Trading Places

REVIEW SUMMARY
Company. EverBank
Industry. Banking
Key. Regulators are swapping out banks on the Gulf Coast.
By the Numbers. Click here.

Is Collier County the place where big community banks go to die?

The latest victim: Naples-based Bank of Florida Corp., whose three subsidiaries were shut down on May 28 by state regulators. This follows other spectacular bank failures in Collier, including Orion Bank on Nov. 13 ($2.7 billion in assets) and Florida Community Bank on Jan. 29 ($875 million in assets).

Despite the carnage, banks with little or no previous presence on the Gulf Coast are eagerly moving into the market to fill the void. These include IberiaBank, Mutual of Omaha Bank, BB&T and Bond Street Holdings.

Jacksonville-based EverBank, the latest entrant on the Gulf Coast banking scene, beat at least five undisclosed bidders for the assets and deposits of the three failed banks on May 28: Bank of Florida Southwest in Naples, Bank of Florida Tampa Bay in Tampa and Bank of Florida Southeast in Fort Lauderdale. Combined, the three banks had assets totaling $1.5 billion, with nearly half at the Naples subsidiary.

So what's to like in this financial graveyard?

“We think these are very attractive markets,” says Robert Clements, 47, chairman and CEO of EverBank. But he cautions that it isn't now for lending on commercial real estate and business expansion, two areas that have been the undoing of so many.

Instead, Clements says markets such as Naples are attractive because of the affluent clientele residing there. These customers deposit large sums in their bank accounts and they're prime candidates for wealth-management services, a big source of diversification away from troublesome lending.

EverBank, now the second-largest bank based in Florida by asset size ($11.5 billion), has its roots as a mortgage company. Most of its loans are in residential real estate, though it avoided making subprime and other exotic residential loans. The lender has been among the few Florida-based banks to make money, reporting $59.2 million in net income last year and $31 million in the first quarter ending March 31.

EverBank was prepared for the downturn better than most. The company raised $150 million in the spring of 2008, months before the collapse of Lehman Bros. froze the capital markets. “We saw the storm clouds coming,” Clements says.

Clements figures Florida's economy probably has reached bottom. But he's planning for a “double dip” recession if it happens, building excess capital and liquidity on the bank's balance sheet and not making many new loans.

EverBank executives are eager to diversify the bank's operations into areas such as wealth management and geography such as Southwest Florida and the Bank of Florida acquisitions were a good fit. “We saw real strategic value,” Clements says.

Residential lending roots
A look at the bank's balance sheet reveals how the company has been growing its assets lately — and it's not by lending. Instead of making loans, it's investing in residential mortgage-backed securities.

Its securities portfolio, most of which consists of high-quality mortgage-backed bonds, grew 364% to nearly $2.3 billion in the one-year period ending March 31, according to FDIC data. In that same period, loan growth was just 1% to about $5.7 billion.

Clements says the bank is finding “above-market” returns on a risk-adjusted basis by investing deposits in these kinds of securities rather than making loans. These securities have the added bonus of being liquid, which could be beneficial in a sudden downturn.

EverBank executives are intimately familiar with the mortgage market because the lender was originally a mortgage company. About 79% of its net loans are residential mortgages, according to FDIC data.

Meanwhile, with super-low interest rates, the profit margins have been generous. Clements cautions he doesn't expect the spreads between what the bank pays depositors and what it earns on loans and securities to remain as favorable in the future.

Clements, a New Orleans native who was educated at Dartmouth College and earned an MBA at Harvard University, says the company stayed away from subprime lending and other kinds of exotic mortgage lending during the boom. Still, 14% of its one-to-four-family residential loans are 90 days or more past due, more than the 8.3% for all Florida banks, according to FDIC data.

But staying away from subprime and other exotic mortgages saved EverBank from reporting a much greater percentage of past-due loans that sank many rival lenders. “Maybe it helps being private,” Clements says. “It helped with discipline. We knew it couldn't continue. We were by design cautious and conservative.”

However, in an effort to diversify, EverBank did venture into commercial real estate and construction lending. Although it was a late entrant into that arena and these loans make up a relatively small part of the bank's loans (about 11%), a greater share of those loans went sour. For example, 36% of its construction and development loans are 90 days or more past due.

But income from non-lending sources has been growing too, helping to boost results. In its most recent quarter, non-interest income represented 27% of total income. Total noninterest income rose nearly 3% in the first quarter of this year compared with the same period last year.

Besides mortgage lending and wealth management, EverBank also has a profitable mortgage-servicing business, it sells certificates of deposits denominated in a variety of world currencies and has a well-established Internet-banking operation.

EverBank acquired the assets of the three Bank of Florida subsidiaries at a 19.3% discount and the deposits without a premium, entering into a loss-share agreement with the FDIC that protects the bank from any substantial losses on bad loans.

“We're pleased with the terms,” says Clements, though he noted that competition for failed banks has increased. Bank of Florida's three subsidiaries failed because of its large concentration of commercial real estate and development loans, not because of poor management or bad customer service. “It was a well-run franchise,” Clements says, noting that the banks' customers have been loyal despite the worsening conditions.

“We're going to continue to look at acquisitions,” Clements says. Florida areas that are attractive include Sarasota, Palm Beach and Orlando. “We have a bias to do it closer to home,” he says.

Clements won't venture to forecast Florida's economy. “For now, we're assuming it won't be robust,” he says. It also varies by area; Clements agrees with the consensus that the southern counties of the Gulf Coast are the weakest links in the state.

On the lending side, Clements says he sees opportunities to make jumbo mortgage loans to wealthy customers, which is part of the bank's focus to boost its wealth management arm. “On the commercial side, demand is going to be limited,” he says.