Q3 2022 Cambridge Bancorp Earnings Call

Welcome to the Cambria.

Corp, third quarter earnings conference call.

We will 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.

Information about those measures, including reconciliation to GAAP measures may be found in our S. E T S SEC filings and in our earnings release.

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After todays presentation, there will be an opportunity to ask questions.

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Please note this event is being recorded.

I would now like to turn the conference over to Mr. Dennis Shaffer.

Chairman, President and Chief Executive Officer.

Please go ahead Sir.

Thank you Marlene and good morning, everyone. Thank you for joining our earnings conference call today, I'm joined by our Chief Financial Officer, Mike <unk>, who will provide an update for the remainder of this year.

To begin I would like to welcome our new colleagues, who recently joined from our merger with North Mark Bank.

The merger closing was completed on October <unk>, representing about four and a half months from announcement to close.

Over these past few months I've gotten to know the team from North Marc and I look forward to working with each of them as we build the Cambridge Trust brand in these new markets. I'm also pleased to report another solid quarter as expected loan growth continued asset quality remains excellent and then.

Net interest margin expanded all balanced against the challenging period for deposit growth and wealth revenue as a result of market volatility.

The key highlights where loan growth continued during the third quarter in both commercial and residential lending with 3% linked quarter growth asset quality remains superb nonperforming assets are just 12 basis points of total assets and we are not seeing concerns in either consumer nor commercial crew.

At this point.

Core deposits decreased by 2% from the second quarter as a result of clients using funds for real estate purchase business investment opportunities combined with marketing market competition, and certainly search for yield.

The adjusted net interest margin expanded by 12 basis points to 293% during the third quarter reflective of our asset sensitive position and our core deposit base.

Wealth management assets declined due to market performance and negative net flows by 4.5% during the quarter.

While the provision for loan loss expense and funding and cost cost increased during the quarter noninterest expenses remain controlled and core profitability remained good with return on average assets of 1.15% and return on tangible common equity of 14.94%.

On an operating basis.

Moving to our local markets and outlook. We are once again entering a period of considerable economic uncertainty.

What distinguishes this cycle versus prior ones is obviously the speed of change, especially as the federal reserve make sizable rate increases in an attempt to combat high inflationary forces, the greater Boston and Southern New Hampshire market, However, still provide both near and long term.

Growth opportunity and remain attractive despite potential near term challenges our crystal ball is no more accurate than any others, but it is pretty assured that growth will slow this.

This is already evident in the significant decline in residential mortgage volumes occurring throughout the industry and at our company. While the net interest margin is poised to increase over the near term deposit rates with typically lag the repricing of loans and other earning assets are increasing competitively to meet client demands for higher raw.

<unk>.

The good news is our deposit base exceeds our loan book by a healthy margin given the scenario of potentially slower growth. We will look to continue to generate new loans as our local market is haunted dynamic industries, such as the innovation economy health care and education.

We will evaluate and slow the pace of investment spending where needed.

We look to maintain superb asset quality and a high percentage of core deposits and we will look to continue attract wealth management professionals given recent consolidation in our marketplace and lastly on North Bank, Our North Park Bank merger is expected to be immediately accretive to earnings.

Right here in this fourth quarter. So all in all we intend to be proactive in advance of this looming environment. The rail real goal for us is to be prepared to hit the ground running to capitalize on opportunities that are available now as they present themselves whenever the economy.

Inevitably turns positive Mike will now make a few comments, including the details of the quarter and outlook for the remaining of remainder of this year Mike.

Thanks, Dennis Good morning, everyone first I will discuss our interest rate position strategy and margin.

As Dennis mentioned, we remain positioned for rising rates, particularly over a two year period, we are asset sensitive and the latest model scenario based on a static balance sheet includes a total deposit beta in line with the last rising rate cycle, which as a reminder was at 26% during 2015 to 2019.

Additionally, 26% of our loan portfolio re prices on the short end of the yield curve. These items combined with lagging on funding costs have contributed to the expansion of our adjusted net interest margin of 12 basis points. During the third quarter. This was expected and prior adjusted NIM guidance of 2.80% to 295% for the full.

All year of 2022 remains unchanged at this point and we expect the fourth quarter to be just over 3%.

What has changed is the deposit outlook for the remainder of this year given the pace and magnitude of the recent federal reserve rate hikes and market competition. We now expect deposits to end the year flat to Q3 levels. While we will look to exceed this updated guidance. We are also in the process of creating our budget and we will provide 2023 guide.

In the first quarter as we have done in the past few years.

We remain first focus on client retention, retaining our high valued households, and the cost of deposits. While secondly, adding new households are office in banking teams have done an incredible job, thus far and we look for that to continue.

We anticipate that investment and loan portfolio amortization cash flows would be used to fund any excess lending growth for the remainder of this year <unk> reduce wholesale funding.

Lower deposit growth than previously anticipated, we have the liquidity and flexibility to manage in this environment given expected securities cash flows are core deposit beta expectations borrowing capacity and the positive impact of north marks cash position, which has already been used to reduce outstanding borrowings in the fourth quarter.

Now I will move to our lending pipelines at quarter end, the commercial and residential pipelines were approximately $90 million and $35 million, respectively down from the last quarter, particularly on our residential lending as we added as we had anticipated.

Our loan growth range for the full year of 2022 is now low double digits around 10%. However, as Dennis alluded to loan pricing is now in focus we want to ensure that new loan yields are at the appropriate level to reflect both risk and return on equity in this environment right now, it's not a matter of demand, but loan pricing not <unk>.

Greasing at the same level as funding cost.

Moving to noninterest income during the quarter noninterest income included approximately 450000 in revenue associated with the seasonal tax preparation fees within our wealth management revenue line.

Additionally, as a reminder, Q2 included approximately $1 $2 million in bully income associated with a death claim and policy surrender, which was nonrecurring.

Noninterest income growth for the full year remains unchanged from our prior guidance of minus 3% to minus 6% from 2021.

Within noninterest expense I would note that we anticipate marketing spend to remain elevated in the fourth quarter as we were active in our new marketing campaign.

Moving to capital as you can see within this quarters release. Despite continued increases in market rates tangible common excuse me tangible book value per share grew during the quarter and while the tangible common equity ratio declined slightly during the quarter, we expect TCE to be approximately 8% by year end inclusive of the impact of North Mark.

Okay.

We continue to guide lower excuse me, who we continue to guide to the lower end of the 26% to 27% operating effective tax rate.

Previously provided as a reminder, the operating tax rate removes the impact of the prior quarters fully policies surrender and offsetting income received.

There are no changes to other estimates from from last quarter.

Finally, we are in the process of finalizing the north Mark fair value market impacts and we expect to include a fair value table as a disclosure within our 10-Q.

North Mark brings an engaged team wonderful clients logical expansion markets and a healthy balance sheet with approximately $317 million in loans and $373 million in deposits prior to the finalization of the accounting for Mark to market, while rates have risen and the numbers will change from an initial estimates the updated.

Results appear to be well contained based upon preliminary estimates, we expect tangible book value dilution to be below 3% and have an earn back under the crossover method of less than three years.

We will now open the line for questions.

Okay.

Yeah.

We will now begin the question and answer session.

Chita.

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At this time, we will pause momentarily to assemble our roster.

Yeah.

Our first question is coming from Mark Fitzgibbon from Piper Sandler. Please go ahead Marc.

Good morning.

And thanks for taking my question, Mike just first could you just clarify I kind of missed your comments on the expense outlook.

Sure Mark So what I said for the fourth quarter is that we anticipate marketing spend to remain elevated as we're active in a new marketing campaign.

Gotcha, Okay great.

And then secondly, I wonder if you guys could kind of remind us of the timing of when you expect to extract all the North Park Mark synergies when when should we expect all of those synergies will be out.

Yeah, So mark thereabouts be about 75% here in Q4, and then our systems conversion is until April so you'll have a 100% by the time, we get to the systems conversion.

Okay great.

Hum.

And that that margin that you referenced being just over 3%.

That's kind of a combined adjusted margin for you guys in north Mark with any restructuring that you contemplated being incorporate Iraq.

That's correct.

Okay, Great and can you help us think about the provision for.

For the next couple of quarters I know it.

Everybody's Crystal ball is a little fuzzy, but any guidance you can give there would be great.

Yeah, Mark so it depends upon two things the level of our loan growth and what happens kind of with the economic factors, particularly unemployment right. So generally speaking if unemployment is rising provision expense generally rises alongside with it and then if loan growth is up you would expect some some provision expense as well what I would say, though is that we continue to be.

Barry we continue to perform very well from an asset quality standpoint.

So from an overall allowance for credit loss ratio, we're at just about 96 basis points today.

We'll probably be in that range into the future and it may climb higher depending upon what happens with unemployment expectations.

Okay, and then and this is really not a question for you guys because your asset quality has been so good historically.

And delinquency so low.

But I guess I'm curious as you look at sort of the the market around you are there any areas of concern from a credit perspective in either commercial real estate or C&I. I think that you guys are sort of shying away from or or a little cautious on.

Thank you.

Sure Mark it's Dennis I think.

Clearly.

There is a big unknown relative to the office market broadly I think throughout the industry and we would share that concern.

I think the answer there, though will be sort of.

It will take years to fully answer what's going to happen in the office market. There is greater occupancy occupancy is growing but it's certainly not back to pre pandemic levels. You can look at data from the.

The large real estate firms look at transportation data, we're not back to pre pandemic levels. So that's that's an area clearly a concern we have limited exposure there but.

But that does that is the one that I would highlight the most.

Okay, and then lastly, Dennis I Wonder if you could sort of share your thoughts on the M&A environment. You know I know bigger transactions are a little tricky to do right now, but do you think that some concerns about the credit environment might Trump more consolidation more small banks to she got a partner like <unk>.

<unk> and do you get that sense that that's a lie.

Likely in the coming quarters.

I think it's too early to say that Mark I think this we're all living with sort of individually and collectively a degree of uncertainty about where the fed is taking rates.

And ultimately the consequence of it and then the longer term impact on that to financial institutions, We know theres a lot of.

Oh temporary or not tangible book value dilution out there you add a credit problem on top of that that could spur some consolidation I think its too early to say I do know, though that I have a lot of confidence in my team.

We've done three very good mergers and a little over three years.

Lot of confidence in my teams ability to execute.

You look you look at this we.

Close this merger and four five months.

That isn't happening today and as a reason it happened it's because of the quality of the two farms here. So I have confidence in our ability to do it I think it's too early to say that.

This this particular cycle will drive more consolidation, there's the obvious challenge of the mark to market the fair value accounting.

Mike referenced we feel good about where we are with north mark but in this rate environment that I think that's a hurdle realistically.

Thank you.

Sure.

Yes.

Yeah.

And let me just remind you if you would like to pose a question press Star then one.

Our next question is coming from Chris O'connell from K B W. Please Chris go ahead.

Good morning.

Yeah.

Wanted to start out with some of the deposit commentary and some of the flows this quarter.

The Cds were up fairly materially I was just wondering what.

The pricing was in terms of what they were coming on at and then you know what you're hearing from your customers, obviously, you're a little bit more of a tepid growth environment on deposits are you.

Into year end here, but.

But just you know what you're hearing from your customers.

As far as the flows going forward.

Yes, so Chris on the deposit side of the house, we did use some brokerage Cds during the quarter when you back that out the spot cost of deposits. Excluding wholesale was 28 basis points. So I think that might be where youre seeing some increase in total total CES there and then in terms of deposits during the quarter as Dennis mentioned, we had clients use funds for <unk>.

Businesses purchase real estate and certainly some money has moved into treasuries or competitor Cds, but some of it has also moved into internal wealth strategies or off balance sheet into a sweep.

Yes, we talked about we expect deposits to be flat to Q3 levels and that's kind of our current outlook right now.

Got it and for the brokered CD Oh go ahead.

And just to add to what Mike said, there it's understandable.

Clients to a degree are searching for yield and when you know.

If you are bombarded in the news every every night about the fed increasing rates.

It's understandable our team is well conditioned to have conversations with our clients and to find a solution for that.

These are normal conversations that happen in.

In our industry.

And we're ready for it.

Got it and for the brokered Cds.

What what did those come on at what rates and what was the duration.

It's shorter short duration, so three months under their blended rate was between $2 50 and three.

Got it.

And on the loan side from what Youre seeing in your pipeline today, and what are the origination yields coming on at.

Yes, so as of today, so new production today, we're looking for mid sixes and Sevens for 30 year residential fixed it's mid fives and sixes in residential arms for commercial pricing fixed rates are generally today in the mid sixes, but we're looking for more variable pricing there.

Got it.

So I mean.

You know given given where you guys betas have been in the past even if it runs a little above that.

Is it fair to say that you know the momentum for the margin maybe less.

You know aggressive of pickups in the first half of 'twenty, three but still an upward trajectory for the first couple of quarters at least.

I think that's fair, Chris I mean, conceptually, we're going to put I mean, youre right conceptually, but we're going to put out some 2023 guidance in the first quarter.

But it also depends upon what happens with the where the fed moves how quickly. They move so there's a lot. There's a lot there's a lot of moving pieces to that.

Got it.

And could you just outline you mentioned some.

Balance sheet movement post quarter end with with north Mark in cash paying down borrowings or wholesale funding and just what the levels of movement, where there.

Yes, so north Mark had about $95 million worth of cash and securities that was used to pay down some wholesale early in Q4.

Got it.

And I hear you on the marketing expense.

Our remaining elevated in the fourth quarter I think last quarter, you might have mentioned.

Organic expenses around 45% for the year does does that change that outlook at all.

Well Youre also going to include north Mark, but but I think that's about right yes.

Great.

Alright, that's all I had I'll step out for now thanks.

Chris.

And this concludes our question and answer session I would like to turn the conference back over to Dennis Shaffer for any closing remarks. Please go ahead.

Thanks, everybody for joining the call and look forward to speaking to you.

After our next quarter.

Yes.

Yeah.

Thank you for attending today's conference you may now disconnect.