OceanFirst Financial Corp (OCFC) Q2 2021 Earnings Call Transcript

Image source: The Motley Fool.

OceanFirst Financial Corp (OCFC 0.83%)
Q2 2021 Earnings Call
Jul 30, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the OceanFirst Financial Corp Earnings conference call. [Operator Instructions]

I would now like to turn the conference over to Jill Hewett. Please go ahead.

Jill Hewitt -- Senior Vice President and Investor Relations Officer

Good morning, and thank you all for joining us. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer at OceanFirst Financial Corp. We will begin this morning's call with our forward-looking statement disclosure. Please remember that many of our remarks today contain forward-looking statements based on current expectations. Refer to our press release and other public filings including the risk factors in our 10-K, where you will find factors that could cause the 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.

Christopher Maher -- Chairman and Chief Executive Officer

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 am joined by our President, Joe Lebel; and Chief Financial Officer, Mike Fitzpatrick. As always, we appreciate your interest in our performance and are pleased to be able to discuss our operating results with you. This morning we will cover our financial and operating performance for the quarter and provide some color regarding the outlook for our business. Please note that our earnings release was accompanied by a set of supplemental slides that are available on the company's website. We may refer to those slides during this call. After our discussion, we look forward to taking your questions.

In terms of financial results for the second quarter, GAAP diluted earnings per share were $0.49, another strong quarter for the company. Earnings reflect a continuing economic recovery with the bank demonstrating improved credit trends, a modest pickup in net interest income, and a committed loan pipeline that indicates our commercial banking expansion is gaining traction. Core earnings approximated GAAP earnings this quarter. Regarding capital management, the Board declared a quarterly cash dividend of $0.17 per common share and approximately $0.44 per depository share of preferred stock. The common share dividend is the company's 98th consecutive quarterly cash dividend. The $0.17 common share dividend represents just 35% of earnings. The common share dividend remains at a conservative payout ratio that will be evaluated later in the year as the post-pandemic earnings trajectory is more established.

Over the past three quarters, robust earnings have driven a $1 increase in tangible book value per share. Tangible stockholder's equity to tangible assets remain strong and now exceeds 9%. Our balance sheet remains inflated as we carried $1.1 billion or almost 10% of the entire balance sheet at cash -- as cash at quarter end. The excess cash is a direct result of positive trends in our business. It should provide an incredible opportunity to build earnings over time. Average deposit costs for the quarter decreased by 10 basis points to 27 basis points and ended the quarter at just 24 basis points in all-time low point. Much of the decrease in deposit costs is linked to a rotation from high-cost CDs to non-interest bearing accounts. On a year-to-date basis, CDs have decreased by $416 million and were largely replaced with non-interest-bearing accounts that have increased by $372 million. The company continued share purchase activities during the second quarter, purchasing 500,000 shares at a weighted average price of $21 and $0.93. During the quarter, the Board authorized an additional 3 million shares to be added to the repurchase program, leaving a quarter-end capacity of slightly more than 4 million shares available for repurchase or a 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 continue to strengthen. Most notably in New York City where Manhattan has begun to show signs of activity. Clients throughout our geographies report strong demand for products and services with labor and supply chain issues continuing to restrain output. Overall, our client base is an excellent financial position as indicated by record low levels of delinquencies and positive trends in all other credit metrics. The New Jersey Shore continues to be our strongest market as the shore season looks to be one of the best on record.

Looking internally, our employees have also been exceptionally resilient, having completed a core systems conversion earlier this month, that upgraded our back-office infrastructure for the first time in decades. That project has set the stage for additional advancements in Business Process Automation and employee efficiency. More importantly, the conversion finished well ahead of schedule and without client disruption. In addition to the long-term benefits that we will achieve from modern core systems, this transition will allow us to remove the final redundant systems in the bank, the Country Bank core application said this September, an 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 online. So we hope many of you can join us. We will be walking through our progress since the last Investor Day in 2018, discussing the post-COVID landscape, and detailing our plans to increase loan growth, capitalize on the shift to digital, and improve the efficiency of our retail distribution network.

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

Joseph J. Lebel -- President, Chief Operating Officer

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 lead by the commercial bank and continued strong activity in our residential mortgage business. More impressively, our new Baltimore commercial team hit the ground running with $40 million in loan originations in Q2. All regions have active calling efforts and pipeline activity. Through quarter-end, we have added 16 new commercial lenders in the last nine months including seven 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 and our Boston LPO and are actively hunting for more talent in both geographies. Efforts continue to add seasoned successful lenders in our existing footprint as well.

We are excited about second half loan growth as we have discussed in prior calls despite the ultra-competitive pricing and credit environment. In the residential business, originations have been solid, with activity only limited by the scarcity of available housing for sale. While I don't expect record originations as we had in 2020 due to the shortage of available properties for sale, this continues to be a sound product and provides diversification and a stable low-risk component of our loan portfolio. We don't expect to grow this book substantially but continue to book quality loans to add to the portfolio and offset amortization. After growth of $116 million in Q1, the loan portfolio contracted $52 million for the quarter, including $27 million in 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 continue to build pipelines as the pandemic recedes.

Turning to the margin. Core NIM was essentially flat, contracting two basis points largely due to the impact of the low rate environment. Putting cash to work is difficult in this environment, but the record pipeline and loan demand in new markets should accelerate and help both margins and net interest income in the second half of the year. We continue to focus on changing the mix of deposits as Chris noted earlier and on reducing the cost, which was 24 basis points at quarter-end. We will continue to drift lower as another $392 million in CDs mature in quarters three and four. We exited $154 million in CDs in quarter two, while adding $87 million in non-interest-bearing deposits. Core deposits now stand at 90% of total deposits. Operating expenses increased 907,000, exclusive of merger-related and branch consolidation expenses, due primarily to higher compensation related to new hires and benefit costs.

We expect some increase in opex in Q3 and Q4 as the new hires and related overhead get fully added into the run rate before reducing in Q1 2022. As Chris noted, we closed four branches in early Q2 and continue to analyze the effects of the pandemic on our customers' behaviors in our branches, online, via mobile, and our customer care center. We expect to provide more details on our plans for delivery of banking services in all of these channels on our Investor Day scheduled for August 5th.

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

Christopher Maher -- Chairman and Chief Executive Officer

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

Questions and Answers:

Operator

[Operator Instructions] And our first question will come from Frank Schiraldi of Piper Sandler. Please go ahead.

Frank Schiraldi -- Piper Sandler -- Analyst

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

Christopher Maher -- Chairman and Chief Executive Officer

That's right. I think you are right. I think that liquidity in the market drives certain folk's 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 would consider to be competition, but probably what I would refer to is something that's 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 permit multifamily loans and it's not uncommon to see them aggressively in the mid-twos today for 10-year money, which is just a fascinating environment to be in. I don't know how long that occurs, but they've extended amortizations have been very aggressive and the market is very good. So, we've also seen some clients opt to monetize instead of refinancing or do other things. But, that's all right. I'm still very bullish on our prospects.

Frank Schiraldi -- Piper Sandler -- Analyst

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

Joseph J. Lebel -- President, Chief Operating Officer

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

Looking beyond that, though, the market has been active and we can't comment on individual deals, but I will tell you that there are some very high-quality institutions that are looking for partners because it's the smart thing to do now and we want to make sure before we commit our capital in repurchases and push that too far that we're exploring all opportunities around M&A. On the M&A side, we have not been shy in the past, but the things we look for in M&A are a little different than what we would have looked for in the past. So if I go back to the first few deals we did, it was really about funding our balance sheet and we were looking for organizations that provided super-high quality funding at low funding costs. Obviously, with $1.1 billion in cash and the momentum we have in our business, the maturity of our treasury products, we are less interested in securing funding is a reason to go out and do M&A.

That said, we love commercial banks. We're building our commercial bank business. So if we found an opportunity to further that, we wouldn't be shy about it. So, I think when you think about capital management. We want to get through probably the next quarter or two and make sure we understand the M&A landscape, and if we have not identified something that makes sense, then we're going to go ahead and have the opportunity to push down and buy back shares more quickly. I'd also say that just an 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 are willing to tolerate in terms of an acquisition, and we're going to be very balanced and disciplined about that. We're protecting book value, I am really pleased it's moved up $1 in the last three quarters. We want to be careful about how we use them.

Frank Schiraldi -- Piper Sandler -- Analyst

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

Joseph J. Lebel -- President, Chief Operating Officer

So that hasn't changed. So our general outlook is that you start saying ideally you'd like to see your earn back within three years. And the reason for that is in a three-year horizon you can really tell what the economic conditions are and there is less risk looking at over that horizon. That said, I think the three-to-five-year earn-backs, in some cases I'd say they are kind of rare, could be appropriate if there is a very strategic opportunity that also really makes a change to your earnings per share can really provide faster earnings per share. And then on the other side, if you're not getting enough earnings momentum, then even three years could be too much dilution. So, we look at the dilution on a sliding scale as it relates to how many accretions you're getting back out of the deal. So if you're going to stretch beyond three years, you better have EPS momentum that is worth that stretch, otherwise, keep it to three years or less. So I hope that helps.

Frank Schiraldi -- Piper Sandler -- Analyst

Yes, thanks for all the color.

Joseph J. Lebel -- President, Chief Operating Officer

Thanks, Frank.

Operator

The next question comes from Michael Perito of KBW. Please go ahead.

Michael Perito -- KBW -- Analyst

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

Christopher Maher -- Chairman and Chief Executive Officer

Let's say, first, Mike, the pay-offs have been reasonably stable so we're not seeing them either accelerating 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, certainly in the range of $250 million per quarter, hopefully in the third quarter, but certainly by the fourth quarter and that's so call it about $1 billion a year in loan growth. That pace is what we've resourced the company to do and it was very important to us that we resource that kind of an effort with new bankers in new markets. Because we know how competitive the world is going to be. And if we had limited ourselves to saying I want to grow a billion a year and we're just going to stick in New Jersey, I think that would have been a much tougher task.

Looking at even just, as Joe mentioned the folks in Baltimore chipped in last quarter with $40 million and that's a big help. So we have to kind of answer your question concisely. We're trying to get the repetitive loan growth to be in the range of $250 million a quarter and we might be able to hit that in the third quarter especially given the pipeline --. As Joe mentioned we have a $630 million pipeline at the end of June. Some of that is lines to credit so you're not going to get full drawdowns during the quarter but still, it's our biggest pipeline ever and we've just pretty bullish.

Michael Perito -- KBW -- Analyst

Helpful. Thank you for that. And then just two other quick ones from me. One, just on non-interest income, any thoughts your term about where that kind of core run rate could trend? I mean, is there room for kind of some rebounds like swaps and things that maybe, mortgage is given where rates are in the third quarter?

Christopher Maher -- Chairman and Chief Executive Officer

Definitely, the swaps are really just a function of loan closings so a certain portion of your commercial loans will go swap, that yield curve is moved a little bit. So it's not quite as attractive as it was a year ago. But I do think as you see loan volumes increase, you're going to see swaps increase and it was a particularly low quarter for swaps for us. So, I think that's a big opportunity. Also very pleased to note, I know we put it in the release but I'll just note that we will not be subject to the Durban cap for another 12 months so that won't be effective for us until July 1 of 2022. One 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 build. So those are the two hot spots.

The deposit fees have been flat, they were hurt a little bit in the pandemic. Some of that is overdraft fees and we're not relying on that being an engine of growth. It's never been a particularly hot-line item for us. So I think there is an opportunity. And I would also point the performance we had in NASDAQ, it is still not an aggregate large number but it's starting to produce numbers now that are meaningful to us and we have a very strong growth in NASDAQ, that's our hybrid robo advisor. So up to $130 million in AUM and grew about 30% this past quarter so the customer adoption has been great there.

Michael Perito -- KBW -- Analyst

And can you just remind me, Chris, real quick, do you expected Durban impact approximately once it kicks in next year?

Christopher Maher -- Chairman and Chief Executive Officer

It's a little hard as the debit card fees go up and the mix of fees changes because it doesn't -- the cap doesn't apply across all transact -- applies across all transaction types, but some transaction revenues are already below the cap, so it really does not apply. Our best guess at this point is that it could be say, $6 million or $7 million, depends a little bit on how fast the deadline grows between now and next July 1.

Michael Perito -- KBW -- Analyst

And that's pre-tax annualized?

Christopher Maher -- Chairman and Chief Executive Officer

Correct.

Michael Perito -- KBW -- Analyst

And then just lastly from me, Joe, I think you mentioned that you expect to opex to step up in the back half of the year. I have two more questions there, I guess one, obviously as a lot of bankers, is it jump up in kind of the $1.5 million to $2 million range, kind of adequate to capture in all that overhead and any other digital investments you're making, number one? And then, number two, you mentioned, I think that you expect to step down in early 2022. So should we read into that that a lot of the hiring that you guys budget more plan for has taken place and that pipeline is a little less active now than maybe it was six months ago?

Joseph J. Lebel -- President, Chief Operating Officer

Just a couple of moving pieces and parts. So as you point out the hires we made, we've got to get full quarter expenses on them and there are a couple of more hires. We will not be hiring at the pace we have been hiring at so that's kind of tapering off. So the expenses will drift up a little bit because of that. Then we have two catalysts, one will show a little bit in the fourth quarter, the other beginning in next year. The first catalyst is the country Bank conversion which I referenced. So today that core application set between the people supporting it and the application set itself costs us about $2 million a year. So getting that deconverted in the third quarter, there'll be some trailing expense in the four quarter but that's a nice tailwind.

And then the second thing is we're going be talking next week about our overall investment in expense management in both digital and retail network and that's going to provide a tailwind as well, and we'll be able to walk you through how that 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 magnitude and may not be quite that high, but that's probably the outer range for Q4.

Michael Perito -- KBW -- Analyst

That's very helpful, thank you guys for taking my questions. I appreciate it.

Christopher Maher -- Chairman and Chief Executive Officer

Thanks, Mike.

Operator

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

Erik Zwick -- Boenning and Scattergood -- Analyst

Good morning, everyone.

Christopher Maher -- Chairman and Chief Executive Officer

Good morning, Erik.

Erik Zwick -- Boenning and Scattergood -- Analyst

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

Joseph J. Lebel -- President, Chief Operating Officer

I think it's a combination of factors, Erik. One is absolutely competition, there are 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 -- we have seen the yield curve go down a bit, so that plays into it by the time loans or closed versus when they've been approved and then it's the mix. So, as Chris mentioned earlier, depending on what your closing and what's being funded. So we tend to do a variety of construction projects those don't always fund at the same time, those tend to be higher yielding projects of the end loans or lower-yielding and the construction loans aren't fully funded that can impact the actual dollars and cents a bit. But as we remind our lenders and we tell them at this stage anything is better than 10 bps of the Fed, so we're willing to be -- we're blowing to be more aggressive for the types of credits that we like and you know our credit appetite. So, I'm happy to be in the negotiating play in the market that we're at.

Erik Zwick -- Boenning and Scattergood -- Analyst

Thanks, Joe, I appreciate the color there. And then just looking at the balance sheet, I noticed that the equity investments were up $41 million in the quarter and I know it's not a primary source of revenue for you guys, but you've been opportunistic from time-to-time and made a nice trade in some bank investments last year. Just curious, is that increase here in Q2, does that reflect some new investments, and if so, maybe you can provide any color to what those might be?

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

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

Erik Zwick -- Boenning and Scattergood -- Analyst

Got it. Thanks, Mike. Thanks for taking my questions today.

Joseph J. Lebel -- President, Chief Operating Officer

Thanks, Erik.

Operator

[Operator Instuctions] And our next question will come from Dave Bishop of Seaport Research Partners. Please go ahead.

Dave Bishop -- Seaport Research Partners -- Analyst

Yeah, good morning gentlemen. Thanks for taking my questions.

Christopher Maher -- Chairman and Chief Executive Officer

Morning, Dave.

Dave Bishop -- Seaport Research Partners -- Analyst

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 to capital shareholders inclusive of buybacks and dividends. Any sort of ratio you're targeting there for TCE ratio remind us or just sort of maybe managing toward? Thanks.

Christopher Maher -- Chairman and Chief Executive Officer

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

The other important thing is we do not need any capital for organic growth for the foreseeable future and what I mean by that is we have $1 billion of cash to deploy. So as we deploy that $1 billion of cash, we don't actually need any more capital to underpin it. And all while we're doing that, we're going to be producing additional capital, right, the internal generation of capital would be even higher. So I think our capital ratios are understated because of the cash. They actually feel to be more higher level than we typically look at. So, as I mentioned before, we want to make sure in a market that is this active with M&A if we could deploy that cash effectively, that would be a great way to do it, but if not, we're going to try and get it back to our shareholders. So we're going to look both at the common dividend and at buybacks. You can see the additional 3 million shares we put on, certainly a very direct signal that we feel we could do meaningful repurchases provided we have exhausted the alternatives through acquisition from organic growth.

Dave Bishop -- Seaport Research Partners -- Analyst

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

Christopher Maher -- Chairman and Chief Executive Officer

I think when you think about the way CECL works and our quantitative loss history, we have been operating the bank to be pretty conservative on the credit side for a long period of time. So our credit losses run about 70% lower than our peer group over if you look at us over say a decade. So we think that our portfolio gives us the opportunity to not have to reserve all that heavily. And in fact, under CECL, it's hard to construct the big reserve on a book like ours. Interesting fact is at the end of the quarter if you look within our ACL, more of our ACL is qualitative than quantitative. It's hard to get that number up. So as you think about new growth, for a long period of time we've been running it probably at normalized say a 70 basis point reserve level. If I were -- not saying that's going to be the exact number, but if I were to pick a number, say how should you be reserving against net loan growth, it's probably somewhere in that area. Certainly, sub 1% based on our credit performance.

Dave Bishop -- Seaport Research Partners -- Analyst

Got it. Appreciate answering the questions. Thanks.

Christopher Maher -- Chairman and Chief Executive Officer

Thanks, Dave.

Operator

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

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

Hey. Good morning, guys. Just a question on the -- hi, question on the margin. So if I heard you right, it sounds like with the loan growth that is expected the margin should improve so fair to characterize the reported NIM this quarter as a trough. And then longer-term you've talked about 320 to 340 guide, the yield curve is become more inhospitable since you laid that out, competition has intensified, any shift in how you're thinking about that from a timing or magnitude perspective?

Christopher Maher -- Chairman and Chief Executive Officer

You're right to point out, Russell, the yield curve plays into that. So we saw a little setback in the yield curve since our last quarterly discussion. So I think it may take us a little longer to get up to the numbers we were talking about previously that 325 or better. I'm still highly confident we're going to get well into the threes. And even the last time we spoke, the difference between 325 and 350 is really what is the yield curve going to give us. So we think that this deployment of cash is a four-five quarter event, by the end of that, I guess we're hopeful that we might have little more steepness in the yield curve. And so, but we would need a little more steepening of the yield curve to get above the 3.25, yqou're absolutely right.

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

Okay. Got it. That's very helpful guys. That's it for me. Thank you.

Christopher Maher -- Chairman and Chief Executive Officer

Thanks, Russell.

Operator

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

Christopher Marinac -- Janney Montgomery Scott -- Analyst

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

Christopher Maher -- Chairman and Chief Executive Officer

Obviously, we think it's a very important metric because it's not just what you're spending, but how you're spending it. And our position this goes back years now is to make sure that we're following where our customers want us to be spending the money. So they want to make sure they've got cutting edge digital apps and things like that. So you can see how that, both in absolute dollars and as a percent, the technology increases expense -- has increased over years and I think it will continue to increase but at a slower rate. So I think it's going to moderate now. The core lift was a big deal. I mentioned the country bank to about $2 million a year. Interestingly, the vast majority of that is people-related, not systems. So the IT number will come down. It's probably 30% of that, right, the rest is going to be people.

So I think you're going to see a slower growth rate, but you will still see growth and it's -- our customers, especially corporate treasury, things like that, they're demanding more and more every quarter. What we have been doing and this will dovetail nicely into our comments next week, is we've deliberately been investing in those digital capabilities and reducing the investment in channels that our customers are using less, look at the 58 branches that we've consolidated today. So, in terms of -- we don't have a particular benchmark. I would point out and this is a curiosity more than anything that proportionately we're spending on IT about the same as JP Morgan Chase, to give you some -- one benchmark. Now obviously, they've got a slightly larger balance sheet so little more spending than we do, but I do think the point is that you should be a heavy investor in IT if you plan to be around for the future.

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

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

Christopher Maher -- Chairman and Chief Executive Officer

I will make a couple of comments, but then I want Joe to talk to the kind of tailwind we've been able to find which we are just thrilled about. The way we look at the expansion of the commercial bank is it has to be led by talent and you can never be sure exactly what talent you're going to find and in which markets. These are all great markets, right. I mean, we can get it an Amtrak train and go north or south a couple of hours and touch literally millions of people in some of the best banking markets on the planet. So the markets are not the question. it's a -- the question is how can you find the people and the people delivering the relationships you need. And you know as we work through the process we didn't know how successful we were going to be. Baltimore became a priority because frankly the talent we found in the market was exceptional and we could bring it on board. And we thought that Boston would be a slower process for us, but again we had a happy opportunity to bring some talent on. But Joe, maybe talk a little bit about the backgrounds of the folks you hire, especially Dan and Tom.

Joseph J. Lebel -- President, Chief Operating Officer

Look, Dan Griggs is the Regional President for Boston, who came on Board at the end of Q2, really just a few days before the end of June. He ran a multi-billion dollar business for TD. Up there, David Heller, Senior Lender, up there is a former BMO Harris U.S. Bancorp lender, very successful in that marketplace. Michael Marcucci is our newly hired Senior Credit Officer from Santander, very strong, all-season folks been around a long time. As I tend to tell our regional officers as they go into these markets, what do they need to do, a lot of them ask us what do we need to do, I'd tell them just look at we're going to be patient, we're going to be thoughtful, but look at what we've built in 3.5 years in Philadelphia in a few years in New York. That's the blueprint. Hire the right people, put people in positions to be successful, give them some autonomy, and support them appropriately, and you can grow. I think we talked about it in the last quarter. Philadelphia is now $1 billion in loans outstanding and just under four years. So, and New York is about 1.5. So there is the opportunity that lies in front of these folks. It is the reason we pick these markets we have markets that are dense and vibrant and you just have to fill them up with the right talent. And again it's only a few folks in Boston we're actively looking for more there.

Christopher Maher -- Chairman and Chief Executive Officer

So I guess, Chris, to answer your question directly, if we don't think we can get to a billion dollars, we're not going to be getting into a market, may take us a couple of years to do that. And each of the markets we're going into could eventually over years be a multi-billion dollar market. So we're not going to go into a market unless we think it has that potential and you know our investments are not going to be sizable unless we feel we've got the talent and we had some extraordinary hires. So we're really pleased.

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

Great. Thank you, Joe. Thank you, Chris. I appreciate it.

Christopher Maher -- Chairman and Chief Executive Officer

Thanks, Chris.

Operator

[Operato Instuctions] And the next question will come from Matthew Breese of Stephens Inc. Please go ahead.

Matthew Breese -- Stephens, Inc. -- Analyst

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

Christopher Maher -- Chairman and Chief Executive Officer

I actually think the pipeline is low compared to what I expect going into really probably by Q4, Q1. We met 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. I can't speak in totally about the resi book, because a resi is driven by the rate environment and the activities but resi has been fairly consistent the last few years.

In the commercial pipe, I do expect it to grow. At the end of the quarter, the vast majority of the pipe was from our existing markets, Central and Southern New Jersey, Philadelphia, and New York. Not a lot yet in Boston or Baltimore other than you saw the $40 million that Baltimore guys put on. Our Baltimore lenders came on at the end of May. That's -- you expect them to take another quarter or two to really ramp. So I'm really bullish on our opportunities in the new markets with the folks that we've hired.

Matthew Breese -- Stephens, Inc. -- Analyst

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

Joseph J. Lebel -- President, Chief Operating Officer

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

Christopher Maher -- Chairman and Chief Executive Officer

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

Joseph J. Lebel -- President, Chief Operating Officer

Construction projects.

Christopher Maher -- Chairman and Chief Executive Officer

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

Matthew Breese -- Stephens, Inc. -- Analyst

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

Christopher Maher -- Chairman and Chief Executive Officer

I think it's -- you have to look at all that stuff and there is going to be in each of the bunch of deals that were announced right in the last six months, different sizes, different kinds of banks. With a few of them and I'm not going to name them, we think there might be more disruption and opportunity. Some of the other ones we don't think there's going to be that much difference or that much opportunity. So our existing folks are in the core markets that we've been in for years. They have their mission cut out for them and they're going to execute and won't need to be an either-or. I think it should be in hand, but I'm comfortable that our folks know where they expect to see opportunities. And look, Baltimore itself was an outgrowth of the PNC-BBVA deal. Without that deal, we wouldn't have that team. So, and we wouldn't be in Baltimore.

Joseph J. Lebel -- President, Chief Operating Officer

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

Matthew Breese -- Stephens, Inc. -- Analyst

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

Christopher Maher -- Chairman and Chief Executive Officer

I think you should expect that overall thing 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 can be hard to execute. You can have all the authorization you want, but there are rules to how many shares you can buy back in different periods. And if you can find a block seller that can be a bit of an issue but you're right that we purposely wanted to send the message that we think our capital position, earnings outlook would both support a much faster amount of buybacks. And I think we could do, these things going the M&A stuff happens in seasons. You've seen a bunch of announcements. We've been watching the market carefully. We are going to be careful not to be distracted by opportunities that might move the needle a little bit, but won't make a material difference. If it's not a material opportunity for us, we rather buyback our own shares and continue with organic, but that doesn't mean we're not looking at M&A. We're happy to do that too. We just have to find the right thing.

Matthew Breese -- Stephens, Inc. -- Analyst

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

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

Yeah. Matt, it's Mike. It's about 24%. I mean it's the state part, the Federal is pretty consistent but the state between New Jersey, New York, etc., has been bouncing around. Last year New Jersey had some increase in rates and surtax and this year that happened in New York, starting in Q2 they had a surtax. That's why the Q2 number came up a little bit because of New York. So it's I'd still say 24, 24.5 something like that. Some of these surtaxes are mostly surtaxes are temporary, supposedly, but time will tell.

Christopher Maher -- Chairman and Chief Executive Officer

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

Matthew Breese -- Stephens, Inc. -- Analyst

Great. Okay. I appreciate it. Thank you very much. See you next week.

Christopher Maher -- Chairman and Chief Executive Officer

All right. Thanks, Matt. Appreciate it.

Operator

The next question comes from Don Koch of Koch Investments. Please go ahead.

Donald L. Koch -- Koch Investments -- Analyst

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

Christopher Maher -- Chairman and Chief Executive Officer

So we would assume you're probably referring to the Investors announcement from earlier this week?

Donald L. Koch -- Koch Investments -- Analyst

Yeah.

Christopher Maher -- Chairman and Chief Executive Officer

Look, we have a lot of respect for the folks at Investors and to think about what they built in the time since they took the company public. And, so we wish them the best and we think of them as really just incredible competitors, right. And sometimes you compete with people and you have a great deal of respect for them. In any deal and it's too early to tell what changes might come in that deal or there is the Sterling Webster deal and there are others like it. It's too early to tell exactly where the opportunities will be, but it tends to be that there are more opportunities, not fewer opportunities when these things happen. Just because everyone loan officers, customers start to reexamine what's important to them, our business model is geared 100% to compete with the largest banks out there. So we go to market everyday, trying to win clients from Wells, BofA, TD, PNC, and others. So in general terms, anytime a bank is bought by a giant competitor, that can be good for us, but we don't count anybody out and the people and investors are remarkable. So I'm not -- I wish them all the best and I'm not sure things are going to change very much.

Donald L. Koch -- Koch Investments -- Analyst

Second quick question, I got one more after that, is that you have done a wonderful job in this branch rationalization, 58 over a period of time, 4 in the last quarter. That should be a tremendous burst of focus. So that do you think you are going to continue to work on that is that right or does that type of run rate is something we can expect?

Christopher Maher -- Chairman and Chief Executive Officer

We're absolutely going to continue to work on that and we'll have more detail on that next week at the Investor Day. And just to give you the power that, if you look at net operating expenses on our balance sheet as a percent of assets, in the last five years they have fallen almost 70 basis points, down to about 1.75%. So you can see that as we've switched and the way we like to look at it is, we are following our customers to digital. So even our customers are telling us every day that they want better solutions, easier ways to bank with us and we have put a lot of money into that. It's now 18.5% of our operating expenses are IT. So as a result, what you have to do is over-invest in those new channels and you have to rationalize your investment in the channels that get less use. But interestingly, we're building new branches too. We have a new branch concept that is going quite well. We've got a couple of them up and running already. We are been in the process of building the next two as well. So I think it's -- you invest in every channel, but your investment levels just have to reflect what your customer needs are.

Donald L. Koch -- Koch Investments -- Analyst

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

Christopher Maher -- Chairman and Chief Executive Officer

We absolutely agree with your point that limiting ourselves to New Jersey is a mistake, right. And in terms of how we get the geographies, I think a little bit is opportunistic overtime. I will say that you'd be astounded and we will have more details to share on this next week in digital. Digital has changed the game in a lot of ways, including when customers decide to switch banks. So one of the biggest successes is we've had in digital is reducing the number of customers who leave us. So customers move to Florida, they move to California, they go to all sorts of places, but the likelihood of them leaving OceanFirst is down materially over the last three or four years. So, maybe there'll be a day for that down in Florida, but for now, we've bitten off a lot in Baltimore and Boston. We want to make sure we get those right.

Donald L. Koch -- Koch Investments -- Analyst

Okay. Thank you. You did a nice job, nice quarter.

Christopher Maher -- Chairman and Chief Executive Officer

Thank you.

Operator

[Operato Instuctions] And the next question will come from William Wallace of Raymond James. Please go ahead.

William Wallace -- Raymond James -- Analyst

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

Christopher Maher -- Chairman and Chief Executive Officer

It's really the mix shift that has to drive it. If you think about deposit costs, they are at 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, it's really just replacing the 10 basis points of cash with loans with little over 3%.

William Wallace -- Raymond James -- Analyst

Okay, great. That's what I thought. I just wanted to make sure. That's my only question. Thank you.

Christopher Maher -- Chairman and Chief Executive Officer

Thanks, Wally.

Operator

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

Christopher Maher -- Chairman and Chief Executive Officer

Thank you. With that, I'd like to thank everyone for their participation in the call this morning. We remain focused on building the business, deploying cash, and improving earnings. We do look forward to seeing those of you that can attend our Investor Day next week. So, please call ahead and make a reservation and we also look forward to discussing our third quarter results with you in October. Thank you.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Jill Hewitt -- Senior Vice President and Investor Relations Officer

Christopher Maher -- Chairman and Chief Executive Officer

Joseph J. Lebel -- President, Chief Operating Officer

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

Frank Schiraldi -- Piper Sandler -- Analyst

Michael Perito -- KBW -- Analyst

Erik Zwick -- Boenning and Scattergood -- Analyst

Dave Bishop -- Seaport Research Partners -- Analyst

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

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Matthew Breese -- Stephens, Inc. -- Analyst

Donald L. Koch -- Koch Investments -- Analyst

William Wallace -- Raymond James -- Analyst

More OCFC analysis

All earnings call transcripts