EverBank Financial's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.30.13 | About: EverBank Financial (EVER)

EverBank Financial (NYSE:EVER)

Q2 2013 Earnings Call

July 30, 2013 08:00 am ET

Executives

Rob Clements – Chairman & Chief Executive Officer

Blake Wilson – President & Chief Operating Officer

Steve Fischer – Executive Vice President & Chief Financial Officer

Scott Verlander – Vice President, Corporate Development

Analysts

Erika Penala – Bank of America Merrill Lynch

Michael Rose – Raymond James

Jeff Langler – Goldman Sachs

John Pancari – Evercore Partners

Kevin Barker – Compass Point

Peyton Green – Sterne Agee

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to EverBank Financial Corp’s Q2 2013 Earnings Conference Call. My name is Emily and I will be your Conference Operator for today. (Operator instructions.) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Scott Verlander, Vice President of Corporate Development for the company. Please go ahead, sir.

Scott Verlander

Thank you, Operator. Good morning, everyone, and welcome to EverBank Financial Corp’s Q2 Earnings Conference Call. Today I’m joined by Rob Clements, our Chairman and CEO; Blake Wilson, our President and COO; and Steve Fisher, our Executive Vice President and CFO.

Before we begin I would like to remind you that our Q2 earnings release, financial tables and earnings supplement are available on the Investor Relations section of our website at www.abouteverbank.com.

I would also like to remind you that comments made on today’s call deal with forward-looking statements related to the company and the banking industry and are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are detailed in the company’s filings with the SEC which you may access on the SEC’s website.

In addition, some of the company’s remarks this morning contain non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in the company’s earnings release and financial tables. I would now like to turn the call over to the company’s Chairman and CEO, Rob Clements.

Rob Clements

Thank you, Scott, and good morning. Our results for the quarter demonstrate the power of our banking franchise as we experienced strong origination volumes across all of our platforms, resulting in loans held for investment growth up 5% along with solid transaction-related deposit growth. We generated a return on equity of 12.7% in the quarter and 11.9% year-to-date which compares favorably in both absolute and relative terms.

I would now like to provide you with some of the highlights of our financial results for the quarter. GAAP diluted earnings per share was $0.35, up 17% quarter-over-quarter and 289% year-over-year. Adjusted diluted earnings per share was $0.28, down 15% quarter-over-quarter and year-over-year. ROE for the quarter was 12.7% and adjusted ROE was 10.2%.

Tangible booked value per share was $11, an increase of 3% for the quarter and 10% year-over-year. Total loans and leases held for investment were $12.8 billion at quarter end, up 5% quarter-over-quarter.

Total deposits were flat in the quarter at $13.7 billion, however our interest-bearing transaction-related deposits grew by approximately $400 million or 5% for the quarter. Year-over-year, total deposits increased $2.9 billion or 27%.

Our credit performance continues to be very strong with a net charge-off ratio of 12 basis points for the quarter. Bank [owned] tier one leverage and total risk-based capital ratios were 8.3% and 13.7% respectively at June 30, meaning the bank is well capitalized under applicable regulatory guidelines.

And finally, as disclosed in our earnings release earlier today the company’s Board of Directors declared a quarterly cash dividend of $0.03 per share of common stock for Q2 representing a 50% increase from prior quarters.

As you all know, we witnessed a change in market conditions during the quarter as long-term interest rates increased significantly. We believe the diversity and flexibility of our business model has us uniquely positioned to adapt to the current market environment. Our commercial lending and leasing businesses continue to benefit from economic growth and higher interest rates as evidenced by strong and growing pipeline activity and we feel good about the prospects for these businesses.

On the residential side we’ve been expecting an eventual rise in rates and a normalization of refinance volumes as well as an increase in purchase market activity. This was precisely the rationale behind our retail lending channel expansion which we initiated early in 2012. Additionally, we believe higher interest rates will be beneficial to our servicing business going forward. We also remain focused on optimizing operational efficiency across the organization.

In short, we believe we have built a high-performing business model that provides opportunities to be successful in a variety of rate environments. I will now turn the call over to Blake who will discuss the performance of our business in the quarter.

Blake Wilson

Thanks, Rob, and good morning everyone. We continue to see strong growth in all of our core asset and deposit generation businesses. In Q2 we generated $3.8 billion in loans and leases, a 39% increase over the prior year and a 15% increase over Q1. Of the $3.8 billion generated in Q2, approximately $1.1 billion was retained in our portfolio driven by increases in our commercial real estate volumes, leasing volumes, prime jumbo private ARMs, and new warehouse finance clients.

Our residential lending business originated approximately $3.2 billion of residential mortgage loans in the quarter, an increase of 43% year-over-year and 12% compared to Q1. Our retail channel originated $1.2 billion in the quarter, a 45% increase quarter-over-quarter and a fourfold increase year-over-year.

Purchase transactions made up nearly half of the retail volume in the quarter, and as we’ve indicated on prior calls we expect this channel to continue to increase our share in the purchased money market. In the quarter we added approximately 100 retail lending professionals and plan to continue to expand this channel by attracting high-performing lending talent in our target markets.

Prime jumbo originations were $1.1 billion in the quarter, which represents an increase of 36% compared to $768 million in Q1. Approximately $500 million of the jumbo volume was shorter-duration hybrid ARMs which we will retain in our portfolio. With the changes in interest rates and steeper yield curve, we believe that the hybrid ARM product will continue to become a larger portion of our residential lending volume over the next few quarters. For jumbo fixed rate loans, we will continue to sell those either into the capital markets or to other whole loan buyers who are seeking the high-quality loans that we originate.

With the interest rate move we believe the overall refinance volumes are going to decline but we have begun marketing to the $13 billion MSR portfolio that we acquired in April and are seeing solid response rates to these activities. We expect this portfolio will provide significant HARP refinance volume over the next few quarters. HARP volumes accounted for 17% of originations in Q2 and we believe this percentage could increase over the next few quarters.

With the change in the regulatory requirements and interest rates we are beginning to reposition our residential lending platforms including the recent announcement of our decision to exit our brokered lending business. This channel represented approximately 17% of origination volumes in Q2 with approximately 65% of the volume coming from refinance activity. We expect a restructuring charge in Q3 of $2 million to $4 million after tax related to the approximately 150 impacted employees.

We continue to focus on the growth opportunities in our retail, consumer direct, and core (inaudible) channels and believe any lost volume from our exit from the broker business will have a minimal impact on net income.

Our commercial lending and leasing businesses continue to experience strong growth and now represent 47% of our loans held for investment compared to 32% a year ago. Our commercial real estate lending platform originated $157 million in Q2, an increase of 149% sequentially. Our commercial finance business grew leases outstanding to over $1 billion, an increase of 11% from the prior quarter and approximately 49% year-over-year.

Lender finance also performed well in the quarter, with outstanding loans increasing 18% sequentially to $434 million. Our warehouse finance business grew loans outstanding by 11% to $1.3 billion driven by high-quality new client additions as utilization rates remained flat at 60% for the fourth consecutive quarter. Based on our current pipeline strength we are optimistic that our commercial platforms will continue to grow originations in the back half of the year. While we expect utilization rates on our warehouse finance business to decline as refinance activity slows, we continue to see significant new client opportunities in this business.

As Rob mentioned, our transaction-related interest checking, savings, and money market deposits increased by approximately $400 million or 5% in Q2. Given the company’s strong deposit growth over the past twelve months we were able to reduce our deposit rates in June and July while continuing to attract new core retail and business deposit clients.

Now I will turn the call over to Steve to cover the financial results in more detail.

Steve Fischer

Thanks, Blake, and good morning. I would like to start by reviewing our total revenue which grew 4% sequentially to $288 million in Q2 and was up 45% or $89 million compared to Q2 2012. Our core net interest margin declined six basis points compared to Q1. Continued growth in short-duration commercial assets offset the impact of higher residential yields in our portfolio loans. We do expect that our core NIM will see some support in future quarters from the deposit rate reduction Blake mentioned.

Our noninterest income was $147 million for the quarter, up approximately $13 million or 10% quarter-over-quarter. While the significant increase in mortgage rates and spread widening negatively impacted our gain on sale margin during the quarter, we recaptured $33 million of MSR valuation allowance. We would expect additional MSR recoveries and reductions in MSR amortization if mortgage refinance activity slows consistent with industry forecasts.

Our noninterest expense was $214 million, an increase of $2 million over the prior quarter. Adjusted for foreclosure review costs of $18 million, NIE was $196 million in the quarter, a decrease of 2% compared to $200 million in Q1. We expect the initial foreclosure review by the independent consultants will be completed by early- to mid-August. Because this is an ongoing regulatory matter of a sensitive nature we will not be able to answer further questions related to the foreclosure review.

Our salaries, commissions and employee benefits increased $8 million or 7% during the quarter. This increase was driven by continued hiring in our retail lending channel as well as additions to our servicing operation related to onboarding the $13 billion UPB of MSR acquired in Q2. Going forward, we will make the appropriate adjustments to capacity as we rebalance our business activities for the new rate environment.

Our G&A decreased by $7 million or 10% from Q1, due primarily to a decrease in FDIC fees and lower marketing expenses. We expect that marketing expense will remain fairly flat from current levels during the second half of 2013.

Our credit performance continues to be very strong as adjusted nonperforming assets declined seven basis points for the quarter to 92 basis points. Year-over-year adjusted NPAs have declined 54 basis points. Our net charge-offs were $4 million or 12 basis points annualized in Q2, down from 23 basis points in the prior quarter.

Our loan loss provision was effectively zero during the quarter as we had approximately $1 million of provision on our non-covered portfolio loans offset by a release in our allowance related to our covered commercial loan portfolio. Now I’d like to turn it back over to Rob for some closing remarks.

Rob Clements

We believe that EverBank’s diversified business model of nationwide asset generation platforms funded by a high-quality deposit franchise allows us to succeed in any economic and interest rate environment. We remain focused on generating attractive risk-adjusted returns and driving shareholder value over the intermediate and long term. With that, Operator, please open the line for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator instructions.) Our first question comes from Erika Penala of Bank of America Merrill Lynch. Please go ahead.

Erika Penala – Bank of America Merrill Lynch

Yes, thank you. Good morning. My first question is on the statement that you just mentioned in terms of the ability to bring in capacity as refinancing originations come off in the second half of the year. Can you help us size what the variable expenses are that could go away when the refi volumes drop off for the second half of the year?

Rob Clements

Hey Erika, it’s Rob. Just some general commentary: we’ve been anticipating for a while a shit in the rate environment. Arguably it happened more severely at the end of the quarter than we anticipated but we’ve taken steps to adjust our capacity. We’re taking steps very quickly to start adjusting capacity to reflect the new environment. And to a large degree that had an impact on our decision to exist the broker wholesale lending business. But in addition to that we’re moving quickly to make sure we are well positioned to lower our expenses in this new environment and adjust capacity accordingly. Blake, do you want to go into a little more detail?

Blake Wilson

Yeah, in addition to I guess the variable costs associated with each of the channels in terms of overtime, temps, contractors or variable incentive compensation, those will adjust naturally with the changes in the environment. But strategically speaking, as you know, Erika, we’ve been investing really heavily in expanding the retail business and we’re really starting to see… You just saw the growth in volume quarter-over-quarter, the traction in that business with the majority now of new applications coming from that business being in the purchased money category, which we find very attractive.

And then finally on the consumer direct front we’re seeing great response from the acquisition of the portfolio we purchased in Q2. And overall the HARP2 volume combined with the coupon in that portfolio, the vast majority of that portfolio is in the money for refinance activity which provide a good tailwind for the consumer direct business in the coming quarters.

Erika Penala – Bank of America Merrill Lynch

Got it. And my follow-up questions are can you give us a sense on what the gain on sale margin is in the wholesale broker channel and also could you help us size the opportunity for HARP refinancing on the $13 billion servicing asset that you had purchased in April? Thanks.

Blake Wilson

Yeah, I don’t think we generally talk specifically about channel margins but the broker business in particular has been most competitive from a pricing perspective. Overall it tends to be more agency-oriented, and given the regulatory demands and costs of that business and competitive pressures – and the majority of that business being refinance in the current environment – we saw revenue pressure coming overall in that channel. So overall as we look then to the consumer direct side, the margins continue to be very attractive on the HARP2 volume and the refinance activity on the consumer direct business.

Steve Fischer

And Erika, hi, it’s Steve. Just as a way to possibly get that from a modeling perspective would be, what we did talk about was the impact of employees – and as Blake mentioned we don’t look at this as a material impact to net income. So I think you can get a sense probably of what the revenue impact is and I think then you kind of get a sense of the gain on sale margin if you do the math that way.

Operator

And our next question comes from Michael Rose of Raymond James. Please go ahead.

Michael Rose – Raymond James

Hey, good morning guys. Just wanted to get an update on BPL. It seemed like the commercial origination this quarter held relatively steady but I wanted to get your sense for where you think you are relative to the guidance that you’d laid out previously.

Rob Clements

Hi Michael, it’s Rob. Yes, we continue to be very pleased with the progress we’re making with the BPL acquisition and the momentum we’re experiencing in the pipeline and in closings. Year-to-date we’re on top of the annual guidance that we gave for BPL and commercial real estate lending, and actually on a run rate in Q2 we’re trending ahead of that guidance. So we’ve made great progress so far and we’re really pleased with how that business is performing.

Michael Rose – Raymond James

Okay, and then as a follow-up just on the retail expansion, I think you said you added 100 people this quarter. How could we expect future hiring to trend really in the back half of the year and can you talk about any associated expenses with additional hires? Thanks.

Rob Clements

Well, as we mentioned at the beginning of the year we had fairly progressive plans to expand for the first six months and that we would then kind of step back and take a look at where we were. As Blake has mentioned, we feel really good about the success of the expansion of that channel and the strong growth that we’ve seen with a 45% increase in closings from the retail channel in Q2.

I will tell you that for the remainder of the year we expect the number of employees that we’ll hire for the remainder of the year will moderate to some degree but we still see great opportunities to add commissions-based originators in those markets where we’ve already established a real strong presence.

Operator

Our next question comes from Ryan Nash of Goldman Sachs. Please go ahead.

Jeff Langler – Goldman Sachs

Hi, this is Jeff Langler on behalf of Ryan Nash. Just a question on the MSR amortization. I guess how should we think about number one, the timing of the decline in MSR amortization expense – I guess do we need to see if CPRs kind of drop to the 10% to 15% range? And then also how do we think about the size of the magnitude of the drop? Should I be looking at the expense relative to the gross MSR value or kind of net of the allowance?

Steve Fischer

Hey Jeff, it’s Steve. I think you’ll see it is a little bit of a lagging indicator and that’s probably the difficulty in modeling it. That’s part of why I think in the supplement we gave you a slide that gave you kind of a historical perspective of the BMR and related CPR rate and the impact of the MSR amortization. I think in that, that historical look kind of pulls you back to $19 million of amortization a year and a half or two years ago. I think that the point of that slide and our sense is we can probably get there – over the next kind of four to six quarters you would see something similar to that. So I think that kind of gives you a $2 million to $4 million kind of decrease on an each quarterly basis assuming historical patterns play out.

But we are seeing, when you look upstream you see the paid in full requests are slowing down. If the refinance wave is slowing we are going to see meaningful MSR amortization relief; and accordingly with that we also, as we mentioned in the remarks, see the impairment recovery come through as well. So it’s a nice counterbalance to any offset to future gain on sale if you believe the refinance wave is beginning to wane.

Jeff Langler – Goldman Sachs

Okay, great. And then just on deposit costs, I think you mentioned that you adjusted some pricing in June. Can you just give us a sense of the magnitude and how much carryover we should expect? And then for the 58% under your CD booked that you say is going to mature in the next twelve months, what rates are these rolling off and kind of what are you putting new CDs on at? Thanks.

Blake Wilson

Yeah thanks, this is Blake. We adjusted our deposit rates in May for the first time in a while. We were at 76 basis points in May and at the end of May we adjusted that down to 67 basis points and then at the beginning of July 61. So we’re really going to start to see the full effect of the 15 basis point reduction in Q3. We also reduced our introductory rate overall, and part of that really stems from the fact that we’ve had great success in deposit growth over the past twelve months.

We’ve really shored up our liquidity profile, paid off higher-cost wholesale borrowings and really put us in a position to pull the lever on deposits in this environment with the change. We’ve moderated some of our marketing initiatives in that regard and really feel good about kind of the liquidity profile while attracting deposit clients both on the business side and the consumer retail side that fit our target profile.

Jeff Langler – Goldman Sachs

Okay, great. Thanks.

Operator

Our next question is from John Pancari of Evercore Partners. Please go ahead.

John Pancari – Evercore Partners

Good morning, guys. Can you give us a little more detail on the sale of the fixed rate jumbos that you indicated that you did approaching the end of the quarter, in terms of was it a bulk sale or securitization?

Blake Wilson

Yeah, hey John, this is Blake. As we indicated in our remarks we, obviously given the sharp sell-off in the market overall we had completed our second securitization in Q2. With the sell-off in the market and some of the spread widening that took place in the securitization markets overall we saw more attractive bids really in the whole loan market. And so with that, as we disclosed, we entered into a forward commitment in July selling substantially all of the long-term fixed rate jumbo product in a forward transaction.

So where that leaves us now is we continue to see really attractive hybrid ARM interest from our customers overall given the steepening of the yield curve, and that continues with that steepening to provide attractive bank portfolio growth as we look forward from here.

Rob Clements

And John, I would add I think these developments really highlight the flexibility of our model the fact that we were able to shift from being a seller through securitizations to being able to use going forward our portfolio to retain very attractive risk-adjusted return profile adjustable ARMs.

John Pancari – Evercore Partners

Okay, yeah; thanks and sorry if I missed that detail. And then on the exist of the wholesale broker business, I know you mentioned that the bottom line contribution should be minimal. Can you just give us an idea of what the historical returns in that business were?

Rob Clements

As you know the broker business, particularly since Dodd-Frank has been under a state of transition given the new regulatory demands, in this current low refinance oriented environment it’s been profitable, not incredibly profitable. And so given again a reduction in refinance activities that’s expected combined with the burdens and regulatory costs we really, historically it’s been a channel that most recently has been producing profits but really under a state of transition for some time. And really we see those headwinds continuing into the future.

John Pancari – Evercore Partners

Okay, and then lastly can you give us a little bit of color on the decline in the C&I and CRE yields in the quarter? It looks like they came off a good amount.

Blake Wilson

We’ve gotten rotation. If you remember, the BPL acquisition was I think about a 6.7% yield, that $2.4 billion that we acquired October 1st of last year. So you’re naturally going to see some rotation inside of that as we’re putting on new money yields at kind of right around 5%. So you’re really just, as the 6.7% runs off and we’re putting new money on at 5% you’re going to see kind of a natural change in that, John.

John Pancari – Evercore Partners

Okay, thank you.

Operator

(Operator instructions.) And our next question comes from Kevin Barker of Compass Point. Please go ahead.

Kevin Barker – Compass Point

Good morning. Could you help us understand the impact of keeping the roughly $600 million or $700 million of jumbo loans on balance sheet given the interest rates have moved so much and you were originally planning to sell those into the market? Can you just explain the impact and some of the gain on sale margin that you were originally expecting in that securitization?

Rob Clements

So those loans weren’t slated for securitization. Generally we’ve been securitizing the longer-term 30-year fixed rate product. And so the loans are either really hedged either from an asset perspective going into the capital markets and hedged based on changes in value, particularly the longer-term fixed rate stuff; or they’re slotted to be a portion of our overall asset liability re-pricing sensitivity. So this really allowed us to go ahead and we expect some moderation in our loans held for sale given the change in this environment and the sale of the longer-term fixed rate product, so this allows the bank portfolio to go ahead and invest in attractive net interest earning assets given the deployment from an asset or hybrid ARM perspective.

Kevin Barker – Compass Point

So do you have longer-duration 30-year fixed mortgages on your balance sheet right now outside of the $600 million that was originated in Q2?

Rob Clements

Earlier in the discussion we talked about at the end of June we did. In July we sold substantially all of that fixed rate position, both pipeline and whole loans or warehouse into the capital markets in a whole loan transaction.

Kevin Barker – Compass Point

Okay. And then given that deposits were relatively flat and loans have been growing recently, is there a certain emphasis on being able to grow those deposits or certain areas where you’re trying to attract new types of deposits to fund the growth, specifically from BPL?

Rob Clements

Just to clarify, our deposit growth in terms of our core transaction accounts grew very, we saw attractive growth in the quarter. The fact that overall deposit growth was flat really reflected a reduction in timed deposits and other wholesale funding. So we still have a lot of strong momentum in terms of building our core deposits, transaction accounts and other core deposits.

Kevin Barker – Compass Point

Okay.

Steve Fischer

And if you look at, I think it’s Table #6B you’ll see that the core, about $8 billion grew about 5% linked quarter; and then you see that transition in the timed deposit where it was down 7%. So kind of to Rob’s point, the deposits are continuing to grow, we still plan them to grow. Part of it is transitioning it out from the wholesale but also then to help us with balance sheet growth and moving forward.

Kevin Barker – Compass Point

Okay, and then just finally a follow-up on some of the questions about gain on sale. How does the gain on sale margin you’re seeing in June and July compare to what you saw in April and May for the HARP loans in particular?

Rob Clements

We continue to see attractive margins on the HARP business into July. Some of the specified executions on that have been muted a bit with the sell-off but overall the channel margins continue to be very attractive.

Kevin Barker – Compass Point

Would you say it’s in line with retail or slightly above? Can you give us a little bit of color on how that compares to retail originations?

Blake Wilson

Historically we haven’t really gotten into the channel specifics but overall as an industry I think you’ve seen that consumer direct retention-related volumes tend to be the most efficient and attractive margins in the industry.

Kevin Barker – Compass Point

Yes, absolutely. Alright, thank you for taking my questions.

Operator

Our next question is from Peyton Green at Sterne Agee. Please go ahead.

Peyton Green – Sterne Agee

Yes, good morning. I was curious if you could answer, out of the loans held for sale how much of the $2 billion was sold subsequent to quarter-end and what would be a good, I mean how much lower should that adjust down in future periods do you think?

Blake Wilson

Hey Peyton, it’s Blake. It was just under $1 billion, $950 million in a forward contract; and the execution on that wasn’t materially different from where we had thought it to be at the end of the quarter.

Peyton Green – Sterne Agee

Okay, so fair value approximates the sale value – is that fair?

Blake Wilson

That’s fair.

Peyton Green – Sterne Agee

Okay, great. And then in thinking about the balance sheet going forward, the commercial real estate business you mentioned is certainly starting to pick up which is kind of in line with your thought that the second half would be more pronounced with the first half. How are you seeing competitive conditions in that business and are you still optimistic that given the progress in Q2 versus Q1 and certainly versus Q4, is the outlook better than it was say a quarter or two ago?

Rob Clements

Hey Peyton, it’s Rob. The commercial growth in our pipelines in both commercial leasing and commercial real estate remained very strong. Of the approximately $1.1 billion of retained production during Q2, approximately 52% of that came from our commercial channels and we still anticipate over time that the commercial asset mix will represent about 50% of our overall loans held for investment mix.

Blake Wilson

This is Blake, just to add to that, obviously given the sell-off there was a little stall out in the market but we’ve seen interest really reengage across the client base on the commercial side. In the commercial real estate platform, as we indicated we did $157 million in Q2, so that’s a 149% increase over Q1, or annualized over $600 million. So we’re continuing to look at the pipeline and gain momentum and build on that platform in particular.

And then given the increase in rates overall we’re seeing better yields and engaged activity on the commercial finance and leasing businesses where we grew leases outstanding now to over $1 billion – that was an 11% increase from the prior quarter, a 50% increase almost year-over-year. And then the lender finance business increased 18% sequentially. So overall with the mix now in the leasing and commercial lending business making up almost 50% of our loans held for investment, that’s up from 32% a year ago.

So we’ve really made a strategic shift and migration in leveraging these great commercial platforms and we think we’ve got a lot of good momentum as we head into the future here.

Peyton Green – Sterne Agee

Okay, and then last question. Just thinking about the origination business on the residential side going forward, I mean in terms of historical perspective would you think the ARM product is kind of where the jumbo fixed rate product was a year ago and that volumes can ramp pretty fast in Q3 and Q4 for you?

Rob Clements

Yeah, and one of the things I think we’ll point out here, it’s a great opportunity to say when we look back at when rates are historically low, customers really tend to migrate towards the 30-year fixed rate product or longer-term fixed rate. That, at historically low rates, has not been attractive to EverBank’s portfolio strategy. So the ability to aggregate and sell into the capital markets at those historic levels shows great flexibility in the model.

As we’ve seen a steepening in the yield curve with the sell-off, both clients and our portfolio interest changes to have more of an appetite for hybrid ARMs or shorter-duration ARM products. And that to us is a great part of EverBank’s business model, is having the ability to execute for our clients both on longer-term fixed rate products, the capital markets are there; or into the bank portfolio if it makes sense for them and the bank’s risk appetite.

Peyton Green – Sterne Agee

So then just conceptually shouldn’t the margins hold up a lot better in the hybrid ARM product relative to the fixed rate product?

Rob Clements

Yeah, we’ve seen margins hold up very well on the hybrid ARM product. And so yeah, we’re still originating hybrid ARMs at attractive levels, and given the steepening as we indicated we expect a mix shift in that direction over the coming quarters which will add to our portfolio income for the future.

Peyton Green – Sterne Agee

Great, thank you very much.

Operator

There are no further questions at this time. I’d like to pass the call back to Rob Clements for any closing remarks.

Rob Clements

Well thank you for joining us today and we look forward to updating everyone on future calls. Have a great day.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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