Q2 2021 Cambridge Bancorp Earnings Call

Welcome to the Cambridge Banc Corps second quarter earnings Conference call.

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I would now like to turn the conference over to Mr. Denis Sheahan, Chairman, President and Chief Executive Officer. Please go ahead Sir.

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 Bank Corp. Actual results may be different.

Factors that may cause actual results to differ include those identified and 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.

Yes.

Thank you again for joining our first earnings conference call today, I'm joined by our Chief Financial Officer, Mike Carrington, New low.

Hopefully you had an opportunity to see our earnings announcement from just a few hours ago. It.

And it reports, 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 132% and return on tangible common equity at 15.6 4%.

These results are driven by consistency and strategy and solid execution.

First provide exceptional client service this brings opportunity to focus on our 3 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 were concerned about the post pandemic impact to banking industry commercial real estate exposure, we recognize there will be challenges and 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 and what we see day to day.

Unique to Cambridge, and Boston and increasingly benefiting the region is it growing innovation economy, and its impact unemployment economic activity and on the commercial real estate market.

And 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'll quickly share with you highlights to illustrate.

And the significant activity and process and planned for the technology and life Science innovation clusters.

And the technology cluster.

A number of the Fang stocks are expanding in our space.

1 is tripling its space and Cambridge, adding an additional 300000 square feet. Another is occupying a 16 story tower under construction and Cambridge.

<unk> is expanding its presence by hundreds of jobs and 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 400000 square feet office buildings, and Cambridge converting from office to lab.

A former global insurance company headquartered in Boston.

Inverting to lab 24 story, New construction office tower re planned as a 14 story life Sciences building and.

And office construction of 225000 square feet Replant as lab space and further new construction of 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 and commercial development of over 900000 square feet is in process and I could go on.

In terms of funding, Massachusetts, startups raised $17.4 billion and venture capital and 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, and Boston that will benefit, Cambridge, Bancorp and Cambridge Trust company.

To quote senior real estate executives from our recent commercial real estate industry Forum quote, it's incredibly difficult to convey what's happening and Boston, Cambridge, specifically and this market to anyone that's not here. It is hard to convey the enthusiasm and not seem like overdoing.

And quote.

This gives you a sense of what we're seeing and 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 to ask a question you May Press Star then 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.

And if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then 2.

At this time, we will pause momentarily to assemble our roster.

Okay.

The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey, good morning, its actually Alex toward all filling in for Mark how are you guys. This morning.

Alex how are you good morning.

Well. Thanks, I just wanted to start off and just sort of hoping maybe you could elaborate a little bit more on your comments that the pipelines are good and obviously, you've got a lot of optimism and your market.

Would you expect that to translate into loan growth continuing into the back half of the year.

Yes, I mean, certainly we're very our pipelines and we think of our pipelines. It's what we expect to close and 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 where 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.

And into the third quarter.

Great and then 1 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 you know as that loan growth and some of the other dynamics DPP purchase accounting accretion et cetera. It translates to the name and maybe you can help.

And just.

I understand how you guys are thinking about the NIM and NII into the back half of the year.

Yes, so and I expect a few basis point reduction and 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 Pete purchase accounting accretion for the next couple of quarters.

It's dependent upon payoff activity, but I would expect a decline from here hopefully.

Okay.

And then are you guys seeing anything in your market and there's been a whole slew of recent merger announcements up and.

And greater Boston area I'm, just wondering if youre seeing some disruption from those mergers and whether that is creating opportunity for us.

Either poaching.

Talent or.

Additional client acquisition.

We're seeing some modest.

Improvement in client acquisition.

If you think about it and 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 you know banks are doing a lot of thinking about conversions, but they're customers or not.

So most of the opportunity will come later.

And there certainly will be some.

Opportunity for talent acquisition, because we recognize there are.

And theres 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.

Yeah.

Great and then just a final question from me.

As you guys think about M&A for you guys. It's been 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're thinking about that and what what's sort of the wish list today.

So.

And I would say no you know our markets well there's limited opportunity in.

Our marketplace for M&A and I would add to that when you think about.

Culturally the kinds of organizations that we would be attracted to theirs, even even fewer opportunities. So but that said our team is ready and <unk>.

Free confident and this team's ability to integrate mergers we integrated 2 mergers and 2 years, 1 of them and the middle of a pandemic.

So we have a high degree of competency here.

We're ready.

Willing to have conversation if somebody wants to have the conversation, but the honest answer is there's very limited opportunity.

Great. Thanks for taking my questions sure.

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 and NIM.

And I believe and the annual guidance slide that 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're going out.

We're going to kind of bounce back and the back half from what we just saw.

So like you said, while we can 6 to 8 we're comfortable with that range, we had 5% roughly year to date. So we're hopeful we can get ahead of it but to be determined.

Okay, So with what you see and the pipelines today I mean.

It seems like there's still a lot of uncertainty that doesn't give you confidence that you could.

Exceed that number you're comfortable but not confident is that in my and my as Dennis said before we're seeing good growth prospects for at least through the third quarter, it's hard to see out beyond that Wally.

Okay.

Okay.

And then on the net interest margin commentary, Mike You mentioned I think you said a couple of basis points of core compression per quarter from here does.

Does that does that consider any kind of run off of liquidity or use of liquidity and the bond portfolio or anything like that.

So we put a lot of excess cash to work during the second quarter here.

We're going to continue to stay invested and assumes that we're going to keep cash levels around current.

And so does that give you a little bit color.

Yes.

And what did you happen to have what the net interest margin was on a core basis in June.

During the month of June well, I don't think we're going to be putting that out there but for the quarter was 301.

Yeah Okay.

And then on on expenses.

And I know you had the wealth systems investment.

We're at just over $25 million and the second quarter.

And what do you think we trend and the back half of the year from from the second quarter.

The second quarter is a good run rate for the remainder of this year given that wealth management systems conversion that you expected to come online during the fourth quarter and continued spend and marketing to capitalize on opportunity that we see externally.

Okay.

Okay. That's very helpful. I'll step back thank you.

Thank you.

The next question comes from Kelly Motta with key BW. 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 mentioned in the past that marketing is and just know that marketing and something that you're trying to do to increase brand awareness.

It did come in higher this quarter or is this kind of.

A level, where you expect to.

Your marketing expense to be for the next couple of quarters or and just any color on how to kind of think about them.

And that initiative and that line. Thanks.

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

Great.

And just a follow up on the core expenses.

Our core core NIM.

I'm, sorry, I missed whether or not.

And your commentary on core NIM is.

Includes.

The excess cash or not and with yield.

Yield trending as they are does that does that change at all on your thoughts.

Thoughts on reinvesting versus holding holding cash hoping for.

Some improvement there yes.

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 on the deposit side.

Yeah.

And they still grew.

A little bit after what was really really strong growth last quarter.

Is there any sort of transitory and amount of deposits that are still expected to sort of flow out or did that all occur.

Mostly during the.

And the second quarter.

So it's a good question, we did see as expected and 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're optimistic that we're going to retain the vast majority of what we've seen thus far.

Great and do you expect that.

Growth in deposits will will outstrip kind of what's left to run off from the back half of the year.

And any sort of help on that would help with the size of the balance sheet.

Sure.

Yes that would be our desire and 1 of our focus and this core deposit growth, but it's a little bit of and unknown at this point and Kelly.

Great. Thank you, Brian and our plan is Kelly this is Dennis.

Continue to focus on core deposit growth is 1 of our key strategies. So we will look to continue to grow deposits here.

But to Mike's point, there's a lot going on and every bank's deposit base today with excess liquidity and and the businesses. We stay very close to our clients to get a sense for what is what where they will use and the near term or over the medium term, but we're still going to be focused on continued growth and 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 announcements. Thank you.

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