BCB Bancorp Q3 2026 Earnings Call Summary

BCB Bancorp, Inc. (NASDAQ: BCBP) used the third quarter of 2026 to accelerate its balance-sheet restructuring. The company sold more than $200 million of primarily criticized and classified loans, marked another approximately $100 million of loans to fair value and completed a capital raise.

Key Takeaways

• Net interest margin was 3.03%, above management’s previously indicated range of 2.90% to 3.00%, despite approximately $1 million of interest receivable accrual reversals.
• BCB sold more than $200 million of mostly criticized and classified loans and marked another approximately $100 million of loans to fair value.
• The company entered the fourth quarter with a $70 million allowance for credit losses, representing more than 3% of loans, while nonperforming loans declined to $22 million.
• Classified loans fell 70% to $46 million from $160 million. Reserve coverage of classified loans increased to 150% from 28%.
• A detailed portfolio review resulted in $77 million of previously pass-rated loans being downgraded to special mention or substandard.
• Management expects to pursue the sale of the remaining cannabis loan and deposit portfolio in the fourth quarter. The portfolio includes about $70 million of loans and $70 million to $80 million of deposits.

Core Financial Data

Business and Operating Performance

Lower deposit costs supported the 3.03% net interest margin. The margin result also absorbed approximately $1 million of reversals related to interest receivable accruals.

Asset quality was management’s primary focus. The bank reviewed every loan above approximately $1 million and reassessed risk ratings, probability of default and loss given default. This process led to $77 million of previously pass-rated loans being moved to special mention or substandard.

The Business Express portfolio declined to approximately $65 million. It recorded close to $1 million of losses during the quarter, compared with an average of $3.7 million in quarterly losses through the middle of the prior year. BCB still increased reserve coverage for the portfolio to nearly 18% from approximately 15%.

Management also highlighted the successful capital raise, saying the stronger capital structure was necessary to protect the bank while addressing legacy credit issues. The company strengthened its executive team and added two directors with public-company experience.

Management Guidance

Management expects several additional problem loans, particularly within the substandard and nonperforming categories, to be resolved through individual transactions in the fourth quarter.

BCB also expects to complete the sale of its remaining cannabis loans and deposits during the fourth quarter. The loans were marked to market as of September 30, and management said the transaction was well advanced, while stopping short of guaranteeing completion.

Professional and legal fees are expected to remain somewhat elevated in the fourth quarter due to the cannabis transaction, remaining held-for-sale assets and the company’s planned reincorporation in Delaware. Management estimated that $2.5 million to $3 million of Q3 expenses were elevated and transaction-related, with a substantial portion expected to fall away, although no precise Q4 expense estimate was provided.

The $60 million deferred tax asset valuation allowance is effectively binary rather than subject to gradual reversal. Management said the end of 2027 could be the first opportunity to reconsider the allowance, provided the quantity and quality of earnings over the next five quarters support that decision.

Risks and Areas to Watch

Residual credit risk remains the principal concern. Although management believes the loan-by-loan review identified and priced potential losses, the company acknowledged that further deterioration in the legacy portfolio cannot be ruled out.

Criticized loans remained at $153 million at quarter-end, even after declining from $207 million in the second quarter. A significant portion consists of loans already marked to market.

The cannabis portfolio sale remains subject to completion. Until then, related professional fees and balance-sheet restructuring costs may keep expenses elevated.

The deferred tax asset cannot be restored unless future profitability demonstrates sufficient quantity and quality over multiple quarters. Management indicated that a reassessment may not occur before the end of 2027.

Analyst Q&A Highlights

Analysts focused on whether the current allowance adequately captures future credit losses. Management pointed to the deep review of loans above approximately $1 million, the fair-value marks and the increase in classified-loan reserve coverage to 150%. However, CEO Thomas O’Brien noted that banking remains a risk business and did not rule out additional losses.

On expenses, management said a good portion of the $2.5 million to $3 million in elevated Q3 transaction costs should decline in Q4. The exact run rate remains uncertain because the cannabis sale and other balance-sheet cleanup transactions are still underway.

Management also clarified that criticized loans were $153 million in Q3, not $200 million, compared with $207 million in Q2. Classified loans were reduced more sharply, falling to $46 million from $160 million.

Regarding the cannabis business, management said the portfolio includes approximately $70 million of loans and $70 million to $80 million of deposits. The company expressed confidence in making progress toward a fourth-quarter sale but did not present the transaction as certain.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Hello, everyone. Thank you for joining us, and welcome to the BCB Bancorp, Inc. 2026 Third Quarter Earnings Call. [Operator Instructions]

I will now hand the conference over to Thomas O'Brien, President and Chief Executive Officer. Thomas, please go ahead.

Thomas O'Brien

Thank you, and good morning, all. I 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, 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 1 call, when I joined the bank and actually more than that. I also believe that the results of the quarter pretty closely follow the guidance we provided in 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 [indiscernible] book numbers for net income. To the extent you want to, certainly, Jawad will 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. But 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.

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 margin came in at 3.03%, slightly higher than the estimated range of 2.90% 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 the NIM. Not surprisingly, asset quality improved along with the reserve coverage ratios.

The sale of mostly criticized and classified loans aggregating over $200 million, along with the write-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 began 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 30.

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.

In so doing, we identified another $77 million of previously pass-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 anticipate additional problem loans being favorably resolved in a few one-off type transactions, individual loans being resolved. I should also point out that 2 larger problem loans were paid in full during the quarter.

As a consequence of the restructuring and prior year losses, we established a 100% valuation allowance against our deferred tax assets. So it 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 lightly, the alternative for BCB 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.

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 interest transparently and proactively. I've strengthened the executive ranks of the bank and welcomed 2 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 over the coming quarters that fully validate our expectations. That's probably more than enough of my thoughts here. I'm -- as typical, I suspect the questions are going to be more focused, and we're going to be happy to take those. Jawad is on the call with me. And so operator, we're ready to take questions.

Operator

[Operator Instructions] Your first question comes from the line of Justin Crowley with Piper Sandler.

Question-and-Answer Session

Justin Crowley

Obviously, a lot of softness in the quarter with the loan sales and still a fair amount sitting in criticized and classified. But as you called out, a pretty healthy allowance to go along with it. So I was just kind of curious a little more for your thoughts 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 the further -- or any further loss being reflected in the reserve, which Tom, I know you touched on a little.

Thomas O'Brien

Yes, sure. That -- I mean, going back to my June 1 call, that asset quality was kind of job 1 through 10. The process we went through in the quarter, we did a pretty deep dive on every single loan over about $1 million. And some we, as I mentioned in my remarks, we risk rated. We have -- I think in total, Jawad 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 remaining criticized loans, that's the lion's share of it.

So I would say several of these loans, we expect to be cleaned up in the quarter, especially in the substandard category, which is relatively low anyhow, but -- and in the NPL category, which is down to $22 million. So it's a risk business, but -- 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 concern of potential loss in.

Justin Crowley

Just in that regard...

Jawad Chaudhry

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 fairly strong progress in reducing our exposure to classified loans.

Justin Crowley

Right. I hear you on that. That's helpful. And then maybe I just wanted to confirm how you're thinking about ultimately the mechanics of the DTA and the valuation allowance. I guess assuming the bank returns to profitability, let's just say, in the fourth quarter and that can be maintained, what could the timing of that recapture look like? And would you expect full recapture just on one fell swoop as opposed to kind of a current piecemeal?

Thomas O'Brien

Yes. No, it's kind of binary, Justin. It's either in or out. So I would -- and again, I guess I'd probably reflect on my experience at Sun National Bank with the DTA valuation allowance there. But I would think by the end of '27, assuming both quantity and quality of earnings in each of the next 5 quarters supports the decision, I think that's probably the first opportunity we have to reconsider.

Justin Crowley

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

Thomas O'Brien

Yes. I think that's absolutely to be expected. 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.

Justin Crowley

Okay. So you're starting to see that drop off.

Thomas O'Brien

Yes. Jawad, feel free to.

Jawad Chaudhry

Yes. I think just echoing what Tom said, I would size probably $2.5 million to $3 million of elevated expenses in the quarter tied to a number of transactions that we executed. Fourth quarter would still see some elevation of 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.

Justin Crowley

And then...

Thomas O'Brien

No, I'm going to -- Justin, I would say, too, and again, this is just kind of goes back to my experience that I mentioned this to the Board of Directors yesterday also that typically, when you go through the work that we have in this context, you start to see some of the fruits of your labor, you start to see some recoveries. And there's some, I would say, positive volatility in that likely or wouldn't be a surprise. But I think in terms of the negative part of that, I think we pretty -- took a pretty sharp pencil to the numbers.

Justin Crowley

Right. Okay. And then, Jawad, that $2.5 million or $3 million, call it, that you called out, you would expect that -- at least that portion of the increase in expenses to maybe fall back out in the fourth quarter. Is that a reasonable assumption?

Jawad Chaudhry

The fourth quarter, a 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 actually held 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.

Operator

Your next question comes from the line of Ross Haberman with Rlh Investments.

Ross Haberman

Just very brief numbers questions. Criticized loans of $200 million, does that include the cannabis loan?

Jawad Chaudhry

So the cannabis loan...

Go ahead please. Go ahead, Tom.

Thomas O'Brien

Yes. We'll both talk -- the cannabis loans were mark-to-market -- and -- but I would say, too, that those loans were performing.

Jawad Chaudhry

And Ross, 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.

Ross Haberman

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

Thomas O'Brien

Go ahead, Jawad.

Jawad Chaudhry

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 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%, 1-5. 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 would see that detail when we publish our 10-Q.

Ross Haberman

And just one final question. Tom, are you optimistic that you're going to sell or get -- have a deal with the cannabis loans and deposits in the fourth quarter?

Thomas O'Brien

Yes, I think so. I mean it's -- I think -- I'm trying to pull the numbers out of my head here. It's about $70 million to $80 million in deposits and about $70 million [indiscernible] loans. But yes, I think we're pretty far along. So there's nothing that's come up that stop, but I feel pretty good about it.

Ross Haberman

And just one final question. Any further deterioration in any of the loans since you first laid 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 -- you don't feel the necessity to make any further larger allowances?

Thomas O'Brien

No, absolutely. I think, as I mentioned, the process we went through, I guess, starting in -- after I've 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 we -- and I looked at the existing risk rating and in my view, it was kind of too strong for the risk on credit. So I just said at that point, let's go through all of them. So again, it's hard to predict what the legacy portfolio is. They've all been -- most of them have been visited. We did a probability of default and loss given default and all of that factors into the numbers you saw in the quarter.

Operator

There are no further questions at this time. I will now turn the call back to Thomas O'Brien for closing remarks.

Thomas O'Brien

Well, okay. That was easier than I expected. 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. But at this point, we're pretty optimistic. So with that, thank you for joining, the last couple of months of the year and I hope it's all a good one for you, and we'll be in touch in early '27. Thank you.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.