OceanFirst Financial Corp (OCFC) 2017 Q3 法說會逐字稿

Good morning, and welcome to the OceanFirst Financial Corp. Quarterly Earnings Conference Call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to 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've been able to join our third quarter 2017 earnings conference call today. This morning, I'm joined by our Chief Financial Officer, Mike 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 to 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 83rd 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've decided to maintain the current dividend level. We expect to bias towards building tangible book value and capital in the coming quarters. And it is likely that further consideration of the quarterly dividend will be deferred 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 earnings accretion from the Sun transaction to be well established. No share repurchases were made 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, we may anticipate during the quarter. And the loan portfolio remained flat, as elevated prepayment levels all set a 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 on loan originations, and then on to 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 of $173.4 million.

The third quarter is typically a seasonally strong quarter for deposits where we're 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% for the bank's branch network, were consolidated this year. In spite of this consolidation, deposit retention has comfortably exceeded our expectations. We've maintained an excess liquidity position to mitigate the risk that deposit runoff might have pressured funding over the past few months. Not only did deposits increase nicely, but the quality of the deposit base is evident as the cost of deposits increased just 1 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. For the remainder, it will available for investment in securities and loan portfolios in the coming months.

With the loan-to-deposit ratio of just 89% and the 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 cash is deployed.

Turning to some other key measures for the quarter. Progress is evident on several fronts. Excluding the residual branch consolidation charges and merger-related charges, the core earnings performance is tracking to our longer-term objectives. Performance measures using core earnings include a return on assets of 111 basis points, a return on tangible common equity of 13.63% and net efficiency ratio of 54.71%.

On the balance sheet, asset quality improved with nonperforming loans falling to just 39 basis points and capital remained strong.

ECE totaled 8.39%, and the bank's 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 since cash is deployed. 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 the Sun acquisition.

I'm pleased to report that the Federal Reserve has rendered its approval for both our acquisition to acquire Sun and our acquisition to convert the current holding company to a bank holding company. In addition, this week, in 2 separate shareholder meetings, the Sun and OceanFirst shareholders approved the transaction within favor voting percentages exceeding 99%. Our application remains under review by the OCC. In the event of OCC approval, the timing of that decision is [well] for process for individual Sun shareholders to elect the desired cash-stock split, which will take about 30 days. It could result in a closing as soon as January of 2018. In the interim, all banks are performing well and we remain confident 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 that totaled $594 million on a 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 solidly above internal targets for loan originations and remain enthusiastic about the cohesive credit culture we're building among the acquired banks. We continue to be able to recruit established relationship with 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 4 months and $28 million in this past quarter, as new or amended credit terms for these loans did not meet our standards for varying reasons, including the cash out of equity, the removal of sponsor recourse or the easing of financial covenants.

We view participations opportunistically and may replace the loss loans with more conservative participations over time. Loan originations this past quarter met our expectations. The pipeline is solid, and we expect the acquired loan runoff to abate in 2018. Those conditions suggest more consistent 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. The net interest margin compression was primarily related to this excess cash position, which impacted NIM by 4 basis points. Funding costs impacted NIM by another basis point, and the rest of the compression was attributable to the net impact of changes in prepayment fees and purchase accounting impacts.

Regarding deposits, we have seen year-to-date growth of $162 million as we have retained and expanded customer relationships despite consolidating 15 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 a 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 for the quarter, net of merger-related and branch consolidation expenses, decreased by $947,000 from 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's always the opportunity for modest improvements and efficiency as the merged business matures. The elevated operating expense items were 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 the Chief Risk Officer and the Chief Information Officer. We also created and funded our permanent project management office to support systems integration projects, direct banking initiatives and other key projects throughout the company, which should result in improved efficiency in the longer term as process improvements and enhance benefits from our systems become operationalized.

Looking forward, we expect to continue to see an improvement to both core operating expenses and the efficiency ratio net of 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 prepare to end to 2018, we 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, Mike, 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.

Chris, maybe a multipart question here, as it pertains to loan growth. I saw it was relatively flat here. Just curious and, I think, Joe mentioned in terms of derisking the portfolio. It sounds like that's mostly played out. I'm just curious in terms of some of the relationships arising, was that -- were these kind of 3 sort of had earmarking? Or 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 rating or re-rating of these credits since she joined? And maybe taking it a different external eye point of view since she joined after the acquisitions in terms of these types of credits? And then from an outlook and from growth perspectives, don't think any sort of mid-single digits as we move into 2018?

That's a great question, David. So I'll make a couple of comments, and then Joe may have some things to add as well. The first is that the participations Joe was talking about were all credits we were perfectly happy with. They were good credits. The majority of them were construction loans with concentration in Philadelphia Center City construction. And they followed the path they were supposed to follow, right? You know they have got bills, they got leased up and they were converting to firms. We opted not to stick in them in some cases because they didn't meet our credit criteria. And in other cases, the [we] bank, chose to take a different path. So it was not a credit risk issue, although staying in them could have taken on incremental credit risk we were interested in doing. In terms of either risk-rating question, we're very comfortable with where our 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 then 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 out of. So this just happened to be a series of transaction that came in the third quarter. That we didn't want to stay and, we bank had other plans. In the long run, we didn't mind having them on the balance sheet, because they were not relationship credits, right? So they didn't have deposits with them, the spreads were a little bit thin, but they were good credits. Joe, anything to add there.

The only thing, I think, I'd add is, we continue as you work through the acquired book and stuff starts to mature and come up for renewal. We continue to pick and choose, and renew credits that we identified at acquisition as possible credits that we would, either continue with or exit. So we continued to do that on a much lower level as well, but Chris refers to the larger transactions in part -- in the participation book appropriately.

Got it. And then, I was speaking with another management team earlier in earnings seasons in the Philly Metro area, and they were sort of promoting the fact that maybe there's obviously been a lot of consolidation within that greater Philly market. But some of the larger peers maybe have woken up and started to [price] more defensive leaders to stop losing market share. Are you seeing that phenomenon occurring in terms of some of the bigger guys out there starting to protect the better relationships more defensively these days?

No, no. Pricing is always, I think, an issue no matter what markets you're in. But then, I would say it's probably incrementally a little bit more competitive in the last 3 or 6 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 talents we've hired that has been really either in the Philly Metro or in the southern part of our footprint, some folks that have been through transactions that have kind of disrupted their environment.

Got it. And in terms of maybe expectations for 2018, any sort of expectations in terms of loan growth there? Still thinking sort of mid-single-digit growth rate in terms of sustainability?

Especially, if you think about the run rate we were on last quarter, it was a little less than $50 million in net growth. Since that quarter, there's a little bit of an anomaly, it's usually a weak quarter anyway. Our originations were strong, but that these payoffs 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, then it's a probably little bit lower.

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

Let me, I guess, touch a little bit on the loan portfolio, again, and just on the pipeline. You guys see that there is a pretty significant drop-off in Mortgage and Construction segment. I'm just wondering if you could tell us 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 -- it's like the balance sheet is. I'm pretty confident in our fourth quarter originations and where we are heading in '18, given the folks that we brought on are our existing folks. So, I think, we're just looking at a snapshot. And of course, at the end of the third quarter, in their 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 and the equity consumer book, it's not uncommon to see that dip. But I'm not concerned at all about the commercial pipeline.

And there was some mention in the prepared remarks about the prepayment levels and accretion income. Just like, can you, I guess, quantify what the, I guess, change in prepayment fees were from second quarter to third quarter?

Sure. So prepayment has not been a big component of our NIM ever. So last quarter, it 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 payoff that had March associated with it. So the accretion income puffed up a little bit, where usually it would have gone a little bit in the other way. But neither of those was a big number. It was in the hundreds of thousands of dollars, wasn't big.

The next question comes from Brian Zabora of Hovde Group.

Just maybe a 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 your -- from other customers?

Surely, that was a significant portion of deposit growth, which is seasonal. And then we do have parts of our franchise that are seasonal with the shore community. So we had commercial deposits come in. In the previous season, the shore that certainly helped things out. But independent of those, internally we look at our deposit tracking, including and excluding commercial in total. And then within commercial, looking at it within government and nongovernment. 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. So certain categories do better or worse than others, but none of them have us concerned.

Okay, great. And then you mentioned the potential for that buildup of cash to reinvest. How should we think about maybe the timing regarding maybe investment securities purchases? Or how do you think that the cash trickles down over the next quarter or 2?

I think, given the outlook for loan growth and the expectation in the season, as we go through the winter, we brought out some of that cash. We're not going to rush to get it all out immediately. We probably put more into the bond book than the loan book in the short-term, because we 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 into the loan portfolio over the next several quarters.

(Operator Instructions) The next question will come from Russell Gunther of D.A. Davidson.

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 [said] hike, you guys would be able to demonstrate some margin expansion in the fourth quarter?

Yes, I think, it's a good question. I mean, the first thing I'd say is their bases have been pretty low. And with the cash that we have on hand, we can be pretty discriminating about deposit pricing. So, for example, if we had to make the choice over a little bit of deposit runoff 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 [said] hike is going to do much for anyone this quarter. 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 off of. As 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. So, I think, for us, it's a relatively neutral effect, might be a little bit positive, but it's unlikely to be negative.

Got it. So I understood with regard to stocks around the hike tying it all together makes right, get the comments. You would think that you would be able to maintain stability in the margin next quarter to possibly up given the flexibility on the funding side?

Russell, it's Mike. The headwind on that is the purchase accounting accretion. So that was elevated. If you look second quarter to third quarter, it went up a bit, which is unusual as because of some prepayments, though we accelerated some of the accretable yield. So the expectation that's going to 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. Now I appreciate that, Mike. And then just one follow-up on the loan growth expectations. Here 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 the fourth quarter?

Quite possible, sure. That's we'd like to see it. 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 what the interest rate scenario is going to be over the next 4 quarters, what the economic scenarios. So we've always been a place that isn't looking to do all the growth in any 1 quarter, so. But $50 million is possible in the fourth quarter.

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

This is Chris coming on for Collyn. So just wanted to nail down for what you guys consider the core cash position or non-excess cash, like as it stands today? And then what will be your, like, core holding cash position after the Sun acquisition?

All right. 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 couldn't have had a different experience in terms of deposit retention. We're thankful that we didn't, but we kept the extra cash around because we would have preferred to fund attrition out of cash than out of some -- having to reach [voluntary] 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 4 to 6 quarters either not maintaining a whole lot of cash or even going into a position where we've 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 $100 million with cash around. We've just done that to mitigate certain risks. So looking -- you can never have exactly what you want like, but over the next several quarters if we drew that down so you had a minimal cash position, that would be ideal. That will depend on market conditions, though. 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 were stressed, we've got a lot of availability in the wholesale side.

Got it. And then in terms of just post-Sun acquisition expense savings. The Sun had a pretty good quarter, I think, in terms of reducing their own operating expense this quarter. So does -- will that kind of reduce the dollar amount or the percentage amount of what you're going to -- what you plan to take out after the close of the acquisition? Or is that already considered?

With that, [class one] is largely already considered. So we were -- obviously, we did our diligence and worked with the folks at Sun. We understood what their plans were. And the 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 as we integrate the companies together 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 (inaudible).

Okay, great. And then in terms of the other line in fee income, I guess, that was a combination of a few things. But what was -- do you think you can maintain this level of fee income going forward?

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

I think, if you're looking at total other income, there was flip-up in gain from real estate operations of 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 and properties we sell with the gain on. 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, bankcard deposit was pretty stable quarter-to-quarter.

The next question comes from Brody Preston of Piper Jaffray.

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 wanted to get to sort of an update with regard to what you're seeing in the market right now? Who is being most aggressive? Those sort of things.

Sure. Certainly, there is pressure on deposit costs in the market. And I would go through a couple of different categories to give you a sense. I think most of the folks that I talked to in the market recognized probably a year ago that the CD market had definitively turned. It was becoming much more competitive. So that's been competitive for at least a year or so. It's not a big category for us. So we haven't felt the impact. But that is -- I mean to say, it's a light switch. But it's a pretty definitive movement starting in the second half of last year. The next market that seems to have been impacted is what I would call the high-yield money market. And you can see some of the top payers both in market, but then there are also some national players, right? So if you look at the yields offered by Goldman Sachs consumer bank, the GS Bank, they're pretty high yield, alley. There are few players out there both nationally, and then also within our region who have those, I'd call them the promotional or high-yield money markets. Those appear to have moved 15 to 25 basis points and could be subject to further movements beyond that. So that's where most of the payment has been felt. And neither category was big for us. We're always watching for when does that bleed 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 have had an occasional relationship we've had to reprise there. So there's a little bit of pressure, but not significant pressure in those categories, kind of corporate cash management. So I'd kind of characterize it that way in terms of which player is, I mean, you could pretty easy to see from people's cost to funds and funding needs, kind of who is feeling it a little bit more.

Great. And, I guess, with regard just going back to the cash balances and sort of how you look at your overall funding. I know you said that with the cash balances 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, how -- like what kind of customers would be leaving in that sort of scenario? And how easy would it be for you to sort of, I guess, ratchet the deposit growth back up by just turning, I guess, the right dial?

It's a good question. So the first thing is when you think about the dollars and dollar growth in deposits, that doesn't always get connected to relationship growth or contraction. So often customers will optimize and they may choose to move deposits between accounts or between institutions. And the most important thing for us is that we continue to maintain the relationship, especially, in the transaction accounts and 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 who may start to optimize a little bit more, right? And they might take money out in open sea-- behavior that hasn't happened in the last 5 or 6 years. So, I think, there is an average balance risk in the 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 pies into these folks and lot of products. We've seen relationships to be pretty sticky. But the dollars may drawdown. 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's a couple of things we consider. The first is, like, my comments around the dividend are important. Because if we have the capital inside the company, any conditions are favorable, you can just grow the balance sheet. I would be careful not to disrupt or deposit profile, if we needed to grow, let's say, any-- many magnitudes to 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 the first place we would go is in laddering some longer-term borrowings if we can good loan growth. The second place would be, maybe, paying a little higher in certain account categories. And then if we had to resort to either a high-yielding money market product or spot CDs in certain durations, we're in a very large deposit market. Just Central and Southern New Jersey represents a $90 billion deposit market, FDIC in short deposit. So there's plenty of room for us to add more deposits if we wanted to be more competitive on pricing.

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 give me a broad overview that?

Sure. I just -- we are at $0.15. Our payout of core earnings is about 32% now. And traditionally we look at 30% to 40% to be an optimal dividend payout range. Meaning, as you get closer to 30%, you're thinking about other opportunities to increase it. And as you get closer to 40%, you start to say, "Let's be little more conservative about things". So this quarter, even though we came down to 32% in the payout range, we left the 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 of going on, right? So we've got Sun acquisition coming in. We'll be normalizing capital levels through 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 like in the first half of next year. So we could go in 1 of 2 directions, either decide at that point that everything is looking good and we're comfortable increasing that payout ratio or we may opt to continue to build capital. But we're going to make that assessment later in 2018 and, specifically, we kept the dividend flat at this point.

(Operator Instructions) The next question comes from Don Koch of Koch Investments.

You have done a fine job in the past and you're managing the assets that you've had. You're taking on a marriage partner that is slightly less than your size. How do you ensure what precise steps do you have to ensure a common culture? I mean, the bank you're buying is more rural than you are. You're more concentrated along that seacoast. How do you ensure that you don't get indigestion 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 said when we announced the transaction, the work that the folks at Sun have done to improve their franchise over the last several years has been tremendous. So with Tom O'Brien's arrival as CEO and the other folks he brought in, he has made a tremendous amount of progress at Sun and improved its 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. And that's important. As a standalone, you want to make sure that what you're integrating into your company has a good foundation of its own. It is National Bank. 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're not very far apart in that. So the first thing is, I think, the franchise we're acquiring is on stable footing. The second thing is that we have developed an expertise in integrating franchises. This will be our fourth whole bank acquisition and a bit of branch acquisition as well in the last 3 years. Those have gotten well. We learned lessons in each one of those integrations. And I think in each case, we're getting better every time we do it. So most of the things we're very happy with. But you always find something you 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, bringing on folks like our hire this quarter of Grace Vallacchi, who is our Chief Risk Officer. And her background not just with the OCC, but also with First Fidelity and the First Union. So hires like that evidenced our commitment to investing in the franchise. The other cultural question you asked, which is how do kind of integrate these is that we didn't talk about it much today, but we have in the last earnings call. We're in the process of consolidating what will be 19 back-office locations into primarily 2 back-office locations. That process is going to happen in the first half of next year. That will leave us with significant operation center and significant administrative center. And getting all the people under one roof, I think, is as important as everything else that we're doing to make sure that, okay, you can unify policies and procedures and risk appetites. But there's no substitute for having people working side-by-side under the same roof, sharing the same culture and the same value. So I acknowledge that the risk that you're presenting, I think, that we've got a good partner, buying someone who has a good foundation and making investments in people. We're making investments in things like technology and facilities. And we've got a pretty good track record of having done these integrations and done them well. So hopefully that addresses your concern.

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

So, I think, if we were to look back on the 3 whole bank acquisitions we did, it's Colonial American, Cape Bancorp and then Ocean City Home. We found that the earnings accretion has met or exceeded what we initially anticipated it would be. There are some categories that wind up being a little bit different as you work through these things. So you may have a little better or worse impact in things like margin. Joe talked earlier about having some elevated payoffs. So we've lost some assets. They were good assets. But it was the right thing to move on from them. So in a very granular level, there are always things that deviate a little bit. But in terms of earnings accretion, your specific question, we're very comfortable that all the transactions have delivered either the earnings accretion we expected or in some cases even more.

The next question is a follow-up from David Bishop of FIG Partners.

Chris, just a quick housekeeping. In terms of the, and I know it can be volatile, the origination yield, I guess, on the commercial portfolio down a bit here. Anything, in particular, is that just sort of inter-quarter volatilities. I don't know if that's a more of commentary in pricing or just sort of something, in particular, this quarter that impacted it?

As you point out, that can be a very volatile figure that usually has more to do with the composition of the loans booked in the quarter than the market condition. So we don't feel that market pricing has changed much. But if you go from quarter-to-quarter and, let's say, one quarter you had on the preponderance of 5-year commercial real estate deals and the next quarter you had more C&I floating rates up, you're going to see differences in that yield. But we don't see anything in the market that would be a material change in either direction.

And I remember the day there was work floating, prime-based, floating-rate C&I than typical. So with overweight -- as Chris said, is overweight that, that tends to drop the yield a little bit. The benefit of that is better interest rate risk management. So it's give and take.

All right. And then sort of a follow-up in terms of the -- Chris, you said, the consolidation of the 19 back-offices to 2. I think you've said, getting the core expense rate down to $27 million next quarter. So as you look at sort of the core branch's network, I guess, you're down to 46 now. As you evaluate that, is there more -- is there room to even consolidate even more from, I guess, the core branch network as you look at into 2018? Or is the focus more in terms of integrating Sun at this moment?

I think it's smooth. I think it's a little bit of both. So we certainly -- our experience to date in branch consolidations has been very favorable. So I think we've developed a good model, which helps us understand in which cases our customer senses the consolidations and where they not. We want to make sure we think branches are important. So we want to make sure that we've got a significant branch presence. The folks that we have in our branches still play a vital role, not just into 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 of this year, we're obviously looking at, I think, like, with some additional level of consolidation in 2018, maybe beyond even what we anticipated with Sun. Won't be big, but I think this is a process in the industry where if you're not doing this each and every year, thinking about where your branches are and how they're configured. If you wait too long, it could be too late.

(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, 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.