Summary
- Acquisition of Optima Bank has increased Cambridge Bancorp's earning assets, which will lead to greater earnings going forward.
- The company's average yield is downward sticky, which is expected to drive NIM upwards in a declining interest rate environment.
- Cambridge Bancorp's non-interest income makes up a significant portion of its total revenue. Non-interest income is expected to decline till 1QFY20 due to the wealth management business.
Earnings of Cambridge Bancorp (CATC) are expected to rise in 2020 due to the jump in its earning assets following its merger with Optima Bank earlier this year. Further, CATC's net interest margin is expected to increase following the Fed's interest rate cut, which will further support earnings. However, all of these factors appear to have been already priced in, as the stock is currently trading very close to its year-ahead target price.
High Earning Assets to Boost Earnings
CATC's earning assets received a boost in the second quarter upon completion of the company's acquisition of Optima Bank and Trust Company. The merger added $475.4 million in loans, which will keep interest income high going forward. For the remainder of 2019 and 2020, I'm expecting loans to increase at a normal organic growth rate of 1.0% every quarter on a linked quarter basis. The table below shows my estimates for key balance sheet items.
NIM to Benefit from Sticky Yields in Declining Interest Rate Environment
CATC stands to benefit from interest rate cut, as its loan book is concentrated in long-term, fixed-rate mortgages, which make its average yield downward sticky. Meanwhile, around a quarter of its deposits is made up of non-interest bearing demand deposits, which will keep funding costs low in the future.
According to the results of a simulation disclosed in the 2QFY19 10-Q filing, a 100bps dip in interest rates can increase net interest income by 1.7% in the next twelve months, provided other factors (like loan growth) remain constant. The results of the simulation are shown below.
Taking management's guidance, I'm assuming net interest margin, or NIM, to increase by 1-2bps quarter over quarter in the third and fourth quarters of 2019. Furthermore, I'm holding NIM constant in each quarter of 2020 on a linked quarter basis. The average NIM for 2020 will still be lower than the average NIM for 2019 due to the quarterly trend observed in the first half of this year.
