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OceanFirst Financial Corp (NASDAQ:OCFC)
Q2 2019 Earnings Call
Jul 26, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the OceanFirst Financial Corp. Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Jill Hewitt, Investor Relations Officer. Please go ahead.

Jill Apito Hewitt -- Senior Vice President, Investor Relations

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'll begin this morning's call with our forward-looking statement disclosure. Please remember that many of our remarks today contain forward-looking statements based on current expectations. Refer to our press release and other public filings, including the risk factors in our 10-K, where you will find factors that could cause actual results to differ materially from these forward-looking statements.

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

Christopher D. Maher -- Chairman, President and Chief Executive Officer

Thank you, Jill, and good morning to all who have been able to join our second quarter 2019 earnings conference call today. This morning, I'm joined by our Chief Operating Officer 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. As has been our practice, we'll highlight a few key items, add some color to the results posted for the quarter and then we look forward to taking your questions. In terms of financial results for the second quarter, diluted earnings per share were $0.37.

Quarterly reported earnings were impacted by Capital Bank merger-related expenses, branch consolidation charges and executive retirement expenses, all which totaled $7 million net of tax benefit. Excluding those amounts, core earnings per share were $0.51, an 11% increase over core earnings of $0.46 in the second quarter of 2018. Core earnings were flat as compared to the prior quarter as there was a much change in the loan portfolio and expenses remained elevated as we completed the Capital Bank integration in June. Going forward, operating expenses are expected to trend favorably as a result of the consolidation of 7 branches and a staff reduction that total 38 full-time equivalents.

At the same time, our efforts in metropolitan New York and Greater Philadelphia are gaining traction and have contributed to a record loan pipeline. These twin tailwinds, combined with what appears to be a plateau in deposit costs, bode well for performance in the second half of the year. Regarding capital management for the quarter, the Board declared a quarterly cash dividend of $0.17, the company's 90th consecutive quarterly cash dividend. That $0.17 dividend represents a 33% payout of core earnings allowing us to build capital levels as we pursue a variety of opportunities to deploy that capital in growth initiatives.

As equity markets have been choppy at times this year, the company was able to repurchase 309,167 shares throughout 2019 at a weighted average price of $23.93 per share. 986,000 shares remain under the existing repurchase program. The second half of the year, we may consider expanding the repurchase program to ensure that we have the capacity to increase share repurchases if the opportunity presents itself. Second quarter earnings present a bit of a pause as the company matured. The organic expansion efforts in metro New York and Greater Philadelphia and the focus on the integration of Capital Bank had put us in a solid position for the second half of the year.

With the progress made during the quarter, we're well positioned for the second half. Although net interest margin compressed a bit, more than we expected during the quarter, we also expect that trend to moderate. Deposit costs were steady throughout the quarter, and there were signs that we are at or near the high watermark for the deposit cost cycle. For the more positive outlook for loan growth in the third quarter, we had the opportunity to improve net interest income in the coming quarters. Our other performance metrics remain highly competitive with a core ROA of 1.29%, 10 basis points higher than the 1.19% posted in the second quarter of 2018, and a core return on tangible common equity of 14.14%, 41 basis points higher than 13.73% level in the second quarter of 2018.

Comparing the balance sheet to the second quarter of 2018, the company's tangible common equity to total assets increased 89 basis points from 8.87% to 9.76%, while tangible book value per share also rose from $13.56 to $14.57, a 7.5% increase. In addition, nonperforming assets decreased from 34 basis points to just 23 basis points over the same period of time. While we're looking forward to balance sheet growth and earnings improvements in the second half of the year, we've demonstrated discipline to strengthen the balance sheet during a period of considerable economic uncertainty. As noted last quarter, we see no near-term threat to the current economic expansion. However, it's prudent to be prepared for a possible downside surprise.

At this point, I'll turn the discussion over to Joe Lebel to provide more details regarding the development of our business.

Joseph J. Lebel -- Executive Vice President and Chief Operating Officer

Thanks, Chris. Loan production for the quarter was basically flat as compared to the first quarter in what traditionally has been our weakest originations quarter. Year-over-year, we significantly outperformed Q2 2018. And more importantly, our pipeline is at all-time highs, driven in part by our Greater Philadelphia and metro New York regions gaining traction and market acceptance. At quarter end, the commercial pipeline of $213 million was $90 million above last quarter and included $126 million from the Philadelphia and New York regions. As of last night, the commercial pipeline had increased to $293 million, including $123 million from Philadelphia and $68 million from New York.

As we had discussed in prior earnings calls, we expected the loan originations to be back-end loaded for 2019, as our newer regions build momentum, and we are pleased to see the progress and remain bullish for the remainder of the year. Strong residential loan volume has bolstered the pipeline, and it continues to deliver solid results. On the credit front, we continue our disciplined approach to the renewals of acquired credits and had exited over $50 million in participation loans in the second quarter due to request from borrowers for pricing our structure amendments that did not meet our hurdles.

While we don't expect a near-term economic recession, we value the opportunity to enhance our strong balance sheet with loans that meet our uncompromising credit and pricing standards. You may recall earlier this quarter, we announced the addition of Susanne Svizeny, a long-time Philadelphia banker, as our new Regional President for the Greater Philadelphia market. We're pleased to have a leader of Susanne's caliber and pedigree. She and her team have already begun to build momentum. Moving to deposits. Seasonal fluctuations in government and business deposits impacted overall balances.

While we saw moderation in the increases in cost of deposits, overall increases in our costs were only 5 basis points versus 9 basis points last quarter. To-date, we have retained 98% of the Capital Bank deposits and are seeing some larger dollar size loan opportunities with capital clients that benefit from the increased size of the OceanFirst Bank balance sheet. As we forecasted last quarter, we experienced slight NIM contraction given the challenging external rate environment on loans, further hampered by the reduced treasury rates commonly used as benchmarks for term borrowings.

Yields on our earning assets dropped 5 basis points, and the NIM was also impacted by reduced purchase accounting accretion of 3 basis points. Moving to operating expenses. The addition of Capital Bank and the increased compensation for the buildout of metro New York and Greater Philadelphia should trend lower this quarter, as the systems conversion was completed, 3 branches related to the Capital Bank acquisition were closed in early June and 4 additional branches in our legacy footprint will close in the third quarter.

With that, I'll turn it back over to Chris for the Q&A portion of the call.

Christopher D. Maher -- Chairman, President and Chief Executive Officer

Okay. Thanks. At this point, Mike, Joe and I would be pleased to take your questions.

Questions and Answers:

 

Operator

[Operator Instructions] Our first question today will come from Frank Schiraldi of Sandler O'Neill. Please go ahead.

Christopher D. Maher -- Chairman, President and Chief Executive Officer

Morning Frank.

Frank Schiraldi -- Sandler O'Neill -- Analyst

I wanted to start with the NIM. So I was surprised by the contraction -- level of contraction. And I understand the deposit side makes sense. Deposit cost did continue to go up, but it didn't moderate linked quarter. But just on the -- I wonder if you could talk a little bit more about the contraction and loan yields linked quarter. I mean, I guess, 3 bps about is purchase accounting accretion. But I think loan yields were down 7 or 8 bps linked quarter. So is that -- I guess some of that's LIBOR-based. If you could just give a little bit more color on the contraction in loan yields.

Christopher D. Maher -- Chairman, President and Chief Executive Officer

I think what we're seeing, Frank, is that if you look at what's happened over the last, say, so far this year, the last 2 quarters, is that the long-term rates have been dropping in the markets, right, so the 5-year and the 10-year, and that has some impact on the competitive market for commercial real estate loans, which tend to be tied to the 5 year. So we're seeing a little pullback in the prices we can get on those loans. And I think dramatic, and I don't think it's anything that's going to persist further in the year.

And you couple that with having some of the pay down, as Joe talked about, and not having loan growth during the quarter, we were putting as much on the new stuff, and you wound up not being able to overcome with a little bit of mix shift. So I don't think it's something that's going to dog us for the rest of the year, although we do run a very balanced interest rate risk position, and we have about $1 billion worth of floating rate loans. So the headwind we may have this quarter is that you see Fed rate decreases, will certainly pull down our funding costs over time, but there may be a little timing issue there where if you have a $1 billion reset down in the quarter, you have to make that up on the funding side. You may not make all that up in the first quarter you get there.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Is that $1 billion in floating -- is that -- that's mostly prime as opposed to LIBOR?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

It's both, yes. It's a little more prime than LIBOR, but it's a fair amount of LIBOR.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Okay. So I guess, LIBOR sort of front ran the Fed rate cut, so you saw some of that this quarter as well?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

Exactly. Yes. So some of that's in -- in some way, we may have a little bit more of that this quarter. But I think the key, though, is -- to Joe's comments about having a production out there. Although the yields are down a little bit on new production, they're still pretty healthy, and we've got good spreads on that. So we don't think that the margin's going to be under assault or anything like that, just maybe a little weak as the timing pulls together.

Frank Schiraldi -- Sandler O'Neill -- Analyst

I guess, if you think about -- if we forget about the Fed action or assumed Fed action for a second and just think about replacement rates. Just given where the longer end of the curve has gone, I mean where the 5 year has gone and thinking about what happened this quarter, I mean, would you say that you would expect loan yield -- average loan yields to contract quarter-over-quarter just as you put new balances on in Philly and New York?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

Yes. We could see a little bit of contraction there. I don't think it's going to be double digits in the NIM or anything like that, but you see a little contraction. And if we had the balance sheet growth, which we expect to see in the second half of the year, you were able to overcome that and your net interest income could trend positively, although your margin may be down a couple bps.

Frank Schiraldi -- Sandler O'Neill -- Analyst

And then the message for -- in terms of deposit costs, is it that you have another quarter of deposit cost -- average deposit cost moving higher, but moderating? Or do you think 3Q deposit cost could be flattish or down versus the second quarter?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

Yes. It right now seems more flattish. The intra-quarter numbers were pretty flat. In fact, I think June might have been 1 basis point lower or something. So what I think you saw was a carryforward of the price changes that had happened in the first quarter. So they seem pretty flat. The other thing, as Joe mentioned, the seasonality of our deposit book. We start to pick up more deposits in the third quarter. That's traditionally what happens. We pick them up in third and fourth quarter. And the deposit to borrowing mix can change, and that can be favorable as well. So the overall funding cost can be a little better.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Okay. And then just finally, thinking about loan growth in the back half of the year, the pipeline looks very strong. I think in the past, you've talked about the need or the expectation of growing $50 million to $100 million in net loans a quarter, if I'm not mistaken. And just given that pipeline, it would seem like, at least in the near-term here, I would assume you're thinking towards the higher end of that. But I guess, if you could just give a little bit of color on that front.

Joseph J. Lebel -- Executive Vice President and Chief Operating Officer

Yes. I think, Frank, we did talk about the bulk of the loan growth coming in the second half of the year as the new regions came online. And I think we had given some guides in the $50 million to $100 million range, and I think we're absolutely trending toward the high end of that range definitely in the third quarter and hopefully in the fourth as well.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Okay. And that's -- when you think about that, that's net of pay downs, right? You're thinking that's net growth?

Joseph J. Lebel -- Executive Vice President and Chief Operating Officer

Net growth. Yes.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Yeah. Okay great.

Joseph J. Lebel -- Executive Vice President and Chief Operating Officer

Thank you Frank

Operator

Our next question will come from Matthew Breese of Piper Jaffray. Please go ahead.

Matthew Breese -- Piper Jaffray -- Analyst

Good morning.

Christopher D. Maher -- Chairman, President and Chief Executive Officer

Morning Matt

Matthew Breese -- Piper Jaffray -- Analyst

Chris, I just wanted to dive into the loan yield side of the equation and perhaps challenge your comments but with the hopes of understanding. As I look at origination yield this quarter provided in the release, for the quarter, they were down 81 basis points. And while the pipeline suggest a little bit of a pickup, they are still well off your 4Q and 1Q levels. And so I wanted again to understanding as to, one, what happened, particularly in the commercial side, down 94 basis points? It seems like you didn't just follow the yield curve. There's more there, so perhaps a spread compression. And then you noted a couple of basis points perhaps of NIM compression. Was that core or reported?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

I'm sorry, the last part of that is the compression you're asking about?

Matthew Breese -- Piper Jaffray -- Analyst

Yes. You had mentioned in your -- one of your replies that perhaps a couple of basis points of NIM compression in the near term. Was that core or reported?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

That would be core. So we're always going to have the fighting against the 2 or 3 basis points of purchase accounting accretion. So in a good quarter, we can overcome that. But when I was talking the 2 or 3, it's probably core. I think to your comments about why the originations fell so much, a lot of that -- or the yield on them changed. Lot has to do with the mix of floating versus fixed-rate instruments. So we've been putting -- which is what we like to do. We've been putting more floating rate stuff on, even floating rate real estate that we achieved through a swap.

So as the mix of floating versus fixed changes, the absolute yield may come down a little bit, but we think that we've got a better balance sheet over the long run. I think also you look at the 5-year treasury was down 47 basis points, I think, from the beginning of the quarter to the end of the quarter. And that underpins a lot of the commercial real estate deal. So I don't think even with the Fed -- I think that front ran the Fed rate cut as well. So you have a combination of the fixed rate stuff probably on average was coming down close to 50 basis points.

The floating rate stuff, we did a higher percentage of that in the quarter, so that's going to water down a little bit. But I don't think you're going to see that persist for the remainder of the year. I think the 5 and the 10-year have moved based on longer-term expectations about what the Fed is going to do. And whether the Fed cuts or doesn't cut in July or later in the year, I don't think you're going to see those dramatic moves in the 5 or 10 years. So I think we're not going to have a persistent drop in those originations.

Michael J. Fitzpatrick -- Executive Vice President and Chief Financial Officer

Matt, the other thing is on the loan originations for the core, the 4.44% there, there was -- this is a seasonal item. We had -- a lot of our municipal clients have short-term funding needs, and we lend them on short-term. So it was -- for 90 days, we had about $10 million at less than 2%, and that's 90-day funding, and it will just tail off because their receipts come in, in August. So that's really the combination, but that dragged down that yield to 4.44%. So there's a bit of an anomaly in that respect. So you see the pipeline yield is 4.90%. So that's kind of a little bit of where the trend is. We'll be closing loans in the third quarter.

Matthew Breese -- Piper Jaffray -- Analyst

Got it. Okay. No, that's really helpful. And just kind of tying this back into the NIM and the NIM outlook. You noted that there's a timing difference perhaps between the loan yield compression versus what you can get out of deposits. If you could give us a gauge of where you think the point of NIM stability -- where do we find that level? And when it happens? Is that over 2 quarters or 3 quarters, and is it still north of, call it, a core NIM of 3.40%? I would just really appreciate some color there.

Christopher D. Maher -- Chairman, President and Chief Executive Officer

I think the most important thing is the business models engineering and the relationship lending we do, that have a strong NIM. So that -- I would kind of define that as being in the mid-3s. Depending on circumstance, maybe that's 3.30s, something like that or 3.50s or 3.60s or 3.70s when you have a great set of circumstances. So I think we're going to be bouncing around in that. I think that the catch up is only a quarter or 2. I don't think anyone anticipates the Fed cutting rates 5x. So I think you have 1 or 2 rate cuts you have to absorb on the floating rate stuff.

We'll bring deposit cost down maybe on a 90-day delay. And then I think you're fine. And then I think the other good thing is that if you get a little more slope to the yield curve or improve that, then the balance sheet growth we put on will be naturally closer to the overall NIM of the company. So I think we wind up -- we're a shop that's going to have persistent NIM well into the 3s. But we've never been a place. We don't -- we're not a 4% NIM shop, and I don't think we're ever going to be a 3% NIM shop.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. The other thing I wanted to touch on was just the tax rate. There has been some recent changes, some technical corrections from the State of New Jersey. How does that impact you, and what is the tax rate outlook for the remainder of the year and 2020?

Michael J. Fitzpatrick -- Executive Vice President and Chief Financial Officer

So including the second quarter, there was a little bit of an increase. You see the effective tax rate went up from 18.6% to 19.0%. Most of that was related -- or part of that was related to a slight increase in state taxes. So for this year, it should be in the low 19%, 19% and 19.5%, so just maybe a touch more than what it is now, but not a big impact. For next year, there'd be more of an impact. So we probably anticipated that 21% when we added about 2% for the state tax impact.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. And do you think that's a good level beyond 2020 or are there loss carryforwards that are bringing that down to 21%?

Michael J. Fitzpatrick -- Executive Vice President and Chief Financial Officer

Well, there's less carryforwards this year. That's what's keeping the numbers somewhat the effect -- somewhat new to this year. Those tax -- those NOLs go away. So the full impact -- we're assuming no NOLs next year, although we might have a little bit that get carried over, let's say. So the 21% should be the full impact.

Matthew Breese -- Piper Jaffray -- Analyst

Okay I'll leave it there. Thanks for taking my questions

Operator

The next question will come from Sean Tobin of Janney. Please go ahead good.

Sean Tobin -- Janney -- Analyst

I guess to start out on the M&A front. Now that you have the systems integration of Capital Bank behind you, I'd be interested in getting any updates on whether or not you guys would consider another deal in the near term? And then if you can also remind us of just kind of how you look at your M&A criteria for a potential acquisition down the road. Thanks.

Christopher D. Maher -- Chairman, President and Chief Executive Officer

I'd start off by saying that we're very pleased to have the Capital Bank integration completed. That will be our fifth whole bank integration. As Joe pointed out, very pleased. We've got 98% of retention on the deposit side, which is a really important indicator for us. So we feel very good with that. There are no barriers to us making additional acquisitions over time, including right now. So we're actively looking at things in the market. And if we had the right opportunity, we would certainly execute on it.

To your second question about what's important to us in an acquisition. I think the first thing is we want to focus on quality shops that run kind of the way we do, relationship-based commercial banks. That's very important to us. We have -- we really like our geography, meaning metropolitan New York, Greater Philadelphia and all New Jersey. So we prioritize opportunities kind of within that circle. And our focus is probably more on earnings than anything else. We think that the strongest value we can contribute to our shareholders over time is by having the strongest possible earnings platform.

So as we weigh things, we look at opportunities so that the post-expense save earnings strongly contribute to our company. And we have to be a little discriminating. We've been able to build the ROA. The core ROA this quarter was 1.29%, return on tangible was 14%. We would prioritize things that allow us to maintain or improve that. We don't want to give up any of our performance criteria just for the sake of being a little larger.

The other comment I would make is that we're fully prepared to run this company without any M&A. So I think the -- as Joe walked through the expansion in the metropolitan areas and the pipelines there, we think we've got a great outlook for organic growth, and we're perfectly happy to just grow organically if that's the way things work out.

Sean Tobin -- Janney -- Analyst

Got you. That's helpful. And then, I guess, switching gears to kind of the nice uptick you saw in non-interest-bearing deposits. Can you kind of give us a little color on what drove that? Was that some of the new relationships from the new teams in Philly and New York?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

Certainly, the new teams have been productive, especially in Philadelphia where we're able to, I think, take better advantage of C&I opportunities in that space. So while we're happy and they have been producing treasury services or corporate cash management accounts, it's really -- the fluctuation you would have seen is just the fluctuation quarter-to-quarter, is more about things like seasonality than any big wave of new accounts being added.

Sean Tobin -- Janney -- Analyst

Understood. And then just one more. On the branch consolidation, I know you mentioned the plan was close another 4 branches next quarter. I was just wondering if you had a goal in mind for the total number of branches you'd kind of want to run at for, say, the full year or if you could even go further out than that, that would be helpful too.

Christopher D. Maher -- Chairman, President and Chief Executive Officer

Yes. I think that's a question that we ask ourselves all the time. And it's very hard in an industry that's changing as quickly as our industry is to kind of put a good number on that. I will say, though, that we continue to be surprised that -- about our ability to retain excellent customer relationships with fewer branches. And I think customers value things other than how quick it is to get to a branch, especially in our market where for all intents and purposes if you're coming to visit our branch, you got into a car. So if you're getting into a car and driving to the branch, whether it's a mile or 1.5 mile or 2 or 2.5 miles, doesn't matter.

You got in the car, and you came to us. So I think there's going to be additional opportunity, and we're going to continue to push the envelope around that. On the other hand, you have to be sensitive that in our industry, there's still the majority of people that open new relationships with the bank, are opening those new relationships in a branch. So the branch serves an incredibly important purpose around new relationship generation. It also ranks consistently in all demographic groups about -- including millennials about their desire to have access to a branch where they can get in when they need to, to resolve an issue.

So I think we're feeling our way through it. I think we're very happy with the pace we're going at. Our customer satisfaction scores have remained very high. So I think we're balancing that well. But we've not been shy. I mean, this will be our -- I think we'll have consolidated 40 branches and continue to maintain a very robust deposit base with -- we still have one of the best deposit profile certainly in the Northeast. So it has not impaired our ability to have a high-quality deposit base.

So I think you're going to see more. I would hesitate to put a number on it, though. But that's something that, I would tell you, we reevaluate more than once a year and look at what our customer transaction trends are, what are they doing, where they're doing it, where the dollars of our deposits. So I think you're going to expect it just to be a long-term trend.

Sean Tobin -- Janney -- Analyst

Got it. That's very helpful. That's that's all I had. Thanks for taking my questions. Thank you.

Operator

Our next question will come from Russell Gunther of D.A. Davidson. Please go ahead

Russell Gunther -- D.A. Davidson. -- Analyst

Good morning guys. I have a couple of kind of ticky-tacky questions around the margin conversation we had earlier. I'd be interested to know the amount of deposits you have that would be indexed to Fed funds, if any. And then whether or not there's any update to your purchase accounting assumptions and contribution to the margin for the back half of the year?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

These are 2 very good questions. The first question -- we went through a concerted effort a number of years back to delink all deposits from external index. So we do not maintain -- we don't have a product set that's linked to an external index. And that was a really important part of our managing the cost of deposits as we went through the rate rising cycle. So we don't have exposure to that. On the negative side then is if those indexes come down, we're going to have to lag a little bit because we're linked to our own index. So that's that. In terms of where we're going in NIM and on the loan side, I'll ask Mike to chime in.

Michael J. Fitzpatrick -- Executive Vice President and Chief Financial Officer

Yes, yes. To your question on the accretion, it -- decline is about $300,000 in Q3 from the Q2 rate, and then another $200,000 in Q4.

Christopher D. Maher -- Chairman, President and Chief Executive Officer

It was decreasing but it's not...

Michael J. Fitzpatrick -- Executive Vice President and Chief Financial Officer

It's relatively modest. And the next year it decreases about $150,000 a quarter. So it's not a big headwind.

Russell Gunther -- D.A. Davidson. -- Analyst

I appreciate that, Mike. And then I guess I was very happy to read about Susanne's hire and running Greater Philadelphia for you guys. Just wondering if there were any other folks you added to those teams in Philly or New York metro in the quarter or any additional plans to add to those teams in the back half of the year?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

You'll have Joe just kind of walk you through the teams as they are today and how we see that over time.

Joseph J. Lebel -- Executive Vice President and Chief Operating Officer

So we've added folks to both teams. So we've added folks to Dan's team in New York. We have half a dozen folks up there now. And Susanne benefited early on by the couple folks that we had hired from competitors, TD especially. In the Philadelphia region, we've added another person there as well. So we've continued to build both teams and don't have any plans to stop. If we'd find additional solid talent, we'll add them to the teams as well, Russell.

Russell Gunther -- D.A. Davidson. -- Analyst

Okay. And then kind of last bit of questions for me would be on the expense run rate going forward. You guys mentioned you'd expect that kind of $42 million core to get some relief in the back half of the year. Just wondering if you could kind of size up for us where that could trend in 3Q, 4Q and maybe perhaps any update on an efficiency ratio target.

Michael J. Fitzpatrick -- Executive Vice President and Chief Financial Officer

Yes. So we expect it to trend down in the next 2 quarters. We had the branch phase from Capital, the branch phase from legacy OceanFirst and then some other cost phase from Capital where employee exiting at the end of the quarter. But then we had some increases in the -- from the Philly and New York City build out that weren't fully incorporated into the second quarter. And so we think probably about $42 million core this quarter going down to about maybe $41.5 million next quarter, Q3, and then $41 million in Q4.

Russell Gunther -- D.A. Davidson. -- Analyst

Okay great. Thanks Mike. And then is it too early to kind of look out into 2020, and as we digest core margin pressure and a higher tax rate, what an efficiency ratio target you'll be after for 2020?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

I think you raised the most important question, which is the shape of the yield curve is going to determine which side of that NIM we wind up on, a couple basis points up or down over time. And that's going to have the single biggest contributor towards the efficiency ratio as well as the loan growth. So I think it's a little bit too early. I think we certainly see ourselves below 55%. I know that prior to the tax changes and all that, we had hope to get closer to 50%. It may take us a little longer to get down to 50%. The tax rate doesn't affect the efficiency ratio, so that won't have a big impact on that. But I think you'll see us below 55%, still trending towards 50%, but it may take us a longer live path to get there.

Russell Gunther -- D.A. Davidson. -- Analyst

Okay I appreciate the thoughts guys. Thank you.

Operator

[Operator Instructions] Our next question will come from Collyn Gilbert of KBW. Please go ahead.

Collyn Gilbert -- KBW -- Analyst

Thanks. Good morning guys. Mike, just a follow-up on the expense comment. Do you have a sense on once we get everything, kind of, folded in here in the back half of this year, all the expense stays realized, what we could see core expense growth being in 2020?

Michael J. Fitzpatrick -- Executive Vice President and Chief Financial Officer

Okay. So fourth quarter, I said about $41 million. There's probably a little bit of cost phase that carry over to Q1, but then we're back into like annual compensation increases and things like that. So that's probably the $41 million range is kind of where we'll be looking at in the first quarter or maybe even a little bit higher.

Collyn Gilbert -- KBW -- Analyst

Okay. So is that imply the no -- really not -- no core expense growth then in 2020? You can flatline it?

Michael J. Fitzpatrick -- Executive Vice President and Chief Financial Officer

Well, I was just looking into the first quarter. I think there's a little bit of carryover phase into the first quarter, but that will be offset by annual compensation increases and merit increases and things of that nature. So Q1 next year may be a little bit -- would probably be higher than the $41 million. And then we'll see -- we'll take another look at our brand structure and try to mitigate any other increases.

Christopher D. Maher -- Chairman, President and Chief Executive Officer

Collyn, I'd also add to Mike's comments that if you think about it in terms of significant net new investments we need to make, there's nothing on the horizon that along the scale of what we would be doing for -- that we've done this year for New York and Philadelphia. We think we can grow those. You might be adding a person or 2, but we're not starting those from scratch again next year. There's always things you need to invest in, like cybersecurity and all that kind of stuff. So there's a little bit of pressure, but there's no major projects that we'd say, wow, this is going to add a couple million bucks. The line item is going to add a few million bucks to the quarterly expense rate.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay. That's helpful. That's kind of what I was getting at. Okay. And then, Mike, sorry if you said this. Did you give the actual accretion dollars that was in this quarter number? I know you gave the reduction for what to expect in 3Q and 4Q, but I missed what it was for 2Q.

Michael J. Fitzpatrick -- Executive Vice President and Chief Financial Officer

It was $3.6 million in Q2.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay. And then I guess just in terms of the deposit outlook and NIM, do you guys have a sense as to what the risk is of internal account migration in the higher cost segments? It's one thing we can -- offering rates are declining and the Fed dropping is encouraging and all that type of things. But do you see a risk within the base of just some of your core customers moving into higher-paying accounts still flowing through?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

We don't see a big risk in that. If you were to look at both sides of our deposit base, on the consumer side, we don't really have those kinds of accounts for them to go to, and we have not seen significant migration in that regard. So I don't think the consumer side is going to see that. On the commercial side, we have already, kind of, made that migration. So we had a series of conversations in the fourth quarter of 2018, the first quarter 2019, where we sat down with our treasury clients and worked through, kind of, what cash they need to run. And instead of incenting them to sweep it out to something else, we provide them with some internal alternatives here at OceanFirst. So those conversations happen. We restructured the vast majority of those to do what we needed to do. So I don't think that's a hangover going forward.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay. That's helpful. And then just finally, Chris, I just asked this last quarter and just kind of again taking a step back and thinking about performance targets and where you're taking your organization. And I think maybe you mentioned that a broad goal would be like a 10% EPS growth rate. But then intrigued by your comments too in saying that you've now structured the organization where you would not need M&A to supplement performance growth or whatever the case might be. Just given the backdrop of the margin -- and I understand it sounds like you're really bullish on where loan growth can go from here despite it's kind of having fits and starts along the way. I mean, do you feel like you're setting up to be able to achieve, certainly maybe not 10% EPS growth, but better EPS growth in the wake of this backdrop without additional M&A folding in?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

I think on the organic side, we feel confident that we can build EPS that way. Now building it consistently at 10% may be too much to do just organically in this environment. But the other thing we think is, look, if we can just set down steady numbers in terms of building it a little bit quarter after quarter, stay in that trend and keep ourselves out of trouble, we do look at this market as one that -- I know we mentioned it in our prepared comments, and we don't see any big economic risk tomorrow. But I think we're very thoughtful of that. Over the next year or 2, that could change.

And we've been trying to remain disciplined and say, we can produce EPS growth organically. We don't need acquisitions to do that. Certainly, we can do even better if we can do acquisitions as well. But we're not looking to jump EPS at -- we're not going to push it to the point where we're going to regret the steps we took this year in a year or 2 if there's a turn in the economic cycle. So we think steady is the way to play it. We think protecting the balance sheet -- that's why you've seen we've built tangible common equity up. We're building tangible book value. We're trying to both deliver a range of EPS improvement, but maybe that's 3%, 4%, 5%, 6% organically. We can do acquisitions. We'll supplement that. Maybe we get comfortably over 10%, but do that in a way that the company still remains really well positioned if the environment changes.

Collyn Gilbert -- KBW -- Analyst

Okay that's helpful. I'll leave it there. Thanks guys

Christopher D. Maher -- Chairman, President and Chief Executive Officer

Thanks

Operator

[Operator Instructions] Our next question is a follow-up from Matthew Breese of Piper Jaffray. Please go ahead.

Matthew Breese -- Piper Jaffray -- Analyst

I appreciate you allowing me to hop back in. I guess to go back to the NIM. Chris, you had mentioned perhaps a couple basis points of contraction, but perhaps maybe some expansion. If we had to take a more dynamic view of how the margin could go, in order to get expansion -- core margin expansion from here, what do you need out of the yield curve? And then oppositely, if we were to see more compression than you would expect right now, what would have to happen?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

I think the conditions you would be looking for are, let's say, either just one Fed rate cut or maybe no further rate cuts, a little more or I guess depending on your point of view, less action by the Fed would help us just because we've got a balance sheet that's positioned to be pretty neutral. So as those cuts come through, we're going to pay a little bit of price for that. So I think the number of actions that Fed take is going to weigh on this and then the market's reaction to where short-term rates go and how quickly we determine we can grow. So if short-term rates continue to come down, but we can grow faster, the outlook could be very different.

So -- and I think it's a combination of what does the Fed do, how do those rates react and what our growth rate is. And those variables kind of mixing them together, we look at them and do projections. The projections tend to cluster, right. So they all tend to wind up to be in a similar range. But certainly to be in the high end, things have to fall more favorably for us. And on the low end, we're absorbing maybe 2 Fed rate increases and seeing that the competitive market for loans kind of pulls down as well.

Matthew Breese -- Piper Jaffray -- Analyst

Right. And then just thinking about the team you have in place, obviously, there is a ramp period and you feel bullish in the near-term about getting to the high end of $50 million to $100 million growth rate. But as we think about 2020 and that team in place for a longer period of time, established, could the ceiling for this year of $100 million become the $400 million next year? Is that the expectation? And can we see perhaps $300 million, $400 million, $500 million of net loan growth for the year?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

Yes. That's certainly possible. I would say that it's interesting. The loan production side, we feel very bullish about. We've taken the opportunity -- and Joe alluded to the $50 million worth of participations that we allowed to run off. In certain markets, you might not do that, and the runoff might be lower. So I think the productive capacity is there. We need a little bit of favorability in terms of market trends and things like that. But I think one of the great advantages we have as a company is that we have access to the largest metropolitan market in the United States, and the sixth largest MSA in Philadelphia at the same time. And I'm very much aware that there are -- not every bank has the ability to operate in those markets.

We also have the ability based on the size of the company we are to pick and choose which deals we want to be in, in each of those markets. So part of the thought about establishing our presence in both of those markets is that if we're doing well, the economic conditions are good, we got excess capital, the growth rates in both of those areas could be much larger than a growth rate we could ever responsibly do in just Central and Southern New Jersey. So it opens up a wide range of possibilities. And I think we have to have the right yield curve. We're going to have to have the right competitive positions. But with both of those markets at our disposal and the quality of the staff we've added, we could certainly outperform in the loan growth side.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. And if prepays do not work in your favor, you do have close to 10% tangible common now. How aggressive might we see you offset slower loan growth with buybacks?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

I think I alluded in my comments that we're considering expanding the size of the buybacks. We have the authorization to do it. And we view that as a math exercise, and we look at tangible book dilution and earnback periods and all that. And obviously, we've kind of demonstrated by the buybacks this year that the market has provided opportunities for us to operate within that window. We have plenty of capital. The balance sheet is in really good shape. If you look at net charge-offs and nonaccruals, we're very pleased with where the company is. So we could really go into buybacks if we have the opportunity, but it's going to depend on market conditions.

Matthew Breese -- Piper Jaffray -- Analyst

That's all I had. Thank you.

Operator

[Operator Instructions] Our next question is a follow-up from Frank Schiraldi of Sandler O'Neill. Please go ahead.

Frank Schiraldi -- Sandler O'Neill -- Analyst

Hi. Just had a follow up on the buyback as well, actually. Thinking about or looking at where you've bought back year-to-date, seems like $24 or under might be a decent bogie for the math you spoke about. Do you think that's still a reasonable expectation of where you get more aggressive knowing what you know about the environment right now?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

I think it starts with how confident are we in our longer-term earnings outlook. And we feel pretty good about that. So the price we're paying -- the price-earnings ratio we trade at we think is a decent bargain at the prices we've been buying back this year. So if you're confident in your earnings, you're going to keep buying at that level. And so we understand that our sector kind of comes in at a favor from time to time. So if the sectors had a favor and multiples fall a little bit, we can cost effectively pullback those shares. We have a much higher capacity than our existing repurchase plan would allow us to capitalize on. So thus far we're thinking about maybe adding to that authorization and being in a position. We've got the dollars to do it, so being in a position to active market conditions head that way.

Frank Schiraldi -- Sandler O'Neill -- Analyst

And then what do you think about special dividends here, just given your capital position? If you were to say it seems like you're continuing to build it. So is that low probability? Is that something you guys think about as well as buybacks?

Christopher D. Maher -- Chairman, President and Chief Executive Officer

We have thought about it, and we did a pretty disciplined set of discussions with our shareholders over the past 6 months or so to kind of get their preferences about the regular dividend and special dividends and buybacks. And primarily our institutional owners seem to favor, and we see the reasons for this that the buyback is great if you can do it. So it has the opportunity to increase EPS and give you positive momentum there. So in terms of how we prioritize things, as we build potentially excess capital, we'll see how much we can get out through the growth initiatives.

As you build excess capital, we can continue to buy back. We prefer buyback to special dividend. Once -- if you got into next year and you got kind of CECL behind you, you've got a little more clarity around the economic environment and you really thought that, that was in the long term no ability for you to productively deploy that capital and the market was not providing a repurchase opportunity, then we would certainly consider it. But it would be a lower priority than growth, the regular dividend or buybacks.

Operator

[Operator Instructions] Our next question will come from Stan Westhoff of Walthausen & Company. Please go ahead

Stan Westhoff -- Walthausen & Company -- Analyst

Good morning I just wanted to -- maybe I missed it or something. The pay downs during the quarter, were they more elevated than they were last quarter or last couple of quarters?

Joseph J. Lebel -- Executive Vice President and Chief Operating Officer

No, I think they were similar, although we did take a little proactive opportunity to exit a couple participations, in particular, that just didn't meet criteria for us. We do continue to see some pressure on some of those larger transactions where lead banks are being asked to do things, which is not uncommon at this point of the cycle, whether it be to lose some financial covenants, provide some additional dollars on stabilizers and certain instances non-stabilized projects in form of return of equity. And most of those are not opportunities for us to stay in the credit, and it provides us an opportunity to exit, and we take advantage of it. But I wouldn't say that they are elevated.

Stan Westhoff -- Walthausen & Company -- Analyst

Was there any -- obviously, you've done some acquisitions over the last few years here. There have to be some that were probably refinanced or lost entirely. Was there any accretion impacts from paydowns?

Michael J. Fitzpatrick -- Executive Vice President and Chief Financial Officer

Yes, there is. Actually, it accelerate the accretion. So from time to time you had a little bit of a spike up where a pay down you accelerate some of the accretion. And that happens -- that's obviously a little bit volatile, but it's not a real big number. And as mentioned earlier, we were at $3.6 million last quarter in purchase accounting accretion, and that number might fluctuate a couple hundred thousand because of payoffs or something like that.

Stan Westhoff -- Walthausen & Company -- Analyst

All right okay. So all I really had check on. Thank you.

Operator

[Operator Instructions] Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Christopher Maher, Chairman and CEO, for closing remarks.

Christopher D. Maher -- Chairman, President and Chief Executive Officer

All right. With that, I'd like to thank everyone for your participation on the call this morning. We look forward to providing you additional updates throughout the year. Thank you.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Jill Apito Hewitt -- Senior Vice President, Investor Relations

Christopher D. Maher -- Chairman, President and Chief Executive Officer

Joseph J. Lebel -- Executive Vice President and Chief Operating Officer

Frank Schiraldi -- Sandler O'Neill -- Analyst

Matthew Breese -- Piper Jaffray -- Analyst

Michael J. Fitzpatrick -- Executive Vice President and Chief Financial Officer

Sean Tobin -- Janney -- Analyst

Russell Gunther -- D.A. Davidson. -- Analyst

Collyn Gilbert -- KBW -- Analyst

Stan Westhoff -- Walthausen & Company -- Analyst

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