Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

for the quarterly period ended March 31, 2012

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2012

or

 

¨

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                to

EverBank Financial Corp

(Exact name of registrant as specified in its charter)

 

Delaware		001-35533		52-2024090
(State of incorporation)		(Commission File Number)		(I.R.S. Employer Identification No.)
501 Riverside Ave., Jacksonville, Florida				32202
(Address of principal executive offices)				(Zip Code)

904-281-6000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ¨    No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨  No x

As of May 15, 2012, there were 116,317,343 shares of common stock outstanding.

 

 

 

 

---

Table of Contents

EverBank Financial Corp

Form 10-Q

Index

 

Part I - Financial Information
Item 1.		Financial Statements (Unaudited)			3
		Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011			3
		Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2012 and 2011			4
		Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011			5
		Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2012 and 2011			6
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011			7
		Notes to Condensed Consolidated Financial Statements (Unaudited)			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			44
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			80
Item 4.		Controls and Procedures			80
Part II - Other Information
Item 1.		Legal Proceedings			81
Item 1A.		Risk Factors			81
Item 6.		Exhibits			100

---

Table of Contents

Part I. Financial Information

Item 1. Financial Statements (unaudited)

EverBank Financial Corp and Subsidiaries

Condensed Consolidated Balance Sheets (unaudited)

(Dollars in thousands, except per share data)

 

 

		March 31,     2012						December 31,     2011
Assets
Cash and due from banks		$			29,142			$			31,441
Interest-bearing deposits in banks					355,581						263,540
Total cash and cash equivalents					384,723						294,981
Investment securities:
Available for sale, at fair value					1,937,748						1,903,922
Held to maturity (fair value of $194,867 and $194,350 as of March 31, 2012 and December 31, 2011, respectively)					190,642						189,518
Other investments					99,915						98,392
Total investment securities					2,228,305						2,191,832
Loans held for sale (includes $672,651 and $777,280 carried at fair value as of March 31, 2012 and December 31, 2011, respectively)					2,530,966						2,725,286
Loans and leases held for investment:
Covered by loss share or indemnification agreements					788,129						841,146
Not covered by loss share or indemnification agreements					6,535,058						5,678,135
Loans and leases held for investment, net of unearned income					7,323,187						6,519,281
Allowance for loan and lease losses					(78,254)						(77,765)
Total loans and leases held for investment, net					7,244,933						6,441,516
Equipment under operating leases, net					67,899						56,399
Mortgage servicing rights (MSR), net					462,420						489,496
Deferred income taxes, net					143,218						151,634
Premises and equipment, net					45,744						43,738
Other assets					666,613						646,796
Total Assets		$			13,774,821			$			13,041,678
Liabilities
Deposits
Noninterest-bearing		$			1,367,592			$			1,234,615
Interest-bearing					9,185,368						9,031,148
Total deposits					10,552,960						10,265,763
Other borrowings					1,706,298						1,257,879
Trust preferred securities					103,750						103,750
Accounts payable and accrued liabilities					417,124						446,621
Total Liabilities					12,780,132						12,074,013
Commitments and Contingencies (Note 13)
Shareholders’ Equity
Series A 6% Cumulative Convertible Preferred Stock, $0.01 par value (1,000,000 shares authorized; 0 and 186,744 issued and outstanding at March 31, 2012 and December 31, 2011, respectively)					-						2
Series B 4% Cumulative Convertible Preferred Stock, $0.01 par value (liquidation preference of $1,000 per share; 1,000,000 shares authorized inclusive of Series A Preferred Stock; 136,544 issued and outstanding at March 31, 2012 and December 31, 2011)					1						1
Common Stock, $0.01 par value (150,000,000 shares authorized; 77,994,699 and 75,094,375 issued and outstanding at March 31, 2012 and December 31, 2011 respectively)					780						751
Additional paid-in capital					562,327						561,247
Retained earnings					520,777						513,413
Accumulated other comprehensive loss					(89,196)						(107,749)
Total Shareholders’ Equity					994,689						967,665
Total Liabilities and Shareholders’ Equity		$			13,774,821			$			13,041,678

See notes to unaudited condensed consolidated financial statements.

 

3

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Condensed Consolidated Statements of Income (unaudited)

(Dollars in thousands, except per share data)

 

 

		Three Months Ended         March 31,
		2012						2011
Interest Income
Interest and fees on loans and leases		$			124,778			$			122,993
Interest and dividends on investment securities					20,549						26,244
Other interest income					104						842
Total interest income					145,431						150,079
Interest Expense
Deposits					20,974						26,190
Other borrowings					8,834						10,196
Total interest expense					29,808						36,386
Net Interest Income					115,623						113,693
Provision for Loan and Lease Losses					11,355						18,030
Net Interest Income after Provision for Loan and Lease Losses					104,268						95,663
Noninterest Income
Loan servicing fee income					45,556						48,876
Amortization and impairment of mortgage servicing rights					(44,483)						(22,788)
Net loan servicing income					1,073						26,088
Gain on sale of loans					48,177						13,477
Loan production revenue					7,437						6,407
Deposit fee income					6,239						5,160
Other lease income					8,663						6,732
Other					1,604						7,988
Total noninterest income					73,193						65,852
Noninterest Expense
Salaries, commissions and other employee benefits expense					66,590						57,373
Equipment expense					15,948						10,760
Occupancy expense					5,349						4,540
General and administrative expense					70,934						72,566
Total noninterest expense					158,821						145,239
Income before Income Taxes					18,640						16,276
Provision for Income Taxes					6,794						6,860
Net Income		$			11,846			$			9,416
Less: Net Income Allocated to Participating Preferred Stock					(5,879)						(2,407)
Net Income Allocated to Common Shareholders		$			5,967			$			7,009
Net Earnings per Common Share, Basic		$			0.08			$			0.09
Net Earnings per Common Share, Diluted		$			0.08			$			0.09

See notes to unaudited condensed consolidated financial statements.

 

4

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (unaudited)

(Dollars in thousands)

 

 

				Three Months Ended          March 31,
		2012						2011
Net Income		$			11,846			$			9,416
Unrealized Holding Gains (Losses) on Debt Securities
Reclassification of unrealized gains to earnings					-						(2,739)
Unrealized gains (losses) due to changes in fair value					21,286						(10,172)
Other-than-temporary impairment (OTTI) (noncredit portion), net of accretion					-						502
Tax effect					(8,029)						4,552
Change in unrealized holding gains (losses) on debt securities					13,257						(7,857)
Changes in Interest Rate Swaps for the Period:
Net unrealized gains due to changes in fair value					6,628						4,887
Reclassification of unrealized losses to earnings					1,710						2,029
Tax effect					(3,042)						(2,410)
Changes in interest rate swaps					5,296						4,506
Total Other Comprehensive Income (Loss)					18,553						(3,351)
Total Comprehensive Income		$			30,399			$			6,065

See notes to unaudited condensed consolidated financial statements.

 

5

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity (unaudited)

(Dollars in thousands)

 

 

		Shareholders’ Equity
		Preferred Stock						Common Stock						Additional Paid-In Capital						Retained Earnings						Accumulated Other Comprehensive Income (Loss), Net of Tax						Total Equity
Balance, January 1, 2012		$			3			$			751			$			561,247			$			513,413			$			(107,749)			$			967,665
Net income					-						-						-						11,846						-						11,846
Total other comprehensive income					-						-						-						-						18,553						18,553
Conversion of Series A Preferred Stock					(2	)					28						(26	)					-						-						-
Issuance of common stock					-						1						57						-						-						58
Repurchase of common stock					-						-						(360)						-						-						(360)
Share-based grants (including income tax benefits)					-						-						1,409						-						-						1,409
Dividends paid on Series A Preferred Stock					-						-						-						(4,482)						-						(4,482)
Balance, March 31, 2012		$			1			$			780			$			562,327			$			520,777			$			(89,196)			$			994,689
Balance, January 1, 2011		$			3			$			747			$			556,001			$			461,503			$			(5,056)			$			1,013,198
Net income					-						-						-						9,416						-						9,416
Total other comprehensive loss					-						-						-						-						(3,351)						(3,351)
Issuance of common stock					-						1						64						-						-						65
Repurchase of common stock					-						-						(267)						-						-						(267)
Share-based grants (including income tax benefits)					-						-						1,579						-						-						1,579
Dividends paid on Series A Preferred Stock					-						-						-						(56	)					-						(56	)
Paid-in-kind dividends on Series B Preferred Stock					-						-						592						(592	)					-						-
Balance, March 31, 2011		$			3			$			748			$			557,969			$			470,271			$			(8,407)			$			1,020,584

See notes to unaudited condensed consolidated financial statements.

 

6

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

(Dollars in thousands)

 

 

		Three Months Ended March 31,
		2012						2011
Operating Activities:
Net income		$			11,846			$			9,416
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of premiums on investments					2,582						1,113
Depreciation and amortization of tangible and intangible assets					8,804						4,458
Amortization of loss on settlement of interest rate swaps					1,710						2,029
Amortization and impairment of mortgage servicing rights					44,483						22,788
Deferred income taxes					(2,654)						11,808
Provision for loan and lease losses					11,355						18,030
Loss on other real estate owned					2,731						6,768
Share-based compensation expense					1,282						1,579
Payments for settlement of forward interest rate swaps					(3,552)						(1,281)
Other operating activities					(2,632)						2,725
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Loans held for sale, including proceeds from sales and repayments					79,718						595,662
Other assets					51,567						39,972
Accounts payable and accrued liabilities					(14,641)						(7,665)
Net cash provided by operating activities					192,599						707,402
Investing Activities:
Investment securities available for sale:
Purchases					(138,186)						(850,784)
Proceeds from sales					-						60,961
Proceeds from prepayments and maturities					123,477						162,292
Investment securities held to maturity:
Purchases					(7,965)						-
Proceeds from prepayments and maturities					6,705						-
Purchases of other investments					(1,547)						(10,219)
Decrease (increase) in loans held for investment, net of discount accretion, premium amortization and principal repayments					(830,144)						(544,163)
Purchases of premises and equipment, including equipment under operating leases					(20,659)						(8,998)
Proceeds related to sale or settlement of real estate owned					9,024						16,437
Proceeds from insured foreclosure claims					28,037						55,694
Other investing activities					(1,463)						(524)
Net cash provided by (used in) investing activities					(832,721)						(1,119,304)
Financing Activities:
Net increase (decrease) in nonmaturity deposits					190,742						(29,536)
Net increase in time deposits					95,036						31,971
Increase (decrease) in short-term Federal Home Loan Bank (FHLB) advances					35,000						(100,000)
Proceeds from long-term FHLB advances					500,000						6,158
Repayments of long-term FHLB advances, including early extinguishment					(86,200)						(10,004)
Other financing activities					(4,714)						(5,878)
Net cash provided by (used in) financing activities					729,864						(107,289)
Net Increase (Decrease) in Cash and Cash Equivalents					89,742						(519,191)
Cash and Cash Equivalents
Beginning of period					294,981						1,169,221
End of period		$			384,723			$			650,030
Supplemental Schedules of Noncash Investing Activities:
Loans transferred to foreclosure claims from loans held for investment		$			13,906			$			62,704
Loans transferred to foreclosure claims from loans held for sale					68,591						5,746

See notes to unaudited condensed consolidated financial statements.

 

7

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

 

1.  Organization and Basis of Presentation

a) Organization — EverBank Financial Corp (the Company) is a thrift holding company with one direct subsidiary, EverBank (EB). EB is a federally chartered thrift institution with its home office located in Jacksonville, Florida. In addition, its direct banking services are offered nationwide. EB operates 14 financial centers in Florida. EB (a) accepts deposits from the general public; (b) originates, purchases, services and sells residential real estate mortgage loans; (c) originates, services, and sells commercial real estate loans; (d) originates consumer, home equity, and commercial loans and leases; and (e) offers full-service securities brokerage and investment advisory services.

EB’s subsidiaries are:

 

—

AMC Holding, Inc., the parent of CustomerOne Financial Network, Inc.;

 

—

Tygris Commercial Finance Group (TCFG);

 

—

EverInsurance, Inc.;

 

—

Elite Lender Services, Inc.; and

 

—

EverBank Wealth Management (EWM).

On January 31, 2012, as part of a tax-free reorganization, the assets, liabilities and business activities of EWM were transferred to EB.

b) Reincorporation — In September 2010, EverBank Financial Corp, a Florida corporation, or EverBank Florida, formed EverBank Financial Corp, a Delaware corporation, or EverBank Delaware. Subsequent to its formation, EverBank Delaware held no assets and had no subsidiaries having never engaged in any business or other activities except in connection with its formation. In May 2012, EverBank Delaware completed an initial public offering with its common stock listed on the New York Stock Exchange LLC (NYSE) under the symbol “EVER”. Immediately preceding the consummation of that offering, EverBank Florida merged with and into EverBank Delaware, with EverBank Delaware continuing as the surviving corporation and succeeding to all of the assets, liabilities and business of EverBank Florida. The merger resulted in the following:

 

—

All of the outstanding shares of common stock of EverBank Florida were converted into approximately 77,994,699 shares of EverBank Delaware common stock;

 

—

All of the outstanding shares of Series B Preferred Stock were converted into 15,964,644 shares of EverBank Delaware common stock;

 

—

The reincorporation of EverBank Florida in Delaware results in the Company now being governed by the laws of the State of Delaware.

Reincorporation of EverBank Florida in Delaware did not result in any change of the business, management, fiscal year, assets, liabilities or location of the principal facilities of the Company.

c) Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. These interim financial statements should be read in conjunction with the audited financial statements and note disclosures as of and for the year ended December 31, 2011, which are included in the Company’s registration statement on Form S-1 for the years ended December 31, 2011, 2010 and 2009.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation. In management’s opinion, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made.

 

8

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(Dollars in thousands, except per share data)

 

 

GAAP requires management to make estimates that affect the reported amounts and disclosures of contingencies in the consolidated financial statements. Estimates by their nature are based on judgment and available information. Material estimates relate to the Company’s allowance for loan and lease losses, loans and leases acquired with evidence of credit deterioration, repurchase obligations, lease residuals, contingent liabilities, and the fair values of investment securities, loans held for sale, MSR, share-based compensation and derivative instruments. Because of the inherent uncertainties associated with any estimation process and future changes in market and economic conditions, it is possible that actual results could differ significantly from those estimates.

2.  Recent Accounting Pronouncements and Updates to Significant Accounting Policies

Recent Accounting Pronouncements

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements — In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820)—Fair Value Measurement, to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. ASU 2011-04 is effective for the first quarter of 2012 and should be applied prospectively. Adoption of this standard resulted in additional disclosures as presented in Note 12 but did not have any impact on the Company’s results of operations.

Presentation of Comprehensive Income — In June 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income, to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. ASU 2011-05 is effective for the first quarter of 2012 and should be applied retrospectively. Adoption of this standard resulted in the presentation of Condensed Consolidated Statements of Comprehensive Income separate from the statement of shareholders’ equity but did not have any impact on the Company’s results of operations. In December 2011, the FASB issued ASU 2011-12,Comprehensive Income (Topic 220)- Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, to allow time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. Adoption of this ASU will not have any impact on the Company’s consolidated financial statements or results of operations since it reinstates the presentation requirements before ASU 2011-05 was issued.

Updates to Significant Accounting Policies

There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in the Company’s registration statement on Form S-1.

 

9

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

3.  Investment Securities

The amortized cost and fair value of investment securities with gross unrealized gains and losses were as follows as of March 31, 2012 and December 31, 2011:

 

 

		Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value						Carrying Amount
March 31, 2012
Available for sale:
Residential collateralized mortgage obligations (CMO) securities - agency		$			80			$			7			$			-			$			87			$			87
Residential CMO securities - nonagency					1,931,621						22,276						24,103						1,929,794						1,929,794
Residential mortgage-backed securities (MBS) - agency					291						17						-						308						308
Asset-backed securities (ABS)					10,556						-						3,211						7,345						7,345
Equity securities					77						137						-						214						214
					1,942,625						22,437						27,314						1,937,748						1,937,748
Held to maturity:
Residential CMO securities - agency					151,919						5,275						-						157,194						151,919
Residential MBS - agency					28,263						1,427						67						29,623						28,263
Corporate securities					10,460						-						2,410						8,050						10,460
					190,642						6,702						2,477						194,867						190,642
		$			2,133,267			$			29,139			$			29,791			$			2,132,615			$			2,128,390
December 31, 2011
Available for sale:
Residential CMO securities - agency		$			96			$			8			$			-			$			104			$			104
Residential CMO securities - nonagency					1,919,046						17,609						40,837						1,895,818						1,895,818
Residential MBS agency					317						21						-						338						338
Asset-backed securities (ABS)					10,573						-						3,096						7,477						7,477
Equity securities					77						108						-						185						185
					1,930,109						17,746						43,933						1,903,922						1,903,922
Held to maturity:
Residential CMO securities - agency					159,882						6,029						78						165,833						159,882
Residential MBS - agency					19,132						1,464						-						20,596						19,132
Corporate securities					10,504						-						2,583						7,921						10,504
					189,518						7,493						2,661						194,350						189,518
		$			2,119,627			$			25,239			$			46,594			$			2,098,272			$			2,093,440

 

10

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

At March 31, 2012 and December 31, 2011, investment securities with a carrying value of $515,483 and $543,705, respectively, were pledged to secure other borrowings, public deposits, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

For the three months ended March 31, 2012, there were neither gross gains nor gross losses realized on available for sale investments. For the three months ended March 31, 2011, gross gains of $2,739 and zero losses were realized on available for sale investments in other noninterest income. The cost of investments sold is calculated using the specific identification method.

The gross unrealized losses and fair value of the Company’s investments with unrealized losses, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position, at March 31, 2012 and December 31, 2011 are as follows:

 

																																						Other-Than- Temporary Impairment
		Less Than 12 Months												12 Months or Greater												Total												(OTTI)
		Fair Value						Unrealized Losses						Fair Value						Unrealized Losses						Fair Value						Unrealized Losses						Realized Losses
March 31, 2012
Debt securities:
Residential CMO securities - nonagency		$			526,918			$			9,054			$			266,131			$			15,049			$			793,049			$			24,103			$			-
Residential MBS - agency					10,333						67						-						-						10,333						67						-
Asset-backed securities					-						-						7,345						3,211						7,345						3,211						-
Corporate securities					-						-						8,050						2,410						8,050						2,410						-
Total debt securities		$			537,251			$			9,121			$			281,526			$			20,670			$			818,777			$			29,791			$			-
December 31, 2011
Debt securities:
Residential CMO securities - nonagency		$			573,928			$			16,646			$			226,507			$			24,191			$			800,435			$			40,837			$			-
Residential CMO securities - agency					6,224						78						-						-						6,224						78						-
Asset-backed securities					-						-						7,477						3,096						7,477						3,096						-
Corporate securities					-						-						2,404						2,583						2,404						2,583						685
Total debt securities		$			580,152			$			16,724			$			236,388			$			29,870			$			816,540			$			46,594			$			685

The Company had unrealized losses at March 31, 2012 and December 31, 2011 on residential CMO securities, MBS, ABS and corporate securities. These unrealized losses are primarily attributable to market conditions. Based on the nature of impairment, these unrealized losses are considered temporary. The Company does not intend to sell nor is it more likely than not that it will be required to sell these investments before their anticipated recovery.

At March 31, 2012, the Company had 68 debt securities in an unrealized loss position. A total of 34 were in an unrealized loss position for less than 12 months. These 34 consisted of 32 nonagency residential CMO securities and 2 agency residential MBS. Of these, 57% in amortized cost attained credit ratings of A or better. The remaining 34 debt securities were in an unrealized loss position for 12 months or longer. These 34 securities consisted of three ABS, one corporate security and 30 nonagency residential CMO securities. Of these debt securities in an unrealized loss position, 24% in amortized cost had credit ratings of A or better.

At December 31, 2011, the Company had 71 debt securities in an unrealized loss position. A total of 42 were in an unrealized loss position for less than 12 months, all of which were residential CMO

 

11

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

securities. Of these, 84% in amortized cost had credit ratings of A or better. The remaining 29 debt securities were in an unrealized loss position for 12 months or longer. These 29 securities consisted of three ABS, one corporate security and 25 nonagency residential CMO securities. Of these 25 nonagency securities, 68% in amortized cost had credit ratings of A or better.

In assessing whether these securities were impaired, the Company performed cash flow analyses that projected prepayments, default rates and loss severities on the collateral supporting each security. If the net present value of the investment is less than the amortized cost, the difference would be recognized in earnings as a credit-related impairment, while the remaining difference between the fair value and the amortized cost is recognized in accumulated other comprehensive income (AOCI). The Company recognized credit-related OTTI losses of $0 and $685 in other noninterest income for the three months ended March 31, 2012 and 2011, respectively, primarily due to a continued decline in the collateral value of a corporate security.

There were no OTTI losses recognized on AFS and HTM securities during the three months ended March 31, 2012.

Information regarding impairment related to credit loss recognized on securities in other noninterest income and impairment related to all other factors recognized in AOCI for the three months ended March 31, 2011 is as follows:

 

Debt securities:		Impairment Related to Credit Loss						Impairment Related to All Other Factors						Total       Impairment
Balance, January 1, 2011		$			3,354			$			502			$			3,856
Additional charges on securities for which OTTI was previously recognized					685						(499	)					186
Reduction for securities on which a reduction in value was taken against earnings (1)					(4,039)						-						(4,039)
Accretion of impairment related to all other factors					-						(3)						(3)
Balance, March 31, 2011		$			-			$			-			$			-

 

(1)

The value for these securities for which impairment is related to credit loss were written to a zero value during 2011 reflecting that the Company does not anticipate the ability to collect cash flows on these investments at any point in the future. This reduction in value was taken through earnings and thus, is reflected in the rollforward as a reduction of the credit loss balance to zero.

During the three months ended March 31, 2012 and 2011, interest and dividend income on investment securities is comprised of the following:

 

		Three Months Ended March 31,
		2012						2011
Interest income on available for sale securities		$			18,871			$			25,628
Interest income on held to maturity securities					1,400						372
Other interest and dividend income					278						244
		$			20,549			$			26,244

 

12

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

All interest income recognized by the Company during the three months ended March 31, 2012 and 2011 is taxable.

4.  Loans Held for Sale

Loans held for sale as of March 31, 2012 and December 31, 2011, consist of the following:

 

The Company sells loans to various financial institutions, government agencies, government-sponsored enterprises, and individual investors. Currently, the Company sells a concentration of loans to government-sponsored entities. The Company does not originate, acquire or sell subprime mortgage loans.

The Company securitizes a portion of its residential mortgage loan originations through government agencies. The following is a summary of cash flows between the Company and the agencies for securitized loans for the three months ended March 31, 2012 and 2011:

 

 

During the three months ended March 31, 2012, the Company transferred $154,340 of conforming residential mortgages to Ginnie Mae (GNMA) in exchange for mortgage-backed securities, which the Company may sell in the market to third party investors for cash. As of March 31, 2012, the Company retained all of the securities backed by the transferred loans and maintained effective control over the transferred assets. Accordingly, the Company has not recorded the transfers as sales. The transferred assets are recorded in the condensed consolidated balance sheet as loans held for sale.

During the three months ended March 31, 2012, the Company sold $4,919 of loans previously described as loans held for investment that were transferred to loans held for sale in 2011 and recognized a gain of $329, which is recorded as gain on sale of loans.

On March 31, 2012, the Company transferred $14,946 in commercial real estate loans held for sale to loans held for investment at lower of cost or market as the Company has the intent to hold these loans for the foreseeable future.

 

13

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

5.  Loans and Leases Held for Investment, Net

Loans and leases held for investment as of March 31, 2012 and December 31, 2011 are comprised of the following:

 

 

As of March 31, 2012 and December 31, 2011, the carrying values presented above include net purchase loan and lease discounts and net deferred loan and lease origination costs as follows:

 

 

Loans and Leases Acquired with Evidence of Credit Deterioration — At acquisition, the Company estimates the fair value of acquired loans and leases by segregating the portfolio into pools with similar risk characteristics. Fair value estimates for acquired loans and leases require estimates of the amounts and timing of expected future principal, interest and other cash flows. For each pool, the Company uses certain loan and lease information, including outstanding principal balance, probability of default and the estimated loss in the event of default to estimate the expected future cash flows for each loan and lease pool.

Information pertaining to the acquired portfolio of loans and leases with evidence of credit deterioration as of March 31, 2012 and December 31, 2011 is as follows:

 

 

 

14

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

The following is a summary of the accretable yield activity for the loans and leases acquired with evidence of credit deterioration during the three months ended March 31, 2012 and 2011:

 

The Company recorded $3,640 and $824 in provision for loan and lease losses for the three months ended March 31, 2012 and 2011, respectively, as a result of a decrease in expected cash flows on acquired loans with evidence of credit deterioration.

Covered Loans and Leases — Covered loans and leases are acquired and recorded at fair value, exclusive of the loss share agreements with the FDIC and the indemnification agreement with former shareholders of TCFG. All loans acquired through the loss share agreement with the FDIC and all loans and leases acquired in the purchase of TCFG are considered covered during the applicable indemnification period.

 

15

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

The following is a summary of the recorded investment of major categories of covered loans and leases outstanding as of March 31, 2012 and December 31, 2011:

 

 

 

16

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

6.  Allowance for Loan and Lease Losses

Changes in the allowance for loan and lease losses for the three months ended March 31, 2012 and 2011 are as follows:

 

		Three Months Ended March 31, 2012
								Commercial																		Consumer
								and						Lease								Home				and
		Residential						Commercial						Financing								Equity				Credit
		Mortgages						Real Estate						Receivables								Lines				Card						Total
Balance, beginning of period		$			43,454			$			28,209			$			3,766			$			2,186			$			150			$			77,765
Provision for loan and lease losses					3,836						5,308						723						1,493						(5)						11,355
Charge-offs					(6,694)						(2,294)						(1,181)						(1,108)						(11)						(11,288)
Recoveries					143						168						36						61						14						422
Balance, end of period		$			40,739			$			31,391			$			3,344			$			2,632			$			148			$			78,254
		Three Months Ended March 31, 2011
								Commercial																		Consumer
								and						Lease								Home				and
		Residential						Commercial						Financing								Equity				Credit
		Mortgages						Real Estate						Receivables								Lines				Card						Total
Balance, beginning of period		$			46,584			$			33,490			$			2,454			$			10,907			$			254			$			93,689
Change in estimate					10,154						(682)						(802)						(6,323)						(440)						1,907
Provision for loan and lease losses					9,770						3,231						1,570						1,217						335						16,123
Charge-offs					(9,238)						(9,088)						(2,096)						(2,172)						(2)						(22,596)
Recoveries					5						522						8						1						-						536
Balance, end of period		$			57,275			$			27,473			$			1,134			$			3,630			$			147			$			89,659

The following tables provide a breakdown of the allowance for loan and lease losses and the recorded investment in loans and leases based on the method for determining the allowance as of March 31, 2012 and December 31, 2011:

 

		Allowance for Loan and Lease Losses
														Loans and Leases
		Individually						Collectively						Acquired with
		Evaluated for						Evaluated for						Deteriorated
		Impairment						Impairment						Credit Quality						Total
March 31, 2012
Residential mortgages		$			7,702			$			27,377			$			5,660			$			40,739
Commercial and commercial real estate					5,445						11,977						13,969						31,391
Lease financing receivables					-						3,344						-						3,344
Home equity lines					-						2,632						-						2,632
Consumer and credit card					-						148						-						148
		$			13,147			$			45,478			$			19,629			$			78,254

 

17

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

		Loans and Leases Held for Investment at Recorded Investment
		Individually Evaluated for Impairment						Collectively Evaluated for Impairment						Loans and Leases Acquired with Deteriorated Credit Quality						Total
March 31, 2012
Residential mortgages		$			92,684			$			4,595,525			$			589,498			$			5,277,707
Commercial and commercial real estate					127,204						590,485						519,687						1,237,376
Lease financing receivables					-						605,763						-						605,763
Home equity lines					-						195,178						-						195,178
Consumer and credit card					-						7,163						-						7,163
		$			219,888			$			5,994,114			$			1,109,185			$			7,323,187
		Allowance for Loan and Lease Losses
		Individually Evaluated for Impairment						Collectively Evaluated for Impairment						Loans and Leases Acquired with Deteriorated Credit Quality						Total
December 31, 2011
Residential mortgages		$			7,436			$			30,554			$			5,464			$			43,454
Commercial and commercial real estate					6,021						11,663						10,525						28,209
Lease financing receivables					-						3,766						-						3,766
Home equity lines					-						2,186						-						2,186
Consumer and credit card					-						150						-						150
		$			13,457			$			48,319			$			15,989			$			77,765
		Loans and Leases Held for Investment at Recorded Investment
		Individually Evaluated for Impairment						Collectively Evaluated for Impairment						Loans and Leases Acquired with Deteriorated Credit Quality						Total
December 31, 2011
Residential mortgages		$			90,927			$			3,852,119			$			613,795			$			4,556,841
Commercial and commercial real estate					142,360						477,643						545,381						1,165,384
Lease financing receivables					-						588,501						-						588,501
Home equity lines					-						200,112						-						200,112
Consumer and credit card					-						8,443						-						8,443
		$			233,287			$			5,126,818			$			1,159,176			$			6,519,281

The Company uses a risk grading matrix to monitor credit quality for commercial and commercial real estate loans. Risk grades are continuously monitored and updated quarterly by credit administration personnel based on current information and events. The Company monitors the quarterly credit quality of all other loan types based on performing status.

 

18

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

The following tables present the recorded investment for loans and leases by credit quality indicator as of March 31, 2012 and December 31, 2011:

 

		Performing						Non-     performing						Total
March 31, 2012
Residential mortgages:
Residential		$			4,412,462			$			71,485			$			4,483,947
Government insured pool buyouts					632,329						161,431						793,760
Lease financing receivables					603,901						1,862						605,763
Home equity lines					191,408						3,770						195,178
Consumer and credit card					6,590						573						7,163
		$			5,846,690			$			239,121			$			6,085,811
		Pass						Special Mention						Substandard						Doubtful						Total
March 31, 2012
Commercial and commercial real estate:
Commercial		$			197,324			$			187			$			13,170			$			4,589			$			215,270
Commercial real estate					635,513						97,516						289,077						-						1,022,106
		$			832,837			$			97,703			$			302,247			$			4,589			$			1,237,376
		Performing						Non- performing						Total
December 31, 2011
Residential mortgages:
Residential		$			3,655,884			$			71,658			$			3,727,542
Government insured pool buyouts					649,391						179,908						829,299
Lease financing receivables					586,116						2,385						588,501
Home equity lines					195,861						4,251						200,112
Consumer and credit card					8,024						419						8,443
		$			5,095,276			$			258,621			$			5,353,897

 

19

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

		Pass						Special Mention						Substandard						Doubtful								Total
December 31, 2011
Commercial and commercial real estate:
Commercial		$			151,473			$			1,527			$			18,279			$					4,136			$			175,415
Commercial real estate					639,883						78,385						270,656								1,045						989,969
		$			791,356			$			79,912			$			288,935			$					5,181			$			1,165,384

The following tables present an aging analysis of the recorded investment for loans and leases by class as of March 31, 2012 and December 31, 2011:

 

		30-59 Days Past Due						60-89 Days Past Due						90 Days and Greater						Total Past Due						Current						Total Loans Held for Investment Excluding ASC 310-30
March 31, 2012
Residential mortgages:
Residential		$			15,812			$			5,187			$			71,485			$			92,484			$			4,255,959			$			4,348,443
Government insured pool buyouts					20,277						12,976						161,431						194,684						145,081						339,765
Commercial and commercial real estate:
Commercial					75						90						4,512						4,677						184,345						189,022
Commercial real estate					5,436						950						45,718						52,104						476,564						528,668
Lease financing receivables					2,026						1,362						979						4,367						601,396						605,763
Home equity lines					2,568						533						3,770						6,871						188,307						195,178
Consumer and credit card					191						94						243						528						6,635						7,163
		$			46,385			$			21,192			$			288,138			$			355,715			$			5,858,287			$			6,214,002
December 31, 2011
Residential mortgages:
Residential		$			16,966			$			12,673			$			71,658			$			101,297			$			3,487,525			$			3,588,822
Government insured pool buyouts					23,396						17,909						179,908						221,213						133,011						354,224
Commercial and commercial real estate:
Commercial					-						32						10,751						10,783						137,216						147,999
Commercial real estate					2,117						4,450						48,611						55,178						416,826						472,004
Lease financing receivables					3,394						971						962						5,327						583,174						588,501
Home equity lines					1,953						498						4,251						6,702						193,410						200,112
Consumer and credit card					106						50						233						389						8,054						8,443
		$			47,932			$			36,583			$			316,374			$			400,889			$			4,959,216			$			5,360,105

 

20

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

Impaired Loans — Impaired loans include loans identified as troubled loans as a result of a borrower’s financial difficulties and other loans on which the accrual of interest income is suspended. The Company continues to collect payments on certain impaired loan balances on which accrual is suspended.

The following tables present the recorded investment and the related allowance for impaired loans as of March 31, 2012 and December 31, 2011:

 

		March 31, 2012												December 31, 2011
		Recorded Investment						Related Allowance						Recorded Investment						Related Allowance
With an allowance recorded:
Residential mortgages:
Residential		$			68,278			$			7,702			$			74,189			$			7,436
Commercial and commercial real estate:
Commercial					3,032						432						4,697						779
Commercial real estate					33,626						5,013						37,189						5,242
		$			104,936			$			13,147			$			116,075			$			13,457
		March 31, 2012												December 31, 2011
		Recorded Investment						Related Allowance						Recorded Investment						Related Allowance
Without a related allowance recorded:
Residential mortgages:
Residential		$			24,406			$			-			$			16,738			$			-
Commercial and commercial real estate:
Commercial					5,826						-						9,814						-
Commercial real estate					84,720						-						90,661						-
		$			114,952			$			-			$			117,213			$			-

The following table presents the average investment and interest income recognized on impaired loans for the three months ended March 31, 2012 and 2011:

 

 

		Three Months Ended
		March 31, 2012												March 31, 2011
		Average Investment						Interest Income Recognized						Average Investment						Interest Income Recognized
With and without a related allowance recorded:
Residential mortgages:
Residential		$			91,806			$			660			$			75,605			$			523
Commercial and commercial real estate:
Commercial					11,685						23						1,344						11
Commercial real estate					123,098						558						171,892						346
		$			226,589			$			1,241			$			248,841			$			880

 

21

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

The following table presents the recorded investment for loans and leases on nonaccrual status by class and loans greater than 90 days past due and still accruing as of March 31, 2012 and December 31, 2011:

 

		March 31, 2012												December 31, 2011
								Greater than												Greater than
								90 Days												90 Days
		Nonaccrual						Past Due						Nonaccrual						Past Due
		Status						and Accruing						Status						and Accruing
Residential mortgages:
Residential		$			71,485			$			-			$			71,658			$			-
Government insured pool buyouts					-						161,431						-						179,908
Commercial and commercial real estate:
Commercial					7,107						-						12,294						-
Commercial real estate					82,478						-						86,772						-
Lease financing receivables					1,862						-						2,385						-
Home equity lines					3,770						-						4,251						-
Consumer and credit card					573						-						419						-
		$			167,275			$			161,431			$			177,779			$			179,908

Troubled Debt Restructurings — Modifications considered to be TDRs are individually evaluated for credit loss based on a discounted cash flow model using the loan’s effective interest rate at the time of origination. The discounted cash flow model used in this evaluation is adjusted to reflect the modified loan’s elevated probability of future default based on the Company’s historical redefault rate. These loans are classified as nonaccrual and have been included in the Company’s impaired loan disclosures in the tables above. A loan is considered to redefault when it is 30 days past due. Once a modified loan demonstrates a consistent period of performance under the modified terms, generally six months, the Company returns the loan to an accrual classification. If, however, a modified loan defaults under the terms of the modified agreement, the Company measures the allowance for loan and lease losses based on the fair value of collateral less cost to sell.

The following is a summary of information relating to modifications considered to be TDRs for the three months ended March 31, 2012:

 

		Three Months Ended
		March 31, 2012
								Pre-						Post-
								modification						modification
		Number of						Recorded						Recorded
		Contracts						Investment						Investment
Residential mortgages:
Residential					16			$			6,014			$			6,021
Commercial and commercial real estate:
Commercial					3						3,035						3,035
Commercial real estate					6						8,241						8,241
					25			$			17,290			$			17,297

 

22

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

Modifications made to residential loans during the period included extension of original contractual maturity date, extension of the period of below market rate interest only payments, or contingent reduction of past due interest. Commercial loan modifications made during the period included extension of original contractual maturity date, payment forbearance, reduction of interest rates, or extension of interest only periods.

The number of contracts and recorded investment of loans that were modified during the last 12 months and subsequently defaulted during the three months ended March 31, 2012 are as follows:

 

		Three Months Ended March 31, 2012
		Number of Contracts						Recorded Investment
Residential mortgages:
Residential					8			$			2,222
Commercial and commercial real estate:
Commercial					3						1,802
Commercial real estate					1						98
					12			$			4,122

The recorded investment of TDRs as of March 31, 2012 and December 31, 2011 are summarized as follows:

 

		March 31,						December 31,
		2012						2011
Loan Type:
Residential mortgages		$			92,684			$			90,927
Commercial and commercial real estate					51,067						61,481
		$			143,751			$			152,408
Accrual Status:
Current		$			88,379			$			85,905
30-89 days past-due accruing					4,423						6,723
90+ days past-due accruing					-						-
Nonaccrual					50,949						59,780
		$			143,751			$			152,408
TDRs classified as impaired loans		$			143,751			$			152,408
Valuation allowance on TDRs					9,016						9,743

 

23

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

7.  Servicing Activities and Mortgage Servicing Rights

A summary of MSR activities for the three months ended March 31, 2012 and 2011 is as follows:

 

 

		Three Months Ended March 31,
		2012						2011
Balance, beginning of period		$			489,496			$			573,196
Originated servicing rights capitalized upon sale of loans					18,529						19,616
Amortization					(29,339)						(22,788)
Impairment					(15,144)						-
Other					(1,122)						(1,379)
Balance, end of period		$			462,420			$			568,645
Valuation Allowance:
Balance, beginning of period		$			39,455
Impairment					15,144
Balance, end of period		$			54,599

For loans securitized and sold for the three months ended March 31, 2012 with servicing retained, management used the following assumptions to determine the fair value of MSR at the date of securitization:

 

		March 31,              2012
Average discount rates		8.60%		-		9.14%
Expected prepayment speeds		10.13%		-		14.62%
Weighted average life in years		5.46		-		6.70

At March 31, 2012 and December 31, 2011, the Company estimated the fair value of its capitalized MSR to be approximately $462,427 and $494,547, respectively. The unpaid principal balance below includes $5,367,000 and $5,248,000 at March 31, 2012 and December 31, 2011, respectively, for loans with no related MSR basis.

The characteristics used in estimating the fair value of the loan servicing portfolio at March 31, 2012 and December 31, 2011 are as follows:

 

 

24

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

A sensitivity analysis of the Company’s fair value of mortgage servicing rights to hypothetical adverse changes of 10% and 20% to the weighted average of certain key assumptions as of March 31, 2012 and December 31, 2011 is presented below.

 

		March 31,     2012				December 31,     2011
Prepayment Rate
10% adverse rate change		$	25,917			$	26,955
20% adverse rate change			49,957				51,872
Discount Rate
10% adverse rate change			17,499				18,306
20% adverse rate change			33,750				35,336

In the previous table, the effect of a variation in a specific assumption on the fair value is calculated without changing any other assumptions. This analysis typically cannot be extrapolated because the relationship of a change in one key assumption to the change in the fair value of the Company’s mortgage servicing rights usually is not linear. The effect of changing one key assumption will likely result in the change of another key assumption which could impact the sensitivities.

Components of loan servicing fee income for the three months ended March 31, 2012 and 2011 are presented below:

 

		Three Months Ended     March 31,
		2012						2011
Contractually specified service fees, net		$			35,385			$			38,050
Other ancillary fees					9,619						10,327
Other					552						499
		$			45,556			$			48,876

8.  Shareholders’ Equity

Initial Public Offering — On May 8, 2012, the Company completed the issuance and sale of 22,103,000 shares of its common stock, par value of $0.01 per share (the Common Stock), in its initial public offering of Common Stock (the Offering), including 2,883,000 shares sold pursuant to the exercise in full by the underwriters of their option to purchase additional shares from the Company, at a price to the public of $10.00 per share. The shares were offered pursuant to the Company’s Registration Statement on Form S-1. The Company received net proceeds of approximately $198,700 from the Offering, after deducting underwriting discounts and commissions and estimated offering expenses.

Preferred Stock — On January 25, 2012, the Company’s Board of Directors approved a special cash dividend of $4,482 to the holders of the Series A 6% Cumulative Convertible Preferred Stock (Series A Preferred Stock), which was paid on March 1, 2012. As a result of the special cash dividend, all shares of Series A Preferred Stock were converted into 2,801,160 shares of Common Stock.

Immediately prior to the completion of the Offering, the 136,544 shares of outstanding Series B 4% Cumulative Convertible Preferred Stock automatically converted into 15,964,644 shares of Common Stock.

 

25

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

Common Stock — At March 31, 2012, there were 150,000,000 shares of Common Stock authorized, and 77,994,699 shares issued and outstanding. Following the Offering, there were 500,000,000 shares authorized and 116,317,343 shares issued and outstanding.

9.  Income Taxes

For the three months ended March 31, 2012, the Company’s effective income tax rate of 36.4% differs from the statutory federal income tax rate primarily due to state income taxes. For the three months ending March 31, 2011, the Company’s effective income tax rate of 42.1% differs from the statutory federal income tax rate primarily due to state income taxes and a $691 increase to income tax expense for the revaluation of the net unrealized built-in losses associated with the Tygris acquisition.

10.  Earnings Per Share

The Company calculates earnings per share in accordance with ASC 260, Earnings per Share. Because the Company’s Series A and Series B Cumulative Convertible Preferred Stock meet the definition of participating securities, this guidance requires the use of the Two-Class Method to calculate basic and diluted earnings per share. The Two-Class Method allocates earnings between common and participating shares. In calculating basic earnings per common share, only the portion of earnings allocated to common shares is used in the numerator. The following table sets forth the computation of basic and diluted earnings per common share for the three months ended March 31, 2012 and 2011:

 

 

 

		Three Months Ended         March  31,
		2012						2011
Net income		$			11,846			$			9,416
Less distributed and undistributed net income allocated to participating preferred stock					(5,879)						(2,407)
Net income allocated to common shareholders		$			5,967			$			7,009
(Units in Thousands)
Average common shares outstanding					76,129						74,735
Common share equivalents:
Stock options					1,917						2,497
Nonvested stock					278						389
Average common shares outstanding, assuming dilution					78,324						77,621
Net income per common share, basic		$			0.08			$			0.09
Net income per common share, assuming dilution		$			0.08			$			0.09

On January 25, 2012, the Company’s Board of Directors approved a special cash dividend of $4,482 to the holders of the Series A Preferred Stock, which was paid on March 1, 2012, in order to induce conversion to shares of Common Stock. The Company has included the special cash dividend as distributed net income attributable to participating preferred stock. In addition, the Company included the Series A Preferred Stock as a participating security through the date of conversion and upon conversion, the Company included the shares in common shares outstanding.

 

26

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

Certain securities were antidilutive and were therefore excluded from the calculation of diluted earnings per share. Common shares attributed to these antidilutive securities had these securities been exercised or converted as of March 31, 2012 and 2011 are as follows:

 

		Three Months Ended          March 31,
		2012				2011
Stock Options			5,882,160				2,906,190

11.  Derivative Financial Instruments

The fair values of derivatives are reported in other assets, deposits, or accounts payable and accrued liabilities. The fair values are derived using the valuation techniques described in Note 12. The total notional or contractual amounts and fair values as of March 31, 2012 and December 31, 2011 are as follows:

 

										Fair Value
		Notional     Amount						Asset     Derivatives						Liability     Derivatives
March 31, 2012
Qualifying hedge contracts accounted for under ASC 815, Derivatives and Hedging
Cash flow hedges (risk management hedges):
Forward interest rate swaps		$			1,103,000			$			-			$			123,717
Derivatives not designated as hedging instruments under ASC 815, Derivatives and Hedging
Freestanding derivatives (economic hedges):
Interest rate lock commitments					1,258,192						4,902						1,117
Forward sales commitments					1,518,476						8,027						2,108
Optional forward sales commitments					269						-						1
Interest rate swaps					18,000						-						932
Foreign exchange contracts					1,070,566						8,479						8,749
Equity, foreign currency, commodity and metals indexed options					218,890						23,717						-
Options embedded in customer deposits					216,677						-						23,532
Indemnification asset					422,469						8,814						-
Total freestanding derivatives											53,939						36,439
Total derivatives								$			53,939			$			160,156

 

27

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

								Fair Value
		Notional       Amount				Asset    Derivatives						Liability    Derivatives
December 31, 2011
Qualifying hedge contracts accounted for under ASC 815, Derivatives and Hedging
Cash flow hedges (risk management hedges):
Forward interest rate swaps		$	1,153,000			$			-			$			133,897
Derivatives not designated as hedging instruments under ASC 815, Derivatives and Hedging
Freestanding derivatives (economic hedges):
Interest rate lock commitments			828,866						8,059						126
Forward sales commitments			1,278,899						1,140						13,340
Interest rate swaps			18,000						-						831
Foreign exchange contracts			1,114,838						9,494						16,293
Equity, foreign currency, commodity and metals indexed options			220,465						20,460						-
Options embedded in customer deposits			218,514						-						20,192
Indemnification assets			482,094						8,540						-
Total freestanding derivatives									47,693						50,782
Total derivatives						$			47,693			$			184,679

Cash Flow Hedges

Activity for derivatives in cash flow hedge relationships for the three months ended March 31, 2012 and 2011 are as follows:

 

		Three Months Ended March 31,
		2012				2011
Gains (losses), net of tax, recognized in AOCI (effective portion)		$	6,482			$	(3,951)
Reclassifications to interest expense (effective portion)			(1,710)				(2,029)
Pretax losses recognized in interest expense (ineffective portion)			(65)				-

All changes in the value of the derivatives were included in the assessment of hedge effectiveness.

As of March 31, 2012, AOCI included $13,561 of deferred pre-tax net losses expected to be reclassified into earnings during the next 12 months for derivative instruments designated as cash flow hedges of forecasted transactions. The Company is hedging its exposure to the variability of future cash flows for all forecasted transactions of fixed-rate debt for a maximum of eight years.

 

28

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

Freestanding Derivatives

The following table shows the net losses recognized for the three months ended March 31, 2012 and 2011 in the consolidated statements of income related to derivatives not designated as hedging instruments under ASC 815, Derivatives and Hedging. These gains and losses are recognized in other noninterest income, except for the indemnification assets which are recognized in general and administrative expense.

 

				Three Months Ended March 31,
		2012						2011
Freestanding derivatives (economic hedges)
Gains (losses) on interest rate contracts		$			(11,830)			$			2,899
Gains (losses) on indemnification assets					273						(8,680)
Other					446						-
		$			(11,111)			$			(5,781)

Interest rate contracts are predominantly used as economic hedges of interest rate lock commitments and loans held for sale. Other derivatives are predominantly used as economic hedges of foreign exchange, commodity, metals and equity risk.

Credit Risk Contingent Features

Certain of the Company’s derivative instruments contain provisions that require the Company to post collateral when derivatives are in a net liability position. The provisions generally are dependent upon the Company’s credit rating based on certain major credit rating agencies or dollar amounts in a liability position at any given time which exceed specified thresholds, as indicated in the relevant contracts. In these circumstances, the counterparties could demand additional collateral or require termination or replacement of derivative instruments in a net liability position. The aggregate fair value of all derivative instruments with such credit-risk-related contingent features in a net liability position on March 31, 2012 and December 31, 2011 was $124,771 and $153,337, respectively, for which the Company posted $127,548 and $170,656, respectively, in collateral in the normal course of business.

Counterparty Credit Risk

The Company is exposed to counterparty credit risk if counterparties to the derivative contracts do not perform as expected. If the counterparty fails to perform, counterparty credit risk equals the amount reported as derivative assets in the balance sheet. The amounts reported as derivative assets are derivative contracts in a gain position, and to the extent subject to master netting arrangements, net of derivatives in a loss position with the same counterparty, and cash collateral received. The Company minimizes this risk through credit approvals, limits, monitoring procedures, and executing master netting arrangements and obtaining collateral, where appropriate. The Company does not offset derivative instruments against the rights to reclaim cash collateral or the obligations to return cash collateral in the balance sheet. As of March 31, 2012 and December 31, 2011, the Company held $8,670 and $3,560, respectively, in collateral from its counterparties. Counterparty credit risk related to derivatives is considered in determining fair value.

 

29

---

Table of Contents

EverBank Financial Corp and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

 

 

12.  Fair Value Measurements

Asset and liability fair value measurements have been categorized based upon the fair value hierarchy described below:

Level 1 – Valuation is based upon quoted market prices for identical instruments in active markets

Level 2 – Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market

Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates or assumptions that market participants would use in pricing the assets to liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques

Recurring Fair Value Measurements

As of March 31, 2012 and December 31, 2011, assets and liabilities measured at fair value on a recurring basis, including certain loans held for sale for which the Company has elected the fair value option, are as follows:

 

Level 1

Level 2

Level 3

Total

March 31, 2012

Financial assets:

Available for sale securities:

Residential CMO securities - agency

$

-

&nbs