loanDepot(LDI) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The report presents unaudited consolidated financial statements for loanDepot, Inc as of June 30, 2021, and for the corresponding three and six-month periods Consolidated Balance Sheets Total assets grew to $13.10 billion, driven by an increase in loans held for sale, while total equity slightly decreased to $1.57 billion Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 (Unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $13,097,643 | $10,893,228 | | Cash and cash equivalents | $419,283 | $284,224 | | Loans held for sale, at fair value | $9,120,653 | $6,955,424 | | Servicing rights, at fair value | $1,781,686 | $1,127,866 | | Total Liabilities | $11,528,809 | $9,236,615 | | Warehouse and other lines of credit | $8,498,365 | $6,577,429 | | Debt obligations, net | $1,473,309 | $712,466 | | Total Equity | $1,568,834 | $1,656,613 | Consolidated Statements of Operations Net income for Q2 2021 fell to $26.3 million due to lower loan sale gains and higher expenses, with a similar trend for the six-month period Key Operational Results (in thousands) | Metric | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Total net revenues | $779,914 | $1,158,730 | $2,095,922 | $1,644,850 | | Gain on origination and sale of loans, net | $692,479 | $1,076,410 | $1,826,054 | $1,515,999 | | Total expenses | $749,405 | $509,245 | $1,619,283 | $906,370 | | Net income | $26,284 | $648,595 | $454,137 | $737,590 | | Net income attributable to loanDepot, Inc | $8,561 | $— | $53,436 | $— | | Diluted EPS | $0.07 | N/A | $0.42 | N/A | Consolidated Statements of Equity Total equity decreased to $1.57 billion, reflecting the impact of the IPO, net income, and significant distributions and dividends - The equity structure changed significantly due to the IPO and reorganization in early 2021, establishing Class A, C, and D common stock[24] - For the six months ended June 30, 2021, total equity was impacted by net income of $454.1 million, offset by dividends and distributions of $400.3 million and other adjustments related to the IPO[24][29][273] - Noncontrolling interest decreased from $1.66 billion at year-end 2020 to $1.05 billion at June 30, 2021, reflecting the reorganization and distributions[15][24] Consolidated Statements of Cash Flows The company saw a significant net cash outflow from operations of $2.27 billion, offset by financing inflows from increased borrowings Six Months Ended June 30, Cash Flow Summary (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(2,270,273) | $710,023 | | Net cash provided by (used in) investing activities | $145,669 | $(3,384) | | Net cash provided by (used in) financing activities | $2,272,633 | $(210,956) | | Net change in cash | $148,029 | $495,683 | Notes to Consolidated Financial Statements The notes detail accounting policies, the IPO reorganization, fair value measurements, debt obligations, and the Tax Receivable Agreement - The company completed its IPO on February 11, 2021, which involved a significant reorganization of its equity structure, creating multiple classes of common stock and a noncontrolling interest in LD Holdings[32][34][35] - Significant estimates are used in determining the fair value of key assets and liabilities, including loans held for sale, servicing rights, and derivatives, which are primarily classified as Level 2 and Level 3 in the fair value hierarchy[47][64] - The company is exposed to concentration risk, with three investors accounting for 43%, 35%, and 13% of loan sales in the first six months of 2021[59] - A Tax Receivable Agreement (TRA) was established, obligating the company to pay 85% of certain realized tax savings to pre-IPO owners; a TRA liability of $12.9 million was recognized as of June 30, 2021[39][185] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a transitional second quarter marked by lower gain on sale margins, strong origination volumes, and changes in financial condition Key Factors and Performance Indicators Company performance was impacted by competitive pressure on margins and interest rate changes, despite a significant increase in loan origination volume - The operating environment in Q2 2021 was characterized by lower gain on sale margins due to industry overcapacity and competitive pressure, particularly in the wholesale partner channel[196][200] - The COVID-19 pandemic continues to pose risks, though the share of the servicing portfolio in active forbearance decreased to 1.4% ($1.9B UPB) as of June 30, 2021, from 2.4% at year-end 2020[197][258] Key Performance Indicators (Q2 2021 vs Q2 2020) | Metric | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Total Loan Originations | $34.5B | $21.0B | | Gain on Sale Margin | 2.28% | 5.39% | | Total Servicing Portfolio (UPB) | $138.8B | $57.9B | | 60+ Days Delinquent (%) | 1.42% | 2.66% | Results of Operations Q2 2021 net income plummeted due to compressed gain on sale margins and higher operating expenses, which also impacted semi-annual results - Q2 2021 net income decreased 95.9% YoY to $26.3 million, primarily due to lower gain on sale margins and higher personnel and marketing expenses[212][213] - Gain on origination and sale of loans for Q2 2021 decreased by $383.9 million (35.7%) YoY, driven by margin compression, despite a 64.0% increase in total origination volume[212][213][214] - Total expenses for Q2 2021 increased by $240.2 million (47.2%) YoY, led by a $129.4 million rise in personnel expense and a $58.3 million increase in marketing and advertising[212][219][220] - For the six months ended June 30, 2021, net income decreased 38.4% YoY to $454.1 million, as a $712.9 million (78.7%) increase in expenses overshadowed a $451.1 million (27.4%) increase in revenues[227] Financial Condition, Liquidity, and Capital Resources The company maintained strong liquidity and available warehouse capacity despite significant growth in assets and liabilities funded by increased debt - Total assets grew to $13.1 billion, primarily due to a $2.2 billion increase in Loans Held for Sale, funded by a $1.9 billion increase in Warehouse and other lines of credit[242][245][250] - Servicing rights (MSRs) increased in fair value by $653.8 million (58.0%) to $1.8 billion, driven by $957.0 million in capitalized MSRs from new originations[242][247] - As of June 30, 2021, the company had $419.3 million in unrestricted cash and $9.5 billion in total warehouse line capacity, with $8.5 billion outstanding[256][266] - Total debt obligations increased by $760.8 million (106.8%) to $1.5 billion, mainly due to the issuance of $600.0 million in 2028 Senior Notes[254] - The company paid dividends and distributions totaling $400.3 million during the first six months of 2021[273] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market exposure is interest rate risk, which is managed through hedging, alongside credit and prepayment risks - The principal market exposure is interest rate risk, which impacts LHFS, IRLCs, and servicing rights; the company uses hedging instruments like forward sales contracts and options to manage this risk[299][301][303] - Credit risk arises from representations and warranties on sold loans, which could lead to repurchase obligations; the company maintains a reserve for these potential losses[304][305] - Prepayment risk affects the value of servicing rights; an increase in prepayments, typically in a falling interest rate environment, reduces the fair value of MSRs[309] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal controls - The CEO and CFO concluded that as of June 30, 2021, the company's disclosure controls and procedures were effective at a reasonable assurance level[312] - There were no material changes in internal control over financial reporting during the quarter ended June 30, 2021[313] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal actions and negotiations that are not expected to have a material adverse financial effect - The company is involved in routine lawsuits related to its business but is not currently subject to any proceedings deemed to be material[315] - A demand letter from a former executive alleging loan origination noncompliance and employment claims is in pre-litigation negotiations after mediation in May 2021 was unsuccessful[175] Item 1A. Risk Factors No material changes have been made to the risk factors previously disclosed in the company's 2020 Form 10-K - No material changes to the risk factors disclosed in the 2020 Form 10-K have occurred[316] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued Class A common stock through conversions of other stock classes, which were exempt from registration - On May 4, 2021, 4,715,556 shares of Class D common stock were converted into Class A common stock[318] - On June 1, 2021, 1,164,487 shares of Class C common stock (with corresponding Holding Units) were converted into Class A common stock[319] Item 6. Exhibits This section lists filed exhibits, including corporate governance documents, debt agreements, and required officer certifications - Exhibits filed with the report include various agreements, such as an Indenture for Senior Notes and amendments to Master Repurchase Agreements, as well as required CEO and CFO certifications[323][324]