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Good morning, ladies and gentlemen, and welcome to the NYCB Second Quarter 2023 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, July 27, 2023.
I would now like to turn the conference over to Sal DiMartino. Please go ahead.
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 as 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 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.
With that out of the way, I would now like to turn it over to Mr. Cangemi.
Thank you, Sal. Good morning, everyone, and 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 the Signature.
This is our first quarter with all three legacy franchises combined under one umbrella. Not only are we benefiting financially from our combinations, but 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 a combined organization.
From an earnings and net income perspective, diluted earnings per share as adjusted for $141 million bargain purchase gain and other merger-related items, we reported a record $0.47 per share. Our net income available to common stockholders totaled a record of $345 million more than doubled 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 in 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 are increasing core deposits funded liability mix.
Our funding composition continues to improve as core deposits increased while CDs both retail and brokered decline. Also, wholesale borrowings declined 24% as we use 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.
In addition, 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 30, 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 are 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 the 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 metric remain strong – 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 discipline underwriting and client selection.
Furthermore, the allowance of credit losses increased $44 million to $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 deposit was our deposit base. Total deposits increased $3.7 billion or 17% annualized on a linked-quarter basis to $88.5 billion as 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 are approximately $5.9 billion of custodial deposits related to the 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 declined $1.4 billion on a linked-quarter basis, excluding custodial accounts. This was primarily due to a planned runoff in higher cost CDs and brokered 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 295 to 305, mortgage gain-on-sale between $20 million to $24 million. Net return on MSR asset is between 8% to 10%. Loan admin income of approximately $15 million and annualized expenses ranging between $2 billion to $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.
Finally, I'd like to say a special thank you to all of our teammates, which now in number nearly 10,000 strong, our results would not be possible without their dedication and commitment to our clients and our customers.
With that, we'll 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 you don't, please feel free to call us later today or this week.
Operator, please open the line for questions.
Thank you. Ladies and gentlemen, we'll now begin with a question-and-answer session. [Operator Instructions] First question comes from Brody Preston with UBS. Please go ahead.
Good morning, Brody.
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 servicing maybe of the FDIC – the loans you're servicing for the FDIC. How long will those stick around? And I guess in conjunction with that, how long will the loan administration income from the subs – or the loan administration income from the subs servicing of those loans stick around as well at that $15 million level?
Sure. So Brody, I'll pass it over to John Pinto. It’s in our guidance. So John, why don't you just speak specifically to those issue?
Yes. So we'll start quickly because it's in the guidance with the loan admin income. So this is the cost recovery of servicing the loans that we did not take as part of the Signature transaction. So if we look back at what those words, the CRE book and it's the fund banking loan. The fund banking loans have paid off pretty significantly in the quarter. So that's why we've seen a larger number in that loan servicing income number, and the 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.
So 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. So we will see lower FDIC or custodial deposits related to Signature as the loan portfolio shrink. And 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'll start to see those numbers drop as we go forward.
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 that 285 of that was related to Signature. And so Tom, maybe you could give us an update in terms of how the work is progressing to kind of bring back those Signature non-interest-bearing deposits that left before the acquisition?
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. So we think about where we're heading with business on the private client group. We anticipate to have more PCG teams, 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 and as we indicated, we were up slightly, which is a very positive signal based on what we anticipated when we announced the transaction. So clearly, better than expected.
I think what's exciting about it is that the opportunity to take the business model and look at the other opportunities that we have as a combined company and look at the overall corporate finance opportunity they have within this middle markets groups. So 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. And not only are we seeing positive momentum there, the teams are excited, they're stable, and we believe that over time, as things start to stabilize, we'll get more deposits back. But we have Eric here on the line. Eric, if you want to share some commentary about what we're seeing with the teams.
Yes. 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. So we are seeing strong demand deposit growth because 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. So we're seeing clients come back, we're seeing new client growth and we're obviously seeing the ability to attract new banking teams. So it's going to be very powerful as we look forward.
And that's also pre-First Republic. As we focused on the opportunity that's dislocated in the marketplace, we believe there's great, great opportunities regarding to bringing our 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. So we're excited about that.
Got it. And John, do you happen to have the purchase accounting accretion number for the quarter?
Yes. So 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 faster. We had more significant pay downs in the loan portfolio than we anticipated. The portfolio dropped by a little under a $1 billion due to a couple of different movements between loan categories and our negotiations about which loans that we took, that we talked about on the last call. So 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.
Got it. Okay. And the last one for – yes, go ahead.
Yes. Sorry, Brody, just going forward, I would expect that to be more in that $50 million, $55 million range. But it is of course as you know, depending on which loans pay down and what kind of marks we had against those loans.
Got it. And then the last one for me, Tom, I think you had addressed the uptick in NPLs. I thought I heard you say that was from the inclusion of acquired loans or something. I was just hoping you could address the CRE, the increase in the CRE NPLs, and if any of that was tied to office, just because I noticed that you said that you did have – you've gotten a decent amount of office reappraisals done at this point as well?
Yes. So specifically to NPAs, we had an uptick on Signature loans that we acquired, so you would assume that's in the purchase that's probably all embedded in purchase accounting. We're comfortable that we're covered there when it comes to any potential loss there, but 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. The other – that's about $22 million in total from the loans acquired from Flagstar. So overall, it was flat when you take out the acquisitions.
Got it. Okay. Thank you very much everyone. I appreciate it.
Thank you. And next question comes from Steve Moss with Raymond James. Please go ahead.
Good morning, Steve.
Good morning. Sorry if I missed it here, but I wanted to ask about the First Republic team, just kind of teams you hired, just curious as to what kind of book of business or how big their book of business is and any color you can give there Tom?
Please let me start off by saying we're super excited to have them and we're super excited to build it, to build a PCG model and continue to invest in that model. So we are making investments, clearly Signatures growth organically is the model, right? So it's very similar entrepreneurially in how they look at the business as a high touch service, focusing on boots on the ground and making their clients very comfortable on a banking perspective. So 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 there is a lot of activity out there and hopefully we continue to be successful on convincing these team members to become part of the new Flagstar. So Eric, if you want to give some more color there.
Yes. I mean, each one of these teams comes with a book of billions of dollars of deposits and loans as well as wealth assets in the AUM. So very excited to have all of them. They're three in New York, three in California thus far as Tom alluded to. And we just feel that, 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. So this is a great home for them. It's 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, but billions in deposits and loans per team.
Okay. Appreciate that color. And Eric, you mentioned that deposit momentum remains strong. Sounds like it's into July. Is there any color you could give around the trends you've seen after June 30, just to kind of get a feel for what's coming on?
Well, 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. So we anticipate to see that runoff eventually and that the sale was done, I'm assuming the deposits will follow. But outside of the anticipated businesses that were not acquired through the transaction, we see strong stability. And in addition to Signature transaction, the community bank 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. So maybe Reggie, you can add some color to what we're seeing on the retail side.
Sure, Tom. So yes, as Tom said, through the balance of the year, we had lost about 3% deposits through the liquidity challenge that the banking industry faced. But we're starting to see those deposits come back. They definitely stabilized and we're actually starting to see some modest opportunity for growth. We're projecting actually, does the deposit stay relatively flat through the balance of the year, and that our weighted average cost is de minimis in terms of the increase.
So we feel really good about the stability of that portfolio. I think it reflects the strong relationship that our bankers have with our clients. And then in the commercial side, equally, we're seeing some opportunity to actually gather some deposits because we look at opportunities to strategically bring on clients, who are maybe disenfranchised from other lending organizations that cannot land in the current environment. And so we're actually picking up some relationships on that side as well. So very positive momentum on the deposit side.
That's great color. I would just addition – culturally, the focus here is, is relationship deposit gathering in all of our lines of businesses. That's the culture here going forward. I've said it many quarters, deposits, deposits, deposits, culture, culture, culture. And on the culture build, we're really meshing well with putting three companies together to build a new Flagstar. And clearly, I think on the lending side, our lending teams truly understand that we're leading with the 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. But we've made significant strides in that way over the past few years. Notable, if you look at the percentage of wholesale to total deposit. So we're excited about that, but that is the culture. That's all we're building here.
Great. Appreciate all the color there. And one last one for me, just on expenses here. As you look to integrate all three banks, kind of curious as to where you think – if you have any update as to where the expense run rate could shake out post the integrations in some point in 2024?
I mean, we gave public guidance, it was about $2 billion to $2.1 billion. Is that right, John? That was the public guidance we gave. But that's fully loaded with anticipation of being a $100 billion plus bank, the First Republic teams that we anticipate bringing on. So 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 with this location. And we feel that as we go into 2024, you'll start seeing a lot of integration benefits of putting the systems together. So the significant adjustment that we'll see next year will be through consolidations of systems, and we're looking forward to that. John, do you want to add some more color?
Yes. So when you look at that $2 billion to $2.1 billion, 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 2023 to 2024. So that's where we're comfortable, very consistent with what we said in our last call where we mentioned we might see some of the upcoming quarters be a little bit higher, but we think it will stabilize over time or we think it'll stabilize in this range.
And that has anticipated cost structure of the new teams. Maybe Eric can talk a little bit about economics, how we viewed the business and how we can build that to neutrality and ultimately to a total return basis.
Ultimately, we see the deposits and loan growth that will be coming in getting us to a breakeven in about a year and a total earn back in 18 months on that, which is pretty normal for team growth, right? 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. So it does take a little bit longer for them to ramp up and get to a breakeven point because you just don't have those revenue streams out of the gate. But what happens over a multiple of years is that they continue to grow, right? And they don't stop growing because of the way that we align their interests with those of the overall bank. So when you look down the road after three years, they're well into 20-plus percent ROE and that'll continue to ratchet up over time.
As we pay down expenses – finance. That's the goal.
Great. Thank you very much.
Sure.
Thank you. Your next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.
Good morning.
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?
Yes. That's the benefit. We did keep that money at the Fed, the number – that was the number at June 30. The average number was a little higher. When you look back at especially April and May, but yes, it's at about 5%. I'd say the average is probably closer to $8 billion.
Got it. So as these deposits come down, and I think you're saying, they should only really start coming down in the fourth quarter, right? So over the next quarter or so, should you still get some benefit?
No. The large piece, and that's why you see the guide on the margin being lower than the 321 actual in Q3, right? So 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 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, that the cash flows from that portfolio occurred in Q2 compared to our – we're expecting them to occur in Q3. So we're going to see that that $6 billion go out very, very quickly in July.
It’s in our margin guide.
Correct.
Got it. All right. Perfect. And then separately, just on regulation, we're expecting the Basel III endgame rules today. Now that you're over a $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?
So I'll start off and I'll defer to John, but obviously this is – until the rules come out, we'll have the clarity, so we will have it when you have it, hopefully very soon, sometime today. At the end of the day, we spend a lot of time thinking through it, and obviously we believe there'll be some type of implementation period, but 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. So 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 a $100 billion.
Just bear in mind, over the past decade, actually going back to 2012, we've been preparing to be a CCAR bank, and since we've – right before the Flagstar transaction, we were preparing to be a $100 billion bank, right, under the new rules. So clearly this is going to have some impact, and when we see the actual literature on it, we'll assess it and run the analysis to see how it'll impact us, but clearly, we're prepared for it. And John, if you want to share some color there as well.
Yes. For some of the items that we're expecting is going to be in the proposed rules, including the lack of an AOCI opt out. We actually screen really well when you look at us comparative to our peers in the $100 billion plus range, where you look at CET1 when you include the loss on securities. And we jumped to the top quartile of capital ratios against a lot of our peers. So there's a lot of – no doubt, a lot of work will do once the proposed rules really come out and we'll analyze it. And as Tom mentioned, we'll deal with the implementation period and go forward from there. No doubt there'll be higher needs for capital, but we are generating it on an organic basis right now, which is really nice to see.
That's right.
Right. And your forward expense guide would also include any investments that you need to make on the regulatory side to become a larger bank or to be a large bank.
That's right.
Great. Thank you.
You are welcome.
Thank you. And next question comes from Bernard von-Gizycki with Deutsche Bank.
Good morning, Bernard.
Hey guys. Good morning. Just on loan growth. So it was 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. So I was just wondering, 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?
It's interesting. We've had obviously a disrupted market since the Fed was very proactive on raising interest rates, at least on the multi-family CRE side. So 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. So we've had about $3.4 billion that we didn't have in a year-ago, or a year and a half ago that opted to take the SOFR option, which puts it in a very good position, right now that's slightly south of 8%, coming up at 3% coupons, and they're paying the bills, which is phenomenal. And these are wealthy customers, and they're making business decisions not to lock in a fixed rate structure.
And the other side of that, we were also opted to put into synthetically some structure that allows them to lock in, 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, but on the multifamily side, it hasn't in CRE, it's not a lot of activity. So we think that'll turn in 2024, 2025 as rates may go lower for them, and we'll have a lot of opportunity. At the same time, what we're gearing up for the Signature portfolio that's interrelated as customers. So we're going to look at those opportunities and bank the relationship that we have. We have a lot of cross relationships, so we think there will be some good growth there as we go into 2024 and 2025.
So 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 we look at the businesses. And more importantly, we're hurdling at expected returns because credit trends are much tighter right now. So we're able to offer a much higher rate given the marketplace. So it's a tighter credit market in all our businesses. So we're seeing strong opportunity in builder finance.
You mentioned Warehouse. Warehouse is doing extremely well because of this location. 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, so 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. But 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. So Lee, if you want to talk a little bit about Warehouse, MSR and you may want to talk a little bit about the mortgage business as well.
Yes. Sure. Thanks, Tom. So let me start with Warehouse and you'll see from the numbers average balances were up $600 million quarter-over-quarter. Now 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. But as Tom mentioned, there's been dislocation in the Warehouse space, and we've seen a number of players announced that they're exiting and 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. And so 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. And the great thing about Warehouse is it turns very quickly. And so 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. And so 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.
And then just coming back to mortgage originations generally, and 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. And our fallout adjusted locks quarter-over-quarter increased 70%, that's what we calculate gain on sale. The vast majority of that increase, we’re 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. So a lot of this dislocation is really playing into our hands and we feel good about our positioning. We've been in the mortgage business 35 years. We've been in the warehouse business 30 years and we're performing very well right now.
Yes. So in addition to that, I think that the reality is that we are in these businesses and they're thriving, but more importantly, the focus towards complete banking relationship. We're seeing good deposit flows, we want do better, we want to have higher compensating balances, but that's the mandate. And given that this location 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.
No. I appreciate, that's a great color. If I have one follow-up, I think this question is for Eric. So 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.
Yes. We actually exited that team, while maintaining the book and moving it to another team that did have experience in that field. And we do anticipate that we will see growth in that area. EB-5 now is a bit more stable though 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 congressional matters. So 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 and we expect to see some pretty significant growth in that space as the deposits build.
And is it similar to prior projections or is there anything you could provide on that?
I think it's a little too early to say, right? We really need to see how clients anticipate utilizing the EB funds in their various project stacks. I would think that we'll see billions over time in deposits. But I think it's going to take a little bit longer, a bit more of a lead time than we saw in the past.
Okay, great. Thanks for taking the questions.
Thank you. Your next question comes from Dave Rochester with Compass Point. Please go ahead.
Good morning, Dave.
Hey. Good morning, guys. Great quarter.
Thank you, Dave.
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. I 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 bring you even more interest.
And then 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 just the wealth business in general? And then is that going to be a big focus here in terms of bringing on more teams with wealth management assets and growing that business going forward?
I'm going to be very short and sweet in this one. I'm going to defer to Eric, but just stay tuned, because things are fluid. But Eric, why don't you handle that question?
Sure. Thanks, Dave. Thanks, Tom. And good to talk to you, Dave. Yes, I mean the opportunity is real, right? When you look at the banking landscape, 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? So 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. So 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 and we will certainly be adding to our wealth capabilities. We did add some people already that we'll be announcing, but we broadly have the capabilities on the wealth side to meet the needs 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 we can meet their needs of their clients right now. So 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.
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?
Yes. So next year $2.9 billion at a 227 is what we have coming. So that portfolio has really, really gotten low compared to where we've been in the past and especially for the size bank we are right now. But yes, $4.9 billion this year assuming some of the portables get put, which we are assuming that they will given their current cost and next year $2.9 billion out of 227.
So Dave, just to be specific, when we announced the Signature transaction, our plan was to pay down the wholesale and be more obviously deposit focused. This is in our strategy. So 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. But I think holistically going forward, we want to be obviously having a much more focused loans to deposit ratio indicative of a commercial bank model. But 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 don't talk a whole lot about, but 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. And I think that's going to 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 loan activity specifically for some of these larger corporate clients as we're not leading the corporate side of the balance sheet. So we can be active there as well, syndicating deals, structuring deals and being a corporate finance banker. So a lot of opportunity to put these companies together, the excitement levels high and looking forward to the future.
All right. Well, sounds great, guys. Appreciate it.
Thank you, Dave.
Your next question comes from Matt Breese. Please go ahead.
Good morning, Matt.
Good morning, everybody. Hey, just to be clear, either Tom or John, the custodial deposits, when do you expect them to kind of draw it down to a near zero balance? Is that by the end of the year or really next year?
We're going to 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. So that $6 billion, will there still be a number over the next couple of quarters, but it's going to drop dramatically. My guess would be in the $1 billion to $2 billion range in the third quarter and then drop even further from there.
It would – it ends up going to zero if and when the FDIC sells the loans. And if we don't retain servicing from whoever the new buyer is of that portfolio. So it's just the collection of P&I and any pay downs and then the remittance back to the owner.
Great. I appreciate that. And then I wanted to follow-up on expenses. So for the full-year, 2023, we have a $2.0 billion to $2.1 billion guide. Can you just level set and provide me where we are relative to that number year-to-date? I see that $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.
Yes. So you're right. When you look at the six months, right, we're just under $1 billion right now, given where we are. We – 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 later today most likely. And they're just the normal $100 billion to make sure we're above a $100 billion. So we're going to see some increased expenses in 2023 for that. And then 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 2023.
So 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, there's a lot of work going on. There's a lot of work being done for the FDIC loans as well. And as you know, remember that that benefit right now is showing up in non-interest income, that will drop over time. And 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.
Yes. So, Matt, just one other point, and this is Tom, is that we're also investing into the PCG model. So we have some teams coming on board projected into this run rate, and that will also commensurate with some good revenue opportunities as we go through the breakeven. As Eric indicated, we’re anticipating a one-year breakeven on bringing the teams on. And from there, we have hurdle rate of returns that we're targeting to 20-plus% over a very short period of time. So that's also in our run rate.
So, clearly, if – the First Republic transaction didn't happen, the guide would be very different, but 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. So that's also embedded in our forecast.
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 to $2.1 billion or right around the same kind of guide range annualized run rate and expect kind of a bell curve shape rise and decrease in expenses till then? Is that the way to think about it?
I mean, I don't know about bell shape, but yes, I would assume that 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 run rate kind of perspective when we get through that. So I think that's right. I don't think it's dramatic, but I do think that you will see lower run rate expenses in Q3 and Q4 as compared to Q1 of 2024.
Got it. Okay. Thanks 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 down 100 basis point scenario and whether or not you want to describe that parallel shift or just the front end coming down. I would just appreciate some color on asset sensitivity, liability, sensitivity, and maybe adjusted for liquidity.
Yes. No, absolutely. So as – if you look back to the first quarter, we were moderately to 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 we'll get to very close to neutral. So we're not an outlier anymore as we had been, historically, on the liability side. We think right now, we're slightly asset sensitive with the trend to get a little less asset sensitive.
Yes. And just one of the point, think about the customers on the multifamily CRE side, 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 and then you're going to see a lot of that activity from the portfolio. We had really virtually no prepayment activity for the past year. It's been a slow market. So 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 versus the clientele will be active in the – if there's a rate change next year. So we're anticipating some activity there, which can actually hedge the balance sheet towards neutrality. We want to be agnostic in movement and 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 at the positive attribute in the current environment because of the stability of the Signature transaction.
But our loan book is all reacting very favorably when it comes to spreads. And more importantly, it's a tight credit market, right? So as I indicated, the loan spread offering right now is higher and we're getting it. And that's with industry-wise. So there is some tight credit standards and customers have to finance. So 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 a much higher spread.
Appreciate all the color. That's all I had. Thank you.
Thanks, Matt.
Thank you. And your next question comes from Peter Winter with D.A. Davidson.
Good morning, Peter.
Good morning. I was just wondering, could you give an update on the office portfolio? And then secondly, just are you seeing any type of stress on the multifamily portfolio just between the inflation pressures, higher interest rates, and it's just harder to increase rents on a rent stabilized apartments.
So Pete, I'll start and I’ll defer to John, CFO, but clearly, it's been resilient. On the multifamily side, it's been an environment where we have a lot of wealthy customers. They're going through this journey of no activity. There's a 3% coupon from the lowest going into, let's say, close to seven and eight. So there is a substantial change and they're weathering the storm. They're paying their bills. Like I indicated, probably 65% of loans coming up for decision on their actual maturity and/or repricing, they're choosing a SOFR option. And 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, but they're doing well in that environment.
There's no question that the bank is benefiting from that, and they are getting some cash flow adjustments to their income stream, but these are wealthy customers that have large portfolios and they're weathering the storm. They're waiting for lower interest rates, and 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 its cash flows are being squeezed, of course, the interest rates going from 3% to 8%, 9% is going to have an impact. But 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, I'm 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. You're not going to – 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 one-up issues, it's been a very resilient portfolio.
So 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. So, John, if you want to share some of the statistics on our commercial side?
Yes, and 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. Portfolio at $3.4 billion, really pretty consistent from the prior quarter with average DSCRs and LTVs and average balance. And we did have just under 40% of our office exposure has been appraised or reappraised in 2022 and 2023.
So, there's 15% of its rated special mention or substandard. So the portfolio has been strong. We have seen some early delinquencies. We think the bulk of them will be cleared in the third quarter, but we are working through a couple of items, as you can imagine.
But still, that it’s been 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 collateral base. So very cautiously optimistic about the portfolio we have been actually since COVID hit. And if you could see, there's really not much coming due in – the rest of 2023 and 2024. So the bulk of the portfolio hit this option or contractual dates starting really in 2025 and forward.
Got it. Thanks. Very helpful. And then 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? And the reason I ask is typically fourth quarter, it tends to be seasonally weak. And so do those deposits flow out?
I’m going to defer to Lee. Lee, go ahead.
Yes. So I think the answer is, yes, we can bring in deposits with the warehouse lending business as we can with all lending businesses and it's a focus of the bank. Tom has been very clear that it's deposits, deposits, deposits. So 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. And 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. So we think there is a big opportunity to bring in more deposits from that mortgage ecosystem.
Got it. Thanks.
Thank you.
Thank you. Our next question comes from Christopher McGratty. Please go ahead.
Good morning, Chris.
Hey, good morning. John, just a follow-up to a prior comment about the assets or the rate positioning of the balance sheet. If you just zoom out and just think more holistically about does the company make more money in the downright environment? Could you speak to potentially the opportunity for better loan growth and better mortgage if the forward curve is right in 2024?
Yes. 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 going to really explode from an upside perspective and protect that the income that we lose in some of the other areas.
So, 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? So – and that – and when we were a much smaller institution, we had a year, we made $120 million in prepayment fees.
So 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. And that's what we're going to 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. And we don't forget about that mortgage business, which will absolutely pick up if we do see across the board rate declines.
Thanks for that. And John, while I have you just on the 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 2025 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?
Yes. So the easiest way to look at it, if you combine the two, the actual for the second quarter was about a $100 million and in the guide is about $70 million on a combined basis. And you 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 spikes in that number. But that's what we're in our guide. We think it's conservative.
And like I said, it is dependent on the market and what happens with interest rates and what happens with pay downs. But it's – 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.
That's helpful. And what's the total pool that'll come back you over the next couple of years? What's the remaining balance of the accretion?
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 loan marks when you look at both banks, but I'll make sure I get that number. I'll make sure we get that out to everyone.
All right. Thanks, John.
Thank you. Your next question comes from Steven Alexopoulos with JPMorgan.
Hey, good morning, Steven.
Steven, good morning.
Good morning. So on the balance sheet, so you've obviously had a huge transformation over the past year and you’ve been very clear, thought about the custodial deposits coming out, some higher cost borrowings coming out in the second half, too. But beyond that, are there any big structural changes on the rise that 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?
Yes. I think that's right. I mean, you could see in the deposits that we have – the wholesale borrowings that we have maturing in the next a couple of quarters and even next year, they're not at high rates. So it's much more of business as usual and let's use these deposits funds that we bring in to fund loan growth. And over time, could we look at paying down wholesale borrowings? Of course, we always could.
But there's other options and some high-cost funding, you could always look to reposition. And that would be a great problem to have if the demand deposits continue to grow. But I think you're right. And the fact that, that pay down of the high-cost borrowings that we did in the second quarter, that's behind us.
Yes, I would just add to Steven at one point, this is Tom. The reality when we look at building out the teams and focusing on the PCG model, 40% to 50% type of statistics has been the track record for deposit inflows of demand money. So 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.
So that's going to be a relationship-driven model, and that's where we're heading for all our lines of businesses. And that's how we're hurtling our returns on 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 deposits gathering.
Yes. And then 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 still to the upside, right? There's some unusual NIM activity because these custodial deposits. But once we get beyond that, do you feel like at least over the near-term, you should see some expansion?
So what I said a quarter ago is that, we think we get to that 3% type – that NIM by year-end. We think we got there a couple of quarters earlier. And 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 average balance going forward, you have an environment that we've done really well in when it comes to growing the NIM from, quite honestly, in the high-2s, right?
So if we get to the mid to low-3s as more of a holistic view of the business model based on the funding mix that we bring to the table to grow the business, it's a different run rate, right? So I think that's something that accelerated here and given the lines of businesses, and we talked about the fact that our loan growth has higher spreads, we think that 3%-plus type margin is reasonable, and that's the target, but we got there a little bit sooner.
So we're excited about that. It really has a lot to do with the market as well. There's definitely a credit tightening in the system, and the Fed was talking about that publicly. There's no question that money is expensive and we're getting paid for the risk. And more importantly, that'll impact stronger margins for this company.
Great. Thanks. And then a final one for Eric. It's great to hear you on this call. And what's the experience been like for you in the team, right, going through the FDIC? Now you're at New York Community. Does it feel culturally like the way Signature felt? Do you guys fully back on us? That's just what's going on.
We're back at it, Steve. There's no doubt. I mean, think about where we were 4.5 months ago to where we are today. My second text the evening was to Tom, right, and to John. And they immediately, and when I say immediately, immediately got back to me, right? They 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. So it is the best cultural fit, no question in my mind and we're really excited about the future.
I mean, Steve, I said it earlier, the opportunity right now is tremendous for us. And that's recognized by the executive team here, by the entire Board here and by the management group, right? We're going to – we've got an opportunity to seize on the moment, one that we haven't seen quite frankly in probably a decade, right? And 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. So really excited to be here and very, very much looking forward to the future.
Sounds good. Great to hear from you guys and best of luck.
Thank you.
Thank you, Steve.
Thank you. Last question, we have Casey Haire with Jefferies. Please go ahead.
Good morning. Thanks. Good morning, guys. How are you doing? So real quick, just on the cash position, still strong at $16 billion. It sounds like the borrowing paydown, the low-hanging fruit has been picked. But just curious, what opportunities do you have to optimize the margin with that excess cash? And then more longer-term, where does that – what is your minimum cash position versus that 13% of assets today?
Yes. So we look at cash and unencumbered securities together from an on balance sheet liquidity perspective. And 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 the wholesale borrowing trade, as I mentioned, with the high-cost wholesale borrowings, 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. But I think the real benefit in the longer-term focus is what can we do on the deposit side. And if we can continue to bring in non-interest bearing demand deposits, that's going to be the driver of margin growth in the future. How successful we are at that will drive that – will drive the margin story.
Yes. I would just also add just on a perspective of our balance sheet. If you think about banks over $50 billion, we're probably the lowest percentage of securities assets in the country right now by design. We have no health and maturity portfolio. We don't believe in it. We’re very comfortable with it with putting in an AFS, but we have little bit of an exposure there, but we have a very small book that needs to be right-sized over time as we go into the $100 billion standard. So that's another area that probably will generate some additional revenues for the company as we right-size ourselves to the industry.
Got it. 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?
That's what the number is.
That's the estimate. I believe we started that at 130. We had a handful that ran off. Again, the deposits are stable. But 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. But we've – and if they ever even want to talk about some of the strategies we had on off-balance sheet that's also accommodating some of the customers right now to come back to us.
Yes. I mean, that's really the new go-to-market, right, where – the clients like Tom said, the clients didn't close their accounts. They just moved their funds out, right? And they're finding it very difficult, very difficult to do business at the mega institutions that they move to. So we're seeing the operating accounts come back and that's why we had DDA up this quarter, right? And that's – so that's starting to flow back as they just – they can't run their businesses at these other institutions.
And then on the excess funds that we've normally keeping on balance sheet money market funds for them, they're bringing those back some on-balance sheet and some off-balance sheet into an array of off-balance sheet money market funds that we have available for those clients, right? So we're going to start making some serious fee income on that, which doesn't tie up capital, right, and really, juices our returns. So 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.
So 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.
And I think as I said previously, our anticipation is that we will have more teams going into – in short order to the summer where pre-March in totality as we continue to evaluate and sign on and onboard the First Republic talent that's in the marketplace. So there is a dislocation that we are competitively looking to put on new personnel to service the clients and bring on their books.
Got it. Thanks, guys.
Thanks, Casey.
Thank you. And there are no further questions at this time. I'll now turn the call to the management team.
Thank you, again, for taking the time to join us this morning and for your interest in NYCB.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.