Cambridge Bancorp: Acquisition Profit, Lagged Impact Of Charge Hikes To Carry Earnings

Earnings of Cambridge Bancorp (NASDAQ:CATC) will likely surge subsequent 12 months on the again of the acquisition of Northmark Financial institution within the final quarter of 2022. Natural mortgage progress will additional assist earnings. Furthermore, the lagged impact of rate of interest hikes on the online curiosity margin will raise earnings this 12 months. Total, I am anticipating Cambridge Bancorp to report earnings of $8.49 per share for 2023, up 16% from my estimated earnings of $7.34 per share for 2022. The December 2023 goal worth suggests a excessive upside from the present market worth. Due to this fact, I’m adopting a purchase ranking on Cambridge Bancorp.

Natural Business Mortgage Progress to Add to the Acquisition Advantages

Cambridge Bancorp accomplished the acquisition of Northmark Financial institution in October 2022, as per a current announcement. Based on the main points given in a earlier press launch, the goal had $314 million value of gross loans on the finish of March 2022; subsequently, the acquisition would have elevated Cambridge Bancorp’s mortgage portfolio by round 9%. Moreover, the acquisition would have added $381 million of deposits to Cambridge’s Steadiness Sheet, representing a progress of 8.9%.

In distinction to the acquired progress, the outlook for natural progress is not too shiny. Excessive-interest charges will damage natural mortgage progress in upcoming quarters, particularly within the residential mortgage section. Residential mortgages and residential fairness traces of credit score loans make up round 44% of complete loans; subsequently, a slowdown on this section could have a major affect on complete mortgage progress.

The outlook for industrial loans is a bit brighter due to sturdy job markets, which point out sturdy financial exercise. Cambridge Bancorp operates in Massachusetts and New Hampshire, each of which at present have unemployment charges which can be higher than the vast majority of different states.

Contemplating these elements, I am anticipating the mortgage portfolio to have grown by 9% within the final quarter of 2022, taking full-year mortgage progress to 19%. For 2023, I am anticipating the mortgage portfolio to develop by 4%. In the meantime, I am anticipating deposits to develop kind of according to loans. The next desk exhibits my steadiness sheet estimates.

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Lagged Impact of Charge Hikes to Profit the Margin this Yr

Cambridge Bancorp’s internet curiosity margin elevated by solely 9 foundation factors within the third quarter, following the 12-basis factors progress within the second quarter of the 12 months. As a result of massive steadiness of residential mortgages, Cambridge Bancorp’s mortgage portfolio is kind of sluggish to reprice. On the identical time, the deposits are fast to reprice due to the massive steadiness of adjustable-rate deposits. These deposits, together with interest-bearing checking, financial savings, and cash market accounts, made up 61% of complete deposits on the finish of September 2022. In consequence, a lot of the advantages of final 12 months’s fed funds charge hikes can be felt this 12 months and past.

Based on the outcomes of the administration’s simulation mannequin given within the 10-Q submitting, a 200-basis factors hike in rates of interest might enhance the online curiosity earnings by 1.6% within the first 12 months and 15.1% within the second 12 months of the speed hike.

Contemplating these elements, I am anticipating the margin to have grown by 5 foundation factors within the final quarter of 2022. Additional, I am anticipating the margin to extend by 40 foundation factors in 2023.

Anticipating Earnings to Surge by 16%

The acquired and natural mortgage progress will drive earnings this 12 months. Additional, the underside line will obtain assist from margin enlargement. Alternatively, merger-related bills within the fourth quarter of 2022 will prohibit earnings. Additional, the excessive inflation will drive up working bills. In the meantime, I am anticipating the provisioning for anticipated mortgage losses to stay at a traditional stage. I am anticipating the online provision expense to make up round 0.1% of complete loans in 2023, which is near the common from 2017 to 2019.

Total, I am anticipating Cambridge Bancorp to report earnings of $7.34 per share for 2022, down 5% year-over-year. For 2023, I am anticipating earnings to develop by 16% to $8.49 per share. The next desk exhibits my earnings assertion estimates.

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My estimates are primarily based on sure macroeconomic assumptions that won’t come to fruition. Due to this fact, precise earnings can differ materially from my estimates.

Excessive Worth Upside Justifies a Purchase Ranking

Cambridge Bancorp’s annual dividend has elevated yearly since 2004. Given the earnings outlook, it’s doubtless that the corporate will keep the dividend pattern this 12 months. Due to this fact, I’m anticipating the corporate to extend its dividend by $0.02 per share to $0.66 per share within the first quarter of 2023. The earnings and dividend estimates counsel a payout ratio of 31% for 2023, which is near the five-year common of 39%. Based mostly on my dividend estimate, Cambridge Bancorp is providing a ahead dividend yield of three.2%.

I’m utilizing the historic price-to-tangible ebook (“P/TB”) and price-to-earnings (“P/E”) multiples to worth Cambridge Bancorp. The inventory has traded at a median P/TB ratio of 1.37 previously, as proven under.

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Multiplying the common P/TB a number of with the forecast tangible ebook worth per share of $64.9 offers a goal worth of $89.1 for the top of 2023. This worth goal implies a 7.4% upside from the January 3 closing worth. The next desk exhibits the sensitivity of the goal worth to the P/TB ratio.

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The inventory has traded at a median P/E ratio of round 12.6x previously, as proven under.

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Multiplying the common P/E a number of with the forecast earnings per share of $8.49 offers a goal worth of $106.9 for the top of 2023. This worth goal implies a 28.8% upside from the January 3 closing worth. The next desk exhibits the sensitivity of the goal worth to the P/E ratio.

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Equally weighting the goal costs from the 2 valuation strategies offers a mixed goal worth of $98.0, which suggests an 18.1% upside from the present market worth. Including the ahead dividend yield offers a complete anticipated return of 21.3%. Therefore, I’m adopting a purchase ranking on Cambridge Bancorp.