loanDepot(US:LDI)2022-11-09 16:00PART I. FINANCIAL INFORMATION This section presents the company's financial statements, highlighting a significant downturn in assets and a shift to net losses driven by challenging market conditions Item 1. Financial Statements The financial statements for the period ended September 30, 2022, show a substantial decrease in total assets and a shift from net income to a net loss Consolidated Balance Sheets Total assets significantly decreased to $7.4 billion as of September 30, 2022, primarily due to a reduction in loans held for sale, with corresponding declines in liabilities and equity | Balance Sheet Item | Sep 30, 2022 (Unaudited) ($) | Dec 31, 2021 ($) | | :--- | :--- | :--- | | Total Assets | $7,378,536 | $11,812,313 | | Cash and cash equivalents | $1,143,948 | $419,571 | | Loans held for sale, at fair value | $2,692,820 | $8,136,817 | | Servicing rights, at fair value | $2,030,026 | $2,006,712 | | Total Liabilities | $6,300,039 | $10,182,953 | | Warehouse and other lines of credit | $2,529,436 | $7,457,199 | | Debt obligations, net | $2,283,704 | $1,628,208 | | Total Equity | $1,078,497 | $1,629,360 | Consolidated Statements of Operations The company reported a net loss of $137.5 million for Q3 2022 and $452.6 million for the nine months, a significant reversal from prior-year net income due to reduced loan origination gains | Metric | Three Months Ended Sep 30, 2022 ($) | Three Months Ended Sep 30, 2021 ($) | Nine Months Ended Sep 30, 2022 ($) | Nine Months Ended Sep 30, 2021 ($) | | :--- | :--- | :--- | :--- | :--- | | Total net revenues | $274,192 | $923,756 | $1,086,141 | $3,019,678 | | Total expenses | $435,125 | $744,771 | $1,602,038 | $2,364,054 | | Net (loss) income | ($137,482) | $154,277 | ($452,623) | $608,414 | | Diluted (Loss) earnings per share | ($0.37) | $0.40 | ($1.29) | $0.82 | Consolidated Statements of Cash Flows Net cash provided by operating activities significantly reversed to $4.4 billion for the nine months ended September 30, 2022, driven by loan sales, while financing activities showed a substantial outflow | Cash Flow Activity | Nine Months Ended Sep 30, 2022 ($) | Nine Months Ended Sep 30, 2021 ($) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $4,414,913 | ($2,058,838) | | Net cash provided by investing activities | $657,868 | $288,792 | | Net cash (used in) provided by financing activities | ($4,388,503) | $1,885,770 | | Net change in cash | $684,278 | $115,724 | Notes to Consolidated Financial Statements Notes detail accounting policies, including a $42.1 million non-cash impairment charge on goodwill and intangible assets, and amendments to debt covenants to maintain compliance - The company's primary income sources include gains on loan origination and sale, loan servicing income, and settlement service fees30 - During Q2 2022, the company recognized a goodwill impairment charge of $40.7 million and an intangible asset impairment of $1.4 million, driven by declining market capitalization and rising interest rates8385 - As of September 30, 2022, the company had $5.7 billion in warehouse and securitization facilities with an outstanding balance of $2.5 billion99108 - The company amended certain warehouse lines and debt obligations related to profitability covenants, maintaining compliance with all financial covenants as of September 30, 2022101114 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the significant decline in financial performance to rising interest rates, detailing revenue and expense impacts, balance sheet changes, and liquidity management under the 'Vision 2025 Plan' Current Market Conditions and Vision 2025 Federal Reserve interest rate hikes have significantly impacted mortgage volumes, prompting the company to implement its 'Vision 2025 Plan' to reduce costs and adapt operations - The Federal Reserve's 3.75 percentage point rate hikes since early 2022 have increased mortgage rates, anticipating continued declines in origination volumes through 2023169 - The company's Vision 2025 Plan aims to address market conditions by focusing on purchase transactions, centralizing loan management, and right-sizing the cost structure170 Results of Operations Q3 2022 saw total net revenues fall 70.3% to $274.2 million and a net loss of $137.5 million, driven by an 81% drop in loan origination gains, with similar trends for the nine-month period | Metric | Q3 2022 ($) | Q3 2021 ($) | % Change | | :--- | :--- | :--- | :--- | | Total net revenues | $274,192 | $923,756 | (70.3)% | | Gain on origination and sale of loans, net | $156,300 | $821,275 | (81.0)% | | Total expenses | $435,125 | $744,771 | (41.6)% | | Personnel expense | $218,819 | $449,152 | (51.3)% | | Net (loss) income | ($137,482) | $154,277 | (189.1)% | | Metric | Nine Months 2022 ($) | Nine Months 2021 ($) | % Change | | :--- | :--- | :--- | :--- | | Total net revenues | $1,086,141 | $3,019,678 | (64.0)% | | Gain on origination and sale of loans, net | $665,993 | $2,647,328 | (74.8)% | | Total expenses | $1,602,038 | $2,364,054 | (32.2)% | | Net (loss) income | ($452,623) | $608,414 | (174.4)% | Balance Sheet Highlights Total assets decreased 37.5% to $7.4 billion due to reduced loans held for sale, while cash increased 172.6% and debt obligations rose 40.3%, with goodwill and intangibles fully written off - Loans held for sale decreased by $5.4 billion (66.9%) from year-end 2021, reflecting a slowdown in origination activity relative to loan sales207208 - Goodwill and intangible assets were entirely written off following a non-cash impairment charge of $42.1 million recognized in Q2 2022212 - Debt obligations increased by $655.5 million (40.3%), primarily due to a $748.8 million increase in secured credit facilities, partially offset by a $97.5 million repurchase of Senior Notes214 Liquidity and Capital Resources As of September 30, 2022, the company maintained $1.1 billion in unrestricted cash and $3.1 billion in available warehouse capacity, but net losses necessitated amending debt profitability covenants and suspending quarterly dividends - As of September 30, 2022, the company held $1.1 billion in unrestricted cash and cash equivalents and $3.1 billion in available capacity under its warehouse and other lines of credit216 - Due to 2022 net losses, the company amended certain debt obligations related to profitability covenants and anticipates needing further amendments or waivers224 - The company suspended its regular quarterly dividend effective March 31, 2022, as part of its balance sheet and capital management strategies236 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include interest rate, credit, and prepayment risks, with interest rate risk being most significant, managed through hedging instruments and loss provisions - The company's principal market exposure is to interest rate risk, impacting the fair value of Loans Held for Sale (LHFS), Interest Rate Lock Commitments (IRLCs), and servicing rights258 - To manage interest rate risk, the company utilizes various hedging instruments, including forward sale contracts, for IRLCs, LHFS, and servicing rights260 - Credit risk is managed by establishing a loan repurchase reserve for potential losses from breaches of representations and warranties on sold loans, requiring significant management judgment261262 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of September 30, 2022, the company's disclosure controls and procedures were effective in providing reasonable assurance for timely information recording, processing, and reporting268 - No material changes to internal control over financial reporting occurred during the quarter269 PART II. OTHER INFORMATION This section covers other relevant information, including legal proceedings, updated risk factors, and details on equity security sales Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings and is vigorously defending against a putative securities class action and shareholder derivative lawsuits related to its February 2021 IPO disclosures - A putative securities class action lawsuit was filed against the company, directors, and officers, challenging IPO-related disclosures, with a motion to dismiss filed in August 2022272 - Multiple shareholder derivative complaints alleging fiduciary duty breaches related to the same disclosures are stayed pending resolution of the securities class action's motion to dismiss273275 Item 1A. Risk Factors New material risk factors include macroeconomic headwinds, particularly rising interest rates leading to net losses, and execution risks associated with the 'Vision 2025' plan, including potential debt covenant breaches - Macroeconomic conditions, especially rising interest rates, have substantially decreased revenues, resulting in net losses for the nine months ended September 30, 2022277 - Due to quarterly losses, the company amended profitability covenants in its debt agreements and anticipates needing further, non-guaranteed amendments or waivers278 - The Vision 2025 restructuring plan, involving significant staffing reductions, carries risks including unrealized benefits, loss of institutional knowledge, reduced morale, and potential employee claims279282 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued Class A common stock in exchange for Class C common stock and Holding Units, exempt from registration, and purchased shares from employees for tax obligations related to restricted stock vesting - The company issued 6,593,660 shares of Class A common stock between July 1, 2022, and October 1, 2022, upon conversion of Class C common stock and Holding Units284285 Other Information (Items 3-6) Items 3, 4, and 5 were noted as 'Not applicable', with Item 6 listing the exhibits filed as part of the 10-Q report - No defaults upon senior securities, mine safety disclosures, or other material information were reported for the period287288289