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Press release from Business Wire

PHH Corporation Announces Second Quarter 2013 Results

<p class='bwalignc'> <i><b>2Q13 Net Income Attributable to PHH Corporation of $90 million or $1.58 per basic share</b></i> </p> <p class='bwalignc'> <i><b>2Q13 Core Loss (after-tax)* of $2 million and Core Loss per Share* of $0.03</b></i> </p> <ul> <li class='bwlistitemmargb'> <b>Tangible book value per share* of $28.14 at June 30, 2013, up 6% from March 31, 2013</b> </li> <li class='bwlistitemmargb'> <b>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</b> </li> <li class='bwlistitemmargb'> <b>Sequential quarter growth in: mortgage applications (up 22%); interest rate lock commitments expected to close (up 9%); and mortgage closings (up 11%)</b> </li> <li class='bwlistitemmargb'> <b>Total loan margin of 348 bps in 2Q13, a 24 bps decrease from 1Q13 and a 33 bps decrease from 2Q12</b> </li> <li class='bwlistitemmargb'> <b>Launched private label relationship with HSBC in 2Q13, and assumed approximately $47 billion in subservicing unpaid principal balance (UPB)</b> </li> <li class='bwlistitemmargb'> <b>Fleet segment profit of $21 million, unchanged from 1Q13 and down from $22 million in 2Q12</b> </li> </ul>

Wednesday, July 31, 2013

PHH Corporation Announces Second Quarter 2013 Results

16:05 EDT Wednesday, July 31, 2013

MT. LAUREL, N.J. (Business Wire) -- PHH Corporation (NYSE: 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 Ended Six Months Ended
June 30, June 30,
2013 2012 2013 2012
Net revenues $ 822 $ 559 $ 1,552 $ 1,336
Income (loss) before income taxes 158 (80 ) 254 44
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
 
Weighted-average common shares outstanding:
Basic shares (in millions) 57.321 56.804 57.285 56.730
Diluted shares (in millions) 64.822 56.804 65.301 59.401
 
Non-GAAP Results*
Core (loss) earnings (pre-tax) $ (8 ) $ 48 $ 10 $ 124
Core (loss) earnings (after-tax) (2 ) 27 10 80
 
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 (NYSE: 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.

1 Inside 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 Six Months Ended
June 30, June 30,
2013   2012 2013   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 income 19 21 39 46
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 rights 75 (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 expenses 163 143 322 279
Occupancy and other office expenses 17 14 32 28
Depreciation on operating leases 305 303 607 604
Fleet interest expense 14 17 29 34
Other depreciation and amortization 9 6 16 12
Other operating expenses   156     156     292     335  
Total expenses   664     639     1,298     1,292  
Income (loss) before income taxes 158 (80 ) 254 44
Income tax expense (benefit)   56     (38 )   88     1  
Net income (loss) 102 (42 ) 166 43
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  
 
 
PHH CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
   
June 30, December 31,
2013 2012
 
ASSETS
Cash and cash equivalents $ 1,044 $ 829
Restricted cash, cash equivalents and investments 349 425
Mortgage loans held for sale 1,751 2,174
Accounts receivable, net 972 797
Net investment in fleet leases 3,736 3,636
Mortgage servicing rights 1,247 1,022
Property, plant and equipment, net 76 79
Goodwill 25 25
Other assets (1)   571   616
Total assets $ 9,771 $ 9,603
 
LIABILITIES AND EQUITY
Accounts payable and accrued expenses $ 782 $ 586
Debt 6,323 6,554
Deferred taxes 705 622
Other liabilities   274   279
Total liabilities   8,084   8,041
Commitments and contingencies
Total PHH Corporation stockholders' equity 1,662 1,526
Noncontrolling interest   25   36
Total equity   1,687   1,562
Total liabilities and equity $ 9,771 $ 9,603
 

(1)

Includes intangible assets of $30 million and $31 million as of June 30, 2013 and December 31, 2012, respectively.
 
Segment Results          
(In millions)            

Second
Quarter
2012

Second Quarter 2013  
Fleet
Mortgage Mortgage Management
Production Servicing Services Total PHH Total PHH
Segment Segment Segment Other Corporation Corporation
Net fee income $ 82 $ $ 44 $ $ 126 $ 128
Fleet lease income 343 343 338
Gain on mortgage loans 197 197 208
Mortgage interest income 16 3 19 21

Mortgage interest expense:

Asset-backed interest expense (14 ) (3 ) (17 ) (19 )
Allocated interest expense (19 ) (12 ) (31 ) (34 )
Loan servicing income (1) 88 88 100

MSR fair value adjustments:

Prepayments and receipt of recurring cash flows

(80 ) (80 ) (60 )
Market-related (2) 155 155 (145 )
Net derivative (loss) gain related to MSRs (1 ) (1 ) 2
Other income   3         20       23     20  
Net revenues   265     150     407       822     559  
Salaries and related expenses 113 14 18 18 163 143
Occupancy and other office expenses 9 3 4 1 17 14
Depreciation on operating leases 305 305 303

Fleet interest expense:

Asset-backed interest expense 14 14 17
Other depreciation and amortization 3 1 3 2 9 6

Other expenses:

Direct origination expenses 34 34 32
Repurchase and foreclosure-related 11 11 39
Direct foreclosure and REO expenses 19 19 13
Cost of goods sold 20 20 17
Equipment and software expenses 1 4 5 10 9
Professional fees and consulting 8 4 1 16 29 17
Overhead Allocation - IT 13 3 7 (23 )
Overhead Allocation - Other 13 3 6 (22 )
Other   15     7     8   3     33     29  
Other expenses   84     51     42   (21 )   156     156  
Total expenses   209     69     386       664     639  
Income (loss) before income taxes 56 81 21 $ 158   $ (80 )

Less: income attributable to noncontrolling interest

  12            
Segment profit $ 44   $ 81   $

21

$  
 

(1)

Loan servicing income includes a net reinsurance loss of $20 million and $17 million for the three months ended June 30, 2013 and 2012, respectively which includes $21 million and $16 million, respectively of losses on the termination of inactive reinsurance agreements.
 

(2)

Represents the Change in fair value of mortgage servicing rights due to changes in market inputs and assumptions used in the valuation model. The fair value of our MSRs is estimated based upon projections of expected future cash flows from our MSRs considering prepayment estimates, our historical prepayment rates, portfolio characteristics, interest rates based on interest rate yield curves, implied volatility and other economic factors.
 
Segment Results          
(In millions)            

Six Months
Ended June
30, 2012

Six Months Ended June 30, 2013    
Fleet
Mortgage Mortgage Management
Production Servicing Services Total PHH Total PHH
Segment Segment Segment Other Corporation Corporation
Net fee income $ 161 $ $ 87 $ $ 248 $ 255
Fleet lease income 675 675 674
Gain on mortgage loans 384 384 438
Mortgage interest income 35 5 (1 ) 39 46

Mortgage interest expense:

Asset-backed interest expense (28 ) (5 ) (33 ) (40 )
Allocated interest expense (39 ) (24 ) (63 ) (68 )
Loan servicing income (1) 196 196 221

MSR fair value adjustments:

Prepayments and receipt of recurring cash flows

(157 ) (157 ) (124 )
Market-related (2) 237 237 (102 )
Net derivative loss related to MSRs (17 ) (17 ) (3 )
Other income   4         39       43     39  
Net revenues   517     235     801   (1 )   1,552     1,336  
Salaries and related expenses 223 25 36 38 322 279
Occupancy and other office expenses 17 6 7 2 32 28
Depreciation on operating leases 607 607 604

Fleet interest expense:

Asset-backed interest expense 30 (1 ) 29 33
Allocated interest expense 1
Other depreciation and amortization 6 1 5 4 16 12

Other expenses:

Direct origination expenses 62 62 61
Repurchase and foreclosure-related 26 26 104
Direct foreclosure and REO expenses 35 35 20
Cost of goods sold 33 33 32
Equipment and software expenses 2 7 10 19 17
Professional fees and consulting 14 8 3 24 49 35
Overhead Allocation - IT 25 6 12 (43 )
Overhead Allocation - Other 23 5 12 (40 )
Other   32     17     14   5     68     66  
Other expenses   158     104     74   (44 )   292     335  
Total expenses   404     136     759   (1 )   1,298     1,292  
Income before income taxes 113 99 42 $ 254   $ 44  

Less: income attributable to noncontrolling interest

  24            
Segment profit $ 89   $ 99   $ 42

 

$  
 

(1)

Loan servicing income includes a net reinsurance loss of $19 million for both the six months ended June 30, 2013 and 2012, which includes $21 million and $16 million, respectively of losses on the termination of inactive reinsurance agreements.
 

(2)

Represents the Change in fair value of mortgage servicing rights due to changes in market inputs and assumptions used in the valuation model. The fair value of our MSRs is estimated based upon projections of expected future cash flows from our MSRs considering prepayment estimates, our historical prepayment rates, portfolio characteristics, interest rates based on interest rate yield curves, implied volatility and other economic factors.
 
Mortgage Production Segment    
($ In millions)      
     
Three Months Ended Six Months Ended
June 30,       June 30,      
2013 2012 Change 2013 2012 Change
Loans closed to be sold $ 7,897 $ 8,059 (2 )% $ 15,744 $ 18,736 (16 )%
Fee-based closings   6,874     4,771   44 %   12,346     8,047   53 %
Total closings $ 14,771   $ 12,830   15 % $ 28,090   $ 26,783   5 %
Purchase closings $ 5,344 $ 5,010 7 % $ 8,483 $ 8,860 (4 )%
Refinance closings   9,427     7,820   21 %   19,607     17,923   9 %
Total closings $ 14,771   $ 12,830   15 % $ 28,090   $ 26,783   5 %
Retail closings - PLS $ 9,503 $ 7,438 28 % $ 18,013 $ 13,968 29 %
Retail closings - Real Estate   3,877     3,618   7 %   6,908     6,578   5 %
Total retail closings 13,380 11,056 21 % 24,921 20,546 21 %
Wholesale/correspondent closings   1,391     1,774   (22 )%   3,169     6,237   (49 )%
Total closings $ 14,771   $ 12,830   15 % $ 28,090   $ 26,783   5 %
Retail - PLS (in units) 24,976 21,472 16 % 48,902 43,257 13 %
Retail - Real Estate (in units)   15,703     14,555   8 %   27,979     26,859   4 %
Total retail 40,679 36,027 13 % 76,881 70,116 10 %
Wholesale/correspondent (in units)   6,131     8,750   (30 )%   14,082     29,946   (53 )%
Total closings (in units)   46,810     44,777   5 %   90,963     100,062   (9 )%
 
Loans sold $ 7,989 $ 7,868 2 % $ 16,222 $ 19,477 (17 )%
Applications $ 19,704 $ 18,653 6 % $ 35,869 $ 36,509 (2 )%
IRLCs expected to close $ 5,386 $ 6,763 (20 )% $ 10,341 $ 13,625 (24 )%
Total loan margin (in basis points) 348 381 (9 )% 359 373 (4 )%
 
 
 
Three Months Ended Six Months Ended
June 30,       June 30,      
2013 2012 Change 2013 2012 Change
Mortgage fees $ 82 $ 83 (1 )% $ 161 $ 163 (1 )%
Gain on mortgage loans, net 197 208 (5 )% 384 438 (12 )%
Mortgage net finance expense (17 ) (17 ) (32 ) (33 ) 3 %
Other income   3     2   50 %   4     4  
Net revenues   265     276   (4 )%   517     572   (10 )%
Salaries and related expenses 113 100 13 % 223 193 16 %
Occupancy and other office expenses 9 8 13 % 17 15 13 %
Other depreciation and amortization 3 1 200 % 6 3 100 %
Other operating expenses   84     74   14 %   158     141   12 %
Total expenses   209     183   14 %   404     352   15 %
Income before income taxes 56 93 (40 )% 113 220 (49 )%

Less: net income attributable to noncontrolling interest

  12     15  

(20

)%   24     25   (4 )%
Segment profit $ 44   $ 78   (44 )% $ 89   $ 195   (54 )%
 
Mortgage Servicing Segment
($ In millions)   As of June 30,    
2013 2012 Change
Total loan servicing portfolio $ 228,637 $ 192,775 19 %
Number of loans serviced 1,259,697 1,100,857 14 %
Capitalized loan servicing portfolio $ 133,061 $ 147,894 (10 )%
Capitalized servicing rate 0.94 % 0.78 %
Capitalized servicing multiple 3.2 2.6
Weighted-average servicing fee (in basis points) 29 30
           
Three Months Ended Six Months Ended
June 30,   June 30,  
  2013     2012   Change   2013     2012   Change
Average total loan servicing portfolio $ 204,961 $ 186,984 10 % $ 195,595 $ 185,551 5 %

Average capitalized loan servicing portfolio

134,962 148,864 (9 )% 136,813 148,622 (8 )%

Payoffs and principal curtailments of capitalized portfolio

10,246 8,412 22 % 20,758 16,639 25 %
 
 
Three Months Ended Six Months Ended
June 30,   June 30,  
  2013     2012   Change   2013     2012   Change
Mortgage net finance expense $ (12 ) $ (15 ) 20 % $ (24 ) $ (28 ) 14 %
Loan servicing income 88 100 (12 )% 196 221 (11 )%

Valuation adjustments related to mortgage servicing rights, net

74 (203 ) n/m(1) 63 (229 ) n/m(1)
Other income (expense)         (1 ) 100 %
Net revenues   150     (118 ) n/m(1)   235     (37 ) n/m(1)
Salaries and related expenses 14 9 56 % 25 19 32 %
Occupancy and other office expenses 3 2 50 % 6 4 50 %
Other depreciation and amortization 1 100 % 1 100 %
Other operating expenses   51     67   (24 )%   104     162   (36 )%
Total expenses   69     78   (12 )%   136     185   (26 )%
Segment profit (loss) $ 81   $ (196 ) n/m(1) $ 99   $ (222 ) n/m(1)
 
n/m - Not meaningful
   
June 30, 2013 December 31, 2012
Number of   Unpaid Number of   Unpaid
Loans Balance Loans Balance
 
Portfolio Delinquency (2)
30 days 2.58 % 2.03 % 2.45 % 1.93 %
60 days 0.75 % 0.60 % 0.64 % 0.52 %
90 or more days 1.04 % 0.95 % 0.80 % 0.70 %
Total(1) 4.37 % 3.58 % 3.89 % 3.15 %
Foreclosure/real estate owned(3) 2.49 % 2.44 % 2.05 % 1.92 %
 

(1)

Excluding the subservicing portfolio assumed during the three months ended June 30, 2013, the Company's total portfolio delinquency and foreclosure/real estate owned based on the number of loans were 3.84% and 2.01%, respectively and based on the unpaid principal balance were 2.97% and 1.79%, respectively.
 

(2)

Represents portfolio delinquencies as a percentage of the total number of loans and the total unpaid balance of the portfolio.
 

(3)

As of June 30, 2013 and December 31, 2012, the total servicing portfolio included 25,978 and 17,329 of loans in foreclosure with an unpaid principal balance of $4.9 billion and $3.0 billion, respectively. Excluding the subservicing portfolio assumed during the three months ended June 30, 2013, the Company's total servicing portfolio included 16,080 of loans in foreclosure with an unpaid principal balance of $2.8 billion.

 

     
Fleet Management Services Segment                  
     
Average for the Average for the
Three Months Ended Six Months Ended
June 30,     June 30,      
2013 2012 Change 2013 2012 Change
(In thousands of units)
Leased vehicles 258 267 (3 )% 258 268 (4 )%
Maintenance service cards 340 347 (2 )% 335 343 (2 )%
Fuel cards 311 301 3 % 310 299 4 %
Accident management vehicles 317 314 1 % 309 314 (2 )%
 
 
 
Three Months Ended Six Months Ended
June 30,     June 30,      
2013 2012 Change 2013 2012 Change
(In millions)
Fleet management fees $ 44 $ 45 (2 )% $ 87 $ 92 (5 )%
Fleet lease income 343 338 1 % 675 674
Other income   20   18 11 %   39   36 8 %
Net revenues   407   401 1 %   801   802
Salaries and related expenses 18 16 13 % 36 32 13 %
Occupancy and other office expenses 4 3 33 % 7 7
Depreciation on operating leases 305 303 1 % 607 604
Fleet interest expense 14 18 (22 )% 30 36 (17 )%
Other depreciation and amortization 3 2 50 % 5 5
Other operating expenses   42   37 14 %   74   72 3 %
Total expenses   386   379 2 %   759   756
Segment profit $ 21 $ 22 (5 )% $ 42 $ 46 (9 )%
 

DEBT AND BORROWING ARRANGEMENTS

 
The following table summarizes the components of Debt:
   
June 30, 2013 December 31, 2012
  Wt. Avg-   Wt. Avg-
Interest Interest
Balance Rate (1) Balance Rate (1)
(In millions)
Term notes, in amortization $ 827 1.3 % $ 424 2.2 %
Term notes, in revolving period 1,650 0.9 % 1,593 1.0 %
Variable-funding notes 1,036 2.1 % 1,415 1.6 %
Other   22 5.0 %   25 5.1 %
Vehicle Management Asset-Backed Debt   3,535   3,457
Secured Canadian credit facility   %   %
Committed warehouse facilities 1,552 2.1 % 1,875 2.0 %
Uncommitted warehouse facilities % %
Servicing advance facility   65 2.7 %   66 2.7 %
Mortgage Asset-Backed Debt   1,617   1,941
Term notes 732 8.5 % 732 8.5 %
Convertible notes(2) 439 5.0 % 424 5.0 %
Unsecured credit facilities   %   %
Unsecured Debt   1,171   1,156
Total $ 6,323 $ 6,554
 

(1)

Represents the weighted-average stated interest rate of outstanding debt as of the respective date, which may be different from the effective rate due to the amortization of premiums, discounts and issuance costs. Facilities are variable-rate, except for the Unsecured Term notes and Convertible notes which are fixed-rate.
 

(2)

Balance is net of unamortized discounts of $61 million and $76 million as of June 30, 2013 and December 31, 2012, respectively. The effective interest rate of the Convertible notes is 13%, which includes the accretion of the discount and issuance costs. Excludes $148 million and $195 million as of June 30, 2013, and December 31, 2012, respectively, related to the if-converted value of the 2017 Convertible notes, as the conversion premium may be settled in either cash or shares upon conversion, at the Company's election.
 

AVAILABLE FUNDING AND BORROWING CAPACITY

 
Capacity under all borrowing agreements is dependent upon maintaining compliance with, or obtaining waivers of, the terms, conditions and covenants of the respective agreements. Available capacity under asset-backed funding arrangements may be further limited by asset eligibility requirements. Available capacity under committed borrowing arrangements as of June 30, 2013 consisted of:
     
Utilized Available
Capacity Capacity Capacity
(In millions)
Vehicle Management Asset-Backed Debt:
Term notes, in revolving period $ 1,650 $ 1,650

$

Variable-funding notes 2,276 1,036 1,240
 
Secured Canadian credit facility 119 119
 
Mortgage Asset-Backed Debt:
Committed warehouse facilities 3,155 1,552 1,603
Servicing advance facility 120 65 55
 
Unsecured credit facilities(1) 305 305
 

(1)

Capacity amount shown reflects the contractual maximum capacity of the facility. The available capacity of this facility is subject to the satisfaction of compliance with a borrowing base coverage ratio test.
 

Capacity for Mortgage asset-backed debt shown above excludes $2.3 billion not drawn under uncommitted facilities, and $380 million available under committed off-balance sheet gestation facilities.

* NOTE REGARDING NON-GAAP FINANCIAL MEASURES

Core earnings or loss (pre-tax and 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 GAAP. See Non-GAAP Reconciliations below for a reconciliation of these measures to the most directly comparable GAAP financial measures as required by Regulation G.

Core earnings or loss (pre-tax and after-tax) and core earnings or loss per share involves differences from Segment profit or loss, Income or loss before income taxes, Net income or loss attributable to PHH Corporation and Basic earnings or loss per share attributable to PHH Corporation computed in accordance with GAAP. Core earnings or loss (pre-tax and after-tax) and core earnings or loss per share should be considered as supplementary to, and not as a substitute for, Segment profit (loss), Income (loss) before income taxes, Net income (loss) attributable to PHH Corporation or Basic earnings (loss) per share attributable to PHH Corporation computed in accordance with GAAP as a measure of the Company's financial performance.

Adjusted cash flow involves differences from Net increase or decrease in cash and cash equivalents computed in accordance with GAAP. Adjusted cash flow should be considered as supplementary to, and not as a substitute for, Net increase or decrease in cash and cash equivalents computed in accordance with GAAP as a measure of the Company's net increase or decrease in cash and cash equivalents.

Tangible book value and tangible book value per share involve differences from Total PHH Corporation stockholders' equity computed in accordance with GAAP. Tangible book value and tangible book value per share should be considered as supplementary to, and not as a substitute for, Total PHH Corporation stockholders' equity computed in accordance with GAAP as a measure of the Company's financial position.

The Company believes that these Non-GAAP Financial Measures can be useful to investors because they provide a means by which investors can evaluate the Company's underlying key drivers and operating performance of the business, exclusive of certain adjustments and activities that investors may consider to be unrelated to the underlying economic performance of the business for a given period.

The Company also believes that any meaningful analysis of the Company's financial performance by investors requires an understanding of the factors that drive the Company's underlying operating performance which can be obscured by significant unrealized changes in value of the Company's mortgage servicing rights, as well as any gain or loss on derivatives that are intended to offset market-related fair value adjustments on the Company's mortgage servicing rights, in a given period that are included in Segment profit (loss), Income (loss) before income taxes, Net income (loss) attributable to PHH Corporation and Basic earnings (loss) per share attributable to PHH Corporation in accordance with GAAP.

Core earnings or loss (pre-tax and after-tax) and core earnings or loss per share

Core earnings or loss (pre-tax and after-tax) and core earnings or loss per share measure the Company's financial performance excluding unrealized changes in fair value of the Company's mortgage servicing rights that are based upon projections of expected future cash flows and prepayments as well as realized and unrealized changes in the fair value of derivatives that are intended to offset changes in the fair value of mortgage servicing rights. The changes in fair value of mortgage servicing rights and related derivatives are highly sensitive to changes in interest rates and are dependent upon the level of current and projected interest rates at the end of each reporting period.

Value lost from actual prepayments and recurring cash flows are recorded when actual cash payments or prepayments of the underlying loans are received, and are included in core earnings based on the current fair value of the mortgage servicing rights at the time the payments are received.

The presentation of core earnings is designed to more closely align the timing of recognizing the actual value lost from prepayments in the mortgage servicing segment with the associated value created through new originations in the mortgage production segment. The Company believes that it will likely replenish most, if not all, realized value lost from changes in value from actual prepayments through new loan originations and actively manages and monitors economic replenishment rates to measure its ability to continue to do so. Therefore, management does not believe the unrealized change in value of the mortgage servicing rights is representative of the economic change in value of the business as a whole.

Core earnings metrics are used in managing the Company's mortgage business. The Company has also designed certain management incentives based upon the achievement of core earnings targets, subject to potential adjustments that may be made at the discretion of the Human Capital and Compensation Committee of the Company's Board of Directors.

Limitations on the use of Core Earnings

Since core earnings or loss (pre-tax and after-tax) and core earnings or loss per share measure the Company's financial performance excluding unrealized changes in value of mortgage servicing rights, such measures may not appropriately reflect the rate of value lost on subsequent actual payments or prepayments over time. As such, core earnings or loss (pre-tax and after-tax) and core earnings or loss per share may tend to overstate operating results in a declining interest rate environment and understate operating results in a rising interest rate environment, absent the effect of any offsetting gains or losses on derivatives that are intended to offset changes in fair value on the Company's mortgage servicing rights.

Adjusted cash flow

Adjusted cash flow measures the Company's Net increase or decrease in cash and cash equivalents for a given period excluding changes resulting from the issuance of equity, the purchase of derivative securities related to the Company's stock or the issuance or repayment of unsecured or other debt by PHH Corporation. The Company believes that Adjusted cash flow is a useful measure for investors because the Company's ability to repay future unsecured debt maturities or return capital to equity holders is highly dependent on a demonstrated ability to generate cash. Accordingly, the Company believes that Adjusted cash flow may assist investors in determining the amount of cash and cash equivalents generated from business activities during a period that is available to repay unsecured debt or distribute to holders of the Company's equity.

Adjusted cash flow can be generated through a combination of earnings, more efficient utilization of asset-backed funding facilities, or an improved working capital position. Adjusted cash flow can vary significantly between periods based upon a variety of potential factors including, but not limited to, timing related to cash collateral postings, mortgage origination volumes and margins, fleet vehicle purchases, sales, and related securitizations.

Adjusted cash flow is not a substitute for the Net increase or decrease in cash and cash equivalents for a period and is not intended to provide the Company's total sources and uses of cash or measure its change in liquidity. As such, it is important that investors review the Company's consolidated statement of cash flows for a more detailed understanding of the drivers of net cash provided by (used in) operating activities, investing activities, and financing activities.

Adjusted cash flow metrics are used in managing the Company's mortgage and fleet businesses. The Company has also designed certain management incentives based upon the achievement of adjusted cash flow targets, subject to potential adjustments that may be made at the discretion of the Human Capital and Compensation Committee of the Company's Board of Directors.

Tangible book value and Tangible book value per share

Tangible book value is a measure of Total PHH Corporation stockholders' equity computed in accordance with GAAP excluding the value of goodwill and other intangible assets. Tangible book value per share is a measure of tangible book value, on a per share basis, using the number of shares of outstanding PHH Corporation common stock as of the applicable measurement date. Certain of the Company's debt agreements contain indebtedness-to-tangible net worth ratio covenants, and such ratios are calculated using a measure of tangible net worth that is calculated on a basis similar to the Company's calculation of tangible book value. Accordingly, the Company believes that tangible book value and tangible book value per share provide useful supplementary information to investors.

 

NON-GAAP RECONCILIATIONS – CORE EARNINGS

(In millions, except per share data)

 
See “Note Regarding Non-GAAP Financial Measures” above in this press release for a description of the uses and limitations of the Non-GAAP Financial Measures.
 
Regulation G Reconciliation
  Three Months Ended   Six Months Ended
June 30, June 30,
2013   2012 2013   2012
Income (loss) before income taxes ― as reported $ 158 $ (80 ) $ 254 $ 44
Less: net income attributable to noncontrolling interest   12     15     24     25
Segment profit (loss) 146 (95 ) 230 19

Market-related fair value adjustments(1)

(155 ) 145 (237 ) 102
Net derivative loss (gain) related to MSRs   1     (2 )   17     3
Core (loss) earnings (pre-tax) $ (8 ) $ 48   $ 10   $ 124
 
Net income (loss) attributable to PHH Corporation ― as reported $ 90 $ (57 ) $ 142 $ 18

Market-related fair value adjustments, net of taxes(1)(2)

(93 ) 85 (142 ) 60
Net derivative loss (gain) related to MSRs, net of taxes(2)   1     (1 )   10     2
Core (loss) earnings (after-tax) $ (2 ) $ 27   $ 10   $ 80
 

 

Basic earnings (loss) per share attributable to PHH Corporation ― as reported

$ 1.58 $ (1.00 ) $ 2.48 $ 0.32

Market-related fair value adjustments, net of taxes(1)(3)

(1.63 ) 1.51 (2.48 ) 1.06

Net derivative loss (gain) related to MSRs, net of taxes(3)

  0.02     (0.02 )   0.18     0.03
Core (loss) earnings per share $ (0.03 ) $ 0.49   $ 0.18   $ 1.41
 

(1)

  Represents the Change in fair value of MSRs due to changes in market inputs and assumptions used in the valuation model.
 

(2)

For the three and six months ended June 30, 2013, an incremental effective tax rate of 40% was applied to the MSRs valuation adjustments to arrive at the net of taxes amounts compared to an incremental effective tax rate of 41% for the three and six months ended June 30, 2012.
 

(3)

Basic weighted-average shares outstanding of 57.321 million and 56.804 million for the three months ended June 30, 2013 and 2012, respectively and 57.285 million and 56.730 million for the six months ended June 30, 2013 and 2012, respectively, were used to calculate per share amounts.
 

NON-GAAP RECONCILIATIONS – CORE EARNINGS BY SEGMENT

(In millions)

 
See “Note Regarding Non-GAAP Financial Measures” above in this press release for a description of the uses and limitations of the Non-GAAP Financial Measures.
 
Regulation G Reconciliation
 
  Second Quarter 2013
    Fleet  
Mortgage Mortgage Management
Production Servicing Services
Segment Segment Segment Other
Segment profit $ 44 $ 81 $ 21

$

Market-related fair value adjustments(1) (155 )

 

Net derivative loss (gain) related to MSRs   1  

 

Core earnings (loss) $ 44 $ (73 ) $ 21

$

 
 
Second Quarter 2012
Fleet
Mortgage Mortgage Management
Production Servicing Services
Segment Segment Segment Other
Segment profit (loss) $ 78 $ (196 ) $ 22 $ 1
Market-related fair value adjustments(1) 145

 

Net derivative loss (gain) related to MSRs   (2 )

 

Core earnings (loss) $ 78 $ (53 ) $ 22 $ 1
 

(1)

  Represents the Change in fair value of MSRs due to changes in market inputs and assumptions used in the valuation model.
 

NON-GAAP RECONCILIATIONS – CORE EARNINGS BY SEGMENT

(In millions)

 
See “Note Regarding Non-GAAP Financial Measures” above in this press release for a description of the uses and limitations of the Non-GAAP Financial Measures.
 
Regulation G Reconciliation
 
  Six Months Ended June 30, 2013
    Fleet  
Mortgage Mortgage Management
Production Servicing Services
Segment Segment Segment Other
Segment profit $ 89 $ 99 $ 42 $
Market-related fair value adjustments(1) (237 )
Net derivative loss related to MSRs   17    
Core earnings (loss) $ 89 $ (121 ) $ 42 $
 
 
Six Months Ended June 30, 2012
Fleet
Mortgage Mortgage Management
Production Servicing Services
Segment Segment Segment Other
Segment profit (loss) $ 195 $ (222 ) $ 46 $
Market-related fair value adjustments(1) 102
Net derivative loss related to MSRs   3    
Core earnings (loss) $ 195 $ (117 ) $ 46 $
 

(1)

  Represents the Change in fair value of MSRs due to changes in market inputs and assumptions used in the valuation model.
 

NON-GAAP RECONCILIATIONS – ADJUSTED CASH FLOW

(In millions)

 
See “Note Regarding Non-GAAP Financial Measures” above in this press release for a description of the uses and limitations of the Non-GAAP Financial Measures.
 
Regulation G Reconciliation
  Three Months Ended   Six Months Ended
June 30, June 30,
2013   2012 2013   2012
Net increase (decrease) in Cash and cash equivalents $ 117 $ (175 ) $ 215 $ 286
Adjustments:
Decrease in unsecured borrowings 201 9
Issuances of common stock   (1 )   (1 )
Adjusted cash flow $ 116   $ 26   $ 214   $ 295
 

NON-GAAP RECONCILIATIONS ― TANGIBLE BOOK VALUE

(In millions except share and per share data)

 
See “Note Regarding Non-GAAP Financial Measures” above in this press release for a description of the uses and limitations of the Non-GAAP Financial Measures.
 
Regulation G Reconciliation
   
June 30, December 31,
2013 2012
PHH Corporation stockholders' equity ― as reported $ 1,662 $ 1,526
Goodwill (25 ) (25 )
Intangible assets   (30 )   (31 )
Tangible book value $ 1,607   $ 1,470  
Common shares issued and outstanding   57,105,651     56,975,991  
Tangible book value per share $ 28.14   $ 25.80  
 

PHH Corporation
Investors
Jim Ballan, 856-917-4311
jim.ballan@phh.com
or
Media
Dico Akseraylian, 410-771-2038
dico.akseraylian@phh.com

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