that Tom brought in. We thought it was prudent to separate this portfolio as a separate entity when we review it under our qualitative framework.
So we don't have those general reserves in the loan book currently attached to specific loans to the extent that we do, we would not wait to take charge-offs.
Christopher Marinak, Analyst at Breen Capital
Got it, Jawad. Thank you.
Thomas O'Brien, President & CEO
Just to add to what I mentioned earlier, and that is that we've had a couple of loans there that were charge-offs. There was virtually the entire loan charge-off. So that gives us some caution and part of the reason behind looking at the portfolio more holistically. $13 million, close to $13 million in total. If you look at the fourth quarter and what we did in the second quarter, loans charged off with 100% charge-offs.
Christopher Marinak, Analyst at Breen Capital
We will still see additional charge-offs in future quarters, I presume. I guess I'm just trying to calibrate the level of that or, you know, maybe that's once you get through Labor Day. Tom, you have a better sense.
Thomas O'Brien, President & CEO
I think that's a better way to look at it because this is like, as I mentioned, you know, it's a work in progress and there's more to be done. Probably the smartest thing to do is to look at it, you know, comprehensively at the tail end. If I could do two quarters at once, it would be easier.
Christopher Marinak, Analyst at Breen Capital
Understood. And then what is your thought about the deposit opportunity? I know you've only been there a few months, but what's the opportunity to reposition deposits, get additional costs down on the funding side?
Thomas O'Brien, President & CEO
Well, I think, you know, we've got, as I said back in June, I mean, we've got an attractive footprint. We've been reasonably cautious, I think, the last year or two in terms of deposit pricing and outreach. But I think, you know, there's a, you know, a reasonably good market for us to be successful in. That said, I don't want to grow the balance sheet right now until I know what our financial needs are.
Christopher Marinak, Analyst at Breen Capital
Understood. Thank you for taking our questions this morning.
OPERATOR (Moderator)
Again, as a reminder, if you'd like to ask a question, press star 1 on your telephone keypad. Your next question comes from the line of David Conrad from KBW. Your line is open.
David Conrad, Analyst at KBW
Yes. Hey, good morning. Just a quick follow-up on Justin's questions. If I understood it, in terms of the review, are you completely through the Business Express portfolio and largely through the C&I? Is that how I understood that?
Thomas O'Brien, President & CEO
So I think it's safe to say we understand the Business Express a lot better than we did 60 days ago. The way we're looking at it is more on a portfolio basis because of the smaller size of the loans. And I think it's also safe to say that in the last, say, four quarters, the sludge rose to the top and they accounted for a large amount of the charge-offs and they were pretty significant. We are down to now a level that you would, I think we can safely say represents a weak portfolio, but not the major charge-offs.
We've had the level of kind of monthly or quarterly write-offs there have been moderated the last couple of months, but it tends to be binary. They either work and pay or they stop and there's nothing there. So that's a little bit of a challenge. C&I, I would say we are halfway through. Halfway through.
Jawad Chaudhry, CFA — EVP, Chief Financial Officer
Express loans, to share some hard numbers with you. If you look at 2025, the total losses in the portfolio were 10 million. 2024 probably had a similar amount of loss level. If you look at 2026 year to date, the losses came in at 1.1 million. So the loss experience has definitely—the reserve coverage on the portfolio sits at 15%. But I would still caution and reiterate what Tom said. It is kind of a binary situation. Once a credit goes bad, it is a loss.
David Conrad, Analyst at KBW
Got it. Right. And so by Labor Day you hope to be through the rest of the C&I and CRE. And you're not going to really look at the consumer at this point, or I mean that's a lot less risk, I guess at this point.
Thomas O'Brien, President & CEO
Yeah. Consumer—I've focused all of my time and our collective energies on where we've had losses and we've had virtually nothing in consumer. I did, you know, I think you probably noted we exited the consumer business now anyhow. So most of what there is is just kind of a legacy portfolio. It has behaved fine, so hasn't warranted a lot of attention in terms of, you know, what we might do longer term with it. Do we keep it? Do we sell the portfolio?
It becomes a servicing issue. And so we'll continue to look at it, but it's not an imperative. And just to be clear too, by Labor Day, I think, you know, what I'm saying, planning to do at that point is to be able to outline what I think the situation will look like and what our plans are. I don't know that I'll have the exact final numbers for the quarter, even a reasonable estimate. But I think we, you know, from a very high level, we should know what the capital needs are, what the portfolios look like and what our thinking is in terms of disposition of portfolios and what the outcomes of that will be.
David Conrad, Analyst at KBW
Got it. Okay.
Thomas O'Brien, President & CEO
Thank you for the question.
OPERATOR (Moderator)
Your next question comes from the line of Ross Haberman from RLH Investments. Your line is open.
Ross Haberman, RLH Investments
Morning, gentlemen. Thanks. Thanks for taking the call.
Thomas O'Brien, President & CEO
Good to see you the other night.
Ross Haberman, RLH Investments
Yes, it was. Good seeing you too. I have a couple of quick ones. The past-due's—I think you said there was about 122 million. Could you break that down between the 90-plus and 60 days and less?
Thomas O'Brien, President & CEO
I'm going to leave that to my—
Jawad Chaudhry, CFA — EVP, Chief Financial Officer
CFO. Ross, that would be disclosed in our quarterly filing. I don't have the numbers in front of me right now, but we will have that breakdown in the quarterly filing that will become public in the next couple of days.
Ross Haberman, RLH Investments
Okay. And the DTA you touched on was a big number. It was like 25 million bucks on the balance sheet. Give us your thoughts on that and how is it going to work? Would you have to—if you continue to have some large write-down the next quarter or two, what happens to that? Would you have to write that off because you can't utilize it? How does that work?
Thomas O'Brien, President & CEO
Well, what you'd normally do, you know, if it's determined to be unlikely to be used, you'd have to do a valuation reserve. We do not believe we're going to be in that position. We think once we're done with this process, the DTA will get utilized actually pretty, pretty efficiently. And we're only talking about, you know, the timing differences in the DTA represent the allowance. And so that's not the same issue as losses on sale, which, you know, are more permanent, I guess I'd say.
So we'll end up—and there's also a regulatory calculation for DTA that encompasses, you know, what you're allowed to count in your regulatory capital and what you are not allowed to count. But in any case, our view at the moment is that we will, you know, have a DTA of some significance and we'll have an earnings capacity to chew it up pretty quickly.
Jawad Chaudhry, CFA — EVP, Chief Financial Officer
I'll echo Tom's comments. I know we are focused on credit and that's the number one issue at hand, but if you look at the core earnings power of the franchise, we have five quarters displayed in our press release. The operating revenue of the organization—very consistently we have posted $25 million per quarter. That's $100 million worth of operating revenue. Unfortunately, the elevated credit costs have been eating into our profitability and turning us into a loss position.
Once the balance sheet has been cleaned up from a credit perspective, as Tom said, any DTA that we have, we should be able to utilize it pretty quickly because the core earnings power of the franchise has stayed pretty intact even though we have shrunk our balance sheet due to the NIM improvement that you have seen over the past several quarters.
Ross Haberman, RLH Investments
You didn't touch upon the cannabis loans and I was wondering if any of them are in the—are any of them in the past due today?
Jawad Chaudhry, CFA — EVP, Chief Financial Officer
To the best of my knowledge, the cannabis loans are not in the past-due bucket. The total portfolio size, Ross, was 70 million or 69 million at the end of the second quarter.
Ross Haberman, RLH Investments
Okay. Do you—Tom, do you lump those mostly into the CRE?
Thomas O'Brien, President & CEO
The cannabis loans? Yeah, yeah. I would say most of them have real estate collateral, but it tends to be specialty properties, so, you know, you've got to keep that in mind. I think the one in Massachusetts that was the consequence of the large write-off either late last year or early this year—it was a warehouse facility, but it was specialty property. So I think that's where we made our mistake, is not understanding and underwriting the nature of the property and how that would impact longer-term values.
As a collateral, it had a lot of value for its use, but once it wasn't for that use, to reposition it, you know, pretty much decimated the value.
Ross Haberman, RLH Investments
Just two last questions if I may. Could you talk about sort of the relations with the regulators? And I don't think you can even discuss whether you're under an order or not. Sort of touch upon whatever you can say about that.
Thomas O'Brien, President & CEO
I can tell you my practice is if there's an order we would disclose it. And so I don't think you're going to read anything about that in the 10-Q. I think our relations are at this point quite good. I maintain an open dialogue with them as I've always done. I kind of let them know, you know, where we are, what we're doing, try to give them, you know, the no-surprise rule and I think they appreciate that. But on the other hand, you know, just like with the investors, I mean there's a lot of uncertainty—and, you know, what happened and how did this happen and what is the fix going to look like?
But again, I'm transparent with them. There's nothing to hide; I just try to tell them how we plan to fix it, what we're finding as we go along.
Ross Haberman, RLH Investments
And just one last question, it's sort of a technical question. You have that subordinated debt—40 some-odd million I think it is. Are you allowed, if push comes to shove, to defer the interest on that and not have it accelerate, or you don't have that option?
Thomas O'Brien, President & CEO
If we deferred it, it would be an event of default.
Ross Haberman, RLH Investments
All right. All right. And one possibility, I just want to throw this out as you're looking at all your options in the next quarter—so I would urge you—I'm not sure it's a... Well, it's an idea to possibly convert all those preferred to common. I'm not sure if that's too dilutive, but that's sort of—I was thinking about that idea.
Thomas O'Brien, President & CEO
Well, you know, as I mentioned, the real financial challenge, at least in the short run here, is at the holding company, because of the debt and the preferred—and both a liquidity issue for the holding company to service the debt and then just the, you know, the ultimate cost of the debt. So, you know, there's obviously not the kind of liquidity at the holding company where we could, you know, buy in the debt at any rate levels. You know, I have thought—actually in one of my prior banks I did a, you know, debt-for-equity swap and that was, you know, reasonably successful.
So it's in our mind and conversations, but nothing definitive at this point.
Ross Haberman, RLH Investments
Best of luck. We'll talk to you in a month or two. Thank you.
Thomas O'Brien, President & CEO
We'll be here.
OPERATOR (Moderator)
Your next question comes from the line of Justin Crowley from Piper Sandler. Your line is open.
Justin Crowley, Analyst at Piper Sandler
Hey, I actually had a follow up that actually just kind of got asked and answered, but it was really just on the holding company structure, how that complicates things. I don't know if there's anything more to elaborate on, just respect to what you might be looking to do there. I do think you kind of touched on it though.
Thomas O'Brien, President & CEO
Yeah, no, it's kind of early stage, Justin. The numbers are what they are and our flexibility around those is constrained, at least at this point. But we're trying to be creative and think about what to do to moderate the, the intermediate term risks that that presents for us.
Justin Crowley, Analyst at Piper Sandler
Okay, great. I appreciate it. Thanks so much again.
OPERATOR (Moderator)
And that concludes our question and answer session and today's conference call. We thank you for your participation and you may now disconnect.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
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