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New York Community Bancorp Inc
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Good morning, and thank you all for joining the management team of New York Community Bancorp for its First Quarter 2019 Conference Call.
I’m now going to turn the conference over to management for their prepared remarks.
Thank you, Matt. Good morning everyone. This is Salvatore DiMartino, Director of Investor Relations. Thank you all for joining us this morning as we report our first quarter 2019 results.
Today's discussion of our first quarter 2019 performance will be led by Senior Executive Vice President and Chief Financial Officer, Thomas Cangemi; together with Chief Operating Officer, Robert Wann; and the Company’s Chief Accounting Officer, John Pinto. Absent from today's call is President and Chief Executive Officer, Joseph Ficalora, who could not be with us this morning due to an unanticipated family matter.
Before I turn the call over to Mr. Cangemi, I have a few statements to read. Certain comments made on this call will contain forward-looking statements that are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those the company currently anticipates due to a number of factors, many of which are beyond its control. Among those factors are general economic conditions and trends, both nationally and in the company's local markets; changes in interest rates, which may affect the company's net income, prepayment income and other future cash flows or the market value of its assets, including its investment securities; changes in the demand for deposit, loan and investment products and other financial services; and changes in legislation, regulation and policies.
You will find more about the risk factors associated with the company's forward-looking statements in this morning's earnings release in its SEC filings, including its 2018 annual report on Form 10-K and Form 10-Q for the quarterly period ended September 30, 2018. This morning’s release also includes reconciliations of certain GAAP and non-GAAP financial measures that may be discussed during this conference call.
As a reminder, today's call is being recorded. [Operator Instructions]
To start the discussion, I will now turn this call over to Mr. Cangemi, who will provide a brief overview of the Company's performance, before opening the lines for Q&A. Mr. Cangemi, please go ahead.
Thanks you, Salvatore. And good morning to everyone on the phone and on the webcast. And thank you for joining us today as we discuss our first quarter 2019 operating results and performance. 2019 has gotten off to a good start for the company. We were able to offset and manage some margin compression with operating leverage resulting in a solid quarter.
Earlier this morning we reported diluted earnings per common share of $0.19 for the three months ended March 31, 2019 unchanged from the three months ended December 31, 2018. Excluding certain items which are more fully discussed in our earnings release, our first quarter 2019 diluted earnings was also $0.19 per common share. In addition to us solid results this quarter, we are also executing on several other strategies, which would benefit the company going forward.
First, we undertook a thorough analysis of our branch network resulting in closing of 12 branches. Second, during the first quarter we sold our wealth management subsidiary, Peter B. Cannell & Company. While this will result in lower level of noninterest income, it will be substantially offset by the cost savings we will realize from the sale. Third, we entered into a new agreement with a third-party provider of non-depository products and services. Under this agreement our financial consultants will be employed by them, but will still service our entire deposit base. This agreement will continue to generate fee income for us without the overhead associated with maintaining a large sales force.
And forth, we are very excited to be partnering with Fiserv, as we convert our core account processing system during the fourth quarter of this year. This product will result in further expense reduction in 2020 and beyond. We look forward to having a long-term relationship with them.
We will continue to seek out other opportunities like these over the course of the year as we continue to grow our balance sheet, right size our core structure and focus on operating leverage.
Turning now to the financial highlights of the quarter, following our last year’s resumption of growth, we continue to grow assets in the first quarter of this year. Total assets as of March 31 2019 were $52.1 billion, up $250 million or 2% on an annualized basis, compared to December 31, 2018. This growth was driven by loan growth and to a lesser extent growth in our securities portfolios.
Our loan portfolio increased $360 million or 4% on an annualized basis to $40.5 billion. During the first quarter we had growth in our C&I portfolio, our commercial real estate portfolio and our multi-family portfolio. The growth in our C&I loan this quarter was driven by a specialty finance business. As that portfolio increased $315 million to $2.3 billion, since 2014 this line of business has grown at a compound annual growth rate of 35%. Commercial real estate loans grew $81 million to $7.1 billion, 5% annualized and multi-family loans increased $49 million to $30 billion or 1% annualized.
The immediate growth in our multi-family portfolio was the result of seasonality as the first quarter is traditionally a slow quarter for NYCB. However, as reflected in our pipeline numbers, we are very pleased to know that demand has picked up in the second quarter and the common pipeline is approximately $1.5 billion up 36% compared to the pipeline with the prior quarter, of which $1 billion or 67% of that pipeline is new money. The multi-family, CRE and specialty finance pipelines all were higher than the previous quarter's pipeline.
While marketing rate continued to decline during the first quarter of the year, our current loan pricing has been relatively unchanged and our spreads have been consistent. More importantly, we have approximately $14.6 billion of multi-family and CRE loans coming in the next three years with an average coupon of 3.39% coming up to the contractual maturity and option B pricing days.
Moving one to deposits, we are also very happy to see that strong deposit growth we experienced over the course of 2018 continue into the first quarter of 2019, with total deposit increasing $837 million or 11% annualized to $31.6 billion. While most of this growth was driven by our targeted retail CD strategy, we also experienced strong growth in non-interest-bearing deposits and in savings account balances, while interest-bearing checking and money market accounts declined modestly. As a result of the strong deposit growth, we used a large portion of our excess cash position during the quarter to pay down some of our wholesale borrowings as we refrained from investing in securities, given the current market conditions.
Turning now to the net interest margin, our margin this quarter was 2.03%, down six basis points on the linked-quarter basis. Prepayment income rose modestly and added eight basis points to the margin, same as the prior quarter. Excluding prepayment income, the net interest margin for the first quarter would have also been down six basis points, compared to the previous quarter in line with my previous quarter’s guidance.
Moving on to our expenses, as detailed in our earnings release, the current quarter's expenses included certain items totaling $9 million including $3.5 million in employee severance costs and $5.5 million in branch rationalization cost. Excluding these items, total non-interest expense on a non-GAAP basis, would have been $130 million down $5 million or 5% compared to the prior quarter, and the adjusted efficiency ratio would have been 48.75%, down 117 basis points compared to the prior quarter, which came embedded in our guidance we provided last quarter.
On the asset quality front, or asset quality metrics remained strong during the current first quarter despite an uptick in nonaccrual loans relate to one C&I borrowings and the amount of $50 million, non-performing assets rose $50 million on a linked quarter basis to $71.3 million or 14 basis points of total assets. Aside from the aforementioned non-accrual borrower, the majority of our nonperforming assets consist of nonaccrual and repossessed taxi medallion-related assets. As of March 31, 2019, our taxi medallion exposure was $69.6 million. Excluding taxi medallions and the one non-accrual borrower, the asset quality measures of our core portfolio remain pristine.
Lastly, we continue to execute in our previously announced $300 million share repurchase program. During the first quarter, we repurchased 7.1 million shares at an average price of $9.47. Today, we have repurchased a total of 23.9 million shares and average price of $9.54 per share for $228 million in aggregate, leaving $72 million remaining under the current authorization plan.
This morning, we also are pleased to announce that the Board of Directors declared a $0.17 cash dividend per common share for the quarter, the dividend will be payable on May 28 to common shareholders of record as of May 14. Based on yesterday's closing price is represents an annual dividend yield at approximately 6%.
On that note, I would now ask the operator to open the lines for your questions. I will do my very best to get to all of you within the time remaining, but if we don't, please feel free to call me later today or during the week. Operator?
Great, thank you. [Operator Instructions] Our first question here is from Ebrahim Poonawala from Bank of America Merrill Lynch. Please go ahead.
Good morning Ebrahim.
Good morning Tom. So just I guess the first question around – in terms of margin outlook as you see how that progresses from here. And in the context of if you could discuss also your funding strategy around more CDs, less borrowings, how you plan to kind of fund the balance sheet going forward. That would be great.
Sure, sure. So Ebrahim I would say that obviously we came in line with the quarter down to six and we were seeing in a short term that margin should be approximate down three basis points for Q2. But more importantly, we're seeing visibility given the Fed pivot and respect to their view of short term interest rates and their actions anticipated. So in this, given that circumstance, we believe that we’re still calling for NII growth in the second half of this year, they come a little bit sooner given the market conditions. But more importantly, next year we see margin expansion in 2020 with EPS growth to follow-up at 2019 versus 2020.
So we're in a unique spot given the patience that we've had over the long time, what's continuing NII declines, but it appears that there's a significant light of the end of the tunnel.
Understood. And any signs for pickup in prepay, given just overall activity being lower, we should expect that to stay around 1Q levels?
Well we typically don't give guidance on pre payment as you as you are aware of, but it's been a – it was an encouraging Q1 versus Q4, it's pretty much relatively flat. So typically Q4 is stronger than Q1, but Q1 had a nice amount of prepayment. I think that consistent level is reasonable. Obviously, there's been less property transactions as we know it it’s mostly refi within the marketplace from other portfolios including our own, but big picture I think on the prepaid side, we'll wait and see. Obviously there's some interesting dynamics going on with the potential adjustments to the rent regulation laws. And I think bar is waiting on the sidelines. So property transactions are relatively slow.
And also going back to your other comment you had on deposit, you had a question on the deposit side, I would say that overall our strategies are consistent. Last year we were very focused on growing the balance sheet. We grew the balance sheet the first time coming off of Citi for five years and without crossing over $50 billion and we were successful in bringing in good deposit flows. What's most encouraging about that it continued into 2019 and the reality is that of every dollar we continue to bring in approximately 82% of that money is coming from our existing customer base. So that's a very encouraging dynamic, given that we do have regional pricings, we have branch structures in Arizona, Ohio, Florida in metro areas.
So we have the ability to target these unique opportunities on the retail fund. The good news is that most of that money is coming from existing customer base. At the same time, some of the money that we brought in prior to significant growth, we can have right side, that cost of deposits and manage our margin towards hopefully having some of the higher cost money roll off, including institutional assess of 15c3 [ph] type money. And then we target the retail campaign, which is in this environment slightly lower than the institutional market. So we're excited about being able to shift around some of those deposits so as to benefit the margin in the short-term.
Understood. In this moving equity to expenses, you came in at a core run rate of about $129.7 that’s $520 million annualized. As we look at your previous guidance for the low 500s by the end of the year, given the sale of the wealth management business one, how much more expenses go away because of that sale and what's your expectation in terms of where expenses land by the end of the year?
Absolutely. We're very excited of where we are and we were very focused on meeting our goals. One of the two things we can't control is our operating expenses, we've done a fine job in getting there. Just to be specific, I'll guide down in Q2 the $125 for the quarter. If you take that run rate, that's $500 million. So we're at the run rate as we speak today. We've announced a number of initiatives. These initiatives are real changes to the P&L going forward. We're very excited about the accomplishments we've had since the announcement going back to 2017 of looking at the balance sheet and looking at how we can look at our operating expenses. And in particular our headcount reduction has been down significantly, went down approximately 20% from our targeted initiative of looking at cost containment and looking at lines of businesses to right size our efficiency ratio.
So we had a approximate 3,500 full time equivalents back in the, let's say June of 2017 went down to 2,700 I'll just under 2,800 today, which is a 20% reduction. So we are focusing on what makes sense going forward here. Our efficiency ratio, as my prepared remarks talked about, we're in the high 40s, but once we start getting operating leverage to kick into balance sheet growth and the NII structure to go up, we should target that low 40% type efficiency ratio.
So we're excited about where we are. We're very comfortable on our guidance on that $500 million number. I think that last quarter was $505 million to $515 million, it seems like $500 million is in the short-term very achievable and we're going to run a flat off for 2020. We have a lot of other initiatives that we haven't publicly announced yet, we continue to grind hard, I'm looking at operating expense reductions and we're going to hopefully benefit from the rise of our balance sheet and operating leverage.
Understood. And you mentioned in your remarks around the Fiserv and bringing them and moving your core systems to that. Like just what's the thought process behind that? Is there are any expense impact tied to that? And does that make M&A easier or does it not have any impact? Just one last question.
It'll make it make M&A much easier obviously because they know we're going to eliminate a lot of the patches that we have currently. This is going to be a partnership with Fiserv’s long-term contract, we chose them, they chose us, we are in business together and more importantly as we've continued to invest together in the opportunity on systems, and data processing and IT, we have to look at our internal process. Down the road we'll look at the cloud computing a lot of other items that will generate better efficiency for the company that's – are in the docking going forward.
I'm not going to be specific on that. We are specific as far as when it's going to happen. They'll start the benefit at the end of the year. And our conversion is slated for, I believe it’s November of 2019. So that'll be behind us this year as we me move forward with the potential of further cost reduction with respect to our systems. More importantly, we are an M&A company. We look at transactions to grow our funding base and look at opportunities. This should only make that more of an enhancement for us given that we do look at it as partnership and hopefully as we look at other opportunities to merge other Fiserv clients or other non-Fiserv clients onto our system.
Go it. Thanks for taking my questions.
Sure.
Alright. Next question is from Brock Vandervliet from UBS. Please go ahead.
Good morning.
Hey, good morning. I'm just wondering if you could just start with maybe an update on the FHLB refinancing that you may have done this quarter and what you've got ahead of you there remainder of the year and how you're looking at that?
Right, sure. So what we have the remaining for the rest of 2019 about $2.9 billion. So I think last quarter we announced $3.8 billion. We’ve dealt with about a $1 billion of that repricing. The current $2.9 billion that's remaining is at its 1.8% cost of funds. That would impact us. The good news is that with the $1 billion that we’ve already dealt with going forward in the previous quarter is at the approximately low-2s, let's say [indiscernible] to 2.15 type range of levels. When we looked at this in November and we have markets, we're in November with the FED in the position of continuing to raise rates with expectation of higher rates, that number was close to 280 to 290.
So we're seeing the benefit there clearly for the funding side. But more importantly, when you think about past 2019, which is we're getting there past 2019, you look at lower to upper-2s on the funding coming due in 2020 to 2022. So that's pretty much slightly above the market. So that's the opportunity. So I'll call that a slight tailwind for the company going forward on the funding side. And mirror that went to CD opportunity given where CDV pricing is in the market, we think that will also be a potential tailwind for the company on the funding cost.
So we're excited about where we were. We had a lot of beta risk last year. We had to re-price the liabilities up quickly from the aggressive move by the Fed. But given the Fed pivot and their position, this should bode well for the company.
And it seems to be a bit of a change in terms of Q1 where end of period borrowings were down, securities growth looked somewhat less than we'd expected. Is that kind of a pattern given where rates are, you may pay down borrowings as opposed to building up securities as much as you have in the past?
Hey Brock I would say long-term we'd like to have our securities more right size to the industry we’re still well below, we should be between 15% and 18% is reasonable. So we're not there yet. We've been very proactive to ensure that when we put on some duration risk, we're going in at the right opportunity and time, we were more aggressive last year in putting on securities. So we built it up in the third and fourth quarter and rates went the other way. So we took advantage in the first quarter sales on that has given the substantial rally in the market.
So we'll be opportunistic, the long-term plan over the next quarters ahead is to grow the portfolio, but we'll be very prudent when we deploy the cash, we sat on a lot of liquidity, the deposit growth was real, it was significant and we looked at what the margin was on securities versus paying down debt and we paid down debt it makes sense for us. But I would say of course the big picture you'll see fight securities growth and you can probably model it between $300 million to $500 million a quarter and so we get to that 15% to 18% total securities to total assets.
Got it, okay. Thanks Tom.
Sure.
Our next question is from Ken Zerbe from Morgan Stanley. Please go ahead.
Good morning Ken, how are you?
Great. Hey, Tom doing well. Thanks. Can you just talk about the – in terms of Peter B. Cannell on a full year basis, how much were they adding to both fees and expenses?
Yes, so big picture it's about a $20 million expense business – income business with about watching the $14 million to $15 million, $16 million of total expense, so net that we're looking at approximately just under $4 million of contribution to the bottom line. We've had a tremendous – that's a before tax number. We've had a tremendous long-term relationship with them and obviously they're growing into a position where they opted to do a management buyout of the firm, so they own the company now and they took it private. And we had a very long relationship with them, it was very successful relationship. And our investment is pretty much at a level where we were getting decent returns, but a very insignificant amount of the consolidated company.
So when we look our cost cutting initiatives, it was many items on the agenda. This happened to be one of them. We’re pleased that they're enjoying the private world again. But more importantly, we have to focus on the big picture for the company. So clearly we needed to look at some expense initiatives and this happened to be one of the items that we spent some time on over the past few years in evaluating and it was just too small of a business for us.
Got you, understood. And I noticed that in the press release you mentioned the fee income was lower because of the sale. Were expenses also lower in this quarter, given the sale?
Yes. So again and I was very clear about the…
[Indiscernible]
Yes that was part of it. Back out the $9 million, we had the one time severance payments as well as the branch optimization charges we took for the quarter of a total of $9 million. But I was clear 125 to Q2. We're in the run rate of $500 million. We’re very pleased. We think we're about two quarters ahead of that. There's a lot of work that the entire bank focused on, and as far as reducing FTEs was another strategy for us over the big picture, given healthcare costs, and the like and overall payroll costs. So we're very pleased on where we are right now. We're not saying we're going to further adjustment there, there are other things to do, but we liked the fact that we have now the operating leverage capability as we grow the balance sheet and run at that $500 million level.
In the best case scenario we would like to go with the balance sheet and keep $500 million five into twenty. We'll update that as we move along during the year to see how much benefits we get from the conversion, but clearly that's a real possibility going into next year to have flat expense base and assets growing, and margins expanding and then the [indiscernible]. So we're excited about where we are on a cost cutting initiative.
Alright, great. And then just one last question, it's good to hear the pipelines are picking up in 2Q, but can you just talk about the other side of that, which is the competition from the non banks? Like what are you seeing there? How aggressive are they being right now? Thanks.
So I think there's number of factors going on. Obviously these non-banks and more importantly, they are our competition that has to look at the multifamily space and the CRE space. And then I'm still believe personally that there is some real, a right sizing on institutions on credit risk management skill. So we went through a very interesting time, with the announcement of our transaction and ultimately not closing that transaction. At the same time, we've invested heavily on credit risk management.
With that being said, we think we're in a great position to be in the market. So we continue to be relevant in the market. We are the leader in the market for commercial real estate, multifamily in the New York City marketplace. And you have to look at the dynamics of what's been going on in New York City politics. We have this uniqueness of a democratic controlled position on the political framework and there's some rent regulatory changes that may come down the pike. And I think a lot of smart property that are sitting on our hands right now, we’re watching and waiting to see what happens in the next three months.
The good news we'll be able to talk about this at the next quarter what the results are. But there's four or five items that are now on the table for potential adjustments and we just have to wait and see. But I think a lot of it has to do with the property transactions. Our refi business is very strong both within our portfolio and without – and bonus coming from other portfolios because we're in the business of doing this. This is our core model and we're very focused on building it.
So although growth in multifamily was not significant for the quarter, we still grew the book and we anticipate that mid-single digit loan growth is reasonable for us in a time where things are relatively sublime right now.
Alright, perfect. Thank you very much.
Sure.
Our next question is from Dave Rochester, from Deutsche Bank, please go ahead.
Good morning Dave.
Hey, good morning guys. So on the sale of the wealth management business, you've already sustained a hit from a fee perspective and the numbers that's completely in the numbers. Is that right?
Yes, that's correct.
Okay.
It was no gain on sale, it was a wash.
Okay. So the $5 million came out and that's it. Okay, got it. And then following up on your…
Excuse me.
Yes, so that was all the fee income $5 million is out, okay. Got it.
Yes.
And then just following-up on your NIM comments, where are you seeing new loan pricing on multifamily and commercial real estate at this point and then on the commercial as well, that you brought in?
Yes. So obviously we reported our pipelines about $1.5 billion of which $1 billion in new money. The average rate in that portfolio is a 4.35%. So that's what's coming on. Obviously it's not 4.5, but it's still north of four. Pricing right now, I'd say, in the marketplace, given where interest rates are, I would say we'll call it the cherry transaction, the best five-year structure is probably three and seven As to that’s four in a quarter of a five-year product, seven-year four to four in the quarter as well. And I look at the CRE portfolios somewhere between 4.25, 4.5 and as high as 4.75 quarters in that range depending on the type of parameters that we're looking at.
So although they are slightly lower than the previous quarters, given interest rates, the spreads are holding up very nicely. And as we all understand here, we have a tremendous amount of vintage from 2015 coming due. That's pretty much the unknown. When is the 2015 vintage going to refinance or re-price than means this is approximately about $8.3 billion of 2015 vintage that needs to deal with the current rate environment. That's a 3.29 for multifamily, the 3.72 for CRE.
So they're significantly in the money and if they roll into the – in the estate, they are paying a floating rate close to 7%, 8% and fixed rate is not an option for them. So we're going to have to come to the market. And when they come to the market or rates are around 4%. So that's going to be a catalyst for us. We haven't seen the catalyst yet, but as time passes we get closer to all of 2015 going into 2020 and I mean every single loan has to be dealt with in 2020. So we're excited about that dynamic in the balance sheet.
Yes, okay. And then you were saying for the 2015 vintage that’s 3.29% and I thought I heard as 3.39% number earlier was that for everything?
3.29% it's just a multifamily, CRE is a possible of 3.72% when you combine that to 3.37%.
Okay.
So that’s $8.3 billion. And these are just the 2015 vintages. This is not taking to account anything legacy 2014 which the majority of the opportunity that we see right now is that those were the lowest yields we've originated and the most volume we originated. So if you look at rate and volume, this is the opportunity given the current market place. As long as rates don’t fall dramatically from here, our customers we’re going to have to make a decision to deal with their financing. And that decision and this environment is not only way up, the cost is only going up not down in the current market. Now if that changes we'll deal with that, but obviously 2015 is significant for us.
And at this point right now, the $5.1 million pricing, it sounds like you're $3 million and $7.8 million maybe 4% is that right?
Yes, I mean the average is $4.35 million in the $1.5 billion pipeline of which $1 billion is new money. We quote rates every week. We change them literally weekly depending on what happens with the treasury curve, but given where the current rate environment is $3 million and $7.8 million to 4% in a quarter is the range of our pricing. We have Tier 1 pricing versus Tier 3 pricing, but I would say somewhere around 4% is reasonable for the five-year paper and four in a quarter to 4.5 will be a little bit more duration. And when you go into the commercial real estate book, you're hitting around $4.75 million.
Got you. And then I guess switching to the funding side, have you seen any softening of the competitive pressures there, were you bringing in new money on the interest bearing side of things?
I'd say again we are targeting our growth, asset and acquisition was going to grow deposits, versus borrowings, because borrowings are more expensive than the environment. So we're very pleased to be able to lower our deposit rates, we've been very targeted subsequent a significant first quarter growth quarter. And if you look at what we're offering in the market, we have a five-month program at $2.40 million that's kind of the rate to enjoy that people are putting money in. If they want to go along, they get 10 basis points.
So we’re now offering to $2.80 million, $2.90 million, $2.50 million is the highest offering we have four CD customers. And we're going to catch a lot of re-pricing over the next year-and-a-half. It may not be this year, but next year if assuming rates are relatively flat and potentially declining, this could be a nice tailwind for the company because we have a tremendous amount of CDs that would have to reprice and the magnitude of the beta risk there is de minimis, given where the current interest rate environment is.
So we're excited about the fact that customers that were one year CD players are going to the five month category at $2.40 million versus to $2.80 million a year ago.
And then as the other borrowings role through this year, I know you've paid some of that off of cash last quarter or in the first quarter. How much more can you reduce cash going forward to pay those down? And then if you have to roll the rest of them, were you saying the cost of the wholesale callable advances right now are still in that low 2% range? Is that where you roll to?
We’ve done some interesting transactions, those are the home loan bank industry and the low twos, as low as 202. So that's anywhere from 18-month money, to a 3.5-year type money, very attractive, some portable transactions. But if you think about what we have left, $2.9 billion is the risk at 1.8% cost of funds. And then next year we have a lot more coming due in the mid-to-upper-2s. So that’s like I indicated in my previous commentary that that could be another tail went on the funding side. And given where interest rate now – assuming the rates are at these levels.
Can you bring cash down anymore to fund some of that?
So if we had our druthers, we'd probably want to put cash in the securities market, try to get the average balance up. But we were very cautious given the duration risk out there, because we had a significant [indiscernible] to rallying in Q1. So we took advantage of selling some assets. So we were very liquid, we bought in a lot of deposit flows. And we opted to take out some of this – we’ll call us this very tight carry and we're going to wait and see. But I think my guidance is that we anticipate being $300 million to $500 million per quarter of securities growth and we'll be opportunistic.
And again, securities didn't move the whole lot in Q1, but we should see a little bit of an uptick this quarter depending on market conditions. And cash will be deployed more importantly into our loan portfolio. That's the goal. The long-term goal is to get that loan portfolio up to let's say 5% to 7% growth. I think 5% is achievable. But market is still, I think, on the sidelines waiting to find out what happens with the New York City results on any adjustments they may make into the rent regulatory laws.
Right. Which we should find out by mid-June anyway, right?
Yes, I mean we'll know next time around this call where we stand because by the end of June it'll be finalized. And the good news, I think, there are a lot of borrowers, you have brokers, you have real constituents working real hard to make sure cooler heads prevail here and not destroy New York City.
Yes. Maybe just one last one, you talked about NIM expansion next year, a little bit of pressure in 2Q, for the back half, I would imagine you still expect to get – reach some kind of stability by 4Q, is it effectively the terms I go through back half.
Yes. The question is that Q3 or Q4, we were looking at NII expansion and I guess at beginning of the year at the second half of 2019 can come sooner, depending on market conditions and where we deploy cash in a like. But no question that the visibility is very bright and the margin depression is de minimis. So we were guiding down three bips for Q2.
Yes. Great. All right, thanks guys.
Sure.
Our next question is from Steven Alexopoulos from JP Morgan. Please go ahead.
Hey, good morning, Tom.
Good morning, Steve.
So I’d like to start, if we look at the loan growth in the quarter, it really a strong specialty finance growth and I would think there would be higher risk content than the New York City Cree. What drove the reserve release in the quarter?
We had a number of construction loans that left the portfolio on the allocation that we started construction is dramatically higher than anything we have on the portfolio, so it's the highest risk asset class that NYCB has in its portfolio. That's where the release was coming from.
On the C&I growth, I’ll just be clear, we've never had a late pay, this is a solid book of business, it's been catering in the ‘30s, we had a very strong Q1, probably a little bit of seasonality on the positive side there. I'm not envisioning 67% CAG is on the C&I book, but we'll probably grow at 30%, this year 28% to 35%, right now we're running at 35%, I should say it's 20 – conservatively 20%, 25% for our growth, but we're very selective Steven. We look at, every deal we see we turned down 97%, 98% of what we see.
So this is household transactions that you would know by name is a solid companies, all super senior secured and you know we’re very selective. When I’m getting deposit relationships, we’re just participating with the best deals in the market selectively, and that's been the strategy, it would be nice if we have deposit relationship, that's not the business model. So what we have here, this is a credit buy-up shop they've done a phenomenal job on selecting these credits and it's a Board process, it goes to a Board of Directors and it’s approved by other Boards for the most part.
So we're very excited about the growth, it's got tremendous returns, the coupon is about 4.36% right now, the return on invested capital of around 20%. So we're doing well with that business and its continuing to grow. And we started from zero when we have the same team that's been in this business for multiple decades with zero losses. So we’re excited that at least we can put some of these cash flows to work in alternative asset class besides multifamily.
So I wanted to explore the prepayment penalty income, because your peers have reported a really sharp decline this quarter, and obviously you see what's going on in the market. Why were you able to hold that steady versus most peers not being able to do so. And are you expecting a big drop here in 2Q?
Again I'm not expecting a drop, I would say that our portfolio not that with different ways, but we’re the largest player for portfolio in the country on total dollar amount. So, you have different dynamics that move prepayment. Like I said, we have a lot of money coming due on – from 15 vintages, so that particular book will not have a lot of prepayment benefits because it's getting close to its role, but we’ll have the coupon benefits going forward.
But from time-to-time prepayment is always lumpy for this, that number that we reported is still is a decimal number, we should be dramatically high given the size of the book. But the encouraging number is that it’s consistent with Q4 which was a tough number. So I think you start the year out with Q4 numbers and we're sitting here going into May and April doesn’t look too bad. So we're pretty confident that prepay is going to be consistent, but unfortunately low given the lack of property transactions, given market conditions, which could change by the way very rapidly in July things do finalize themselves and we expect to borrowers want to take more risk on going back into the New York City marketplace, given as a complete understanding of what potential changes t hey may do regarding regulation.
Right.
So again, we don't guide for it Steven, we never guide for prepaid, it's kind of a benefit of the portfolio yield that we book, but we break it out for analyst to understand that we don't control it. But we're pleased that a decent number compared to the previous quarter.
Right. And Tom thinking through the rent regulations which are really causing a slowing of volumes, what are you seeing on building valuations? Understand there are quite a bit of pressure, but what are you seeing there?
I would again, we are a cash flow lender Steven, so if you think about what we do, we’re lending to customers that see the opportunity upside on embedded cash flow. So clearly, when you discount the cash flow lender, we're not a market players. So valuation that we underwrite and our LTVs are dramatically lower than our competition, okay, based on cash flow and we look at the opportunity of upside potential, and that's why they choose the structure of the only work they are financing five years out, instead of going along to the agency or other types of opportunities or insurance companies alike.
So obviously, the MCI is a big issue out there and major capital improvements and IAI increases could have impacts. But I think that could impact the current portfolio, but we're still underwritten those portfolio based on in-place cash flows and to get to 50% risk-weighted, we have to go back to the previous year's cash flow. So I don't really insulate it, we’re underwriting for – with the target we get 50% risk weighting eligibility, where other institutions look at the potential, we're learning on the historical, which is always a more conservative view.
Got you. And Tom, if I could squeeze one more in. What date did the sale of the Peter B. Cannell transaction occurred?
It was throughout middle of the quarter. So we – actually we anticipated against on at the end of last year. But given current market conditions, I think there was a lot of nervousness into equity markets, but the good news is that we're able to successfully complete this and we're very pleased that they are in a good place and they're going to run their private company and it was a good long-term relationship. We are very disappointed to see them go, but I think it was best for both parties.
So there's still a fee and expense impact flowing through…
No, it’s netted out for zero, so there’s no impact in Q1.
Got it. Okay. Thank you very much.
Our next question is from Collyn Gilbert from KBW. Please go ahead.
Thanks. Good morning, Tom.
Good morning, Collyn. How are you?
I’m good, thanks. Just want to drill into some of the behavior this quarter on the loan book, just to get a sense of what – kind of where the depositors, I'm sorry, the borrowers mindsets are. Do you have the actual dollars of roll-off? And what the corresponding yields were? And then what the role on, I know you indicated, your…
Yes, I’ll give you that, so we had – for the quarter, we had approximately origination of 437 were paid off over 391, so it's about 45 basis points benefit. Now, that's a good number, but unfortunately, we'd like to see higher numbers because going back to Q3 of 2018, that was 25 basis points. So and Q4 was 50 basis points.
So it's consistent with Q4 within 5 basis points and the trend could be stronger, given the current average yield coming up to roll, but the good news is that is moving in the right direction where three years ago, that was a negative 175. So as far as what we originate versus what paid off, it's been a positive delta for us and we continue to experience that going forward and we think that's going to be the trend, given the current interest rate environment. That rates were to be substantially inverted that may change, but given where we are today, having anywhere from 45 basis points to 75 basis points change it could be very meaningful impact to the go-forward margin outlook.
Okay. And that yield…
It's a big ship to move, right, so it’s depending on how much of volume and activity occurs, but as you know our pipeline right now at $1.5 billion is a 435 coming on.
Got it. Okay. So the blended those rates of 391 to the 437 is that a blended rate or – I was curious, especially for multifamily specifically, do you have those?
I could probably can follow back to you with that, I don't have in front of me.
Okay. Just – again, just to…
I would think a big picture that's been coming on average cost of 4% to multifamily on average and commercial is probably 25 to 30 days higher.
The multifamily that was coming on you said was it 4%?
Last quarter, in the low-4s, if you still – you’re always about a 90 day lag. So we priced that booking, you tried real hard to close the rate that you have an agreement with your customer and rates are – it will save declining rapidly. I mean I just have a number in from of me, it’s 4.25 was the actual number, so 4.25 was the multi for the quarter. But again that could have been a 4.5 close that ends up closing at 4.25 given where rates are, you struck to accommodate the environment because we are very focused on the asset quality side and looking at very strongly underwritten credit. So rate is – we’re going to be right in there with the rates, one, the credit size where we choose to be very selective, let's put it that way.
No, right. I guess, you’re just trying to again kind of back to Steven’s question on prepaid, just trying to understand the borrowers sort of sensitivity here. So the multifamily onboard rate was 425 and then what was – do you have what the roll-off rate was on the specific multifamily book?
I would say probably in 380s.
Okay.
We can wrap that, and see that in second.
Okay.
I think that’s about 380...
Okay. And then so just to be clear on the Peter B. Cannell move, so we should assume like $20 million drop in fee income, right?
Yes. Again, and also – yes, $20 million of non-interest income going down, out of that $60 million to $70 million of the expense renewal, we will grow the balance sheet to offset that and obviously this has been part of our ongoing initiative and how you're going to get to that $500 million was there and it should – we were actually targeting this to happen in 12-31 last year, but we are there, this is part of our strategy. The compensation structure is dramatically different and they are growing and they're going to invest in their company as a private institution and we're going to look at other alternative ways to grow fee income items over the long-term and the short-term, we are what we are, and more importantly the expense number, which we feel very proud to be at 500 will be the operating leverage that will run off into 2020.
Okay. And then just a question on capital. I know your outlook for securities growth is holding, but if the curve stays unfriendly or in the dynamics within the loan book, don't allow you to get to the 5% target or whatever. How should we be thinking about share repurchase appetite and just your kind of capital targets from here?
So we always truly believe given our risk profile, we have excess capital. So when you look at our capital analysis, we have significant excess capital amount, we pay a very substantial dividend back to our shareholders, which is a large portion of our earnings. But we still have excess capital and our targets and our warning levels were not close to a very – we're very confident that we could continue to be active growing the balance sheet, which is a priority.
The repurchase opportunity, the $300 million authorization, which we have about $72 million left, when that's behind us, we'll deal with that going forward. But I think the priority for the company is to maintain a very strong dividend and over time utilize that opportunity to be a strong dividend pay as we've always been and with the expectation over time, as we grow the balance sheet through acquisition that we offer a unique, we'll call it payout for shareholders who want to join our team as part of our M&A strategy.
So it's always been helpful to understand that some of the smaller banks that we've acquired and some of these books, say large institutional, large owners of stocks have the opportunity to get a very sizable uptick in their cash flow, on their yield, on their investment as they become part of the NYCB family. So, no question the dividend is very important, we're going to continue focusing on that and obviously buybacks will come depending on market conditions, but we got the one approve last year, given a very volatile Q3, Q4, we felt that was appropriate and the Fed was accommodated for us and we'll evaluate markets as we go forward.
But if things don't grow as fast we have excess capital, buybacks would be potentially on the table to be utilized in a different environment. But no question, we are in growth mode, we're very focused on growth, we're looking at the opportunities to consolidate other opportunities within the marketplace, we think there's lots to do out there and we'll be very proactive.
Okay. Just one final question quickly sort of tied to that. Any preliminary guidance you can give on Cecil?
We‘re not going to give a number, but I will tell you that we're in a very good place. I mean, we've been working on this for probably going back to when we were becoming a CCAR bank, having this modeling and all the one of the things that will be required for us to be like a Citibank. So we’re very confident that our backlog was able to get our models in a place to switch over to a seasonal strategy. And given that we have a very low average – very short average life and a history of no losses, we believe we'll be in de minimis impact of the company.
Okay. That's great. I will leave it there. Thanks, Tom.
Sure.
Our next question is from Matthew Breese from Piper Jaffray. Please go ahead.
Good morning, Matt.
Yes, I was just hoping for some clarification. On the Peter B. Cannell sale, it sounds like $20 million in fees coming off around $16 million, $17 million in expenses. But in the release you noted that the loss fees will be substantially offset by cost saves relating to the sub. So there’s – is it 16-17? Or is there anything in addition there that will come out?
We’re going to have, I mean obviously some of that will have some additional book or related party class to go back and forth. And more importantly, it's not just one strategy, we've done three strategies in the quarter, we looked at branch optimization, we looked at our own internal people that are selling financial products to our customer base, that's now being rolled off the P&L, we take this all collectively. This is going to be a positive impact to the bottom line for the company, driven by our cost initiatives. So yes, dollar for dollar you are taking off $20 million and you've taken off income and you’re reducing around $70 million of expenses.
The net of that before tax for that particular line of business is just under $4 million. However, when you take all of these strategies into the quarter, we will have a net income benefit for the year.
Understood. And can we talk a little bit about the other strategies? So the branch consolidation, I think you noted, there is 12 closures or relocations and what was the exact number of branch?
Closures.
Closures, okay. And what is the cost saves from that?
Approximately $4 million, $5 million a year.
Okay.
And we think – we feel highly confident most of those deposits will be coming to the bank, so we're not looking at any real attrition there.
Okay. And then from the outsourcing of your folks selling financial products, what's the cost saves there?
Approximately around the same, it’s $4.5 million to $5 million.
Okay.
And the yield give up is – again the revenue gave up is less than like 500,000, 600,000 a year, so it's not a big number.
And are these items included in the 16-17 from Peter B. Cannell standalone? I'm just wondering if it's really like a 20…
That's separate, that's separate.
Okay. So it's really…
Yes. At the end of the day you're looking at a – we’ll call it a strategy, when you take these three particular announcement that we put in Q1 that will have a positive impact to the bottom line and expenses, healthcare costs like and dealing with payroll-related expenses are significant. So like I said before, we got our headcounts down, FTE equivalents down 20%, since we've announced our initiative going back to 2017, there are M&A transactions that get you 20% cost savings. So it's not just cost savings, we're exiting lines of businesses given our profile, we had a $660 million run rate when we embarked upon this journey and now we’re running to $500 million, that’s a tremendous, not only down 20% on headcount but 25% on actual expenditures.
So we're very pleased to be where we are, we said operating leverage is going to be the story in 2019 and it should continue through 20 as we grow the balance sheet as margins open up and NII starts to grow, this could be a very – at least a positive tailwind for the company, which we're excited about. We had 12 quarters of declining margins, NII, so we see visibility in the very short term.
Right. Okay. And then the second of the loan portfolio that grew the most this quarter the specialty finance segment. I was just hoping to learn a little bit more about that. So could you give us a breakdown of how much of the $2.3 billion are in the three verticals, the asset-based lending the dealer...
Yes. So ABL is about 30%, the $727 million and the equipment finance is about $1.061 billion, so just about, just under $1.1 billion, which is about 42% of the portfolio and dealer financing is about 26% of $633 million and that's including our LC, so total $2.4 billion outstanding were $1.7 billion, so – 2.3, yes the 2.4 is including LC. So all in, it's been – over the long-term we were trying to look at 30% allocated each bucket, right now, we probably have a little bit more on the equipment finance side, about 44% for equipment finance.
And how much of that book is syndicated?
All of that. We are a credit buy of short we do not drive the deal. We – like I said previously, we look at the best transactions that work for the bank, our Board is actively involved in picking those credits and we turn down 97% of what we see. We haven't had a late pay, we haven't had a delinquency, we haven’t had a credit downgrades. We are laser focused on asset quality, because we’re not driving that deal, we're not bringing in deposits, we’re just participating in significant syndications where we take a small piece of a very high profile senior secured deal.
And what's the average size of a deal? And what's the average size of the loan in that book?
I got to get back to that, I don’t have that in front of me. But we can follow-up, the coupon is about 436, I would say that probably between 15 to 20 by I don’t want to give you the missed information there.
And is there any vertical that is more predominant than others?
No, it's widespread out. We've avoided when we had issues we regarding the oil markets we tried to stay away from any oil credits. But we’re very cognizant of what's going on throughout the GDP of the economy and what areas could be a risk profile, and we avoid them. Like I said, we see a lot of paper and we turned down about 97% of what we see. So we have that flexibility, we’re not driving a deal, we don't have headcount that's based on commission of bringing paper and employees. We have a small group of smart razor focus on the raise, they’ll do a great job for the bank and pick and choose the best deals they can see in we participate.
Understood. Okay.
Sure.
My last quite, you mentioned a couple times just M&A and the strategy for M&A. Can you give us an update on activity in the market conversation flow? And just remind us of your appetite for geography deal size and deal metrics.
So we're very excited about the opportunities. But most importantly, we've been – we’re disciplined, right. So we're not going to take down our tangible book value. So anything we look at is going to have a benchmark to have a tangible book value creation of dilution. So we don't want to be in a call making an announcement of our earn back, that’s not in our DNA and we're not looking to do transactions that have any meaningful earn backs. I mean obviously never say never, but the reality is that, that’s part of our M&A philosophy.
We see lots of opportunity in all scale, small, large and we're very cognizant of what's out there and we’re very focused on our business strategy, which has been the hallmark of growth from the $1 billion to 52 has seen growth in mergers and acquisitions. So in the past two years, we've grown our deposit base to fund our growth and we are off razor focused on helping finding a partner that could continue bringing in funding in perhaps in the long run also bring lines of businesses.
We're not discounting any line of business, however, we are very focused on the asset quality, we’re an asset quality shops, so we're not going to take away any of our quality of our assets. But the reality is that, we are right to be in a position as we focus on M&A to do our strategy which is accretive transactions that don't impact tangible book value. And obviously, with a biased miss towards bringing in funding.
Right. Understood. Okay, that's all I had. Thanks for taking my questions.
Sure.
Our next question is from Christopher Marinac from FIG Partners. Please go ahead.
Good morning.
Thanks. Good morning, Tom. Just want to ask about funding. Do you think this year as a time where the funding mix continues to evolve towards more CDs or stay about stable?
It could be more mix, I think, given where – there has been a lot of interesting competition pulling away from high rates. So the good news that some of the Internet players are very focused on bringing their rates down. So I think when you look at where treasuries are trading on let's say the one to two year basis and you have an inversion going on, I think customers are willing to go much shorter, so they’re looking at products that have been offered by financial institutions, the brick and mortar franchise, that's what we are, we have a very small Internet presence there. So I think the fact that the competition is veining, should bode well for us as targeting our customer base.
But more importantly, we haven't really seen the non-customer base come through yet. So like I said on my previous commentary 80% of every dollar bought into the 1.5 years has been from our customers, so it's only 20% is new money. So we hope to now tap into the new money, we hope to get our commercial real estate personnel focused on bringing in some more customer deposit base, which could be more demand-type money and leased money and rent income flows from these buildings that we have a major presence and that will be helpful over the long-term and I think that’s more of the long-term strategy.
But the reality is, it seems like since the Fed pivot going back into the fourth quarter, where we are today, it seems like deposit flows are more towards the shorter end of duration. And I think that the cost has been coming down throughout the nation. So that will be helpful for us as we – we’re going to fund our balance sheet. And so, we find a partner to look at on the M&A side. So we're going to continue to grow our balance sheet with the best possible funding sources, which in this environment would be retail deposits.
In the event that wholesale becomes more attractive and the Fed is an addition of current rates that we may go back to the wholesale markets. But we have the refinance of wholesale book that's obvious, it's less material than it was two years ago and the fact of the cost structure is much lower, it was lower last year and it may be higher in the future will be another positive for us.
And when we go into 2020, you’re looking at mid to up – several quarters mid-2s that's coming due. So it's not as painful if rates are low twos and maybe potentially with a buy score towards going lower.
Great. That's helpful. Are you incenting folks in the branches more than you had in the past just curious on work there?
Again, I would say nominal, I mean, we've – again we are very retail-focused, so we’ve advertised in regional pricing, we have a unique presence in Arizona, Ohio down South Florida, New York Metro, these are all regional pricing opportunities some offer to more competitive than the other and we're going to be in line. We're not going to be the highest rate payable, we’re not going to be the lowest, we're going to be in the market, I think that will get a lot lease deposit flows continuing to grow. We just reduced our rates recently about 1.5 weeks ago and deposit on the CD side as well coming in, I think going to have money coming in and out regarding tax payments and alike.
But the reality is that people that are putting money in the bank right now it's still adding to their position of deposit growth right now as we stand in April. So we're going to make some strategic decisions on getting some of the higher cost money out of the balance sheet, as we go into Q2 depending on growth, we’re not going to sit on excess cash, if we can save real money on the margin by reducing our cost of funds on what's on the portfolio, so we have some higher cost institutional type money that we’re not going to take, we'll let them roll off and benefit ourselves on the retail side.
Great. Tom. Thanks very much.
Sure.
Our next question is from Steve Moss from B. Riley FBR. Please go head.
Good morning. Just on the mid-single digit loan growth front. Origination for the quarter were down year-over-year and the pipeline was down as well, going into the second quarter, just kind of wondering how do you get there in terms of mid-single digits or could we maybe, be at the low end of our range
Yes. So I guess the new money pipelines encouraging, if you look at that $1.5 billion and of that $1 billion of its new money, if that's new that's growth. So we know we have the $1 billion coming on, depending on how much we retain on refi, which typically is high, we typically retain them on 85%. So we're encouraged by that, but I think what's most encouraging about the growth in the past year, if you think about the property transaction the lack thereof, we’re getting money from other banks.
And I think there’s a lot to do about where we are with the statement, that we are in business to be the premier multifamily rent regulated lender and we spent a lot of money on credit risk management practices to ensure that. So we don't have a cap – that 850 cap has been lifted. So we're very comfortable on managing our capital position and our credit risk management position going forward here. And I think that's a positive, I think a lot of other banks that have to get there will have to spend some money on OpEx to catch up and we're going to take advantage of the opportunity.
So as far as the level of property transactions, not only has the market been rich for the past decade, it's probably stabilizing the value. But more importantly, the property transactions are not happening, but we are getting money from other banks because for various other reasons, it could be rate, my view, I think it's more driven on their own internal view of the business and what they can put on and what's – what they can do with their capacity of their capital. We're in a very good place where we need to be.
Last year – last two years we ran without a task, we raised capital to be in business, that was a painful exercise to go to raise preferred stock to be in business and the good news that restriction is behind us and we're focused on being the premier bank regulated lender in the marketplace.
Okay.
If we get it through refi other portfolios, it's still growth.
That's helpful. And then just wondering are there any further branch rationalization plans coming up?
Yes, overtime, yes, we took a hard deep-dive in the past 1.5 years, we’ve look at does it make sense now versus what the true cost to exit and what's the earn back, we try to get the earn back within 1.5 years, so we were there on this particular first batch from time-to-time. I think that may come to consolidation in the event that we look at the environment on acquisitions and perhaps we joined with some other institutions, where there is some branch overlap perhaps, but – we – that's part of our DNA when it comes to looking at what makes sense on a financial point of view.
So realistically the 12 was the first real two leg of it, a lot of it has to do with the fact that these are compelling reasons to – we have a branch across the street and you have $20 million, we’re going to deal one as the $100 million and we’re losing money and given where the current environment is and our exit costs are de minimis will exit, and that's what – and that was the first 12, it was very focused on financial driven, it was really in earn back analysis we did, and we think it was like a one year earn back.
Alright, thank you very much.
Sure.
Our next question is from Brock Vandervliet from UBS. Please go ahead.
Brock, you’re back.
Yes. Sorry just my follow-up on the…
No problem.
On the FHLB that roles next year, you mentioned that passing, it's mid to upper 2s what's the – how much of that do you have for next year?
It’s about $5.2 billion at about a 2.20. And then we might as well go to 2.21 in 2021, its may be at 2.42. So that's encouraging because we're doing trades below that right now. So that's going to take away some of the pressure that we have to deal with. And obviously that's a long way out, in the long term we would like to replace our overall wholesale borrowings mixed with retail deposits you get through our internal growth with M&A.
Yes.
I think the long-term strategy will be to be less reliant on wholesale funding over the long-term.
Alright. Just a follow-up on that $15 million NPA loan what's the outlook and loss expectation there?
Again, it's a little too soon to tell. We're doing our work on it. It was a one-off, our customer is a name porter wholesale of non-fashion apparel this goes back to Legacy Atlantic Bank long-term relationship, probably multi decades. The guy has never had a problem, never had a miss payment he just got himself caught up I guess in a very turbulent fourth quarter and one of his customers went bankrupt. So we had a large order of that just went bankrupt and put him in a very difficult position. We're evaluating collateral, we have our people out there counting the inventory. We have cash collateral, we have the old receivables, we have the inventory, but again, at the end of the day we don't think it's going to be any material loss, but it's $50 million in total. So that's the exposure.
Okay. And is there anything regarding the Fiserv transition that would knock out of the box in terms of a deal M&A?
Not at all. No we're super excited about the opportunity. This is going to deal with years of consolidation, lots of patches that we have in our current systems, we're excited. We chose Fiserv, they chose us. We're partnering, we're going to get the conversion done this year. And then if you think about the long term, we will be on the one platform for all our systems, the bones table, [indiscernible] GL loans, online, we're going to have a unique opportunity here to be on one platform and deal with our multiple patches through many years of growth. So we think that we have tremendous cost savings opportunities.
End eventually we get – some of this will go into the cloud and we further cost saving initiatives that may not happen in 2019 that can be 2220 story. But this should be very good for the company because historically we've utilized our partner relationships to get benefits when we consolidate other institutions. So if we have – by the way many institutions are on Fiserv, they are going to make it that much easier for the M&A conversion opportunity, as well. But historically we typically get preferential arrangements on growing the balance sheet with the contracts, and that's part of our strategy with them.
Got it. I appreciate the follow-up.
Sure.
Our next question here is from William Wallace from Raymond James. Please go ahead.
Thanks.
Good morning.
Good morning Tom, I'm sorry to kind of beat a dead horse here. But I sort of want to make sure I understand some of your commentary around the expense. So you're guiding a $125 million in the second quarter, so you're at the $500 million run rate. Are you saying that you think you're going to get $500 million for the year or you're at where you're going to be in the second quarter?
Yes simple math 125 times four you have to hit $500 million. But bear in mind the first quarter you had the one time, $9 million charge. If you take the one times out, it's possible, but I think one 125 is – multiply by four get you to $500 million. I don't see our expenses growing. I see our expenses being raised the folks to reduce over time. I'm giving you a one quarter guidance and I’m trying to two up to 2019 scenario.
I wouldn't, if I'm an analyst, I’d back out the onetime expenses on severance and the branch closer expenses. And when you look at 2020, I'm kind of saying that I don't anticipate to grow, the expense base in 2020 because we're going to have further opportunities as we focus on the company's P&L going forward. So again the operating leverage story is in place, now we have to get the asset growth and the NNI [ph] up then we can have some meaningful benefits on EPS growth.
Okay. Thank you. That's helpful. And then just housekeeping on tax rate, I think, you were suggesting 25% looks like you're at 24%, did you change your expectations on tax?
Yes I would run 25% in a quarter is fair. We’ll probably end somewhere between 25% to 25.25%, but conservatively 25% in a quarter for 2019.
Thanks very much.
Sure.
This concludes the question-and-answer session. I'd like to turn the floor back to management for any closing comments.
Thank you again for taking the time to join us this morning and for your interest in NYCB. We look forward to chatting with you again at the end of July when we will discuss our performance for the three and six months ended June 30, 2019
This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.