EverBank Financial (EVER) showed during the third quarter that it was willing to sacrifice its net interest margin to build both sides of its balance sheet.
The Jacksonville, Fla., company's net income nearly doubled from the second quarter and almost tripled form a year earlier, to $22.2 million, even though its margin contracted 20 basis points from a quarter earlier, to 3.66%. The $16.5 billion-asset company launched a costly campaign this year to build out its retail business in an effort to complement acquisitions that have boosted commercial loans.
Analysts have been watching margins closely during recent quarterly conference calls. Staying true to form, they used EverBank's call on Thursday to question management about the quarter's shrinkage. EverBank decided to spend more to attract depositors and staff, while focusing more on home purchases than refinance activity, W. Blake Wilson, the company's president and chief operating officer, said during the conference call.
"Ultimately, when [interest] rates rise and the refinance activity slows down, we still want to be in a position to produce attractive volumes in target markets," Wilson said. "That's the strategic build out which is primarily targeting more purchase-oriented business which is more visible and sustainable over the longer haul."
Noninterest expense increased 5% from the second quarter, to $184 million, because of higher personal costs. EverBank has hired 350 people for its retail operations so far this year, it said in a late Thursday press release. The company also raised its deposit rates to attract more core depositors.
Deposits rose 9% from the second quarter and 16% from a year earlier, to $11.8 billion. Interest expense grew 11% from the second quarter, to $35 million.
Management said they also wanted to increase deposits to complement its $2.4 billion purchase of Business Property Lending, a unit of GE Capital Real Estate. "We devoted significant resources to the integrating and planning" of the acquisition, Robert Clements, EverBank's chairman and chief executive, said during the call. "We're optimistic about the strategic and financial benefit that BPN will bring to EverBank and its shareholders."
EverBank completed the acquisition on Oct. 1, adding about $2.4 billion of commercial loans, servicing rights on $2.9 billion in loans securitized by GE Capital and 110 employees.
Total loans grew 5% from the second quarter and 42% from a year earlier, to $11.4 billion. The increase helped offset margin compression; net interest income rose by nearly 1% from the second quarter and 14% from a year earlier, to $126.2 million.
EverBank warned analysts that it could incur a pretax charge of $6 million to $8 million during the fourth quarter because of recent regulatory guidance regarding the classification of certain loans. EverBank said the guidance, which would require that certain loans be reclassified as nonperforming even if the borrower is current, could force downgrades of $31.5 million of loans held on its balance sheet at Sept. 30. About 78% of the loans are current.
Clements said that the company would "continue to analyze optimal capital opportunities," though he declined to discuss EverBank's Oct. 12 regulatory filing to issue $100 million in perpetual preferred stock.
