Flagstar Financial - Q3 2023
October 26, 2023
Transcript
Operator (participant)
Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the New York Community Bancorp, Inc Q3 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press Star, then the number one on your telephone keypad. If you'd like to withdraw your question, press Star one again. I would now like to turn the conference over to Sal DiMartino, Executive Vice President, Chief of Staff, and Director of Investor Relations. Please go ahead.
Salvatore DiMartino (EVP, Chief of Staff, and Director of Investor Relations)
Thank you, Regina. Good morning, everyone, and thank you for joining the management team of New York Community Bancorp for today's conference call. Today's discussion of the company's Q3 2023 results will be led by President and CEO, Thomas Cangemi, joined by the company's Chief Financial Officer, John Pinto, along with several members of the company's executive leadership team. 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 the 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.
Now, I would like to turn the call over to Mr. Cangemi.
Thomas Cangemi (President and CEO)
Thank you, Sal. Good morning, everyone, and thank you for joining us today. Earlier this morning, we announced solid operating results for the Q3 of the year. Our performance reflects our ongoing diversification efforts on both sides of the balance sheet, arising from the combination of three legacy banks. Among this quarter's highlights was good linked quarter loan growth, stable deposit trends, and a significantly higher net interest margin. We also made further progress in improving our funding mix, as both wholesale borrowings and brokered CDs declined, while non-interest-bearing deposits remained approximately one-third of total deposits, virtually unchanged from the previous quarter. From a net income and earnings perspective, we reported net income available to common stockholders of $266 million or 36 cents per diluted share, as adjusted for merger-related expenses. Our EPS this quarter was 2 cents better than consensus.
One of the drivers this quarter was a much higher net interest margin. The NIM came in at 3.27% up six basis points compared to the prior quarter and well ahead of our guidance range of 2.95%-3.05%. The increase was driven by higher asset yields as we continue to benefit from the higher interest rate environment and a higher average balance of non-interest-bearing deposits compared to last quarter. We remain constructive on the net interest margin going forward due to the continuing positive shift in our, in our funding mix and the impact of higher asset yields. Another driver was our loan growth. Total loans during the Q3 were up modestly as growth in the C&I portfolio, led by our specialty finance businesses and in home builder finance, offset declines in other businesses.
Overall, the loan portfolio ended the quarter at $84 billion, up over $700 million, or 1% compared to the prior quarter. At September 30, total commercial loans represented 45% of total loans, reflecting a significant diversification compared to where we stood a year ago. Turning now to deposits. Our deposit trends during the Q3 were relatively stable. Total deposits were $82.7 billion, $5.8 billion lower compared to the $88.5 billion at June 30. The majority of the decline was due to a $4 billion decrease in custodial deposits related to the Signature transaction, which totaled $2 billion at the end of the quarter, compared to $6 billion last quarter. In addition, brokered deposits declined $1.2 billion to $8.1 billion, compared to the previous quarter.
Excluding these two items, deposits are down less than 1% on a linked-quarter basis. Additionally, our funding mix continues to improve as wholesale borrowings declined 12% compared to the previous quarter. Overall, they are down 33% or nearly $7 billion since year-end 2022. In the Q4, we have approximately $3.1 billion of wholesale borrowings at a weighted average rate of 4.02% that either are maturing or can be called by the FHLB. Turning now to asset quality. While early-stage delinquencies declined significantly, total non-performing loans increased $159 million or 68% to $392 million compared to the prior quarter, due to the increase in the CRE portfolio.
More specifically, the increase was related to two office-related loans, one of which was in Syracuse, New York, totaling $28 million, and the other in Manhattan, totaling $112 million. Despite the increase in NPLs, our asset quality metrics remained strong, as NPLs to total loans were 47 basis points compared to 28 basis points last quarter. While our net charge-offs were also up, were a mere 3 basis points of average loans. Also, as you can see on slides 9-12 of our investor presentation material, our asset quality metrics remain solid and continue to rank among the best relative to the industry and our peers. These strong metrics reflect our conservative underwriting standards, which have served us well over multiple business cycles. Turning now to our guidance for the Q4.
We expect a NIM in the range of 3%-3.10%, mortgage gain on sale of $16 million-$20 million, the net return on MSR assets of 8%-10%, loan admin income of $15 million, annualized operating expense range of $2 billion-$2.1 billion, and a full-year tax rate of 23%. Also during the quarter, we unveiled our modern new brand and logo, combining the best elements of all three legacy banks. Our teammates are excited about this new branding, and I'm excited as well. Even though it will be a new logo and a brand, the meaning behind it does not change. We remain committed to helping our customers and teammates thrive as we move to one bank, one brand, one culture as the new Flagstar.
Finally, I would like to say a special thank you to all of our teammates. Our results would not be possible without their dedication and commitment to our clients and our customers. With that, we would 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 during the week. Operator, please open the line for questions.
Operator (participant)
At this time, if you'd like to ask a question, press Star, then the number one on your telephone keypad. We ask that you please limit your initial question to one and return to the queue for any additional questions that you may have. Our first question will come from the line of David Rochester with Compass Point. Please go ahead.
Thomas Cangemi (President and CEO)
Morning, Dave.
David Rochester (Managing Director and Director of Research)
Hey, good morning, guys.
Thomas Cangemi (President and CEO)
Hi-
David Rochester (Managing Director and Director of Research)
On the margin guide, what's your assumption for custodial deposits baked into that, and what was the average balance for those in the quarter?
Thomas Cangemi (President and CEO)
Right. So the big move, as we talked about last quarter on the custodial deposits, is really coming from the fund banking loans. They're the ones that are paying down pretty quickly, so those are the deposits that we're holding. As you may know, the FDIC has announced the sale of that portfolio, so that will transfer at the end of this month, so in the next couple of days. So we're going to see that number drop dramatically when we hit November first because the rest of the custodial deposits will be related to the multifamily and the CRE loans, and their paydowns are significantly less than on the fund banking side. So the average balance is around $4 billion for the quarter, $2 billion at the end of the quarter, and then drops dramatically once we get into November.
David Rochester (Managing Director and Director of Research)
This margin guide really doesn't include much in the way of custodial deposits remaining?
Thomas Cangemi (President and CEO)
That's correct.
David Rochester (Managing Director and Director of Research)
Great. All right, I'll step back in the queue. Thanks, guys.
Thomas Cangemi (President and CEO)
Thanks.
Operator (participant)
Your next question will come from the line of Ebrahim Poonawala with Bank of America. Please go ahead.
Thomas Cangemi (President and CEO)
Good morning, Ebrahim. How are you?
Ebrahim Poonawala (Managing Director and Head of North American Banks Research)
Good. So Tom, maybe just start on asset quality. I mean, again, you had pristine track record on asset quality. When we think about, one, just address, like, the office portfolio, your expectation around the loss content for your book relative to what we hear from the industry, how well reserved, and, New York Community is, for that book. And then secondly, also talk about the health of the multifamily landlords in New York. Like, you're hearing a lot more concern around, the rent regulation limiting the ability to raise rents, and that's going to squeeze these, the landlords. So if we can address the office and the health of the multifamily landlords, yep.
Thomas Cangemi (President and CEO)
I'll start with the latter first. So obviously, the marketplace has changed significantly since the rent laws back in 2018 had changed, and we've been monitoring that very carefully. We've seen some significant success with our client book, given the fact that we have a long history. These are, you know, in place families that have been doing this for multiple decades, very confident in their long-term business strategies. But they do a very strong job at managing their book of business, the generational business for the most part. With that being said, we have a very strong portfolio with low LTVs, and we monitor it carefully, and we're seeing, you know, consistencies of payment.
We're seeing the reaction to higher interest rates on the reset, either the SOFR option or a fixed-rate option, them having the capacity and the ability to continue to pay, and that's what we're seeing. So we're not seeing any delinquency trends of any material at all in the multifamily space, which is a positive. Again, rates have significantly risen over the past year or so and does have an impact to the cash flow, but these are, you know, well-in-tune operators have been able to manage through that. But the reality of the activity has been very slow. We haven't seen much activity at all.
I would say since I've been here, this is my 26th, 27th year, going to my 27th year now at the bank, this is the slowest activity we've ever seen when it comes to property transactions, you know, the interest as far as buying and selling. So it really is a relatively static or no activity whatsoever, and we're monitoring that very carefully. At the same time, rents are up to the highest point in the city of New York, so they're getting very strong rentals, and they're managing through an inflationary environment. So we're very positive is in respect to our portfolio, but there's no question that the rent law changes, you know, had an impact and the activity of taking the units to a free market unit has... It's a different business model.
Our team is monitoring the statistics as far as how that impacts valuation, how it impacts overall cap rates, and it's been relatively stable, even despite the significant rise in interest rates. In respect to the overall CRE portfolio, we have about $3.44 billion in total CRE, about $1.5 billion, is that right, that's in Manhattan?
David Rochester (Managing Director and Director of Research)
$1.008 billion, yeah.
Thomas Cangemi (President and CEO)
About $8 billion in Manhattan. This is one specific loan in the Manhattan portfolio. I believe it's like an A-minus type of credit. You know, we're confident that we have value there, so there was no-- I don't, I don't think there was a related charge off to that particular credit, but it's one loan. So we, we have a very strong portfolio. We have statistics that we put out in our slide presentation material. It's very clear on the, the overall strength of the portfolio, you know, relatively low LTVs, strong debt service coverage ratios, a very strong sponsorship, but it's not a trend, and we're monitoring it. You know, no question, rates are much higher. We're still coming out of the pandemic.
We're, you know, we're evaluating, you know, overall square footage in rentals and as far as leases coming due and exits of certain large clientele, but it's been a relatively stable scenario. And despite the negativity you're reading about, our portfolio is performing extremely well relevant to the marketplace.
Ebrahim Poonawala (Managing Director and Head of North American Banks Research)
That's helpful. And maybe just one other one on expenses. I think in the past, you've said you expect expenses to stay flat next year versus this year. One, remind us in terms of where we are in realizing savings side to the both the acquisitions, how much more to go? And, do you still feel good about expenses staying flat? Seems like you're making a lot of investments. There's a lot going on at the bank, so, would appreciate an update there.
Thomas Cangemi (President and CEO)
I'll start, and then I'll pass the baton to John. The big picture is I don't think our guide's pretty much the same as it was last quarter for 2023.
John Pinto (Senior EVP and CFO)
Right.
Thomas Cangemi (President and CEO)
We haven't given our 2024 guidance, and clearly we are investing, as you indicated, into the infrastructure, the build-out past $100 billion now. We understand our obligations there, so we clearly are focusing on making this company, you know, at the point of a $100 billion-dollar process and ensure that we have all of the requisite infrastructure. And we spent a lot of money over the years to get there, so we understand the path there. At the same time, we're also investing into the market regarding our new partner with the Signature transaction. So we are adding talent to the pools of additional PCG teams that also add to the expense base.
That's why you saw the ramp up in the Q2, second and Q3. But the reality is that we have a very strong focus here to make sure that we have a, you know, a history, and this is just a history of managing a very strong efficiency ratio, but also being cognizant of our obligations as a $100 billion+ institution. With that, I'll pass it to John.
John Pinto (Senior EVP and CFO)
Yeah, and we haven't given specific guidance yet for 2024, but how we've talked about it is that there are both headwinds and tailwinds into 2024 when you compare it to 2023. As Tom mentioned, you know, we definitely have some additional adds, both back office and through our PCG groups that are gonna, you know, put pressure on the, on the expense base going up, along with just the additional expenses for being over $100 billion. And then the tailwinds of, you know, the systems conversions, which we have the Flagstar systems conversion scheduled in the Q1. So we'll start to see some benefits from that. And then, you know, we have the Signature conversion after that. So, you know, those benefits will be later, you know, towards the later end of the year.
So, that's kind of how we think about 2024 right now, but we'll give our guidance at the next quarter.
Thomas Cangemi (President and CEO)
You know, I have one thing to add to John's comments are, we're still unwinding the legacy Signature portfolio that we don't own, so we do have costs associated with that-
John Pinto (Senior EVP and CFO)
Correct.
Thomas Cangemi (President and CEO)
-that will be impacted favorably as we... Assuming that, those assets depart the institution go elsewhere. So that's also, that will also be impacted into next year as well, assuming the transaction.
John Pinto (Senior EVP and CFO)
Yeah. That's, that's right. The FDIC has put out the MF and CRE portfolios for sale. We expect bids to be this quarter, and we'll see what happens when that comes to pass.
Ebrahim Poonawala (Managing Director and Head of North American Banks Research)
Noted. Thank you.
Operator (participant)
Your next question comes from the line of Chris McGratty with KBW. Please go ahead.
Thomas Cangemi (President and CEO)
Morning, Chris.
Chris McGratty (Managing Director And Head of U.S. Bank Research)
Hey, good morning. John, maybe just a question on the balance sheet to start. A lot of movements with the deposits that you telegraphed, but can you help us with just overall size of earning assets near term? You know, targeted cash levels, you're building the bond book. Just, just help on the moving pieces for the next couple of quarters.
John Pinto (Senior EVP and CFO)
Sure. Yeah, no, no, no problem. We have slowly started to build the securities portfolio. Really, it's just a, you know, a liquidity shift between cash and, and securities, government securities, you know, very liquid, just to try to, try to monetize some asset sensitivity here and get closer to neutral. That's been our plan back since March 31, to get closer to neutral. And we have each quarter, we're slightly asset sensitive right now, and that'll continue to trend towards neutrality here in the next quarter or so. So I think when you look at where we are in interest earning assets, the declines have basically stopped from the cash side. This is about where we'll be within $1 billion or so from a cash and securities perspective.
So you may see cash drop a little bit, but that would be offset by incremental purchases on the security side. So I'd say that the large drops are behind us on the cash and the liquidity front, right? We've paid down a lot of debt on the wholesale side and some brokerage side. That'll be more limited going forward. And then we'll look to grow certain areas of the loan portfolio where it makes sense strategically for the company, and where we have the best opportunity to bring in deposits related to those loans. So I would say, you know, very, very limited change from the... if you look at cash and securities combined going forward, and then some, you know, hopefully some small growth on the loan side where it makes sense strategically.
Chris McGratty (Managing Director And Head of U.S. Bank Research)
Okay, just if I could, the follow-up. You know, you had 107 of earning assets in the quarter. Obviously, timing of everything is related, you know, when you move such during the quarter, but, like, just zeroing in on the Q4 earning assets, it feels like it's going to be lower than those 107, but just any kind of fine-tuning with that-
John Pinto (Senior EVP and CFO)
Yeah, but-margin estimate. Yeah, not significantly lower than the 107.
Chris McGratty (Managing Director And Head of U.S. Bank Research)
Got it.
John Pinto (Senior EVP and CFO)
We expect it to be right around that number because I, I really don't-
Chris McGratty (Managing Director And Head of U.S. Bank Research)
Okay.
John Pinto (Senior EVP and CFO)
see us dropping much more on the securities in total in the cash side. So I expect that'll be pretty stable here, and hopefully we'll be able to build that as our success on the deposit side, you know, starts to come through.
Chris McGratty (Managing Director And Head of U.S. Bank Research)
Okay, and then maybe just the last one on the loan to deposit. You retooled it a bit. How are you thinking about that entering 2024? It's a little high.
Thomas Cangemi (President and CEO)
So, Chris, it's Tom. I would say that the strategy going forward here is relationship deposit story in all lines of the businesses, right? We are—we're a different company. We're focusing on New Flagstar. We're focusing on getting ourselves to a commercial banking standard. We recognize that, you know, historically, we've had a very low-high loan to deposit ratio as a traditional thrift model. That's history. The goal here is to, as right-sized institution, to be more in line to a commercial banking model. We had the Flagstar transaction, and we had the opportunity to be participating in a receivership transaction, which really changed the model in respect to the funding mix. So the goal here is to bring that level, you know, inside of 100.
You know, that's the goal here and, and continue to focus on best practices in the industry, and that's, that's a more commercial bank model. So we're proud of the opportunity to diversify our lines and focus on deposit relationship lending. If there's no deposit on the relationship, we're probably not going to make the loan. It's just that that's coming from the top of the house at the board level. It's very focused there, that this is a great opportunity to take these, the institutions under the new Flagstar umbrella and focus on relationship banking. We see it transforming actively on the multifamily CRE side. Throughout the past three years, we've had tremendous success with that model, and that's going to be filtered to all of the lines of businesses.
That's going to be the strategy going forward.
Chris McGratty (Managing Director And Head of U.S. Bank Research)
Great. Thanks. Thanks, guys.
Operator (participant)
Your next question comes from the line of Steven Alexopoulos with J.P. Morgan. Please go ahead.
Thomas Cangemi (President and CEO)
Good morning, Steven.
Janet Lee (VP)
Good morning. This is Janet Lee for Steve Alexopoulos. My first question is on your new hires as it relates to private banking team hires out of First Republic. Are you seeing any more opportunities to hire new teams here over the near term?
Thomas Cangemi (President and CEO)
I'll pass that over to Eric. Eric?
Eric Howell (President of Commercial and Private Banking)
Yeah. Hi, good morning. So we've hired in total now 59 group directors and 105 support staff. So, you know, there was tremendous opportunity over the last couple of quarters to hire. We're very excited about the team members that we've brought on board. I mean, this is truly a tremendous opportunity to fill a massive void in the marketplace for service-oriented institutions, and we're really happy with the talent that we've brought on board in order to do that.
Thomas Cangemi (President and CEO)
I would just add to the point to that, the stability of the legacy Signature teams are solid. We had tremendous strength throughout the summer on stabilizing the team. That was the business risk when we announced the transaction. So there's been stability and as Eric indicated, an opportunity as well.
Janet Lee (VP)
Okay, great. As you're obviously growing and investing into the franchise, do you expect to be able to achieve positive operating leverage next year? Is that a target that you have in mind?
Thomas Cangemi (President and CEO)
That's the plan, absolutely. I mean, we kind of thought through the process. I'll let Eric go through some of the mechanics on history. We've done this for quite some time as far as how it goes into the runway. But why don't you expand upon that, Eric?
Eric Howell (President of Commercial and Private Banking)
Well, yeah. It usually takes about 12-24 months, right? Each team is different, has a different book of business and underlying client base, but, you know, we'll usually achieve positive leverage, if you look 12-24 months out.
Janet Lee (VP)
Great. My last question-
Thomas Cangemi (President and CEO)
Just on that point, that's on the new team that came on board. But obviously, we have embedded within the franchise close to 1,200 team members from the legacy Signature portfolio that's managing close to $30 billion of deposits, that has tremendous operating leverage for the franchise, of which I think it's probably close to 40% of their deposit base is at zero.
Eric Howell (President of Commercial and Private Banking)
That's right.
Janet Lee (VP)
Got it. And can you give us an update on the progress of bringing back Signature non-interest-bearing deposits that have left during the Q3 and maybe 4Q to date? Has it accelerated versus the $285 million that you brought in during the Q2?
Eric Howell (President of Commercial and Private Banking)
Yeah, we're really stable. I mean, we brought in, you know, nearly $300 million again in deposits. So they continue to flow back, and that's in the face of obviously the most difficult deposit environment that we've seen in our careers, for sure. So we're very pleased with the traction that we're gaining. We had growth in both the West Coast banking teams and the East Coast banking teams, as well as the new FRB teams that we brought on board. So we're seeing growth from all areas of our traditional banking teams.
Thomas Cangemi (President and CEO)
You know, I'll just add some comments there. I spent most of the summer meeting both PCGs as well as our new client base, and close to 1,000 hands I've shaken over the summer, and it was amazing to see the connectivity between the PCG teams and the clients, and the loyalty factor behind that. So we're very proud of the team. We're proud that they're able to go through a significant adverse time in March and see an opportunity here under the Flagstar. And we're very pleased with the success and the stability of the base. You know, accounts are still there. They may be cleaned out as far as some of the excess liquidity to the market, but they're not leaving the institution when it comes to the actual relationship, but they did move some significant deposits.
So when we did the transaction in March, you know, that institution was at a much higher base when we stepped in. It's been stable, which is a very positive signal for what we expected. And as you can recall from the original deal mechanics, we felt there would be further runoff just because of the unknown factor as we came into a very tumultuous time.
Janet Lee (VP)
All right. Thanks for taking my questions.
Thomas Cangemi (President and CEO)
Thank you.
Operator (participant)
Your next question comes from the line of Bernard Von Gizycki with Deutsche Bank. Please go ahead.
Bernard Von Gizycki (Research Analyst)
Morning. Hey, good morning. So just on purchase accounting accretion, if you could just remind us on 3Q for the NIM, how much there was, what the split was between Flagstar and Signature, and, based on your 4Q guide of NIM, what are you expecting?
John Pinto (Senior EVP and CFO)
Sure, Bernard. If you look, we did add a slide, I don't know if you saw it in the earnings presentation, around the purchase accounting accretion, because, you know, we, we knew we were going to get some questions on that. So it was about $100 million that came in in September. The split is about 70% Signature, and about 30% from the, from the Flagstar transaction. From a forecasting perspective, we're expecting it to be, a little bit lower than that in the Q4. Not substantially. We believe that the, you know, we have another quarter or so at a pretty high run rate from the Signature transaction, given how we're seeing some pay downs.
We will see the Flagstar piece start to slow down here, as we get to the one-year mark in December. But right now, that's where we kind of expect it to be, pretty close to that level, around $100 million.
Bernard Von Gizycki (Research Analyst)
Okay, great. And then just on deposits, I know in the past you guys have talked about, you know, the banking-as-a-service initiatives that you had. I just wonder if you could kind of remind us, you know, what you might have in the pipeline as you kind of think of, you know, how non-interest bearing deposits could trend, maybe, you know, going into next year?
Thomas Cangemi (President and CEO)
... I'll start off, and I'm going to defer to Reggie. But I will tell you that the reality is that we have a lot of interesting opportunities in front of us. We did mention about a year ago that we did successfully compete and actually win the opportunity within the California Unemployment Fund. That should be coming on sometime early in 2024. That'll be a nice pickup for the institution. With that being said, there's so many different lines of businesses as well as opportunities. I'd love to have Reggie Davis just share some thoughts on this deposit strategy, because we're really excited what we can do in the future. So Reggie, if you don't mind.
Reggie Davis (Senior EVP, President of Consumer and Corporate Banking)
Yeah, sure, Tom. So not a lot more to add around banking as a service in addition to what Tom said. But as you know, that business kind of comes in at, from an opportunistic standpoint. So we've got a lot in the pipeline, and we feel really good about our prospects of winning additional business. But we don't try to project out exactly where that book is going to be. I think where we've had a lot of success this year is in our consumer book, which you know, that tends to be a little bit more steady, a little bit more predictable, and I feel really good about where that retail business is positioned. Particularly given the tough environment, the team's done a lot of really good work.
You know, our relationship banking model this year really proved its value. Tremendous amount of stability in that book. We actually brought the branch teams together this year, combined the back office. We're now operating under the same leadership structure, same sales and service model. That model change went really well, no disruptions. We're in the process of introducing a more skilled and consistent sales culture across the entire network of, you know, 380 branches. It's designed to create a great client experience, and it will be uniquely Flagstar positioned with the brand that Tom talked about. And if you kind of think about where we are, there's a lot of upside in that business.
The legacy Flagstar branches are still only able to open accounts in branch. That's 40% of our branches, about 157 branches. Next year, we'll be able to have online capabilities, so we know that'll actually increase our net acquisition. This year, for the first year, we began using targeted digital marketing in our NYCB footprint to drive new client acquisition. That's gone well. We've introduced a new skinny down version of our AI-powered client relationship tool, which is called NextGen Sales in our NYCB branches. That's had tremendous impact. We see increases in new account balances, all those validated. And then next year, we'll be fully operational across the entire footprint with additional enhancements for that, that tool. But we, we feel really good. The, you know, the portfolio performed well this year.
Quarter-over-quarter, we're only down $500 million, which is less than 1.5%. You know, most of the year we've had success with this high touch model. If you look at our weighted average cost, it's only up a hundred and seventy-seven basis points since January against the Fed funds increase of 525. So we're really pleased with the retention in that portfolio. And, you know, I think another good news story is, you know, from a CD renewal perspective, we've been above the 80% retention rate all year, which is kind of top of class from an industry perspective. We had 20% of our CD book renewed between August and September. We had 81% retention rate on that.
Average rate went from at 1.7 at maturity to less than 5%, so positioned well below the kind of market leaders in terms of rate. So, you know, we continue to be really optimistic around deposits. It's one of the success stories we've got this year.
Thomas Cangemi (President and CEO)
As you can see, we have a lot of enthusiasm under Mr. Davis, so thank you, Reggie. I will tell you that, the energy and thriving in this institution is the new focus for the institution. So clearly, Reggie has a lot of interesting opportunities in front of us, so we're excited as this whole team. So thank you for that, Reggie.
Operator (participant)
Your next question will come from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.
Mark Fitzgibbon (Managing Director and Head of FSG Research)
Hey, guys. Good morning. I was wondering, was any of the $62 million provision this quarter, did it have any specific reserves in there for those two credits you singled out? And have you reappraised those two properties?
John Pinto (Senior EVP and CFO)
Yeah. So both of those two properties, as they go through the process of non-performing, were both recently reappraised. So you know, the charge-off on the Syracuse loan was based, of course, on that most recent appraisal. And then if you look at the $62 million, the bulk of the provision was 1, to, you know, really restore the allowance for the charge-offs that we took, as well as some small modest growth that we had, some CRE modeling changes through the Moody's macroeconomic factor, and then another more qualitative-like factor related to the office portfolio. That's kind of how it was broken apart to get to that $62 million. But yes, both of those loans have recent appraisals on them.
And we're holding them now at, you know, at where we believe, especially on that Syracuse loan, the write-down we've taken, you know, we're very comfortable with where that is, and the same process we used for decades when we take charge-offs.
Mark Fitzgibbon (Managing Director and Head of FSG Research)
Okay. And then just to follow up, unrelated. And this may seem like a hard thing to imagine right now, but could you consider doing additional sort of troubled bank acquisitions if they came along? And hopefully, they don't. But if there were some failed institutions in 2024, do you think it's conceivable that you could do another transaction?
Thomas Cangemi (President and CEO)
Hey, Mark, it's Tom. I will tell you that we are laser focused on building new Flagstar. We have a lot on our plate, as you can imagine. You know, March came along unexpectedly from pretty much everybody. We were able to be accommodative and work with the government to facilitate a, which we believe a very good transaction. We're busy, right? We want to get our conversions done. We want to get our systems in order. We have a lot of integration that we want to make sure we prioritize. So I will tell you that we're very pleased where we are, and we're building New Flagstar, and it's unlikely that we'll be participating in growth opportunities. The company has gone from $60 billion to $120-ish billion, and that's a lot of growth.
We have a lot of work to do in front of us, and the team is, as you can hear, with Reggie Davis and Eric and all the great team members we have here, we're busy. So we have the priority of getting it, you know, getting us to be that, you know, that $100 billion institution where we feel very proud of the back office, the system conversion. A lot of work ahead of us, Mark. And that's a priority.
Operator (participant)
Your next question comes from the line of Brody Preston with UBS. Please go ahead.
Thomas Cangemi (President and CEO)
Morning, Brodie.
Brody Preston (Analyst)
Hey, good morning. Hey, I just wanted to follow up on those two office credits. I wanted to ask, what was the LTV on those loans, prior to the reappraisal, John? And where did the LTV go, on reappraisal prior to you charging, charging them down?
Thomas Cangemi (President and CEO)
Well, let me defer to John Adams. He's actually in my office. So John, do you want to just address those two credits?
John Adams (President of Commercial Real Estate Finance)
Good morning, both. Both those credits at the time of origination were 65% or less. They were originated, you know, quite some time before the pandemic. But the impact of the pandemic and obviously leasing activity and vacancies, both of those credits at the time that we reappraised, obviously, Syracuse was more than 100%, but the larger asset in the city, 90%.
Brody Preston (Analyst)
Got it. Thank you for that
Thomas Cangemi (President and CEO)
Syracuse had a significant tenant. This was a unique, iconic building that lost its major tenant, and we'll deal with it as we go along here. We were very active to, you know, get the appraisal updated. We took a much lower valuation, and then we'll work through the workout process. Feel good about the fact that this is at a level that we can move this, we'll be happy, but we'll work with the existing buyer to see if he wants to try to work it through the bank. If not, we'll have people that are willing to step in here.
Brody Preston (Analyst)
Got it. Okay. I just wanted to get a sense for, you know, do you have an idea for what the lease rolls look like for the rest of the office portfolio? If it was a tenant leaving that kind of caused the issue with the Syracuse portfolio. Just wanted to get a sense for what those lease rolls look like.
Thomas Cangemi (President and CEO)
So this is Tom again. I would say big picture, we know we're going through that process. You know, we talked about Manhattan. We have about $1.8 billion, is it John? $1.8 billion? $1.8 billion in Manhattan. Very cognizant of what's coming due when it comes to refinancing and respect to coupons as well as the tenancy. We evaluate that. Feel pretty good about the portfolio, but, you know, this is an environment where you have to not have an enhanced monitoring. The company is doing a lot of work to ensure that we're getting updated financial statements. You know, this is that time of year from now until the end of the year, we get a lot of new financial statements. As John indicated, we updated the macroeconomic backstop towards the credit environment, in particular, CRE.
But clearly, you know, this is a unique portfolio, typically, in historical basis. It was a, it's a sponsor-driven opportunity for the bank. Historically, we've had a very strong mix of very strong families that actually buy into the multifamily and CRE market opportunistically, tied to the 1031 exchange opportunity when it comes to tax deferrals. And we have a very strong overall leverage, overall average LTV and a strong debt service coverage ratio. You're going to have one-offs from time to time. We'll call this particular one a one-off. We don't see trends yet, but we're monitoring very carefully.
Brody Preston (Analyst)
Okay, and I'll just ask one more and then hop out. Just a clarifying one on the average earning asset guide. Was that stable at $107 billion for the Q4? And if so, could you kind of clarify the moving parts there for me, John, just given the period end was quite a bit lower than that?
John Pinto (Senior EVP and CFO)
Yeah. So what we're looking at is from an average perspective, we expect that cash and securities will be pretty flat. You know, we don't expect significant declines in those two items. Now, once again, that depends, of course, on our success in bringing in deposits in the quarter. And we do expect to have some loan growth, nothing substantial, but you know, just a little bit of loan growth here, which is why we think we can be pretty close to that. I don't think, like I mentioned, we're not going to see the big declines we've seen in the past. There'll still be a little bit of a mix shift between cash, securities, and loans. We just don't expect it to be as big a drop as it was, you know, quarter-over-quarter.
It's going to be relatively consistent.
Thomas Cangemi (President and CEO)
So I would just add to that point, Tom again, that, you know, strategically, we, we put out a plan when we announced the receivership transaction and how we see the balance sheet coming in at year-end. Now we're focusing on, on the businesses. And the businesses will have some businesses actually seeing declines, in particular, multifamily CRE, the business is very slow. You'll see the offset of growth in the C&I portfolios. We're very, very optimistic about the opportunity on overall interest rates when it comes to residential lending. We have Lee Smith on the line. He can expand upon the opportunity there. It's a much different market when it comes to resi lending. So our mortgage bank has been right-sized back in January.
So we actually are making money in the line of business, which is not common in financial services in today's environment, but clearly have other levers to pull, and probably the augmentation of the balance sheet will continue. You'll see more of a shift away from CRE multifamily just because of the market. There's not a lot of activity, and our spread's about 300 basis points spread off the five-year treasury and probably wider than where the government is. And the government will be proactive with their balance sheet, will be less proactive, and will be focusing on relationship deposit gathering. So like I indicated, going back to the strategy, it's going to be about relationship banking in all the lines of businesses.
We're seeing some good pickup on the home builder finance business, good pickup on the C&I business as far as really getting a seat at the table and getting deposit flows tied to the businesses that we're banking on the corporate bank sponsorship side. With that, I'm going to just pass the baton over to Lee, if you can get some update on mortgage and what we see the opportunity in respect to the mortgage market. So Lee Smith?
Lee Smith (Senior EVP and President of Mortgage)
Yeah, sure. Thanks, Tom. I think there's a number of opportunities. I think, first of all, just from an origination point of view, if you look at Q3 versus Q2, the market was down 6% quarter-over-quarter, and our mortgage locks were down only 1.7%, and we actually saw gain on sale margin expansion of about 8 basis points or 15% quarter-over-quarter. And I think we've benefited from dislocation in the market, certainly in the TPO channels. We've seen a major player exit. We've seen others exit. We've been able to bring in some very strong account executives. We've brought in some new clients, and we're getting a greater share of wallet from existing customers as well. So we've benefited on the origination side.
To Tom's point, we've right-sized our operation. From an infrastructure point of view, we've taken about 65% of our infrastructure costs out from the high of 2021. And the mortgage origination business, which includes the return on MSR, is profitable, and we're very pleased about that in this environment. That dislocation is also spreading to the warehouse lending business. And so as I mentioned, the market was down 6%, but average outstandings from a warehouse point of view were up $600 million or 14%. And again, as we've seen dislocation and people exiting that space, we've been able to benefit from that, as well. And then I think finally, and you know, Tom has talked about deposits.
When you look at the mortgage vertical, and you look at all the various ways that we're plugged in to the mortgage ecosystem from an origination, a servicing, a lending point of view, and then you've got the cash and treasury management team that we acquired as part of the Signature acquisition. We've got somewhere between $10 billion-$12 billion of deposits that are coming from that mortgage vertical. There's about $5.5 billion coming from the servicing or sub-servicing business and all the loans on the servicing platform, and then there's another $4.25 billion-$6.5 billion, $7 billion from that team that came over from Signature. Some of those are escrow deposits, and so those balances, you know, typically move between $4.25 billion-$6.75 billion.
There's $10 billion-$12 billion of deposits on the balance sheet that are coming from that mortgage vertical and the ecosystem that we're working with day in, day out, and we think we can attract more deposits over time from that ecosystem.
Thomas Cangemi (President and CEO)
Now, the other I want to add in Lee's business is clearly the opportunity that we look at the hybrid arm market right now. We do have a tremendous opportunity as customers are looking away from the 30- or 15-year market and focusing on the shorter duration opportunity, which really is underwriting at very low LTVs, an opportunity for this bank to look at balance sheet opportunities and look at an asset class that we're very comfortable with on putting on, given the changes in interest rates, which will also be a potential for organic growth for the company. Especially tied to the opportunity with some of our new team members who have joined us and focus on that business.
Lee Smith (Senior EVP and President of Mortgage)
Got it. Thank you very much for the thorough answer. I appreciate it.
Thomas Cangemi (President and CEO)
Sure.
Operator (participant)
Your next question comes from the line of Manan Gosalia with Morgan Stanley. Please go ahead.
Thomas Cangemi (President and CEO)
Morning.
Manan Gosalia (Research Analyst)
Hey, good morning. So you spoke about NIM stepping down from 3.27 to about 3.10, and the majority of the custodial deposits going away and earning assets being relatively flat. So it sounds like an NII of roughly a little bit over $800 million or so next quarter is what you're guiding to. So A, you know, do I have that right? And B, you know, I think more broadly, how are you thinking about the run rate for net interest income for next year? Is that $800 million plus number a good starting point from which you can grow through 2024?
Thomas Cangemi (President and CEO)
I'll start, and I'll pass it to Tom, to John, our CFO. I will tell you, big picture, it seems like we got to 3% a lot faster than I expected from the transaction on the overall margin. So obviously, we're, we're still asset sensitive. We're, we're pleased on the results thus far. Regarding future guidance, we don't have future guidance out there in the marketplace, but we are very optimistic with the diversification in our asset mix. We're not that same bank that we were a year ago when it comes to a legacy thrift models. We have diversification that has a lot of floating rate coupons tied to higher spreads. We have unique businesses tied to the C&I marketplace. We have, as we indicated, Lee Smith's businesses that has an opportunity on the hybrid ARM book of business as well.
So when you look at, you know, future asset growth, it's going to be diversification within the portfolio and rates have significantly increased. Just to give you some data points on the CRE multifamily portfolio, we have $18 billion coming due over the next 36 months. Next year alone, it's about $4.5 billion, multifamily coupons of 3.82 coming due, and CRE is 5.75. You bring that to the market, that's a powerful benefit for the asset yield. That goes consistently between $4-$7 billion each year, that we know is coming due, and we'll deal with as it comes due. Not all those loans are not going to stay with the bank, because going back to our focus is going to be relationship banking.
and if the government steps in, the government can gladly step in for customers who don't want to have deposits. But the reality is, we're going to focus on making sure that customers get to the other side, and we're going to work with our customers, very, you know, carefully on the relationship banking side. And if there's no relationship, we're really not interested in partnering with just loan activity that are coming off coupons that are well below the market. So we have an opportunity to really price up that portfolio, and growth is not going to drive profitability in that book. Now, the other lines of businesses can grow very, very favorably here, given the current spreads that we're seeing in all lines of business and banking.
Spreads have changed dramatically across the financial services spectrum since March. As I indicated, with 300 basis point spread, we're not moving on that. We're going to be very proactive to have strong economic spreads on the multifamily CRE side, but it all spreads. That all our line of business has clearly upped it quite a bit given the interest rate environment. So with that being said, I'll pass the baton to John to add more color
John Pinto (Senior EVP and CFO)
Yeah, just quickly on the Q4. We're not going to see declines in the spot balances that we've seen, right? On interest-earning assets or on total assets. So total assets is about $111 billion. That, you know, we're not going to see the continued drops in that that we've seen in the last couple of quarters due to the pay down in the cash. The average will still be down, just not down as much as it was when you look at Q2 to Q3 as our expectation. So it's not going to be at exactly the $107 billion. We just believe that the rate of change on the average is starting to decline as we're hitting our spot balances here.
We don't think we'll drop much lower than this, this $111 billion that we were as of 9/30. So you know, that's, that's the only piece I want to make sure that I clarify.
Thomas Cangemi (President and CEO)
The one other point I would say, we're really focusing on creating this institution that we're going to be agnostic to changes of interest rates. We really want to get away from being so significantly asset sensitive and/or liability sensitive, where on the legacy thrift model, that was our Achilles heel. We had a significant history of liability sensitivity. We're moving towards, as John indicated, neutrality. We're still asset sensitive, and it's rising rate environment. The current rate environment that will add to continued margin benefits. But ultimately, rates go up or down. We want to have a very strong margin as we run these businesses through changes of interest rates. That's the focus to build this institution going forward under the new Flagstar.
Manan Gosalia (Research Analyst)
That's helpful. And, and just a clarification there, the loans that are coming due over the next year, the yield pickup on those loans would be 300-400 basis points or so?
Thomas Cangemi (President and CEO)
I mean, right now, the multifamily books for next year is a 3.82% coming due, and its CRE is 5.75%. Markets is what? Right now, about 300 basis points off to five years, probably close to, close to [audio distortion]
John Pinto (Senior EVP and CFO)
Yeah.
Thomas Cangemi (President and CEO)
It's a pretty big difference. We have different product mix, which we're proud that we've offered to our customers to work with them. We have a structure that's synthetic, that kind of mimics what's being done in the government market, which is a new product to the bank. We have the SOFR option on repricing, which has been very positive for their refinancing opportunities, and they'll choose when they want to lock in long. Most of our customers feel that in the years ahead, there'll be lower rates. So they're waiting on the sideline, paying a much higher interest rate today, the ones that are staying with us, and the ones that are going away are typically going to the government.
Manan Gosalia (Research Analyst)
Got it. Okay. And then, another, just another question on expenses. It looks like there's high expenses associated with the Flagstar conversion and the Signature loan portfolio servicing that will come out at some point in the next year. Can you size the expense benefits that come from that?
John Pinto (Senior EVP and CFO)
Yeah, we're going to provide our, you know, a full 2024 guide, you know, at our next conference call in January. But as we mentioned, we see both headwinds and tailwinds for 2024 when compared to 2023, and those systems integrations will provide us the benefit and some cost reductions, as well as depending on what happens with the rest of the FDIC receivership loans, the multifamily and the CRE loans. If those do end up transferring to a purchaser in this Q4, then we'll have some benefits also on the cost side, from, you know, from that excess servicing that we no longer have.
Manan Gosalia (Research Analyst)
Great. Thank you.
John Pinto (Senior EVP and CFO)
Sure.
Operator (participant)
Your next question comes from the line of Casey Haire with Jefferies. Please go ahead.
Thomas Cangemi (President and CEO)
Morning, Casey.
Casey Haire (Managing Director of Equity Research)
Yeah, thanks. Yeah, good morning, everyone. So sorry to beat a dead horse, but I do want to another follow-up on the NIM. So if I'm understanding this correctly, you expect cash to be flat, but you still have $2 billion of custody deposits, you know, that are going to run out in the near term here. So, what is that? So how are you going to fund that, given that DDA ex the custody was still down $1 billion? So, is that CD-
Thomas Cangemi (President and CEO)
Yeah, so we-
Casey Haire (Managing Director of Equity Research)
Deposits? Sorry, go ahead.
John Pinto (Senior EVP and CFO)
Yeah. So yeah, correct. We expect cash and securities, when you look at them, look at them combined, to be relatively flat, depending on the changes in the balance sheet, right? We are hoping to bring in deposits from multiple teams, is what Reggie was speaking about, and Eric, on both the consumer and the private banking side. So you know, any shortfall we can make up with, you know, either in the brokered CD market, or in the wholesale borrowing market, just to ensure that we have the appropriate liquidity on the balance sheet, you know, for you know, each quarter that we go through this process.
So, you know, we just, we don't expect significant changes in significant drops from the period end balance, but, you know, we'll take a look and see what market conditions provide and how our deposit growth comes in in the Q4.
Casey Haire (Managing Director of Equity Research)
Okay. So, I mean, it's-
Thomas Cangemi (President and CEO)
Tom, just on that point. Now, when you think about where we came out of March, you know, we were in a different position, right? We had a lot of liquidity. We had the ability to take a step back. We weren't chasing deposits. We weren't chasing rates. So we've been very proactive on paying down broker deposits, high-cost brokers, also, you know, high-cost borrowings that came due as a strategy to get to 12/31. That's, that's the public strategy from the receivership transaction. Going forward, it's going to go back to an organic strategy and focusing on, on deposit initiatives out all of our lines of businesses.
Casey Haire (Managing Director of Equity Research)
Okay, understood. Then just one more on expenses. The guide for 2023 implies a pretty wide range of anywhere from $510-$610 in the Q4. I mean, I think most of us expect kind of a flat number, but your guide does allow for some upward expense pressure in the Q4. Just wondering what would drive that if it, you know, another $20 million or so?
John Pinto (Senior EVP and CFO)
Yeah, I would think that, you know, given where we came out in the Q3, you know, the Q3 had higher expenses compared to the Q2. I wouldn't expect the run rate to be above that, so that would fall us right, really close to the middle of the guide. And I think there's, you know, opportunities to do slightly better than that in the Q4 as well, to get to more the mid to the low end of that guide. So yes, when you have the guide for the year, when you only have a quarter left, I understand why it's pretty wide, but I would focus on the midpoint of the guide.
Casey Haire (Managing Director of Equity Research)
Thank you.
John Pinto (Senior EVP and CFO)
You're welcome.
Operator (participant)
Your next question comes from the line of Matthew Breese with Stephens. Please go ahead.
Matthew Breese (Managing Director and Research Analyst)
Good morning.
Thomas Cangemi (President and CEO)
Morning.
Matthew Breese (Managing Director and Research Analyst)
Tom, I was hoping you could touch on the wholesale borrowings coming due in the Q4. I think they had a near 4% rate. What's the anticipated strategy with those as they seemingly get calls?
Thomas Cangemi (President and CEO)
I'll pass that to John. John?
John Pinto (Senior EVP and CFO)
Yeah, including the puts that we have, it's three billion dollars at 4%, for the rest of this quarter. Given where the portables are of that amount, it's about a billion and four in portables. We expect they will be put. So, you know, that three billion dollars we would expect to refi unless we have deposit growth to pay them off. We'd expect to refi them in the market, as we go forward here. Or like I said, if we have deposit growth, we'll pay them off.
Matthew Breese (Managing Director and Research Analyst)
Okay. And similar to the Signature custody deposits running off, we should not really anticipate that much movement in cash balances from 3Q to 4Q. It feels like the $6 billion level is where you want to keep cash for now.
John Pinto (Senior EVP and CFO)
Yeah, when you look at—I would look at the cash and the securities together, but I think that's right, around $6 billion, you know, makes sense depending on, you know, the level of deposit growth, what we're seeing, the type of deposits that come in. You know, we want to make sure that we're—we stay liquid, from an on-balance sheet perspective with cash and security. So I think around $6 billion, you know, makes sense on the cash side, depending on where our securities end up.
Matthew Breese (Managing Director and Research Analyst)
Okay. And then just to clear up the prior discussion around average earning asset balances for the Q4, it sounds like, you know, maybe they will trend lower, just not at the same pace we just saw. Is that an accurate statement?
John Pinto (Senior EVP and CFO)
Right. That's right. The spot balances are not going to move dramatically from the $110, but the average will still trend down. It's just the rate of change is starting to slow. Right?
Matthew Breese (Managing Director and Research Analyst)
When do you expect to start to see average earning asset growth again?
John Pinto (Senior EVP and CFO)
I think once we get through the Q4, and you know, that these custodial deposits are the biggest driver of this, right? I mean, we went from, you know, $6 billion at the end of June to $2 billion now. And then, you know, we have after that, once we get to December, we're going to be very, you know, very low in that number. So I think once we hit our December period end balances, which will not be too dramatically different, we don't believe, to the 9/30 piece, then we'll start to see the average start to stabilize and start to grow, depending on loan growth, once you get into the Q1 of 2024.
Matthew Breese (Managing Director and Research Analyst)
Okay. Just going back to credit, beyond the office, the office loans. Within the release, it showed that multifamily loans, I think NPAs there are up to $60 million, just been steadily increasing. I was hoping you could talk about your broader multifamily portfolio. How much is rent-regulated? I think in the past it's been $19 billion, of which $13 billion are for buildings where units or rent-regulated units are north of 50%. Starting to see any sort of cracks there? It just feels like there's a pileup of issues, you know, from the 2019 rent laws. Now, let me start off, and I'm going to pass the time to John Adams, who runs that portfolio. The reality is that it's one-off families
Thomas Cangemi (President and CEO)
And most banks have widened their spreads given the economic backdrop of what we're seeing in credit spreads. So it's been a relatively strong book. Like I said, a very powerful position regarding the consistency of performance. We're not seeing trends with that. I'll pass over to John to get some color.
John Pinto (Senior EVP and CFO)
Sure.
Thomas Cangemi (President and CEO)
John?
John Pinto (Senior EVP and CFO)
Thanks, Tom. Yeah, exactly what Tom said. Some of those instances are really more family-related issues and not really the performance of the assets themselves. There are some instances where a lot of the issues from them not being able to pay timely is because the tenants aren't paying. And those are typically in the more working-class neighborhoods, in the rent-regulated properties that, you know, they know the system. They know how to, you know, drag on an eviction process. So, it's not really rapid. And for the rest of the portfolio, outside of those isolated instances, the market rents, like Tom mentioned earlier, are up, I think, 4% month-over-month. And, you know, you just can't kill the New York multifamily market.
So we're monitoring the rent-regulated properties closely, but, you know, there's not really a lot of cracks in that particular portfolio that is really raising anything for us to, you know, have any real concern over it right at this time.
Matthew Breese (Managing Director and Research Analyst)
Okay. The follow-up question there is, you know, Signature's, of course, real estate multifamily, and then rent-regulated multifamily portfolio is being bid out and some of the news articles out there are citing this as a more difficult portfolio to sell. When it sells, if it sells, and depending on the price, does this come into play for your balance sheet in any way, shape, or form? You know, does it impact the level three asset pricing and your estimated fair value of your own loan portfolio?
Thomas Cangemi (President and CEO)
Let me give you my big picture thoughts on that, right? We're a cash flow lender for deeply discounted rent rolls. We've been doing this a long time. We're not mark to market. I can't comment specifically on what's going to happen for the unknown on the portfolio, but ultimately, my guess is that the assets will trade. I think it'll be a little bit more complicated given the rent-regulated nuance and portion of that portfolio. In my view, that's something that's got interesting views in respect to the ongoing landlords and the tenants and a happy relationship going forward, whoever buys that portfolio. That's something that's a nuance that we haven't seen before because we haven't seen such a large transaction in the market.
But the non-rent-regulated portfolio will trade at a clearing price, depending on interest rates and credit marks. And I don't believe, in my opinion, it's going to impact mark to market in respect to an institution that's been putting on the portfolio loans to maturity and the ability to hold that portfolio as a cash flow lender. And as far as trade-clearing prices, at the end of the day, there's not a lot of trades going on. There's not a lot of activity, buying and selling. These assets will go through the market eventually, and we'll deal with the outcome of that activity. And there'll be probably some smart individual investors that will probably do financially well by pricing it accordingly.
It gets a little bit more complicated on the rent-regulated portfolio just because of the community ties and the nuances between landlord and tenant relationship. You know, we've done a tremendous job on really managing that process, as a community institution, focusing on working with the landlords, working with the tenant community groups, and being part of that ambassador in between that. A new player coming in that doesn't have that, you know, that culture, that history, can make it challenging. So that seems a little bit complicated, but at the end of the day, like, my view is the assets will trade eventually, and we'll move on from that.
I don't call it a mark to market per se, because if you're, if you're a cash flow lender, and we are a discounted cash flow lender, given that rent-regulated portfolio, that's traditionally significantly below, traditional market, rent rolls.
Matthew Breese (Managing Director and Research Analyst)
Got it. Okay. Just last one for me, more broadly, what is the size of your overall syndicated loan portfolio? And maybe just give some color on the credit metrics behind it.
Thomas Cangemi (President and CEO)
Reggie, you want to hit that? Or if not, we can probably get back to that on that one. Reggie, you have any color there?
Reggie Davis (Senior EVP, President of Consumer and Corporate Banking)
Yeah. I don't have that exact number at my fingertips, but we can get it.
John Pinto (Senior EVP and CFO)
Great.
Thomas Cangemi (President and CEO)
I will tell you-
John Pinto (Senior EVP and CFO)
I'll leave it there. Thank you, everybody.
Thomas Cangemi (President and CEO)
Just one point on that. We are building a corporate bank sponsorship division that actually participates on originating and selling to the syndicated market, generating the opportunity for fees for the bank going forward, with more of a commercial bank flair to that, using the derivative marketplaces. So really moving towards that commercial bank mentality, not just making a loan and holding a loan, but making a loan and holding a piece of the loan, but selling a large amount of the exposure off to the secondary market. So that's going to be the strategy as we build out the commercial bank model.
Reggie Davis (Senior EVP, President of Consumer and Corporate Banking)
Yeah. Tom, Tom, let me just... Let me—I think that's an important point. When you ask about the size of syndicated book, we use syndications primarily to sell down positions. We're not out buying participations for the most part. That is primarily an offensive play for us and allows us to participate to a larger extent with our most important clients and still keep our relative exposure low. That's how we use that function.
Thomas Cangemi (President and CEO)
That's right.
Operator (participant)
Your next question will come from the line of David Smith with Autonomous Research. Please go ahead.
David Smith (Analyst)
Morning. Good morning. Appreciate the clarification on the earning asset outlook. I think a lot of us were confused that, you know, getting to flattish on an average mark when the spot balance was more around 1 or 2. But it sounds like you're just saying that the decline will be smaller than the $4.2 billion that we saw in average assets from 2Q to 3Q, so, you know, something above $1 or $3 billion, presumably for the Q4?
John Pinto (Senior EVP and CFO)
Yeah. What we're talking about is the actual spot balance. We don't anticipate to be dramatically smaller. A lot of the pay downs have already occurred. As I mentioned at the last, you know, the last question, cash around $6 billion, give or take, where securities end. So, you know, the significant drop in cash is basically stopped here. So this is about where we'll be. So the average will continue to decline as it catches up to the spot balance. And then once that's been pretty consistent, you know, which we believe will start in the Q4, then hopefully we can see some of the average balances start to grow after that.
David Smith (Analyst)
Okay, got it. And then beyond the bulk of the remaining $2 billion of custodial deposits running off, presumably in a week or so, as you said, I appreciate that you're expecting and planning for some deposit growth across the businesses, but is there anything else we should keep in mind in terms of seasonality of deposits or anything like that, that might, you know, help influence the average balance in the Q4 compared to the 9/30 spot balance?
John Pinto (Senior EVP and CFO)
No, I don't... Nothing specific, on my side. Reggie, anything you could think of from a seasonality perspective?
Reggie Davis (Senior EVP, President of Consumer and Corporate Banking)
No, there's really not seasonality. There's some movement within the month, but basically, any seasonality would relate to production. There is a little bit of seasonality in that, but that doesn't really affect the overall balances in the book. So no.
David Smith (Analyst)
All right. Thank you. Appreciate the color.
John Pinto (Senior EVP and CFO)
Sure.
John Adams (President of Commercial Real Estate Finance)
Our next question will come from the line of Steve Moss with Raymond James. Please go ahead.
Thomas Cangemi (President and CEO)
Hi, Steve.
Steve Moss (Managing Director)
Good morning. A follow-up on the, you know, multifamily lending and commercial real estate. Just given where pricing is these days, you know, curious where, you know, debt service coverage ratios are shaking out, you know, whether it's on a renewal or reset, and, you know, if you're seeing any borrowers who are having to put up additional cash to support the property.
Thomas Cangemi (President and CEO)
I'll start the response, then I'll defer to John Adams. But I will tell you that it's been relatively strong, given many of the customers are able to look at their options, and their option is a SOFR option or a fixed-rate option, and we work with them, and they have the capacity to continue to pay. The ones that are looking to get more dollars, I think it's falling through between. Is that fair, John? ...
John Adams (President of Commercial Real Estate Finance)
Yep.
Thomas Cangemi (President and CEO)
And the reality is that when they do have significant equity and they're looking for locking in more, which a lot of them are, they're not looking to lock in more. They really believe rates will be lower in the future. They're choosing to roll to the higher coupon in the market. And when they do go to the refinancing market, it's us and/or the agency market as being the opportunity. And like I indicated, we're focusing on relationship deposit banking. So it's going to have compensating balances, which is going to be critical for our business model going forward. And more importantly, if there's equity there and they're looking at economic spreads, they're much wider, and the government's probably slightly tighter than us, and that's an option to go along.
But a lot of customers are waiting this out, thinking that in 2024, 2025 is when they're going to make that longer-term decision. So maybe John, you want to comment.
John Adams (President of Commercial Real Estate Finance)
I'll just add to that. But yes, of course, if they're just repricing, and they're leaving a, you know, a three-handle, four-handle coupon, and, you know, today it's seven plus, sure, the debt service coverage isn't where it was typically when the loan was originated. But there's still enough coverage for them to meet all their obligations, operating as well as debt service. And obviously, we track that on an annual basis, and if they are, you know, less than what we would expect, they get risk-graded accordingly, and they get reserved the way that they should be based on our model.
So something that we do definitely keep an eye on, but in answer to your question, if there's not enough to re-refinance out, yeah, the debt service coverages have come down, but not to the point where they can't meet their obligations.
Thomas Cangemi (President and CEO)
I would say we haven't seen many customers that had to write a check to do a refinancing. Yes, but rates are much higher than they were a year ago. And as the customers come to us, our goal here is to get them to the other side. It's a difficult environment coming from, you know, a much lower rate, let's say in the mid-3s to now, let's say mid-7s to almost 8 on a fixed rate. You know, you can probably do something floating somewhere in like 50, 60 basis points below that, and government's probably going to be 50 basis points inside of that. So we're being proactive to get the customer to the other side, given the challenges, because of the significant changes of interest rates.
Steve Moss (Managing Director)
Okay. And then on the office portfolio, just curious here, John, you mentioned a qualitative factor for office. Curious, what's the reserve allocated to that portfolio, just given the mix of criticized and classified?
John Pinto (Senior EVP and CFO)
Yeah, we don't split it out specifically, but it is something that has been growing, especially given the $62 million provision that we booked this quarter. But like we talked about before, these... You know, prior to this quarter, the performance has been extremely strong, so we continue to look at that. We continue to look at the DSCRs and the LTVs in the portfolio as well, as well as the deep dive we've been doing into, you know, the underlying, you know, leases in the portfolio. So, you know, we're comfortable with where we are right now, but, you know, we did start to see a bit of a build, an allowance build here this quarter.
Steve Moss (Managing Director)
Okay, great. Thank you very much.
John Pinto (Senior EVP and CFO)
Thank you.
John Adams (President of Commercial Real Estate Finance)
Your next question comes from the line of Peter Winter with DA Davidson. Please go ahead.
Thomas Cangemi (President and CEO)
Morning, Peter.
Peter Winter (Managing Director and Senior Research Analyst)
Good morning. Good morning, Tom. Will you guys have to go through the formal DFAST exam next year? And I'm just wondering if you can quantify, you know, the expense component that needs to be realized as part of a DFAST bank.
Thomas Cangemi (President and CEO)
Well, let me, let me just start off, and I'm going to pass that to John. We are going to always go through a capital planning process, and we've been doing the DFAST process prior to the change in the limit when $50 billion became much higher. With that being said, we will go through that process. I believe we'll go through that process in early 2024. And I don't believe it's a public process, but it's going to go through the process, and we're preparing for that. So, John, if you want to-
John Pinto (Senior EVP and CFO)
Yeah, that's right, Tom. I mean, we, you know, we'll continue to do what we have been doing and since we started building to get ready for the old $50 billion threshold back in 2012 with preparing a capital plan, submitting a capital plan, you know, going through the process. We have a significant stress testing group that we've put in place a long time ago and have added to, to be ready for, you know, the plan to be ready to be over $100 billion. So yes, we'll be performing those-- we will be performing that process in 2024. And then, you know, we'll probably be part of the next cycle when it comes to the public process that Tom was mentioning.
Peter Winter (Managing Director and Senior Research Analyst)
Got it. Okay, thanks. Then can you just talk about maybe the outlook for provision expense? When I look at the ACL ratio, you know, it increased a little bit to 0.74%, but do you need to keep adding to reserves just given the change to the composition of the loan portfolio?
John Pinto (Senior EVP and CFO)
Well, there's no doubt that the loan portfolio composition has changed, and we're a much more diversified lender now than we have been. And that ratio has consistently gone up since the acquisitions of both Flagstar and Signature. But you know, what it really comes down to under CECL is the macroeconomic factors and the performance of the portfolio. So, depending on, you know, what the trend is here in those macroeconomic factors. You know, we have seen them decline, but you know, relatively, a stable decline in those types of factors.
But we'll, if depending on how that comes out and depending on the growth in the portfolios, you know, we could see the provisions move around a little bit here, but it really depends on those macroeconomic factors and what we're seeing in the individual portfolios.
Peter Winter (Managing Director and Senior Research Analyst)
Okay. Got it. Thanks very much.
John Pinto (Senior EVP and CFO)
Hey.
Operator (participant)
Your next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Please go ahead.
Christopher Marinac (Director of Research)
Hey, thanks. Good morning. Hey, thanks for taking all of our questions. Tom, just a quick one about the enforcement of kind of new deposits with new loans. Can you write in your contracts higher interest rates if the compensating balances go below certain thresholds? Is that something that you can do in this era?
Thomas Cangemi (President and CEO)
No, what we have in our, on our agreements, we do have requirements to have operating accounts. You know, no question during the pandemic, it was critical, and it really gave us some good guidance on where the cash flows are coming in, given the unknown of the pandemic. We carried into that, into our docs, that we have, you know, an expectation of an operating account, regarding the cash flows of these, in particular, the properties that we have to make sure that the cash flow is coming in. But I think the reality is that we have long-standing relationships. We are going to prioritize the capital allocation towards relationship banking in all businesses, and I think that's how we're going to be successful.
There was a significant shift about three years ago, and it's been very proactive on CAGR growth of significance when it comes to the multifamily CRE portfolio. I would say as far as what we saw running out of the bank is maybe 5%. The 95% will understand that we want to ensure that we have a strong depository relationship. And as we move forward, it'll be more towards this expectation of compensating balances. And in many instances, that also applies to lines of credit. I mean, we're really working with the client to really ensure that we are their bank partnership. We expect reciprocation when it comes to the business opportunity.
If it doesn't happen, we're very glad to allocate that capital to other lines of businesses, and we have other avenues where historically we did not.
Christopher Marinac (Director of Research)
Great, Tom. That's great clarity. Thank you very much, again, for all the information this morning.
Operator (participant)
Our final question will come from the line of Chris McGratty with KBW. Please go ahead.
Thomas Cangemi (President and CEO)
Morning, Chris. You're the final.
Chris McGratty (Managing Director And Head of U.S. Bank Research)
Yeah, thanks for the follow-up. Just a clarification, two quick modeling questions. The expenses, I think last quarter you said included in your guide was a potential for an FDIC assessment. I just wanted to verify that. And then secondarily, do you happen to have the spot deposit costs and beta assumptions here? Thanks.
John Pinto (Senior EVP and CFO)
Yes, in that $2 billion-$2.1 billion, the FDIC assessment is in that guide. And then when you're looking at betas quarter-over-quarter, they were relatively consistent in September. We're still under 40%, just under 40%, both in June and in September. And our spot interest-bearing, you know, basically our end of September interest-bearing deposit cost for the quarter was 3.37%, and then really towards the end of September was 3.50%.
Chris McGratty (Managing Director And Head of U.S. Bank Research)
All right. Thanks, John. Perfect.
Thomas Cangemi (President and CEO)
Great. Well, thank you again for taking the time to join us this morning and for your interest in NYCB. We'll see you. We'll be speaking to you in January. Thank you all.
Operator (participant)
That will conclude today's call. Thank you all for joining. You may now disconnect.