PHH Corporation Announces First Quarter 2013 Results

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PHH Corporation Announces First Quarter 2013 Results

1Q13 Net Income Attributable to PHH Corporation of $52 million or $0.90 per basic share

1Q13 Core Earnings (after-tax)* of $12 million and Core Earnings per Share* of $0.21

  • Total retail mortgage loan closings increased 22% in 1Q13 to $11.5 billion from 1Q12. 1Q13 interest rate lock commitments (IRLCs) expected to close declined 28% from 1Q12 to $5.0 billion
  • Total loan margin of 372 bps in 1Q13, a 34 bps decrease from 4Q12 but 8 bps greater than 1Q12
  • Total loan servicing portfolio at March 31, 2013, of $181.8 billion in unpaid principal balance (UPB), down 2% from $184.9 billion in UPB at March 31, 2012
  • During 2Q13, commenced originations and servicing under our private label arrangement with HSBC and assumed approximately $47 billion of subservicing from HSBC
  • Fleet segment profit of $21 million, down from $24 million in 1Q12 and up $1 million from 4Q12

MT. LAUREL, N.J.--(BUSINESS WIRE)-- PHH Corporation (NYS: PHH) ("PHH" or the "Company") today announced financial results for the quarter ended March 31, 2013.

For the quarter ended March 31, 2013, the Company reported net income attributable to PHH Corporation of $52 million or $0.90 per basic share. Core earnings (after-tax)* and core earnings per share* for the quarter ended March 31, 2013, were $12 million and $0.21, respectively. Tangible book value per share* was $26.62 at March 31, 2013, up 3% from $25.80 at year-end 2012.

Glen A. Messina, president and CEO of PHH Corporation, said, "Our financial performance in the first quarter was consistent with our expectations for the business relative to interest rate movements and with the framework we previously discussed. We believe we are appropriately positioned in our mortgage business for a rising interest rate environment by being in both origination and servicing. We intend to scale our mortgage production costs to be consistent with expected volumes, our commitment to high customer service levels, and the rapidly-changing regulatory environment. Meanwhile, our Fleet business continued to provide consistency in segment profit and cash flows."

Messina added, "As we look into the second quarter and the second half of 2013, we continue to be enthusiastic about the prospects for our combined mortgage production and servicing businesses. We believe our business model is well-designed to respond to change and opportunities in the mortgage and fleet industries."

 
Summary Consolidated Results
(In millions, except per share data)
    
Three Months Ended
March 31,
20132012
Net revenues$730$777
Income before income taxes96124
Net income attributable to PHH Corporation5275
 
Basic earnings per share attributable to PHH Corporation$0.90$1.32
Diluted earnings per share attributable to PHH Corporation0.791.30
 
Weighted-average common shares outstanding:
Basic shares (in millions)57.24956.657
Diluted shares (in millions)65.78657.722
 
Non-GAAP Results*
Core earnings (pre-tax)$18$76
Core earnings (after-tax)1253
 
Core earnings per share$0.21$0.93
 
Adjusted cash flow$98$269
 

* Non-GAAP Financial Measures

Core earnings (pre-tax), core earnings (after-tax), core earnings per share, adjusted cash flow, tangible book value and tangible book value per share are financial measures that are not in accordance with U.S. generally accepted accounting principles (GAAP). See the "Note Regarding Non-GAAP Financial Measures" below for a detailed description of these and certain other Non-GAAP financial measures and reconciliations of such Non-GAAP financial measures to their most directly comparable GAAP financial measures as required by Regulation G.

Mortgage Production and Mortgage Servicing

Mortgage Production Segment Profit

Mortgage Production segment profit in the first quarter of 2013 was $45 million, down 62% from $117 million in the first quarter of 2012 and down 55% from the fourth quarter of 2012. The sequential quarter decline from the fourth quarter 2012 was primarily due to lower mortgage fees and a lower gain on mortgage loans, from both lower total loan margins and lower interest rate lock commitments (IRLCs) expected to close. Segment profit declined from the first quarter 2012 primarily due to lower IRLCs expected to close and greater operating expenses resulting from the expansion of our retail volumes.

Mortgage Servicing Segment Profit

Mortgage Servicing segment profit in the first quarter of 2013 was $18 million, which included a positive $82 million market-related fair value adjustment to our MSR, primarily from an increase in mortgage interest rates and partially offset by $16 million in hedge losses. Loan servicing income in the first quarter of 2013 declined from the fourth quarter of 2012 due to the decline in our average capitalized loan servicing portfolio as our replenishment rate remained less than 100% in the first quarter of 2013. The decline in our replenishment rate has been driven by the reduction in Wholesale/Correspondent volumes. In addition, Repurchase and foreclosure-related charges during the first quarter of 2013 decreased to $15 million from $37 million in the fourth quarter of 2012 and $65 million in the first quarter of 2012. Repurchase and foreclosure-related charges were reflective of elevated repurchase requests, which are expected to continue through the end of 2013.

Interest Rate Lock Commitments

IRLCs expected to close of $5.0 billion in the first quarter of 2013 declined 28% from the first quarter of 2012, primarily reflecting a 51% decline in IRLCs expected to close in our wholesale/correspondent channel as we remain keenly focused on cash usage and the relative profitability of wholesale/correspondent originations. IRLCs expected to close decreased 20% from $6.2 billion in the fourth quarter of 2012, primarily due to a greater portion of our production done on a fee-for-service basis, where we do not enter into an IRLC, and lower wholesale/correspondent volume.

Total Loan Margin

Total loan margin on IRLCs expected to close for the first quarter of 2013 was 372 bps, a 34 bps decrease from the fourth quarter of 2012 but 8 bps greater than the first quarter of 2012. Wider margins throughout 2012 and the first quarter of 2013 reflect higher consumer demand, especially for refinancing, primarily due to lower mortgage interest rates. A greater portion of our originations in the first quarter of 2013 as compared to the fourth quarter of 2012 were from the Home Affordable Refinance Program (HARP). HARP originations made a positive contribution to total loan margin in the quarter, but we have experienced declines in total loan margin in our Wholesale/Correspondent channel. We continue to believe that margins could remain elevated in 2013 when compared to historical experience, reflecting a longer-term industry view of the returns required to manage the underlying risk in the mortgage production and servicing business.

Mortgage Closing Volume

Total first quarter 2013 mortgage closings were $13.3 billion, a 5% decline from the first quarter of 2012; however, retail closings increased 22% in the first quarter of 2013 compared to the first quarter of 2012, reflecting our strategy of growth in our retail channels. Of total mortgage closings in the first quarter of 2013, 87% were from our retail channels and 13% were from our wholesale/correspondent channel, consistent with fourth quarter closings. Fee-based closings had been trending higher over the past few quarters. In the first quarter of 2013, Fee-based closings remained consistent with the fourth quarter 2012 at 47% of total retail closings. This was up from 35% of total retail closings in the first quarter of 2012.

Unpaid Principal Balance of Mortgage Servicing Portfolio

At March 31, 2013, the UPB of our capitalized servicing portfolio was $136.8 billion, down 3% from the UPB at December 31, 2012, and 9% from the UPB at the end of the first quarter of 2012. These decreases reflect prepayments that were not fully offset by additions from new loan production.

At March 31, 2013, the UPB of our total loan servicing portfolio was $181.8 billion, a 1% decrease from the UPB at the end of 2012, and a 2% decrease from the UPB at the end of the first quarter of 2012. The sequential quarter and year-over-year changes in our total loan servicing portfolio reflect the aforementioned declines in the UPB of our capitalized servicing portfolio offset by increases in our subservicing UPB. In the second quarter of 2013, we assumed approximately $47 billion of subservicing UPB related to our private label agreement with HSBC.

Mortgage Servicing Rights

At March 31, 2013, the book value of our mortgage servicing rights was $1.1 billion, up 8% from the end of 2012. During the first quarter of 2013, $74 million in book value of MSR was added from the capitalization of new servicing rights from new loans sold in the quarter, and our MSR book value increased by $82 million due to market-related fair value adjustments. Our MSR book value decreased $77 million in the first quarter related to prepayments and the receipt of recurring cash flows, primarily attributable to continued high prepayment speeds from low mortgage interest rates. We also incurred $16 million in MSR hedge losses in the first quarter of 2013.

Repurchase and Foreclosure-related Charges

Repurchase and foreclosure-related charges in the first quarter of 2013 were $15 million, down from $37 million in the fourth quarter of 2012, reflecting a continued downward trend but still a high level of repurchase requests. Total repurchase and foreclosure-related reserves were $194 million at the end of the first quarter of 2013, compared to $165 million at the end of the first quarter of 2012. As of March 31, 2013, the estimated amount of reasonably possible losses in excess of total repurchase and foreclosure-related reserves was $45 million, up from $40 million at the end of the fourth quarter of 2012.

Fleet Management Services

Segment Profit

In the first quarter of 2013, Fleet Management Services segment profit was $21 million, up $1 million from the fourth quarter of 2012 but down $3 million from the first quarter of 2012. The sequential quarter segment profit growth was driven by a slight improvement in our leasing business, and the segment profit decline from the first quarter of 2012 was driven primarily by a decline in Fleet management fees and lower syndication results.

Fleet Leasing

Net investment in fleet leases at March 31, 2013, represented a 1% increase compared to the end of 2012, while average leased vehicle units declined 1% during the first quarter of 2013. This was the result of higher-capitalized units continuing to replace lower-cost vehicles, consistent with our emphasis on service fleets.

Fleet Management Fees

In the first quarter of 2013, Fleet management fees decreased to $43 million from $47 million in the first quarter of 2012, primarily driven by lower client participation in driver safety training services. Fleet management fees in the first quarter of 2013 was relatively unchanged from the fourth quarter of 2012.

Liquidity Update

Liquidity at March 31, 2013, included $927 million in unrestricted cash and cash equivalents.

As of March 31, 2013, we had no outstanding balances on our $305 million in total unsecured revolving credit facilities or our $123 million Canadian secured revolving credit facility.

Conference Call/Webcast

The Company will host a conference call at 10:00 a.m. (Eastern Time) on Thursday, May 2, 2013, to discuss its first quarter 2013 results. All interested parties are welcome to participate. You can access the conference call by dialing (888) 677-8816 or (913) 312-1448 and using the conference ID 1282635 approximately 10 minutes prior to the call. The conference call will also be webcast, which can be accessed from the Investor Relations page of PHH's website at www.phh.com/invest under webcasts and presentations.

An investor presentation of supplemental schedules will be available by visiting the Investor Relations page of PHH's website at www.phh.com/invest on Thursday, May 2, 2013, prior to the start of the conference call.

A replay will be available beginning shortly after the end of the call through May 17, 2013, by dialing (888) 203-1112 or (719) 457-0820 and using conference ID 1282635, or by visiting the Investor Relations page of PHH's website at www.phh.com/invest.

About PHH Corporation

Headquartered in Mount Laurel, New Jersey, PHH Corporation (NYS: PHH) is a leading provider of business process management services for the mortgage and fleet industries. Its subsidiary, PHH Mortgage, is one of the largest originators and servicers of residential mortgages in the United States1, and its subsidiary, PHH Arval, is a leading fleet management services provider in the United States and Canada. PHH is dedicated to delivering premier customer service and providing value-added solutions to its clients. For additional information about PHH and its subsidiaries, please visit the Company's website at www.phh.com.

1Inside Mortgage Finance, Copyright 2013

Forward-Looking Statements

Certain statements in this press release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Generally, forward looking-statements are not based on historical facts but instead represent only our current beliefs regarding future events. All forward-looking statements are, by their nature, subject to risks, uncertainties and other factors that could cause actual results, performance or achievements to differ materially from those expressed or implied in such forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements. Such statements may be identified by words such as "expects," "anticipates," "intends," "projects," "estimates," "plans," "may increase," "may fluctuate" and similar expressions or future or conditional verbs such as "will," "should," "would," "may" and "could."

You should understand that forward-looking statements are not guarantees of performance or results and are preliminary in nature. You should consider the areas of risk described under the heading "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" in our periodic reports filed with the U.S. Securities and Exchange Commission, including our most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, in connection with any forward-looking statements that may be made by us or our businesses generally. Such periodic reports are available in the "Investors" section of our website at http://www.phh.com and are also available at http://www.sec.gov. Except for our ongoing obligations to disclose material information under the federal securities laws, applicable stock exchange listing standards and unless otherwise required by law, we undertake no obligation to release publicly any updates or revisions to any forward-looking statements or to report the occurrence or non-occurrence of anticipated or unanticipated events.

 
PHH CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
 
 
  Three Months Ended
March 31,
2013  2012
REVENUES
Mortgage fees$79$80
Fleet management fees 43  47 

Net fee income

 122  127 
Fleet lease income 332  336 
Gain on mortgage loans, net 187  230 
Mortgage interest income2025
Mortgage interest expense (48) (55)
Mortgage net finance expense (28) (30)
Loan servicing income 108  121 
Change in fair value of mortgage servicing rights5(21)
Net derivative loss related to mortgage servicing rights (16) (5)
Valuation adjustments related to mortgage servicing rights, net (11) (26)
Net loan servicing income 97  95 
Other income 20  19 
Net revenues 730  777 
EXPENSES
Salaries and related expenses159136
Occupancy and other office expenses1514
Depreciation on operating leases302301
Fleet interest expense1517
Other depreciation and amortization76
Other operating expenses 136  179 
Total expenses 634  653 
Income before income taxes96124
Income tax expense 32  39 
Net income6485
Less: net income attributable to noncontrolling interest 12  10 
Net income attributable to PHH Corporation$52 $75 
Basic earnings per share attributable to PHH Corporation$0.90 $1.32 
Diluted earnings per share attributable to PHH Corporation$0.79 $1.30 
 
 
PHH CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
 
    
March 31,December 31,
20132012
 
ASSETS
Cash and cash equivalents$927$829
Restricted cash, cash equivalents and investments402425
Mortgage loans held for sale1,7322,174
Accounts receivable, net742797
Net investment in fleet leases3,6783,636
Mortgage servicing rights1,1011,022
Property, plant and equipment, net7979
Goodwill2525
Other assets (1) 570 616
Total assets$9,256$9,603
 
LIABILITIES AND EQUITY
Accounts payable and accrued expenses$502$562
Debt6,2096,554
Deferred taxes650622
Other liabilities 287 303
Total liabilities 7,648 8,041
Commitments and contingencies
Total PHH Corporation stockholders' equity1,5751,526
Noncontrolling interest 33 36
Total equity 1,608 1,562
Total liabilities and equity$9,256$9,603

____________________

(1)

 Includes intangible assets of $30 million and $31 million as of March 31, 2013 and December 31, 2012, respectively.
 
 
Segment Results

(In millions)

            

First Quarter

2012

First Quarter 2013

Mortgage

Production

Segment

Mortgage

Servicing

Segment

Fleet

Management

Services


Segment

Other

Total PHH

Corporation

Total PHH

Corporation

Net fee income$79$$43$$122$127
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