loanDepot(US:LDI)2021-11-11 16:00PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents loanDepot, Inc.'s unaudited consolidated financial statements for Q3 and 9M 2021, including balance sheets, operations, equity, cash flows, and detailed accounting notes Consolidated Financial Statements These statements detail the company's financial position, performance, and cash flows, showing asset growth but a significant decline in net income for Q3 and 9M 2021 Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $12,749,278 | $10,893,228 | | Cash and cash equivalents | $506,608 | $284,224 | | Loans held for sale, at fair value | $8,873,736 | $6,955,424 | | Servicing rights, at fair value | $1,841,512 | $1,127,866 | | Total Liabilities | $11,091,114 | $9,236,615 | | Warehouse and other lines of credit | $8,212,142 | $6,577,429 | | Debt obligations, net | $1,408,751 | $712,466 | | Total Equity | $1,658,164 | $1,656,613 | Consolidated Statement of Operations Highlights (in thousands) | Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 | | :--- | :--- | :--- | :--- | :--- | | Total net revenues | $923,756 | $1,368,930 | $3,019,678 | $3,013,780 | | Gain on origination and sale of loans, net | $821,275 | $1,251,141 | $2,647,328 | $2,767,140 | | Total expenses | $744,771 | $640,014 | $2,364,054 | $1,546,384 | | Net income | $154,277 | $728,349 | $608,414 | $1,465,939 | | Diluted EPS | $0.40 | N/A | $0.82 | N/A | Consolidated Statement of Cash Flows Highlights (Nine Months Ended, in thousands) | Cash Flow Activity | Sep 30, 2021 | Sep 30, 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,058,838) | $(418,143) | | Net cash provided by (used in) investing activities | $288,792 | $(13,302) | | Net cash provided by financing activities | $1,885,770 | $1,021,847 | Notes to Consolidated Financial Statements These notes explain loanDepot's accounting policies, business operations, financial instruments, and significant concentration risks following its February 2021 IPO - The company's primary income sources are gains on the origination and sale of residential mortgage loans, loan servicing income, and fees from settlement services30 - Following its IPO in February 2021, loanDepot, Inc. became a holding company whose sole material asset is an equity interest in LD Holdings. The company now consolidates LD Holdings' financial results and allocates a portion of net earnings to noncontrolling interests313435 - The company has significant concentration risk, with three investors accounting for 41%, 33%, and 14% of loan sales for the nine months ended September 30, 2021. Additionally, 29% of total loan originations in Q3 2021 were for properties in California5657 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, market conditions, and liquidity, noting strong origination volume but compressed gain-on-sale margins compared to the prior year Key Performance Indicators Key performance indicators track loan origination volumes, gain on sale margins, and servicing portfolio metrics, showing increased originations but compressed margins Key Performance Indicators (in thousands, except percentages and units) | Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 | | :--- | :--- | :--- | :--- | :--- | | Loan Originations | $31,985,805 | $27,157,669 | $107,959,122 | $63,364,799 | | - Purchase | $11,008,399 | $8,546,295 | $29,307,875 | $18,487,155 | | - Refinance | $20,977,406 | $18,611,374 | $78,651,247 | $44,877,644 | | Gain on sale margin | 2.84% | 4.87% | 2.71% | 4.63% | | Total servicing portfolio (UPB) | $145,305,182 | $77,171,998 | $145,305,182 | $77,171,998 | | 60+ days delinquent (%) | 1.16% | 2.69% | 1.16% | 2.69% | Results of Operations Operating results show a significant decline in net income for Q3 and 9M 2021, driven by compressed gain-on-sale margins and increased operating expenses - Q3 2021 vs. Q3 2020: Net income decreased by $574.1 million (78.8%) primarily due to a $429.9 million decrease in gain on origination and sale of loans, net, and a $104.8 million increase in total expenses. Industry overcapacity and competitive pressure led to lower gain on sale margins208209 - 9M 2021 vs. 9M 2020: Net income decreased by $857.5 million (58.5%) as total expenses grew by $817.7 million, outpacing a $5.9 million increase in revenue. The expense increase was driven by higher personnel costs to support a 70.4% increase in loan origination volume and higher marketing spend to build brand awareness222 - Marketing and advertising expense increased by 118.4% in Q3 2021 and 104.9% in the first nine months of 2021 compared to the same periods in 2020. This was due to investments in acquired leads and major brand awareness campaigns, including partnerships with Major League Baseball (MLB)216230 Financial Condition Financial condition as of September 30, 2021, reflects asset growth primarily from loans held for sale and servicing rights, alongside increased liabilities from warehouse lines and debt - Loans Held for Sale increased by 27.6% to $8.9 billion, reflecting loan originations of $108.0 billion outpacing sales of $106.4 billion during the first nine months of 2021238242 - Servicing Rights, at fair value, grew by 63.3% to $1.8 billion, driven by $1.3 billion in capitalized servicing rights from new originations238244 - Debt obligations increased by 97.7% to $1.4 billion, primarily due to the issuance of $600.0 million in 2028 Senior Notes238251 Liquidity and Capital Resources Liquidity is primarily sourced from warehouse lines, debt, and loan sales, with available capacity and cash supporting operations, while forbearance rates have decreased - As of September 30, 2021, the company had $506.6 million in unrestricted cash and cash equivalents and $2.8 billion in available capacity under its warehouse lines253 - The active forbearance portion of the servicing portfolio decreased to 1.1% ($1.6 billion UPB) as of September 30, 2021, from 2.4% ($2.4 billion UPB) as of December 31, 2020255 Contractual Obligations as of September 30, 2021 (in thousands) | Obligation | Total | Less than 1 Year | 1-3 years | 3-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Warehouse lines | $8,212,142 | $4,556,910 | $3,655,232 | $— | $— | | Secured debt obligations | $325,089 | $125,089 | $200,000 | $— | $— | | Senior notes | $1,100,000 | $— | $— | $500,000 | $600,000 | | Operating lease obligations | $84,749 | $26,515 | $36,184 | $14,650 | $7,400 | | Naming and promotional rights | $124,828 | $19,030 | $44,826 | $31,222 | $29,750 | | Total | $9,846,808 | $4,727,544 | $3,936,242 | $545,872 | $637,150 | Quantitative and Qualitative Disclosures About Market Risk The company faces primary market risks from interest rate fluctuations, credit risk on sold loans, and prepayment risk affecting servicing rights, managed through hedging and reserves - The company's main market exposure is interest rate risk, which affects the value of its Loans Held for Sale (LHFS), Interest Rate Lock Commitments (IRLCs), and servicing rights297 - To manage interest rate risk associated with IRLCs and LHFS, the company enters into hedging instruments, such as forward sales contracts, with the expectation that their value will move opposite to the hedged items299 - Credit risk is managed through a provision for losses on representations and warranties for sold loans. The level of this reserve requires significant management judgment and depends on economic factors and investor demand300301 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of September 30, 2021, the company's disclosure controls and procedures were effective at a reasonable assurance level308 - There were no changes during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting309 PART II. OTHER INFORMATION Legal Proceedings The company is involved in various ordinary course legal actions but is not currently subject to any material legal proceedings - The company is party to various legal actions that arise in the ordinary course of business but is not currently subject to any material legal proceedings311 Risk Factors No material changes or updates have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes to the risk factors disclosed in the 2020 Form 10-K have occurred312 Unregistered Sales of Equity Securities and Use of Proceeds This section details the conversion of Class C common stock into Class A common stock during Q3 2021, exempt from registration under Section 3(a)(9) of the Securities Act - During Q3 2021, the company issued shares of Class A common stock upon the conversion of Class C common stock and corresponding Holding Units on three separate occasions: - July 1, 2021: 1,606 shares - August 2, 2021: 3,882,188 shares - September 1, 2021: 3,136,229 shares314315 Defaults Upon Senior Securities Not applicable Mine Safety Disclosures Not applicable Other Information Not applicable Exhibits This section lists the exhibits filed as part of the Form 10-Q report, including corporate governance documents, debt agreements, and officer certifications