This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: 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 our 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.
spk03: 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 Carantinuto, 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. Why? Though 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. 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 mergers 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, as while it is small for the bank today, we hope to gradually build momentum in this space in a very deliberate way. core profitability remain 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, this end presents opportunity to focus on our three core areas of business strategy. grow core deposits, lend 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?
spk08: Thank you, Dennis. 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 Dennis mentioned, residential lending may be challenged in the second half of this year with a 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 the 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%. 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. 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 7% to 9% for the full year, primarily due to volatility within the equity markets and corresponding wealth management revenue 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. We will now open the line for questions.
spk04: 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 are 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. The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead. Hey, guys. Good morning.
spk05: Morning, Mark. Morning, Mark. Mike, just to clarify a couple things, did you say 27% effective tax rate is what you're looking for? Did I catch that right?
spk08: No, we're going to be on the lower end of the 26% to 27% range, so closer to 26%, Mark.
spk05: 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 2Q?
spk08: Yes.
spk05: Okay. And then you guys, you guys obviously are 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, you know, the bigger banks? You know, how would you characterize sort of the mix of business that you're generating?
spk03: I'd say markets from a couple of areas, one being, you know, the economic activity in the marketplace. There's still a lot, there's a lot of activity, there's good momentum. Um, and then there's, you know, we are increasingly a good alternative to the other, the institutions who've been going through mergers. You know, the, the client base of, of the companies that were acquired don't necessarily, um, find comfort in those larger organizations. So they're 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.
spk05: Okay. And then, Dennis, I'm curious if you could share with us, you know, how big is the innovation banking portfolio now and the warrant portfolio related to it?
spk03: So Mike can give you some detail on warrants and success fees. This is mostly a deposit business, Mark, but the The lending exposure, Mike, is around 60 million. Is that right? And we've roughly 150 million in deposits. We feel pretty good about the outlook there over the next few years. In terms of the number of warrant and success fees.
spk08: 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.
spk03: Yeah. So that will be growing for us. You know, we just pointed out is this is definitely an area of focus for us. We're being very cautious and deliberate, learning the space every day. And we want it to be a bigger part of the company going forward.
spk05: Okay. 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?
spk03: No, not at this time, Mark. You know, with our profitability, we will accrete back capital very quickly. You know, we have a very limited part of this quarter was certainly the AFS hit. but the available for sale securities portfolio, but it's a very limited portfolio in size for us. It's only $180 million portfolio. And based upon our earnings performance, we'll accrete back capital very quickly. Thank you. You're welcome.
spk04: Again, if you have a question, please press star, then one. Our next question is, comes from Chris O'Connell with KBW. Please go ahead.
spk07: Good morning. Good morning. So I just wanted to start off on the loan growth outlook. You know, growth has been great to start off the year, and it seems like you guys are highly confident, you know, in the guidance. I was wondering what has been the driver within the renewable energy book on the CNI side, It seems like that's had, you know, pretty strong growth over the past, you know, 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?
spk03: Sure. So, Chris, I assume you're aware 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 renewable development. Most of it for us is solar. There's a little bit of hydro. I don't think we have any wind in there. But this has been a nice segment for us in the CNI space, and we expect that growth to continue.
spk07: Great. And then switching over to the cash management side, You know, it looks like you guys did a good job of, you know, working that down and putting it into the securities book this quarter. I was just wondering the rate that you were putting those securities on at and, you know, how that cash came down over the course of the quarter, or was it more front or back weighted?
spk08: Yeah, Chris, so it was kind of mid-weighted, and the yield that we saw in that is in the mid-2s.
spk07: Okay, great. And then circling back on the capital discussion, I mean, the regulatory ratios all look very strong, even with TC 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.
spk03: So in terms of capital, what capital ratios do we look at and consider? We consider all of them. They're all important for different reasons. Our regulatory ratios are fine. We view our tangible common equity ratio as just fine. This is a low-risk balance sheet. You know, look at our trend in asset quality over a long period of time. It's a focus of ours to deliver low risk for our shareholders, and we do. In terms of the TCE being in the mid sevens, look, 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. 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 of value right now. But, you know, we evaluate that frequently. We're not, we have a buyback authorization in places you know. We're not planning to execute that buyback at the moment, but that situation could change depending on volatility in the market.
spk07: Great. Appreciate the color. That's all I have. Thank you.
spk04: Again, if you have a question, please press star, then 1. Our next question comes from William Wallace with Raymond James. Please go ahead.
spk01: Hi. Thanks. Good morning. I apologize, I was dropped from the call, so I apologize if this question was already asked, but your 270 to 285 NIM guide, does that compare to the 267 kind of core NIM that you highlight in the table, or is that compared to the 274 reported?
spk08: That's the adjusted net interest margin, Wally. That's the 267 number.
spk01: Okay, great. And then as far as that kind of range of expectations, are there various liquidity deployment assumptions in there, or is it very based on deposit betas or loan betas? Just kind of help me think about what causes the 15 basis point range.
spk08: Yeah, so as I mentioned during my comments, we're asset sensitive, right? It comprises both the repricing of the loan portfolio in an up interest rate environment, the repricing of securities and new loan yields, And it also does take into account some assumptions with deposit beta WALI, but it's consistent with our asset liability management modeling.
spk01: Okay. And if your guide for loans is 6 to 8 and deposits is 8 to 10, should we assume that liquidity pressures actually will kind of intensify as the year progresses? Yes.
spk08: If you're asking are deposits going to grow faster than loans, yes, based upon that growth range, it will. And we will deploy that into a securities environment where securities yields are increasing.
spk01: 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, 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 overly optimistic to assume?
spk03: Yes, we do. I think it will... We're hopeful it 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, you know, 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 clients and let them ply their trade. So we are hopeful that that will result in some accelerated growth on the long side in the back half of the year for sure. Okay.
spk01: Great. I appreciate the comment. That's all I have.
spk04: You're welcome. Our next question comes from Bernard Horn with Polaris Capital Management. Please go ahead.
spk02: Hi, good morning. Two quick questions. The first is, on your NIM guidance, is that based on any assumption about Fed movements and 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 still 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.
spk08: Sure. Thanks, Bernie. So on your first question, that adjusted debt interest margin guidance assumes six additional Federal Reserve increases bring Fed funds to 2% by year end. And then, Dennis, you want to answer the second one?
spk03: Sure. So, Bernie, there certainly is an impact of stimulus within our deposit base, whether it's consumer or business, you know, 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. 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. We have a very limited exposure there. So many of our clients have done just fine during COVID, and they have built liquidity on their balance sheets. 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 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 know we're sensitive to the fact that there is some stimulus within our deposit base, but we know we can manage through it.
spk02: All right. That's great. Thanks so much for the extra color on that last point. Appreciate it. You're welcome. You're welcome, Bernie.
spk04: Our next question is a follow-up from Chris O'Connell with KBW. Please go ahead.
spk07: Hey, I just want to follow up, you know, appreciate the color on the size of the pipelines and, you know, both commercial and resi. I was just wondering if you could provide, you know, what the origination yields, you know, across the different line segments are coming on at now.
spk08: Yeah, and certainly there's a lagging effect with pipelines, but rates are in the mid threes moving into the fours and the commercial side of the house and same on the consumer side.
spk07: Great. That's perfect. Appreciate it. Thank you.
spk04: This concludes our question and answer session. I would like to turn the conference back over to Dennis Sheehan for any closing remarks.
spk03: Thanks, everybody. We look forward to speaking with you after our next report. Thank you.
spk04: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer