Q4 2021 Cambridge Bancorp Earnings Call

Welcome to the Cambridge Bancorp fourth quarter earnings Conference call.

We will 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 with.

Which applies to statements made in this call.

<unk> some of our discussion may include references to non-GAAP financial measures.

Information about those measures, including reconciliation to GAAP measures, maybe found in our SEC filings and our earnings release.

All participants will be in listen only mode.

So can you just system. Please signal conference specialist by pressing the star key followed by zero.

After todays 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.

Thank you and good morning. Thank you all for joining our earnings conference call today I'll be brief in my comments, assuming you've seen the earnings release.

I'm joined this morning by our Chief Financial Officer, Mike Carrots, Newdow, who will provide commentary regarding estimates for 2022 for your reference. Those estimates are included on page 22 of an investor presentation, we posted along with the earnings release.

I am pleased to report another strong year of growth and solid financial performance at Cambridge Bancorp in Kansas Trust company and with that an increase to the common stock dividend by 5% to 64 cents per share.

Core deposit growth was again, a key highlight with growth achieved a 32% or $1 billion in 2022. The majority of this growth was from existing clients deepening their relationship.

It was buttressed by a more aggressive marketing and money market campaign to take advantage of the merger noise in the marketplace and it worked.

Over a third of this deposit growth was new clients to the bank and we look forward to working with those clients to deepen their relationships overtime.

I recognize this strong level of growth in core deposits has built significant liquidity on the balance sheet in both cash and securities.

It will take some time to deploy this level of liquidity into loans and we're working on it.

Mike is guiding to 6% to 8% growth in loans for 2022, and my hope is we can exceed that.

Loans, excluding PPP redemptions grew by 9% for the year and in both our commercial and residential lending we remain optimistic regarding continued growth in 'twenty two.

So why are we optimistic about growth while market conditions remain conducive for it.

Economic conditions continue to improve strong life Sciences technology and innovation economy.

That all benefit the lending sectors that we emphasize housing multifamily industrial lab space construction.

And unemployment in both Massachusetts, and New Hampshire dropped nicely in the fourth quarter, three 9% in Massachusetts, and under 3% and New Hampshire.

Recent bank consolidation should provide opportunity as we are an alternative to the larger merged companies for both talent and clients.

Demand continues to exceed supply for housing in both Massachusetts, and New Hampshire, and finally, our team has a reputation of being stable and dependable in the marketplace with a proven ability to deliver.

Returning to results for the year asset quality remains superb with continued low levels of delinquency nonperforming assets and no charge offs.

Wealth management assets and revenue grew by 16 and 18% respectively in 2022.

And we achieved positive net flows for both the quarter and year to date periods.

We announced during the fourth quarter the hiring of a team from a competitor institution that will cover New Hampshire, Massachusetts, and Connecticut for the bank and we are delighted they joined Cambridge Trust. This.

This and other sales initiatives will hopefully benefit this year and beyond.

Core profitability remained solid with return on assets of 126 and return on tangible common equity at $15 10 on an operating basis and growth in operating earnings per share of 13% for the year.

These results are driven by consistency in strategy and solid execution.

First provide exceptional client service.

This then presents opportunity to focus on our three core areas of business strategy growth in core deposits lend responsibly and build high quality fee revenue diversification.

In summary, I'm immensely proud of my team's support for our clients for one another and our communities throughout the last two years, a continuation of the 132 year history of caring for all who make Cambridge Trust has special place.

We're having fun and look forward to executing again in 2022, so with that I will ask Mike to make a few comments regarding the outlook for this year.

Thanks, Dennis as mentioned earlier on page 22 of our Investor presentation released earlier today inside of 2022 financial expectations.

Of note. These estimates do not include any increased interest rates. Therefore, you can choose what if any rate scenario you believe to be the most likely however, I would note that we're asset sensitive and we would expect to benefit in a rising rate environment.

For further clarity I would note that each 25 basis point increase in short term interest rates with no change to long term interest rates and no increase in our funding costs would provide approximately $2 $2 million in pretax interest income on an annualized basis or an approximate 2% increase.

Net interest income.

For additional rate scenarios. Please refer to our disclosures included within the appendix of the Investor presentation.

The SEC filings, we will now open the line for questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad if.

If youre using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two at.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Mark.

Given with Piper Sandler you May go ahead.

Hey, guys good morning.

Hmm.

Mike just to clarify the adjusted net interest margin assumption for the full year of $2 50 to $2 60 with no no rate hikes embedded in that so that excludes purchase accounting adjustments are any residual impact from PPP is there anything else that we should be thinking is excluded from that.

No that's correct Marc just as two items, Okay, and then secondly, it looks like your cost of deposits rose a bit this quarter.

Obviously, it's still very low.

But I guess I'm curious where is the upward pressure coming from from high net worth clients corporations or somewhere else.

This was more Mark this was strategic from US you know with all the merger noise in the marketplace. We wanted to go out aggressively we increased our marketing spend.

And went out aggressively as clients are sort of Prost.

Prospects are sticking their head up and looking around for other financial institutions, when they're going through the mergers. It was an opportunity for us to try and capture some share and that's exactly what we did as I referenced in my comments, a third of our deposit.

Growth in.

Last year was new to the bank households, which is really strong.

Okay, great. So I guess as we think about sort of balance sheet growth. It does it probably slow a little bit in the first quarter. As you you sort of remix out of short term securities and cash into loans.

That would be fair.

Yeah.

Would think so yes, I mean, it was quite a frenzy of activity, particularly on the deposit side and in 'twenty, one we'd expect it to slow somewhat in 'twenty two.

Okay, and then could you share with us the size and complexion of your loan portfolio, our loan pipeline, maybe the average rate as well.

Sure sure Mark so on the commercial side of the house, we have about $60 million Steve.

You expected payoffs on the residential side, we have about 80 $83 million in terms of pipeline. So it's about $143 million in terms of total loan pipeline and then in terms of rates.

Depending upon the product right.

It's anywhere in the in the low threes to mid threes.

Okay, and then lastly, I guess.

I was curious what you would do wealth management system allows you to do and I'm curious does it facilitate more of an open architecture approach. Thank you.

Sure so on the wealth systems.

It will improve not there is a new front end for our clients that has the ability to do account aggregation. So you can aggregate all of your relationship both inside the company and wherever else.

All in one place that's in the client facing portal in terms of the core system and it's used throughout the wealth division, it's a much more.

Efficient more productive way of executing business less much less paper intense.

There is also advantages that the old system didn't have such as the ability to sleeve or strategies into one account for a client previously we had to open up multiple accounts. So there's a number of benefits.

That will help us in terms of scaling that business.

In terms of being having a more open architecture, we have that so the system itself doesn't.

Necessarily facilitate the ability to expand that or not that's more strategic.

Thank you.

Sure.

Again, if you have a question. Please press Star then one.

Our next question comes from Chris O'connell with K B W.

You May now go ahead.

Good morning, gentlemen.

Yeah.

So.

<unk>.

And looking at the buildup of liquidity here just wondering.

As you guys are kind of putting more work into the securities book, what are the new securities yields are coming on in.

Yeah, so anywhere between.

I would say mid ones.

To low twos.

Okay great.

Yeah.

And as far as future growth in the Securities book.

How do you see the pace of that going throughout 2022.

Yes, so Chris obviously, our priority would be to continue to grow loans and use the liquidity for that to the extent that the deposit growth is ahead of loan growth. We will continue to put it into the securities portfolio.

As mentioned, it's going take some time for us to remix.

From from cash and securities backing.

Understood and.

As far as the money market campaign.

Goes what was the what was the rate on those.

Yeah, we're not going to talk about the rate on it Chris that's very sort of part of business strategy. So we're not going to get into that.

Okay, I guess, what I'm getting at is.

You could see the increase in money market deposit rate this quarter.

Was that what was the clean burning spread evenly throughout the quarter like should we should we be expecting another uptick in interest bearing deposit cost for next quarter.

It was throughout the quarter. So we're going to do our best to continue to work down that funding costs as we have in the past Chris but it was the camp that campaign ran all during the fourth quarter.

Okay got it understood.

And then I was just hoping to get.

Some clarity or color on the.

On the fee guide.

In particular.

How you guys are expecting Zurich of income going forward. After you know a little bit of a jump this quarter.

Yes, I mean, certainly derivative income is based upon client preference, but we would expect to continue to grow that in that range that we put out there Chris.

Great and.

What's the level of.

Loan prepayment of considerably this quarter I mean, it seems like the fees were up in other income a lot, but it was that high.

Did that hamper net growth relative to the past few quarters.

I mean, certainly there was some payoff activity that happened during the quarter as we've seen throughout the throughout the full year I mean, there was a little bit what was it about $250000 worth of prepayment activity during the quarter that impacted noninterest income.

Okay.

But as.

As far as.

How much was paying off versus previous quarters.

A greater headwind to kind of net loan growth this quarter.

I wouldn't say that it was about the same Chris.

Okay.

Prepayments overall in the back half of last year were not as significant as they were in the prior year. So.

They certainly happen from time to time, Chris where there'll be some payoffs every quarter, but it wasn't.

Significant.

In the back half of last year.

Okay.

Got it and.

As far as.

The <unk>.

NIM and NII NIM guide.

The 25 basis point.

Color is super helpful and.

You guys mentioned the asset sensitivity, which is clear in that color I was just wondering like what the differences are and what the variables are four up 100 basis point shock that you guys disclosed being.

Down one 6% is there higher betas being assumed in that versus like the 25 basis point increase that you're talking about or what's what the what the variances between those two.

Sure. So the guide that I talked about in terms of that $2 $2 million pre tax increase assumes no change in our funding cost Chris the shocks assume an immediate increase on the entire deposit portfolio.

Of a 100 basis points. So given the fact that our deposit portfolio is larger than our loan book you can see it's going to have an impact in terms of NIM from a shock scenario.

We probably tried to provide some color on what would happen.

Really the pure floating rate assets of the institution and you can look towards ramps within the appendix. If you feel like there is a more gradual expectation of increased interest rates.

Got it and what are the do you have what the betas being assumed in the shock scenario.

Yes, they're consistent across all of the scenarios, Chris So the beta assumptions in each one of them.

We're not changing them between shocks versus ramps.

Yeah, no I get that I, just meant more like what the actual data being assumed is because you guys you had.

In the past cycles are fairly low beta just wondering how conservative the estimates are versus to what you guys have put up in the past.

Yes, so we're not going to I'm not going to put out are exactly those but if you look at the last rising rate cycle are beta last time was 26%. We believe that we are appropriately conservative in our assumptions for rising interest rates included within the appendix materials.

Understood makes sense.

Yes.

Okay, Great and then.

Just a couple of cleanup questions one.

<unk> is how much does the PPP fees remaining.

Little over 600000.

Great.

Do you have any outlook as to.

Accretion income for next year.

Yes, somewhere between one and $2 million as our guests on.

Accretion on the loan side.

Great.

And lastly, just.

Was wondering if how the.

After its worth for lender hires or general higher than taking tires and taking advantage of the M&A disruption in your guys' markets.

The wealth team I saw but is there a.

Are you guys, making good progress there do you expect to add some people.

From that disruption in 2022, and if so is that incorporated in kind of the overall opex guidance.

Yeah.

So this is Dennis Chris Yeah, there was a team of five on the well on the wealth side.

Very happy that they joined US we also.

Brought on to lenders.

Latter part of the year.

And we'll keep looking there conversations still to be had.

You know not everybody.

Wants to work in the larger organization and we're a very good alternative for them. So we'll keep looking.

We certainly have open positions that are included in the estimates.

But we're not afraid to go beyond what Mike has assumed in terms of operating expense growth for the right candidates for sure.

Great.

That's all I had thank you.

Sure.

Okay.

Our next question comes from William Wallace with Raymond James You May now go ahead.

Thanks, just a couple of quick follow up questions.

Mike if I just want to talk about liquidity so.

You said that Youre, not really planning on investing in securities portfolio, and less deposit growth outstrips loan growth.

I'm curious how that decision matrix changes could you would you get more aggressive if you do get fed hikes in the securities yield starts to look a little bit more attractive or do you really want to hold all that cash on balance sheet just to make sure you have enough liquidity to fund loan growth.

So for the first part I think I just need to clarify that what I was saying was that we're actually gonna continue to invest in the securities portfolio. The magnitude of it depends upon how quickly youre Arctic deposit growth out.

Scripps loan growth during this period of time, it's just not going to be at the pace that you saw in 2021 in terms of what happens in a rising rate environment, we're going to we're going to look to see what's happening around us the environment that we're in what's happening with inflation before we make any decisions regarding holding in cash versus.

I would say a more aggressive stance to the investment portfolio. So time will tell.

Okay.

Okay fair enough.

And then as you think about the kind of.

Optimizing your earning asset mix, if you maybe being two to three years from now.

I mean, some of this liquidity he leaves the system yet your average loans are 73% of earning assets right now.

Where do you think kind of an optimized.

Mix would be.

I would say while it's Dennis.

Certainly, 85% or better you know, it's a securities portfolio say, 10% to 15% in cash.

Okay.

Great and then just last question just to clean up on the expense guide slide that non operating I'm sorry the expense.

Slide that has the guide to the expense guide does that.

Is that growth based on the base, excluding the noninterest nonoperating expenses in the year in 2021.

That's stated GAAP expenses. This was about 100 and 105 as a starting point there.

Great. Thank you very much I appreciate it that's all I have.

Thanks, Paul.

This concludes our question and answer session I would like to turn the conference back over to Denis Sheahan for any closing remarks.

Thank you everybody for joining us we look forward to speaking to you. After our next speaking to you after our next earnings release.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.