Cambridge Bancorp (NASDAQ:CATC) Q1 2022 Earnings Conference Call April 20, 2022 11:00 AM ET
Company Participants
Denis Sheahan – Chairman, President and Chief Executive Officer
Mike Carotenuto – Chief Financial Officer
Conference Call Participants
Mark Fitzgibbon – Piper Sandler
Chris O’Connell – KBW
William Wallace – Raymond James
Bernard Horn – Polaris Capital Management
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 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 maybe found in our SEC filings and in our earnings release. All participants will be in listen-only mode [Operator Instructions]. Please note this event is being recorded.
I would now like to turn the conference over to Mr. Denis Sheehan, Chairman, President and Chief Executive Officer. Please go ahead, sir.
Denis Sheahan
Thank you, Joe. Good morning everyone, and thank you all 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, Mike 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. 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 merge 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 and 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, 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?
Mike 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 maybe challenged in the second half of this year with the significant movement higher and 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 and 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 noninterest income. Noninterest 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 noninterest 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.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session [Operator Instructions]. The first question comes from Mark Fitzgibbon with Piper Sandler.
Mark Fitzgibbon
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?
Mike Carotenuto
No, we’re going to be on the lower end of the 26% to 27% range, so closer to 26%, Mark.
Mark Fitzgibbon
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?
Mike Carotenuto
Yes.
Mark Fitzgibbon
And then 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 the bigger banks? How would you characterize sort of the mix of business that you’re generating?
Denis Sheahan
I think, Mark, it’s from a couple of areas, one being the economic activity in the marketplace. There’s a lot of activity, there’s good momentum. And then there’s — we are increasingly a good alternative to the other — the 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’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.
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?
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’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 warrants and success fees…
Mike Carotenuto
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
So that will be growing for us. We just pointed out is this is definitely an area of focus for us. We’re being very cautious and deliberate learning this 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?
Denis Sheahan
No, not at this time, Mark. With our profitability, we’ll accrete back capital very quickly. We’ve a very limited — part of this quarter was certainly the AFS hit. But — 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.
Operator
[Operator Instructions] Our next question comes from Chris O’Connell with KBW.
Chris O’Connell
So just want 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? It seems like that side pretty strong growth over the past six months or so or couple of quarters? And just what’s comprised there and how do you guys see that growth going forward?
Denis Sheahan
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, one of it is consumer solar. It is debt, it’s not equity, we’ve no equity investments 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, there’s no — I think 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 O’Connell
And then switching over to the cash management side. Looks like you guys did a good job of working that down and putting it into the securities book this quarter. Just wondering the rate as you were putting those securities on at and how that cash came down over the course of the quarter, or was it more front or back weighted?
Mike Carotenuto
So it’s kind of mid weighted, and the yield that we saw in that is in the mid 2s.
Chris O’Connell
And then circling back on the capital discussion. The regulatory ratios all look very strong 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 make decisions as to whether or not to utilize the buyback plan and kind of what goes into that?
Denis Sheahan
So in terms of capital, what capital ratios did 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. We look at our trend and 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 7s, look we’ve 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’re not — we have a buyback authorization in places we know, we’re not planning to execute that buyback at the moment, but that situation could change depending on volatility in the market.
Operator
[Operator Instructions] Our next question comes from William Wallace with Raymond James.
William Wallace
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?
Mike Carotenuto
That’s the adjusted net interest margin, Wally, that’s the 267 number.
William Wallace
And then as far as that kind of range of expectations, are there various liquidity deployment assumptions in there? Or is it vary based on deposit betas alone, just kind of help me think about what causes the 15 basis point range?
Mike Carotenuto
So as I mentioned during my comments we’re asset sensitive, right? It comprises both the repricing of 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, Wally, but it’s consistent with our asset and liability management modeling.
William Wallace
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?
Mike Carotenuto
If you’re asking our 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.
William Wallace
And then lastly, just kind of some commentary around the opportunities that you are seeing. You’ve mentioned the opportunities that some disruption is being 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…
Denis Sheahan
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, 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 — it’s already having an effect, but more materially in the back half of the year. So that’s part of that. 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 and the back half of the year for sure.
Operator
Our next question comes from Bernard Horn with Polaris Capital Management.
Bernard Horn
Just two questions. The first is on your NIM guidance, is that based on any assumption about fed movements in rates, or is it something that rates stay where they are? And the second question is just on the deposits. We’ve seen quite a lot of stimulus checks 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?
Mike Carotenuto
So on your first question, that adjusted net interest margin guidance assume 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. There are many of our business clients that didn’t take a step backwards at all. There tend 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, and there is very limited exposure there.
So many of our clients have done just fine during COVID and they have built liquidity on their balance sheet. 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. And 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.
Operator
Our next question is a follow-up from Chris O’Connell with KBW.
Chris O’Connell
I just want to follow-up. I appreciate the color and the size of the pipelines in both commercial and resi. I was just wondering if you could provide with the origination yields across the different line segments are coming on at now?
Denis Sheahan
And certainly there’s a lagging effect with pipelines but rates are in the mid-3s, moving into the 4s in the commercial side of the house and same on the consumer side.
Operator
This concludes our question-and-answer session. I’d like to turn the conference back over to Denis Sheahan, for any closing remarks.
Denis Sheahan
Thanks, everybody. We look forward to speaking with you after our next report. Thank you.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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