OceanFirst Financial Corp (OCFC) 2021 Q2 法說會逐字稿

Good morning, and welcome to the OceanFirst Financial Corp. 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.

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 results to differ materially from those forward-looking statements. Thank you. And now I will turn the call over to our host, Chairman and Chief Executive Officer, Christopher Maher.

Thank you, Jill, and good morning to all who've been able to join our second quarter 2021 earnings conference call today. This morning, I'm joined by our President, Joe Lebel; and Chief Financial Officer, Mike Fitzpatrick. As always, we appreciate your interest in our performance and are pleased to be able to discuss our operating results with you.

This morning we will cover our financial and operating performance for the quarter and provide some color regarding the outlook for our business. Please note that our earnings release was accompanied by a set of supplemental slides that are available on the company's website. You may refer to those slides during this call. After our discussion, we look forward to taking your questions.

In terms of financial results for the second quarter, GAAP diluted earnings per share were $0.49, another strong quarter for the company. Earnings reflect the continuing economic recovery with the bank demonstrating improved credit trends, a modest pickup in net interest income and a committed loan pipeline that indicates our commercial banking expansion is gaining traction. Core earnings approximated GAAP earnings this quarter.

Regarding capital management, the Board declared a quarterly cash dividend of $0.17 per common share and approximately $0.44 per depository share of preferred stock. The common share dividend is the company's 98th consecutive quarterly cash dividend. The $0.17 common share dividend represents just 35% of earnings. The common share dividend remains at a conservative payout ratio and will be evaluated later in the year as the post-pandemic earnings trajectory is more established.

Over the past 3 quarters, robust earnings have driven a $1 increase in tangible book value per share. Tangible stockholders' equity to tangible assets remained strong and now exceeds 9%. Our balance sheet remains inflated as we carried $1.1 billion or almost 10% of the entire balance sheet at cash -- as cash at quarter end. The excess cash is a direct result of positive trends in our business. It should provide an incredible opportunity to build earnings over time. Average deposit costs for the quarter decreased by 10 basis points to 27 basis points and ended the quarter at just 24 basis points, an all-time low point.

Much of the decrease in deposit costs is linked to a rotation from high-cost CDs to noninterest-bearing accounts. On a year-to-date basis, CDs have decreased by $416 million and were largely replaced with noninterest-bearing accounts that have increased by $372 million. The company continued share repurchase activities during the second quarter, purchasing 500,000 shares at a weighted average price of $21.93.

During the quarter, the Board authorized and additional 3 million shares to be added to the repurchase program, leaving a quarter end capacity of slightly more than 4 million shares available for repurchase or 6.7% of the current outstanding share base. Before we discuss the outlook for our business, I will spend a minute reviewing market conditions in some of our operating areas. During the second quarter, local economic conditions continued to strengthen, most notably in New York city, where Manhattan has begun to show signs of activity. Clients throughout our geographies report strong demand for products and services, with labor and supply chain issues continuing to restrain output. Overall, our client base is in excellent financial position as indicated by record low levels of delinquencies and positive trends in all other credit metrics. The New Jersey shore continues to be our strongest market as the shore season looks to be one of the best on record.

Looking internally, our employees have also been exceptionally resilient, having completed a core systems conversion earlier this month that upgraded our back office infrastructure for the first time in decades. That project has set the stage for additional advancements in business process automation and employee efficiency. More importantly, the conversion finished well ahead of schedule and without client disruption.

In addition to the long-term benefits that we will achieve from modern core systems, this transition will allow us to remove the final redundant systems in the bank, the Country Bank core application set this September, an important efficiency project. Our forward focus remains on deploying liquidity, building our digital capabilities and improving operating efficiency.

To provide a more complete context for our efforts in these areas, we will be holding an Investor day event next week. The event will be available in person at our Red Bank, New Jersey administrative offices and also available online. So we hope many of you can join us. We will be walking through our progress since the last Investor Day in 2018, discussing the post-COVID landscape and detailing our plans to increase loan growth, capitalize on the shift to digital and improve the efficiency of our retail distribution network.

At this point, I'll turn the call over to Joe for a discussion regarding progress this past quarter, including an update on our expansion of the commercial bank.

Thanks, Chris. Loan originations of $447 million were lower than our Q1 activity, which set an all-time record for the company. Positive momentum is evident with the pipeline at all-time highs led by the commercial bank and continued strong activity in our residential mortgage business. More impressively, our new Baltimore commercial team hit the ground running with $40 million in loan originations in Q2.

All regions have active calling efforts and pipeline activity. Through quarter end, we have added 16 new commercial lenders in the last 9 months, including 7 in 2021. We've also added regional credit team members in the Baltimore market to supplement our lenders, as well as the new Regional President and Senior Credit Officer in our Boston LPO and are actively hunting for more talent in both geographies. Efforts continue to add seasoned successful lenders in our existing footprint as well. We are excited about second half loan growth as we have discussed in prior calls, despite the ultra competitive pricing and credit environment.

In the residential business, originations have been solid with activity only limited by the scarcity of available housing for sale. While I don't expect record originations as we had in 2020 due to the shortage of available properties for sale, this continues to be a sound product and provides diversification and a stable low risk component

of our loan portfolio. We don't expect to grow this book substantially but continue to book quality loans to add to the portfolio and offset amortization. After growth of $116 million in Q1, the loan portfolio contracted $52 million for the quarter, including $27 million in payoffs from PPP loans. The commercial book has grown $250 million year-to-date, while the consumer book has declined largely from normal amortization coupled with $97 million in residential loan sales. As we forecasted in Q1, adding the new geographies will begin to pay dividends via increasing loan portfolio growth in Q3 and Q4. Our existing markets continue to build pipeline as the pandemic recedes.

Turning to the margin. Core NIM was essentially flat, contracting 2 basis points largely due to the impact of the low rate environment. Putting cash to work is difficult in this environment, but the record pipeline and loan demand in new markets should accelerate and help both margins and net interest income in the second half of the year. We continue to focus on changing the mix of deposits, as Chris noted earlier and on reducing the cost, which was 24 basis points at quarter end. We will continue to drift lower as another $392 million in CDs mature in quarters 3 and 4. We exited $154 million in CDs in quarter 2, while adding $87 million in noninterest-bearing deposits. Core deposits now stand at 90% of total deposits.

Operating expenses increased $907,000 exclusive of merger-related and branch consolidation expenses, due primarily to higher compensation related to new hires and benefit costs. We expect some increase in OpEx in Q3 and Q4 as the new hires and related overhead get fully added into the run rate before reducing in Q1 2022.

As Chris noted, we closed 4 branches in early Q2 and continue to analyze the effects of the pandemic on our customers' behaviors in our branches, online, via mobile and our customer care center. We expect to provide more details on our plans for delivery of banking services in all of these channels, on our Investor Day scheduled for August 5.

With that, I'll turn it back to Chris.

Thanks, Joe. At this point, we'll move to the Q&A portion of the call.

(Operator Instructions) And our first question will come from Frank Schiraldi of Piper Sandler.

Good morning. I wanted to ask about the older competitive atmosphere out there, as I think you referred to, Joe. Is that the biggest risk to loan growth in the back half of the year? And I would imagine the competition is just getting fiercer, given it seems like everybody is talking about a pickup in loan growth in the back half of the year.

Thanks, Frank. I think you're right. I think that liquidity in the market drives certain folks activity. I do think that -- I can't speak for others. I do think for us, the addition of the new folks, as well as the expanded geographies will help us. But as Chris mentioned earlier, the core markets have done remarkably well. We've seen some resilience in New York, continued growth in Philadelphia.

I will tell you -- I'll give you an example of what you'd consider to be competition, but probably what I refer to is something that's not typically competition. And that's Freddie and Fannie, right?

So Fannie Mae is very aggressive in the marketplace with banks on long-term finance of permanent multifamily loans. And it's not uncommon to see them aggressively in the mid-2s today for 10-year money, which is just a fascinating environment to be in. I don't know how long that occurs, but they've -- extended amortizations have been very aggressive. And the market is very good. So we've also seen some clients opt to monetize instead of refinancing to do other things. But that's all right. I'm still very bullish on our prospects.

Okay. And then just a second one for me is on the -- on capital deployment. You got a pretty big authorization out there now. So I think you look at repurchases as attractive. I just wonder if you can maybe talk about that, the priority for buybacks versus potential deployment through M&A. And then just kind of remind us of what you're looking for on the deal side and if you've looked at any of the deals that have recently been inked out there in Jersey.

So a couple of things on that, Frank. I mean I think you made a good point about capital management and M&A and the share buyback. We want to have optionality here. So having the authorization with the buyback allows us to repurchase shares more quickly than we have in the past 2 quarters. And we certainly have the capital and the earnings capacity to do that. And at today's price, we're very comfortable. The dilution and earn-back levels are quite modest. So we have a strong appetite for our own shares, and that's probably the best M&A you can ever do.

Looking beyond that, though, the market has been active, and we can't comment on individual deals. But I will tell you that there are some very high-quality institutions that are looking for partners because it's the smart thing to do now. And we want to make sure before we commit our capital in repurchases and push that too far, that we're exploring all opportunities around M&A.

On the M&A side, we have not been shy in the past. But the things we look for in M&A are a little different than what we would have looked for in the past. So if I go back to the first few deals we did, that was really about funding our balance sheet, and we were looking for organizations that provided super high-quality funding at low funding costs.

Obviously, with $1.1 billion in cash and the momentum we have in our business, the maturity of our treasury products, we're less interested in securing funding as a reason to go out and do M&A. That said, we love commercial banks. We're building our commercial bank business. So if we found an opportunity to further that, we wouldn't be shy about it.

So I think when you think about capital management, we want to get through probably the next quarter or 2 and make sure we understand the M&A landscape. And if we have not identified something that makes sense then we're going to go ahead and have the opportunity to push down and buy back shares more quickly.

I'd also say that just in aggregate, as you saw the deals that were done, I thought they were all really well constructed and properly structured deals. We have to be very thoughtful about the realities of our currency and our price to book and what we're willing to tolerate in terms of an acquisition.

We're going to be very balanced and disciplined about that. We're protecting book value. I'm really pleased it's moved up $1 in the last 3 quarters. We want to be careful about how we use that.

Sure. And then just a follow-up to that. Is there any sort of -- can you just remind us of what you're willing to tolerate on the dilution/earn-back side?

Yes. So that hasn't changed. So our general outlook is that you start at saying, ideally you'd like to see earn back within 3 years. And the reason for that is in a 3-year horizon, you can really tell kind of what the economic conditions are and there's less risk looking at over that horizon.

That said, I think the 3- to 5-year earn backs in some cases, I'd say they're kind of rare, could be appropriate if there's a very strategic opportunity that also really makes a change to your earnings per share, can really provide a faster earnings per share. And then on the other side, if you're not getting enough earnings momentum, then even 3 years are going to be too much dilution.

So we look at the dilution on a sliding scale as it relates to how much accretion you're getting back out of the deal. So if you're going to stretch beyond 3 years, you better have EPS momentum that is worth that stretch, otherwise, keep it to 3 years or less. So I hope that helps.

The next question comes from Michael Perito of KBW.

I wanted to start on the loan growth side. Chris, Joe, I appreciate all the color. I guess, kind of a simplistic question. But as we think about the expectation for net growth to accelerate in the back half of the year, I know you guys are going to probably provide more color next week. But just is that an expectation of originations increasing or the closing rate of the pipeline changing or payoffs moderating or maybe a mixture of all 3. Just trying to understand what's beneath that assumption a little bit better as we saw kind of the slower growth quarter over the past 90 days.

I'd say, I mean, first, like the payoffs have been reasonably stable, so we're not seeing them either accelerating or decelerating. It's kind of a normal level of amortization.

So what we've engineered the company for, meaning the markets and the producers and all that is to get ourselves to a net growth number, certainly in the range of $250 million per quarter, hopefully, in the third quarter, but certainly by the fourth quarter. And that's so, call it, about $1 billion a year in loan growth. That pace is what we've resourced the company to do.

And it was very important to us that we resource that kind of an effort with new bankers and new markets because we know how competitive the world is going to be. And if we had limited ourselves to saying, "I want to grow $1 billion a year and we're just going to stick in New Jersey," I think that would have been a much tougher task. Looking at even just -- as Joe mentioned, the folks in Baltimore chipped in last quarter with $40 million, and that's a big help.

So we have to kind of answer your question concisely. We're trying to get the repetitive loan growth to be in the range of $250 million a quarter. And we might be able to hit that in the third quarter, especially given the pipeline. As Joe mentioned, we have a $630 million pipeline at the end of June. Now some of that is lines of credit, so you're not going to get full drawdowns during the quarter. But still, it's our biggest pipeline ever. And leaves us pretty bullish.

Helpful. And then just 2 other quick ones for me. One, just on noninterest income. Any thoughts near term about where that kind of core run rate could trend? I mean, is there room for, kind of some rebound in some items like swaps and things that maybe mortgage, given where rates are in the third quarter?

Yes, definitely. The swaps are really just a function of loan closing. So a certain portion of your commercial loans will go swap. The yield curve has moved a little bit, so it's not quite as attractive as it was a year ago. But I do think as you see loan volumes increase, you're going to see swaps increase, and it was a particularly low quarter for swaps for us. So I think that's a big opportunity.

Also very pleased to note, I know we put it in the release, but I'll just note that we will not be subject to the Durbin cap for another 12 months. So that will begin -- it won't be effective for us until July 1, 2022. One of the nice line items we had this quarter, and I think it's a continuing trend, is debit card income came up. So I think that's a positive and should probably only build. So those are the 2 hot spots.

The deposit fees have been flat. They were hurt a little bit in the pandemic. Some of that is overdraft fees, and we're not relying on that being an engine of growth. It's never been a particularly hot line item for us. So I think there is an opportunity.

And I would also point the performance we had in NestEgg, it's still not an aggregate large number, but it's starting to produce numbers now that are meaningful to us. And we have a very strong growth in NestEgg. That's our hybrid robo adviser. It's up to $130 million in AUM and grew about 30% this past quarter. So that customer adoption has been great there.

And can you just remind me just real quick the expected Durbin impact approximately once it kicks in next year?

It's -- a little hard is the debit card fees go up. And the mix of fees changes because it doesn't -- the cap doesn't apply across all -- it applies across all transaction types. But some transaction revenue is already below the cap, so it really doesn't apply.

Our best guess at this point is that it could be, say, $6 million or $7 million, depends a little bit on how fast that line grows between now and next July 1.

And that's pretax annualized?

Correct.

And then just lastly for me. Joe, I think you mentioned that you expect the OpEx to step up in the back half of the year. Kind of a 2-part question there. I guess one, obviously, you added a lot of bankers. Is it a jump up in kind of the $1.5 million to $2 million range kind of adequate to capture all that overhead and any other digital investments you're making? number one. And then -- number two, you mentioned, I think, that you expect to step down in early 2022. So should we read into that, that a lot of the hiring that you guys budgeted or planned for has taken place and that, that pipeline is a little less active now than maybe it was 6 months ago?

There's a couple of moving pieces and parts. So as you point out, the hires we made, we've got to get full quarter expenses on them and there are a couple more hires. We will not be hiring at the pace we have been hiring at, so that's kind of tapering off.

So expenses will drift up a little bit because of that. Then we have 2 catalysts, one will show a little bit in the fourth quarter, the other beginning in next year. The first catalyst is the Country Bank conversion, which I referenced. So today, that core application set between the people supporting it and the application set itself costs us about $2 million a year. So getting that de-converted in the third quarter. There'll be some trailing expenses in the fourth quarter, but that's a nice tailwind.

And then the second thing is we're going to be talking next week about our overall investment and expense management in both digital and retail network. And that's going to provide a tailwind as well, and we'll be able to walk you through how that happens. So in terms of -- I know you guys all have models and you're trying to think about this quarter, next quarter, we could peak as high as $54 million by the fourth quarter before beginning to trend down in absolute numbers in the first quarter. So that's kind of the order of magnitude. And it may not be quite that high, but that's probably the outer range for Q4.

The next question comes from Erik Zwick of Boenning and Scattergood.

Just 2 questions for me today. The first one, impressive to see that the build in the commercial pipeline and just looking at the yield as well, it looks like the commercial pipeline yield has stayed pretty constant over the past 3 quarters at kind of that 3.75% level. Looking at the origination yields in that portfolio for the past few quarters, it's come in lower than kind of the pipeline yield. I'm just curious, is that a reflection of the competition that you're seeing, that what you're actually able to close is a little bit lower? Or is there something else at play there?

I think it's a combination of factors, Erik. One is absolutely competition. There's negotiations that go on even after you approve transactions given the environment that we're in. And I think the other thing is that we've done -- we have seen the yield curve go down a bit. So that plays into it by the time loans are closed versus when they've been approved.

And then it's the mix. So as Chris mentioned earlier, depending on what you're closing and what's being funded, so we tend to do a variety of construction projects. Those don't always fund at the same time. Those tend to be higher-yielding projects. So if the end loans are lower yielding and the construction loans aren't fully funded, that can impact the actual dollars and cents a bit.

But as we remind our lenders and we tell them at this stage, anything is better than 10 bps at the Fed. So we're willing to be more aggressive for the types of credits that we like, and you know our credit appetite. So I'm happy to be in a negotiating play in the market that we're at.

I appreciate the color there. And then just looking at the balance sheet, I noticed that the equity investments were up $41 million in the quarter. And I know it's not a primary source of revenue for you guys, but you've been opportunistic from time to time and made a nice trade in some bank investments last year.

Just curious, does that increase here in 2Q? Does that reflect some new investments? And if so, maybe if you can provide any color to what those might be.

Erik, it's Mike. It's pretty straightforward. Last year, we had -- you recall, we had -- we were investing in common stock of regional banks, and we sold out of those positions at the beginning of the year. Now we're investing in preferred stock of financial service companies. So that's the -- all of the $40 million in growth is related to that strategy.

(Operator Instructions) And our next question will come from Dave Bishop of Seaport Research Partners.

Chris, a quick question for you in terms of the capital deployment. You mentioned the strong capital positioning. But just curious as it relates to maybe targeted return of capital to shareholders, inclusive of buybacks and dividends. Any sort of ratio you're targeting there or TCE ratio, remind us what you're sort of maybe managing towards.

Probably the best way to answer that is to think about the long-term TCE ratio. So we're -- right where we'd like to be right in the mid-8s. So we think as you start to approach 9, then maybe you're getting a little too much capital. As you start to approach 8, you better start to manage your capital more carefully. So -- and because of our preferred stock, the tangible equity ratio is 9%. So between TCE and the tangible equity ratio of 8.5% to 9%, that's certainly starting to get to the point where we feel we've got a bunch of excess capital.

The other important thing is we do not need any capital for organic growth for the foreseeable future. And what I mean by that is we have $1 billion of cash to deploy. So as we deploy that $1 billion of cash, we don't actually need any more capital to underpin it. And all while we're doing that, we're going to be producing additional capital, right, the internal generation of capital being even higher.

So I think our capital ratios are understated because of the cash. They actually feel to be more at a higher level than what we typically look at. So as I mentioned before, we want to make sure in a market that is this active with M&A, if we could deploy that cash effectively, that would be a great way to do it. But if not, we're going to try and get it back to our shareholders.

So we're going to look both at the common dividend and buybacks. You can see the additional 3 million shares we put on is certainly a very direct signal that we feel we could do meaningful repurchases, provided we've exhausted the alternatives through acquisition or organic growth.

Maybe a question on credit here, obviously, with the economic backdrop at least in the current quarter or the current informing the allowance for credit losses here. Just curious, as you do expect some positive trends in terms of just net loan growth here, just curious maybe at what rate ratio of loans you'd be reserving at as you do grow the balance sheet?

I think when you think about the way CECL works and our quantitative loss history, we have been operating the bank to be pretty conservative on the credit side for a long period of time. So our credit losses run about 70% lower than our peer group over -- if you look at us over, say, a decade.

So we think that our portfolio gives us the opportunity to not have to reserve all that heavily. And in fact, under CECL, it's kind of hard to construct a big reserve on a book like ours. Interesting fact is at the end of the quarter, if you look within our ACL, more of our ACL is qualitative than quantitative. It's kind of hard to get that number up.

So as you think about net new growth, for a long period of time, we've been running at probably a normalized, say, a 70 basis point reserve level. If I were -- I'm not saying that's going to be the exact number. But if I were to pick a number, let's say, how should you be reserving against net loan growth, it's probably somewhere in that area, certainly sub-1% based on our credit performance.

The next question comes from Russell Gunther of D.A. Davidson.

Just a question on the -- a question on the margin. So if I heard you right, it sounds like with the loan growth that's expected, the margin should improve. So fair to characterize the reported NIM this quarter as a trough.

And then longer term, you've talked about a 320 to 340 guide. The yield curve has become more inhospitable since you laid that out. Competition has intensified. Any shift in how you're thinking about that from a timing or magnitude perspective?

You're right to point out, Russell, the yield curve plays into that. So we saw a little setback in the yield curve since our last quarterly discussion. So I think it may take us a little longer to get up to the numbers we were talking about previously, that 325 or better. I'm still highly confident we're going to get well into the 3s.

And even the last time we spoke, the difference between 325 and 350 is really what is the yield curve going to give us. So we think that this deployment of cash is a 4-, 5-quarter event. By the end of that, I guess we're hopeful that we might have a little more steepness in the yield curve. And so -- but we would need a little more steepening of the yield curve to get above the 3.25%. You're absolutely right.

The next question comes from Christopher Marinac of Janney Montgomery Scott.

Chris and team, I wanted to drill down on Slide 7, just to talk about technology expenses. So should we relate that mix change that you're kind of articulating to one that the other core expenses will be slow while technology rises? And would you look at technology as kind of a subcomponent of the efficiency ratio or other asset-based metrics over time?

We -- obviously, we think it's a very important metric, because it's not just what you're spending, but how you're spending it. And our position, this goes back years now, is to make sure that we're following where our customers want us to be spending the money. So they want to make sure they've got cutting-edge digital apps and things like that.

So you can see how that both in absolute dollars and as a percent, the technology increase has increased over years. And I think it will continue to increase, but at a slower rate. So I think it's going to moderate now. The core lift was a big deal.

I mentioned the Country Bank to about $2 million a year. Interestingly, the vast majority of that is people related, not systems. So the IT number will come down. It's probably 30% of that, right? The rest is going to be people. So I think you're going to see a slower growth rate, but you will still see growth. And it's -- our customers, especially corporate treasury, things like that, they're demanding more and more every quarter.

What we have been doing and this will dovetail nicely into our comments next week is we've deliberately been investing in those digital capabilities and reducing the investment in channels that our customers are using less. Look at the 58 branches that we've consolidated to date.

So in terms of -- we don't have a particular benchmark. I would point out, this is a curiosity more than anything that proportionally, we're spending on IT about the same as JPMorgan Chase, to give you some one benchmark. Now obviously, they've got a slightly larger balance sheet, so it's a little more spending than we do. But I do think -- the point is that you should be a heavy investor in IT, if you plan to be around for the future.

Good, Chris. I appreciate it. And just a quick follow-up on the New England/Boston initiative. How large would you like that market to be over time? And should we think of it like a Baltimore and Philadelphia, or is it too early to tell?

I'll make a couple of comments. Then I want Joe to talk to the kind of talent we've been able to find, which we're just thrilled about.

The way we look at the expansion of the commercial bank is it has to be led by talent. And you can never be sure exactly what talent you're going to find and in which markets. These are all great markets, right? I mean we can get on an Amtrak train and go north or south a couple of hours and touch literally millions of people in some of the best banking markets in the planet.

So the market's are not the question. It's -- the question is, how can you find the people and the people delivering the relationship you need. And as we work through the process, we didn't know how successful we were going to be. Baltimore became a priority because, frankly, the talent we found in the market was exceptional, and we could bring it on board. And we thought that Boston would be a slower process for us. But again, we have the opportunity to bring some talent on. But Joe, maybe talk a little bit about the backgrounds of the folks you hire, especially Dan and Tom.

Look, Dan Griggs, is the Regional President for Boston, who came on board at the end of Q2, really just a few days before the end of June. Ran a multibillion-dollar business for TD up there. David Heller, the Senior Lender up there is a former BMO Harris, U.S. Bancorp lender, very successful in that marketplace. Michael Marcucci, who's our newly hired Senior Credit Officer from Santander, very strong, all seasoned folks been around a long time.

As I tend to tell our regional officers as they go into these markets, what do they need to do. A lot of them ask us, what do we need to do. I tell them, just look at -- we're going to be patient, we're going to be thoughtful, but look at what we've built in 3.5 years in Philadelphia, in a few years in New York. That's the blueprint. Hire the right people, put people in positions to be successful, give them some autonomy and support them appropriately, and you can grow.

I think we talked about it in the last quarter, Philadelphia is now over $1 billion in loans outstanding in just under 4 years. So -- and New York is about $1.5 billion. So there's the opportunity that lies in front of these folks. It's the reason we pick these markets. We have markets that are dense and vibrant. And you just have to fill them up with the right talent. And again, there's only a few folks in Boston. We're actively looking for more there.

So I guess, Christopher, to answer your question directly, if we don't think we can get to $1 billion, we're not going to be getting into a market, it may take us a couple of years to do that. And each of the markets we're going into could eventually over years be a multibillion dollar market.

So -- we're not going to go into a market unless we think it has that potential. And our investments are not going to be sizable unless we feel we've got the talent, and we had some extraordinary hires. We're really pleased.

(Operator Instructions) And the next question will come from Matthew Breese of Stephens Inc.

I wanted to go back to the pipeline. I was hoping you could comment on which geographies you're seeing the greatest strength and you're contributing to that pipeline. And maybe you could comment a little bit on the robustness of the pipeline versus the team that you now have on the field. Is this the type of origination horsepower that we should get used to, or is this an exceptional level for the team you have?

I actually think the pipeline is low compared to what I expect going into really probably by Q4, Q1. We had new lenders, Matt, it takes them a period of time to acclimate not only to your own culture, but also to acclimate their prior clients and prospects to opportunities at a new bank.

So I do think the pipeline is going to grow. I can't speak totally about the resi book because the resi is driven by the rate environment and the activities, but resi has been fairly consistent in the last few years.

In the commercial pipe, I do expect it to grow. At the end of the quarter, the vast majority of the pipe was from our existing markets, Central and Southern New Jersey, Philadelphia and New York. Not a lot yet in Boston or Baltimore other than you saw the 40 million that Baltimore guys put on.

Our Baltimore lenders came on at the end of May. That's -- you expect them to take another quarter or 2 to really ramp. So I'm really bullish on our opportunities in the new markets with the folks that we've hired.

As you've gone through the historical pipeline, could you just give us some idea of what the success rate is, the pull-through rate on pipelines?

Typically for us, the residential pipeline pull-through rate is substantial. It's well over 90%, probably pushing 95%. The commercial pipeline is probably in the low to mid-80s. Once it gets to the point -- we're conservative in the way we report pipeline in commercial. The commercial pipe is only reported as approved. So the pipeline you see is only the approved pipeline. It does not include any of our work-in-progress, stuff in credit underwriting, and we do that on purpose.

Those are real commitments, Matt. They're not work in progress. So the pull-through rate on both sides is pretty strong. The one thing that does happen from time to time, and I want to be careful in the $630 million, we have about $150 million of commercial lines.

Construction projects.

So the drawdowns on that will be a little bit lower, but that's still -- it's still a very healthy pipeline. And as Joe pointed out, we do expect the pace of lending to pick up even beyond this.

Another changing factor here beyond just the yield curve is just the competitive landscape, a lot of your former competitors and peers are either involved in deals or being sold themselves. So -- how do you think about balancing the market expansion? Do you see Baltimore, Boston, with what might be a newfound opportunities right in your home state and nearby?

I think you have to look at all that stuff. And there's going to be -- in each of the bunch of deals that were announced right in the last 6 months, different sizes, different kinds of banks, with a few of them and I'm not going to name them, we think there might be more disruption and opportunity.

Some of the other ones, we don't think there's going to be that much difference or that much opportunity. So -- our existing folks, in the core markets that we've been in for years, they have their mission cut out for them, and they're going to execute.

And it won't need to be an either/or, I think it should be an and. But I'm comfortable that our folks know where they expect to see opportunities. And look, the Baltimore itself was an outgrowth of the PNC BBVA deal. Without that deal, we wouldn't have that team. And we wouldn't be in Baltimore.

And Matt, we've added new lenders in the existing markets because of some of the disruption. I mentioned last quarter that we stood up a construction vertical, which is already paying dividends for us, led by a former very senior-level banker in our current market environment. So we're approaching it on all fronts.

I appreciate that. Two other quick ones. The new buyback authorization is pretty robust. Just curious in terms of appetite and given where the stock is, should we expect execution on full or near full amount of the authorization over the balance of the year?

I think you should expect that all else equal, we're going to be pretty aggressive. We -- at the current price, the earn-back metrics are extremely good for us. There are times, though, that it can be hard to execute. You can have all the authorization you want, but there are rules to how many shares you can buy back in different periods. And if you can't find a block seller, that can be a bit of an issue.

But you're right that we purposely wanted to send the message that we think our capital position, earnings outlook would both support a much faster amount of buybacks. And I think, look, these things go -- the M&A stuff happens in seasons. You've seen a bunch of announcements. We've been watching the market carefully.

We are going to be careful not to be distracted by opportunities that might move the needle a little bit, but won't make a material difference. If it's not a material opportunity for us, we'd rather buy back our own shares and continue with organic. But that doesn't mean we're not looking at M&A. We're happy to do that, too. We just have to find the right thing.

Okay. Last one for me is just the tax rate year-to-date is a little bit higher. Could you just recalibrate that for us? What's a good run rate?

Yes. It's -- it's Mike. It's 24%. I mean the state part -- the federal is pretty consistent, but the state between New Jersey, New York, et cetera, has been bouncing around. Last year, New Jersey had some increase in rates and surtax.

And this year, that happened in New York starting in Q2, they had a surtax. That's why the Q2 number kind of came up a little bit because of New York. So it's, I'd say still, say, 24, 24.5, something like that. Some of these surtaxes or most of these surtaxes are temporary supposedly, but time will tell.

I would just point out to Matt, one of the reasons we took the strategy of diversifying a little bit out of New Jersey is by a long shot our highest tax or the income we derive in New Jersey is the least efficient. So it doesn't hurt to have some growth elsewhere.

The next question comes from Don Koch of Koch Investments.

I got 3 quick questions, one, you've sort of given some local color on, but a major competitor has been sort of -- that was always struggling, has been taken off the board. Is that going to be a blessing or a curse? Are you going to have a new group of people that will fight more fiercely, or do you think you can really pick up not only market share but some much better talent?

So we assume you're probably referring to the investors announcement from earlier this week.

Yes.

Look, we have a lot of respect for the folks at investors. And if you think about what they built in the time since they took the company public. And -- so we wish them the best and think of them as really just incredible competitors, right? And sometimes you compete with people and you have a great deal of respect for them.

In any deal, and it's too early to tell what changes might come in that deal or there's the Sterling Webster deal and there are others like it, it's too early to tell exactly where the opportunities will be. But it tends to be that there are more opportunities, not fewer opportunities, when these things happen. Just because everyone -- loan officers, customers start to reexamine kind of what's important to them. Our business model is geared 100% to compete with the largest banks out there. So we go to market every day trying to win clients from Wells, BofA, TD, PNC others.

So in general terms, any time a bank gets bought by a giant competitor that can be good for us, but we don't count anybody out and the people and investors are remarkable. So I'm not -- I wish them all the best, and I'm not sure things are going to change very much.

Second quick question. I've got one more after that, is that you've done a wonderful job in this branch rationalization, 58 over a period of time, 4 in the last quarter. That should be a tremendous course of focus. So that -- you're continuing to continue to work on that, is that right? Were those -- does that type of run rate is something we can expect?

We're absolutely going to continue to work on that. We'll have more detail on that next week at the Investor Day. And just to give you the power of that, if you look at net operating expenses on our balance sheet as a percent of assets, in the last 5 years, they've fallen almost 70 basis points, down to about 1.75%.

So you can see that as we've switched -- and the way we like to look at it is we are following our customers to digital. So our customers are telling us every day that they want better solutions, easier ways to bank with us. And we have put a lot of money into that. It's now 18.5% of our operating expenses are IT.

So as a result, what you have to do is overinvest in those new channels, and you have to rationalize your investment in the channels that get less use. But interestingly, we're building new branches, too. We have a new branch concept that is going quite well. We've got a couple of them up and running already. We've built -- in the process of building the next 2 as well.

So I think it's a -- you invest in every channel, but your investment levels just have to reflect what your customer needs are.

And finally, my last question, and I know I've brought this a couple of times with Mike. The last time I looked -- your immediate footprint in New Jersey has about 9 million souls, your greater footprint has close to 20 million people. But especially in New Jersey, half of those people on the Western Coast of Florida every winter. You've got to have some kind of presence to follow that or that migration will go to the locals in that region, some beachhead or something that sort of keeps your customers because eventually, those New England or those northeastern states with the high tax rate, blue governance it's going to -- I mean, Florida in the last 30 years has gone from $7 million to $23 million. That's now larger than New York. You've got to follow that money somewhere.

We absolutely agree with your point that limiting ourselves to New Jersey is a mistake, right? And in terms of how we get to geographies, I think a little bit is opportunistic over time.

I will say that you'd be astounded in more details to share on this next week in digital. Digital has changed the game in a lot of ways, including when customers decide to switch banks. So one of the biggest successes we've had in digital is reducing the number of customers who leave us.

So customers move to Florida. They move to California. They go to all sorts of places. But the likelihood of them leaving OceanFirst is down materially over the last 3 or 4 years. So maybe there'll be a day for that down in Florida. But for now, we've bitten off a lot in Baltimore and Boston. We want to make sure we get those right.

(Operator Instructions) And the next question will come from William Wallace of Raymond James.

I'll try to be brief. I just wanted to circle back on the cash deployment and margin commentary, this sort of concept of getting into the 3s on NIM. Are we just talking about purely a function of deploying the cash that gets you there? Or are there underlying trends, whether it's funding relief or pricing benefits that are going to be drivers of margin expansion?

It's really the mix shift that has to drive it. If you think about deposit costs or 24 basis points, they continue to go down, and they'll go down a little bit more. But -- we're not going to make it on the funding side, and given the competitive market conditions, we have rational expectations about loan yields. So we're not going to be picking up -- our loan yield is not going to move up materially. So as a result that it's really just replacing the 10 basis points of cash with loans at little over 3%.

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

Thank you. With that, I'd like to thank everyone for their participation on the call this morning. We remain focused on building the business, deploying cash and improving earnings.

We do look forward to seeing those of you that can attend our Investor Day next week, so please call ahead and make a reservation. And we also look forward to discussing our third quarter results with you in October. Thank you.

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