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Edited Transcript of BDGE earnings conference call or presentation 25-Oct-19 2:00pm GMT

Q3 2019 Bridge Bancorp Inc Earnings Call

BRIDGEHAMPTON Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Bridge Bancorp Inc earnings conference call or presentation Friday, October 25, 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

* David Jason Bishop

D.A. Davidson & Co., Research Division - Senior VP & Senior Research 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's Third Quarter 2019 Earnings Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. 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, everybody. Thank you for joining us on the third quarter earnings call. I know we're competing with a call relating to an acquisition so I appreciate you taking the time to join us. I'm certainly pleased to be able to provide an overview of our performance, discuss certain aspects of our business and give some context on the strategic challenges and the direction for BNB. I'm also joined on our call by our CFO, John McCaffery, and together, we'll take your questions regarding results and general market conditions.

Let me start with some several positive financial highlights. Reported record net income of $13.9 million or an EPS of $0.70 a share. This translated into return on assets of 1.17% and our ROE of 11.44%. The return on tangible common equity was approximately 15%. This strong performance is a result of many factors, including record levels of net interest income and fees generated from businesses complementary to our core mission of delivering community banking services.

Diving deeper into the results for the quarter and the reason for this success, we see the continuation of many of the trends and the benefits of strategic initiatives we've instituted over the past several years. We continue to grow both loans and deposits at strong levels, and coupling this with pricing discipline, we've delivered net growth in earning assets and an expanding net interest margin.

Specifically, we've seen loans grow despite some significant paydowns and competitive pressures by $310 million or almost 10% on a year-over-year basis and $232 million or 9.5% on a year-to-date basis. The funding for this activity, despite the seasonality of certain public funds, has been provided primarily by growth in core deposits. We have grown by 10.7% year-over-year or 8.8% year-to-date. The mix of these deposits remained strong, with almost 44% of the total DDA. This strong mix of community banking loans, funded by core deposits, has delivered a net interest margin of 3.4%, an increase of 10 basis points over the prior quarter. This, again, in contrast to many of our competitors who experienced contracting margins. These achievements again reflect our strong underlying franchise and prudent balance sheet management. This is an appropriate mix of fixed and floating rate assets, and we've actively managed deposit repricing coincident with the recent Fed rate cuts.

We began the year with a minimal reliance on higher cost wholesale liabilities and lower than Tier 1 deposit ratio and have managed accordingly by aggressively replacing higher-cost brokered deposits or core deposits. We've also refrained from chasing certain low-yielding loans and investments. This discipline, while suppressing net growth in total assets, has resulted in quality growth across our footprint. We've originated in excess of $750 million in new loans and lines of credit across the product type and experienced core deposit growth throughout our markets.

The increases in expenses reflect higher salary levels as we compete to attract and retain talented bankers. We've also invested in developing the next-generation of banking services, recognizing the movement from traditional delivery channels through digital methods of FERC, serving and expanding our customer base. However, we are cognizant we need to move slowly to ensure we deliver this with a personal touch. It's been the hallmark of our success.

The banking landscape remains difficult as we operate in a challenging interest rate environment, both because of the absolute low level of rates and the shape of the curve. However, we utilize the value of the core funding developed over the past 110 years and the strength of the partnership we forged to manage through this time.

I'll now turn this call over to John to discuss in greater detail specifics on our margin and the other income and expenses in capital. Thank you, John.

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

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Thank you, Kevin, and thank you all for joining our call this morning. Picking up on the themes that Kevin touched on, I'll be walking through some more of the detail on this quarter's results, results we're very proud of.

The headline is our net interest margin, which expanded by 10 basis points versus the second quarter. This was achieved through aggressive management of deposit rates that the Fed cuts and Fed funds rated twice during the quarter. Thus we were able to offset the drop in yield on our floating rate loans. Additionally, we decreased the amount of high-cost brokered deposits and increased DDA balances.

Quarter-over-quarter assets yields dropped 1 basis point, while the cost of total interest-earning liabilities fell 13 basis points. Although we have been deemphasizing the effects of purchase accounting on the margin, I wanted to point out that without purchase accounting, the margin expanded 13 basis points quarter-over-quarter.

Year-to-date, our loans grew $230 million or so or 9%. IPT deposits, those deposits of individuals, partnerships and corporations, our customers, grew by $195 million and also 9%. Our loan-to-deposit ratio increased to 94% at the end of the third quarter versus 84% at December 31. This is mostly due to the drop in brokered deposits as well as easing the (inaudible) close of public deposits.

As Kevin alluded to, we continue to grow our core businesses, while shedding noncore lower margin assets and liabilities. All components of our noninterest income performed well this quarter. Title fees, gain on sale of SBA loan and our loan swap program were firing on all cylinders. Total noninterest income increased 27% in Q3 over the same period last year.

Our loan-to-deposit program is being broken out at our income statement for the first time this quarter as the current rate environment makes the structure increasingly attractive to our borrowers. Since 2014, we have converted $233 million in loans from fixed to floating rates, thus diversifying the rate exposure of our real estate loan book.

Noninterest expense was up 1% sequentially and 13% over the same period last year, excluding the impact of the fraud loss in 2018. The majority of the increase is related to investments in people and technology. Besides salary increases and new hires, there are increases in incentive accruals and increases in medical insurance costs as well.

Technology costs related to investments in new software and systems drove 21% of the increase in Q3 expenses year-over-year. These investments are related to expanding our digital offerings, building efficiencies in our internal processes and protecting our customer's data. The $1 million provision during the quarter was due in large part to our last 2 Taxi Medallion loans being renewed. As in previous Medallion loans, they're assessed mainly through TDRs. The loans are currently performing as agreed. The additional provision was also the result of loan growth in certain categories.

The increase in past due loans was due to 2 loans that have since been brought current after 9/30. Nonaccrual loans are down quarter-over-quarter, due mostly to 2 CRE loans that we're paying off. We have no guidance on CECL at this time other than to say we are very close to having a working model and we'll be compliant in 2020.

Capital continues to build with tangible common equity coursing at 8% threshold this quarter. The tangible book value per share came in at $18.99. Our estimate for the tax rate for Q4 is 22%, and for next year, we are targeting 22.5% to 23%. Thank you, again, for spending your time with us.

At this time, we'll take any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today will come from Alex Twerdahl 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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Just first off, a little housekeeping. John, do you have the amount of the FDIC credit that you would have received in the third quarter?

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

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It was about...

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [4]

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380?

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

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Yes, maybe $380,000.

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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 just to move over to the margin, some really nice expansion this quarter due to some remixing on the liability side, it looks like. Is the full impact of that remixing reflected in the margin at this point? Or do you think we might get a little carry through into the fourth quarter just from that alone before talking about the potential impact on the actual rate cut?

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

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There will be a little bit of carryover due to these fees. September rate cuts is middle of the month, so we didn't get full impact of what we were able to do on the costs from that. So there will be some carryover regardless of what happens next meeting.

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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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Okay. And so margin could continue expanding into the end of the year, just kind of -- just given sort of the remix in the liabilities and the ability to bring back cost to deposits, et cetera?

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [9]

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Well, we think on the subsequent rate cut, it's not going to have as much ability to lower rates so much, but I think there will be some of our portfolio rate bonds will be enforced. So we're cautiously optimistic, but I don't know if we have the same, the same bang for the buck on the subsequent rate cuts on behalf of the first 2.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [10]

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Got it. And then it seems like with the loan swap fee income, that you guys are now on track to kind of hit well above your targeted fee income growth for 2019. Is that right? Or is the -- do you think the third quarter is just especially strong for loan swap fees, and that it's going to be reined in a little bit into the fourth quarter.

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [11]

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We still are getting a lot of inquiries from customers on those. Again, right now, just because of the way the yield curve is shaped, they can get a lower fixed rate and we can get a higher floating rate on the same transaction. So it's beneficial for both sides, but we're getting more inquiries every day from customers and vendors. It's certainly become an accepted way to get fixed rate exposure for the borrowers.

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Operator [12]

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Our next question will come from Erik Zwick with Boenning and Scattergood.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [13]

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John, I think you mentioned it in your prepared remarks, but I missed it. Did you have a contribution to the net interest margin from purchasing accounting accretion, either in dollar terms or basis points in the third quarter?

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

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I didn't give it in my remarks, but I guess I have it. It's about, in the quarter, I'd put it at about 4 to 5 basis points.

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

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Okay. And then I'm looking at loans, and obviously, very strong growth in the quarter, which is great to see, particularly the investor CRE and multifamily segments are strong. How are pipelines at the end of the quarter relative to 3 months ago? And what are your expectations for growth in the fourth quarter?

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

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So the pipeline is about $360 million, which is higher than it was since last quarter. We have a coupon amount at about 4.5%. We did get some -- a lot of our loan closings in the quarter happened in the last week, and some of that spread over in into the beginning of the fourth quarter. So we are optimistically getting back on pace in the fourth quarter, which is also typically a stronger quarter for us for loan originations.

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

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Okay. Great. And then also, obviously, you had great success bringing in demand deposits. Those balances were up about $57 million. I guess what factors contributed to that growth? And how would you characterize the split between commercial and retail in that growth?

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

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I think this -- the growth in the DDA has been -- that's been a hallmark of what we've done for the last dozen years. It's principally all commercial. We don't have a big retail network, if you will. So it is principally all commercial. A lot of them are tied to the lending relationships we have. And we see that, that's really -- our job is to continue to grow that so, yes.

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

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We notice that we've added, over the past couple of years, especially in our rents and markets as they start to come online. And that gives the Bridge more ability to go to those customers for additional wallet share.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [20]

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And with the decline of some of the higher cost deposits that ran off, the loan-to-deposit ratio moved up to 94%. Can you just remind me of your target range? And how high you are comfortable letting that metric go?

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

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Our internal number is 95%. We've been at 95% or a little bit higher. We certainly like it below 100%. But in circumstances, given where the market is, I wouldn't take at 95% as a hard [cap] for the near term, but certainly going to keep a little higher.

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

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And I think as we talk, the seasonality-related public funds, so as we head into the end of the year, we start taking deposits and tax receivers. You will see that public funds pop back again.

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

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Right.

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

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Okay. I appreciate that color. And just 1 more for me, and I'll step aside. You guys referenced the acquisition in your backyard this morning. I guess kind of a 2-part question. One, did you have any opportunity to look at that deal and potentially bid? And two, did that present any opportunities to gain any new talent or customers?

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

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We were not invited to participate so we really did not get involved. And with any acquisition, there is always going to be some turnover of people. And so we obviously think that we're the bank of choice if somebody is looking to come on take a job. So something should come of it.

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [26]

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And since we didn't get involved and sign an NDA, we could (inaudible)...

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Operator [27]

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(Operator Instructions) Our next question will come from David Bishop with D.A. Davidson.

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [28]

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A question for you, just in terms of the loan swap program. I think you mentioned a $233 million since 2013, I believe. Just curious if that, if you have a dollar amount converted this quarter and if the fees on that is just -- is that typically just driven by the dollar amount of loans converted? Just curious how that's calculated on a quarter-to-quarter basis.

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

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It's a combination of the size of the loan and the term of the loan. So the longer the term, the more we get as well. I would say, in the quarter, kind of had -- if I have the individual system, but it was a strong quarter. There were some longer-term ones this quarter, so even though the dollar amounts were up, there was some that were like 20 years, so they got bigger premiums on them.

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [30]

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Got it. And then in terms of the -- I apologize, in terms of just getting (inaudible) the company. The fees on inflows on the public side, will that -- does that come out of the inflationary pressure (inaudible)? And I'm just curious if there is flowback and that will have any sort of an offset to the improvement in terms of average deposit (inaudible)

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

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The tax received money that comes in at the end of the year are DDA match.

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [32]

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It's DDA, how soon is that?

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

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If a company comes in like the last week -- from an average balance standpoint, it's not as much as a factor, it's used in the case of the beginning balances.

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [34]

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Got it. Also, that loan-to-growth in multifamily market, obviously, there's been a lot of headlines in terms of the New York, more of the NYC rent control market. But just any commentary in terms of the health of that market, opportunities that you see growing there out of that regulation or just the health of the market in general?

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Kevin M. O'Connor, Bridge Bancorp, Inc. - President, CEO & Director [35]

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I think we've -- it hasn't really flowed through yet in the appraisals that we're seeing. I think there's some uptick and some cap rates, if you will. But it's still a highly competitive market. There's still a lot of people chasing those assets. Some of our paydown issue were loans that went away. The insurance companies are back in this marketplace, too. So it's something that we think will be part of our growth going forward, but it has certainly declined year-over-year.

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

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We actually had some growth, obviously, a significant growth on (inaudible) this quarter as well, not just in the boroughs.

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [37]

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Got it. And then, you mentioned the balance hitting forward. Do you know the dollar amount of loans that would be hitting forward, maybe within the next 25 to 50 basis points during the rate cut?

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

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So the net 25 would be about $15 million, and then after that about $40 million, [exact].

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [39]

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I'm sorry, $15 million and $40 million?

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [40]

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$15 million for the first one and $40 million for the next one.

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [41]

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Nice one. Got it. And then one final housekeeping. It broke up a little bit. The FDIC credit this quarter, was that $80,000 or approximately $380,000 (inaudible)?

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John Martin McCaffery, Bridge Bancorp, Inc. - Executive VP, CFO & Treasurer [42]

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$380,000.

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [43]

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$380,000?

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

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$380,000.

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Operator [45]

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

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

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In closing, I just want to thank everybody who participated. We feel that this was a strong quarter. It reflects a lot of the hard work. I know a number of our employees were on this call, so I'm going to thank them for what they've done and contributed to this. So again, I appreciate you all taking the time. And if there's any further questions or specifics, you can give John a call. Thanks.

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Operator [47]

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