PHH Corporation (NYSE: PHH) (“PHH” or the “Company”) today
announced financial results for the three and nine month periods
ended September 30, 2012.
For the quarter ended September 30, 2012, the Company reported
net loss attributable to PHH Corporation of $42 million or $0.74
per share. Core earnings (after-tax)* and core earnings per share*
for the quarter ended September 30, 2012, were $42 million and
$0.74, respectively. These results include a $13 million pre-tax
loss ($0.14 per share after tax) related to the early repayment of
our 2013 medium term notes. Tangible book value per share* was
$24.82 at September 30, 2012.
Glen A. Messina, president and CEO of PHH Corporation, said, “In
the third quarter, we delivered solid performance and progress in
the execution of our four key strategies: disciplined growth in our
franchise platforms, operational excellence, an unwavering
commitment to customer service, and liquidity and cash flow
generation and deleveraging. The continued execution on these
strategies should maximize value for our shareholders by
positioning us for growth and making us a more competitive, more
profitable, and more capital-efficient company.”
Messina added, “Mortgage loan origination volume and
applications in our retail platforms remain at high levels, and our
retail platforms represented 87% of total mortgage closings in the
quarter. We see significant growth opportunities through both
increased penetration of our existing clients and expansion of our
client base. Our mortgage model is well-positioned for current
trends, and we believe the industry is evolving toward our
strengths. Meanwhile, Fleet continued to provide recurring segment
profit and operating cash flow in the quarter. We also made
significant progress on our liquidity and financing objectives in
that we fully repaid our 2013 unsecured debt maturity with the
combination of the proceeds of a successful debt offering and cash
on hand, and we closed the third quarter with $677 million in
unrestricted cash and cash equivalents.”
Liquidity and Capital Raising Update
Liquidity at September 30, 2012, included $677 million in
unrestricted cash and cash equivalents.
On August 2, 2012, we closed a $300 million unsecured U.S.
revolving credit facility, consisting of a three-year $250 million
tranche and an approximately two-year $50 million tranche. On
September 25, 2012, we closed a three-year C$125 million secured
Canadian revolving credit facility. These credit facilities replace
our former $525 million revolving credit facility that would have
matured in February 2013. At the end of the third quarter of 2012,
there were no outstanding borrowings on these revolving credit
facilities.
On August 23, 2012, we completed an offering of $275 million
aggregate principal amount of 7.375% Senior Notes due 2019. After
deducting underwriting fees, we realized net proceeds of $270
million from the issuance. We used the net proceeds of this
offering, along with cash on hand, to fully repay the $418 million
remaining outstanding aggregate principal amount of our 2013 medium
term notes. A pre-tax loss of $13 million ($0.14 per share after
tax) associated with the early repayment of these notes was
recorded in Other operating expenses in the third quarter.
Summary Consolidated Results (In millions, except
per share data) Three Months
Ended Nine Months Ended September 30,
September 30, 2012 2011 2012
2011 Net revenues $ 624 $ 384 $ 1,960 $ 1,565 Loss before
income taxes (56 ) (242 ) (12 ) (223 ) Net loss attributable to PHH
Corporation (42 ) (148 ) (24 ) (140 ) Basic loss per share
attributable to PHH Corporation $ (0.74 ) $ (2.62 ) $ (0.42 ) $
(2.48 )
Non-GAAP Results* Core earnings (pre-tax) $
67 $ 108 $ 191 $ 212 Core earnings (after-tax) 42 64 122 127
Core earnings per share $ 0.74 $ 1.14 $ 2.15 $ 2.25 Adjusted
cash flow $ 120 $ (208 ) $ 415 $ (199 )
* 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.
Segment Results
(In millions)
Third Third Quarter 2012 Quarter 2011
Fleet Mortgage Mortgage Management
Production Servicing Services Total PHH
Total PHH Segment Segment Segment
Other Corporation Corporation Net fee income $
91 $― $ 45 $― $ 136 $ 110 Fleet lease income ― ― 340 ― 340 370 Gain
on mortgage loans 257 ― ― ― 257 203 Mortgage net finance expense
(16 ) (14 ) ― ― (30 ) (24 ) Loan servicing income (1) ― 112 ― ― 112
112 MSR fair value adjustments:
Prepayments and receipt of recurring cash
flows
― (75 ) ― ― (75 ) (49 ) Market-related (2) ― (150 ) ― ― (150 ) (361
) Net derivative gain related to MSRs ― 8 ― ― 8 1 Other income
5 1 20 ― 26
22
Net revenues 337 (118
) 405 ― 624 384
Depreciation on operating leases ― ― 304 ― 304 307 Fleet interest
expense ― ― 17 1 18 19 Foreclosure-related charges ― 41 ― ― 41 20
Other expenses 196 46 63
12 317 280
Total expenses
196 87 384 13
680 626
Income (loss) before income
taxes 141 (205 ) 21 (13 ) $ (56 ) $ (242 )
Less: income attributable to
noncontrolling interest
19 ― ― ―
Segment profit (loss) $
122 $ (205 ) $ 21 $ (13 )
(1)
Net reinsurance loss for the three months ended September
30, 2012 was not significant. Loan servicing income includes net
reinsurance loss of $8 million for the three months ended September
30, 2011.
(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) Nine
Months Ended September Nine Months Ended
September 30, 2012 30, 2011 Fleet Mortgage
Mortgage Management Production
Servicing Services Total PHH Total PHH
Segment Segment Segment Other
Corporation Corporation Net fee income $ 254 $ ― $
137 $ ― $ 391 $ 338 Fleet lease income ― ― 1,014 ― 1,014 1,050 Gain
on mortgage loans 695 ― ― ― 695 381 Mortgage net finance expense
(49 ) (42 ) ― (1 ) (92 ) (68 ) Loan servicing income (1) ― 333 ― ―
333 337 MSR fair value adjustments:
Prepayments and receipt of recurring cash
flows
― (199 ) ― ― (199 ) (148 ) Market-related (2) ― (252 ) ― ― (252 )
(453 ) Net derivative gain related to MSRs ― 5 ― ― 5 1 Other income
9 ― 56 ― 65
127
Net revenues 909
(155 ) 1,207 (1 ) 1,960
1,565 Depreciation on operating leases ― ― 908 ― 908 922
Fleet interest expense
―
― 53 (1 ) 52 60 Foreclosure-related charges ― 145 ― ― 145 59 Other
expenses 548 127 179 13
867 747
Total expenses
548 272 1,140 12
1,972 1,788
Income (loss) before
income taxes 361 (427 ) 67 (13 ) $ (12 ) $ (223 )
Less: income attributable to
noncontrolling interest
44 ― ― ―
Segment profit (loss) $ 317 $ (427 ) $ 67 $ (13 )
(1)
Includes net reinsurance loss of $19 million and $15 million
for the nine months ended September 30, 2012 and 2011,
respectively. The reinsurance loss for the nine months ended
September 30, 2012 includes a $16 million loss on the termination
of one of our 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 and Mortgage Servicing
Mortgage Production Segment Profit
Mortgage Production segment profit in the third quarter of 2012
was $122 million, up 56% from $78 million in the second quarter of
2012 and up 28% from the third quarter of 2011, driven by strong
gain on sale margins from the continuation of high refinance
originations that began in the third quarter 2011 and growth in
Mortgage fees as a result of greater volumes of Fee-based
closings.
Mortgage Servicing Segment Loss
Mortgage Servicing segment loss in the third quarter of 2012 was
$205 million, primarily driven by an aggregate $217 million in
negative changes in the fair value of our MSR and related
derivatives and $41 million in foreclosure-related charges. The
changes in the fair value of our MSR and related derivatives
included $150 million in market-related negative fair value
adjustments on our mortgage servicing rights and $75 million in
prepayments and receipts of recurring cash flows, primarily
attributable to a decrease in mortgage interest rates, partially
offset by $8 million in net derivative gains. Foreclosure-related
charges during the third quarter of 2012 increased slightly from
$39 million in the second quarter 2012. The continued elevated
levels of foreclosure-related charges were reflective of
significant repurchase requests and declining defense rates, and we
expect repurchase requests to remain elevated potentially through
the end of 2013.
Interest Rate Lock Commitments
IRLCs expected to close of $6.8 billion in the third quarter of
2012 were essentially unchanged from the second quarter of 2012,
reflecting the continuation of the high level of refinancing
originations that began in the third quarter 2011. IRLCs expected
to close declined 41% from the third quarter 2011, reflecting our
strategy of growth in our retail channels and narrowing our focus
in our wholesale/correspondent channel to business partners we
believe will consistently deliver high-quality loans. Although
total IRLCs expected to close declined compared to the third
quarter of 2011, retail IRLCs expected to close in the third
quarter of 2012 made up a greater portion of the total.
Total Priced-in Margin
Total priced-in margin on IRLCs expected to close continued its
increasing trend and remained at an elevated level for the third
quarter. Total priced-in margin in the quarter was 420 bps, a 39
bps increase from the second quarter 2012 and a 132 bps increase
from the third quarter 2011. These margins reflect continuing high
levels of refinancing activity, primarily due to a reduction in
mortgage interest rates and higher consumer demand. Although we
expect priced-in margins to eventually decline from current levels,
we believe these margins could remain elevated in the near term due
to industry capacity constraints and the low absolute level of
interest rates.
Mortgage Closing Volume
Total third quarter 2012 mortgage closings were $14.4 billion of
which 87% were retail and 13% were wholesale/correspondent,
reflecting our strategy of growth in our retail channels and
narrowing our focus in our wholesale/correspondent channel to
business partners we believe will consistently deliver high-quality
loans. Fee-based closings increased to 39% of total closings in the
quarter, compared to 37% of total closings in the second quarter
2012 and 25% of total closings in the third quarter of 2011. Total
third quarter 2012 mortgage closings increased 12% from the second
quarter 2012.
Unpaid Principal Balance of Mortgage Servicing
Portfolio
At September 30, 2012, the UPB of our capitalized servicing
portfolio was $144.8 billion, consistent with the UPB at September
30, 2011, and a 2% decrease from the UPB at the end of the second
quarter of 2012. The sequential quarter decrease reflects
prepayments, not fully offset by additions from production. At
September 30, 2012, the UPB of our total loan servicing portfolio
was $185.1 billion, a 4% increase over the UPB at September 30,
2011, and a 4% decrease from the UPB at the end of the second
quarter of 2012. The sequential quarter and year-over-year changes
in our total loan servicing portfolio included an $8 billion
reduction in UPB in the third quarter 2012 from a transfer of
subservicing related to our previously-announced termination of an
agreement with Charles Schwab. We anticipate adding approximately
$52 billion of subservicing UPB in the first quarter of 2013
related to our private label agreement with HSBC.
Mortgage Servicing Rights
At September 30, 2012, the fair value of our mortgage servicing
rights was $1.0 billion, a decrease of 13% from the second quarter
of 2012. This change reflects $150 million in negative
market-related fair value adjustments and $75 million in negative
fair value adjustments related to prepayments and the receipt of
recurring cash flows, partially offset by $70 million in MSR added
from the capitalization of new servicing rights, reflecting $8.8
billion of loans sold in the quarter.
Foreclosure-related Charges
Foreclosure-related charges in the third quarter of 2012 were
$41 million, a slight increase from $39 million in the second
quarter of 2012, primarily as a result of a declining defense rate
as investors have become more selective in determining loans to put
back. Total foreclosure-related reserves were $176 million at the
end of the third quarter, compared to $175 million at the end of
the second quarter. As of September 30, 2012, the estimated amount
of reasonably possible losses in excess of the total
foreclosure-related reserves was $70 million, down from $105
million at the end of the second quarter of 2012. The reasonably
possible estimate assumes that repurchases and indemnifications
remain at an elevated level through the year ended December 31,
2013, our success rate in defending against requests declines, and
loss severities remain at current levels.
Fleet Management Services
Segment Profit
Fleet Management Services third quarter segment profit was $21
million, consistent with the third quarter 2011. These results
reflected growth in fleet management fees, as well as lower funding
costs, offset by a decline in Fleet lease income due to a 3%
decline in the average number of leased vehicles and lower
operating lease syndication volumes. Third quarter 2012 segment
profit declined $1 million from the second quarter 2012, primarily
due to a decline in Fleet lease income.
Fleet Leasing
Net investment in fleet leases at September 30, 2012,
represented a 7% increase compared to September 30, 2011, despite a
3% decline in average leased vehicle units, reflecting a shift in
the mix of our leased units to higher-capitalized cost truck and
service-type vehicles.
Fleet Management Fees
Fleet management fees increased to $45 million in the third
quarter 2012 from $42 million in the third quarter 2011, primarily
resulting from an increase in maintenance service card units and an
increase in asset-based fleet management services resulting from
asset dispositions.
Conference Call/Webcast
The Company will host a conference call at 10:00 a.m. (Eastern
Time) on Thursday, November 8, 2012, to discuss its third quarter
2012 results. All interested parties are welcome to participate.
You can access the conference call by dialing (800) 533-9703 or
(785) 830-1926 and using the conference ID 6417933 approximately 10
minutes prior to the call. The conference call will also be webcast
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, November 8, 2012, prior to the
start of the conference call.
A replay will be available shortly after the end of the call
through November 23, 2012, by dialing (888) 203-1112 or (719)
457-0820 and using conference ID 6417933 or by logging on to the
company's website.
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 2012
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 Nine Months Ended
September 30, September 30, 2012
2011 2012 2011 REVENUES Mortgage
fees $ 91 $ 68 $ 254 $ 210 Fleet management fees 45
42 137 128 Net fee income
136 110 391 338
Fleet lease income 340 370
1,014 1,050 Gain on mortgage loans, net
257 203 695 381
Mortgage interest income 24 24 70 82 Mortgage interest
expense (54 ) (48 ) (162 ) (150 )
Mortgage net finance expense (30 ) (24 ) (92 )
(68 ) Loan servicing income 112 112
333 337 Change in fair value of
mortgage servicing rights (225 ) (410 ) (451 ) (601 ) Net
derivative gain related to mortgage servicing rights 8
1 5 1 Valuation
adjustments related to mortgage servicing rights, net (217 )
(409 ) (446 ) (600 ) Net loan servicing loss
(105 ) (297 ) (113 ) (263 ) Other
income 26 22 65
127
Net revenues 624 384
1,960 1,565
EXPENSES Salaries
and related expenses 159 124 438 375 Occupancy and other office
expenses 15 14 43 44 Depreciation on operating leases 304 307 908
922 Fleet interest expense 18 19 52 60 Other depreciation and
amortization 7 7 19 19 Other operating expenses 177
155 512 368
Total
expenses 680 626 1,972
1,788
Loss before income taxes (56 )
(242 ) (12 ) (223 ) Income tax benefit (33 ) (104 )
(32 ) (100 )
Net (loss) income (23 ) (138 ) 20
(123 ) Less: net income attributable to noncontrolling interest
19 10 44 17
Net loss attributable to PHH Corporation $ (42 ) $ (148 ) $
(24 ) $ (140 )
Basic loss per share attributable to PHH
Corporation $ (0.74 ) $ (2.62 ) $ (0.42 ) $ (2.48 )
Diluted
loss per share attributable to PHH Corporation $ (0.74 ) $
(2.62 ) $ (0.42 ) $ (2.48 )
PHH CORPORATION AND
SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE
SHEETS (In millions) September 30,
December 31, 2012 2011 ASSETS
Cash and cash equivalents $ 677 $ 414 Restricted cash, cash
equivalents and investments 435 574 Mortgage loans held for sale
1,953 2,658 Accounts receivable, net 742 700 Net investment in
fleet leases 3,653 3,515 Mortgage servicing rights 1,002 1,209
Property, plant and equipment, net 68 64 Goodwill 25 25 Other
assets (1) 691 618
Total assets $ 9,246 $
9,777
LIABILITIES AND EQUITY Accounts payable and
accrued expenses $ 516 $ 504 Debt 6,318 6,914 Deferred taxes 604
626 Other liabilities 309 272
Total
liabilities 7,747 8,316 Commitments and
contingencies ― ―
Total PHH Corporation stockholders’ equity
1,463 1,442 Noncontrolling interest 36 19
Total
equity 1,499 1,461
Total liabilities and
equity $ 9,246 $ 9,777
(1)
Includes intangible assets of $31 million and $33 million as
of September 30, 2012 and December 31, 2011, respectively.
DEBT AND BORROWING ARRANGEMENTS
The following table summarizes the components of Debt:
September 30, 2012 December 31, 2011
Wt. Avg- Wt. Avg- Interest
Interest Balance Rate(1) Balance
Rate(1) (In millions) Term notes, in
amortization $ 529 2.1 % $ 1,196 2.1 % Term notes, in revolving
period 993 1.2 % 374 1.6 % Variable-funding notes 1,849 1.4 % 1,516
1.4 % Other 26 5.1 % 32 5.1 % Vehicle Management
Asset-Backed Debt 3,397 3,118 Secured Canadian Credit
facility ― ― % ― ― % Committed warehouse facilities
1,701 2.1 % 2,313 2.0 % Uncommitted warehouse facilities ― ― % 44
1.2 % Servicing advance facility 71 2.7 % 79 2.8 %
Mortgage Asset-Backed Debt 1,772 2,436 Term notes 732
8.5 % 879 8.2 % Convertible notes 417 5.0 % 460 4.0 % Unsecured
Credit facilities ― ― % ― ― % Unsecured Debt
1,149 1,339
Mortgage loan securitization debt
certificates, at fair value
― ― % 21 7.0 % Total $ 6,318 $ 6,914
(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, Convertible notes, and Mortgage loan
securitization debt certificates which are fixed-rate.
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 September 30, 2012 consisted
of:
Utilized Available
Capacity Capacity Capacity (In
millions) Vehicle Management Asset-Backed Debt: Term notes, in
revolving period $ 993 $ 993 $― Variable-funding notes 2,330 1,849
481 Secured Canadian Credit facility(1) 127 4 123 Mortgage
Asset-Backed Debt: Committed warehouse facilities 3,545 1,701 1,844
Servicing advance facility 120 71 49 Unsecured Credit facilities
305 ― 305
(1)
Utilized capacity reflects $4 million of letters of credit
issued under the Secured Canadian Credit facility, which are not
included in Debt in the Condensed Consolidated Balance Sheet.
Capacity for Mortgage asset-backed debt shown above excludes
$2.0 billion not drawn under uncommitted facilities, and $320
million available under committed off-balance sheet gestation
facilities.
Mortgage Production Segment (In millions, except
average loan amount)
Three Months Ended Nine Months Ended September
30, September 30, 2012 2011 Change
2012 2011 Change Loans closed to be sold $
8,793 $ 9,552 (8 )% $ 27,529 $ 26,082 6 % Fee-based closings
5,595 3,197 75 % 13,642
10,244 33 % Total closings $ 14,388 $ 12,749
13 % $ 41,171 $ 36,326 13 % Purchase closings
$ 4,731 $ 6,211 (24 )% $ 13,591 $ 16,078 (15 )% Refinance closings
9,657 6,538 48 % 27,580
20,248 36 % Total closings $ 14,388 $ 12,749
13 % $ 41,171 $ 36,326 13 % Fixed rate
$ 9,863 $ 9,139 8 % $ 29,264 $ 25,804 13 % Adjustable rate
4,525 3,610 25 % 11,907
10,522 13 % Total closings $ 14,388 $ 12,749
13 % $ 41,171 $ 36,326 13 % Retail closings $
12,466 $ 8,597 45 % $ 33,012 $ 25,373 30 % Wholesale/correspondent
closings 1,922 4,152 (54 )%
8,159 10,953 (26 )% Total closings $ 14,388
$ 12,749 13 % $ 41,171 $ 36,326 13 %
Average loan amount $ 301,101 $ 257,872 17 % $ 278,474 $
256,977 8 % Loans sold $ 8,808 $ 8,579 3 % $ 28,285 $ 28,307 ―
Applications $ 18,579 $ 22,704 (18 )% $ 55,088 $ 49,006 12 % IRLCs
expected to close $ 6,769 $ 11,429 (41 )% $ 20,394 $ 23,974 (15 )%
Three Months Ended Nine
Months Ended September 30, September
30, 2012 2011 Change
2012 2011 Change Mortgage fees $ 91 $ 68 34 %
$ 254 $ 210 21 % Gain on mortgage loans, net 257 203 27 % 695 381
82 % Mortgage net finance expense (16 ) (8 ) (100 )% (49 ) (18 )
(172 )% Other income 5 1 400 % 9
74 (88 )%
Net revenues 337
264 28 % 909 647
40 %
Total expenses 196 159 23 %
548 458 20 %
Income before income
taxes 141 105 34 % 361 189 91 %
Less: net income attributable to
noncontrolling interest
19 10 90 % 44 17
159 %
Segment profit $ 122 $ 95 28 % $
317 $ 172 84 %
Mortgage Servicing
Segment ($ In millions) As of September
30, 2012 2011
Change Ending total loan servicing portfolio $ 185,143 $
178,129 4 % Number of loans serviced 1,032,823 1,048,291 (1 )%
Ending capitalized loan servicing portfolio $ 144,780 $ 144,275 ―
Capitalized servicing rate 0.69 % 0.83 % Capitalized servicing
multiple 2.3 2.8 Weighted-average servicing fee (in basis points)
30 30
Three Months Ended Nine Months
Ended September 30, September 30, 2012
2011 Change 2012
2011 Change Average total loan servicing
portfolio $ 189,287 $ 176,019 8 % $ 186,323 $ 172,298 8 %
Average capitalized loan servicing
portfolio
146,189 143,396 2 % 147,722 140,909 5 %
Payoffs and principal curtailments of
capitalized portfolio
10,463 6,014 74 % 27,102 16,980 60 %
Three Months
Ended Nine Months Ended September 30,
September 30, 2012 2011 Change
2012 2011 Change Mortgage net finance expense
$ (14 ) $ (16 ) 13 % $ (42 ) $ (48 ) 13 % Loan servicing income 112
112 ― 333 337 (1 )%
Valuation adjustments related to mortgage
servicing rights, net
(217 ) (409 ) 47 % (446 ) (600 ) 26 % Other income (expense)
1 1 ― ― (2 ) 100 %
Net
revenues (118 ) (312 ) 62 % (155 )
(313 ) 50 % Foreclosure-related charges 41 20 105 % 145 59 146 %
Other expenses 46 36 28 % 127
95 34 %
Total expenses 87
56 55 % 272 154 77 %
Segment loss $ (205 ) $ (368 ) 44 % $ (427 ) $ (467 ) 9 %
September 30, 2012 December 31, 2011 Number
of Number of Loans Unpaid
Balance Loans Unpaid Balance Portfolio
Delinquency(1) 30 days 2.40 % 1.91 % 2.24 % 1.83 % 60 days 0.59 %
0.47 % 0.60 % 0.51 % 90 or more days 0.76 % 0.66 % 0.98 % 0.95 %
Total 3.75 % 3.04 % 3.82 % 3.29 % Foreclosure/real estate owned(2)
1.99 % 1.91 % 1.83 % 1.85 %
(1)
Represents portfolio delinquencies as a percentage of the
total number of loans and the total unpaid balance of the
portfolio.
(2)
As of September 30, 2012 and December 31, 2011, there were 17,141
and 15,689 of loans in foreclosure with an unpaid principal balance
of $3.0 billion and $2.8 billion, respectively.
Fleet Management Services Segment
Average
for the Average for the Three Months Ended
Nine Months Ended September 30,
September 30, 2012 2011
Change 2012 2011 Change (in
thousands of units) Leased vehicles 264 272 (3 )% 267 275 (3 )%
Maintenance service cards 345 324 6 % 344 320 8 % Fuel cards 308
296 4 % 302 293 3 % Accident management vehicles 304 297 2 % 311
295 5 %
Three Months Ended Nine
Months Ended September 30,
September 30, 2012 2011
Change 2012 2011 Change (in
millions) Fleet management fees $ 45 $ 42 7 % $ 137 $ 128 7 %
Fleet lease income 340 370 (8 )% 1,014 1,050 (3 )% Other income
20 20 ― 56 55 2 %
Net revenues
405 432 (6 )% 1,207 1,233 ―
Depreciation on operating leases 304 307 (1 )% 908 922 (2 )% Fleet
interest expense 17 20 (15 )% 53 63 (16 )% Other expenses 63
84 (25 )% 179 192 (7 )%
Total expenses
384 411 (7 )% 1,140 1,177 (3 )%
Segment profit $ 21 $ 21 ― $ 67 $ 56 20 %
* NOTE REGARDING NON-GAAP FINANCIAL MEASURES
Core earnings (loss) (pre-tax and after-tax), core earnings
(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 (loss) (pre-tax and after-tax) and core earnings
(loss) per share involves differences from 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 computed in accordance with GAAP. Core earnings
(loss) (pre-tax and after-tax) and core earnings (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
(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 (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 (loss) (pre-tax and
after-tax) and core earnings (loss) per share
Core earnings (loss) (pre-tax and after-tax) and core earnings
(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 (loss) (pre-tax and after-tax) and core
earnings (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 (loss) (pre-tax and after-tax)
and core earnings (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.
Due to changes in the Company’s mortgage servicing rights
valuation model that became effective January 1, 2012, the Company
no longer reports “Credit-related fair value adjustments” to MSRs
as a discrete component of the change in value of MSRs. For periods
ending after December 31, 2011, “Market-related fair value
adjustments” in the accompanying Regulation G reconciliation
include changes in MSR value due to the impact of estimated
portfolio delinquencies and foreclosures. Accordingly, amounts
previously classified as “Credit-related fair value adjustments”
have been reclassified to “Market-related fair value adjustments”
for periods ending on or before December 31, 2011.
Adjusted cash flow
Adjusted cash flow measures the Company’s Net increase
(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
(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 Nine
Months Ended September 30, September 30,
2012 2011 2012 2011 Loss
before income taxes ― as reported $ (56 ) $ (242 ) $ (12 ) $ (223 )
Less: net income attributable to
noncontrolling interest
19 10 44 17
Segment loss (75 ) (252 ) (56 ) (240 ) Market-related fair value
adjustments (1) 150 361 252 453 Net derivative gain related to MSRs
(8 ) (1 ) (5 ) (1 ) Core earnings
(pre-tax) $ 67 $ 108 $ 191 $ 212
Net loss attributable to PHH Corporation― as reported $ (42 ) $
(148 ) $ (24 ) $ (140 ) Market-related fair value adjustments, net
of taxes (1)(2) 89 212 149 267 Net derivative gain related to MSRs,
net of taxes(2) (5 ) ― (3 ) ― Core
earnings (after-tax) $ 42 $ 64 $ 122 $ 127
Basic loss per share attributable to PHH
Corporation ― as reported
$ (0.74 ) $ (2.62 ) $ (0.42 ) $ (2.48 ) Market-related fair value
adjustments, net of taxes (1)(3) 1.57 3.77 2.63 4.74 Net derivative
gain related to MSRs, net of taxes(3) (0.09 ) (0.01 )
(0.06 ) (0.01 ) Core earnings per share $ 0.74
$ 1.14 $ 2.15 $ 2.25
(1)
Represents the Change in fair value of MSRs due to changes
in market inputs and assumptions used in the valuation model.
(2)
An incremental effective tax rate of 41% was applied to the MSRs
valuation adjustments to arrive at the net of taxes amounts.
(3)
Basic weighted-average shares outstanding of 56.842 million and
56.437 million for the three months ended September 30, 2012 and
2011, respectively and 56.768 million and 56.298 million for the
nine months ended September 30, 2012 and 2011, 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 Third Quarter
2012 Fleet Mortgage Mortgage
Management Production Servicing
Services Segment Segment Segment
Other Segment profit (loss) $ 122 $ (205 ) $ 21 $ (13 )
Market-related fair value adjustments(1) ― 150 ― ― Net derivative
gain related to MSRs ― (8 ) ― ― Core
earnings (loss) $ 122 $ (63 ) $ 21 $ (13 )
Third
Quarter 2011 Fleet Mortgage Mortgage
Management Production Servicing
Services Segment Segment Segment
Other Segment profit (loss) $ 95 $ (368 ) $ 21 $ ―
Market-related fair value adjustments(1) ― 361 ― ― Net derivative
gain related to MSRs ― (1 ) ― ― Core
earnings (loss) $ 95 $ (8 ) $ 21 $ ―
(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 Nine Months Ended
September 30, 2012 Fleet Mortgage Mortgage
Management Production Servicing
Services Segment Segment Segment
Other Segment profit (loss) $ 317 $ (427 ) $ 67 $ (13 )
Market-related fair value adjustments(1) ― 252 ― ― Net derivative
gain related to MSRs ― (5 ) ― ― Core
earnings (loss) $ 317 $ (180 ) $ 67 $ (13 )
Nine
Months Ended September 30, 2011 Fleet Mortgage
Mortgage Management Production
Servicing Services Segment Segment
Segment Other Segment profit (loss) $ 172 $ (467 ) $
56 $ (1 ) Market-related fair value adjustments(1) ― 453 ― ― Net
derivative gain related to MSRs ― (1 ) ―
― Core earnings (loss) $ 172 $ (15 ) $ 56 $ (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 – 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 Nine
Months Ended September 30, September 30,
2012 2011 2012 2011 Net
(decrease) increase in Cash and cash equivalents $ (23 ) $ (128 ) $
263 $ (111 ) Adjustments: Decrease (increase) in unsecured
borrowings 144 (80 ) 153 (80 ) Issuances of common stock (1
) ― (1 ) (8 ) Adjusted cash flow $ 120
$ (208 ) $ 415 $ (199 )
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 September
30, December 31, 2012 2011 PHH Corporation
stockholders' equity ― as reported $ 1,463 $ 1,442 Goodwill (25 )
(25 ) Intangible assets (31 ) (33 ) Tangible book
value $ 1,407 $ 1,384 Common shares issued and
outstanding 56,695,730 56,361,155 Tangible book value
per share $ 24.82 $ 24.56
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