Cambridge Bancorp (NASDAQ:CATC) Fourth Quarter 2022 Earnings Presentation January 24, 2023
operator: Welcome to Cambridge Bancorp’s fourth quarter earnings conference call. Although forward-looking statements are made in this conference call, actual results may differ materially. We encourage you to review the forward-looking earnings release disclaimer that applies to statements made during this conference call. In addition, some discussions may include references to non-GAAP financial measures. Information regarding these measures, including reconciliations to GAAP measures, can be found in our SEC filings and earnings releases. All participants are in listen-only mode. Note that this event is logged. I would now like to turn the meeting over to Mr. Dennis Sheahan, Chairman, President and Chief Executive Officer. Please, sir.
Dennis Sheehan: Thank you very much for participating in today’s financial results briefing. I will be joining Chief Financial Officer Michael Carotenuto to provide a fourth quarter review and his outlook for 2023. For reference, the 2023 estimates are included on page 23 of the investor presentation I posted with the announced earnings. this morning. I am pleased to report his strong year at Cambridge Bancorp, with strong loan growth, asset quality still excellent, capital growing very well and net interest margin widening throughout the year. All of this was balanced by a difficult period for deposit growth and wealth return as a result of market volatility and interest rates. Organic loan growth, excluding merger balances, continued in both commercial and residential lending in the fourth quarter, growing 3.6% for the quarter and 13.3% year-over-year.
Core deposits, excluding merger balances, declined 5.2% over the year as a result of increased market competition, attractive yields in fixed income markets and clients using funds for other opportunistic investments. Wealth management assets decreased primarily due to market volatility during the year. As of the end of 2022, assets under management and administration of clients totaled $4 billion. The tangible common equity ratio increased to 8.12% at the end of the year, with return on average assets of 1.1% and return on tangible common equity of 14.18%. Both are business-based. Another highlight is the completion of our merger with Northmark Bank, adding three new markets and approximately $430 million in banking assets.
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And we are well on our way to system integration in the second quarter of this year. He also announced that he would increase the quarterly common stock dividend by $0.03 per share to $0.67 per share. This will put him up 5% in the first quarter of 2023. Importantly, asset quality continues to be strong, with non-performing assets representing only 12 basis points of total assets. I would like to take this opportunity to provide some insight into some of the bank loan portfolios that investors have asked about. That’s the office lending portfolio, and it’s understandable why we and other institutions get these questions after the pandemic, our office lending portfolio is 8% of his total loan portfolio, or 319,000 million dollars. The average loan amount at inception was 48%. In particular, the question seems to focus on urban areas of the city and exposure there.
The City of Boston’s office lending market represents 2% of the total loan portfolio, with a weighted average starting loan volume of 40%. The City of Cambridge accounts for 1% of the total loan portfolio and has a weighted average loan amount of 41%. There are no delinquencies in the office loan portfolio and all loans pass. Before I turn to Michael for some comments, I would like to make some general comments on the outlook for 2023. We expect this year to be a recession and slow balance sheet growth in both loans and deposits, but we are prepared. terrible. The capital and reserve levels are very adequate. We also believe that our focus on conservative loan underwriting means we are well prepared for any environment.
In addition to these areas, it was viable for us to focus on managing our cost of funds and assessing opportunities to reduce operating expenses. I’m very proud of my team’s support of the community. Now let’s ask Michael to make some comments on the fourth quarter and his outlook for 2023. Michael?
Michael Carotenuto: Thank you Dennis. Good morning, ladies and gentlemen. Highlighting some items within the quarter, operating earnings per diluted share was $1.92 for the fourth quarter and $7.80 for the full year. Adjusted net interest margin, which excludes the impact of merger-related loan growth, increased 8 basis points to 3.01%. Loan growth in the fourth quarter was approximately 915,000 or 7 basis points on a GAAP basis. Deposit costs, excluding wholesale deposits, increased 21 basis points to 45 basis points in the fourth quarter as a result of customer requests for higher interest rates. The fourth quarter loan loss reserves consisted of two main items. The first item is the non-recurring Day 2 CECL reserve ($2.2 million pre-tax) related to the Northmark merger and the remainder ($1.4 million pre-tax) related to active reserve building. doing.
Wealth Management revenues in the fourth quarter non-interest revenue were down from the third quarter due to approximately $450,000 of revenue related to seasonal tax preparation costs. Quarterly noninterest expense. Professional services increased from the third quarter primarily as a result of consulting expenses related to the renegotiation of core data service provider contracts and various other contract reviews. This has been a key factor in managing non-interest expense growth, with significant gains in technology cost run rates beyond 2023. We now turn our attention to the outlook for 2023. This is again included on page 23 of the investor presentation we filed with the earnings announced this morning.
Our rate environment assumptions for these forecasts assume the Fed will reach 5% in the first quarter of 2023 and keep rates at 5% for the rest of the year. Loan growth is expected to be lower than last year as short-term interest rates are expected to continue to rise. We also currently assume 0% to 5% loan growth as we anticipate a slowdown in economic activity. Core deposit growth is expected to be between 2% and 5% in 2023. The current rate of the fixed income security. To that end, throughout 2023, we aim to use investment cash flow and net new customer additions to reduce the approximately $487 million of borrowings and wholesale CD positions that existed at the end of 2022.
As far as possible, this would create a situation where total assets would remain fairly constant until the end of 2022. Investment securities are expected to decline between $100 million and $150 million based on current cash flow projections. The adjusted margin is expected to be in the range of 2.85% to 3% for the full year 2023. Transition to non-interest income. Wealth Management income is the largest component of this category. Our assumption of a 0% to 5% decline in non-interest income is derived from two key items. Lower BOLI income and lower starting points for assets under management. In noninterest expense, we expect operating expenses to grow between 0% and 3% in 2023. This is off the base level of operating expenses of 107.3 million in 2022.
The loan loss reserves range is 90 to 100 basis points and we expect asset quality to continue to be strong as Cambridge Bancorp has seen so far. He also assumes that current unemployment forecasts remain consistent through 2023. 4.23%. Last, and most importantly, is capital. Given the company’s earnings profile, the tangible common equity ratio is expected to continue to rise throughout 2023, approaching 9% given the various ranges included in the guidance.
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