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Bridge Bancorp, Inc. (BDGE) Q1 2019 Earnings Call Transcript

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Bridge Bancorp, Inc. (NASDAQ: BDGE)
Q1 2019 Earnings Call
April 24, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Bridge Bancorp first quarter 2019 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing * then 0 on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your telephone keypad. To withdraw your question, please press * then 2. Please note this event is being recorded.

I would not like to turn the conference over to Kevin O'Connor, President and CEO. Please go ahead.

Kevin O'Connor -- President and Chief Executive Officer 

Thank you. Good morning and welcome. Thank you for joining us on our second earnings call and for the positive feedback we received for initiating this method of communication. We were actually on the road recently speaking to shareholders who expressed their appreciation for the call. Also, with their advice, we added some additional disclosure to our press release. I'm again pleased to provide an overview of our business, our performance, and some discussion on strategy. I'm joined on our call by our CFO John McCaffery and between us, we hope to answer your questions regarding results and general market conditions.

The first quarter of each year always goes by fast. To mix the finalizing prior year results, dealing with the orders, and other year-end issues or we're trying to track early returns versus the budget and the projections we've established. We coupled this in 2019 with our first successful exam by our new regulators, the New York State DFS and the Federal Reserve Bank of New York.

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Each year comes with different challenges and opportunities and 2019 is no different. We believe our early results reflect our ability to navigate these and deliver organic growth and strong results. It's a testament to our ingrained commitment to a community banking model focused on building long-term relationships, protecting our industry-leading core funding, and seeking profitable credit-worthy loans. We strive to be the bank of choice on Long Island for businesses, working in concert with a strong network of accountants, lawyers, and insurance professionals and other advisors who recommend and sometimes sell BNB to their clients.

We remain focused on credit, cognizant of technology initiatives, and aware of the growth potential provided by the continued changes in our competitors' delivery models. We strive to control core expenses while still making prudent investments with the goal of continuing to deliver positive operating leverage. It's a somewhat simple business model, but it's again translating to strong financial returns and a continued expansion of our franchise.

I will again ask John to discuss in detail some of the financial items. However, I want to highlight some of the first quarter trends and results. We delivered record revenues, strong growth in loans, and year-over-year core deposit growth. Most importantly, an increase in net interest margin. This translated into a net income of $12.9 million or an EPS of $0.65 a share.

Diving a bit deeper, during the first quarter, loans grew at a net $115 million or toward a 14% annualized rate. This growth included almost $60 million of C&I and owner-occupied real estate loans, the real sweet spot for community banking. These types of relationships come with core deposits as we become in many cases, the customer's primary bank.

The funding side of the balance sheet, while improving sequentially is given certain seasonality best viewed on a year over year basis. Our total IBC deposits, more simply the deposits of individuals and businesses increased over $400 million or 16% from a year ago with DBA representing 42% of these types of deposits. Additionally, over that same timeframe, wholesale liabilities including FHLB advances and broker deposits decreased over $300 million.

The strong quarterly growth in loans offset by an expected net decline in certain public and broker deposits still left BNB with a loan to deposit ratio of 91%. Again, positioning us as one of the few community banks with a loan to deposit ratio of below 100%.

Despite the challenges of an ever-flattening yield curve, we again experienced growth in our net interest margin as increases in loan yields and continued DBA growth offset the increases in the cost of interest-bearing liabilities. The NIM increased sequentially to 3.27% and after adjusting for certain purchase accounting items was up on a year over year basis as well. Again, John will provide some specifics on this.

The economy, specifically on Long Island, remains relatively strong. Unemployment has historically low levels and customers remain optimistic despite the fact they can't find employees to actually deliver their products and services. On a more global level, we're aware of the changes in the economic outlook and the posture of the Fed. For these reasons, we remain vigilant in assessing and managing credit.

The uptick in the quarter from 30 to 59-day delinquencies related to two specific relationships. One relationship resolved the loans paying off shortly after quarter end. In the other relationship, the property in question is in contracts with anticipated closing sometime in Q2 or Q3. Net charge-offs were minimal, but with the growth in loans, we report a provision of $600,000.00 and total reserves increased to $31.8 million.

At quarter end, our ratio of reserves to total loans was 94 basis points, but more importantly, the reserve coverage to BNB-originated loans was 102 basis points. These positive trends resulted in Bridge posting a first quarter return on assets of 1.13% and a return on tangible common equity of 15.2%.

We are proud of these results. I'm going to turn this over to John to take you through some of the details and together we'll take your questions.

John McCaffery -- Executive Vice President, Chief Financial Officer, and Treasurer

Thank you, Kevin. Just a couple of details on some of these financials and then we'll take questions. The margin showed modest expansion for the quarter, as Kevin said. Comparing the average and ending balances for loans, you can tell that a lot of the loan growth was back-loaded. This will give us a good platform on which to build Q2. IPC deposit growth, while modest, is net of a $45 million decrease and a large deposit that we referenced last quarter. So, again, we are making good progress there.

We are seeing overall deposit betas [inaudible]. The beta for all deposits over the last 50 basis points of debt increases, which would include the September and December increases, is slightly lower than for the past 100 basis points. We see this as a good sign and hope that it maintains.

Non-interest income benefited from an increase in our loan swap program in the first quarter, offsetting a slow start to our SBA and title businesses. Title business is typically slow this time of year in the first quarter. Our SBA pipeline is strong and we have had several closings in April already.

Non-interest expense is difficult to compare fourth quarter to first quarter because of many different things. If we look at year over year, our expenses are essentially flat. Q1 2018 to Q1 2019 was only a 4% increase in compensation since the first quarter of last year. The tax rate also increased in the last year due to the losses that we took. Our tax rate was in the high teens. In the first quarter, it was a little bit under 21% due to the tax treatment of certain restricted stocks. We had targeted 22% for the full year.

At this point, we'd like to open up the call to questions. We look forward to discussing these issues with you.

Questions and Answers:

Operator

We will now begin the question and answer session. To ask a question, you may press * then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press * then 2. At this time, we will pause momentarily to assemble our roster.

The first question comes from Alex Twerdahl with Sandler O'Neill. Please go ahead.

Alexander Twerdahl -- Sandler O'Neill & Partners -- Managing Director

Hey, good morning, guys. First off, I was wondering, John, if you could maybe give some updated commentary around how you think the trajectory of the NIM could look over the next couple quarters just given the current rate environment relative to some of the guidance you put out a month and a half ago and also relative to some of the loan growth that was pretty back loaded during the quarter.

John McCaffery -- Executive Vice President, Chief Financial Officer, and Treasurer

Sure. A couple things -- the operating environment from an interest rate standpoint is difficult. The Fed has stopped raising rates. Our C&I loans that we have growth won't be getting any lift. However, as we reorient our focus of loan growth to more C&I-based loans, they typically come with higher rates in certainly multi-family and CRE. We do have, picking up on the latter part of this year, more CRE multi-family loans that we'll be repricing up at some level. Again, as we are able to maintain our mid-30s DEA concentration, I think that will also help us on the funding side.

Alexander Twerdahl -- Sandler O'Neill & Partners -- Managing Director

So, you think the 3.27% to 3.32% NIM guidance is still reasonable for the full year, given all the things you just said?

John McCaffery -- Executive Vice President, Chief Financial Officer, and Treasurer

Yes. I think it's reasonable.

Alexander Twerdahl -- Sandler O'Neill & Partners -- Managing Director

Okay. Then I just wanted to drill in on expenses a little bit. Relative to some of the guidance earlier, it looks like you're on track to come in ahead of that. I assume that there's a number of initiatives you have going on that potentially could be backloaded in the year. Do you think we're going to seek out a steady ramp in expenses as 2019 progresses or is it going to be kind of another quarter similar to the first quarter and the second quarter with some of those expenses kind of hitting later in the year?

John McCaffery -- Executive Vice President, Chief Financial Officer, and Treasurer

So, we're pretty confident in our strategic plan going forward and the guidance we put out, but it does involve us hiring people. The C&I business is a little bit more people-intensive than the CRE business is. We have one hire so far this year. I think we're close to another one. Additionally, again, like you said, some of the other initiatives we have going on are in flight. So, we see a steady ramp for the rest of the year. So, part of it is hiring people is good news because that means business is coming in eventually.

Alexander Twerdahl -- Sandler O'Neill & Partners -- Managing Director

And then just finally maybe you can give some updated commentary on how the loan pipelines were looking at the end of the quarter just given a lot of the activity that could be backloaded in the first quarter?

Kevin O'Connor -- President and Chief Executive Officer 

We're still looking at a pipeline that's over $200 million, which is about where it was at the end of last year. We're pretty confident. We had to hire people last year that are now hitting the ground running here. So, we're comfortable here that we'll be able to achieve those growth targets.

Alexander Twerdahl -- Sandler O'Neill & Partners -- Managing Director

Great. Thank you for taking my questions.

Operator

The next question comes from Collyn Gillbert with KBW. Please go ahead.

Collyn Gilbert -- Keefe, Bruyette & Wood -- Managing Director

Thanks. Good morning, guys. Just back to the loan conversation, Kevin, you just said you were comfortable with the loan growth targets. I just wanted to get into that a little bit because I guess the growth we saw on a period-end basis this quarter was heavier than multi-family than I would have thought.

First question on it is what's the pricing that you're seeing in the multi-family paper that you're putting on? I know that broadly, I think you guys were thinking -- you said it in your prepared comments too that the mix shift is going to be geared more toward C&I as you move out to the year. So, was it an anomaly that happened this quarter?

Kevin O'Connor -- President and Chief Executive Officer 

I think in the pipeline that I'm looking at here today, I'm looking at almost $150 million of the $200 million being a combination of C&I and non-owner. So, the multi-family, I think there was sort of a build up as you got to the end of the year. What we booked in the first quarter was in the 440 range on the multi-family side, but we're certainly seeing pricing pressure there.

I guess we have term sheets added in a quarter, but then I know there are market forces taking it below four, but we are comfortable on the C&I part of this and the multi-family will be determined. We are not going to chase down the rate. I'll be honest with you. There's a certain amount of money I want to work for and we will hold to that.

Collyn Gilbert -- Keefe, Bruyette & Wood -- Managing Director

Okay. That's helpful. John, on your NIM guide, holding that at 3.27% to 3.32%, which is what you guys have provided before, I think that you have included in that guidance before one more rate hike and a curve, I think, at 10 to 2 or 2 to 10 at 50 BPs by the end of the year. Is that still inclusive of those assumptions or are we taking that out and you're just seeing better trends within the core book that's making you still comfortable with that NIM guide?

John McCaffery -- Executive Vice President, Chief Financial Officer, and Treasurer

I think given the timing of our assumption of that rate rise and the keeping of the current in our 2019 plan, there's not much of an impact on the margin for this year if those things don't happen. We can talk back and forth about how much the rate rise contributes to the loans going up. I think as the pre-multi-family loans, we have in the second half of this year come in to the price and maturity phase. That may pick up where some of the C&I liquid growth would have been. Then less pressure on deposit pricing may be offset there. So, again, I don't see at least for 2019 a large shift in our guidance based upon that.

Collyn Gilbert -- Keefe, Bruyette & Wood -- Managing Director

Okay. That's helpful. Any material changes in your outlook for accretion income? I think it came in at 385 this quarter, sort of what you're anticipating that to be in the following quarters throughout the rest of the year.

John McCaffery -- Executive Vice President, Chief Financial Officer, and Treasurer

There are no big loans that we hear about paying off or that we're looking to exit relationships. So, right now, we're just looking at it to be kind of ratable over the next few quarters.

Collyn Gilbert -- Keefe, Bruyette & Wood -- Managing Director

Okay. And then just on the deposit side, the drop in non-interest-bearing that we saw period to period, the $45 million decrease, was that in the non-interest-bearing bucket?

Kevin O'Connor -- President and Chief Executive Officer 

No. That would have been in the money market category.

Collyn Gilbert -- Keefe, Bruyette & Wood -- Managing Director

So, what was the -- I know you usually see a drop in the first quarter in non-interest-bearing.

Kevin O'Connor -- President and Chief Executive Officer 

It's seasonal. If you think about it, we've got customers that are making tax payments. We still have an East End business that this is where they draw down their excess in liquidity to basically fund their operations, build their inventory, and head into spring. It was much more announced in years when we were principally a East End bank, but there still does exist that and then you do have the impact of people paying their income taxes.

Collyn Gilbert -- Keefe, Bruyette & Wood -- Managing Director

Okay. So, you expect that to sort of rebound as the year goes on?

Kevin O'Connor -- President and Chief Executive Officer 

That has been the pattern for the last dozen years, yes.

Collyn Gilbert -- Keefe, Bruyette & Wood -- Managing Director

Got it. Okay. That's all I had. Thank you.

Operator

Again, if you have a question, please press * then 1. The next question comes from Erik Zwick with Boenning Scattergood. Please go ahead.

Erik Zwick -- Boenning & Scattergood -- Analyst

Good morning, guys. Maybe just first a follow-up on the deposit discussion. The jumbo and brokered balances were down quarter over quarter and I assume some of that is due to the recent strength you've seen on the core balances. The loan deposit ratio is up at 91% now. I guess can you just remind us of your comfort level of where you'd like to operate with that ratio. Do you think the jumbo and brokered balances will stay relatively consistent here or is there an opportunity to let some higher cost funding move off the balance sheet?

Kevin O'Connor -- President and Chief Executive Officer 

I think we continue to manage that. We're comfortable operating up to 95% loan to deposit ratio. That seems to be enough. As I'm sitting in our board room, that's a number that when I look around, everybody seems to be reasonably comfortable with. We'll continue to look at broker deposits and the jumbo deposits.

At some point in time, they become cheaper than home loan bank advances, we'll do that. That's at the margins how we manage changes in our funding. This is really a core funded company. That's the goal. We have public funds that create some seasonality too. So, you'll see we make choices about where the most efficient please is to fund, the changes in seasonality.

Erik Zwick -- Boenning & Scattergood -- Analyst

Then moving to non-interest income, I think you mentioned you already had some SBA deals closed here in 2Q. Just looking at the 1Q results, was the weakness relative to power quarter as a reflection of lower demand or did the government shut down impact at all? Going forward, the average down gains from last year, what would you expect for the remainder of 2019?

Kevin O'Connor -- President and Chief Executive Officer 

It was the government shut down. It was the government shut down and actually being able to close the loans and then sell them. Then if you think about customer behavior, every day you're reading the paper and thinking what's going to happen and the decisions about taking those loans are about building your livelihood or buying a business. It affects your psyche. So, the fact that government comes back on or comes back to work in one day doesn't make customers change their behavior, but we feel pretty comfortable as we look out and we see what the pipeline looks like and the momentum we have to get back to where we were last year.

Erik Zwick -- Boenning & Scattergood -- Analyst

Got it. Lastly, I think part of your strategy is to add scale in Nassau County. Can you update us on any plans to add any branches or bankers there this year? I think you mentioned you added one banker already. Was that in Nassau County?

Kevin O'Connor -- President and Chief Executive Officer 

Yes, it was. Actually, it's a combination of we had something in the middle market side. It was a little bit larger credit, but we've also added somebody to work with our branch managers and our branches to do this business banking that we have always done. So, we feel very comfortable there. It is a work in progress, but it is a focus of ours and we feel comfortable that we should be able to do that. Every time I think the market is going to stop giving us opportunities, it does. So, I believe that will be achievable.

Erik Zwick -- Boenning & Scattergood -- Analyst

And no immediate plans to add branches, it sounds like. I think from previous discussions, you'd like to add banks --

Kevin O'Connor -- President and Chief Executive Officer 

You look at the footprint we have, I think we're in all the places we need to be, I think it's leveraging that real estate.

Erik Zwick -- Boenning & Scattergood -- Analyst

Great. Thanks for taking my questions.

Operator

Next, we have a follow-up question from Collyn Gilbert with KBW. Please go ahead.

Collyn Gilbert -- Keefe, Bruyette & Wood -- Managing Director

Thanks. Sorry, guys. If you covered it in your prepared remarks, I apologize. But just on the reserve and provisioning, are you guys still targeting -- what did you say in the past -- 50-70 BPs on new loans in terms of provisioning? How should we be thinking about it? The reserve to loans has steadily been coming down over the last five quarters. I'm just wondering if you anticipate that trend to continue.

John McCaffery -- Executive Vice President, Chief Financial Officer, and Treasurer

I think based on how our model has been running based upon the loans we've been adding, you put things in one end and the 10-Q has been drifting down, like you said, over the past five quarters. So, we see that continuing given no other outside changes.

Collyn Gilbert -- Keefe, Bruyette & Wood -- Managing Director

Okay. Thanks.

Operator

This concludes our question and answer session. I would like to turn the conversation back over to Kevin O'Connor for any closing remarks.

Kevin O'Connor -- President and Chief Executive Officer 

Before we end the call, I want to take a moment to acknowledge our BNB team, many of whom are actually shareholders and are on the call. The success of our organization is based on the commitment they make to grow the company. They're really the primary drivers of success. As a shareholder, I appreciate everything they do. I want to take the time to thank them. I also want to think everybody who participated in this call and for your interest in our company and our story. Thank you and have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 23 minutes

Call participants:

Kevin O'Connor -- President and Chief Executive Officer 

John McCaffery -- Executive Vice President, Chief Financial Officer, and Treasurer

Alexander Twerdahl -- Sandler O'Neill & Partners -- Managing Director

Collyn Gilbert -- Keefe, Bruyette & Wood -- Managing Director

Erik Zwick -- Boenning & Scattergood -- Analyst

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