UWM Holdings Corp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. UWM originates, sells and services residential mortgage loans, exclusively through the wholesale channel. Comparisons below are to the corresponding 2022 periods unless noted.
Financial performance and position
| Metric | Q2 2023 | Six months 2023 |
|---|---|---|
| Loan originations | $31.8 billion, up 6.6% | $54.2 billion, down 21.1% |
| Total revenue, net | $587.5 million, up 4.1% | $748.8 million, down 45.9% |
| Consolidated net income | $228.8 million, up 6.2% | $90.2 million, down 86.5% |
| Net income attributable to UWM Holdings Corp. | $7.6 million, versus $8.4 million | Loss of $4.4 million, versus income of $30.3 million |
| Class A EPS | $0.08 basic and diluted | $(0.05) basic and diluted |
| Adjusted EBITDA (non-GAAP) | $125.4 million, versus $95.0 million | $266.4 million, versus $223.4 million |
About 94% of Holdings LLC’s economic interest is held by SFS Corp.; consolidated net income therefore differs substantially from earnings attributable to UWM Holdings Corp. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results or operating cash flow.
- Production and gain margin: Q2 loan production income was $280.8 million, down 5.3%, despite higher volume; reported gain margin declined to 88 basis points from 99. First-half production income fell 28.5% to $486.2 million, with gain margin of 90 basis points versus 99.
- Servicing and MSRs: Q2 servicing income increased 7.6% to $193.2 million, while servicing costs fell 28.8% to $31.7 million. First-half servicing income rose 8.9% to $411.8 million. The first-half change in MSR fair value was a $312.6 million loss, compared with a $198.1 million gain in 2022; this was a major contributor to the decline in first-half revenue and earnings.
- Interest and expenses: Q2 interest income was $88.9 million and total interest expense was $82.4 million. Net interest income after funding-facility interest was $49.2 million, up 44%. First-half net interest income was $103.2 million, up 46%; non-funding debt interest expense increased, partly reflecting new MSR facilities. Q2 G&A rose 32.0% to $52.7 million, including a loss related to a specific prior-period loan repurchase issue.
- Cash flow: First-half operating cash flow was $148.6 million, versus $11.36 billion in 2022; investing cash flow was $1.07 billion, versus $802.6 million; financing cash outflow was $1.29 billion, versus $11.94 billion. Management attributed the large operating-cash-flow comparison primarily to much larger mortgage-loan balance reductions in 2022. Cash declined $70.3 million to $634.6 million.
- Balance sheet and funding: Total assets were $12.43 billion and total liabilities $9.48 billion at June 30, 2023. Cash was $634.6 million; warehouse lines totaled $5.73 billion, secured lines $500 million, borrowings against investment securities $100.9 million, and senior notes were $2.0 billion principal ($1.99 billion carrying value). Senior notes bear fixed rates of 5.50%–5.75%, with maturities in 2025, 2027 and 2029; warehouse and MSR facilities generally have variable rates.
- Servicing portfolio: Loans serviced for others had $294.9 billion unpaid principal balance at June 30, down from $312.5 billion at year-end 2022. Loans 60 or more days delinquent were 0.99% of the portfolio, up from 0.85% at year-end.
Changes, outlook, risks and unusual items
- Q2 originations improved year over year, led by purchase volume, but first-half originations remained lower because elevated mortgage rates reduced refinance activity. The average note rate on originated loans rose to 6.31% in Q2 from 4.83% a year earlier.
- The company provided no specific numerical earnings or origination guidance in the supplied filing text. Management identifies interest rates, housing and mortgage demand, loan-sale execution, warehouse funding and MSR values as important business drivers.
- MSR values depend on modeled assumptions, including discount rates and prepayment speeds. The filing’s sensitivity analysis estimates that a 10% adverse change in the discount-rate assumption would reduce MSR value by $174.7 million; a 10% adverse change in prepayment speeds would reduce it by $125.9 million. These are hypothetical sensitivities, not forecasts.
- Liquidity depends on loan sales or securitizations and continued access to warehouse funding. As of June 30, $650 million of warehouse line amounts were committed; the $500 million unsecured revolving facility from SFS Corp. had no borrowings outstanding. The Citibank MSR facility had $250 million outstanding and an initial maturity date of September 26, 2023. Several warehouse agreements also had 2023 expirations. The company reported covenant compliance at quarter-end.
- UWM reported compliance with regulatory minimums, including the most restrictive requirements of $739.9 million minimum net worth, $95.5 million liquidity and a 6% minimum capital ratio.
- Commitments to extend credit were approximately $26.5 billion at quarter-end; the filing describes these as off-balance-sheet commitments, not funded debt. The representations-and-warranties reserve was $59.1 million; first-half repurchases totaled $161.5 million in unpaid principal balance.
- After quarter-end, the board declared a $0.10-per-share Class A dividend and approved a $150.2 million proportional distribution to SFS Corp., payable around October 11, 2023. The company also reported a subsequent sale of MSRs on loans with $26.2 billion UPB for gross proceeds of approximately $346.3 million.
- Legal matters include an antitrust class action concerning broker relationships and litigation with former client America’s Moneyline, including a pending motion concerning amended counterclaims. The company said resolution of the described legal matters was not currently expected to materially adversely affect its financial position, performance or cash flows.
- Related-party matters include leases and other payments to entities connected to the founder and CEO, and a revolving credit facility from SFS Corp. First-half net payments to commonly owned related parties were approximately $10.7 million.
Most important facts for investors to verify
- Whether the Citibank MSR facility and near-term warehouse lines were renewed, extended or replaced after their stated maturities.
- How much of first-half earnings and cash generation reflects recurring operations versus MSR valuation changes and MSR or excess-servicing sales.
- Current MSR valuation assumptions, servicing-portfolio delinquency trends and sensitivity to rates and prepayments.
- Availability and terms of committed funding, covenant headroom, and the company’s liquidity after dividends, distributions and debt service.
- Developments in loan repurchase claims, the $59.1 million reserve, the specific loan repurchase issue affecting Q2 G&A, and pending litigation.
- The effect of the Up-C ownership structure and non-controlling interest on per-share results and cash distributions to public shareholders.