Q3 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Carolina Financial Corporation 2019 third quarter earnings call.
This time all participants are in listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you need a press star one on your telephone if your require any further assistance. Please press star zero. Please be advised the today's conference is being recorded I would now like to hand, the conference over to your speaker.
Today Mr. William Gaming Chief Financial Officer. Please go ahead Sir.
Thank you operator, and again welcome to the Carolina Financial Corporation's third quarter 2019 Investor call.
Please refer to slide two regarding forward looking statements a non-GAAP measures and I'd like to turn the call over to Jerry but true Ceos Carolina Financial Corporation.
Thanks, Bill and I do think overview for attending our third quarter earnings release called procure a lot of financial you're turning to page three older Ortho, we got a very good third quarter really pleased with the overall result.
Net income.
The third quarter 2019 increased 9.3%.
60, 46 million or 74 cents per diluted share compared to 15.2 million or 66 cents per diluted share in the third quarter of 2018 on an operating basis earnings increased 20.8% to 18.6 million or 83 cents per diluted share up from 15.4 million.
Were 67 cents per diluted share for the third quarter 2018.
Loan receivable grew 71 million for the quarter.
And on an annualized rate that's 10.7%.
For the year have grown almost 198 million for an annualized rate of 10.5% really pleased with their own group groups and really want to thank or.
Team members for excellent job I'm, particularly when you consider that this year, we've had a nice decrease in or PC islands of about $12 million, we've chosen to get out of a couple lines of business that we have picked up through merger, primarily the AG business and that and the leasing division business that we have picked up.
Both of those areas are down fairly significantly isn't quite frankly in the third quarter, we had a fair amount of repayment of mortgage loans. So overall loan growth was excellent.
With our overall loan growth than I do apologize I was my phone.
Third quarter 2019 that compares to 750 in the third quarter of 2018 deposit increase for the year kind of 25 million for the quarter about 37 million.
Hi, I'm real pleased to say that we've announced the execution of our agreement this quarter.
So far and merge with Carolina Trust Bancshares combined our company will have over 4.7 billion, a total assets and all the regulatory approvals for that transaction were received the September and October of 2019, and the shareholder vote scheduled for December the 18.
We did have some impact in our markets from Hurricane Doria.
Primarily impacted.
Particularly the tourism business along the coast for probably a couple weeks certainly had some impact on our deposits being a little lower early on in the quarter. In addition that did impact our mortgage business quite a bit September , particularly in our banking.
Segment.
Overall.
Really the damage was minimal I don't expect any customer impacts to be material and.
Overall really.
Limited impact this year from storms. Unlike what we had last year book value per common share $28, an eight cents.
Second and at the end of third quarter that compares to $25. An 83 cents a 15 year tangible book value per share was 20 $1.68 cents.
At September 32019, and that compares to $19.36 at the beginning of year.
We've previously announced the stock repurchase plan.
Stock repurchase plan is somewhat limited because we're in a transaction.
With his Caroline Trust, but we did purchase.
Repurchase approximately 47000 shares in the quarter at an average price of $34 in 23 cents.
I'm pleased to announce that our board of directors on October 20, Threerd did increase our dividends and we declared a dividend of 10 cents per common share payable January the third 2020, and that's the shareholders of record on December 13th.
This represents an 11% increasing the dividend and over the last four quarters. The company is increase this quarterly dividend from seven cents a share the 10 cents to share or almost 43% as a result of improving earnings.
Let's talk about our community banking segment results on page five.
Overall really good quarter.
Community banking segment 16.9 million in the third quarter of 19, or 76 cents a share compared to 15.3 million in the third quarter of 18 or 67 cents a share on an operating basis.
Third quarter, 2019, 70.5 million or 78 cents per diluted share compared to 15.4 million in the prior year third quarter or 67 cents a share.
Segment return on average assets was 1.73% products are COVID-19 on an operating basis community banking segment was 1.8% for the third quarter 2019.
Sure. Most of you want to know what happened was margin and that's on page six we give a lot of information here.
Try to give you all the different pieces.
And there are a lot of moving pieces this quarter during the quarter. We did have recognition of interest income of approximately 1.2 million related to the payoff of a previously purchased credit impaired loan.
Does that had an impact on loan yield of almost 18 basis points.
Our accretion income for the quarter was 1.7 million that compares to 1.5 being in the second quarter 2019 also we had early payoff fees related to loan repayments and interest income of 276000 in the third quarter of 19 that compares to 46002nd quarter, two I will point.
And after we make that available for everybody to see what it is simply because.
It really is a part of our normal ongoing business. We do generally require prepayment penalties on term commercial loans. However, there are choppy in the recognition they can kind of move up and down so where do you break it out separately.
When you exclude the accretion income our net interest margin was 377 for the quarter compared to 382 in the second quarter of 2019 cost of funds decreased four basis points.
Overall felt like the margin really held up pretty nicely considering the decreases in frame rate will experience to recently.
Operating efficiency in the bank remains very strong we've had four quarters in a row, where our noninterest expense divided by average assets is less than 2%. It's really been a goal for a long time.
And we had started achieving that late last year, and frankly have continued to be able to achieve that level efficiency throughout this year I'm very proud of our team in the hard work they do to make sure that happened.
Talked about our balance sheet growth and pay Jay I won't spend much time on that I will go to page nine and mentioned that we did have one in PA that wasn't material that occurred this quarter Mpsvs are still has a very favorable.
By 2% of assets the increase in the NPL ratio was primarily due to one fully collateralized lending relationship that had not hit 90 days delinquent, where we chose to go ahead of put it on non accrual and we do believe that it is fully collateralized based on information we have at this time provision for loan loss for the quarter 620000.
And I think you can continue to see that our loan mix continues to be fairly.
Conservative I think 26% of our portfolio is one to four family with a very small emphasis on consumer being less than 4% of our total loans.
I'm going to go forward to talk about Crescent mortgage on page 12.
Cressa Morry showed a really good quarter.
I really pleased with the margin increase you can see that some margin increased 31 basis points from last quarter.
The four basis points from the third quarter of 2018.
Also our origination volume 233 million in the third quarter compared to 189 in the second quarter of 2019 in 190 million into third quarter 2018, that's a 23% increase the mortgage company Crescent mortgage company made 325000 or one cents a share.
That compares to 555000 on a GAAP basis or two cents a share a year ago. However, this year included in net income for the third quarter was a 1.8 million temporary impairment of mortgage servicing rights and so if you exclude that which we believe is a non operating items.
Our actual earnings our wholesale movies segment were 1.7 billion or eight cents a share there was some impact this year I met your from Dorian, but of course last year did have some fairly significant as back from Hurricane Florent I do want to look down at the right.
Side of page 12 at the bottom there we've added some information that I think very valuable.
Our servicing portfolio began the year at about $4 billion, we haven't added a whole lot to it this year little less than 100 million.
I see that repayments for the year 413 million, that's 10% now when I say repayments that includes amortization and early payoff. So a pretty benign number when you really look at interest rates of what they've done if you look to the right of that you can see that we've actually amortized through normal.
Amortization, 12% of the asset but in addition, do the fair value requirements under generally accepted accounting principles that are based upon really market metrics you can see that we've written down the acid, an additional 10% prepare value adjustment. So we've actually decreased the asset 22%.
Whereas the servicing portfolios only decreased 10% and I will say it will take time for us to figure out what happens as we go forward.
But I am generally very pleased that our servicing portfolio has repaid barely slowly it's certainly paying slow as appear.
Obviously, the third party valuations are based on market metrics and the expectation of future repayment I will mention that at the end of the third quarter is the time that does servicing portfolios valued at that date. The 10 year Treasury was 1.68% today, it's about 1.77%.
So as we look forward I can't really make projections, but what I can't say is that if rates continue to be moderate as far as compared to that 1.68 on the 10 year, we would expect that there's a potential for possible recovery.
Some of that temporary impairment and we would also expected it would be possible as time goes on that was slower.
As Asia. So overall, although we did have the impairment I must say that still feel very good about the asset that we purchased.
I believe that strategically it represents an opportunity in the mortgage company continues to be profitable for us as we move forward.
Looking at page 13.
A couple key shareholder metrics.
For the quarter.
Return on our average asset 1.71% operating return on a consolidated basis, 1.91%.
I mentioned earlier tangible book value per share, but if you look from a year ago, we were 18.69.
Those are 69 cents a year ago were $21.68 at the end of this quarter almost a $3 improvement.
60%.
When comparing your go to now on a operating earnings basis and this is shown on the slide on the bottom of page 13, a year ago. We made 67 cents on an operating basis in the third quarter. This year, 83% 83 cents on the third quarter 2019.
A 24% increase in operating earnings so it really pleased with the third quarter Im really pleased with their overall result quick summary of the quarter really good organic loan growth almost certainly $1 million.
Margin.
We mentioned earlier I felt very good about really good mortgage operations, both really in the bank and in the mortgage company overall, good expense control and again I would say both in the bank and in the mortgage company very pleased to say that we received a regulatory approvals to complete the merger with Carolina Trust tangible book.
Value per share increasing.
60% from a year ago and of course, I mentioned that our operating return on tangible assets was 1.9% was a quarter ending September 32019.
So I wouldn't really thank our team members spin.
Really good core obviously challenged by Hurricane Dorian for a couple of weeks there but.
I feel like the team has really done a great job.
Really want to say, thank you to our people Crescent mortgage had been busy think they've done a great job delivering great service as well as being able to really make it impact on our quarter. So with that I'll go ahead and opened up for questions.
As a reminder to ask a question you want me to press Star one on your telephone to withdraw your question press the pound.
Please standby when we compile acuity roster.
And our first question comes from Kevin Fitzsimmons with D.A. Davidson. Please proceed with your question.
Hey, good morning, guys.
Yeah.
Just a couple of questions first on the margin if you.
Excluding all the accretion in the recoveries so just looking at the core.
How would you think about it.
Reacting to.
Just the current environment, we have as well as.
The rate cuts in fourth quarter and first quarter. Thanks.
Kevin It's a really hard question for us to answer, particularly given our seasonality in our deposit portfolio.
So you know we.
And I think that seasonality actually happened quicker.
This year I think we had a really good.
Summer.
Particularly up and down the coast and so I think people had to pay quite a bit and income taxes September 15th and then of course that came right off of.
Really not having a good first two weeks in September which September is actually become a very good.
Part of the season, along the coast so.
Having said that.
Deposits are always hard for us to project as we go into the fourth quarter.
And and particularly the non interest bearing deposits the shrink a little bit.
But we also have quite a bit of.
Cds that are repricing in the fourth quarter, an unusually large amount in the fourth quarter.
And it really just depends on when when we get the next rate cut you know those rate cuts are immediate as far as impact the yield on loans and of course, the impact on deposits tends to be a little slower than reacting. So I would expect some some further help if let's say we don't get until December .
Yeah.
You know I think we could do fairly well with margin. The other thing I'll mention Kevin and I mentioned this in my call is you know when you have an extremely good loan growth much like we did.
In September and really Augusts August and September really strong loan growth modes for us and those loan rates that we're putting on now although I think their market for sure and we're not giving away our loans like I do see some of our competitors doing the marketplace, but frankly, there rates that are lower than our average rate and so they really do.
Pull down.
They pulled down our yield on loans, a little bit I'm guessing a little bit when I say this but.
I think it's a pretty good guess and that is I think the probably hit us two to three basis points.
In this quarter on low rate. So overall, that's probably going to continue if we continue to have extremely good loan growth, but if loan growth moderates to be more like what we thought it did have a lesser impact. So I kind of look at net interest income with felt really good about the quarter's a whole because I think does once you go look about is grow.
In revenue, but yes, it breaks drop I mean, we've made it very clear that we're going to lose a little bit a margin.
On a year over year basis, but so far it seems to be pretty controlled.
Okay great.
Very helpful can you remind us.
As far as you know it was very strong quarter from mortgage but now as we go into fourth quarter is there.
On one hand is their typical fourth quarter seasonality, but is there were also some kind of pent up.
Strength that not strength, but the effect of the hurricanes it seemed like you've got pushed.
A little later so is there any activity.
Fourth quarter that might not have.
Normally.
So I will say I'll answer the Hurricane question first then I'll try to answer the second part it's a good question.
Problem was hurricanes is the key people from come into the coast and those people are typically come in Dubai.
And it's amazing how much activity there is in our coastal markets people looking for.
To do so.
Yes, you know it may push some of those people back in the coming in the fourth quarter and you know I just can't predict what I do know is that really the first two weeks of September were really really negatively impacted by.
Hurricane Dorian and and in all honesty of that is that is typically a good period for our mortgage team well purchases. So.
You know, we're just have to wait and see what the fourth quarter looks like I will say that I'm pretty pleased with fourth quarter volume so far.
And.
On the mortgage side.
Touch about our wholesale mortgage company that is that has been very sensitive to interest rate. So.
When we see the 10 year dropdown like 160, our volumes increase significantly.
When they go when rates go up towards they want to 81 91, the 10 year.
Things slow down and then they kind of level off so there is some real sensitivity to rates there so far again in the fourth quarter that good but.
I can't tell you how much of that.
It.
Is related to.
People deserve finally, just going ahead, and refinancing or or purchasing versus others. Thanks. Overall, you know you look at the fourth quarter.
Last year in our wholesale mortgage company.
We typically do drop say, 15% in the fourth quarter and probably another.
15% in the first quarter, so definitely the second.
The the second third quarter are definitely are better quarters.
But.
But as long as rates stay in this up 2% on the 10 year.
I feel pretty confident that mortgage will continue to be a good driver for us if the fed decreases in the future and long term rates go down then obviously mortgage gets benefited significantly by that so hopefully I guess hopeful I kind of covered that not long.
Explanation there.
No that was great Jerry thanks very much.
Thank you and our next question comes from William Wallace with Raymond James. Please proceed with your question.
Thanks.
Good morning, guys.
Dave.
I wanted to follow up on Kevin margin question, if I could.
Sure you you said a lot. So so maybe if I could just.
Okay, Yeah very direct question if the fed does not come next week.
Am I hearing you correctly, where you think you could you could hold net interest margin in the fourth quarter.
It totally depends on the seasonality of our deposit mix and while we always try to dance around that because.
It just is very very unpredictable and.
So.
No the fed not decreasing next week would be very good I will mention.
And I think I've said this on previous calls we ought we have opened an office in Charlotte, we're being very aggressive on acquiring deposits there.
We also have had some closures of competitors in a number of our markets and we're being very aggressive in our.
Attempted acquisition of deposits in those markets and there's about five markets. If that's the case.
That could have some empaque. It just depends on how successful we are so I always struggled to try to give guidance on where interest rates are going.
But overall Wally no decrease by the fed I wouldn't be surprised just because of this fourth quarter, we're still going to have a little compression, but quite frankly will get most of that back probably in the latter part of the first quarter. It starts in March and then by time April comps, we see pretty large increases.
Isn't deposit starting to come back is so when I look at it more over a year period of time. This what is what we try to do so far we're pretty pleased with what margins done.
Considering seasonality.
Okay. All right. Thank you and then have you started to take down the rates you're paying on deposits yet.
Yes.
Yes, we have.
Okay, and if we do get another cut next week, what would we expect that you would be.
The aggressive on on.
Hitting those costs again.
Yes, we would now we can have like I said, three or four markets that we probably remain aggressive them, but were even bring our rates down in those markets, but yeah, we're definitely bring in our rate stat.
Okay. So so it's fair to assume that.
That.
The the deposit cost likely peak in the third quarter understanding that a shift in the mix could could change that.
Yeah.
I would think so I mean, we were down four basis points in the third quarter as I, even though there's no doubt there'll be some deposit mix shift in the fourth quarter I definitely think your hypothesis there's correct.
Okay. Thank you.
And then I was wondering if you could get a little bit more specific color on the one credit that you said drove the EPA increase can you tell us on the balance of of the law the nature of the alone.
And.
And what drove the deterioration.
Okay.
No I can't give you that kind of the detail it was.
You know it was approximately five and a half million in size, it's one relationship.
And it's a relationship does collateralized by real estate, we feel based upon the information that we have is fully collateralized.
You know as to why it happened in that kind of stuff that I can't really goes there but.
It's a customer that.
You know has been with us for awhile and quite frankly.
Just experienced some difficulties, but it is a CRM Sheila.
Okay can you say what industry it was that.
I did not.
Okay and you won't.
I did that.
Yes.
Okay.
Alright fair enough.
The.
As far as the loan pipeline goes I'm curious if you guys are changing.
Any kind of underwriting metrics just given that were late in the cycle. We're hearing some commentary from other bank management teams that they're seeing what would be consistent with late cycle behavior. I'm. Just curious if you guys are seeing.
Any questionable behavior and if you're changing some of your decision matrices as a result.
So Wally it's a really good question and it's frustrating to me because I tend to what we see in the marketplace of what you hear some of these banks say don't seem to be consistent because we're definitely seeing much more aggressive terms and is one of the things is made it much harder for me to for Jack what our loan growth is going.
To be because we're losing more loans that are in our pipeline that we traditionally have have lost.
As for two reasons one.
Quite a bit more aggressive underwriting the we're willing to go.
Two.
Actually add one borrowers who thinks they can get away was more aggressive underwriting who consequently are asking for things that you have to say no and and sometimes you lose the deal sometimes you keep it but it delays at closing by good while.
And then three rates that we just won't play out and that May be you know something we just have to watch over time, but we're seeing is a really aggressive long term C or rig rates that when you compare him too.
When you compared to the swap curve are under 200 basis points. So.
Very very aggressive pricing in our opinion for properties I, just don't deserve it so having said that.
One of the things is making it hard on on Bill and I was trying to project future growth numbers, because we used to feel like either we if it was in the pipeline. We had a proof that we had a pretty doggone good chance of getting the close today, that's just not as higher percentage.
On our side, we have tightened.
In a in probably four or five different areas and so.
We are requiring more equity on certain kinds of loans and.
And and we are in some cases, requiring by calling on startup projects requiring more upfront money.
From a LT loved the cost standpoint, so yes, we have tightened a little bit I wouldn't say its overly material, but what we're seeing is that incidents in some cases on on credit metrics of loans not only rates that we're seeing some pretty aggressively.
Advance rates on construction that we that we probably tightened the hair and others seem to have loosen the hair.
That's just an outside observation I can't say I'm right or wrong. Okay fair enough. What are you you seem to have devastation pretty strong loan growth. This year. Despite that fact is that a function of.
Hi errors or.
What do you.
What do you think is.
Is driving.
Quite a few things one hires we have added a number of people and I think a number of good people when they've been pretty successful.
Too I would suggest to you that we have less competition in our sized banks. If you go back two or three years. There was a number of banks that we're you know three that $10 billion that we're competing in our markets.
And then honestly there not there and I think a lot of those customers have come to us because.
Either we have the you know we might have the person they used to deal with or.
They're looking for community bank, whose responsive and they can know the senior people.
In addition to just the loan officer and I think that's probably been our if I had to say what's the biggest thing. This impact is it would be that is in the third thing is is weren't fabulous markets I.
I think as you know we're in eight of the very best markets in the southeast five of the fastest a top 25 markets in the United States as far as growth.
And just as a tremendous help to be to be in those markets and those of players in those markets. We are seeing some competition from outside forces in a couple of those markets.
And so you know how long do we get the benefit I don't know, but I do think that a lot of people want to do business was a community bank and and the beautiful thing is you know we are the community bank of size.
In a lot of these markets that I think people want to do business with.
You know certain markets are really lost a number of competitors. So.
I think we're into right place we're in right markets I think we've done a really good job of picking up people.
To help us grow.
Needless to say from from a credit and from a rate standpoint, it remains very competitive.
Thank you very much for all that color Jerry I appreciate it.
That's why.
Thank you enter next question comes from Stewart lots with KBW. Please proceed with your question.
Hey, guys good morning.
Hi.
Jerry following up on your commentary there on.
Competition, you're seeing on why on.
On funded deals you're losing or you mean.
Hello.
Winning.
Some of these credits now is at larger regional competitors or is it.
Are they end up going to smaller.
Community banks in your markets just curious too.
Who you're running up against the most right now.
I would say their banks that are larger than us who are not super regionals.
But that's about all give yet.
Okay.
Nothing really from Suntrust BBT getting super defensive.
From a merger.
Yes.
Yep.
I think I've always been great competitors and.
But I haven't noticed anything increasingly from them, if that's what you're asking but they've always been great competitors are good banks.
Got it.
Appreciate the color there and then in terms of I guess going back to the margin per second.
Yeah.
Total interest bearing deposit cost shake up this quarter.
I think last quarter, you're running at 125 and hurdle deposit costs were up two basis points on quarter I'm just curious.
The increase for interest bearing kind of inline with that two basis point increase.
And I have to give us a second here.
Yes.
Yes.
Yes, you with the course, yes.
Yes, I am I to get back with you on that when I'm not quite sure a follow on that.
The overall, if you if you're comparing year over year.
I'm doing this from memory, our core margin actually dropped from third quarter of last year about three basis points the cost of funds was down.
About four basis points, obviously some of that does have to do was mix.
And.
Part of that does have to do was you will have a big broker portfolio, but it does that does fluctuate up and down one or 2% of the of the told the total liabilities that we have but.
And but overall like I said cost of funds for the for the quarter were down four basis points.
And I.
Yes, they can further into that.
Yes, we got the cut in July we got the kind of September how quickly where are you able to lower yeah.
Your various prices was was there a bit of a lag and then what the September cod, we really see much benefit this quarter and the third quarter, which we see more benefit.
Yes going up before.
Well, you're definitely right there is a lag.
I I guess is probably.
A week and a half.
We typically don't drop or money market rates until it actually happens and then do we get together and me, even though we kind of follow pretty systematic process. We from an internal controls standpoint, we always me. We go through it and then we have to communicate it and put it out system wide. So there's a lag.
So the third quarter fed increase would not have given much impact they would have given an immediate impact on prime and LIBOR. Those those things of course happened pretty darn fast, but when the on the liability side, there's a slower process and then on the Cds, it's even slower than that because obviously it takes about that same 10 days.
Change the rates, but then then in all honesty. It you know there's our average.
CDAV period of time between.
Repricing is you know drug out over five or six months so.
Definitely definitely a lag on on the deposit side of the liabilities.
The.
Federal home loan bank advances, which we have so that's more immediate but that probably represents.
12% of our total liabilities.
Okay.
There are new Cds going on and if we do get cut next week.
You know how how large is that balance that you said you have an unusually large amount of Cds maturing in the fourth quarter.
No I don't think we've ever disclose that and honestly.
We do put we do put.
Repricing in the 10-Q, and that's where it will be.
But as far as particular month to month, we've never disclose that and I really don't want to give them the habit of trying to do that.
I understand the competitive dynamics.
All right during the last one from me.
As it relates to the acquisition of the Carolina Trust.
Okay and Cecil.
Just any preliminary gas on the impact from Cecil day, one and that in terms of you know what this deal closing at year end or early in the early on one Q.
What the PCD marker.
Provision any guidance around there that you're willing to go at this point.
No we're not we're not there yet.
I will say that we do at this point in time and tend to close the Carolina Trust transaction on December 31st.
But as far as specifics you know obviously, there's a lot that will happen between now and December 30, Onest in that portfolio. So obviously you redo it right on the day that you acquire the portfolio.
Interest rates will have some impact on.
You know part of the.
Relation metrics that go in for you know liquidity mark in that kind of stuff. So.
The answer is no. We I think were very good shape, but we're going to you know we would intend to disclose that.
Really.
In Q4 is that right Yep yep, Okay. So yes, bill for Bills got me pretty good Muslim.
Yes.
Does that can you comment on what the 10-K or could we expect some type of either press release.
Deal close I mean, just in terms of timing.
Well I don't think it would be a deal close to be honest with you because in all honesty too, but honestly Stewart. There's there's a lot of work that has to be done because either you actually have you're supposed to re look at all the work you've done your purchase accounting work and update and of course adjust for anything that you see that happens in.
Her being six month period, so no. It would it would be included in that take care.
Got it.
Well, thanks for taking my questions guys and congrats on nice quarter.
Our pleasure thanks.
Thank you.
And I'm not showing any further questions at this time I would now like to turn it back to Jerry Rexford, Chief Executive Officer for any further remarks.
Well. Thank you so much for joining the call today and again. Thank you team members for a great job.
And look good look forward to a good fourth quarter.
Thank you goodbye.
Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.