Carolina Financial Corp (CARO) Q2 2019 Earnings Call Transcript

CARO earnings call for the period ending June 30, 2019.

Motley Fool Transcribers
Motley Fool Transcribers
Jul 26, 2019 at 7:23PM
Financials
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Carolina Financial Corp (NASDAQ:CARO)
Q2 2019 Earnings Call
Jul 26, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Carolina Financial Corporation 2019 Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded.

At this time, I would like to turn the conference over to Mr. William Gehman, Chief Financial Officer. Sir, please begin.

William A. Gehman -- Chief Financial Officer

Thank you, operator, and welcome to Carolina Financial Corporation's Second Quarter 2019 Investor Call. Please refer to slide two regarding forward-looking statements and non-GAAP measures. I'll turn the call over to Jerold Rexroad, CEO of Carolina Financial Corporation.

Jerry Rexroad -- Chief Executive Officer

Thanks, Bill, and thank you all for joining the Carolina Financial Corporation's second quarter earnings call. Appreciate that very much. Let's talk about the highlights for the quarter on page three of the deck. Second quarter 2019 net income increased 0.7% to $15.1 million or $0.67 per diluted share and that compares to $15 million or $0.70 per diluted share in the second quarter of 2018. On an operating basis, second quarter 2019 increased 4.2% to $16.3 million or $0.73 per diluted share from $15.6 million or $0.73 per diluted share for the 2018 second quarter. I will remind you that in the latter part of the second quarter of 2018, we did sell some additional shares, and as a result, the share count in 2019 is fairly significantly higher than that in 2018. As far as depicting operating earnings, we did have gain on securities that was slightly more than offset by the loss on swaps.

We did have a fairly significant increase in the unrealized gain on our securities portfolio, and in addition to those items was -- are pretty much every quarter, we also had an impairment of our MSR asset at Crescent Mortgage Company of $1.3 million, and I'll discuss that later in the presentation. Loans receivable grew $60.6 million in the second quarter at an annualized rate of 9.4%. On a year-to-date basis, we're up approximately 10% or $126.9 million. Provision for loan loss in the second quarter of 2019 $680,000 and that compares to $559,000 in the second quarter of 2018. Our provision for loan losses was primarily driven by organic loan growth. Deposits increased $87.9 million in the year-to-date number and decreased slightly in the second quarter of 2019. Tangible common book value per share was $20.88 that compares to $19.36 at year-end.

We have an outstanding share repurchase program that's been approved by the Board of Directors to purchase up to $25 million of common stock. We did purchase some shares during the second quarter, approximately 30,000 at an average price of $34.33. If you go to slide four , we're really pleased to announce our merger with Carolina Trust BancShares on July 15. Carolina Trust BancShares is headquartered in Lincolnton, North Carolina, has assets of $621 million, loans receivable of $474 million, deposits of $523 million as of quarter end March 2019. Really excited as this significantly increases Carolina Financial's presence in the Carolina's largest market, which of course is Charlotte, MSA.

We had a loan production office in the Charlotte, MSA, but this significantly increases our deposit presence in that market. Combined, the companies will have assets over $4.5 billion and a market capitalization of approximately $850 million. Real excited as we did our due diligence, we really came to understand that both of us have a very strong community banking philosophy. I think that our teams will merge very well together, and we were very pleased that the transaction from our perspective was very financially attractive. If you go to page five, you can look at the map of the combined companies and I think you'll see that it's just a excellent map and one of the very best markets in the country.

The Carolinas are really blessed to have a number of markets that are just growing very, very well compared to national averages. If you look at page six, we're blessed to be able to operate in 8 of the top 25 growth markets in the Southeast, really from Myrtle Beach to the Charleston, Raleigh, Charlotte, of course, significantly improved with the presence of Carolina Trust Wilmingon, North Carolina, Chapel Hill, Durham and then of course Greenville and Spartanburg, South Carolina. So we're just really blessed to be in great markets, obviously the health of loan growth, which we had a really good quarter in loan growth.

Let's talk about the second quarter community banking segment results. If you go to slide eight, community bank segment on a GAAP basis net income was $15.8 million or $0.71 a share compared to $14.9 million in the second quarter of '18 or $0.70 a share. On an operating basis, in the second quarter of '19, $16 million in earnings, $0.71 per diluted share compared to the prior year $15.6 million in the second quarter of '18 or $0.73 per diluted share. On an operating return on average assets, we decreased slightly. On a GAAP basis, return on average assets was 1.63% for second quarter 2019 compared to 1.65% in the second quarter of 2018. Net interest margin, on page nine . Several things I want to point out here.

Overall, I thought we just had a really solid quarter on NIM. We did have an increase in yield on loans by about 1 basis point, slightly offset by our tax equivalent yield on securities, which decreased from 3.74% to 3.69%. We had accretion income for the second quarter of 2019 of $1.5 million and early payoff fees of $46,000 and that compares to the prior quarter of $1.5 million in accretion income and $99,000 in payoff fees. So first and second quarter, pretty comparable on accretion income and payoff income. If I take you back a year to the second quarter 2018 though, our accretion income and payoff fees were $2.2 million. So approximately, a $700,000 reduction in accretion income when you compare 2018 second quarter to 2019 second quarter. So given that, very, very pleased with the earnings results in the community bank segment in the second quarter of 2019.

As far as operating efficiency, we continue to work very hard to make sure we're very a efficient company and noninterest expenses divided by average assets 1.96%. Our efficiency ratio in the banking segment was approximately 47%. Again, numbers that we've been pretty consistent and being able to hold to over really in the last several quarters. Balance sheet growth. We're really pleased with. Good growth in loans, we had a very good growth in our noninterest-bearing in the second quarter, approximately $41 million.

Total assets at about $3.9 billion. If you go to page twelve, our nonperforming assets remain very steady, 0.37% at the end of the second quarter compared to 0.35% at the end of the year. They've been holding very steady. Overall, asset quality continues to appear to be very favorable. And we were also pleased that during the second quarter of 2019, we did have a net recovery. I've said before that we don't expect that to continue for the foreseeable future, but we were really pleased to be able to take care of a couple long-standing items and actually had a net recovery in the second quarter. That's not going to continue forever, but we continue to work hard to make sure that we resolve all those old outstanding issues that we have, but I do think that net recoveries is probably coming to an end certainly this year. If you go to slide thirteen, our cost of deposits was 98 basis points, and then we'll go and talk about Crescent mortgage.

Crescent mortgage, of course, had a little bit of noise in this quarter with the impairment of the MSR asset, but overall, I thought they had a very good quarter. Origination volume was down just slightly from what it was a year ago, up significantly from the fourth quarter of '18 and the first quarter of '19. Overall, the margins held very firm, up actually 14 basis points of what it was in the second quarter of '18, but we did record a impairment on MSR servicing of $1.3 million in the quarter. Most of that relates to servicing that we bought in 2018 or originated in 2018. Overall, that portfolio has actually performed very well, and based upon some recent data that we received, that portfolio has actually paid approximately 2/3 of what the peer portfolios appear to be paying, so it's performed well.

But that portfolio has recorded at a lower cost to market by tranche, and that particular 2018 tranche on a market value showed a impairment. If you exclude that item from earnings, the mortgage company actually would have made about $900,000, which is up from where they were in the second quarter of 2018. I'll also point out that we record our servicing rights at the lower cost to market. So when you look at the portfolio as a whole, our portfolio still has an unrealized gain at the midpoint of the valuation of close to $5 million. So just that one piece impaired still a significant unrealized value in the portfolio.

We still like the asset a lot, and I'm really pleased with the repayment performance of that portfolio. Hopefully, market values begin to stabilize and improve as we go forward. Overall shareholder results, I've mentioned most of these numbers on slide sixteen before. I will point out that tangible book value per share was $20.88 at the end of the second quarter. That compares to $18.11 at the end of second quarter 2018, up 15.3% from where it was a year ago. Second quarter 2019 just had a number very positive things and really pleased with the quarter. Really excited to announce the opportunity to have merged with Carolina Trust bank.

I feel like we have very similar cultures and the transaction is financially accretive in a fairly significant way. Overall loan growth was excellent during the quarter, good noninterest deposit growth in the quarter, and overall, the margin held very solid and up 1 basis point on a core basis. Mortgage pipeline looks good, similar levels to where it was a year ago. Good volumes continuing into this quarter. Very good expense control in the mortgage company, and overall, very good expense control in the company as a whole. As I mentioned, tangible book value up to 15% from where it was a year ago, and on operating return on average tangible asset, we had a 1.74% operating return on average tangible assets for the quarter ended June 30, which we're really, really pleased with. So I really want to thank our team members. They've worked hard during this quarter. I think we've had excellent result, and I just want to thank them for their hard work.

And at this point in time, I'll open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question or comment comes from the line of Peter Ruiz from Sandler O'Neill. Your line is open.

Jerry Rexroad -- Chief Executive Officer

Hey good morning. Peter.

Peter Ruiz -- Sandler O'Neill -- Analyst

Sure. Maybe just first starting with the net interest margin. Just wanted to kind of get your thoughts on what the NIM looks like going forward assuming we have some rate cuts in the next couple quarters, maybe starting next week? And kind of encompassing with that just what deposit costs are trending right now? And is competition easing at all?

Jerry Rexroad -- Chief Executive Officer

I'd say competition remains challenging. It probably has eased a little, but it's pretty challenging and particularly, I would say -- we don't have a lot of this, but for government deposits seem to be very aggressively priced. And so I would say deposits remain a challenge as we go forward. We do disclose in our 10-Q -- 10-K information as to what happens if interest rates go up and down based upon what our best estimates are from a interest-sensitivity standpoint. We would expect that there would will be some probably tightening of the margin. I did mention -- I think I got asked this question last quarter, and I said second quarter, third quarter we get help from the fact that we're in tourism markets, and we get a growth typically in noninterest-bearing deposits during this period of time.

And then, of course, the fourth quarter gets challenged because some of those deposit gets used to -- continue to operate businesses when market's much slower and then, of course, to pay taxes. So our margin can be a little bit hard to follow simply because of the seasonality that's in some of our deposit portfolio, Peter. But if interest rates drop, I think we are going to definitely have to fight hard to keep our margin close to where it is that now, but I would expect it to contract slightly. I will say that on the lending side, our pipelines look really good, and we fight really, really hard on the lending side to maintain our pricing. And fortunately, we're in really good markets and so we've been able to do that, and I think that's proven out by the fact that we continue to get some increase in mortgage yield -- I mean, in loan yield during the quarter.

So deposits would be tough, but I will say that we do have a decent amount of other borrowings that are fairly short that should also catch that repricing that will occur should the Fed decrease. And so overall, slight contraction, but it probably will be more pronounced in the fourth and first quarter than it will be in the second and third quarter. Second and third quarter, we get some real help from just the seasonality of the businesses that we serve.

Peter Ruiz -- Sandler O'Neill -- Analyst

Okay. Great. And just maybe kind of following up on your loan pipeline comment. Another good quarter of the high single-digit range here. I know things aren't necessarily linear for you guys all the time. But kind of what's the pipeline looking like? And is kind of the high single-digit range still achievable? And maybe any commentary on pay down?

Jerry Rexroad -- Chief Executive Officer

Yes. Actually this quarter, we probably had a couple loans that didn't close, which obviously seems to be part of that issue too as can you get them closed at quarter end or do they roll over into the next month? And we feel very good about our pipelines. The pay downs are part of the normal business. We're not seeing any excessive amount of pay downs at this point in time. But I expect that we'll some we don't know about. But when I look at the pipeline taken as a whole, I probably would say the number of opportunities out there are as good as we've ever seen. I think our teams are probably operating certainly better than they were a year ago.

Real proud of our team in North Carolina, thought that they had a really good first half of the year, and we continue to see a lot of opportunities in really all 7 or 8 of our MSAs that we serve. We're just blessed to be in great markets. I think we got really good team members and they're working hard. So pipeline looks good. What I can't tell you is what are the unknown payoffs, and what I can tell you is, will there be loans that we think we're going to close and end up not closing. But so far, we're pretty encouraged about loan growth year-to-date and what we continue to see throughout the remainder of this year.

Peter Ruiz -- Sandler O'Neill -- Analyst

Great. I'll step back for now.

Operator

Thank you. Our next question or comment comes from the line of William Wallace from Raymond James. Your line is open.

William Wallace -- Raymond James -- Analyst

Thank you. Morning Jerry.

Jerry Rexroad -- Chief Executive Officer

Well. Very good thanks.

William Wallace -- Raymond James -- Analyst

With the Carolina Trust acquisition and the thoughts around the upcoming integration of that, I'm curious if you are still planning on attacking the opportunities that might be provided by the BB&T and SunTrust merger as aggressively as you would have without Carolina Trust? And I'd also like to know if you've see any opportunity early?

Jerry Rexroad -- Chief Executive Officer

Great question. I think of anything this probably gives us more opportunity for that particularly transaction. So we're -- I think Carolina Trust had a very good opportunity related to this as do we. And so no, we're going to be -- it's something we're talking about almost weekly. I will say this, we're not only seeing closings related to that particular transaction you mentioned, but we're also seeing some other people close branches in some of our markets. So we're very, very focused on the opportunities that, that creates. We've actually -- most of them haven't actually closed yet, but there's been a number of announcements in several of our markets about upcoming branch closings, and we're focused on those probably as a good practice for what we will have down the road with the Truist transaction.

So we seem to be seeing some consolidation in all of our markets, and we really look at that as an opportunity. I really don't see that Carolina Trust transaction distracting us from that because it's just one of those almost once in a -- I'll say, once in a decade opportunity, that you really just got to do your best to focus on and try to capture as much as you can. As far as activity to date, haven't seen a whole lot related to that transaction. I will tell you some of these other branch closings that I mentioned, we are seeing a number of accounts opened in some of those markets. So we're going to -- we see this as an opportunity. We believe that -- there's very few community banks that have great presence in the Carolinas as a whole. I think we are certainly one that does, and we're very focused on being a community bank in the Carolinas and trying to make sure that people that are seeing their bank close understand that we're there to serve them, and hopefully, they will choose to do business with us.

William Wallace -- Raymond James -- Analyst

Okay. I had one question, just thinking about the mortgage bank and now the interest rate environment has changed, which brings that more back to a potential positive for the earnings. So one, first question is, based on what you can see now and just kind of your past experience, do you think with the way the mortgage rates are behaving now that you could get your volume for the year above where it was last year? I believe you're tracking below on a year-to-date basis?

Jerry Rexroad -- Chief Executive Officer

First quarter was very good, Wally.

William Wallace -- Raymond James -- Analyst

Right, right.

Jerry Rexroad -- Chief Executive Officer

So -- yes, I think that's probably in the ballpark. It really depends on what rates do from here. At June 30, I think the 10-year have gotten down to 2%, and I don't know exactly where it is today, but at about 2.08%, so it hadn't moved materially up a little bit. There does seem to -- at least from my perspective, there does seem to be a pickup when we get down in that 2% on the 10-year, 1.85% on the 7-year. We start to see actually a pickup. I will tell you that, Wally, our community bank and our mortgage company do business in, what I would call, nonsuper regional areas as far as urban activity. So California, we don't do business in and that's where the refi has pickup obviously very, very quickly to begin because the loan amounts are higher. We tend to see it delayed, and so it's a little early for me to probably say exactly where we're going to see what happens in third and fourth quarters.

So far, I would say we're kind of operating exactly like I thought, kind of a delayed response, and now it's starting to pickup a little bit. But our average loan that we do is lower than national averages, and so those people don't tend to refi unless there is about 1% drop in rates, and we're not quite there yet. So if the 10-year -- if we see the 10-year drop with the Fed, which I certainly hope we don't, because we don't need any flatter yield curve. But if we see it do that, then, yes, I think we will have a pretty strong second half of the year. If on the other hand, the Fed drops rates and the long end goes up, which easily could happen, then I think we're just going to have a good solid second half of the year and not necessarily any kind of a refi boom.

William Wallace -- Raymond James -- Analyst

Okay. And then when you have rates change like this, how does that impact margin? Or does volume not really impact what you see margin in that business. Is there like more a function of how many competitors there are?

Jerry Rexroad -- Chief Executive Officer

No. It definitely does impact. If our volume was running, say, 25% higher, you would

definitely see us spreading out margin a little bit, and I think you will see some of that in the third quarter from some people, I don't know if you see it from us. But definitely volumes do impact margin, the higher the volumes. You just get to a point where you really have to kind of control your activity with pricing. We're certainly not at that level right now. So I mean, we're -- our team's doing a great job. I think we're probably 2 days in underwriting still, so it's not like we're being overly stressed. Our service levels are extremely important to our customers and to us. So if volume was to increase to the point where we started to see our service levels decline, we would control that through pricing, but we're not there right now.

William Wallace -- Raymond James -- Analyst

Okay. All right. Thank you very much for the time appreciate it.

Jerry Rexroad -- Chief Executive Officer

Thanks for calling.

Operator

Thank you [Operator Instructions] And our next question or comment comes from the line of Tyler Stafford from Stephens. Your line is open.

Tyler Stafford -- Stephens Inc. -- Analyst

Hey good morning guys. Just one for me on the margin. Can you just remind us of the repricing dynamics of the loan portfolio as it sits today kind of pre-acquisition. Just how much is variable versus fixed? Any kind of loan forward commentary you would provide would be helpful.

Jerry Rexroad -- Chief Executive Officer

Yes. About 30% to 35% are -- would actually have repricing. Now some of those would already be at a floor, but about 30% to 35%, Tyler.

Tyler Stafford -- Stephens Inc. -- Analyst

And do you have the mix of how much of that is kind of prime versus LIBOR?

Jerry Rexroad -- Chief Executive Officer

The -- we have a small snick portfolio that would probably be LIBOR pretty much completely LIBOR, that would probably represent maybe 5%, 6% of the portfolio. The majority of what's left would be tied to prime. So I would say less than 10% tied to LIBOR, the rest tied to prime.

Tyler Stafford -- Stephens Inc. -- Analyst

Okay. Yes, that makes sense. Just a question on expense growth, and if we do get a few rate cuts and the revenue picture is a little bit more challenging. Obviously, you're going to have some offsets hopefully with the mortgage businesses. But just curious how much flexibility you think you have with the tougher revenue picture to kind of mute expense growth? Or just given the organic kind of hiring opportunity you've got it if it -- you probably wouldn't see any slowdown on expense growth?

Jerry Rexroad -- Chief Executive Officer

Yes. Nobody asked a question about hiring. We are definitely seeing some opportunities for some really good people, and we're being very selective and -- but we have added some, and I've been really pleased with some of our adds, really solid, solid team members. So truthfully, you're right. If -- from an expense standpoint, if rates were to drop and the mortgage company were to pickup significantly, we'd actually have an increase in expenses because of course our incentive pay would go up with the increase in mortgage volume. I think, overall, we've been targeting under that 2% noninterest expense as a percentage of our assets, and we've been pretty comfortable staying at that level and so far have been doing pretty good job.

So the answer to your question is, there is always opportunities to manage expenses. The question is, is it the right thing to do for franchise value over the long term? I would suggest to you that the other thing that we're looking at is that kind of this once in a decade opportunity from a marketing standpoint to try to really capture some deposit opportunities with some branch closings that may occur very near some of our offices. So there is some expense incurring that we will probably have in -- probably in the latter part of this year related to that. But overall, I think we -- I got to say, I think we work really hard to manage our expenses on an overall basis, and I think we've done a really good job on that, but when opportunity comes, you've got to take advantage of those opportunities. At the same time, I think we recognize that we try to hit our earnings targets too as much as we can.

Tyler Stafford -- Stephens Inc. -- Analyst

Sure. Just on the -- one of those comments you just made just the marketing campaign around the kind of the larger end market deal. Has that marketing on your end really kind of hit full force yet? Or do you need to wait -- are you planning to wait, I guess, closer to the deal close? Or how are you just kind of thinking about the preparation and timing of taking advantage of that?

Jerry Rexroad -- Chief Executive Officer

So as I mentioned earlier, there is 2 different things going on. We are seeing a number of branches close in some of our markets right now that are not related to Truist. And so having said that, we're doing some marketing related to those right now. And on the other hand, I would say the BB&T, SunTrust merger, we're going to try to look probably closer to when system changes occur maybe not necessarily legal, the legal transaction occurs. So -- but we're seeing -- like I said, there's been a number of offices closed within 2, 3 miles of one of our branches, and we're definitely investing in that right now.

Tyler Stafford -- Stephens Inc. -- Analyst

Okay. And then just last question for me. Just around CECL, not as much of the impact. But just thinking about how CECL might impact your loan mix? Do you see the loan mix changing dramatically for you guys or really at all just kind of under the CECL framework?

Jerry Rexroad -- Chief Executive Officer

It's a really interesting study as you look at CECL, and you can get such widely divergent results depending on how you actually implement it. So at this point in time, we haven't totally made our decision on implementation. And so I would say as of right now, the answer to that's probably, no. But as we go forward, you're getting a lot of information every single week on this accounting standard that sometimes changes how you think about it. So right now, I don't see a tremendous change. We do have some long life mortgages, but the performance on those mortgages has just been outstanding over the years. So I don't see any major, major impact related to CECL on an ongoing basis. But there is just so much information that comes out that you really kind of -- you almost planche to give an answer here.

I will say that our consumer portfolio is very small. We don't have a lot -- we have any indirect auto, we don't have credit cards, we don't have some of these thing that have significant loss ratios that would make me planche as to trying to figure out how to implement CECL in those. So I think ours is probably more plain vanilla probably than some others. And right now, we have certainly not made any plans to adjust what we're really doing from a lending standpoint.

Tyler Stafford -- Stephens Inc. -- Analyst

Got it. Very helpful. Congrats on last quarter.

Jerry Rexroad -- Chief Executive Officer

Thank you Tyler.

Operator

[Operator Instructions]

Jerry Rexroad -- Chief Executive Officer

Thank you for those that have joined, and appreciate your support of Carolina Financial. We're very much looking forward to the second half of the year. Have a good day. Goodbye.

Operator

[Operator Closing Remarks].

Duration: 33 minutes

Call participants:

William A. Gehman -- Chief Financial Officer

Jerry Rexroad -- Chief Executive Officer

Peter Ruiz -- Sandler O'Neill -- Analyst

William Wallace -- Raymond James -- Analyst

Tyler Stafford -- Stephens Inc. -- Analyst

More CARO analysis

All earnings call transcripts

AlphaStreet Logo