Rocket Companies(RKT) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (unaudited) The unaudited condensed consolidated financial statements for the period ended June 30, 2023, detail the company's financial position, performance, and cash flows, showing a slight increase in total assets to $20.9 billion, a shift to a net loss of $272.3 million for the first six months of 2023 from a net income of $1.1 billion in the prior year period, and a significant decrease in cash from operations Condensed Consolidated Balance Sheets - Total assets increased to $20.86 billion as of June 30, 2023, from $20.08 billion at December 31, 2022, primarily driven by an increase in Mortgage loans held for sale[12] - Total liabilities also rose to $12.49 billion from $11.61 billion, mainly due to higher balances on funding facilities[12] Key Balance Sheet Items (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $20,855,677 | $20,082,212 | | Cash and cash equivalents | $882,783 | $722,293 | | Mortgage loans held for sale, at fair value | $8,444,443 | $7,343,475 | | Mortgage servicing rights ("MSRs"), at fair value | $6,443,632 | $6,946,940 | | Total Liabilities | $12,490,823 | $11,606,663 | | Funding facilities | $4,889,236 | $3,548,699 | | Senior Notes, net | $4,030,709 | $4,027,970 | | Total Equity | $8,364,854 | $8,475,549 | Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) - For Q2 2023, the company reported net income of $139.2 million, a 133% increase from $59.8 million in Q2 2022, despite a decrease in total revenue[13] - For the six months ended June 30, 2023, the company recorded a net loss of $272.3 million, a significant downturn from a net income of $1.1 billion in the same period of 2022, primarily due to lower gain on sale of loans and unfavorable changes in the fair value of MSRs[13] Key Income Statement Data (in thousands, except per share amounts) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenue, net | $1,236,227 | $1,392,419 | $1,902,295 | $4,063,015 | | Total expenses | $1,097,857 | $1,313,902 | $2,179,912 | $2,922,041 | | Net income (loss) | $139,152 | $59,756 | $(272,331) | $1,096,364 | | Diluted EPS | $0.05 | $0.02 | $(0.11) | $0.43 | Condensed Consolidated Statements of Changes in Equity - Total equity decreased from $8.48 billion at the end of 2022 to $8.36 billion as of June 30, 2023, primarily driven by a net loss of $411.5 million in the first quarter, partially offset by net income of $139.2 million in the second quarter and share-based compensation[19] Condensed Consolidated Statements of Cash Flows - For the first six months of 2023, net cash used in operating activities was $1.61 billion, a stark contrast to the $6.59 billion provided by operating activities in the same period of 2022, mainly due to lower net income and changes in mortgage loans held for sale[22] - Net cash from financing activities was $1.1 billion, a reversal from an $8.22 billion use of cash in H1 2022, driven by net borrowings on funding facilities[22] Net Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(1,611,938) | $6,585,334 | | Net cash provided by investing activities | $641,740 | $408,522 | | Net cash provided by (used in) financing activities | $1,099,037 | $(8,221,278) | | Net increase (decrease) in cash | $128,688 | $(1,227,513) | Notes to Condensed Consolidated Financial Statements - The company operates as a fintech holding company with two reportable segments: Direct to Consumer and Partner Network, with a significant portion of its assets, including MSRs and IRLCs, measured at fair value and many classified as Level 3 due to reliance on unobservable inputs[26][64][163] - As of June 30, 2023, the fair value of Mortgage Servicing Rights (MSRs) was $6.44 billion, covering a portfolio with an unpaid principal balance (UPB) of $462 billion, and the company was in compliance with all debt covenants[89][90][97] - The company's organizational structure as a C Corporation holding an interest in a partnership (Holdings) significantly impacts its income tax expense, with a Tax Receivable Agreement obligating the company to pay original LLC members 90% of realized cash tax savings from certain tax basis step-ups[126][130] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the significant decline in mortgage origination volume and gain on sale revenue in the first half of 2023 to the rising interest rate environment initiated by the U.S. Federal Reserve, despite which the company improved Q2 2023 net income over Q2 2022 through aggressive cost-saving measures, maintaining a strong liquidity position of $8.6 billion and announcing a voluntary career transition program expected to result in a $50-$60 million charge in Q3 2023 - The U.S. Federal Reserve's interest rate hikes have driven a significant decline in the mortgage origination market, particularly impacting refinance transactions, which has adversely affected the company's loan volume[198] - A voluntary career transition program was initiated on July 28, 2023, which is expected to incur a non-recurring charge of $50 to $60 million in Q3 2023[199] Key Performance Indicators | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Closed loan origination volume | $22.3B | $34.5B | $39.3B | $88.5B | | Gain on sale margin | 2.67% | 2.92% | 2.54% | 2.98% | | Net income (loss) | $139.2M | $59.8M | $(272.3)M | $1.1B | - Total expenses decreased by 16% in Q2 2023 and 25% in H1 2023 year-over-year, driven by cost-saving measures in salaries, general & administrative, and marketing expenses[263][264] - The company maintained a strong liquidity position with $8.6 billion as of June 30, 2023, consisting of cash, self-funding capacity, and undrawn lines of credit[297] Quantitative and Qualitative Disclosures about Market Risk The company reports that there have been no material changes to its exposure to market risks from the information previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes to the Company's market risk exposure since the end of 2022[305] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2023, with no material changes to the company's internal control over financial reporting during the quarter - As of June 30, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures are effective at a reasonable assurance level[306] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[307] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal actions in the ordinary course of business but does not expect any currently pending matters to have a material adverse effect on its financial condition or results of operations - Management believes that currently pending or threatened legal matters are not expected to have a material adverse effect on the company's business or financial condition[310] Risk Factors There have been no significant changes to the company's risk factors from those disclosed in its 2022 Form 10-K, and investors are advised to refer to that document for a detailed discussion of risks and uncertainties - The company's risk factors have not changed significantly from those disclosed in the 2022 Form 10-K[311] Unregistered Sales of Equity Securities and Use of Proceeds The company's $1.0 billion share repurchase program, renewed in November 2022, had approximately $590.7 million remaining available as of June 30, 2023, with no shares repurchased during the three months ended June 30, 2023 - No share repurchases were made during the three months ended June 30, 2023[312] - As of June 30, 2023, approximately $590.7 million remained available under the company's $1.0 billion share repurchase program[312] Other Information On July 7, 2023, the company's subsidiary, Rocket Mortgage, LLC, entered into an agreement that increased the commitments under its Revolving Credit Agreement by $150 million with the addition of a new lender - Subsequent to the quarter end, on July 7, 2023, a subsidiary increased its Revolving Credit Agreement commitments by $150 million by adding Wells Fargo Bank as a new lender[315][316] Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO, and various agreements