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Edited Transcript of CARO earnings conference call or presentation 25-Apr-19 3:00pm GMT

Q1 2019 Carolina Financial Corp Earnings Call

CHARLESTON May 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Carolina Financial Corp earnings conference call or presentation Thursday, April 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jerold L. Rexroad

Carolina Financial Corporation - President, CEO & Director

* William A. Gehman

Carolina Financial Corporation - Executive VP & CFO

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Conference Call Participants

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* Blair Craig Brantley

Brean Capital, LLC, Research Division - SVP and Senior Equity Research Analyst

* Catherine Fitzhugh Summerson Mealor

Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP

* Peter Finley Ruiz

Sandler O'Neill + Partners, L.P., Research Division - Director

* Tyler Stafford

Stephens Inc., Research Division - MD

* William Jefferson Wallace

Raymond James & Associates, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Carolina Financial Corporation First Quarter 2019 Earnings Call. (Operator Instructions) Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host Mr. William Gehman, Chief Financial Officer. Sir, you may begin.

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William A. Gehman, Carolina Financial Corporation - Executive VP & CFO [2]

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Thank you, operator, and welcome to the Carolina Financial Corporation First Quarter 2019 Investor Call. Please refer to Slide 2 regarding forward-looking statements and non-GAAP financial measures.

Now I'd like to turn the call over to Jerry Rexroad, CEO of Carolina Financial Corporation.

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [3]

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Thanks, Bill, and welcome to our 2019 first quarter earnings release call. Appreciate everybody joining us this morning.

To talk about the first quarter highlights, 2019 first quarter net income increased 258.6% to $14.5 million, or $0.65 per diluted share. That's compared to $4.1 million or $0.19 per diluted share for the first quarter of 2018. I will remind you that in the first quarter of 2018, we had fairly significant merger-related expenses related to the acquisition of First South Bank, which occurred November 1, 2017.

Our operating earnings for the first quarter decreased 1.8% to $14.7 million, $0.66 per diluted share from $14.9 million or $0.71 per diluted share in the first quarter of 2018. Loans receivable increased $66.3 million from the prior year-end, at an annualized rate of 10.5%. Very pleased with loan growth in the first quarter. Provision for loan loss primarily as a result of that loan growth in the first quarter increased $700,000, primarily driven by organic loan growth. There wasn't any provision for loan losses in the first quarter of 2018.

Our total deposits on a period-to-period basis, if you compare December 31, 2018 to March 31, 2019, increased $98.9 million. Tangible common book value per share was $20.10 at the end of March 2019. That compares to $19.36 at the end of the year. On December 31, 2018, we did announce that there was a plan to repurchase shares and during the first quarter, the Company actually repurchased approximately 129,000 shares at an average price of $32.33.

If you move forward to Slide 5, we'll talk about the community banking segment results. These are the results for the Company that do not include Crescent Mortgage Company, our wholesale mortgage company. The community banking segment was -- had earnings of $14.8 million in the first quarter of 2019. That was $0.66 per diluted share and that compares to $4 million in the first quarter of 2018, or $0.19 per share. On an operating basis, first quarter of 2019 had operating earnings of $14.9 million, or $0.67 per diluted share compared to $14.9 million in the first quarter of 2018, or $0.71 per diluted share. Remember that earnings per share were impacted by the fact that we did sell 1.5 million shares of common stock in June of 2018, raising $63 million of capital. Segment return on average assets was 1.55% for the first quarter of 2019 compared to 45 basis points for the first quarter of 2018 and on an operating basis, decreased slightly to 1.56% for the first quarter compared to 1.69% for the first quarter of 2018.

If you go to Slide 6, we've really tried to give a lot of additional information here. Net interest margin is being impacted by several different things which are having a fairly significant impact. We've tried to kind of give you a core net interest margin and that core net interest margin actually excludes the accretion income from purchase loans related to purchase accounting and also excludes the prepayment penalties that we might receive from early repayment of loans. The prepayment penalties in the first quarter of 2019 were $99,000. In the fourth quarter of 2018, they were $414,000. The accretion income in the first quarter of 2019 was $1.5 million and that compares to $1.9 million in the fourth quarter. So there's fairly significant items that are impacting the yield on loans. Excluding those items, net interest margin was 3.81% for 2019 and 3.84% for the fourth quarter of 2018, pretty much what we would have expected considering the seasonality of our deposits. And I'll talk about that more later.

Our security yield pretty much stayed the same for the quarter, that did also have a little impact. It was 3.53% in the first quarter of 2019 compared to 3.52% in the fourth quarter of 2018. Operating efficiencies, continue to operate very efficiently. One thing we've really tried to do is keep our non-interest expenses divided by average assets under 2%. We were able to do that for the second consecutive quarter. It's been a long-term goal for us to get to that level. Our bank efficiency ratio was 49%, up a slight bit from the third quarter of 2018. Remember, in the second quarter of 2018, we had not only the accretion income being a good bit higher, but we also received $900,000 related to the pay-off of a problem asset. It was in purchase accounting that ran through net [interest] income. So both of those items had a fairly big impact on the fourth quarter 2018.

Had very good balance sheet growth, particularly on the lending side. Felt really good about that. $66 million of growth, our pipeline continues to look very solid. We're very pleased in really all of our markets with the pipeline. Normally we have loans that don't get closed at the end of the quarter and move into the next quarter. We did have that happen again in the first quarter. So overall, feel very good about where we're at now and where it looks that we would be in the future.

Deposit increased $98.9 million, that is actually a period-to-period increase. If you look at average balances, actually we had about a 3% decline in the non-interest bearing deposits. And that's really what we would expect in our first quarter. The seasonality of our markets, particularly in the fourth quarter and first quarter, are very much impacted. Fourth quarter, you begin to see a decline. First quarter, a lot of tax payments are made in the tourist-related business and they are just very slow in January and February. And we saw a very nice pickup in balances at the end of March and quite frankly, average balances being down 3% for the first quarter, pretty much exactly what we would have expected. Our loan mix remains, we believe, focused on lower risk assets. NPAs look very good for the quarter and we were at 34 basis points at the end of the third quarter. Charge-offs were very minor at 2 basis points. So overall, very, very pleased with what we saw from an asset quality standpoint.

Deposits, as I mentioned on Slide 10, did increase. Our cost of deposits were 93 basis points and a good bit of that was the impact that we normally see in the first quarter related to the reduction particularly in our checking balances. Hopefully, we will see those begin to build as we start to get into the May season and then, of course, they build generally through about the end of September.

Crescent Mortgage Company, the wholesale mortgage company located in Atlanta, Georgia, had a fairly weak first quarter. January and February were in particular very, very slow. We saw really reduced originations during the first 60 days of the quarter. They began to pick up a little bit in March and then quite frankly from about the middle of March on and we began to see nice increases. Their production was down 23% quarter-over-quarter, but the margin did offset that. We saw an increasing margin in the first quarter, up to 204 basis points.

Crescent Mortgage Company made $390,000 in the first quarter of 2019. That compares to $562,000 in the prior year first quarter, down also about $200,000 from what we saw in the fourth quarter of 2018. I will say that, when you look at production, currently our pipeline is about 3% less than what it was on the exact same day a year ago. That is a significant improvement from what we saw about 45 days ago. 45 days ago, if we looked at pipeline this year versus last year, we were probably down about 20% to 25%. So there has been some decent recovery in the latter half of March and more importantly in the first half of April. Hopefully, we will continue to see that continue. Generally, that business is somewhat seasonal. A lot of our customers are in the northeast, midwest and upper midwest and to some degree the west and their winter was pretty tough in January and February. Obviously, as they began to get better weather, it is positive for Crescent Mortgage Company.

Slide 13, we do our very best to be focused on our shareholder results. I believe that our return on average tangible capital continues to remain very strong at 13.4% and of course, our return on average tangible assets is about 1.53%. Good earnings for the quarter, I felt, considering the various different things that we had. Tangible capital ended the quarter at 12.1%. Our tangible common book value was $20.10. That's up 28% from where it was a year ago at $15.71 at the end of the first quarter 2018. Obviously, the capital raise that we did in the middle of the summer made a big impact on our tangible book value per share.

I did want to kind of give an overall summary on the quarter. I feel like it's important to kind of look at everything in context. And overall, I have to tell you, meeting with our shareholders at our Annual Shareholder Meeting yesterday, I felt very good about the first quarter. Loan growth was very solid. End of the period deposit growth very solid as a result of really and probably better than expected loan growth. We did have a provision for loan losses of $700,000, but that was driven by the loan growth and our NPAs actually remain very good.

OREO expense at $186,000 for the quarter, primarily a result of disposing of one long-term asset that we had had on the books for a long time that we chose to get rid of. This is kind of an expense that we haven't had much of it in the past. But this particular quarter, in disposing of that one long-term property, we did choose to just go ahead and get rid of it. We don't really have any other properties like that in our OREO and of course our OREO is extremely low.

Our net interest margin declined just 3 basis points on what we would call a core basis, primarily due to seasonality. I would point out to you that, when you look at accretion plus prepayment penalties, there's been a pretty significant change in the first quarter. In the first quarter, our accretion and prepay income was $1.6 million. If you compare that to the fourth quarter of 2018, remember, we had that one big pickup related to the payoff of a problem asset that we have picked up in the Greer State Bank acquisition and of course it was very positive. Our total prepay and accretion-related income in the fourth quarter was $3.3 million. And if you compare it to the first quarter of last year, accretion income and prepay income was $3.2 million. So overall, when you consider core income for the Bank, we really overcame about a $1.6 million to $1.7 million, if you compare a year ago and the linked quarter to the current quarter, reduction in net interest income related to reduced accretion and reduced prepay income. So overall, felt like our margin held up very, very well.

Mortgage operations was particularly weak in the first two and a half months of the quarter. Crescent Mortgage Company declined over the prior quarter approximately $209,000 after tax. Our retail operation actually came through pretty good in March, and so we were pretty much flat when you looked at the retail mortgage compared to what we were in the fourth quarter. We had really good expense control in the mortgage operations, both retail and wholesale. However, I will tell you, it was somewhat offset by the fact that we did pay severance for the reduction in staff that we did at the beginning of the year.

Mortgage locks have certainly improved, as I mentioned earlier, and we're currently seeing pipeline similar to what we saw a year ago. Expense control remains a real focus and I think we did a really good job on that. First quarter tangible book value per share, as I mentioned, increased 28%. And we continue to have very strong returns on tangible assets and tangible equity.

I would also mention to you that the Board of Directors announced yesterday that we were increasing our dividend to $0.09 for the second quarter. That's actually an increase of 50% from where we were a year ago and actually a year ago was a 50% increase from where we were two years ago. So over the last eight quarters, we've increased our dividend from $0.04 to $0.09. I believe that shows our overall belief that the results should continue to be very strong as we go into the future.

Thank you for listening. And at this point in time, I'll go ahead and open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Catherine Mealor with KBW.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [2]

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I'm first going to start on the margin. Thank you for the additional disclosure on Slide 6, and you show here that how your core loan yield had some really nice expansion over the past couple of quarters. How do we -- how should we think about that moving forward in a flat rate environment and maybe where new loan pricing is coming on versus that 5.31% level right now?

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [3]

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So the 5.31% level is lower than what we will be wanting to offer commercial loans at this point in time. Obviously, one of the things that helped the first quarter, Catherine, was the fact that we had the prime increase in February -- excuse me, in December 19, 2018. So most of that impact for that increase really didn't come until the first quarter. And so I think you saw that we did get a pretty good pickup in our yield. I will say that we do have some loans that are repricing quarterly, so we probably didn't get all of it. But we will -- I would expect that we will get a little bit more in the first quarter -- from the first quarter into the second quarter.

Loan yields, I will say, are very competitive and we are seeing some, what I would call, just really, really, really competitive rates, in particular in the commercial real estate area, but we have pretty well stuck to our pricing model and quite frankly we're probably not getting quite as good a hit rate on closures that we've gotten in the past because we are losing some deals where people are just, in my opinion, pricing below the market. But of course that's our choice. But we've kind of stuck to our pricing model. And so I would expect it, as we see, particularly the First South portfolio, continue to roll over like it's been doing. We should see some pickup from that as well as just a little bit more pickup related to the adjustment on the LIBOR-based loans that are typically adjusting quarterly.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [4]

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And then you said you are seeing competition on the loan side, but your loan growth was still so strong this quarter. Any thoughts about an outlook for loan growth this year?

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [5]

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Well, as I think I said during the call, our pipelines do look very good. And our hit rate is not as good as it used to be because we are just -- we are getting beat sometimes and when we get beat, it's not by 10 or 20 basis points, it's typically by a much bigger spread because I think if it's 10 or 20 basis points, our guys are keeping the loans. But hit rate is down, but pipelines look really good. And I think we're pretty positive about the loan growth. Our markets look very good. We've been able to add several really experienced bankers that are coming from some of the mergers that happened a year or so ago. And I'm really pleased with some of the team members that we've been able to add in our commercial lending team. So I would say we're generally positive.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [6]

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Okay. And then, any thoughts on M&A? Just given your excess capital position, has -- any increased activity given your pricing has gotten a little bit better than last time we spoke?

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [7]

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Yes, that's helped. There's no doubt about it. I think it's also taking a little bit of time for people's expectations to adjust. But I would say, we're actively working on that. It's definitely part of our certain value drivers that we talk about. We absolutely remain committed to being acquisitive and so, I would say, activity has definitely picked up from where it was three months ago, particularly considering the fact that our stock price has performed a little bit better. Obviously, at year-end, it was, I think, we were all kind of almost having no calls, but it's clearly a better activity right now.

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Operator [8]

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And our next question is from the line of William Wallace with Raymond James.

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [9]

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Wallace?

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [10]

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I apologize. I was kicked out. I missed the beginning of the first question. Did you talk about deposit pricing trends and kind of expectations on that side of the NIM equation?

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [11]

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No, the prior question, Wally, more was focused on the loan side. Deposit pricing has been aggressive and I will say, probably in the first quarter we were pretty aggressive ourselves. We've definitely tried to get -- we thought like loan growth was going to be pretty good. And so we were reasonably aggressive ourselves in some of our different markets on the deposit side pricing. It remains pretty competitive. I will say that after First South, we probably struggled a little bit as we went through the normal conversion process and we didn't see a lot of deposit growth in numbers.

Well, we didn't see any deposit growth numbers last year, quite frankly we were down mostly in those markets. But this year we're beginning to see pretty good increases in the number of deposits, particularly considering it's a seasonally slow period for us in the first quarter and I feel pretty good about deposits overall, but it is competitive and it's hard for me to predict because, at this point in time, we are seeing some offers in the markets and they are a little sporadic. But we're seeing some markets that would be above broker deposit rates. So it's a little, what I would call, unusual and maybe a little bit of hangover over the fact that rates have dropped over the last 30 or 40 days. But we definitely will be attempting to be pretty aggressive in growing our deposit base because we feel like we've got to support the loan growth that we see and overall loan growth has been really good.

And I've been -- I've actually been really pleased with our loan growth and the fact that it's come with a good many of checking accounts with it. So I'm actually really pleased with the checking account growth, but it's always hard for us in that first quarter because non-interest bearing deposits always drop in the first quarter. Actually, the 3% drop that we had in average balances in non-interest bearing deposits is probably pretty good for us quite frankly. So I will say that, for CD, it's pretty competitive. We will continue to be pretty aggressive in ours, but we are going into a much better seasonally adjusted period for us.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [12]

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So if you kind of put that together with the commentary that you made on loan pricing, should -- do you think you can hold the line on your margin on a core basis or do you think there is probably still some additional pressure from the funding side?

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [13]

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I would say, it's close and Wally, I just can't really give you good outlook. Whether it's 2 or 3 basis points that we could see a decline, that certainly could happen or could we hold flat. It really just depends on the seasonality of our business and it is a -- it could be a very, very significant thing. If we have good weather at the beach, let's face it, it is a pretty rough winter in a lot of this country and I'd tell you, right now traffic is pretty busy in the seasonal tourism areas. And we -- and that's why I said, we saw a pretty big increase at the end of March. But it's hard for us to measure and I just don't have enough time to really give a good solid answer to that. There is pressure on the deposit side. I think we're doing a really good job on the lending side to make sure we hold our yields. And so I do expect that we will probably get some yield increase on the loan side. Will it be enough to catch the deposits? It's going to be close.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [14]

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Okay. On the loan side, we're seeing the prepayment fee income dropping. Does that indicate that the cadence of early payoffs has slowed significantly in your portfolio?

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [15]

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I would say it's just a spotty thing for us. We're very consistent. If you want a fixed rate, we really do expect to get protection from our customers on prepaid penalties. If they want the fixed rate instead of a variable rate, we really try pretty hard to get it. Businesses -- there are some businesses sell, some businesses go to the permanent market and so that the prepaid penalties just tend, to me, to be very spotty. And honestly, I could see, in the second quarter that we could potentially be right back to normal and normal is probably more $250,000 to $500,000, then a really small amount like we had in the first quarter. So the $99,000 was pretty low compared to where we were most of last year. So I would tend to say, no, I really expect prepayment penalties to probably be more in the range of last year. And quite frankly, I expect to have some prepayments. This quarter was really good. Let's face it, loan growth of $66 million in our first quarter which, like I said, is seasonally slow and actually had bad weather, we felt great about it.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [16]

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Okay. Thanks for all that color. One last question I have on the mortgage business. Do you think that with -- it sounds like maybe there were some weather that you think was pressuring the volume in the first quarter. Do you think that you can get it bounce back to make up for the decline in production and have production for the year be kind of in line to what it was in 2018? And then also I'd just love to know what commentary you have around gain on sale margin and what you think might happen there. And I'll hop out. Thanks.

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [17]

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Yes, that's a great question. Way too early for me to give a forecast. I would say this, I do think the mortgage company can get their earnings back to where they were last year. I think the production levels are there. We do a lot of business in Minnesota, Wisconsin, Wyoming, Massachusetts, New Hampshire, Rhode Island and I could keep going state after state. They had very bad weather to a great degree first two or three months. And as things begin to pick up, I expect that we will see an increase. The other thing is, as we do a good bit of construction firm business obviously that is very slow and even in the south where the weather wasn't all that bad, we had tremendous amount of rain. So our construction firm business we just don't get a lot of completions until April, May, June. So I do expect volumes to come back. Whether we will meet what we did last year, I can tell you that our goal was definitely at that level or better. I do think the margin feels a little bit better to me than it did last year. And then, of course, our servicing business, it's going to be dependent upon prepays. And so you take all those things together, I feel pretty good about what we made last year versus what I think we'll make this year. Production, a little bit harder for me to predict. But I mean it was a slow, like I said, very slow January, February. If you look at March and where we are at so far in April, I certainly feel a lot better than I did in January, February.

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Operator [18]

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Our next question comes from the line of Peter Ruiz with Sandler O'Neill.

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - Director [19]

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Hey, most of my answers have been -- my questions have been answered, but just wanted to kind of follow up maybe on the Charlotte expansion. Any update on that? And maybe following up on that, just any change to the expense outlook, any additional hires maybe that you see any change there?

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [20]

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That's a good question. Charlotte lease has been signed. And we're moving forward with our loan production office. I do expect to add at least one more commercial loan officer in Charlotte over the coming months. We have added a couple senior commercial lending officers to our team in the current quarter, actually probably three or four if I get right down to it. But overall expenses, they are going to move up a little bit. But we're pretty tight on expense control right now and absolutely doing our best to keep that really tight. So really it's more important. We hired quite few commercial people last year. It's really more important that we get them producing, quite frankly, more in line with what our expectations are. So we have added a few with just some really quality people in the market that it will have very, very strong books of business that we're able to add to the team. Obviously, if those people continue to become available, we're going to absolutely be interested in wanting to talk to them and if they meet our culture, we're going to add them. But having said that, I think expense control, we will continue to do a good job in managing that and hopefully keep that in line with our growth.

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Operator [21]

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And our next question is from Tyler Stafford with Stephens.

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Tyler Stafford, Stephens Inc., Research Division - MD [22]

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I wanted to just start on some of your earlier comments just about deposit pricing and competition. Just generally speaking, across the market, the new I guess more aggressive CD rates that you're seeing in the market, where generally are those rates at right now?

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [23]

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Well, right now we're seeing some competition probably in every single market. That has been a lot more spotty up until this point, but there are a couple more, what I would call, national players that have suddenly gotten kind of competitive. Having said that, they tend to come and go. Competition in Raleigh, I would say, remains very -- pretty solid and intense. Myrtle Beach is very spotty. Charleston I think is somewhat spotty, it comes and goes. Wilmington probably more like Raleigh and then the upstate, there's quite a few community banks in the upstate market. And so we do see -- we do probably -- when I say spotty, it's a lot of different players, but it seems to go on all the time. So big market, but pretty competitive. Columbia, I would say, pretty spotty. So overall, competitive right now, very competitive, but I wouldn't be surprised if two weeks from now all of a sudden it goes into a lull again. It's just -- it's kind of what we've kind of thought through for the last, I will say, nine months in our markets.

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Tyler Stafford, Stephens Inc., Research Division - MD [24]

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That's good color. I guess I was speaking more towards just absolute kind of rate for CDs on the more aggressive side that you're seeing.

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [25]

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Well, there is 2.40%, is that what you're -- are you actually asking for the rate?

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Tyler Stafford, Stephens Inc., Research Division - MD [26]

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Yes, just general, I mean, 2.50%, 2.75%, I'm just curious kind of what just kind of average you're seeing?

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [27]

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2.40%, 2.50% will be on the high side.

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Tyler Stafford, Stephens Inc., Research Division - MD [28]

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Okay.

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [29]

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If you need one yourself just -- I'll tell you who it is.

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Tyler Stafford, Stephens Inc., Research Division - MD [30]

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I appreciate that. I think you mentioned in one of the earlier questions or the prepared remarks that there was severance expenses in the quarter related to FTE reductions. I think within mortgage, just how much was that and just any comments you can share on what you did during the quarter?

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [31]

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Yes, I'll just give you some general information because I'm not going to give an actual number because I don't know if I could come up with off the top of my head, but we had about a reduction of 10 FTEs and typically our severance, depending on service is going to be one to three months. So it wasn't huge, but it did pretty much offset the expense save.

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Tyler Stafford, Stephens Inc., Research Division - MD [32]

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Okay. And then just last one for me. Any preliminary thoughts on CECL, just given the residential portfolio you guys have on the books and the longer duration aspect of that? I know it's early, just curious if you had any preliminary thoughts.

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [33]

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I actually think that's an interesting question because I might spin it a different way. The reason I say that is, if you look at our residential portfolio, it does have a longer life, but it's almost had an impeccable performance. And so if you take 10 times zero, it's still zero, right. So the fact that they are longer life, it doesn't necessarily mean that you have more allowance. I would tend to suggest that I'm interested to see what those who have large consumer portfolios that have significant charge-offs that may have a 3-year life that have been previously booking one year of charge-offs. So it's an -- I think I am interested to see where this thing comes out.

Personally, our residential portfolio of -- I think, it's about 27% of our book. It has had extremely good performance. I would suggest that our probably last five years' loss ratio in that book has been almost zero. And so the life doesn't necessarily concern me as much as the metrics underneath it. And if you look at our LTV and average credit score of that book, it's pretty darn good. And so the real question to me is, what happens on the consumer part of our portfolio, something like equity lines that may have an average life of seven or eight years where the performance hasn't been quite so good. Industry-wise, ours has been pretty good. I just can't answer the question. I'd like -- it's one of those things that we're still waiting to get a lot of color on because I think the bigger risk may be on shorter-term loans that have a higher risk.

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Tyler Stafford, Stephens Inc., Research Division - MD [34]

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No, that's very helpful and no doubt that credit quality for you guys there has been spectacular. So I appreciate the thoughts.

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Operator [35]

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And our next question comes from the line of Blair Brantley with Brean Capital.

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Blair Craig Brantley, Brean Capital, LLC, Research Division - SVP and Senior Equity Research Analyst [36]

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Good morning, everyone.

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [37]

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Good morning, Blair.

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Blair Craig Brantley, Brean Capital, LLC, Research Division - SVP and Senior Equity Research Analyst [38]

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Hey, just a quick question on capital. Just some -- given where the share price is now relative to your buyback price, any updated thoughts on future activity?

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [39]

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I think the activity that we've done in the past is fairly reflective of what we see in the future. I think we've been very opportunistic in the repurchase of shares and I think that's pretty much reflected by our ability to buy about 1.5% of our outstanding shares back at I think are really, really attractive price. And so I think it's pretty much reflective of how we think. We remain very focused on acquisition opportunities and we've built that capital primarily to do acquisitions and not repurchase stock for sure. And so that's primarily where we're going to keep it. We feel good about organic growth, but obviously we've got to have great organic growth just to use the capital we're creating. So it's primarily there for acquisitions, but at point in this time that we see what we think are really good opportunities in stock, we're definitely going to be involved.

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Blair Craig Brantley, Brean Capital, LLC, Research Division - SVP and Senior Equity Research Analyst [40]

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Okay. And then just kind of with your capital build and the view on M&A, any thoughts on kind of what you're willing to do from a mix standpoint like in terms of putting more cash in the deal?

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [41]

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Every deal stays on the zone, right. That's a good question. But would we be willing to use cash in a deal, I think we would. We've got the ability to do that. If it's the right opportunity and that's what it takes to get the deal done, we certainly stand ready to do that. And it's one of the reasons we've built that capital to begin with. So I can't give you any real direct color, but we have the powder to be able, I think, to compete on pretty much any type of acquisition without raising capital and we felt like that was really important.

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Blair Craig Brantley, Brean Capital, LLC, Research Division - SVP and Senior Equity Research Analyst [42]

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Right. And then just one last question on the servicing portfolio. Any updated view there obviously with the shift in the yield curve? Maybe it doesn't make sense to...

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [43]

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Yes, well, obviously it's going to have reduced our unrealized gain in that book. No question about it. And we did amortize our current 2018-19 pools at a more aggressive rate in the first quarter. And so it -- obviously it's -- to me it's a crapshoot to some degree and that's maybe poor terminology, but it's just really what it is because the fact is, our prepay in the first quarter was actually really, really good. And so what actually happens to prepayments versus expectations of prepayments, I think our book is really a really good book. Our average rate if I recall on that book is like 4% -- I think, it's under 4.20%. I think I'm safe in saying that. It's got a good seasoning to it. So there's no doubt that the expectation for prepays did pick up at the end of March. They are probably muted somewhat because rates have certainly come back up a little bit. But actual performance really good, projected performance was declined. We did not have impairment, but we did increase the amortization in our 2 current year pools to help the [blow of the] impairment quite frankly.

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Blair Craig Brantley, Brean Capital, LLC, Research Division - SVP and Senior Equity Research Analyst [44]

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Okay, great. Well, I guess, any thoughts on shrinking that portfolio or growing it at this point?

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [45]

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I will say, right now we're in a pretty much standstill position. Our mortgage team has a lot of contacts throughout the industry. And if they can find little tiny pools, when I say that, I mean under $100 million that we can buy cheap because somebody just wants to get out and there's really not very many buyers for tiny pools like that, we would do small aggregations like that. I'll be honest with you, at the pricing right now, I don't think there is a whole lot of people willing to sell anything south of 4 times servicing value, which generally is going to be 100 to 104 on agency servicing. I just -- I think most everybody -- I got to be honest, anytime this happens, there's always somebody who is willing to bid an extremely low price, but there's almost never somebody willing to sell.

If we could find somebody that was willing to sell at extremely low price for a decent sized pool, we'd probably be a buyer. I just don't think that's going to happen. Obviously, at this pricing, right now we are absolutely not a seller. I kind of look back and probably say, man, I wish I would hit at that one or two month period and probably sell a little bit when it got unbelievably high. But quite frankly we like the asset and it's been a good asset. If it cheapens up a little bit and stays cheap with WACCs dropping, we might get back involved in the second half of the year a little bit, but right now we're pretty much status quo.

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Operator [46]

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Thank you. And I'm not showing any further questions, so I'll now turn the call back over to Jerry Rexroad, CEO, for closing remarks

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Jerold L. Rexroad, Carolina Financial Corporation - President, CEO & Director [47]

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Thank you, operator. I do want to thank everybody for being on the call and very much appreciate the questions. Thought they were really good questions and as always, we're going to work very hard to continue to build shareholder value and really want to thank our team members. I felt like we had a very good quarter in loan and deposit growth. And thank you for all your hard work. Thanks, and have a good day. Bye-bye.

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Operator [48]

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Ladies and gentlemen, this does conclude the program. You may now disconnect.