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Edited Transcript of BDGE earnings conference call or presentation 24-Jul-19 1:00pm GMT

Q2 2019 Bridge Bancorp Inc Earnings Call

BRIDGEHAMPTON Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Bridge Bancorp Inc earnings conference call or presentation Wednesday, July 24, 2019 at 1:00:00pm 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 - Director and 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 Second Quarter 2019 Earnings Conference 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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Good morning and welcome. Thank you again for joining us on the second quarter earnings call. We appreciate again your taking the time to listen and, again, appreciate the feedback we received this quarter on our results and this method of communicating. As always, we continue to add and refine disclosures to make our releases more topical and informative. I'm again pleased to provide an overview of our business, discuss certain aspects of our performance and give some color on some of the strategic challenges and direction we're taking.

I'm joined on our call by John McCaffery, our CFO. Between us, we hope to answer your questions regarding the results and general market conditions.

Although we're disappointed our net income this quarter declined from the 65% -- $0.65 per share recorded in Q1 to $0.53 per share, we remain optimistic and positive about the core trends in our businesses. Customer relationships continue to expand in -- both in our traditional markets and as -- more importantly, really, in our western markets that we target as opportunities.

This business expansion further strengthens our balance sheet. Year-to-date, there has been strong across-the-board loan growth, and we've reduced holdings of lower-yielding securities. And as always, these new customer relationships provide core deposits, allowing us to continue to reduce reliance on higher-costing, more volatile liabilities.

We've stabilized the margin with asset yields keeping pace with the increased funding costs. Obviously, this is occurring against a backdrop of a flattening curve and highly competitive market forces, this quarter probably more so on the asset side than on the liability side.

And finally, we have several diversified product offerings, which enhance our ability to create fee income opportunities, swaps and SBA gains. These are products and services our customers need and want.

With that as a backdrop, I'll highlight some of the 2019 trends and results. Again, we posted EPS of $0.53 per share with a posted ROA of 90 basis points and ROE of 9.06%. This included about $0.12 of provisions related to the charge down of 1 specific loan to a not-for-profit entity.

The loan is collateralized by the mortgage on the facility the organization operates, and honestly, we believe the best course of action was to identify it as held for sale and seek on the -- help identify the mortgage as held for sale and seek all remedies for repayment. Results excluding this would've reflected an ROA of -- and an ROE of 1.09% and 10.9%, respectively, and our return on tangible common equity would've been 14.5%.

Driving down into these results, we see positive trends on loan originations and net loan growth spread across almost all categories. Year-to-date net loan growth was 9.5% on an annualized basis as we originated and closed almost $500 million of new exposure. However, offsetting this has been significant paydowns and we've had several clients sell businesses, and we've lost a number of loans due to pricing.

On the funding side, we see continued growth in core IBC -- IPC deposits, which grew at an annualized rate of 13% with the DDA component of these deposits growing over 7%. This put our ending DDA as a percentage of IPC deposits at a very strong 43%.

Again, our net interest margin remained strong at 3.3% and increased quarter-over-quarter as we posted record net interest income of $35.5 million. We continue to see an increase in asset yields, and on a linked quarter basis, loan yields increased 10 basis points offsetting declines in the securities yield. The cost of interest-bearing deposits increased, but the DDA growth we've spoken about and the change in the mix somewhat muted the impact, and I'll let John cover this in more detail.

With a loan-to-deposit ratio of 89%, we're again positioned as one of the few community banks with a loan-to-deposit ratio below 100%. This, we believe, will provide us the flexibility to aggressively manage our deposit pricing in what appears to be a declining rate environment. We're already seeing a lot of the national players reduce rates. And we had an occasion yesterday, just had an economist come in and speak to our Board and our customers, and he is seeing that trend across the board also.

At this time, I'm going to turn this over to John to discuss in greater detail specifics on our margin, other income and expense and capital. And together, later on, we will answer whatever questions you have.

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

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Thank you, Kevin. So I'll walk through some of the details on the financials. On the balance sheet, as Kevin mentioned, year-to-date loan growth in our loans held for investment was almost 9.5% on an annualized basis.

While this is below our current guidance, the growth is affected by several large payoffs, moving the charged-off loan to held for sale and a slowdown in multifamily originations. We are adjusting our guidance on annual growth in the loans to 10% to 12%, down from 12% to 14%.

While Kevin covered the IPC deposits, I want to talk about total deposits just for a little bit. While total deposits are down slightly year-to-date, this is a function of seasonal public deposit outflow as well as the reduction of brokered deposits. The year-to-date increase in brokered deposits is about the same as the decrease in the investment portfolio plus interest-earning deposits with banks as we deleverage the low and negative spread components of our balance sheet.

Speaking of the margin, although up 1% from last quarter, there was some pressure from the investment portfolio as increased cash flows and mortgage-backed securities caused an increase in premium amortization quarter-over-quarter.

We also took the opportunity during the quarter to sell about $50 million in negative carry bonds, using the proceeds to reduce our reliance on brokered deposits.

Loan yields were supported by originations in the quarter of $165 million at an average coupon of 4.98%. Payoffs were $84 million at 4.2%. These numbers do not include the effect of revolving lines of credit flows.

IPC deposit yields were up 7 basis points sequentially and total interest-bearing deposit yields were up 5 basis points. Including DDA in these deposits, the total cost of deposits quarter-over-quarter was up only 2 basis points from 85 to 87 basis points. Our community banking model continues to help us keep funding costs under control.

As Kevin said, we are poised to aggressively lower rates in deposits if the FOMC, as expected, lowers the Fed funds target rate next week. Our interest rate in this model directionally show our margin increasing in the short term under falling rate scenarios. To some extent, the shape of the yield curve will determine the outcome, so we are focused on all levers at our disposal. Our previous guidance of margin of 3.27% to 3.32% will hold in the short term.

On credit, obviously, the biggest part of the credit story is the charge-off of an owner-occupied commercial real estate loan to a nonprofit. Although the charge-off was $3.7 million, the net impact of the provision was $2.9 million.

Past due loans quarter-over-quarter dropped from $18 million to $3 million. This was due in part to a large relationship becoming current during the quarter.

Nonperforming loans increased from $3 million to $5.5 million. This increase was due to 2 residential loans totaling $1.9 million and 1 investor commercial real estate loan of $500,000.

Our allowance to total loans is 91 basis points, and our allowance to BNB-originated loans is 98 basis points. The quarterly drop in coverage is partially attributable to the release of reserves associated with the charge-off loan. We are currently testing our CECL model but have no guidance at this time.

Noninterest income. Adjusting for gains and losses on securities, noninterest income was up 11% for the first 6 months of 2019 versus the same period in 2018. As we continue to diversify our noninterest income sources, we saw a quarter-over-quarter increase in SBA income plus there's a drop in loan swap fees. This is our goal in diversifying our sources of noninterest income.

Noninterest expense was up quarter-over-quarter $1.4 million or 6% sequentially. The second quarter includes increased marketing spend targeting competitors' branch closures, seasonal increases in charitable donations, catch-up adjustments on FDIC assessments and some hiring-related expenses. We are reassessing some expansion plans in light of the rate priming. We believe that our total other expense number will remain in the $24 million range per quarter, in line with our previous guidance of $93 million to $97 million for the year.

Capital. Capital ratios all remain strong. Tangible book value per share and tangible common equity have benefited from improving OCI marks due to lower rates with TCE increasing to 7.9% and tangible book value per share up to $18.41.

We did step in to support our stock during the quarter, purchasing 11,400 shares at an average price of $28.15. We will continue to purchase shares under our existing authorization when we think conditions call for it.

That's all I had. We are ready to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Alex Twerdahl of 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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Just first off, I was wondering if you can maybe give us just a little additional color on the sort of the one-off loan. I know you said it was a not-for-profit commercial real estate mortgage, but maybe you could sort of share a little bit more about maybe what happened during the quarter and get us comfortable to the fact that it really is a one-off situation.

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

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It's a relationship we've had for a number of years. It came to us through contacts at another not-for-profit that we had. It was -- they have struggled to grow into the facility they constructed. They reached out to us, and honestly, we're involved in the credit with several of the founding members of the organization and they are existing debt holders, too.

The loan is actually current at this moment, but we recognize they're having some issues and it makes sense for us to identify this as a strategy as it relates to that. Sorry for being a little circumspect. We're sort of in negotiations to try and move this along, but this is not indicative, it's not related to any sort of governmental funding. It's not an educational loan. It's a museum, honestly.

And so we thought that we were involved with an organization that had strong support and that has not materialized at this point. So we don't have a lot of these not-for-profit funds in our portfolio that look like this, and we really do feel like this is a unique situation.

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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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Okay. And this is -- the $3.7 million charge-off is a pretty aggressive mark on it at this point? There's -- foresee there being a possibility of additional charges coming down the line in the future?

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [5]

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We feel that it is, and we are strongly discussing just at this point on exiting this credit so that we move on from it.

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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. All right. And then getting back to the loan growth, John, you updated the guidance to kind of 10% to 12% I think you said. You are at 4.7% for the year. A little bit of a slowdown in the second quarter. So it suggests that there should still be a pretty decent amount of growth in the back half of the year.

Can you maybe just talk a little bit about the pipelines going into the back half of the year? And then kind of what you're seeing from a rate standpoint, et cetera, that gives you confidence that the rates will actually be attractive enough for you guys to put on your balance sheet?

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

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Yes. I mean I think most of the stuff that we walked through, the rate that Kevin referenced, this commercial real estate or multifamily stuff that we still see some softening in the pricing. Our pipeline is still strong.

I'd say that coming into this out of the gate in the third quarter, we're doing very well and this gives us the confidence that the back half of the year will get us to our new guidance. Again, there were some things in the first half of the year that kind of dampened that, but nothing in the pipeline tells us that rates are under pressure at this point or volumes.

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [8]

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I will say that in the end of the first quarter, we booked a lot of loans in the last week of the quarter that sort of affected the impact on the margin of those. It seems in this quarter, we missed the last week of the quarter and we booked them in the first 2 weeks of the subsequent quarter.

So -- and we did -- and I never thought Bridgehampton Bank would be affected by flows in private equity, but we have had 3 specific customers sell their businesses to some level of either strategic or financial buyers that have private equity backing, and I'd like to think that's not going to continue.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [9]

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Okay. And you said that you've already booked a number of loans in the first 2 weeks of July and the pipeline looks pretty good?

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [10]

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Yes.

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Operator [11]

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Our next question comes from Erik Zwick of Boenning and Scattergood.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [12]

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In the press release, you mentioned your western markets of Long Island are showing accelerated growth. I'm curious if you could provide some commentary into which loan product types are presenting the best opportunities and whether those growth opportunities are balanced with regard to loans and deposits.

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [13]

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I'd probably -- when I look at it, I focus more on to the deposit growth there, honestly. But it is a bit -- for Long Island, there's no moat between Nassau and Suffolk counties, it's just a matter of having the right people on the ground. So I think it's continuing to sort of offer community-based lending in marketplaces.

We have more feet on the ground now in Queens and in Nassau County that are allowing us to access the customers that we have traditionally accessed in -- for the long time Eastern Suffolk, and for the last dozen years in the middle of Suffolk County. So it's not a product set. This is still a business built on people. And so we have several more people that are running around partnering with strong branch managers we have to drive business.

And so for -- when we decided or we put together a plan for how we were going to move this company forward, we knew that we had, had tremendous success in traditional markets, but we looked at our market share in Nassau County and then the place that we're operating in Queens and recognized there were tremendous opportunities. And it was -- for us, it was just not having the right people in place and we feel like we do today.

So it's not a rollout of products, it's just expanding the business. We've expanded it from Bridgehampton to the middle of Suffolk County, now to Western Suffolk and then into Nassau County by just offering the services that people need.

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

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So to pick up from Kevin's point, I think the lending money in Nassau County and Queens in different respects, the idea in doing that was really always to capture market share as it relates to deposits. So now we're currently seeing the fruits of that labor and seeing the deposit market share kick up in those western markets which really -- the measure of success for us in those markets is going to be getting those deposits market shares.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [15]

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That's great color. And then moving to noninterest income. You had a very strong quarter on the SBA loan sales. I'm curious, was this driven by an increase in demand or just a catch-up after a slow first quarter? And then can you also speak to the quality of small business borrowers that you're seeing at this stage of the economic cycle?

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [16]

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I think it's a little bit of both. Obviously, you had the government shutdown slowed down first quarter originations, and then some of that spilled over to the second quarter. We've hired a new individual who is generating SBA opportunities. And we're still seeing quality opportunities there.

I mean, again, we are using this as a tool in some cases to supplement what we're doing to the borrowers traditionally. But for the same reason, I guess, that I said that we are seeing customers sell their businesses to private equity because maybe they don't really have a succession plan. You are seeing some of that happen and that's creating small business SBA opportunities for us where -- these are not such that they'd go to private equity, but they do have succession planning issues and an SBA product is a nice way to transition from the traditional founder of the business to either an employee or even his family.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [17]

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Got it. And then with regard to the 1 large loan that was charged off, what is the current size of the loan after the markdown? And I'm curious if this was a shared credit or if you are the sole bank.

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [18]

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So we were the sole credit on that. And you can see on the page of our balance sheet there's loans held for sale, and that number there, $12.5 million, represents that 1 loan after we charged it down.

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Operator [19]

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(Operator Instructions) 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 [20]

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Just back to the loan conversation. So the color you're offering is great. Just curious if you see the mix of your books changing much in the back half of the year. I mean -- or more specifically, kind of what portfolios where you think you'll have maybe outsized growth versus the portfolios where it could flatline or see potential declines.

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

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We've seen already some decline in multifamily. We can't say specifically it's due to the change in rent regulations, but we think that's part of it. Part of it is just pricing as well. Other than that, I'm not sure we see a big change in mix in the other segments of the portfolio. We are still continuing to really -- our originations in the C&I side are strong.

As far as adding exposure, it just takes some time for people to draw down those lines and give us outstandings. And again Kevin's point before, the -- in the first half of the year, we did have significant paydowns in some C&I loans, but to keep that even where it was, it shows strong activity there.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [22]

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And that was going to be my next question, John. So within this loan guidance, you're -- are you still kind of assuming that you could see elevated paydowns in the back half of the year?

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

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They're very -- they're tough. It's hard to figure that out. It's episodic really, depending upon the -- we haven't heard from anybody else. We do sometimes hear from some of these customers. They're long-time customers with large relationships and they may even come to us and ask for advice on selling the business and we'll get kind of a heads-up.

I don't think there's anything else in the pipe where they're coming to us saying, "Hey, by the way, private equity is calling on me or I'm thinking about a generational change or something like that."

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

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Okay. That's helpful. And then just back to the point on multifamily, can you just remind us what -- how much exposure you guys do have to the New York City rent-regulated space?

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

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So...

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

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A lot of shuffling pages here.

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [27]

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Yes. So I mean, generally, 2/3 of our book is in New York City, and I think I would say probably 80% of that has some level of exposure to...

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [28]

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Rent regulated.

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [29]

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Rent regulated.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [30]

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Okay. All right. That's helpful. And then just on the NIM, can you just talk a little bit, John, about kind of what the components are going into your thoughts that the NIM should increase as we move forward here?

I guess just -- I mean you guys have so few borrowings, I just want to make sure I understand kind of the dynamics of what you're thinking about loan yields from here? And assuming the Fed cuts twice, what that might do to your NIM outlook as well?

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [31]

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So I think the NIM -- I mean first of all, we're generating -- the coupons in our loans are generating higher than what we had in the book. So we feel there will be at least some stabilization of risk there. On the deposit side, like I said, year-to-date or for the quarter, we only increased 2 basis points in our deposits. That's a little bit due to mix, but again, we are still able to generate DDA, which helps to keep that TAM down.

On rate drops, our interest rate risk model, although we don't -- from the last quarter, we didn't do a 225 basis points cuts. Directionally, in the short term, we're still liability sensitive. We do have plans in place because a large part of our -- especially our money markets book is exception priced. So people come in and we can give them more upgrades. So we do have plans in place to drop those loans -- to drop those amounts next week.

So if -- let's -- if the [5%] continues to stay where they are, we get a little bit of steeping and that should be helpful to us. And then again, as we get out of more of the wholesale or brokered deposits that's more expensive, we think that's going to help us as well.

The only thing is the increase in cash flows on the bond portfolio. So we think in our core businesses on loans and deposits, we're holding steady, it's just the bond portfolio that we have could be under pressure due to increased prepayments for a bit. Do you refinance your loans, Collyn?

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [32]

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No. I'm not going to pat myself on the back, but I timed that pretty well back in the day. Okay. So on the -- just on the fees, so do you think -- I know there's a lot of moving parts, but just given some of the business initiatives you have in place and activity you're seeing there, I mean do you think that you can grow the fee line from here? Is that the objective?

I know in that $5.5 million range per quarter, can you grow from there? Just I know you gave us some guidance on the expenses, just curious if you can tighten up the guidance a little bit on the fees?

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [33]

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Yes. I think that the fee number this quarter was a little bit weak actually given historical trends. So I guess on like the NSF fees and customer fees. So hopefully, that will come back, especially getting to the summer season.

We're still seeing a lot of interest from customers on the swap product to generate fees, and I think the SBA pipeline is strong, so those being the big pieces. Hopefully, title income picks up as we get into the summer season, but that's heavily dependent upon the east end. And we do have -- we are studying other ways and we see there are opportunities. With [customer retail], we really have an opportunity to increase fees in certain areas that we haven't focused yet, but more to come on that.

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Operator [34]

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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 [35]

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Again, I just want to take a moment to thank everybody on the call, to acknowledge that there's [annualized] number of employees on the call, so thank them for their efforts. Certainly, we're disappointed in what happened with the loan but believe very strongly in the business prospects for BNB and look forward to continuing to have discussions with you, our shareholders, on how to move this company forward. So thank you, and have a great day.

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Operator [36]

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