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Edited Transcript of BDGE earnings conference call or presentation 29-Jan-19 3:00pm GMT

Q4 2018 Bridge Bancorp Inc Earnings Call

BRIDGEHAMPTON Jan 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Bridge Bancorp Inc earnings conference call or presentation Tuesday, January 29, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Martin McCaffery

Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer

* Kevin M. O'Connor

Bridge Bancorp, Inc. - President, CEO & Director

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Conference Call Participants

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* Collyn Bement Gilbert

Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst

* Jeffrey Scott Kitsis

Sandler O'Neill + Partners, L.P., Research Division - Associate

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Presentation

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Operator [1]

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Good day, and welcome to the Bridge Bancorp Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

At this time, I'd like to turn the conference over to Kevin O'Connor, President and CEO of Bridge Bancorp. Please go ahead.

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [2]

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Thank you. Good morning, and welcome. Again, thank you for joining and tuning into our conference call. I see by the number of analysts on here, this is probably your -- I know it should be dozenth or your 20th call, so we'll try to make it at least interesting.

I want to thank you, again, for tuning in. The goal today will basically -- I'll talk to you personally, provide an overview of our business, the context behind the performance and some insight and discussion on strategies. I'm going to be joined by our CFO, John McCaffery. Between us, hopefully, we can answer some of your questions regarding results and some of the general market conditions.

As always, each year provides challenges and opportunities. We believe our results for the year and certainly for the fourth quarter reflect our ability to recognize these opportunities, anticipate the challenges and maintain a course to deliver results as we've done over the last dozen years.

We do this because of the underlying strength of our franchise and our commitment to a community banking model. We focus on seeking and building commercial relationships. These provide invaluable core funding, profitable lending opportunities, and as importantly, access significant numbers of successful business owners and entrepreneurs. It's really about the partnerships we've developed. We know these relationships, along with a strong network of advisers and influencers like accountants and insurance people and attorneys, allows us to leverage our current success into new opportunities. Bridge has also demonstrated strong credit discipline and adherence to maintaining control of core expenses, allowing us to create operating leverage.

This has translated into strong financial returns and a continued expansion of our franchise. I'm going to leave it to John to discuss in detail some of the financial items, where we'll want to highlight some of the full year and fourth quarter trends and results. The full year, exclusive of our second quarter portfolio restructuring and the previously disclosed fraud loss, show BNB achieving net income of almost $53 million or $2.66 per share, and in the fourth quarter, almost $14 million and $0.70 of EPS.

During the year, we continued a decade-long trend of strong deposit growth, and as importantly, a maintenance of above-peer DDA mix. Deposits grew almost $500 million this year, a 17% annual increase, and DDA still represents 37% of the total. Loan growth, however, a little bit more modest at 7%, as in parts of the year, market pricing for certain asset types was challenging and it didn't make sense for us to continue to add assets where we felt there was no incremental returns.

However, during the fourth quarter, we saw increased deposit velocity with annualized double-digit increase in both loans and deposits. At times, I always feel that numbers need to be personalized, as for us, we think about each of these loans and deposits as individual customers making a decision to bank with us.

It's really someone choosing BNB as their bank, and as importantly, a BNB Bank or someone they trust with their financial affairs. This improved funding and again the decision to exit low-yielding investment securities allowed us to reduce our wholesale borrowings and very importantly left BNB as one of the few community banks with a loan-to-deposit ratio below 100; in fact, we ended at 84% this year. This allows us to maintain pricing discipline on deposits, and we think heading into 2019, provide opportunities for future margin expansion, as we can just deploy these low-priced core funds into higher yielding loans.

Throughout the year, we saw modest increase in net interest margin and this, coupled with asset growth, provided over 8% in increase to net interest income. Again, I'm going to turn to John to give specifics on our margin and the trend a bit, but I would just say, our core margin throughout the year was in an upward trajectory. The economy, specifically on Long Island, remained strong. Unemployment at historically low levels, in fact, anecdotally, we have heard customers basically saying that they're curtailing their business growth because they could not find the employees, which is an interesting dilemma. And despite the noise out of Washington and shutdowns and tariffs, our customers remain optimistic and believe me, I have tried to extract from them where they're worried. This has translated into strong network metrics and in fact, during the year, we were able to reduce our Taxi Medallion portfolio in half with only modest haircuts on the underlying loans.

On some future things, we continue to be excited about our SBA business. We've become the #1 lender on Long Island in this space and actually cracked the top 100 nationally. We're especially pleased to know we've been able to integrate SBA opportunities to traditional community banking relationships. We don't do a lot of small loans. We definitely do some larger loans, but we do them packaged as part a whole relationship. In fact, it's especially gratifying to see one of the former community national SBA customers, he's actually grown into one of our largest and most successful customers.

Operating expenses, despite our growth objectives and continued investment in people, remain controlled. And our efficiency ratio remains in the mid-50s with operating leverage around 190 basis points. We believe we'll see modest growth in 2019 on these as we continue to be optimistic by adding talented bankers, while also being mindful of required investments in technology and people to control risk and remain relevant in the future.

The culmination of all these positive actions and outcomes resulted in us posting fourth quarter returns on assets in excess of 1.2% and return on tangible common equity exceeding 16%. We are proud of these results, and now I'm going to turn it over to John to take you through some of the details. Together we'll take your questions. Again, I want to thank you again for your participation in this call and for your interest in Bridge and our story.

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [3]

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Good morning. Thank you, Kevin. I just want to drill down in the margin for a minute before we get to questions, just to make clear of some of the things Kevin had said and pick up some of the trends he spoke about as it relates to the margin, what we did in this year, and why we're confident about 2019 and the margin.

Fourth quarter margin increased year-over-year on a reported and adjusted basis. The adjusted basis is just removing the purchase accounting. Our quarter-over-quarter margin showed contraction due to lower levels of purchase accounting accretion and traditionally, as we spoke about in the press release, we had a very large deposit coming from a customer in December. We believe he didn't make any money on that deposit, but it was here through the end of the year. So it had an effect of depressing the margin by approximately 3 basis points. So picking up from what Kevin said, our core margin throughout the year really had held steady, while we were able to grow the balance sheet modestly.

So as the effective purchase accounting wanes, our underlying business is picking up and should support -- should be able to support an expanding margin. We expect our deposit pricing pressure to stay as the Fed seems to have paused in its rate rise, and since we have a low loan-to-deposit ratio, we won't be feel as much pressure to compete for the last deposit dollar. Additionally, we do have a core community bank, commercial bank loan book, where we have $600 million of loans that are floating and approximately $600 million of loans that will be repricing or maturing during the coming year. So given all those items put together, we feel like 2019 is teed up pretty well for us to go forward. So I'm happy to take your questions now regarding any other aspects of the fourth quarter and full year earnings.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today will come from Alex Twerdahl of Sandler O'Neill.

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Jeffrey Scott Kitsis, Sandler O'Neill + Partners, L.P., Research Division - Associate [2]

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This is Jeff Kitsis on for Alex this morning. First question, I was wondering if you foresee any expense initiatives for 2019, similar to the branch reduction we saw last year or the recent back-office consolidation?

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [3]

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I would say there is no big plans, efforts on that side. I mean, I think we've continued to look at the branch network, but I don't see wholesale closures, and again, I think what we did in the fourth quarter consolidating the back office and consolidating the operations should see us through to the future.

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Jeffrey Scott Kitsis, Sandler O'Neill + Partners, L.P., Research Division - Associate [4]

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And next question, I was wondering if you can give us an update on the loan pipelines and outlook for 2019? In the past, you've said that loan growth would depend on deposit growth. You cited the accelerating loan growth in the end of 2018. Now the loan-to-deposit ratio is down 9 percentage points to 84%. So is that still the case that loan growth will depend on deposit growth, or no?

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [5]

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Loan growth and deposit growth, especially in the C&I side, are interrelated. They kind of ebb and flow, but they're connected directionally. So currently the pipeline is very strong. The weighted average rate of loans in that pipeline is about 5.62%. It really is across all the different asset classes.

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [6]

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What's -- what occurred is really in the second half of '17. We brought a middle market team on, and we sort of added to that. We're really seeing tremendous momentum there. It feels once a month, we are closing a sizable relationship and the pipeline in the future for that looks very strong. So as you can see, C&I loans combination of owner-occupied and C&I direct loans exceed 40% of the loan portfolio. So, again, very optimistic as we look forward.

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [7]

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45% of the loans we added in the fourth quarter were C&I loans.

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Jeffrey Scott Kitsis, Sandler O'Neill + Partners, L.P., Research Division - Associate [8]

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Got it. The last question I had for you, you talked about deposit costs in the market have seen pressure, but with the 84% loan-to-deposit ratio, that deposit pressure could abate in 2019. I was wondering, just drilling down into the 4Q move that we saw, did the increases -- and in 3Q as well, did the increases over those quarters reflect more of a catch-up and repricing of the current book? Or are they -- or are the higher costs reflective of new money coming in through promotions?

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [9]

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More new money -- new money, I think it's new money. I think, we obviously -- we saw in the earlier part of the year, it seemed every time we got together to talk about rates, they were up 50 basis points and sort of the offering. We talked about the headline Capital One, and that seems to have abated as we headed into the fourth quarter. But I think all of us have adjusted to that and again, the loan-to-deposit ratio today will allow us to be more disciplined.

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Operator [10]

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And our next question will come from Collyn Gilbert of KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [11]

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John, if we could just start by just breaking down the NIM a little bit more? So I'm sorry, can you -- you said that in the fourth quarter, the large deposit relationship that came in -- excuse me, towards the end of the quarter, compressed the NIM by 3 bps, is that what you said?

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [12]

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Yes.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [13]

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Okay. And -- but so that's obviously a customer that came in at a higher cost, so that's going to stay -- that's going to stay in the bank. So as we think about the NIM going -- oh sorry, go ahead.

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [14]

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So, I mean, a large amount came in, it was around for a few weeks. By the end of the year, about half of it was -- that $90 million was still in the bank at the end of the year. About twice that came in sometime in early December. So the intention is -- this is a customer of ours. They sold their business and they intend to continue working with us, so some of that money will stick around in some capacity for a while.

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [15]

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And we hope to participate them in new ventures.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [16]

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Okay. So but your outlook -- so the outlook for the core NIM for 2019 is for expansion, is that correct? Is that what you're saying?

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [17]

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Yes, I'd say, it's slight expansion or just, look, we're able to grow the balance sheet 10% and still hold the margin where it is in general. So that's pretty good.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [18]

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Okay. And so on the asset side, you commented on the C&I growth that came in and then what the weighted average yield was on the pipeline. Because I guess that was one -- that's one thing that's kind of struck me is that we haven't -- it doesn't look as if the loan yields have expanded quite as much as I would have thought throughout the year with higher rates and I know some of that is accretion. But are you seeing the mix shift be materially different as like the later part of the year versus what you saw in the earlier part of the year to kind of drive what I'm assuming you're expecting to be higher asset yields going forward?

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [19]

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Yes, so we're seeing -- certainly, there's a mix of loans we closed in the second half of the year, improved that with more C&I loans. I think we shrunk in the fourth quarter multifamily. So that, coupled with the -- the Fed rate increases certainly help the C&I loan just price up the way it would have anyway. So, but yes, the loan...

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [20]

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Loan yields are up almost 25 basis points over the course of the year.

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [21]

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Right.

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [22]

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Including purchase accounting.

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [23]

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Right.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [24]

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Yes, okay. Okay, and then...

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [25]

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And again, there's more room to run there on the loans that haven't been repriced. Yes, the longer term commercial real estate loans that are coming up for repricing over the next couple of years.

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [26]

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For us, like a lot of other people that originated loans in '15, '16, '17, there's still loans on our books in the high-3s to low-4s that given current market rates, we're not going to say they're going to go to the home loan bank close to 50, but if they just repriced the market, there's upward trajectory there.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [27]

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Okay, that's helpful. And then, what should we assume, John, for accretion income for '19?

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [28]

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I would probably put that less than a couple of million dollars for the whole year. I mean, it depends upon if a big chunk of your loan comes in, it matures, it gets paid off, that can -- that's what happens. Just ratably it kind of goes through 2024.

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [29]

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Fair to say the big part of that, to be honest.

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [30]

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Yes.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [31]

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Yes, okay. Got it. And then, just back to growth. So the pipeline is good, you're optimistic about growth going forward. Kevin, you kind of just threw in there -- or conversation, 10% balance sheet growth with stable NIM or whatever. Is that -- I mean, from a loan -- just to try to tie it a little bit tighter to the loan growth outlook, do you -- are you guys expecting loan growth to accelerate in 2019 relative to what you put up in '18?

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [32]

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I'm much more comfortable with where we had the trajectory of the fourth quarter that was a 10% annualized rate. I think we actually can exceed that in 2019.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [33]

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Okay. That's helpful. And then...

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [34]

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No, no. I think -- I will just caveat that just to understand that as long as there's rational pricing of some of the asset classes that we're participating, I'm not going to chase 4% money multi-family loans. But I think as long as there's rationality in our marketplace, I do get focused certainly on the commercial side. We feel very comfortable about the momentum we have there as continuing.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [35]

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Okay, that's helpful. And then, John, was there anything unusual in either the operating expense or fee lines this quarter that we should be backing out going forward?

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [36]

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No, I don't think so. I mean, there was -- we had a couple of below-the-line items to point I don't think were kind of offsetting. So first quarter, we always get a little bit of a pop in expenses just because of FICA, people's raises that come in and stuff. But we had some initiatives planned for this year, but nothing is going to be happening in the near term.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [37]

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Okay. And then, so then if we were to think about the growth rate of operating expense now with the benefit of a lot of the initiatives you guys have put in place last year, how should we think about the operating expense growth in '19?

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [38]

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I'm thinking around 5%.

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Operator [39]

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(Operator Instructions) Our next question will come from [Garrett Breeland] of Alex. Brown.

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Unidentified Analyst, [40]

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The people that have preceded me are qualified analysts and have covered all the questions that I wanted to ask. However, I did want to echo the young lady who just thanked you for putting this call up. It is incredibly helpful to people like myself who manage portfolios, albeit they small, and have substantial holdings in the stocks to be able to participate in a call like this. So Kevin, thank you very much for it. Having said all that, I would like to ask one question of a broad sense. And that is, having had the experience now of the last 4 or 5 quarters of a number of unexpected events, can you give us a broad sense of how the oversight has changed, what you've implemented as a result of some of the outside counseling you've gotten in just a few brief sentences, Kevin?

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [41]

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No problem. Garrett, again, thanks for participating and I always appreciate the kind comments and questions. I think, I'll -- the -- it goes back to the fourth quarter of 2017, with the large credit loss in there, we have talked about sort of identifying contactor portfolio and bringing somebody on with great experience to really lead that effort because banking on Long Island, you cannot avoid contractors as a customer and it just a matter how you do it appropriately. So I think we've responded there to the, I think, the -- the restructuring of the investment portfolio was a prudent way to really manage the net interest margin of the organization and acknowledge that at certain times, leveraged trades make sense, sometimes they don't. On the bigger issue, on the fraud loss, that is -- that was obviously something that shook the organization to the core. I think that we were quick in our responses to change people, policies, procedures. The board took this very seriously as did management. We had some operational functions that were still housed under revenue producers, and we've moved that. We really had -- assessed all the people we have in the organization to make sure they're in the appropriate jobs. And so this was a call to arms and we did it and I think that we moved, and I think we're in a better place for it. It's not something that we'll ever forget and we live with every day, and I'll just say that one of the other challenges is to make sure that it doesn't become the focus of too much so that we forget what our job is, deliver results and returns for you. So try to balance that risk management and that process with the understanding that we are in the business of making money and delivering results. So it's something we think about every day and have changed accordingly and will continue to work toward delivering results for you.

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Operator [42]

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Our next question is a follow-up from Collyn Gilbert of KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [43]

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I guess, I just can't get enough of these calls that I got to come back into the queue. Just one final question, just what tax rate should we be assuming for '19?

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [44]

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We're going with 22%, Collyn.

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Operator [45]

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And ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Kevin O'Connor for any closing remarks.

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [46]

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Again, I want to thank everybody for participating. This was something that we decided very recently to actually do it. We have debated it and feel that this is a good opportunity to communicate with you, our shareholders and investors. We'll be holding these quarterly now, and again, sort of using this as an opportunity to get behind the numbers and give you sort of strategies and thoughts of how we get there. So again, I want to thank everybody that called in. This isn't your last chance to ask a question. If you have another question, you all know John McCaffery's phone number. So again, have a great day and look forward to catching up. Thank you.

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Operator [47]

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The conference has now concluded. And we thank you for attending today's presentation. You may now disconnect your lines.