KBRA Downgrades Ratings for EverBank Financial Corp; Outlook Stable

KBRA downgrades the ratings for EverBank Financial Corp f/k/a TIAA FSB Holdings, Inc. ("EVER" or "the company"), including the senior unsecured debt rating to BBB+ from A+, the subordinated debt rating to BBB from A, and the short-term debt rating to K2 from K1. KBRA also downgrades the ratings for the company’s subsidiary, EverBank, National Association f/k/a TIAA Bank, FSB ("the bank"), including the deposit and senior unsecured debt ratings to A- from AA-, the subordinated debt rating to BBB+ from A+, and the short-term deposit and debt ratings to K2 from K1+. The downgrade resolves the Watch status and the Outlook for all long-term ratings is Stable.

Key Credit Considerations

The downgrade is largely reflective of the change in ownership support following the completion of the sale of the bank on August 1, 2023 by Teachers' Insurance and Annuity Association of America ("TIAA") to a private equity consortium (Reverence Capital Partners, Bayview Asset Management, Warburg Pincus, Stone Point Capital, Sixth Street). We note that TIAA will remain a minority shareholder, which, in combination with certain partnerships with TIAA subsidiaries, notably Nuveen, will prospectively align economic incentives to support EVER's commercial growth to a degree. The ratings are supported by KBRA's favorable view of EVER's management given the significant industry experience of the team. The bank’s expansion and strategic initiatives under the new ownership regime will be led by new CEO, Greg Seibly, formerly the CEO of MUFG Union Bank, who is well credentialed to lead the company's push into new commercial verticals; previous CEO Steve Fisher will transition to an executive chairman role while the remainder of the company's executive team is expected to be augmented with additional talent as the company's strategy evolves. KBRA also positively considers EVER’s credit performance given comparatively favorable realized loss history, despite NPA levels that have run moderately above peer levels historically, which have been partially inflated by GNMA buyout activity. Additionally, EVER has historically achieved a higher degree of diversification and granularity in its credit portfolio through its national delivery channels; this could potentially shift given the bank's change in charter to a national bank, which allows for a strategic pivot toward more commercial banking activities without the limitations of the legacy thrift charter. The bank’s overall funding profile, which has historically been more wholesale oriented, is expected to undergo a transition as EVER migrates its strategy to drive organic deposit growth in tandem with its commercial banking expansion. With that said, EVER's legacy funding profile has generally been considered less favorable relative to peers, though we note that, through the completion of the sale, EVER's near-term liquidity profile has been bolstered to include a substantial level of cash derived from the retention of residential mortgages by TIAA at par. EverBank's earnings profile is expected to remain somewhat challenged due principally to funding-led margin headwinds as the company executes on its shift in strategy. Moreover, TIAA retained the bank's trust division, which was a key source of noninterest income for EVER; the loss of this key noninterest income source prospectively increases EVER's reliance upon spread derived revenue until other fee sources can be developed. Additionally, with transition to a commercially-oriented business model, the risk-weighted density of the company's loan portfolio is expected to increase modestly over time as growth in higher risk-weighted commercial loans replaces legacy allocation into lower weighted residential mortgages. However, this is offset in the near term by the company’s post-close capital profile, which is well above peer levels and reflects minimal AOCI. Capital levels are expected to normalize somewhat over time coinciding with loan growth and the remixing of risk-weighted assets, though KBRA expects capital, particularly CET1, to remain at or above peer levels.

Rating Sensitivities

Given the transitional nature of EVER's corporate strategy, positive rating momentum is not expected in the medium term. However, evidence of successful execution on strategy as denoted by improved earnings dynamics, both in diversification and overall trends, in combination with sustained improvements within nonperforming loans and maintenance of higher than peer capital levels could drive positive sentiment. Conversely, failure to attain success in strategic execution, including increased and sustained material degradation in earnings, credit quality, or the deposit franchise could result in negative sentiment. Additionally, a decrease in capital levels, particularly CET1, beyond our expectations, whether through realized losses or more aggressive capital management, could drive a rating downgrade.

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