EverBank Financial's CEO Presents at Raymond James Institutional Investor Conference (Transcript)

Mar. 5.13 | About: EverBank Financial (EVER)

EverBank Financial Corporation (NYSE:EVER)

Raymond James Institutional Investors Conference Call

March 5, 2013 1:40 p.m. ET

Executives

Michael Rose – Raymond James

Rob Clements – Chairman and CEO

Steve Fischer – CFO

Michael Rose

Hi. Good afternoon, everyone. I'm Michael Rose. I cover the Southeast and Southwest Banks here for Raymond James. I'm very pleased to have EverBank with us today. I'm not sure that if all of you know the story but it's certainly one of the most interesting bank stories out there in my opinion in the space today.

I'm very pleased to have Chairman and CEO Rob Clements with us today as well as our CFO Steve Fischer and Scott Verlander from Investor Relations and I will pass it off to Rob. Thank you very much.

Rob Clements

Thank you, Michael. I'm Rob Clements, Chairman and CEO of EverBank and with me is Steve Fischer, our Chief Financial Officer. I first like to thank, Raymond James for inviting us here today to speak to you and we really appreciate your time and interest and welcome the opportunity to tell you about EverBank.

[Inaudible] please read the disclaimer as it relates to our remarks today. Okay. So I'm going to give you some background. In 1994, a group of investors, myself included, acquired what was then Alliance Mortgage Company, a mortgage business with less than $200 million assets. Since then, we've built a nationwide banking franchise with what we believe is a superior operating model that is well-positioned and capitalized on industry trends and achieved sustainable long-term growth.

As of year-end of 2012, EverBank had approximately $18.2 billion in assets and $13.1 billion in deposits, more than three times our size five years ago. 2012 was a successful and transformative year for the company as we raised significant equity growth capital as well as closing integrated two strategic acquisitions.

Our success stems [ph] on a number of competitive advantages which we feel differentiates us from many of our bank peers. First, we have robust asset generation capabilities from diverse sources and can quickly adjust product in geographic focus based on market conditions. Our unique deposit engines generates deposits with a low OEM costs than most other banks and can scale much more quickly. We have always maintained a disciplined risk management culture.

And lastly, EverBank has been built by management team with a proven long-term track record of success. These competitive advantages have allowed us to build a business with greater flexibility and diversity. The net results is a company that generates strong returns and high growth with low risks.

For those of you not familiar with our story, I'd like to share some history with you. Over the last decade, we've evolved into a full service banking company driven by a broad asset origination capabilities, a unique low cost deposit model. As you can see, this approach has enabled us to significantly grow our business.

Our robust growth has been fueled by a core deposit engine which we view as a key strength. Throughout the history, we have opportunistically augmented our organic growth through strategic acquisitions, most recently with the acquisition of business property lending from GE Capital and MetLife Bank's warehouse lending division.

We have also made significant infrastructure investments over the last couple of years reflecting the unprecedented changes in the regulatory environment and are surpassing the $10 billion asset threshold. We believe with good [ph] heavy lifting of these investments is complete and look forward to driving operating leverage as we continue to scale the balance sheet.

Overall, our differentiated model has enabled us to grow rapidly and profitably to a variety of business cycles and has us well-position to thrive in any economic environment.

We have built the EverBank model to capitalize on the best features of both online and traditional brick and mortar banks while avoiding the limitations of each model. We have attractive well-developed asset generation businesses. Like the best of branch banks, we have an attractive high growth deposit-based that emphasizes core [ph] checking, savings and global market deposit products.

We enjoyed strong customer retention because our product offerings attract self-directed customers that appreciate our value proposition. Our deposits and assets are sourced nationally which limits our exposure to regional concentration risk. We have a low OEM cost because we avoid the high overhead associated with branches than most traditional banks.

Finally, we have the ability to scale our deposit-based much more rapidly than branch-based models. We believe EverBank's long-term business strategy differentiates us from our peers. Without making large investments in a branch infrastructure, we have created a nationwide footprint with significant large MSA market share.

Our product offering, operating platform, distribution channels and marketing strategies have been specifically designed to attract our vanguard retail and business customers in key markets nationwide.

As you can see, our business model had successfully generated lending and deposit relationships in major metropolitan markets as represented by the blue portions of the map. We have an integrating small business financing options from our commercial financing, commercial lending businesses to our customer-based. We feel the BPL acquisition represents another complementary platform and we still opportunities over time to extend our products offering into investing services such brokerage and wealth management.

We've been insignificantly expanding our retail lending platform represented by most of the red dots on the map. We expect to return to a more stable purchased money -- purchased-driven mortgage market and a well-position to materially increase our market share.

In summary, we feel our model a robust and diverse asset generation channel that is funded by a scalable deposit funding engine is a blueprint for how to design a financial services company today.

This slide has some of the key performance highlight in 2012 compared to 2011. As you can see, we generated significant growth in revenues, adjusted earnings per share and asset generation volumes. Our revenues for the year increased 29%, adjusted EPS increased 14% and the $11.8 billion of assets generated represents an annual increase of more than 70%.

As I described on the previous slide, we feel this kind of growth in a client-operating environment is a validation of a flexible and diversified banking model we have created.

I'd like to spend a few minutes talking about our asset generation capabilities in more detail. We were able to generate significant balance sheet growth through our various asset platforms which are becoming more diversified with the success of our commercial finance and warehouse finance businesses.

As you can see, residential mortgages has a percent of retained production was 32% in the fourth quarter of 2012, that compares to 66% a year ago. We're also pleased with our duration profile in the current low-rate environment has a short duration warehousing commercial finance assets complement the longer duration BPL assets.

Overall, our mortgage production volumes continue to grow and we were able to selectively retain certain loan products for our balance sheet depending on loan characteristics dictated by market conditions. We are also an active participant in the restart of the prime [ph] jumbo securitization market and see strong demand for the high quality preferred jumbo product we originate.

We expect our asset generation volumes to continue to outpace our balance sheet growth and will selectively either retain or sell assets based on the risk adjusted ROEs available to us at the time.

As I've already discussed, in 2012, we made a strategic decision to invest in a retail lending platform expansion which is designed and capitalized and a return to a purchased-driven origination market. Throughout the year, we hired approximately 440 professionals which included the regional management teams and operational infrastructure. We have indicated that we will continue to add sales teams in the first half of the year and these assets were intended to more deeply penetrate the existing footprint we built in 2012.

The chart on the bottom, that shows the success we have to-date with origination volumes from this channel increasing nearly 10 folds to $837 million in the fourth quarter of 2012 compared to $89 million in the first quarter of 2012.

Now, I'd like to turn our focus to our core deposit franchise. Over the last decade, we have managed to capitalize on the industry trend our customers migrating from traditional banks to digital channels. This chart shows bank channel usage by US households and as you can see, the online channel has set [ph] to increase since the mid-1990s.

The significant growth in online adoption and the recent accelerations of mobile banking are trends that we expect to continue providing EverBank with a distinct competitive advantage. We attract high quality clients with our exceptional value proposition. Our one-stop integrated online portal provides all the services what we find at a traditional bank while offering more convenience and control to our clients.

Our unique award-winning deposit products attracting [ph] deep in our client relationships, for example, our FDIC insured global markets products has [ph] saw the needs of customers seeking diversification in foreign currencies, commodities and other market industries.

Our low [ph] operating costs allow us to provide features such as our yield pledge promise which enables us to give our clients confidence that they will always receive a competitive rate, also providing us with a lower OEM cost [inaudible] funds than traditional banks.

Simply put, EverBank's operating platform provides clients with a better way to bank, nowhere else can they get the real -- can get the level of controlled quality and breadth of products and value that EverBank provides.

The chart this slide demonstrates the strength and stickiness of our deposit relationships. The chart [inaudible] the compound annual retention rate of customer deposit balances by Vintage. This metric represents the percent of account balances we retained on a year-over-year basis. As you can see, we have achieved annual retention rate in the mid to high 90% range across Vintage's. We believe this is among the best retention in the industry and we've achieved this in the variety of growth, interest rate and competitive pricing cycles.

The right chart shows account balances by Vintage. As you can see, the customers have high average balances that consistently grow over time. It is exactly what we want. We believe we have a significant all-in funding advantage over traditional banks in the current low rate environment. When one looks at the fully loaded all-in cost of funding including operating expenses, we're also position to take advantage of the next rising rate environment whenever that may be as we did in previous cycles.

This chart shows our deposit cost versus one-year LIBOR. In an increasing environment, we have the ability to lag deposit repricing similar to more traditional deposit models. You can see that in 2006, we priced deposits plus 200 basis points below one-year LIBOR and could create a significant value on the right hand side of our balance sheet.

And now, I'd like to turn over to Steve Fisher who will walk you through some of our financial highlights.

Steve Fischer

Well, thank you, Rob. Now, I'd like to spend a few minutes talking about our historical financial highlights as well as our fourth quarter performance. As you can see on the two charts on the left side of the page, we have grown our earnings per share and our tangible book of value per share at a CAGR of 13% and 14% respectively over the last 10 years which highlights EverBank's strong performance through a variety of business environments.

On the top right chart, you can see our strong ROE performance which includes double-digit ROEs and 9% over the last 10 years. Pre-credit crisis, EverBank's ROE exceeded the peer group average while maintaining our disciplined credit culture. You can see even the during the credit crisis, lower credit cost compared to our peers resulted in positive earnings growth throughout the crisis including achieving an ROE of 11.5% in 2009 when the industry average was zero.

We evaluate all business opportunities as well as our asset generation channels based on the risk adjusted ROEs which we feel is the best way to drive strong financial performance over the long-term.

And the chart on the bottom right shows our strong capital ratios. As of the end of the year, our bank level tier 1 leverage ratio was 8% and our total risk-based capital was 13.5%. On a fully phased in basis, we estimated our Basel III Tier 1 or CET1 ratio to be between 8.5% to 9%.

As you can see in this chart, we have achieved strong year-over-year and linked to quarter revenue growth of 55% and 29% respectively. We believe this ability to drive revenue growth differentiates us and highlights the diversity and flexibility of our business model which has allowed us to capitalize on changes in the business cycle and interest rate environment.

In the future, we expect that the investments that we've made in our retail mortgage lending channel will continue to drive strong non-interest income and expect our net interest income to grow as we continue to scale our balance sheet.

As Rob mentioned, we continue to make investments in our business to drive sustainable growth over the long-term. This includes our retail lending expansion, our acquisition of BPL as well as continued investments on our governments and regulatory infrastructure.

We believe we have the platform in place and look forward to realizing operating leverage as we move into 2013. Approximately, $22 million of our total NIE in the fourth quarter related to our investments and our retail lending expansion. It's important to note however that more than 15% of our retail lending NIE is variable and we believe that the mix of variable versus fixed cost will grow as we continue to add commission-based lending professionals.

Salaries, commissions and benefits increased $18 million in the quarter due primarily to the on boarding of the BPO employees as well as hiring activity in our retail lending Channel. The other G&A excluding credit increased due to increases in non-recurring professional fees and other expenses which are largely environmental. We expect to see a decline in professional fees beginning in the third quarter as a result of completed independent [ph] foreclosure review related to our consent order by June of 2013.

Lastly, credit related expenses decreased in the fourth quarter due largely to reduction in expenses related to our government-insured GNMA pool buyouts.

Now I'd also like to discuss our asset quality which we view as the core strength. Our adjusted NPA to total assets ratio is 108 basis points. This ratio excludes government-insured GNMA pool buyouts as well as Tygris and Bank of Florida purchase credit impaired portfolios that were recorded at their fair value with significant discounts and also having enhanced credit protection.

If you look at the chart on the bottom right, our adjusted NPA ration has been in a steady decline. And we expect that trend to continue based on the addition of new originations with very strong credit characteristics. This improving credit trend is also highlighted in our trend of net charge-offs which has dropped from a peak of a 146 basis points in 2010 to just 16 basis points in the fourth quarter of 2012.

Thanks for your time today. And Rob and I, would be happy to answer any questions that you have.

Question-and-Answer Session

Unidentified Company Representative

[Inaudible] mortgage that fall in the cycle that falls [ph] in the NPA forecast as we take [inaudible] in the mortgage space [inaudible]

Rob Clements

Sure. I think it’s important to note that we made the decision to invest heavily in this retail lending platform over a year ago when many of our peers, our competitors were going in the other direction. It would have been easy for us just to continue to kind of take advantage of unique market environment and the outside games that we were enjoying in our existing origination channels. But we’re really being forward looking where we thought ultimately we needed to have a sustainable franchise that could have generate assets at attractive risk adjusted returns. And our feeling our conviction was that we had the opportunity to start investing in a very durable, sustainable retail franchise.

We started off by hiring the top players in the industry Tom Wind, to manage this effort and made that commitment as I’m sure many of you can appreciate this. The environment has changed, it’s a hard business to be and the regulatory environment could not be more challenging. And you really have to be you have to have that commitment, you have to be all in if you’re going to be successful.

And we have a great history of being through many cycles of generating strong returns in the mortgage lending business. And we made the decision to make the investment building out this platform and we’re in a position because we were early, because now you’re hearing others who are saying we talking about doing the same thing. But we have already put the infrastructure in place and we’re just driving 2012 getting to manage the structure [ph] in place, putting this fulfillment centers in place. And now, we’re just adding these commissioned loan officers to penetrate these markets more deeply.

So we believe our success to date doing 87 million in the first quarter of 2012 to around 850 million in the fourth quarter of 2012 and that momentum is carrying over in 2013. We all know that refined [ph] market is going to change at some point. But we feel very bullish about the strength of the purchase money business. And we think we have all the raw material and the products to attract talent [ph] and to go after that purchase money market in particular we’re having great success in originating high quality jumbo mortgages that we can either keep on our balance sheet or what’s been kind of a more recent and exciting development stability to secure ties to those assets.

So our market share today is 70 basis points. We don’t think that it’s going to be too hard to double that market share. And hopefully more than that, and that really moves a needle in terms of volume.

We think margins, the GNMA sale [ph] margins are not expected to stay at the levels where they’ve been. But we don’t think they’re also going to contract the way they have in the past when volumes come down in the cycle turns because the barriers to entry we believe are a lot greater today than they’ve been in the past. And that’s not the only example of how we’ve continue to invest in business lines that we think will perform well when the cycle turns. And we’re confident we can manage through a change as reprise [ph] is going to decreased. And we believe that purchase money business will be strong. Yes, sir.

Unidentified Analyst

[Inaudible]

Rob Clements

We do conforming and not conforming Fannie, Freddie and Jumbo [ph] mortgages.

Unidentified Analyst

[Inaudible] on how the particular big story which is [ph] [inaudible]

Rob Clements

It’s really what the loan officers, what the market is demanding for our balance sheet we like to keep a shorter duration jumbo, the products on our balance that conforming. And we fell onto the secondary market in a longer duration jumbo markets. In jumbo products there’s a great market opportunity now to accumulate those loans and securitize them going forward.

I think it’s --

Unidentified Analyst

[Inaudible]

Rob Clements

That type [ph] essentially yes.

Steve Fischer

Yes. I mean, just to add. So back to that in my comments, I mentioned that we kind of have an ROE based threshold from putting things in our balance sheet. So when it relates to residential mortgages and particularly jumbo loans, generally your 7151s’ are going to target [ph] and meet that ROE threshold for us to do that and that will put on balance sheet. As the proportion of what we’ve originated, that’s become a little smaller piece of it.

The longer duration jumbo as with these retail lending expenses really kind of a critical product offering that we have out there. And to give you a sense of magnitude about 400 million of the 2.9 billion that we originated in the fourth quarter was a jumbo. And that percentage as the retail lending expansion, that mix shift that happens in our overall production occurs; I think the percentage of jumbo is going to increase as well.

So we don’t have a specific target. I think the point of it 400 million of 2.9 billion I think as an overall percentage of the mix, I think you’re going to continue to its grow. So as Rob said, the longer duration called N one [ph] and longer, we would sell into the capital markets.

Unidentified Analyst

So [inaudible], how do you yield that back office and the larger players [ph] [inaudible]? And then talk about the experiences [ph] [inaudible].

Rob Clements

I didn’t get the last [inaudible].

Unidentified Analyst

[Inaudible]

Rob Clements

Are you talking about fair lending or --

Unidentified Analyst

[Inaudible]

Rob Clements

Oh, desperate impact. I’m sorry. I mean --

Unidentified Analyst

[Inaudible]

Rob Clements

Right.

Unidentified Analyst

[Inaudible]

Rob Clements

Well, your words. It’s concerning but it has an impact. I mean, I don't know where it’s going to go. I mean, that’s a big question mark. And we’re kind of reading what you’re reading about on the one hand they’re driving the industry to originate loans that need a certain definition that just came out with the queue around [ph] definition. But on the other hand they’re saying you could be exposed to the desperate impact under fair lending which arguably is in conflict.

I mean, it’s not I can’t tell you I have better insights and you don’t how that could also made point out [ph]. I think it’s fluid [ph] right now and ultimately there has to be some or we’re all in this together, there has to be some standard [ph] --

Unidentified Analyst

[Inaudible]

Rob Clements

I mean, if you look at our track record, I think we have differentiate ourselves by staying out of those product categories that created that liability, that exposure. And our repurchase exposure has been very modest over time. And we’ve had to invest heavily to make sure that in terms of our enterprise risk management, all the risk control areas in the company and making sure that the regulators are satisfied and comfortable that we can not only support our recent growth but also we think we have an infrastructure in place that can support a much larger balance sheet.

Yes, I can tell we’re in very good standing with the regulators. I think a testimony to that is the speedy approval that we received on the two of our strategic acquisitions that we consummated last year.

So I think on a relative basis, we’ve always, I mean, I should take credit off the table. And we invested heavily in our infrastructure. We do look forward to getting achieving some operating leverage going forward, having made that heavy investment to really adopt to the new regulatory environment.

So again, it’s a tough business to be in that the business is still going to be conducted. And we think we had some real competitive advantages going forward.

Unidentified Analyst

What is your [inaudible]

Rob Clements

Yes, our business lines, there is a fair amount of overlap. We’re not doing large went off commercial loans. We have centralized platforms with centralized underwriting and very metric based analytic that go into everything we do. And as we diversified, we’ve picked up seasoned, experienced managed teams that have really remained intact in each recent acquisition, whether it’s warehouse lending finance or the Tygris commercial finance or the BPL acquisition. We’re able to negotiate attractively in attractive [ph] terms. But we also picked up high quality platforms with strong management teams that have remained intact. And we’ve been able to integrate it into our culture, with all the discipline that we have around credit.

And so, we don’t feel like we’ve gotten out of our comfort zone in anyway. And we’ve invested heavily in our bench trends [ph] over the last two years. We hired the best CFO in the industry. Steve, was the late partner with Deloitte, auditing us for many years. And I guess he somehow he got comfortable with what he have been signing off on all these years to join us as our CFO.

We hired Tom Wind [ph] JPMorgan’s mortgage division. And we’ve hired a top chief information officer that was Freddie Macs’ CIO and then the teams that we’ve picked up.

So we’ve invested heavily in our branches [ph] which is why we think we’ve got all the running room with the infrastructure we have in place to grow. I think there are about maybe four out of the questions that you had [inaudible].

Unidentified Analyst

[Inaudible]

Rob Clements

Just on efficiency ratio I’ll make a general comment. Then I’ll let Steve jump in. But I can tell you unlike other banks we’re a growth. We believe we’re a growth story and we are really [ph] focused. And all of the business lines that we’re in today don’t look that great from efficiency ratio point of view but still generate attractive risk adjusted returns.

If you look at just our core banking platform, our efficiency ratios are competitive with what the best. But that’s really not how we focus on the business. But why don’t you --

Steve Fischer

Yes, from the efficiency perspective our banking ratio is I think was 45%. In the most recent quarter our NIM [ph] was 356. As Rob kind of mentioned and in my remarks I mentioned we are ROE capital managers first. So if you look at our mix of net interest income versus non-interest income, it was about 50% in the fourth quarter. And those non-interest income businesses that’s been off a very high ROE have a very lousy efficiency ratio in a classical bank.

So It’s not something that from a peering group, we are not your classical NIM minus efficiency ratio equals ROE. That’s just not the bank that we have. We’re much more diversified to your earlier risk question than that. But I think that’s an important point when you’re trying peer [ph] us [inaudible] we like high efficiency ratio businesses that spin off a high ROE.

Unidentified Company Representative

Yes. Yes.

Unidentified Analyst

[Inaudible]

Unidentified Company Representative

[Inaudible]

Unidentified Analyst

[Inaudible]

Rob Clements

[Inaudible] much larger than they are.

Unidentified Analyst

[Inaudible]

Rob Clements

Right. I was focused on the [inaudible]

Unidentified Analyst

[Inaudible]

Rob Clements

Oh, okay. So we have a target ROE goal. We went out with [inaudible] ’10 to ’13 [ph] target ROE, I take issue. We could have generate a much higher ROEs if we want in looking [inaudible] long-term focus in investing business lines that are dragging down overall ROE today but that will perform well in a rising rate [ph] environment.

I hope, I mean, our ROEs are up, we look at a very select high performing peer group and we’re in the 75 plus percentile in that group. But again, we think we’re also uniquely positioned to continue to generate these kinds of returns in any rate cycle.

I also both inspired if you go back to 84 at least [ph] in the historical spread to the risk free rate it’s been 5.5%. So that’s what 7.5% today would be an average ROE, if you just look at it on a historical basis.

We haven’t spent much time spending Bank of Florida [ph]. I think our deposit franchise is unique and that we generate these attractive sticky to pop [ph] relationships, transaction accounts, we’ve been doing it for a long time. And we’re replicated that story as we’ve grown from a few 100 million to 10 billion. And from many of our customers we’re the primary banking relationships.

And we think our deposit model is very different in our act organization [ph] channels are seasoned. High performing businesses, I can’t tell you exactly how that compares to what they have today. But we think there’s a big difference in terms of our size and our long-term track record.

Unidentified Analyst

[Inaudible]

Rob Clements

I’ll let Michael answer that question.

Michael Rose

[Inaudible]

Rob Clements

Okay. Thank you very much. I appreciate it.

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