CATC (2021 - Q2)

Welcome to the Cambridge Bancorp Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Denis Sheahan, Chairman, President and Chief Executive Officer. Please go ahead, sir. Denis Sh

Thank you, Betsy and welcome everybody to the Cambridge Bancorp second quarter earnings conference call. Before proceeding, let me mention that this call may contain forward looking statements with respect to the financial condition, results of operations and business of Cambridge Bancorp. Actual results maybe different. Factors that may cause actual results to differ include those identified in our Annual Report on Form 10-K and our earnings press release. Cambridge Bancorp cautions you against unduly relying upon any forward-looking statements and disclaims any intent to update publicly any forward-looking statements whether in response to new information, future events or otherwise. Thank you again for joining our first earnings conference call today. I am joined by our Chief Financial Officer, Mike Carotenuto. Hopefully, you had an opportunity to see our earnings announcement from just a few hours ago. It reports that Cambridge Bancorp and Cambridge Trust Company had a terrific second quarter by almost any measure. Loan growth was strong. Excluding PPP loans forgiven, loan growth was almost $160 million, or 20% annualized. We continue to be core deposit funded, with negligible wholesale funding. Asset quality remains superb. Core profitability was excellent with return on average assets of 1.32% and return on tangible common equity at 15.64%. These results are driven by consistency in strategy and solid execution. First, provide exceptional client service. This brings opportunity to focus on our three core areas of business strategy: grow core deposits; lend responsibly and build high-quality fee revenue diversification. Looking ahead, we feel good about growth for the remainder of the year. Pipelines are good. Merger integration is behind us. And our team generally returned to the office effective July 6. In terms of non-financial commentary, I know many of you are concerned about the post-pandemic impact to banking industry commercial real estate exposure. We recognized there will be challenges in the office market for a period of time. However, we are not overly concerned due to our limited exposure and the characteristics of our markets. And I thought it would provide a brief perspective on what we see day-to-day. Unique to Cambridge and Boston and increasingly benefiting the region is the growing innovation economy and its impact on employment, economic activity, and on the commercial real estate market. As many of the commercial real estate projects associated with this sector are beyond our lending capacity, we generally benefit from the spin-off effect of this activity, for example, multifamily housing, benefiting from strong employment and household income trends. I will quickly share with you highlights to illustrate the significant activity and process and planned for the technology and life science innovation clusters. In the technology cluster, a number of the FAANG stocks are expanding in our space. One is tripling its space in Cambridge, adding an additional 300,000 square feet. Another is occupying a 16-storey tower under construction in Cambridge. A third is expanding its presence by hundreds of jobs in Boston and Cambridge. And in the life science innovation cluster, demand for life science space is currently 7 million square feet, up from 1.9 million square feet a year ago. There are numerous office to lab space conversions underway. 400,000 square feet office buildings in Cambridge converting from office to lab, a former global insurance company headquartered in Boston, converting to lab, 24-storey new construction office tower re-planned as a 14-storey life sciences building, an office construction of 225,000 square feet re-planned as lab space, and further new construction a 1 million square feet lab space building under construction above the mass turnpike. The first phase of the Harvard University Enterprise Research Campus of non-academic commercial development of over 900,000 square feet is in process. And I could go o. In terms of funding, Massachusetts startups raised $17.4 billion in venture capital in the first 6 months of 2021, exceeding the total amount brought in last year and breaking annual records. And so, while there are understandable post-pandemic concerns about commercial real estate, there is something very special happening in our backyard of Cambridge on Boston that will benefit Cambridge Bancorp and Cambridge Trust Company. To quote a senior real estate executive from a recent commercial real estate industry forum, “it’s incredibly difficult to convey what’s happening in Boston, Cambridge, specifically, in this market to anyone that’s not here. It’s hard to convey the enthusiasm and not seem like overdoing it.” Hopefully, this gives you a sense of what we are seeing in the local marketplace and why I am more optimistic than pessimistic regarding the Cambridge, Greater Boston and New Hampshire markets. So with that, I will now open the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey, good morning. It’s actually Alex Twerdahl filling in for Mark. How are you guys this morning?

Hi, Alex. How are you?

Well, thanks. I just wanted to start off into sort of hoping that maybe you could elaborate a little bit more on your comments that the pipelines were good. And obviously, you have had a lot of optimism in your market. Would you expect that to translate for into loan growth continuing into the back half of the year?

Yes. I mean, certainly we are very – our pipelines, we think of our pipelines, it’s what we expect to close in the next 90 days. So, while it is lower than it was at the end of the last quarter, it’s because of the really good closings obviously that we had during the quarter, but we are – we feel pretty good about continued loan growth into the third quarter. Now, obviously, where the 10-year has gone, we all have to think about will that create further prepayment. But as far as we can see sitting here today, we feel good about continued growth certainly into the third quarter.

Great. And then one thing I noticed is that residential mortgage actually grew in the second quarter, have you guys switched your strategy about putting residential mortgages on the books versus selling off that paper?

No, it’s primarily driven by reduced payoff activity during the quarter.

Great. And then just as that loan growth and some of the other dynamics, PPP, purchases and accretion etcetera translate to the NIM, maybe you could help – just help understand how you guys are thinking about the NIM and NII into the back half of the year?

Yes. So I’d expect a few basis point reduction in the core net interest margin for the next couple of quarters just given the earning asset pressure that’s out there externally.

Okay. And then how should we be thinking about purchase accounting accretion for the next couple of quarters?

It’s dependent upon payoff activity, but I would expect it to decline from here hopefully.

Okay. And then are you guys seeing anything in your market, there has been a whole slew of recent merger announcements up in the greater Boston area. I am just wondering if you are seeing some disruption from those mergers and whether that’s creating opportunity for either poaching talent or additional client acquisition?

We are seeing some modest improvement in client acquisition. Alex, if you think about it, those organizations haven’t gone through their conversion process yet. Clients haven’t been hit with notification of conversions. And at this stage for those organizations, banks are doing a lot of thinking about convergence, but their customers are not. So, most of the opportunity will come later. There certainly will be some opportunity for talent acquisition, because we have recognized there are – there is going to be some significant job losses associated with those mergers. And they are larger organizations, and not everybody is going to fit in those larger organizations culturally. So, we certainly are having conversations. We are hopeful that some talent will free up and we will look to execute on that.

Great. And then just a final question for me, as you guys think about M&A for you guys. It’s been I think, a year since Wellesley closed and how are you – are you ready to do additional M&A? Are there opportunities out there? And sort of how you think about that? And what – what’s sort of the wish list today?

So, I would say no, you know our markets well. There is limited opportunity in our marketplace for M&A. And I would add to that, when you think about culturally, the kind of organizations that we would be attracted to, there is even fewer opportunities. So, that said, our team is ready. I am very confident in this team’s ability to integrate mergers. We integrated two mergers in 2 years, one of them in the middle of a pandemic. So, we have a high degree of competency here. We are ready. We are willing to have conversation if somebody wants to have the conversation. But there is – the honest answer is, it’s very limited opportunity.

Great. Thanks for taking my questions.

Sure. You’re welcome.

The next question comes from William Wallace with Raymond James. Please go ahead.

Alright, thanks. Maybe just a couple of quick follow-up questions on the loan growth of NIM, I believe in the annual guidance slide, the target for loan growth was 6% to 8%, this quarter was extraordinarily strong, ex-PPP, is it – should we assume that that you might come in above that target or do you feel like, we are going to kind of bounce back in the back half from what we just saw?

So, like you said, Wally, we had 6% to 8%, we are comfortable with that range. We had 5% roughly year-to-date. So, we are hopeful we could get ahead of it, but to be determined.

Okay. So, with what you see in the pipelines today, I mean, it seems like there is still a lot of uncertainty, that doesn’t give you confidence that you could exceed that number. You are comfortable, but not confident is that it might…?

As Denis said before, we are seeing good growth prospects for at least for the third quarter. It’s hard to see out beyond that Wally.

Okay. And then on the net interest margin commentary, Mike you mentioned, I think you said a couple of basis points of core compression for quarter from here. Does that consider any kind of run-off of liquidity or use of liquidity in the bond portfolio or anything like that?

So, we have put a lot of the excess cash to work during the second quarter here. We are going to continue to stay invested. So, assumes that we are going to keep cash levels around current. So, did that give you a little bit color?

Yes. Do you – would you have now what the net interest margin was on a core basis in June?

During the month of June, well, I don’t think we are going to be putting out there, but for the quarter was 3.01.

Yes. Okay. And then on expenses, I know you had the wealth systems investment, were at just over $25 million in the second quarter. What do you think we trend in the back half of the year from the second quarter?

I think the second quarter is a good run rate for the remainder of this year, given that wealth management systems conversion that’s expected to come online during the fourth quarter and continue to spend in marketing to capitalize on opportunities that we see externally.

Okay. That’s very helpful. I will step back. Thank you.

Thank you.

The next question comes from Kelly Motta with KBW. Please go ahead.

Hi. Thank you so much for the question. Just wanted to do a quick follow-up on the last question on expenses, you have mentioned in the past that marketing is and just now that marketing is something that you are trying to do increase brand awareness, did come in higher this quarter. Is this kind of a level where you expect to your marketing spends to be for the next couple quarters or just any color on how to kind of think about that initiative and that line? Thanks.

Yes. Kelly, this quarter represents right around a good run-rate for the next couple quarters for us as it relates to marketing.

Right. And just to follow-up on the core expenses, core NIM. Sorry, I missed whether or not your commentary on core NIM is includes the excess cash or not and with yields trending as they are, does that change at all on your thoughts on reinvesting versus holding cash hoping for some improvement there? Thanks.

Yes. So Kelly, it does. We utilized a lot of that excess cash during the second quarter, we plan to stay invested. So, cash levels are going to be around where they ended the second quarter.

Great. And then on the deposit side, they still grew a little bit after what was really, really strong growth last quarter. Is there any sort of transitory amount of deposits that are still expected to sort of flow out or did that all occur mostly during the second quarter?

So, that’s a good question. We did see, as expected, some of the transitory deposits for tax payments and other during the second quarter, but offsetting that was growth between new and existing clients. So, there is still some PPP related deposits, which may leave later this year, depending upon if people invest in their businesses. But we are optimistic that we are going to retain the vast majority of what we have seen thus far.

Great. And do you expect that growth in deposits will outstrip kind of what’s left to runoff for the back half of the year? Just any sort of help on that would help with the size of the balance sheet? Thanks.

Sure. Yes, that would be our desire. One of our focuses is core deposit growth. But it’s a little bit of an unknown at this point, Kelly.

Great. Thank you.

Our plan is Kelly for Denis is to continue to focus on core deposit growth is one of our key strategies. So, we will look to continue to grow deposits here. But to Mike’s point, there is a lot going on in every banks deposit base today with excess liquidity and businesses, we stay very close to our clients to get a sense for what they will use in the near-term or over the medium-term, but we are still going to be focused on continued growth in core deposits.

Right. Thank you. I’ll step back.

This concludes our question-and-answer session. I would like to turn the conference back over to Denis for any closing remarks.

Thank you, Betsy. Thank you everybody for joining us today. We look forward to speaking with you after our third quarter earnings announcement. Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.