Q2 2023 Cambridge Bancorp Earnings Call
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Yeah.
Welcome to the Cambria Bancorp second quarter, 'twenty 'twenty 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.
Soon about those measures, including reconciliation to GAAP measures, maybe found in our SEC filings and in our earnings release.
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After todays presentation, there will be an opportunity to ask questions too.
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Please note this event is being recorded.
I would now like to turn the conference over to Mr. Dennis Yang Chairman, President and Chief Executive Officer.
Please go ahead Sir.
Thank you Marlene and good morning, everybody and thank you for joining our earnings conference call today, I'm joined by our Chief Credit Officer, Pete Halberstadt, Our interim Chief Financial Officer, Joe Sappy, and Uh Huh, Vice President of Finance, Joe Lombardi, and our Chief Marketing Officer, Danielle We Miss Hackel.
In a moment I will speak to earnings for the second quarter and our current thinking on the outlook.
From a macro perspective, we see continued uncertainty regarding interest rates and recession. In addition to equity market volatility.
Cambridge Bancorp deposit levels have stabilized and pricing pressure, while not as elevated still exists.
Growth in deposits remains a priority and is very challenging due to the pricing pressure in the market. However, we are beginning to see green shoots and I'm hopeful of deposit growth in the second half of this year.
Beyond deposit levels capital is strong and continues to grow liquidity is robust at approximately two times the level of uninsured deposits and asset quality remains excellent.
From a lending perspective activity during the quarter was modest as expected.
Total balances were essentially flat as a result of slowing market activity and the continued disconnect between buyer and seller expectations in commercial real estate combined with the reduction in consumer mortgage activity due to the level of interest rates and ongoing lack of housing supply.
The one bright spot was in commercial and industrial lending, which achieved growth of 7% in the quarter in both the renewable energy and innovation banking sectors. I expect we will continue to see solid growth in the innovation banking segment in the second half of the year as the opportunities are many.
And commercial real estate lending it is clearly slow.
There is activity, but we are not attracted to either the loan structures are pricing offered in the market at this time.
We are known for our credit discipline and that will not waiver just to achieve growth.
In summary, aside from CNI lending, we would not expect significant loan growth in the second half of this year.
Following the industry turmoil earlier this year, we are focused on benefiting from the disruption in the markets by acquiring new clients and talent spin.
Specifically, we have hired four skilled relationship bankers to focus on acquiring deposits in Massachusetts, and New Hampshire. Additionally.
Additionally, we hired a new head of wealth management, Jeff Smith, who brings decades of experience in growing wealth management business as our new head of wealth management, replacing Jennifer applying who retired last month.
I look forward to Jeff digging in and building our wealth management growth story in the coming months and years.
A few highlights in the quarter.
Deposits, excluding wholesale funds totaled 4.09 billion as compared to 4.13 billion at March 31, and have been remarkably stable since the middle of March when comparing week over week changes during this period.
Interest and noninterest bearing checking balances combined were also stable at two point to $3 billion at June 30th as compared to 2.24 billion at March 31.
Of note approximately $50 million moved to interest bearing deposits via our insured cash sweep which has been a focal point for clients. During the backdrop of recent bank stress in failures.
The tangible common equity ratio ended June at 8.41% as compared to the March level of 8.32% and tangible book value per share increased to just over $58 at June 30th.
Loan asset quality remains superb delinquencies are well managed and we are not seeing any significant issues to date Peter.
Pete Hell of a start will join in a minute to speak to our commercial loan portfolio in detail and provide an update on the office environment.
Wealth management assets increased primarily due to market appreciation during the quarter and client assets under management and administration totaled $4.4 billion as of June 30th.
The total amount of available liquidity was $2 $6 billion remaining roughly two times the level of uninsured deposits at the at the end of the quarter.
Moving to earnings net income profitability ratios and earnings per share are all negatively affected by the weight of higher interest rates and negative deposit flows in the latter part of 2022 and beginning of 2023.
GAAP diluted earnings per share were 91 cents and diluted operating earnings per share were $1 23 for the second quarter.
The adjusted net interest margin, which excludes the impact of merger related loan accretion decreased by 37 basis points to 2.21% from the previous quarter.
The cost of deposits, excluding wholesale deposits for the quarter increased by 51 basis points to 1.52%, bringing the cumulative total non wholesale deposit beta to 27%.
The company had a return on average assets of 170% and return on tangible common equity of 851% both on an operating basis for the quarter.
Regarding the outlook the expectations of the fed continue to change during the quarter given uncertainty about inflation and economic conditions. As a result wholesale funding costs and deposit costs were elevated during the quarter, both as a continuation of client rate requests during the month of April and higher borrowing expense.
In June .
As it relates to client rates change requests the level of activity has certainly diminished from the activity seen in March and April and the spot cost of deposits at the end of the quarter was 166%.
We believe based on the current forward yield curve and consistent with our previous guidance. The net interest margin will likely continue to decline into the low twos towards the end of this year and could be further reduced if rates continue to move higher.
Recently, we've been adding more derivatives to reduce the impact of a higher interest rate increases.
The remainder of the outlook also remains similar to last quarter.
System with prior guidance, we are expecting a reasonably flat year in terms of loan growth and while we were focused on deposit growth. We expect modest growth for the remainder of the year as we were looking to avoid the race to the top in interest rates and instead focus on relationship based core deposits.
We expect to monitor operating expenses closely for the remainder of the year and a growth rate of zero to 3% from the prior year remains appropriate.
Within noninterest income a reduction of between zero and 5% from the prior year.
<unk> is appropriate for the allowance for credit loss ratio, we still expect that to remain between 9% and 1% for 2023 barring changes in unemployment or other macro level items.
The effective tax rate for the year is expected to be between 24, 5% and 25% for the full year.
I'll now ask our Chief Credit Officer, Pete Halbur start to make a few comments on his observations regarding loan asset quality and in particular, the commercial real estate loan portfolio Pete Thanks, Dennis Good morning, everyone.
Overall asset quality remained steady nonperforming assets ended the quarter at 0.13% of total assets largely unchanged from March 31, 2023 and year end 2022, we are not seeing significant movement in risk rating changes in early stage delinquency levels remain low relative to the size of the port.
So through the first six months performance has remained strong within the consumer lending portfolio and we continue to see a shortage of housing supply throughout our markets on.
On the commercial side, we've maintained diversified commercial real estate loan portfolio overall with a focus on multifamily as compared to other property types multifamily remains an attractive asset class for us with a seasoned portfolio that is well dispersed throughout our new England market.
Even with the potential for slowing year over year rental growth, we believe multifamily fundamentals remain sound within our markets strengthened by a diverse workforce and continued pressure on housing supply that yield stable demand.
As it relates to investment office properties nationally and within our own footprint, we're keeping a sharp eye on both sales activity and rental rates, while we recognize that we will not be immune to office trends nationally, we feel optimistic that our long history of conservative underwriting will help limit downside exposure.
As a reminder, the weighted average loan to value on the total investment office portfolio remains strong at 56% typically based on originated values and excluding any appreciation since loan inception.
The office market is something that will need constant monitoring and as such we continue to dissect our portfolio at the loan level.
Our lending teams have maintained close contact with our borrowers surrounding leasing activity and as expected more pressure is being seen within Boston as compared to the suburban office market.
As noted in the past our exposure to urban office is nominal at less than 3% of total loans.
Moving to the provision for credit loss in the second quarter. The provision consisted of two primary items. The first being the calculate a reduction of the reserve due to slightly lower unemployment expectations.
This reduction was offset by a slight increase in loan balances as well as prudent increases and qualitative factors given the environment.
In a small net provision overall.
These items kept the ACL ratio at zero point, 95%.
We continue to expect the strong asset quality that you have seen from Cambridge bank or historically in the ending unemployment rate forecast within the seasonal model for the fourth quarter of 2023 is estimated to be 4.08%.
I'll now turn the call back to Dennis for the conclusion.
Thanks, Pete as I end my comments I'd like to emphasize that while this has been a challenging period. We are optimistic about the opportunity ahead, we are investing in new talent acquisition and will benefit from the opportunity posed by the takeovers of SBB, Boston private and first Republic.
Finally, an observation of Cambridge Trust brand and New England recently brought on a commercial client whose offices are not located in our immediate footprint, but compel them to make the change to Cambridge Trust from the previous bank was a safety and soundness of our institution the expertise of our team the exceptional personal attention they received.
And the personalized solutions they needed and we deliver this is our value proposition to our clients and we will now open the line for questions.
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.
If you wish to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yes.
And our first question comes from Mark Fitzgibbon from Piper Sandler.
Please go ahead, thank you and good morning, guys.
Dennis I Wonder if you could share with us where did those fall relationship bankers you brought on board this quarter come from and how big how big was their book of business at their prior institution.
And they came from a variety of different institutions first Republic Silicon Valley, and then two smaller organizations.
And I don't I don't know the size of their book, but they certainly.
We were attracted to their capability and you know the contacts that they had in our marketplace and already seeing some of the benefit roll in AR from them and we think in the coming months it will it'll have a.
A really nice benefit and we're not done yet in terms of picking up talent.
You know I've actually been disappointed and and the or our inability to pick up talent on the innovation banking side.
But we have been able to do more on the traditional relationship banking team.
And then do you have a sense for the timing when you'll have a new CFO on board.
Yeah, well the recruiting process is underway you know I would expect over the next certainly the next three to six months, we will we'll have a new CFO .
Hum interview process starts in the next week.
And then since we've got Pete on the call Pete I Wonder if you could share with us what caused that 30 to 89 day delinquency bucket to pick up a bit this quarter was there any particular category or kind of spread across things.
No it was fairly fairly isolated to one loan actually not office, it's another Cree and assisted living facility.
The bar has been struggling a little bit with cash flow at its early stages now, but it just a crossover so one loan fairly isolated.
And then maybe just if we could spend a minute on that.
Office book.
You know I know you guys have talked in the past about downtown Boston struggling a little bit with vacancy rates and I know you don't have a big book there, but are you seeing any signs of distress in your portfolio in that market and also I wondered if you could share with us where you.
You think values have gone on those office loans in the greater Boston market.
So Boston in particular, we'd probably updated a few of the ones in downtown Boston against a very limited pool, we're seeing in that 20% to 25% decline since since one inception seems to align with what the market, saying Hey I.
I wouldn't say.
There's there's material changes within the portfolio not a lot of movement within risk grade as we have a pretty low overall criticized.
Criticized ratio in office, it's really just one month.
Okay and then last question Dennis is assuming the fed pause the forward curve.
Yeah.
I know you think the margin is going to sort of get into the low twos by the fourth quarter do you think that's sort of the.
Below does the margins start to stabilize do you think in early 2024.
So.
Yeah.
The rate of reduction will decline for the rest of this year. So we've had two tough quarters in terms of margin reduction, but I think roughly 40 basis points a quarter. So we're guiding at the margins that what a 226 gap.
You know where were pointing towards the lower too. So the rate of the rate of decline will slow looking into into next year. I think we would continue to see margin compression unless we were successful in growing deposits. Obviously at a rate that is less than wholesale funding.
Or that are lending picks up and we can achieve higher yield on.
Loans, that's a challenge at the moment, particularly on the commercial real estate side, but yeah, I mean, mark it is conceivable that could it could tip below the below the 2% range.
But we're working hard to try and avoid that.
Thank you.
Yeah.
Our next question comes from Steve Moss from Raymond James.
Steve. Please go ahead.
Good morning good.
Morning, Seth.
Genocea just following up in terms of the competitive and pricing environment on loans. If you could just give a little more color as to what rates youre seeing competitors price different loan debt.
So it's not just it's not just pricing specific to commercial real estate.
From our perspective, it isn't just pricing it's also structure we're seeing.
Amortization lengthen.
You know our loan to values go up I mean, there's less less equity being put into into the opportunities. So that's problematic for us and then when you add to that pricing in some case Pete in the fives and come out we're still saying hey.
That's tough.
You know, you're where you're dealing with with that so we are.
You know, we're not attracted to that kind of growth.
And one would hope that some more logic prevails in the market, but this happens from time to time. So that's the one that specifically is is problematic.
In the C&I space, there's there's better pricing you agree with that and.
We're having some nice success in the innovation banking category.
I think that will continue here through the rest of the year, we're having a lot of conversations.
In that area.
And for obvious reasons with some of the bank failures that happen, we think that we can pick up some nice client business in that category and that that's nice is nicely yielding.
Okay.
That's helpful and in terms of just the you know on the innovation banking side.
You mentioned growth is likely to continue here just kind of curious the dynamics youre seeing there that's driving the growth and just you know where where loan pricing is for that portfolio.
So some of it I would put it in two categories and Pete you jump in here if you if other opinions please.
One is what's.
Happening, there's less VC money in the space today.
Today than there was a year ago or two years ago. So companies may be inclined to borrow more to help from a cash flow perspective, one would hope that the VC funding comes back in time and then the second reason is clearly there's been some disruption in the marketplace with the unfortunate.
Demise of Silicon Valley Bank and.
The the <unk>.
That organization is gone so clients are looking for other options.
Some of the talent went to larger institutions and so we are an option you know we've been in this space for now seven years.
And we're building credibility day by day, a borrower by borrower private equity firm by private equity firm.
And it's an area that we're definitely interested and intrigued in for future growth.
It's right here in our <unk>.
In our home territory, and we believe we got a lot to offer in the space not just on the banking side, but also on the wealth management side. So we're excited about the potential there.
And Oh really looking forward to further growth.
Pete would you add anything to that no I think that's a fair representation I would say the investment itself is paying off now seven years in this space.
A bigger market presence. So we're seeing a lot more activity, even even predating March just in terms of the borrowers.
Borrowers reaching out in that market presence.
Okay. That's that's helpful and one last question for me.
Dennis I believe you mentioned that youre using derivatives to just the balance sheet here, but maybe just a little more color as to you know.
What how youre, making the adjustments in the notional value of any adjustments.
Yeah, I think the notion.
Don't have that in front of me, Steve, but it you know somewhere around $500 million, we have in derivatives here and we will continue to add where appropriate that that is.
Protecting against the up it's essentially there are pay fixed swaps that are helping to protect against the up it doesn't eliminate all of the.
The upward.
Right sensitivity, but it certainly protects to a degree so we've been we've been adding those over time and did some more here in the second quarter.
Okay. Great. Appreciate all color. Thank you very much thanks, Dave sure.
And let me remind you know that if you would like to pose a question press star one.
Our next question comes from Chris O'donnell, I'm, sorry, O'connell from K B W.
Chris. Please go ahead.
Good morning.
I was hoping to start.
To start off on the deposit side, you know, obviously a tough environment.
You know it seems like you still have some mixed shift out of noninterest bearing gear.
Into the second quarter, how are you thinking about those flows you know did did they continue to outflow or mix out of noninterest bearing and you know so far in July and do you think that that mix shift is slowing down to stopping or is it something that's going to persist in the back half of the year.
It's definitely slower than Chris you know, but.
Look safety is definitely an element of our conversation with clients today in a way that it wasn't a year ago. So it's one of the sort of elements of the Arsenal of those things that you you talk to clients about and for some clients they want an insured product and.
So we're facilitating that four of them acting in their best interest so, but just as the level of discussion around rates has.
Slowed somewhat.
The level of discussion around safety and stability in the industry I wouldn't pose has slowed and certainly for us.
So I would expect that mix shift to slow.
Okay got it.
And as far as your strategy on a go forward basis regarding the use of a wholesale you know or you know brokerage Cds versus wholesale borrowings.
I noticed you kind of shifted more to the borrowing side and let some of those higher cost Cds run off this quarter are you know how how are you thinking about the trade off and using each of those are you know products are funding are going forward.
It comes down really to cost, which is the best the better economic decision.
Between between the two.
That's really what comes down to it from time to time.
Joe You're correct me, if you feel differently, but you know the brokerage market can get out ahead of the federal home loan bank curve and vice versa. So it's really looking at the best economic solution do you agree Joe absolutely yes.
Got it.
And then I don't know if you mentioned earlier, but for the innovation.
Banking space on those new loan originations are where were you seeing that pricing yet.
You know, it's it's Oh.
It's fairly competitive.
Is it a seven seven.
Seven seven plus some in the egg dependent on the credit.
Great.
And as far as you know what you're seeing you know over the course of the back half of 'twenty three 'twenty four you know on the on the loan side that is maturing.
Where were those yields in general are you know coming off at.
I don't know specifically, Chris maybe we could follow up with you but.
Do you have a sense Pete from just what you're seeing I mean, similar to what we posted on office, we actually don't have that much of the portfolio maturing in the next two years.
It's a small subset that's maturing in the next two years yeah.
But we can follow up with you with a sense of what.
What the amortization portfolio yeah.
Just trying to get a sense of you know for the CRE. Obviously that you guys have on the books already you know that that is coming due.
You know obviously you know it sounds like you guys aren't looking to put on you know some of the new CRE at you know the.
Five per cent range here, but yeah.
For the credits that are you know refinancing of maturing and that you already have within the portfolio.
You know where is the pricing I guess, so you can get a you know on those credits you know if you choose to refi. So what would be rolling off is probably in the three east the mid threes and for smaller opportunities.
We are achieving in the mid sixes, yes, Pete you agree with that.
Got it.
And.
Appreciate.
The guidance and the color on the expense side here.
And with the conversion being done this this past quarter.
It is it is it fair to say that next quarter. You know so still have expenses you know down even with some of these new hires and Nick and that kind of puts you you know into the guidance range as things flatten out into the fourth quarter.
So excluding the nonoperating.
Right, you're excluding the merger charges.
That's pretty flat down modestly I think but pretty flat for the rest of the year compared to the second quarter.
Okay.
And that should get us into that into that range.
And was there any true ups or you know accruals happening in the in the FDIC line this quarter or is that a good run rate.
Okay.
Current quarter should be a good run rate.
Okay. Thanks.
Yeah.
And then as you know you you guys are well capitalized here and you know there's not a you know.
Too much balance sheet growth it seems like it in the near future.
How do you guys think about you know the capital management from here and specifically you know is there any opportunity to be doing a buyback over the next couple of quarters.
I think the likelihood is is low certainly over the next quarter.
Maybe we'll get greater clarity around our outlook for recession, and ER and that sort of thing as we had head through the rest of this year, but I think we want to be prudent here and retain capital until there's greater certainty and then yes, I would I would absolutely welcome perhaps heading into <unk>.
Next year buying back stock.
Great.
Alright, that's all I had for now thanks for taking my questions. Thanks, Chris.
Okay.
And this concludes our question and answer session I would like to turn the conference back over to Dennis Yang for any closing remarks.
Thanks, everybody, we look forward to talking to you again after our next quarterly report.
Yeah.
And the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.