Q4 2022 Cambridge Bancorp Earnings Call
Welcome to the Cambridge Bancorp fourth 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 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.
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I would now like to turn the conference over to Mr. Denis Sheahan, Chairman, President and Chief Executive Officer. Please go ahead Sir.
Thank you and thank you everyone for joining our earnings conference call today, I'm joined by our Chief Financial Officer, Michael Caron, Tenuto, who will provide a review of the fourth quarter and an outlook for 2023 for your reference 2023 estimates are included on page 23 of an investor.
<unk>, we posted along with the earnings release this morning.
I'm pleased to report another solid year of Cambridge Bancorp.
Loan growth was robust.
Asset quality remains excellent.
Capital grew very nicely in the net interest margin expanded during the year all of this balanced against the challenging period for deposit growth and wealth revenue as a result of market volatility and interest rates.
Organic loan growth excluding merger balances continued into the fourth quarter in both commercial and residential lending with three 6% linked quarter growth and year over year growth of 13, 3%.
Core deposits, excluding merger balances decreased by five 2% during the year as a result of increased market competition attractive yields within the fixed income markets and clients using funds for other opportunistic investments.
Wealth management assets decreased primarily due to market volatility during the year.
Assets under management and administration totaled $4 billion as of year end 'twenty two.
The tangible common equity ratio rose to 812% as of year end and the company delivered a return on average assets of one 1% and a return on tangible common equity of 14.18% both on an operating basis.
Another highlight was the completion of our merger with North Mark Bank, adding three new markets and approximately $430 million in banking assets and we are on track for system integration in the second quarter of this year.
Okay.
We also announced a <unk> <unk> per share increase to the quarterly common stock dividend to <unk> 67 per share a 5% increase for the first quarter of 2023.
Importantly asset quality remains superb with nonperforming assets are just 12 basis points of total assets.
I thought I would take an opportunity to provide insight into a segment of the bank's loan portfolio to get questions from investors. That's the office lending portfolio and it's understandable why we get and other institutions to get those questions post pandemic.
Our office lending portfolio represents 8% of the total loan portfolio or $319 million the average loan to value at origination was 48%.
In particular questions seem to focus on the urban areas in the cities and our exposure there.
The city of Boston office lending market for us represents 2% of the total loan portfolio with a weighted average loan to value at origination of 40%.
The city of Cambridge represents 1% of the total loan portfolio with a weighted average loan to value at origination of 41% there were no delinquencies and the office lending portfolio and all loans are pass rated.
Before I bring Michael and to make a few comments I'll make a general comment regarding our outlook for 2023.
While we expect this year may bring a recession and a year of slower balance sheet growth in both loans and deposits. We are prepared for the worst.
Capital in reserve levels are very adequate and based on our emphasis of conservative loan underwriting. We believe we are well prepared for whatever environment. We are presented with.
In addition to these areas our focus will be on controlling the cost of funds and evaluating opportunities to reduce operating expenses where feasible.
Overall I continue to be immensely proud of my team's support of clients of one another and our communities throughout 2022, I will now ask Michael to make a few comments regarding the fourth quarter and the outlook for 2023 Michael.
Thanks, Dennis good morning, everyone.
To highlight a few items within the quarter diluted operating earnings per share were $1.92 for the fourth quarter and $7.80 for the full year.
The adjusted net interest margin, which excludes the impact of merger related loan accretion increased by eight basis points to 3.0% to 1%.
Loan accretion during the fourth quarter was approximately 915000 or seven basis points on a GAAP basis.
The cost of deposits, excluding wholesale deposits increased by 21 basis points to 45 basis points for the quarter as a result of client request for increased rates.
Provision for credit loss in the fourth quarter consisted of two primary items. The first being the nonrecurring day to seasonal reserve build associated with the North park merger of $2 $2 million pre tax and the remainder or 1.4 million pretax associated with proactive reserve build.
Within noninterest income for the quarter wealth management revenue decreased from the third quarter due to approximately 450000 in revenue associated with seasonal tax preparation fees.
Our noninterest expenses for the quarter professional services were increased from the third quarter, primarily as a result of consulting expenses associated with the renegotiation renegotiation of our core data service provider contract and other various contract reviews.
This provided a material benefit to the run rate of technology costs in 2023 and beyond and it is an important factor in managing increases to noninterest expenses.
I will now turn my attention to the outlook for 2023, which again is included on page 23 of an investor presentation, We filed along with the earnings release this morning.
The interest rate environment assumption for these expectations assumes that the fed reached 5% in the first quarter of 2023 and holds rates at 5% for the balance of the year.
With an expectation of continued increased short term rates loan growth is expected to be lower than prior years and given the expectation of slowing economic activity. We are currently assuming loan growth of zero to 5%.
Core deposit growth is expected to be between 2% and 5% for 2023.
Growing and retaining deposits continues to be a priority for us. During 2023. However, we understand this will be a challenge this will be challenging given competitive pressures and the current rates on fixed income securities.
To that end during 2023, we will look to use investment cash flow and net new client growth to reduce the approximate 487 million dollar borrowing and wholesale CD position that existed at the end of 2022 to the extent possible.
If achieved this will create a situation where total assets would remain fairly consistent to year end 2022.
Investment Securities are expected to be reduced between $100 million and $150 million based upon current cash flow expectations.
The adjusted margin is it is expected to be within 2.85% to 3% for the full year of 2023.
Moving to noninterest income.
The largest component of this category is wealth management revenue.
Our assumption of a reduction within noninterest income of between zero percent and 5% is derived from two key items lower bully income and a lower starting point of assets under management.
Within noninterest expense, we expect an increase in operating expenses of between zero and 3% for 2023.
This is off a base level of operating expenses of $107 3 million in 2022.
The allowance for credit loss range of 90 to 100 basis points expect the continued strong asset quality that <unk> seen historically from Cambridge Bancorp and we assume current unemployment forecast remained consistent throughout 2023.
Which has an ending unemployment rate in the fourth quarter of $4 two 3%.
Finally, and importantly capital given the company's earnings profile, we would expect the tangible common equity ratio to continue to build throughout 2023 approaching 9% given the various ranges included within our guidance.
M. J now we will open the line for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Hey, guys. Good morning, good morning.
Mark.
Dennis in the slides.
Earnings release, rather you said that you see evidence of a slowdown.
What are what kind of evidence that youre seeing out there with borrowers.
Well I think mark obviously the <unk>.
Obvious one is in the residential space given the increase in rates. It's a it's really a slow down activity in that area, but that also extends into the commercial side at least at least for us, we and talking with our clients.
There's sort of this broad uncertainty.
<unk> business clients I think we'd all like some clarity as to when the fed.
We'll we'll end it is.
Its campaign on raising interest rates.
Slowdown in commercial real estate transaction volume I think the best way I can describe it for you Mark as there is.
In terms of transactions for investors. There is today. It's of course may change, there's a large bid ask spread.
Sellers are not adjusting there.
Exit cap rates to reflect today's interest rate environment, and then buyers are challenged to make deals work due to the higher rate environment. So that's that's a segment of our business that we think will be slower doesn't mean, there's not going to be any transactions, but we think it'll be slower.
In construction, which isn't a huge huge emphasis for us.
Construction costs are high.
Finding skilled labor is tough.
<unk> in our market.
So I think those those in particular would be areas and I've commented on in the past on the innovation.
<unk> economy in Massachusetts, which is such an important.
A fundamental strength of our economy.
I would characterize it is experiencing a modest downturn there are.
Layoffs evident in some companies to sort of to preserve cash and to extend the runway.
But there still is a an optimistic long view of the innovation economy in the state that larger companies are still expanding.
But there certainly is I would characterize it as a modest downturn. So I think it's reasonably widespread across the business community and then the consumer section as well as I mentioned in my in my first comment okay.
Okay. That's helpful and then Mike a couple of modeling related questions.
First so your your margin guidance of $2, 85% to 3% excludes <unk>.
Loan accretion. So if we were to kind of add that back it sort of be an additional five to seven basis points roughly is that fair.
Okay.
Yeah, that's about right Mark on the reported margin okay.
Do you have a feel for the trajectory of the margin throughout the year how are you modeling it.
Yeah, So I think youre going to see.
Lower in the first half and then recover in the second half just because we'll have greater time to for new asset cash flows to come on at higher yields.
Okay, Great and then I heard your guidance about sort of expenses in sort of 2007, and a half ish million a reasonable run rate in the first quarter do you think.
So if you take the full year I think you just dividing it by four I think that's a reasonable I mean, the first quarter always has a little bit higher expenses, just because of payroll taxes and the like right, but on average it's about right.
Okay.
And then.
I guess I was curious sort of a more strategic question you've had a fair number of senior executives retire recently I'm curious does that signal any changes in strategy or incremental focus on any particular lines of business.
No no I mean.
[noise] retirements happen.
And we're prepared for that we're very pleased with.
The succession plan and succession planning, we had in place in the commercial banking division with two of our team step up into.
As the Chief commercial banking officer role of Chief Credit Officer role, So that's really terrific.
Succession planning there.
We are initiating a search process for a new head of wealth management, so that will be an important.
Positioned for us to fill here in the first half of this year.
Feel optimistic about our ability to do so but it doesn't signal.
Anything other than people retire every so often.
Thank you.
The next question comes from Steve <unk> with Raymond James. Please go ahead.
Hey, guys. This is Thomas reads Steve's already.
Can you offer us some insight on where new loan yields are today.
Yes, I can give you a little bit there so on the residential side of the house for 30 year, where in the Six's 71 arms or around five and an eighth today on the commercial side of the house for fixed rate, it's in the high fives low sixes.
Okay great.
Also I'm wondering can you give us an update on sort of how are you.
Feeling about deposit pricing and beta going into 2023.
Sure.
Our through the cycle, thus far our cumulative beta on our cost of deposits. Excluding wholesale was about 7%. When you look at the last cycle. Our beta was around 26%. This cycle, we expect it to be a little bit high a little bit higher so we're assuming about a 30% through the cycle beta.
Okay. That's helpful.
Okay. That's it from me thanks, guys.
Thank you.
Again, if you have a question. Please press Star then one.
Our next question comes from Chris O'connell with <unk>. Please go ahead.
Good morning.
Good morning, Chris Yeah, just wanted to follow up.
On the prior question as far as the payments.
D C.
Yes, pretty good organic deposit growth this past quarter.
Looking for.
That growth over 2023 as well.
You think that ramps up in the first quarter, and then slows or do you think it's going to be.
Fairly consistent throughout 2023.
Yeah, I mean, Chris it's it's certainly hard to tell when it's difficult to predict consumer and business behavior in this environment, but if you look at what's happened you've seen an increase in deposit costs. Since Q4 of last year, we expect deposit cost to continue to increase consistent with that guidance I talked about in terms of beta but the timing.
Of it it's difficult to tell.
And just also be careful there Mike on I think Chris mentioned growth in Q4 can you correct, yes, Chris So when you look at deposits just just when you exclude the impact of the merger, we actually had a slight decline in core deposits during the fourth quarter.
Okay got it.
Okay.
And.
As far as the securities Rolling off.
150.
$50 million I think you mentioned for 2023.
<unk> is the maturity schedule for that fairly consistent over the course of the year or is there any big chunks come in.
No it's fairly consistent.
Okay.
Yeah.
And then as far as the wealth management AUM.
For the fourth quarter.
How much.
What is the kind of gross inflows versus the market impact.
So during the fourth quarter, we had net client flows net client loss of about $17 million market impact during the fourth quarter was $230 million.
Yeah.
Okay great.
Are you guys targeting or do you have any specific targets as to.
Net client flows or kind of organic growth ex market activity on the wealth management segment for 2023.
We do but we havent typically put that out there Chris.
Okay got it and for.
The loan derivative income.
Yeah.
Obviously kind of a low point this quarter do you see any signs of that kind of improving in the near term.
It remains a little bit of a debt environment for the foreseeable future.
So we're very interested in continuing to do.
Derivatives with art with our clients something that we're pushing on to the extent that we're successful you'll see an increase in derivative income but.
But clients are our intelligent you know what I mean.
May be looking for fixed rate right now that may change as we go throughout the course of the year.
It's always been something that's moved up and down dependent upon client preference.
Okay got it we're assuming Christa 'twenty three will not be a robust year of loan growth per my earlier comments.
In terms of what's happening in the marketplace.
Should that change I think.
The derivative revenue.
Also change.
Great.
Appreciate the time, thanks for taking my question.
Sure. Thank you.
The next question comes from Bernard Horn with Polaris. Please go ahead.
Yes, good morning.
Quick questions. The first is on a loan.
Your loan expectations on growth like zero to 5%.
And I'm just curious if you had been you had pretty good organic loan growth last year I think it was about 13% excluding the North Park merger.
I'm just wondering if you can.
There any scheduled repayments on the loan portfolio that would kind of.
Neat therefore, you'd need to have higher growth.
To offset that or is it just you know your expectation that the economy is gonna be a little softer.
I think it's the latter Mike would you agree yes, it's the latter Barney debt.
Just just softness.
Sure.
The borrowers are generally on the sidelines building cash and I think waiting to see what the new environment, where we end up.
We're hearing of projects sort of being mothballed.
<unk>.
As people the uncertainty is we understand why this is happening but the uncertainty is not welcome by a lot of.
Commercial borrowers.
Sure.
And then on your.
On your loan payoffs did you have anything material.
In 2021 that.
What have you.
Been higher had you not had the had they pay offs.
No no I don't think okay.
And then on the on the that's fine on the deposit side it looks like you've got a.
Tick up in like wholesale.
A positive is that something you have.
You know look to increase in the prior year in the upcoming year or is it just you know things that.
Came your way because people are looking for yield.
Bernie it's really.
It's an alternative to federal home loan bank basically visit.
This is accounting for.
The robust loan growth, we had and some deposit outflows for those clients who are searching for yield. So it's either federal home loan bank or brokered Cds, it's not it's nothing other than that.
We put them basically in the same category, we have about $480 million of wholesale funds.
Yeah. Okay. That's that was my follow on question as to how that compared to the S. H LP borrowings like great Alright. Thanks, That's all I had good quarter. Thanks for thanks Perry.
This concludes our question and answer session.
I would like to turn the conference back over to Denis Sheahan for any closing remarks.
Thank you everybody for your participation we look forward to speaking to you again at our next earnings release Conference call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.