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spk02: 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 gap 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. 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. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Dennis Sheehan, Chairman, President, and Chief Executive Officer. Please go ahead, sir.
spk05: Thank you, and thank you, everyone, for joining our earnings conference call today. I am joined by our Chief Financial Officer, Michael Carantinuto, 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 presentation we posted along with the earnings release this morning. I'm pleased to report another solid year at Cambridge Bancorp. Loan growth was robust, asset quality remains excellent, capital grew very nicely, and the net interest margin expanded during the year. All of this balanced against a 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 3.6% linked quarter growth and year-over-year growth of 13.3%. Core deposits, excluding merger balances, decreased by 5.2% 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. Client assets under management and administration totaled $4 billion as of year-end 22. The tangible common equity ratio rose to 8.12% as of year-end, and the company delivered a return on average assets of 1.1% and a return on tangible common equity of 14.18%, both on an operating basis. Another highlight was the completion of our merger with Northmark 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. We also announced a $0.03 per share increase to the quarterly common stock dividend to $0.67 per share, a 5% increase for the first quarter of 2023. Importantly, asset quality remains superb, with non-performing assets are just 12 basis points of total assets. I thought I'd take an opportunity to provide insight into a segment of the bank's loan portfolio that gets questions from investors, and that's the office. lending portfolio and it's understandable why we get and other institutions 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 and 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 are no delinquencies in the office lending portfolio and all loans are pass rated. Before I bring Michael in 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 and 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?
spk06: 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 3.01%. Loan accretion during the fourth quarter was approximately 915,000 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 requests for increased rates. Provision for credit loss in the fourth quarter consisted of two primary items. The first being the non-recurring day two CECL reserve build associated with the Northmark merger of $2.2 million pre-tax and the remainder or $1.4 million pre-tax associated with proactive reserve build. Within non-interest income for the quarter, wealth management revenue decreased from the third quarter due to approximately $450,000 in revenue associated with seasonal tax preparation fees. On non-interest expenses for the quarter, professional services were increased from the third quarter primarily as a result of consulting expenses associated with a 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 non-interest 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 reaches 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 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 in based upon current cash flow expectations. The adjusted margin is expected to be within 2.85% to 3% for the full year of 2023. Moving to non-interest income. The largest component of this category is wealth management revenue. Our assumption of a reduction within non-interest income of between 0% and 5% is derived from two key items, lower BOLI income and the lower starting point of assets under management. Within non-interest expense, we expect an increase in operating expenses of between 0% 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 expects the continued strong asset quality that you have seen historically from Cambridge Bancorp. And we assume current unemployment forecasts remain consistent throughout 2023, which has an ending unemployment rate in the fourth quarter of 4.23%. Finally, and importantly, capital. Given the company's earnings profile, we would expect a tangible common equity ratio to continue to build throughout 2023, approaching 9%, given the various ranges included within our guidance. MJ, now we will open the line for questions.
spk02: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. 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.
spk07: Hey, guys. Good morning. Good morning, Mark. Dennis, in the earnings release, you said that you see evidence of a slowdown. What kind of evidence are you seeing out there with borrowers?
spk05: Well, I think, Mark, obviously, the obvious one is in the residential space, given the increase in rates. It's really slowed down activity in that area. But that also extends into the commercial side, at least for us. In talking with our clients, there's broad uncertainty among business clients. I think we'd all like some clarity as to when the Fed will end its campaign on raising interest rates. There's a slowdown in commercial real estate transaction volume. I think the best way I can describe it for you, Mark, is there's In terms of transactions for investors, there is today, this of course may change, there's a large bid-ask spread. Sellers are not adjusting their 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 a segment of our business that we think will be slower. It doesn't mean there's not going to be any transactions, but we think it will be slower. I think construction, which isn't a huge emphasis for us, construction costs are high. Finding skilled labor is tough still in our market. So I think those in particular would be areas, and I've commented in the past, On the innovation economy in Massachusetts, which is such an important fundamental strength of our economy, I would characterize it as experiencing a modest downturn. There are layoffs evident in some companies to preserve cash and to extend the runway, there still is an optimistic long view of the innovation economy in the state. The larger companies are still expanding. But there certainly is, I 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 first comment.
spk07: Okay, that's helpful. And then, Mike, a couple of modeling-related questions. So first, so your margin guidance of 285 to 3% excludes loan accretion. So if we were to kind of add that back, it'd sort of be an additional five to seven basis points roughly. Is that fair? Yeah, that's about right, Mark. Yeah, on the reported margin. Okay. And do you have a feel for the trajectory of the margin throughout the year? How are you modeling it?
spk06: Yeah, so I think you're going to see lower in the first half and then it'll recover in the second half just because we'll have greater time for new asset cash flows to come on at higher yields.
spk07: Okay, great. And then I heard your guidance about sort of expenses. Is sort of 27 and a half-ish million a reasonable run rate in the first quarter, do you think?
spk06: So if you take the full year, I think you're just dividing it by four. I think that's 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, that's about right. Okay.
spk07: And then I guess I was curious, sort of a more strategic question. You've had a fair number of senior executives retire recently. You know, I'm curious, does that signal any changes in strategy or incremental focus on any particular lines of business?
spk05: No, no. I mean, retirements happen and we're prepared for them. We're very pleased with the succession plan and succession planning we had in place in the commercial banking division. Two of our teams step up into the chief commercial banking officer role and the chief credit officer role. So that's really terrific, the succession planning there. We are initiating a search process for a new head of wealth management. So that will be an important position for us to fill here in the first half of this year. And we feel optimistic about our ability to do so. But it doesn't signal anything other than people retire every so often.
spk07: Thank you.
spk01: The next question comes from Steve Moss with Raymond James. Please go ahead.
spk03: Hey, guys. This is Thomas Reed, Steve's RA. Can you offer us some insight on where new loan yields are today?
spk06: Yeah, I can, I can give you a little bit there. So on the residential side of the house for 30 year, we're in the sixes, uh, seven, one arms are around five and an eighth today on the commercial side of the house for fixed rate. It's in the high fives, low sixes.
spk03: Okay, great. Um, also wondering, can you give us an update on sort of, you know, how, how you're feeling about deposit pricing and beta going into 2023? Sure.
spk06: So through the cycle thus far, our cumulative beta on our cost of deposits excluding wholesale is about 7%. When you look at the last cycle, our beta was around 26%. This cycle, we expect it to be a little bit higher. So we're assuming about a 30% through the cycle beta.
spk03: Okay, that's helpful. Okay, that's it for me. Thanks, guys. Thank you.
spk02: Again, if you have a question, please press star, then one. Our next question comes from Chris O'Connell with KVW. Please go ahead.
spk08: Good morning. Good morning, Chris. Yeah, just wanted to follow up on the prior question as far as the betas. Do you see, like, you had pretty, you know, good organic deposit growth this past quarter. looking for net growth over 2023 as well. Do you think that beta ramps up in the first quarter and then slows, or do you think it's going to be fairly consistent throughout 2023?
spk06: Yeah, I mean, Chris, it's certainly hard to tell, and 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 costs to continue to increase consistent with that guidance that I talked about in terms of beta. But the timing of it, it's difficult to tell.
spk05: And just also be careful there, Mike. I think Chris mentioned growth in Q4. Can you correct that?
spk06: Yeah, Chris. So when you look at deposits, just when you exclude the impact of the merger, we actually had a slight decline in core deposits during the fourth quarter.
spk08: Okay, got it. Okay. And then as far as the securities runoff, the $150 million I think you mentioned for 2023, is the maturity schedule for that fairly consistent over the course of the year, or is there any big chunks coming in at one point or the other?
spk06: No, it's fairly consistent.
spk08: Okay. And then as far as the wealth management AUM, for the fourth quarter. How much was the kind of gross inflows versus the market impact?
spk06: So during the fourth quarter, we had net client flows or net client loss of about $17 million. Market impact during the fourth quarter was $230 million. Okay, great.
spk08: Are you guys targeting or do you have any specific targets as to, you know, net client flows or kind of organic growth ex-market activity on the wealth management segment for 2023?
spk06: We do, but we haven't typically put that out there, Chris.
spk08: Okay, got it. And for the loan derivative income, obviously, you know, kind of a low point this quarter. Do you see any signs of that kind of improving in the near term, or does it kind of remain a little bit of a dead environment for the foreseeable future?
spk06: So we're very interested in continuing to do derivatives 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 clients are intelligent. You know what I mean? They 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.
spk05: Okay, got it. We're assuming, Chris, that 23 will not be a robust year of loan growth per sort of my earlier comments in terms of what's happening in the marketplace. Should that change, I think the derivative revenue would also change.
spk08: Great. I appreciate the time. Thanks for taking my question.
spk05: Sure. Thank you.
spk02: The next question comes from Bernard Horn with Polaris. Please go ahead.
spk04: Good morning. Two quick questions. The first is on your loan expectations on growth. It's like 0% to 5%. And I'm just curious if you have any, you had pretty good organic loan growth last year, I think it was about 13%, excluding the Northmark merger. I'm just wondering if you can, are there any scheduled repayments on the loan portfolio that would kind of, you know, therefore you'd need to have higher growth to offset that? Or is it just, you know, your expectation that the economy is going to be a little bit softer?
spk05: I think it's the latter. Mike, would you agree? It's the latter, Bernie. Just softness. 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. The uncertainty is We understand why this is happening, but the uncertainty is not welcomed by a lot of commercial borrowers.
spk04: Sure. It makes sense. And then on your loan payoffs, did you have anything material in 2021 that would have been higher had you not had the payoffs? No, I don't think so. And then on the – that's fine. On the deposit side, it looks like you've got a tick up in wholesale deposits. Is that something you have looked to increase in the prior year and the upcoming year? Or is it just things that came your way because people are looking for yield?
spk05: No, Bernie, it's really an alternative to Federal Home Loan Bank, basically.
spk04: Yeah.
spk05: 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 nothing other than that. We put them basically in the same category. We have about $480 million of wholesale funds.
spk04: Yeah. Okay. That was my follow-on question as to how does it compare to the All right, well, thanks. That's all I had. Good quarter.
spk06: Thanks, Bernie.
spk02: This concludes our question and answer session. I would like to turn the conference back over to Dennis Sheehan for any closing remarks.
spk05: Thank you, everybody, for your participation. We look forward to speaking to you again at our next earnings release conference call.
spk02: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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