Q1 2022 Cambridge Bancorp Earnings Call

April 20, 2022

Operator: Welcome to the Cambridge Bancorp first 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, which applies to all statements made in this call. In addition, some of our discussed 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.

It may include references to non-GAAP financial measures.

Formation about those measures, including reconciliation to GAAP measures, maybe found in our S E 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 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.

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. Denis Sheahan, Chairman President, and Chief Executive Officer. Please go ahead, Sir.

Chairman President and Chief Executive Officer. Please go ahead Sir.

Denis Sheahan: Thank you Joe and good morning everyone, and thank you for joining our earnings conference call today.

I'll be brief in my comments, assuming you have seen the earnings release. I'm joined as always today by our Chief Financial Officer, Michael Carotenuto who will provide commentary regarding estimates for the remainder of this year and in particular, the impact of rising rates as well as loan pipelines.

I'm pleased to report another good quarter of earnings and growth at Cambridge Bancorp.

Net income was $13.3 million for the quarter, resulting in diluted earnings per share of $1.89.

Core deposit growth was again solid, with growth of 4% from the previous quarter or 16% annualized.

Loan growth gained nicely in the first quarter in both commercial and residential lending with 3% linked quarter growth or 12% annualized.

Looking ahead, we expect residential lending to slow due to higher rates, but feel good about prospects for continued growth in commercial lending.

Hi.

So inflation is evident, the conditions I referenced in prior earnings calls remain in effect.

Economic conditions are good. Strong innovation economy, life sciences, and technology innovation is rampant in our market. Benefiting the lending sectors, we emphasize housing, especially multifamily housing, light industrial, lab space, and construction.

Strong innovation economy life Sciences, and technology innovation is is rampant in our market benefiting.

Benefiting the lending sectors, we emphasize housing, especially multifamily housing light industrial lab space and construction.

Unemployment levels are low in Massachusetts, and New Hampshire.

Recent banking consolidation provides 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 responsive, stable, and dependable in the marketplace with a proven ability to deliver.

Returning to the results for the quarter, asset quality remains superb.

Wealth management assets and revenue declined due to equity market performance by 4% and 5%, respectively. However, our new business pipelines remain encouraging and we continue active discussions for talent opportunities given the recent merger within our marketplace.

<unk> within our marketplace.

While wealth revenue negatively affected total fee revenue in the quarter, a different category kicked in during this quarter, equity warrant gains as we recognized a $450,000 gain associated with an innovation banking credit.

Keep an eye on this space because while it is small for the bank today, we hope to gradually build momentum in this space in a very deliberate way.

Core profitability remained good with return on average assets of 1.09% and return on tangible common equity at 14.13%.

These results are driven by consistency in strategy and solid execution. First, provide exceptional client service. This represents opportunity to focus on our three core areas of business strategy: grow core deposits, land responsibly, and build high-quality fee revenue businesses.

Grow core deposits land responsibly and build high quality fee revenue businesses.

Overall, we are very pleased with performance. Business momentum is good, we continue to invest for growth, rising rates will help, and our balance sheet is strong. So with that, I will ask Mike to make a few comments regarding the outlook for the remainder of this year. Mike?

Business momentum is good.

We continue to invest for growth.

Rising rates will help and our balance sheet is strong so with that I will ask Mike to make a few comments regarding the outlook for the remainder of this year Mike.

Michael Carotenuto: Thank you Denis. Given the significant change in the rate environment, we wanted to provide an update to our prior guidance, but first let me start with our lending pipelines. At quarter-end, the commercial and residential pipelines were both at approximately $75 million each and we continue to see opportunity within commercial lending. However, as Denis mentioned, residential lending may be challenged in the second half of this year with the significant movement higher in interest rates.

<unk> lending may be challenged in the second half of this year with the significant movement higher in interest rates.

The level of our current pipelines combined with robust market activity give us comfort with the previously anticipated growth range of 6% to 8% for the full year and we may exceed that range.

We also continue to see solid deposit opportunities as evidenced by the core deposit growth during the first quarter. Again, giving us comfort with a full-year growth range of 8% to 10% previously announced.

Moving to the adjusted net interest margin, we expect to benefit in a rising rate environment.

If there were six more 25 basis point increases, moving fed funds to 2% by year-end, we would expect our net interest margin to be in the range of 2.70% to 2.85% for the full year of 2022, better than the prior NIM guidance of 2.5 to 2.6%.

<unk> in the prior NIM guidance of two five to two 6%.

What are the key attributes to this updated estimate? 26% of our loan book is variable, 32% of our deposits are demand, 50% of total deposits inclusive of demand deposits are checking deposits.

26% of our loan book is variable.

32% of our deposits are demand, 50% of total deposits inclusive of demand deposits are checking deposits are.

Our deposit beta in the last rising rate cycle was 26% and the last quarter of that period included the impact of a higher cost deposit franchise from optima.

We have no wholesale funding that would reprice in this environment and our loan to deposit ratio sits at 76%.

Collectively, all of these represent fuel for a rising rate environment, and we are well-positioned to benefit from rising rates.

Moving to non-interest income, non-interest income growth will be less than the initial estimates of 79% for the full year, primarily due to volatility within the equity markets and corresponding wealth management revenue and lower sales of conforming mortgages.

And lower sales of conforming mortgages.

Our current estimates are flat to plus 3% for the full year of 2022 for non-interest income.

We also expect to be on the lower end of the 26% to 27% effective tax rate range previously provided, and the rest of our estimates from last quarter remain intact.

And the rest of our estimates from last quarter remain intact.

We will now open the line for questions.

Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're 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.

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

Multiple speakers: The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead. Hey guys, good morning.

Denis Sheahan: Good morning, Mark.

Multiple speakers: Mike just to clarify a couple of things, did you say 27% effective tax rate is what you're looking for? Did I catch that right? No, we're going to be on the lower end of the 26% to 27% range, so closer to 26% mark.

You say, 27% effective tax rate is what youre looking for did I catch that right no we're going to be on the lower end of the 26% to 27% range, so closer to 26% Mark Okay great.

Mark Fitzgibbon: Okay, great. And then I heard your guidance on the margin. Should we assume that the first quarter was sort of the bottoming of the margin? Do you think we'll start to see the margin turn upward in Q2?

Michael Carotenuto: Yes.

Mark Fitzgibbon: And then, you guys obviously, you're seeing some pretty good loan growth. I guess, I'm curious where that's coming from. Is it coming from the banks that are distracted in the market? Is it coming from the bigger banks? How would you characterize sort of the mix of business that you're generating?

You guys you guys.

Obviously, you're seeing some pretty good loan growth I guess, I'm curious, where that's coming from is it coming from the banks that are distracted and the market is it coming from the bigger banks.

How would you characterize sort of the mix of business that you're generating.

Michael Carotenuto: I'd say Mark it's from a couple of areas; one being the economic activity in the marketplace. There's a lot of activity, there is good momentum.

And then we are increasingly a good alternative to the other institutions who have been going through mergers. The client base of the companies that were acquired don't necessarily find comfort in those larger organizations. So they are looking for alternatives, we are one, there are some others. So we definitely are seeing new client opportunities, both on the lending and on the deposit side.

The client base of of the companies that were acquired don't necessarily. Find comfort in those larger organizations. So they are looking for alternatives. We are one there are some others. So we definitely are seeing new client opportunities. Both on the lending and on the deposit side.

Find comfort in those larger organizations. So they are looking for alternatives. We are one there are some others. So we definitely are seeing new client opportunities. Both on the lending and on the deposit side.

Both on the lending and on the deposit side.

Mark Fitzgibbon: And then Denis, I'm curious if you could share with us how big is the innovation banking portfolio now and the warrant portfolio related to it.

<unk> banking portfolio, now and the warrant portfolio related to it.

Denis Sheahan: So Mike can give you some detail on warrants and success fees. This is mostly a deposit business Mark, but the lending exposure, Mike is around $60 million, is that right? And we have roughly $150 million in deposits.

This is mostly a deposit business mark but the.

The lending exposure, Mike is around $60 million is that right and we have roughly $150 million in deposits.

Multiple speakers: We feel pretty good about the outlook there over the next few years. In terms of the number of warrants and success fees-- We have about 10 of them Mark, right now in terms of that portfolio and we'd look for those in future credits as well.

Denis Sheahan: Yeah, so that will be growing for us. I just pointed out that this is definitely an area of focus for us. We're being very cautious and deliberate in learning the space every day and we want it to be a bigger part of the company going forward.

Mark Fitzgibbon: And your growth has been great. Obviously, the capital ratios have come in a little bit. I guess I'm curious does your growth plan call for raising additional capital in coming quarters?

Your growth has been great. Obviously, the capital ratios have come in a little bit I guess I'm curious does your growth plan call for raising additional capital in coming quarters.

Michael Carotenuto: No, not at this time, Mark. With our profitability, we will accrete back capital very quickly. A very limited part of this quarter was certainly the [inaudible] hit in the available for sale securities portfolio, but it's a very limited portfolio in size for us. It's only a $180 million portfolio and based upon our earnings performance, we'll accrete back capital very quickly.

A very limited part of part of this quarter was certainly the a SaaS hit.

But in the available for sale securities portfolio, but it's a very limited portfolio in size for us, it's only a $180 million portfolio.

And and based upon our earnings performance will accrete back capital very quickly.

Mark Fitzgibbon: Thank you.

Operator: Again, if you have a question, please press star then one.

Our next question comes from Chris O'Connell with KBW. Please go ahead.

Chris O'Connell: Good morning. So just wanted to start off on the loan growth outlook. Growth has been great to start off the year and it seems like you guys are highly confident in the guidance. I was wondering what has been the driver within the renewable energy book on the C&I side and it seems like that's had pretty strong growth over the past six months or so or a couple of quarters, and just what's comprised there and how you guys see that growth going forward.

So just wanted to start off on the loan growth outlook.

Yeah.

Growth has been great.

To start off the year and it seems like you guys are highly confident.

In the guidance.

I was wondering what has been the driver within the renewable energy book on the C&I side and it.

It seems like that's a pretty strong growth over the past six months or so or a couple of quarters.

And just you know what's comprised there and how you guys see that growth going forward.

Michael Carotenuto: Sure, so Chris I assume you're aware of that certain states, of course nationally, but certainly in the northeast have tax incentives for developers of commercial solar. And this is all commercial solar for us, none of it is consumer solar. It is debt, it's not equity. We have no equity investment in any solar where I know there's been some issues in the past. And so those tax incentives drive these projects in New England, certainly Massachusetts, Vermont, Maine, down into New Jersey, and New York; they all have favorable tax incentives for renewables development. Most of it for us is solar, there's a little bit of hydro. I think we have any wind in there but this has been a nice segment for us in the C&I space, and we expect that growth to continue.

Chris I assume you're aware of that.

Certain states of course nationally, but certainly in the northeast have tax incentives for developers of commercial solar and this is all commercial solar for US none of it is consumer solar it is that it's not equity with no equity investment in any solar where I know there's been some issues in the past and so that.

Tax incentives.

Drive these these projects.

In New England, certainly, Massachusetts, Vermont, Maine down into New Jersey, and New York are they they they all have favorable. Tax incentives for renewables development most of it for US is solar theres, a little bit of hydro Theres No I think we have any wind in there but this is a this has been a nice segue. Segment for us in the C&I space, and we expect that growth to continue.

Tax incentives for renewables development most of it for US is solar theres, a little bit of hydro Theres No I think we have any wind in there but this is a this has been a nice segue.

Segment for us in the C&I space, and we expect that growth to continue.

Great.

Chris O'Connell: And then switching over to the cash management side, it looks like you guys did a good job of working that down and putting it into the securities book this quarter. I'm just wondering at the rate that you were putting those securities on that and how that cash came down over the course of the quarter or was it more front or back weighted?

And then.

Switching over to the cash management side.

You know it looks like you guys did a good job of working that down and putting into the securities book. This quarter I'm just wondering at the rate that you were putting those securities on that and you know how how that cash came down over the course of the quarter.

Or was it more front or back weighted.

Michael Carotenuto: Yes, Chris, so it was kind of mid-weighted and the yield that we saw on that is in the mid-twos.

Chris O'Connell: Okay great. And then circling back on the capital discussion, I mean, the regulatory ratios all look very strong even with TCE down a bit. What do you guys focus on the most in terms of your capital ratios? And how do you make decisions as to whether or not to utilize the buyback plan and kind of what goes into that?

And then.

Circling back on the capital discussion I mean, they're the regulatory ratios all look very strong.

You know, even with TCE down a bit how are you guys. What do you guys focus on the most in terms of your capital ratios.

And how do you you know.

Make decisions as to whether or not to.

To utilize the buyback plan and kind of what goes into that.

Denis Sheahan: So in terms of what capital ratios did we look at, we consider all of them, they're all important for different reasons. Our regulatory ratios are fine. Our tangible common equity ratio was just fine. This is a low-risk balance sheet. And we look at our trend in asset quality over a long period of time, it is a focus of ours to deliver low risk for our shareholders and we do.

Time, it is a focus of ours to deliver low risk for our shareholders and we do.

In terms of the TCE being in the mid-sevens, we had a huge burst of growth last year. Core deposits grew 32%. That's not the kind of growth we're expecting this year, so we will be accreting capital we believe for the rest of this year and that TCE will get up closer to 8%. In terms of buyback, I mean, we believe our stock is a value right now but we evaluate that frequently. We have a buyback authorization in place as you know. We're not planning to execute that buyback at the moment, but that situation could change depending on volatility in the market.

The TCE being in the mid Sevens.

A huge burst of growth last year.

Core deposits grew 32% that's not the kind of growth were expecting this year. So we will be accretive capital. We believe for the rest of this year and that TCE will get up closer to 8% in terms of of buyback I.

I mean, we believe our stock is a value right now but.

But we evaluate that are frequently.

We're not we have a buyback authorization in place as you know, we're not planning to execute that buyback.

At the moment, but that situation could change depending on volatility in the market.

Chris O'Connell: Great. Appreciate the color, thank you.

Thank you.

Operator: Again, if you have a question, please press star then one. Our next question comes from William Wallace with Raymond James. Please go ahead.

Our next question comes from William Wallace with Raymond James. Please go ahead.

William Wallace: Alright, thanks, good morning. I was dropped from the call so I apologize If this question was already asked but your 2.70 to 2.85 NIM guide, does that compare to the to 2.67 kind of core NIM that you highlighted in the table or is that compared to the two 2.74 reported?

I I apologize I was dropped from the call. So I apologize. If this question was already asked but yeah.

There are $2 70 to $2 85, NIM guide does that compare to the to 267 kind of core NIM that you highlighted in the table or is that compared to the two.

274 reported.

Michael Carotenuto: That's the adjusted net interest margin, Wally. That's the 2.67 number.

William Wallace: Okay, great. And then as far as that kind of range of expectations, are there various liquidity deployment assumptions in there or does it vary based on deposit betas alone? But it's just to kind of help me think about what causes the 15 basis point range.

You know what what causes the 15 basis point range.

Michael Carotenuto: Yeah. So as I mentioned during my comments, we're asset sensitive, right? It comprises both the repricing of the loan portfolio ended up interest rate environment, the repricing of securities and new loan yields, and it also does take into account some assumptions with deposit beta Wally, but it's consistent with our asset-liability management modeling.

William Wallace: Okay. And if your guide for loans is six to eight and deposits is eight to 10, should we assume that that liquidity pressure actually will intensify as the year progresses?

Six to eight in deposits is eight to 10 I should should we assume that that liquidity pressures actually will will intensify as the year progresses.

Michael Carotenuto: If you're asking are deposit is going to grow faster than loans, yes, based upon that growth range it will. And we will deploy that into our securities environment where securities yields are increasing.

William Wallace: Okay. And then lastly, just kind of some commentary around the opportunities that you are seeing. You've mentioned the opportunities that some disruption is creating on the loan side, but how about on the wealth side looking at the net flows? It looks like you did have some net flows in the quarter. Do you feel like there's an opportunity for new customer acquisition to accelerate this year, given some disruption in the market, or would we be [inaudible]?

And then lastly, just kind of some commentary around the opportunities that you are seeing you've mentioned the opportunities that some disruption is creating on the loan side, but how about on the wealth side looking at the net flows it.

It looks like you did have some net flows in the quarter do you feel like there's an opportunity for.

For for new customer acquisition to accelerate this year, given some disruption in the market or what would we be yeah. Okay. So a mistake to assume.

Denis Sheahan: Yes, we do. We're hopeful that will come certainly in the back half of the year. You may recall that we hired a team from a competitor at the very end of the year. They joined us between September and November, a team of five from a competitor institution, and we're not done talking to talent there. We're hopeful to bring in some other talent and all of that will hopefully have an effect as they get sort of oriented and online with us. We hope beginning, well, it's already having an effect, but more materially in the back half of the year, so that's part of that.

We're hopeful that will come certainly in the back half of the year you may recall that we hired.

A team from a competitor at the very end of the year. They joined US between September and November or a team of five from a competitor institution and we're not done talking to talent there were hopeful to bring in some other talent and all of that will hopefully have an effect as they get.

Oriented and online with.

With us we hope beginning well, it's already having an effect, but more materially in the back half of the year.

The disruption in the marketplace, the talent is attracted to joining Cambridge Trust company. They like what they see here. They like how we think about the relationship with the clients and let them ply their trade. So we are hopeful that that will result in some accelerated growth on the loan side in the back half of the year for sure.

Is attracted to joining Cambridge Trust company, they like what they see here they like how we think about the the relationship with <unk>.

Clients.

And let them play their trade. So we are hopeful that that will result in some accelerated growth on the loan side in the back half of the year for sure.

William Wallace: Okay, great. I appreciate the color, that's all I had.

Denis Sheahan: You're welcome.

Yeah.

Operator: Our next question comes from Bernard Horn with Polaris Capital Management. Please go ahead.

Bernard Horn: Hi, good morning, just two quick questions. The first is, on your NIM guidance, is that based on any assumption about fed movements in rates or is it assuming that rates stay where they are? And the second question is just on the deposits. We've seen quite a lot of stimulus checks hit and a lot of banks are talking about a large amount of liquidity from that. Is there any sense for how much of your deposit base is related to that and whether or not it could kind of go away as people spend their stimulus money or PPP money? Those are my only questions.

Movements in rates or is it a assuming that rates stay where they are in the.

Second question is just on the.

Deposits.

We've seen quite a lot of stimulus checks hit and a lot of banks are talking about.

A large amount of liquidity from that is there any sense for how much of your deposit base is related to that and whether or not it could kind of go away as people spend their stimulus money, our PPP money well those.

Those are my only questions.

Michael Carotenuto: Sure. Thanks, Bernie. So on your first question, that adjusted net interest margin guidance assumes six additional federal reserve increases bring fed funds to 2% by year-end. And then Denis, you want to answer the second one?

Denis Sheahan: So Bernie there certainly is an impact of stimulus within our deposit base, whether it's consumer or business, the PPP kind of stimulus. We know that many of our clients didn't necessarily use the PPP funds right away. So there is an element of that. It's difficult to ascertain how much of it is that. We also know that our clients largely have done very well during COVID-19. There are many of our business clients that didn't take a step backwards at all. There tends of course to be a focus on those negatively affected sectors like restaurants, and accommodation, et cetera, and we don't have a lot of that in our client base. There's a limited exposure there. So many of our clients have done just fine during COVID-19 and they have built liquidity on their balance sheets.

An impact of of stimulus.

Hum.

Within our deposit base, whether it's consumer or business. The PPP kind of stimulus, we know that many of our clients.

Didn't necessarily use the PPP funds right away. So there is an element of that it's difficult to ascertain how much of it is that we also know that.

Our our clients largely have done very well during COVID-19 . There are many of our business clients that didn't take a step backwards at all there are tens of course to be a focus on those negatively affected sectors like restaurants, and accommodation et cetera, and we don't have a lot of that in our client base.

Limited exposure there so many of our clients have done just fine during COVID-19 and they have built liquidity on their on their balance sheets will they begin to use that.

Will they begin to use that? I mean it's hard to gauge, Bernie, quite honestly. I will say from a liquidity management perspective, for us, when we think about this, we certainly hope we work hard to retain all of those deposits, but we have no borrowings. We're very deliberate about growing the balance sheet in a conservative fashion, deposit funded. Our wholesale funding availability is there for times where there might be outflows for us to use it or to structure from an asset-liability perspective. So we very deliberately don't use that in terms of periods of growth for the very reasons that you're asking questions about. Could there be outflows, whether we enter a recession, or during a period of economic growth there could be. We're sensitive to the fact that there is some stimulus within our deposit base but we know we can manage through it.

It's hard to gauge Bernie quite honestly I will say from a liquidity management perspective for us when we think about this we certainly hope we work hard to retain all of those deposits, but we have.

No borrowings.

We're very deliberate about growing the balance sheet in a conservative fashion deposit funded or.

Our wholesale funding.

Availability is there for times, where there might be outflows for us to use it or to structure from an asset liability perspective. So we very deliberately don't use that in terms of peers.

Periods of growth for the very reasons that you're asking questions about could there be outflows.

Whether we enter a recession or during a period of economic growth there could be a we know where we're sensitive to the fact that there is some stimulus within our deposit base.

But we know we can manage through it.

Multiple speakers: Alright, that's great. Thanks so much for the extra color on that last point. I appreciate it. You're welcome, Bernie.

Our next question is a follow up from Chris O'Connell with KBW. Please go ahead.

Chris O'Connell: Hey, I just wanted to follow up. I appreciate the color on the size of the pipelines and both commercial and [inaudible]. I was just wondering if you could provide the origination yields across the different line segments that are coming out of that now.

Appreciate the color on the size of the pipelines and you know both commercial and rosy.

I was just wondering if you could provide.

The origination yields across the different lines segments are coming out of that now.

Michael Carotenuto: Yeah, and certainly there's a lagging effect with pipelines, but rates are in the mid-threes moving into the fours in the commercial side of the house and same on the consumer side.

Chris O'Connell: Great, that's perfect. I appreciate it. Thank you.

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

Denis Sheahan: Thanks everybody and we look forward to speaking with you after our next report. Thank you.

Thank you.

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

Q1 2022 Cambridge Bancorp Earnings Call

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