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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. Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [Operator Instructions]. 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.

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 third quarter 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.

Thank you, Sal. Good morning, everyone, and thank you for joining us today. Early this morning, we announced solid operating results for the third quarter 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 were 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 $256 million, or $0.36 per diluted share, as adjusted for merger-related expenses. Our EPS this quarter was $0.02 better than consensus. One of the drivers this quarter was our much higher net interest margin. The NIM came in at 3.27%, up 6 basis points compared to the prior quarter and well ahead of our guidance range of 2.95% to 3.05%. The increase was driven by higher asset yields as we continue to benefit from the higher interest rate environment and 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 funding mix and the impact of higher asset yields. Another driver was our loan growth. Total loans during this third quarter were up modestly as growth in the C&I portfolio led by our specialty finance businesses and in homebuilder finance offset declines in other businesses. Overall, our loan portfolio ended this quarter at $84 billion, up over $700 million or 1% compared to the prior quarter. At December 30, total commercial loans represented 45% of total loans effecting a significant diversification compared to where we stood a year ago. Turning now to deposits. Our deposit trends during the third quarter were relatively stable. Total deposits were $83.7 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 were 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 the year end 2022. In the fourth quarter, we had approximately 3.1 billion of wholesale borrowings at a weighted average rate of 4.03% that either are maturing or can be caused by the FHLB. Turning now to asset quality. While early stage delinquency declined significantly, total nonperforming loans increased $159 million or 68% to $390 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 MPLs, our asset quality metrics remained strong as MPLs to total loans were 47 basis points compared to 28 basis points last quarter, while our net charge-offs were also up or near 3 basis points of average loans. Also, as you can see on Slide 9 to 12 on our investor presentation materials, our asset quality metrics remained solid and continue to rank among the best relative to the industry and our peers. The strong metrics reflect our conservative underwriting standards, which has served us well over multiple business cycles. Turning now to our guidance for the fourth quarter. We expect NIM in the range of 3.00% to 3.10%, mortgage gain on sale of 16 million to 20 million, the net return on MSR assets at 8% to 10%, loan admin income of $15 million, annualized operating expense range of 2 billion to 2.1 billion, and 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 flagstone. 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 client and our customers. For 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 Instructions]. Our first question will come from the line of David Rochester with Compass Point. Please go ahead.

Good morning, Dave.

Hi. Good morning, guys. 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?

Right. So the big move is 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 1, because the rest of the custodial deposits will be related to the multifamily and the CRE loans and those 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 drop dramatically once we get into November.

So this margin guide really doesn't include much in the way of custodial deposits remaining.

That's correct.

Great. I will step back in the queue. Thanks, guys.

Your next question will come from the line of Ebrahim Poonawala with Bank of America. Please go ahead.

Good morning, Ebrahim. How are you?

Good. So, Tom, maybe to start on asset quality, again, you had pristine track record on asset quality. When we think about, one, just adjust like the office portfolio, your expectation around the lost content for your book relative to what we hear from the industry, how well deserved your 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 landlords. So if we can address the office and the health of the multifamily landlords.

I'll start with the latter first. So obviously, the marketplace has changed significantly since the rent laws back in '18 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 in-place families that have been doing this for multiple decades, very competent and long-term business strategies, but they do a very strong job of managing their book of business and 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 consistencies of payment, we’re seeing the reaction to higher interest rates on the reset either SOFR option or fixed rate option, then 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 it does have an impact to the cash flow but these are well in tune, operate and be able to manage through that. But the reality of the activities and very slowly haven't seen much activity at all. I would say since I've been here, it’s my 26, 27 year -- going into my 27th year now at the bank, this is the slowest activity we’ve ever seen when it comes to property transactions, 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 we're getting very strong rentals and they're managing through an inflationary environment. So we're very positive in respect to our portfolio. But there's no question that the ample of changes had an impact and the activity of taking the units to a free market unit has its different business model. And 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 $3.4 billion in total CRE, about $1.5 billion -- about 1.8 billion in Manhattan. This is one specific loan in the Manhattan portfolio I believe it's like an A minus type of credit. We're confident that we have value there, so I don't think there was a related charge off to that particular credit. But it's one loan. So we have a very strong portfolio. We have statistics that we put out in our slide presentation material. It is very clear on the overall strength of the portfolio, relatively low LTVs, strong debt service coverage ratio, very strong sponsorship, but it's not a trend. And we're monitoring it. No question rates are much higher. We're still coming out of the pandemic. We’re evaluating overall square footage in rentals and as far as leases coming through 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.

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. Remind us in terms of where we are in realizing savings side to both the acquisitions, how much more to go? And do you still feel good about expenses staying flat? It feels like you're making a lot of investments, there's a lot going on at the bank. So I would appreciate an update there.

So I'll start and I'll pass the baton to John. The big picture is that our guide is pretty much the same as it was last quarter for 2023. We haven't given our 2024 guidance. And clearly we are investing as you indicate into the infrastructure to build out passed the 100 billion now. We understand our obligations there. So we clearly are focusing on making this company at the point of $100 billion process to 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 team that also adds to the expense base. That's where you sort of ramp up in the second and third quarter. But the reality is that we have a very strong focus here to make sure that we have a history, and this is just a history of managing a very strong efficiency ratio but also being cognizant of obligations as $100 million plus institution. With that, I'll pass it to John.

Yes, we haven't given specific guidance yet for '24. But how we've talked about it is that there are both headwinds and tailwinds into '24 when you compare it to '23. As Tom mentioned, we definitely have some additional adds, both back office and through our PCG groups that are going to put pressure on the expense base going up along with just the additional expenses for being over 100 billion. And then the tailwinds of the system's conversions which we have the Flagstar systems conversion scheduled in the first quarter. So we'll start to see some benefits from that. And then we have the signature conversion after that. So those benefits will be later, 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.

Ebrahim, the only thing I'll add to John's comments, we are still unwinding the legacy financial portfolio that we don't own. So we do have costs associated with that that will be impacted favorably as we -- assuming that those assets do plot the institution go elsewhere. So that's also -- that will also be impacted into next year as well, assuming that --

Yes, 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.

Got it. Thank you.

Your next question comes from the line of Chris McGratty with KBW. Please go ahead.

Good morning, Chris.

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, targeted cash levels you're building in the bond book, just help on the moving pieces for the next couple of quarters?

Sure. No problem. We have slowly started to build the securities portfolio, really just a liquidity shift between cash and securities, government securities, very liquid, just 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. 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, where we have the best opportunity to bring in deposits related to those loans. So I would say, very limited change from the -- if you look at cash and securities combined going forward. And then hopefully some small growth on the loan side where it makes sense strategically.

Okay. Just if I can -- the follow up, you had 107 of earning assets in the quarter. Obviously, timing of everything is related when you move stuff during the quarter. But just zeroing in on the fourth quarter earning assets, it feels like it's going to be lower than those 107, but just any kind of fine tuning --?

Yes, not significantly lower than the 107. We expect it to be right around that number, because I really don't see us dropping much more than the securities in total in the cash side. So I expect that will be pretty stable here. And hopefully, we'll be able to build that as our success on the deposit side starts to come through.

Okay. And then maybe just the last one on the loan and deposit, you retooled that a bit. How are you thinking about that entering 2024 a little high?

Chris, it's Tom. I would say that the strategy going forward here is relationship deposit story and all lines of the businesses, right? 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 historically we've had a very high loan to deposit ratio have a traditional thrift model. That's history. The goal here is to right-size 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. We really changed the model with respect to the funding mix. So the goal here is to bring that level inside of 100, that's the goal here and continue to focus on best practices in the industry. And that's a more commercial bank model. So we’re proud of the opportunity to diversify our lines and focus on the positive relationship of 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 three institutions under the new Flagstar umbrella and focus on relationship banking. We see it transforming actively on the multifamily CRE side. Throughout the past few 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.

Great. Thanks, guys.

Your next question comes from the line of Steven Alexopoulos with JPMorgan. Please go ahead.

Good morning, Steven.

Good morning. This is Janet Lee for Steven 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?

I'll pass that over to Eric. Eric?

Yes. Good morning. So we've hired in total now 59 group directors and 105 support staff. So 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. And 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 brought on board in order to do that.

I'll just add a 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 risks when we announced the transaction. So there's been stability, and as Eric indicated, an opportunity as well.

Okay, great. And as you're obviously growing and investing into a franchise, do you expect to be able to achieve positive operating leverage next year? Is that a target that you have in mind?

That's the plan, absolutely. We've learned a lot 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.

Well, it usually takes about 12 to 24 months, right? Each team is different, has a different book of business and underlying client base. But we’ll usually achieve positive leverage if you look 12 to 24 months out.

Great. My last question is on --

Just another 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, which is probably close to 40% of the deposit base is at zero.

That's right.

Got it. And can you give us an update on the progress of bringing back signature in non-interest-bearing deposits that have left during the third quarter and maybe for q-to-date has it accelerated versus the 285 million that you brought in during the second quarter?

Yes, we were really stable. We brought in 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.

I'll just add some comments. I spent most of the summer meeting both PCGs as well as our new client base and close to 1,000 hands I've shake for over the summer. And it was amazing to see the connectivity between the PCG teams and the client 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 on the Flagstar, and we're very pleased with the success on the stability of the base. 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 didn't move some significant deposits. When we did the transaction in March, that institution was at a much highest base. And 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 will be further runoff just because of the unknown factor as we came into a very tumultuous time.

All right. Thanks for taking my questions.

Sure. Thank you.

Your next question comes from the line of Bernard von-Gizycki with Deutsche Bank. Please go ahead.

Good morning.

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 Flag and Signature? And based on your 4Q guide of NIM, what you're expecting?

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 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 Flagstar transaction. From a forecasting perspective, we're expecting it to be a little bit lower than that in the fourth quarter, not substantially. We believe that 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.

Okay, great. And then just on deposits, I know in the past you guys have talked about the banking-as-a-service initiatives that you had. I was just wondering if you could kind of remind us what you might have had in the pipeline as you kind of think of how non-interest-bearing deposits could trend maybe going into next year?

I'll start off and then 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 will 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 the part of strategy because we're really excited what we can do in the future. So, Reggie, if you don't mind.

Yes, sure, Tom. So a lot more to add around banking-as-a-service in addition to what Tom said that as you know, that business kind of comes in 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 consumable, which 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 has done a lot of really good work. Our relationship banking model this year really proved its value, tremendous amount of stability in that book. We actually brought both 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 was written went really well, no disruptions. We're in the process of introducing a more skilled and consistent sales culture across the entire network of 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 franchise, about 157 branches. Next year, we'll be able to have online capability. So we know that will 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 next gen sales in our NYCB branches. That had tremendous impact. We see increases in new account balances, all those validated and then next year we will be fully operational across the entire footprint with additional enhancements for that tool. But we feel really good that the portfolio has performed well this year. Quarter-over-quarter, we're only down 500 million, which is less than 1.5%. 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 177 basis points since January against the Fed funds increase of 525. So we're really pleased with the retention in that portfolio. And I think another good news story is, 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 1.7 at maturity to less than 5%, so positioned well below the kind of market leaders in terms of rate. So we continue to be really optimistic around the positives. It's one of the success stories we've got this year.

As you can see, we have a lot of [indiscernible] 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 at this whole team. So thank you for that, Reggie.

Your next question will come from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hi, guys. Good morning.

Hi, Mark.

I was wondering was any of the $62 million provision this quarter did have any specific reserves in there for those two credits you singled out? And have you reappraised those two properties?

Yes, so both of those two properties as they go through the process of nonperforming were both recently reappraised. So 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 one to 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 where we believe, especially on that Syracuse loan write down we've taken, we're very comfortable with where that is and the same process we use for decades when we take charge-offs.

Okay. And then just a 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?

Hi, 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. Launch [ph] came along unexpectedly from pretty much everybody, and we were able to be accommodated and work with the government to facilitate what we believe a very good transaction. We're busy, right? We want to get our conversions done. We got 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, and the company has gone from 60 billion to 120-ish billion, and that's a lot of growth. And we have a lot of work to do in front of us and the team is excellent here with Reggie Davis and Eric and all the great team members we have here, we're busy. So we have the priority of getting us to be that $100 billion institution where we feel very proud of the back office, the system conversion, a lot of work ahead of us, Mark.

You’re saying that's a priority.

And that's a priority.

Your next question comes from the line of Brody Preston with UBS. Please go ahead.

Good morning, Brody.

Good morning. 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 charging them down?

Well, let me defer to John Adams. He's actually in my office. John, do you want to just address those two credits.

Good morning. Both those credits at time of origination were 65% or less. They were originated quite some time before the pandemic. The impact of the pandemic and obviously leasing activity in 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%.

Got it. Thank you for that.

Syracuse had a significant tenant. This was a unique iconic building that blessed its major tenant and we'll deal with it as we go along here. We were very active to get the appraisal updated. We took the much lower valuation, and we will work through the workout process. Feel good about the fact that this is at a level that we can move this, we will be happy, but we'll work with the existing borrower to see if he wants to try to work through the bank. If not, we will have people that are willing to step in here.

Got it. Okay. And I just wanted to get a sense for, do you have an idea for what the lease roles 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 roles look like?

This is Tom, again. I would say big picture, we know we're going through that process. We talked about Manhattan. We have about 1.8 billion in Manhattan, very cognizant of what's coming due when it comes to refinancing and respect the coupons as well as the tendency we evaluate that. Feel pretty good about the portfolio. But this is an environment where you have to have an enhanced monitoring. The company's doing a lot of work to ensure that we're getting updated financial statements. 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 backdrop towards a credit environment, in particular CRE. But clearly, this is a unique portfolio typically and historical basis. It was 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 10/31 exchange opportunity when it comes to tax deferrals. And we have a very strong overall average LTV and a strong debt service coverage ratio. You're going to have one-offs from time to time. I'll call this particular one a one up. We don't see trends yet, but we're monitoring very carefully.

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 fourth quarter? 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?

Yes. So what we're looking at is, from an average perspective, we expect that cash and securities will be pretty flat. We don't expect significant declines in those two items. Now, once again, that depends of course on our success and bringing in deposits in the quarter, and we do expect to have some loan growth. Nothing substantial, but 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. They'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 quarter-over-quarter. It's going to be relatively consistent.

I would just add to that point. It’s Tom again that strategically 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 the businesses, and the businesses will have -- some businesses actually seen declines in particular multifamily, CRE, the business is very slow, you'll see the offset of growth in the C&I portfolio. 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 seeing more of a shift away from CRE and 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. We will be less proactive and we'll be focusing on relationships for deposit gathering. So like I indicated going back to the strategy, it's going to be about relationship banking and all the lines of businesses and we're seeing some good pickup on the homebuilder finance business, good pick up 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 pass the baton over to Lee to get some update on mortgage and what we see the opportunity in respect to the mortgage market. So Lee Smith.

Yes, 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 mock 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 cost 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 exit in that space, we've been able to benefit from that as well. And then I think finally, and you know Tom has talked about the policy [ph], 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 and 12 billion of deposits that are coming from that mortgage vertical. There's about 5.5 billion coming from the servicing or subservicing business and all the loans on the servicing platform. And then there's another 4.25 billion to 6.5 billion, 7 billion from that team that came over from Signature. Some of those are escrow deposits. And so those balances typically move between four and a quarter and six and three quarters. But the 10 billion to 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.

I want to add to [indiscernible] 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 50 year mark [ph] and focusing on the shorter duration opportunity, which really is underwriting at very low LTV is an opportunity for this bank to look at balance sheet opportunities and look at an asset class that we're very comfortable with and 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 have joined us and focus on that business.

Got it. Thank you very much for the thorough answer. I appreciate it.

Sure.

Your next question comes from the line of Manan Gosalia with Morgan Stanley. Please go ahead.

Good morning.

Good morning. So you spoke about NIM stepping down from 3.27 to about 3, 3.10 and the majority of the custodial deposits going away and earning assets being relatively flat. So it sounds like NII of roughly a little bit over 800 million or so next quarter is what you're guiding to. So a, do I have that right? And b, 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 what you can grow through 2024?

I'll start and I'll pass the baton to John. So I will tell you big picture, it seems like we got the 3% a lot faster than I expected from the transaction and the overall margin. So obviously, we're still asset sensitive. 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 what comes to a legacy thrift model. So we had 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 [indiscernible] business that has an opportunity on a hybrid arm book to business as well. So when you look at future asset growth, it is 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 at 382 coming due and CRE is 575. You bring that to the market. That's a powerful benefit to the asset yield. That goes consistently between 4 billion to 7 billion each year that we know is coming due and we'll deal with it as they come due. Now all those loans are not going to stay with the bank. 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 carefully on the relationship banking side. And there's no relationship, we're really not interested in partnering with just one 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 in banking. Spreads have changed dramatically across the financial services spectrum since March. As I indicated with 300 basis points better, we're not moving on that. We're going to be very proactive to have strong economic spreads on the multifamily CRE side, but at all spreads throughout all lines of business have clearly upped quite a bit given the interest rate environment. So with that being said, I'll pass the baton to John to add more color.

Yes. Just quickly on the fourth quarter, we're not going to see declines in the spot balances that we've seen, right, on interest earning assets or on total assets. And total assets is about 111 million -- I'm sorry, 111 billion. 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 on the cash. The average will still be down just not down as much as it was when you look at Q2 to Q3 is our expectation. So it's not going to be exactly the 107. 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 that's the only piece I want to make sure that I clarify.

Now 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 reliability sensitive 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 was still asset sensitive and it's rising rate -- 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.

That's helpful. And just for clarification, the loans that are coming to you over the next year, the yield pick up on those loans would be 300 to 400 basis points or so?

Right now, they’re multifamily books for next year to 382 coming due and this CRE 575. So market is right now 305 [ph] that is probably close to 877 is the 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 been done in the government markets 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 sidelines 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.

Got it. Okay. And then just another question on expenses. It looks like there's high expenses associated with Flagstar conversion and Signature servicing that will come out at some point in the next year. Can you size the expense benefits that come from that?

Yes. We're going to provide our full 2024 guide at our conference call in January. But as we mentioned, we see both headwinds and tailwind for '24 when compared to '23. 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 fourth quarter, then we'll have some benefits also on the cost side from that extra servicing that we no longer have.

Great. Thank you.

Your next question comes from the line of Casey Haire with Jefferies. Please go ahead.

Good morning, Casey.

Thanks. Good morning, everyone. So I’m 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 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 brokered deposits? Sorry, go ahead.

Correct. We expect cash and securities when you 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 any shortfall we can make up with 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 for each quarter that we go through this process. So we don't expect significant changes and significant drops from the period end balance, but we will take a look and see what market conditions provide and how our deposit growth comes in, in the fourth quarter.

Okay.

This is Tom. When you think about where we came out of March, 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 or chasing rates. The industry has. So we've been very proactive on paying down brokered deposits across brokers, also high costs borrowing they came due as a strategy to get to 12/31. That's the public strategy from the receivership transaction going forward. It's going to go back to an organic strategy focusing on deposit initiatives on all of our lines of businesses.

Okay, understood. And then just one more on expenses. The guide for '23 implies a pretty wide range anywhere from 510 to 610 in the fourth quarter. I think most of us expect kind of a flat number, but your guide does allow for some upward expense pressure in the fourth quarter. Just wondering what would drive that, another point 20 million or so?

Yes. I would think that, given where we came out in the third quarter, the third quarter had higher expenses compared to the second quarter. I wouldn't expect the run rate to be above that. So that would fall, right, really close to the middle of the guide. And I think there's opportunities to do slightly better than that in the fourth quarter as well to get to more than mid to the low end of that guide. So, yes, when you -- 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.

Thank you.

You're welcome.

Your next question comes from the line of Matthew Breese with Stephens. Please go ahead.

Good morning.

Good morning.

Tom, I was hoping you could touch on the wholesale borrowings coming due in the fourth quarter. I think they had a near 4% rate. What's the anticipated strategy with those as they assumingly get calls?

I'll pass it to John. John?

Yes. Including the puts that we have, it's $3 billion at 4% for the rest of this quarter. Given where the portables are of that amount, it's about 1.4 billion in portables. We expect they will be put. So that $3 billion, 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 will pay them off.

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.

Yes. When you look at -- I would look at the cash and the securities together. But I think that's right, around 6 billion make sense depending on the level of deposit growth, what we are seeing, the type of deposits that come in. We want to make sure that we stay liquid from an unbalance sheet perspective with cash and securities. So I think around 6 billion makes sense on the cash side, depending on where securities end up.

Okay. And then just to clear up the prior discussion around average earning asset balances for the fourth quarter, it sounds like maybe they will trend lower, just not at the same page we saw. Is that an accurate statement?

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?

And when do you expect to start to see average earning asset gross again?

I think once we get through the fourth quarter, the custodial deposits are the biggest driver of this, right? We went from 6 billion at the end of June to 2 billion now. And then we have after that, once we get to December, we're going to be very, 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 930 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 first quarter of '24.

Okay. Just going back to credit beyond the office loans, within the release, it showed that multifamily loans, I think MPAs 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 regulated units are north of 50%. Starting to see any sort of cracks there, it just feels like there's a pileup of issues from the 2019 rent laws.

Let me start off. Then I'm going to pass the baton to John Adams who runs that portfolio. The reality is that it's one-off families -- maybe one or two families that one's going to a marital dispute that's going through the court system and there's a handful of those credits tied to a relationship. It's a handful of relationships. It's not systemic, it's not something we're seeing yet, we're clearly monitoring. Rates are dramatically higher and our customers don’t have the capacity to deal with the SOFR option and with a fixed rate option tied to a derivative option that we offer to them. So it's been proactive. And if they want to go for long-term financing and they want to go to the government, the government's open for business. And most banks have wide missed 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 give some color. John?

Thanks, Tom. Yes, it’s 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 they know the system. They know how to 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 just can't kill the New York multifamily market. So we're monitoring the rent regulated properties closely. But there's not really a lot of cracks in that particular portfolio that is really raising anything for us to have any real concern over it right at this time.

Okay. The follow-up question there is, Signature's, commercial real estate, multifamily and then rent regulated multifamily portfolio is being bid out. And some of the news articles out there are setting 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? Does it impact the level three asset pricing and your estimated fair value of your own loan portfolio?

So let me give you my big picture thoughts on that, right? We’re a cash flow lender [indiscernible] discounted rental homes. 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 to a 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 happy relationship going forward, whoever buys that portfolio, that's something that's a nuance that we haven't seen before. 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, loan to maturity and the ability to hold that portfolio as a cash flow lender. And as far as 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 at 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. 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 that ambassador in between that. A new player coming in doesn't have that culture, that history, so it makes it challenging. So that seems a little bit complicated. But at the end of the day, 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 if you're a cash flow lender, and we are a discounted cash flow lender given that rent regulated portfolio that’s significantly below traditional market rentals.

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?

Reggie, do you want to hit that? Or if not, we can probably get back to that on that one. Reggie, do you have any color there?

Yes, I don't have that exact number at my fingertips, but we can get it.

I'll leave it there. Thank you, everybody.

Just one point to that. We are building a corporate bank sponsorship division that actually participates on originating and selling to the syndicate market, generating the opportunity for fees for the bank going forward, was more of a commercial bank prior to that using the derivative marketplaces. So really moving towards a commercial bank mentality, not just making a loan or holding loan, but making a loan or holding a piece of the loan, but selling a large amount of exposure off to the secondary market. So that's going to be the strategy as we build up the commercial bank model.

I think that's an important point. And you asked about the size of syndicated book, we use syndications primarily to sell down position. 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 client and still keep our relative exposure low. That's how we use that function.

That's right.

Your next question will come from the line of David Smith with Autonomous Research. Please go ahead.

Good morning.

Good morning. I appreciate the clarification on the earning asset. I think a lot of us were confused that getting to flattish on an average mark when the spot balance was more around 102. But it sounds like you're just saying that the decline will be smaller than the 4.2 billion that we saw on average assets from 2Q to 3Q, so something above 1 billion or 3 billion presumably for the fourth quarter.

Yes. What we're talking about is the actual -- let's start with the 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 question, cash around 6 billion give or take were securities and so the drop in cash is -- 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, which we believe will start in the fourth quarter, then hopefully we can see some of the average balances start to grow after that.

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 anything else you can keep in mind in terms of seasonality of deposits or anything like that that might help influence the average balance in the fourth quarter compared to the 9/30 spot balance?

Nothing specific on my side. Reggie, anything you could think of from the seasonality perspective?

No, there's really not seasonality. There's some movement within the month. But basically, any seasonality would relate to production. There's a little bit of seasonality in that, but that doesn't really affect the overall balances in the book. So no.

Thank you. I appreciate the color.

You're welcome.

Our next question will come from the line of Steve Moss with Raymond James. Please go ahead.

Good morning, Steve.

Good morning. Following up on the multifamily lending and commercial real estate, just given where pricing is these days, curious where debt service coverage ratios are shaking out, whether it's on a renewal or reset? And if you're seeing any borrowers who are having to put up additional cash to support the property?

I'll start the response and then I'll defer it 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 far too between. Is that fair, John? And the reality is that when they do have significant equity and they're looking for locking in loan, which a lot of them are, they are not looking to locking in loan, 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 '24, '25 is when they're going to make that longer term decision. So maybe, John, do you want to add some color?

And I'll just add to that. But yes, of course, if they're just repricing and they're leaving a three handle, a four handle coupon and 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 less than what we would expect to get risk graded accordingly, and they get reserved the way that they should be based on our model. So something that we definitely keep an eye on. But in answer to your question, if there's not enough to refinance out, the debt service coverage have come down, but not to the point where they can't meet their obligations.

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 a much lower rate I'd say in the mid threes to now. Let's say mid seven to almost eight on a fixed rate, you can probably do something floating somewhere in 50, 60 basis points below that, and governments following every 50 basis point 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.

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?

Yes, 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, prior to this quarter, the performance has been extremely strong. So we continue to look at that. We continue to look at the SDRs and the LTVs in the portfolio as well, as well as the deep dive we've been doing into the underlying leases in the portfolio. So we're comfortable with where we are right now, but we did start to see a bit of a build, an allowance build here this quarter.

Okay, great. Thank you very much.

Your next question comes from the line of Peter Winter with D.A. Davidson. Please go ahead.

Good morning, Peter.

Good morning, Tom. Will you guys have to go through the formal de-stress [ph] exam next year? And I'm just wondering if you can quantify the expense component that needs to be realized as part of a de-stress bank?

Let me just start off and I'm going to pass that to John. We are going to go through a -- always go to capital planning process. And we've been doing the de-stress 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 '24. 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. John, if you want to --

Yes, that's right. We will 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, 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 -- the plan to be ready to be over 100 billion. So yes, we'll be performing that process in '24. And then we'll probably be part of the next cycle when it comes to the public process that Tom was mentioning.

Got it. Okay. Thanks. And then can you just talk about maybe the outlook for provision expense? When I look at the ACL ratio, 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?

Well, there's no doubt that the loan portfolio composition has changed, and we're much more diversified lender than we have been, and that ratio has consistently gone up since the acquisitions of both Flagstar and Signature. But what it really comes down to under CECL is the macroeconomic factors and the performance of the portfolio. So depending on what the trend is here in those macroeconomic factors, we have seen them declined, but relatively a stable decline in those types of factors. But depending on how that comes out and depending on the growth in the portfolios, 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.

Okay, got it. Thanks very much.

Your next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Good morning, Chris.

Thanks. Good morning. 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?

We have in our agreement we do have requirements to have operating accounts, and there's 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, be carried into our docs [ph] that we have an expectation of an operating account regarding the cash flows, in particular the properties that we have to make sure that the cash was coming in. But I think the reality is that we have longstanding relationships. We're 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 roles of significance when it comes to the multifamily CRE portfolio. And I would say as far as what we saw running out of the bank is maybe 5% to 95%, we will understand that we want to ensure that we have a strong depository relationship. And as we move forward, it'd be more towards this expectation of compensating balances. In many instances, that's also tied to lines of credit and we're really working with the client to really ensure that we are a bank partnership. We expect reciprocation when it comes to the business opportunity. And 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.

Great, Tom. That's great clarity. Thank you very much again for all the information this morning.

Our final question will come from the line of Chris McGratty with KBW. Please go ahead.

Good morning, Chris. You're the final.

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? Thanks.

Yes, in that 2 billion to 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 -- basically our end of September interest bearing deposit costs for the quarter was 337. And then really towards the end of September was 350.

Okay. Thanks, John. Perfect.

Well, thank you again for taking the time to join us this morning and for your interest in NYCB. We'll be speaking to you in January. Thank you all.