This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: 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, 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.
spk03: Thank you, MJ, and thank you everyone for joining our earnings conference call today. I'm joined by our Chief Financial Officer, Michael Carantinuto, and our Chief Credit Officer, Peter Halberstadt. 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 through client and talent acquisition. With that context, my comments today will focus on two matters. First, the Northmark 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 Northmark Bank. Former Northmark clients can now access their accounts across our online systems or through 22 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 have 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's 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 8.32%, up from 8.12% at year-end 22, 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 in its 133-year history, and we expect to do so very effectively again in this period. To that end, our Chief Credit Officer, Pete Halberstadt, will join in a minute to speak to our commercial loan portfolio in detail... ...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 4.9% 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 1.9%. 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 in net outflows, nearly half or $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 in significant stress. In this geography, the public saw lines outside a failing bank's 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, a 130-year-old conservatively managed 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 has 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 Halberstadt, to make a few comments on his observations regarding loan asset quality, and in particular, the commercial real estate loan portfolio. Pete has been with Cambridge Trust for 19 years and has been a leader in building the credit culture we are so proud of. Pete?
spk06: Thanks, Dennis. Good morning, everyone. Overall, asset quality remains steady. Non-performing assets are 0.13 percent of total assets, which is largely unchanged from year-end 2022. We are not seeing significant movement in risk rating changes, and early-stage delinquency levels are consistent with year-end 2022. Despite rising interest rates, we are not yet seeing 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, just about 6% or 259 million of our total loan portfolio is held as investment office or non-owner-occupied properties. 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 loan 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 repricing at current market rates. For investment office, we have a relatively low percentage of borrowers that fit either of these criteria. We note 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 pressure 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 calculated reduction of the reserve due to decreased loan balances, which is offset by both slightly increased unemployment expectations and prudent increases in qualitative factors given the environment. This brought the ACL ratio to 0.95%. We continue to expect the strong asset quality that you have seen from Cambridge Bancorp historically and the ending unemployment rate forecasts within the CECL model for the fourth quarter of 2023 is estimated to be 4.26%. I will now turn it over to Mike.
spk07: Thanks, Peter. Good morning, everyone. GAAP earnings per share were $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 2.58%. Loan accretion during the first quarter was 643,000 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%.
spk01: The company had a return
spk07: 0.93% and a return on tangible common equity of 11.52% both on an operating basis for the quarter. Within deposits, the insured cash suite product offered through Intrify is currently within the interest bearing checking line item on the balance sheet. 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 are combined, The total reduction is less than 2% from the prior quarter. Additionally, 49% of non-wholesale deposit accounts are consumer and 51% are 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 1.1%. 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 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 31st, 2023. Within non-interest expense, total operating expenses or $27.9 million in the first quarter, or a reduction of 4.5% 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 in force within consumer lending due to lower activity levels. As we indicated last quarter, we continue to look for other areas to reduce spend where it's prudent, Tangible book value per share increased from $57.15 as of year-end 2022 to $57.98, or 1.4% 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 220s. 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 the net interest margin will slow. 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 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 non-interest income, if the equity and bond markets remain 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 $500,000 in success fees and community development fund income that occurred during the first quarter. Operating expenses will continue to be managed closely, and a growth range of 0% 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 the year, barring changes in unemployment or other macro-level items that present themselves. I will now turn it back to Dennis for final thoughts.
spk03: Thanks, Mike. Clearly this has been a unique and stressful period for clients, shareholders, and my colleagues. This occasion has afforded additional opportunity to engage with our clients and has truly fortified relationships. We hear again and again the faith and trust our clients have in Cambridge 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'll now open the call for questions.
spk00: 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 you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question, or I'm sorry, 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.
spk05: Hey guys, good morning. Morning. I wonder if you could share with us what your sort of spot deposit rates are currently?
spk07: At the end of the first quarter, market spot deposit rate was 1.26% X wholesale.
spk05: 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 there. How are you thinking about modestly? Does the margin get down close to 2% by the end of the year, do you think, assuming you follow the forward curve?
spk07: Yeah, I think that's about right, Mark.
spk05: Okay. And then how are you thinking about balance sheet growth? Dennis, I heard your comments about, you know, growing capital and putting the buyback on hold. Does the balance sheet grow much at all this year?
spk03: No, 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 some in our innovation banking capabilities, some in renewable energy, but broadly, demand is down. So hopefully in the second half, we'll see some improvement. And then in terms of the margin, your margin question, Mark, what I take some confidence and faith in is the degree of deposit repricing requests have slowed materially. Through the panic period, if you will, we were 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 outperform on Mike's guidance 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.
spk05: Okay. And then maybe a question for Pete. On page 14 of the slide deck, you suggested a 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?
spk06: No, we continuously update based on when we're renewing loans, so there'll be some updated appraisals in there. That's on a stress against the entire portfolio, so an additional 25% would put it under 75% overall. There have been some updates within the portfolio.
spk03: So it's our stress. We did not reappraise the bookmark. There's routinely updates and new appraisals, but the stress that Pete is referencing is a stress that we completed.
spk05: Okay. And last question for me is, you know, I heard that you completed the systems conversion with Northmark this weekend. Can you remind us what the expected cost synergies from that will be?
spk07: Yeah, Mark, so we guided to 35% cost savings, and we've achieved them.
spk03: Thank you. Thank you.
spk00: Thank you. Our next question comes from Steve Moss with Raymond James. Please go ahead.
spk02: 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 was it that interest-bearing checking balances increased while most other core deposit balances fell?
spk07: There was a shift between demand and interest-bearing checking because of the use of the IntraFi product. When you combine demand and interest-bearing checking, it was down modestly, about 2% between the quarters.
spk02: Okay, gotcha.
spk03: Thomas, when clients move into that insured deposit product, it's an interest checking product. So you move out of demand into interest checking.
spk02: Understood. Okay. Thank you for that. Next question. You guys said recent originations are in the mid-sixes. So that's what's coming on right now or that's what people are committing?
spk07: That's what we saw during the first quarter, and we continue to see improvement between funding costs and loan yields.
spk02: Okay, great. And just last one from me. What does the pipeline look like about now in terms of unfunded commitments?
spk07: So pipeline for loans or unfunded commitments?
spk02: Can you just clarify? The pipeline for loans, excuse me.
spk07: Sure. So we talked in our prepared comments that we think we're going to have slower activity here 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 a narrowing of buyer and seller expectations.
spk02: Okay. That's great. Thank you guys so much. That covers it for me. Thank you.
spk00: Thank you. The next question comes from Chris O'Connell with KBW. Please go ahead.
spk04: Hey, good morning. On the expense guide for down 2% to 3% next quarter, is that inclusive of the Northmark cost savings?
spk07: It is, and it was 2% to 4%. Okay, 2% to 4%. Thanks.
spk04: And how do you guys expect expenses kind of to trend for the remainder of the year after that level?
spk07: So, Chris, we got it to zero to 3% for the full year. So that's what we had in our prepared comments.
spk04: Great. Thank you. And I may have missed it. Was the guide for fees for the full year, was that down 5%? Zero to 5%. Zero to 5%. Okay, got it. And how are you thinking about the wealth management fees going into next quarter, given the increased AUM from this quarter?
spk07: Yeah, so as we talked about in the past, Chris, it's pretty linear, right? If bond and equity valuations remain stable, you'll see increased levels. If they decline, you'll 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.
spk04: Okay, got it. And for the move from non-interest-bearing to interest-bearing checking on the ICS, what's the average cost for those ICS deposits?
spk07: It really depends upon the client or relationship, Chris. It depends upon the entirety of their relationship here at the company. So I don't have a... I can, you can look at the release. It's about 93 basis points and interest bearing checking was the weighted average for the quarter.
spk04: Okay. Got it. Um, and as you guys were thinking, or I guess one, uh, what's like the securities duration right now and maybe what the kind of monthly cash flows are.
spk07: Sure. So the expected principal cash flows of the securities portfolio, remain between $100 and $150 million over the next 12 months, and the duration of the portfolio is approximately six years.
spk04: Got it. And so, I mean, as you guys are, you know, looking ahead on, you know, the margin of 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?
spk03: So the primary, Chris, this is Dennis, the primary would be deposit growth. 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.
spk04: Got it. And as you guys are, I guess, looking out, maybe if you have how much the fixed rate loans are set to reprice for the remainder of 2023, and if you have 2024 as well, that'd be great.
spk07: Chris, I don't have that information here. We can follow up.
spk04: Got it. And just thinking about longer term, Uh, you know, I, I appreciate all the color around the margin and kind of where that's heading for the remainder of the year. Um, I mean, how, how are you guys thinking about how the margin, you know, reacts, uh, you know, without any further rate changes as you get into 2024, uh, you know, it starts to rebound. And if so, you know, any, any loose comments around, you know, how much that rebound could be kind of almost equal on rates as the loan portfolio. and kind of overall asset base continue to reprice upward? And, you know, I mean, how are you guys thinking about it if, you know, we do get some rate relief, you know, for the Fed funds rate and how that might change kind of the margin outlook going into 2024?
spk03: There's a lot of, Chris, there's a lot of variables there. I would say all else being equal, the margin should expand. You know, if the Fed, if you're talking about if the Fed gives relief and cuts rates, But there's a football field of variables in the question that are challenging to answer. I think just fundamentally, if the Fed cuts, we 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 with some more liability sensitivity now, if the Fed cuts, we'll benefit.
spk04: Okay, got it. That's all I have for now. Appreciate the time.
spk03: Thanks, Chris.
spk00: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Dana Sheehan for any closing remarks.
spk03: Thanks, everybody. Look forward to speaking to you after our next earnings release.
spk00: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer