Bridge Bancorp, Inc. (BDGE) Q2 2019 Earnings Call Transcript

Bridge Bancorp, Inc. (BDGE)
Q2 2019 Earnings Call
July 24, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Bridge Bancorp Second Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing "*0". After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press "*1" on your telephone keypad. To withdraw your question, please press "*2". 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.

Kevin O'Connor -- President and Chief Executive Officer

Good morning and welcome. Thank you again for joining us on the second quarter earnings call. We appreciate, again, you taking the time to listen and, again, appreciate the feedback we've received on quarter-end results and this method of communicating. As always, we continue to 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 the call by John McCaffery, our CFO, and between us, we hope to answer your questions regarding the results and general market conditions.

Although we are disappointed our net income this quarter declined from the $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 and grow both in our traditional markets and, more importantly really, in our western markets that we target as opportunities. This business expansion further strengthens our balance sheet.

Year-to-date, there's 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 clustering, more volatile liabilities. We have a stabilized 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.

Against this 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 one specific loan to a not-for-profit entity. The loan is collateralized by a 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 all remedies for repayment. Results excluding this would have reflected an ROA and a ROE of 1.09% and 10.9%, respectively, and our return on tangible common equity would have 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 on almost $500 million of new exposure. However, offsetting his has been significant paydowns, where 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 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 yield increased 10 basis points, offsetting declines in the securities yields. 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.

We have 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 are already seeing a lot of the national players reduce rates and we had an occasion yesterday to have 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 gonna turn this over to John to discuss in greater detail the specifics on the margin, other income and expense, and capital, and together, later on, we will answer whatever questions you have.

John McCaffery -- Chief Financial Officer

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 growth in our loans helped our investors by almost 9.5% on an annualized basis. While this is below our guidance, the growth was affected by several large payoffs, moving the charged off loan to held for sale and a slowdown in multifamily originations. We are addressing 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 for a little bit. While total deposits are down slightly year-to-date, this is a function of seasonal public deposit outflows, 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 in 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 carried 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 4.89%. 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 seven basis points sequentially and total interest-earning deposit yields were up five basis points. Including DDA in these deposits, the total cost of deposits quarter over quarter was up only two 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 and deposits if the FOMC, as expected, lowers the Fed Funds target rate next week. Our interest rate risk models directionally show our margin increasing in the short term under flowing rate scenarios. To some extent, the shape of the yield curve will determine the outcome, but 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 non-profit. Although the charge off was $3.7 million, 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 coming current during the quarter. Non-performing loans increased from $3 million to $5.5 million. This increase was due to two residential loans totaling $1.9 million and one 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 charged off loan. We are currently testing our SISA model but have no model at this time.

Non-interest income. Adjusting for gains and losses on securities, non-interest income was up 11% for the first six months of 2019 versus the same period in 2018. As we continue to diversify our non-interest income sources, we saw a quarter-over-quarter increase in SBA income offset the drop in loan swap fees. This is our goal when diversifying our sources of non-interest income.

Non-interest 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 environment. 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 have. We are ready to take your questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. To ask a question, you may press "*1" on your touchtone phone. If you are using a speaker phone, 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 "*2". At this time, we will pause momentarily to assemble our roster.

Our first question comes from Alex Twerdahl of Sandler O'Neill. Please go ahead.

Alexander Twerdahl -- Sandler O'Neill & Partners -- Analyst

Hey. Good morning, guys.

John McCaffery -- Chief Financial Officer

Good morning, Alex.

Alexander Twerdahl -- Sandler O'Neill & Partners -- Analyst

Just first off, I was wondering if you could maybe give us just a little additional color on 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 with the fact that it truly is a one-off situation?

Kevin O'Connor -- President and Chief Executive Officer

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 were involved in the credit with several of the founding members of the organization and they are existing debtholders too. The loan is actually current at this moment but we recognized they were having some issues and it made sense for us to identify this as a strategy as it relates to that. Sorry for being a little circumspect. We are sort of in negotiations to 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 loans in our portfolio that look like this and we really do feel like this is a unique situation.

Alexander Twerdahl -- Sandler O'Neill & Partners -- Analyst

Okay. And this, the $3.7 million charge off, is a pretty aggressive mark on it at this point? You don't foresee there being a possibility of additional charges coming down the line in the future?

Kevin O'Connor -- President and Chief Executive Officer

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

Alexander Twerdahl -- Sandler O'Neill & Partners -- Analyst

Okay. All right. Thanks for the additional on that. And then getting back to the loan growth, John, you updated the guidance to kind of 10% to 12%, I think you said. You're at 4.7% for the year. A little bit of a slowdown in the second quarter or 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, etcetera, that gives you confidence that the rates will actually be attractive enough for you guys to put on your balance sheet?

John McCaffery -- Chief Financial Officer

I mean, I think most of the stuff that we lost in the rate that Kevin referenced was commercial real estate or multifamily stuff that you'll see some softening in pricing. Our pipeline is still just as strong. I'd say that coming out of the gate in the third quarter, we're doing very well which gives us 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.

Kevin O'Connor -- President and Chief Executive Officer

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 two weeks of the subsequent quarter. And I never thought the bank would be affected by flows in private equity but we have had three specific customers sell their businesses to some level of either strategic or financial buyers that have private equity backing them. We'd like to think that's not going to continue.

Alexander Twerdahl -- Sandler O'Neill & Partners -- Analyst

Okay. And you said that you've already booked a number of loans in the first two weeks of July and the pipeline looked pretty good. Okay. That's great color. Thanks. I'll get back in the queue.

Kevin O'Connor -- President and Chief Executive Officer

Thank you.

Operator

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

Erik Zwick -- Boenning and Scattergood -- Analyst

Good morning, guys.

Kevin O'Connor -- President and Chief Executive Officer

Good morning, Erik.

Erik Zwick -- Boenning and Scattergood -- Analyst

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.

Kevin O'Connor -- President and Chief Executive Officer

When I look, I focus more on sort of the deposit growth there, honestly. But Long Island, there's no moat between Nassau and Suffolk County. It's just about 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 for the longtime 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 when we decided and we put together a plan for how we were gonna 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 in the places we were operating in Queens and recognized there were tremendous opportunities. And for us, it's 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.

John McCaffery -- Chief Financial Officer

So, to pick up on Kevin's point, I think we've been 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 gonna be getting those deposit market shares.

Erik Zwick -- Boenning and Scattergood -- Analyst

That's great color. Thanks. And then moving to non-interest 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?

Kevin O'Connor -- President and Chief Executive Officer

I think it's a little of both. Obviously, you had the government shutdown slow down first quarter originations and some of that spilled over into 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 is creating SBA opportunities for us, where these are not the type of businesses that 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.

Erik Zwick -- Boenning and Scattergood -- Analyst

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

John McCaffery -- Chief Financial Officer

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

Erik Zwick -- Boenning and Scattergood -- Analyst

Great. Thanks so much for taking my questions.

John McCaffery -- Chief Financial Officer

You're welcome.

Kevin O'Connor -- President and Chief Executive Officer

Thank you.

Operator

Again, if you'd like to ask a question, please press "*1". And our next question will come from Collyn Gilbert of KBW. Please go ahead.

Collyn Gilbert -- KBW -- Analyst

Thanks. Good morning, guys.

Kevin O'Connor -- President and Chief Executive Officer

Good morning, Collyn.

Collyn Gilbert -- KBW -- Analyst

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. Or more specifically, kind of what portfolios where you think you'll have maybe outsized growth versus the portfolios where it could flat line or see potential declines?

John McCaffery -- Chief Financial Officer

We've seen already some decline in multifamily. We can't 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 still continue to really -- our originations in the CNI 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 -- in the first half of the year, we did have significant paydowns in some CNI loans. But to keep that needle where it was shows strong activity there.

Collyn Gilbert -- KBW -- Analyst

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

John McCaffery -- Chief Financial Officer

They're very --

Kevin O'Connor -- President and Chief Executive Officer

They're choppy. It's hard to figure that out.

John McCaffery -- Chief Financial Officer

It's episodic, really, depending upon the -- we haven't heard from anybody else. We do sometimes hear from some of these customers. They are longtime customers with large relationships and they maybe come to us and ask for advice on selling the business and we'll get kind of a heads up. I don't think we have anything else in the pipeline coming to us and saying, hey, by the way, private equity is calling on me or I'm thinking about a generational change or something like that.

Collyn Gilbert -- KBW -- Analyst

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

John McCaffery -- Chief Financial Officer

Yeah. So --

Kevin O'Connor -- President and Chief Executive Officer

A lot of shuffling papers here.

John McCaffery -- Chief Financial Officer

Yeah. So, generally, two-thirds of our book is in New York City. And I think I would say probably 80% of that has some level of exposure to rent regulations.

Collyn Gilbert -- KBW -- Analyst

Okay. 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? 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?

John McCaffery -- Chief Financial Officer

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

On the rate drops, our interest rate risk models, although we don't currently -- the last quarter we did, we didn't do a 225 basis point cut -- directionally, in the short term, we're still liability sensitive. We do have plans in place because a large part of especially our money market book is exception priced. So, people come in and we tend to give them one-off rates. So, we do have plans in place to drop those amounts next week. So, if the price continues to stay where they are, we'll get a little bit of steeping. That should be helpful to us. And, again, as we get out of more of the wholesale or brokered deposits that's more expensive, we think that's gonna help us as well.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay. That's helpful.

John McCaffery -- Chief Financial Officer

The only thing is the increase in cash flows on the bond portfolio -- so, we think that 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 repayments for a bit. Are you refinancing your loans now?

Collyn Gilbert -- KBW -- Analyst

No. I'm not gonna pat myself on the back but I timed that pretty well back in the day. Okay. So, just on the fees, 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 -- do you think that you can grow the fee line from here? Is that the objective? In that $5.5 million range per quarter, can you grow from there? Or 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.

John McCaffery -- Chief Financial Officer

Yeah. I think the fee number this quarter was a little bit weak, actually, given historical trends. So, just on the NSS fees and customer fees. So, hopefully that will come back, especially as you get into 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. Without too much detail, we really have the opportunity to increase fees in certain areas where we haven't focused yet. But there's more to come on that.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay. That's great. I'll leave it there. Thanks, guys.

John McCaffery -- Chief Financial Officer

Thank you.

Operator

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

Kevin O'Connor -- President and Chief Executive Officer

Again, I just want to take a moment to thank everybody on the call, to acknowledge -- I know I have a number of employees on the call -- to thank them for their efforts. Certainly, we are disappointed with 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 we move this company forward. So, thank you and have a great day.

Operator

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

Duration: 25 minutes

Call participants:

Kevin O'Connor -- President and Chief Executive Officer

John McCaffery -- Chief Financial Officer

Alexander Twerdahl -- Sandler O'Neill & Partners -- Analyst

Erik Zwick -- Boenning and Scattergood -- Analyst

Collyn Gilbert -- KBW -- Analyst

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