Flagstar Financial - Q2 2023
July 27, 2023
Transcript
Operator (participant)
Good morning, ladies and gentlemen, welcome to the NYCB second quarter 2023 earnings conference call. At this time, all lines are in the listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, July 27th, 2023. I would now like to turn the conference over to Sal DiMartino. Please go ahead.
Sal DiMartino (Director of Investor Relations)
Thank you, operator, and good morning, everyone, and thank you for joining the management team of New York Community Bancorp for today's conference call. Our discussion today of the company's second quarter 2023 results will be led by President and Chief Executive Officer Thomas Cangemi, who is joined by the company's Chief Financial Officer John Pinto, along with Reggie Davis, President of Banking, Eric Howell, President of Commercial and Private Banking, and Lee Smith, President of Mortgage. Before the discussion begins, I'd like to remind you that certain comments made today by the management team of New York Community may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements we may make are subject to these safe harbor rules.
Please review the forward-looking disclaimer and safe harbor language in today's press release and presentation for more information about risks and uncertainties which may affect us. With that out of the way, I would now like to turn it over to Mr. Cangemi.
Thomas Cangemi (President and CEO)
Thank you, Sal. Good morning, everyone. Thank you for joining us today. I would like to begin by briefly summarizing the strong operating results we achieved during the second quarter. Early this morning, we reported record net income, earnings per share fueled in large part by the benefits from our two recent acquisitions of Flagstar Bank and Signature. This is our first quarter with all three legacy franchises combined under one umbrella. Not only are we benefiting financially from our combinations, we are continuing to benefit from the power of diversification in both our loan portfolio and in our deposit composition. I believe that our operating performance is only just beginning to show the true underlying core earnings power of our combined organization.
From an earnings and net income perspective, diluted earnings per share as adjusted for a $141 million bargain purchase gain and other merger-related items, we reported a record $0.47 per share on net income available to common stockholders, total of a record of $345 million. More than double what we reported during the first quarter. Operating results were driven by a full quarter benefit from the Signature transaction, as opposed to only 12 business days last quarter and a significantly higher net interest margin. Our NIM expanded by 61 basis points to 3.21% on a linked quarter basis, driven by higher interest earning assets, specifically cash and stronger yields on our loan portfolio, as our asset sensitivity balance sheet continues to benefit from the higher interest rate environment.
Our net interest margin should remain elevated over the course of the year, given our diversified loan portfolio, which is mostly variable rate and our increasingly core deposit funded liability mix. Our funding composition continues to improve as core deposits increase, while CDs, both retail and broker, decline. Wholesale borrowings declined 24% as we used a portion of our cash balances to pay down $5 billion of Federal Home Loan Bank advances. Over time, I believe this change in our funding mix will be an advantage and support higher multiple expansion in the go-forward periods. Another positive was our capital. Our capital ratios trended higher, while tangible book value per share increased 4% compared to the prior quarter and 23% year-over-year. Our tangible capital generation remains very strong given our earnings power.
Aside from our strong quarterly results, last week, we announced the expansion of our private banking businesses, which we added as part of the Signature Bank transaction by hiring six teams from the former First Republic Bank. These initial teams are highly regarded, and the fact that they chose to join the new Flagstar is a testament to our business model and strong reputation in the marketplace. With these hires, we have a total of 127 teams as of June 30th, 2023, including 92 in the Northeast and 35 on the West Coast, and we now operate in 10 cities. These teams are part of a broader strategy to create a premier private banking division dedicated to delivering best-in-class service to a personalized single point of contact model.
We're excited that these six teams have partnered with us and look forward to achieving great things together. Moving on to our balance sheet. Total loans were up modestly during the second quarter, reflecting our diversification efforts as growth in the C&I portfolio offset declines in other lending verticals. Overall, total loans and leases were $83.3 billion, up about $800 million, or 1% compared to the previous quarter, primarily driven by growth in the C&I book, which benefited by continued growth in the mortgage warehouse business. At June 30th, total commercial loans represented 44% of total loans and leases. As for asset quality, our metrics remain strong, that and despite and also best in the industry.
Despite an uptick in NPLs off of historical low levels in legacy NYCB, NPAs totaled $246 million or 21 basis points, compared to $174 million or 14 basis points last quarter. The increase resulted largely from the inclusion of acquired loans from both our acquisitions. Despite this uptick, NPAs and total assets ranked in the top quartile compared to industry peers, reflecting our disciplined underwriting and client selection. Furthermore, the allowance for credit losses increased $44 million-$594 million compared to the previous quarter, and coverage was 255% of non-performing loans and 71 basis points of total loans. Importantly, this was another quarter of low or no loan losses, as we recorded a net recovery of $1 million compared to zero net charge-offs last quarter.
Another positive was our deposit base. Total deposits increased $3.7 billion, or 17% annualized on a linked quarter basis to $88.5 billion. The increase in non-interest-bearing deposits more than offset the decline in other categories, including higher cost CDs and deposits related to the loan portfolios we did not acquire from Signature. Including in non-interest-bearing deposits, approximately $5.9 billion of custodial deposits related to Signature transaction. Excluding these deposits, non-interest-bearing deposits now represent 29% of total deposits, compared to 27% last quarter. Coming off the March events, our deposit base remains increasingly resilient. This is due in large part to the diversity of the distribution channels, which, in addition to our retail branch network, includes commercial and private client groups, digital and Banking-as-a-Service, and deposits derived through the mortgage ecosystem.
Deposits at Legacy Signature declined $1.4 billion on a linked quarter basis, excluding custodial accounts. This was primarily due to planned runoff in higher cost CDs and broker deposits, offset by $285 million quarter-over-quarter growth in non-interest-bearing demand deposits. In addition to the stabilization in the deposit base, legacy Signature PCG teams have also stabilized, and we expect to grow from these levels. As for guidance, given the current economic and interest rate environment, we currently expect the NIM in the range of 2.95% to 3.05%, mortgage gain on sale between $20 million-$24 million, net return on MSR assets between 8%-10%, loan admin income of approximately $15 million, and annualized expenses ranging between $2 billion-$2.1 billion, excluding merger-related expenses and intangible amortization, as well as a 23% full-year tax rate.
In terms of expenses, total OpEx were $515 million, up $123 million, or 31% on a linked quarter basis. Second quarter operating expenses include a full quarter of Signature expenses, compared to only 12 days during the first quarter. I'd like to say a special thank you to all of our teammates, which now number nearly 10,000 strong. Our results would not be possible without the dedication and commitment to our clients and our customers. We will be happy to answer any questions you may have. We'll do our very best to get to all of you within the time remaining, but if we don't, please feel free to call us later today or this week. Operator, please open the line for questions.
Operator (participant)
Thank you. Ladies and gentlemen, we will now begin with the question-and-answer session. If you wish to ask a question, please press star followed by one on your touchtone phone. If you wish to withdraw, press the pound key. Please wait for a moment while we compile the Q&A roster. First question comes from Brody Preston with UBS. Please go ahead.
Thomas Cangemi (President and CEO)
Morning, Brody.
Brody Preston (Executive Director and Equity Research)
Thank you. I was hoping that you would talk a little bit about the duration of those custodial non-interest-bearing deposits. You've kind of carved them out separately, and it seems like they're related to the loans you're servicing for the FDIC. How long will those stick around? I guess, in conjunction with that, how long will the loan administration income from the sub-servicing of those loans stick around as well at that $15 million level?
Thomas Cangemi (President and CEO)
Sure. Brody, I'll pass it over to John Pinto, but it's in our guidance. John, why don't you just speak specifically to this issue?
John Pinto (CFO)
Yeah. We'll start quickly because it's in the guidance with the loan admin income. This is the cost recovery of servicing the loans that we did not take as part of the Signature transaction. If we look back at what those were, it's the CRE book, and it's the fund banking loans. The fund banking loans have paid off pretty significantly in the quarter, that's why we've seen a larger number in this in that loan servicing income number and loan admin income number for this quarter than what we're guiding in Q3. We expect those loans to continue to pay down, and it's really those pay downs that we saw throughout the second quarter that built up the custodial deposits that we had throughout the quarter.
Both issues are intertwined in that the receivership loans, as they're paying down, we're collecting those funds for the FDIC, and then on a monthly basis, we are remitting that back to them. We will see lower FDIC or custodial deposits related to Signature as the loan portfolio shrink. Over time, depending on the disposition of those quarters, which we expect to be for fund, we expect the sale probably to be in the early fourth quarter, we will start to see those numbers drop as we go forward.
Brody Preston (Executive Director and Equity Research)
Got it. Thank you for that. Excluding the $5.9 billion, you still had some solid non-interest-bearing deposit growth. I think you called out $285 of that was related to Signature. Tom, maybe you could give us an update in terms of, you know, how the work is progressing to kind of bring back those Signature non-interest-bearing deposits that left before the acquisition.
Thomas Cangemi (President and CEO)
Well, the good news is that the teams are stable, like we discussed in the opening remarks, but more importantly, we're building the team. If we think about where we're heading with the business on the private client group, we anticipate to have more P-PCG teams, you know, going forward than Signature had pre-March, which is really the momentum of the business model. When it comes to DDA, it was stable throughout the entire quarter. As we indicated, we're up slightly, which is a very positive signal based on what we anticipated when we announced the transaction. Clearly better than expected.
I think what's exciting about it is that the opportunity to take the business model and look at the, the other opportunities that we have as a, as a, a combined company, and look at the, the overall corporate finance opportunity they have within this middle markets groups. That's another exciting attribute, and the teams are excited to be building back the liabilities that have shredded off the balance sheet because of the fear in March. Not only are we seeing, you know, positive momentum there, the teams are excited, they're stable, and we believe that over time, you know, as things start to stabilize, we'll get more deposits back. We have Eric here on the line. Eric, if you want to share some commentary about what we're seeing with the, with the teams.
Eric Howell (President of Commercial and Private Banking)
Yeah, you know, thanks, Tom. Look, the teams are really starting to have success and attract those clients back. Our clients simply just don't want to be at the mega institutions that they ran to. They can't provide the level of service that we can provide. We are seeing strong demand deposit growth because, you know, the teams really provide stellar service. We're also seeing strong off-balance sheet money market fund growth because our clients appreciate our service and want us to be able to control the entire client experience. We're seeing clients come back, we're seeing, you know, new client growth, and we're obviously seeing the ability to attract new banking teams. It's, it's gonna be very powerful as we look forward.
Thomas Cangemi (President and CEO)
That's also pre First Republic. As we focus on the opportunity that's dislocated in the marketplace, we believe there's great opportunities regarding to bringing on new PCG teams that focus on service, and obviously, that have the entrepreneurial view of what Signature built over the years when it comes to deposit gathering efforts. We're excited about that.
Brody Preston (Executive Director and Equity Research)
Got it. John, do you happen to have the purchase accounting accretion number for the quarter?
John Pinto (CFO)
Yes. That was another item that came in better than expected, and one of the reasons why our margin was as strong as it was. If you look at it from both institutions, Flagstar really came in, where we anticipated it in that $25 million range. It was the Signature purchase accounting that came in, came in faster. We had more significant pay downs in the loan portfolio than we anticipated. The portfolio dropped by a little under $1 billion due to a couple of different, you know, movements between loan categories and our negotiations about which loans that we took, we talked about on the last call.
When you look at the actual accretion, it was $75 million for Signature in the quarter, and about $20 million of that was related to unanticipated pay downs.
Brody Preston (Executive Director and Equity Research)
Got it. Okay, the last one-
John Pinto (CFO)
Going forward.
Brody Preston (Executive Director and Equity Research)
Yeah, go ahead.
John Pinto (CFO)
Yeah, sorry, Brody. Just going forward, I would expect that to be more in that $50 million-$55 million range. It is, of course, as you know, dependent on which loans pay down and what kind of, you know, marks we had against those loans.
Brody Preston (Executive Director and Equity Research)
Got it. The last one for me, Tom, I think you had addressed it, the uptick in NLPs. I, I thought I heard you say there was from the inclusion of acquired loans or something, I was just hoping you could address the CRE, the increase in the CRE NLPs, and if any of that was tied to office, just because I noticed that you said that you've got a decent amount of office reappraisals done at this point as well.
Thomas Cangemi (President and CEO)
Yes, specifically to NPAs, we had an uptick on Signature loans that we acquired. You would assume that's in the purchase accounting, so we're comfortable that we're covered there when it comes to any potential loss there. That's $31 million of Signature exposure that we acquired as part of the transaction. The other piece mostly is from loans acquired through Flagstar. That's about $22 million in total from the loans acquired from Flagstar. Overall, it was flat when you take out the acquisitions.
Brody Preston (Executive Director and Equity Research)
Got it. Okay. Thank you very much, everyone. I appreciate it.
Operator (participant)
Thank you. Next question comes from Steve Moss with Raymond James. Please go ahead.
Thomas Cangemi (President and CEO)
Morning, Steve.
Steve Moss (Managing Director and Senior Equity Research Analyst)
Good morning. Sorry if I missed it here, but I, you know, wanted to ask about the First Republic team, just kind of the teams you hired. Just curious as to, you know, what kind of book of business or how big their book of business is, and, you know, any color you can give there, Tom?
Thomas Cangemi (President and CEO)
Steve, let me start off by saying we're super excited to have them, we're super excited to build a PCG model and continue to invest in that model. We are making investments. You know, clearly, Signature's growth organically is the model, right? It's very similar entrepreneurially in how they look at the business as a high white, you know, high touch service, focusing on boots on the ground and making their clients very comfortable on the banking perspective. The focus here is that there's a dislocation in the marketplace, it's very competitive. I'm going to pass it on to Eric, but before that, I just want to tell you that we're super excited to have them. Stay tuned, as it's a lot of activity out there.
You know, hopefully, we continue to be successful on convincing these team members to become part of the new Flagstar. Eric, if you want to give some more color there.
Eric Howell (President of Commercial and Private Banking)
Yeah, I mean, each one of these teams comes with a book of billions of dollars of deposits and loans, as well as, you know, wealth assets and the AUM. Very excited to have all of them. There are three in New York, three in California, thus far, as Tom alluded to. And we just feel that we're the best, without question, the best cultural fit for these bankers, right? We have an entrepreneurial model like they had, that truly caters to the client's needs, with that single point of touch contact. You know, this is a great home for them. It's a great cultural fit.
We have the products and services that we need to go to market, which is critical, and we're really looking forward to their future, success here. Billions in deposits and loans per team.
Steve Moss (Managing Director and Senior Equity Research Analyst)
Okay, appreciate that color. Eric, you mentioned that, you know, deposit, momentum remains strong. Sounds like it's into July. Is there any, you know, color you could give around, you know, the trends you've seen after June 30th? Just to kind of get a feel for what's coming on.
Thomas Cangemi (President and CEO)
I'll start off by saying we're seeing overall for the bank in total, very stable. I will tell you that we still have to deal with some of the assets are going to be sold in the market that are attached to the core franchise of Signature, in particular, Ventures. We anticipate to see that run off eventually, and that the sale is done, as soon as deposits will follow. Outside of the anticipated businesses that were not acquired through the transaction, we see strong stability. In addition to Signature transaction, the community bank's franchise has been very stable. Maybe Reggie can share some commentary on what we're seeing on the community bank, but we're a diversified company. Maybe, Reggie, you can add some color to what we're seeing on the retail side.
Reggie Davis (President of Banking)
Sure, Tom. Yes, as Tom said, through the balance of the year, you know, we had lost about 3% deposits through the liquidity challenge that the banking industry faced. We're starting to see those, those deposits come back. They've definitely stabilized, and we're actually starting to see some modest opportunity for growth. We're projecting actually, the deposits stay relatively flat through the balance of the year, and that our weighted average cost is, you know, de minimis in terms of the inquiry. We feel really good about the stability of that portfolio. I think it reflects the strong relationship that our bankers have with our clients.
On the commercial side, equally, we're seeing some opportunity to actually gather some deposits as we look at opportunities to strategically bring on clients who are maybe disenfranchised from other lending organizations that cannot lend in the current environment. We're actually picking up some relationships on that side as well. Very positive momentum on the deposit side.
Steve Moss (Managing Director and Senior Equity Research Analyst)
That's great color, Reggie.
Reggie Davis (President of Banking)
Hey, Tom,
Thomas Cangemi (President and CEO)
Just to add addition. Culturally, the focus here is relationship deposit gathering in all of our lines of businesses. That's the culture here going forward. I've said it, you know, many quarters, deposits, deposits, deposits, culture, culture, culture. On the culture build, we're really meshing well with putting three companies together to build a new Flagstar. Clearly, I think on the lending side, our lending teams truly understand that we're leading with a deposit opportunity. We really want to make sure that we fund the balance sheet, commercial bank-like, and our transition from dependency on wholesale finance will dissipate over time. We've made significant strides in that way over the past few years. Notable, if you look at the percentage of wholesale to total deposits. We're excited about that, but that is the culture.
That's what we're building here.
Steve Moss (Managing Director and Senior Equity Research Analyst)
Great. Appreciate all the color there. One last one for me, just on expenses here. you know, as you look to integrate all three banks, kind of curious as to, you know, where you think if you have any update as to where the expense run rate could shake out, post the integrations at some point in 2024?
Thomas Cangemi (President and CEO)
I mean, we gave public guidance. It was about $2 billion-$2.1 billion. Is that right, John? That was the public guidance we gave. You know, that's fully loaded with, you know, anticipation of being a $100 billion plus bank, the First Republic teams that we anticipate bringing on. We think we have some reasonable conservatism around that, given the nature of the growth story. This is going to be a very powerful opportunity for us to capitalize in the marketplace for this location. You know, we feel that as we go into 2024, you'll start seeing a lot of integration benefits of putting the systems together. The significant adjustment that we'll see next year will be through consolidations of systems, and we're looking forward to that. John, if you want to add some more?
John Pinto (CFO)
Yeah, when you look at that $2 billion-$2.1 billion, you know, that's our 2023 guide. As Tom mentioned, with the conversions that we have coming in 2024, we're comfortable that our non-interest expense base is not going to grow dramatically off of that guide from, you know, from 2023 to 2024. You know, that's where we're comfortable. It's very consistent with what we said in our last call, where we mentioned where, you know, we might see some of the upcoming quarters be a little bit higher, but we think it will stabilize over time, and we think it'll stabilize in this range.
Thomas Cangemi (President and CEO)
That has the anticipated cost structure of the new teams. Maybe Eric can talk a little bit about, you know, economics, how we view the business and how we can build that to neutrality and ultimately to a total return basis.
Eric Howell (President of Commercial and Private Banking)
I mean, ultimately, we see, you know, the deposits and loan growth that will be coming in, getting us to a break even in about a year and a total earn back in 18 months on that, which is pretty normal for, you know, team growth. When you acquire these teams, they come with nothing, right? There's no loans, there's no deposits. It's not like acquiring a bank. It does take a little bit longer for them to ramp up and get to a break-even point because you just don't have those revenue streams out the gate. What happens over a multiple of years is that they continue to grow, right? They don't stop growing because of the way that we align their interests with those of the overall bank.
You know, when you look down the road, after three years, they're well into, you know, 20%+, ROE, and that'll continue to ratchet up over time.
Thomas Cangemi (President and CEO)
As we pay down expenses, finance, that's the goal.
Steve Moss (Managing Director and Senior Equity Research Analyst)
Great. Thank you very much.
Thomas Cangemi (President and CEO)
Sure.
Operator (participant)
Thank you. Your next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.
Thomas Cangemi (President and CEO)
Morning.
Manan Gosalia (Executive Director and Senior Equity Analyst)
Hey, good morning. Question on just on the NIM benefit from those $5.9 billion of custodial deposits from Signature this quarter. Should we just think of that as those $6 billion of deposits at the 5% rate you get with the Fed? Is that the benefit to NIM this quarter from that?
John Pinto (CFO)
Yes, that's the benefit, we did keep that money at the Fed. The number, you know, that was the number at June 30th. The average number was a little higher, when you look back at especially April and May. Yeah, it's at about 5%. I'd say the average is probably closer to $8 billion.
Manan Gosalia (Executive Director and Senior Equity Analyst)
Got it. As these deposits come down, I think you're saying, they should only really start coming down in the fourth quarter, right? Over the next quarter or so.
John Pinto (CFO)
Yeah
Manan Gosalia (Executive Director and Senior Equity Analyst)
should you still get some benefit?
John Pinto (CFO)
No, the large piece. That's why you see the guide on the margin being lower than the 321 actual in Q3, right? The large amount of the pay of the custodial deposits, we believe happened in the second quarter. We think that the payoffs in the portfolios have slowed a little bit, so we're collecting, you know, a lot less right now. Plus the announcement that the fund banking business is expected to hit market and potentially be sold in October. We're going to see a drop in the third quarter just because of the way that the cash flows from that portfolio occurred in Q2, compared to how we're expecting them to occur in Q3. We're going to see that, that $6 billion go out very, you know, very quickly in July.
Thomas Cangemi (President and CEO)
It's in our margin guide.
John Pinto (CFO)
Correctly. Yeah.
Manan Gosalia (Executive Director and Senior Equity Analyst)
Got it. All right, perfect. Separately, just on regulation, you know, we're expecting the Basel III endgame rules today. Now that you're over 100 billion in assets, can you talk about how you're planning for any increase in capital requirements and how you think about the right level of capital that you'd like to maintain?
Thomas Cangemi (President and CEO)
I'll start off and I'll defer to John, obviously this is, you know, until the rules come out, we'll have better clarity, we'll have it when you have it, hopefully very soon, sometime today. At the end of the day, we spent a lot of time thinking through it, and obviously, we believe there'll be some type of implementation period. This company is building capital. This company, for the first time in a long time, is generating tangible book value creation by the earnings power of the company. We feel very confident that we have adequate capital, and when the rules come out, we'll be able to assess how that impacts our position at $100 billion.
Just bear in mind, over the past decade, actually going back to 2012, we've been preparing to be a CCAR bank. Since we've Right before the Flagstar transaction, we were preparing to be a $100 billion bank, right? Under the new rules. Clearly, this is going to have some impact, and when we've seen the actual literature on it, we'll assess it and run the analysis to see how it will impact us. Clearly, we're prepared for it. John, if you want to...
John Pinto (CFO)
Yeah.
Thomas Cangemi (President and CEO)
Add some color there as well.
John Pinto (CFO)
Yeah, for some of the items that we're expecting is going to be in the proposed rules, including the, you know, the lack of an AOCI up, opt-out. You know, we, we actually screen really well when you look at us comparative to our peers in the $100 billion plus range. You know, where you look at CET1, when you include the loss on securities and, you know, we jump to the top quartile of capital ratios against a lot of our peers. no doubt, a lot of work to do once the proposed rules really come out, and we'll analyze it. As Tom mentioned, you know, we'll, we'll deal with the implementation period, and go forward from there.
No doubt there'll be a higher needs for capital. We are generating it on an organic basis right now, which is really nice to see.
Thomas Cangemi (President and CEO)
That's right.
Manan Gosalia (Executive Director and Senior Equity Analyst)
Right. Your forward expense guide would also include any investments that you need to make on the regulatory side to become a larger bank?
Thomas Cangemi (President and CEO)
Yeah.
Manan Gosalia (Executive Director and Senior Equity Analyst)
To be a larger bank.
Thomas Cangemi (President and CEO)
That's right.
John Pinto (CFO)
That's right. Yes.
Manan Gosalia (Executive Director and Senior Equity Analyst)
Great. Thank you.
Thomas Cangemi (President and CEO)
Sure.
Operator (participant)
Thank you. Next question comes from Bernard von Gizycki with Deutsche Bank.
Bernard von Gizycki (Equity Research Analyst)
Morning, Bernard. Hey, guys, morning. Just on loan growth, it's modest, but you noted it reflected some of the diversification efforts and the disciplined client selection underwriting. You did have some growth in mortgage warehouse, just wondering, you know, where are you seeing across your verticals with regards to demand, and what is your outlook for loan growth in the back half of the year?
Thomas Cangemi (President and CEO)
It's interesting. We've had, obviously a disrupted market since the Fed was very proactive in raising interest rates, at least on the multifamily pre side. If you think about what's going on with that portfolio, it's relatively flat, and our coupons are rising significantly as customers are opting to go into a SOFR option as they get ready for what they anticipate, hopefully lower rates in their perspective in 2024 and 2025. We've had about $3.4 billion that we didn't have in a year ago, a year and a half ago, that opted to take the SOFR option, which puts us in a very good position. Right now, that's slightly south of 8%, coming off a 3% coupon, and they're paying the bills, which is phenomenal.
These are wealthy customers, and they're making business decisions not to lock in a fixed rate structure. The other side of that, we've also opted to put into synthetically some structure that allows them to lock into, we'll call it a swap transaction tied to a fixed rate option that they could live with, given if they feel that this is the right fixed rate time to lock in the next five to 10 years. That's also been a new strategy for the bank. On the multifamily side, it hasn't, and there is not a lot of activity. We think that will turn in 2024, 2025, as rates may go lower for them, and we'll have a lot of opportunity.
At the same time, we're gearing up for the Signature portfolio that's interrelated as customers. We're going to, you know, look at those opportunities and bank the relationships that we have. We have a lot of cross relationships. We think there will be some good growth there as we go into 2024 and 2025. I think that business, which is the largest component of our balance sheet when it comes to asset classes, is operating as expected, given the environment. In respect to the other lines of businesses, it's been a reasonable growth story. We're allocating capital based on hurdle rate of returns. It's more of a philosophical view how, as we look at the businesses. More importantly, we're hurdling at expected returns because credit trends are much tighter right now.
We're able to offer a higher rate given the marketplace. It's a tighter credit market in all our businesses. We're seeing strong opportunity in Builder Finance. You mentioned warehouse. Warehouse is doing extremely well because of dislocation. Many banks that were in the warehouse business can't be in the warehouse business, given what happened in March, and we're seeing the overflow into our book, and we welcome that opportunity. MSR Finance, maybe, Lee, if you want to talk a little bit about MSR and warehouse, as well as on the mortgage side. We're seeing some positive trends there.
I would say in theory right now, as expected based on our growth trajectory, we're as according to plan, I think I said it last quarter, we don't have to make a loan this year, and we'll do very well. The good news is that our businesses are thriving, and we're looking forward to allocate capital to this opportunity at a much higher spread. Lee, if you want to talk a little bit about warehouse MSR, and you may want to talk a little about the mortgage business as well.
Lee Smith (President of Mortgage)
Yeah, sure. Thanks, Tom. Let me start with warehouse, and you'll see from the numbers, average balances were up $600 million quarter-over-quarter. Part of that was due to mortgage volumes being up about 35% quarter-over-quarter when you look at what was happening in the industry, and we got the natural lift from that. As Tom mentioned, there's been dislocation in the warehouse space, and we've seen a number of players announce that they're exiting. We can take advantage of that. We've already seen towards the end of the quarter, some of the clients that were party to those banks that are exiting reach out to us, and as you know, we're already the second-largest warehouse lender in the business.
As we move into the second half of this year, we think we can take more market share as a result of the dislocation and some of these other players exiting. Now, as Tom says, when we make loans, whether it's a warehouse or MSR, we're always looking at the return on equity. The great thing about warehouse is it turns very quickly. We're generating very strong returns, and we feel confident that we can continue to show market share growth as we move through the second half of the year, just given the dislocation we're seeing. That's also spreading into the mortgage servicing lending arena as well, and we've seen players pull back as they're looking to sort of preserve capital.
We've got a very strong capital position. We've seen good growth from an MSR servicing advanced lending point of view, and we think we'll continue to see that as we move through the second half of this year as well. Just coming back to mortgage originations generally, as Tom mentioned, there's been dislocation in that space. We've seen a major player exiting the market. We've seen minor players exiting the market. Our fallout-adjusted locks quarter-over-quarter increased 70%. That's what we calculate gain on sale on.
The vast majority of that increase were in the TPO channels, particularly the correspondent channels, given some of the dislocation that I just mentioned, and we feel that we'll continue to take advantage of that as we move through the second half of the year as well. A lot of this dislocation is really playing into our hands, and, you know, we feel good about our positioning. We've been in the mortgage business 35 years. We've been in the warehouse business 30 years. We're performing very well right now.
Thomas Cangemi (President and CEO)
Yeah, in addition to that, I think the reality is that we are in these businesses, and they're thriving, and but more importantly, the focus towards complete banking relationship. We're seeing good deposit flows. We want to do better. We want to have higher compensating balances, but that's the mandate. Given that this dislocation is moving assets of other balance sheets, we are seeing higher deposit compensating balances in these lines of business, which is very encouraging for our culture going forward as being a relationship deposit-driven institution.
Bernard von Gizycki (Equity Research Analyst)
No, I appreciate it. That's a great color. If I have one follow-up. I think this question is for Eric. Legacy Signature had a specialized banking team that focused on EB-5 deposits. I'm just curious, was that team acquired? If so, wondering if you could comment on any pipeline growth that could be there? Thank you.
Eric Howell (President of Commercial and Private Banking)
Yeah, we actually exited that team while maintaining the book and moving it to another team that did have experience in that field. We do anticipate that we will see growth in that area. EB-5 now is a bit more stable now that the government has approved the EB-5 program for five years. They used to do it on an annual basis, and often they didn't approve it timely, given, you know, congressional matters. The program is now in place for an extended period of time, and we are adding more capabilities there. We're actually bringing on board a client, a banker from another institution to rejoin us. We expect to see some pretty significant growth in that space as the deposits build.
Bernard von Gizycki (Equity Research Analyst)
Is it similar to, prior projections, or, is there anything you could, provide on that?
Eric Howell (President of Commercial and Private Banking)
I think it's a little too early to say, right? We really need to see how clients anticipate utilizing the EB-5 funds in their various project stacks. You know, I would think that we'll see $ billions over time in deposits, but I think it's gonna take a little bit longer, a bit more of a lead time than we saw in the past.
Bernard von Gizycki (Equity Research Analyst)
Okay, great. Thanks for taking the questions.
Eric Howell (President of Commercial and Private Banking)
Thank you.
Operator (participant)
Thank you. Your next question comes from Dave Rochester of Compass Point. Please go ahead.
Thomas Cangemi (President and CEO)
Morning, Dave.
Dave Rochester (Managing Director and Director of Research)
Hey, good morning, guys. Great quarter.
Thomas Cangemi (President and CEO)
Thank you, Dave.
Dave Rochester (Managing Director and Director of Research)
Just going back to the conversation on the teams. It seems like you guys have a great opportunity going forward here to capture even more of the First Republic teams, as well as successful teams from other banks, given the incentive structures you guys now have in place. Was wondering how the new team pipeline looks at this point after capturing those teams? Was curious if that got people's attention. I would think that it would have, and might even, you know, bring you even more interest.
Just going back to what Eric mentioned on what these teams are bringing over, it was great hearing about the billions of deposits and loans, but you also mentioned AUM, which was a very exciting part of the First Republic business. Do you guys need to develop or build out any functionality to support those wealth assets, or the just the wealth business in general? Is that gonna be a big focus here in terms of bringing on more teams with wealth management assets, and growing that business going forward?
Thomas Cangemi (President and CEO)
I'm gonna be very short and sweet in this one. I'm gonna defer to Eric, just stay tuned because things are fluid. Eric, why don't you handle that question?
Eric Howell (President of Commercial and Private Banking)
Sure. Thanks. Thanks, Tom. Good to talk to you, Dave. Yeah, I mean, the opportunity is real, right? When you look at the banking landscape, you know, the mega banks are who we specifically built the institution to compete against, and they're more arrogant than ever, which is great. Bankers at the regional banks, quite frankly, don't have ammunition to go to market with, right? We not only have a balance sheet to utilize, but we have an approach and a team-based compensation model and practices that are attractive to these bankers out there. I think it is sending a buzz around the industry. We are actively engaged with a number of other teams to look to bring on board. We will certainly be adding to our wealth capabilities.
We did add some people already that we'll be announcing. We broadly have the capabilities on the wealth side to meet the needs of these, of the teams and the clients that they're onboarding. We always are looking to improve, but I'd say, Dave, that we have the vast majority of the needs that, you know, that we can meet their needs of their clients right now. We feel good about the capabilities that we have, and now it's just attracting the wealth management side of the business to work with those banking teams.
Dave Rochester (Managing Director and Director of Research)
Great. That sounds good. maybe just a smaller one on the margin and borrowings rolling off. It sounded like you've got another roughly $5 billion or so in the back half of this year. I was just curious what that opportunity looks like, for next year, as you try to offload the rest of this wholesale funding.
John Pinto (CFO)
Next year, $2.9 billion at a 2.27 is what we have coming. That, you know, that portfolio is, has really gotten, you know, low compared to where we've been in the past, especially for the size of bank we are right now. Yeah, $4.9 billion this year, assuming some of the putables get put, which we are assuming that they will, given their current cost, and next year, $2.9 billion at a 2.27.
Thomas Cangemi (President and CEO)
Dave, just to be specific, when we announced the Signature transaction, our plan was to pay down the wholesale and be.
John Pinto (CFO)
Yep
Thomas Cangemi (President and CEO)
... obviously deposit focused. This is in our strategy. As John indicated, a lot of the higher cost stuff has paid off already, and we've replaced it with demand money and liquidity from the transaction. I think holistically going forward, we wanna be obviously having a much more focused loan-to-deposit ratio, indicative of a commercial bank model. Obviously, as we said time and time again, the culture here is relationship banking. Go after the deposits, leave with the deposit opportunities, and we think we have a lot of low-lying fruit as we put this organization together. One of the areas that we, you know, we didn't talk a whole lot about, we have a very diversified team of people that could really service the Signature transaction when it comes to opportunity on the corporate banking side.
I think that's gonna be something in the years to come that's going to be very favorable as we look at leading deals for these middle-market clients. These are very strong companies, and we have tremendous deposit relationships, but we don't have a lot of, we'll call it loan activity, specifically for some of these larger corporate clients, as we're now leading the corporate side of the balance sheet. We can be active there as well, syndicating deals, structuring deals, and being a corporate finance banker. A lot of opportunity to put these companies together. The excitement level is high and looking forward to the future.
Dave Rochester (Managing Director and Director of Research)
All right. Well, sounds great, guys. Appreciate it.
Thomas Cangemi (President and CEO)
Thank you, Dave.
Operator (participant)
Your next question comes from Matthew Breese. Please go ahead.
Eric Howell (President of Commercial and Private Banking)
Morning, Matt.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Good morning, everybody. Hey, just to be clear, either Tom or John, the custodial deposits, when do you expect them to kind of draw down to a near zero balance? Is that by the end of the year or early next year?
John Pinto (CFO)
Well, we're gonna see a big drop in the third quarter because of just the nature of the pay downs that we saw early on in the portfolio. You know, that $6 billion there'll still be a number over the next couple of quarters, but it's gonna drop dramatically. My guess would be in the $1 billion-$2 billion range in the third quarter, and then drop even further from there. It ends up going to 0 if and when the FDIC sells the loans and if we don't retain servicing from whoever the new buyer is of that portfolio. It's just the collection of P&I and any pay downs and then the remittance back to the owner.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Great. I appreciate that. I wanted to follow up on expenses. For the full year, 2023, we have a $2.0 billion-$2.1 billion guide. Can you just level set and provide me where we are, relative to that number year to date? I see it at $909 million, but I wanted to confirm it because it implies a ramp-up in expenses for the back half of this year, and then a pretty significant ramp down in 2024 as we think about flattish expenses.
John Pinto (CFO)
You're right. When you look at the six months, right? We're just under $1 billion right now, given where we are. If you looked at the second quarter run rate, it's just under a $2.1 billion run rate. We will have some expenses, as Tom had mentioned, that's in this guide, which is included in the new rules that we'll see, but later today, most likely, and the just the normal $100 billion to make sure we're above $100 billion. We're going to see some increased expenses in 2023 for that. We believe once we can get the systems conversions done, that'll be what allows us to stay pretty close to flat in 2024 when you compare it to 2023.
As, you know, as I mentioned early on, we're going to see a ramp-up in expenses, in the next couple of quarters. I mentioned that on the last call. You know, there's a lot of work going on. You know, there's a lot of work being done for, you know, the FDIC loans as well. As you know, remember, that benefit right now is showing up in non-interest income, that will drop over time. As that drops over time, we'll be able to get some efficiencies on the non-interest expense side if we're not ended up servicing those loans when we get into 2024, depending on what happens with those assets.
Thomas Cangemi (President and CEO)
Yeah. Matt, just one other point, and this is Tom, is that we're also investing into the PCG model. We have some teams coming on board projected into this run rate, and that'll also commensurate with some good revenue opportunities as we go through the break even. As Eric indicated, we're anticipating a one-year break even on bringing the teams on, and from there, we have hurdle rate of returns that we're targeting to 20%+ over a very short period of time. That's also in our run rate. Clearly, you know, if the First Republic transaction didn't happen, the guide will be very different. We're clearly investing in the model, which will have significant deposit opportunity, revenue opportunity across the board, and profitability to the bottom line over time.
That's also embedded in our, in our forecast.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Understood. Okay, maybe if we were to think about the back half of 2024, should we think about at that point, getting to a $2 billion-$2.1 billion or right around the same kind of guide range, annualized run rate, and expect kind of a, you know, a bell curve shape, rise and decrease in expenses till then? Is that the way to think about it?
John Pinto (CFO)
I mean, I, I don't know about bell shape, but yes, I would assume that, you know, when we get to the Q3, Q4, 2024 numbers, we would see all things being equal, that those expenses would be lower than Q1 and Q2, right? We're expecting the Flagstar conversion will be in February of 2024, so the back half of the year will be more of a, you know, run rate kind of perspective when we get through that. I, I think that's right. I don't think it's, you know, dramatic, but I do think that you will see, you know, lower run rate expenses in Q3 and Q4 as compared to Q1 of 2024.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Got it. Okay. Thank you for that color. Last one, can you just describe the interest rate position of the bank at this point, and how the NIM would respond, and call it a, a down 100 basis point scenario, and whether or not you want to describe that in parallel shift or just the front end coming down? I would just appreciate some color on asset sensitivity, liability sensitivity.
John Pinto (CFO)
Yeah
Matthew Breese (Managing Director and Senior Equity Research Analyst)
... adjusted for liquidity.
John Pinto (CFO)
Yeah, no, absolutely. If you look back to the first quarter, we were moderately to, you know, very highly asset sensitive, given the amount of cash that was on the balance sheet. We are now slightly asset sensitive, and that asset sensitivity, just with the passage of time and the utilization of some of the cash on hand, and some of the loan growth that we may see in the back half of the year, we believe will get to very close to neutral. We're not an outlier anymore as we had been, you know, historically on the liability side. We think right now we're slightly asset sensitive with the trend to get a little less asset sensitive.
Thomas Cangemi (President and CEO)
Yeah, that's one of the points. Think about the customers on the multifamily CRE side. You know, naturally, if rates were to go lower in 2024, our customers are going to look to take their floating rate instruments, probably lock in some fixed rate structure, then you're going to see a lot of activity from the portfolio. We had virtually no prepayment activity for the past year. It's been a slow market, we anticipate a lot of activity which will naturally, organically put this company in a very interesting position when it comes to managing interest rate risk, because the clientele will be active if, when, if there's a rate change next year. We're anticipating some activity there, which can naturally hedge the balance sheet towards neutrality. We want to be agnostic to movement in interest rates.
That's the plan here. We don't want to be liability sensitive too much or asset sensitive too much. We want to be relatively neutral as we make money in any interest rate environment. Obviously, the goal here was to get to 3%. We think we got here probably a couple of quarters earlier. That's a positive attribute in the current environment because of the stability of the Signature transaction. Our loan book is all reacting very favorably when it comes to spreads. More importantly, it's a tight credit market, right? As I indicated, the loan spread offering right now is higher, and we're getting it. That's with industry-wide. There is some tight credit standards, and customers have to finance.
We're going to be in the market, we're in business, and we're comfortable on working with our clients, but the beauty of this opportunity is that it's at much higher spread.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Appreciate all the color. That's all I had. Thank you.
John Pinto (CFO)
Thanks, Matt.
Operator (participant)
Thank you. Your next question comes from Peter Winter with D.A. Davidson.
Peter Winter (Managing Director and Senior Research Analyst)
Good morning.
John Pinto (CFO)
Good morning.
Peter Winter (Managing Director and Senior Research Analyst)
I was just wondering, could you give an update on the office portfolio? Secondly, are you seeing any type of stress on the multifamily portfolio, just between, you know, the inflation pressures, higher interest rates, and it's just harder to increase rents on a rent-stabilized apartments?
Thomas Cangemi (President and CEO)
Pete, I'll start and I'll defer to John, the CFO, but clearly it's been resilient. On the multifamily side, it's been an environment where, you know, we have a lot of wealthy customers. They're going through this journey of no activity. There's a 3% coupon from the lows going into, let's say, close to seven and eight. There is, you know, a substantial change, and they're weathering the storm. They're paying their bills. Like I indicated, probably 65% of loans coming up for a decision on their actual maturity and/or repricing, they're choosing a SOFR option.
They're holding that until they feel it's the right time to lock in a fixed rate structure, which is unusual because we haven't seen this environment in quite some time, they're doing well in that environment. There's no question that the bank is benefiting from that, they are getting some cash flow adjustments to their income stream. These are wealthy customers that have large portfolios, they're weathering the storm. They're waiting for lower interest rates, we have a tremendous asset quality performance as a result of this environment, which is a positive discussion point. We can talk all day about the fact that its cash flows are being squeezed. Of course, the interest rates going from 3% to 8%, 9% is going to have an impact.
We think that we're getting close to a point where if we stabilize on the SOFR side, and there is this view that next year will be the year where the Fed starts to adjust their policy stance, then customers may be very active on thinking about the next five to 10 years of financing. We're not seeing any late pays. We're not seeing any delinquencies on multifamily. The commercial real estate portfolio is doing extremely well. It's resilient. We have statistics in the deck. We talked about that. We're not going to be perfect because obviously it's an environment where it's fluid, but it seems like as we reappraise buildings, as we get deep into the portfolio and we deal with some, you know, one-off issues, it's been a very resilient portfolio.
With that, I'm going to have John go through the statistics, but I will tell you that we're very pleased with the asset quality, given the ramp-up of interest rates. John, if you want to share some of the statistics on the commercial side.
John Pinto (CFO)
Especially to your question, Peter, on office, right? We do have a slide. We added some additional information as we're going to continue to do over time. You know, the portfolio, $3.4 billion, really pretty consistent from the prior quarter with, you know, average DSCRs and LTVs and average balance. We did have just under 40% of our office exposure has been appraised or reappraised in 2022 and 2023. You know there's 15% of it's rated special mention or substandard. You know, the portfolio has been strong. We have seen some early delinquencies. We think the bulk of them will be cleared in the third quarter. We are working through a couple of items, as you can imagine. Still, it's been, you know, very strong.
It's bread-and-butter-type lending for us. It's the same structure that we did and that we've done historically for decades with multifamily, just with a different, you know, collateral base. Very, you know, cautiously optimistic about the portfolio. We have been actually since COVID hit. If you could see, there's really not much coming due in the rest of 2023 and 2024. The bulk of the portfolio hits its option or contractual date, starting really in 2025 and forward.
Peter Winter (Managing Director and Senior Research Analyst)
Got it. Thanks. Very helpful. Can I just ask a follow-up on the mortgage warehouse? You had nice growth in mortgage warehouse. Are you able to get deposits with the mortgage warehouse business? The reason I ask is typically fourth quarter, it tends to be seasonally weak, do those deposits flow out?
Thomas Cangemi (President and CEO)
John, want to go ahead and leave.
Lee Smith (President of Mortgage)
Yeah.
Thomas Cangemi (President and CEO)
Leave. Go ahead.
Lee Smith (President of Mortgage)
I think the answer is yes. We can bring in deposits with the warehouse lending business, as we can with all lending businesses, it's a focus of the bank. You know, Tom has been very clear that it's deposits, deposits, deposits. The answer is yes, we can bring in deposits from the warehouse customers. I think the other thing that I would point out is we can bring in more deposits from the mortgage ecosystem. As part of the Signature acquisition, we acquired a cash and treasury management team that focus on the mortgage ecosystem. You think of all the TPOs, we work with 3,500 TPOs. We have 400 warehouse customers. You think of the MSR owners that we subservice for or we lend to.
We think there is a big opportunity to bring in more deposits from that mortgage ecosystem.
Peter Winter (Managing Director and Senior Research Analyst)
Got it. Thanks.
Thomas Cangemi (President and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Christopher McGratty. Please go ahead.
Thomas Cangemi (President and CEO)
Morning, Chris.
Christopher McGratty (Managing Director and Head of U.S. Bank Research)
Hey, good morning. John, just a follow-up to a prior comment about the assets or the, the rate positioning of the balance sheet. If you zoom out and just think more holistically about does the company make more money in a down rate environment, could you speak to potentially the opportunity for better loan growth and better mortgage if the forward curve is right in 2024?
John Pinto (CFO)
Yeah, I mean, there are a lot of even being slightly asset sensitive, depending on how the curve moves. The other item to really think about, we talk about asset sensitivity from an NII perspective, but if we see significant declines in rates, the mortgage banking business, the warehouse business is gonna, you know, really explode from an upside perspective and protect the income that we lose in some of the other areas. You know, we also and what Tom mentioned on the multifamily portfolio as well, I mean, you'll see prepayment fees start to pick up substantially. I mean, we haven't talked about a prepayment fee in quarters now, right? That, when we were a much smaller institution, we had a year where we made $120 million in prepayment fees.
You know, depending on what happens with the rate curve, there are multiple levers in this balance sheet that can help in any really, in any rate environment. That's what we're gonna continue to strive for, to try to get the balance sheet as agnostic as possible to interest rates. You can't plan, of course, for everything, but that's the goal. Don't forget about that mortgage business, which will absolutely pick up if we do see, you know, across-the-board rate declines.
Christopher McGratty (Managing Director and Head of U.S. Bank Research)
Yeah, thanks for that.
John Pinto (CFO)
Yeah-
Christopher McGratty (Managing Director and Head of U.S. Bank Research)
John, while I have you, just on a, just on a, accretable yield, if I could for a second. Could you help us with what's in your guide for the back half of the year? I think you said 25 came in from Flagstar, 75 from Signature, but 20 was high. What's the right level, and what's left to kind of burn through over the next several quarters?
John Pinto (CFO)
The easiest way to look at, if you combine the two, the actual for the second quarter was about $100 million. In the guide is about $70 million on a combined basis. It's just given the way purchase accounting works, that'll slowly decline over time, with the exception of pay downs, right? Pay downs, depending on what kind of loans pay down, you could see some, you know, some spikes in that number. That's, that's what we're in our guide. We think it's conservative. You know, like I said, it is dependent on the market and what happens with interest rates and what happens with pay downs.
You know, that $50 million or so from Signature that we're now expecting is higher than we originally anticipated, and it's just the nature of the portfolio and the speed that portfolio seems to be paying down at.
Christopher McGratty (Managing Director and Head of U.S. Bank Research)
That's helpful. What's the total pool that will come back to you over the next couple of years? What's the remaining balance of the accretion?
John Pinto (CFO)
Well, on the loan side, originally, the Signature piece was over $700 million, so we still have to have almost $1 billion in total in, in loan marks when you look at both banks. I'll make sure I get that number. I'll make sure we get that out to everyone.
Christopher McGratty (Managing Director and Head of U.S. Bank Research)
All right. Thanks, John.
John Pinto (CFO)
Thank you.
Operator (participant)
Your next question comes from Steven Alexopoulos with JP Morgan.
Steven Alexopoulos (Equity Analyst)
Hey, good morning.
John Pinto (CFO)
Steven, good morning.
Steven Alexopoulos (Equity Analyst)
Good morning.
John Pinto (CFO)
Good morning.
Steven Alexopoulos (Equity Analyst)
On the balance sheet, you've obviously had a huge transformation over the past year, and you've been very clear about the custodial deposits coming out, some higher cost borrowings coming out in the second half, too. Beyond that, are there any big structural changes on the horizon we should be thinking about? Are we finally getting to more or less steady state, where it's loans and deposits that are just going to drive net interest income?
John Pinto (CFO)
Yeah, I think that's right. I mean, you can see in the deposits that we have, the wholesale borrowings that we have maturing in the next, you know, couple of quarters and even next year, you know, they're not at high rates. It's much more of business as usual, and let's use these deposit funds that we bring in to fund loan growth.
Steven Alexopoulos (Equity Analyst)
Right.
John Pinto (CFO)
You know, over time, could we look at paying down wholesale borrowings? Of course, we always could, but there, there's other options in some high-cost funding you could always look to reposition. That would be a great problem to have if the demand deposits continue to grow. I, I think you're right in the fact that, you know, the, the pay down of the high-cost borrowings that we did in the second quarter, that's behind us.
Thomas Cangemi (President and CEO)
Yeah, I would just add to, Steven, to one point, this is Tom, that the reality when we look at building out the teams and focusing on the PCG model, you know, 40%-50% type of statistics has been the track record for deposit inflows of demand money. Every dollar bringing in, I think we're forecasting 40, but the reality is more like 50%. That's going to be a significant catalyst as we change the mix of our deposit funding going forward. At the same time, we're focusing on compensating balances amongst all the lines of businesses, and we're going after operating accounts, payroll accounts. We really feel confident that if we're going to put our capital at risk, we want to make sure we have the relationship.
That's going to be a relationship-driven model, and that's where we're heading for all our lines of businesses. That's how we're hurdling our returns on a loan-by-loan basis. That's a sea change on culture here, and I think it's refreshing to have that capability now, having diversified portfolios we can allocate capital to. Focusing on deposit gathering.
Steven Alexopoulos (Equity Analyst)
Yeah. On the NIM, I think we all understand why the NIM is coming down in the third quarter. I know typically you don't go beyond that, but do you feel the bias is still to the upside? Right, there's some unusual NIM activity because these are custodial deposits. Once we get beyond that, do you feel like at least over the near term, you should see some expansion?
Thomas Cangemi (President and CEO)
You know, what I said a quarter ago was that, you know, we think we get to that, that 3% type that, that NIM by year-end. We think we got there a couple of quarters earlier. When you take that model and you look at the expense base and the size of the balance sheet and put a reasonable return on that, on the average balance going forward, you have a, a environment that we've done really well in when it comes to growing the NIM from, well, quite honestly, in the high two's, right? If we get to the mid to low three's as, as more of a holistic view of the business model, based on the funding mix that we bring to the table as we grow the business, it's a different, it's a different run rate, right?
I think that's something that accelerated here. Given the lines of businesses, and we talked about the fact that our loan growth has higher spreads, we think that 3% plus tight margin is reasonable, and that's the target, but we got there a little bit sooner. We're excited about that. It really has a lot to do with the market as well. You know, there's definitely a credit tightening in the system, and, you know, the Fed was talking about that publicly. There's no question that money is expensive, and we're getting paid for the risk. More importantly, that'll impact stronger margins for this company.
Steven Alexopoulos (Equity Analyst)
Great. Thanks. Then a final one for Eric. Great to hear you on this call.
Eric Howell (President of Commercial and Private Banking)
Thank you.
Steven Alexopoulos (Equity Analyst)
what's the experience been like for you and the team, right? Going through the FDIC, now you're at New York Community. Does it feel culturally like the way Signature felt? Are you guys fully back on offense? Just what's going on?
Eric Howell (President of Commercial and Private Banking)
We're back at it, Steve. There's no doubt. I mean, think about where we were four and a half months ago to where we are today. You know, my second text the evening was to Tom, right, and to John, and they immediately, and when I say immediately, got back to me, right? They've embraced us since the moment we've arrived. They completely appreciate our culture and what we're doing here, and we're doing a lot around cultural transformation overall across the organization. I can't tell you how pleased I am to be here. They've truly just embraced all of us. It is the best cultural fit, no question in my mind. We're really excited about the future. I mean, you know, Steve, I said it earlier, the opportunity right now is tremendous for us.
You know, that's recognized by the executive team here, by the entire board here, and by the management group, right? We've got an opportunity to seize on the moment, one that we haven't seen, quite frankly, in probably a decade, right? You know, I equate what's going on back to the days of when we acquired teams from EAB, when they were purchased from North Fork, right, when they were acquired. I mean, this is a tremendous opportunity now. There will be further M&A. Even given the regulatory hurdles, many of these mid-market, mid-sized banks need to go away and will, and we will be able to capture on that. Really excited to be here and very, very much looking forward to the future.
Steven Alexopoulos (Equity Analyst)
Sounds good. Great to hear from you again, and, best of luck.
Eric Howell (President of Commercial and Private Banking)
Thank you. You too. Thank you.
Thomas Cangemi (President and CEO)
Thank you, Steve.
Operator (participant)
Thank you. Last question, we have J.C. Ayer with Jefferies. Please go ahead.
Speaker 16
Morning. Thanks. Good morning, guys. How you doing? Real quick, just on the cash position, still strong at $16 billion. Sounds like the borrowing paydown, the low-hanging fruit has been picked. Just curious, what opportunities do you have to optimize the margin with that excess cash? Then more longer term, where does that what is your minimum cash position, versus that 13% of assets today?
Thomas Cangemi (President and CEO)
We look at cash and unencumbered securities together from an on-balance sheet liquidity perspective. You know, right now, we're very comfortable with where we are. The utilization of the cash, and the benefits that we can get that can drive it forward, we do have, you know, the wholesale borrowing trade, as I mentioned, with the high-cost wholesale borrowings, you know, that we took care of in Q2. We do have some high-cost brokered CDs, that we can always deal with, in order to try to maximize and benefit the margin. I think the real benefit in the, in the longer-term focus is what can we do on the deposit side? If we can continue to bring in non-interest-bearing demand deposits, that's gonna be the driver of margin growth in the future.
How successful we are at that will drive the margin story.
Eric Howell (President of Commercial and Private Banking)
I would just also add this on, on a perspective of our balance sheet. If you think about banks over $50 billion, we're probably the lowest % of securities assets in the country right now.
Thomas Cangemi (President and CEO)
Yeah
Eric Howell (President of Commercial and Private Banking)
by design. You know, we have no hold-to-maturity portfolio. We don't believe in it. We're very comfortable with it, with putting it in AFS, we have limited exposure there. We have a very small book that needs to be right-sized over time as we go into the $100 billion standard. That's another area that probably will generate some additional revenues for the company as we rightsize ourselves to the industry.
Speaker 16
Gotcha. Okay, and just last one for me. Apologies if I missed this, but the Signature teams, of the 127 that you guys acquired, what is that number today?
Eric Howell (President of Commercial and Private Banking)
That's what the number is.
Thomas Cangemi (President and CEO)
That's the number.
Eric Howell (President of Commercial and Private Banking)
That's the number.
Thomas Cangemi (President and CEO)
I believe we started at 1:30. We had a handful that ran off. Again, the deposits are stable. What's interesting about the story here is that since our last public release, we had full stability. There hasn't been any exits at all, and it's been an encouraging experience. As Eric said, the team is motivated. We're focused on building back the business, getting the clients back into the higher average balances, but the accounts are still here. A lot of the money has moved to different funding vehicles to try to get out of the system because of the insurance issue. We've. Even when we talk about some of the strategies we had on off-balance sheet, that's also accommodating some of the customers right now.
Eric Howell (President of Commercial and Private Banking)
Yeah.
Thomas Cangemi (President and CEO)
Coming back to us.
Eric Howell (President of Commercial and Private Banking)
That's really the new go-to-market, right? You know, look, the clients, like Tom said, the clients didn't close their accounts. They just moved their funds out, right? They're finding it very difficult to do business at the mega institutions that they moved to. We're seeing the operating accounts come back, and that's why we had DDA up this quarter, right? That's starting to flow back as they just, they can't run their businesses at these other institutions, right? On the excess funds that we would normally keep in on-balance sheet money market funds for them, they're bringing those back, some on-balance sheet and some off-balance sheet, into, you know, an array of off-balance sheet money market funds that we have available for those clients.
Right, we're going to start making some, you know, serious fee income on that, which doesn't tie up capital, right, and really, juices our returns. That's the new go-to-market. Clients are reacting very favorably to that. They're recognizing that we can continue to control the entire client experience for them, while also giving them that safety. We're seeing successes there across the board, quite frankly. Every time I talk to a team, I hear about how unhappy their clients are elsewhere and how they're starting to come back.
Thomas Cangemi (President and CEO)
Yeah, I think, as I said previously, our anticipation is that we will have more teams going into the, in short order to the summer, where pre-March in, in, in totality, as we continue to evaluate and, and sign on and onboard the First Republic talent that's in the marketplace. There is a dislocation that we are competitively looking to put on new personnel to service the clients and bring on their books.
Speaker 16
Got it. Thanks, guys.
Eric Howell (President of Commercial and Private Banking)
Thanks, JC.
Thomas Cangemi (President and CEO)
Sure.
Operator (participant)
Thank you. There are no further questions at this time. I'll now turn the call to the management team.
Thomas Cangemi (President and CEO)
Thank you again for taking the time to join us this morning and for your interest in NYCB.
Operator (participant)
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.