OceanFirst Financial Corp. (OCFC) Q2 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the OceanFirst Financial Corp Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded.I would now like to turn the conference over to Jill Hewitt, Investor Relations Officer. Please, go ahead.

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

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 am 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 consolidated charges, executive retirement expenses, all of 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 wasn't 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 seven branches and the staff reduction that totaled 38 full-time equivalents. At the same time, our efforts in Metropolitan New York, Greater Philadelphia are gaining traction and have contributed to a record loan pipeline. These sell tailwinds, combined with what appears to be a flat sell and deposit costs bodes well for performance in the second 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 growth initiative. 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 remaining 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 presented 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, put us in a solid position for the second half of year. With the progress made during the quarter, we are well-positioned for the second half.While 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 are signs that we are at or near the high watermark for deposit cost cycle. With a more positive outlook for loan growth in the third quarter, we have the opportunity to improve net interest income in the coming quarters. Our other performance metrics remain highly competitive with core ROA of 1.29%, 10 basis points higher than the 1.19% posted in the second quarter of 2018. And the 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 sheets to the second quarter 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 22 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 Joe Lebel to provide more details regarding the development of our business.

Thanks, Chris. Loan production for the quarter was basically flat as compared to the first quarter, and 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, 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 expect that the loan originations to be backend 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 environment has bolstered the pipeline, and it continues to deliver solid results. On the credit front, we continued our disciplined approach to the renewals of acquired credits and have exited over $50 million in participation loans in the second quarter due to requests from borrowers for pricing restructure amendments that does not meet our hurdles. While we don't expect the 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 are 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 the government and business deposits impacted overall balances. While we saw moderation in the increases in cost of deposits, overall increases on our costs are 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 treasuries commonly used as benchmarks for term borrowings. Yields on our earning assets dropped 5 basis points and the NIM was also impacted by a 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 more this quarter as the systems conversion was completed, three branches related to the Capital Bank acquisition were closed in early June and four additional branches in our legacy footprint were closed in the third quarter.With that, I'll turn it back over to Chris for the Q&A portion of the call.

Okay, thanks. So at this point Mike, Joe and I would be pleased to take your questions.

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

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

I think what we are seeing, Frank, is that if you look at what's happened over the last, say -- so far this year or the last two quarters, is that the long-term rates have been dropping in the markets, so the five year and the 10 year. And that has some impact on the competitive market for commercial real estate loans, which to be tied to the five 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 persists further in the year. When you couple that with having some of pay downs Joe talked about and not having loan growth during the quarter. We weren't putting as much on the new stuff and you round up not being able to overcome, it was a little bit of mix shift.So I don't think it's something that's going dodge us for the rest of the year. Although, we do run a very balanced interest rate risk position and we have about $1 million worth of floating rate loans. So the headwind we may have this quarter is as you see Fed rate decreases, we'll certainly pull out our finding costs overtime, but there may be a little timing issue there where if you have $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 to get there.

But is that billion in floating, is that mostly prime as opposed to LIBOR?

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

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

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

And I guess if you think about -- if we forget about the fed action or assuming fed action, for a second, and just think about replacement rates. So just given where the longer end of the curve has gone, I mean where the five years 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?

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 had balance sheet growth, which we expect to see in the second half of the year, you're able to overcome that and your net interest income could trend positively although, your margin maybe down a couple of bps.

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

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

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 give us a little bit of color on that front.

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

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

Net growth? Yes.

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

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 pickup, you're still well off your 4Q and 1Q levels. And so, I wanted to gain some understand as to; one, what happened particularly in the commercial side, down 94 basis points? Seems like it didn't follow the yield curve, there is more there, so perhaps just some spread compression. And then you noted a couple of basis points perhaps of NIM compression. Was that core or reported?

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

Yes, you'd mentioned in one of your replies that perhaps a couple of basis points of NIM compression in the near term. Was that core or reported?

That would be core. So, we're always going to have the fighting against 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, that's probably core. I think to see your comments about why the originations fell so much. A lot of that or the yield of them changed. One, it has to do with the mix of floating versus fixed rate instruments. So, we've been putting, which is what we like we do, we've putting more floating rate stuff on, even floating rate in real estate we achieved through swap. So as the mix of floating versus fixed changes, the absolute yield may come down a little bit. But we think that we have got a better balance sheet over the long run.I think also you look at the five year treasury was down 47 basis points, I think from the beginning of quarter to 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 the fed rate cut as well. So you have a combination of the fixed rates 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 watered down a little bit. But I don't think you are going to see that persist for the remainder of the year.I think the five and the 10 year have moved based on the longer-term expectations about what the fed is going to do. And whether the fed cuts or doesn't cut in July and later in the year, I don't think you're going to see those dramatic moves in the five and 10 year. So I think we're not going to have a persistent drop in those originations.

Matt, the other thing is on the loan originations for the core, the 44 there, this is a seasonal item. We had a lot of the municipal clients have short-term funding needs, and we lend them on short-term. So for 90 days we had about $10 million at less than 2% and that 90 days funding, it will just pave off, because their receipts come in August. So that's really the combination. But that drag down that yield to 44, so it’s a bit of an anomaly in that respect. So you see the pipeline yield is 490, so that's a little bit where the trend is, where we will be closing loans in the third quarter.

And just tying this back into the NIM and NIM outlook, you noted that there is a timing difference perhaps between loan yield compressions versus what you can get out of deposits. If you could give us a gauge of where you seeing the point of NIM stability? Where do we find that level? And when it happens? Is that over two quarters or three quarters? And is it still north of, call it, a core NIM of 340. I would just really appreciate some color there.

I think the most important thing is that the business models engineered around relationship lending we do, that have a strong NIM. So that -- and I would define that as being in the mid-3s, depending on circumstance maybe that's 330s something like that or 350s or 360s, or 370s when you have a great set of circumstances. So I think we are going to be bouncing around in that. I think the cash up is only a quarter or two. I don't think anyone anticipates the fed cutting rates 5 times.So I think you have one or two rate cuts you have to absorb on the floating rate stuff. We'll bring deposit costs down maybe on the 90 day delay, and then I think you are fine. And then I think the other good thing is that you get a little more scope for yield curve to 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 have never been a place we don't -- we're not in 4% NIM shop, and I don't think we're going to be a 3% of shop.

The other thing I wanted to touch on was just the tax rate. There's 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?

So including the second quarter, there was a little bit of an increase. You see the effective rate went up from 18.6% to 19%. Most of that was related, or part of that was related to slight increase in state taxes. So for this year, it should 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 will be more of an impact. So we probably anticipate about 21%, and we ended in about 2% for the state tax impact.

And do you think that's a good level beyond 2020, or are there loss carry forwards that are bringing that down to 21%?

Well, there's less cash towards this year, that's what's keeping the number somewhat -- the effect somewhat muted this year. Those NOLs go away so the full impact will be -- we are assuming no NOLs next year. Although, we might have a little bit to get carried over we'll say. So the 21% should be the full impact.

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

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 how you look at your M&A criteria for a potential acquisition down the road? Thanks.

I think I'll start off by saying that we're very pleased to have the Capital Bank integration completed. That will be our fifth whole bank integration. And as Joe pointed out very, very pleased, we've got 98% retention on the deposit side, which is 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 are actively looking at things in the market. And if we have 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 the way we do relationship based commercial banks. That's very important to us. We really like our geography, meaning Metropolitan New York, Greater Philadelphia and all New Jersey. So we prioritize opportunities 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 then 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 as Joe walked through the expansions 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.

And then I guess switching gears to the nice uptick you saw in noninterest-bearing deposits. Can you give us a little color on what drove that? Was that some of the new relationships from the new teams and affiliates in New York?

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 fluctuations you would have seen, it's just the fluctuation quarter-to-quarter is more about things like seasonality than any big wave of new accounts being added.

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

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 put a good number on that. I will say, though, that we continue to be surprised 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 intensive 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 1 mile or 1.5 mile or 2 mile or 2.5 miles doesn't matter, you got in a 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 a 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 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 will have consolidate 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 of 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 are they doing it, where the dollars are deposits. So I think you can expect it just to be a long term trend.

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

I have a couple 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 is any update to your purchase accounting assumptions and contribution to the margin for the back half of the year?

Those are two very good questions. The first question, we went through concerted effort a number of years back to de-link all deposits from an 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 a exposure to that. On the negative side then, if those index 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 the -- where we are going in NIM and on the loan side, I'll ask Mike to chime in.

To your question on the accretion, it's declined about $300,000 in Q3 from the Q2 rate and then another $200,000 in Q4. It could also be modest. And the next year's decrease is about $150,000 a quarter, so it's not a big headwind.

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?

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

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

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

Yes. So we expect expenses to trend down in next two quarters. We have the branch phase from Capital, the branch phase from legacy OceanFirst. And then some of the cost saves from capital employee exiting at the end of the quarter. So within that, we have been some increases from the Philly and New York City build out that we're going to fully incorporate into the second quarter. And so, we think probably about $42 million core this quarter going down about maybe $41.5 million next quarter Q3 and then $41 million in Q4.

And then is it too early to look out into 2020 and as we digest core margin pressure and a higher tax rate. What an efficiency ratio target you will be after is for 2020?

I think you raised the most important questions, which is the shape of the yield curve is going to determine which side 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 now that prior to the tax changes and all that, we had hoped 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 glide path to get there.

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

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

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 annual compensation increases and things like that. So that's probably the $41 million range is where we'll be looking at in the first quarter or maybe even little bit higher.

So does that imply that no -- really not -- no core expense growth then in 2020? I think you can flat line it.

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'll be offset by annual compensation increases and merit increases and things of that nature. So Q1 next year, maybe 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.

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 two, but we're not starting those from scratch again next year. There's always things you need to invest in, like cyber security 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.

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.

It was $3.6 million in Q2.

And then I guess just in terms of the deposit 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 a one thing we can -- offering rates are declining and the fed dropping is encouraging, and all that type of thing. But do you see a risk within base of just some of your core consumers moving into higher paying account still flowing through?

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 accounts for them to go to. We had not seen the 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 made that migration. So we had a series of conversations in the fourth quarter of 2018 the first quarter 2019 where we sat there with our treasury clients and worked through what cash they need to run. And instead of incenting them to sweep it out to something else, we provided them with some internal alternatives here at OceanFirst. So those conversations happened. We've restructured the vast majority of those to do what we needed to do. So I don't think that's a hangover, going forward.

And then just finally, Chris, I think I asked this last quarter and again taking a step back and thinking about performance targets and where you are taking the organization. And I think maybe you'd mentioned that a broad goal would be like 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 having fits and starts along the way. I mean do you feel like you are 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?

I think on the organic side, we feel confident that we can build EPS that way. Now building it consistently at 10% maybe too much to do just organically in this environment. 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 is one that -- I know we mentioned it in our prepared comments that we don't see any big economic risk tomorrow. But I think we are very thoughtful that over the next year or two, that could change. And we have 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 can do acquisitions as well.But we're not looking to jump EPS at -- we are not going to push it to the point where we're going to regret the steps we took this year in a year or two if there is 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 are trying to both deliver a range of EPS improvement, but maybe that's 3%, 4%, 5%, 6% organically. We can do, acquisitions will 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.

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

I appreciate you allowing me to hop back in. I guess you go back to the NIM. Chris, you had mentioned perhaps a couple of 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 your curve? And then oppositely, if we were to see more compression than you would expect right now. What would have to happen?

So I think the conditions you would be looking for are, let's say, either just one fed rate cut or maybe no fed 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 the balance sheet that's positioned to be pretty neutral. So that those cuts come through .We're going to pay a little bit of a price for that. So I think the number of actions the fed take is going weigh on this. And then the markets' reactions 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 I think it's a combination of what does the Fed to, how do those rates react and what our growth rate is and those variables mixing them together we look at them and do projections. Those projections tend to cluster. So they're 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 two fed rate increases and seeing that the competitive market for loans pulls down as well.

And then just thinking about the team you have in place, obviously, there's 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 if you think about 2020 and that team in place for a longer period of time established, because the ceiling for this year of $100 million become the floor next year? Is that the expectation? And can we see perhaps, $300 million, $400 million, or $500 million of net loan growth for the year?

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 favor ability 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 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 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, we feel the economic conditions are good, we've got access 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.

And then 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?

I think I alluded in my comments that we're considering expanding the size of the buybacks. So we have the authorization to it. And we view that as a math exercise. And we look at tangible book dilution and earn back periods and all that. And obviously, we've demonstrated about the buyback 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 non-accruals, we're very pleased with where the company is. So we can really go into buybacks if we have the opportunity. But it's going to depend on market conditions.

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

I just had a follow up on the buyback as well actually, thinking about what we're looking at where you've bought back year-to-date. It 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 or where you get more aggressive knowing what you know about the environment right now?

I think it starts with how confident are we about 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 are confident in your earnings, you're going to keep buying at that level. And so, we understand that our sector comes in at a favor from time-to-time. So if the sector is out of favor and multiples fall little bit and we can cost-effectively pull back those shares.We have a much higher capacity than our existing repurchase plan would allow us to capitalize on. So that's how 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 act if market conditions head that way.

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

We have thought about it and we did a pretty disciplined set of discussions with our shareholders over the past six months or so to kind of get there. References 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 a positive momentum there. So in terms of how we prioritize things as we build potentially an excess capital, we will see how much we can get out through the growth initiatives.But as you build excess capital, we can continue to buyback. We prefer buyback to special dividend. Once if you get into next year and you've got CECL behind you, you've got a little more clarity around the economic environment, and you really have thought that there was in the long-term, no ability for productively deploy that capital and the market is not providing a repurchase opportunity then we would certainly consider it. But it would be a lower priority than growth, regular dividend or buybacks.

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

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

No, I think they were similar. Although, we did take a little proactive opportunity to exit a couple of 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 in the cycle, whether it'd be to lose some financial covenants, provide some additional dollars on stabilizers, in certain instances non-stabilized projects in the form of return of equity. And most of those are not opportunities for us to stay in the credit and provides us an opportunity to exit and we take advantage of it. but I wouldn't say that they're elevated.

Was there any -- I mean obviously, you've done some acquisitions over the last few years here. There had to be some that were probably refinanced lost entirely. Is there any accretion impacts from pay downs?

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

[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.

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.

The conference is now concluded. We thank you all for attending today's presentation. You may now disconnect your lines.