Cambridge Bancorp

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.

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?

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.