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Edited Transcript of CARO earnings conference call or presentation 25-Apr-17 6:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Carolina Financial Corp Earnings Call

CHARLESTON Apr 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Carolina Financial Corp earnings conference call or presentation Tuesday, April 25, 2017 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bill Gehman

Carolina Financial Corporation - CFO

* Jerry Rexroad

Carolina Financial Corporation - CEO

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Conference Call Participants

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* Nick Grant

Keefe, Bruyette & Woods - Analyst

* Tyler Stafford

Stephens Inc. - Analyst

* Matthew Forgotson

Sandler O'Neill & Partners - Analyst

* William Wallace

Raymond James & Associates - Analyst

* Blair Brantley

BB&T Capital Markets - Analyst

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Presentation

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Operator [1]

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Welcome to the Carolina Financial Corporation first-quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

It is now my pleasure to hand the conference over to Mr. Bill Gehman, Chief Financial Officer.

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Bill Gehman, Carolina Financial Corporation - CFO [2]

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Thank you, operator, and thank you for participating in the Carolina Financial Corporation earnings call. Please refer to slide 2 regarding forward-looking statements on non-GAAP measures used in this presentation.

I would now like to turn the meeting over to Jerry Rexroad, CEO of Carolina Financial Corporation.

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Jerry Rexroad, Carolina Financial Corporation - CEO [3]

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Thanks, Bill. Thank you for joining our first-quarter 2017 investor call. Due to the acquisition of Greer Bancshares, we had some nonoperational items which I will cover in today's call. Overall, we were really pleased with the first quarter so I'm going to start with the highlights on page 3 of the deck for the first quarter.

In January 2017, the Company closed a secondary public offering in which we sold 1.8 million shares of its common stock and had net proceeds of $47.7 million. In addition, in March, the Company closed its previously announced acquisition of Greer Bancshares. We had announced that acquisition on November 8; really pleased to be able to get it closed on March 18 and actually completed our operational conversion on April 10.

First-quarter net income increased 34.6% to $4.9 million, or $0.35 per diluted share. That compares to $3.6 million, or $0.30 per share diluted share, for the first quarter of 2016. Operating earnings, a non-GAAP measure, in the first quarter increased 56.1% to $5.7 million, or $0.41 per diluted share, from $3.7 million, or $0.31 per diluted share, in the first quarter of 2016. Our tangible book value per share at the end of March 2017 was $14.17 and that compared to $12.59 at December 31, 2016.

We had very solid loan growth in the first quarter. Loans receivable, which excluded the Greer loans that we acquired, grew at an annualized rate of 15.7%, or $46.4 million, since the beginning of the year. Very pleased with our loan growth overall. Still believe that loan growth will be in the low double-digits for the year, but first quarter was an exceptional quarter for what we would generally consider to be a slow quarter.

Our total deposits, which excluded the Greer deposits that we acquired, increased $35.7 million in the first quarter and, of that growth, $26.6 million was in core deposits in the first quarter. Very solid growth in our core deposits in the first quarter. We were really pleased with that.

A quick update on Greer. As I mentioned, the acquisition closed in March and the operational conversion was completed on April 10. As a result of that, the cost savings will be realized slightly faster than what we originally modeled. We do expect by the end of the second quarter to realize the majority of those cost saves. Our merger-related expenses were $1.3 million and those were recognized through the first quarter 2017.

Included in the financial statements and the consolidated balance sheets were $192.4 million of loans that we acquired from Greer. That is net of the related purchase accounting adjustments. In addition, we acquired $313.9 million in deposits.

So I want to talk a little bit about the community banking segment results. That's really the results that exclude the Crescent Mortgage Company.

Our GAAP bank earnings were in the first quarter $4.5 million, or $0.32 a share, and that compares to $3.4 million in the first quarter of 2016, or $0.28 per share. Operating bank segment earnings for the first quarter were $5.3 million, or $0.38 per diluted share. Again that compares to $3.5 million in the first quarter of 2016 or $0.29 per share.

As you can see on the chart on page 6, our bank segment operating return on average assets was 1.21% and that was a very, very solid first quarter. And that compares to the first quarter in the prior year of 98 basis points. So we are really pleased with the continued growth in our return on average assets as a result of the increased scale.

First-quarter margin in 2017 was really strong. I will try to talk about a number of the issues that we had that helped that margin. Of course we have had over the last few months some increases by the Fed, including one in the first quarter of 2017, so that has had some positive impact on both the yield on our securities and the yield on our loans.

That has been very, very positive, while, quite frankly, we have not had to reprice our deposits as quickly and they have repriced slower than what we actually modeled. So, overall, a very nice increase in spread.

A couple other things that happened during the quarter -- or comparing the quarters, I should say, is the average earning assets were 75.8% loans in the first quarter of 2017. And that compares to 73.1% in the first quarter of 2016. We continue to work on continuing to convert our securities portfolio into loans and we were able to do that over the last year and that certainly had an impact on our margin.

Accretion income from the loans that we have acquired was $372,000 in the quarter. It did impact this number by about 10 basis points. Our securities yield was 3.29% on a tax equivalent basis in the first quarter of 2017. That compares to 2.92% in the first quarter of 2016.

We do have some securities that are tied to LIBOR and are floating rate; those certainly helped. And we also have slower prepay speeds on securities that we had acquired at a premium. So both of those issues really helped the securities yield.

Combining with the increased yield on securities and the increased yield on loans is the fact that our cost of funds compared to a year ago was 62 basis points and a year ago it was 66 basis points. Slightly up from the linked-quarter, but overall we were really pleased with the cost of funds.

That's kind of being impacted by two things. I mentioned that we had very solid growth in our core deposits, but also we acquired deposits from Greer and their cost of funds was lower than what Prescott Bank's cost of funds was previously. Both of those issues had a very nice impact on our cost of funds and so overall, like I said, margin 3.93% versus 3.53% a year ago.

Looking forward, I do think this was an exceptionally good quarter. I would expect margin to not be quite this good going forward for the rest of the year, unless we can continue to be able to hold the deposit costs. We aren't seeing a tremendous amount of pressure in our markets right now, but overall I would expect that as we go into the summer to see some increased pressure on the cost of funds, particularly in deposit area.

Our bank segment operating efficiency; a number that we continue to like to look at is our noninterest expense number divided by average assets. I believe this is probably the best number we have reported, 2.26%. That compares to a year ago of 2.34%. So it continues to show that as we grow, we are able to get some efficiency in our nonoperating expense as a percentage of average assets.

Our bank efficiency ratio for the first quarter of 2017 was 57%, very, very solid number for us.

Looking at our balance sheet, we did end the quarter at $2.2 billion in total assets with loans of $1.6 billion -- excuse me, $1.4 billion and deposits of $1.6 billion. Loans, as I mentioned earlier, grew at 15.7% and deposits increased $35.6 million in the first quarter.

Our loan mix on page 10 continues to be what we believe to be lower-risk assets. 33.4% of our loan portfolio is in one- to four-family, which has of course performed extremely well over the years. And again our asset quality just continues to get slightly better. Our NPAs, as a percentage of assets, was 0.34%.

And we are also pleased to be able to report that although recoveries were much lower in the first quarter 2017, and we certainly indicated that that would probably be the case, they still -- we still ended up with having net recoveries again in the first quarter of 2017.

Really pleased with our growth in the number of checking accounts. Traditionally, the first quarter is a rather slow quarter. The increase in the number of checking accounts was 11.7% and that excludes the accounts that we acquired from Greer. We are really pleased with that number, certainly better than what we experienced in the last couple quarters of last year.

And our deposit mix, as you can see, continues to remain very, very strong, with 65% of the deposits being in core deposits. Number of checking accounts, including Greer, getting close to that 50,000 number I've talked about for some time, but we had 46,634 checking accounts at the end of the first quarter 2017.

Let's talk a little bit about Crescent Mortgage. Really pleased with Crescent Mortgage first quarter. They earned $645,000, or $0.05 a share, and that compares to last year $401,000, or $0.03 a share.

Couple things that I think really impacted the quarter. We did expect that volume would be down some in 2017 versus 2016. That did occur; we were down about 4% in the total loans closed. But the thing that surprised us was the fact that margin was so solid in the first quarter.

Some of that is probably impacted by the volatility that we saw in interest rates in the first quarter and when that happens often we are able to pick up some additional margin. I wouldn't really expect that margin to continue for the rest of the year, but really pleased to have it in the first quarter. I will say that expense control by our team was excellent and that did also contribute to the first-quarter success.

As you look forward, couple things that I will kind of make final closing remarks on: our average return on assets was, from an operating perspective, 130 basis points for the first quarter of 2017. That compares to 104 basis points in the first quarter of 2016. Our tangible return on equity was 11.7% in the first quarter. Given the capital raise, we were very pleased with that number.

And the final point on slide number 14 is that our tangible common equity ratio at the holding company -- at Carolina Financial Corporation, not at the bank -- was 10.6%. I think that provides a significant amount of opportunity for us to continue to grow organically, which of course the first quarter I think our team has done an extremely good job.

But it also continues to provide acquisition opportunities as we go forward. We continue to remain focused on looking for opportunities. Don't have anything to announce, but we are continuing to be active, looking for opportunities to continue to leverage the balance sheet.

So thank you for joining the call. At this point in time I will open it up for questions and be happy to take anything you have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Nick Grant, KBW.

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Nick Grant, Keefe, Bruyette & Woods - Analyst [2]

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Would you mind providing a little more color on what, in terms geographies, are driving the nice loan growth and your outlook for the rest of the year?

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Jerry Rexroad, Carolina Financial Corporation - CEO [3]

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Be happy to. We are really seeing loan growth across the platform. There is -- I think, a couple years ago we would've probably said that the competition in Charleston was absolutely excessive from a rate standpoint and really we are not seeing tremendous growth in that part of the market.

That's no longer true. We are seeing good, solid lending growth throughout the platform and so I can't really say it's concentrated in any one market. Of course, we do do business in five of the top 25 Southeast markets -- Charleston, Greenville, Myrtle Beach, Wilmington, and Columbia -- and they are all growing very nicely and providing us a lot of opportunities.

When I look at the pipeline by area, all the pipelines look good. So, Nick, I think we feel really good about the overall growth of the market.

Now, first quarter we did have some loans close at the end of the quarter which really provided a really, really good growth number in the first quarter. I continue to think that we are probably looking at somewhere in the low double-digit growth for the quarter and for the year, I should say. First quarter at 15.7% just was exceptionally good.

Pipelines look good, but it's often hard to determine when loans are going to close. And so sometimes you get kind of lucky and everything goes perfectly and they all close by the end of the quarter. Then other times, quite frankly, you end up having things that delay the closing. This was one of those quarters where you can look at and say first quarter is seasonally slow for us and we just had everything go right.

I continue think we are going to have really good loan growth, but this, for a first quarter, we just couldn't be more pleased.

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Nick Grant, Keefe, Bruyette & Woods - Analyst [4]

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Great, thanks for the color. And then you have your loans as a percentage of average earning assets increasing. Is there kind of a level you are targeting on that side and just optimizing that mix?

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Jerry Rexroad, Carolina Financial Corporation - CEO [5]

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That's a good question. I don't think we've ever actually given that kind of number, but I think at our size of company that we certainly have plenty of room to see our securities portfolio drop into the high teens and still have plenty of liquidity. So that's about as much color as I can give you.

We don't have a target. Part of it has to do with just loan growth. We are pretty careful not to try to just say, hey, we are going to convert all that securities portfolio into loans in the next year or so, because we're trying to be opportunistic and our securities portfolio does provide a very attractive yield compared to the duration we've got. So it's more opportunistic based on the opportunities that are in the loan growth number, but I think we would feel very comfortable with the securities portfolio being in the high teens.

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Nick Grant, Keefe, Bruyette & Woods - Analyst [6]

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All right. And then one last one from me. I think you touched on this earlier, but where are you guys at on the cost savings following the systems conversion with Greer? And are you still pretty confident in achieving the 35% cost savings number?

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Jerry Rexroad, Carolina Financial Corporation - CEO [7]

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We feel very confident. With everything that we've disclosed previously on Greer, we would have given you an update. But, no, we feel good about the increase in earnings projections that we provided as well as the cost saves.

The only difference that we did provide color on this quarter was we expect the cost saves to actually occur quicker than what we had originally modeled, because we were able to get the conversion done in early April. Our team worked very, very hard and our partners worked hard with us and really had a little window of opportunity in their scheduling and so everything just worked perfectly to get that done shortly after the legal conversion.

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Nick Grant, Keefe, Bruyette & Woods - Analyst [8]

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All right, great. Thank you.

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Operator [9]

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Tyler Stafford, Stephens.

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Tyler Stafford, Stephens Inc. - Analyst [10]

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Good afternoon, guys. Congratulations on a nice quarter.

I just want to start maybe on M&A and going back to a couple of your M&A commentary that you made earlier. Just in terms of potentially moving to newer markets, whether it's on -- with an LPO or M&A, could you just give us some color on markets that are of interest to you that you would consider moving to and expanding your footprint?

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Jerry Rexroad, Carolina Financial Corporation - CEO [11]

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Tyler, I think what we have generally said is there's a lot of very attractive markets that surround the five great markets that we have. First of all, I would suggest that if there was opportunities in any of those five markets we would be interested, and as you know, there's not a lot of targets in several of those markets.

However, as you take -- a lot of our senior management team is either in Charleston or Myrtle Beach and we've tried to take a four-mile circle that takes four miles -- I said miles; four hours north of Myrtle Beach and takes a circle and goes four hours south of Charleston. That is kind of the circle that we have been looking at. There is a lot of opportunities within that circle.

That takes us up above Raleigh, kind of covers the Greensboro markets, of course Chapel Hill and Raleigh-Durham and Winston-Salem, and kind of continues to move over to Asheville. And as you keep going around that circle of course on the bottom side you would get down to down below Savannah. Those are the markets we've traditionally tried to look at and that pretty much keeps us in the Carolinas and covers a little bit of Georgia.

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Tyler Stafford, Stephens Inc. - Analyst [12]

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Okay, great. Thanks for that, Jerry. In terms of just new hiring opportunity, there has obviously been some large in-market M&A and we've had a little bit of lag since some larger deals were announced. Just curious if you see that as an opportunity for you now; if you've had any early wins from a new hiring perspective this quarter and expectations for this year?

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Jerry Rexroad, Carolina Financial Corporation - CEO [13]

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We've had a number of opportunities to add very experienced bankers in both our commercial team and our mortgage team, but interestingly enough, at this point in time we really haven't had any from what you are talking about. And so we do see that as continued opportunity going forward. Certainly in that North Carolina market there has been a lot of consolidation and we are certainly looking at some of those opportunities.

But we have added a number of people to the team, but most of those have come from people who are looking to get back to the community banking model that are in bigger banks. And so we are really pleased. I can say that we have added a number of commercial bankers this quarter and we've also added a number of mortgage bankers. It's really been a great quarter for adding some really, really good team members to our team.

But we continue to see the opportunities that you are referring to on the consolidation front probably sometime this summer, if there's going to be anything at all. I think that seems to be where those things are kind of working out as to where people will have more opportunity to move. But at this point in time, nothing specific from the consolidation activity, but honestly, a number of really, really exciting adds to our team. More from people who used to be in community banks and want to get back to the community banking model.

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Tyler Stafford, Stephens Inc. - Analyst [14]

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So the hire that you have made, those type of lenders and additions have come more from the larger super regionals, rather than the similar-sized regional banks; is that fair?

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Jerry Rexroad, Carolina Financial Corporation - CEO [15]

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I think that's probably a better description.

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Tyler Stafford, Stephens Inc. - Analyst [16]

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Great. And then maybe just last one from me, just on the mortgage side of the house. I appreciate the gain on sale outlook commentary that you gave. What about just in terms of absolute production this year relative to 2016? Would you expect that to be similar to down? Just any color you could provide there would be helpful.

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Jerry Rexroad, Carolina Financial Corporation - CEO [17]

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It's a great question and probably one that I'm getting a little less clear on by the day. If you asked us that in the fourth quarter, our answer would have been that we would have expected that purchase activity would've been up some and that refi activity would definitely be down quite a bit. We felt like that because we did more purchases and refis that we would be down, but less than what the Mortgage Bankers Association had projected.

As you go forward and you see that the 10-year is now-- I'm not positive what it is today, but it's probably around 2.3%, 2.32%, something like that -- you begin to question whether we are going to see some more refis this summer. I do think refis tend to kind of happen more in the summer and fall, because people just have more time and, of course, the weather is way better in a number of our markets.

I still think that we are going to be down for the year on production kind of in that 10% range. I do think the margin the first quarter is exceptionally good and I couldn't really project that we would get that all year long, but so far we are feeling pretty good about our mortgage operations on the wholesale side.

The retail team had a very tough first quarter. I think part of it was weather. I think part of it was just a little uncertainty coming out of the election, but in the second quarter our retail team has really seen very, very nice pickup and we've been able to add some people to the team too. So I'm pretty optimistic about probably not seeing that decline on our retail team. I think the retail team could actually be up over last year.

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Tyler Stafford, Stephens Inc. - Analyst [18]

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Okay, very good. Thank you so much, guys.

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Operator [19]

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Matthew Forgotson, Sandler O'Neill.

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Matthew Forgotson, Sandler O'Neill & Partners - Analyst [20]

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Good afternoon, gentlemen. Just looking to dig into net interest margin a little bit more. Jerry, I know you said margin probably not as good from here. Just looking to get a sense of -- to clarify exactly what you're talking about. Do you think core margin drives lower from here or do you think the rate of expansion slows?

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Jerry Rexroad, Carolina Financial Corporation - CEO [21]

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Well, I definitely think the latter, because we have had tremendously strong growth in margin over the last year. If you back out the purchase accounting, which is what I think I'm trying to do in my comment, because that's very hard to predict, but the core margin we would expect that it --. I mean, let's face it, you take 10 basis points off the 3.93%, you're at 3.83%. It's pretty hard for me to believe that we are going to continue to get a lot of growth.

Now it's possible if we do not see the deposit side reprice much over the summer. I tend to think that deposits reprice more slowly, that there tends to become more competition in the summer, and that we probably do see some repricing on the deposit side this summer.

My thought is that we had a great margin number and I tend to think that it probably moderates slightly from here. But at the same time, let's face it, if we get another Fed increase and we don't see the repricing on the deposit side, then I've got to be careful and say, yes, it could go up. Because there's no doubt that the Fed increases that we've gotten so far have definitely been very positive for us. I just tend to be a little bit more cautious in trying to say that we're going to be able to maintain this low 60 cost of funds going through the summer.

Now I will make a comment that is important for us and that is remember that in the summer we get tremendous growth in core deposits. So it can be a little bit harder for us to predict our margin, because we can sometimes get -- we can get $100 million of growth in core deposits over the summer just due to the seasonality of the markets that we serve.

So if there's a great summer as far as tourism activity in the Wilmington, Myrtle Beach, Charleston markets, we could see a lot of growth in core deposits, which could kind of moderate some of that repricing. So I am trying to be careful in giving you guys some knowledge that, hey, we had a great number or margin for the quarter. At the same time, there are some factors which make me say, well, could it happen again? It could, it could; but it was really good.

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Matthew Forgotson, Sandler O'Neill & Partners - Analyst [22]

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Thanks for the color. Just in terms of wholesale mortgage, can you give us a sense of what the purchase refi split was for the quarter?

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Jerry Rexroad, Carolina Financial Corporation - CEO [23]

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You know, I think we were somewhere around 70% on the purchase side. I'll be honest with you; I paid more attention to the lock numbers than I do the closing numbers. But we were running at the beginning of the year almost 75%, 80% purchased, but we are starting to -- there is some refi pick up that we've seen here recently.

So I'm a little bit -- I'm probably not as careful -- I got to be careful with that number. But I think for the quarter a 75% number of purchases at the beginning of the quarter and probably more like 70% purchases at the end of the quarter.

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Matthew Forgotson, Sandler O'Neill & Partners - Analyst [24]

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Last one from me and then I'll hop out. Just in terms of the gain-on-sale margin within the wholesale bank, it also sounds like you are guiding us down off of that 1.80%. Can you give us a sense of where you are running quarter to date?

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Jerry Rexroad, Carolina Financial Corporation - CEO [25]

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No, I can't. Obviously, we do pay attention to it, but it's very much impacted by the mark-to-market on the hedges at the end of the quarter so it would impossible to actually do that at any point in time.

I can tell you this, first-quarter margin has traditionally been a good bit lower and 1.80% for the first quarter is really, really good. Second-quarter 180 is more in line with what you would typically see as the volume begins to pick up, but I think we're going to be a little off that.

During the summer I'll be a little bit more careful with my prognostication thoughts because the volume is the driver of the margin in the summer. If you get more volume, you tend to get more opportunities and get more secondary gains. Usually by the fourth quarter though we are coming back down.

So first quarter at 1.80% was really good. You're right; I would be surprised to see us average 1.80% throughout the rest of the year, but a lot of that depends on how much refi activity. If the 10-year would drop another say 20, 25 basis points, then forget everything I've said because we will start seeing refis again.

We are really close to that cusp where you get that 30-year mortgage where it could go into the retail market at 3.875%, 3.75%; there's still a lot of people that can refi. And we are not terribly far away from that right now. Of course, with the stock market running up the last couple days we've kind of gotten away from that 2.20% on the 10-year.

But if something happens and -- I mean, good night. There's all kinds of things that could happen, right? You've got the French election. You've got things going on in Korea. You've got things going on in the Ukraine, etc. Any of those events that could move that rate down could easily -- we are very, very close to being able to see some refis again.

Where we are assuming that rates kind of climb back up, then I would expect the margin definitely to moderate. But we are close to seeing some refi pick up. If you asked me, what was it four or five days ago, I would've said, boy, refis could start picking up if we drop another 10 basis points.

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Matthew Forgotson, Sandler O'Neill & Partners - Analyst [26]

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Appreciate it. Thank you for all the color.

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Operator [27]

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William Wallace, Raymond James.

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William Wallace, Raymond James & Associates - Analyst [28]

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Good afternoon, gentlemen. Curious about Charleston. You had mentioned that the environment from a pricing perspective has improved enough that now you are driving meaningful loan growth out of that market. I'm curious what has changed. How has the competitive environment moved in your favor?

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Jerry Rexroad, Carolina Financial Corporation - CEO [29]

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There were a number of LPOs in the Charleston market and some of them have gone away. Some of them probably struggled to get the business they were looking for and others, quite frankly, I think were buying in the market and so they've probably gotten tired of doing that. Then, finally, with what's going on in North Carolina and some other markets, we've seen some competitors leave or get consolidated.

There's just not the amount of activity coming from the loan production offices that are at rates that we would've considered competing with. In addition, there has probably been a little bit of pull back in the market by a couple what I would call more super regionals. We're just not seeing them from a competitive standpoint the way we did a couple years ago.

Again, I think there was some giving away of commercial real estate loans in that market and C&I loans, and it just seems that the competition is not so willing to really price what I would call unreasonable rates. Then I think we've got a team that continues to season in that market and that team is doing very, very well.

And so more the relationship banking -- the more banking relationships that they create in a market the more opportunities that they are getting. Some of those opportunities are based a lot more on relationship than they are on rate. So I think all those things together are helping us in Charleston.

Frankly, the latter comment I would suggest to you is true in a number of our markets. We got several of these commercial team members in the last three years and as they've continued to build their relationships and understand the way we would like to do banking, all of them seem to be doing a pretty good job of being able to expand their opportunities. So it's not just Charleston. Charleston is probably -- was just way too competitive for a period of time. That has moderated, but our team is also I think seasoning and being able to grow their books nicely.

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William Wallace, Raymond James & Associates - Analyst [30]

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Okay, thank you for that color. If you look just across all of your markets, the pricing on commercial product, are you seeing that pricing come up now or is it more stabilizing? How would you characterize what you are seeing?

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Jerry Rexroad, Carolina Financial Corporation - CEO [31]

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With the Fed increases, obviously floating rate is definitely seeing the increase. We've seen some increase in the five-year balloon pricing, not probably as much as you've seen in the Fed increase. Well, certainly not as much as you've seen in the Fed increase. But overall, yes, I think the new loans are pricing better than what they were pre-Fed increases.

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William Wallace, Raymond James & Associates - Analyst [32]

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Okay, good to hear. So mid-teens kind of run rate loan growth in the first quarter; you're sticking with low double-digit loan growth forecast for 2017. I'm curious; did March end stronger than April has been from a closing perspective, loan closings?

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Jerry Rexroad, Carolina Financial Corporation - CEO [33]

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Well, loans tend to close at the end of the month, Wally, so it's hard. We've still got a week to go before I can actually tell what April will be, but it's just by habit, as you know, that loans close at the end of the month.

We did have an extremely good March on commercial loan closures. It's hard for me to say where April is and besides that I probably wouldn't give that color anyway, but it was a great first quarter loan growth wise.

Our pipelines look good, but we also got a bigger loan portfolio than we used to have. So I still think that low double-digits is where we are pretty comfortable and we just are happy for the quarters that end up coming in better than that. And certainly the first quarter was a very, very nice surprise.

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William Wallace, Raymond James & Associates - Analyst [34]

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All right, good deal. Switching gears a little bit, you had a slide that -- where you talked about the growth in checking counts up. I think you -- I can't remember if you said 11% or 17%, but what, in your opinion, is driving the growth in checking accounts? Are you offering new products or is it a change in focus among your bankers? Just maybe some color around that.

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Jerry Rexroad, Carolina Financial Corporation - CEO [35]

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No, our growth in the number of checking accounts was 11.7%, excluding the accounts that we acquired from Greer.

If you look back a couple years ago, we were pretty consistently getting 11% to 12% growth in a number of checking accounts. Last year, the first quarter we just -- I don't know whether it was the acquisition that kind of got us a little bit, but we just didn't have as good a first quarter last year. Then summer we were starting to make up and then we got Hurricane Matthew in the fourth quarter.

And so despite the fact that we had very nice number of checking account growth -- I think we were 9.2% last year -- we just didn't get off to a as good a year and we certainly -- Matthew had a big impact on us. And so, overall, the summer was really good, but we just didn't get that double-digit increase in the number of checking accounts.

To be honest with you that was the first year in -- well, five previous years. It was the first year in six years that we hadn't gotten double-digit. It's really nice to see our team get back to that number.

I will tell you our retail team and our commercial and mortgage bankers worked very hard to create relationships and, of course, we are in high-growth markets, so our goal is to continue to try to get this double-digit growth in the number of checking accounts. First quarter was a great start to the year and hopefully we are continuing to see that throughout the year.

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William Wallace, Raymond James & Associates - Analyst [36]

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Very good. All my other questions were answered. I appreciate your time. Thanks, gentlemen.

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Operator [37]

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Blair Brantley, BB&T Capital.

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Blair Brantley, BB&T Capital Markets - Analyst [38]

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Good afternoon, everyone. A couple of questions on loan growth. You mentioned it was broad-based geographically. Can you talk about by loan type and also if there's any more sizable credits that you are booking versus previous quarters?

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Jerry Rexroad, Carolina Financial Corporation - CEO [39]

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I don't know that, quite frankly, we are booking any different size of loans than we have done traditionally. There are times where we book a larger loan and there are times where we book a bunch of smaller loans and they just kind of all come and go I think pretty consistently over a long period of time. So, no, there was nothing extraordinarily large in the first quarter, if that was the question that you were probably alluding to.

As far as the mix, the mix has pretty much stayed consistent. We have been able to show good, solid growth on the commercial side and then, quite frankly, our one- to four- had a very, very good first quarter, which we were -- I got to be honest and say we were really, really pleased with, because usually we don't see as much portfolio growth over the one- to four-family in the first quarter.

So overall mix looked good. Nothing extraordinary and just a really good quarter across the board. Our consumer business continues to be very slow. It is not something we have put a lot of emphasis on, but nothing different from the first quarter of 2017 and the first quarter of 2016, or any other quarter, quite frankly.

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Blair Brantley, BB&T Capital Markets - Analyst [40]

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Okay, great. Then on the expense side, how are you looking at this quarter compared to your view for the year from an efficiency standpoint?

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Jerry Rexroad, Carolina Financial Corporation - CEO [41]

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Well, I was pretty pleased overall, to tell you the truth. We did have some costs coming in to the first quarter from the Greer transaction. Then, of course, you got to remember that when you're comparing this year's first quarter to last year's first quarter, we had the Congaree acquisition in June of 2016.

Overall, I would take you to the slide number 8 that compares our noninterest expenses as a percentage of earning assets and at 2.26% compared to 2.34% last year's first quarter, I was really, really pleased. I couldn't be more happy with the overall expense efficiency in the first quarter.

Like I said, when you compare last year's first quarter to this year's first quarter, there's quite a bit of noise because of the two acquisitions. But when you look at it -- and that's why I like that measure that we show on page 8 there is it really takes all that out of play and says what is your noninterest expenses as a percentage of earning assets. So, overall, I couldn't be more pleased for a first quarter.

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Blair Brantley, BB&T Capital Markets - Analyst [42]

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Okay. So you think more on an operating basis, obviously backing out some of those merger expenses, that those kind of ratios can flow through this year and into 2018 or is there --?

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Jerry Rexroad, Carolina Financial Corporation - CEO [43]

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I actually do. I think, if anything, the additional scale that we get from the Greer transaction as it begins to go into full effect in the third quarter, hopefully we can continue not only to see it flow through. But we do believe that as we continue to gain size and scale that there are some opportunities on the efficiency side and that's we've shown now really for the last three years.

There's no doubt that with our current business model that as we move forward we should be able to gain some efficiency. Now should we add wealth management or some other line of business that has a higher cost per revenue dollar, that could change. But as long as we stay on our current path, which I don't foresee any difference right now, we are going to continue to work hard to gain efficiencies as we get additional size and scale.

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Blair Brantley, BB&T Capital Markets - Analyst [44]

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Okay, great. Thanks for that color. Then just one final question on M&A. What are your side parameters that you guys are focusing on?

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Jerry Rexroad, Carolina Financial Corporation - CEO [45]

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You know, it depends on the opportunity and where the opportunity is at. But I think we would be hard-pressed to see something under $200 million unless it really, really was an accretive transaction that gave us a good market or at least expanded a good market.

On the top side, probably our capital level would allow us to do an acquisition somewhere around $1 billion, assuming that was a well-capitalized company.

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Blair Brantley, BB&T Capital Markets - Analyst [46]

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Okay, great. Thank you so much for the color.

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Operator [47]

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William Wallace, Raymond James.

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William Wallace, Raymond James & Associates - Analyst [48]

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Thanks. Sorry, guys. Just quick housekeeping question. The 29% tax rate, did you have any benefit related to change in stock-option accounting in there. Or is that a new -- is that your core rate?

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Jerry Rexroad, Carolina Financial Corporation - CEO [49]

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I actually expected that question from all five of you, Wally, so I'm glad you actually gave me a chance to answer it. The fact is that our tax rate has been low 30%s range and we did have a little bit of shareholder-based compensation that affected the tax rate in the first quarter.

The second quarter is really where that impact has been in the past. And so if you look at last year and go back to the call that we did a year ago, you might want to refresh because I think I actually said the second quarter would have -- second quarter of 2017 would have some impact. First-quarter impact is much less.

There were a couple other things, though, that did affect the tax rate. One is, as I had mentioned on previous calls, that we've been working on the tax efficiency projects, which, quite frankly, we are beginning to see the results of that. The second thing is that Greer had a little -- had a bigger percentage of their securities portfolio in tax-efficient securities and so that also had some impact on the first quarter. But both of those things had some positive effect.

Third and fourth quarter, not so much in the way of share-based compensation advantage. First quarter a little bit, second quarter quite a bit.

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Bill Gehman, Carolina Financial Corporation - CFO [50]

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Wally, this is Bill. We actually were an early adopter of that literature in 2016. So the way that I heard your question was: Was there any impact as a result of adopting the literature? So the answer to that is, no, not this quarter because we were an early adopter last year.

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William Wallace, Raymond James & Associates - Analyst [51]

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Sorry, okay. Was there any impact, though, related to exercise of options during the quarter in the first quarter? What I am hearing is that there's going to be a larger impact in the second quarter, but that there was some impact in the first quarter.

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Jerry Rexroad, Carolina Financial Corporation - CEO [52]

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It was but it was pretty minor, right, Bill?

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Bill Gehman, Carolina Financial Corporation - CFO [53]

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First quarter has some, second quarter has more, and then there's usually not that much in the third and fourth quarters.

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William Wallace, Raymond James & Associates - Analyst [54]

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So what should we anticipate in, say, third- and fourth-quarter tax rate?

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Jerry Rexroad, Carolina Financial Corporation - CEO [55]

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That's a tough question and I will try to explain why.

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William Wallace, Raymond James & Associates - Analyst [56]

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Exclusive of any option-related or restricted stock-related benefit.

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Jerry Rexroad, Carolina Financial Corporation - CEO [57]

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Well, the reason I say it's a tough question is it depends on our securities mix, right? And so if we choose to increase the percentage that is in munis or if we increase BOLI, for instance, you've got some things that necessarily could change the tax rate just between what happens in the capital markets from a spreads perspective.

But let's assume that all things remain the same. I think our tax rate in the first quarter will be slightly, and I mean very slightly, higher than the third and fourth quarter. There will be some impact in the second quarter and if you go back to last year and look in the second quarter, it's pretty obvious what the impact was last year. And I would expect that impact to be probably about the same or maybe slightly higher in the second quarter of this year.

But the first-quarter tax rate, Bill, was 29% to 30%. I think you are probably going to see us be on the higher size of that range in this third and fourth quarter, assuming we keep the same mix of securities portfolio. And we're going to probably be in the first quarter of the following year probably back in that 29% range.

But having said that, Wally, the thing that I don't want to get us overly focused on is that if we are successful in converting some of that securities book over to loans, we actually get a much bigger pickup in net interest than we get in tax rate. So, overall, the tax rate for the first quarter was not materially impacted by share-based comp.

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William Wallace, Raymond James & Associates - Analyst [58]

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Okay, thank you very much.

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Operator [59]

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Thank you. There are no further questions, so now it is my pleasure to hand the conference back over to Mr. Jerry Rexroad, Chief Executive Officer, for closing comments and remarks. Sir?

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Jerry Rexroad, Carolina Financial Corporation - CEO [60]

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Thank you. I would like to thank all of you for attending the call. Certainly had a number of good questions today and I appreciate those and appreciate an opportunity to be able to follow up.

I would invite all of you to our annual meeting, which is tomorrow, April 26, at 5 o'clock, at the Marian Inn at Grande Dunes. I would love to get the opportunity to meet some of you there, if you get a chance to join us. That address is actually 8121 Amalfi Place, Myrtle Beach, South Carolina. We do alternate our annual meeting between Charleston and Myrtle Beach, and this year it's in Myrtle Beach.

So thank you all for joining. Once again I will say that we were really, really pleased with the first quarter. It did exceed our expectations on a number of areas: loan growth, margin, expense control in the mortgage company was really solid. And so overall we were really pleased and are certainly going to work hard at continuing to maximize the value of our shareholders' investment over both the short and long term. Thank you again. Goodbye.

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Operator [61]

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Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Everybody, have a wonderful day.