Q1 2023 Cambridge Bancorp Earnings Call
Welcome to the Cambridge Bancorp first quarter 2023 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 discussions may include references to non-GAAP financial measures information about those measures.
Including reconciliation to GAAP measures, maybe found in our S E T SEC filings and in our earnings release.
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Please note this event is being recorded.
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 M J and thank you everyone for joining our earnings conference call today, I'm joined by our Chief Financial Officer, Michael Carrots, and Ido, and our Chief Credit Officer, Peter how the stock.
In a moment, Mike will speak to earnings for the first quarter and our current thinking on the outlook.
To set the stage since the bank failures last month things have quieted down demonstrably.
While we experienced a modest amount of net deposit outflow in March deposits have stabilized and deposit repricing requests have decreased significantly.
Beyond deposit levels capital is strong and continues to grow liquidity is robust.
Uninsured deposits are materially lower and asset quality is excellent.
We are strong and looking ahead, we will focus on opportunity.
Disruption brings opportunity and we believe we will benefit from this disruption to clients and talent acquisition.
With that context my comments today will focus on two matters first the north Mark Bank systems conversion integration and second the recent events in our industry and their impact to our company.
This past weekend, we successfully finalized our systems conversion with North Mark Bank, former North my clients can now access their accounts across our online systems through 'twenty two locations in Massachusetts, and New Hampshire.
I want to thank my colleagues for their efforts as the process went smoothly and we are pleased to now operate as one and look to build as a unified brand in these new markets.
As you know the events following recent bank failures, if placed a heightened focus on a number of areas in our industry, namely deposit flows level of uninsured deposits liquidity securities portfolio evaluation, and the likelihood of a recession and its potential impact on commercial real estate lending.
Portfolios there is a lot to unpack here, so let's get to it.
Let me begin with a couple of background items capital is strong and continues to build tangible common equity ended March 31, 2023 at 832% up from 8.12% at year end 'twenty, two and we expect it to continue to build through the rest of this year.
While we have a buyback plan in place I would not expect it to be executed until we see greater line of sight through this turbulent period.
Loan asset quality remains superb delinquencies are well managed and we are not seeing any significant issues to date.
As you know, Cambridge Trust has managed through many periods of economic and industry stress and its 133 year history, and we expect to do so very effectively again in this period.
To that end, our chief credit Officer, Pete how all of us that will join in a minute to speak to our commercial loan portfolio in detail and while we feel why we feel good about it.
Next deposits deposits, excluding wholesale funds declined by $300 million or six 8% during the quarter for two primary reasons.
The first was a continuation of the trend we saw in the second half of last year with clients searching for higher yield in treasuries and other pricier deposit offerings.
As the federal reserve reduced the size of interest rate increases in the quarter, we saw solid stability in deposit levels in mid February following a reduction of $219 million or four 9% since year end.
The second reason was the stress due to the bank failures.
The net effect in March of both new deposits and deposits, leaving was a net outflow in the month of March of $81 million or one 9%.
These deposits generally left to the larger banks money market funds Treasury securities or to our wealth Division.
As a matter of fact of the $81 million and net outflows nearly half our $38 million went to our wealth division.
Overall I am very pleased with this outcome keep in mind, we are in close geographic proximity to the branch offices of one of the failed institutions and to another insignificant stress.
In this geography, the public saw lines.
Syed a failing banks branch offices, which of course increases the panic factor.
My team has done an outstanding job working with our clients to counsel and remind who Cambridge Trust is 130 year old conservatively manage institution, we do not have significant and concentrated specialized businesses.
We bank locally.
Simply put we take our client deposits and lend them locally as a responsible partner to our communities.
As of April 21st the level of deposits, excluding wholesale has stabilized and is actually modestly grown as a result of new business efforts and reaching out to our clients and outlining the safe and sound insured options we have in place.
Moving to uninsured deposits to no great surprise, our business model and client base will typically have a higher level of uninsured deposits.
Our clients have a high degree of faith in Cambridge Trust and they should.
We however worked with clients to build greater deposit insurance levels in reaction to the learnings from the recent bank failures and stress.
I'm happy to share at March 31st our uninsured level of total deposits has dropped significantly to 33% from 52% at year end.
And so total uninsured deposits were $1 5 billion at March 31, and the total amount of available liquidity was $2 7 billion or just about two times the level of uninsured deposits.
I would now ask our chief Credit Officer, Pete Hell of a start to make a few comments on his observations regarding loan asset quality and in particular, the commercial real estate loan portfolio.
Peter has been with Cambridge Trust for 19 years and has been a leader in building the credit culture. We are so proud of Pete Thanks, Dennis Good morning, everyone.
Overall asset quality remained steady nonperforming assets or 0.13% of total assets, which is largely unchanged from year end 2022.
We are not seeing significant movement in risk rating changes in early stage delinquency levels are consistent with year end 2022.
Despite rising interest rates, we are not yet seen any notable impact to performance within the consumer lending portfolio and we note that housing supply remains tight throughout our core markets.
On the commercial side, we continue to maintain a diversified commercial real estate loan portfolio overall with a larger focus on multifamily as compared to other property types. This is consistent with our approach for several decades, and even with a potential slowdown in rental growth in the near term, we maintain a positive outlook on this portfolio.
We added slide 14 to our Investor presentation, as we recognize the concern with investment office properties nationally and within our own footprint given the shift to a longer term hybrid work environment.
We have been assessing this portfolio coming out of the pandemic and note that while only 7% or $291 million of total loans are classified as office.
About 6% or $259 million of our total loan portfolio is held as an investment office or non owner occupied properties getting.
Getting more granular on investment office less than 3% of total loans is located in a more urban setting, including Boston and Cambridge and the majority is geographically dispersed throughout our suburban markets.
Given our conservative underwriting approach the weighted average loan to value on the total investment office portfolio remains strong at 56%, which is typically based on originated values and excluding any appreciation since <unk> inception.
While we expect the office market May show some property value declines from its peak, we feel we are well positioned to absorb any market correction based on our historically strong underwriting fundamentals.
The other area of focus has been on interest rates and the impact from loans maturing in the near term or re pricing at current market rates.
For investment office, we have a relatively low percentage of borrowers that fit either of these criteria.
Only 14% of the portfolio is maturing over the next two years and just 4% subject to a rate reset during the same period.
While these loans would not be immune to potential rate pressures should they stay high longer term the near term impact is more limited.
We continue to dissect our portfolio at the loan level and keep in close contact with our borrowers.
Moving to the provision for credit loss in the first quarter. The provision consisted of three primary items. The first being the calculate a reduction of the reserve due to decreased loan balances, which was offset by both slightly increased unemployment expectations and prudent increases and qualitative factors given the environment.
This brought the ACL ratio to zero point, 95% we.
We continue to expect the strong asset quality that you have seen from Cambridge, Bancor, historically, and the Andean unemployment rate forecast within the seasonal model for the fourth quarter of 2023 is estimated to be four 2% to 6%.
I'll now turn it over to Mike.
Thanks, Peter and good morning, everyone GAAP earnings per share of $1 58.
And diluted earnings per share were $1 62 for the first quarter. The adjusted net interest margin, which excludes the impact of merger related loan accretion decreased by 43 basis points to 258%.
Loan accretion during the first quarter was 643000 or five basis points on a GAAP basis.
The cost of deposits, excluding wholesale deposits for the quarter increased by 56 basis points to 1.01%, bringing the cumulative total non wholesale deposit beta to 18%.
The company had a return on average assets of zero point, 93% and a return on tangible common equity of 11, five 2% bolt on an operating basis for the quarter.
Within deposits the insured cash suite product offered through <unk> is currently within the interest bearing checking line item on the balance sheet the.
The usage of this product accounts for the majority of the shift between demand deposits and interest bearing checking during the quarter when demand and interest bearing checking their combined the total reduction is less than 2% from the prior quarter.
Additionally, 49% of non wholesale deposit accounts are consumer and 51% or commercial.
Approximately 70% of commercial deposits are within demand or interest bearing checking accounts.
As expected loan activity during the quarter slowed balances were reduced by $45 million or one 1% as a result of slowing market activity and the continued disconnect between buyer and seller expectations combined with a reduction in consumer activity due to the level of interest rates and ongoing lack of supply.
Wealth management assets increased primarily due to market appreciation and a modest amount of positive net flows during the quarter.
Client assets under management and administration totaled $4 3 billion as of March 31 2023.
Within noninterest expense total operating expenses were $27 9 million in the first quarter or a reduction of four 5% from the fourth quarter of 2022.
This was driven by lower professional services marketing and data processing expenses.
We have made reductions within expenses associated both with roles from staff attrition that have not been replaced and a reduction enforced within consumer lending due to lower activity levels as.
As we indicated last quarter, we continue to look for other areas to reduce spend where it is prudent.
Tangible book value per share increased from $57 15.
As of year end 2022 to $57 98.
Or one 4% as of March 31, 2023.
Moving to the outlook a lot has happened in the past three months that affects the previously provided full year guidance.
The net interest margin in the second quarter will decline into the $2 <unk>.
From there we expect modest compression to continue which of course is dependent on further action from the federal reserve.
Our conversations with clients regarding deposit pricing have slowed and deposits are stable. This gives us confidence that the reduction in net interest margin will slow we.
We are opening new relationships and expect progress on deposits from the level in March and we'll update you again at June 30th.
For loan growth when we had previously provided an estimate of flattish loan growth for 2023 that has proven to be true.
We are down modestly since the beginning of the year and we expect that trend to continue in the short term due to borrower demand, including the need to absorb the impact of higher rates.
But recent originations however have seen improved yields into the mid sixes.
We had previously commented commented that spreads between new loans and funding costs were lower than desired, but that is beginning to change if market activity picks up either due to clarity on federal reserve rate movements or a narrowing of buyer and seller expectations that can further improve the outlook.
Within noninterest income if the equity and bond markets remains stable that would put the full year reduction between zero and 5% again, assuming limited market volatility second quarter levels will be slightly lower than the first quarter. As a result of approximately 500000 in success fees and community development funding come that occurred.
During the first quarter.
Operating expenses will continue to be managed closely and a growth range of zero to 3% for the full year still makes sense. We expect the second quarter levels will be between 2% and 4% lower than the first quarter due to the seasonality of first quarter expenses and the full quarter impact of recent cost savings.
As you heard Peter discuss credit quality remains excellent. So we expect the allowance for credit loss ratio to be between 0.90% and 1% for.
For the year barring changes in unemployment or other macro level items that prevent present themselves.
I will now turn it back to Dennis for final thoughts. Thanks, Mike clearly this has been a unique and stressful period for our clients shareholders and my colleagues.
This occasion is afforded additional opportunity to engage with our clients and is truly fortified relationships, we hear again and again, the faith and trust our clients have and canvas Trust company and the value they place in us.
Disruption may be painful yet it also brings opportunity and we are engaged and optimistic about the potential we will now open the call 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.
You are using a speakerphone please pick up your handset before pressing the keys.
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Today's first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Hey, guys good morning.
Good morning.
I Wonder if you could share with us what's your sort of spot deposit rates are currently.
So as we ended the first quarter market spot deposit rate was one point to two 6% ex wholesale.
Yeah.
Okay.
And then Mike on your guidance I think you said in the 220 range for the second quarter for the margin.
And declining modestly from from there.
How are you thinking about modestly does that does the margin get down close to 2% by the end of the year do you think assuming you follow the forward curve yeah.
Yes, I think thats about right Mark.
Okay.
And then how are you thinking about balance sheet growth Dennis I heard your comments about.
Growing capital and putting the buyback on hold.
Does the balance sheet grow much at all this year.
So mark it's.
When we look out certainly for this quarter, we don't see a lot of loan demand.
My hope would be in the second half of the year that that will change there are pockets of opportunity for sure that we're seeing seminar.
Innovation banking.
Capabilities, some in renewable energy, but broadly its demand is down.
So hopefully in the second half we will see some improvement and then in terms of the margin your margin question Mark.
Take some confidence in phases and is the degree of deposit repricing requests have have slowed materially through the panic period, if you will.
We're talking to clients about insured deposits et cetera, there was a lot of requests for deposit repricing that has slowed materially. So my hope is we'll we'll outperform on on Mike's guidance on on the margin.
But it's really dependent I think on if the fed keeps moving it's going to continue to be highlighted in the media and clients are going to ask for repricing, but as of now that has slowed materially.
Okay, and then maybe a question for Pete on on page 14, the slide deck you suggested.
25% reduction in appraised value on the office book is that just a hypothetical decline or did you actually have the office book Reappraised and the values were down in that 25% neighborhood.
No.
Continuously update based on when we're renewing loans. So it would be some updated appraisals in there that's on a stress against the entire portfolio. So an additional 25% would put it.
75% overall.
There have been some updates within the portfolio. So it's our stress its not we did not reappraise the bookmark their routine.
Routinely updates and new appraisals, but the stress that Peter's referencing as distressed that we completed.
Okay and last question for me is.
I heard that you completed the systems conversion with North Mark This weekend.
Can you remind us what the expected cost synergies from that will be.
Yes, Mark so we guided to 35% cost savings and we achieve them.
Thank you.
Thank you.
Thank you. Our next question comes from Steve <unk> with Raymond James. Please go ahead.
Hey, good morning, everybody. This is Thomas stepping in for Steve.
Good morning.
Thank you first question for me is I know you guys hit on this in your prepared remarks, but I just missed it why wasn't that interest bearing checking balances increased while most other core deposit balance itself.
There was a shift between demand and interest bearing checking the use of the <unk> product when you combine demand and interest bearing checking it was down modestly about 2% between the quarters.
Okay got you.
Oklahoma when you when you.
When clients move into that insured deposit product, it's an interest checking product. So you move out of demand into interest checking.
Understood. Okay. Thank you for that.
Next question you guys said recent originations are in the midst thickness is that so that's what's coming on right now or that's what people are committed.
What we saw during the first quarter and we continue to see improvement between funding costs and loan yields.
Okay great.
Just last one from me what does it what does the pipeline look like.
How about now in terms of unfunded commitments.
So pipeline for loans or unfunded commitments can you just clarify the pipeline the pipeline for large excuse me.
Sure. So we talked in our prepared comments that we think we're going to have slower activity here during during the near term, but we're hopeful that the longer term outlook continues to improve as there's greater clarity either on federal reserve rate movements or narrowing of buyer and seller expectations.
Okay. That's great. Thank you guys. So much that covers it for me.
Thank you.
Thank you. The next question comes from Chris O'connell with <unk>. Please go ahead.
Hey, good morning.
Good morning, Chris.
On the on the expense guide for down 2% to 3% next quarter is that inclusive of the North park cost saves.
It is and it was 2% to 4%.
Okay, 2% to 4%.
And how do you guys expect.
It's kind of the trend for the remainder of the year after that level.
So so Chris we guided to zero to 3% for the full year.
So that's what we had in our prepared comments.
Great. Thank you.
And.
I may have missed it was the it was the guide for fees for the full year or was it down 5%.
Zero to 5%.
Zero to 5%, Okay got it.
How are you thinking about as.
Wealth management fees going into next quarter, given the increased AUM.
From this quarter.
Yes, so as we've talked about past, Chris it's pretty linear right.
Bond and equity valuations remain stable youll see increased levels, if they decline youll see slightly decreased levels certainly being up from the end of the year up into the first quarter is going to help on a go forward basis.
Okay got it.
Yeah.
And for the.
The move into from non interest bearing into.
Interest bearing checking on the Ics, but what's like the average.
Cost for those Ics deposits.
It really depends upon the client relationship Chris its depends upon the entirety of their relationship here at the company. So I don't have.
I can you can look at the release, it's about 93 basis points and interest bearing checking with the weighted average for the quarter.
Okay got it.
Okay.
And as you guys.
Thank you.
One it looks like the securities duration, right now and maybe what the kind of monthly cash flows.
Sure. So the expected principal cash flows of the securities portfolio.
<unk> between 101 hundred $50 million over the next 12 months and the duration of that portfolio is approximately six years.
Got it.
And so I mean as you guys are looking ahead on the.
The margin.
I mean is there any other balance sheet actions that you guys are considering.
That can give.
Some sort of flexibility to kind of reduce the amount of wholesale deposits going forward or the amount of wholesale borrowings.
So the primary Chris this is Dennis the primary would be deposit growth.
And.
We are optimistic about our ability to grow deposits here for the rest of the year now that we're hopefully through this period.
Beyond that I assume you're referencing some form of a balance sheet restructure we would always look at opportunities from time to time, but we have nothing currently planned.
Got it.
And as you guys are you guys looking out maybe if you have how much.
The fixed rate loans.
Set to reprice.
For the remainder of 2023.
If you have 2024 is the hope would be great.
Chris I don't have that information here, we can follow up.
Got it.
And just thinking longer term.
I appreciate all the color around the margin and kind of where that's heading for the remainder of the year.
I mean, how are you guys thinking about how the margin right.
<unk>.
Without any further rate changes as you get into 2024.
It starts to rebound and if so.
Any comments around how much that rebound could be kind of equal on rates as the loan portfolio and kind of overall asset base continue to reprice upward and.
I mean, how are you guys thinking about or if we do get some rate relief.
For the fed funds rate.
Might change kind of the.
Margin outlook going into 2024.
There's a lot of Chris there's a lot of variables there I would say all else being equal the margin should expand.
If the fed if youre talking about if the fed gives relief and cuts rates.
Put this theirs.
A football field the variables and the question that.
Our challenging to answer I think just fundamentally.
If the fed cuts.
Should benefit.
We're certainly as you can expect after that first quarter, we're more liability sensitive than we were in the past we were asset sensitive, but when you. When you increase rates 500 basis points in a short period of time, you kind of blow through a lot of that asset sensitivity.
So we have some more liability sensitivity now if the fed cuts we will benefit.
Okay got it that's all I had for now I appreciate the time.
Thanks, Chris.
Thank you. This concludes our question and answer session I would like to turn the conference back over to Denis Sheahan for any closing remarks.
Thanks, everybody and look forward to speaking to you after our next earnings release.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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