BCB Bancorp, Inc. (NJ) Q3 Earnings Call Highlights

Key Points

• BCB Bancorp took major steps to strengthen its balance sheet, selling more than $200 million in criticized and classified loans, marking another roughly $100 million to fair value, and completing a capital raise. Classified loans fell 70% to $46 million, while reserve coverage increased to 150%.
• Third-quarter net interest margin reached 3.03%, above management’s prior 2.90%-3.00% range, as deposit costs declined. However, the bank recorded a $60 million valuation allowance against its deferred tax asset and expects elevated professional and legal expenses to continue in the fourth quarter.
• Management expects to sell its remaining cannabis portfolio—about $70 million of loans and $70 million-$80 million of deposits—in the fourth quarter. It also reported lower criticized loans and improving losses in the Business Express portfolio, while acknowledging that additional credit risk remains.

BCB Bancorp, Inc. NJ) (NASDAQ: BCBP said its third-quarter results reflected a broad effort to strengthen capital, reduce problem assets and reassess credit risk across its loan book, following actions that included more than $200 million in loan sales and additional fair-value marks.

President and Chief Executive Officer Thomas O'Brien said the quarter was “momentous” for the company and that management had completed the objectives outlined when he joined the bank on June 1. He said reported earnings included unusually large figures associated with the company’s previously disclosed strategic actions, capital issuance and loan sales.

Margin, Capital and Asset Quality

The company reported net interest margin of 3.03%, exceeding its previously discussed range of 2.90% to 3.00%, according to O'Brien. The margin performance came despite reversals of roughly $1 million in interest receivable accruals, while deposit costs continued to decline.

BCB sold mostly criticized and classified loans totaling more than $200 million during the quarter and wrote down another $100 million of loans to fair market value, O'Brien said. The measures were intended to address loan-quality issues that had affected the bank in recent periods.

At the start of the fourth quarter, BCB had an allowance for credit losses of $70 million, representing more than 3% of loans, and nonperforming loans of approximately $22 million, O'Brien said. Chief Financial Officer and Treasurer Jawad Chaudhry said classified loans declined 70%, to $46 million from $160 million, while reserve coverage on classified loans rose to 150% from 28%.

Management also conducted a loan-by-loan review of credits above roughly $1 million in advance of its capital raise. The review resulted in $77 million of loans previously rated pass being downgraded to special mention or substandard. O'Brien said the company marked nearly $100 million of loans to market and believes its review process identified and accounted for residual credit risk.

“It is a risk business, so I can never say never,” O'Brien said in response to a question on additional credit losses. “But I do not know what else we could have done to identify and price the credits that we have concern of potential loss in.”

Cannabis Portfolio and Other Lending Updates

BCB continues to expect a sale of its remaining cannabis loan and deposit portfolio during the fourth quarter. O'Brien said the cannabis loans had been marked to market as of Sept. 30 and were performing. He estimated the portfolio includes approximately $70 million in loans and $70 million to $80 million in deposits.

O'Brien said the company was “pretty far along” in the sale process and that no developments had emerged that would halt the transaction.

Chaudhry said criticized loans totaled $153 million at the end of the third quarter, down from $207 million in the second quarter. He also provided an update on the Business Express loan portfolio, which had a balance of about $65 million. The portfolio generated close to $1 million of losses during the third quarter, compared with an average of $3.7 million in quarterly losses through the middle of the prior year, according to Chaudhry.

Reserve coverage for the Business Express portfolio increased to nearly 18% from approximately 15% in the second quarter, Chaudhry said.

Deferred Tax Asset and Expenses

The company recorded a 100% valuation allowance against its deferred tax asset, totaling $60 million, following restructuring actions and prior-year losses. O'Brien said the allowance could be reversed when management determines that future profitability over several quarters supports such a change.

In response to a question about timing, O'Brien described the accounting treatment as “binary” and said the company might first reconsider the valuation allowance by the end of 2027, assuming both the quantity and quality of earnings over the next five quarters support that conclusion.

Management expects elevated professional and legal expenses to continue in the fourth quarter as it completes remaining strategic initiatives, including the cannabis transaction, the cleanup of loans held for sale and a planned reincorporation in Delaware expected in mid-November.

Chaudhry estimated that approximately $2.5 million to $3 million of third-quarter expenses were elevated due to transactions completed during the period. He said a good portion of those costs should decline in the fourth quarter, though management did not provide a precise estimate and expects to offer fuller expense guidance when it reports fourth-quarter results.

Outlook

O'Brien said two larger problem loans were paid in full during the quarter and management expects additional individual problem loans to be resolved favorably in the fourth quarter. He said the company’s capital raise was successful and that the stronger capital position was preferable to alternatives that could have been more damaging to shareholders.

The CEO said BCB has strengthened its executive ranks and added two directors with public-company experience. Looking ahead, he said management expects the work completed to improve the company’s outlook, while acknowledging that the business remains exposed to normal credit risk.

“The diligence in the process and the carefulness that we exercise 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,” O'Brien said.

About BCB Bancorp, Inc. (NJ) (NASDAQ:BCBP)

BCB Bancorp, Inc is the bank holding company for BCB Community Bank, a full-service community bank headquartered in Bayonne, New Jersey. The bank provides deposit products, residential and commercial real estate lending, commercial and industrial loans, consumer loans, and other banking services to individuals, families, businesses, and nonprofit organizations.

BCB Community Bank serves customers through a branch network and digital banking channels in communities across New Jersey and parts of New York.

This instant news alert was generated by narrative science technology and financial data from MarketBeat in order to provide readers with the fastest reporting and unbiased coverage. Please send any questions or comments about this story to contact@marketbeat.com.