OceanFirst Financial Corp.
Q1 2017 Earnings Call Transcript

Published: 30 Jun 2017

[Operator:]

Good morning and welcome to the OceanFirst Financial Corporation Investor Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jill Hewitt, Senior Vice President, Investor Relations Officer. Please go ahead.

[Jill Hewitt:]

Thank you, Laura. Good morning and thank you all for joining us this morning. Before we begin, I want to remind you that many of our remarks today contain forward-looking statements based on current expectations. Please refer to Slide 2 of our investor presentation 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. For any forward-looking statements made in this presentation or in any document, OceanFirst and Sun claimant protection of the Safe Harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995, this presentation is being made in respect of the proposed transaction involving OceanFirst and Sun. This material is not a solicitation of any vote or approval of OceanFirst’s or Sun’s shareholders and is not a substitute for the joint proxy statement/prospectus or any other documents which OceanFirst and Sun may send to their respective shareholders in connection with the proposed transaction. This communication shall not constitute an offer to sell or the solicitation of an offer to buy any securities. In connection with the proposed Transaction, OceanFirst intends to file a registration statement on Form S-4 containing a joint proxy statement/prospectus and other documents regarding the proposed transaction with the SEC. Before making any voting or investment decision, respective investors and shareholders of OceanFirst and Sun are urged to carefully read the entire joint proxy statement/prospectus when it becomes available and any other relevant documents filed by either company with the SEC, as well as any amendments or supplements to those documents, because they will contain important information about OceanFirst and Sun in the proposed transaction. Investors and shareholders are also urged to carefully review and consider each of OceanFirst’s and Sun’s public filings with the SEC, including but not limited to their Annual Reports on Form 10-K, their proxy statements or Current Reports on Form 8-K and their Quarterly Reports on Form 10-Q. When available, copies of the joint proxy statement/prospectus will be mailed to the respective shareholders of OceanFirst and Sun. When available, copies of the joint proxy statement/prospectus also may be obtained free of charge at the SEC’s website at www.sec.gov or by directing a request to OceanFirst Financial Corp., 975 Hooper Avenue, Toms River, New Jersey 08753, Attn

[Christopher Maher:]

Thank you, Jill. Good morning and thank you for taking the time to join this conference call regarding OceanFirst Financial Corp's agreement to acquire Sun Bank. This morning I'm joined by Tom O'Brien, Chief Executive Officer of Sun; and Mike Fitzpatrick, Executive Vice President and Chief Financial Officer at OceanFirst. During the call, I'll be referring to the slide presentation that we made available earlier this morning and that is also made available via webcast. My prepared comments will walk through the strategic value of the transaction as well as provide some color to the structure, pricing and other metrics of the opportunity. Following our prepared comments Tom, Mike and I would be happy to take your questions. Before I begin the formal presentation, I want to take a moment to express my appreciation for the Sun team. Sun has made tremendous progress over the past few years and overcome a series of incredible challenges to develop a high quality franchise with the furiously loyal following in the marketplace. Those accomplishments did not come easily, requiring leadership team work and dedication from Sun's Board, Tom, the senior officers and from officers and staff in every part of the Company. Many characterized community banking as been in the midst of a talent war. The opportunity to add Sun's professional bankers and clients to the OceanFirst family is perhaps the most valuable aspect of this transaction. I'll now direct you to the slide presentation. Slide 2 has already provided the required legal disclosures. I'll jump through the first couple of slides and begin on Slide number 4, the transaction highlights. This is an in-market acquisition that substantially improves OceanFirst's operating scale and market share and also provides the strong branch network in counties OceanFirst has been covering with commercial lenders but not branches. These additional counties edge the OceanFirst franchise closer to both the New York and Philadelphia metropolitan areas. Sun's core deposit franchise carries one of the lowest cost profiles in New Jersey and with 23% non-interest deposits complements the high quality core deposit franchise at OceanFirst. The financial metrics are attractive, has substantial market overlaps and OceanFirst's existing operating scale can be leveraged to produce cost savings of 53%, a figure in the same range is achieved in our recent Ocean City Home acquisition. 15 communities have both the Sun and OceanFirst branch within a three mile radius. But considering an acquisition, the primary question we ask is will the pro forma company exhibit valuable performance characteristics. And in this opportunity, the additional scale will allow us to target a 120 basis point ROI, 13.5% return on tangible common equity and a 50% efficiency ratio. Finally, in my opening comments, I alluded to the work the Sun team has done to improve the deposit funding profile and asset quality, both of which now demonstrate very impressive characteristics. Moving to Slide 5, the transaction summary. The consideration aggregate is $487 million. We will issue 15.1 million shares and pay $72.5 million in cash. These numbers are fixed and do not change. What does change however is how these are allocated to the closing; for example, if the stock price goes up, the mechanics in the definitive agreement increase the cash per share value to track closer to the closing stock price. As a result, the overall exchange ratio for the stock component will change slightly. However, what we will issue and pay does not change. For more information, I would point you to the election feature that's detailed in the merger agreement. The valuation multiple represents 169% of Sun's current tangible book value or 156% of Sun's tangible book value, after factoring the amount of the deferred tax asset that will be realizable to OceanFirst. The PE ratio is high as Sun is still shutting legacy expenses and deploying liquidity. After considering the planned expense reductions, the PE ratio applicable to 2018 earnings would be just 14.5 times, a very rational price given today's multiples. Most of the other purchase accounting marks are straightforward with the exception of the DTA. In the case of the DTA, Sun currently has a DTA with total value of $124 million, while they currently value the realizable portion of that DTA at about $50 million, after applying the IRS 382 analysis OceanFirst anticipates the realization of a $74 million DTA. That's a net increase of $24 million as compared to Sun's currently realizable value. If the tax rate drops to 15% and extensively the book value is reduced by $42 million, we would estimate that Sun's franchise will contribute an additional $10 million in net income per year in perpetuity. That would indicate we would earn back a potential DTA write-off in approximately four years. Capital levels which have been calculated here to exclude the value of the DTA are projected to remain within their normal operating range. Tangible common equity to assets will be at or above 8.8%, and the leverage ratio should be at or above 8.3% at closing. Internally generated capital will be strong, supporting the ability to increase capital over time and fund organic growth. The OceanFirst Board will be expanded by two seats to be chosen from the Sun Board following regulatory approval. Closing is subject to regulatory and shareholder approvals, so determining a precise closing timeline can be problematic. In addition to the acquisition application, we are considering simultaneously making applications to convert our existing thrift charters to a bank holding company and the national bank, which tends to add a little time to the approval process. Given that, we expect the closing in early 2018 as achievable. Then moving onto Slide 6, building a community bank of scale. I won't spend too much on this slide, but it illustrates the effect of the series of disciplined and well-executed acquisition that have allowed us to build OceanFirst, while also strengthening margin, the deposit profile and overall profitability metrics. Further, the pro forma franchise is positioned to perform among the highest quartile in the peer group, which we would hope would support valuation that also reflect the median of our new peer group. Let's move to Slide 7, which is an overview of Sun Bancorp. We will pause just briefly on this slide as well. For those of you that are not familiar with Sun or with the work Tom and his team have accomplished over the past few years Sun is a well-capitalized bank with very strong credit metrics and steadily improving profitability. Sun is well established with a 30-year history. It presents one of the larger independent banks available in New Jersey. This map also provides a clear picture of the overlapping franchises. Moving to Slide 8, achieving our priorities. All three of our recent whole bank acquisitions have focused on deposit quality and Sun is no exception. While bearing a slightly higher cost than OceanFirst's franchise the Sun deposits are very favorably structured in a geography where many competitors are struggling to find efficient funding. Operating efficiency is a must for any high performing community bank and the scale advantage of servicing these clients on the OceanFirst infrastructure is clear and compelling. The market migration provides a stronger competitive foundation in counties like Burlington, Mercer, Middlesex, and Monmouth, all areas in which OceanFirst is an active commercial lender, but limited by a modest or a non-existing branch network. Revenue synergies have not been modeled into this transaction, but we will have the opportunity to better support large commercial clients and we will be reintroducing residential mortgages, consumer loans, and trust services into the Sun customer base. But these advantages in the strong and diversified commercial lending operations, growth initiatives present additional upside. Now onto the Slide 9, improving our deposit share. This slide illustrates the solidified deposit market share the pro forma company, while we will remain the fourth largest depository in New Jersey. Our deposit market share in New Jersey will approach better provident with an operating skill advantage measured in deposit per branch over Valley, Provident, Lakeland, Columbia and Kearny. In addition, our deposit market share and the counties in which we operate will be higher than JPMorgan Chase, M&T and Provident. Now going onto Slide 10, expanding access to robust markets. This map and chart illustrate the opportunity to better compete in markets where OceanFirst has limited or no-branch presence. We lend in all these counties today, but we are in an obvious disadvantage we got a strong branch network. Moving to Slide 11, improved coverage of business centers. This slide further demonstrates the density of commercial lending markets and Sun will provide better physical coverage in key expansion markets for OceanFirst. Now onto Slide 12, the strong core deposit franchise. Here you see map of the relative deposit market densities within overlay branches. In addition, the chart demonstrates the hypercompetitive nature of the New Jersey, New York and Philadelphia MSA. At 39 basis points, Sun deposits outperform the market in terms of cost and a 23.4% non-interest bearing they may prove incredibly valuable in a rising rate environment. Onto Slide 13 its distribution capabilities. These images represent heat maps of deposits and loans for both OceanFirst and Sun. The expansion of our commercial banking business is clearly focused on the corridor from Philadelphia to New York with Sun our presence improves nicely. On the deposit side, our clear advantage is our brand and distribution network in the southern part of the state, a very different competitive market from the dense markets in northern New Jersey. Moving to Slide 14, Sun's loan and deposit transformation. This slide illustrates that Sun has developed both the funding and the lending side of the business, and how complimentary these franchises are. One important note here is that pro forma balance sheet shows an investor CRE concentration slight above 300% at an estimated 315%. We're not concerned about this as both institutions have strong concentration management programs. The sub concentrations within investor CRE are well diversified. Funding is primarily high quality core deposits and almost none of these loans are broker driven. I'd also point out that we would wind up with $1.2 billion in loans that effectively demonstrate characteristics of C&I loans, which includes C&I but also owner occupied CRE which is both underwriting and priced like a C&I loan. Looking at Slide 15, our proven acquisition formula. While we have been inquisitive, our selection criteria has allowed us to maintain a valuable balance sheet mix above the deposit and lending sides. Non-interest deposits were right 20% or residential loans will fall to 34%. Commercial loans including CRE will rise to 56% of the loan book while construction remains modest at just 3% of loans. Next to Slide 16, the transaction assumptions. I won't run through this slide, but we can certainly address questions and assumptions during the Q&A. So onto Slide 17, our history of expense reduction. The ability to achieve expense reductions is one of the most critical assumptions. I thought it valuable to review our record to date. At legacy OceanFirst, branch consolidations, branch hour and staff adjustments, applying automation to certain residential lending tasks, and the exit of the agency mortgage servicing business supported investments in commercial banking. Our recent acquisitions have all met or exceeded our model expense saves. The Ocean Shore target is being achieved as of today. This experience gives us the confidence we can achieve the required reductions with the Sun integration, all while growing our deposit franchise and maintaining a strong level of compliance. Now to Slide 18, the transaction financials. I will repeat some of these numbers, but I will focus on the disciplined approach to pricing which resulted in a modest 1.2% dilution to tangible book value and a relatively short earn-back horizon, 2.3 years on the simple method and 3.5 years in the crossover method. As mentioned earlier, capital levels remains strong. Onto Slide 19, significant upside potential. This slide compares to pro forma franchise to our expected peer group and demonstrates the substantial gap between the projected position of the pro forma company as compared to the peer group. 198% of tangible book value versus 279% from peer group and 11.3% core deposit premium versus of 17.9% from the peer group, and a 14.2 times PE ratio versus 16.7 for the peer group. While multiples are never in our control, this does illustrate the magnitude of the value enhancement opportunity in the event we demonstrate continued performance. Moving on to Slide 20, with pro forma efficiency ratio. The slide just gives you a sense of the pro forma banks opportunity to be among the most efficient banks in the national peer group. Now onto Slide 21, which is our summary. But before we head into questions, I'll just summarize by saying we believe the strategic value of this opportunities based on. The transaction being conservatively structured, will increase deposit funding at a time when funding may be very important. Cost saves are driven by a high degree of market overlap. We benefited from an extended branch network closure to New York and Philadelphia. Peer valuations suggest the strong opportunity to deliver value. Our shareholders will continue to build liquidity and finally our track record regarding acquisitions should provide comfort regarding the risk profile of this transaction as well as the likelihood we will achieve the required expense reductions. At this point, Tom, Mike and I would be happy to take your questions. Thank you.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from David Bishop of FIG Partners.

[David Bishop:]

Hi, couple of questions here before I jump off and give some other people a chance. But I guess first question, the net interest margin I noticed at Sun is relatively low compared to you all. Is that a function of excess liquidity or I saw this from the heat map a lot of their loans, it looks like are sort of in that metro New York area. Is that sort of pricing competition, just maybe getting a sense on a pro forma basis how you see maybe the deployment of the excess cash that they have on balance sheet impacting the combined margin and maybe just a color on the current margin in terms of relative to why it's lower than yours?

[Christopher Maher:]

So, first comment I'd make is that, if you look at the yield on the loan portfolios, they are relatively close to each other. And both companies have really been focused on relationship lending. So, we're pursuing opportunities in clients who have a lot of business with the companies that have deposit profiles as well as lending profile and very little broker driven business. So, the loan yields are pretty close to each other. We pick up a little bit of an advantage on the deposit side. And going forward, we are going to continue to focus on that. We do expect we'll do little more business in New York and Philadelphia metros. We also recognize that as banks get larger, there's a little bit more pressure to maintain that net interest margin, so it may come down a little bit, but the efficiency would be there. And then you mentioned the deployment of liquidity, both companies have an opportunity to deploy excess liquidity. Interestingly, our loan to deposit ratios are just about on top of each other at 92%. So, as we go forward into the next 4, 8, 12 quarters, I think both companies are going to be looking to deploy some of that cash, at a time when rates come up just little bit so we are asset sensitive going forward. So, I think we're comfortable the margins will stay reasonably steady.

[David Bishop:]

And then as a follow-up, maybe walk through, maybe some of the pro forma market leadership pro forma for the deal in terms of maybe some of the market leaders following the acquisition of Sun?

[Christopher Maher:]

I am not -- market leaders in terms of who we would compete with, is that…?

[David Bishop:]

Just in terms of maybe the southern versus central, if there is a sort of your bench in terms of who is going to be sort of you're running the various markets. I know you've got some people there on the ground in terms of Central Jersey, Mercer County, if there is sort of any change in sort of how you are redeploying some of the executive already in place there at OceanFirst?

[Christopher Maher:]

Sure. So, you -- it's very early. I don’t really have any definitive statements to make, but I will talk a little bit about philosophy. We are not interested in buying buildings or branches. We're investing in client relationships and we're investing in people. And I referred to the talent war in the opening and I really meant that. It's very hard to find top quality people. It's very hard to find top quality lenders in particular. We've strived in the acquisitions we've done to date to retain the highest level of staff we can. We are very careful about managing open requisitions and finding places for people. And in fact I was looking this morning, we've retained about 75% of the folks that we brought over in the last three deals we did, while achieving the cost savings. So, we took a lot of the cost out of facilities and technology and all that. So, I can make this comment, we have it -- we're placing a significant reliance on the quality of the clients relationships and the folks over at Sun who are handling those. And we're going to work with them and find an organizational alignment that works for everybody because that's a one of the biggest values we can get out of this is extending into those relationships.

[David Bishop:]

Got it and I'll just ask one more and hop-off. In terms of core deposits at Sun Bancorp obviously the past few deals you guys have had pretty overwhelming success in retaining those core deposit. Are you assuming pretty close to 100% retention like you've seen recently in the Cape and Ocean Shore? Or do you expect some level of attrition that could be exceeded so to speak?

[Christopher Maher:]

So, you rightly point out, David. We are very comfortable with our results to date. So, our retention just through last month of the three acquisitions that we've done has been running about as 99% of the deposit dollars acquired with us today, which is a very high retention level. From modeling purposes, I think it's always wise to be a little bit more pessimistic about that especially when you've got branch consolidations you're contemplating. So, we modeled for a little bit more run-off than that, but obviously our objectives are to retain at that level.

[Operator:]

[Operator Instructions] And our next question will come from Collyn Gilbert of KBW.

[Collyn Gilbert:]

Chris, just on the -- obviously, a great transaction brings you a lot of liquidity. You guys already had a lot of liquidity. I mean how are you thinking about this, maybe kind of some tighter commentary as to where you think the overall growth rates can go on kind of the business and the loan book from here? I mean do you think this would allow you to accelerate the growth and then you know tie that into I guess how you're thinking about things from a macro point of view because I know you guys have been disciplined through the kind of the fits and starts of the cycles when you want to grow, when you pull back. So just if you could kind of give us your thoughts on kind of the current state of affairs where the growth opportunities are? And then, if you see this sort of accelerating, loan growth in excess of double digits or how we should we think about the business kind of longer term?

[Christopher Maher:]

I think the first comment I would make is that, this increases our optionality to grow faster if we think that's a smart idea, and so that's a big caveat. I think we're at, at the reasonably unsettled point in terms of the future regarding interest rates and the future regarding economic prospects. There's a lot of policy decisions being made, right now. So, I think this opportunity positions us well in the event we went into, I wouldn't even call it, say, Goldilocks area. But if we're in a favorable scenario going into 2018 where interest rates look positive, meaning not just the amount but also the shape of the curve, where economic prospects still look good, where we're comfortable, we're not facing any recessionary pressures. We would have the optionality to grow much more quickly. But I think we’re going to consider those things as we put the companies together and be careful, thoughtful about it, so that's kind of how it answers. It gives us the raw material to do that and then you know with the fed unwinding its balance sheet, I don't think there is a tremendous amount of clarity from the markets about how that will impact overall liquidity, liquidity in community banks. I think we'll look over the next probably quarter or so, as we're working through the requirement to close the deal, understand where the economy is going. And if we choose to grow little faster, this gives us the raw materials to do so, but I don't think we'd be making that decision till later in the year when things are a little more clear.

[Collyn Gilbert:]

Okay, that's helpful. And then just on the cost save front, I know you had indicated this potential there to consolidate the 15 branches. Is that really the primary driver? I mean I guess 53% seemed high to me just knowing that Tom's been really slicing expenses there for a while now. So just trying to understand a little bit more is to what the dynamic is there on the cost saves side?

[Christopher Maher:]

There's a few things to contribute obviously the branches are a significant part of that. But beyond the branches, the technology infrastructure for any community banks are expensive, there's a lot of third parties involve, so there is an opportunity there. And then Tom has done terrific work, there are pending expense reductions that we will be realizing. For example, vacating of back office space that is already -- the back office space is already vacant with leases expiring -- that are fairly -- highly predictable decreases in operating expenses that will naturally occur over the next six months. So, I think it's a mix of several things.

[Collyn Gilbert:]

And then just in terms of the culture, Chris. Obviously, you guys have done a lot of deals. How are you sort of positioning the institution now? How should we be thinking about culture? How are you guys thinking about culture? And just kind of integrating and making sure that everybody is sort of on the same page going after the -- the same targets going forward here with such a mix of a number of different franchises now underneath the hood?

[Christopher Maher:]

That certainly is significant concern that we spent a lot of time on. As you integrate institutions, you got to work very hard to try and pull these cultures together and to make sure that everybody has a uniform vision of where you're going. We certainly worked hard to do that. We have some more work to do. We mentioned I think in prior calls, we have back office folks in about 13 different facilities. We're working on a plan to pull that together to get more people under the same roof. I think you'll hear more from us on that in the future. One of the very helpful things here though is that, if you're acquiring institutions that have a shared vision, it’s fundamentally easier. So, I would say that if our businesses were very different, it would be much harder for us to put things together. But particularly now having the same regulatory agency provides kind of the same approach internally to the way you're doing everything from underwriting credit and looking at BSA. So, there was a lot of commonality as we did our diligence, the franchises weren't really that different. It was a much different franchise it has bigger concern. The other thing is that while we've done a lot in a short period of time, a number of those acquisitions are reasonably mature. So, I'd point for example on the Cape side, so a year and half ago since announcement, we closed more than a year ago, and we've been working solidly with those folks for more than a year. The Ocean City Home people, we announced last July, we've been working for a long time with them. So, I think if you got shared value, you should get a little bit of a head start, but you're points well taken. And we'll be doing some other things to try and pull these cultures together in short term.

[Collyn Gilbert:]

And then just one, final one and I'll hop out. Can you just run through the DTA again for us and how that -- how again we should be thinking about it, because I guess the fact that you put out there that you're bringing over what the 74 million, but yet maybe we shouldn't assume that could ever get recognizable. Just if you could walk through that again that will be helpful?

[Christopher Maher:]

Sure. We -- trust me, the last couple of weeks, there has been a lot of stuff walking through this. So, let me just start by saying that today Sun has DTA that has got a total value of a 124 million; however, they're not able to realize the full 124 million. So, they've got their valuation reserve against it, which means they carry about $50 million today which would be what they estimate to be their realizable portion of that DTA. When we go through the transactions, the way the rules work, you're going to look at a number of factors including a discount rate, the size of the transaction. And you're going to calculate under IRS rules, what portion of the $124 million would be attributable or carried over to OceanFirst. And how much of that can OceanFirst actually realize, right. So, how much earnings power do we have over the remaining life of the DTA, which is in this case is about 17 years. So when you do that math, you determine that under today's rules, if we were to close today, we would be able to carryover $74 million. That figure may change between now and when we actually close, depending on the aggregate size of the transaction and a few other factors. Let's assume we're closing today. That $74 million gets carried over to us. And that's realizable we've a high degree of confidence in that. The question is what happens with income taxes and income tax policy at the federal level and that's anybody's guess. So for the purposes of understanding what our risk position would be, we took what we believe to be the outside limit of the lowest federal income tax rate we'd expect might be applied to corporate taxes, so that rate is 15%. So, imagine we close today we carryover 74 million and then tomorrow income tax reform gets passed, signed by the President as inactive. On that day that it becomes effective, we would write down -- we have an immediate write down of the DTA by about $42 million, so that certainly a hit to book value. However, the Sun franchise as part of the OceanFirst franchise would be contributing about $50 million a year in pre-tax earnings to us, so the additional or the lower tax rate actually improved the earning. The valuation of that $50 million worth of earnings and gives us another $10 million a year in net after-tax income. So, what happens is the $42 million would be write off, you recover that hit the book value in about four years. But let me just walk you through something else that I think is even more important. Let's assumes that that happens exactly as I stated, if you took valuations in the sector and let's just give them our current valuation which is two times book value, we would be removing two times the $42 million write off from the valuation of the Company. So, you could make the argument that the Company was devalued by $84 million. However, if you value based on earnings, which is a conservative earnings, right, call it 12 times PE. The $10 million in additional net income in perpetuity would carry a franchise valuation of about a 120 million. So, while there's a book value hit, there's a certain earnings gain and that's in perpetuity. So, I think those two things would trade off each other, as we work through the map we determined that the outcomes were neutral to positive for us. And we are not doing this transaction for the DTA to complexity I just assume not having in the transaction, but it is what it is. It doesn’t affect the strategic value of the companies we're putting together. It's an accounting thing, we got to keep an eye on and something we wanted to make sure we disclose careful.

[Operator:]

And the next question will come from Phil Ordway of Anabatic. Q - Phil Ordway Chris, I was wondering if Tom O'Brian will be staying with the Company or joining the Board?

[Christopher Maher:]

Yes, what we said is that Tom is not going to stay in an executive role. The determination of the Board seats though is something that we will be taken under consideration by leadership community of our Board and our full Board. And that will be done in a couple of months from now, hopefully, we will get the regulatory approval. And certainly, we will consider Tom at that time. We hope, he -- I hope, if we choose him, I hope he'd consider staying with us.

[Phil Ordway:]

I hope he'll stay in an executive role then for the foreseeable future either way?

[Christopher Maher:]

He's staying in an executive role until closing. After closing, he would relinquish the executive role.

[Phil Ordway:]

And then can you tell us a little more about how the deal came together? And how this changing environment for New Jersey community banks which is shifted in the past years? How that played a factor in your decision here versus other strategic options that you have considered in the past either buying Sun, buying someone else, selling yourselves, just sort of the how the competitive landscape has been shifting and evolving pretty quickly over the past couple of years?

[Christopher Maher:]

Sure, I'll make some comments. Tom may have some as well. I think we are in an industry where you have to have your eyes open. You have to be thoughtful about where you are taking your company and which moves are smart and which moves might being not so smart. We are in a business where scale matters, where everything from cyber securities to regulatory complexity means that as you get scale, you've got an opportunity to improve the efficiencies of your network. It's also a market where I think community banks always do well and they have high market shares. And one of these we have always focused on as what things can we do that improve the Company make it a denser market share, to make it a more formidable competitor in the markets its in. So, this is something that we look at and we discussed with our Board on a regular basis, and we look at all sorts of potential combinations. Certainly, I would say after the -- particularly after the Trump bump, I think a lot of people in the industry were and are still continuing to try and figure out, what does all this mean, what's the new environment, what would be best for our shareholders. So, as I thought through that, discussed through the various scenarios with our Board, we settled on the determination that this was something that would be particularly additive to our franchise and would make us a much better bank at the end of the day. So, Tom and I have been friendly and we talk from time to time. And so on that basis, I approached Tom, we talked through it and seem to make sense. That what I would say, Tom, I don't know if you have anything, you'd add to that.

[Tom O'Brien:]

Oh, I think I'd just add that the New Jersey market much like most of the nations market. Scale continues to drive a lot of transactions. The cost of doing business, the economic regulatory headwinds just favored more scale deals and I think that will continue. And in our case, we really -- we look at this essentially as making a $450 million investment and which stock did we like better and we like the pro forma stock an awful lot. And that was our determination.

[Operator:]

[Operator Instructions] And we have a follow-up question from Collyn Gilbert of KBW.

[Collyn Gilbert:]

Tom, just to follow up on your comment just there and I know, respecting you can always say so much. But was this a negotiated transaction or bid transaction or if you could talk little bit about how that part came together?

[Tom O'Brien:]

We will have plenty of time to read about it in proxy comment, but I will just say that if you know me and you know the Board of Directors of our bank, we are incredibly well informed and thoughtful and experienced and we know the markets we play in and where the opportunities are. I leave with that.

[Operator:]

And next we have a question from Adam Hurwich of Ulysses. Q - Adam Hurwich Hi, just a follow-up quickly on the comment regarding the DTA. One thing you didn’t mention, I'm wondering whether or not it entered your consideration. If that was with tax shield that you get even though it's not recognized on GAAP, GAAP isn’t really relevant, it's your regulatory capital account that really matters. And the growth in your regulatory capital grows quicker then you're GAAP capital grows, which means that you got more flexibility in managing your capital for the bank going forward. Is that correct? Did you think about it?

[Christopher Maher:]

That is correct, but under Basel, there are new rules coming out on the application of DTAs and their limits to how much the DTA you can apple to regulatory capital. So, rather than get into a whole lot of slicing and dicing of how much of this DTA would be applicable to regulatory capital, for the purposes of the modeling, we would excluded it from regulatory capital which means it only has upside.

[Adam Hurwich:]

Right. And so in other words, I understood correctly. So you exclude at the beginning, but then as you realized your earnings and use the shied, it kicks into your capital accounts on a regulatory basis and that's without stripping your GAAP growth in book.

[Christopher Maher:]

That’s correct.

[Adam Hurwich:]

Thank you.

[Christopher Maher:]

As it gets paid down, you're absolute right. So, that’s a tangential benefit. It doesn't move the needle on this deal and we try to keep the modeling simple. But you're absolutely right in there.

[Tom O'Brien:]

That is $20 million at loan. In addition when DTA comes over about 16 years, so instead of as a receivable on a closing date and that is realized into cash over 16 years, and as the DTE comes down and converted into cash that get converted into capital, so, yes.

[Operator:]

[Operation Instructions] And this will conclude our question and answer session. I would like to turn the conference back over to Chris Maher for any closing remarks.

[Christopher Maher:]

Just thank you everybody, I appreciate everyone joining the call, especially on the eve of national holiday weekend. So stay safe and appreciate everybody's time. Thank you.

[Operator:]

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