UWM Holdings Corp. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. UWM originates and services residential mortgages exclusively through the wholesale channel. The January 2021 business combination created an Up-C structure; SFS Corp. held approximately 94% of Holdings LLC’s economic interest at quarter-end.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Loan originations | $63.0 billion | $54.3 billion | Up 16% |
| Net revenue | $690.3 million | $1.834 billion | Down 62% |
| Net income, consolidated | $329.9 million | $1.451 billion | Down 77% |
| Net income attributable to UWM Holdings Corp. | $25.2 million | Not presented | Not comparable |
| Adjusted EBITDA (non-GAAP) | $290.4 million | $1.391 billion | Down 79% |
| Basic / diluted Class A EPS | $0.25 / $0.16 | Not presented | Not comparable |
For the first nine months, originations rose 34% to $171.3 billion, while net revenue fell 24% to $2.365 billion, consolidated net income fell 34% to $1.329 billion, and Adjusted EBITDA declined to $1.211 billion from $2.097 billion. Nine-month EPS and income attributable to the public company cover only the period after the January 21 business combination; 2020 EPS was not presented.
- Revenue and margins: Q3 loan production income fell 66% to $589.5 million. Management reported a loan production gain margin of 94 basis points, versus 318 basis points a year earlier. Loan servicing income rose 148% to $174.7 million; interest income rose to $102.1 million. The $170.5 million negative MSR fair-value change was included in revenue.
- Cash flow: Nine-month operating cash flow was negative $3.754 billion, compared with positive $1.390 billion in 2020, mainly reflecting increased mortgage loans held and MSR capitalization as originations expanded. Financing activities provided $3.291 billion. Cash declined by $272.9 million to $950.9 million.
- Debt and liquidity: At September 30, warehouse borrowings were $10.488 billion, up from $6.941 billion at year-end 2020. Senior notes had $1.5 billion principal outstanding, with a $1.484 billion balance-sheet carrying amount; both note issues bear 5.5% interest. Total liabilities were $13.487 billion. Management reported compliance with warehouse and note covenants and applicable agency net-worth, liquidity and capital requirements.
- Other balance-sheet items: Mortgage loans at fair value were $11.737 billion and MSRs were $2.900 billion. Total assets were $16.481 billion, versus $11.493 billion at December 31, 2020.
Material changes and management commentary
- Origination volume grew, but higher interest rates and increased competition compressed the primary/secondary spread and sharply reduced gain margins, driving the decline in production income and earnings.
- The servicing portfolio expanded: unpaid principal balance rose to $284.9 billion from $188.3 billion at year-end 2020; loans serviced increased to 906,825 from 606,688. Delinquencies over 60 days were 1.01%, down from 1.93%.
- The company adopted fair-value accounting for all current MSR classes on January 1, 2021. This added $3.4 million to opening MSR assets and retained earnings; subsequent MSR fair-value movements are reported in revenue rather than amortization expense. Q3 MSR valuation assumptions increased fair value by $61.5 million, while cash-flow realization and decay reduced it by $217.0 million; sale-related provisions and costs reduced it by a further $14.9 million.
- During Q3, the company sold MSRs on loans with approximately $22.7 billion of unpaid principal balance for about $269.9 million. It also recorded a $5.4 million loss related to an uncollectible receivable from a prior MSR-sale counterparty.
- The company issued $700 million of 5.5% senior notes due 2029 in April and used part of the proceeds to repay and terminate a $400 million operating credit line. Nine-month financing cash flow also included $895.1 million of business-combination proceeds and $1.469 billion of distributions to SFS Corp.
Outlook, risks and contingencies
The filing provides no specific earnings, origination, margin or other quantitative guidance. Management describes results as sensitive to interest rates, mortgage-market conditions, competition, loan-sale execution and the availability and renewal of warehouse funding. The business also faces potential warehouse margin calls, counterparty risk, exposure to GSE and agency requirements, borrower credit risk, and repurchase or indemnification claims. Management states that servicing can partly offset origination exposure to interest-rate changes, but MSRs are not hedged.
- MSR values depend on estimated prepayments, discount rates and servicing costs. The filing’s sensitivity analysis shows a hypothetical 10% adverse change in prepayment speeds would reduce MSR fair value by $125.0 million; a 10% adverse change in discount rates would reduce it by $94.2 million.
- At September 30, the company had $38.8 billion of commitments to extend credit to potential borrowers. It had repurchased $102.3 million of loans during the first nine months under representations-and-warranties obligations; the related reserve was $84.7 million.
- Three class-action matters are described: an alleged unpaid origination-fee claim, an antitrust claim relating to a broker policy, and an overtime claim by a former employee. Motions to dismiss were pending in the first two matters. The company said resolution of disclosed legal matters was not expected to materially adversely affect its financial position, performance or cash flows.
- Related-party arrangements include leases of company facilities and aircraft from entities controlled by the CEO. After quarter-end, a lease amendment for additional campus space carried approximately $25.2 million of undiscounted payments through 2034, including $3.7 million for termination and moving costs.
- The Board declared a $0.10-per-share Class A dividend payable January 6, 2022. A separate $0.10-per-share dividend declared in August was paid October 6, 2021.
Important facts for investors to verify
- Whether production margins and earnings stabilize if rates rise further or competition remains intense.
- How MSR fair-value assumptions, prepayments and servicing-sale activity affect reported revenue and book value.
- Whether warehouse funding capacity, covenant compliance and liquidity remain adequate as mortgage loans and warehouse borrowings fluctuate.
- The scale and outcome of repurchase claims, the disclosed class actions and other regulatory or legal proceedings.
- The economic and governance implications of SFS Corp.’s approximately 94% non-controlling interest, related-party arrangements, dividends and distributions.
- Adjusted EBITDA is a non-GAAP measure; review the filing’s reconciliation and do not treat it as a substitute for GAAP earnings or operating cash flow.