Jill Hewitt - Senior VP, IRO Christopher Maher - President, CEO Michael Fitzpatrick - CFO Joe Lebel - EVP, CLO Joe Iantosca - Chief Administrative Officer.

David Bishop - FIG Partners Joe Gladue - Merion Capital Group Brian Zabora - Hovde Group Russell Gunther - D.A. Davidson Brody Preston - Piper Jaffray Don Koch - Koch Investments David Bishop - FIG Partners.

Good morning and welcome to the OceanFirst Financial Corp. Quarterly Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note that today’s event is being recorded. I would now like to turn the conference over to Ms. Jill Hewitt. Please go ahead..

Thank you, Kerry. Good morning and thank you all for joining us. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer at OceanFirst Financial Corp. We will begin this morning’s call with our forward-looking statement disclosure.

Please remember that many of our remarks today contain forward-looking statements based on current expectations. Refer to our press release and other public filings, including the Risk Factors in our 10-K, where you will find factors that could cause actual results to differ materially from these forward-looking statements. Thank you.

And now, I will turn the call over to our host, Chairman, President, and Chief Executive Officer Christopher Maher..

Thank you, Jill, and good morning to all who have been able to join our third quarter 2017 earnings conference call today. This morning, I'm joined by our Chief Financial Officer, Michael Fitzpatrick; Chief Administrative Officer, Joe Iantosca; and Chief Banking Officer, Joe Lebel.

As always, we appreciate your interest in our performance and are pleased to be able to discuss our operating results with you. As has been our practice, we will highlight a few key items and add some color to the results posted for the quarter and then we look forward to taking your questions.

In terms of financial results for the third quarter, diluted earnings per share were $0.39. Quarterly reported earnings were impacted by branch consolidation charges and merger-related expenses primarily related to the pending Sun acquisition which totaled $0.06 or $2.1 million after-tax, resulting in core earnings per share of $0.45.

Core earnings per share increased 12.5% as compared to the prior year period. Regarding capital management for the quarter, the Board declared a cash dividend of $0.15, the company's 83nd consecutive quarterly cash dividend.

The $0.15 dividend represents a 32% payout of core earnings, which is in the low end of our historical payout range of 30% to 40% of core earnings. Given the pending Sun acquisition and the uncertainty regarding fiscal and tax policy, we have decided to maintain the current dividend level.

We expect the buyers towards building tangible book value and capital in the coming quarters. And is likely to further consideration of the quarterly dividend will be differed until the second half of 2018.

At that point, we expect to be in a better position to assess overall economic conditions and for the earning accretion from the Sun transaction to be well established. No share repurchases remain during the quarter leaving 1.8 million shares available for repurchase.

Operating results were generally in line with our expectations, although expenses declined more slowly, they anticipated during the quarter. And the loan portfolio remained flat as elevated prepayment levels offset reasonably strong quarter for loan originations which totaled $195 million.

In a few minutes I'll turn the call over to Joe Lebel for some perspective and loan originations. And then also Joe Iantosca for comments regarding operating efficiency initiatives. Perhaps the most critical operating result for the quarter was the level of deposit growth which exceeded our expectations at $173.4 million.

The third quarter's typically a seasonally strong quarter for deposits where we are particularly pleased with the level of growth and while the branch consolidations completed earlier in the year. To put the deposit growth in perspective, a total of 15 branches representing approximately 20% of the bank's branch network were consolidated this year.

In spite of this consolidation, deposit retention has comfortably exceeded our expectations. We maintain an excess liquidity position to mitigate the risk the deposit one off might have pressured funding over the past few months.

Not only did deposits nicely but the quality of the deposit base is evident as the cost of deposits increased just one basis point. As deposit growth outperformed our assumptions, our level of cash on hand increased by $147.6 million to $255.3 million.

Some of that cash will run down through the fourth and first quarters which are our seasonal low points but the remainder will be available for investment in securities and loan portfolios in the coming month. With the loan to deposit ratio of just 89%, any additional liquidity anticipated in the Sun acquisition, the funding picture looks strong.

Of course the excess cash impacted the net interest margin but some of that effect will be mitigated as the cashes deploy. Turning to some other key measures for the quarter, progress is evident in on several fronts.

Excluding the residual branch consolidation charges and merger related charges, the quarter earnings performance is tracking to our longer term objectives. Performance measures using quarter earnings include a return on assets of a 111 basis points, a return on tangible common equity of 13.63% and an efficiency ratio of 54.71%.

On the balance sheet, asset quality improved with non-performing loans falling to just 39 basis point and capital remain strong. ECE totaled 8.39% and the bank leverage ratio is 8.91%.

As you move into the fourth quarter, we see the opportunity for additional reductions to operating expenses and the opportunity to strengthen net interest income this cash is deploying. Joe and Joe will discuss those opportunities in more detail. Before I hand the call over, I'll provide a brief update on progress towards closing Sun acquisitions.

I'm pleased to report that the Federal Reserve has rendered its approval for both our acquisitions to acquire Sun and our acquisition to convert the current thrift holding company to a bank holding company.

In addition, this week in two separate shareholder meetings, the Sun and Ocean for shareholders approved the transaction with in favor loading percentages exceeding 99%. Our application remains under review by the OCC.

In the event of OCC approval, the timing of that decision as well as the process for individual Sun shareholders to elective desired cash stock split which will take about 30 days, could result in a closing as soon of January 2018.

In the interim, all banks are performing well and we remain constant in the opportunity for the combined company to provide strong shareholder value. At this point, I'd like to turn the call over to Joe Lebel for commentary regarding third quarter loan originations..

Thanks, Chris. The third quarter represented another solid period of loan originations in commercial and consumer banking. Loan originations totaled 195 million this quarter and it tolled 594 million on the year-to-date basis putting the bank on track to have its strongest origination record this year.

For the quarter and year-to-date, we are subtly above internal targets for loan originations and remain enthusiastic about the cohesive credit culture we are building among the acquired banks. We continue to be able to recruit established relationship lenders from well-regarded competitors such as BB&T, M&T and TD Bank.

Although quarterly average loans increased 31 million, point-to-point loan growth was minimal in the quarter. As we continue our credit discipline in the acquired portfolios, exiting certain acquired loans that don’t meet our credit appetite.

For example, our acquired commercial participation loan book was reduced by roughly 40 million in the past four months and 28 million in this past quarter as new or amended credit terms for these loans did not meet our standards for baring reasons, the including the cash out of equity to removal of sponsor recourse or the easing of financial covenants.

We view participations opportunistically and may replace the lost loans with more conservative participations over time. Loan origination this past quarter met our expectations, the pipeline is solid and we expect the acquired loan run off to abate in 2018. Those conditions suggest more consist of loan portfolio growth in 2018.

Importantly, asset quality remains strong as we effectively and aggressively manage our credit risk position. While we continue to see loan pressure on loan pricing, we have been able to compete effectively and win profitable business.

The reduction in the quarterly net interest margin reflects a higher proportion of low yielding cash on the balance sheet. Tentative just margin compression was primarily related to this excess cash position, which impacted NIM by four basis points.

Funding costs impacted NIM by another basis point and the rest of the compression was attributable to the net impact of changes and prepayment fees and purchase accounting impacts.

Regarding deposits, we have seen year-to-date growth of a 162 million as we have retained and expanded customer relationships despite consolidating 50 branches and converting the Ocean City systems in the second quarter.

Our average branch size which was a respectable 65 million last year is now highly competitive 95 million, placing us well on our way toward our long term goal of an average branch size of 100 million. Retention of customers from all acquired companies and branch consolidations has well exceeded expectations.

With that, I'll turn it over to Joe Iantosca to discuss the trends in operating efficiency and expense management..

Thank you, Joe. Both core operating efficiency and core expenses continued to improve over prior periods. Operating expenses of the quarter that are merger related and branch consolidation expenses decreased by $947,000 in the linked quarter but was somewhat elevated compared to expectations.

The most significant driver of the added expense load was the timing of the extraction of efficiencies following the Ocean City home bank integration and the branch closures which occurred in May and July.

The Ocean City home integration was fully completed in the second quarter but there is always the opportunity for modest improvements and efficiency as the merged business matures. The elevated operating expense items was concentrated in the occupancy and data processing categories, which are expected to improve in the fourth quarter.

Additionally, quarterly expenses in the compensation and benefits, professional fees and other operating expense categories included over $250,000 of items that are not expected to recur. Compensation expense includes the expansion of our management team in the third quarter.

Additions to staff include the strategic hires of both achieve risk officer and the chief information officer.

We also created and funded a permanent project management office to support systems integration projects, direct banking initiatives and other chief projects throughout the company, which should result and improve the efficiency in the longer term as process improvements and enhanced benefits from our systems become operationalize.

Looking forward, we expect to continue to see improvement to both core operating expenses and the efficiency ratio met a merger and branch consolidation expenses. For the fourth quarter, the additional savings from the Ocean City home integration and branch consolidations should drive the core expense base to approximately $27 million.

As we prepared after 2018, we all remain focused on reducing the expense base through both branch rationalizations and process improvements. With that, I'd like to turn the call back to Chris for questions..

Thank you, Joe. At this point Joe might Joe and I would be pleased to take your questions this morning..

[Operator Instructions] The first question will come from David Bishop of FIG Partners. Please go ahead..

Hi, good morning, gentlemen..

Good morning, David..

Hey Chris, maybe a multi-part question here as it pertains to loan growth. This fall was relatively flat here. Just curious and I think Joe mentioned in terms or the derisking the portfolio. It sounds like that's mostly played out, I'm just curious in terms of some of the relationships you're exiting.

Was that, were these kind of or these sort of had ear mark when you did the acquisitions like yes we might be getting out of these credits. Or just curious, obviously with Grace joining.

Any sort of rerisk creating a rerating these credits since he's joined and maybe taking it a different external eyes point-of-view since he joined after the acquisitions in terms of these types of credits.

And then from an outlook and from a growth perspective, still thinking sort of mid-single digits as we move into 2018?.

It's a great question, David. So, to make a couple of comments and then Joe may have some things to add as well. The first is that the participations Joe is talking about were all credit, we were partly happy with, they were good credits. The majority of them were construction models with a concentration in Philadelphia center city in construction.

And they followed the path they were supposed to follow, right? Buildings got built, they got leased up and they were converting to perms. We opted not to stick in them in come cases because they didn’t meet our credit criteria and in other cases that WeBank chose to take it in a different path.

So, it was not a credit risk issue, although staying in them could have taken on incremental credit risk we weren’t interested in doing. In terms of either risk rating question, we're very comfortable with where risk ratings are.

We had gone through the acquired portfolios this time last year and reassigned a whole bunch of risk ratings at that time and the migration since that has been either benign or positive. So, we don’t anticipate any changes across the portfolio of magnitude in risk rating nor are there any big slices the portfolio we want to get at them.

So, this just happened to be a series of transaction that came in the third quarter that we didn’t want to stay in at WeBank and other plants. In the long run we didn’t mind having them on the balance sheet, but they were not relationship credits. They didn’t have deposits with them, the spreads were a little bit then but they were good credits.

Joe, anything to add to it?.

David, they unite us with. We continue as you work through the acquired book and sub starts to mature and come up for renewal. We continue to pick and choose and renew credits that we identified that acquisition as possible credits that we would either continue with or exit. So, we continue to do that on a much lower level as well.

But Chris refers to the larger transaction report in the participation book appropriately..

Got it. Then when speaking with another management team earlier in earnings seasons in the Phili metro area, and they were promoting the fact that maybe there has always been a lot of consolidation within that accretive Phili market.

But some of the larger peers maybe have woken up and started up to price more defensively just to stop moving market share.

Are you seeing that phenomena in the current times with some of the bigger guys out there that starting to have to protect the better relationships more defensibly these days?.

Pricing's always I think initially matter what market you're in. but and I would say it's probably will increment a little bit more competitive in the last three or six months. But I wouldn’t say that there has been a big sea change.

The turnover you refer to though has had some benefit to us and Joe mentioned some of the new commercial town we've hired. That has been really either in the Phili metro or in the southern part of our footprint from folks that have been through transactions that kind of disrupted their environment..

Got it.

And in terms of maybe expectations for 2018, any sort of expectations in terms of the loan growth there, still thinking sort of mid-single digit growth rates in terms of sustainability?.

It should be. If you think about the run rate we were on last quarter was a little less than 50 million in net growth. I think that quarter is a little bit of an anomaly. It's usually a weak quarter anyway. Our originations were strong but then these pay offs came through.

We'd like to target to try and get to somewhere around 50 million a quarter, which is single digits for us now, although if you put the Sun balance sheet and it's probably a little bit lower..

Great. I'll hop off into the queue now..

Thank you..

The next question comes from Joe Gladue of Merion Capital Group. Please go ahead..

Good morning..

Good morning..

Hi, Joe..

Let me I guess touch a little bit on the loan portfolio again just on the pipeline I guess see that there is pretty significant drop off in mortgage and construction segment.

I just wondering if you could tell us here what's going on in the market there and just what's driving that decline?.

Joe, thank you. It's Joe Lebel. We're not I think when we talk about pipelines, it's always a day or point in time like as like a balance sheet it. I'm pretty confident in our fourth quarter originations and where we are heading in '18 given the folks we brought on our existing books.

So, I think we're just looking at a snapshot and of course at the end of the third quarter in the residential business you tend to see that drop off as the seasons head into the fourth and first quarter anyway. So, in the resi book in the equity consumer book, it's not uncommon to see that dip.

But I'm not concerned of all about the commercial pipeline..

And there was mention in the prepared remarks about the prepayment levels and accretion income.

Just wondering can you I guess quantify what the I guess change in prepayment fees where from second quarter to third quarter?.

Prepayments not been is it pressed, prepayment's not been a big component of our NIM ever. So, last quarter was 2 basis points, this quarter it's actually none. So, we had no prepayments. So, that would have been 2 basis points of contraction in the NIM. But then on the other side, we had a couple of PCI loans pay off that had March associated with it.

So, the accretion income popped up a little bit where usually would have gone a little bit in the other way. But neither of those was a big number. It was 100s or 1000s of dollars, wasn’t big..

Alright, I get that. Other questions been answered. Thanks..

Well, thank you, Joe..

The next question comes from Brian Zabora of Hovde Group. Please go ahead..

Thanks, good morning..

Good morning..

Just a very question on the deposit side. Last quarter you thought that your municipals might come in as well.

Was that also a portion of the deposit growth or is it more you're getting from other customers?.

Surely that was a significant portion deposit growth which is seasonal. And then we do have parts of our franchise that are seasonal with the shore communities. So, we had commercial deposits come in and a pretty good season in the shore that certainly helped things out.

But independent of those, internally we look at our deposit tracking including excluding commercial in total and then within commercial looking at it within government and non-government and all those trends are positive, some are more positive than others.

But we're not detecting any concerns about attrition of any scale anywhere in the deposit base. Certain categories do better or worse than others but none of them have us concerned..

Okay, great.

And then you'd mentioned the potential for that buildup of cash to reinvest, how should we think about maybe the timing regarding maybe investment securities purchase or how do you think that that cash trickles down over the next quarter or two?.

Given the outlook for loan growth and the expectation that the season as we go through the winter will run off some of that cash. We're not going to rush to get it all out immediately, we'll probably put more into the bond book and the loan book in the short term because you can deploy that faster and then look to kind of bleed that over.

The cash flows of the bond book are pretty good. So, we can put it in the bond book now and then just bleed it back to the loan portfolio over the next several quarters. So, default only..

Okay, great. Thanks for taking my questions..

Thank you, Brian..

That's right. Thank you..

[Operator Instructions] The next question will come from Russell Gunther of D.A. Davidson. Please go ahead..

Hi, good morning guys..

Good morning, Russell..

Just a quick follow-up here on some of the margin comments that have been made.

I appreciate the color on the puts and takes but kind of tying it all together, do you think even with kind of late quarter fed hike, you guys would be able to demonstrate some margin expansion in the fourth quarter?.

Yes, so this is a good question. The first thing I'd say is their betas have been pretty low. And with the cash that we have on hand, we can be pretty discriminating about deposit pricing. So, we had to make the choice over what would be the deposit run offs but better margins.

With the loan to deposit ratio of 89% you have the ability to make that choice. So, I don’t know that the fed hike is going to do much for anyone this quarter. And the reason I say that is because the long end of the curve doesn't seem to be impacted that much. That's where most of us price the asset side offer.

And in the short end of the curve even if it were to go up in December, it's mainly anticipated today to I think look the latest numbers but the majority of folks are handicapping and increase in December. So, some of that's already reflected in the market.

I think for us it's relatively neutral effect, might be able to be positive but it's unlikely to be negative..

Got it. So, I understood with regard to the thoughts around the hike. Tying it altogether make sure I get the comments. You would think that you would be able to maintain stability in the margin next quarter to possibly up given flexibility on the funding side..

Hey Russell, it's Mike. If the headwind on that is see the purchase account accretion, so that would elevate it. If you look second quarter to third quarter, it went up a bit, which is usual because of some prepayments. So, we accelerated some of the accretable yield. So, this expectation that that could decline back to again in the fourth quarter.

So, there'll be a little bit of a headwind with respect to that. So, I wouldn’t expect NIM expansion and maybe the same or down a couple of basis points..

Okay. No, I appreciate that Mike, thanks for the color there. And then just one follow-up on the loan growth expectations. I hear you guys comfort with the pipeline and loud and clear on how originations are tracking year-to-date.

I guess with regard to that 50 million quarter-on-quarter target, is that something you think you could achieve with prepayments hopefully using in in the fourth quarter?.

That's possible, sure. That's what we'd like to see, that's we think a meaningful that provides a meaningful boost to your earnings capacity but it doesn't push too much growth in any one period. We're always thoughtful about where the interest rate scenarios going to be over the next four quarters with the economic scenarios.

So, we've always been a place that isn’t looking to do all the growth in any one quarter. So, but 50 million is possible in the fourth quarter..

Okay, great. That's all I had. Thanks for the help, guys..

Thanks, Russell..

The next question comes from Chris O'Connell of KBW. Please go ahead..

Hi guys, this is Chris coming on for O'Connell..

Hi, Chris..

So, I just wanted to nail down for what you guys consider the core cash position non excess cash like as it stands today and then what will be year like core holding cash position after this Sun acquisition?.

Alright. So, I think the way to think about the funding side of our balance sheet and cash in particular is that over the last year we've been favoring different amounts in different quarters but we kept a lot of cash on hand.

That was with the Cape and the Ocean City home acquisition, we could have had a different experience in terms of deposit retention. We're thankful that we didn’t but we kept the extra cash right on because we would have preferred to fund attrition out of cash than out of some having to reach for alternative funding. That's really maturing now though.

So, and we've got an excess cash position today. Given the strength of our deposit franchise in total, and where our loan to deposit ratio is. I could see this over the next four to six quarters either not maintaining a whole lot of cash or even going into a position where we got overnight borrowings.

So, we'd be comfortable doing that given the profile of the company. So, I don’t feel like we need to keep a $100 million with cash around. We've just done that to mitigate certain risks.

So, look at, you can never have exactly which you want to like but over the next several quarters if we drew that down so that you had a minimal cash position, that would be ideal. That depends on market conditions there..

Okay..

I just mentioned that our borrowing capacity is pretty significant. If you look at our balance sheet, our wholesale borrowing position is way lower than virtually all the peers we compare to. So, in the event we needed to fund up growth and deposits for stress, we got a lot of availability in the wholesale front..

Got it. And then in terms of just post Sun acquisition expense savings. This one is a pretty good quarter I think in terms of reducing their own operating expense, is this quarter.

So, will that kind of reduce the dollar amount or the percentage amount of what you plan to take out after the close of the acquisition or is that already considered?.

I would, that's classified as largely already considered. So, we were obviously we did our diligence and work with the folks at Sun.

we understood what their plans were and part of the reason we were comfortable with the significant cost savings that we expected when we announced the deal is we knew there were certain levers that Sun was going to pull independently and then we'll pull the second half of that is we integrate the companies next year.

So, yes I would avoid double counting that. I think we know where we're going to get to combine. We're pleased to see Sun's progress but it was right in line with what we thought that rate..

Okay, great. And then in terms of the other line in fee income or I guess that was a that's a combination of a few things.

But what was, do you think you can maintain these levels the income going forward?.

Fee income should be stable, we're not we don’t have any concerns about that. I have to just go back and make sure I'm reconciling to the right line item you're looking at..

Yes, I think if you're looking at total income, there was a flip up and gain from real-estate operations about $300,000 higher than the quarter.

So, if you’re looking at the total other income that varies quarter-to-quarter with real estate properties we sale with the gain, so that was a little bit, that was accounted for most of the increase from last quarter to this quarter. Fee income relating to trust bank core deposit was pretty stable quarter-to-quarter..

Okay, great. I will leave it there. Thanks, guys..

Thanks Chris..

The next question comes from Brody Preston of Piper Jaffray, please go ahead..

Good morning everyone, how are you?.

Great Brody..

So, most of my questions have been answered.

But I just wanted to, I know you guys did a really good job sort of containing deposits this quarter especially relative to the rest of your northeast peers, but I just want to get a sort of an update with regard to what you’re seeing in the market right now, who is being most aggressive and those sort of things?.

Sure. Yes certainly there is a pressure on deposit costs in the market, and I’ll go through a couple of different categories to give you a sense. I think most of the folks that I talk to in the market, if you recognize probably a year ago that CD market had definitively turn to is becoming much more competitive.

So, that’s been competitive for at least a year or so it’s not a big category for us, we haven’t felt the impact; I wouldn’t say it’s the light switch, but it was pretty definitive movement starting in the second half of last year.

The next market seems to be impacted is rather called a high yield money market, and you can see some of the top players both in market, but then there are also some national players, so if you look at the yields offered by Goldman Sachs consumer bank, the GS bank is pretty high yield, ally, there are few players out there both nationally and then also within our region who have those, I call them the promotional or high yield money markets, those appeared to have moved 15 to 25 basis points and could be subject to further movements beyond that.

So, that’s where most of the payments have been felt and neither category was big up for us.

We’re always watching from when does that lead over to the corporate clients, cash management is a big business for us, we’ve got to stay sharp on that, our government business is competitive, those things get bid out, so we had an occasional relationship who has the re-price there, so there’s a little bit of pressure, but not significant pressure in those categories and corporate cash management.

So, I kind of characterize that way in terms of which players, I mean, it’s pretty easy to see from people’s cost to funds and funding new who is feeling a little bit more..

All right, great; thank you for that. And, I guess with regard just going back to the cash balances and sort of how you look at your overall funding, and I know you said that the cash balance if it was more advantageous to you to sort of maintain a little bit of extra liquidity instead of getting more competitive.

On the deposit front you wouldn’t mind doing that if it was going to help the margin.

But with regard to that like what kind of customers would be living in that sort of scenario and how easy would it be for you to sort of I guess ratchet the deposit growth backup by just turning the, I guess, the right dial?.

That’s a good question. So, the first thing is when you think about the dollars and dollar growth in deposit, it doesn’t always get connect to relationship growth or contraction. So, often customer will optimize and they may choose to move deposits between accounts or between institutions.

The most important thing for us is that we continue to maintain the relationship especially in the transaction accounts, the cash management accounts.

So, what we see is probably a bigger risk for us than losing a relationship is, do we have commercial relationships and they start to optimize a little bit more, right, and then they might take money out of open CD, behavior that hasn’t happened over the last five or six years.

So, I think there is average balance risk in portfolio like ours as people optimize, so that’s more of the risk that I would see than say losing relationships. As a relationship lender, we’ve got a lot of ties into the folks a lot of the products, we’ve seen relationships to be pretty sticking, but the dollars may draw down.

In terms of your second part which is if we chose to increase our deposit funding, in the event that we had outsized opportunity to grow the balance sheet.

There are a couple of things we consider, the first is, my comments around the dividend are important, because if you have the capital inside the company and conditions are favorable, you can just grow the balance sheet.

I would be careful not to disrupt our deposit profile if we needed to grow let’s say in any magnitude of few hundred million dollars, we might first turn to wholesale borrowings and particularly longer term borrowings, because that would allow us the opportunity to keep our interest rate risk position very balanced.

So, I think kind of first place we would go is in laddering some longer term borrowings, if can have good loan growth. The second place would be maybe hang a little higher in certain account categories and then if we have to resort to either a high yield in money market products or spots CD in certain durations.

We are in a very large deposit market, just central in Southern New Jersey where it represents $90 billion deposit market, FDI has seen short deposit. So, there’s plenty of room for us to add more deposits if we wanted to be more competitive on price..

Okay. And, then one more item, my phone had cut out when you were talking about the dividend earlier, could you just sort of, not the entire thing, but just sort of giving a broad overview..

Sure. We are a $0.15, our payout of quarter earnings is about 32% now, and traditionally we looked at 30% to 40% to be an optimal dividend payout range, meaning as you get close to the 30% you’re thinking about other opportunities to increase it and as you get closer to 40% you start to say, let’s do it more conservative about things.

So, this quarter even though came down to 32% payout range, we left dividend flat and we anticipate keeping it at that level until we get into the second half of 2018, because we’ve got a lot going on, right, so we’ve got Sun Acquisition coming, be normalizing, capital levels to that, we want to assess what’s happening in the markets in terms of fiscal policy and tax policy.

We want to see what we think the credit cycle looks in the first half of next year, so we could go in one or two directions to decide at that point, everything is looking good and we’re comfortable increasing that payout ratio or we may opt to continue to build capital, but we would make that assessment later in 2018 and we specifically kept the dividend flat at this point..

All right, great; thank you very much guys..

Okay. Thanks very much..

[Operator Instructions] The next question comes from Don Koch of Koch Investments. Please go ahead..

Hey gentlemen you have done a fine job in the past and you are managing the assets since you’ve had.

You’re taking on a [marriage] partner that is slightly less than your size, how do you ensure, what’s precise steps do you have to ensure a common culture, I mean, the bank you’re buying is more ruled than you are, you are more concentrated along that seacoast? How do you ensure that you don’t get into suggestion and you’re not sort of fighting within, but you’re fighting the external challenge?.

It’s a terrific question Don. So, let me just point to a few things. The first is that as we typically announced the transaction, the work that folks of Sun have done to improve their franchise over the last several years has been tremendous.

So, with Thomas O'Brien is rival CEO and the other folks he’s brought in, he made a tremendous amount of progress at Sun and approved this operating profile in virtually every measure.

So, as we look to Sun, we see a company that’s well run and provides good opportunity on its own, that’s important to sustain the loan, you want to make sure that what’s your integrating into your company has a good foundation of its own.

International banks, we share the same regulator which also allows a lot of our cultural points around, credit risk appetite and all that to be well aligned, so we are not very part of them. So, the first thing is that I think the franchise were acquiring is on stable footing.

The second thing is that we have built an expertise in integrating franchises, this will be our fourth hold bank acquisition, branch acquisition as well in the last three years, those have done well. We’ve learned lessons in each one of those integrations. And, I think in each case we are getting better every time we do it.

So, most of the things we’re happy with, but we always find something we could improve for the next time around. The last part is our commitment to investing in the infrastructure of the company and that has been significant.

If you followed us over the last couple of years, you’ve noted the important additions we’ve made to the management team, so it’s both in breadth and depth bring on folks like our higher this quarter, Grace Vallacchi Chief Risk Officer, her background not just with the OCC, but also with First Fidelity and First Union.

So, high is like that, evidence our commitment to investing in the franchise. The other cultural question you asked which is, how do you kind of integrate these? We didn’t talk about it much today, but we have in the last earning’s call. We are in the process of consolidating what will be 19 back office locations into primarily 2 back office location.

That process is going to happen in the first half of next year that will leave us with significant operation center, significant administrative center, and getting all the people under one roof I think is as important as everything else we are doing to make sure that, you can unify policies and procedure and risk appetites, but there is no substitute for having people working side by side under the same roof, sharing the same culture and the same value.

So, I acknowledge the risk that you’re presenting, I think we’ve got a good partner by somewhere the good foundation, we’re making investments in people, we’re making investments on things like technologies and facilities, and then we’ve got a pretty good track record of having done these integrations and done it well, so I hope that addresses your concern..

Yes, it does.

And, finally are you finding these marriages, especially the current one is accretive to earnings in a shorter time period or a longer time period?.

So, I think if we were to look back on the three hold back acquisitions we did fully American, Cape Bancorp, and Ocean City Bank, we found that the earning equation has met or exceeded what we initially anticipated it would be.

There are some categories that windup being a little bit of different issue work with these things, so you may have a little better worst impacting things like margin, Joe talked earlier about having some LV payoffs, we’ve lost some assets, they were good assets, but it was the right thing to move on from them, so at a very granular level, we always think the [DJ] is a little bit, but in terms of earning’s equation to your specific question, we are very comfortable that all the transactions has delivered either the earning’s equation we expected or in some cases even more..

Okay, thank you..

Thank you, Don.

The next question is a follow up David Bishop of FIG Partners. Please go ahead..

Yes, Chris just a quick housekeeping in terms of the, and I know it can be volatile, the origination yields I guess on the commercial portfolio down a bit here, anything in particular that just sort of into quarter volatility, I don’t know if that’s more of a commentary pricing or something in particular this quarter that impacted?.

David as you point out they can be a very volatile figure that usually has more to do with the composition of the loan booked in the quarter then the market conditions, so we don’t feel that market price has changed much, but if you go come from quarter-to-quarter, and let’s say one quarter you had preponderance five year commercial real estate deals and the next quarter you had more CNI floating rate stuff, you’re going to see differences in that yield, but we don’t see anything in the market that would be material change in any direction..

There was floating prime based, floating rate, CNI, then typical was overweight as Chris said its overweight that tends to drop the yields a little bit [indiscernible] interest rate risk management, so it’s a give and take..

Right, and then sort of follow up in terms of the, Chris you said, the consolidation of 19 back offices to 2, I think Jill said getting the quarter expense right down to $27 million next quarter. So, as you look at some of the core branch network, I guess you are down to 46 now.

As you evaluate that, is there more room to even consolidate even from that, I guess the core branch network if you look at into 2018 or is the focus more in terms of integrating Sun at this moment?.

I think it’s suitable, so we certainly - our experience today in branch consolidations has been very favorable. So, I think we’ve developed a good model which helps us understand in which cases our customers send the consolidations.

We want to make sure which branches are important, so we want to make sure we got a significant branch presence that folks we have in our branches still play a vital role, let’s just do account generation, but in helping folks activate new technology like mobile banking and all that. So, we believe branches play a very significant role going forward.

That said, I think if you look at the results this year, we’re obviously looking at I think like some additional level consolidation in 2018 maybe beyond even what we had anticipated result, not big, I think this is the process in the industry where if you’re not doing this each and every year and thinking about where your branches are and how they’re configured, if you wait too long, it could be too late so..

Yes, got it, great. Thank you for the color..

[Operator Instructions] This concludes our question-and-answer session. I would now like to turn the conference back over to Chris Maher for any closing remarks..

Once again thanks to everyone for joining us in the call this morning. We look forward to presenting additional updates in January. Thank you..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day..