EverBank Financial (NYSE:EVER)
Q1 2016 Results Earnings Conference Call
April 27, 2016, 08:30 AM ET
Scott Verlander - VP, Corporate Development & IR
Rob Clements - CEO & President
Blake Wilson - President & COO
Steven Fischer - SVP & CFO
Michael Rose - Raymond James
Jared Shaw - Wells Fargo Securities
Jefferson Harralson - KBW
Matthew Forgotson - Sandler O'Neill
Peyton Green - Piper Jaffray
Steve Moss - Evercore ISI
Jesus Bueno - Compass Point Research & Trading
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to EverBank Financial Corp's First Quarter 2016 Earnings Conference Call.
My name is Allison 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 Corporation 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 call 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's first quarter 2015 earnings call. I am 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 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 and 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 would like to turn the call over to Rob.
Thank you, Scott and good morning everyone. We're pleased with our first quarter results, which are driven by solid portfolio loan and deposit growth, lower noninterest expense, and continued strong credit quality.
As we've shared with you on recent calls, we continue to expect a low and flat interest rate environment with modest economic growth throughout the remainder of the year. as a result, We'll continue to grow our balance sheet on a more selective basis by retaining few or the high quality loans and leases we originate and optimize risk adjusted returns during the year through continued asset sales, similar to those we executed in the first quarter.
We'll also continue to build on the successful cost reduction initiatives, which have resulted in a 4% year-over-year decline in non-interest expense. As we've discussed, the company is well positioned now to continue benefitting from further cost reduction and optimization initiatives.
Adjusted net income available to common shareholders was $40 million for the first quarter or $0.32 per diluted share, compared to $43 million or $0.34 per diluted share in the fourth quarter and $39 million or $0.31 2015 per diluted share a year ago.
GAAP net income available to common shareholders was $25 million or $0.20 per diluted share, due to $23 million of temporary non-cash MSR valuation allowance that resulted from lower mortgage rates in the quarter.
Adjusted return on average equity was 9.3% for the quarter and GAAP ROE was 6%. Total assets were $26.6 billion, an increase of 40% year-over-year and unchanged from the fourth quarter as the growth in our loans held for investment was offset by lower level of loans held for sale.
Loans held for investment increased 2% sequentially and 23% year-over-year to $22.8 billion, driven by diversified growth across our consumer and commercial portfolios.
We enjoy continued strong credit quality in the quarter with net charge-offs at seven basis points, a non-performing asset ratio of 53 basis point. Deposits increased 18% year-over-year and 4% sequentially to $19 billion driven by continued inflows of new consumer and commercial balances. Our capital levels remain well within our target ranges and we're supplemented by the supporting of debt issuances we executed in March.
The consolidated common equity Tier 1 ratio was 9.9% and bank Tier 1 leverage and total risk based ratio is about 8.2% and 12.9% respectively at quarter end.
I'll now turn the call over Blake to discuss our business performance in more detail.
Thanks, Rob and good morning, everyone.
As we discussed last quarter, we successfully managed our origination volumes, asset mix and loan sales to position us for success in the current low and fact interest rate environment.
We intentionally slowed Jumbo originations in corresponding channel, invested $969 million in Ginnie Mae pool buyouts and selectively sold longer duration assets, including $278 million in commercial loans, $981 million in Jumbo residential loans.
Our consumer lending business generated healthy originations of $1.8 billion in the quarter. The credit profile of our portfolio Jumbo volume originated in the quarter continues to be strong with an average LTV of 69% and a FICO of 762.
Total commercial originations were $665 million for the quarter. Equipment finance and leasing volumes were $300 million, commercial real estate originations were $149 million and total new client originations within the warehouse finance, lender finance and business finance groups were $216 million.
At March 31, 2016, the weighted average LTV on our outstanding CRE portfolio was approximately 61%. In addition 69% of our portfolio has been originated since 2012 with a 30-plus day delinquency rate of five basis points.
During the quarter, we also continue to enjoy robust consumer and commercial deposit growth. Consumer deposit balances increased $631 million or 4%, compared to the prior quarter and $1.8 billion or 14% year-over-year to $14.7 billion.
The increase was driven by solid results from our proven client marketing strategies. This growth reflects the long-term success we've had in scaling our retail deposit franchise by attracting and retaining value clients with an average age of 59 years old and an average household account balance of more than $100,000.
Commercial deposit growth was also strong in the quarter with $4.3 billion of commercial balances, an increase of $1.1 billion or 34% year-over-year. Our base deposit pricing for core checking and money market accounts has remained unchanged at 61 basis points for the past 2.5 years, which is comfortably above the levels required by our yield pledge.
During this period, we have grown the balance sheet by more than $8 billion. We will continue to evaluate our deposit pricing strategy given the current low level of interest rates and our expectation of moderating balance sheet growth in this environment.
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 decreased $1 million or 1% compared to the prior quarter to $174 million as a 3% increase in average interest earning assets was offset by a 4% increase in interest bearing liabilities and an eight basis point decline in our net interest margin to 2.82%.
The average yield on interest earning assets decreased five basis points sequentially to 3.85% as flat residential yields partially offset a decrease in commercial yields, which was driven by lower on-book prepay and other loan fees and replacing higher yielding commercial loans at current market rates.
Average interest bearing liability costs increased to 1.14% driven by bonus interest rates on new consumer deposits and the addition of duration to our time deposits and FHLB advances.
In 2016, given the asset rotation strategy that Blake described and expected normalization in commercial prepayment fees, we expect net interest margin to decline by three to five basis points per quarter.
Our credit performance remained strong in the first quarter with net charge-offs of $4 million or 7 basis points flat compared to last quarter.
Provision expense was $9 million in the first quarter, which resulted in a 7% sequential increase in our allowance for loan and lease losses. Over the past 12 month we've provided more than $38 million and only charged off $17 million resulting in a $21 million increase in our allowance.
We currently have nearly five years of allowance coverage based on our trailing 12-month charge-off levels.
Non-interest income was $52 million in the first quarter after adjusting for the impact of the non-cash MSR valuation allowance, which represents a decrease of $5 million or 9% quarter-over-quarter. The non-favorable loans increased $4 million or 16% sequentially driven by a total residential gain on sale of $22 million and commercial gain on sale of $6 million.
Offsetting the increase in gain on sale was a $3 million or 26% sequential decrease in net loan servicing revenue, which excludes the MSR valuation allowance impact and a $6 million or 74% decline in other revenue. The decline in other income resulted from lower levels of prepaid income on commercial loans serviced.
Non-interest expense decreased $3 million or 2% to $149 million in the first quarter, resulting in an adjusted efficiency ratio of 66%. Salaries, commissions and benefits expense increased $1 million or 1%, while occupancy and equipment expense were down slightly compared to the prior quarter.
G&A decreased $4 million or 10% driven by lower legal and professional fees, credit related expenses and advertising and marketing expense, partially offset by higher other G&A expense. Going forward we expect to achieve further reductions in non-interest expense from the first quarter level.
Now I would like to turn it back over to Rob for some closing remarks.
Thanks Steve. In closing, while the environment presents further potential headwinds from a revenue perspective, we believe there are meaningful opportunities to enhance efficiency over the near and intermediate term and deliver an attractive earnings return profile for our shareholders.
With that, I would 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] And our first question will come from Michael Rose of Raymond James. Please go ahead.
Hey, good morning, guys. How are you?
Good morning, Michael.
Hey, so just reconciling a little bit the guidance here before I ask a strategic question, it seems like on an expense run-rate basis you guys are tracking a little bit below the $600 million that Steve had laid out last quarter.
But on the margin side it looks like you were down a little bit below the 3 to 5 basis points this quarter as well, and I think you're continuing to guide for a 3 to 5 basis point per quarter run rate decline from here. Is that the right way to think about those two items?
Yes, but we're feeling very good about our progress on non-interest expense and as Steve indicated, we think we're very confident in our ability to beat our target in that area.
Okay. So then thinking about the efficiency ratio, which was -- on an operating basis looked like flattish to maybe a little bit up. How should we think about that in regards to the profitability goals you've laid out, the 10% to 13%?
Little below that this quarter; obviously making progress. Would you expect to get that number closer to the low 60 -- from an efficiency perspective as we move through the year and into next?
Yes, we see some real opportunity drive down the efficiency ratio. Yes, I can tell you over the past several years we've invested a tremendous amount of time, energy and resources and adapting to the change in regulatory environment and meeting the current requirements and expectations and I can tell you we've made great progress and we're very pleased with our status with our regulators today.
But going forward, we're going to invest a lot more time and energy and really going after some of its operational efficiency initiatives. And as we mentioned, we were confident in our ability to beat our target for AIE for this year and would expect to see meaningful improvement in our efficiency ratio going forward.
Okay. That's helpful. And then maybe one last one for me. Obviously, the commercial loan origination and really origination in total was down from a really strong fourth quarter. Can you just talk about some of the seasonality in some of the categories and maybe how we should think about the pace of origination from here?
If you've hired any more mortgage bankers or commercial lenders or things like that added to the BPL team, things that will help reconcile the drop this quarter, and then how we should think about the pace of originations as we move through the year. Thanks, guys.
Sure, Michael. As you know commercial originations are -- the first quarter is seasonally slow and if you do a year-over-year comparison, there are a couple of categories that tend me lumpy, in particular warehouse lending and lender finance in terms of new client acquisitions.
We’re very strong in the first quarter a year ago and so we saw a drop even though our balances remain high, but in terms of new client acquisition there was a decrease year-over-year. And our CRA business volumes were relatively flat for this quarter but I can tell you, we actually saw some improvement in our margins in the quarter as we improved our pricing.
We did see a nice increase in our equipment finance about 35%, $300 million this quarter compared to last quarter a year ago, but I think more significantly our pipeline, commercial pipeline showed a meaningful increase about 9% year-over-year. So, some seasonal slowness, but we feel very good about our growth prospectus for our commercial business lines for the rest of the year.
Okay. Thanks for taking my questions guys.
Our next question will come from Jared Shaw of Wells Fargo Securities. Please go ahead.
Hi, good morning.
Good morning, Jared.
Looking at the growth in deposits and especially the savings account growth, as you look forward, how sticky do you think that growth is? And what's driving it? Is that more business from existing customers, or is it net new customer growth? Just a little detail around the deposit growth would be great. Thanks.
Hey Jared, it’s Blake. We really saw solid growth during the quarter from new client acquisitions on the consumer side. In general, we’ve been building that up over the last several quarters and really saw most of the marketing efficiency play through the first quarter.
We’re seeing very good and normal retention levels with customers as our retention rates remain very favorable in the current market environment. As we noted, we haven’t changed any of our base pricing overall despite the Fed move and overall I think the deposit engine is humming well with new client growth and stable and strong retention of existing clients.
Okay, thanks. And then just as a follow-up, when we look at the linked-quarter decline in commercial yields this quarter, how much of that was driven by lower prepayment penalty income? And is this a good yield to use going forward, at this point?
Hey Jared its Steve. Yes you’re right that a significant portion of it was related to that and did have some NIM impact as well in the current quarter and so on a quarter-over-quarter basis, we really had a change there of almost about $2 million, which on a quarterly basis can significantly move that yield. So we were in a more normalized prepayment quarter.
You would see that yield actually come back up a little bit. So I think it bounces around a little bit quarter-over-quarter. You can see that in the commercial yield over the last year or two, but I do if we get back to more normalized, it was really an unusually low level in the quarter. So if we get back to a more normalized level, you could actually see the commercial yield move up a little bit from where it is in this quarter.
Great. Thank you.
Our next question will come from Jefferson Harralson of KBW. Please go ahead.
Hey, thanks, guys. I'll ask a bigger-picture strategic question. You mentioned that you originated less jumbos intentionally this quarter; that you plan to sell a greater amount of your conventional originations; and that it seems like you're also continuing to press the gas pedal on the Ginnie Mae piece of it.
This is all because of the shape of the yield curve? Didn't we -- we just -- I guess we had a strategic change before, where we were selling more loans; and then we went away from that. So I guess, what's pushing you towards selling more loans?
And how is it different from the last time you went away from it, when the gain on sale was volatile, it seemed like, to me? But can you talk about your strategic changes, and why? And then what changes if rates go up another 50 basis points or 1%? Does this all unwind?
Hey, Jefferson actually the first quarter was really consistent with our strategy in the fourth quarter of being very selective in terms of the assets that we're retaining on the balance sheet and looking to sell more duration and/or minimize concentration risk and really lean on the Ginnie Mae opportunity to again stay more active sensitive and minimize duration risk in this environment.
So, I won't characterize it as a change. I think it's really consistent with our strategic objectives that we’ve laid our previously.
Yeah, I think you're thinking back, maybe it was a quite some time ago where we had a lot of excess liquidity on both sides of the balance sheet. We went into growing net interest income overall, but certainly and back to your earlier point, given the shape of the yield curve and how flat things are, we're really fortunate we have this remix strategy to invest in high yielding, government backed generally buyouts that short duration and remix with selling longer duration assets and be more selective and relative to how we're pricing some of the assets as well.
So, really driving profitable growth and supporting assets yields overall in this kind of flat and low environment.
Right. And does that change -- it all makes sense. Does that change if rates were to move up two to three times over the next two years?
That would be -- that in a raising rate environment we like quality of the assets we're originating. It’s just the return profile and a more favorable rate environment would be our plan to retain a higher percentage of assets we generate.
Okay. Thanks guys.
Our next question will come from Matthew Forgotson of Sandler O'Neill. Please go ahead.
Hi, good morning gentlemen.
Good morning Matt.
Steve you mentioned, just getting back into the NIM question, you mentioned that we should expect 3 to 5 Bps of sequential erosion, just relative to the 8 bps we saw this quarter. Can you give me just a sense of the dynamics there? What drives slower erosion as we move through the year?
I think it starts, I referenced in one of the prior questions around the commercial prepayment and another fees that we collect related to our on-book portfolio and it was about a $2 million swing, $2 million-$2.5 million swing quarter-over-quarter and really accounted for out about 8 basis points about 4 basis points of the NIM declines.
So ex that, as we get to a more normalized level, we would have seen more of a 3 to 5 basis point type of compression in the quarter. And so our expectation is to see a little bit more normalization in that income and moving forward.
And so that’s probably as you’ll see the commercial yields bump up as a result of that for yet a more normalized level there. As Rob and Blake just described, with our strategy of investing in higher yielding Ginnie Mae cool buyouts in the support of the NIMs getting from that, I think we continue that if we stay in this lower and flatter rate environment that provides support on the asset yield sides.
And as also Blake mentioned from a deposit perspective, we've been holding our core deposit pricing at 61 basis points and have for the last 2.5 years. So I think when you put that together with where we are from an overall rate environment, it really shows core degradation in the NIM of about 3 to 5 basis points.
Okay. And I guess credit quality looks very good, but I did note that there was some slight deterioration in the equipment financing portfolio quarter-to-quarter. Still very small numbers, but I know that this is a book that you're sensitive to. Can you give us a little color here?
Yeah, sure Matt. That actually is a one lease that actually that went into a bankruptcy in the current quarter and actually we -- currently we had to move into a non-performing status. So there is not a general trend change. It’s a single credit.
And actually the good news is with the collateral position that we're in, we don’t anticipate any loss on that asset and expect it to resolve itself very quickly.
And it possibly could come out of NPL status in the near term.
Providing that trends continue to remain very strong.
[Operator Instructions] Our next question will come from Peyton Green of Piper Jaffray. Please go ahead.
Yes, good morning. Steve, how much do you think short-term rates have to go up before you would see your commercial loan yields start to rise, rather than the attrition that is still running through from the previously higher rate environment?
Yeah, Hey, Peytaon it's Blake. What we're actually seeing on the commercial yield front, based on more selective pricing, we’re starting to see ex the prepayment penalties going on yields really starting to converge with the legacy going off yields.
So, we wouldn’t actually have to see a material change in the overall direction of rates to have that stabilize. The volatility of our recent periods has been the movement around in prepayment fees collected on those loans paying off.
Okay. And then, Blake, I think you referenced the opportunity to lower your deposit costs, given a lower-for-longer rate environment. Is this something that we would expect to see in the second quarter, or not necessarily?
No not necessarily, what we’re saying is look in this environment we’re evaluating all scenarios and if we continue to remain in this very low and flat environment, everything is on the table for consideration including our deposit pricing strategy.
We’ve had great success in growing deposits, maintaining clients and we’ve seen despite the Feds move, we’ve not changed our base level of pricing and based on that we continue to evaluate the strategies of balancing our deposit growth to meet our funding means as well as maximizing profitability and considering that lever in this environment.
Okay. And then last question is with the LOCs that you had in at the end of the quarter, are you more optimistic about origination volumes on the jumbo and conforming front in the second quarter than the more then maybe if you could characterize what kind of volume lift we should expect to see.
Yeah, I think as you know generally as we head into the summer months are seasonally stronger, so from that perspective we would be continuing to see growth and stability in the residential volumes as well as the seasonal build up on the commercial side.
As we mentioned we're moderating some of the Jumbo volume we're seeing from correspondence and being more selective with some of the retained or Jumbo volume with a little more duration to it. So, it’s a little bit of an optimization play, but generally expect to see seasonally strong summer months as usual.
And just to add to that, lots were up significantly approximately 30% year-over-year and with the seasonally strong quarters coming up, we feel very good about how things are shaping up for the year.
Okay, I guess -- but would you expect volumes to be in line with where they were in the second and third quarter of last year as we go into the second and third quarter of this year, or lower given the optimization strategy?
Yeah, probably we’re speaking to more of just to build from the first quarter versus year-over-year. We made some adjustments on pricing and our position overall so, I wouldn’t draw comparisons to last year.
Okay. Great. Thank you very much for taking the questions.
Our next question will come from Steve Moss of Evercore ISI. Please go ahead.
Good morning, Steve.
I was wondering -- just talk about overall the commercial loan pipeline and the competitive environment you guys are experiencing here.
Yeah, the overall commercial loan pipeline was at $1.1 billion at the end of the quarter and as Rob indicated grew 9% quarter-over-quarter and really this speaks to the optimization strategy we talked about where we're being more selective on pricing particularly in the commercial real estate segment both on multifamily and multitenant commercial assets.
We do continue to see good opportunities in the lender finance and warehouse finance business and have actually seen mainly floating rate assets at attractive returns overall. So we've seen good momentum, but continue to leverage and build those businesses and then really optimizing our commercial real estate strategy.
And as we indicated, the pipeline is strong going into the second quarter and typically particularly on the commercial real estate side that builds throughout the year for a stronger fourth quarter both on commercial finance and commercial real estate.
Okay. And then regarding the NIM guidance linked-quarter, I think I heard you guys -- correct me -- was down 3 to 5 basis points. But for the second quarter, should we use that off the 2.82% number or should we use that off a 2.86% number, adjusting for prepays?
Yes, I think of the 2.82% number is probably the right way to think about it from that standpoint. So the 3.85% is really from where we start right now.
Okay. Thank you very much.
Our next question will come from Jesus Bueno of Compass Point. Please go ahead.
Good morning. Very quickly, you touched on the net servicing fee income, but looking at your loan service for others it looked pretty stable. It seemed like there was a big drop in your actual core servicing fee income. Could you add some color to that, comment on that?
Okay. Good morning. Really as you know we've been going through some strength in repositioning and sales of our mortgage servicing rights and so really what we're left with is a lower convex and higher quality book, but with that comes some lower ancillary type fees.
So we're really starting to see kind of -- and the quality of the book has improved. We've seen a bit of a drop-off. So I do think the $23.4 million we had and what is probably a reasonable run rate moving forward.
Okay. That's helpful. Thank you. Just on the loan growth, the HELOC balance has obviously moved up a lot. As we go forward, should we expect similar increases as you try to manage and perhaps take on some asset sensitivity?
Yes, I think generally the first quarter reflects the current operating strategy relative to this interest rate environment and the shape of the yield curve and the remix strategy we've got going on the asset side, so generally in this neighborhood.
That's great. And lastly, do you have any color, maybe on margins? Gain on sale margins particularly for residential loans, how they're doing so far in 2Q?
Yes, generally we think we've seen stability in the margins overall and pricing in general. Some of the jumbo fixed rate products are priced more aggressively and so we're just really selectively finding our spots where we can compete, but overall the margin environment is relatively stable.
Great Thank you for taking my questions.
There are no further questions at this time. I would like to pass the call back to Rob Clements for closing remarks.
Well thank you for joining us today and we look forward to updating everyone on future calls. Have a great day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!