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EVER > SEC Filings for EVER > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for EVERBANK FINANCIAL CORP

Form 10-K for EVERBANK FINANCIAL CORP


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of the Company and should be read in conjunction with our Consolidated Financial Statements and notes thereto included in this report.
In addition to historical financial information, the following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs, but that also involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Please see "Forward-Looking Statements" and "Item 1A. Risk Factors" for discussions of the uncertainties, risks and assumptions associated with these statements.
Reclassifications
Certain prior period information in Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) has been reclassified to conform to current period classifications. Introduction and Overview
We are a savings and loan holding company which operates primarily through our direct subsidiary, EverBank (EB or EverBank). EB is a federally chartered thrift institution with its home office located in Jacksonville, Florida. References to "we," "our," "us," or the "Company" refer to the holding company and its subsidiaries that are consolidated for financial reporting purposes. We are a diversified financial services company that provides innovative banking, lending and investment products and services to clients nationwide through scalable, low-cost distribution channels. Our business model attracts financially sophisticated, self-directed, mass-affluent clients and a diverse base of small and medium-sized business clients. We market and distribute our products and services primarily through our integrated online financial portal, which is augmented by our nationwide network of independent financial advisors, high-volume financial centers in targeted Florida markets and other financial intermediaries. These channels are connected by technology-driven centralized platforms, which provide operating leverage throughout our business. We have a suite of asset origination and fee income businesses that individually generate attractive financial returns and collectively leverage our core deposit franchise and client base. We originate, invest in, sell and service residential mortgage loans, equipment leases, and various other consumer and commercial loans, as market conditions warrant. Our organic origination activities are scalable, significant relative to our balance sheet size and provide us with substantial growth potential. Our origination, lending and servicing expertise positions us to acquire assets in the capital markets when risk-adjusted returns available through acquisition exceed those available through origination. Our rigorous analytical approach provides capital markets discipline to calibrate our levels of asset origination, retention and acquisition. These activities diversify our earnings, strengthen our balance sheet and provide us with flexibility to capitalize on market opportunities.
Our deposit franchise fosters strong relationships with a large number of financially sophisticated clients and provides us with a stable and flexible source of low, all-in cost funding. We have a demonstrated ability to grow our client deposit base significantly with short lead time by adapting our product offerings and marketing activities rather than incurring the higher fixed operating costs inherent in more branch-intensive banking models. Our extensive offering of deposit products and services includes proprietary features that distinguish us from our competitors and enhance our value proposition to clients. Our products, distribution and marketing strategies allow us to generate substantial deposit growth while maintaining an attractive mix of high-value transaction and savings accounts.
Key Factors Affecting Our Business and Financial Statements 2012 Acquisitions
General Electric Capital Corporation (GECC) Business Property Lending, Inc. (BPL) Acquisition
In June 2012, we entered into a Stock and Asset Purchase Agreement and a Tax Matters Agreement with GECC pursuant to which we agreed to purchase all of the issued and outstanding stock of BPL, a wholly owned subsidiary of GECC. On October 1, 2012, we completed the purchase for approximately $2.4 billion in cash and announced the closing of the transaction. No debt was assumed in the acquisition. The acquisition included approximately $2.3 billion of performing business lending loans selected by us, the origination and servicing platforms and servicing rights relating to $2.9 billion of loans securitized by GECC. Acquisition of Warehouse Finance Business In April 2012, we acquired MetLife Bank's warehouse finance business, including approximately $351.6 million in assets for a price of approximately $351.1 million. In connection with the acquisition, we hired 16 sales and operational staff from MetLife who were a part of the existing warehouse business. The warehouse business is operated out of locations in Boston, Massachusetts and Jacksonville, Florida.
Economic and Interest Rate Environment
The results of our operations are highly dependent on economic conditions and market interest rates. Beginning in 2007, turmoil in the financial sector resulted in a reduced level of confidence in financial markets among borrowers, lenders and depositors, as well as extreme volatility in the capital and credit markets. In response to these conditions, the Board of Governors of the FRB began decreasing short-term interest rates, with 11 consecutive decreases totaling 525 basis points between September 2007 and December 2008. To stimulate economic activity and stabilize the financial markets, the FRB maintained historically low market interest rates from 2009 to 2013. Market conditions have improved during this period as unemployment rates have declined to 6.7% in December 2013, and consumer confidence, GDP and average


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home prices have all risen. Despite cumulative progress and an improved outlook in December 2013, the FRB has indicated that it would maintain its federal funds rate target at a near-zero range, which indicates low market interest rates will likely continue into 2014.
Net interest income is our largest source of income and is driven primarily as a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities and the spread between the contractual yield on such assets and the contractual cost of such liabilities. These factors are influenced by both the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as the local economy, competition for loans and deposits, the monetary policy of the FRB and market interest rates. The cost of our deposits is largely based on short-term interest rates which are driven primarily by the FRB's actions. However, the yields generated by our loans and securities are typically driven by longer-term interest rates which are set by the market, or, at times by the FRB's actions. Our net interest income is therefore influenced by movements in interest rates and the pace at which these movements occur. See "Risk Factors-We are subject to interest rate risk" and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk." In the latter half of the second quarter of 2013, the FRB indicated their intention to reduce their bond buying activities associated with quantitative easing 3 (QE3) if the economy continued to show improvement. The uncertainty around the FRB's intent created volatility in the capital markets and resulted in a market sell-off which drove the 10-year treasury yield from 1.7% on May 2, 2013 to 2.6% on June 25, 2013. These events had a direct impact on mortgage rates which increased sharply from 3.7% at the beginning of the second quarter 2013 to 4.4% at the end of the second quarter. Mortgage interest rates increase to a high of 4.7% in early September, however were down slightly throughout the remainder of the year and ended the year at 4.5%. In addition, the spreads over the treasury curve widened to levels experienced earlier in the year. Increases in mortgage rates impacted our origination volume as the number of borrowers eligible to refinance into lower rates was reduced. However, we have made substantial investments in our retail platform focusing on purchase money transactions in anticipation of the higher rate environment and slowed refinancing activity. Moreover, the expectation of slower prepayments due to refinancing has had a positive impact on the fair value and amortization of our mortgage servicing rights. We continue to monitor the status of the economy as well as the expected interest rate environment both in the near term and over the long term to best position our balance sheet to optimize risk-adjusted returns.
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Regulatory Changes
Our financial condition and the results of our operations are dependent upon the composition of our balance sheet and the assets which we originate, sell, and/or retain for investment. Proposed changes to the regulatory capital treatment of certain securities and asset classes could cause our management to reevaluate components of our capital structure as well as our exposure to certain assets. See "Item 1. Business-Supervision and Regulation-Recent Regulatory Developments-Dodd-Frank Act" under the headings "Annual Company-Run Stress Tests" and "Basel III" for more information. Performance Highlights

         Adjusted net income was $32 million for the fourth quarter of 20131,
          compared to $34 million for the third quarter of 2013 and $44 million
          for the fourth quarter of 2012. For the year, adjusted net income was
          $148 million, an increase of 3% over 2012.


         GAAP net income was $18 million for the fourth quarter of 2013,
          compared to $33 million for the third quarter of 2013 and $29 million
          for the fourth quarter of 2012. For the year, GAAP net income was $137
          million, an increase of 85% over 2012.


         Adjusted diluted earnings per share was $0.24 in the fourth quarter
          2013, an 8% decrease from $0.26 in the third quarter 2013 and a 29%
          decrease from $0.34 in the fourth quarter of 2012. For the full year
          2013, adjusted diluted earnings per share was $1.11, a 13% decrease
          from $1.27 in 2012.


         GAAP diluted earnings per share was $0.13, a 48% decrease from $0.25 in
          the third quarter of 2013 and a 41% decrease from $0.22 in the fourth
          quarter of 2012. For the year, GAAP diluted earnings per share was
          $1.02, a 70% increase from $0.60 in 2012.


         Tangible common equity per common share was $11.57 at December 31,
          2013, an increase of 12% compared to year end 2012.


         Adjusted return on equity (ROE) was 10% and GAAP ROE was 9% for the
          full year 2013.


         Retained asset generation of $1.6 billion for the fourth quarter,
          including commercial origination volume of $701 million, an increase of
          45% and 99%, respectively, compared to the prior quarter.


         Deployed excess liquidity to grow portfolio loans held for investment
          to $13.3 billion, an increase of 5% compared to the prior quarter, or
          22% annualized.


         Adjusted non-performing assets were 0.65% of total assets at December
          31, 2013, a 36% decline compared to the prior quarter. Annualized net
          charge-offs to average loans and leases held for investment were 0.20%
          for the quarter.


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1 Reconciliations of Non-GAAP financial measures can be found in the "Key Metrics" and "Quarterly Financial Data" sections. Balance Sheet
Strong Loan Portfolio Growth
Total assets were $17.6 billion at December 31, 2013, flat compared to $17.6 billion at September 30, 2013. Consistent with our strategy to retain loans for our portfolio, total loans held for investment (HFI) increased $0.7 billion, or 5%, compared to the prior quarter, to $13.3 billion. Loans HFI for the referenced quarter end were comprised of:

                                                      December 31,       September 30,       December 31,
(dollars in millions)                                     2013               2013                2012
Residential loans                                   $        5,153     $         4,624     $        3,949
Mortgage pool buyouts                                        1,892               2,075              2,760
Total residential mortgages                                  7,045               6,699              6,709
Commercial real estate                                       3,190               3,243              3,390
Commercial finance                                           1,917               1,607              1,248
Total commercial real estate and commercial finance          5,107               4,850              4,638
Warehouse finance                                              944                 851                970
Other                                                          157                 163                188
Total HFI                                           $       13,253     $        12,563     $       12,505

During the fourth quarter, residential loans HFI increased by 11% compared to the prior quarter to $5.2 billion, driven by continued growth in our high quality prime jumbo hybrid ARM portfolio. Mortgage pool buyouts declined 9% to $1.9 billion compared to the prior quarter. Total commercial real estate and commercial finance balances increased 5% compared to the prior quarter to $5.1 billion, driven by continued strength in our EverBank Commercial Finance platform. At December 31, 2013 our commercial platforms represented approximately 46% of loans HFI.
Loan Origination Activities
Organic asset generation totaled $2.7 billion and retained organic originations totaled $1.6 billion for the fourth quarter of 2013, a decrease of 12% and an increase of 45%, respectively, from the prior quarter. Total commercial originations for the fourth quarter increased 99% to $701 million, including commercial real estate and commercial finance originations of $266 million and $435 million, respectively.
Residential loan originations were $2.0 billion for the fourth quarter, a decrease of 26% compared to the prior quarter and a decrease of 32% year over year. Excluding the impact of our exit from the wholesale broker channel in the third quarter, origination volume decreased 16% compared to the prior quarter and 11% year over year. Prime jumbo origination volume was $808 million for the fourth quarter, an increase of 5% compared to the prior quarter and 43% year over year. The mix of purchase transactions increased to 43% of total originations, compared to 40% in the prior quarter. Our gain on sale margin increased 120 basis points during the quarter to 2.88%, as we executed on our strategy to sell agency conforming originations and retain prime jumbo originations.
The following table presents total organic loan and lease origination information by product type:

                                December 31,     September 30,      December 31,
(dollars in millions)               2013              2013              2012
Residential origination volume
Conventional loans             $       1,188    $         1,933    $       2,373
Prime jumbo loans                        808                767              567
                                       1,996              2,700            2,940
Commercial origination volume
Commercial real estate                   266                122              132
Commercial finance                       435                223              195
Warehouse finance                          -                  7               35
                                         701                352              362
Total organic originations     $       2,697    $         3,052    $       3,302

Deposits
Total deposits decreased by $0.4 billion, or 3%, to $13.3 billion at
December 31, 2013, from $13.6 billion at September 30, 2013, and increased by
$0.1 billion, or 1%, from $13.1 billion at December 31, 2012.

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At December 31, 2013, our deposits were comprised of the following:
                                   December 31,      September 30,      December 31,
(dollars in millions)                  2013               2013              2012
Noninterest-bearing demand        $        1,077    $         1,366    $        1,446
Interest-bearing demand                    3,006              2,999             2,681
Savings and money market accounts          5,111              5,186             4,452
Global market-based accounts               1,011              1,041             1,176
Time, excluding market-based               3,056              3,036             3,387
Total deposits                    $       13,261    $        13,628    $       13,142
Consumer deposits                         11,434             11,864            11,602
Business deposits                          1,827              1,764             1,540
Total deposits                    $       13,261    $        13,628    $       13,142

Key Metrics
The primary metrics we use to evaluate and manage our financial results are described below. Although we believe these metrics are meaningful in evaluating our results and financial condition, they may not be directly comparable to similar metrics used by other financial services companies and may not provide an appropriate basis to compare our results or financial condition to the results or financial condition of our competitors. The following table sets forth the metrics we use to evaluate the success of our business and our resulting financial position and operating performance.
The table below includes certain financial information that is calculated and presented on the basis of methodologies other than in accordance with generally accepted accounting principles, or GAAP. We believe these measures provide useful information to investors in evaluating our financial performance. In addition, our management uses these measures to gauge the performance of our operations and for business planning purposes. These non-GAAP financial measures, however, may not be comparable to similarly titled measures reported by other companies because other companies may not calculate these non-GAAP measures in the same manner. As a result, the usefulness of these measures to investors may be limited, and they should not be considered in isolation or as a substitute for measures prepared in accordance with GAAP. In the notes following the table we provide a reconciliation of these measures, or, in the case of ratios, the measures used in the calculation of such ratios, to the closest measures calculated directly from our GAAP financial statements.


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Key Metrics                                                                             Table 1
                                                               As of and for the Year Ended
                                                                       December 31,
(dollars in thousands, except per share amounts)             2013          2012          2011
Performance Metrics:
Yield on interest-earning assets                               4.39 %        4.78 %        5.35 %
Cost of interest-bearing liabilities                           1.19 %        1.18 %        1.38 %
Net interest spread                                            3.20 %        3.60 %        3.97 %
Net interest margin                                            3.34 %        3.74 %        4.11 %
Return on average assets                                       0.75 %        0.49 %        0.43 %
Return on average equity(1)                                    9.11 %        6.36 %        5.22 %
Adjusted return on average assets(2)                           0.81 %        0.94 %        0.87 %
Adjusted return on average equity(3)                           9.89 %       12.43 %       10.66 %
Credit Quality Ratios:
Adjusted non-performing assets as a percentage of total
assets(4)                                                      0.65 %        1.08 %        1.86 %
Net charge-offs to average loans and leases held for
investment                                                     0.21 %        0.31 %        1.02 %
ALLL as a percentage of loans and leases held for
investment                                                     0.48 %        0.66 %        1.19 %
Capital Ratios:
Tier 1 leverage ratio (bank level)(5)                           9.0 %         8.0 %         8.0 %
Tier 1 risk-based capital ratio (bank level)(5)                13.8 %        12.8 %        14.6 %
Total risk-based capital ratio (bank level)(5)                 14.3 %        13.5 %        15.7 %
Tangible common equity to tangible assets(6)                    8.1 %         6.9 %         7.3 %
Tangible equity to tangible assets(6)                           8.9 %         7.7 %         7.3 %
Average equity to average assets                                8.5 %         7.7 %         8.3 %
Deposit Metrics:
Deposit growth (trailing 12 months)                             0.9 %        28.0 %         6.0 %
Banking and Wealth Management Metrics:
Efficiency ratio(7)                                            44.9 %        51.7 %        42.8 %
Mortgage Banking Metrics: (in millions)
Unpaid principal balance of loans originated             $ 10,820.0     $ 9,632.4     $ 5,974.2
Unpaid principal balance of loans serviced for the
Company and others                                         61,035.3      51,198.7      54,838.1
Share Data:
Tangible common equity per common share(8)               $    11.57     $   10.30     $   10.12
Dividend payout ratio (9)                                      9.62 %        6.56 %        0.00 %

(1) Due to the issuance of non-participating perpetual preferred stock during the fourth quarter of 2012, we amended our calculation for return on average equity. Beginning with the fourth quarter of 2012, return on average equity is calculated as net income less dividends declared on the Series A 6.75% Non-Cumulative Perpetual Preferred Stock divided by average common shareholders' equity (average shareholders' equity less average Series A 6.75% Non-Cumulative Perpetual Preferred Stock). Prior to the fourth quarter of 2012, return on average equity was calculated as net income divided by average shareholders' equity.

(2) Adjusted return on average assets equals adjusted net income divided by average total assets. Adjusted net income is a non-GAAP measure of our financial performance and its most directly comparable GAAP measure is net income. Adjusted net income includes adjustments to our net income for certain significant items that we believe are not reflective of our ongoing business or operating performance.


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A reconciliation of adjusted net income to net income, which is the most directly comparable GAAP measure, is as follows:

Adjusted Net Income                                                                    Table 2
                                                                 Year Ended December 31,
(dollars in thousands)                                      2013          2012          2011
Net income                                               $ 136,740     $  74,042     $  52,729
Gain on repurchase of trust preferred securities, net of
tax                                                              -             -        (2,910 )
Transaction expense, net of tax                                  -         5,355         9,006
Non-recurring regulatory related expense, net of tax        48,477        17,733         7,825
Decrease in fair value of Tygris indemnification asset
resulting from a decrease in estimated future credit
losses, net of tax                                               -             -         5,382
Increase (decrease) in Bank of Florida non-accretable
discount, net of tax                                           (95 )       3,195         3,007
Impact of change in ALLL methodology, net of tax                 -             -         1,178
Adoption of TDR guidance and policy change, net of tax           -         3,709         6,225
MSR impairment (recovery), net of tax                      (58,870 )      39,375        24,462
Restructuring cost, net of tax                              19,332             -             -
OTTI losses on investment securities (Volcker Rule), net
of tax                                                       2,045             -             -
Tax expense (benefit) related to revaluation of Tygris
net unrealized built-in losses, net of tax                       -             -           691
Adjusted net income                                      $ 147,629     $ 143,409     $ 107,595

(3) Due to the issuance of non-participating perpetual preferred stock during the fourth quarter of 2012, we amended our calculation for adjusted return on average equity. Beginning with the fourth quarter of 2012, adjusted return on average equity is calculated as adjusted net income less dividends declared on the Series A 6.75% Non-Cumulative Perpetual Preferred Stock divided by average common shareholders' equity. Prior to the fourth quarter of 2012, adjusted return on average equity was calculated as adjusted net income divided by average shareholders' equity. Adjusted net income is a non-GAAP measure of our financial performance and its most directly comparable GAAP measure is net income. For a reconciliation of net income to adjusted net income, see Note 2 above.

(4) We define non-performing assets (NPA), as non-accrual loans, accruing loans past due 90 days or more and foreclosed property. Our NPA calculation excludes government-insured pool buyout loans for which payment is insured by the government. We also exclude loans, leases and foreclosed property accounted for under Accounting Standards Codification (ASC) 310-30 because we expect to fully collect the carrying value of such loans, leases and foreclosed property. For further discussion of NPA, see "Management's Discussion and Analysis of Financial Condition and Results of Operations
- Loan and Lease Quality".

(5) The Tier 1 leverage ratio, the Tier 1 risk-based capital ratio and the total risk-based capital ratio are regulatory financial measures that are used to assess the capital position of financial services companies and, as such, these ratios are presented at the bank level.

The Tier 1 leverage ratio is calculated as Tier 1 capital divided by adjusted total assets. The Tier 1 risk-based capital ratio is calculated as Tier 1 capital divided by total risk-weighted assets. The total risk-based capital ratio is calculated as total risk-based capital (total regulatory capital) divided by total risk-weighted assets.
Adjusted total assets is a non-GAAP financial measure and its most directly comparable GAAP financial measure is bank level total assets. In calculating adjusted total assets, total assets are adjusted for goodwill, deferred tax assets disallowed from Tier 1 capital and other regulatory adjustments. Total risk-weighted assets is a non-GAAP financial measure and its most directly comparable GAAP financial measure is bank level total assets. Under the . . .

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