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Edited Transcript of BDGE earnings conference call or presentation 24-Apr-19 2:00pm GMT

Q1 2019 Bridge Bancorp Inc Earnings Call

BRIDGEHAMPTON Apr 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Bridge Bancorp Inc earnings conference call or presentation Wednesday, April 24, 2019 at 2:00:00pm 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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* Alexander Roberts Huxley Twerdahl

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Collyn Bement Gilbert

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

* Erik Edward Zwick

Boenning and Scattergood, Inc., Research Division - Research Analyst of Northeast Banks

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Presentation

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Operator [1]

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Good morning and welcome to the Bridge Bancorp First Quarter 2019 Earnings Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Kevin O'Connor, President and CEO. 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. 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 express their appreciation for the call, and actually, with their advice, we also added some additional disclosure in our press release. I'm again pleased to be able 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 the results and general market conditions.

The first quarter of each year always goes by fast. It's a mix of finalizing prior year results, dealing with the auditors and other year-end issues, all while 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. Each year comes with different challenges and opportunities and 2019 is no different, and 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 achieving a 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 advisers who recommend and sometimes sell BNB to their clients. We remain focused on credit, processing and 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 a positive operating leverage. It's a somewhat simple business model, but it's again translated into strong financial returns and the 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 a year-over-year core deposit growth. Most importantly, an increasing net interest margin. This translates into 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 at 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 type of relationships come with core deposits as we become, in many cases, the customers' primary bank.

The funding side of the balance sheet, while improving sequentially, has given certain seasonality best [unit] on a year-over-year basis. Our total IPC deposits, more simply, the deposits of individuals and businesses, increased over $400 million or 16% from a year ago, with DDA representing 40% -- 42% of these types of deposits. Additionally, over that same time frame, wholesale liabilities, including FHLB advances and brokered deposits, decreased over $300 million. The strong quarterly growth in loans offset by an expected net decline in certain public and brokered 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 and ever flattening yield curve, we again experienced growth in our net interest margin as increases in loan yields and continued DDA 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, is 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 is at 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 are 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 on the 30- to 59-day delinquencies were related primarily to 2 specific relationships: 1 relationship was resolved with the loan paying shortly after quarter end; and the other relationship, the property in question is in contract with anticipated closing sometime in Q2 and Q3. Net charge-offs were minimal, but with the growth of loans reported provision of $600,000, and total reserves increased to $31.8 million. At quarter end, our ratio reserve 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, and I'm going to turn it over to John to take you through some of the details and together, we'll take your questions.

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

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Thank you, Kevin. So just a couple of, I guess, details on some of these positive financials, and then we'll take questions. The margin shows modest expansion for the quarter, as Kevin said, comparing the average in ending balances for loans, you can tell, that a lot of the loan growth was backloaded, so this will give us a good platform on which to build Q2. IPC deposit growth, while modest, is net at a $45 million decrease in the large deposit that we referenced last quarter. So again, we are making good progress there. We are seeing overall deposit betas moderate. The beta for all deposits over the last 50 basis points of Fed 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. Noninterest income benefited from the increase in our loan swap program in the first quarter, offsetting the slow start to our SBA and (inaudible) businesses. (inaudible) business is typically slow at 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 our fourth quarter to the first quarter because of many different things, but if you look at year-over-year, our expenses are especially 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 from 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 and we are targeting 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Alex Twerdahl with Sandler O'Neill.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [2]

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First off, I was wondering, John, if you can maybe give some updated commentary around how you think the NIM could -- how the trajectory of the NIM could look over the next couple of quarters, just given the current rate environment relative to some of the guidance you put out a 1.5 month ago, and also relative to some of the loan growth that was pretty backloaded during the quarter?

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

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So a couple of things. You're right, the operating environment from an interest rate standpoint is difficult. We do have -- the Fed has stopped raising rates. Our C&I loans that we have booked 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 than certainly multifamily and CRE. We do have, picking up in the latter part of this year, more CRE multifamily loans that we'll be repricing up some level. And again, as we are able to maintain our mid-30s DDA concentration, we think that will also help us on the funding side.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [4]

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

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

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Yes, I think it's reasonable.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [6]

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Okay. And then I just wanted to drill in on expenses little bit. Relative to some of the guidance earlier, it looks like you're on track to kind of come in ahead of that. I assume that there's a number of initiatives that you have going on that potentially could be backloaded in the year. Do you think we're going to see kind of 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 as some of those expenses are kind of hitting later in the year?

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

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So we have a pretty -- we're pretty confident in our strategic plan for incorporating the guidance we put out but it does involve us hiring people. The C&I business is a little more people-intensive than the CRE businesses, and we have made at least 1 hire so far this year, I think we're close to another one. Additionally, some of the -- 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 the people is good news because that means business is coming in eventually.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [8]

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

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

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

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Operator [10]

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The next question comes from Collyn Gilbert with KBW.

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

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Just back to the loan conversation, and Kevin, you just said you were comfortable with the loan growth targets. Just want to dig into that a little bit, because, I guess, the growth that we saw on a period-end basis this quarter was heavier on multifamily than I would've thought. First question on it is, what's the pricing that you're seeing in the multifamily paper that you're putting on? I know that broadly, I think you guys were thinking, and you said it in your prepared comments too, that the mix shift is going to be geared more towards C&I as you move out through the year? So was it an anomaly that happened this quarter? And then -- yes, let me stop there.

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [12]

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Yes. So I mean I think in the pipeline that I'm looking at here today, I'm looking at probably almost $150 million to $200 million being a combination of C&I and non-owner. So multifamily, I think there was sort of a build up as you got towards the end of the year. What we booked in the first quarter was in the 4.40 range on the multifamily side, but we're certainly seeing pricing pressure there. I guess, we have term sheets added 4.25 and then I know there was market forces that are something taking it below 4. But we are comfortable on the C&I part of this and the multifamily will be determined, as -- we are not going to chase down the rate, I'll be honest with you. There's a certain amount of money that I want to work for and that we will hold to that.

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

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Okay. Okay, that's helpful. And then John, on your NIM guide, holding that at 3.27% to 3.32%, which is what you guys have provided before, I think you had included in that guidance before one more rate hike and a curve, I think a 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 feel comfortable with that NIM guide?

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

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I think given the timing of our assumption on that rate rise and steepening of the curve in our 2019 plan, there's not much of an impact on the margin for this year if those things don't happen. So we can talk back and forth about the -- how much the rate rise contributes to the loans going up but I think that as the pre-multifamily loans we had in the second half of this year come into the new pricing maturity phase, that may pick up where some of the C&I lift would go -- would've been, and 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.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [15]

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Okay. Okay, that's helpful. And any material change in your outlook for accretion income? I think it came in at, was it 3 85 this quarter, and sort of what you're anticipating that to be in the following quarters throughout the rest of the year?

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [16]

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No we don't have -- there's 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.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [17]

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Okay. Okay. And then just on the deposit side. So the drop in non-interest-bearing that we saw period to period -- I'm sorry, you may have said this, was that the $45 million decrease, was that in the non-interest-bearing bucket of the...

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [18]

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No. That would've been in the money market category.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [19]

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

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

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

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [21]

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

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

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

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Operator [23]

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(Operator Instructions) The next question comes from Erik Zwick with Boenning and Scattergood.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Research Analyst of Northeast Banks [24]

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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 just due to the recent strength you've seen on the core balances. But the loan-deposit ratio is up at 91% now. I guess, can you just remind us kind of your comfort level of where you like to operate with that ratio and do you think the jumbo and brokered balances will stay relatively consistent here or is there more opportunity, like potentially some higher cost funding to move off the balance sheet?

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [25]

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I mean, I think we continue to manage that. I mean, we're comfortable operating up to 95% loan to deposit ratio, that seems to be a number that, as we said, as I'm sitting in our boardroom, that's the number that when I look around, everybody seems to be reasonably comfortable at, as am I. And we'll continue to look at sort of broker deposits and the jumbo deposits. I mean, if at some point in time they become cheaper than home loan bank advances, we'll do that. I mean that's just -- that's a margin, how we manage sort of the changes in our funding. But this is really about a core -- this is a core-funded company, that's the goal. And we have public funds that create some seasonality too. And so you'll see -- we make choices about where the most efficient places to fund that -- the changes of seasonality.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Research Analyst of Northeast Banks [26]

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And then moving to non-interest income, I think you mentioned that you've already had some SBA deals close here in Q2. Just looking at the 1Q results, was the weakness relative to prior quarters a reflection of lower kind of demand, or did the government shutdown impact at all? And then I guess, going forward, should be thinking that kind of the average rate of gains from last year is what you would expect for the remainder of 2019?

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [27]

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I mean, it was the government shutdown. It was the government shutdown in actually being able to close the loans and then sell them. And 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, and turns -- basically 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 go back -- to get back to sort of where we were last year.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Research Analyst of Northeast Banks [28]

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Got it. And then maybe just lastly, 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 1 banker already, was that in Nassau County?

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

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Yes, it was. And then we have added -- actually -- and we added, it's a combination of we added somebody in the middle market side, which is a little bit larger credit, but we've also added somebody to work with our branch managers in our branches to do the sort of the business banking that we have always done. So we feel very comfortable there. It's 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.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Research Analyst of Northeast Banks [30]

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

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [31]

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Yes. It's funny, as we look -- if 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.

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Operator [32]

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

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

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If you covered it in your prepared remarks, I apologize. But just on the reserves and provisioning, are you guys still targeting -- what is included did you say in the past, 50 to 70 bps on new loans in terms of provisioning, right? Or how should we be thinking about it? I know there -- the reserve to loans have steadily been coming down over the last 5 quarters. I'm just wondering, yes, if that -- you anticipate that trend to continue?

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

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I think just based upon how our model has been running based upon the loans we've been adding, just kind of -- you put things in one end and this level is impacted and tends to -- have been drifting down like you said, over the past 5 quarters. So we see that continuing given no other outside changes.

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Operator [35]

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This concludes our question-and-answer session. I would 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 [36]

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Before I end the call, I want to take a moment to acknowledge our BNB team. Many of them are actually shareholders and are on the call. I mean, the success of our organization is based on the commitment that they make to grow the company. They're really the primary drivers of our success. And as a shareholder, I appreciate everything they did. So I just wanted to take the time to thank them, and I also want to thank everybody who participated in this call and for your interest in our company and our story. So thank you, and have a great day.

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Operator [37]

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