Erika Penala – Bank of America Merrill Lynch
EverBank, a financial services company, headquartered in Jacksonville, Florida. EverBank has more than $ 17 billion in assets and $ 13 billion in deposits and despite some of the mortgage headlines you may have been seeing, the stock is up 50% since EverBank completed its IPO in May of last year.
Management has clearly been focused on diversifying its revenue mix, launching a series of business falling with acquisition of the CRE lending business by last year. They’ve also continued to grow its commercial finance business, origination of volumes are on pace with our 20% year-over-year, following a 70% jump in orders.
So with that, I’m very excited to have President and COO, Blake Wilson; and EVP and CFO Steve Fischer with us again this year. Blake the stage is yours.
Blake Wilson
Thank you, Erika and good afternoon everyone. As Erika stated, I’m Blake Wilson, President and COO of EverBank. Steve Fischer, our EVP and CFO; and Scott Verlander, Corporate Development is with us here today. First I’d like to thank BofA Merrill for inviting us to speak in today’s conference. I appreciate your time and interest in hearing more about the EverBank’s story.
EverBank is a diversified financial services company, headquartered in Jacksonville, Florida. We provide lending and deposit products, consumer and commercial banking clients nationwide. As you can see from the map, we’ve placed our commercial and retail residential lending offices in top metro markets across the country. In addition, we have a low density physical presence in Florida with 14 financial centers that we largely inherited through our Bank of Florida FDIC acquisition in 2010.
We believe we have a superior operating model, designed to capitalize on industry trends and achieve sustainable long-term growth across the variety of cycles. These geographic diversification created by our national lending and deposit businesses in addition to our centralized operating and underwriting platforms, allows us to prudently manage risk and grow in different environments dating back to the mid 1990s, when the predecessor company they EverBank was acquired with roughly $ 200 million in assets.
As of the third quarter, we were approximately $ 17.6 billion in assets, $ 13.6 billion in deposits with the market cap of approximately $ 1.9 billion. For those of you not familiar with our story, I’d like to briefly touch on our strategic evolution and growth.
You can see how we’ve evolved through the years when residential mortgage lending and servicing business, 10 to 15 years ago into a full service mortgage banking or full service banking company today, driven by executing our plans to build broad nationwide asset origination capabilities and a scalable high quality deposit engine. The past 12 months, we’ve dedicated to integrating and optimizing our business to succeed in the current environment, and we are extremely well positioned to continue growth as we look into 2014.
As you can see this is a calculated approach that has enabled us to significantly grow our business with a low to mid 20% compound annual growth rate in assets and loans over the past five plus years. This strong asset growth has been fueled by our core deposit engine, which has grown balances on a CAGR of 24% over that same time period.
We have also made significant infrastructure investment over the last couple of years reflecting unprecedented changes in the regulatory environment and our growth past $ 10 billion asset threshold. We believe the heavy lifting of these investments is complete and we look forward to driving operating leverage as we continue to scale our balance sheet. Throughout our history, we have opportunistically augmented our organic growth through strategic acquisitions including three meaningful acquisitions since 2010.
Consistent with our business evolution during the third quarter, we completed several key strategic initiatives that position the company to execute its core strategy as we enter 2014. Last month, we announced the series of transactions designed to optimize our servicing business by partnering with Walter Investments and its subsidiary Green Tree on the sale and sub servicing of $ 20.3 billion of UPB of higher delinquency profile servicing and the sale of our servicing to pull platform.
We also completed our exit from the wholesale broker mortgage origination business to focus on growing our balance sheet with purchase oriented residential lending to our core clients. In addition, we completed a realignment of our three commercial lending platforms into the single business unit, and lastly we entered into a settlement with the OCC in [Indiscernible] independent foreclosure review during the third quarter.
These agreements will stem the amount of third party expenses and allow us executive management to focus on growing the franchise. All of these initiatives were designed were designed to best position the company for long-term growth across our many businesses. The result is a more diversified with simplify business with an enhanced focus on our core clients.
The next slide highlight the evolution of our balance sheet mix and the diversity of our asset generation channel, as you can see, we have made great progress diversifying our balance sheet over the past five years. As of September 30, our total loans held for investment were $ 12.5 billion double the level in 2010 and more than three times the level in 2007.
What is just as important to notice however is the diversification we have achieved during this time; commercial loans now represent 45% of our loans held for investment portfolio in the third quarter compared to 30% in 2010 and 27% in 2007?
Our retained asset generation is also very balanced between commercial and residential. You can see from the chart on the right side in 2013 year-to-date retained assets origination volume of $ 2.6 billion is well diversified with approximately half driven by commercial finances and commercial real state volumes as well as strong climb jumbo volume coming from our retail lending channel.
As I previously mentioned EverBank’s franchise is made up of asset generation and deposit platform that reach clients through diversified distribution channels on a national wide basis. These platforms include our commercial real estate and commercial finance business, our prime residential lending and servicing businesses and our deposit platform which targets both commercial and small business clients. We built EverBank on a few key principles that set us apart from many other banks of our size.
First all of the product and services are distributed through multiple channels with the nation wide reach. We believe that geographic diversity is just as important as product and balance sheet diversity and few banks enjoy the national REIT we have today, second many of our corporate services as well as our credit approval and under writing function are delivered through centralized platforms which provides us the flexibility to quickly scale and make necessary adjustments based on market dynamics and risk perimeters.
Lastly our deposit platform provides a low all-in cost to funding compared to traditional brand space models; this is an important competitive advantage as it allows us to achieve high quality growth at a more attractive risk adjusted return. I would now like to spend a few minutes walking through our lending businesses and deposit platform in more detail. Our commercial real estate lending business targets both single tenant and multi-tenant properties in the top 100 markets nationwide.
The portfolio is well diversified both on geography and property type as you can see from the charts on the right side of the page. We effectively relaunched our commercial real estate lending business earlier this year following the integration of business property lending, the acquisition we made from GE Capital in the fourth quarter of 2012. We were very deliberate on the front end and ensuring that we had the product and underwriting strategy fine tuned that are now benefiting from increased activity. Year-to-date originations are about $ 341 million on this platform it’s capable of significantly higher origination levels which will continue to drive operating leverage as we achieve greater scale, well attractive on a stand-alone basis we also see a meaningful opportunity to cross sell additional banking products to various small and midsized businesses as well as our owners and managers.
We also have a $ 1.6 billion commercial finance and leasing business that originates small and mid-ticket leases across different platforms and industries as well as lending facilities to small and middle market companies across the country. The businesses have enjoyed significant growth since our platform acquisition of Tygris Commercial Finance in 2010.
Similar to the integration process I just described related to the GE business we spend much of 2010 redefining and restarting EverBank commercial finance. As you can see from the bar chart the results have been dramatic with our total lease and loan portfolio outstanding having more than doubled since the end of 2011. In addition to the pie chart you can see the strong geographic diversity across our lease portfolio which further enhances the businesses nationwide platform easy as those complementary to our overall business with ancillary fee income opportunities as well as small to midsized business deposit generation potential.
EverBank’s residential lending business originate loans nationwide for three channels, our retail lending offices located in top metro markets, our centralized consumer direct channel and our correspondence channel. Total residential origination volumes in the quarter was $ 2.7 billion back in 2011 and 2012 as many as larger banks reporting back from the mortgage market, we made a decision to grow our retail presence to position the company for the ultimate normalization of refinance volumes and return to more purchase money transaction.
Since the first quarter of 2012, we have hired more than 700 retail lending FTEs and open loan production offices in top wealth markets nationwide. We are pleased with the channel success to date as retail volumes were approximately $ 1 billion in the third quarter of this year an increase from $ 89 million in the first quarter of 2012. The table on the top right details the profile of our typical prime jumbo lending customer. As you can see more than half of the Jumbo volume in the third quarter was purchase driven and the credit quality as we have seen. Given the moving rates since May we have seen a material shift declines and had some longer duration fixed rate loans to hybrid ARMs. We have put more than $ 1 billion of these prime jumbo loans on a balance sheet this year and we expect to grow our jumbo ARM origination next year. The map shows geographically where we originated prime jumbo loans in the third quarter. Similar to the nationwide presence in our commercial lending and deposit businesses, we have built the residential platform that targets our core clients in key wealth markets across the country.
As you can tell from the map on this page, our deposit clients household concentration extensively overlays with the population map of the U.S. as our core value proposition is well received nationally. We generate deposits primarily through three channels, our [indiscernible] direct bank, our Florida Financial Centers and through certain longstanding financial advisor relationships. Our one stop integrated online mobile portal, provides all the services well maintained at the traditional bank, while offering more convenience and control to our clients.
You can see from the price chart that approximately two-thirds of our deposit balances are in transaction based accounts or less than a quarter of our deposits are time-based. We think this speaks to the overall quality of our deposits as we target a type of client with larger balances who appreciate our value proposition. In fact, our average deposits for household is more than $ 86,000 significantly higher than the industry average.
This chart demonstrates the quality and scalability of our deposit platform, as we’ve been able to grow deposit balances on a compound annual growth rate of 24% since 2007. It is important to note that the quality of deposits has remained constant throughout this time period as our consistent deposit composition and client profile reflects our successful strategy of attracting and targeting high quality clients.
This chart on this slide demonstrates the strength and stickiness of the deposit relationships, the chart on the left shows the compound annual retention rate of customer deposit balances by vintage on a three-year look back period. This metric represents the percent of account balances we’ve retained on a year-over-year basis.
As you can see we’ve achieved annual retention rates in the mid-to-high 90s across percentages. We believe this retention compares quite favorably in the industry and we have achieved it in a variety of growth, interest rates and competitive pricing cycles.
The right chart shows the account balances by Vintage and as you can see our customers have high average balances that consistently grow with this over time. We believe we have a significant all in funding advantage from a cost perspective compared to traditional banks in the current low rate environment when one looks at the fully loaded all-in cost including operating expenses of the branch.
We are also well-positioned to take advantage of the next rising rate environment as we’ve done in previous cycles back in 2006 where we lag one-year LIBOR by more than 200 basis points creating spread income on the right side of the balance sheet.
Now, I’d like to turn it over to Steve to walk through the financial highlights in more detail.
Steven J. Fischer
Thanks Blake. I would like to spend a few minutes talking about our third quarter financial performance as well as some of our historical trend that highlights the long-term performance of our business. The third quarter was solid and demonstrate the power of our franchise, despite the volatile mortgage market. GAAP earnings per share were $ 0.25 and after adjusting for consent order related cost, one-time expenses in MSR valuation allowance recovery adjusted EPS was $ 0.26 for the quarter.
Total loans and leases held for investment were $ 12.6 billion, an increase of $ 2.5 billion, or 25% year-over-year. Deposits were flat consistent with our elevated level of liquidity; tangible book value per share was $ 11.42 an increase of 4% quarter-over-quarter and 11% year-over-year.
We generated $ 3.1 billion in assets during the quarter and originated $ 1.1 billion for our balance sheet, including more than $ 350 million of commercial loan and more than $ 750 million in prime jumbo loans. Lastly, we recovered $ 35 million MSR valuation allowance in the quarter leaving our remaining recoverable valuation allowance of $ 23 million assuming interest rates remain constant for current levels are higher, we would expect to recover the remaining valuation allowance over the coming quarters.
So, moving on to the next slide, I would like to touch on our asset quality, it’s important to reiterate that analytics driven risk averse credit culture is core who we are and certainly served us well over the past five years.
In addition, the benefit of product and geographic diversity as well as centralized underwriting and credit approval is a critical part why our credit metrics have performed so well. Our adjusted NPA to total assets ratio as of the third quarter was approximately 1%. Our adjusted NPA ratio has been in steady decline with the small uptick this quarter driven by few commercial real estate loans, we expect our strong credit trends to continue based on the additional new originations with very strong credit characteristics.
Our net charge off level was 30 basis points in the quarter and it’s toward at the high end of our expected range of last quarter’s 12 basis points being at low end. This chart highlights our ability to generate earnings per share growth over many different cycles and interest rate environment as we achieved a 13% compound annual growth rate and EPS over the past 10 years.
There are obviously many moving pieces over the next couple of quarter as we complete the previously announced servicing transaction however our expectation of double digit EPS growth for the franchise over the intermediate for long term has not changed and we feel the steps we’ve taken had greater transparency and how we will deliver those results.
Using third quarter figures we’ve originated $ 1.1 billion of balance sheet assets which equates to more than $ 4.4 billion annualized. Our current liquidity and capital position will unable us to achieve meaningful incremental growth in earning assets and generate increased net interest income. We also believe we’ll be able to realize significant non-interest expense reduction as a result of the activities Blake outlined earlier.
This should result in a more transparent and predictable earnings stream in the future. With the similar slope to the previous chart our tangible book value per share has grown at a compound annual growth rate of 14% from 2003 to 2012. I would also highlight that our tangible book value per share has been impacted by the volatility of our MSR assets and as I mentioned we still have approximately $ 23 million of temporary evaluation allowance that could be re-captured over the next few quarters.
This chart shows our strong ROE performance over time which includes double digit ROEs in nine of the last 10 years as well as year-to-date in 2013; pre-credit crisis EverBank’s ROE exceeded the peer group average well maintaining our disciplined credit culture. You can see even during the credit crisis, lower credits cards 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, it’s also important to note that the returns we’ve achieved in 2011, 2012 and year-to-date 2013 includes many investments we’ve made across our organization. These investments position EverBank to achieve sustainable growth and consistent ROEs over the long-term.
So in conclusion, why invest in EverBank, we have complementary asset generation businesses that are now more than ever focused on our core consumer and commercial clients. We have a scaleable high quality deposit platform. We have a long tenured management team that has instilled the disciplined risk management and credit culture across our organization and finally we have built the higher performing national banking franchise that is poised for strong growth with lower risk.
We believe the actions we have taken have us well positioned to enhance the valuation profile of our franchise in the future.
Thank you for your interest in EverBank, and Blake and I would be happy to answer any question you may have.