EverQuote, Inc. (EVER) Q1 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to EverBank Financial Corp's First Quarter 2015 Earnings Conference Call. My name is Emily and I will be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, EverBank Financial Corp management will conduct a question-and-answer session and conference participants will be given instructions at that time. As a reminder, this conference call is being recorded. [Operator Instructions]. I would now like to turn the conference over to Scott Verlander, Senior Vice President, Corporate Development and Investor Relations for the company. Please go ahead, sir.

Thank you, Operator. Good morning, everyone, and welcome to EverBank Financial Corp's first quarter 2015 earnings call. I'm joined today by Rob Clements, our Chairman and CEO; Blake Wilson, our President and COO; and Steve Fischer, our Executive Vice President and CFO. Before we begin, I would like to remind you that our earnings release and financial tables are available on the Investor Relations section of our website. I would also like to remind you that certain comments made on today's call are forward-looking statements related to the Company and are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are detailed in the Company's filings with the SEC. In addition, some of the Company's remarks this morning may contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in the Company's earnings release and financial tables. Now I’ll turn the call over to Rob.

Thank you, Scott, and good morning everyone. As reported in our earnings release earlier today, our core performance was strong in the first quarter. In addition, we executed two strategic servicing transactions that we believe will positively impact our future performance. First quarter adjusted net income available to common shareholders was $39 million or $0.31 per fully diluted share, compared to $28 million or $0.22 per share a year ago. Adjusted return on average equity was 9.7% for the quarter compared to 7.5% a year ago and we grew tangible common equity per common share 10% year over year to $12.55 at March 31, 2015. We also announced this morning that on April 27, we executed agreements with two counterparties to sell MSR portfolios totaling $12.4 of UPB, representing substantially all of our remaining non-core servicing not included in the 2014 default servicing platform sale and to also terminate our sub servicing agreement with Green Tree. We believe these strategic actions will be accretive to earnings, meaningfully enhance our capital position, continue to improve our operational efficiency and reduce regulatory cost and risk. As a result of the temporary valuation allowance on our core servicing and the impact from the MSR portfolio sales, GAAP net income available to common shareholders was $12 million, or $0.09 per diluted share. The strength and diversification of our origination capabilities were evident in the quarter, with total originations of $3.1 billion, an increase of 2% quarter over quarter and 52% year-over-year. Total loans and leases held for investments, plus loans held for sale, increased 9% or $1.7 billion quarter over quarter and 41% or $5.9 billion year-over-year to $20.4 billion. Total assets grew 8% sequentially and 32% year-over-year to $23.3 billion. Deposits increased 4% sequentially and 21% year-over-year to $16.1 billion driven by a continued inflow of new commercial and consumer deposit relationships in the quarter. Commercial deposits now represent 20% of our total deposits, compared to 13% a year ago and we expect this mix to continue to increase over time. Our capital position was solid in the first quarter with a consolidated common equity tier 1 ratio of10.6% and a bank tier 1 leverage ratio of 8.1%. I'll now turn the call over to Blake to discuss our operating performance in more detail.

Thanks, Rob, and good morning everyone. We continue to be pleased with our ability to source high quality residential and commercial loans. Retained originations in the first quarter were strong at $1.7 billion, which is a 56% increase year-over-year and represents a 3% decline compared to the seasonally strong fourth quarter. In the first quarter, we originated $704 million of total commercial loans and leases to small and midsized businesses, which represents 116% increase year-over-year and a 16% decline compared to the fourth quarter. Commercial and commercial real estate originations were strong at $480 million, driven by our warehouse finance and lender finance businesses, as well as year-over-year growth in commercial real estate. Equipment financial leasing performed well for the seasonally slower first quarter, with originations of $223 million, an increase of 33% year-over-year. The credit profile of our commercial real estate originations is strong with average LTVs on first quarter originations of 61%, in addition to solid diversification by both property type and geography. We are pleased with the growth and success our commercial lending business continue to achieve and remain optimistic about our portfolio growth opportunities in 2015, driven by strength of our commercial pipeline, which totaled $1.3 billion at March 31, a 45% increase compared to the fourth quarter. As we’ve discussed on prior quarters’ calls, commercial deposits have been an area of focus for EverBank and we continue to capitalize on both industry trends and our ability to deepen commercial banking client relationships. We grew commercial deposits by $257 million or 9% compared to the prior quarter to $3.2 billion. This represents an increase of more than $1.4 billion, or 82% from $1.8 billion a year ago when we began the strategic initiative, which we believe clearly demonstrates the strength of our value proposition. We also enjoyed continued strength in our consumer lending business, which strategically focuses on serving the needs of our core consumer clients with prime purchase oriented lending in top metro markets nationwide. During the quarter, prime jumbo originations were $1.3 billion, an increase of 10% compared to the prior quarter and 61% year-over-year. The client profile of our jumbo loan originations has remained consistent, with an average balance of approximately $800,000, and average loan-to-value of approximately 66% and an average FICO score of 766 in the first quarter. Total residential originations were $2.4 billion in the first quarter, an increase of 9% quarter over quarter and a 39% increase year-over-year driven by stronger refinance activity resulting from the lower rate environment. Applications were $1.7 billion in the first quarter, an increase of 24% compared to the fourth quarter and rate locks were up 25% to $1.6 billion. Consumer deposits increased $311 million or 2% compared to the prior quarter and $1.3 billion or 12% year-over-year to $12.9 billion. We continue to be pleased with our ability to generate high quality consumer deposit relationships with a similar profile to our existing client base. Now, I will turn the call over to Steve to cover the financial results for the quarter in more detail.

Thanks, Blake, and good morning. Net interest income was $155 million in the quarter, an increase of $8 million or 5% compared to the fourth quarter, driven by an $862 million or 4% sequential increase in average interest earning assets. Year-over-year net interest income increased $25 million or 19%, driven by $4.8 billion or 31% increase in average interest earning assets. Adjusting for the MSR valuation allowance, this strategic asset growth resulted in net interest income representing over 67% of total revenue in the quarter, compared to 62% a year ago. Net interest margin increased 9 basis points sequentially to 3.09%. The average yield on interest earning assets increased 2 basis points in the quarter to 3.99%, driven by a 3 basis point increase in portfolio residential loan yields, resulting from a 29 basis point increase in our Ginnie Mae pool buyout average yields. The asset rotation strategy of selling longer duration jumbo hybrid arms, to accommodate shorter duration government and short Ginnie Mae pool buyout loans, continues to perform well and is offsetting the headwind from the continued low rate environment. Commercial and commercial real estate loan yields declined 3 basis points in the quarter, while equipment financials declined 4 basis points. Total cost of interest bearing liabilities declined one basis point in the quarter, driven by lower average costs on time deposits and FHLB advances. Credit performance continues to be strong as non-performing assets declined to 40 basis points for the quarter. Our provision was $9 million for the quarter, flat sequentially and exceeded net charge-offs of $7 million or 16 basis points. Non-interest income was $33 million for the first quarter or $76 million when adjusting for the $43 million MSR valuation allowance incurred in the quarter. Approximately $15 to $20 million of the valuation allowance recorded in the first quarter is related to our retained core MSR due to a decline in the base mortgage rate which may be recovered overtime. The remainder represents expected losses resulting from the MSR sale transactions we announced today. Gain on sale of loans increased $8 million or 25% quarter-over-quarter to $43 million driven by higher lending volumes and an increase in margins. As we discussed last quarter, we have flexibility in our ability to manage our balance sheet and the duration of the assets we hold. During the quarter we sold forward approximately $770 million of longer duration jumbo hybrid arms, which is reflected in our elevated loans held for sale balance at the end of the quarter. These sales will settle in the second quarter as small gains. Non-interest expense increased $3 million or 2% to $156 million in the first quarter driven by a $5 million or 6% increase in salaries, commissions and benefits expense driven by the normal seasonal impact of higher benefits and payroll tax expenses. This increase was partially offset by lower occupancy and equipment expense in the quarter. G&A expense was $42 million, flat compared to the fourth quarter, with decreases in legal and professional fees and credit related expense, offset by increases in non-recurring consent order expenses. Our GAAP efficiency ratio was 83% for the first quarter. However, adjusting for the $43 million MSR valuation allowance, and other non-recurring items, our pro forma efficiency ratio was 66%, a 300 basis point improvement from 69% in the fourth quarter. In closing, I’d like to walk everyone through the financial impact of the MSR sale transactions. As we disclosed in the earnings release, we expect to realize a pre-tax loss of $40 million during the first and second quarters of 2015. The components include MSR impairments of approximately $27 million pre-tax, plus transaction costs and other accruals of approximately $13 million pre-tax. The $27 million MSR impairment was incurred in the first quarter as part of the MSR valuation allowance and we expect the remaining $13 million of transaction costs and other accruals to be incurred in the second quarter. Looking prospectively, we expect the pre-tax earnings accretions as a result of the transaction to be $2 million to $5 million in 2015, $8 million to $12 million in 2016 and $29 million to $35 million in 2017, driven by improved operational efficiencies as well as our ability to deploy the tier 1 capital created as a result of the transactions. More specifically, due to the [fading] impact on our MSR threshold deduction over the next three years under Basel III, we expect these sales to improve our tier 1 capital by $10 million to $15 million in 2015, $45 melon to $50 million in 2016 and $90 million to $95 million in 2017. Now I would like to turn it back over to Rob for some closing remarks.

Thanks Blake. Before we open the call for questions, I would like to provide some perspective on our strategic evolution over the last three years as a public company and how the transactions we announced today fit in that plan. Since 2012, we have successfully executed our initiatives design to grow and leverage our scalable platform through investing in our commercial and consumer origination capabilities. We’ve also simplified our operations by exiting less profitable, complex and cycle driven businesses in response to the dynamic regulatory and market environment and our goal to improve efficiency and strategically align our franchise around our core consumer and commercial clients. We believe the non-core portfolio dispositions we announced today represent the culmination of this plan and position EverBank for continued strong financial performance over the long term. Now, I’d like to turn the call over to the operator for questions.

[Operator Instructions]. Our first question is from Michael Rose of Raymond James. Please go ahead.

Hey, good morning guys. I just wanted to dig into to this quarter's margin expansion a little bit. I think in the last call, Steve had kind of guided us to 4 or 5 basis points a quarter of compression. Obviously this quarter was up from the balance sheet management. Can you give us kind of an outlook for what you’d expect from here?

Hey Michael, it’s Steve. I think between three -- we were in 3% at the end of last quarter and obviously the 309 this quarter. We are very pleased with the NIM expansion that you described and the two primary things, one that we talked about on the call, the Ginnie Mae yield expansion that we are experiencing as well as we are benefiting from elevated non-interest bearing deposits as well based on the low rate environments. Really those two things are contributing to why the NIMs look a little higher than what we guided to last quarter. I think we’d be pleased with the remaining stable in the current environment. I think the dynamics that we highlighted this quarter will continue. And so anywhere between kind of 3% of last quarter and 309 this quarter I think would be a reasonable estimate for the next couple of quarters.

Okay, that's very helpful. And then just secondarily, you had mentioned last quarter that the second half of '14 on the expense side was a good kind of run rate. It seems like it was relatively in line with my forecast. Is that still kind of a good run rate to work of off?

Yeah. We feel very good about progress on non-interest expense and we continue to see improvements in our efficiency ratio and I give you confidences that will meet if not do better than what we have forecasted so far.

Right, because as you get into modeling the transaction, the MSR transaction, one of the things that will be a part of that ultimately for example is the sub-servicing expense will come out of the expense number. Arguably we’ll do better than the guidance that we gave you before.

All right, that was my follow up question. Thanks for answering my questions

Our next question is from Jefferson Haralson of KBW. Please go ahead.

Hey, thanks guys. I first want to ask about the accretion you talk about from the sale of the servicing rate and how we should think about that. What's the major assumption to go into the $8 million to $12 million and $29 million to $35 million? Is it higher loan growth, because you guys already have really high loan growth or is it save the capital raise down the road or I guess how you think about where there’s this relative accretion?

Hey Jefferson, it's Blake. The big drivers of the overall accretion really relate to one, expense savings in general from changes in our operational capacity and direct and indirect costs associated with that. There’s obviously lost net revenue opportunities associated with the servicing fees and net of amortization expense. And then finally, it’s really as we talked about the leveraging of the capital generated through the transaction and ultimately those compliance components add up to drive the accretion in earnings over time.

Okay. And what is your current evaluation of your MSR? Where is that relative to your tier 1 capital? Is it over 10% and if, so can you talk about the strategy to have the Servicing business even though it's not kind of Basel III friendly?

Hey Jefferson. Yes, you’re right that that actually you can see it in the table 10D is we are experiencing disallowance related to the MSR and as you know with the Basel III rules that came into effect in the first quarter, the rules changed a little bit around how that’s calculated. We’ve had one for a long time. Under Basel I it was a 90% of fair value test. In other words anything over the 90% of the fair value of the asset was disallowed and now we have the 10% bucket test under the Basel III rules and you can see for example we’ve got the $53.6 million disallowed servicing asset in the current quarter end of Basel III rules. Ultimately clearing this MSR asset is what drives that capital accretion because we’ll have a reduction in that deduct. We are at a 40% phasing under the Basel III rule, so that will get larger over time. And so that’s the big part of the driver as to what’s creating the capital accretion that we’ve described.

How much capital are you going to lose as you get to 100% phasing and what's your pro-forma level of MSR?

When we look at the mix of the balance sheet and the MSR to capital ratio after the transactions, we really get to a modest level of activity above the deduction given the nature of how many loans we are putting on balance sheet versus how much MSR were created in the loan sales. Given capital growth over time, we think we’ve now brought the capital deduct down pretty close to an optimal level just above the MSR deduction.

And the good news with that is we are replacing non-core servicing and making room for more core servicing as well.

Okay, thanks guys.

Our next question is from Jared Shaw of Wells Fargo Securities. Please go ahead.

Good morning. With the sale on the Ginnie Mae servicing, is that going to have an impact on future Ginnie Mae pool buy downs or are these non-core from that sense?

It changes the structure overall. As you know over the last several quarters, we’ve been able to continue to invest in a Ginnie Mae pool buyout with partnering with some of our servicing partners. And so given the nature of that structure, we continue to see opportunities to invest in the Ginnie Mae pool buyouts without taking legal ownership and responsibility for the servicing.

Okay, great. Thanks. And then on the deposit side, when you see the growth in [DDAs] this quarter, was that getting deeper penetration of existing customers of average balances or was that new customers or was that primarily the commercial growth coming through non-interest bearing?

It's really a combination of all three things. We’ve seen as we highlighted strong commercial growth during the period of time and consumer deposit growth as well. We do have some seasonally strong growth in the T&I accounts that are also underpinning some of that increase, but it was really all three of those driving to overall increases in non-interest bearing deposits.

Great. Thank you.

Our next question is from John Pancari of Evercare ISI. Please go ahead.

Hi, it's Steve Moss for John. I'm wondering here in terms of the transfer of resi mortgage loans to held for sale this quarter, if we should think of it as a balance sheet management tool or more of a one off?

I think it really demonstrates what we’ve been describing over the past several quarters, the flexibility we have in our balance sheet and our ability to source assets which allows us to sell those assets at a longer duration in this environment less attractive to hold and to replace that with lower duration government insured Ginnie Mae assets for example. And so it's really part of -- we talked about our growth targets for this year. Asset growth is on pace to comfortably exceed originations from last year, but in terms of what we’ve retained on the balance sheet, it's really a function of market conditions and our ability to really optimize our asset mix and to continue to tilt towards being asset sensitive in this environment. So it's – again, it’s really part of our ongoing balance sheet optimization strategy.

Okay, and then commercial real estate and commercial loans were up about 1% this quarter. Looking for a bit more than that. I was just wondering, what are the dynamic and what are your expectations going forward?

There is seasonality in the business. We had a strong fourth quarter, but we actually feel very, very positive about our outlook for the year. We mentioned we had a record pipeline at the end of the quarter. And if you look on a year over year basis, really all our asset channels our year over year growth is pretty dramatic. We remain very bullish on our prospect for this year and again first quarter was not a surprise, strong year over year growth, but the sequential comparison really reflects the seasonality of the business.

I mean specifically as we mentioned, the pipeline on the commercial side at March 31 was $1.3 billion and that’s a 45% increase compared to the fourth quarter, which is really driving some of that growth that Rob mentioned.

Okay, thanks very much.

[Operator Instructions]. Our next question is from Kevin Barker of Compass Point. Please go ahead.

Good morning. Could you give us your fully phased in pro forma common equity tier 1 equity ratio and tier 1 leverage ratio?

Hey Kevin, it’s Steve. I think we’ve disclosed that a few times. I think we’ve been fairly stable between 10% and 10.25% on a fully phased in basis. That’s relative to the 10.6 that we got in the first quarter.

And staying with tier 1 and tier 1 leverage is relatively stable also?

I think that-- I don’t believe we’ve actually disclosed that separately, but I think the underpinning assumptions are essentially the same.

Okay. And then when we think about, you mentioned you're increasing amount of asset sensitivity going forward. If you were to see let's just say a parallel shift in the yield curve of 100 basis points or 200 basis points, what would be your effective change in net interest income on that much movement in rates?

As you know, in our 10-Qs, we do disclose it on a need basis which gives you a sense of the overall performance of the balance sheet. I think over the last few quarters, we’ve been on a positive and a parallel shift up of 100 basis points of kind of 1% to 3% and I think that’s probably about where we are, continue to be. As Rob mentioned, some of the activities that we’ve done in the current quarter, the loans held for sale, additional growth in warehouse finance have made the balance sheet a little more asset sensitive. That number has been improving little bit over that time. But I think you’re able to see some marginal improvement quarter over quarter.

So basically shortening your duration or increase the asset sensitivity to get a little bit higher than the one at 3%. Is that right?

Yeah. The significant move there that Rob highlighted was continuing to sell longer duration assets and as you know the Ginnie Mae assets are shorter and more assets sensitive. That coupled with continuing to stay balanced on lengthening our liability duration with the FHLB borrowings and forward starting swaps. We continue to maintain that neutral the asset sensitive position overall.

Thanks for taking my question.

Our next question is from Matthew Keating of Barclays. Please go ahead.

Thank you. Steve, I just wanted to make sure I heard your comments correctly about the transfer of the jumbo ARMs would result in modest gains in 2Q. But just generally, as you think about gain on sale of loans and loans held for sale balances are now back up the levels above what we saw in the second quarter of last year. And so do you think gain on sale of loans, that line item moves closer to $50 million going forward? Do you have any expectations there? Thank you.

Hey Matt. We were I think around $42 million, $43 million in the quarter as we indicated and I think we’ve talked about in previous discussion that the jumbo hybrid ARMs margins on a relative basis are lower than you agency margins. And so that was the intent I’m saying they will clear a small gain. So when you’re walking in, your expectation, we’ve talked about previously the loan sold number will spike and I think we’re about $1.3 billion of loans sold in the first quarter. Run rates, we see continued momentum in our lending channels. If you take the 770 and added on top of that, that’s probably a pretty good starting point as to what the loan sold number is, but it’s only going to record a small gain which will be consistent with what you see in the market. It is going to an overall margin. We’re going to look a lot more like we did a few quarters ago I think with the last time we sold a significant chunk of the jumbo. So I think you're going to see the overall margin come in, but the loan sold number spike up for the 770 that we’ve put in loans held for sale.

Got you. Thanks for the clarification.

There are no further questions at this time. I'd like to pass the call back to Rob Clements for any closing remarks.

Well, thanks everyone for joining us today and we look forward to updating you on future calls. Have a great day.

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