Cambridge Bancorp

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.

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?

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.