Cambridge Bancorp

Welcome to the Cambridge Bancorp second 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 discussion 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, Marlise, and good morning, everybody, and thank you for joining our earnings conference call today. I'm joined by our Chief Credit Officer, Pete Halberstadt, our Interim Chief Financial Officer, Joe Sapienza, our Vice President of Finance, Joe Lombardi, and our Chief Marketing Officer, Danielle Remus-Hackel. In a moment, I will speak to earnings for the second quarter and our current thinking on the outlook. From a macro perspective, we see continued uncertainty regarding interest rates and recession in addition to equity market volatility. At Cambridge Bancorp, deposit levels have stabilized and pricing pressure, while not as elevated, still exists. Growth in deposits remains a priority and is very challenging due to the pricing pressure in the market. However, we are beginning to see green shoots. and I'm hopeful of deposit growth in the second half of this year. Beyond deposit levels, capital is strong and continues to grow. Liquidity is robust at approximately two times the level of uninsured deposits, and asset quality remains excellent. From a lending perspective, activity during the quarter was modest, as expected. Total balances were essentially flat as a result of slowing market activity and the continued disconnect between buyer and seller exportations in commercial real estate, combined with the reduction in consumer mortgage activity due to the level of interest rates and ongoing lack of housing supply. The one bright spot was in commercial and industrial lending, which achieved growth of 7% in the quarter in both the renewable energy and innovation banking sectors. I expect we will continue to see solid growth in the innovation banking segment in the second half of the year, as the opportunities are many. In commercial real estate lending, it is clearly slow. There is activity, but we are not attracted to either the loan structures or pricing offered in the market at this time. We are known for our credit discipline, and that will not waver just to achieve growth. In summary, aside from C&I lending, we would not expect significant loan growth in the second half of this year. Following the industry turmoil earlier this year, we are focused on benefiting from the disruption in the markets by acquiring new clients and talent. Specifically, we have hired four skilled relationship bankers to focus on acquiring deposits in Massachusetts and New Hampshire. Additionally, we hired a new head of wealth management, Jeff Smith, who brings decades of experience in growing wealth management business as our new head of wealth management, replacing Jennifer Pline who retired last month. I look forward to Jeff digging in and building a wealth management growth story in the coming months and years. A few highlights in the quarter. Deposits excluding wholesale funds totaled $4.09 billion as compared to $4.13 billion at March 31, and have been remarkably stable since the middle of March when comparing week over week changes during this period. Interest and non-interest bearing checking balances combined were also stable at $2.23 billion at June 30th as compared to $2.24 billion at March 31. Of note, approximately $50 million moved to interest bearing deposits via our insured cash sweep which has been a focal point for clients during the backdrop of recent bank stress and failures. The tangible common equity ratio ended June at 8.41% as compared to the March level of 8.32%, and tangible book value per share increased to just over $58 at June 30th. Loan asset quality remains superb. Delinquencies are well managed, and we are not seeing any significant issues to date. Pete Halberstadt will join in a minute to speak to our commercial loan portfolio in detail and provide an update on the office environment. Wealth management assets increased primarily due to market appreciation during the quarter, and client assets under management and administration totaled $4.4 billion as of June 30th. The total amount of available liquidity was $2.6 billion, remaining roughly two times the level of uninsured deposits at the end of the quarter. Moving to earnings, net income, profitability ratios, and earnings per share are all negatively affected by the weight of higher interest rates, and negative deposit flows in the latter part of 2022 and beginning of 2023. GAAP diluted earnings per share were 91 cents, and diluted operating earnings per share were $1.23 for the second quarter. The adjusted net interest margin, which excludes the impact of merger-related loan accretion, decreased by 37 basis points to 2.21% from the previous quarter. The cost of deposits excluding wholesale deposits for the quarter increased by 51 basis points to 1.52%, bringing the cumulative total non-wholesale deposit beta to 27%. The company had a return on average assets of 0.70% and return on tangible common equity of 8.51%, both on an operating basis for the quarter. Regarding the outlook, the expectations of the Fed continued to change during the quarter, given uncertainty about inflation and economic conditions. As a result, wholesale funding costs and deposit costs were elevated during the quarter, both as a continuation of client rate requests during the month of April and higher borrowing expenses in June. As it relates to client rate change requests, the level of activity is certainly diminished from the activity seen in March and April. And the spot cost of deposits at the end of the quarter was 1.66%. We believe based on the current forward yield curve and consistent with our previous guidance the net interest margin will likely continue to decline into the low twos toward the end of this year and could be further reduced if rates continue to move higher. Recently, we've been adding more derivatives to reduce the impact of higher interest rate increases. The remainder of the outlook also remains similar to last quarter. Consistent with prior guidance, we are expecting a reasonably flat year in terms of loan growth And while we are focused on deposit growth, we expect modest growth for the remainder of the year as we are looking to avoid the race to the top in interest rates and instead focus on relationship-based core deposits. We expect to monitor operating expenses closely for the remainder of the year, and a growth rate of 0 to 3 percent from the prior year remains appropriate. Within non-interest income, a reduction of between 0% and 5% from the prior year remains appropriate. For the allowance for credit loss ratio, we still expect that to remain between 0.9% and 1% for 2023, barring changes in unemployment or other macro-level items. The effective tax rate for the year is expected to be between 24.5% and 25%. for the full year. I'll 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?

Thanks, Dennis. Good morning, everyone. Overall, asset quality remains steady. Non-performing assets ended the quarter at 0.13% of total assets, largely unchanged from March 31, 2023, and year-end 2022. We are not seeing significant movement in risk rating changes, and early stage delinquency levels remain low relative to the size of the portfolio. Through the first six months, performance has remained strong within the consumer lending portfolio, and we continue to see a shortage of housing supply throughout our markets. On the commercial side, we've maintained a diversified commercial real estate loan portfolio overall, with a focus on multifamily as compared to other property types. Multifamily remains an attractive asset class for us, with a seasoned portfolio that is well dispersed throughout our New England market. Even with the potential for slowing year-over-year rental growth, we believe multifamily fundamentals remain sound within our markets, strengthened by a diverse workforce and continued pressure on housing supply that yields stable demand. As it relates to investment office properties nationally and within our own footprint, we are keeping a sharp eye on both sales activity and rental rates. While we recognize that we will not be immune to office trends nationally, we feel optimistic that our long history of conservative underwriting will help limit downside exposure. As a reminder, the weighted average loan-to-value on the total investment office portfolio remains strong at 56%, typically based on originated values and excluding any appreciation since loan inception. The office market is something that will need constant monitoring, and as such, we continue to dissect our portfolio at the loan level. Our lending teams have maintained close contact with our borrowers surrounding leasing activity, and as expected, more pressure is being seen within Boston as compared to the suburban office market. As noted in the past, our exposure to urban office is nominal at less than 3% of total loans. Moving to the provision for credit loss, In the second quarter, the provision consisted of two primary items, the first being the calculated reduction of the reserve due to slightly lower unemployment expectations. This reduction was offset by a slight increase in loan balances as well as prudent increases in qualitative factors given the environment, resulting in a small net provision overall. These items kept the ACL ratio at 0.95%. We continue to expect the strong asset quality that you have seen from Cambridge Bancorp historically, and the ending unemployment rate forecast within the CECL model for the fourth quarter of 2023 is estimated to be 4.08%. I will now turn the call back to Dennis for the conclusion.