Cambridge Bancorp

to the Cambridge Bancorp Third 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. Our 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 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Mr. Dennis Sherhan, Chairman, President, and Chief Executive Officer. Please go ahead, sir.

Thank you, Marlise, and good morning, everyone. Thank you for joining our earnings conference call today. I'm joined by our Chief Financial Officer, Mike Carantinuto, who will provide an update for the remainder of this year. To begin, I would like to welcome our new colleagues who recently joined from our merger with Northmark Bank. The merger closing was completed on October 1st, representing about four and a half months from announcement to close. Over these past few months, I've gotten to know the team from Northmark, and I look forward to working with each of them as we build the Cambridge Trust brand in these new markets. I'm also pleased to report another solid quarter. As expected, loan growth continued, asset quality remains excellent, and the net interest margin expanded, all balanced against a challenging period for deposit growth and wealth revenue as a result of market volatility. The key highlights were loan growth continued during the third quarter in both commercial and residential lending with 3% linked quarter growth. Asset quality remains superb. Non-performing assets are just 12 basis points of total assets, and we are not seeing concerns in either consumer nor commercial credit at this point. Core deposits decreased by 2% from the second quarter as a result of clients using funds for real estate purchase, business investment opportunities, combined with market competition and certainly search for yield. The adjusted net interest margin expanded by 12 basis points to 2.93% during the third quarter, reflective of our asset sensitive position and our core deposit base. Wealth management assets declined due to market performance and negative net flows by 4.5% during the quarter. While provision for loan loss expense and funding and costs increased during the quarter, non-interest expenses remained controlled and core profitability remained good with return on average assets of 1.15 percent and return on tangible common equity of 14.94 percent, both on an operating basis. Moving to our local markets and outlook, we are once again entering a period of considerable economic uncertainty. What distinguishes this cycle versus prior ones is obviously the speed of change, especially as the Federal Reserve makes sizable rate increases in an attempt to combat high inflationary forces. The greater Boston and southern New Hampshire market, however, still provide both near and long-term growth opportunity and remain attractive despite potential near-term challenges. Our crystal ball is no more accurate than any others, but it is pretty assured that growth will slow. This is already evident in the significant decline in residential mortgage volumes occurring throughout the industry and at our company. While the net interest margin is poised to increase over the near term, deposit rates, which typically lag the repricing of loans and other earning assets, are increasing competitively to meet client demands for higher rates. The good news is our deposit base exceeds our loan book by a healthy margin. Given the scenario of potentially slower growth, we will look to continue to generate new loans as our local market is home to dynamic industries such as the innovation economy, healthcare, and education. We will evaluate and slow the pace of investment spending where needed. We'll look to maintain superb asset quality and a high percentage of core deposits. And we will look to continue to attract wealth management professionals given recent consolidation in our marketplace. And lastly, our North Mark Bank merger is expected to be immediately accretive to earnings right here in this fourth quarter. So all in all, we intend to be proactive in advance of this looming environment. The real goal for us is to be prepared to hit the ground running to capitalize on opportunities that are available now as they present themselves whenever the economy inevitably turns positive. Mike will now make a few comments, including the details of the quarter and outlook for the remaining of remainder of this year.

Mike. Thanks, Dennis. Good morning, everyone. First, I will discuss our interest rate position strategy and margin. As Dennis mentioned, we remain positioned for rising rates, particularly over a two-year period. We are asset sensitive, and the latest model scenario based on a static balance sheet includes a total deposit beta in line with the last rising rate cycle, which as a reminder was at 26% during 2015 to 2019. Additionally, 26% of our loan portfolio reprices on the short end of the yield curve. These items, combined with lagging on funding costs, have contributed to the expansion of our adjusted net interest margin of 12 basis points during the third quarter. This was expected, And prior adjusted NIM guidance of 2.80% to 2.95% for the full year of 2022 remains unchanged at this point. And we expect the fourth quarter to be just over 3%. What has changed is the deposit outlook for the remainder of this year. Given the pace and magnitude of the recent Federal Reserve rate hikes and market competition, we now expect deposits to end the year flat to Q3 levels. While we will look to exceed this updating guidance, we are also in the process of creating our budget and we will provide 2023 guidance in the first quarter as we have done in the past few years. We remain first focused on client retention, retaining our high valued households and the cost of deposits, while secondly adding new households. Our office and banking teams have done an incredible job thus far and we look for that to continue. We anticipate that investment and loan portfolio amortization cash flows would be used to fund any excess lending growth for the remainder of this year and or reduce wholesale funding. Despite lower deposit growth than previously anticipated, we have the liquidity and flexibility to manage this environment given expected securities cash flows, our core deposit beta expectations, borrowing capacity, and the positive impact of Northmark's cash position, which has already been used to reduce outstanding borrowings in the fourth quarter. Now I will move to our lending pipelines. At quarter end, the commercial and residential pipelines were approximately $90 million and $35 million, respectively, down from the last quarter, particularly on residential lending as we had anticipated. Our loan growth range for the full year of 2022 is now low double digits, around 10%. However, as Dennis alluded to, loan pricing is now in focus. we want to ensure that new loan yields are at the appropriate level to reflect both risk and return on equity in this environment. Right now it's not a matter of demand, but loan pricing not increasing at the same level as funding costs. Moving to non-interest income, during the quarter non-interest income included approximately $450,000 in revenue associated with the seasonal tax preparation fees within our wealth management revenue line. Additionally, as a reminder, Q2 included approximately $1.2 million in BOLI income associated with a death claim and policy surrender, which was non-recurring. Non-interest income growth for the full year remains unchanged from our prior guidance of minus 3% to minus 6% from 2021. Within non-interest expense, I would note that we anticipate marketing spend to remain elevated in the fourth quarter as we are active in a new marketing campaign. Moving to capital. As you can see within this quarter's release, despite continued increases in market rates, tangible common, excuse me, tangible book value per share grew during the quarter, and while the tangible common equity ratio declined slightly during the quarter, we expect TCE to be approximately 8% by year end, inclusive of the impact of Northmark. We continue to guide lower, excuse me, we continue to guide to the lower end of the 26 to 27% operating effective tax rate previously provided. As a reminder, the operating tax rate removes the impact of the prior quarter's boldly policy surrender and offsetting income received. There are no changes to other estimates from last quarter. Finally, we are in the process of finalizing the Northmark fair value market impacts, and we expect to include a fair value table as a disclosure within our 10Q. Northmark brings an engaged team, wonderful clients, logical expansion markets, and a healthy balance sheet with approximately $317 million in loans and $373 million in deposits prior to the finalization of the accounting for mark-to-market. While rates have risen and the numbers will change from initial estimates, the updated results appear to be well-contained. Based upon preliminary estimates, we expect tangible book value dilution to be below 3% and have an earn-back under the crossover method of less than three years. We will now open the line for questions.