PHH Corporation Announces Second Quarter 2013 Results

PHH Corporation Announces Second Quarter 2013 Results

2Q13 Net Income Attributable to PHH Corporation of $90 million or $1.58 per basic share

2Q13 Core Loss (after-tax)* of $2 million and Core Loss per Share* of $0.03

  • Tangible book value per share* of $28.14 at June 30, 2013, up 6% from March 31, 2013
  • 2Q13 results include a $21 million pre-tax loss ($0.24 per basic share after tax) related to the termination of an inactive mortgage reinsurance agreement
  • Sequential quarter growth in: mortgage applications (up 22%); interest rate lock commitments expected to close (up 9%); and mortgage closings (up 11%)
  • Total loan margin of 348 bps in 2Q13, a 24 bps decrease from 1Q13 and a 33 bps decrease from 2Q12
  • Launched private label relationship with HSBC in 2Q13, and assumed approximately $47 billion in subservicing unpaid principal balance (UPB)
  • Fleet segment profit of $21 million, unchanged from 1Q13 and down from $22 million in 2Q12

MT. LAUREL, N.J.--(BUSINESS WIRE)-- PHH Corporation (NYS: PHH) ("PHH" or the "Company") today announced financial results for the quarter ended June 30, 2013.

For the quarter ended June 30, 2013, the Company reported net income attributable to PHH Corporation of $90 million or $1.58 per basic share. Core loss (after-tax)* and core loss per share* for the quarter ended June 30, 2013, were $2 million and $0.03, respectively. These results include a $21 million pre-tax loss ($0.24 per basic share after tax) related to the termination of an inactive mortgage reinsurance agreement. This transaction generated $69 million of unrestricted cash of which $30 million was received in the second quarter of 2013 and $39 million was received in the third quarter of 2013.

Tangible book value per share* was $28.14 at June 30, 2013, up 6% from $26.62 at March 31, 2013.

Glen A. Messina, president and CEO of PHH Corporation, said, "Over the past year and a half, through the execution of our strategic priorities, PHH has made significant progress in placing the company in a position of strength to deal with the cyclical and dynamic nature of the mortgage industry. In the second quarter, our financial performance reflected the impact of a rising interest rate environment, which drove an increase in the value of our mortgage servicing rights and negatively impacted our mortgage origination volume. I'm pleased with the progress the company is making in managing through this transition period to a rising interest rate environment. Our results were also impacted by a charge related to the commutation of our remaining Atrium reinsurance contract. The Fleet business continued to provide solid profitability."

Messina added, "We are taking the necessary actions to reposition our mortgage businesses for the current interest rate and regulatory environment. We are scaling expenses to be consistent with lower expected mortgage production volumes, while maintaining our commitment to high customer service levels and accommodating the demands of the rapidly-changing regulatory environment. In part due to recent regulatory changes, we also are seeking to amend certain private label contracts to address the fundamental changes in the industry and ensure our programs are meeting our mutual objectives. Further, we are working to ensure that we have access to multiple funding sources aimed at lowering our capital needs and overall cost of capital."

 
Summary Consolidated Results
(In millions, except per share data)  
  
Three Months EndedSix Months Ended
June 30,June 30,
2013201220132012
Net revenues$822$559$1,552$1,336
Income (loss) before income taxes158(80)25444
Net income (loss) attributable to PHH Corporation90(57)14218
 
Basic earnings (loss) per share attributable to PHH Corporation$1.58$(1.00)$2.48$0.32
Diluted earnings (loss) per share attributable to PHH Corporation1.40(1.00)2.180.31
 
Weighted-average common shares outstanding:
Basic shares (in millions)57.32156.80457.28556.730
Diluted shares (in millions)64.82256.80465.30159.401
 
Non-GAAP Results*
Core (loss) earnings (pre-tax)$(8)$48$10$124
Core (loss) earnings (after-tax)(2)271080
 
Core (loss) earnings per share$(0.03)$0.49$0.18$1.41
 
Adjusted cash flow$116$26$214$295
 

* Non-GAAP Financial Measures

Core earnings or loss (pre-tax), core earnings or loss (after-tax), core earnings or loss 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 second quarter of 2013 was $44 million, down 44% from $78 million in the second quarter of 2012 and down $1 million from the first quarter of 2013. Segment profit declined from the second quarter 2012 primarily due to a 20% decline in IRLCs expected to close, a 33 bps decline in total loan margin and greater operating expenses as a result of higher retail origination volume. A slight decline in sequential quarter segment profit reflected the impact of narrower total loan margin offset by 9% growth in IRLCs expected to close.

Mortgage Servicing Segment Profit

Mortgage Servicing segment profit in the second quarter of 2013 was $81 million, which included a favorable $155 million market-related fair value adjustment to our MSR, primarily from an increase in mortgage interest rates, which was offset slightly by $1 million in hedge losses. The MSR fair value adjustment for prepayments and recurring cash flows was an unfavorable $80 million in the second quarter of 2013, compared to an unfavorable $77 million in the first quarter of 2013. Loan servicing income includes losses associated with the termination of reinsurance agreements of $21 million and $16 million in the second quarters of 2013 and 2012, respectively.

Repurchase and foreclosure-related charges during the second quarter of 2013 decreased to $11 million from $39 million in the second quarter of 2012 and $15 million in the first quarter of 2013. Repurchase and foreclosure-related charges were reflective of the continued decrease in repurchase requests as the Agencies have continued to focus on reviewing loans from pre-2009 origination years.

Interest Rate Lock Commitments

IRLCs expected to close of $5.4 billion in the second quarter of 2013 declined 20% from the second quarter of 2012, primarily reflecting declining demand for refinancings attributable to rising interest rates, a decline in wholesale/correspondent volume as we remain focused on cash usage and the relative profitability of wholesale/correspondent originations, and a continued shift in mix toward fee-based production. IRLCs expected to close increased 9% from $5.0 billion in the first quarter of 2013, driven by sequential quarter growth in home purchase volume and the addition of HSBC as a private label client, partially offset by a greater portion of our production done on a fee-for-service basis.

Total Loan Margin

Total loan margin on IRLCs expected to close for the second quarter of 2013 was 348 bps, a 24 bps decrease from the first quarter of 2013 and 33 bps less than the second quarter of 2012. Margins narrowed in the second quarter of 2013, primarily due to rising mortgage interest rates. Margins generally widen when mortgage interest rates decline and tighten when mortgage interest rates increase, as loan originators attempt to balance origination volume with operational capacity.

Mortgage Closing Volume

Total second quarter 2013 mortgage closings were $14.8 billion, a 15% increase from the second quarter of 2012. Retail closings increased 21% in the second quarter of 2013 compared to the second quarter of 2012 and 16% compared to the first quarter of 2013, reflecting our strategy of growth in our retail channels. Retail closings represented 91% of our total closings during the second quarter of 2013. Fee-based closings continued to trend higher in the second quarter of 2013, increasing to 51% of total retail closings. This was up from 43% of total retail closings in the second quarter of 2012 and 47% of total retail closings in the first quarter of 2013. Our private label agreement with HSBC that was launched in the second quarter of 2013 did not meaningfully contribute to closing volume in the quarter.

Unpaid Principal Balance of Mortgage Servicing Portfolio

At June 30, 2013, the UPB of our capitalized servicing portfolio was $133.1 billion, down 3% from March 31, 2013, and 10% from June 30, 2012. These decreases reflect prepayments that were not fully offset by additions from new loan production.

At June 30, 2013, the UPB of our total loan servicing portfolio was $228.6 billion, a 26% increase from March 31, 2013, and a 19% increase from June 30, 2012. The sequential quarter and year-over-year increases in our total loan servicing portfolio primarily reflect approximately $47 billion of subservicing UPB that we assumed from HSBC in the second quarter of 2013, partially offset by the aforementioned declines in the UPB of our capitalized servicing portfolio.

Mortgage Servicing Rights

At June 30, 2013, the book value of our mortgage servicing rights was $1.2 billion, up 22% from the end of 2012. During the second quarter of 2013, $71 million in MSR value was added from the capitalization of new servicing rights from new loans sold in the quarter, and our MSR value increased by $155 million due to market-related fair value adjustments. Our MSR value decreased $80 million in the second quarter of 2013 related to prepayments and the receipt of recurring cash flows, primarily attributable to continued high prepayment speeds from refinances driven by low mortgage interest rates. We also incurred $1 million in MSR hedge losses in the second quarter of 2013.

Repurchase and Foreclosure-related Charges

Repurchase and foreclosure-related charges in the second quarter of 2013 were $11 million, down from $15 million in the first quarter of 2013, reflecting a continued downward trend of repurchase requests. Total repurchase and foreclosure-related reserves were $191 million at the end of the second quarter of 2013, compared to $194 million at the end of the first quarter of 2013. As of June 30, 2013, the estimated amount of reasonably possible losses in excess of total repurchase and foreclosure-related reserves was $45 million, unchanged from the end of the first quarter of 2013. Although Fannie Mae and Freddie Mac are still expected to be complete with repurchase requests for pre-2009 origination years by the end of 2013, losses associated with government insured loan foreclosures could persist into 2014 and beyond as loans continue to work through the foreclosure process and we evaluate loans and expenses that are not eligible for insurance reimbursement.

Fleet Management Services

Segment Profit

In the second quarter of 2013, Fleet Management Services segment profit was $21 million, unchanged from the first quarter of 2013 and down from $22 million in the second quarter of 2012. Sequential quarter segment profit remained unchanged as growth in our fleet lease income was offset by greater operating expenses.

Fleet Leasing

Net investment in fleet leases at June 30, 2013, increased 2% compared to March 31, 2013, while average leased vehicle units remained unchanged during the second 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 second quarter of 2013, Fleet management fees decreased to $44 million from $45 million in the second quarter of 2012, primarily driven by lower client participation in driver safety training services. Fleet management fees increased by $1 million compared to the first quarter of 2013 primarily attributable to sequential quarter average unit growth in our key fleet service offerings.

Liquidity Update

Liquidity at June 30, 2013, included $1.0 billion in unrestricted cash and cash equivalents.

As of June 30, 2013, we had no outstanding balances on our $305 million in total unsecured revolving credit facilities or our $119 million Canadian secured revolving credit facility.

On July 29, 2013, we amended our U.S. revolving credit agreement to increase our flexibility to repay or refinance our 2016 and 2017 unsecured notes prior to the maturity of our revolving credit facility.

Conference Call/Webcast

The Company will host a conference call at 10:00 a.m. (Eastern Time) on Thursday, August 1, 2013, to discuss its second quarter 2013 results. All interested parties are welcome to participate. You can access the conference call by dialing (800) 344-6491 or (785) 830-7988 and using the conference ID 7283605 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, August 1, 2013, prior to the start of the conference call.

A replay will be available beginning shortly after the end of the call through August 15, 2013, by dialing (888) 203-1112 or (719) 457-0820 and using conference ID 7283605, 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 EndedSix Months Ended
June 30,June 30,
2013 20122013 2012
REVENUES
Mortgage fees$82$83$161$163
Fleet management fees 44  45  87  92 
Net fee income 126  128  248  255 
Fleet lease income 343  338  675  674 
Gain on mortgage loans, net 197  208  384  438 
Mortgage interest income19213946
Mortgage interest expense (48) (53) (96) (108)
Mortgage net finance expense (29) (32) (57) (62)
Loan servicing income 88  100  196  221 
Change in fair value of mortgage servicing rights75(205)80(226)
Net derivative (loss) gain related to mortgage servicing rights (1) 2  (17) (3)
Valuation adjustments related to mortgage servicing rights, net 74  (203) 63  (229)
Net loan servicing income (loss) 162  (103) 259  (8)
Other income 23  20  43  39 
Net revenues 822  559  1,552  1,336 
EXPENSES
Salaries and related expenses163143322279
Occupancy and other office expenses17143228
Depreciation on operating leases305303607604
Fleet interest expense14172934
Other depreciation and amortization961612
Other operating expenses 156  156  292  335 
Total expenses 664  639  1,298  1,292 
Income (loss) before income taxes158(80)25444
Income tax expense (benefit) 56  (38) 88  1 
Net income (loss)102(42)16643
Less: net income attributable to noncontrolling interest 12  15  24  25 
Net income (loss) attributable to PHH Corporation$90 $(57)$142 $18 
Basic earnings (loss) per share attributable to PHH Corporation$1.58 $(1.00)$2.48 $0.32 
Diluted earnings (loss) per share attributable to PHH Corporation$1.40 $(1.00)$2.18 $0.31 
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