loanDepot, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unless stated otherwise, amounts below are U.S. dollars; financial statement amounts are converted from thousands to millions.
Business context and reporting period
loanDepot originates, funds, sells and services residential mortgage loans, with additional title, escrow and settlement services. Results were sharply affected by higher mortgage rates, weaker refinancing demand and lower mortgage origination volumes. The filing is unaudited.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total net revenue | $274.2 million | $923.8 million | $1,086.1 million | $3,019.7 million |
| Net income (loss), consolidated | $(137.5) million | $154.3 million | $(452.6) million | $608.4 million |
| Net income (loss) attributable to loanDepot, Inc. | $(60.1) million | $51.5 million | $(195.8) million | $104.9 million |
| Basic and diluted EPS | $(0.37) | $0.40 | $(1.29) | $0.82 |
| Loan originations | $9.85 billion | $31.99 billion | $47.40 billion | $107.96 billion |
| Gain-on-sale margin | 1.80% | 2.84% | 1.66% | 2.71% |
| Adjusted EBITDA (LBITDA), non-GAAP | $(114.1) million | $238.3 million | $(380.0) million | $805.6 million |
In Q3, gain on origination and sale of loans fell 81.0% to $156.3 million; servicing fee income increased 10.9% to $113.5 million. Personnel expense fell 51.3% to $218.8 million, while general and administrative expense rose 66.8% to $83.4 million. Q3 operating margin is not separately stated in the filing.
For the first nine months, operating cash flow was $4.415 billion, investing cash flow was $657.9 million and financing cash flow was $(4.389) billion. Cash and restricted cash together increased $684.3 million to $1.305 billion. Operating cash flow is heavily affected by loan originations and sales and should not be read as recurring free cash flow.
At September 30, 2022, cash and cash equivalents were $1.144 billion and restricted cash was $160.9 million. Total assets were $7.379 billion, total liabilities $6.300 billion and total equity $1.078 billion. Warehouse and other lines of credit were $2.529 billion; debt obligations, net, were $2.284 billion, including $991.2 million of senior notes. The servicing portfolio was $139.7 billion unpaid principal balance.
Material changes versus comparable periods
- Q3 originations decreased 69.2% year over year; refinance originations declined to $2.91 billion from $20.98 billion. Purchase originations were $6.94 billion, down from $11.01 billion.
- Q3 revenue declined 70.3% year over year, reflecting lower loan volumes and margins. Management attributed the reduction in gain on sale primarily to higher rates, lower volume and weaker loan-sale premiums.
- Cost reductions substantially lowered personnel and marketing expense, but were not enough to offset lower revenue. Employee headcount fell 47.5% year over year to 6,121.
- Compared with December 31, 2021, loans held for sale fell 66.9% to $2.693 billion and warehouse borrowings fell 66.1% to $2.529 billion. Debt obligations increased 40.3% to $2.284 billion, while equity declined 33.8%.
- The servicing portfolio declined from $162.1 billion at year-end 2021, although servicing fee income increased year over year. The company sold $43.2 billion of servicing-rights UPB during the first nine months.
Outlook, management commentary, risks and unusual items
- Outlook: Management said cash on hand and identified liquidity sources were expected to support current operations and loan operations for the next 12 months, while noting continued review of liquidity needs and dependence on market conditions. This is not a guarantee. The filing cites an MBA forecast, published October 23, 2022, projecting U.S. residential mortgage originations to decline 9% to $2.0 trillion by year-end 2023. Management expected transaction volumes to continue declining through 2023. No company-specific earnings or revenue guidance is provided.
- Strategic response: Vision 2025 focuses on purchase lending, growth initiatives, centralized origination and fulfillment, and right-sizing costs. Actions included reducing real estate footprint, exiting wholesale, shifting servicing in-house, launching a digital HELOC solution and forming a homebuilder joint venture. The company targeted approximately 6,500 employees by year-end 2022.
- Liquidity and covenants: The company reported $1.1 billion of unrestricted cash, $3.1 billion of available warehouse and other line capacity, and $5.7 billion of total facility capacity, of which $1.4 billion was committed. It amended certain profitability covenants and was compliant at quarter-end, but said further amendments or waivers may be needed. Lenders are not obligated to grant them; failure could trigger defaults, accelerated repayment, termination of commitments, collateral demands or cross-defaults.
- Unusual items: The company recorded a $40.7 million goodwill impairment and $1.4 million intangible-asset impairment in Q2. Q3 included an $11.0 million loss on fixed-asset disposals and $9.1 million of lease impairment; nine-month lease impairment was $15.1 million. It also recognized a $10.5 million gain on extinguishment after repurchasing $97.5 million of 2028 senior notes below par.
- Repurchase and credit exposure: The provision for loan-loss obligations on sold loans was $108.6 million for the first nine months, versus $2.7 million in 2021; the related liability was $68.9 million at quarter-end. Loans eligible for repurchase and the related liability were each $554.9 million. Three investors accounted for 78% of nine-month loan sales.
- Legal and regulatory matters: The company disclosed securities class-action and shareholder derivative litigation related to IPO and later disclosures; it said losses were not probable or reasonably estimable. An employment lawsuit seeks damages exceeding $75 million; the company said it believes the claim is without merit and intends to defend it. Management stated it was compliant with selling and servicing capital and liquidity requirements at quarter-end.
- Other risks: Results are sensitive to rates, origination demand, loan-sale pricing, MSR valuation and prepayments. The company also faces warehouse funding and investor demand risk, loan repurchase and representation-and-warranty exposure, and potential staffing, execution and cost-saving risks. The regular quarterly dividend was suspended effective March 31, 2022.
Most important facts for investors to verify
- Whether origination volumes, gain-on-sale margins and losses continue to deteriorate, and whether cost reductions can restore profitability.
- Whether the company obtains covenant amendments or waivers as needed, and whether its committed and uncommitted funding capacity remains available on acceptable terms.
- Cash needs and debt maturities, including warehouse facilities scheduled to expire through 2024 and senior notes due in 2025 and 2028.
- Future loan repurchase claims, provisions and charge-offs, especially given the increase in the repurchase-related balance and investor concentration.
- Changes in servicing portfolio size, MSR fair value and assumptions, hedge results, and the company’s execution of its cost and operating plans.
- Developments in the securities, derivative and employment litigation, including whether any losses become estimable or material.