Welcome to EverBank Financial Corp's Fourth Quarter 2015 Earnings Conference Call. My name is Emily and I will be your conference operator today. [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 fourth 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 related to the Company 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 fourth quarter results which, as we expected, substantially improved compared to the third quarter. The rebound was driven by continued loan and deposit growth, higher revenues, stable expenses and an improvement in asset quality.

Fourth quarter adjusted net income available to common shareholders was $43 million or $0.34 per diluted share, compared to $29 million or $0.23 per diluted share in the third quarter and $38 million or $0.30 per diluted share a year ago. Adjusted return on equity was 10.1% for the quarter and was 9.3% for the full year.

We continue to originate high quality assets for the balance sheet and ended the year with total loans and leases held for investment of $22.2 billion, an increase of 6% sequentially and 25% year over year.

This continued balance sheet growth was driven by strong retained origination volumes which totaled $2.2 billion in the quarter, an increase of 28% year over year. Total assets grew 23% year over year to $26.6 billion and deposits increased 18% year over year to $18.2 billion, driven by continued inflows of new consumer and commercial deposits.

We enjoyed strong credit performance in the quarter with net charge off of 7 basis points and a nonperforming asset ratio 53 basis points. As we've shared with many of you on past calls, we have built our franchise on a disciplined risk management philosophy and deeply rooted credit culture.

In addition, we believe that our nationwide model offers significant advantages in managing risk, as it results in greater geographic and industry diversification compared to banks with a more regional focus.

A good example of this diversification benefit is evidenced by our low level of total exposure to oil and gas or energy related companies of less than 1% of loans and leases and direct exposure of less than 50 basis points.

In addition to being well diversified, our centralized credit decisioning and underwriting allows us to tightly control and shift the credit box based on our risk appetite in a given environment. As we shared with you on last quarter's call, we were positioning the business for a low and flat interest rate environment with modest economic growth.

We currently expect a similar environment in 2016, albeit perhaps even a bit lower and flatter than we originally expected. As a result we continue to utilize a balanced approach to our asset liability management and expect to capitalize on additional operational efficiency initiatives throughout 2016.

And finally, earlier this month, we announced that the OCC has terminated its continuing order with EverBank. This is obviously welcome news and I would like to publicly thank the tireless efforts of all of our employees who are involved in this important initiative.

I will 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 continued asset growth in the quarter with retained originations of $2.2 billion which is a 16% increase compared to the third quarter and a 28% increase year over year. For the full year, retained originations increased by 26% to $7.6 billion.

Commercial originations were $1.2 billion for the quarter which represents a 20% increase compared to the third quarter. For the full year, commercial originations were $3.6 billion.

The strength in the fourth quarter's commercial growth was driven by equipment finance and leasing volumes of $420 million; new client originations within our warehouse finance, lender finance and business credit groups of $396 million; and commercial real estate originations of $373 million.

While the market continues to be competitive with compressed spreads driving lower, new commercial loan yields, we remain focused on finding opportunities that meet our rigorous credit and risk adjusted return requirements. At the end of 2015 the weighted average LTV on our total outstanding CRE portfolio was approximately 60%.

In addition, two-thirds of our portfolio has been originated since 2012 with a 30 plus day delinquency rate of 9 basis points. Our consumer lending business generated total originations of $2.1 billion in the quarter which represents a 4% decline year over year.

Jumbo originations were $1.1 billion or 52% of total volume and the credit profile of our portfolio jumbo volume in the quarter continues to be strong with an average LTV of 67%, a FICO of 766 and nearly 90% representing primary residence.

Total deposits grew 4% in the quarter and 18% year over year to $18.2 billion, as our increased modeling activities drove attractive consumer growth. Consumer balances increased $536 million or 4% compared to the prior quarter and $1.5 billion or 12% year over year to $14.1 billion.

Commercial deposit growth was also solid in the quarter as we ended the year with $4.2 billion of commercial balances, an increase of $1.2 billion or 42% year over year. On last quarter's call we discussed initiatives to diversify our fee revenue through commercial loan sell activities.

And we executed on $119 million in commercial loan sales during the fourth quarter. We expect additional commercial loan sales in 2016 as we seek 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 increased $6 million or 4% compared to the prior quarter to $175 million, driven by a 4% increase in average interest earning assets and a stable net interest margin of 2.90%.

The average yield on interest earning assets increased 5 basis points sequentially to 3.90%, driven by a 7 basis point increase in residential yields and flat commercial yields.

Average interest-bearing liability cost increased 5 basis points to 1.08%, driven by bonus interest rates on new consumer deposits and the addition of duration to our time deposits and FHLB advances. As Rob mentioned, we believe that the yield curve will remain compressed and flat during 2016 which could result in additional NIM compression.

Our credit performance was strong in the fourth quarter, as net charge offs declined to $4 million or 7 basis points from $5 million or 11 basis points last quarter. Our provision expense was $10 million in the fourth quarter which resulted in a 9% sequential increase in our allowance for loan losses.

We currently have nearly four years of allowance coverage, based on our trailing 12 month charge-off levels. Noninterest income was $58 million for the fourth quarter which represents an increase of $12 million or 27% quarter over quarter when adjusting for the MSR valuation allowance in the third quarter.

The strong sequential increase was primarily driven by a $7 million increase in gain on sale revenue and a $4 million increase in other income. Noninterest expense increased $1 million or 1% to $153 million in the fourth quarter.

Salaries, commissions and benefits expense increased $1 million or 1%, while occupancy and equipment expense and G&A were flat compared to the prior quarter. Our efficiency ratio improved 600 basis points in the fourth quarter to 66%.

We remain focused on driving greater efficiency across the organization and believe our efficiency ratio should continue to improve in 2016, driven by both higher revenue and lower levels of NIE. Now I would like to turn it back over to Rob for some closing remarks..

Thanks Steve. As I indicated at the beginning of the call, we expect current industry headwinds to persist into 2016. We continue to be focused on delivering attractive, long-term risk adjusted return over an entire economic cycle and to that end we'll continue to manage credit and interest rate risk accordingly.

This formula has served the Company and shareholders well throughout our history, it has resulted in us been profitable every year for the last 21 years. With that, I would now 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..

Just wanted to get some color on the uptick in deposit cost, is that a targeted thing? Obviously the asset and loan growth was exceptionally strong this quarter, but as we think about funding costs going forward and that ties into the question on NIM, how should we think about trajectory of both from here? Thanks..

From a deposit perspective you really had two things going on. One, we have increased marketing initiatives that have induced balance bill campaigns and other things that are on the margin increase, the bonus rate for some of the money market accounts. That's part of it.

In addition to that, we have added some duration to build the borrowings and the CDs which drove some of the uptick during the period of time..

Okay and then as that ties into the margin, maybe for Steve..

I think as it relates to the margin, as you heard in the prepared remarks, based on the market environment low and flat, but there could be some NIM compressions.

As you look back on 2015 though, one of the ways we mitigated the low and flat environment was continued investment in Ginnie Mae pool buyouts and so that was a supporting effort to the NIM.

So if we're staying low and flat and I think as we've talked about before Michael, I would anticipate you'd see us continue to invest in the Ginnie Mae pool buyout asset classes as a support to the NIM, but overall based on low and flat, we could still see some marginal NIM compression from here..

And maybe just shifting back to expenses, I know you have guided to about $600 million for next year.

Has any of that changed in light of a lower for longer type of environment on the rate side? Is there places where you can milk trend and the consent order, with that being gone, most expenses should go to zero, correct?.

Yes, I think starting with the back part of the consent order going away, that's something we've anticipated in the guidance that we've given in the $600 million.

I think we still feel very good about the $600 million NIE guidance which as you are looking at, I think we had about $153 million in the fourth quarter and imply some continued savings from here. So we still feel very good about that $600 million run rate for 2016..

Our next question is from Peyton Green of Piper Jaffray. Please go ahead..

I was just wondering, preparing for the lower for longer environment, how will that change your willingness to sell assets in 2016 versus 2015? Would we expect more gain on sale from that, from other asset classes versus the residential? And then also, how is your outlook for the residential heading into the first quarter?.

I would say just a general comment that, in this environment we would anticipate still strong, attractive asset growth, but arguably more moderate growth. As we continued to really be diligent in how we manage interest rate risk and credit risk in an environment of spreads been pretty tight.

We're, we do have the flexibility to optimize our balance sheet and arguably -- potentially sell more into the secondary market. So we would still anticipate strong growth and average earning assets. But relative to our more recent experience, I wouldn't be surprised to see that moderate if this rate environment persists throughout the year..

And just with regard to the residential view, you really saw in the fourth quarter what we probably expect from an origination and asset sale perspective. Origination volumes on the residential side are relatively consistent early into the first quarter.

We have seen some uptick in activity given the decline in rates, but overall the strategy of selling particular assets on the residential side with longer durations and selectively selling commercial assets with longer duration or particular credit concentrations and then reinvesting in the more attractive shorter duration Ginnie Mae buyouts is really the go forward strategy..

So then, Steve, does the margin guidance, does that take into contemplation more usage of borrowings and long term borrowings at that? Or how should we think about that?.

Yes, it does. I think as we're repositioning, I think, some of the NIM, the possible NIM compression does take into consideration some of the things we're doing around the borrowings, as well that we saw even in the fourth quarter..

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

Just looking at the, on the circling back on the expenses on the salaries and commissions line, what should we be going on there? I know that with the sale of the servicing last quarter, I think you had indicated about $6 million a year could be coming out of that.

Is this a good run rate here to go forward or could there still be some more money coming out of the comp line?.

I think right now I think this is a pretty good run rate as to where it stands.

I think you will have a little bit of offsetting items in the next quarter where you could see we're into the merit increase phase, where we'd see some merit increased be applied and then potentially with a little bit of a lower commission base as it tends to be a bit of a seasonally lower quarter, as well.

So I think you might have some offsetting items, but I think it rounds out to something similar to where we're in the fourth quarter..

Okay and then could you speak a little bit about what you saw with the depositor behavior as rate started moving. I know you said you added a little duration and were putting in, bringing in new accounts with the incentive rate.

What happened to the customers who were already there? Did you see the beta moving as you expected or was there more or less movement than you were expecting?.

Yes, we really did not see any change in our client behaviors from a retention or attrition perspective. In fact, as we noted, the consumer growth overall was particularly strong during the quarter. As you look more broadly at the industry, we really have not seen much change in deposit pricing.

So really had no impact on our competitiveness, either with existing customers or our ability to grow and retain new customers..

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

I was going to ask you some questions on the gain on sale this quarter. First, on the $119 million of commercial loan sales.

Can you talk about what type of commercial loans those were and to what extent did that impact the $24.7 million of gain on sale that you recorded in Q4?.

As we indicated previously, we'd been looking at a number of asset classes on the commercial side to exit into the capital markets. Those were both commercial real estate related assets, as well as selected concentrations of commercial finance assets. So probably typical of what we expect going forward.

We're really not breaking out the specifics on the gain on sales there, but you can see the overall fourth quarter mix of asset sales and the related noninterest income or gain on sales, probably indicative of what we'd expect in the current environment..

Okay, but either way, so whatever gains there were there it is included in the $24.7 million this quarter?.

That's correct..

Okay. So if I may ask a second question, related. On the gain on sale moving from 1.7% to 2.1%, can you talk about what drove the increase? And if you think about it going from 1% last quarter we had the mix timing issue that negatively affected this quarter. Presumably it positively affected this quarter.

So is the real run rate here or is it somewhere in the middle as these two mix timing issues offset each other and the real answer is somewhere in the middle?.

Yes I'm thinking that gain on sale margin calculation too, if you needed to include the commercial loans sold number in that. It's about 1.9%, I think if you do the call it roughly $25 million divided by the mortgage loans sold. It's about 1.9% in the quarter.

I think as Blake indicated, the margin is going to move around a little bit on a quarter-over quarter basis. And probably next quarter we will see it come in a little bit as we -- we will see the loans sold number pick up, particularly in the agency side.

But from a dollars perspective, the gain on sale dollars perspective as Blake mentioned, we see relative stability and a similar mix of loans sold as we did in the fourth quarter, as we add commercial loans into the mix of loans sold. So that $25 million will be made up of both consumer and commercial loans, a mix thereof.

The margin is going to bounce around a little bit based on how we execute and close those sales and we've talked about kind of numerator and denominator effects before. But ultimately from a dollars perspective, relative stability is probably where we expect it to play out..

Our next question is from Matthew Forgotson of Sandler O'Neill. Please go ahead..

In terms of the balance sheet growth, can you just help us think through it a little bit. If you did, just on an end of year basis, if you were up a little north of 20%, 2015 over 2014, you're talking about selectively slowing that growth or selectively growing.

What's a reasonable point to point growth rate to use if you were in our shoes?.

Just reiterating, it's hard to give you a definitive guidance on that point. But again, our expectation is that it is going to be more moderate than it was last year in this environment..

One of the things you saw in the fourth quarter is the loans held for sale is actually elevated from what we'd expect it to normalize out to. So from that perspective as we settled some of these agency transactions and other loan sales in the first quarter, we would expect that number to normalize out which will impact obviously total asset activity.

But as Rob mentioned, we expect growth, but not the growth that we've seen over the last year..

And in terms of the commercial loan sales, if you are doing, you did $119 million or so in the fourth quarter right, is that, is this a right-sizing these concentrations, is that in 2016 initiative or should we expect that to extend into 2017? Just trying to get a sense of the dollar amount of concentrations that you are trying to right size..

Yes, I think as long as we're in this low and flat environment and we continue to have good momentum on the commercial side that could continue into 2017..

Our next question is from Steve Moss of Evercore ISI. Please go ahead..

I want to start off on with the commercial real estate front, just wondering how much you have in Texas and Houston specifically..

Yes, the exposure that we have in Texas and energy-related exposure in general, we feel really good about how modest it is and it really does reflect our broad geographic and product diversity. Mentioned in our prepared remarks that our overall exposure to the energy sector is less than 1% and direct exposure is less than 50 basis points.

Overall, Texas exposure is approximately 5.4% which compares to Texas representing 8% percent of U.S. population and 10% of GDP. So again, relatively modest overall exposure in Texas. Large percentage of that exposure is comprised of high, very attractive LTV residential loans, a high percentage of government guaranteed loans represents that amount.

And then, solidly underwritten CRE and equipment finance loans. So we really think it's a relative strength of ours, our ability to really pick up markets and really manage our exposure in any one sector..

Okay. And then, also with regards to the commercial loan sales, trying to think about how we look at this with the loan sales relative to capital.

Are you targeting, is there any capital ratio you want to, you're close to your limit on whether it's leverage or total?.

We're focused, I think as we've stated in the past really on the total risk-based capital being in the 12% to 14% range. And so, as we look at these levels here, as I mentioned, we've got an elevated loans held for sale balance that gives us room there.

And then, overall, we see some of this risk-weighting shift from commercial to Ginnie Mae pool buyouts as being a very effective way to manage the total risk-based capital level.

And as we've talked about in the past, we still have, we think, room in our capital stack for some nondilutive Tier 2 or Tier 1 debt or equity that can support future asset growth..

Needless to say we don't anticipate a common equity raise based on where our share price is, what we're currently trading. But we do have real in front of the forms of nondilutive capital..

Our next question is from Jesus Bueno of Compass Point. Please go ahead..

Very quickly, I was just hoping you could comment on TRID, how the transition went during the quarter and if you did see any impact on perhaps on timelines being extended and more so what the impact would be on the first quarter if any?.

TRID, obviously has been a big industry initiative. We put a lot of resources into it, particularly in the third and fourth, second, third and fourth quarter of last year. Like everybody, we have had some modest delays in timelines, but overall I'd say we're playing ahead of the pack relative to our implementation.

It has taken a lot of resources and as we refine the process and get automated solutions refined to execute more efficiently, we think that will free up a lot of resources to focus on other opportunities. So, modest decline in turn times or turnover levels overall, nothing really material to note there..

And next question just on the provision.

You have been building reserves over the past year, but just in terms of what we should expect for 2016? Is it going to be more of the same in terms of a reserve build?.

Yes, I think probably $7 million to $10 million is probably a reasonable guidance as we move forward. You can see on a relative basis our net charge offs are very low. As you indicated, we have been building reserves over the last few quarters, probably continues into the foreseeable future based on our forecast.

But I do think $7 million to $10 million is a reasonable run rate moving forward..

And I may try and slip more one question. Just on the mortgage warehouse balances, there was definitely a nice pickup in 4Q over 3Q, I have heard grumblings that some of this could be TRID-related with delays in terms of closings.

Can you comment on those balances and what your expectation is coming from that change moving into the first quarter?.

Yes, no, the growth in the loans held for sale was really an execution opportunity for us. We saw better execution to settle those transactions into the January period and made a conscious decision not to do so. Those are all available and ready for sale and closing. Not TRID-related.

If anything, on the TRID front from a closing perspective, that's probably pre-closing, that any of those delays really happen on the front end of closing the origination transactions..

And then more broadly speaking, it did note that was on our loans held for sale specifically or the warehouse finance business. We're working through and monitoring clients from that perspective. Most of the delays, again, that we see are pre-closing of the loan versus in the repair process after the loan has closed.

So a modest increases if any in the warehouse finance utilization because of TRID..

Okay.

So the expectation is, as we work through that we might see some of those balances come down?.

Yes, although at the same time, you have seen rates relatively low and general industry activity pick up. So we would expect to see some moderation, but probably not TRID-related, really more dependent on what's happening with the overall origination activity in the mortgage market..

[Operator Instructions]. Our next question is from Erika Najarian of Bank of America Merrill Lynch. Please go ahead..

Just wanted to ask a question in a clearly we're in a skittish market, a jittery market for bank stocks and Rob you said something during your prepared remarks that piqued my interest. You mentioned that you have posted 21 straight years of profitability.

Could you remind us about how your credit quality trended during the previous two recessions? I think it will give investors great context for what to anticipate from your institution..

We do have metrics that demonstrate our far superior performance through certainly the last financial crisis and I don't know if we have those at our fingertips. We far outperformed the market. We generated attractive ROEs throughout the crisis and again, our credit losses were much less than industry averages..

Specifically I think if you go to our investor presentation, there are a couple of charts that show charge-off performance versus the peer group, particularly during the crisis and even during the full cycle of EverBank. You can note very strong relative outperformance on credit..

I will add to not only 21 straight years of profitability, but we've been profitable every quarter over those 21 years. And we pull back from certain product categories in certain markets when the yields in the underwriting criteria seem to be too aggressive and we always have had a long-term focus.

That's how we operate the business and hopefully I am not sure we get full credit for that today, but over time we're confident we will..

And just to put a fine point on it, in 2009 the bank earning 11.5% ROE and that was due to our provisioning and net charge offs being a fraction of the industry..

In that context, you mentioned that in a more challenging backdrop the origination growth could slow, but given your relative credit strength, do you anticipate that if we do come into a downturn in the United States that you would have the balance sheet and the wherewithal to outperform gross in the industry, as your peers pull back?.

Yes, I think we see no reason why we should not enjoy a similar outperformance as we go through another cycle. We're not going to compromise on taking interest rate risk or credit risk. It's really going to be a question of the risk adjusted returns being under greater pressure in this environment.

But as we go through a cycle, we believe we will see a similar outperformance..

And just one more follow-up. Thank you so much for giving us the LTV metrics for your portfolios. I was wondering, this is a question I'm starting to get from investors again, Blake you shared the LTV for your commercial real estate portfolio.

Is it possible to share the average debt service coverage ratio for that book, as well?.

Yes, for that particular book the debts service coverage ratio is about 1.6..

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

Thank you 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..