EverBank Financial Corp (NYSE:EVER)
Barclays Capital Global Financials Conference Call
September 11, 2013 10:30 ET
Rob Clements - Chairman and Chief Executive Officer
Steve Fischer - Chief Financial Officer
Good morning, and welcome to Day 3 of our Global Financial Services Conference. We are very delighted to have EverBank Financial attending the conference this year. I think you will learn that it’s one of the more unique stories in banking at the moment with a kind of a nationwide deposit gathering and asset generating capabilities. Presenting from the company today are both, Chairman and CEO, Rob Clements as well as Chief Financial Officer, Steve Fischer.
With that as an introduction, I will turn the podium over to Rob.
Rob Clements - Chairman and Chief Executive Officer
Thanks Matt. I am Rob Clements, Chairman and CEO of EverBank. I am joined today by Steve Fischer, our EVP and CFO. I’d first like to thank Barclays for inviting us to speak to you today and we also appreciate your time and interest and welcome the opportunity to tell you about EverBank.
The predecessor company to EverBank was acquired in 1994 and has been transformed from a mortgage-focused company with approximately $200 million in assets to a diverse nationwide financial services company with more than $18 billion in assets today. We believe we have a superior operational operating model designed to capitalize on industry trends and achieve sustainable long-term growth across a variety of cycles.
2012 was a successful and transformative year for our company as we raised significant equity growth capital as well as closed and integrated two strategic acquisitions. In 2013, we have managed through the evolving market condition and have positioned the company to prosper over the long-term. Our success stems from a number of competitive advantages which we feel differentiate us from many of our bank peers. We have robust asset generation capabilities from many diverse sources and can quickly adjust both product and geographic focus based on market conditions.
Our unique deposit engine is scalable and generates deposits with a lower all-in cost the most branch based models. We have always maintained a disciplined risk management culture that has minimized operational and balance sheet risk through various market cycles. And lastly, EverBank is managed by team with a proven long-term track record of success. These competitive advantages have allowed us to build the business with greater flexibility and diversity. The net result is the company that generates strong returns and consistent growth with low risk.
For those of you not familiar with our story, I would like to share some history with you. Over the last decade, we have evolved into a full service banking company driven by a broad nationwide asset generation capabilities and scalable deposit engine. As you can see, this approach has enabled us to significantly grow our business with a 27% compound annual growth rate in assets from 2000 to 2012. This strong asset growth has been fueled by our core deposit engine, which has grown at a compound annual growth rate of 50% over the same time period. Throughout our history, we have opportunistically augmented our organic growth through strategic acquisition, including three meaningful acquisitions since 2010.
It is also important to note that we have been highly selective and disciplined in our acquisitions as evidenced by less than $50 million of total goodwill on our balance sheet. 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 the heavy lifting of these investments is complete and look forward to driving operating leverage as we are continuing to scale the balance sheet. Overall, our differentiated model has been able to grow rapidly and profitably through a variety of economic and interest rate cycles.
While we are headquartered in Jacksonville, Florida, our product offerings, operating platform, distribution channels and marketing strategies have been specifically designed to attract our Vanguard retail and business customers in key metropolitan markets nationwide highlighted by the blue and red locations on the map. Looking at this map, the black circles signify the markets where we have commercial and commercial real estate lending offices in most cases lending officers in these markets also cover markets in contiguous areas or states giving us coverage throughout the top commercial lending markets in the country. The blue dots represent the offices we have opened as a result of our retail lending expansion.
And as you can see, we have strategically targeted SIPCOs and large MSAs across the country with a large percentage of jumbo originations. As the mortgage market returns to a more stable purchase-driven environment, we believe we are well-positioned to take advantage, to take market share as a result of the investments we have made. As noted by the red dots, we do have a right fiscal financial center presence. Our Florida Financial Center infrastructure is a low-density network and was largely acquired through the Bank of Florida FDIC-assisted transaction in 2010. We have been successful with generating deposits in these markets with total average deposits for a financial center of approximately $175 million. We feel our franchise made up of national wide lending and deposit platforms is a blueprint for how to design a financial services company today.
The next slide highlights the evolution of our balance sheet mix and the diversity of our asset generation channels. As you can see we have made great progress diversifying our balance sheet mix over the past 2 years. As of June 30th residential loans made up approximately half of our loans held for investments consisting primarily of prime jumbo hybrid ARMs. Commercial and commercial finance loans represent 48% of our total loans as of June 30th compared to less than 25% in 2011. Our retained asset generation is also very balanced between commercial and residential.
You can see from the two pie charts on the bottom of the page that our retained asset generation volume of $1.1 billion in the second quarter was approximately 2.5 times greater than it was two years ago driven by robust commercial finance, warehouse finance and commercial real estate volumes as well as strong prime jumbo volume coming from our retail lending channels. We believe this mix shift will continue over time. As I previously mentioned EverBank’s franchise is made of asset generation and deposit platforms that reach clients through diversified channels on a nationwide basis. These platforms include our commercial lending, commercial finance residential lending and residential servicing businesses in addition to our deposit platform.
We built EverBank on a few key principles that set us apart from many banks our size. First, all of the products and services are distributed through multiple channels with a nationwide reach. We believe that geographic diversity is just as important as products and balance sheet diversity and few banks enjoy the national reach we have today. Second, many of our corporate services as well as credit approval and underwriting functions are delivered through centralized platforms, which provide us with flexibility of quickly scale and make necessary adjustments based on market dynamics and risk parameters. Lastly, our deposit platform provides lower all-in costs of funding than most traditional branch based models. This is an important competitive advantage that allows us to achieve high-quality growth with lower credit costs that yields more attractive risk adjusted returns.
I’d like to spend a few minutes now walking through our lending businesses and deposit platform in a more detail. Our commercial real estate lending business targets single tenant and multi-tenant properties in the top 100 markets nationwide. Our current portfolio is approximately $2.6 billion in UPB and is well diversified by both geography and product type. We effectively re-launched our commercial real estate lending business earlier this year following the integration of our Business Property Lending acquisition from GE Capital in the fourth quarter of 2012. We are very deliberate on the front end ensuring we had the product and underwriting strategy fine tune are now benefiting from increased origination levels as evidenced by nearly 150% quarter-over-quarter increase in commercial real estate origination volumes in the second quarter to $157 million. While attractive on a standalone basis, we also see a meaningful opportunity to cross sell additional banking products to the various small and midsized businesses as well as their mass-affluent owners and managers.
We also have $1.5 billion commercial finance business that originates small to mid ticket leases across different platforms and industries as well as LBL - ABL facilities to small and middle market companies across the country. The business that’s enjoyed significant growth since our platform acquisition of Tygris Commercial Finance in 2010 similar to the integration process I just described related to our commercial real estate businesses we spend much of 2010 redefining and restarting ECF. As you can see from these two bar charts that results have been dramatic with our total lease and loan portfolio outstanding having more than doubled since the end of 2011. Origination volumes are also strong with second quarter originations up approximately 44% compared to the first quarter. ECF is complementary to our overall business with ancillary fee income opportunities as well as small to mid-size business deposit generation potential. In addition our deposit engine gives us the funding cost advantage over many competitors.
EverBank’s residential lending business originates loans nationwide through three channels our retail lending offices locate in top metro markets, our centralized consumer direct channel and our correspondent channel. Total residential origination volume in the second quarter was $3.2 billion, an increase of 12% compared to the first quarter. Back in 2011 and 2012 as many of larger banks were pulling back from the mortgage market, we made the decision to grow our retail presence to position the company for the ultimate normalization of refinance volumes and return to more purchase money transactions. Since first quarter 2012, we have added approximately 675 retail lending FTEs and opened loan production offices in top wealth markets nationwide. We are pleased with the channel expect today as retail volumes were approximately $1.2 billion in the second quarter and increased from $89 million in the first quarter of 2012 when we began this expansion.
As you can see from the chart on the bottom right approximately one-third of our loan volume is prime jumbo loans, which will be the portfolio on our balance sheet, our best executed way depending on the duration expected risk adjusted returns. This mix has grown over the past year as we expect the percentage of prime jumbo loans as a percent of our total volume to increase with the continued growth in our retail channel and a continue shift towards purchase transactions. The mortgage market today is very dynamic based on the recent move in interest rates. EverBank has managed through many different cycles over the past 19 year and we remain proactive in making the necessary adjustments as the market – as a market transitions to a more steady state. We remain confident that our scalable consumer direct and correspondent channels as well as the investments we have made in our retail channel has us well-positioned for the future.
Our competitive groups and servicing run deep and we believe that over entire cycle servicing represents a natural hedge to our residential lending business. In addition our servicing business generates an attractive source of non-interest bank deposits to help fund bank’s balance sheet. Obviously the interest rate environment over the past two years has created some volatility in servicing earnings since we do not financially hedge our MSR. However, the value created through an expansion of cash flows and lower amortization expense in a rising rate environment should be an important driver of our future performance. As you can see in the chart on the bottom right our MSR amortization expense has been elevated over the past couple of years due to refinance driven prepayment activity. We believe that our amortization expense should decline meaningfully in the future based on lower forecasted prepayment fees resulting from higher interest rates.
As you can see from the map on this page our deposit customer household concentration essentially overlays with the population map of the U.S. as our client valuation proposition is well received nationally. We generate deposits primarily through three channels our branches direct bank, our Florida Financial Centers and through a certain longstanding financial advisor relationships. Our one-stop integrated online and mobile portal provides all the services one would find at a traditional bank, while offering more convenience and control to our clients. You can see from the pie chart that approximately two-thirds of our deposit balances are in transaction based accounts, while that’s in a quarter of our deposits at time based. We think this speaks to the overall quality of our deposits as we targeted type of clients with larger balances to realize our value proposition. In fact our average deposit for household is more than $85,000, significantly higher than the industry average.
Features such as our Yield Pledge promise which gives our clients confidence that they will always receive a competitive rate, while still providing us with lower all-in costs of funds in traditional banks contribute to the overall stickiness of our deposit relationships. Simply put EverBank’s platform provides clients with a better way to bank.
The chart on this slide demonstrates the strength and stickiness of our deposit relationship. The chart on the left shows the compound annual retention rate of customer deposit balances by vintage based on a three-year look back. This metric represents the percentage of account balances we retain on a year-over-year basis. As you can see, we have attracted annual retention rates in the mid to high 90% range across vintages. We believe this retention compares quite favorably in the industry and we have achieved it in a variety of growth, interest rate, and competitive pricing cycles. The right chart shows account balances by vintage. As you can see, our customers have high average balances that consistently grow over time, which is exactly what we want.
We believe we have a significant all-in funding advantage of attritional banks in the current low rate environment when one looks at a fully loaded all-in cost of funding, including operating expenses. We are also well-positioned to take advantage of the next rising rate environment whenever that maybe as we did in previous cycles. This chart shows our deposit cost versus one year LIBOR. In an increasing rate environment, we have previously demonstrated the ability to lag deposit re-pricing similar to more traditional deposit models. You can see that in 2006 we priced deposits 200 basis points below one year LIBOR and created significant value on the right hand side of our balance sheet.
I’d now like to turn it over to Steve Fischer who will walk you through some of our financial highlights in more detail.
Steve Fischer - Chief Financial Officer
Thanks, Rob. I’d like to spend a few minutes talking about our current – our second quarter financing performance as well as some of our historical trends that highlight the long-term performance of our franchise. The second quarter was highlighted by strong earnings, robust asset generation volumes significant year-over-year deposit growth as well as credit quality that improved from already low levels.
Year-over-year, we increased our asset generation by 41% to $3.8 billion. Of this amount, approximately $1.1 billion was put on our balance sheet. We have invested heavily in our capacity to source assets and we now have the flexibility across our platforms to either retain the assets we generate or sell them while maintaining the servicing and customer relationship. We grew our deposits by $2.9 billion, or 27% year-over-year in the second quarter, which highlights the scalability of this platform. More recently, we have been executing on our plan to harmonize this deposit growth with our asset growth opportunities and recently lowered our deposit pricing highlighting the quality and stickiness of these relationships.
Subsequent to the quarter end, we announced the settlement with the OCC related to its independent foreclosure review program. We announced that we would incur an after-tax charge of $20 million in the third quarter related to the settlement compared to after-tax expense of $12 million in the second quarter. I would also like to point out however, that beginning in the fourth quarter we will no longer incur the regulatory related expenses in professional fees which will positively affect our G&A.
So moving on to the next slide, I’d like to touch on our asset quality. It’s important to reiterate that an analytics driven risk reversed critical through is at the core of who we are and certainly served us well over the past five years. In addition, the benefit of product and geographic diversify as well as centralized underwriting and credited approval is critical to why our credit metrics have performed so well.
Our adjusted NPA to total assets ratio as of the second quarter was approximately 92 basis points. This ratio excludes government insured Ginnie Mae pool buyout as well as purchased credit impaired portfolios that have enhanced credit protection. Our adjusted NPA ratio has been a steady decline and we expect that trend to continue based on the addition of new originations with very strong credit characteristics. Our strong credit performance is also highlighted in the trend of our net charge-offs, which is dropped from a peak of 146 basis points in 2010 to only 12 basis points in the second quarter.
This chart highlights our ability to generate earnings per share growth over many different cycles and interest rate environments as we have achieved a 13% compound annual growth rate and EPS over the past 10 years. Another key takeaway is that we have done this while remaining profitable in 2008 which speaks to the risk management culture across our franchise. The current interest rate environment is in transition as the market adjusts and adapts to a steeper yield curve. However, our asset sensitive balance sheet of positioning and our ability to generate both high quality commercial and residential assets for our balance sheet will allow us to benefit from a rising rate environment over time and achieve sustainable earnings growth over the long-term.
With the similar slope to the previous chart, our tangible book value per share has grown at a compound annual rate of 14% from 2003 to 2012, which is consistent with the growth in tangible book value in the first half of 2013. I would note that our tangible book value per share has been positively impacted by the increasing value of our MSR asset, but we still have approximately $58 million or $0.22 per share of temporary valuation allowance that can be recaptured in earnings over time if mortgage rate levels continue to rise.
This chart shows our strong ROE performance over time, which includes double-digit ROEs in 9 of the last 10 years as well as year-to-date in 2013. Pre-credit crisis, EverBank’s ROE exceeded the peer group average while maintaining our disciplined credit culture. You could see even during the credit crisis, our lower credit costs 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 negative.
What’s also important to note is that the returns we achieved in 2011 and 2012 include the many investments we have made across our organizations. These expenses and investments should position EverBank to achieve sustainable growth and our goal of teen ROEs over the long-term. Thanks for your interest in EverBank. And at this time, Rob and I would be happy to take your questions.
Okay. So we are going to pull up the audience response for questions in a second. And so the first question is if you don’t own shares of EVER at the moment or underweight the stock, what might cause you to revisit your thinking, one, continued growth in online mobile banking adoption rates, two, less reliance on mortgage banking revenues, three, higher interest rates and reduced NIM pressure, four, improved operating leverage, or five, less of a variance between reported and adjusted net income? So we will take 10 seconds to vote here.
Okay. So the results are in and 68% of the audience would hope for little less reliance on mortgage banking revenues. So maybe you guys can talk about some of the initiatives that you have to kind of diversify the revenue stream?
Well, I hope one of the themes that is clear in our presentation was the successors had in diversifying the business over the past several years and in particular through several strategic acquisitions that we consummated. And as we pointed out in one of the charts, our commercial assets represent approximately 50% upon held for investment today in a slightly higher mix of those loans that we are retaining on a go-forward basis. And I think that to our sense that the market doesn’t really fully appreciate the diversity and flexibility of the business model that in our view is very well positioned going forward and we look forward to environment that is going to be a lot more stable where earnings or growth will be much more visible and predictable as we move away with what has been the last couple of years a much more kind of volatile in some cases unprecedented market environment. Steve, I don’t know if you want to add to that?
Yes, I think I would just add to that. During that unprecedented refinance ways, you heard in the prepared remarks, we had the opportunity to drive even higher ROEs during that phase when we chose to reinvest that back into the business through some very significant commercial asset platforms with the warehouse finance business and then from GE, the BPL business. And these are now just really beginning to get their legs. So, we did made an over move to really utilize that period of time to position the business really where we are now. And we’ve been talking a lot over the last two years as to what does the business do when we get to really where we are from an interest rate perspective where they are now. The good news is we’ve had these two years to really reposition the business and invest in the business and I think we are in a really good place now.
I would add that we also feel good about our mortgage banking business and on a relative basis we’ve all read some recent articles about some of peers and what they are forecasting in terms of future volumes. And while there will be headwinds out there, we see our business and with the investments we’ve made and going after to the purchase money business is that we will see a lot more stability certainly on a relative basis going forward as we continue to enjoy the payoff on the investments we’ve made in the commercial lending businesses.
Let’s now move to the second audience question please. So what sort of volume do you view as Ever’s strongest investment attribute at the moment, one its nationwide deposit franchise and lending capabilities, two, its comparably low cost and scalable deposit gathering platform, three, it’s balance spread which is the income mix, four, it’s substantial flexibility in both side of it’s balance sheet, five, the current valuation discount versus (indiscernible)?
Okay so the results are in and it’s a tie, we have lot of ties over this conference, but anyway the a 47% choice two is comparably low cost and scalable deposit platform and choice five current evaluation discount are the two top choices from the audience. I guess those are fairly self explanatory. So, maybe we will move on to question three. So where would you like to see Ever focus its resources over the next year, growing in commercial money and commercial finance operations, cross selling banking and wealth management services to mass affluent customer base, three, streamline its expense base, four, increasing its dividend, or five engaging financially disciplined – additional financially disciplined M&A.
So the results here it show that 45% of the audience have referred resources to be focused on growing the commercial lending and commercial financed operations followed by 30% of the audience who would like to see additional selective M&A, maybe we’ll move on to the fourth question please.
Fourth and final question, so over the next two years do you believe Ever is more likely to one, acquire a smaller bank and turn to a merger-of-equals transaction sell through larger bank or refraining some M&A activity entirely and we will take 10 second to answer.
So the results here show that most of the audience, 76% think additional acquisitions on order over the next couple of years and maybe you have to just talk about have you seen any pickup in discussions of your targets, they tend to be somewhat unique in terms of the operations you have acquired in the past, so is there a pretty large pipeline that you look at?
Yeah we consider our M&A capabilities to be a real strength for the company and we highlighted the success we’ve had in some recent acquisitions over the past few years. And again I think the amount of goodwill on the balance sheet really does reflect the discipline that we’ve always maintained through the years. We went into 2013 kind of emphasizing our focus on organic growth, feeling like we’ve really put the pieces in place to enjoy above the average growth and above the average ROEs going forward. And that view – that’s still the view today, we don’t feel like there or any voids that we need to fill. We really like the balance that we have today on the asset side and continue that tremendous confidences have been surprised me about where we came out on in terms of the view that our deposit platform is really a core strength. We have the ability to really generate all the funding we need and can adjust the dollars based on our growth prospects to on again a very attractive all-in low cost basis. So right now I feel very good about continuing to support these recent acquisitions and enjoy very strong robust organic growth going forward, but when we are at the possibility just because the strength of our M&A capability is that we won’t identify an interesting opportunity that will complement what we have in place today.
Great. At this point, we will open it up to broader Q&A from the audience.
Hi. I just wonder if you could talk about what your expectations would be for your deposits that will behave in terms of stickiness when interest rates rise, particularly when short-term rate start to rise relative to branch-based deposits. I guess, the thinking being that given the mortgage direct, I guess digital way of accessing and moving deposits if you will, is that going to create anymore sort of elasticity or whatever with rising interest rates?
Well, good news is we have the experience having managed this through different rate cycles and the metrics that demonstrate that our retention numbers are still moving very high in a rising rate environment. And actually our value proposition is greater, because our rates will increase. Our ability to lag our LIBOR, yet still be more competitive than many of our peers, it actually we think we have become more competitive in a rising rate environment, but we don’t see any reason why our ability to maintain the same retention metrics would be any different in a future rising rate environment than it has been in the past. I don’t know if that answers.
Maybe just add in there, I think the one it starts with getting the right customer out of the gate and so we went through the slides quickly, but if we get back to the deposit slide, you will see that we are very disciplined in the acquisition phase of getting the right folks in certain target markets and the offering is kind of tailored to those folks. So it begins with getting the right people in to begin with. And then I think if you take a couple of the slides we gave you which would be combining kind of the retention slides where you saw, I think if you look back in ‘06 where we had – we lagged, I mean, so you really have kind of a case study in the slide deck which is we lagged LIBOR in 2006. So you can look at that vintage, from a retention perspective over a three-year period, I think it was 97% or 98%. And that really goes back to we are focusing on the right customers, we get the right sticky counts, and we are not really chasing the CD market, as I think it’s 20% or so of our markets. So when you look at the composition of the deposit, it looks a lot like a branch bank and that’s intentional. So we are not time, time deposits, and not a core part of what we are going to get as well. So what tends to happen is we get new customers balances actually come in. We have a little bit of minor accretion for people that will move. You like to see that on the retention that happens over fairly quickly and then the balances rise as they get comfortable with the level and quality of service that we provide.
Just a quick follow-up, but a lot of other the branch based banks obviously developed this kind of capabilities, well since 2006 and you have had in couple of banks acquired capability as well. So do you think that changes in anyway how the behavior might be this time?
Well, we expect to be a beneficiary for rising consumer adoption rates, especially since we don’t have the channel conflict in some of the competitive disadvantages and many of our peers will have with the legacy branch network. So we actually like the fact that some of our larger competitors are educating customer base on the ease of mobile banking, which will result in higher adoption rates, but we think we are well-positioned to benefit from that.
Perhaps you could update us on the trends in the mortgage warehouse business that you have acquired, we have heard some things in different banks that those balances are down fairly materially in the third quarter, are you seeing similar trends in your warehouse business at the moment?
Yes, the outstanding balances have actually remained relatively stable. That’s been another key acquisition that we made in 2010, I am sorry 2012. We have seen balances grow from $350 million to I guess about $1.2 billion at the end of the quarter. And while utilization rates have come down a little bit, we continue to add new customers. And so we expect that business to remain, the outstandings remain relatively stable going forward.
Well, if there is no additional questions please join me in thanking Ever for their presentation. There will be a breakout in the Madison Suite immediately following this presentation. Thank you.
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