Bright Green Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 6 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Amalgamated Financial Corporation Third Quarter 2023 Earnings Conference Call. During today's presentation, all parties will be in a listen only mode. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Jason Darby, Chief Financial Officer.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate your participation in our Q3 20 With me today is Priscilla Sims Brown, our President and Chief Executive Officer. As a reminder, telephonic replay of this call will be available on the Investors section of our website for an extended period of time. Additionally, a slide deck to complement today's Discussion is also available on the Investors section of our website. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Speaker 1

We caution investors that actual results may differ from the expectations indicated or implied by any such forward looking information or statements. Investors should refer to Slide 2 of our earnings deck as well as our 2022 10 ks filed on March 9, 2023 for a list of risk factors that could cause actual results to differ materially from those indicated or implied by such statements. Additionally, during today's call, we will discuss certain non GAAP measures, which we believe are useful in evaluating our performance. A presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U. S.

Speaker 1

GAAP. A reconciliation of these non GAAP measures to the most comparable GAAP measure can be found in our earnings release as well as on our website. Let me now turn the call over to Priscilla.

Speaker 2

Thank you, Jason, and good morning, everyone. I'm excited to be here today to discuss our Q3 results as they clearly demonstrate the business of social responsibility is a business that can do well financially while also doing good in the world. While the banking events from earlier in the year are no longer dominating the news headlines, We are conscious of the economic environment we're operating in. With the Fed continuing to maintain a hawkish stance and the reality of this Higher for longer interest rate positions slowly settling into the bond markets, we believe we have a solid strategy to prepare our balance sheet for growth optionality by the second half of next year. As a reminder, in mid March, we quickly pivoted to a modified growth strategy centered on a neutral balance sheet, building capital and increasing our tangible common equity ratio.

Speaker 2

Now to full quarters in, our neutral balance sheet strategy is playing out well and perhaps even better than we expected. Since our March results, our leverage ratio has improved 39 basis points to 7.89 percent As we steadily march towards an 8.5 percent leverage target and our tangible common equity ratio has increased modestly by 29 basis points to 6.72 percent as we target 7.5%. The TCE ratio is very important to us and we have been measuring ourselves against the minimum target of 6% since the Q2 of 2022. Looking more closely at our balance sheet, we continue to fund loan growth predominantly from runoff of our securities portfolio augmented by select security sales. As we change the mix of assets from securities to loans, The balance sheet health will benefit as the portfolio amortization will naturally reduce unrealized loss positions and replace those assets with loans at market rates.

Speaker 2

During the quarter, we reduced our traditional securities portfolio by 109 point $6,000,000 or nearly 5 percent and by $185,300,000 or nearly 8% since March. In tandem, loans have continued to grow. During the quarter, net loans receivable increased $113,000,000 of 2.7 percent to $4,400,000,000 Importantly, the growth was mainly driven by our commercial and industrial asset Which I will discuss more fully in just a bit. Shifting to deposits, Total deposits, excluding brokered CDs, increased $172,800,000 or 2.7 percent to $6,600,000,000 during the quarter. Importantly, we experienced approximately $68,000,000 new deposit inflows from our customer segments outside of the political segment, which includes sustainability and not for profit organizations.

Speaker 2

That highlights the diversity of our deposit franchise. Our political deposit segment is important and it's a differentiator for the bank, particularly in this tight liquidity environment. During the quarter, political contributed $115,400,000 of our deposit growth as the presidential campaign cycle kicks into high gear with the election now only a year away. Looking forward, we expect our political inflows As our balance sheet continues to take shape, the trajectory for growth of our profitability is becoming more clear and predictable. Our net interest income was $63,700,000 and our net interest margin was 3.29 percent, with each Better than the guidance range we provided in the Q2.

Speaker 2

It's important to note that we believe our margin is reaching an inflection point as our loan yields increased 23 basis points to 4.56%, mostly offsetting the rise in our cost of funds. As I discussed last quarter, we are in the midst of turning over an older balance sheet as our lower yielding residential loans, multifamily loans When paired with our deposit franchise, I'm excited about our prospects for margin expansion in 2024. Perhaps what is most important to highlight is how we are achieving our results. We are working directly with our mission aligned And we're having success. I have often said that we want to use our voice to drive change that both our customers and our employees are passionate about And to do this in a way that also drives profitability and earnings growth.

Speaker 2

Importantly, we're just getting started and we have a long runway for continued growth. We believe we're only in the early innings of the asset mix shift that I spoke of earlier, given the opportunities apparent in our sustainable lending franchise. We have deeply experienced bankers in sustainable lending with the sophistication to prudently underwrite sustainable loans and rapidly expanding asset classes in the renewables sector. Sustainability is a huge opportunity for us. Efforts to combat climate change are growing with an estimated $3,000,000,000,000 of investment needed over the next 10 years in order for the U.

Speaker 2

S. To achieve a goal of net zero emissions by 2,050. This is a significant market opportunity, which we believe will grow through economic cycles, given the importance, urgency and momentum to address the issue. Additionally, the Inflation Reduction Act It's funneling money to critical projects in the renewables, infrastructure and water segments of the market, which will need additional capital, We are well suited to participate and provide visibility into in the years ahead. The importance of combating Climate change was on full display during Climate Week, which took place in partnership with the UN General Assembly in New York City in September.

Speaker 2

Amalgamated Bank was honored to be a part of the UN General Secretary's Client Ambitions Summit, which speaks to our industry leading position, highlighted by the fact that we are only 1 of 4 banks to be a part of the UN's 0 target banking alliance, as well as Having our own zero based emission targets that have been validated by the science based targets initiative. Wrapping up my comments, our quarterly results clearly demonstrate the clarity of our current balance sheet strategy, the value of our franchise and the strength of our differentiated business model, which positions us to win even if the environment proves to be more challenging. We are America's socially responsible bank, and we deliver results for our shareholders, our customers and the communities we serve. Most importantly, we have a long runway ahead for continued earnings growth and value creation. Let me now turn the call over to Jason to provide a few of our Q3 financial results.

Speaker 1

Thank you, Priscilla. Net income for the Q3 of 2020 was $22,300,000 or $0.73 per diluted share compared to $21,600,000 or $0.70 per diluted share for the Q2 of 2023. The $700,000 increase for the Q3 of 2023 was primarily driven by a $1,900,000 decrease in the provision for credit losses, A $700,000 increase in net interest income and a $200,000 decrease in non interest expense, offset by an increase in net losses on sales of available for sale securities of $800,000 and a $1,000,000 increase in income tax expense. Beginning on Slide 5, there were no exclusions related to Solartex Equity Investments for the Q3 of 2023. Because of the income statement volatility associated with the accounting for these investments, we believe metrics excluding the timing impact of tax credits or accelerated depreciation is a helpful way to evaluate our current and historical performance.

Speaker 1

Core net income excluding the impact of solar tax equity investments, a non GAAP measure For the Q3 of 2023 was $23,300,000 or $0.76 per diluted share compared to $22,000,000 $0.72 per diluted share for the Q2 of 2023. Turning to Slide 7, Deposits at September 30, 2023 were $7,000,000,000 an increase of $96,200,000 in the Q2 of 2023. As Priscilla touched on, total deposits excluding brokered CDs increased by $172,700,000 to $6,600,000,000 Excluding brokered CDs, non interest bearing deposits represent approximately 45% of average deposits and 43% of ending deposits for the quarter ended September 30, 2023, contributing to an average cost of deposits of 111 basis points, up 24 basis points from the previous quarter as we continue to competitively price our deposits to build and protect our customer base. Our total cost of deposits, including brokered CDs, was 133 basis points in the Q3 of 2023, a 23 basis point increase from the previous quarter. We have been carrying brokered CDs since early in the year to provide funding for our midterm election deposit outflows in late 2022.

Speaker 1

As our political deposits continue to reaccumulate, we are now in the process of replacing this higher cost funding over the next few quarters, which should have a positive impact on our cost of funds. We anticipate brokered CD maturities of approximately $150,000,000 during the 4th quarter. Moving to Slide 8, our high quality supercore deposit base totaled $3,400,000,000 Our supercore deposit base Uniquely displays important insight into our impact customer segments. At quarter end, total uninsured deposits were $3,800,000,000 or 54% of total deposits, an improvement from $3,900,000,000 or 57% during the Q2 of 2023. Excluding uninsured Super Core deposits of approximately $2,600,000,000 remaining uninsured deposits were approximately 17% to 20% of total deposits with immediate liquidity coverage improving to 224% from 183% in the prior quarter.

Speaker 1

Consistent with prior quarters, we have maintained significant liquidity with cash and immediate borrowing capacity of $2,600,000,000 $576,000,000 of 2 day capacity from unpledged securities, resulting in $3,200,000,000 of total 2 day liquidity. Our liquidity covers 85 percent of our uninsured deposits consistent with our uninsured deposits in the prior quarter. Taking a closer look on Slide 9, deposits held by politically active customers were $951,200,000 as of September 30, 2023, an increase of $115,500,000 on a linked quarter basis. Through October 20, we've had a further $17,300,000 of political deposit inflows. Jumping ahead to Slides 1213.

Speaker 1

The book value of our traditional securities portfolio decreased $109,600,000 during the quarter, primarily as a result of $77,100,000 in strategic sales and $45,800,000 in traditional securities paydowns, While net pace assessment growth was $48,300,000 floating rate securities represented 45% of traditional securities at the end of the quarter, A 1% decline from the prior quarter as we have consistently reduced that ratio over the past several quarters to protect our earnings stream. Our unrealized loss position in our available for sale securities portfolio was $128,700,000 or 7.9 percent of the total portfolio balance. Importantly, our AFS portfolio effective duration was only 1.9 years, reflecting our conservative investment decisions. Turning to Slide 14. Total loans receivable net of deferred fees and costs at September 30, 2023 were $4,400,000,000 an increase of $113,000,000 or 2.7 percent compared to June 30, 2023.

Speaker 1

This increase in loans is primarily driven by a $101,000,000 increase in in the commercial real estate portfolio and a $800,000 decrease in multifamily loans. During the quarter, had $37,400,000 of payoffs and upgrades of criticized classified loans, including $20,900,000 of commercial real estate loan upgrades, $4,700,000 in multifamily loan upgrades and a full payoff of an $8,000,000 multifamily loan as we continue to focus on improving the credit quality of our loan portfolio. The yield in our total loans was 4.56% compared to 4.33% in the 2nd quarter. The loan yield increase was mainly attributed the improved loan yield of new loans generated during the quarter. As we discussed on prior calls, our commercial real estate portfolio has A portfolio that we've been derisking for quite a while.

Speaker 1

At quarter end, we had $61,000,000 in office only exposure across 6 credits with an average LTV of approximately 41%. Of the 6 credits, all are now pass grade as one special mentioned credit returned to pass grade during the quarter. On Slide 15, Net interest margin was 3.29 percent for the Q3 of 2023, a decrease of 4 basis points from 3.33% in the Q2 of 2023. The decrease is largely due to increased rates and average balances of interest bearing liabilities, primarily for deposit costs. Importantly, we are beginning to see an inflection point in our NIM as improving loan yields mitigate funding pressures combined with higher cost brokered CDs and term funding set to be replaced by lower cost deposit inflows in the quarters ahead.

Speaker 1

On Page 16, Core non interest income excluding the impact of SolarTax Equity Investments, a non GAAP measure, was $7,800,000 for the Q3 of 2023 compared to $8,200,000 in the Q2 of 2023. The decrease of $400,000 was primarily related to a decrease in trust department fees as On Page 17, core non interest expense, a non GAAP measure for the Q3 of 2023 was $37,000,000 a decrease of $200,000 from the Q2 of 2023. This is in line with the expected non interest expense range provided on last quarter's call was mainly due to a $600,000 decrease in professional fees, offset by a $400,000 increase in data processing expense attributed to a sales tax credit recognized in the previous quarter. Moving to Slide 18, non performing assets totaled $36,500,000 0.46 percent of period end total assets at September 30, 2023. This was an increase of $1,200,000 as compared to $35,300,000 or 0.45 percent on a linked quarter basis.

Speaker 1

The increase in non performing assets was primarily driven by a $2,400,000 construction loan and $500,000 residential loans placed on non accrual status in the 3rd quarter. That was partially offset by a $1,200,000 charge off on a multifamily loan moved to held for sale and subsequently sold in October and the sale of $600,000 of non accrual consumer loans held for sale. Our criticized assets decreased $16,000,000 or 15 percent, dollars 87,900,000 on a linked quarter basis. During the quarter, the allowance for credit losses on loans increased $400,000 to $67,800,000 at September 30, 2023 from $67,400,000 at June 30, 2023. The ratio of allowance to total loans was 1.55 a decrease of 4 basis points from 1.59 percent in the Q2 of 2023.

Speaker 1

Provision for credit losses totaled $2,000,000 the Q3 of 2023 compared to $3,900,000 in the Q2 of 2023. The decrease in the provision is largely due to $2,100,000 decrease in the provision for Off balance sheet risk on loans related to a decrease in the unfunded exposure on consumer solar loans and commercial and industrial loans. Continuing to Slide 20, our core return on average equity and core return on average tangible common equity were 17.2% 17.7%, respectively for the Q3 of 2023. We repurchased $2,600,000 of common stock during the 3rd quarter And have $20,900,000 of remaining capacity under our $40,000,000 share repurchase program. Additionally, we have declared our regular quarterly dividend of $0.10 per share.

Speaker 1

As previously noted, we continue to build our capital position based on the state of the current economic environment and in the wake of the banking sector volatility. As a result and as shown on Slide 21, our Tier 1 leverage capital ratio improved 11 basis points to 7.89% as compared to the linked quarter, primarily driven by our strong quarterly earnings. Slide 22 shows a reconciliation of the change in tangible common equity and related tangible book value. As expected, the Federal Reserve Board kept rates steady through the Q3 of 2023 Our tangible book value per share, a non GAAP measure, improved to $17.43 as of September 30, 2020 3 as compared to $16.78 in the prior quarter, representing an annual growth rate of 16%. The increase was driven by our $22,300,000 of net income for the quarter, offset by $3,100,000 in dividends paid at $0.10 per outstanding share, $2,600,000 of common stock repurchases and $100,000 increase in accumulated other comprehensive loss due to the tax affected mark to market on our available for sale securities portfolio.

Speaker 1

Tangible book value per share is a key metric for us and we have targeted greater than $19 per share by the Q2 of 2020 4. Another key metric of focus for us is core revenue per share as we continue to grow our net interest income, earnings profile and also our ability to drive more meaningful non interest income. Our core revenue per diluted share was $2.34 for the 3rd quarter. We also remain pleased with our tangible common equity to tangible assets of 6.72% for the quarter in comparison to 6.59% from the previous quarter. We remind investors that we publicly set a tangible common equity minimum target of 6% back in the Q2 of 2022 and we have never been below that target.

Speaker 1

Turning to Slide 23, we note that the high degree of economic and banking sector uncertainty makes projections difficult. That said, for our full year 2023 guidance, we have tightened our core pre tax pre provision range at the higher end and have modestly expanded our net interest income range as follows. Core pre tax pre provision earnings excluding Solar of $136,000,000 to $139,000,000 And net interest income of $256,000,000 to $258,000,000 which considers the effect of migration of interest bearing accounts and the forward rate curve for the remainder of 2023. Going forward, we estimate an approximate $500,000 decrease in annual net income for a parallel 25 basis point increase in interest rates. Our focus remains equally on growing our capital position, Limiting balance sheet leverage and managing expenses.

Speaker 1

We think our net interest margin has reached an inflection point and we cautiously do not expect significant margin change in the 4th quarter. Correspondingly, we anticipate our net interest income to range between $62,000,000 $64,000,000 in the Q4 of 2023. Wrapping up, we are taking prudent steps to prepare our balance sheet for growth options next year by building capital, changing the mix of our assets, And we're pleased with our progress so far. We're also happy to report that the bank's credit rating remained unchanged with a stable outlook during the independent annual surveillance conducted during the 3rd Our ability to grow our deposit franchise in a competitive market combined with our distinct impact lending business model will help drive improved profitability over the next year and will have a significant positive impact on our key per share metrics. And with that, I'd like to ask the operator to open up the line for any questions.

Speaker 1

Operator?

Operator

Thank you. Before opening the line for questions, Amalgamated's CEO, Priscilla Sims Brown, would like to make a few additional comments in light of last evening's events.

Speaker 3

Thank you, Camilla. Like most of you, I watched the news stories of the mass shootings in Maine last night. I would be remiss if I didn't acknowledge it. Like many of you, I had a sleepless night thinking about the victims and their loved ones and what we should do to end the epidemic of Gun violence in this country. I don't have all the answers, but this much I do know.

Speaker 3

We cannot continue to leave the solution to those directly affected or to their children for whom this has become the number one cause of death in America. We can't point fingers at others without also looking at ourselves. Every single American has a role to play in ending this. Amalgamated Bank filed for a merchant code for gun retailers This is not about attacking, altering or diluting the 2nd Amendment. We now have the code and it should be implemented worldwide.

Speaker 3

This is just one small step of many, many steps Society should take health care workers, teachers, legislators, parents, bystanders, public servants, lawyers, advocates, organizers, Ministers, employers and yes, everyone in Financial Services, we all have a role to play beyond offering our thoughts and even our prayers. This is a solvable American problem. I'll now turn it back to the operator and Jason and I are happy to take your questions.

Operator

Thank you. The confirmation One moment please while we poll for questions. Thank you. Our first question comes from the line of Baader Heli with Piper Sandler. Please proceed with your question.

Speaker 4

Hey, good morning guys. Just filling in for Alex Wardle today.

Speaker 1

Good morning. How are you? Good morning. Good. How are you?

Speaker 3

Good.

Speaker 4

Could you give us some color on what new loan yields are coming on the books that I know you mentioned Some lower yielding loans are rolling off the loan book and you're adding higher yielding loans. So any color on new loan yields and maybe The yields on specific segments that would be helpful.

Speaker 1

Sure. Happy to take that question. Yields bring on yields have been strong. For the quarter, I would say on the commercial portfolio blended, the bring on rates were around 7.25%. Obviously, that has a little bit of movement across the segments.

Speaker 1

We saw about 6.5% sort of on average between the multifamily and our regular real And then the C and I business was quite a bit higher, probably more closer to the 8% 9% range in certain cases. So pretty strong yields there. The PACE assets were in the mid-7s during the quarter. And we're even seeing as you probably noticed with the rates pushing up subsequent to the close of the quarter, we're seeing Increased rates again, we're seeing our PACE assets now being originated in the low 8% range. Our multifamilies are probably right around 7 So we're really seeing a fairly decent lift and we're not really having any Issues at the moment, finding lendable opportunities that are also strong on credit metrics that are meeting market rates.

Speaker 1

So We think it ties really well into the point you raised about our lower yielding assets turning over and that's been something that we've been pointing to for a little while And the rate opportunities for the credit segments we operate in are fairly substantial at this point.

Speaker 4

Got it. Thanks. I just want to switch to expenses. I know it seems like you guys found some stability This quarter and last quarter in core expenses around the $37,000,000 range. Is there any reason to believe that That won't be repeatable or like how should we think about expenses maybe going into 4Q and entering 2024?

Speaker 1

Yes. So 4Q, I think can look very similar to 3Q. We've been fairly disciplined in our approach for the entire year. As you know, we moved into A kind of capital constraining mode after the events of mid March and really focusing on building capital and being As prudent as possible with expense management, so the $37,000,000 $37,500,000 Kind of baseline that we've said over the past couple of quarters, I think is reasonable to assume for Q4. Now I'll caveat that by saying Quarter 4 is usually the quarter where if there is going to be a surprise that's when it comes up.

Speaker 1

So we're cautiously optimistic and I think I'm not really aware of anything major or material otherwise I'd be letting you know today. But just kind of bear that in mind, when we think about 2024, I don't really have a number for you. Ordinarily, we will Forecast that in a guidance perspective when we do our Q4 earnings and we kind of roll forward our entire model for the upcoming plan year. But I do think that we're going to be making investments in our business. I do think there'll be opportunities for us to make various improvements.

Speaker 1

And so I would not think that a $37,000,000 or $37,500,000 Quarterly run rate would be what we go for in the 2024 year. That said, we'll always kind of keep ourselves banded To a core efficiency ratio and even in this year we said 52% was really going to be our outer band and we were really going to try to stay within that and not go past that. We would be disciplined similarly in the 2024 plan year and we'll have more to share about that at the next quarter.

Speaker 4

Got it. Thanks. That's all for now. I'll step back in the queue. Thanks for answering my questions.

Speaker 1

Thank you.

Operator

Thank you. Our next question comes from the line of Chris O'Connell with KBW. Please proceed with your question.

Speaker 5

Hey, good morning. Nice quarter. Good morning, Chris. How are you? Good.

Speaker 5

Hi, Jason. So I was hoping to get some color, obviously, political deposits, The growth was great this quarter and it seems to be chugging along in early Q4. I was wondering if you could provide any color as to where you think they could top out at the top of the election cycle Next year and then also, if you'd be willing to provide roughly where a blended range of the cost Of new political deposits coming on the balance sheet are?

Speaker 1

Sure, Chris. Happy to take that. Great to talk to you again. So the political deposits have trended nicely for us. I think we've been very, very pleased with The results so far, I think it's nice to see that the Historical expertise that we built up in being able to reasonably predict the nature of these deposits has been playing out.

Speaker 1

And if I look at My current quarter, it looks a lot like what quarter 3 in 2021 looks like. So I think there's some Repeatable trends that you could look to when you think about the forward quarters as a good benchmark for where deposit balances Will likely top out. It's difficult to nail it down and say it's going to do one particular thing because The cycles are always different, but we feel pretty good about how those historical trends look and I wouldn't expect us to be in excess of what those historical trends were at this time. I think if we're neutral To that or even to that, I think that would be a pretty good positive for us because the environment is certainly a lot different from a liquidity point of view Was during the last cycle, Chris. In terms of the rates, we have seen a continuing trend Towards interest bearing, while these deposits are in an accumulation phase, we talked last quarter that 2 thirds of those deposits were in DDA or non interest bearing.

Speaker 1

That trend has shifted to very close to fifty-fifty at this point. And we think that that ratio will probably hold if not even continue to migrate downward. You could see a forty-sixty ratio On the political deposit balances, as we kind of move towards the early part of next year, the later we go into the cycle, probably the more transactional it will become and a little bit less rate dependent because those deposits will be staged for usage. But that's generally how we're seeing The numbers right now and what I could reasonably project for you for the upcoming quarters.

Speaker 5

Okay, great. Yes, that's super helpful. And then just shifting To the fee side, trust we're down a little bit and I know that there is market factors on the AUM and AUC side, but you guys noted, I think, in the deck that they were down as striving for net revenue quality. Just hoping you could kind of provide some color around what exactly that entails?

Speaker 3

It's one way to think about that is similar to the way we looked at lending and what you've seen going in the lending book where we've traded out of customer activity that is less favorable to the bank in the long term And into better quality relationships that are more favorable to the bank long term. Certainly, it's not a credit issue obviously on the trust side, but Similar in the sense that we are looking for better quality long term relationships. So as there's a natural attrition going on In the trust business, we are allowing that to happen. Now none of this is new or specific to the quarter. This is the follow on to activity we started earlier in the year where you'll recall we talked about Rightsizing some of the fees, passing on some of the costs that appropriately should be passed on to customers.

Speaker 3

And then where that results in having a relationship that is not good for the bank long term or good overall, Then we've allowed the natural attrition to occur. You saw that reflected in the quarter.

Speaker 5

Okay. Yes. Got it. And then As far as the credit trends in the quarter go, just any detail you could provide. I mean, there is a number of large Upgrades, it seems like on criticized and classified loans that were fairly substantial And a couple of payoffs and then in particular the multifamily, dollars 1,200,000 net charge off in 3Q.

Speaker 5

Was that getting sold at par? Should we expect a reversal of that in 4Q?

Speaker 1

So I'll take the multifamily charge off part of that first, Chris. I think that was one credit that we had kept our eye on for quite some time. And The resolution of that credit not having it move into an REO position, all things equal It was a good outcome for the bank. Really at the end of the day that there was an Improvement related to that $1,200,000 in our non accrual assets, but that really just got traded out into a charge off metric. Yes, I don't view that as an overall favorable improvement for our non performing assets.

Speaker 1

But To your question of could we see more of those types of things, there's probably one credit where we're keeping a very close eye on where you can and that's already in Our non accrual numbers where we could see a similar instance, I don't think the numbers would be at the $1,200,000 range. It's something less But there is probably one more credit that we're just keeping our eye on right now that could follow a similar path, albeit I don't have a good estimate as to when the timing will be on that. And so aside from those two loans that we're speaking about, on the credit quality side We've been able to see some substantial improvement that occurred during the quarter. I've talked a couple of times about Substandard loans, not substandard, excuse me, special mention loans that we were waiting for some updated financial information, Some other factors that would be triggers for improvement to the quality rating. I think we were very prudent In waiting for those perhaps some of those could have been upgraded sooner and you would have seen a smoother trail on that criticized asset trend line.

Speaker 1

But at the same time, we're not really the type of bank that's going to just upgrade something because we think it's going to be In a past great situation, so once we got empirical information on the metrics, we made the decision to do the upgrades. But these to us are not substantial Surprised as we felt for quite a while that these would be upgradable and hopefully we're able to reasonably communicate that in past quarters.

Speaker 5

Yes, absolutely. And then I know you guys are Moving towards on pace for your capital targets and still was able You got some repurchases along the way this quarter. Do you think that is something that you Can you continue to do in Q4 while moving towards those targets?

Speaker 1

I reasonably do, yes. I think everything that we put into our capital projection targets assumes A constant dividend, it assumes a fair level of capital allocation for buyback And it also assumes a reasonable loss on undervalued assets like securities and I'm sure you saw we took another $1,800,000 or so in securities losses this quarter. So the plan really kind of allows for some capital We could probably accelerate the capital build if we pulled back on some of those other shareholder related metrics, but I'm not sure that that's really something We want to do, it's always an arrow in the quiver, but we feel like the earnings stream that we've developed really gets us And ability to quickly accumulate capital. I think this quarter we slowed a little bit on the capital build because we A little bit of a larger balance sheet than we wanted, but I do expect that to return to the levels of previous quarters Mainly because with the deposit gathering we had, we brought in a little bit of excess cash and our borrowings or CD, broker CD maturities, we're really scheduled to start releasing this month and the next month.

Speaker 1

So We'll be able to reduce that balance sheet size by about $150,000,000 over the course of the quarter just because Of the brokered CDs that are going to be maturing and hopefully that will continue on our continue aiding our capital building pace. Great.

Speaker 5

And so Sorry, did I hear you right, dollars 100,000,000 for the full balance sheet next quarter down?

Speaker 1

It will be $150,000,000 for the broker CD maturities for the full quarter and we have about $100,000,000 that will be maturing before the end of this month October.

Speaker 5

Got it. And then just thinking about like the balance sheet as we move beyond Q4 And into 2024, how are you thinking about the amount of pace Growth as we get beyond this quarter in loan growth and just the overall kind of net balance sheet growth as we get into next year Given there's still a fairly short duration securities portfolio and obviously there you have some Still some ability to bring down brokered CDs or borrowings?

Speaker 1

Yes. So Not really prepared yet, Chris, to talk much beyond the Q2 of next year. We've targeted the Q2 as Sort of the potential end to a flat balance sheet Structure, now within that we will continue to add PACE assets. Do You think we were a little bit higher than we expected this quarter and that's fine because there were great volume opportunities for us. But I like the idea of Somewhere between $35,000,000 $40,000,000 a quarter in net pace growth between now In the middle of the second quarter, we've got the capacity coming through from our provider and we think it makes a lot of sense for us Be able to add assets in that space between the securities portfolio runoff and Cash flow from that, we think that the ability for us to generate loans that 2% to 3% sequential Sequential quarter loan growth is still very viable.

Speaker 1

I do think we're going to keep moving our Loans to secure I'm sorry, our securities to loans ratio in an inverse direction were about fifty-fifty Right now, and I would expect that to be somewhere around 40% security, 60% loans by the time we get to the end of the second quarter Next year. And then in terms of like absolute balance sheet growth and where we might go from there, if you don't mind, I'll Reserve on that until we give you our full year projections when we do our Q4 earnings release. But I do think We'll be if we do things the way we expect, we'll be in a spot where we'll be able to grow the balance sheet by some amount.

Speaker 5

Great. Yes, that's helpful. And do you have Do you have how much of the loan portfolio is set to mature over like the next 12 months or so?

Speaker 1

I do. One minute here, I'd have that in front of me. Yes, and these are somewhat Move around numbers just because of prepayments and other types of events that might occur. But would guess you're going to be somewhere in the range of over the next 12 months on the commercial portfolio, dollars 350,000,000 to $370,000,000 And I think it's going to split somewhere around 2 thirds for commercial real estate including multifamily and about a third of that In C and I and maybe to answer a follow on question, I think the yield on that particular on the real estate portfolio It's going to be a nice opportunity for us to replace a blended yield on the real estate portfolio loan is about Just a little over 4%, maybe 4.05%, somewhere in that range. So you'll see quite a bit of the older assets set to mature and Whether we reprice on those or we choose to allow those refinance elsewhere, we think we have plenty of to be able to keep our repricing pace going and not have any balance sheet erosion.

Speaker 5

Great. And then just last one for me. Could we get an early look at What the tax rate could be for next year?

Speaker 1

Yes. Right now, we think it's going to be somewhere around 27.5%. It can change, Chris. I just want to be cautious on that. But being at 27% and we're going to finish this year, we're targeting 27.4 We had to go back and do an update to our annual effective tax rate after we became clear that we were going to have higher Pretax income, I think we had a little bit of a lower assumption on some of the original estimates when we were earlier in the year and some The events are unfolding, but based on how we expect to end the year and based on what we think Earnings might look like in the forward years, I think 27.5% is probably a reasonable estimate at this point, Chris, and we'll tighten that up free when we do our AETR calculation early next year.

Speaker 5

Got it. Thanks Jason. Thanks Criscilla. Appreciate you taking my questions.

Speaker 1

Thanks, Gretchen.

Speaker 3

Good question. Thank you.

Operator

Thank you. There are no further questions at this time. And I would like to turn the floor back over to management for closing comments.

Speaker 3

Thank you, Camilla, and thank you for those very good questions. And of course, as Jason mentioned, we look forward to Next quarter when we can provide a little bit more color as to how the next year looks. So with that, we'd like to, as usual, invite you to continue to ask your questions. We're available over the course of the next days. And we like to bid you a good day.

Speaker 3

Thank you.

Operator

Thank you. This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Bright Green Q3 2023
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