Cambridge Bancorp

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.

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?

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.