PHH CEO Discusses Q1 2011 Results - Earnings Call Transcript

| About: PHH Corporation (PHH)

PHH Corporation (NYSE:PHH)

Q1 2011 Earnings Call

May 4, 2011 10:00 am ET

Executives

Jonathan T. McGrain – Senior Vice President, Corporate Communication

Jerome J. Selitto – President and Chief Executive Officer

David J. Coles – Interim Chief Financial Officer, Executive Vice President and Principal Accounting Officer

Luke S. Hayden – Executive Vice President, Mortgage

George J. Kilroy – Executive Vice President, Fleet

Analysts

Bose George – Keefe, Bruyette & Woods

Paul Miller – FBR Capital Markets

James J. Fowler – Harvest Capital

Operator

Good morning ladies and gentlemen. Welcome to PHH Corporation First Quarter 2011 Earnings Conference Call. Your lines will be in a listen-only mode during the remarks by PHH management. At the conclusion of the company’s remarks, we will begin the question-and-answer session at which time I will give instructions on entering the queue to ask your questions. This call is (Inaudible) being webcast and recorded for replay purposes. The audio replay can be accessed either on the company’s website at www.phh.com or by telephone at 719-457-0820 or 1888-203-1112, using conference ID 237-5535 beginning shortly after the conclusion of the call. It will be available until May 19, 2011. This access information is also described in the company’s earning release and I’ll repeat it again at the end of our session.

At this time Jonathan McGrain, Senior Vice President of Corporate Communications will proceed with the introduction.

Jonathan T. McGrain

Thank you, Holly. Good morning and welcome to the PHH Corporation first quarter 2011 earnings conference call. On the call today are Jerry Selitto, President and Chief Executive Officer; David Coles, Interim Executive Vice President and Chief Financial Officer; Luke Hayden, Executive Vice President of Mortgage; and George Kilroy, Executive Vice President of Fleet.

Remarks by our management team will be supplemented by a presentation that is posted on our website at www.phh.com. The earnings release we issued yesterday may be accessed from our website or you may request a fax or mail copy by calling our investor hotline at 856-917-7405. Please note that statements made during this conference call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as further described in slide two of the presentation.

We will also be discussing various non-GAAP financial measures including core earnings pre-tax, core earnings after-tax and core earnings per share. Please refer to our earrings release and accompanying investor presentation for description of these non-GAAP financial measures as well as the reconciliation of such measures to their respective most directly comparable GAAP financial measures.

I will now turn the call over to Jerry Selito.

Jerome J. Selitto

Thank you and good morning. I will begin today’s call with a brief review of PHH Corporations first quarter results then I will ask David to discuss our financials. Luke and George will provide commentary on the mortgage and fleet businesses before I conclude with our outlook for the remainder of 2011.

Our first quarter earnings were driven by strong performance in our fleet business and a one-time gain from the sale of 50.1% of our STARS appraisal services business to create a joint venture with CoreLogic. This transaction which we’ve been working on since last year not only produced a gain in the quarter but more importantly over the long-term it will enable us to leverage the technology of CoreLogic, offer an expanded product set, and we believe drive earnings growth.

Our Mortgage business closed volumes for the quarter, were quite strong at $13.8 billion resulting in a market share of 4.3%. This closing volume reflected the significant pipeline of applications from fourth quarter 2010 that carried over into this year.

Locks were down 21% from the first quarter of 2010. The high level of closings from the 2010 pipeline prevented us from making meaningful expense reductions early in the first quarter. We have now taken action to address the downturn in application volume by reducing staffing and mortgage fulfillment by approximately 20% since the beginning of the year. I’m pleased to say that because of the process improvements we undertook last year, we’ve been able to enhance service levels at the same time that we’ve been reducing expenses.

Our Fleet business had a very strong quarter with earnings of $16 million, up from $8 million in the same period last year. Fleet’s results were driven by higher fee-based revenues, lower operating expenses versus the prior year. Despite the first quarter challenges in the mortgage market I remain enthusiastic about the future of PHH and the opportunities we see.

We have one of the highest quality servicing portfolios in the industry with an average FICO score at the time of application of 725 and an average original loan-to-value ratio of 63% excluding FHA/VA loans.

We continue to build our portfolio in this period of historically low interest rates and as rates rice, as we expect them to, our servicing earnings and the value of our MSR asset will grow. We have a unique business model and an incredible franchise that when executed well should allow us to outperform the market.

I’ll speak to this in more detail in a moment, but now I want to turn the call over to David Coles to provide additional perspective on our financial results. David?

David J. Coles

Thank you, Jerry. I want you to take a moment to highlight a number of items before George and Luke discuss in more depth that this (inaudible). Firstly, I am now 60 days into my role as Chief Financial Officer and I am very encouraged by what I see as the potential of the PHH platform and its ability together with that as a management team to embrace and respond to evolving market conditions.

Net income attributable to PHH Corporation was $49 million or $0.87 per share aided by $68 million pre-tax gain from STARS transaction and the $25 million increase in the fair value of our mortgage servicing rights. Core earnings after-tax were $34 million or $0.61 per share inclusive over $40 million after-tax benefit associated with the STARS transaction. While profit in all three of our segments increased compared to the first quarter of 2010, our Mortgage Production segment benefited from that one-time gain on sale of STARS. This was fully offset however by lower margins on loans and lower volumes if IRLCs expected to close.

In analyzing the first quarters’ result which reflects the closing out of the significant pipeline of loans it’s worth noting the following; GAAP accounting required us to recognize the majority of the income related to an IRLC at the date of lock. The expense is related to production however a recruit has incurred with a significant portion accrued like in closing. During Q1 many of our closed loans will lock to 90 to 120 days prior. In Q1, our lock volume was only $5 billion compared with $13.8 billion in closings. As a result, our earnings reflect cost dipropionate to the income recognized on the current period locks. Going forward, if lock volume is more in line with closing activity, this effect will not recur.

Operationally as mentioned previously, we are rigorously reducing our expense base in response to anticipated volumes, which now exclude that significant pipeline of unclosed loans. And as Jerry mentioned, over the first quarter and in to April, we reduced staffing in our mortgage fulfillment group by nearly 600 FTEs that relining resources with current and anticipated volumes.

I wanted also to discuss liquidity which remains at strengthened levels reflecting the capacity build during the refinancing with the past two years and disciplined management of our working capital. At the end of the quarter, we held $325 million in cash and $514 million of available capacity under our revolving credit facility. The STARS JV transaction is also worthy of further explanation. Firstly, this is a transaction which the company has being pursuing since last year. Secondly, motivation for the transaction was the partnering with CoreLogic we are able to leverage their technology and expand our product offerings to enhance the customer experience, and we believe drive future earnings growth.

In forming the JV, we sold a 50.1% interest in the venture to CoreLogic for $35 million in cash, $20 million of that was received at closing and $15 million will be received in three equal installments at the end of years one, three and five respectively.

In addition, we are required to recognize the value with our residual stake in the JV. After accounting for the net present value discount on the future cash consideration and on negligible cost basis in this business, the recognized gain on sales were $68 million and is shown in other income. Although this gain is included in core earnings, it does represent recognition through the income statement as a future earning stream and hence we consider it to be non-recurring.

Going forward, our new basic in the venture will be accounted for by the equity method, and we will recognize our half share in the earnings of the JV through the income statement. We anticipate that within three years our half share of the JV's earnings will be equivalent to our full share part of this transaction. You can find further details of the STARS transaction on page nine of the 10-Q.

I also wanted to give you an overview of credit trends. We continue to see an elevated level of repurchase request with $211 million of unresolved request at the end of the first quarter compared to $165 million at the end of 2010. We have been historically successful defending over 60% of such repurchase request.

On slide eight of the investor presentation, the foreclosure cost were approximately $15 million for the first quarter of 2011 and we expect that will remain at an elevated level for at least the balance of 2011 as the agencies continue their reviews. Over 75% of the unresolved request relate to 2005 through 2008 origination years.

On the positive side, we continue to see improvement in all categories of portfolio delinquencies with 90 plus delinquencies decreasing from 1.27% at year-end down to 1% at quarter-end benefiting from additions of higher performing servicing we’ve added to our servicing book.

On an absolute dollar basis, the unpaid balance of loans and foreclosure in our servicing portfolio declined from $3.3 billion to $3.2 billion. While we believe foreclosure cost will continue at elevated levels as the agencies work through their losses from the 2005 through 2008 vintages, the improving credit quality of the portfolio may provide an indication that foreclosure losses will begin to improve as the portfolio continues its shift to a higher concentration of post-2008 originations.

In my role as CFO, I am encouraged to be working closely with our Chief Risk Officer, Smriti Popenoe on the key business issues and we have many parallel objectives, including the appropriate allocation of capital to optimize risk-adjusted returns.

Based on requests we received after our fourth quarter call, slide five of this quarter’s investor supplement provides a sensitivity example for our Mortgage Production segment. This illustration is based on 2010 actuals and provide sensitivities on the two key business drivers, gain on sale margins and the level of rate locks by channel.

With that, I’d like to hand the call to George to discuss the Fleet business.

George J. Kilroy

Thanks David and good morning. I thought I’d take a few minutes this morning and give a quick overview of how the Fleet business generates earnings and how you should view cash flow from our business. Fleet generates revenue from two basic sources, assets and services. The asset part of the business is simply the acquisition of vehicles on our clients’ behalf and the leasing of those units to our clients, or in some cases the purchase and rebuild to clients that don’t lease, but would like to have us acquire for them using our state-of-the-art systems and expertise.

Our leases, which represent over 80% of purchased vehicles, have a monthly depreciation component and interest charge and a monthly management fee. At a high level the margin on leases is simply the monthly leased charges minus depreciation, interest expense and associated variable cost. The lease business also generates a tax advantage that minimizes actual cash tax.

The service business, maintenance assistance, accident management, fuel and others are fee-for-service programs monthly or per incident. Using component the pace PHH to act as a rebuilder of these client expenses. The service business requires less capital and is usually a higher margin business than leasing.

Cash flow generated by the Fleet business is approximately the same as operating income. Annual CapEx is usually the same as depreciation and due to the tax advantage nature of the leasing business actual cash taxes are minimal. And with that backdrop, let me give you an update on Fleet’s performance for the first quarter. All of our fee-for-service units are up over the beginning of the year with leased units slightly down. We continue our focus on growing as part of the business with nearly all of our new business signings, either being service-only or lease with services.

We’ve seen an increase in our heavy truck leasing business, which let me remind you, is a fair market value lease that we syndicate for fee to other financial institutions. As a general rule, PHH does not hold these leases on our books. So you can look at this as very similar to our fee-for-service business. We continue to aggressively pursue increased market share in a competitive market characterized by a great deal of new business proposal activity.

Our overall vehicles under management, that is the combination of leased and service vehicles, have grown 7% since the first quarter of 2010. We realized $2 million in revenue in the first quarter of 2011 from our driver safety training business we acquired in 2010, and we’ve seen overall earnings positively impacted by the expense management initiatives we put in place last year. Finally, we expect to benefit from the much improved debt markets for additional funding for our lease program.

I’ll now turn the call over to Luke for review of the mortgage business

Luke S. Hayden

Thanks George, and good morning. I’m going to review trends and volumes and margins and update you on our mortgage banking business. During the first quarter our share based on closings increased to 4.3%. This was driven by applications from the fourth quarter of 2010. While our first quarter closings declined 25% from the prior quarter to $13.8 billion, this performance was better than any of the other top ten mortgage originators identified in the table on slide six of the investor presentation.

Our corresponding closing volume was 30% of total closings in the quarter, down from 39% in the fourth quarter of 2010. This is consistent with our strategy to opportunistically pursue correspondent business. We strive to increase volumes when spreads are attractive. Spreads have narrowed considerably in this segment and we have reduced our originations accordingly.

That said, we continue to pursue high credit quality business and hope to remain the investor of choice for selected high quality partners. In our retail business, which comprises private label and real estate, rate locks declined from $6.4 billion in the prior quarter to $5 billion reflecting a significant reduction in refinance demand driven by interest rate increases in late 2010 and little growth in purchase mortgage demand. Our real estate business has not been the beneficiary of an uptick in home sales typically associated with a warmer month. Although the first quarter of the year is seasonally slow for the mortgage industry, our experience in April suggest the second quarter will also be weaker than the prior year quarter.

We have a strong pipeline of new private label solution prospects under active negotiations. We have signed an agreement with the premier financial institution scheduled to launch by the end of the second quarter. We are finalizing negotiations with several additional accounts in the second half that will contribute to our market share run rate. Historically, PHH Mortgage has had its greatest success signing prospects in down markets. This year we’ll clearly reinforce that trend. The mortgage industry’s lower application demand has resulted in lower margins. The decline in margins that began during the fourth quarter of 2010 has continued as you can see on slide four in the investor’s supplement.

All in pricing margins were 25 basis points lower in the first quarter of 2010. We are addressing the decline in volumes and margins with three specific imitatives. First, we are aggressively managing our headcount. As David mentioned previously, we reduced staffing in our mortgage fulfillment group by nearly 20% over the first four months of 2011. Second, we are developing a more flexible workforce allowing us to scale staffing levels up and down with changes in demand while maintaining at high level of customer service. We have established vendor relationships to supplement our staffing during high volume periods and will be testing a reserved workforce concept during the second quarter to further improve our staffing flexibility.

Third, we are improving efficiency through process operation improvements and upgrades to our technology platform. These improvements include the implementation of milestone driven workflows, lean manufacturing tactics, communication check lists and email templates. We are upgrading the technology infrastructure in our correspondent business to further drive down cost and improve margins. And we will be upgrading our telephony infrastructure to improve customer service levels. These enhancements to our process operations and investments in technology have already yielded better customer satisfaction scores in shorter cycle times, and ultimately we believe lower cost per loans.

Moving on to our Servicing segment. At the end of the first quarter, the unpaid principle balance of our servicing portfolio stood at nearly $171 billion, an increase of about 12% from a year ago, as you can see on slide seven of the Investor presentation. The weighted average note rate declined from 5.2% in March of 2010 to 4.8% in March of 2011. As David mentioned, we are seeing improvements in our 30, 60 and 90 day delinquency ratios.

And now I’ll turn the call back to Jerry.

Jerome J. Selitto

Thanks. Our unique business franchise provides us with enormous opportunities. We partner with clients on a consultative basis improving processes to drive business growth, customer satisfaction at reduced cost with attractive returns to our and their shareholders.

On the mortgage side our market footprint and reach is comparable to that with nation’s largest financial institutions. In cooperation with our client partners, we intend to further leverage and penetrate that franchise to increase profitable market share. My plan is to build an organization that performs across a variety of economic and business conditions. To that end we are taking advantage of the run rate cost savings we achieved last year along with some of the proceeds from the STARS transaction to invest heavily in our future by improving efficiencies, productivity and customer service in both Fleet and Mortgage.

We have demonstrated over the past year that we’re capable of adding profitable market share without our increasing credit risk. As we’ve noted, our pipeline of new PLS client is quite strong with a number of cross backs in various stages on the negotiation process. Our increased focus on our real estate channel is beginning to pay off as our performance metrics have improved across the board.

Our Fleet business is continuing the momentum. It’s fabulous last year by winning new fee-for-service business. We are also expanding our heavy truck business and we continue to be recognized for outstanding customer service and innovation in technology. Our Fleet operation has an active pipeline of prospects.

As you know, the Mortgage industry continues to face unprecedented challenges as it atones for the sins of the past. The media is full of stories about the future of the GSEs, regulatory orders resulting in penalties against services and overall procedures. And of course the Dodd-Frank Act and it’s sweeping implications to the industry. Given this landscape, it’s difficult, it’s not impossible to predict with any clarity the future.

What we can tell you is this. By the fourth quarter of this year it is our goal to increase mortgage origination market share to approximately 5% to 5.5%, up from 3.7% in the fourth quarter of 2010. While many see challenges in the current mortgage market, we believe there is no better time than now to grow profitable share as our major competitors remain distracted by regulatory and service issues.

Our Mortgage operation is in the business of producing and investing in highly valuable assets or MSRs driving an annuity stream that generates on average 30 basis points annually on the unpaid principal balance of the loans in our capitalized portfolio.

Our servicing portfolio is one of our highest credit quality, as Luke mentioned, grew by 12% year-over-year. We continue to believe that this investment in quality MSRs is an excellent use of our shareholders capital.

As part of our ongoing expense management initiative we are making an investment in technology to increase productivity which we expect to drive lower expenses, future earnings, and increased customer satisfaction, again to lower our cost per loan this year. On the public policy front, we are actively engaging lawmakers and regulators to ensure that our voice is heard on the critical issues of the future of the GSEs and the definition of qualified residential mortgages.

While we agree in principle with skin in the game, we are concerned about the potential unintended consequences of the proposed rule. The economy in general in the housing market in particular remain extremely gradual. And we don't believe a peace-meal approach is substitute for a comprehensive national housing policy. Although we were not a party to the consent orders signed by the large bank services, we are proactively reviewing the terms of these orders in the context of our own servicing processes.

And while we do not participate in the sub-prime market and our delinquency rates remain among the lowest in the industry, we do feel the impact of the negative publicity that surrounds the industry. Our fleet and mortgage clients see PHH as a resourceful process management partner, and are looking to us to design, operate, and optimize solutions that integrate seamlessly with their operations provide high quality services and deliver strong bottom-line results to their shareholders and ours.

We are working very hard to build businesses that deliver low-to-mid teen returns through the cycle, and that can compete effectively across a variety of economic and market conditions. Our demonstrated proficiency and increasing penetration in our mortgage channels will help us to realize our market share goal and our continued progress in growing revenues and managing expenses.

Fleet will provide critical balance to the mortgage business. As I lead our company’s response with the challenges of the marketplace, I remain very enthusiastic about the future.

Now, we’ll take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question from Bose George with KBW.

Bose George – Keefe, Bruyette & Woods

Hey, good morning. Actually couple of things, I just wanted to start with the mortgage banking segment. You noted that applications are $10.9 billion while the locks were $5 billion. In the last couple of quarters, it looks like about 70% of your closings were locks rather 30% of your closings were fee-based, and I’m wondering if the application numbers suggest that fee-based percentage is going to be closer to 50% and also do the revenues from fee-based closings flow in differently like do they happen more backend loaded than revenues for the locks?

Luke S. Hayden

Yes. Good morning, Bose. This is Luke. Let me respond to that question. You are correct. We have seen a shift away from loans originating for resale to fee-based closings. However, the interest rate lock number is a pull through adjusted number, and the application number is not. So you can’t just subtract locks from applications and conclude that that remaining amount is what is fee-based applications that will actually close? You’ve got to multiply that difference of applications minus locks by the pull through rate. So that’s number one. What was your second part of the question?

Bose George – Keefe, Bruyette & Woods

The second part of it’s just the revenues, I’m wondering if fee-based closings have a different sort of the flow, the way the fee-based revenues flow in versus the lock revenues?

Luke S. Hayden

It does. Fee-based revenues are fee per service and they close basically since the revenues are really recognized at the closing.

Bose George – Keefe, Bruyette & Woods

Okay. So I mean that just that shift essentially pushes like if you had more locks you would have more of the revenue now and the fact that you’ve kind of shifting this pushes more of the revenues into the next quarter or whenever it closes?

Luke S. Hayden

That’s correct.

Bose George – Keefe, Bruyette & Woods

Okay, great. And then just switching to just the relationship between locks versus closings, I mean, once things kind of stabilize apart from, and volumes are a kind of little more steady, is it reasonable to think there shouldn’t be a big difference between the locks and closings, I mean leaving aside the fee-based closings that you do?

Luke S. Hayden

David, why don’t you take that?

David J. Coles

Good morning, Bose. It’s David Coles. I think in the second quarter given the spring up-tick we would expect some increase in locks and applications over what is historically our quietest period, the first quarter.

Jerome J. Selitto

Bose, let me ask you again. What was your question?

Bose George – Keefe, Bruyette & Woods

Actually my question was I think to get more steady say, if there is less volatility in mortgage originations. In any given quarter, should we see locks and fee-based closings and the two of them kind of equal your total closings for the quarter, I mean, if things are steady, do we kind of get to that level?

Jerome J. Selitto

Yes, what we actually recognized in the first quarter was really the influence of our heavy lock volumes in [seriously] fourth quarter of last year. So there was that imbalance, the $15.8 billion versus the $5 billion, $15.8 billion in closings versus the $5 billion in locks. As we move forward and we now work through that backlog there’ll be a better balance each one, closings and locks.

Bose George – Keefe, Bruyette & Woods

Okay, yes. That makes sense. Great. Thanks. And then just a couple of other little things. One is, I was just curious about gain on sale margin trends after the end of the quarter so that trends that are happening right now.

Luke S. Hayden

Well, trends that are happening right now it’s a little better than the end of the first quarter, but not materially better.

Bose George – Keefe, Bruyette & Woods

Okay, that’s good. So at least things aren’t getting anywhere. So things are stabilizing.

Jerome J. Selitto

Yes. That’s correct.

Bose George – Keefe, Bruyette & Woods

And then one last thing. Just the accounts that you referred to in terms of the potential private label deal, give any color on how big any of them could be?

Jerome J. Selitto

We have one premier account. We are working on several others that will be premier accounts. We are in various stages of negotiation with those. And so, we expect to start rolling those accounts out beginning the third quarter.

Bose George – Keefe, Bruyette & Woods

Okay. But too early to size them yet or don’t want to disclose that?

Jerome J. Selitto

I don’t want to disclose it because we’re still in the final negotiations, but they’re premier names in the financial services industry.

Bose George – Keefe, Bruyette & Woods

Okay, great. Thanks for that. I’ll jump back on later with a couple of (inaudible).

Jerome J. Selitto

Okay.

Operator

Thank you. Next we’ll hear from Paul Miller with FBR Capital Markets.

Paul Miller – FBR Capital Markets

Yes. Thank you very much and excuse me if I didn’t pick up everything this morning because I’ve been traveling. I was 15 minutes late on the call. What a lot of people are looking at this company that you guys, if you didn’t sell the STARS that’s I think was like $60 million for the income statement that you would have lost money this quarter on a quarter basis. And I think that’s causing some confusion this morning. And when I picked up the tail end of this, is that you didn’t have a lot of locks this quarter and I think last year was your big quarter on locks, and you made, I think close to $2 on a quarter basis and I think it was $0.30 in the fourth. And then, now we get like a negative $0.10 [Audio Gap] if we take out the STARS. Am I looking at this correctly, was there that much volatility in the business model and was it mainly due again going back to all this locks you’ve locked up in the third quarter?

Jerome J. Selitto

Yes Paul. It’s Jerry. Good morning. You’re exactly right. The latter part of your point, I mean what we had was very high volume of locks on the second half of 2010 as David said you may not have been on the call, but as David said those locks typically close 60 to 90 days after their lock. And so, we had very high closing volume in the first quarter, $13.8 billion, and that’s really closings when we book the majority of the cost associated with those loans. So that occurred in the first quarter and at the same time our lock volume for the quarter was down $5 billion. So there was an imbalance between closings and locks which we should see smoothing out over the course of the year. So it’s sort of the cyclicality of the business.

I want to just kind of address this real quickly. We operate in a very cyclical business, and the drivers of revenue for us, there is some that we have control over and others that we don’t. So the number of transactions is the mortgage volume is something that we really don’t have a lot of control over in the market. We do have control over market share, and that’s how we should mitigate the downturn in volume.

The other area where we don’t have a lot of control is the value of those transactions, and that’s margin, and so margin started down in the fourth quarter. We saw a continuation of that in the first quarter and started now to stabilize, we’ve seen a slight uptick in margins. And then the third area where we do have some control over is servicing income. So as we see rates rise, the value of our asset MSR increases and so to is a revenue that we see are from our servicing portfolio.

What we have under our control is market share and expenses, and then something that we have an ongoing our expense reduction initiative, and so we’re very focused on reducing expenses and balancing our expenses to customer service level both on our current volume and looking at our projections for future volume. Well, I didn’t answer to your question but I hope it helps.

Paul Miller – FBR Capital Markets

It does help. And so if you had a low level of locks, because your production was very strong, I know that your fee income part of the business has increased that aided some of that production. But should we expect a higher level of locks in the second and third quarter and what you’ll again pull in some I guess the pull in quarter earnings. I don’t know how you really want to say it but would elevate earnings in the second and third quarter?

Jerome J. Selitto

One of the things that we’re looking at right now is that in the early part of the quarter we’re not really seeing the pick up that we would have seen on real estate channel in the purchase market. Our PLS market is primarily a retail market and that’s virtually gone, the retail market decisions there. Our forecast going forward, are that, we’re going to have a stronger second quarter and third quarter not just traditionally. So, I don’t know if I’m answering your question hopefully I’m but our forecast is that we will see a pick up in the second and third quarter.

Paul Miller – FBR Capital Markets

I guess, Jerry, I guess the real question is you see a pick up in volume, what surprises was on the upside, was the market share I think, you even were guiding for a little bit lower market share for the year, so this I don’t know whether it surprise you or you were just, this is what you’re expecting, coming out and going into 2011. But we didn’t, what is confusing us is you said that locks is that earnings was down so much. And so therefore can we expect, the big issue was can we expect the positive earnings side to flow through in the second and third quarter, as the numbers were somewhat depressed in the fourth and first quarter. Does that make sense?

Jerome J. Selitto

Yes, but then I think what we have to remember is that the driver of our earnings is really a function of locks. So we’re booking earnings and locks and you’re accurate to point out that we’re seeing a bit of a shift to more fees and service business where we’re not recording the loss on that business. I think that when you start looking at going forward looking at probably at the end of the third quarter and going forward into the fourth quarter, I mean we always project that we’re going to see, the first quarter is typical – typically its down, what we’re really seeing is coming off an incredibly strong second half of 2010 that difference in March was more notable in this quarter than it may have been in previous quarters.

Paul Miller – FBR Capital Markets

Okay and then, yes I think we could take this offline a little bit but I just think that it’s a volatility and where that volatility comes from it causes lot of confusion out there. The market share, you have 3.7% market share in the industry, in the fourth quarter, I believe it's over 4% this quarter. What really, did anything surprise you because you already, I thought the tone was that probably it was down in 2011. It looks like it's going up which is a nice surprise for us. Are you just finding it easier to get going on market share right now?

Jerome J. Selitto

I think the market share you’re seeing in the first quarter is more reflection again of the strong second half of 2010. So closing we really got we took a long market share in the second quarter of 2010. And that’s been evidenced by the high volume of our closures. Again our objective this year is to grow market share on a run rate basis 5% to 5.5% this year. And that is what we are really driving our organizations to do.

Paul Miller – FBR Capital Markets

And is that mainly through the wholesale market or is that through the other channel?

George J. Kilroy

I think Luke you may have missed it from Luke in his presentation, just mentioned that we’re opportunistic in that channel. We are actually seeing margins compression in that channel so we’ve set back from that channel. This really is what we've done to increase our sales force, our sales focus both on the PLS side and also on the real estate side of the business.

Paul Miller – FBR Capital Markets

Okay, great. Thank you.

Jerome J. Selitto

Thank you Paul.

Operator

Thank you, (Operator Instructions) our next question comes from Jim Fowler with Harvest Capital.

James J. Fowler – Harvest Capital

Hello, I just want to ask a question on correspondent versus wholesale in the quarter and how that compared to the fourth quarter.

Jerome J. Selitto

Okay, I’ll let Luke to address that.

Luke S. Hayden

Yes, the vast majority of our third-party originations is correspondent originations. We do have a small amount of wholesale originations. I don't have the statistics in front of me but I can get some for you.

James J. Fowler – Harvest Capital

Okay. Then how about third-party versus retail?

Jerome J. Selitto

Third party versus retail, 30% of our closings in the first quarter was third party, 70% was retail, and that's down from 39% to 61% the prior quarter.

James J. Fowler – Harvest Capital

Great, thank you.

Operator

(Operator Instructions) And at this time there’s no further questions in the queue. I'll turn the conference back over to our speakers for any additional closing remarks.

Jerome J. Selitto

Thank you, very much. This is Jerry Selitto, to conclude let me reiterate that while 2011 has brought new challenges, we believe we’re well positioned to confront them. We look forward to continuing to drive earnings to improve the efficiency and enhance customer service, which will position us to deliver sustainable, attractive returns to our shareholders throughout the business cycle.

Thank you for your confidence and your support. Thank you very much.

Operator

This concludes the PHH Corporation first quarter 2011 earnings conference call. Once again, ladies and gentlemen the replay will be available beginning later today at the company’s website at www.phh.com or by dialing 719-457-0820 or 188-203-1112 using the conference ID 2375535. It will be archived until May 19, 2011. You may now disconnect.

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