Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

EverBank Financial Corp. (NYSE:EVER)

Q1 2013 Earnings Call

April 25, 2013 8:30 am ET

Executives

Scott Verlander – Vice President-Corporate Development

Robert M. Clements – Chairman and Chief Executive Officer

Blake Wilson – President and Chief Operating Officer

Steven J. Fischer – Executive Vice President and Chief Financial Officer

Analysts

Ryan M. Nash – Goldman Sachs

Erika Penala – Bank of America

Michael Rose – Raymond James

John Pancari – Evercore Partners

Kevin James Barker – Compass Point Research & Trading LLC

Peyton Green – Sterne Agee

Thomas Alonso – Macquarie

Nicholas Karzon – Credit Suisse Securities LLC

Operator

Good morning ladies and gentlemen, thank you for standing by. Welcome to the EverBank Financial Corp’s First Quarter 2013 Earning Conference Call. My name is Laura and I will be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, the management from EverBank Financial Corp will conduct a question-and-answer session (Operator instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference call over to Scott Verlander, Vice President of Corporate Development for the Company. Please go ahead, sir.

Scott Verlander

Thank you, operator. Good morning, everyone and welcome to EverBank Financial Corp’s First Quarter Earnings Call. Today, I am joined by Rob Clements, our Chairman and CEO; Blake Wilson, our President and COO; and Steve Fischer, our Executive Vice President and CFO. Before we begin, I would like to remind you that our first quarter earnings release, financial tables and earnings supplement are available on the Investor Relations section of our website at abouteverbank.com.

I would also like to remind you that comments made on today’s call and some of the responses to your questions deal with forward-looking statements related to EverBank Financial Corp and the banking industry, 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, which you may access on the SEC’s website.

We undertake no obligation to revise these statements following the date of this call, except as required by law. In addition, some of the company’s remarks this morning contained non-GAAP financial measures. You can find reconciliation of those measures to the most comparable GAAP measures in the earnings release and financial table, which are posted on the Investor Relations section of the company’s website. I would now like to turn the call over to the company’s Chairman and CEO, Rob Clements.

Robert M. Clements

Thank you, Scott. Good morning and welcome to our first quarter earnings conference call. We are pleased with our results for the quarter, which demonstrate the diversity and flexibility of our banking franchise. The company generated strong revenue growth for the second consecutive quarter, solid loan and deposit growth, and an attractive ROE.

I would like to provide you with some of the highlights of our financial results for the quarter. GAAP diluted earnings per share was $0.30, up 36% quarter-over-quarter and 275% year-over-year. Adjusted diluted earnings per share was $0.33, down 3% quarter-over-quarter and up 18% year-over-year. Adjusted ROE for the quarter was 12.4%, up a 137 basis points compared to the first quarter 2012.

Tangible book value per share was $10.65, an increase of 3% for the quarter. We grew our total assets to over $18.3 billion at March 31. Total loans and leases were $14.6 billion at quarter end, up 1% quarter-over-quarter. Deposits grew $532 million in the quarter to $13.7 billion, up 4% for the quarter and up 30% year-over-year. Our credit performance continues to be very strong with an adjusted NPA ratio of 99 basis points and a net charge off ratio of 23 basis points for the quarter.

And finally, bank level Tier 1 leverage and total risk based capital ratios were 8.2% and 13.7% respectively at March 31, meaning the bank has well capitalized under applicable regulatory guidelines. We also achieved one of our key strategic objectives during the quarter as we closed our first private securitization in March consisting of $307 million of EverBank jumbo mortgages. This capability highlights the quality of our customer base (inaudible) further flexibility to our balance sheet in the future.

Subsequent to the quarter end, we entered into an agreement to purchase a $13 billion portfolio of Fannie Mae backed servicing rights for approximately $68 million. This acquisition leverages our platform and should increase our HARP refinance activity in the future. As we have shared with you previously, we consider our servicing capabilities to be a core competency and have a long history of bulk servicing acquisitions.

We believe our MSR will be extremely valuable in a rising rate environment and are pleased to have executed this transaction at a time when multiples and rates are at historic lows. Lastly, as disclosed our earnings release yesterday afternoon, the company’s Board of Directors declared a quarterly cash dividend of $0.02 per share of common stock for the first quarter.

I will now turn the call over to Blake who will discuss the performance of our businesses in the quarter.

Blake Wilson

Thanks, Rob and good morning everyone. We continue to see strong growth in all of our assets and deposit generation businesses. In the first quarter, we generated $3.3 billion in loans and leases, a 56% increase over the prior year and in line with the fourth quarter. Of the $3.3 billion generated in the first quarter, approximately $500 million was retained on our balance sheet, driven by an increase in our commercial leasing volumes, new warehouse finance clients, commercial real estate loan growth and GNMA pool buyout.

This retained volume level reflects our current strategy of originating more general mortgages to sell into the capital markets as evidenced by the $329 million or 16% increase quarter-over-quarter in our loans held for sale. Our residential lending business originated approximately $2.9 billion of residential mortgage loans in the quarter, an increase of 52% year-over-year and flat quarter-over-quarter.

During the quarter, we achieved record jumbo originations of $768 million, which represents an increase of $201 million or 35% compared to $567 million in the fourth quarter. The jumbo volume represented approximately 26% of total volumes compared to 19% in the fourth quarter.

Our retail channel originated $833 million in the quarter, flat quarter-over-quarter and nearly a ten-fold increase year-over-year. In the quarter, we added approximately 110 retail lending professionals as we continue to lever the investments we’ve made by going deeper in our existing markets.

For the quarter, our retail lending volume represents 29% of total originations while consumer direct totaled 35%. Our gain on sale margin remains strong at 3.03%, an increase of 8 basis points compared to the fourth quarter. This reflects the positive contribution from our retail channel, our jumbo securitization program activity as well as continuation of HARP volumes from a consumer direct channel, which accounted for 15% of originations in the first quarter versus 18% last quarter.

With the recent development out of Washington regarding the extension of HARP, we continue to penetrate our existing portfolio and believe approximately $3 billion or 25% of the recently acquired $13 billion servicing portfolio is eligible under HARP guidelines. This should benefit margins and volumes in the future. Our commercial lending and leasing business also grew during the quarter and now represents approximately 48% of loans held for investment compared to 25% a year ago.

The warehouse finance business grew loans outstanding by a $190 million or 20% for the quarter. Total [committed] lines now exceed $1.9 billion compared $1.6 billion at December 31 and approximately $700 million when we purchased the business in April of 2012. This growth continues to be driven by high quality new client additions as our utilization rates remain flat at around 60%.

Equipment leasing grew leases outstanding to $911 million, an increase of $74 million or 9% sequentially and approximately $306 million or 50% year-over-year. Retro finance also performed well in the quarter as committed lines outstanding were approximately 600 million and loans were 370 million respectively. We now have completed the integration of our BPL acquisition and are experiencing strong momentum as evidenced by our increasing pipeline activity following our relaunch of the business. We originated approximately $60 million at commercial loans in the first quarter and remain confident in our previously provided intermediate term guidance.

As Rob mentioned, our core deposit generation was a highlight of the quarter as total deposits increased by $532 million or 4% in the first quarter. This increase in our marketing efforts a year ago, we have grown our deposits by $3.1 billion or 30%. This strong growth demonstrates the attractiveness of our customer value proposition and the scalability of our nationwide deposit franchise.

Now, I will turn the call over to Steve to cover the financial results in more detail.

Steven J. Fischer

Thanks, Blake, and good morning. I would like to start by reviewing our total revenue which grew 2% sequentially to $277 million in the first quarter was up 47% or $88 million compared to the first quarter of 2012.

Our net interest income was $144 million for the quarter, a decrease of $3 million or 2% from the fourth quarter of 2012. Interest in fees on loans and leases increased slightly for the quarter, however, lower securities balances and higher deposit balances more than offset this increase.

Our cost of interest-bearing liabilities benefited from the repayment of wholesale and repo borrowings with core deposits consistent with our funding plan following the BPL acquisition. Our core net interest margin declined 13 basis points compared to the fourth quarter while we acquired BPL loans, continue to positively impact our net interest income and margin. Lower yields on our residential loans held for sale and continued growth in our high quality floating rate commercial assets, such as our warehouse finance business impacted our interest margin. We continue to like the ROE and asset sensitive nature of those investments, and expect these investments to benefit from an eventual rise in rates.

In addition, we received approximately $1 million of prepayment fees related to the acquired BPL loans in the first quarter compared to $4 million in the fourth quarter 2012. We do expect to have $2 million to $4 million of prepayment fees each quarter on this portfolio. Our non-interest income was $133 million for the quarter, up approximately $8 million or 7% quarter-over-quarter.

Net loan servicing income increased $12 million and other revenue increased $7 million offsetting the decline again on sales and other non-interest income. During the quarter, mortgage rates as indicated by the base mortgage rate increased by 27 basis points to 3.67%. As a result of this increase, we recaptured $13 million of the MSR valuation taken in prior periods. At the end of the quarter, we had $90 million of remaining valuation allowance.

Our non-interest expense was $212 million, a decrease of $5 million over the prior quarter. Adjusted for regulatory related expenses, an IE with a $193 million in the quarter, a decrease of 4% compared to $202 million in the fourth quarter. The company’s overall level of non-interest expense continues to reflect investments in our retail lending expansion and regulatory related costs.

Our salaries, commissions, and employee benefits increased $7 million or 7% during the quarter with approximately 50% of the increase attributed to normal merit increases in employee salaries with the balance of the increase being related to continue hiring in our retail lending channel and governance and risk management functions.

Our credit related expenses for the first quarter decreased by $6 million or 39% driven by lower repurchase expenses, a continued reduction in expenses related to our government ensured Ginnie Mae pool buyout loans and lower foreclosure and REO expenses related to our Bank of Florida portfolio.

Our G&A, excluding credit related expenses, decreased by $6 million or 8% from the fourth quarter due primarily to a decrease in our consent order expenses. As we indicated last quarter, we expect to complete the independent file review related to the consent order by the end of the second quarter. Based on our knowledge as of today, we estimate the second quarter consent order expenses will be between $5 million and $7 million after tax.

Our credit performance was strong in the quarter as adjusted non-performing assets declined 9 basis points for the quarter to 99 basis points. Year-over-year adjusted NPAs have declined 87 basis points. Our net charge-offs were $7 million or 23 basis points annualized in the first quarter. The $2 million increase was driven entirely by $2 million decrease in recoveries, which can vary on a quarterly basis.

During the quarter, we recorded a loan loss provision of $2 million, a decrease of $9 million linked quarter. As we discussed on last quarter’s call, we incurred a one-time provision of $6 million in the fourth quarter related to our adoption of the OCC’s TDR guidance on performing loans in Chapter 7 bankruptcy. Excluding this non-recurring charge, our provision declined $3 million compared to the prior quarter. We expect a strong credit performance to continue.

As it relates to our originated mortgage repurchase reserve, we recorded a provision of $1 million and experienced realized losses on loan repurchases of $3 million during the quarter, resulting in an end of period reserve of $25 million, down from $27 million last quarter. As of the end of the first quarter, we had six quarters of coverage based on our trailing 12 month realized losses, which is consistent with the prior quarter.

Now, I’d like to turn it back over to Rob for some closing remarks.

Robert M. Clements

Thanks, Steve. We believe our high quality banking franchise and the strength of our business model positions EverBank for sustainable earnings growth over the intermediate term. Based on the robust growth in our core deposit franchise, coupled with the positive momentum in our commercial and residential lending businesses, we are confident in our ability to create shareholder value over the long-term.

With that operator, please open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Ryan Nash of Goldman Sachs.

Ryan M. Nash – Goldman Sachs

Yeah, thanks. Good morning, guys.

Robert M. Clements

Hi, Ryan.

Ryan M. Nash – Goldman Sachs

Can you just give us a little bit more color on the gain on sale in the quarter, your margin, I think, held up much better than a lot of the others that we’ve seen across the industry? Can you maybe give us the puts and takes versus last quarter, maybe by channel mix and also, how should we think about the path on the gain on sale from here?

Robert M. Clements

Hey, Ryan, it’s Rob. Needless to say we’re very pleased with our gain on sale results in the quarter, which really reflects the success of our private label securitization as well as our favorable origination channel mix as we continue to make great progress and building out our retail network and seeing great traction with our jumbo mortgages, which there is clearly a strong investor demand for our high quality products. Going forward, I mean we are not immune to market forces and over time expect to see gain on sale margins, we are, in fact, closer to historic norms. But on a relative basis, we feel very good about how we are positioned as we continue to grow our retail channel, which historically has a favorable stable gain on sale margin. And we also excited about the opportunity to continue to see the HARP refinancing opportunities, the extension is clearly a positive, and that creates opportunities not only with our legacy portfolio, but as Blake mentioned, there is real attractive opportunity with our recent portfolio of acquisition to see continued strong HARP production throughout the rest of the year.

Blake Wilson

Yeah, Ryan, the only thing I add on the current momentum is, we also saw a decline in rates as we entered the end of the third quarter combined with as we entered the seasonally strong summer months from a purchase perspective. So in terms of a current pipeline activity and the backdrop in the environment as Rob indicated, we’ve got these unique pockets of growth both on the retail side and the jumbo mortgage side, which is gaining greater momentum, and then the ability to again penetrate our existing hard volume. But even more importantly the $13 billion servicing portfolio, which really hasn’t been so listed it directly for our HARP activity, which again gives us pretty good confidence relative to volume trends and margin opportunities.

Ryan M. Nash – Goldman Sachs

Great. And if I could just ask one quick follow-up, in terms of the $13 billion servicing acquisition, can you talk about your appetite for those deals on a go forward basis. And I know you alluded to in the prepared remarks the fact that there should be a lot of value as rates do begin to rise, I guess, on the flipside, there is – there also comes a higher capital charge. So, how more capacity do you think you have to continue to add from here?

Robert M. Clements

Well, as I mentioned earlier remarks, our servicing operation is really a core strength and we really like the fact that we do have some limits in terms of the amount of MSR to capital that – how high that ratio can be, and we’ll probably with this acquisition, we had some capacity. We’re comfortable targeting around 30% level of MSR to capital and this acquisition gets us close to that level give or take. Going forward there could opportunities to partner with investors and MSRs, where we can leverage our servicing capabilities and origination capabilities on a partnership basis. But as we grow our capital base and generate some additional cushion going forward, we’re always going to be looking for opportunities to pursue interesting growth acquisitions.

Ryan M. Nash – Goldman Sachs

Great, thanks for taking my question.

Operator

And our next question is from Erika Penala of Bank of America.

Erika Penala – Bank of America

Good morning

Robert M. Clements

Good morning, Erika

Blake Wilson

Good morning

Erika Penala – Bank of America

My first question is actually a follow-on to Ryan’s question, I think a big differential that we’re seeing from your bank this quarter versus the other bank that we’ve seen report is your channel mix in terms of your origination. I guess, could you give us a sense of what (inaudible) channel margin you are seeing by channel and what your mix is likely going to look like at the end of the year?

Blake Wilson

Yeah, Erika, this is Blake, I don’t think we’ve been disclosing channel margins in detail. But as you can get a sense, in general, we’re seeing a growing mix of the retail business overall. And that happens to have generally a wider margin in some of the other wholesale related channels. And then within that, there is a growing proportion of the jumbo business. And that continues to be a big part of the mix in the retail channel overall and really for the business overall is growing. And those margins continue to be attractive.

And then the follow on point, there is really the consumer direct side, which again, allows us to really uniquely, probably extend for several quarters the opportunity to penetrate the HARP volumes that we’ve been discussing. And those are probably the widest margins and most efficient channel that we have overall.

Erika Penala – Bank of America

Okay. And in terms of the origination activity trends we should expect, I recognize that you just mentioned that you are going to also be – your trends are not going to be (inaudible) what’s happening with the industry. But if the MVA forecast is looking for an 18% decline in origination for 2013, how much better can you do?

Robert M. Clements

Well, I can tell you, Erika, this is Rob, that we’re feeling very good about the momentum we’re seeing in our pipeline right now. The first quarter, typically, seasonally a slow quarter and we did see a meaningful increase in the BMR in the quarter. But going forward, we think the purchase market is going to continue to come back and be strong and we’ll be well positioned to continue to gain market share. We did see a nice increase in our market share in the quarter and we’re confident that trend, we can replicate that through the course of the year and continue to gain market share and take advantage of the rebounding purchase money market.

Erika Penala – Bank of America

I guess, so is it fair to assume given what you just mentioned, clearly there’ll be seasonal [blog] next quarter, but is it fair to assume that your rate of decline could be far [less in the deep percent] and is it fair to – for us to assume maybe just a single-digit decline current run rate as we think about second half of the year?

Robert M. Clements

Yeah, I mean, I think we are looking overall at the volume levels and the unique opportunities to grow market shares as Rob indicated, and then you combine that with the fact that we are really focused on penetrating the purchase money business and particularly on the retail channel as you know Erika, we’ve made the vast majority of the fixed cost investments in the overall strategy. From here, the new hires tend to be substantially lending professionals that bring incremental revenue and volume within. So it’s really a brick-by-brick building process that we think that we’ve good visibility into our current pipeline activity. And the way that we expect to expand overall market share and the margin activity, clearly a substantial rise in rates at some point in time will diminish the refinance opportunity and that’s why we continue to like the servicing that we are putting on the books and focusing on the purchase money business and a big differentiator is the growing on agency market, which were a big part of leading and those are real differentiators as you indicated.

Erika Penala – Bank of America

Got it. Thank you for taking my questions.

Robert M. Clements

Welcome, Erika.

Operator

And next we have a question from Michael Rose of Raymond James.

Michael Rose – Raymond James

Hey, good morning, guys. How are you?

Robert M. Clements

Good morning, Michael.

Blake Wilson

Good morning, Michael.

Michael Rose – Raymond James

Hey, looks like you guys added another 110 people in the retail channel. Can I just get your thoughts on additional incremental hires here, how that might impact expenses going forward?

Blake Wilson

Yeah. Hey, Michael, it’s Blake. Yeah, the 110 people was a good add for the quarter and a little bit lighter than the previous couple of quarters. As you know, that tends to be a little lumpy depending on the type of talent and focus in areas. But we are – we believe continuing to see great opportunities that are attracted to EverBank and all of our capabilities from a banking and mortgage lending perspective. The Northeast continues to be an attractive area that we’re in the early stages, feel it building out. and so we’d expect to see similar or even greater growth. And most important thing from our perspective is, it tends to from here be tied to a revenue generating activities. So incremental staffing for the vast majority of the growth on the retail side will come with incremental revenue opportunities in the future.

Robert M. Clements

I do want to emphasize, we’ve continued to be extremely (inaudible) with the caliber of the talent that we’re able to attract in the marketplace, feel very good about the progress we continue to make and the growth in the first quarter. But deeply excited about conversations we’re having with teams that are interested in joining us going forward.

Michael Rose – Raymond James

Okay. and then as a follow-up, just as it relates to BPL, I think on the last call, you talked about potentially expanding the team both geographically the number of offices mainly in some new markets and also the team itself in terms of people. can you kind of give us an update there? Thanks.

Robert M. Clements

Yeah. The key focus from that perspective has been to complete the integration, which we communicated has been done and then very thoughtfully relaunched the business overall and that’s really underway. We’ve seen great success in really reactivating the existing account executives that they had on the team, and with growing pipelines in success. So there has been a couple of ads, but it hasn’t been a real substantial expansion of personnel and new geographies at this point. It’s really been more of, let’s reactivate the distribution that we have and grow the – and regain the momentum in the businesses in which we indicated at the end of the first quarter, we’re starting to have good visibility into that.

Blake Wilson

Just to add to that, we see some real similarities with our relaunch of the Tygris Commercial Finance business. We took a lot of time in both cases on the upfront integration and really refining the underwriting guidelines and credit criteria and marketing strategies in the case of EverBank Commercial Finance formally Tygris.

As you may recall, first month after closing, we were around a $5 million origination level and we’ve grown that to roughly a $100 million plus monthly origination level. And we’re very excited about the progress we’ve made with the BPL acquisition, and the outlook for the remainder of the year is very strong and recent pipeline activity has been very healthy.

Michael Rose – Raymond James

Thanks, guys.

Operator

And our next question is from John Pancari of Evercore Partners.

John Pancari – Evercore Partners

Good morning, guys.

Robert M. Clements

Good morning, John.

John Pancari – Evercore Partners

Can you talk a little bit about the trends you are seeing in the BPL portfolio, the loan growth, the demand there, as well as the incremental margin that you are achieving now on those credits as you bring them on?

Steven J. Fischer

Yeah, as we indicated, the growth on the commercial lending side for closings was $60 million in the first quarter. But we’ve really been in a thoughtful way, relaunching the business. And so we see the approved backlog and pipeline activity growing inline with, I think the intermediate term targets that we had previously communicated.

As it relates to the broader portfolio and performance, we’ve completed, again the integration and review from that perspective and the portfolio has been performing in line with our expectation. So overall, things are well positioned from the business perspective on the existing portfolio, the people, and the relaunch of the business.

John Pancari – Evercore Partners

Okay, great, and thanks for reiterating some of that, sorry if I missed it. On the BPL side, I mean, do you see other opportunities to add to that portfolio with other additional acquisitions at all as you expand the net business?

Robert M. Clements

Well, we’re obviously mindful of portfolio opportunities that exist and we stay kind of in the flows from that perspective. But right now, what we’ve just really seen, a great opportunity to reactivate the distribution channel that we have in place and get that to a scaled and sustainable level. We’re also starting to see great synergies from all these businesses working together. And that’s really both on the retail side, cross over referral activity, not only to deposits, but also to potential commercial customers and our business banking deposits customers were also seen good penetration of some of our business customers overall. So part of it is optimizing the synergy of the platforms that we have overall is a real key focus.

John Pancari – Evercore Partners

Okay, thank you. That’s helpful. Then lastly, can you talk a little bit on your outlook for deposit flows. Pretty good growth again, this quarter; I guess a little bit below the level I was looking for, but trying to get some color on what you’re seeing there in terms of deposit flows. And are you starting to see any migration of the balance sheet at all.

Blake Wilson

We actually, we’re really pleased with our strong deposit growth in the quarter, it was actually well in excess of our plan, and feel like the momentum is very strong both through our retail financial centers in Florida as well as our branches banking operation. So we remain pretty bullish on our deposit growth going forward.

Robert M. Clements

And the key part of that is we were able to ahead of our expectation pay off the higher cost repo lines that we used to fund the BPL transaction and really starting to restore core deposits and create a lot of liquidity in the balance sheet overall. So, we like the quality of the customer we’re bringing in very much in line with our target profile in existing customer base. And then overall, again, just good moment in building deposit franchise and replacing some of the borrowings we used to do the BPL transaction.

John Pancari – Evercore Partners

Okay. And then just on that note if I could just ask, what level of growth, what quarterly growth rate do you think is mostly in that deposit book link quarter?

Robert M. Clements

I don’t think link quarter, we’ve been kind of focused on that, I think if you refer back to our immediate term targets on the deposit growth, we’re very comfortable with that. We’re fully engaged in the market from a marketing perspective right now. We haven’t changed pricing on deposits and we’re – I guess, we’re confident in the momentum we saw in the first quarter continuing.

John Pancari – Evercore Partners

Okay, thank you.

Operator

And the next question is from Kevin Barker of Compass Point.

Kevin James Barker – Compass Point Research & Trading LLC

Good morning

Robert M. Clements

Good morning, Kevin.

Steven J. Fischer

Good morning.

Kevin James Barker – Compass Point Research & Trading LLC

With the MSR transaction and you bought the MSR is roughly for 52 basis points of the total portfolio. And it seems like a fairly large transaction for EVER. Is this something were – that portfolio has high delinquency levels to make it so cheap compared to past transactions? I mean we saw it quicken by the heavy MSR, the heavy HARP eligible portfolio for roughly 82 basis points. Could you just talk about the characteristics of the servicing portfolio and why it was cheaper compared to MSR?

Robert M. Clements

Yeah, sure. I guess there are a couple of things. One is a lot of the focus was trying to get to these customers and provide HARP refinance opportunities. And as I indicated earlier, that had not been done previously. And so there was a real motivation to make a conversion, to have the transaction to provide HARP II refinancing opportunities.

This is a typical servicing portfolio, though it’s got market-based delinquencies embedded in it. It’s not what you consider a scratch and dent or other type of distress portfolio. And so I think that’s the differentiator for it. But it is important to get these customers the opportunity to the HARP II program and that was the real impetus for the transaction.

Kevin James Barker – Compass Point Research & Trading LLC

Was that encouraged by the GSE – by Fannie Mae to have this portfolio transferred?

Robert M. Clements

No, we wouldn’t comment on that.

Kevin James Barker – Compass Point Research & Trading LLC

Okay. And considering 25% of the loans are HARP, how many of these loans do you expect to recapture through the HARP program?

Robert M. Clements

Yeah. So we’ve had really good penetration experience based on our existing marketing and solicitation of HARP 2.0 customers. Early indicators are because they have not been marketed to in the past, we’re getting a very response rate at or above those levels. And so overall, you could start to see good penetration, we think, in line with or maybe better than we saw on our existing books.

Kevin James Barker – Compass Point Research & Trading LLC

Okay, I appreciate it. Thank you very much.

Operator

And our next question is from Peyton Green of Sterne Agee.

Peyton Green – Sterne Agee

Hi, guys, good morning. I was wondering maybe if you could talk about the deposit growth that’s been exceptional. Is there a point in which you start to maybe rethink the pricing and bringing the pricing down or what’s an appropriate loan to deposit ratio that you’re looking for?

Steven J. Fischer

I mean, we’re currently really enjoying the high quality customers that we’re bringing on in the pace of growth and the marketing strategies that have allowed us to continue to build our brand that give us synergy with our other business channels. And so continuing to build that core franchise we think at least in the near future is really based on how we’ve been running the last few quarters. So I wouldn’t expect us to revisit pricing in the near-term because we’re still seeing good asset generation growth overall and good risk adjusted returns both on the commercial side and as we’ve been talking on the residential side.

So overall, the balance growth from all the businesses, we like at these levels and we’ll continue to support.

Robert M. Clements

The strength of our deposit franchise is really what fuels our ability to take advantage of the asset opportunities in the marketplace and Blake touched on the increase in our marketing efforts and the contribution that has had. But we’ve also, over time, as we elevate our brand profile, and there’s greater appreciation in the market for our value proposition that seems to have a real positive impact on our momentum. So we’re looking forward to future growth.

Steven J. Fischer

But you highlighted a great point from flexibility perspective that given where we are from a pricing perspective, we have a lot of room to maneuver with price if the point comes where that makes sense for us. right now, we’d probably continue with the focus we have.

Peyton Green – Sterne Agee

Okay. And then back to the serving portfolio acquisition, what was the note rate, I mean, is there anything out of whack on the coupon or anything? Or you mentioned that the delinquencies were basically market based and not distressed, but what could you tell us about kind of your expectation of the life of the portfolio?

Steven J. Fischer

Yeah, I think the note rate on the portfolio was a little over 5%, and so a lot of the customers are not only HARP eligible, but potentially in the money for refinance. it’s an average loan size of about 140,000 and 93,000 units overall, and again, it’s about a 5.21% interest rate on the portfolio overall.

Peyton Green – Sterne Agee

Okay, great. And then, I mean, just maybe stepping back in terms of you all’s history, I mean, where do you feel like you are now compared to prior cycles and times?

Steven J. Fischer

In terms of …

Peyton Green – Sterne Agee

Just the overall business and the growth prospects and the profitability outlook?

Steven J. Fischer

Peyton, I can tell you we feel very good about the progress we’ve made progress and executing on our key strategic objectives so far and feel good about achieving our growth targets in terms of assets, revenue growth, and earnings objectives. and as we continue to demonstrate the diversity of our business model and achieve our – make right progress in terms of the change in our asset mix. And while our commercial business was about what 40% of overall loans at the end of the quarter, and about 45% of loans held for investment, and we see our ability to get to that roughly 50% of commercial loans, 50% of commercial loans to total loans down the road. And I feel like we’re really firing on all cylinders in terms of achieving those objectives that we’ve laid out.

Blake Wilson

I mean, the two things as you know, we’ve always talked about is the diversity in our business model, and the flexibility we have to make adjustments to capitalize on market opportunities and we’re really starting to see that work in full stride with great asset sourcing opportunities, and we are seeing great demand in the capital markets from a fixed income perspective.

So the ability to selectively originate beyond the balance sheet and securitize and sell them in the capital markets, or selectively grow assets in line with our core organic growth on the deposit side. That coupled with the fact that we’ve got these great platforms where we’re starting to really leverage not only the core infrastructure we’ve invested in, but the brand and the marketing initiatives and getting the crossover synergy from the channel in terms of cross sell and penetration and that’s a long-term development, and one that we’re really excited about and starting to see some early returns on.

Peyton Green – Sterne Agee

And certainly over the past year you all had great opportunities present themselves and you’ve been able to take advantage of them, how does the pipeline of potential opportunity look today maybe compared to 6 months ago or a year ago?

Robert M. Clements

Well, we continue to focus on organic growth and feel like we have really all the pieces in place to achieve our objectives. We’re always – we’re always going to be opportunistic if an interesting acquisition opportunity comes along or probably more of a focus on potential bolt-on acquisition to our existing platforms. But really, our primary focus is on continued strong organic growth.

Peyton Green – Sterne Agee

Okay, great. Thank you.

Operator

(Operator Instructions) And our next question comes from Tom Alonso of Macquarie.

Thomas Alonso – Macquarie

Hey, good morning, guys.

Robert M. Clements

Good morning, Tom.

Steven J. Fischer

Good morning.

Thomas Alonso – Macquarie

Just real quick, just thinking about how the balance sheet kind of moves around here, should – you’ve got a little bit more cash than you had last quarter. The held for sale balances are up. Should we kind of expect to see some of that cash get reinvested into the loan book or are you going to look to pay down the borrowings and maybe the overall balance sheet doesn’t grow as much, because you start to see some of the held for investment loan to move up, but that held for sale balance kind of stays flat. How should we be thinking about that?

Blake Wilson

Yeah, this is Blake. I think the way to think about that particularly with the reactivation of the resi securitization program overall is the fact that, there will be – the cash was a little bit higher. But we want to have some cash there on a periodic basis. Overall, like it was a little bit higher depending on the timing of when some of the securitization of loan sale happened.

So there will be some movement around there. We would continue to see loans held for sale and really get into the rhythm of doing one, maybe two securitizations a quarter and really turn over the residential growth overall and like we’ve been talking about, we see pipeline, pipeline activity building on the commercial side, and we’d see kind of core commercial loan sales from our investment growth overall. So, with the mix that we’ve been talking about for a long time, now growing into that 45%, 50% commercial and then remainder on residential and then turning over the residential warehouse more frequently

Thomas Alonso – Macquarie

Okay, great and just to clarify on the consent order expenses that are going to be in the second quarter, is that number similar to what you have in the first quarter?

Steven J. Fischer

No, hey, Tom, it’s Steve. They are a little bit higher, we’ve – ultimately the staffing was higher than we had originally anticipated in the first quarter, actually that staffing level of the independent consulting is beginning to fade, but you’re right in that, we’ve – our estimate has gone up a little bit.

Thomas Alonso – Macquarie

Okay, so then those expenses will take up a little bit in the second quarter and then in the third quarter they‘re gone.

Steven J. Fischer

I think actually quarter-over-quarter they are down a little bit.

Thomas Alonso – Macquarie

Okay, sorry.

Steven J. Fischer

But they are a little higher than we had…

Thomas Alonso – Macquarie

Got it.

Steven J. Fischer

In the last quarter, but then they’re gone.

Thomas Alonso – Macquarie

Okay, great. And then just on the hiring front on the slow down, is that just because you, you purposely slow down because there wasn’t as much opportunity, or was it just more competition folks, just kind of trying to get a sense of why things weren’t as aggressive as you anticipated?

Robert M. Clements

Yeah, 110 people wasn’t exactly a huge slow down, it was a little less from the prior quarters. Part of it is, we’re really wanting to make sure that we’ve got the environment in place from the capacity and service delivery perspective. And so the other thing is, we’re really focused on making sure we get the right people that are in line with our philosophies, our values, our strategies and part of that is a little lumpy from a timing perspective, but overall, we continue to attract great talent given the capabilities of EverBank and we’re pleased with the staff that we added in the first quarter.

Thomas Alonso – Macquarie

Okay. Thanks, guys.

Robert M. Clements

Thank you.

Operator

And our next question is from Craig Siegenthaler of Credit Suisse.

Nicholas Karzon – Credit Suisse Securities LLC

Good morning. This is actually Nick Karzon standing in for Craig.

Robert M. Clements

Good morning.

Steven J. Fischer

Hi, Nick.

Nicholas Karzon – Credit Suisse Securities LLC

I guess, if we could focus on the quarter NIM for a bit, I think it came down about 13 basis points quarter-over-quarter, and I know there is a partly a little bit more liquidity than we should expect going forward, but if you can help us think about the trends there, kind of throughout the rest of year? That will be helpful.

Steven J. Fischer

Yeah, hey, Nick, it’s Steve. I think when we talked about NIM last quarter, in the sense that if you looked year-over-year 2012 to 2011, about a 40 basis point decline and that wasn’t a bad proxy for what we anticipate for the current year. And I think that we still feel that that’s not a bad approach. I think with some of the dynamics that Rob and Blake have walked through, if we did see increases in loans held for sale in some of the shorter duration commercial assets, they are trends that are positive, so while they negatively impact NIM on a quarter-over-quarter basis, ultimately, they generate high ROEs and future gain on sale. And so that just with the way the balance sheet mix is shaping out, we just think the trend that you saw in kind of quarter-over-quarter is probably not going to be all that different as we move forward.

Nicholas Karzon – Credit Suisse Securities LLC

Thanks and I guess, it’s like a follow-up on the reserve level there is a relatively large reserve released in the quarter. And I was just wondering kind of how we should think about that going forward with kind of the charge-offs in kind of in that 20 basis point range, is that the right way to think about it?

Steven J. Fischer

Yeah, I think the charge-offs are, they were lumpy this quarter primarily due to recoveries that we had in the last two quarters, I think we had about $2.5 million of recoveries in the last two quarters, and they were a little bit smaller. we’ll probably see some additional recovery of the lumpiness as we move forward. so where we are in the credit cycle, we’re kind of in, they’re based when they come. but I think from, looking at upstream at the improvement in the credit quality of the book, we don’t see anything that’s going to significantly impact growth charge-offs.

One thing, as we pointed out from an allowance perspective, I think, we included this in the earnings supplement. an important metric to me is, if you look at our allowance, commonly as the allowances as a percentage of loans held for investment, but I think telling for the quality of the book that we have is the allowance divided by our annualized net charge-offs, which is when we’ve got 2.75 years coverage on that. I think if you look at that versus many of our peers or other banks, that’s a very strong position.

Nicholas Karzon – Credit Suisse Securities LLC

Okay, thanks for taking my questions.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to Rob Clements for any closing remarks.

Robert M. Clements

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

Operator

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

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: transcripts@seekingalpha.com. Thank you!

Source: EverBank Financial's CEO Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts