10-Q 1 a13-12877_110q.htm 10-Q

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

R                                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2013

 

OR

 

£                                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                        to                        

 

Commission File Number: 1-7797


PHH CORPORATION

(Exact name of registrant as specified in its charter)

 

MARYLAND

 

52-0551284

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

 

 

3000 LEADENHALL ROAD

 

08054

MT. LAUREL, NEW JERSEY

 

(Zip Code)

(Address of principal executive offices)

 

 

 

856-917-1744

(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No £

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer R Accelerated filer £ Non-accelerated filer £ (Do not check if a smaller reporting company) Smaller reporting company £

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes £ No R

 

As of July 24, 2013, 57,144,550 shares of PHH common stock were outstanding.

 

 

 




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Except as expressly indicated or unless the context otherwise requires, the “Company,” “PHH,” “we,” “our” or “us” means PHH Corporation, a Maryland corporation, and its subsidiaries.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be made in other documents filed or furnished with the SEC or may be made orally to analysts, investors, representatives of the media and others.

 

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. 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”. Forward-looking statements contained in this Form 10-Q include, but are not limited to, statements concerning the following:

 

¡

the impact of the adoption of recently issued accounting pronouncements on our financial statements;

 

 

¡

our expectations of the impacts of regulatory changes on our businesses;

 

 

¡

our expected cost reductions and responses to the changing mortgage production environment;

 

 

¡

our expectations regarding improvements in our systems and processes, including our information technology infrastructure and systems;

 

 

¡

future origination volumes and loan margins in the mortgage industry;

 

 

¡

our expectations of origination volumes from our retail platform, including from our private label relationships and our relationship with Realogy Corporation;

 

 

¡

our ability to generate mortgage originations in excess of voluntary prepayments;

 

 

¡

potential acquisitions, dispositions, partnerships, joint ventures and changes in product offerings to achieve disciplined growth in our franchise platforms and to optimize our mortgage and fleet management services businesses;

 

 

¡

our belief that sources of liquidity will be adequate to fund operations;

 

 

¡

mortgage repurchase and indemnification requests and associated reserves and provisions; and

 

 

¡

our assessment of legal proceedings and associated reserves and provisions.

 

Actual results, performance or achievements may differ materially from those expressed or implied in forward-looking statements due to a variety of factors, including but not limited to the factors listed and discussed in “Part I—Item 1A. Risk Factors” in our 2012 Form 10-K, “Part II—Item 1A. Risk Factors” in this Form 10-Q and those factors described below:

 

¡

the effects of market volatility or macroeconomic changes on the availability and cost of our financing arrangements and the value of our assets;

 

 

¡

the effects of any further declines in the volume of U.S. home sales and home prices, due to adverse economic changes or otherwise, on our Mortgage Production and Mortgage Servicing segments;

 

 

¡

the effects of changes in current interest rates on our business and our financing costs;

 

 

¡

our decisions regarding the use of derivatives related to mortgage servicing rights, if any, and the resulting potential volatility of the results of operations of our Mortgage Servicing segment;

 

 

¡

the impact of the failure to maintain our credit ratings, including the impact on our cost of capital and ability to incur new indebtedness or refinance our existing indebtedness, as well as our current or potential customers’ assessment of our counterparty credit risk;

 

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¡

the effects of continued elevated volumes or increases in our actual and projected repurchases of, indemnification given in respect of, or related losses associated with, sold mortgage loans for which we have provided representations and warranties or other contractual recourse to purchasers and insurers of such loans, including increases in our loss severity and reserves associated with such loans;

 

 

¡

the effects of any significant adverse changes in the underwriting criteria or existence or programs of government-sponsored entities, including Fannie Mae and Freddie Mac, including any changes caused by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other actions of the federal government;

 

 

¡

the effects of any inquiries and investigations by attorneys general of certain states and the U.S. Department of Justice, the Bureau of Consumer Financial Protection, U.S. Department of Housing and Urban Development or other state or federal regulatory agencies related to foreclosure procedures or other mortgage origination or servicing activities, any litigation related to our mortgage origination or servicing activities, or any related fines, penalties and increased costs;

 

 

¡

the ability to maintain our status as a government sponsored entity-approved seller and servicer, including the ability to continue to comply with the respective selling and servicing guides, including any changes caused by the Dodd-Frank Act;

 

 

¡

the effects of changes in, or our failure to comply with, laws and regulations, including mortgage- and real estate-related laws and regulations (including changes caused by the Dodd-Frank Act), changes in the status of government sponsored-entities and changes in state, federal and foreign tax laws and accounting standards;

 

 

¡

the effects of the insolvency of any of the counterparties to our significant customer contracts or financing arrangements or the inability or unwillingness of such counterparties to perform their respective obligations under, or to renew on terms favorable to us, such contracts, or our ability to continue to comply with the terms of our significant customer contracts, including service level agreements;

 

 

¡

the effects of competition in our existing and potential future lines of business, including the impact of consolidation within the industries in which we operate and competitors with greater financial resources and broader product lines;

 

 

¡

the ability to obtain alternative funding sources for our mortgage servicing rights or to obtain financing (including refinancing and extending existing indebtedness) on acceptable terms, if at all, to finance our operations or growth strategies, to operate within the limitations imposed by our financing arrangements and to maintain the amount of cash required to service our indebtedness;

 

 

¡

the ability to maintain our relationships with our existing clients, including our efforts to amend the terms of certain of our private label client agreements, and to establish relationships with new clients;

 

 

¡

the effects of any failure in or breach of our technology infrastructure, or those of our outsource providers, or any failure to implement changes to our information systems in a manner sufficient to comply with applicable law and our contractual obligations;

 

 

¡

the ability to attract and retain key employees;

 

 

¡

a deterioration in the performance of assets held as collateral for secured borrowings;

 

 

¡

any failure to comply with covenants under our financing arrangements; and

 

 

¡

the impact of changes in the U.S. financial condition and fiscal and monetary policies, or any actions taken or to be taken by the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System on the credit markets and the U.S. economy.

 

Forward-looking statements speak only as of the date on which they are made.  Factors and assumptions discussed above, and other factors not identified above, may have an impact on the continued accuracy of any forward-looking statements that we make. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

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PART I – FINANCIAL INFORMATION

 

 

Item 1.  Financial Statements

 

 

PHH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
(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

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In millions)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net income (loss)

 

$

102

 

$

(42)

 

$

166

 

$

43

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

Currency translation adjustment

 

(6)

 

(4)

 

(11)

 

 

Change in unrealized gains on available-for-sale securities, net

 

(1)

 

 

(1)

 

(1)

 

Change in unfunded pension liability, net

 

 

 

 

1

 

Total other comprehensive (loss) income, net of tax

 

(7)

 

(4)

 

(12)

 

 

Total comprehensive income (loss)

 

95

 

(46)

 

154

 

43

 

Less: comprehensive income attributable to noncontrolling interest

 

12

 

15

 

24

 

25

 

Comprehensive income (loss) attributable to PHH Corporation

 

$

83

 

$

(61)

 

$

130

 

$

18

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except share data)

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

1,044

 

$

829

 

Restricted cash, cash equivalents and investments (including $0 and $121 of available-for-sale securities at fair value)

 

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

 

571

 

616

 

Total assets (1)

 

$

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 (1)

 

8,084

 

8,041

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

Preferred stock, $0.01 par value; 1,090,000 shares authorized; none issued or outstanding

 

 

 

Common stock, $0.01 par value; 273,910,000 shares authorized; 57,105,651 shares issued and outstanding at June 30, 2013; 56,975,991 shares issued and outstanding at December 31, 2012

 

1

 

1

 

Additional paid-in capital

 

1,133

 

1,127

 

Retained earnings

 

514

 

372

 

Accumulated other comprehensive income

 

14

 

26

 

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

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

Continued.

 

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CONDENSED CONSOLIDATED BALANCE SHEETS—(Continued)

(Unaudited)
(In millions)


(1)              The Condensed Consolidated Balance Sheets include assets of variable interest entities which can be used only to settle their obligations and liabilities of variable interest entities which creditors or beneficial interest holders do not have recourse to PHH Corporation and subsidiaries as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

73

 

$

66

 

Restricted cash, cash equivalents and investments

 

298

 

249

 

Mortgage loans held for sale

 

667

 

730

 

Accounts receivable, net

 

92

 

90

 

Net investment in fleet leases

 

3,634

 

3,531

 

Property, plant and equipment, net

 

2

 

2

 

Other assets

 

43

 

39

 

Total assets

 

$

4,809

 

$

4,707

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Accounts payable and accrued expenses

 

$

35

 

$

36

 

Debt

 

4,140

 

4,074

 

Other liabilities

 

17

 

13

 

Total liabilities

 

$

4,192

 

$

4,123

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)

(In millions, except share data)

 

 

 

 

PHH Corporation Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Comprehensive

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Income

 

Noncontrolling

 

Total

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

(Loss)

 

Interest

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

 

56,975,991

 

$

1

 

$

1,127

 

$

372

 

$

26

 

$

36

 

$

1,562

 

Total comprehensive income (loss)

 

 

 

 

142

 

(12)

 

24

 

154

 

Distributions to noncontrolling interest

 

 

 

 

 

 

(35)

 

(35)

 

Stock compensation expense

 

 

 

4

 

 

 

 

4

 

Stock issued under share-based payment plans

 

129,660

 

 

 

 

 

 

 

Recognition of deferred taxes related to Convertible notes

 

 

 

2

 

 

 

 

2

 

Balance at June 30, 2013

 

57,105,651

 

$

1

 

$

1,133

 

$

514

 

$

14

 

$

25

 

$

1,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

56,361,155

 

$

1

 

$

1,082

 

$

338

 

$

21

 

$

19

 

$

1,461

 

Total comprehensive income

 

 

 

 

18

 

 

25

 

43

 

Distributions to noncontrolling interest

 

 

 

 

 

 

(14)

 

(14)

 

Stock compensation expense

 

 

 

2

 

 

 

 

2

 

Stock issued under share-based payment plans

 

284,942

 

 

(2)

 

 

 

 

(2)

 

Conversion option related to Convertible note issuance, net

 

 

 

33

 

 

 

 

33

 

Recognition of deferred taxes related to Convertible notes

 

 

 

2

 

 

 

 

2

 

Balance at June 30, 2012

 

56,646,097

 

$

1

 

$

1,117

 

$

356

 

$

21

 

$

30

 

$

1,525

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(In millions)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

166

 

$

43

 

Adjustments to reconcile Net income to net cash provided by operating activities:

 

 

 

 

 

Capitalization of originated mortgage servicing rights

 

(145)

 

(174)

 

Net (gain) loss on mortgage servicing rights and related derivatives

 

(63)

 

229

 

Vehicle depreciation

 

607

 

604

 

Other depreciation and amortization

 

16

 

12

 

Origination of mortgage loans held for sale

 

(15,842)

 

(19,168)

 

Proceeds on sale of and payments from mortgage loans held for sale

 

16,611

 

20,323

 

Net gain on interest rate lock commitments, mortgage loans held for sale and related derivatives

 

(379)

 

(510)

 

Deferred income tax expense (benefit)

 

85

 

(5)

 

Other adjustments and changes in other assets and liabilities, net

 

193

 

157

 

Net cash provided by operating activities

 

1,249

 

1,511

 

Cash flows from investing activities:

 

 

 

 

 

Investment in vehicles

 

(924)

 

(970)

 

Proceeds on sale of investment vehicles

 

154

 

156

 

Net cash paid on derivatives related to mortgage servicing rights

 

(19)

 

(3)

 

Purchases of property, plant and equipment

 

(17)

 

(10)

 

Purchases of restricted investments

 

(85)

 

(95)

 

Proceeds from sales and maturities of restricted investments

 

166

 

130

 

(Increase) decrease in restricted cash and cash equivalents

 

(48)

 

41

 

Other, net

 

2

 

19

 

Net cash used in investing activities

 

(771)

 

(732)

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from secured borrowings

 

25,675

 

32,351

 

Principal payments on secured borrowings

 

(25,885)

 

(32,797)

 

Proceeds from unsecured borrowings

 

 

243

 

Principal payments on unsecured borrowings

 

 

(252)

 

Issuances of common stock

 

1

 

 

Cash paid for debt issuance costs

 

(11)

 

(22)

 

Other, net

 

(40)

 

(17)

 

Net cash used in financing activities

 

(260)

 

(494)

 

Effect of changes in exchange rates on Cash and cash equivalents

 

(3)

 

1

 

Net increase in Cash and cash equivalents

 

215

 

286

 

Cash and cash equivalents at beginning of period

 

829

 

414

 

Cash and cash equivalents at end of period

 

$

1,044

 

$

700

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.  Summary of Significant Accounting Policies

 

BASIS OF PRESENTATION

 

PHH Corporation and subsidiaries (collectively, “PHH” or the “Company”) is a leading outsource provider of mortgage and fleet management services operating in the following business segments:

 

¡         Mortgage Production — provides mortgage loan origination services and sells mortgage loans.

 

¡         Mortgage Servicing — performs servicing activities for originated and purchased loans.

 

¡         Fleet Management Services — provides commercial fleet management services.

 

The Condensed Consolidated Financial Statements include the accounts and transactions of PHH and its subsidiaries, as well as entities in which the Company directly or indirectly has a controlling interest and variable interest entities of which the Company is the primary beneficiary. PHH Home Loans, LLC and its subsidiaries are consolidated within the Condensed Consolidated Financial Statements, and Realogy Corporation’s ownership interest is presented as a noncontrolling interest.  Intercompany balances and transactions have been eliminated from the Condensed Consolidated Financial Statements.

 

Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no effect on reported totals for assets, liabilities, stockholders’ equity, cash flows or net income or loss. See Note 8, “Accounts Payable and Accrued Expenses”, for further information.

 

The Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States, which is commonly referred to as GAAP, for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In management’s opinion, the unaudited Condensed Consolidated Financial Statements contain all adjustments, which include normal and recurring adjustments necessary for a fair presentation of the financial position and results of operations for the interim periods presented. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s 2012 Form 10-K.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions include, but are not limited to, those related to the valuation of mortgage servicing rights, mortgage loans held for sale and other financial instruments, the estimation of liabilities for mortgage loan repurchases and indemnifications and reinsurance losses, and the determination of certain income tax assets and liabilities and associated valuation allowances. Actual results could differ from those estimates.

 

Unless otherwise noted and except for share and per share data, dollar amounts presented within these Notes to Condensed Consolidated Financial Statements are in millions.

 

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Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

CHANGES IN ACCOUNTING POLICIES

 

Comprehensive Income.  In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income”.  This update to the comprehensive income guidance requires additional disclosure about the amounts reclassified out of Accumulated other comprehensive income, including disclosing the amounts that impact each line item in the Statement of Operations within a reporting period.  This update enhances the disclosure requirements for amounts reclassified out of Accumulated other comprehensive income but will not impact the Company’s financial position, results of operations or cash flows. The Company adopted the new accounting guidance prospectively effective January 1, 2013.  The updated disclosures are included in Note 14, “Accumulated Other Comprehensive Income”.

 

Intangibles.  In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment”. This update amends the current guidance on testing indefinite-lived intangibles for impairment and allows for the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangibles are impaired. If it is more likely than not that the indefinite-lived intangibles are impaired, the entity is required to determine the fair value of the indefinite-lived intangibles and perform the quantitative impairment test by comparing the fair value with the carrying amount. The Company adopted the new accounting guidance effective January 1, 2013 and the guidance will be incorporated prospectively when performing impairment tests for intangible assets.

 

Offsetting Assets and Liabilities.  In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities”.  This update requires disclosure of both gross and net information about instruments and transactions in the scope of these pronouncements.  Subsequently in January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” which limited the disclosures to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are offset in accordance with current derivative and netting guidance, or subject to a master netting arrangement or similar agreement.   The Company adopted the new accounting guidance retrospectively effective January 1, 2013.  The updated disclosures are included in Note 5, “Derivatives”.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

Income Taxes.  In July 2013, the FASB issued ASU 2013-11,”Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”.  This update to the income tax guidance clarifies the diversity in practice in the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  This update requires the unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset or as a liability to the extent the entity cannot or does not intend to use the deferred tax asset for such purpose.  The new accounting guidance is effective beginning January 1, 2014 and should be applied prospectively to all unrecognized tax benefits that exist at the effective date and retrospective application is permitted. The Company is currently evaluating the impact of adopting the new accounting standard.

 

 

2.  Earnings Per Share

 

Basic earnings (loss) per share attributable to PHH Corporation was computed by dividing Net income (loss) attributable to PHH Corporation for the period by the weighted-average number of shares outstanding during the period. Diluted earnings (loss) per share attributable to PHH Corporation was computed by dividing Net income (loss) attributable to PHH Corporation for the period by the weighted-average number of shares outstanding during the period, assuming all potentially dilutive common shares were issued.

 

10



Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The weighted-average computation of the dilutive effect of potentially issuable shares of Common stock under the treasury stock method excludes the effect of any contingently issuable securities where the contingency has not been met and the effect of securities that would be anti-dilutive.  Anti-dilutive securities may include:

 

¡                  outstanding stock-based compensation awards representing shares from restricted stock units and stock options;

 

¡                  stock assumed to be issued related to convertible notes; and

 

¡                  sold warrants related to the Company’s Convertible notes due 2014.

 

The computation also excludes shares related to the assumed issuance of the Convertible notes due 2014 and related purchased options as they are currently to be settled only in cash. Shares associated with anti-dilutive securities are outlined in the table below.

 

The following table summarizes the calculations of basic and diluted earnings (loss) per share attributable to PHH Corporation for the periods indicated:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In millions, except share and per share data)

 

Net income (loss) attributable to PHH Corporation

 

$

90

 

$

(57)

 

$

142

 

$

18

 

Weighted-average common shares outstanding — basic

 

57,320,953

 

56,803,903

 

57,285,088

 

56,730,471

 

Effect of potentially dilutive securities:

 

 

 

 

 

 

 

 

 

Share-based payment arrangements(1)

 

140,484

 

 

189,649

 

152,126

 

Conversion of debt securities

 

7,360,737

 

 

7,826,754

 

2,518,414

 

Weighted-average common shares outstanding — diluted

 

64,822,174

 

56,803,903

 

65,301,491

 

59,401,011

 

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

 

Anti-dilutive securities excluded from the computation of dilutive securities:

 

 

 

 

 

 

 

 

 

Outstanding stock-based compensation awards

 

1,109,118

 

2,066,270

 

650,818

 

1,623,297

 

Assumed conversion of debt securities

 

 

4,195,717

 

 

 

 


(1)              Represents incremental shares from restricted stock units and stock options.  For the three and six months ended June 30, 2013, excludes 719,606 shares that are contingently issuable for which the contingency has not been met.  For the three and six months ended June 30, 2012, excludes 358,984 shares that are contingently issuable for which the contingency has not been met.

 

 

3.  Restricted Cash, Cash Equivalents and Investments

 

The following table summarizes Restricted cash, cash equivalents and investment balances:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In millions)

 

Restricted cash and cash equivalents

 

$

349

 

$

304

 

Restricted investments, at fair value

 

 

121

 

Total

 

$

349

 

$

425

 

 

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Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

During the three months ended June 30, 2013, the Company terminated its remaining reinsurance agreement.  As a result, the restricted cash and investments held in trust to pay future losses were released and the remaining liability was settled with the primary mortgage insurer.  As of June 30, 2013, the Company no longer had any restricted investments classified as available-for-sale securities since the investments were sold in order to distribute unrestricted cash to the Company and primary mortgage insurer pursuant to the termination agreement.  See Note 12, “Credit Risk” for information regarding the termination.

 

The following tables summarize Restricted investments, at fair value as of December 31, 2012:

 

 

 

Amortized
Cost

 

Fair
Value

 

Unrealized
Gains

 

Unrealized
Losses

 

Weighted-
average
remaining
maturity

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

Corporate securities

 

$

30

 

$

31

 

$

1

 

$

 

25 mos.

 

Agency securities (1)

 

39

 

39

 

 

 

21 mos.

 

Government securities

 

51

 

51

 

 

 

19 mos.

 

Total

 

$

120

 

$

121

 

$

1

 

$

 

21 mos.

 


(1)              Represents bonds and notes issued by various agencies including, but not limited to, Fannie Mae, Freddie Mac and Federal Home Loan Banks.

 

During both the three and six months ended June 30, 2013, $1 million of realized gains and $1 million of realized losses from the sale of available-for-sale securities were recorded.  The amount of realized gains and losses from the sale of available-for-sale securities was not significant for the three months ended June 30, 2012. During the six months ended June 30, 2012, realized gains of $1 million from the sale of available-for-sale securities were recorded, and realized losses were not significant.

 

 

4.  Transfers and Servicing of Mortgage Loans

 

Residential mortgage loans are sold through one of the following methods: (i) sales to or pursuant to programs sponsored by Fannie Mae, Freddie Mac and Ginnie Mae, or (ii) sales to private investors. The Company may have continuing involvement in mortgage loans sold by retaining one or more of the following: servicing rights and servicing obligations; recourse obligations; and/or beneficial interests (such as interest-only strips, principal-only strips, or subordinated interests).  See Note 12, “Credit Risk” for a further description of recourse obligations.

 

The total servicing portfolio consists of loans associated with capitalized mortgage servicing rights, loans held for sale, and the servicing portfolio associated with loans subserviced for others.  The total servicing portfolio was $228.6 billion and $183.7 billion as of June 30, 2013 and December 31, 2012, respectively.  The increase in the total servicing portfolio relates to the assumption of a subservicing portfolio in the three months ended June 30, 2013.

 

Mortgage servicing rights (“MSRs”) recorded in the Condensed Consolidated Balance Sheets are related to the capitalized servicing portfolio and are created either through the direct purchase of servicing from a third party or through the sale of an originated loan.

 

The activity in the loan servicing portfolio associated with capitalized servicing rights consisted of:

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2013

 

2012

 

 

 

(In millions)

 

Balance, beginning of period

 

$

140,381

 

$

147,088

 

Additions

 

13,438

 

17,445

 

Payoffs, sales and curtailments

 

(20,758)

 

(16,639)

 

Balance, end of period

 

$

133,061

 

$

147,894

 

 

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Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The activity in capitalized MSRs consisted of:

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2013

 

2012

 

 

 

(In millions)

 

Balance, beginning of period

 

$

1,022

 

$

1,209

 

Additions

 

145

 

174

 

Changes in fair value due to:

 

 

 

 

 

Realization of expected cash flows

 

(157)

 

(124)

 

Changes in market inputs or assumptions used in the valuation model

 

237

 

(102)

 

Balance, end of period

 

$

1,247

 

$

1,157

 

 

The value of MSRs is driven by the net positive cash flows associated with servicing activities.  These cash flows include contractually specified servicing fees, late fees and other ancillary servicing revenue and were recorded within Loan servicing income as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In millions)

 

Servicing fees from capitalized portfolio

 

$

99

 

$

111

 

$

199

 

$

223

 

Late fees

 

4

 

5

 

9

 

10

 

Other ancillary servicing revenue

 

9

 

8

 

19

 

20

 

 

As of June 30, 2013 and December 31, 2012, the MSRs had a weighted-average life of approximately 5.8 years and 4.3 years, respectively.  See Note 15, “Fair Value Measurements”, for additional information regarding the valuation of MSRs.

 

The following table sets forth information regarding cash flows relating to loan sales in which the Company has continuing involvement:

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2013

 

2012

 

 

 

(In millions)

 

Proceeds from new loan sales or securitizations

 

$

13,805

 

$

18,149

 

Servicing fees from capitalized portfolio(1)

 

199

 

223

 

Other cash flows on retained interests (2)

 

 

5

 

Purchases of delinquent or foreclosed loans (3)

 

(37)

 

(42)

 

Servicing advances (4)

 

(562)

 

(651)

 

Repayment of servicing advances

 

569

 

642

 


(1)              Excludes late fees and other ancillary servicing revenue.

(2)              Represents cash flows received on retained interests other than servicing fees.

(3)              Excludes indemnification payments to investors and insurers of the related mortgage loans.

(4)              As of June 30, 2013 and December 31, 2012, outstanding servicing advance receivables related to our total servicing portfolio of $477 million and $293 million, respectively, were included in Accounts receivable, net.

 

During the three and six months ended June 30, 2013, pre-tax gains of $186 million and $428 million, respectively, related to the sale or securitization of residential mortgage loans were recognized in Gain on mortgage loans, net in the Condensed Consolidated Statements of Operations.

 

During the three and six months ended June 30, 2012, pre-tax gains of $198 million and $426 million, respectively, related to the sale or securitization of residential mortgage loans were recognized in Gain on mortgage loans, net in the Condensed Consolidated Statements of Operations.

 

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Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

5.  Derivatives

 

Derivative instruments and the risks they manage are as follows:

 

¡                  Forward delivery commitments—Related to interest rate and price risk for Mortgage loans held for sale and interest rate lock commitments

¡                  Option contracts— Related to interest rate and price risk for Mortgage loans held for sale and interest rate lock commitments

¡                  MSR-related agreements—Related to interest rate risk for Mortgage servicing rights

¡                  Interest rate contracts—Related to interest rate risk for variable-rate debt arrangements and fixed-rate leases

¡                  Convertible note-related agreements—Related to the issuance of the Convertible notes due in 2014

¡                  Foreign exchange contracts—Related to exposure to currency fluctuations that would impact our investment in or borrowings related to our Canadian operations

 

Derivative instruments are recorded in Other assets and Other liabilities in the Condensed Consolidated Balance Sheets.  The Company does not have any derivative instruments designated as hedging instruments.

 

DERIVATIVE ACTIVITY

 

The following table summarizes the gross notional amount of derivatives:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In millions)

 

Notional amounts:

 

 

 

 

 

Interest rate lock commitments

 

$

4,375

 

$

4,993

 

Forward delivery commitments

 

11,670

 

12,303

 

Option contracts

 

660

 

1,070

 

Interest rate contracts

 

692

 

614

 

Convertible note-related agreements(1)

 

 

 

MSR-related agreements

 

1,565

 

3,915

 


(1)              The notional of derivative instruments underlying the Convertible-note related agreements is 9.6881 million shares of the Company’s Common stock.  These instruments relate to the issuance of the Convertible notes due 2014.

 

The Company is exposed to risk in the event of non-performance by counterparties to our derivative contracts. In general, the Company manages such risk by evaluating the financial position and creditworthiness of counterparties, monitoring the amount of exposure and/or dispersing the risk among multiple counterparties. The Company’s derivatives may also be governed by an ISDA or an MSFTA, and bilateral collateral agreements are in place with certain counterparties. When the Company has more than one outstanding derivative transaction with a single counterparty and a legally enforceable master netting agreement is in effect with that counterparty, the Company considers its exposure to be the net fair value of all positions with that counterparty including the value of any cash collateral amounts posted or received.

 

The Company also has collateral posting arrangements with certain counterparties that do not qualify for net presentation.  As of December 31, 2012, $1 million was recorded in Other assets in the Condensed Consolidated Balance Sheets for collateral that did not qualify for net presentation, and as of June 30, 2013, the amount was not significant.

 

In addition, the Company has global netting arrangements with certain counterparties whereby the Company’s outstanding derivative and cash collateral positions may be settled net against amounts outstanding under borrowing arrangements and other obligations when an event of default has occurred.  These amounts are not presented net in the Condensed Consolidated Balance Sheets as the netting provisions are contingent upon an event of default.

 

14



Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Derivative instruments are recorded in Other assets and Other liabilities in the Condensed Consolidated Balance Sheets. The following tables present the balances of outstanding derivative instruments on a gross basis and the application of counterparty and collateral netting:

 

 

 

June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Assets

 

Offsetting
Payables

 

Cash Collateral
Received

 

Net Amount

 

 

 

(In millions)

 

ASSETS

 

 

 

 

 

 

 

 

 

Subject to master netting arrangements:

 

 

 

 

 

 

 

 

 

Forward delivery commitments

 

$

165

 

$

(127)

 

$

(37)

 

$

1

 

Option contracts

 

2

 

(2)

 

 

 

Derivative assets subject to netting

 

167

 

(129)

 

(37)

 

1

 

Not subject to master netting arrangements:

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

26

 

 

 

26

 

Forward delivery commitments

 

49

 

 

 

49

 

Option contracts

 

22

 

 

 

22

 

Interest rate contracts

 

2

 

 

 

2

 

Convertible note-related agreements

 

12

 

 

 

12

 

Derivative assets not subject to netting

 

111

 

 

 

111

 

Total derivative assets

 

$

278

 

$

(129)

 

$

(37)

 

$

112

 

 

 

 

Gross Liabilities

 

Offsetting
Receivables

 

Cash Collateral
Received

 

Net Amount

 

 

 

(In millions)

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Subject to master netting arrangements:

 

 

 

 

 

 

 

 

 

Forward delivery commitments

 

$

57

 

$

(127)

 

$

84

 

$

14

 

Option contracts

 

 

(2)

 

4

 

2

 

Derivative liabilities subject to netting

 

57

 

(129)

 

88

 

16

 

Not subject to master netting arrangements:

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

37

 

 

 

37

 

Forward delivery commitments

 

6

 

 

 

6

 

Convertible note-related agreements

 

12

 

 

 

12

 

Derivative liabilities not subject to netting

 

55

 

 

 

55

 

Total derivative liabilities

 

$

112

 

$

(129)

 

$

88

 

$

71

 

 

15



Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

December 31, 2012

 

 

 

Gross Assets

 

Offsetting
Payables

 

Cash Collateral
(Received) Paid

 

Net Amount

 

 

 

(In millions)

 

ASSETS

 

 

 

 

 

 

 

 

 

Subject to master netting arrangements:

 

 

 

 

 

 

 

 

 

Forward delivery commitments

 

$

10

 

$

(12)

 

$

5

 

$

3

 

MSR-related agreements

 

5

 

(4)

 

(1)

 

 

Derivative assets subject to netting

 

15

 

(16)

 

4

 

3

 

Not subject to master netting arrangements:

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

140

 

 

 

140

 

Forward delivery commitments

 

5

 

 

 

5

 

Option contracts

 

2

 

 

 

2

 

Interest rate contracts

 

1

 

 

 

1

 

Convertible note-related agreements

 

27

 

 

 

27

 

Derivative assets not subject to netting

 

175

 

 

 

175

 

Total derivative assets

 

$

190

 

$

(16)

 

$

4

 

$

178

 

 

 

 

Gross Liabilities

 

Offsetting
Receivables

 

Cash Collateral
(Paid) Received

 

Net Amount

 

 

 

(In millions)

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Subject to master netting arrangements:

 

 

 

 

 

 

 

 

 

Forward delivery commitments

 

$

14

 

$

(12)

 

$

(1)

 

$

1

 

MSR-related agreements

 

 

(4)

 

9

 

5

 

Derivative liabilities subject to netting

 

14

 

(16)

 

8

 

6

 

Not subject to master netting arrangements:

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

1

 

 

 

1

 

Forward delivery commitments

 

5

 

 

 

5

 

Convertible note-related agreements

 

27

 

 

 

27

 

Derivative liabilities not subject to netting

 

33

 

 

 

33

 

Total derivative liabilities

 

$

47

 

$

(16)

 

$

8

 

$

39

 

 

The following table summarizes the gains (losses) recorded in the Condensed Consolidated Statements of Operations for derivative instruments:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(In millions)

 

Gain on mortgage loans, net:

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

$

67

 

$

374

 

$

269

 

$

760

 

Forward delivery commitments

 

185

 

(124)

 

239

 

(153)

 

Options contracts

 

20

 

(6)

 

18

 

(10)

 

Net derivative (loss) gain related to mortgage servicing rights:

 

 

 

 

 

 

 

 

 

MSR-related agreements

 

(1)

 

2

 

(17)

 

(3)

 

Fleet interest expense:

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

(1)

 

 

(1)

 

Foreign exchange contracts

 

 

1

 

 

1

 

 

16



Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

6.  Vehicle Leasing Activities

 

The following table summarizes the components of Net investment in fleet leases:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In millions)

 

Operating Leases:

 

 

 

 

 

Vehicles under open-end operating leases

 

$

8,176

 

$

8,174

 

Vehicles under closed-end operating leases

 

139

 

154

 

Vehicles under operating leases

 

8,315

 

8,328

 

Less: Accumulated depreciation

 

(4,931)

 

(4,959)

 

Net investment in operating leases

 

3,384

 

3,369

 

Direct Financing Leases:

 

 

 

 

 

Lease payments receivable

 

96

 

91

 

Less: Unearned income

 

(2)

 

 

Net investment in direct financing leases

 

94

 

91

 

Off-Lease Vehicles:

 

 

 

 

 

Vehicles not yet subject to a lease

 

253

 

169

 

Vehicles held for sale

 

12

 

15

 

Less: Accumulated depreciation

 

(7)

 

(8)

 

Net investment in off-lease vehicles

 

258

 

176

 

Total

 

$

3,736

 

$

3,636

 

 

7.  Other Assets

 

Other assets consisted of:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In millions)

 

Mortgage loans in foreclosure, net

 

$

151

 

$

120

 

Derivatives

 

112

 

178

 

Repurchase eligible loans(1) 

 

88

 

99

 

Real estate owned, net

 

50

 

53

 

Deferred financing costs

 

41

 

49

 

Equity method investments

 

40

 

38

 

Intangible assets

 

30

 

31

 

Other

 

59

 

48

 

Total

 

$

571

 

$

616

 


(1)              Repurchase eligible loans represent sold mortgage loans that are held by investors where the Company has the right, but not the obligation, to repurchase the loan.  Corresponding liabilities related to the loan balances were recorded within Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets.

 

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Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

8.  Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consisted of:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In millions)

 

Accounts payable

 

$

330

 

331

 

Subservicing advance liabilities(1) 

 

242

 

24

 

Repurchase eligible loans

 

88

 

99

 

Accrued payroll and benefits

 

70

 

80

 

Accrued interest

 

30

 

32

 

Other

 

22

 

20

 

Total

 

$

782

 

$

586

 


(1)   Amounts were reclassified from prior presentation in Other liabilities.

 

The Company is required under most of our mortgage servicing agreements to advance our own funds to meet contractual principal and interest payments for certain investors and to pay taxes, insurance, foreclosure costs and various other items that are required to preserve the assets being serviced. Servicing advance receivables are reduced by the collection of principal and interest or escrow payments from the respective borrowers, or upon foreclosure or liquidation.  Amounts advanced as the servicer and subservicer of mortgage loans are recorded within Accounts receivable in the accompanying Condensed Consolidated Balance Sheets.

 

Under the terms of certain subservicing arrangements, the Company has required the subservicing counterparty to fund servicing advances for their respective portfolios of subserviced loans.  A subservicing advance liability is recorded for cash received from the counterparty to fund advances, and is repaid to the counterparty upon the collection of the mortgage servicing advance receivables.  Amounts received from counterparties to fund subservicing advances are recorded within Accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets.

 

During the three months ended June 30, 2013, the Company assumed the role of subservicer for a mortgage loan portfolio.   As of June 30, 2013, the subservicing portfolio that was assumed had an unpaid principal balance of $46.8 billion and related balances of servicing advance receivables and liabilities of $223 million and $219 million, respectively.

 

9.  Other Liabilities

 

Other liabilities consisted of:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(In millions)

 

Loan repurchase and indemnification liability

 

$

141

 

$

140

 

Derivatives

 

71

 

39

 

Pension and other post employment benefits liability

 

15

 

15

 

Lease syndication liability

 

13

 

16

 

Liability for reinsurance losses(1) 

 

 

33

 

Other

 

34

 

36

 

Total

 

$

274

 

$

279

 


(1)              Decrease in balance relates to the termination of the remaining inactive reinsurance contract.  See Note 12, “Credit Risk” for further discussion.

 

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Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

10.  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.

 

Assets held as collateral for asset-backed borrowing arrangements that are not available to pay the Company’s general obligations as of June 30, 2013 consisted of:

 

 

 

Vehicle

 

Mortgage

 

 

 

Asset-Backed

 

Asset-Backed

 

 

 

Debt

 

Debt

 

 

 

(In millions)

 

Restricted cash and cash equivalents

 

$

294

 

$

9

 

Accounts receivable

 

64

 

81

 

Mortgage loans held for sale (unpaid principal balance)

 

 

1,630

 

Net investment in fleet leases

 

3,678

 

 

Total

 

$

4,036

 

$

1,720

 

 

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Table of Contents

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following table provides the contractual debt maturities as of June 30, 2013:

 

 

 

Vehicle

 

Mortgage

 

 

 

 

 

 

 

Asset-Backed

 

Asset-Backed

 

Unsecured

 

 

 

 

 

Debt(1)

 

Debt

 

Debt(2)

 

Total

 

 

 

(In millions)

 

Within one year

 

$

936

 

$

1,617

 

$

 

$

2,553

 

Between one and two years

 

1,128

 

 

250

 

1,378

 

Between two and three years

 

822

 

 

450

 

1,272

 

Between three and four years

 

477

 

 

250

 

727

 

Between four and five years

 

160

 

 

8

 

168

 

Thereafter

 

12

 

 

275

 

287

 

 

 

$

3,535

 

$

1,617

 

$

1,233

 

$

6,385

 


(1)              Maturities of vehicle management asset-backed notes, a portion of which are amortizing in accordance with their terms, represent estimated payments based on the expected cash inflows related to the securitized vehicle leases and related assets.

 

(2)              Maturities of convertible notes have been reflected based on the contractual maturity date.  Under certain circumstances, the convertible notes may be converted, and the principal portion of the notes and the conversion premium, if any, would be due in cash prior to the contractual maturity date.

 

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