Amalgamated Financial Corp. (NASDAQ:AMAL) Q3 2023 Earnings Conference Call October 26, 2023 11:00 AM ET

Company Participants

Jason Darby - Chief Financial Officer

Priscilla Sims Brown - President & Chief Executive Officer

Conference Call Participants

Chris O'Connell - KBW

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 on a listen only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time. 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. Please go ahead sir.

Jason Darby

Thank you, operator, and good morning, everyone. We appreciate your participation in our third quarter 2023 earnings call. With me today is Priscilla Sims Brown, our President and Chief Executive Officer.

As a reminder, a 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. We caution investors that actual results may differ from the expectations indicated or implied by any such forward-looking statements or information. Investors should refer to slide 2 of our earnings slide deck as well as our 2021 10-K 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. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with US 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.

Priscilla Sims Brown

Thank you, Jason, and good morning, everyone. I'm excited to be here today to discuss our third quarter results as they clearly demonstrate the business of social responsibility as 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 position slowly settling into the bond market, 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 mutual balance sheet, building capital and increasing our tangible common equity ratio.

Now to full quarter's end, 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% as we steadily march towards an 8.5% leverage target. And our tangible common equity ratio has increased modestly by 29 basis points to 6.72% 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 second quarter 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.

During the quarter, we reduced our traditional securities portfolio by 139.6 million or nearly 5% and by $185.3 million or nearly 8% since March. In tandem, loans have continued to grow. During the quarter, net loans receivable increased $113 million or 2.7% to $4.4 billion. Importantly, the growth was mainly driven by our commercial and industrial asset class, which I will discuss more fully in just a bit.

Shifting to deposits. Total deposits excluding brokered CDs increased $172.8 million or 2.7% to $6.6 billion during the quarter. Importantly, we experienced approximately 68 million new deposit inflows from our customer segments outside of the political segment, which includes sustainability and not-for-profit organizations. 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 $115.4 million 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 to continue well into next year, which provides important visibility to further deposit growth in the quarters ahead.

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 $63.7 million and our net interest margin was 3.29% with each better than the guidance range we provided in the second quarter. 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 and securities, roll off over the next 12 to 18 months and they are replaced with higher-yielding loans and PACE assets. 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 business model 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. 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 of parent in our sustainable lending franchise. We have deeply experienced bankers and sustainable lending with the sophistication to prudently underwrite sustainable loans and rapidly expanding asset classes in the renewable sector.

Sustainability is a huge opportunity for us. Efforts to combat climate change are growing at an estimated $3 trillion of investment needed over the next 10 years in order for the US to achieve a goal of net zero emissions by 2050. 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 is finally money to critical projects in the renewables infrastructure and water segments of the market, which will need additional capital, but 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. Amalgamated Bank was honored to be a part of the UN General Secretary's Client Ambition Summit, which speaks to our industry-leading position, highlighted by the fact that we are only one of four banks to be a part of the UN Zero 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 third quarter financial results.

Jason Darby

Thank you, Priscilla. Net income for the third quarter of 2023 was $22.3 million or $0.73 per diluted share compared to $21.6 million or $0.70 per diluted share for the second quarter of 2023. The $0.7 million increase for the third quarter of 2023 was primarily driven by a $1.9 million decrease in the provision for credit losses, a $0.7 million increase in net interest income and a $0.2 million decrease in noninterest expense, offset by an increase in net losses on sales of available-for-sale securities of $0.8 million and a $1 million increase in income tax expense.

Beginning on slide five, there were no exclusions related to solar tax equity investments for the third quarter 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. Core net income excluding the impact of solar tax equity investments, a non-GAAP measure for the third quarter of 2023 was $23.3 million or $0.76 per diluted share compared to $22 million or $0.72 per diluted share for the second quarter of 2023.

Turning to slide seven. Deposits at September 30, 2023 were $7 billion, an increase of $96.2 million in the second quarter of 2023. As Priscilla touched on, total deposits, excluding brokered CDs increased by $172.7 million to $6.6 billion. Excluding brokered CDs, noninterest-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 third quarter 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. As our political deposits continue to re-accumulate, 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 brokerage CD maturities of approximately $150 million during the fourth quarter.

Moving to slide eight, our high-quality super-core deposit base totaled $3.4 billion. Our super-core deposit base uniquely displays important insight into our impact customer segments. At quarter end, total uninsured deposits were $3.8 billion or 54% of total deposits, an improvement from $3.9 billion or 57% during the second quarter of 2023. Excluding uninsured super-core deposits of approximately $2.6 billion, remaining uninsured deposits were approximately 17% to 20% of total deposits with immediate liquidity coverage, improving to 224% from 183% in the prior quarter.

Consistent with prior quarters, we have maintained significant liquidity with cash and immediate borrowing capacity of $2.6 billion and $576 million of two-day capacity from unpledged securities resulting in $3.2 billion of total two-day liquidity. Our liquidity covers 85% of our own insured deposits consistent with our uninsured deposits in the prior quarter.

Taking a closer look on Slide 9. Deposits held by politically active customers were $951.2 million as of September 30, 2023, an increase of $115.5 million on a linked-quarter basis. Through October 20th, we have had a further $17.3 million of political deposit inflows.

Jumping ahead to Slides 12 and 13. The book value of our traditional securities portfolio decreased $109.6 million during the quarter, primarily as a result of $77.1 million in strategic sales and $45.8 million in traditional securities paydowns, while net PACE assessment growth was $48.3 million.

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 $128.7 million or 7.9% 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 $4.4 billion, an increase of $113 million or 2.7% compared to June 30, 2023. This increase in loans is primarily driven by a $101 million increase in commercial and industrial loans and a $21 million increase in residential loans, offset by a $9.2 million decrease in the commercial real estate portfolio and a $0.8 million decrease in multifamily loans.

During the quarter, we had $37.4 million of payoffs and upgrades of criticized classified loans including $20.9 million of commercial real estate loan upgrades, $4.7 million in multifamily loan upgrades and a full payoff of an $8 million multifamily loan, as we continue to focus on improving the credit quality of our loan portfolio.

The yield on our total loans was 4.56% compared to 4.33% in the second quarter. The loan yield increase was mainly attributed to the improved loan yield of new loans generated during the quarter.

As we discussed on prior calls, our commercial real estate portfolio has been a portfolio that we have been derisking for quite a while. At quarter end, we had $61 million in office-only exposure across six credits with an average LTV of approximately 41%. Of the six credits all are now pass grade, as one special mention credit returned to pass grade during the quarter.

On Slide 15, net interest margin was 3.29% for the third quarter of 2023, a decrease of four basis points from 3.33% in the second quarter 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 brokerage CDs and term funding set to be replaced by lower-cost deposit inflows in the quarters ahead.

On Page 16, core non-interest income excluding the impact of solar tax equity investments a non-GAAP measure was $7.8 million for the third quarter of 2023 compared to $8.2 million in the second quarter of 2023. The decrease of $0.4 million was primarily related to a decrease in trust department fees as we focus on net revenue quality.

On Page 17, core non-interest expense, a non-GAAP measure for the third quarter of 2023 was $37 million, a decrease of $0.2 million from the second quarter of 2023. This is in line with the expected non-interest expense range provided on last quarter's call and was mainly due to a $0.6 million decrease in professional fees, offset by a $0.4 million increase in data processing expense attributed to a sales tax credit recognized in the previous quarter.

Moving to Slide 18. Non-performing assets totaled $36.5 million or 0.46% of period-end total assets at September 30, 2023. This was an increase of $1.2 million as compared to $35.3 million or 0.45% on a linked-quarter basis. The increase in non-performing assets was primarily driven by a $2.4 million construction loan and $0.5 million in residential loans placed on non-accrual status in the third quarter. That was partially offset by a $1.2 million charge-off on a multifamily loan move to held for sale and subsequently sold in October and the sale of $0.6 million of non-accrual consumer loans held for sale.

Our criticized assets decreased $16 million or 15% $87.9 million on a linked-quarter basis. During the quarter the allowance for credit losses on loans increased $0.4 million to $67.8 million at September 30, 2023 from $67.4 million at June 30, 2023. The ratio of allowance to total loans was 1.55%, a decrease of four basis points from 1.59% in the second quarter of 2023.

Provision for credit losses totaled $2.0 million for the third quarter of 2023 compared to $3.9 million in the second quarter of 2023. The decrease in the provision is largely due to a $2.1 million 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% and 17.7% respectively for the third quarter of 2023. We repurchased $2.6 million of common stock during the third quarter and have $20.9 million of remaining capacity under our $40 million share repurchase program. Additionally, we have declared our regular quarterly dividend of $0.10 per share.

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 rate steady through the third quarter of 2023 and it is more likely than not for one more 25 basis point rate increase this year. Looking forward, we expect interest rates to remain higher for longer with any potential interest rate reductions to occur during the second half of 2024.

Our tangible book value per share a non-GAAP measure improved to $17.43 as of September 30, 2023 as compared to $16.78 in the prior quarter representing an annual growth rate of 16%. The increase was driven by our $22.3 million of net income for the quarter offset by $3.1 million in dividends paid at $0.10 per outstanding share, $2.6 million of common stock repurchases and a $0.1 million increase in accumulated other comprehensive loss due to the tax affected mark-to-market on our available-for-sale securities portfolio.

Tangible book value per share is a key metric for us and we have targeted greater than $19 per share by the second quarter of 2024. 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 third 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 second quarter of 2022 and we have never been below that target.

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 pretax pre-provision earnings excluding solar of $136 million to $139 million and net interest income of $256 million to $258 million 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 $0.5 million decrease in annual net interest 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. We think our net interest margin has reached an inflection point and we cautiously do not expect significant margin change in the fourth quarter. Correspondingly, we anticipate our net interest income to range between $62 million and $64 million in the fourth quarter 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 are pleased with our progress so far. We're also happy to report that the bank's credit rating remains unchanged with a stable outlook during the independent annual surveillance conducted during the third quarter.

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. Operator?

Operator

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

Priscilla Sims Brown

Thank you, Camilla. Like most of you I watch 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. 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 to support law enforcement efforts to detect illicit firearm purchases. This is not about attacking altering or diluting the Second Amendment. We now have a code and it should be implemented worldwide.

This is just one small step of many, many steps society should take. Health care workers, teachers, legislators, parents, bystanders, public service, 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.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Peter Hale [ph] with Piper Sandler. Please proceed with your question.

Unidentified Analyst

Hey, good morning, guys. Just filling in for Alex Twerdahl today. Could you give us some color on what new loan yields are coming on the books at? 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?

Jason Darby

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. We saw about 6.5% sort of on average between the multifamily and our regular real estate. And then the C&I business was quite a bit higher probably more closer to the 8% to 9% range in certain cases. So pretty strong yields there.

The PACE assets were in the mid-7%s 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.

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.

Unidentified Analyst

Got it. Thanks. I just want to switch to expenses. I know it seems like you guys found some stability in this quarter and last quarter in core expenses around the $37 million 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?

Jason Darby

Yeah. 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 million, $37.5 million 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 four is usually the quarter where if there is going to be a surprise that's when it comes up. 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 and 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. And so I would not think that a $37 million or $37.5 million 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 share about that at the next quarter.

Unidentified Analyst

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

Jason Darby

Thank you.

Operator

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

Chris O'Connell

Hey. Good morning. Nice quarter.

Jason Darby

Good morning, Chris. How are you?

Chris O'Connell

Good. 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?

Jason Darby

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.

And if I look at my current quarter it looks a lot like what quarter three and 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 than it 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 accumulation phase we talked last quarter that two-thirds of those deposits were in DDA or noninterest-bearing. That trend has shifted to very close to 50-50 at this point.

And we think that that ratio will probably hold if not even continue to migrate downward you could see a 40-60 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.

Chris O'Connell

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

Priscilla Sims Brown

One way to think about that is similar to the way we looked at lending and what you've seen going on 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.

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.

Chris O'Connell

Okay. Got it. And then, as far as the credit trends in the quarter ago 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 $1.2 million net charge-off in 3Q was that getting sold at par should we expect a reversal of that in 4Q?

Jason Darby

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 and not having it move into an REO position, all things equal, was a good outcome for the bank. Really at the end of the day that there was an improvement related to that $1.2 million in our non-accrual assets but that really just got traded out into a charge-off metric.

So, I don't view that as an overall favorable improvement for our nonperforming assets. 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 -- 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 $1.2 million range. It's something less than that. 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 though, 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 and 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.

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 surprises we felt for quite a while that these would be upgradable and hopefully we're able to reasonably communicate that in past quarters.

Chris O'Connell

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

Jason Darby

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 $1.8 or so million in securities losses this quarter. So the plan really kind of allows for some capital flexibility. 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 an ability to quickly accumulate capital.

I think this quarter we slowed a little bit on the capital build because we carried 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 were really scheduled to start releasing this month and the next month. So, we'll be able to reduce that balance sheet size by about $150 million 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.

Chris O'Connell

Great. Sorry, did I hear you at $100 million for the full balance sheet next quarter down?

Jason Darby

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

Chris O'Connell

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, you have some -- still some ability to bring down brokered CDs or borrowings?

Jason Darby

Yes. So, not really prepared yet, Chris, to talk much beyond the second quarter of next year. We've targeted the second quarter 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 they were great volume opportunities for us? But I like the idea of somewhere between $35 million and $40 million a quarter in net PACE growth between now and 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 to 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 quarter loan growth is still very viable.

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 we're about 50-50 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. They do think will 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.

Chris O'Connell

Great. That’s helpful. And do you have how much of the loan portfolio is set to mature over like the next 12 months or so?

Jason Darby

I do. And these are somewhat move around numbers just because of the prepayments and other types of events that might occur. But I would guess you're going to be somewhere in the range of over the next 12 months on the commercial portfolio $350 million to $370 million. And I think it's going to split somewhere around two-thirds for commercial real estate including multifamily and about a third of that in C&I.

And maybe to answer a follow-on question I think the yield on that particular in the real estate portfolio is 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 4.5% 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 to refinance elsewhere. We think we have plenty of pipeline to be able to keep our repricing PACE going and not have any balance sheet erosion.

Chris O'Connell

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

Jason Darby

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 of the events were 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 for you when we do our ATR calculation early next year.

Chris O'Connell

Got it. Thanks Jason. Appreciate taking my questions.

Jason Darby

Thanks Chris.

Priscilla Sims Brown

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.

Priscilla Sims Brown

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 phase and we like to bid you a good day. Thank you.

Operator

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