loanDepot(LDI) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company reported a net loss of $91.7 million in Q1 2023, with assets decreasing and operating cash flow significantly lower Consolidated Balance Sheets - Total assets decreased by $419.1 million (6.3%) from December 31, 2022, to March 31, 2023, primarily driven by a $334.1 million decrease in Loans held for sale. Total liabilities decreased by $338.8 million (6.0%), mainly due to a $316.3 million reduction in Warehouse and other lines of credit[167] Consolidated Balance Sheet Highlights (Unaudited) | (In thousands) | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $798,119 | $863,956 | | Loans held for sale, at fair value | $2,039,367 | $2,373,427 | | Servicing rights, at fair value | $2,028,788 | $2,037,447 | | Total assets | $6,190,791 | $6,609,934 | | Liabilities & Equity | | | | Warehouse and other lines of credit | $1,830,319 | $2,146,602 | | Debt obligations, net | $2,303,712 | $2,289,319 | | Total liabilities | $5,349,629 | $5,688,461 | | Total equity | $841,162 | $921,473 | Consolidated Statements of Operations - Total net revenues for Q1 2023 were $207.9 million, a 58.7% decrease from $503.3 million in Q1 2022. This was primarily driven by a 70.2% decrease in 'Gain on origination and sale of loans, net' due to lower transaction volumes[152] - Total expenses decreased by 48.1% to $314.5 million in Q1 2023 from $606.3 million in Q1 2022, largely due to significant reductions in personnel, marketing, and direct origination expenses, reflecting cost-cutting measures and lower loan volumes[152] Consolidated Statements of Operations Summary (Unaudited) | (In thousands, except per share amounts) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Total net revenues | $207,901 | $503,311 | | Total expenses | $314,484 | $606,256 | | Loss before income taxes | $(106,583) | $(102,945) | | Net loss | $(91,721) | $(91,318) | | Net loss attributable to loanDepot, Inc. | $(42,907) | $(34,741) | | Diluted loss per share | $(0.25) | $(0.25) | Consolidated Statements of Equity - Total equity decreased from $921.5 million at December 31, 2022, to $841.2 million at March 31, 2023. The decrease was primarily driven by a net loss of $91.7 million for the quarter[18] Consolidated Statements of Cash Flows Cash Flow Summary (Unaudited) | (In thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $205,352 | $1,148,439 | | Net cash provided by investing activities | $6,922 | $291,026 | | Net cash used in financing activities | $(304,572) | $(1,352,226) | | Net change in cash | $(92,298) | $87,239 | - The significant decrease in net cash from operating activities YoY was mainly due to a sharp reduction in proceeds from sales of loans, which fell from $22.9 billion in Q1 2022 to $5.4 billion in Q1 2023, reflecting the challenging market conditions[22] Notes to Consolidated Financial Statements - The company's primary income sources are gains on the origination and sale of residential mortgage loans, loan servicing income, and fees for settlement services[29] - As of March 31, 2023, the company had significant concentration risk with three investors accounting for 11%, 29%, and 33% of its loan sales[39] - The company is involved in legal proceedings, including employment litigation seeking damages over $75 million and a securities class action lawsuit. Management believes these lawsuits are without merit but notes that defending them will incur substantial costs[119][225] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q1 2023's decline to rising interest rates, leading to a 58.7% revenue drop, and is executing cost-cutting measures Overview and Market Conditions - The Federal Reserve's continued rate hikes in Q1 2023 have increased mortgage interest rates, leading to an expected decline in mortgage transaction volumes for 2023 compared to 2022[141] - In response to market conditions, the company initiated its 'Vision 2025' plan in July 2022, focusing on purchase transactions, centralizing operations, and aggressively rightsizing its cost structure. Key actions included consolidating locations, exiting the wholesale business, and transitioning the servicing portfolio in-house[141] Key Performance Indicators Key Performance Indicators (Unaudited) | (Dollars in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Total loan originations | $4,944,337 | $21,550,731 | | Purchase loan originations | $3,512,771 | $8,030,766 | | Refinance loan originations | $1,431,566 | $13,519,965 | | Gain on sale margin | 2.43% | 1.96% | | Total servicing portfolio (UPB) | $141,673,464 | $153,385,817 | - Loan origination volume plummeted by 77.1% YoY, from $21.6 billion in Q1 2022 to $4.9 billion in Q1 2023, with refinance volume dropping nearly 90%[148] Results of Operations - The 70.2% decrease in 'Gain on origination and sale of loans, net' was driven by reduced volume and a significant decrease in fair value gains from hedging instruments, which was partially offset by lower fair value losses on IRLCs[155] - Personnel expense decreased by $205.0 million (59.2%), reflecting volume-related commission declines and lower salaries & benefits from a 51.9% reduction in headcount as part of cost-saving initiatives[160] - Servicing expense decreased by $16.7 million (77.5%) due to the completion of the transition of the servicing portfolio to the company's in-house platform in early 2023[165] Liquidity and Capital Resources - As of March 31, 2023, the company had $798.1 million in unrestricted cash and cash equivalents and $2.1 billion in available capacity under its warehouse and other lines of credit[170] - The company suspended its regular quarterly dividend effective March 31, 2022, and for the foreseeable future to manage its balance sheet and capital[185] Contractual Obligations as of March 31, 2023 | (In thousands) | Total | Less than 1 Year | 1-3 years | 3-5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Warehouse and other lines of credit | $1,830,319 | $1,330,319 | $500,000 | $— | $— | | Debt obligations | $2,314,287 | $963,830 | $847,982 | $— | $502,475 | | Operating lease obligations | $69,489 | $22,621 | $30,207 | $15,006 | $1,654 | | Total contractual obligations | $4,301,164 | $2,337,400 | $1,416,128 | $27,006 | $520,629 | Non-GAAP Measures - The company uses non-GAAP measures like Adjusted Total Revenue, Adjusted Net Income (Loss), and Adjusted EBITDA (LBITDA) to provide investors with additional perspectives on performance by excluding volatile items like fair value changes of MSRs and non-cash expenses like stock-based compensation[195] Reconciliation of Net Loss to Adjusted LBITDA (Unaudited) | (In thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net loss | $(91,721) | $(91,318) | | Adjustments: | | | | Interest expense — non-funding debt | 43,090 | 14,393 | | Income tax benefit | (14,862) | (11,627) | | Depreciation and amortization | 10,026 | 10,545 | | Change in fair value of servicing rights, net | 18,289 | 1,295 | | Stock-based compensation expense | 5,926 | 2,309 | | Adjusted LBITDA | $(29,336) | $(74,403) | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations impacting loan volumes and asset values, mitigated by hedging instruments, alongside credit and prepayment risks - The company's principal market exposure is interest rate risk, which affects loan origination volumes, margins, and the value of assets like LHFS, IRLCs, and servicing rights[211] - To manage interest rate risk on IRLCs and LHFS, the company enters into various hedging instruments, expecting their fair value to move opposite to the hedged assets, thereby reducing earnings volatility[213] - Credit risk arises from representations and warranties on sold loans. The company may be required to repurchase loans or indemnify purchasers for breaches, and it maintains a provision for these potential losses based on historical experience and economic factors[214][215] Controls and Procedures Management concluded that as of March 31, 2023, the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - The CEO and CFO concluded that as of March 31, 2023, the company's disclosure controls and procedures are effective to provide reasonable assurance that required information is recorded and reported in a timely manner[221] - No material changes were identified in the company's internal control over financial reporting during the first quarter of 2023[222] PART II. OTHER INFORMATION Legal Proceedings The company is defending against a securities class action lawsuit and multiple shareholder derivative complaints alleging false disclosures and breach of fiduciary duties, which management believes are without merit - The company is defending against a consolidated putative class action lawsuit alleging false and/or misleading disclosures in connection with its IPO and subsequent statements. A motion to dismiss was partially granted and partially denied in January 2023[225] - Multiple shareholder derivative lawsuits have been filed against certain directors and officers, alleging breach of fiduciary duties. These actions are currently stayed pending developments in the securities class action[226][228] Risk Factors No material changes to the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K were reported - No material changes in risk factors were reported from the company's 2022 Form 10-K[229] Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2023, the company issued 1,555,870 shares of Class A common stock through conversions of Class C common stock and Holdco Units, exempt from registration - In Q1 2023, the company issued 1,555,870 shares of Class A common stock upon the conversion of Class C common stock and Holdco Units by stockholders on three separate occasions[231][232] Exhibits This section lists exhibits filed with the Form 10-Q, including amendments to credit and repurchase agreements, settlement agreements, and required officer certifications - Key exhibits filed include amendments to master repurchase and credit agreements with various financial institutions, a settlement agreement with Anthony Hsieh, and CEO/CFO certifications[237]