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Bridge Bancorp Inc (BDGE)
Q3Â 2020 Earnings Call
Oct 28, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Bridge Bancorp Third Quarter 2020 Earnings Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. 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, sir.
Kevin M. O'Connor -- President and Chief Executive Officer
Good morning, and thank you for being on the call this morning. I'm again joined by our CFO, John McCaffery. I'd like to cover our quarterly performance, share some business updates, and discuss the status of our planned Q1 merger with Dime Community.
We saw a lot of positive momentum in the third quarter with net income, inclusive of a merger expenses, of $13.3 million, or EPS of $0.66 per share. When costs associated with the merger excluded, adjusted net income was $15.4 million, or EPS of $0.77 per share. These positive outcomes occurred despite headwinds driven by low rates and the economic uncertainty, caused by the global pandemic. These good numbers were largely due to loan growth, fueled by PPP, a reduced provision for credit losses for the quarter, and another increase -- and an increase in other income. Additionally, deposits grew this quarter by over 8% or $322 million, signaling the effectiveness of our efforts related to expanding the single product PPP relationships, and the overall enhanced liquidity of many of our customers.
Our efforts this quarter had been focused primarily on certain main goals. Working with our customers and our communities on pandemic-related issues, including forbearance management in PPP issuance and forgiveness. And we've also got to ensure the anticipated closing in early 2021, and the successful execution of the merger to create the new dawn, the 2021 and beyond.
On the pandemic front, as we deal with marketplaces, definitely affected by COVID and the result in economic activity. We have been working diligently with our customers to identify credit issues, provide relief, and ultimately manage them back to full modified payment status. This has been successful, as John will further discuss, as we reduced loans on forbearance from a high of 70% of the portfolio to just over 1% to $44 million. This success is a testament to the strong underlying credit fundamentals of BNB, including low LTVs and strong debt service coverage ratios. And as importantly, it's a sign of the commitment of our customers to standby and honor their obligations. We, like all, are concerned as we move further along in this process, and the path pandemic ultimately takes. But as of now, the situation appears to have stabilized.
We've also been engaged with our PPP customers both to work through forgiveness and with new customers, who comprised over 900 of the almost 4,000 loans we originated. We are working to fully develop these relationships. And to-date, they as a subset of deposit customers have almost $165 million on deposit with us. One unforeseen result of the PPP activity for us has been for certain segment of our customer base, it's enhanced the liquidity. This has resulted in an increased deposits and a diminish use of traditional lending facilities.
On the Dime front, our focus have been on three primary funds. The effort to complete the transaction has been ongoing and significant progress has been made. Merger applications have been filed with the New York State DFS, and the FOB of New York. And we have, in the past week, received certain FOB approvals and await the DFS. Last week, we filed our joint Bridge, Dime proxy statements and mailed to our shareholders. As a reminder, we will both be holding virtual meetings on December 3. We anticipate shareholders will vote to approve the creation of the new Dime.
Secondly, we continue to manage the balance sheet for the eventuality of a merger by reducing longer-term liabilities and rationalizing our holdings securities. This, coupled with substantial deposit growth, has resulted in an outsized level of liquidity. For the third quarter, we averaged over $530 million in overnight investments, yielding mostly below 10 basis points. While this contribute positively to NII, we had the impact of depressing reported margin by almost 40 basis points. This funding in the combined entity will be utilized to manage down certain of the combined companies higher cost liabilities, enhancing longer-term NIM of the new Dime.
Finally, and most importantly, the organization has finalized a new combined structure, which is being communicated to employees. BNB and Dime employees are working in concert to achieve our overarching goal of retaining the best practices of each organization, while minimizing, and I say, eliminating customer disruption. Based on the commitment to excellence I'm seeing from our consolidated teams, working together to create the new Dime, I am more confident than ever this will truly result in the best community bank for business in New York.
John will now take you through some more details of our third quarter results.
John Martin McCaffery -- Executive Vice President, Chief Financial Officer & Treasurer
Thank you, Kevin. Overall results, as Kevin said, our reported quarterly earnings were $0.66. Excluding merger charges, earnings were $0.77. Additionally, we continue to see impacts in the various shut down, government programs and the market's reaction to these events. Increases in deposits drove balance sheet growth during the quarter, with total deposits up around $300 million. All the product categories, with the exception of time and brokered deposits, were up.
Loan originations were $166 million in the quarter. However, due to pay-downs and increased line of credit usage, as Kevin spoke about, net loans grew only by $18 million. However, fourth quarter is going up strong with October month-to-date loans up a net $53 million. We also took the opportunity to sell $80 million in bonds, and hugely gained to unwind $125 million of swaps and home loan bank advances, with an all-in cost of 190 basis points.
On the margin, net interest income was up slightly quarter-over-quarter, but inflating balances in interest-bearing cash put pressure on the margin, as did the full quarter impact of the PPP loans. Excluding these factors, the adjusted margin for the third quarter would have been 3.22%, just 2 basis points lower than the second quarter adjusted margin. We made the move during September. We will have a positive impact on the margin in Q4. We continue to lower our deposit costs, lowering rates in $1.5 billion in the month of September. Also the aforementioned reduction in home loan bank borrowings of 1.90% will have a positive effect in Q4.
Non-interest income. Service charges showed a rebound from the second quarter lows as activity picked up in those markets. Our title business had its best quarter since 2017, as real estate activity in our Eastern markets increased. SBA gains were also very strong, as businesses rushed to close loans while still qualifying for the six-month payment deferral. Merchant income was up 11% over the same period last year, as fewer people are using cash in order to maintain social distancing.
Non-interest expense, ex-merger charges, were up $2.2 million on a linked quarter basis. Two factors contributed to this. In the second quarter, we deferred $1 million in expenses related to the origination of PPP loan. Remaining increase is mostly attributable to a rise in incentive accruals. The increase was partially due to the strong SBA gains in title fee income on which we pay incentives.
Credit. All credit metrics continue to be strong. The ACL to total loans was 94 basis points and 116 basis points, excluding PPP. Provision for the quarter was $1.5 million. We made no changes to economic outlook in the CECL model. The decline in payment deferrals didn't have a positive impact on the ACL. We move to collateral value on taxi down to $150,000 during the quarter as well. The majority of the remaining moratoriums are multifamily and invested to CRE, with average LTVs in the low-60s. Taxi medallions account for less than 10% of the remaining deferrals, and there is only one other C&I loan still in deferral, which is less than $300,000. Less than 10% are in their first moratorium. So the remaining will come to their second moratorium, and we'll continue to repeat those customers to make sure that they are on solid ground.
Net charge-offs were $1.4 million, and this was related to a retailer that was having trouble before COVID began. The tax rate was 23.4%, which is higher than recent quarters due to its non-deductibility of much of the merger charges that we took. We expect the tax rate for the fourth quarter to be between 23% and 24%, kind of wide range, but it will depend upon the level of merger charge to be taken during the quarter.
I will now turn the call back over to Chad, to start the Q&A.
Questions and Answers:
Operator
Thank you so much. We will now begin the question-and-answer session. [Operator Instructions] Thank you. And our first question will come from Alex Twerdahl with Piper Sandler. Please go ahead.
Alex Twerdahl -- Piper Sandler -- Analyst
Hey, good morning, guys.
Kevin M. O'Connor -- President and Chief Executive Officer
Good morning, Alex.
John Martin McCaffery -- Executive Vice President, Chief Financial Officer & Treasurer
Good morning, Alex.
Alex Twerdahl -- Piper Sandler -- Analyst
Hey, I just wanted to ask for maybe a little bit more color and commentary on what you're seeing from a credit perspective. Obviously, deferrals down to 1%. It's a pretty big progress and credit looks pretty strong. But just given that your geography, in particularly, the part in New York City is it seems to be under a bit of a magnifying glass right now from a -- from an investor and credit standpoint. Maybe you could just give us a little bit more commentary on what you're seeing across the footprint in which areas you still remain very concerned about, If any?
Kevin M. O'Connor -- President and Chief Executive Officer
I think is -- and I think, I had this conversation before. But as we move from east to west across our footprint, I was in Bridgehampton yesterday, and it's still the middle of summer out there. The restaurants were full. Business and traffic was, as if nothing has happened, except for people wearing mask. As I go further up the Island, the middle of the Island still seems to be getting better and the traffic we face every day, and our employee -- our customers feel that. I mean, the measurement of -- those are sort of the anecdotal things. But as I look at balances, customers have larger deposits with us than they had last year. Their need for credit appears to be less. They are feeling reasonably optimistic and people are getting back to work. Again -- as again, we move further west, and I think our exposure to New York City is not inconsequential. But the loans that we have there are currently performing. So, yeah, I paint the positive picture, but we all know that that can change on a dime -- unintended, but I do think that as we stand now -- and I speak for my new partners. On the other side, they feel very comfortable and we do. The diligence that we did in underwriting the loans that we have been making for a number of years, and our success, the true various cycles should be well for us as we move forward.
John Martin McCaffery -- Executive Vice President, Chief Financial Officer & Treasurer
Yeah, I think -- Kevin, if there is -- again, we took a charge-off this quarter for a loan that probably would have been charge-off at some point, because it was just having trouble before even COVID began. There'll be positive here and there, but I think compared to the rest of the industry, we'll be doing pretty well. Even the increase in our past dues was mostly due to one residential loan that's currently being refinanced away from us. That's over $3 million, which is most of the increase in past dues. So with certainty -- certain customer, we have our eye on. But I think from a macro standpoint, we feel pretty good.
Alex Twerdahl -- Piper Sandler -- Analyst
Great. Thanks for that commentary. And then just -- asking it on expenses. John, I think you said the salaries were a little inflated due to some deferment of a PPP-related expenses. So what's the right level of expenses for the fourth quarter? Or the right kind of starting point for the fourth quarter?
John Martin McCaffery -- Executive Vice President, Chief Financial Officer & Treasurer
I think we're still going to come in around $26 million for the fourth quarter. So it was in the third quarter we deferred $1 million for PPP, and then a couple of things more. Just on the incentive front that we are looking to pay our incentives in December based upon the fact we want to close this merger early next year. And we'll be -- listen not all of our employees are going to be staying, so we're going to pay out the incentives, which usually has a component of stocking in. We're going to pay 100% cash assets, increasing the period expense as well for the incentives. And plus, on some of the activity we had in Q3, as far as SBA and title, when they do better, that's great. But they're going to get paid for that activity as well.
Alex Twerdahl -- Piper Sandler -- Analyst
Great. Thank you for taking my questions.
Kevin M. O'Connor -- President and Chief Executive Officer
Thank you.
Operator
The next question will come from Collyn Gilbert with KBW. Please go ahead.
Collyn Gilbert -- KBW -- Analyst
Thanks. Good morning, guys.
Kevin M. O'Connor -- President and Chief Executive Officer
Good morning, Collyn.
Collyn Gilbert -- KBW -- Analyst
Good morning. I apologize, I missed your opening comments.
Kevin M. O'Connor -- President and Chief Executive Officer
I answered all your questions right there, that was it.
Collyn Gilbert -- KBW -- Analyst
You did. Anyway, it's a pretty simple one. It's just about loan growth. And kind of where you see customer demand or loan demand kind of migrating as you move into the end of this year and then into next year?
John Martin McCaffery -- Executive Vice President, Chief Financial Officer & Treasurer
I mean it's -- the pipeline is strong.
Kevin M. O'Connor -- President and Chief Executive Officer
Our multifamily...
John Martin McCaffery -- Executive Vice President, Chief Financial Officer & Treasurer
Our multifamily is strong. And then as I think, we've sort of timing issues. I think we grew loan $50 million in the first month of the quarter. I think there is a focus -- there was a focus on our side to manage the forbearance, and I don't know if it was that the expense at certain times of moving some new business through the pipeline. I -- there is still optimism by our customers. But I would argue that some of it is, they are worried about when they're going to be able to get their PPP forgiveness. So we are managing thinking about 2021 and beyond. So will we get -- we have $50 million net growth for the first month of this quarter. The pipeline would indicate that probably we can get about that right amounts for the end of the year, which is greater than we did last quarter, and I think the focus will be more on new loan growth as opposed to managing. I mean, as a with a mature portfolio, if you will, of commercial loans and commercial real estate, and I think it was appropriate that we directed our efforts to make sure that we managed through this process and got our customers back pain than chasing the next incremental loan.
Collyn Gilbert -- KBW -- Analyst
Okay, that's helpful. And. And then, did you see, I mean, I'm just curious as to the split between like originations and pay downs in the third quarter. Was there -- did you -- are you guys seeing elevated pay downs?
John Martin McCaffery -- Executive Vice President, Chief Financial Officer & Treasurer
We originated $166 million of paydowns, where $130-ish, that's a little bit elevated probably. That's on track. We usually do like $30 million, $35 million as a regular amortization and pay loss on a given loan kind of for done deal for that. So I think it was just the originations and the last people using their lines of credit. There are 40% usage on the line. Typically, we're between 48% to 50% on line usage numbers.
Collyn Gilbert -- KBW -- Analyst
Okay, that's helpful. And how about new loan pricing, kind of where you're seeing some of the origination yields coming in?
Kevin M. O'Connor -- President and Chief Executive Officer
So in the quarter -- the quarter origination coupons were 404.
Collyn Gilbert -- KBW -- Analyst
Okay, that's pretty good. Does that I'm assuming mix driven or are you seeing?
John Martin McCaffery -- Executive Vice President, Chief Financial Officer & Treasurer
Yes. So I guess on the C&I stuff, but that was the driver. But we're still holding, we're still seeing our multi -- it was 355% [Phonetics] and 364% [Phonetics] for the quarter. Lot of the numbers we've been talking about in the past, a couple of quarters still to hold.
Collyn Gilbert -- KBW -- Analyst
Okay. And then lastly PPT, what are you guys thinking about kind of forgiveness schedule as you work on it right now. [Speech Overlap].
John Martin McCaffery -- Executive Vice President, Chief Financial Officer & Treasurer
So we like everybody else have with contracted with somebody to create a portal for everything to go through. We piloted about 70 customers through there. I think they probably have a bit 70 maybe 40 have actually submitted thing to the SBA, which will take 60 days to 90 days to process. I think everybody is waiting. It is still a cumbersome process, just lots of information. I think we're all hoping we get there next Tuesday and cooler heads prevail, and they up the accelerated forgiveness, maybe $250,000, which in our case, probably get rid of three quarters of the numbers of loans that we have done and about 25% of the dollar value that we did. I think earlier, we were talking to customers and two months ago, every customer climbing because their accountant told them that they should be worried about forgiveness and now it's the other way, accounts are finally and we're glad we're all on the same pay there, going slow, because this will only get easier. The overwhelming job in front of the SBA to look at every document that were being asked to submit is really unsustainable and so somewhere along the way that will change and that will only change to the benefit of the customers. I mean, the more we talked to them and more they recognized this free money. Now, some of them are holding in the money and holding it in deposit that's what's driving our industry to have sort of outsized growth in deposits and in some cases lack of loan demand because people are sitting on this liquidity. It'd certainly not going to be a fourth quarter event, it will be a first quarter event, probably can do the second and third.
Collyn Gilbert -- KBW -- Analyst
Okay. That's all I have. Thanks guys.
John Martin McCaffery -- Executive Vice President, Chief Financial Officer & Treasurer
Thank you, Collyn.
Operator
[Operator Instructions] The next question will come from Erik Zwick with Boenning & Scattergood. Please go ahead.
Erik Zwick -- Boenning & Scattergood -- Analyst
Good morning, guys.
John Martin McCaffery -- Executive Vice President, Chief Financial Officer & Treasurer
Hey, Eric.
Erik Zwick -- Boenning & Scattergood -- Analyst
So if we kind of back out the -- that the impact on the net interest margin from the excess liquidity in the PPP loan fees, you mentioned there is about 3.22% for the margin. So about 40 basis points impact, and you just mentioned now that the PPP is going to take a while to resolve probably into mid 2021. Just curious more on the thoughts about putting some of the excess liquidity to work, and then what is the path to kind of moving back toward that kind of 3.20%-ish range over the next few quarters?
John Martin McCaffery -- Executive Vice President, Chief Financial Officer & Treasurer
The path Eric will be in the next quarter, first quarter 2021, we're going to be one company. And if you look at the two balance sheets that will put out together on our press releases, I think there is $0.5 billion of home loan bank advances on their balance sheet because there is $1 billion home loan bank advances on the time that have a cost of 170 basis points. I think, when we are managing this organization, we are thinking down that path. At some point in time, this will be together and the $500 million -- 10 basis points on will be used to pay down borrowings on their side that co-founded..
Kevin M. O'Connor -- President and Chief Executive Officer
Plus the cash that will come from the PPP forgiveness we felt like we're going to have an ability to really take out the low margin for parts of the combined balance sheet to have a better margin going forward over the combined path. I guess given the deposits, do something with the liquidity that I have now but I'd much rather pay down 170 home loan dab debt, that's much better used to net cash just not now.
Erik Zwick -- Boenning & Scattergood -- Analyst
Okay that makes sense. And then just thinking about the fee revenue, very strong quarter for the SBA gains. Do you have a kind of insight into how that quarters for the fourth quarter shaping up again, and just trying to think about the run rate for 4Q for non-interest income?
John Martin McCaffery -- Executive Vice President, Chief Financial Officer & Treasurer
I think Q3 was really kind of an outlier, I think there was pent-up demand and again it was the FDA was forgiving payment deferrals. I expect there may have been some pent-up demand and COVID's forward [Phonetic] demand from Q4. I'm probably looking at full year number kind of think what's would that really be....So we've been about, we go between $300,000 and $500,000, a quarter on SBA gains from a global standpoint [Indecipherable]. Again, maybe next quarter is going to be able to rise because demand we have this quarter. Again, they had strong quarter in FBA gains as well. So the combined company is going to have a good platform.
Kevin M. O'Connor -- President and Chief Executive Officer
Those who have $25 million of SBA loans in the pipeline, today how much that gets pull through in the fourth quarter [Indecipherable].
Erik Zwick -- Boenning & Scattergood -- Analyst
Okay, and then just last one for me, thinking about commercial real estate valves, more specific kind of on western end of loan islanders, obviously some concern once you cross the river [Indecipherable], are you seeing any of that or are there many properties trading at this point on any indication of, any value kind of commercial real estate values at this point?
John Martin McCaffery -- Executive Vice President, Chief Financial Officer & Treasurer
I don't know, there's a lot of touch points on that at this point to really identify. The conversation is, there is still multispace being leased here, there is still industrial buildings being built. I mean, cap rates have actually, the cap rates on the ground have actually held in as opposed to increase in the borrowings. So we are still positive about that, part of that segment of the market. Step away from region big box retail. But I think if you get into the industrial and most of that space is still going well.
Erik Zwick -- Boenning & Scattergood -- Analyst
I appreciate the comments. Thanks for taking my questions.
Operator
Ladies and gentlemen, 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 M. O'Connor -- President and Chief Executive Officer
Thank you. As I conclude, I want to reiterate my comments that I made on our third quarter release. Well, I think not only employees, but I also want to thank our soon to be partners [Indecipherable] for their extraordinary diligence and compassionate in dealing with the issue that we're all facing today with the pandemic, remote work, child care, home schooling and health concerns. It's really clear to me that this is an incredible group of dedicated bankers. They are working tirelessly on integration to create the new doc. And I [Indecipherable] this opportunity on behalf of the rest of management team and the combined boards. I'll take that liberty to pull their efforts, diligence and ultimate success. We remain incredibly excited for what is being created. I feel better than I felt in July I was excited then to do this. Every day we get closer putting these two companies together and delivering on the promises. I think we've made to you as shareholders and to our customers and our communities. So I want to thank again all the people who are working very hard to get this done in the face of lots of adversity and challenges. So I thank everybody on the call for their time today for their interest in our company. I look forward to hearing from many of you as we get through this process and any further questions, please don't hesitate to reach out, probably we'll be talking to some of you at our shareholder meeting in about a month and a half. But this is an amazing time for this organization and I continue to look forward to working with our partners on the other side. So thank you.
Operator
[Operator Closing Remarks]
Duration: 26 minutes
Call participants:
Kevin M. O'Connor -- President and Chief Executive Officer
John Martin McCaffery -- Executive Vice President, Chief Financial Officer & Treasurer
Alex Twerdahl -- Piper Sandler -- Analyst
Collyn Gilbert -- KBW -- Analyst
Erik Zwick -- Boenning & Scattergood -- Analyst
