BCB Bancorp, Inc. (BCBP) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the BCB Bancorp, Inc. Second Quarter Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to our President and CEO, Thomas O'Brien. You may begin.

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 and 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 are engaged in a major undertaking, but we're making good progress. And consistent with what I said in my June 1 call, I think the schedule that I laid out of that tone 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 allow time for questions. From my perspective, the highlights for the quarter, concern a lot of the actions that you're probably already aware but we did suspend the dividends on the common and the preferred shares to both the 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 and a goodwill write-off. 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 5 years, but countered in the fully diluted shares on day 1. Some governance matters, the Board has determined to change the state of incorporation to Delaware and thereby will also eliminate the staggered terms of office for directors. Both of these are designed to bring BCB into a more contemporary corporate structure. The financial restructuring 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 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 will always err on the side of keeping the bank well capitalized. That said, the bank continues to have a healthy capital base. The 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 get into some businesses that we didn't fully understand. In these 2 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 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 on 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 we're -- again, we're making very good progress. We want to be as thorough and comprehensive as we possibly can to, again, and 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, probably best if we just take some questions here and start with those.

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

With the provisioning and charge-offs this quarter all coming in C&I, does that reflect just a partial review of that loan category? Or is that reflective of most of the work you need to do in derisking that book?

Most of it was in what the bank is 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 banks, 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 2 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 with at FICO degradation payment histories, pretty much everything else that gave us some insight into what is a relatively small individual loan portfolio, but it's been the source of a lot of loss over the last, I guess, the last 2 years.

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 3 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 now only 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 can through the portfolio and their feedback was used to analyze it under a qualitative framework.

Okay. Got you. That's helpful. And so I guess as 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 with that view 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?

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 the concerns weren't as larger, well defined as I thought they were early on in 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 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 Sun National, we had kind of similar situations with the real estate portfolio. And they worked out predictably well. We sold some in those cases. worked out some. But the absolute level of the criticized and classified wallets, it's down a little bit, it's still pretty shockingly high. So I think you have to take that into account also.

And has that -- how much of that commercial real estate portfolio needs to be kind of re-underwriting? Is that not really reflected at all in kind of the criticized classified numbers we see as of June 30, recognizing that they still are pretty high.

Yes, 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.

Okay. Got you. And then just pivoting just on the expense side, if we exclude the goodwill charge and some of the severance you called out in the release, do you have a sense for what operating expenses could look like in the quarters ahead?

I think they'll be elevated because we have -- as I mentioned, we have consultants. We have legal expenses. We -- 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 more normal levels. But it's real hard to put...

Okay. Got you. And then maybe just one last one. I'll take a stab, but you mentioned shoring up capital in your prepared remarks, staying a little capitalized and even with the quarter's loss, just given the size of the balance sheet, capital levels we're able to kind of stay flat. And I know there's a lot more work to do here, and you mentioned nothing decided. But just -- any early thoughts on to what extent you think you can continue to 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? I realize it might not be a great answer at this stage.

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.

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 lock in the door in terms of how that could potentially necessitate that?

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 better. It really is getting to understand what's here. And some of the issues, frankly, were just poor pricing. Some were just core structure. And as I said in the beginning, we got under businesses we didn't understand. And I would say in some of that context, we didn't structure price things as smartly as we could have. And I think one of the lessons for any bank is we get into a new business, which is -- it's always fine, worth looking at, but you really need to talk to the experts and test the market and test your assumptions before you get too deep. And I would say we got a little too deep.

Your next question comes from the line of Christopher Marinac from Brean Capital.

Tom, can you talk about when you will be taking the C&I charge-offs given the big C&I reserves is now in place?

Not so much. The C&I reserve -- Chris, this is Jawad. The C&I reserve that the build that you saw in the second quarter was primarily due to us attaching some high-risk factors using our qualitative framework. So they're not assigned specifically to some credits. It's just a general sense that the portfolio has shown an uptick 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 and then we review it under our qualitative framework. So we don't have those general reserves and the loan book currently attached to specific loans. To the extent that we do, we would not wait to take charge-offs.

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 portfolio more holistically.

$30 million -- close to $30 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.

So we will still see additional charge-offs in future quarters, I presume. I guess I'm just trying to calibrate the level of them or maybe that's once you get through Labor Day, Tom, you have a better sense?

I think that's a better way to look at it because this is like, as I mentioned, it's a work in progress, and there's more to be done. Probably the smartest thing to do is to look at comprehensively at the tail end.

Transition [indiscernible].

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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 cost down on the funding side?

Well, I think 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 2 in terms of deposit pricing and outreach, but I think there's 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.

[Operator Instructions] Your next question comes from the line of David Konrad from KBW.

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?