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spk01: 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.
spk02: 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.
spk03: 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.
spk01: We will now begin the question and answer session. To talk, I'm sorry, 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 your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question is coming from Mark Fitzgibbon from Piper Sandler. Please, go ahead, Mark.
spk05: Good morning, and thanks for taking my question. Mike, just first, could you just clarify? I kind of missed your comments on the expense outlook.
spk03: Sure, Mark. So what I said for the fourth quarter is that we anticipate marketing spend to remain elevated as we're active in a new marketing campaign. Gotcha.
spk05: Okay, great. And then secondly, I wondered if you guys could kind of remind us of the timing of when you expect to extract all the North Park synergies. When should we expect all those synergies will be out?
spk03: Yeah, so Mark, there'll be about 75% here in Q4, and then our systems conversion is until April, so you'll have 100% by the time we get to the systems conversion.
spk05: Okay, great. And that margin that you referenced being just over 3%, that's kind of a combined adjusted margin for you guys and Northmark with any restructuring that you contemplated being incorporated in that? That's correct. That's correct. Okay, great. And can you help us think about the provision for the next couple of quarters? I know everybody's crystal ball is a little fuzzy, but any guidance you can give there would be great.
spk03: Yeah, Mark, so it depends upon two things, the level of our loan growth and what happens kind of with economic factors, particularly unemployment, right? So generally speaking, if unemployment is rising, provision expense generally rises alongside with it. And if loan growth is up, you'd expect some provision expense as well. What I would say, though, is that We continue to perform very well from an asset quality standpoint. So from an overall allowance for credit loss ratio, we're at just about 96 basis points today. We'll probably be in that range into the future. And it may climb higher depending upon what happens with unemployment expectations.
spk05: Okay. And this is really not a question for you guys because your asset quality has been so good historically. and delinquency is so low. But I guess I'm curious as you look at sort of the market around you, are there any areas of concern from a credit perspective in either commercial real estate or CNI, things that you guys are sort of shying away from or a little cautious on? Thank you.
spk02: Sure, Mark. It's Dennis. I think, you know, clearly there's a big unknown relative to the office market. broadly, I think, throughout the industry, and we would share that concern. I think the answer there, though, will be sort of it will take years to fully answer what's going to happen in the office market. There is greater occupancy. Occupancy is growing, but it's certainly not back to pre-pandemic levels. You can look at data from the large real estate firms, look at transportation data. We're not back to pre-pandemic levels. So that's an area clearly of concern. We have limited exposure there, but that is the one that I would highlight the most.
spk05: Okay. And then lastly, Dennis, I wonder if you could sort of share your thoughts on the M&A environment. I know bigger transactions are a little tricky to do right now, but do you think that some concerns about the credit environment might prompt more consolidation, more small banks to seek out a partner like Cambridge? And do you get that sense that that's likely in the coming quarters?
spk02: I think it's too early to say that, Mark. You know, I think this, we're all living with, you know, sort of individually and collectively a degree of uncertainty about where the Fed is taking rates and ultimately the consequence of it. And then the longer term impact on that to financial institutions. We know there's a lot of temporary or not, tangible book value dilution out there, you add a credit problem on top of that, that could spur some consolidation. I think it's too early to say. I do know, though, that I have a lot of confidence in my team. You know, we've done three very good mergers in a little over three years. I have a lot of confidence in my team's ability to execute. You know, you look at this, we closed this merger in four and a half months. That isn't happening today, and there's a reason it happens. It's because of the quality of the two firms here. So I have confidence in our ability to do it. I think it's too early to say that this particular cycle will drive more consolidation. There's the obvious challenge of the mark to markets, the fair value accounting. Mike referenced we feel good about where we are with Northmark, but in this rate environment, I think that's a hurdle, realistically.
spk05: Thank you.
spk02: Sure.
spk01: And let me just remind you, if you would like to pose a question, press star, then 1. Our next question is coming from Chris O'Connell from KBW. Please, Chris, go ahead.
spk04: Good morning. Good morning. I wanted to start out with some of the deposit commentary and some of the flows this quarter. You know, the CDs were up fairly materially. I was just wondering what the pricing was in terms of what they were coming on at. And then, you know, what you're hearing from your customers, obviously a little bit more of a, you know, tepid growth environment on deposits, you know, into the year end here. But just what you're hearing from your customers as far as the flows going forward.
spk03: Yeah, so Chris, on the deposit side of the house, we did use some brokered CDs during the quarter. When you back that out, the spot cost of deposits, excluding wholesale, was 28 basis points. So I think that might be where you're seeing some increase in total CDs there. And then in terms of deposits during the quarter, as Dennis mentioned, we had clients use funds to purchase businesses, purchase real estate. And certainly some money has moved into treasuries or competitor CDs, but some of it has also moved into internal wealth strategies or off-balance sheet into a sweep. You know, we talked about we expect deposits to be flat to Q3 levels, and that's kind of our current outlook right now.
spk04: Got it. And for the brokered CD, go ahead.
spk02: And just to add to what Mike said there, it's understandable. You know, clients to a degree are searching for yield, and when, you know, you're bombarded in the news every night about the Fed increasing rates, it's understandable. Our team is well conditioned to have conversations with our clients and to find a solution for them. So these are normal conversations that happen in our industry and we're ready for it.
spk04: Got it. And for the brokered CDs, what did those come on at? What rates and what was the duration?
spk03: It's short duration, so three months and under, and their blended rate was between 250 and three.
spk04: Got it. And on the loan side, from what you're seeing in your pipeline today, what are the origination yields coming on at?
spk03: Yeah, so as of today, so new production today, we're looking for mid-sixes to sevens for 30-year residential fixed. It's mid-fives to sixes in residential arms fixed. For commercial pricing, fixed rates are generally today in the mid-sixes, but we're looking for more variable pricing there.
spk04: Got it. So, I mean, you know, given where your guys' betas have been in the past, even if it runs a little above that, is it fair to say that, you know, the momentum for the margin, you know, may be less, you know, aggressive of, you know, pickups in the first half of 23, but you know, still an upward trajectory for the first couple quarters, at least.
spk03: Yeah, I think that's fair, Chris. I mean, conceptually, we're going to put, I mean, you're right conceptually, but we're going to put out some 2023 guidance in the first quarter. But it also depends upon what happens with the, you know, where the Fed moves, how quickly they move. So there's a lot of moving pieces to that. Got it.
spk04: And could you just outline, you mentioned some balance sheet movement post-quarter end with Northmark and cash paying down borrowings or wholesale funding and just what the levels of movement were there?
spk03: Yeah, so Northmark had about $95 million worth of cash and securities that was used to pay down some wholesale early in Q4. Okay.
spk04: And I hear you on the marketing expense remaining elevated in the fourth quarter. I think last quarter you might have mentioned organic expenses around 4% to 5% for the year. Does that change that outlook at all?
spk03: Well, you're also going to have to include Northmark, but I think that's about right, yes.
spk04: Great. All right, that's all I had. I'll step out for now. Thanks.
spk01: And this concludes our question and answer session. I would like to turn the conference back over to Dennis Sheehan for any closing remarks. Please go ahead.
spk02: Thanks, everybody, for joining the call. We look forward to speaking to you after our next quarter.
spk01: Thank you for attending today's conference you may now disconnect.
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