Q2 2021 OceanFirst Financial Corp Earnings Call
Good morning, and welcome to the Ocean First Financial Corp Earnings Conference call on.
Participants will be in listen only mode.
Should you need assistance, please signal a conference specialist by pressing the Starkey from zero.
After todays presentation, there will be an opportunity to ask a question.
To ask a question you May press Star then 1 on your telephone keypad to withdraw your question. Please press Star then 2.
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 Ocean First financial Corp. We will begin this morning's call with our forward looking statements 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 on 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.
Julien by our President, Joe Labelle, Chief Financial Officer, Mike Fitzpatrick.
As always we appreciate your interest in our performance and pleased and are pleased to be able to discuss our operating results with you.
This morning, we'll 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.
I refer those slides during this call.
After our discussion we look forward to take on your questions.
In terms of financial results for the second quarter GAAP diluted earnings per share were 49 cents.
Another strong quarter for the company.
<unk>.
Earnings reflect the continuing economic recovery for the bank demonstrating improved credit trends.
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.
For the management the board declared a quarterly cash dividend of 17 cents per common share at approximately 44 cents per depository share of preferred stock.
The common share dividend as the company's 98th consecutive quarterly cash dividend.
The 17th <unk> 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 cycle.
Stockholders' equity to tangible assets remained strong and now exceeds 9%.
While our balance sheet remains inflated as we carried $1.1 billion or almost 10% of the entire balance sheet had cash as cash at quarter end.
The excess cash as a direct result of positive trends in our business.
What an incredible opportunity to build earnings overtime.
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.
It should provoke C d's, the noninterest bearing accounts.
On a year to date basis Cds have decreased by $416 million.
And we're largely replaced with noninterest bearing accounts that have increased by $372 million.
The company continued share repurchase activities.
Hi caught in the second quarter.
<unk> 500000 shares at a weighted average price of $21.93.
During the quarter the board authorized an additional 3 million shares be added to the repurchase program.
Having a quarter end capacity of slightly more than 4 million shares available for repurchase.
<unk> story or 6.7% of the current outstanding share base.
Before we discuss the outlook for our business I'll 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.
<unk> 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 restrained output.
Overall, our client base is in excellent financial position as indicated by record low levels of delinquencies and positive.
And all other credit metrics.
The New Jersey shore continues to be our strongest market is the short season looks to be 1 of the best on record.
Looking internally our employees have also been exceptionally resilient, having completed a core systems conversion earlier this month.
Upgraded our back office infrastructure.
<unk> for the first time in decades.
That project has set the stage for additional advancements and business process automation and deploy 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.
<unk> this transition will allow us to remove the final redundant systems in the bank the country Bank core application set this September and important efficiency project.
Our forward focus remains on deploying liquidity.
Building on 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 on mine. 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-19 landscape and detailing our plans to increase loan growth capitalize on the shift to digital and improve the efficiency of our retail distribution network.
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 on 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 weighted regional credit team members in the Baltimore market to supplement our lenders as well as a new regional President and senior credit officer on our Boston L. P O.
And are actively hunting for more talent in both geographies.
Efforts continued to add seasoned successful lenders in our existing footprint as well.
We're 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 graduate record originations as we had in 2.
'twenty 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.
<unk> thousand after growth of $116 million in Q1, the loan portfolio contracted 52 million for the quarter, including $27 million in pay offs 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 continued to build pipeline as the pandemic receipts.
<unk>.
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 on loan demand in new markets should accelerate and help both margin and net interest income in the.
For the year.
We need 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 for.
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 907000 <unk>.
Exclusive of merger related and branch consolidation expenses.
Half 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.
As noted we closed 4 branches in early Q2 and continue to analyze the effects of the pandemic on our customers behaviors and 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 5th.
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.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your telephone keypad.
Speaker phone please pick up the handset before pressing the keys.
To withdraw your question. Please press Star then 2 once again that is star then 1 to ask a question.
Our first question will come from Frank Schiraldi of Piper Sandler. Please go ahead.
Good morning.
Thank you.
I wanted to ask about the.
You know.
The ultra competitive atmosphere out there.
As I think you referred to Joe.
Is that the biggest risk to loan growth on the back half of the year on I would imagine.
The competition is just getting.
Fiercer given it seems like everybody is talking about a pickup in loan growth from the back half of the year.
Thanks, Greg I think I think you're right I think that the 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 and I'll give you. An example of what you'd consider to be competition, but.
What I referred to is something that's not.
Not typically competition and that's of 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 twos today for 10 year money, which.
Which is just a fascinating.
Fascinating environment to be in I don't know how long that occurs but they've extended amortizations had been very aggressive.
And the market is very good. So we've also seen some some clients opt to monetize.
And instead of a set of refinance or do other things but.
But that's all right I'm still very bullish on our prospects.
Okay and then on.
Just second 1 from me is on the on capital deployment you guys you got pretty big authorization out there now. So you know I think you look at repurchases on factor, but I just wonder if you can.
Hum.
Maybe talk about that.
Alrighty for buyback.
Thanks for deployment through.
M&A.
And then just kind of remind us.
What youre looking for on the deal side and if you've looked at any of the deal debt.
Recently.
And tourism.
So from a couple of things on that Frank I mean, I think you make a good point about capital management, and M&A and the share buyback.
We wanted to have Optionality here. So you know having the authorization with the buyback allows us for.
For 2 shares more quickly than we have in the past 2 quarters and we certainly have the capital on 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 you know 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 and repurchases and push that too far there, we're exploring all opportunities around M&A.
On the M&A side, we have not been.
For the past.
But the things we look for in M&A are a little different than what we would've 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 and low funding costs.
Obviously with 1 billion 1 on cash and.
And the momentum we have in our business. The majority of our Treasury products were 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.
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.
We're going to go ahead, and and have the opportunity to push down in.
And buy back shares more quickly.
I'd also say that.
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.
And we're gonna be very balanced and disciplined about debt.
We're protecting book value I'm really pleased it's moved up a dollar in the last 3 quarters.
Be careful about how we use them.
Alright, and then just a follow up to that is there any.
Sort of can you just remind us of what you are willing to tolerate on.
Dilution.
Slash the earn backs on it.
So that Hasnt changed so our general outlook is that you start, saying you know ideally you'd like to see earned back within 3 years and.
And the reason for that is you know on a 3 year horizon, you can really tell kind of what the economic conditions are and theres less.
And just looking at over that horizon.
That said.
The 3 to 5 year earn backs in some cases, I'd say, they're kind of rare could be appropriate if theres a very strategic opportunity that also really makes a change to your earnings per share can really provide a fast earnings per share.
Less right and then on the other side, if you're not getting enough earnings momentum than even 3 years could it be too much dilution. So we look at the dilution on a sliding scale as it relates to how much accretion youre getting back out of the deal. So if youre 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.
Yes, thanks for all the color.
Thanks Frank.
The next question comes from Michael Perito.
Please go ahead.
Hey, guys. Thanks for taking my questions.
I wanted to start on the loan growth side.
I appreciate all the color I guess kind of a thing.
Simplistic question, but as we think about the expectation for net growth to accelerate on the back half of the year.
I know you guys can probably provide more color next week, but just.
Is that on an expectation of origination.
On the increasing ore or the quoted weighted pipeline changing or pay offs moderating or there may be a mixture of all 3 just trying to understand what could eat that assumption a little bit better as we saw kind of a slower growth quarter over the past 90 days.
Let's say you mean first like the payoffs have been reasonably stable. So we're not seeing them either accelerated.
Celebrating or decelerating, it's kind of a normal level of amortization so.
We've engineered the company for meeting the markets and the producers and all that is to get ourselves to a net growth number a.
Certainly in the range of $250 million per quarter.
Hopefully in the third quarter.
<unk> by the fourth quarter and that's so call it about $1 billion a year in loan growth that that pace is what we've resource the company to do and it was very important to us that we resource that kind of an effort with new bankers in new markets, because we know how competitive the world is going to be and if we had limited.
It ourselves to saying, Hey, we want to grow a $1 billion a year and we're just going to stick in New Jersey, I think that would've been a much tougher task.
Looking at even just as Joe mentioned, the folks in Baltimore chipped in last quarter with $40 million net that's a big help so.
We have to kind of answer your question concisely.
Trying to get the.
But certainly a repetitive loan growth to be in the range of $250 million a quarter and we made we might be able to hit that in the third quarter.
Especially given the pipeline that you know that.
As Joe mentioned, we have a $630 million pipeline at the end of June now some of that is lines of credit so youre not going to get full draw downs during the quarter, but but still it's a very it's our biggest pipeline.
Pipeline ever and leaves us pretty bullish.
Helpful. Thank you for that net.
Just 2 other quick ones for me 1 just on on noninterest income.
Any thoughts your term about where.
On a core run rate could trend I mean is there.
Room for kind of some rebounding from items like swaps and things that maybe mortgage given where rates are in the third quarter.
Yeah definitely on the swaps are really just a function of loan closings. So certain portion of your commercial loans will go swap.
Yield curve has moved a little bit so it's not quite as attractive as it was you know a year ago, but I.
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've 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 won't begin for it wont be effective for us.
Until July 1.2022.
1 of the nice line items, we had this quarter and I think it's a continuing trend as debit card income came up so I think that's a positive and should probably only built so those are the 2 hotspots the.
On a deposit piece had been flat they were hurt a little bit in the pandemic.
You know 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 theres. There there is an opportunity and I would also point you know the performance we had a nest egg you know its still not an aggregate large number but it is starting to produce numbers now that are on the meaningful.
To us and we have with very strong growth in NASDAQ, that's our hybrid Robo advisor.
$130 million net AUM and grew about 30% this past quarter. So the customer adoption has been great there.
And can you just for mom and close real quick do you expect the Durbin and popped approximately once it kicks 'em all true.
It's a little hard because it is the debit card fees go up and the mix of fees changes because it doesn't the cap doesn't apply across all transact it applies across all transaction types, but some transaction revenue is already built.
Below the cap so it really doesn't apply.
Our best guess at this point.
Is that it could be say 6 or $7 million it depends a little bit on how fast.
The defeat that that line growth between now and extra wipers.
And that's true on a car.
Correct.
And then just lastly for me Joe I think you mentioned that you expect the opex to step up in the box out for the year.
You're on.
Part of a 2 part question there I was just 1.
You know.
Obviously, you added a lot of bankers you know it is a jump up in kind of a 1 on a half to $2 million range kind of equate to capture all of it.
That overhead than any other digital investments youre, making number 1 and then number 2 you mentioned I think that you expect to step down then.
'twenty 'twenty 2 so should we read into that that you know a lot of the hiring that you guys bought it for phone for that's taking place on that that pipeline is a little less active now than maybe it was 6 months ago.
It was a couple of moving pieces and parts. So as you as you point out the hires we made we've gotta get full quarter expenses on.
And there are a couple more hires and when we will not be hiring at the pace. We have been hiring out so that's kind of tapering off.
So expenses will drift up a little bit because of that.
Then we have 2 catalysts, 1 will show a little bit in the fourth quarter. The other beginning in next year. The first catalyst as the country bank conversion, which I referenced so.
And today that core application said between the people supporting it in this application set itself.
So it's about 2 million a year, so getting that deconversion in the third quarter there'll be some trailing expenses in the fourth quarter, but that's a nice tailwind and.
And then the second thing is we're gonna 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 will be able to walk you through how that happened. 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 it may not be quite that high but that's probably the the outer range for Q4.
Very that's very helpful. Thank you guys for taking my questions I appreciate it.
Right.
The next.
When it comes from Erik Zwick of Boenning and Scattergood. Please go ahead.
Good morning, everyone. Good morning, Eric.
Just 2 questions for me today. The first 1 was impressive to see that the build and the commercial pipeline and just looking at the yield as well it looks like the commercial pipeline yield his day.
Question constant over the past 3 quarters at kind of at 3 and 3 quarters percent level are looking at the origination yields on that portfolio for the past 2 quarters, it's come in lower than a return.
The pipeline you know I'm, just curious is that a reflection of the competition that you're seeing that what you're actually able to close as you know a little bit lower or is there something else at play.
Paid for.
I think it's a combination of factors are 1 is absolutely competition years negotiations that go on even after you approved transactions given the environment that we're in.
And I think the other thing is that we've done you know we we have seen you know the yield curve go down a bit so that plays into it by the time loans or close versus when they've been approved.
Bruce.
And then it's the mix so as Chris mentioned earlier, you know 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 funded at the same time those tend to be higher yielding projects of the end loans are lower yielding and the construction loans arent fully funded that can impact.
<unk>, 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 of deferred so we're willing to be willing to be more aggressive for the types of credits that we like and you know our credit appetite, so I'm happy to I'm happy to be.
We are in and negotiating play in.
And the market that we're at.
Thanks for you I appreciate the color there and then just looking at the balance sheet I noticed that the equity investments are up $41 million in the quarter and I know, it's not a primary source of revenue for you guys, but you've just been opportunity opportunistic from time to time and made a nice trade.
And the bank investment from last year, just curious does that increase out here on <unk> does that reflect some from new investments and if so maybe if you could provide any color to what those might be.
Yeah, Eric It's Mike it's pretty straightforward do you. That's true we had you recall, we had a we were investing in common common stock of regional banks and we sold out.
Net of those positions at the beginning of the year now we're investing in preferred stock of financial service companies.
It's the all of the $40 million and growth is related to that to that strategy.
Got it thanks, Mike Thanks for taking my questions today.
Yeah.
Once again, if you would like to ask.
Question. Please press Star then 1.
And our next question will come from Dave Bishop of Seaport Research Partners. Please go ahead.
Yes, good morning, gentlemen, thanks for taking my questions.
Hi, Dave.
Hey, 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 any sort of ratio you you're targeting there for Tc ratio remind us what's your sort of maybe managing towards the banks.
On the best way to answer that is to think about the long.
From TCE ratio, so we're right.
Right, where we'd like to be in the mid 8 so we think as you start to approach 9.
Then maybe you're getting a little too much capital as you start to approach a better start to manage your capital and more carefully so and because of our preferred stock the tangible equity ratio was.
Long term loans, so between TCE and the tangible equity ratio right in a half day 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 it is.
Mean by that is we have a $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 gonna be producing additional capital right. The internal generation of capital would be even higher so I think our capital ratios are understated because of the cash.
I actually feel to be more.
9.
For the higher level than we would typically look at so you know 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 gonna try and get it back to our shareholders. So we're gonna look both at the common dividend and debt.
Buybacks.
See the additional 3 million shares who put on is certainly very direct signal that we feel we could do meaningful repurchases provided we've exhausted the alternatives through ACA.
Sure.
Got it and then.
Maybe a question on credit here, obviously with the economic backdrop.
At least in the current quarter for the current and informing the the allowance for credit losses here just curious as you do.
Some positive trends in terms of just net loan growth here just curious maybe.
At what rate our ratio of loans you'd be reserving at as you do grow the balance sheet.
I think when you think about the way Cecil works in our quantitative loss history.
We have been operating the bank to be pretty conservative 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 a decade.
So we think that our portfolio gives us the opportunity to not have to reserve all that heavily and in fact under Cecil it's kind of hard to construct the big reserve on a book like ours.
An interesting fact is at the end of the quarter.
Quarter if.
If you look within our ACL.
More of our ACL is qualitative and quantitative it's kind of hard to get that number up so.
Think about net new growth for a long period of time, we've been running it.
Probably a normalized say a 70 basis point reserve level.
If I were.
Nothing that's going to be the exact number but if I were to pick a number.
Say you know how should you be reserving against net loan growth, it's probably somewhere in that area.
Sub 1% based on our credit performance.
Got it I appreciate answering the questions.
Alright, Thanks, Dave.
The next question comes from Russell Gunther of D. A Davidson. Please go ahead.
Hey, good morning, guys for a.
Question on the leap a question on the margin. So if I heard you right it sounds like with the loan growth that.
Affected 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 $3.20 to $3.40 guide.
You know the yield curve has become more inhospitable since you laid that out on the competition.
That's the exception 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 you know I think it may take us over the longer to get up to the numbers we were.
Previously that 325 or better.
Still highly confident we're going to get well into the threes.
And I mean, even the last time, we spoke the.
The difference between $3.25, and $3.50 is really what what is the yield curve can you give us so we.
We think that this deployment of cash as of for a 5 quarter event.
Talking about at 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 on a quarter you're absolutely right.
Okay got it that's very helpful guys. That's it for me. Thank you. Thanks Russell.
The next question comes from Christopher Merrimack of Janney Montgomery Scott. Please go ahead.
Thanks, Good morning, Chris and team I wanted to drill down on slide 7 just to talk about on technology expenses. So should we relate that mix change that you're kind of articulating.
2.1 that the but the other corp.
My sense will be slow while technology rises and would you look at technology as kind of a sub component of the efficiency ratio or other asset based metrics over time.
We are 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.
For export 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 you know they they want to make sure. They've got you know cutting edge digital apps and things like that so you can see how that.
Both on absolute dollars and as a percent of the technology increases expense has increased over.
For 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 it was a big deal.
I mentioned the country bank about $2 million a year interestingly the vast majority of that is people related not systems. So the number will come down.
Probably.
30% of that right. The rest is going to be people. So.
I think youre going to see a slower growth rate, but you will still see growth in its.
Our customer, especially corporate treasury things like that you know the.
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 you know look at the 58 branches that we've consolidated the date. So in terms of we don't have a particular benchmark I would point out and this is a curiosity more than anything.
Proportionately, we're spending on it about the same as J P. Morgan Chase.
To give you some 1 benchmark now obviously, they've got a slightly larger balance sheet, so and so on a more spending than we do but I do think the point is that you should be a heavy investor in I T. If you plan to be around for the future.
Net.
Chris Thanks for that additional color I appreciate it and just a quick follow up on the New England Flashed 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 and then I want you to talk to the the kind of talent.
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 youre 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 on some of the best banking markets on the planet.
So the markets are not the question is.
The question is how can you find the people and the people delivering the relationship you need and and you know we as we work through the process. We didn't know how successful we were gonna be Baltimore became a priority.
Talent, we 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 had a.
Have the opportunity to bring some town on for Joe maybe talk a little bit about the backgrounds of the folks who are higher specially Oh, Dan and Tom.
<unk> looked in Greg's, whose original.
Because when it for Boston, who came on board at the end of Q2 really are just a few days before the end of June ran a multibillion dollar business for T D up there David Heller.
Senior lender up there.
From a BMO Harris Bank Corp, lender very successful in that marketplace Michael Mark.
Mark who cheese, our newly hired senior credit officer from Santander very strong all season folks been around a long time.
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.
Tell him just look at we're going to be patient.
We're going to be thoughtful, but look at what we've built in 3 and a half years in Philadelphia and in a few years in New York, that's the blueprint and 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.
Last quarter, you know Philadelphia is now over $1 billion in loans outstanding.
Just under 4 years, So New York is about 1 billion and a half. So there is the opportunity that lies in front of these folks. It's the reason we picked these markets. We have markets that are dense and vibrant and you just have to fill them up with the right talent.
Again, there's only a few folks on Boston, we're actively looking for more there.
So I guess, Chris 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 may take us a couple of years to do that in each of the markets. We're going into could eventually over years be a multibillion dollar market. So.
We're not going to go.
And unless we think it has that potential.
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.
Great. Thank you Joe Thank you for Us I appreciate it thanks, Chris.
Once again, if you would like to ask a question. Please press.
Until March 1.
And the next question will come from Matthew Breese of Stephens, Inc. Please go ahead.
Okay.
I wanted to go back to the pipeline I was hoping you could comment on which geographies youre seeing the greatest strength on your contributing to that pipeline and then maybe you could comment a little bit on.
The robustness of the pipeline for 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 that pipeline is low.
Compared to what I expect going into really probably by Q.
For Q1.
Net new lenders, Matt It takes some period of time to acclimate not only to your own culture, but also to acclimate their prior clients and prospects to new opportunities at a new bank. So I do think the pipeline is going to grow.
Can't speak.
Totally about the recipe book because.
Cause of resi is driven by the rate environment and the activities, but <unk> been fairly consistent the last few years and 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.
For the 40 million net our Baltimore guys put on our Baltimore lenders came on at the end of May.
That's.
Do 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 <unk> gone.
When you say 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 its well over 90% probably pushing 95%. The rest of the commercial pipeline is probably in the low to mid eighties.
Once it gets to the point, where we're conservative in the way we report pipeline in commercial the commercial pipe has only reported.
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 math.
Or not.
Theyre not work in progress so the pull through rate on both sides is pretty strong. The 1 thing that does happen from time to time, whether it be careful on the $630 million of about $150 million of commercial lines. Construction projects is at the drawdowns on that'll be a little bit lower but that's still it's still very healthy pipeline and as Joe pointed.
We do expect that the pace of lending to pick up even beyond this.
Okay.
Another changing factor here beyond just the yield curve is just the competitive landscape a lot of year for her.
Competitors and peers are either involved in deals are being sold themselves. So how do you think about.
Balanced.
<unk> the market expansion D C Baltimore, Boston with what might be.
Newfound opportunities right in your home state and nearby.
I think it's.
I think you have to look at all of that stuff and there's going to be in each of the there's a bunch of deals that were announced in the last 6 months different sizes.
It out 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 for that much opportunity. So our.
<unk> folks are in the core markets that we've been in for years.
They have their mission cut out for them.
<unk> and they're going to execute and will need to be an either or.
I think it should be in and.
But I'm comfortable that our folks know where they expect to see opportunities in and looked at Baltimore itself was an outgrowth of the P&C BBVA deal without that deal we wouldn't have that team. So.
We wouldn't be involved.
And Matt we've added new lenders in the existing markets because of some of the disruption that I mentioned last quarter that we stood up a construction vertical which is already paying dividends for us.
Led by.
Our former very senior level banker in our current market environment.
We're approaching on on all fronts.
Okay I appreciate that.
2 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.
On a full amount on the authors.
<unk> over the balance of the year.
Yes, you should expect that.
All else equal, we're going to be pretty aggressive.
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.
Yeah, there are rules to how many shares you can buy back in different.
Periods.
If you can't find a block by block seller that can be a bit of an issue but.
Youre right that we purposely wanted to send the message that we think our capital position earnings outlook.
We both support a much faster amount of buybacks.
And I think we'll keep.
These things go on 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 wont 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 happy to do that too we just have to find the right thing.
Okay.
Last 1 for me just the tax rate year to date as click a little bit higher.
Could you just re calibrate that for us what's a good run rate.
Yes.
Yeah.
Matt It's Mike it's on.
At 24.24.
<unk> percent I mean is.
The state part the federal is pretty consistent but the state between New Jersey, New York et cetera has been bouncing around last year in New Jersey had.
Some increase in rates and since their tax and this year that happened in New York.
Starting in Q2, they had a certain tax that's why the Q2.
For kind of came up a little bit is because of New York.
So it's I'd say still say 'twenty, 4 'twenty 4 and a half.
Something like that some of these third taxes are most easter taxes or temporary supposedly but time will tell.
I would just point out to me that 1 of the reasons, we took the strategy.
<unk> of diversifying a little bit out of New Jersey.
So by a long shot our highest tax.
The income we derive in new Jersey is the least efficient.
True.
It doesn't hurt to have some growth elsewhere.
Great. Okay I appreciate it thank.
Thank you very much for your next week alright.
Thanks, Matt appreciate it.
The next question comes from Don Koch of Koch investments. Please go ahead.
I've got 3 quick questions.
1 you've sort of given some local color on but.
Our major competitor has been sort of that was always struggling is taken.
Been taken off the board is that gonna be a blessing or a curse where you're going.
They have a new group of people that will fight more fiercely or do you think you can really pick up.
On the market share, but some much better talent.
Yes.
Assume you're probably referring to the the investors announcement young from earlier this week.
Aw.
A lot of respect for the folks at investors and you think about what they built in the time since they took the company public and.
So so 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 you know, 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.
Because everyone you know loan officers customers start to reexamine kind of what 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 T D.
PNC and others. So in general terms anytime a bank gets bought by a giant competitor that can be good for us, but we don't count anybody out in that people and investors are are remarkable so I'm not.
I wish them, all the best and I'm not sure if things are going to change very much.
A second quick question I got.
1 more after that is that you have done a wonderful job on this branch rationalization 58 over a period of time for in the last quarter.
That should be a tremendous force of focus so that you can do on a continue to work on that is that right where those does that type of run rate is something we can expect.
We're still going to continue to work on that and we will.
I'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 of as a percent of assets.
In the last 5 years, they've fallen almost.
Almost 70 basis points down to about.
1 on 3 cornered percent. So you can see that.
As we've switched in the way we like to look at it is we are following our customers to digital.
So you know 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 for I T.
So as a result, what you.
I have to do is overinvest in those new channels and you have to rationalize your investment in the channels that get my shoes, but interestingly, we're building new branches too.
On a new branch concept that is going quite well, we've got a couple of them up and running already we were built in the process of building. The next 2 as well.
So I think it said you invest.
First in every channel.
But your investment levels just have to reflect what your customer needs are.
And finally on my last question on I know Ive brought this up a couple of times with Mike.
The last time I looked at your.
Amazing your immediate footprint in New Jersey has about 9 million soles.
There are a greater footprint has close to the 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 for fall of that or that migration will go to the locals in that region are some beachhead or something that sort of keeps your customers because eventually.
Eventually those new England, or those north eastern states with a high tax rate.
On a blue governance, what's going on on.
Florida on the last 30 years has gone from 7 million to $23 million.
Now larger than New York, you've got a fall that money somewhere.
Yeah, well you we absolutely agree with your point that you know limiting ourselves.
As to New Jersey is a mistake right.
And in terms of how we get the geographies I think a little bit as opportunistic overtime I.
I will say that if you you'd be astounded and want 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 you know 1 of the biggest successes we've had in digital is reducing the number of customers who leave us.
So customers moved to Florida, and they moved to California. They got all sorts of places, but the likelihood of them, leaving Ocean first 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 and in Baltimore, and Boston and we want to make sure we get those right.
Okay. Thank you did a nice job nice quarter. Thank you.
Again, if you have a question. Please press Star then 1.
And the next question will come from William Wallace.
Wallace of Raymond James Please go ahead.
Hi, Thanks, I'll try to be brief.
I just wanted to circle back on the cash deployment and margin commentary, that's sort of concept of getting into the threes on NIM or are we just talking about purely a function of deploying the cash gets you there.
Sure.
Are there underlying trends whether it's funding.
Leaf or pricing benefits debt debt 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 are at a 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 of its really just replacing the 10 basis points of cash with.
Loans at.
Lynn.
A little over 3%.
Okay, Great. That's what I thought I just wanted to make sure. That's my only question. Thank you.
Thanks Wally.
This concludes our question and answer session I would like to turn the conference back over to Chris Maher for any closing remarks.
With that I'd like to thank everyone.
Your participation on the call. This morning, we remain focused on building the business deploying cash and improve 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.
[music].
1 for <unk>.
Right.
[music].
Yeah.
[music].