Updated -- News reports indicate that EverBank is bringing a rare IPO in the financial institution sector. Needless to say, the Sell Side is very excited about this private-equity sponsored deal, but let’s see what The IRA Bank Monitor says about this $12 billion asset Jacksonville, FL based lender.
As of the end of 2011, EverBank was rated “A” by The IRA bank Monitor using the relatively harsh Bank Stress Index (“BSI”) measure for current performance that we use for our retail customers. The BSI is based on a five factor survey of ROE, Capital, Charge-offs, Exposure at Default and Efficiency for all FDIC insured banks, which is then presented as an index.
The BSI rating for EverBank dropped in December 2010 from “A+” to “A” after the institution’s BSI score steadily rose from 0.9 to the current 1.2 in Q4 2011. The most recent BSI score for EverBank is shown below:
EverBank -- (12/31/2011) -- The IRA Bank Monitor
Source: FDIC/The IRA Bank Monitor
While the overall BSI score for EverBank is below the industry stress score of 1.7 (1995=1), in terms of both capital and efficiency, the institution shows stress levels above the industry average. Notice how the BSI score for ROE for EverBank and the entire industry is > 2, illustrating the profitability pressures on all banks.
The broader public data CAMELS rating for EverBank generated by IRA is 2.3, again reflecting the satisfactory scores for current capital and operating efficiency.
In terms of capital, EverBank has good numbers at present with a Tier One leverage ratio of 8.4%. But the TCE ratio of just 3.5% as calculated by IRA is a concern. U.S. market convention is that Tangible Common Equity ratio should be greater than 3% of Tangible Assets, but under Basel III this floor is raised to 4.5% for TCE. Thus the IPO is necessary just for EverBank to keep up with changing regulatory norms. All US banks face lower asset and equity returns going forward because of the idiotic Basel III rules.
At the end of 2011, EverBank reported an ROA of 0.4% and an ROE of 5.18%, in both cases below the peer group averages. In terms of Economic Capital and risk adjusted returns (“EC”), EverBank had a Risk-Adjusted Return on Capital or “RAROC” of 4.557%. The EC factor calculated by IRA includes a maximum probable loss for lending, trading and investment activities. The EC number is then compared with income to calculate RAROC.
In this case, EverBank’s ratio of EC to T1 RBC was over 2:1, which is fairly aggressive for a bank of this size. Most US banks included in the IRA Bank Monitor quarterly survey have EC to T1 RBC ratios well below 1, meaning that those conservative institutions are arguably over-capitalized. Of the $2.1 billion in EC calculated for EverBank, more than $1.1 billion is attributable to securities exposure, while trading operations was $700 million and lending $240 million.
The distribution for EC for EverBank suggests that lending is not the largest area of risk in this institution, a remarkable observation since lending makes up over three quarters of the bank’s tangible assets. The three quarters of a billion dollar negative CMBS/SPF position reported to the FDIC starting back in Q2 2011 is also something I’d like to hear more about from EverBank management.
IRA calculates a Texas ratio of 3.2 for EverBank. The Texas ratio takes the amount of a bank's non-performing assets and loans, as well as loans more than 90 days past due, and divides this number by the firm's tangible capital equity plus its loan loss reserve. A ratio of more than 100 (or 1:1) is considered a warning sign, so the 3.2 Texas ratio for EverBank is remarkable. In March 2010, the Texas ratio for EverBank was just 1.75%.
The efficiency ratio of EverBank at 81% is not especially good, although the entire US banking industry is seeing operational efficiency degrade. EverBank has seen its efficiency ratio, which is the dollar cost of revenue, rise from 57% in 2010 to 81.4% at the end of 2011. Figures 65% and lower are considered desirable. Efficiency figures above 85% are considered stressed and figures above 150% are distressed.
Perhaps more troubling is the trend in terms of the bank’s troubled assets. As of Q4 2011, EverBank reported a charge-off rate of 63 bp, half a standard deviation below the peer group defined dynamically by The IRA Bank Monitor. The Statistical Peering Cluster is calculated by Institutional Risk Analytics for Red Flag standard deviation testing and is dynamically constructed based on bank unit asset base specific to each reporting quarter. The statistical peering cluster for EverBank includes:
Astoria Federal Savings and Loan Association
Bank of America California, National Association
Bank of America Oregon, National Association
Bank of America, Rhode Island, National Association
Bank of Hawaii
Charles Schwab Bank
Citicorp Trust Bank, fsb
First Republic Bank
Flagstar Bank, FSB
Hudson City Savings Bank
ING Bank, fsb
JPMorgan Bank and Trust Company, National Association
Metlife Bank, National Association
Morgan Stanley Private Bank, National Association
State Farm Bank, F.S.B.
Third Federal Savings and Loan Association of Cleveland
Wells Fargo Bank South Central, National Association
Based on data from the FDIC, the asset quality trouble factor calculated by IRA has risen from 12 in March 2010 to 19 at the end of 2011. This trend suggests that the bank may be facing increased credit losses in the future.
Another are of concern for EverBank is the rising use of volatile liabilities to fund the bank’s assets. While most FDIC insured banks have been pushing down the use of volatile liabilities and particularly advances from the Federal Home Loan Banks, EverBank has been increasing both categories over the past two years and more.
While the use of brokered deposits came down slightly in Q1 2011, such funding still supports 30% of the balance sheet, according to data from the FDIC. FHLB advances are now almost 10% of total assets, raising concerns about moral hazard.
Overall, EverBank is showing good current performance, but some of the asset quality factors and trends that I see from the ratings summary from The IRA Bank Monitor are of concern. A ratings decrease is a fact of life as a bank grows and takes on more risk exposures. That said, because of the trends in some of the key asset quality metrics, I would tend to not to be a buyer of this offering and would want to see the bank stabilize some of these indicators. The nominal and risk-adjusted returns now being delivered by EverBank based on their filings with the FDIC are not sufficient to make me want to take exposure to this name at this time.
To look up the ratings summary for EverBank or other US banks, go to: