Q2 2022 Cambridge Bancorp Earnings Call

Speaker 2: Good morning. Welcome to the Cambridge Bancorp second quarter earnings conference call. We'll be making forward-looking statements during this call and actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward-looking information, which applies to statements made in this call. In addition, some of our discussion may include references to non-GAAP financial measures.

Speaker 2: Information about those measures, including reconciliation to GAAP measures , may be found in our SEC filings and in our earnings release. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Speaker 2: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two.

Speaker 2: Please note, this event is being recorded.

Speaker 2: I would now like to turn the conference over to Mr. Denna Sheehan, Chairman, President, and Chief Executive Officer. Please go ahead, sir.

Speaker 3: Thank you, and thank you for joining our earnings conference call today. My comments will focus on key items within the quarter and what we're seeing within our local markets.

Speaker 3: I'm joined today by our chief banking officer, Tom Fontaine, and our chief financial officer, Mike Carrattonuto. And Mike will provide commentary regarding estimates for the remainder of this year, and in particular, the impact of rising rates, as well as an outlook for loan and deposit growth and wealth revenue.

Speaker 3: I'm pleased to report another solid period with robust long growth.

Speaker 3: continued strength in asset quality, and an expanding net interest margin due to our asset-sensitive position.

Speaker 3: This is balanced against a challenging period for wealth revenue led by market volatility and asset flows.

Speaker 3: We also announced during the second quarter the proposed merger of Northmark Bank into Cambridge Trust, which brings together to high quality banks in terrific markets.

Speaker 3: As expected, loan growth continued during the second quarter in both commercial and residential lending with 3% linked quarter growth.

Speaker 3: Looking ahead, we feel good about continued prospects for growth in commercial lending.

Speaker 3: As the quality remains superb with non-performing assets at just 12 basis points of total assets.

Speaker 3: Core deposits decreased by 4% from the first quarter as a result of tax payments and clients using funds for investment opportunities.

Speaker 3: We still see the opportunity for core deposit growth for the year, and Mike will provide further commentary in a few minutes.

Speaker 3: The adjusted net interest margin expanded by 14 basis points to 2.81% during the second quarter reflective of our acid sensitive position and strong core deposit base.

Speaker 3: Wealth management assets and revenue declined due to market performance and negative net flows by 14% and 5% respectively.

Speaker 3: While wealth revenue negatively affected total fee revenue during the quarter, expenses remain controlled, and core profitability remain good with the return and average assets of 1.07% and a return on tangible common equity at 14.07% on an operating basis.

Speaker 3: Importantly, we feel very good about progress in the Northmark merger approval process and integration effort. All appears on track to close early in the fourth quarter of this year, and we remain excited about the long-term potential of this combination.

Speaker 3: Moving to our local markets and outlook, we remain optimistic regarding near-term loan growth opportunity, particularly in commercial lending.

Speaker 3: We see continued solid commercial loan demand in the next 90 days, and as always it's tough to see longer than that.

Speaker 3: We also expect residential lending to slow in the back half of this year due to the higher level of interest rates.

Speaker 3: From an economic perspective in our markets, unemployment remains strong with Massachusetts around 4% unemployment and New Hampshire less than 3%. 2011

Speaker 3: Upstream real estate activity that is activity above our lending size and focus but affecting general market conditions is mixed.

Speaker 3: In the life sciences category, absorption of vacant leaf space was significantly positive, driven by large pharma.

Speaker 3: However, there is a clear tightening occurring within small private companies in the innovation space.

Speaker 3: Overall, vacancy in this category remains low at just over 1%.

Speaker 3: The downtown office market activity is picked up, particularly in class A buildings, and data regarding both building occupancy and subway ridership are trending significantly positive. We hope the potentially sole advantage of potential urban ????ysz around?? urban urban urban urban urban urban urban urban urban urban urban urbanbat m urban ba b b k h s v m b h m b k h h m b k h h m b m m ta m 2 b k h m a b g b c b g m r s com m to

Speaker 3: So with that, I will ask Mike to make a few comments regarding the details of the quarter and outlook for the remainder of this year.

Speaker 4: Thank you, Dennis. Good morning, everyone. I will start with our lending pipelines.

Speaker 4: At quarter end, the commercial and residential pipelines were approximately 110 million and 70 million respectively. The commercial and residential pipelines were approximately 110 million and 70 million respectively.

Speaker 4: Overall, slightly better than the Pifeline at March 31st.

Speaker 4: These levels combined with the market activity Dennis mentioned allow us to update our growth range from the six to eight percent range announced earlier this year to a revised range of eight to 10% for the full year. And we will update you as the year progresses.

Speaker 4: We continue to see solid deposit opportunities for the remainder of 2022, however, our deposit profile allows us to be flexible in this environment.

Speaker 4: We are first focused on client retention, retaining our high valued households and the cost of deposits, while secondly adding new households.

Speaker 4: As such, we have recasted expectations for the full year, and the growth range is now expected to be five to seven percent of total deposits from eight to 10 percent previously. The total deposits are now expected to be five to ten percent of total deposits from eight to ten percent previously.

Speaker 4: With this level of deposit growth, we would anticipate that the investment portfolio cash flow would be used to fund any excess lending growth.

Speaker 4: Moving to the adjusted Nantras margin.

Speaker 4: We expect to continue to benefit in this rising rate environment.

Speaker 4: If Fed funds were to increase to 3.60%, by year end, we would expect our net interest margin to be in the range of 2.80% to 2.95% for the full year of 2022.

Speaker 4: better than the prior quarter net interest margin guidance of 2.7% to 2.85%.

Speaker 4: This would put our fourth quarter 2022 adjusted net interest margin above 3%.

Speaker 4: Moving to non-interesting income. Non-interesting income growth is going to be less than previously contemplated due to declines within the equity markets, corresponding wealth revenue, and lower sales of conforming mortgages.

Speaker 4: If the equity markets stay at current levels, our forecast estimates of non-interest income are minus 3% to minus 6% for the full year of 2022, as compared to 2021.

Speaker 4: While we are not immune to rising rates on our available for sale security portfolio, it makes up only 14% of total investments and 3% of total assets.

Speaker 4: It is expected that there will be a small continued negative impact to tangible common equity as rates rise, but it is manageable given our use of the health and maturity portfolio and our outlook for the remainder of the year.

Speaker 4: As you can see within this quarter's release, despite continued increases within interest rates, both tangible common equity and tangible book value per share grew nicely during the quarter.

Speaker 4: We also expect to be on the lower end of the 26-27% range for the operating effective tax rate previously provided.

Speaker 4: As shown within the non-operating reconciliation during this quarter, we surrendered a bank-owned life insurance policy which created an increase of approximately 2.3% in the income tax expense rate for the quarter, which was completely offset by increased bank-owned life insurance income.

Speaker 4: The rest of our estimates from last quarter remain intact.

Speaker 4: And we will now open the line for questions.

Speaker 2: Thank you. We will now begin the question and answer session.

Speaker 2: To ask a question, you may press star then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. If you are using a speaker phone,

Speaker 2: To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster.

Speaker 2: The first question today comes from Mark Fitzgibbon of Piper Sandler. Please go ahead. You're welcome.

Speaker 4: Hey guys, good morning. Good morning, Mark. A couple questions around deposits. It's, you guys have had sort of pretty impressive deposit cost at eight basis points on those business deposits. I guess I'm curious, do you starting to feel any deposit pricing pressure there?

Speaker 4: morning. A couple questions around deposits. It's you guys have had sort of pretty impressive deposit costs at eight basis points on those business deposits. I guess I'm curious, are you starting to feel any deposit pricing pressure there from commercial customers?

Speaker 4: Sure, Mark, so it's Mike. You know, in the last cycle, we saw 26% deposit beta, and certainly the cycle is going to be different than that. You know, we're modeling a higher beta in our expectations that you'll see within the assilability slide that we have with an interest rate risk. So we're expecting higher than that and we're hoping to do better. And we're hoping to do better. And we're hoping to do better.

Speaker 3: I would add to it Mark Dennis.

Speaker 3: To know great surprise with the Fed increasing rates this quickly, we're certainly getting some questions from clients. It's to be expected. It's not overly aggressive, but certainly clients are...

Speaker 3: You have questioning the positive rates.

Speaker 3: rates to be expected.

Speaker 5: Okay, but it sounds like from your guidance on deposits, you're not expecting more deposit runoff in 3Q. Is that chair?

Speaker 4: Yes, that's very smart.

Speaker 3: It's a big seasonal component associated with tax payments. It was certainly exacerbated somewhat this quarter by some clients taking advantage of investment opportunities, some of our larger clients. And so those are the two key factors this quarter.

Speaker 5: Okay, and then I heard your comments about, you know, the employment picture and economy, et cetera, being pretty good. Are you seeing any sort of hints of distress in any of the portfolios related to either consumers or businesses out there, things that you're sort of watching are a little concerned about?

Speaker 3: No, none. We feel very good, very good about asset quality, delinquency. Certainly if we do go to recession, there will be some weakness one would imagine, but we always think about...

Speaker 3: you know, when we're making loans about bad times and the conditioning of this organization. And we feel very, very good about.

Speaker 3: you know, when we're making loans about bad times and the conditioning of this organization and we feel very, very good about asset quality.

Speaker 5: Okay, last question I had Dennis was sort of around the wealth management business. Obviously difficult market so far this year. You know, I guess I was curious sort of about customer behavior in that space. Are people sort of shifting asset classes? Are they holding pad or, you know, what is, what are you all seeing in terms of, your client behavior?

Speaker 3: There's certainly stress that, and we're conditioned to work with our clients through that stress. You get a lot of questions about what's going on in the markets. There are the rare occasions where a client wants to go totally to cash and we try and coach them not to do that. And most of the time, the vast, vast majority of the time we are successful. On occasion we are not.

Speaker 3: But that's the the nature of the relationship that we have with our clients is that we're there to coach them through these stressful periods. But you can expect with this kind of volatility you're going to have more conversations with clients and we certainly are doing that.

Speaker 5: Okay, and then just one final one to clarify. Mike, did you say the loan pipeline was 110 million?

Speaker 4: The commercial loan pipeline, yes, Mark, $110 million.

Speaker 6: Great, thank you.

Speaker 2: Our next question comes from Chris O'Connell of KBW. Please go ahead.

Speaker 7: Good morning gentlemen. Good morning.

Speaker 7: So I was just going to follow up on the deposit question and I know you guys said you're assuming beta is above the 26% from last cycle. But within the guide given that you have not moved deposit rates as of yet, for that core NIM 280 to 295 guidance, are you assuming that there is a significant move at some point during?

Speaker 7: the third quarter here because you know we're getting to close to a third of the way through the quarter so I'm just wondering you know when those betas are kind of you know starting to become effective and if that's included in your guidance as being above the 26% or if it's you know if that if those betas kind of start a little later in the third quarter that there could be some upside to that name guide.

Speaker 4: Yeah, certainly Chris. So to the extent that we're able to do better from a deposit cost standpoint, there's the potential for that NIM guide to be at the higher end of that range for sure. We are expecting some increase funding costs as we move forward here and that's included within that forecast.

Speaker 3: Also Mike you might clarify for Chris that the 280 to 295 is for the full year. You expect to be over 3% in the fourth quarter.

Speaker 7: Yep, thank you.

Speaker 7: Okay, great. And then as far as you guys are thinking about the cast balances here, drop pretty low during the quarter. Does that stay there until at least the deal gets closed?

Speaker 4: Yeah, we think it'll be around these levels, you know, for at least, to your point, at least until the video closes. I think that's a fair assessment.

Speaker 6: Okay, great.

Speaker 8: Ten.

Speaker 7: And then as you're thinking about the deposit flows, and I know this quarter seemed to be seasonally impacted fairly substantially, how are you thinking about the sources of growth on the deposit side going forward? I mean, is it primarily the core commercial customers? They continue to get growth from and kind of have the rest of the factors that are present in this quarter normalized.

Speaker 7: or are you getting good traction in any particular pockets that are kind of giving confidence to the growth guidance?

Speaker 4: Yeah, Chris, so when we think about growing deposits, I mean, certainly we first think about growing operating accounts from a commercial standpoint, which would be our desired way to continue to grow deposits, and from consumer households, which are important to us. And when we look at consumer households, we're looking to grow consumers both from a checking standpoint, whether they need money market or savings options. So we'll use all of our available tools to grow that deposit base.

Speaker 4: And when you look back at what we did last year, we had over a billion dollars worth of deposit growth, so we intend to continue to grow in the ways that we were able to grow in prior year.

Speaker 6: Okay, got it.

Speaker 7: And on the long-go side, I mean, I understand, you know, that, you know, the positive with the, you know, revised core growth guidance, but 8 to 10 percent, you know, up from prior. Given the strong pipeline, particularly on the commercial side, and, you know, quite frankly, a fairly solid pipeline relative to where you guys were at last quarter on the Rezzi side, that seems like that could even, you know, still end up being a bit light on the core.

Speaker 7: at the recorder right now.

Speaker 4: I think Chris, it's hard to see out more than 90 days in the commercial standpoint. We'll update you next quarter to the extent that we're able to overachieve their, certainly it's going to be a positive both from an earnings and an end standpoint.

Speaker 7: Great. And then last one for me, and I apologize, as you guys mentioned, I missed it, but you might walk us through the origination yields and where those are coming on for both the commercial and the writing side.

Speaker 4: Sure, on the commercial side of the house, it's in the mid-force, depending on the product, you could go up and down from there, on the residential side of the house, I would say it's the high-force.

Speaker 7: Okay, great. That's all. Thank you.

Speaker 2: Again, if you have a question, please press star, then one.

Speaker 2: This concludes our question and answer session. I would like to turn the conference back over to Dana Sheehan for any closing remarks.

Speaker 3: Thanks everybody, we look forward to speaking to you at the end of our next quarter.

Speaker 2: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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