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PHH Corporation Announces Second Quarter 2013 Results

Stocks in this article: PHH

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.

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