EverQuote, Inc. (EVER) Q3 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to EverBank Financial Corp's Third 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’d 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 third 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 Senior Executive Vice President and CFO. Before we begin, I’d like to remind you that our earnings release and financial tables are available on the Investor Relations section of our Web site. I’d also like to remind you that certain comments made on today's call are forward-looking statements related to the Company and the Company’s financial results 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 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’d like to turn the call over to Rob.

Thank you, Scott, and good morning everyone. Despite the fact that our third quarter financial results were negatively impacted by challenging market environment and some unusual items, our business fundamentals remain solid as we continue to execute our strategy of generating strong consumer and commercial loan and deposit growth. Third quarter adjusted net income available to common shareholders were $29 million or $0.23 per diluted share compared to $44 million or $0.35 per diluted share in the prior quarter and $41 million or $0.33 per diluted share a year-ago. Adjusted return on average equity was 6.9% for the quarter and was 9.1% year-to-date. Our capital position remains solid in the quarter, with a consolidated common Tier 1 ratio of 10.2% and a bank Tier 1 leverage ratio of 8.2%. We were pleased with our overall level of originations in the quarter of total loans and leases held for investment increased 5% sequentially and 26% year-over-year to $20.9 billion. This continued balance sheet growth was driven by strong retained origination volumes, which totaled $1.9 billion in the quarter, an increase of 14% year-over-year. Total assets grew 23% year-over-year to $25.2 billion and deposits increased 21% year-over-year to $17.6 billion, driven by continued inflows of new commercial and consumer deposits in the quarter. Commercial deposits now represent 23% of our total deposits compared to 16% a year-ago. We remain focused on driving greater efficiency across the organization, which resulted in a continued reduction in non-interest expense. In fact, our non-interest expense of $152 million was the lowest reported level of any quarter since becoming a public company in the second quarter of 2012. It’s also important to highlight that our third quarter NIE still includes expenses associated with our non-core servicing assets. However, during the quarter, we received approval from Fannie Mae to sell $3.4 billion of unpaid principal balance of non-core MSR to Nationstar and we expect to benefit from additional expense savings after the transfer occurs on November 1. A hallmark of our strategy in business model for many years has been our flexibility due to sell or retain assets in order to capitalize on market conditions and maximize the return profile of our balance sheet. This quarter’s performance was influenced by the continued low interest rate environment and competitive market conditions, which impacted the timing, mix, and execution of loan sale transactions, that resulted in lower than expected non-interest income. In addition, we believe our disciplined risk management and credit culture is a competitive strength that has enabled us to generate strong credit performance throughout many different credit cycles. During the quarter, we did however experience an increase in provision expense associated with a single current paying relationship that we moved to non-accrual status. Despite the ongoing challenges in the market environment, we expect fourth quarter earnings to rebound significantly driven by growth in net interest income, reduction in provision expense, and improvement in non-interest income. I’ll now turn the call over to Blake to discuss our business performance in more detail.

Thanks, Rob and good morning everyone. As Rob mentioned, we enjoyed strong asset growth in the quarter, driven by our ability to source high quality residential and commercial loans. Retained originations remained strong at $1.9 billion in the quarter, which is a 5% increase compared to the second quarter. Year-to-date, retained originations were $5.4 billion, an increase of 25% year-over-year. In the third quarter, we originated $994 million of total commercial loans and leases to small and mid-size businesses, which represents a 31% increase compared to the second quarter and a 32% increase year-over-year. Total commercial and commercial real estate originations were $649 million in the third quarter, which represents a 39% increase compared to the prior quarter and an 80% increase from the prior year. Commercial real estate originations were $379 million in the quarter, an increase of 47% compared to the prior quarter and 73% year-over-year. In addition, we added new client originations within our warehouse finance, lender finance, and business credit groups totaling $270 million in the quarter, a 30% increase compared to the prior quarter and a 90% increase year-over-year. Equipment finance and leasing also performed well in the third quarter with originations of $345 million, an increase of 18% compared to the prior quarter. We continue to be pleased with our commercial loan pipelines, which were approximately $1.4 billion, up 54% year-over-year. While the continued low interest rate environment has resulted in compression in our new commercial loan yields, we remain focused on winning opportunities that meet our rigorous credit and risk-adjusted return requirements. This is evidenced by a weighted average LTV of 59% on commercial real estate origination since 2010. In addition, our portfolio remains well diversified by both property type and geography. Commercial deposit growth was a highlight in the quarter with total commercial deposits of $4 billion at quarter end, an increase of $648 million or 19% compared to the prior quarter and an increase of $1.7 billion or 70% year-over-year. We remain focused on both deepening existing commercial client relationships and cultivating new ones and expect our mix of commercial deposits to continue to increase over time. We also saw attractive consumer deposit growth in the quarter, as we began to benefit from renewed marketing efforts. Consumer balances increased $435 million or 3% compared to the prior quarter and $1.4 billion or 12% year-over-year to $13.5 billion. Our consumer lending business generated solid year-over-year performance with total mortgage originations of $2.3 billion in the quarter, which was flat year-over-year. Jumbo originations grew 3% year-over-year to $1.2 billion, while agency volume declined 13% to $961 million. Purchase activity increased to 65% of originations in the quarter compared to 58% last quarter. The client profile of our jumbo loan originations has remained consistent over time with an average balance of approximately $811,000 and average LTV of approximately 69% and an average FICO score of 763 in the third quarter. Our continued success in building our loan origination platforms has us well positioned to benefit from both enhanced spread based earnings through balance sheet and strong fee income from loan sell opportunities. In the future, we expect to generate enhanced fee income by selling additional asset classes, such as multi family and other commercial loans. This will also allow us to optimize risk adjusted returns, while managing balance sheet concentrations and capital levels. Now I’ll 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 $169 million, which was flat quarter-over-quarter. We did enjoy a $1.3 billion or 6% increase in average interest earning assets. However, the asset growth was offset by a decline in our net interest margin for the quarter to 2.90%. This 21 basis point decrease was driven by a 14 basis point decline in our interest earning asset yield and a 4 basis point increase in liability cost. We expect growth in fourth quarter net interest income to be driven by average interest earning asset growth similar to the third quarter with a relatively stable NIM. Yield on our residential mortgages declined 16 basis points compared to the prior quarter, driven by the execution of our balance sheet rotation strategy by closing on the sale of longer duration jumbo loan at the end of the second quarter and investing in shorter duration pool buyouts. The average balance of our pool buyout portfolio grew 8% sequentially, as we continue to have success growing this portfolio through both new and existing relationships. As a reminder, these assets carry a full government guarantee and offering attractive risk adjusted return in the current low interest rate environment, given their attractive yield and an average duration of less than two years. In the commercial banking segment yields declined 16 basis points sequentially. As we continue to replace the runoff of higher yielding CRE loans from our BPL portfolio acquisition in 2012, with new loans at current market rates. In addition, we’re incrementally adding more floating rate commercial loans to the balance sheet as our lender finance, warehouse finance, and asset-based lending businesses continue to grow. While average interest-bearing deposit cost remain flat on a sequential basis, the average cost of total interest-bearing liabilities increased 4 basis points in the quarter to 103 basis points. This increase was driven primarily by the full quarter impact of our sub-debt issuance in late June. Our charge-off activity remained benign in the quarter with net charge-offs of 11 basis points. As Rob mentioned, we did however experience an increase in non-performing commercial loans in the quarter that was driven by a single isolated downgrade of a current paying commercial real estate relationship. To give some perspective, this is a $45 million single-tenant exposure, secured by three office buildings in multiple locations with a lease expiration in March of 2017. Based on the tenants plan not to renew their lease, we move the loan to non-accrual and incurred a specific provision of $5 million in the quarter. Outside of this relationship the credit performance of our portfolio remains strong. Non-interest income was $41 million for the quarter or $46 million when adjusting for the MSR valuation allowance we incurred in the quarter. Excluding the valuation allowance recovery in the second quarter, non-interest income declined $22 million or 33% quarter-over-quarter. This decline was driven by the $23 million or 56% reduction in gain on sale revenue quarter-over-quarter to $18 million. As Rob mentioned, the decline was impacted by a reduction in loan sales, lower agency originations and a smaller pipeline of agency interest rate lock commitments. We expect non-interest income to normalize to within a range of $48 million to $52 million in the fourth quarter. Going forward, gain on sale income will be influenced by the timing of loan sales, our expectation for more seasonal residential lending cycle and the new commercial loan sale opportunities Blake mentioned. Non-interest expense declined $26 million or 15% to a $152 million in the third quarter. Salaries, commissions and benefits expense decreased by $6 million or 7% driven by lower commissions resulting from lower residential lending volumes and one-time employee separation costs incurred in the second quarter. G&A decreased $20 million, or 33% compared to the prior quarter, primarily driven by lower transaction and credit related cost that incurred during the second quarter in conjunction with our non-core servicing sales. Our efficiency ratio increased to 71% in the third quarter. We remain focused on driving greater efficiency across the organization and believe our efficiency ratio should improve in the fourth quarter and in 2016, driven by both higher revenue and lower levels of NIE. As we disclosed in our earnings release this morning, we currently expect 2016 non-interest expense of approximately $600 million, driven by the benefit from our non-core servicing sales and continued organizational focus on expense reduction. Now I’d like to turn it back over to Rob for some closing remarks.

Thanks, Steve. Based on the current environment of prolonged loan compressed interest rates, we would expect to deliver annual ROE over the intermediate term at the lower end of our target range of 10% to 13%. On top end we can achieve this performance given our strong origination capabilities, our flexibility to retain or sell assets and the opportunity for additional expense reductions across the organization. With that, I’d now like to turn the call over to the operator for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Michael Rose of Raymond James. Please go ahead.

Hey, good morning guys. How are you?

Good morning, Michael.

Steve, maybe we could start with the margin. I think you said you expect relative stability in the fourth quarter. Can you talk about what the drivers are? It seems like asset yields are still under pressure. I know there is a mix shift this year, but if you can walk through the drivers, and then maybe some initial expectations for what you would expect going into ’16?

Sure. Yes. Hey good morning, Michael. If you reflect back to the third quarter of 2014, we arrived at about a 3% NIM. As you know those kind of quarters after that, we saw stability and some -- actually some relative increases in the NIM. And really as we’ve talked about as part of the asset rotation we’ve been investing in the Ginnie Mae pool buyouts, which is the short duration asset that I mentioned in my remarks and we’ve talked about previously, that generates a very nice yield, and that’s really been supporting to NIM. So, as some of the lower rate environment that we’ve got and as you said some of the other asset yields that are continuing to move down, really we’ve been investing in the pool buyouts, it’s become a bigger part of the mix in our balance sheet and supporting the NIM over the last year or 18 months. And so, right now based on the opportunities that we highlighted both in the quarter, and moving forward, we think that continues to play out. So I think the premise of it is, you’re right, other asset classes will continue to come down. I do think the residential yield won't come in as much on a quarter-over-quarter basis, but then we continue to see significant opportunities in the Ginnie Mae pool buyout space just to continue to offer support to the NIM.

Okay, that's helpful. And then maybe switching to expenses on the $600 million guide for next year; is that more a function of lower mortgage production or is it further expense reduction efforts? If you can kind of walk us through kind of what the guidance implies.

Sure. So if you just start with the $152 million that we had in the quarter and annualize that, obviously that’s about $608 million. Rob, mentioned in his remarks that we haven’t cleared the expenses related to the non-core servicing sales, so we did get the Fannie Mae approval in the quarter and so that’s probably another $5 million to $6 million of expenses that can come out of the run rate to that $608 million and then -- so that gets you close to the $600 million. You are going to see some little bit seasonally higher NIE in the summer months related to increases in mortgage production but we do think that there’s other organizational opportunities out there that more than offset that, so that’s how we’re arriving at the $600 million.

Okay that's helpful, and then maybe just one more for me. I appreciate the color on credit and the one relationship that's still paying. But if I look at coverage to non-accrual loans at this point you're at about 60 bps, how should we think about that going forward? And maybe the better way to look at it is with the growth should we still continue to expect provision of loans to be kind of in the 20 basis point range? Are you seeing anything on the horizon that might give you some caution just from environmental factors, not your own portfolio that may cause you to start to build the general reserve?

No, I think overall actually if anything delinquency trends are improving, so and they had been great to begin with. So this really is a single individual event, so I do think you’ll see us, I think we’ve guided in the past to something around $7 million to $9 million a quarter and we see ourselves returning to that type of guidance after this quarter.

Okay. Thanks for taking my questions.

Thanks, Mike.

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

Hi, good morning.

Good morning, Jared.

Looking at the gain on sale margin, that's really been coming down the last few quarters, and then with your guidance of $48 million to $52 million per quarter, do you think that we're going to be seeing a gain on sale margin staying at these lower levels or is that non-interest income guidance more a function of continued reduction in volume?

Hi, good morning. I think you’re right, we’ll see some return on the gain on sale margin, so I think this is kind of 1% when you do the math. We do see some rebound in the gain on sale margin as we go into the fourth quarter. So I do think its, as Blake mentioned as well we see other asset sales opportunities out there that we could execute into the fourth quarter and moving into 2016, so that’s part of the guidance that we provided as well.

And that $48 million to $52 million guidance; is that just fourth quarter or is that sort of for the foreseeable future, the next few quarters?

It really was for the fourth quarter. I think after that as I mentioned kind of as it related to the expenses, the mortgage business we do see a return to more of a classical seasonal type mortgage market and so, as that happens we saw a little bit of that in 2015 as well, but our base clam would be that we’re returning more to that classical environment which would then imply that you’d see higher levels of gain on sale probably margin and dollars really in the second quarter and then into the third quarter and then a seasonally low in the first and fourth quarter. So the $48 million to $52 million is into a, really a seasonally low gain on sale quarter.

And just to add to that, this is Blake, during the third quarter we really continued to invest in growing net interest income and building the average earning assets. Steve alluded to and we’ll continue to expect to see that going forward, but we did see a slight makeshift in the agency volume which historically supported the gain on sale number. Over time we’ll benefit from continuing to build net interest income and then support the non-interest income or fee income by additional preferred arm or non-agency sales as well as some of the additional asset classes that we’re exploring.

Okay, thanks. And then on the commercial side we saw a decline in period end balances there. Can you just sort of walk through what you're seeing for the pipeline and what would be some good expectations for commercial as we're going forward the next few quarters here?

Sure. Well the pipeline actually, we finished the quarter -- the pipeline is very strong, significant increase year-over-year as we mentioned our remarks. The drop in the balances is really, primarily a function of moving some commercial assets into loans held for sale for loans held for investment. But the outlook for our commercial lending business is really across the board and all of our product categories is very strong and really a highlight for the quarter and for our outlook.

Okay. Thank you.

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

I just want to ask you guys about the gain on sale this quarter and follow-up on Jared's question on the mix. Because the mix became a lot less jumbo heavy, so it seemed like that should have translated into a higher gain on sale. But just can you talk about the market conditions and the various asset classes that you sold this quarter and just kind of get to the components if you can of why this gain on sale fell by so much?

Hi. Good morning, Jefferson. One of the things that influence this is, how the revenue is recorded particularly on the agency book. Sometimes you’ll see it in our filings is the fair value loans and so, with that portfolio of loans, the revenue on those is really recorded upon rate lock and funding. And so by the time you originate the loan most of the core gain on sale is in the -- is recorded in that period as opposed to the period when the loan is actually sold. And so what we saw was, with some of the deceleration and the mix shift that Blake highlighted that, actually the fundings number, if you see in the table 11 actually decelerated and that really caused a significant portion of the change in gain on sale quarter-over-quarter was really related to that change in fundings versus actually sales. So by the time we sell the loans, really you do get kind of a denominator affect in that gain on sale margin quarter, because I do think that was originated in the prior quarter and then sold in the next quarter, you have in essence zero revenue in the numerator and it really impacts the margin. So that’s a big part of why the margin was as low as it was in this quarter.

And just to put a finer point on that Jefferson, the rate lock number in the third quarter was just under $1.6 billion, that declined to about -- just over $1.4 billion and the agency fundings were -- almost $1.2 billion declining to $961 million. So most of that decline in rate locks and decline in the loan funding volumes was agency related which is putting kind of the fine point on the income recognition during the quarter.

Okay. And then -- when you guys talk about additional asset classes, how much of that is in the $48 million to $52 million of fee income? How much of other assets -- are other assets bolstering that increase versus this quarter?

Yes, not a significant amount. I think its something that we’re exploring as Blake mentioned. So we really don’t have a significant portion that’s related to those other classes. But as Rob mentioned, we’ve moved some commercial into loans help for sale. We have some jumbo arms in loans help for sale and so we do see a variety of asset classes that we can see. But it’s really not a huge portion of the gain on sale in the fourth quarter.

And again, with the idea of leveraging the recently rates subordinated debt in the second quarter, if you look at the jumbo loans sold during the period it was down significantly from over $1 billion in the second quarter down to $314 million in the third quarter. So between non-agency additional loan sales plus some of the commercial opportunities that we’re seeing with strategically we think will also benefit the origination business overall and help us manage concentrations and capital. We think it puts us in a good position to provide for stability around that non-interest income guidance that Steve gave.

And then just a quickie, on a commercial loan sold the asset class you were talking it’s just a 1% gain or a 2% gain or a 3% gain? What types of gains do you foresee in these asset -- in this commercial real estate asset classes that you’re contemplating?

Well, we’re currently in the market and so we’re really not in a position to comment specifically on the execution level. Obviously, we generate a high quality product and we’ve got great relationships with agencies as well as pension funds, insurance companies, and other bank investors. So obviously we’re seeing attractive opportunities, but not prepared to give a specific guidance on numbers.

All right. Thanks, guys. I will pass it on.

[Operator Instructions] Our next question is from Steve Moss of Evercore ISI. Please go ahead.

Good morning.

Good morning, Steve.

I was wondering if I could follow-up on Jefferson’s question here in a different way. Just wondering what are your limits in terms of concentration for commercial real estate?

Yes, so generally speaking the way we think about that is from a either an industry perspective or particular category or a client perspective. And so as we look at particular opportunities, for example within the multifamily business and we look at vintages or customer concentration levels, or if we look more broadly speaking at other commercial real estate industry or specific name concentrations, that’s where we’re seeing some of the opportunity to manage not only our level of exposure to a particular category of industry or client or geography. But then take advantage of some of the liquidity that we’re seeing in the capital markets.

Okay. And then my second question, I wonder if you could give a little more color around the nonperforming asset? Given that the tenant is paying until 2017, just wondering what are the characteristics of this property that cause you to place it on nonperforming status?

Yes, I mean, the primary reason and you’re right, it’s pretty early in the timeframe and a little bit unusually early. This lease did have a pretty early renewal timeframe and so when the tenant ultimately indicated that they were not going to renew as I mentioned in the remarks, that was really the beginning of our assessment processes to what was going on with that credit, and ultimately led us to determining the -- as part of that assessment that we needed to downgrade to a non-accrual status. So it is as you said, we do anticipate that it will be current paying throughout the relationship, through March 2017. So we don’t think this will actually be a delinquent loan over that time period, but ultimately based on our credit evaluation decided that was the appropriate way to go.

Okay. Thank you very much

Thanks.

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

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

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.