GUILD HOLDINGS COMPANY The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to highlight and supplement data and information presented elsewhere in this Quarterly Report, including the condensed consolidated financial statements and related notes thereto included in Part I, Item 1. Prior period information has been revised to conform to the current period presentation. The following discussion includes forward-looking statements that reflect our plans, estimates and assumptions and involve numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of our Annual Report on Form 10-K for the year endedDecember 31, 2020 and in Item 1A in this Quarterly Report. See also "Cautionary Note Regarding Forward-Looking Statements." Future results could differ significantly from the historical results presented in this section. Business and Executive Overview We started our business in 1960 and are among the longest-operating seller servicers inthe United States . We are a growth-oriented mortgage company that employs a relationship-based loan sourcing strategy to execute our mission of delivering the promise of homeownership in neighborhoods and communities acrossthe United States . Our business model is centered on providing a personalized mortgage-borrowing experience that is delivered by our knowledgeable loan officers and supported by our diverse product offerings. Throughout these individualized interactions, we work to earn our clients' trust and confidence as a financial partner that can help them find their way through life's changes and build for the future. Executive Summary This executive summary highlights selected financial information that should be considered in the context of the additional discussions below. •Originated$8.2 billion and$8.8 billion of mortgage loans for the three months endedJune 30, 2021 and 2020, respectively. Originated$18.0 billion and$14.6 billion of mortgage loans for the six months endedJune 30, 2021 and 2020, respectively. Lower interest rates led to an increase in origination volume across theU.S. mortgage market during the six months endedJune 30, 2021 compared to the same prior period. •Servicing portfolio as ofJune 30, 2021 was$65.7 billion of UPB compared to$52.8 billion of UPB as ofJune 30, 2020 , with the average size of the portfolio increasing 23.0% over that time. •Generated$8.9 million and$123.0 million of net income for the three months endedJune 30, 2021 and 2020, respectively. Generated$169.5 million and$110.0 million of net income for the six months endedJune 30, 2021 and 2020, respectively. •Generated$52.0 million and$179.5 million of Adjusted Net Income for the three months endedJune 30, 2021 and 2020, respectively. Generated$158.7 million and$237.4 million of Adjusted Net Income for the six months endedJune 30, 2021 and 2020, respectively. •Generated$74.9 million and$243.5 million of Adjusted EBITDA for the three months endedJune 30, 2021 and 2020, respectively. Generated$219.2 million and$325.5 million of Adjusted EBITDA for the six months endedJune 30, 2021 and 2020, respectively. Please see "-Non-GAAP Financial Measures" for further information regarding our use of non-GAAP measures and reconciliations to net income, the nearest comparable financial measure calculated and presented in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The decreases in net income, Adjusted Net Income and Adjusted EBITDA for the three months endedJune 30, 2021 compared to the same period in 2020 were primarily due to a decrease in loan origination fees and gain on sale of loans, net of$162.7 million . This decrease was primarily driven by a decrease in gain on sale margins on originated loans of 155 basis points or 27.7% for the three 28 -------------------------------------------------------------------------------- Table of Contents months endedJune 30, 2021 compared to the same period in 2020. Net income and loan origination fees and gain on sale of loans, net increased during the six months endedJune 30, 2021 compared to the same period in 2020 primarily due to a$4.1 billion , or 29.0% increase in loan sales, offset by a decrease in gain on sale margins of 71 basis points or 14.1% for the six months endedJune 30, 2021 compared to the same period in 2020. The decreases in Adjusted Net Income and Adjusted EBITDA for the six months endedJune 30, 2021 compared to the same period in 2020 were primarily due the decrease in gain on sale margins referenced above. While low interest rates and increased demand for mortgage financing characterized each of the three and six month periods endedJune 30, 2021 and 2020, capacity constraints in the mortgage origination market were more pronounced during the three and six months endedJune 30, 2020 compared to the same periods in 2021, leading to higher gain on sale margins during the three and six months endedJune 30, 2020 . Margins may decrease in the future due to increasing competition among mortgage providers which has placed additional pressure on pricing, but such changes will depend on future market demand and capacity. The decrease in net income for the three months endedJune 30, 2021 compared to the same period in 2020 was partly offset by a decrease in loss related to the fair value of our MSRs, which was$84.8 million for the three months endedJune 30, 2021 and$96.2 million for the same time period in 2020. Similarly, the increase in net income for the six months endedJune 30, 2021 compared to the same period in 2020 was partly due to a decrease in loss related to the fair value of our MSRs, which was$49.0 million and$204.8 million for the six months endedJune 30, 2021 and 2020, respectively. These losses in the fair value of our MSRs resulted from decreases in projected duration of cash flow collections during these periods as a result of the increase in average prepayment speeds. According to the Mortgage Finance Forecast from theMortgage Bankers Association (the "MBA Mortgage Finance Forecast"), average 30-year mortgage rates increased by 10 basis points during the three months endedJune 30, 2021 and decreased by 30 basis points during the three months endedJune 30, 2020 . Average 30-year mortgage rates increased by 20 basis points during the six months endedJune 30, 2021 and decreased 50 basis points during the six months endedJune 30, 2020 . Although interest rates increased during the three months endedJune 30, 2021 , we experienced an increase in average prepayment speeds because there was an increase in cash-out refinancing during such period. Management believes that maintaining both an origination segment and a servicing segment provides us with a more balanced business model in both rising and declining interest rate environments, compared to other industry participants that predominately focus on either origination or servicing, instead of both. In addition, one of our business strategies is to seek to recapture mortgage transactions when our borrowers prepay their loans. During the six months endedJune 30, 2021 , we had a 27% purchase recapture rate, a 64% refinance recapture rate and a 59% overall recapture rate, compared to 26%, 67% and 62%, respectively, for the six months endedJune 30, 2020 . Recapture rate is calculated as the UPB of our clients that originated a new mortgage with us in a given period, divided by the UPB of our clients that paid off their existing mortgage and originated a new mortgage in the same period. Purchase recapture is calculated based on those clients who originate a new mortgage for the purchase of a home, and refinance recapture is calculated based on those clients who originate a new mortgage to refinance an existing mortgage. Overall recapture rate is calculated as the total of our clients that originate a new mortgage with us divided by the total of our clients that paid off their existing mortgage and originated a new mortgage. This calculation excludes clients to whom we did not actively market due to contractual prohibitions or other business reasons. Recent Developments Acquisition of RMS OnMay 10, 2021 , we entered into a definitive agreement to acquire RMS. The acquisition was completed onJuly 1, 2021 for a purchase price of$204.9 million , subject to customary purchase price adjustments. The acquisition was financed with a combination of$189.6 million in cash and the issuance of 996,644 shares of our Class A common shares. Additionally, RMS shareholders are entitled to contingent earn-out payments based on net income from RMS branch locations. RMS will continue as a wholly-owned subsidiary of GMC. 29 -------------------------------------------------------------------------------- Table of Contents COVID-19 Pandemic Business Operations and Liquidity We continue to closely monitor the economic impact resulting from the COVID-19 pandemic. Although we experienced increased origination volume in our origination segment during the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 , the COVID-19 pandemic has had a slight negative impact on the financial results of our servicing segment. In addition, we expect that with the limited supply of inventory in the housing market we may experience lower origination in future periods. We continue to experience intense competition in the housing and mortgage markets, and we expect this competition will continue to put pressure on gain on sale margins and profitability. The federal government enacted the CARES Act, which allowed borrowers with federally backed loans to request a temporary mortgage forbearance. InFebruary 2021 , theFederal Housing Finance Agency , theDepartment of Housing and Urban Development , theDepartment of Veterans Affairs , and theDepartment of Agriculture announced an extension of the forbearance period of three to six months depending on the loan type. InJune 2021 , theConsumer Financial Protection Bureau ("CFPB") finalized a rule that effectively prohibits foreclosures beforeJanuary 1, 2022 , with certain limited exceptions. The final rule is effective onAugust 31, 2021 . As a result of the CARES Act forbearance requirements and the subsequent extension of federal forbearance programs, we may experience increases in our foreclosure loss expenses in the future, depending on future delinquency rates in our servicing portfolio. As ofJune 30, 2021 , the 60-plus day delinquency rate on our servicing portfolio was 2.5%, compared to a 60-plus day delinquency rate of 3.5% as ofDecember 31, 2020 . If we were to experience an increased delinquency rate on our servicing portfolio this may require us to finance substantial amounts of advances of principal and interest, property taxes, insurance premiums and other expenses to protect investors' interests in the properties securing the loans. Although we have decreased our provision for foreclosure losses due to the decrease in the delinquency rate during the three and six months endedJune 30, 2021 , this is partially offset by an increase to our provision due to an increase in estimated per-loan losses due to expected longer foreclosure times as described further below. These advances and payments, coupled with increased servicing costs and lower servicing revenue, have negatively affected and we expect will continue to negatively affect our cash position. We continuously monitor the requirements around these advances and how, if at all, they impact our liquidity. Additionally, we are currently prohibited from collecting certain servicing-related fees, such as late fees, and initiating foreclosure proceedings. As a result, we expect the effects of the CARES Act forbearance requirements and the subsequent federal forbearance programs to reduce our servicing income and increase our servicing expenses. As ofJuly 31, 2021 , approximately 2.0% of the loans in our servicing portfolio had elected the forbearance option compared to the industry average of 3.4%, as reported by theMortgage Bankers Association and, as ofJune 30, 2021 , approximately 2.1% of the loans in our servicing portfolio had elected the forbearance option compared to the industry average of 3.9%, as reported by theMortgage Bankers Association . Of the 2.0% of the loans in our servicing portfolio that had elected forbearance as ofJuly 31, 2021 , approximately 7.8% remained current on their July payments and, of the 2.1% of the loans in our servicing portfolio that had elected forbearance as ofJune 30, 2021 , approximately 9.3% remained current on their June payments. We believe our portfolio has performed better than the industry average because of our in-house servicing capabilities and timely response to the COVID-19 pandemic and that our performance is a testament to the strength of our client relationships. Our in-house servicing team and local loan officers continue to work with our clients to understand forbearance plans and determine the best paths forward for their unique circumstances. By maintaining relationships with our clients throughout the loan lifecycle, and supporting our clients during times of uncertainty, we position ourselves to capture future business. 30
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Servicing Portfolio Forbearance
(as of period end)
[[Image Removed: ghld-20210630_g1.jpg]]
Source: Mortgage Bankers Association .
Increased Liquidity
During the first half of 2021, to support our increased loan origination volume,
we added one additional loan funding facility with a total facility size of
$250.0 million . As of June 30, 2021 , the aggregate available amount under our
loan facilities was approximately $3.1 billion . See "-Liquidity, Capital
Resources and Cash Flows" for further information regarding our funding
facilities.
The extent to which the COVID-19 pandemic affects our business, results of
operations and financial condition will ultimately depend on future
developments, which are highly uncertain and cannot be predicted, including the
scope and duration of the pandemic and actions taken by governmental authorities
and other third parties in response to the pandemic.
Description of Certain Components of Financial Data
The primary components of our revenue and expenses are described below.
Our Components of Revenue
Loan origination fees and gain on sale of loans, net - This represents all
income recognized from the time when a loan is originated until the time when a
loan is subsequently sold to an investor and includes cash and non-cash
components. Each component is described below:
•Gain (loss) on sale of loans - Net proceeds from the difference between the
quoted loan price committed to the client and the price received from the
investor at loan sale, net of miscellaneous investor fees charged.
•Loan origination fees - Fees collected from the client, which typically include
processing, underwriting, funding, credit report, tax service, flood
certification and appraisal fees, net of any associated third-party costs.
•The fair value of the MSRs at time of sale - After a loan for which we continue
to act as the servicer is sold to an investor, we record the value of the MSR at
fair value. Fair value is estimated based on the present value of future cash
flows. We utilize a third-party valuation service to determine this estimated
value based on variables such as contractual servicing fees, ancillary fees,
estimated prepayment speeds, discount rate and the cost to service.
•Changes in the fair value of IRLC and MLHS - When the client accepts an
interest rate lock, we record the estimated fair value of the loan. We also
evaluate several factors to determine the likelihood of the loan closing and
discount the value of any interest rate lock commitments ("IRLCs") we consider
having a lower probability of closing. The probability of the loan ultimately
closing changes as the stage of the loan progresses
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from application to underwriting submission, loan approval and funding. Loans
that close and are held for sale are commonly referred to as mortgage loans held
for sale or "MLHS." MLHS are also recorded at fair value. We typically determine
the fair value of our MLHS based on investor committed pricing; however, we
determine the fair value of any MLHS that is not allocated to a commitment based
on current delivery trade prices.
•Changes in the fair value of forward delivery commitments - We enter into
forward delivery commitments to hedge against changes in the interest rates
associated with our IRLCs and MLHS. Our hedging policies are set by our risk
management function and are monitored daily. Typically, when the fair value of
an IRLC or MLHS increases, the fair value of any related forward contract
decreases.
•Provision for investor reserves - At the time a loan is sold to an investor, we
make certain representations and warranties. If defects are subsequently
discovered in these representations and warranties that cause a loan to no
longer satisfy the applicable investor eligibility requirements, we may be
required to repurchase that loan. We are also required to indemnify several of
our investors for borrowers' prepayments and defaults. We estimate the potential
for these losses based on our recent and historical loan repurchase and
indemnification experience and our success rate on appeals. We also screen
market conditions for any indications of a rise in delinquency rates, which may
result in a heightened exposure to loss.
•Early pay-off fees - The amount of gain on sale premium received from the
investors who purchase our loans that we must return to those investors when
loans sold to them are repaid before a specified point in time.
Loan servicing and other fees - Loan servicing and other fees consist of:
•Loan servicing income - This represents the contractual fees that we earn by
servicing loans for various investors. Fees are calculated based on a percentage
of the outstanding principal balance and are recognized into revenue as related
payments are received.
•Other ancillary fees - We may also collect other ancillary fees from the
client, such as late fees and nonsufficient funds fees.
•Impound interest - We are required to pay interest to our clients annually
based on the average escrow account balances that we hold in trust for the
payment of their property taxes and insurance.
Valuation adjustment of mortgage servicing rights - We have elected to recognize
MSRs at fair value. This requires that we periodically reevaluate the valuation
of our MSRs following our initial analysis at the time of sale. A third party
conducts a monthly valuation of our MSRs, and we record any changes to the fair
value of our MSRs that result from changes in valuation model inputs or
assumptions and collections of servicing cash flows in accordance with such
third-party analysis. Changes in the fair value of our MSRs result in an
adjustment to the value of our MSRs.
Interest income - Interest income consists primarily of interest earned on MLHS.
Interest expense - Interest expense consists primarily of interest paid on
funding and non-funding debt facilities collateralized by our MLHS and MSRs. We
define funding debt as all other debt related to operations, such as warehouse
lines of credit and our early buyout facility, which we use to repurchase
certain delinquent GNMA loans. Non-funding debt includes the note agreements
collateralized by our MSRs (our "MSR notes payable"). We also record related
bank charges and payoff interest expense as interest expense. Payoff interest
expense is equal to the difference between what we collect in interest from our
clients and what we remit in interest to the investors who purchase the loans
that we originate. For loans sold through Agency MBS, we are required to remit a
full month of interest to those investors, regardless of the date on which the
client prepays during the payoff month, resulting in additional interest
expense.
Other income, net - Other income, net typically includes dividend and fair value
adjustments related to marketable securities that are generally immaterial to
our operating results.
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Our Components of Expenses
Salaries, incentive compensation and benefits - Salaries, incentive compensation
and benefits expense includes all payroll, incentive compensation and employee
benefits paid to our employees, as well as expenses incurred in connection with
our use of employment and temporary help agencies. Our loan officers are paid
incentive compensation based on origination volume, resulting in a variable pay
structure that fluctuates.
General and administrative - General and administrative expense primarily
includes costs associated with professional services, attendance at conferences
and meetings, office expenses, liability insurance, business licenses and other
miscellaneous costs.
In addition, within general and administrative expense, we record any
adjustments to the fair value of the contingent liabilities related to our
completed acquisitions, commonly known as "earn-out payments." These payments
are estimated based on the present value of future cash flows during the
earn-out period. The earn-out periods for our acquisitions span from three to
five years, and the earn-out periods for two of our acquisitions are still
ongoing.
Occupancy, equipment and communication - Occupancy, equipment and communication
includes expenses related to the commercial office spaces we lease, as well as
telephone and internet service and miscellaneous leased equipment used for
operations.
Depreciation and amortization - We depreciate furniture and equipment on a
straight-line basis for a period of up to five years and we record amortization
expense related to our leasehold improvements on rented space. That amortization
expense is recognized over the shorter of the lease term or the useful life of
the asset. We also record costs related to the maintenance of software, which
consist of both internal and external costs incurred in connection with software
development and testing, as well as any costs associated with the implementation
of new software. These costs are amortized over a three-year period.
Provision for foreclosure losses - We may incur a loss on government loans
related to unreimbursed interest and costs associated with foreclosure. We
reserve for government loans based on historical loss experience as well as for
loan-specific issues related to foreclosure.
Income tax expense - We are subject to federal and state income tax. We record
this expense based on our statutory federal and state tax rates. These statutory
rates are adjusted for permanent non-deductible differences and reconciliation
differences from prior years. We also evaluate material temporary differences to
determine whether any additional adjustments to this expense are required.
Key Performance Indicators
Management reviews several key performance indicators to evaluate our business
results, measure our performance and identify trends to inform our business
decisions. Summary data for these key performance indicators is listed below.
Please refer to "Results of Operations" for additional metrics that management
reviews in conjunction with the condensed consolidated financial statements.
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Three Months Ended
June 30, %
($ and units in thousands) 2021 2020 Change Change
Origination Data
$ Total in-house origination(1) $ 8,173,153 $ 8,814,629 $ (641,476) (7.3)%
# Total in-house origination 27 31 (4) (12.9)%
$ Retail in-house origination $ 7,939,469 $ 8,640,411 $ (700,942) (8.1)%
# Retail in-house origination 27 30 (3) (10.0)%
$ Retail brokered origination(2) $ 19,356 $ 15,363 $ 3,993 26.0 %
Total originations $ 8,192,509 $ 8,829,992 $ (637,483) (7.2)%
Gain on sale margin (bps)(3) 405 560 (155) (27.7)%
Gain on sale margin on pull-through
adjusted locked volume (bps)(4) 415 494 (79) (16.0)%
30-year conventional conforming par
rate(5) 3.0 % 3.2 % (0.2)% (6.3)%
Servicing Data
UPB (period end)(6) $ 65,670,291 $ 52,794,328 $ 12,875,963 24.4 %
Loans serviced (period end) 287 249 38 15.3 %
MSR multiple (period end)(7) 3.1 2.2 0.9 40.9 %
Weighted average coupon rate 3.4% 4.0% (0.6)% (15.0)%
Loan payoffs(8) $ 4,161,228 $ 5,125,908 $ (964,680) (18.8)%
Loan delinquency rate 60-plus days
(period end) 2.5% 3.5% (1.0)% (28.6)%
Six Months Ended
June 30, %
($ and units in thousands) 2021 2020 Change Change
Origination Data
$ Total in-house origination(1) $ 17,941,190 $ 14,558,875 $ 3,382,315 23.2 %
# Total in-house origination 62 52 10 19.2 %
$ Retail in-house origination $ 17,424,164 $ 14,186,728 $ 3,237,436 22.8 %
# Retail in-house origination 60 50 10 20.0 %
$ Retail brokered origination(2) $ 32,671 $ 42,423 $ (9,752) (23.0)%
Total originations $ 17,973,861 $ 14,601,298 $ 3,372,563 23.1 %
Gain on sale margin (bps)(3) 433 504 (71) (14.1)%
Gain on sale margin on pull-through
adjusted locked volume (bps)(4) 454 407 47 11.5 %
30-year conventional conforming par
rate(5) 3.0 % 3.2 % (0.2)% (6.3)%
Servicing Data
UPB (period end)(6) $ 65,670,291 $ 52,794,328 $ 12,875,963 24.4 %
Loans serviced (period end) 287 249 38 15.3 %
MSR multiple (period end)(7) 3.1 2.1 1.0 47.6 %
Weighted average coupon rate 3.4% 4.0% (0.6)% (15.0)%
Loan payoffs(8) $ 9,986,782 $ 8,223,361 $ 1,763,421 21.4 %
Loan delinquency rate 60-plus days
(period end) 2.5% 3.5% (1.0)% (28.6)%
__________________________(1)Includes retail and correspondent loans and excludes brokered loans.
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(2)Brokered loans are defined as loans we originate in the retail channel that
are processed by us but underwritten and closed by another lender. These loans
are typically for products we choose not to offer in-house.
(3)Represents loan origination fees and gain on sale of loans, net divided by
total in-house origination to derive basis points.
(4)Represents loan origination fees and gain on sales of loans, net divided by
pull-through adjusted locked volume. Pull-through adjusted locked volume is
equal to total locked volume multiplied by pull-through rates of 90.7% and 87.2%
as of June 30, 2021 and 2020, respectively. We estimate the pull-through rate
based on changes in pricing and actual borrower behavior using a historical
analysis of loan closing data and "fallout" data with respect to the number of
commitments that have historically remained unexercised. For additional
information regarding our total locked volume and pull-through adjusted locked
volume for the three and six months ended June 30, 2021 and 2020, see "-Results
of Operations for the Three and Six Months Ended June 30, 2021 and
2020-Revenue-Loan Origination Fees and Gain on Sale of Loans, Net."
(5)Represents the 30-year average conventional conforming note rate published
monthly according to the MBA Mortgage Monthly Finance Forecast.
(6)Excludes subserviced portfolio of $0.6 billion and $1.1 billion as of June
30, 2021 and 2020, respectively.
(7)Represents a metric used to determine the relative value of our MSRs in
relation to our annualized retained servicing fee. It is calculated by dividing
(a) the fair market value of our MSRs as of a specified date by (b) the weighted
average annualized retained servicing fee for our servicing portfolio as of such
date. We exclude purchased MSRs from this calculation because our servicing
portfolio consists primarily of originated MSRs and, consequently, purchased
MSRs do not have a material impact on our weighted average service fee.
(8)Represents the gross amount of UPB paid off from our servicing portfolio.
Non-GAAP Financial Measures
To supplement our financial statements presented in accordance with GAAP and to
provide investors with additional information regarding our GAAP financial
results, we have presented Adjusted Net Income, Adjusted EBITDA and Adjusted
Return on Equity, which are non-GAAP financial measures. These non-GAAP
financial measures are not based on any standardized methodology prescribed by
GAAP and are not necessarily comparable to similarly titled measures presented
by other companies.
Adjusted Net Income. We define Adjusted Net Income as earnings before the change
in the fair value measurements related to our MSRs, contingent liabilities
related to completed acquisitions due to changes in valuation assumptions and
stock-based compensation. The fair value of our MSRs is estimated based on a
projection of expected future cash flows and the fair value of our contingent
liabilities related to completed acquisitions is estimated based on a projection
of expected future earn-out payments. Adjusted Net Income is also adjusted by
applying an implied tax effect to these adjustments. The Company excludes the
change in the fair value of its MSRs due to changes in model inputs and
assumptions from Adjusted Net Income and Adjusted EBITDA because the Company
believes this non-cash, non-realized adjustment to total revenues is not
indicative of the Company's operating performance or results of operation but
rather reflects changes in model inputs and assumptions (e.g., prepayment speed,
discount rate and cost to service assumptions) that impact the carrying value of
the Company's MSRs from period to period. The Company also excludes stock-based
compensation because the Company believes it is a non-cash expense that is not
reflective of its core operations or indicative of its ongoing operations.
Adjusted EBITDA. We define Adjusted EBITDA as earnings before interest (without
adjustment for net warehouse interest related to loan fundings and payoff
interest related to loan prepayments), taxes, depreciation and amortization
exclusive of any change in the fair value measurements of the MSRs due to
valuation assumptions, contingent liabilities from business acquisitions and
stock-based compensation. The Company excludes the change in the fair value of
its MSRs due to changes in model inputs and assumptions from Adjusted Net Income
and Adjusted EBITDA because the Company believes this non-cash, non-realized
adjustment to total revenues is not indicative of the Company's operating
performance or results of operation but rather reflects
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changes in model inputs and assumptions (e.g., prepayment speed, discount rate
and cost to service assumptions) that impact the carrying value of the Company's
MSRs from period to period.
Adjusted Return on Equity. We define Adjusted Return on Equity as Adjusted Net
Income as a percentage of average beginning and ending stockholders' equity
during the period. For periods of less than one year, Return on Equity and
Adjusted Return on Equity are shown on an annualized basis.
We use these non-GAAP financial measures to evaluate our operating performance,
to establish budgets and to develop operational goals for managing our business.
These non-GAAP financial measures are designed to evaluate operating results
exclusive of fair value adjustments that are not indicative of management's
operating performance. Accordingly, we believe that these financial measures
provide useful information to investors and others in understanding and
evaluating our operating results, enhancing the overall understanding of our
past performance and future prospects.
Our non-GAAP financial measures are not prepared in accordance with GAAP and
should not be considered in isolation of, or as an alternative to, measures
prepared in accordance with GAAP. There are a number of limitations related to
the use of these non-GAAP financial measures rather than net income (loss),
which is the most directly comparable financial measure calculated and presented
in accordance with GAAP for Adjusted Net Income and Adjusted EBITDA, and Return
on Equity, which is the most directly comparable financial measure calculated
and presented in accordance with GAAP for Adjusted Return on Equity. These
limitations include that these non-GAAP financial measures are not based on a
comprehensive set of accounting rules or principles and many of the adjustments
to the GAAP financial measures reflect the exclusion of items that are recurring
and may be reflected in the Company's financial results for the foreseeable
future. In addition, other companies may use other measures to evaluate their
performance, all of which could reduce the usefulness of our non-GAAP financial
measures as tools for comparison.
The following tables reconcile Adjusted Net Income and Adjusted EBITDA to net
income and Adjusted Return on Equity to Return on Equity, the most directly
comparable financial measures calculated and presented in accordance with GAAP.
Reconciliation of Net Income to Adjusted Net
Income Three Months Ended June 30, Six Months Ended June 30,
($ in thousands) 2021 2020 2021 2020
Net income $ 8,938 $ 122,975 $ 169,542 $ 109,989
Add adjustments:
Change in fair value of MSRs due to model
inputs and assumptions 49,845 64,941 (30,760) 151,080
Change in fair value of contingent
liabilities due to acquisitions 6,494 11,018 13,114 20,025
Stock-based compensation 1,457 - 3,089 -
Tax impact of adjustments(1) (14,738) (19,408) 3,712 (43,718)
Adjusted Net Income $ 51,996 $ 179,526 $ 158,697 $ 237,376 ___________________________
(1)Implied tax rate used is 25.5%.
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Reconciliation of Net Income to Adjusted
EBITDA Three Months Ended June 30, Six Months Ended June 30,
($ in thousands) 2021 2020 2021 2020
Net income $ 8,938
1,592 2,129 2,989 4,291
Income tax expense 4,986 40,646 57,991 36,465
Depreciation and amortization 1,608 1,806 3,262 3,693
Change in fair value of MSRs due to model
inputs and assumptions 49,845 64,941 (30,760) 151,080
Change in fair value of contingent
liabilities due to acquisitions 6,494 11,018 13,114 20,025
Stock-based compensation 1,457 - 3,089 -
Adjusted EBITDA $ 74,920 $ 243,515 $ 219,227 $ 325,543
Adjusted Return on Equity Calculation Three Months Ended June 30, Six Months Ended June 30,
($ in thousands) 2021 2020 2021 2020
Numerator: Adjusted Net Income $ 51,996 $ 179,526 $ 158,697 $ 237,376
Denominator: Average stockholders' equity 873,426 444,534 792,308 456,026
Adjusted Return on Equity 23.8 % 161.5 % 40.1 % 104.1 %
Return on Equity 4.1 % 110.7 % 42.8 % 48.2 %
The following table reconciles the valuation adjustment of mortgage servicing
rights from the Company's Condensed Consolidated Statements of Income to the
change in fair value of MSRs due to model inputs and assumptions included in the
reconciliation tables above.
Reconciliation of valuation adjustment of mortgage
servicing rights to change in fair value of MSRs due
to model inputs and assumptions Three Months Ended June 30, Six Months Ended June 30,
($ in thousands) 2021 2020 2021 2020
Valuation adjustment of mortgage servicing rights
$ (96,161) $ (49,046) $ (204,810) Subtract adjustment: Change in fair value of MSRs due to collection/realization of cash flows (34,944) (31,220) (79,806) (53,730) Change in fair value of MSRs due to model inputs and assumptions$ (49,845) $ (64,941) $ 30,760 $ (151,080) 37
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Results of Operations for the Three Months Ended
Consolidated Statement of Operations Three Months Ended June 30, ($ in thousands) 2021 2020 $ Change % Change
Revenue
Loan origination fees and gain on sale of loans, net$ 330,759 $ 493,432 $ (162,673) (33.0) % Loan servicing and other fees 47,652 37,778 9,874 26.1 % Valuation adjustment of mortgage servicing rights (84,789) (96,161) 11,372 11.8 % Interest income 14,635 13,948 687 4.9 % Interest expense (14,209) (14,508) 299 (2.1) % Other income, net 61 608 (547) (90.0) % Net revenue 294,109 435,097 (140,988) (32.4) % Expenses Salaries, incentive compensation and benefits 232,563 229,885 2,678 1.2 % General and administrative 31,794 25,967 5,827 22.4 % Occupancy, equipment and communication 14,662 13,882 780 5.6 % Depreciation and amortization 1,608 1,806 (198) (11.0) % Provision for foreclosure losses (442) (64) (378) (590.6) % Total expenses 280,185 271,476 8,709 3.2 % Income before income tax expense 13,924 163,621 (149,697) NM Income tax expense 4,986 40,646 (35,660) NM Net income$ 8,938 $ 122,975 $ (114,037) NM
Results of Operations for the Six Months Ended June 30, 2021 and 2020
Six Months Ended
Consolidated Statement of Operations June 30,
($ in thousands) 2021 2020 $ Change % Change
Revenue
Loan origination fees and gain on sale of loans, net$ 777,347 $ 733,293 $ 44,054 6.0 % Loan servicing and other fees 92,851 76,310 16,541 21.7 % Valuation adjustment of mortgage servicing rights (49,046) (204,810) 155,764 76.1 % Interest income 29,734 26,949 2,785 10.3 % Interest expense (30,720) (27,442) (3,278) 11.9 % Other income, net 130 997 (867) (87.0) % Net revenue 820,296 605,297 214,999 35.5 % Expenses Salaries, incentive compensation and benefits 499,287 377,898 121,389 32.1 % General and administrative 58,701 48,192 10,509 21.8 % Occupancy, equipment and communication 29,494 27,200 2,294 8.4 % Depreciation and amortization 3,262 3,693 (431) (11.7) % Provision for foreclosure losses 2,019 1,860 159 8.5 % Total expenses 592,763 458,843 133,920 29.2 % Income before income tax expense 227,533 146,454 81,079 NM Income tax expense 57,991 36,465 21,526 NM Net income$ 169,542 $ 109,989 $ 59,553 NM 38
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RevenueLoan Origination Fees and Gain on Sale of Loans, Net The tables below provide additional detail regarding the loan origination fees and gain on sale of loans, net for the periods presented:
Three Months Ended June 30,
($ in thousands) 2021 2020 $ Change % Change
Gain on sale of loans $ 298,631 $ 282,884 $ 15,747 5.6 %
Loan origination fees 25,519 28,179 (2,660) (9.4) %
Fair value of originated MSRs 74,397 76,148 (1,751) (2.3) %
Fair value adjustment to MLHS and IRLCs 33,550 87,589 (54,039) NM
Changes in fair value of forward
commitments (98,083) 27,534 (125,617) NM
Provision for investor reserves (3,255) (8,902) 5,647 (63.4) %
Total loan origination fees and gain on
sale of loans, net $ 330,759 $ 493,432 $ (162,673) (33.0) %
Six Months Ended June 30,
($ in thousands) 2021 2020 $ Change % Change
Gain on sale of loans $ 623,006 $ 442,106 $ 180,900 40.9 %
Loan origination fees 52,347 43,778 8,569 19.6 %
Fair value of originated MSRs 173,861 114,771 59,090 51.5 %
Fair value adjustment to MLHS and IRLCs (103,510) 167,200 (270,710) NM
Changes in fair value of forward
commitments 37,247 (23,509) 60,756 NM
Provision for investor reserves (5,604) (11,053) 5,449 (49.3) %
Total loan origination fees and gain on
sale of loans, net $ 777,347 $ 733,293 $ 44,054 6.0 %
The tables below provide additional detail regarding the composition of our origination volume and other key performance indicators for the periods presented:
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Three Months Ended
June 30,
($ and units in thousands) 2021 2020 Change % Change
Loan origination volume by type:
Conventional conforming $ 5,644,574 $ 6,417,967 $ (773,393) (12.1) %
Government 1,845,232 1,843,357 1,875 0.1 %
State housing 433,629 477,954 (44,325) (9.3) %
Non-agency 249,718 75,351 174,367 231.4 %
Total in-house originations(1) $ 8,173,153 $ 8,814,629 $ (641,476) (7.3) %
Brokered loans $ 19,356 $ 15,363 $ 3,993 26.0 %
Total originations $ 8,192,509 $ 8,829,992 $ (637,483) (7.2) %
In-house loans closed 27 31 (4) (12.9) %
Average loan amount $ 303 $ 284 $ 19 6.7 %
Purchase 59.3 % 41.9 % 17.4 % 41.5 %
Refinance 40.7 % 58.1 % (17.4) % (29.9) %
Service retained(2) 91.6 % 93.2 % (1.6) % (1.7) %
Service released(3) 8.4 % 6.8 % 1.6 % 23.5 %
Gain on sale margin (bps)(4) 405 560 (155) (27.7) %
Total locked volume(5) $ 8,784,283 $ 11,451,872 $ (2,667,589) (23.3) %
Pull-through adjusted locked
volume(6) $ 7,964,709 $ 9,986,032 $ (2,021,323) (20.2) %
Gain on sale margin on pull-through
adjusted locked volume (bps)(7) 415 494 (79) (16.0) %
Weighted average loan-to-value 79.3 % 79.9 % (0.6) % (0.8) %
Weighted average credit score 746 754 (8) (1.1) %
Weighted average note rate 3.2 % 3.4 % (0.2) % (5.9) %
Days application to close 51 55 (4) (7.3) %
Days close to purchase by investors 14 14 - - %
Purchase recapture rate 25.5 % 24.7 % 0.8 % 3.2 %
Refinance recapture rate 55.4 % 63.7 % (8.3) % (13.0) %
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Six Months Ended
June 30,
($ and units in thousands) 2021 2020 Change % Change
Loan origination volume by type:
Conventional conforming $ 12,334,525 $ 9,937,145 $ 2,397,380 24.1 %
Government 4,387,659 3,538,359 849,300 24.0 %
State housing 749,575 828,566 (78,991) (9.5) %
Non-agency 469,431 254,805 214,626 84.2 %
Total in-house originations(1) $ 17,941,190 $ 14,558,875 $ 3,382,315 23.2 %
Brokered loans $ 32,671 $ 42,423 $ (9,752) (23.0) %
Total originations $ 17,973,861 $ 14,601,298 $ 3,372,563 23.1 %In-house loans closed 62 52 10 19.2 % Average loan amount$ 289 $ 280 $ 9 3.2 % Purchase 47.2 % 45.0 % 2.2 % 4.9 % Refinance 52.8 % 55.0 % (2.2) % (4.0) % Service retained(2) 93.0 % 85.1 % 7.9 % 9.3 % Service released(3) 7.0 % 14.9 % (7.9) % (53.0) % Gain on sale margin (bps)(4) 433 504 (71) (14.1) % Total locked volume(5)$ 18,882,697 $ 20,678,153 $ (1,795,456) (8.7) % Pull-through adjusted locked volume(6)$ 17,120,941 $ 18,031,349 $ (910,408) (5.0) % Gain on sale margin on pull-through adjusted locked volume (bps)(7) 454 407 47 11.5 % Weighted average loan-to-value 78.4 % 81.0 % (2.6) % (3.2) % Weighted average credit score 755 754 1 0.1 % Weighted average note rate 3.0 % 3.5 % (0.5) % (14.3) % Days application to close 56 44 12 27.3 % Days close to purchase by investors 15 16 (1) (6.3) % Purchase recapture rate 26.5 % 26.3 % 0.2 % 0.8 % Refinance recapture rate 63.6 % 66.6 % (3.0) % (4.5) % ___________________________ (1)Includes retail and correspondent loans and excludes brokered loans. (2)Represents loans sold for which we continue to act as the servicer. (3)Represents loans sold for which we do not continue to act as the servicer. (4)Represents loan origination fees and gain on sales of loans, net divided by total in-house origination to derive basis points. (5)Total locked volume represents the aggregate dollar value of the potential loans for which the Company has agreed to extend credit to consumers at specified rates for a specified period of time, subject to certain contingencies that are described in the IRLCs between the Company and each of those consumers. The total locked volume for a given period is representative of the IRLCs that the Company has initially entered into during that period. (6)Pull-through adjusted locked volume is equal to total locked volume multiplied by pull-through rates of 90.7% and 87.2% as ofJune 30, 2021 and 2020, respectively. We estimate the pull-through rate based on changes in pricing and actual borrower behavior using a historical analysis of loan closing data and "fallout" data with respect to the number of commitments that have historically remained unexercised. (7)Represents loan origination fees and gain on sales of loans, net divided by pull-through adjusted locked volume. The decrease in gain on sales of loans for the three months endedJune 30, 2021 was primarily due to the decrease in gain on sale margins of 155 basis points or 27.7%. The increase in gain on sale of loans for the six months endedJune 30, 2021 was primarily driven by a$4.1 billion or 29.0% increase in loan sales, offset by a decrease in gain on sale margins of 71 basis points or 14.1%. 41
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The increase in the initial fair value recorded for our originated MSRs during the six months endedJune 30, 2021 compared to the same period in 2020 was primarily caused by an increase in our origination volume, as well as an increase in the percentage of our loans sold for which we continued to act as the servicer (i.e., on a "service retained" basis). We experienced adjustments to the recorded fair value of our MLHS and IRLCs, net of any related changes in the recorded fair value of our forward delivery commitments. Average 30-year mortgage rates increased by 20 basis points during the six months endedJune 30, 2021 , compared to a 50 basis point decrease during the six months endedJune 30, 2020 . Generally, as interest rates increase, the fair value of our MLHS and IRLCs decreases and the fair value of our forward delivery commitments increases. Loan Servicing and Other Fees The tables below provide additional details regarding our loan servicing and other fees for the periods presented. Three Months Ended June 30, ($ in thousands) 2021 2020 $ Change % Change Servicing fee income$ 46,035 $ 37,102 $ 8,933 24.1 % Other ancillary fees 1,592 983 609 62.0 % Loan modification fees 408 162 246 151.9 % Interest on impound accounts (383) (469) 86 (18.3) % Total servicing fees$ 47,652 $ 37,778 $ 9,874 26.1 % Six Months Ended June 30, ($ in thousands) 2021 2020 $ Change % Change Servicing fee income$ 89,891 $ 74,178 $ 15,713 21.2 % Other ancillary fees 2,863 2,636 227 8.6 % Loan modification fees 843 361 482 133.5 % Interest on impound accounts (746) (865) 119 (13.8) % Total servicing fees$ 92,851 $ 76,310 $ 16,541 21.7 % 42
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The table below provides additional details regarding our servicing portfolio
composition and key performance indicators for the period presented.
Three Months Ended
June 30,
%
($ and units in thousands) 2021 2020 Change Change
Beginning UPB of servicing
portfolio(1) $ 62,891,262 $ 50,117,988 $ 12,773,274 25.5 %
New UPB origination additions(2) 8,173,153 8,814,629 (641,476) (7.3) %
Less:
UPB originations sold service
released(3) $ 732,315 $ 659,033 $ 73,282 11.1 %
Loan payoffs 4,161,228 5,125,908 (964,680) (18.8) %
Loan principal reductions 495,533 345,597 149,936 43.4 %
Loan foreclosures 5,048 7,751 (2,703) (34.9) %
Ending UPB of servicing portfolio $ 65,670,291 $ 52,794,328 $ 12,875,963 24.4 %
Average UPB of servicing portfolio
24.9 %
Weighted average servicing fee 0.30 % 0.31 % - 0.0 %
Weighted average coupon rate 3.4 % 4.0 % (0.6) % (15.0) %
Weighted average prepayment speed(4) 15.1 % 22.5 % (7.4) % (32.9) %
Weighted average credit score 666 683 (17.0) (2.5) %
Weighted average loan age (in months) 20.9 27.8 (6.9) (24.8) %
Weighted average loan-to-value 78.4 % 83.4 % (5.0) % (6.0) %
MSR multiple (period end)(5) 3.1 2.2 0.9 40.9 %
Loans serviced (period end) 287 249 38.0 15.3 %
Loans delinquent 60-plus days (period
end) 7.3 9.2 (1.9) (20.7) %
Loan delinquency rate 60-plus days
(period end) 2.5 % 3.5 % (1.0) % (28.6) %
Six Months Ended
June 30,
%
($ and units in thousands) 2021 2020 Change Change
Beginning UPB of servicing
portfolio(1) $ 59,969,653 $ 49,326,579 $ 10,643,074 21.6 %
New UPB origination additions(2) 17,941,190 14,558,875 3,382,315 23.2 %
Less:
UPB originations sold service
released(3) $ 1,286,459 $ 2,145,044 $ (858,585) (40.0) %
Loan payoffs 9,986,782 8,223,361 1,763,421 21.4 %
Loan principal reductions 953,268 692,900 260,368 37.6 %
Loan foreclosures 14,043 29,821 (15,778) (52.9) %
Ending UPB of servicing portfolio $ 65,670,291 $ 52,794,328 $ 12,875,963 24.4 %
Average UPB of servicing portfolio
23.0 %
Weighted average servicing fee 0.30 % 0.31 % - 0.0 %
Weighted average coupon rate 3.4 % 4.0 % (0.6) % (15.0) %
Weighted average prepayment speed(4) 15.1 % 22.5 % (7.4) % (32.9) %
Weighted average credit score 666 683 (17.0) (2.5) %
Weighted average loan age (in months) 20.9 27.8 (6.9) (24.8) %
Weighted average loan-to-value 78.4 % 83.4 % (5.0) % (6.0) %
MSR multiple (period end)(5) 3.1 2.2 0.9 40.9 %
Loans serviced (period end) 287 249 38.0 15.3 %
Loans delinquent 60-plus days (period
end) 7.3 9.2 (1.9) (20.7) %
Loan delinquency rate 60-plus days
(period end) 2.5 % 3.5 % (1.0) % (28.6) %
43-------------------------------------------------------------------------------- Table of Contents ___________________________ (1)Excludes$0.6 billion and$1.1 billion atJune 30, 2021 and 2020, respectively, that are currently being subserviced by a third party. (2)Includes all in-house loans originated in the period, irrespective if it is eventually sold service retained or service released. (3)Represents loans sold for which we do not continue to act as the servicer of the loan. (4)Represents an estimated percentage of UPB that will pay off ahead of time in each period, calculated as an annual rate. This estimate is calculated by our third-party valuation provider. (5)Represents a metric used to determine the relative value of our MSRs in relation to our annualized retained servicing fee. It is calculated by dividing (a) the fair market value of our MSRs as of a specified date by (b) the weighted average annualized retained servicing fee for our servicing portfolio as of such date. We exclude purchased MSRs from this calculation because our servicing portfolio consists primarily of originated MSRs and, consequently, purchased MSRs do not have a material impact on our weighted average service fee. Total loan servicing and other fees increased for the three and six months endedJune 30, 2021 compared to the corresponding periods in 2020 due to the increase in our average servicing portfolio of 24.9% and 23.0% for the three and six months endedJune 30, 2021 , respectively. Although the increase in loan servicing and other fees is consistent with our average servicing portfolio growth over the same time periods, servicing and ancillary fee income have been below their historical averages due to the inability to collect late charges and servicing fees for customers who have elected to accept forbearance relief under the CARES Act. Those customers are currently not required to make their mortgage payments. InFebruary 2021 , theFederal Housing Finance Agency , theDepartment of Housing and Urban Development , theDepartment of Veterans Affairs , and theDepartment of Agriculture announced an extension of the forbearance period of three to six months depending on loan type. InJune 2021 , theCFPB finalized a rule that effectively prohibits foreclosures beforeJanuary 1, 2022 , with certain limited exceptions. The final rule is effective onAugust 31, 2021 . Valuation Adjustment of Mortgage Servicing Rights The table below presents our MSR valuation adjustment for the periods presented. Three Months Ended June 30, ($ in thousands) 2021 2020 $ Change % Change MSR valuation adjustment$ (84,789) $ (96,161) $ 11,372 (11.8) % Six Months Ended June 30, ($ in thousands) 2021 2020 $ Change % Change MSR valuation adjustment$ (49,046) $ (204,810) $ 155,764
(76.1) %
The fair value of our MSRs generally declines as interest rates decline and prepayments increase; conversely the fair value generally increases as interest rates increase and prepayments decrease. The valuation adjustments related to MSRs also include losses related to loan prepayments. During the three and six months endedJune 30, 2020 , interest rates declined, which contributed to higher valuation losses as compared to the three and six months endedJune 30, 2021 when there was minimal movement in interest rates. However, the increase in value from slightly higher interest rates was more than offset by loan prepayments due to an increase in cash-out refinancing during the three and six months endedJune 30, 2021 . The fair value of our mortgage servicing rights asset was 88 basis points of our servicing portfolio atJune 30, 2021 compared to 64 basis points atJune 30, 2020 . 44 --------------------------------------------------------------------------------
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Interest Income
Three Months Ended June 30,
($ in thousands) 2021 2020 $ Change % Change
Interest income, funding $ 12,243 $ 12,129 $ 114 0.9 %
Interest income earnings credit 1,022 269 753 279.9 %
Wire transfer fees 1,370 1,550 (180) (11.6) %
Total interest income $ 14,635 $ 13,948 $ 687 4.9 %
Six Months Ended
June 30,
($ in thousands) 2021 2020 $ Change % Change
Interest income, funding $ 24,932 $ 22,048 $ 2,884 13.1 %
Interest income earnings credit 1,736 2,345 (609) (26.0) %
Wire transfer fees 3,066 2,556 510 20.0 %
Total interest income $ 29,734 $ 29,734 $ 26,949 26949000 $ 2,785 10.3 %
The increase in total interest income for the three months ended June 30, 2021
compared to the same period in 2020 is primarily due to an increase in interest
income earnings credit, which is due to a one-time adjustment we received from
certain warehouse lenders. The weighted average note rate of originated loans
decreased from 3.4% for the three months ended June 30, 2020 to 3.2% for the
three months ended June 30, 2021 .
The increase in total interest income for the six months ended June 30, 2021 is
primarily related to an increase in interest income, funding. The increase in
interest income, funding is primarily due to an increase in origination volume
of $3.4 billion or 23.2%. Although the increase in interest income, funding is
directionally consistent with our increase in origination volume for the six
months ended June 30, 2021 , we are earning lower interest income per loan due to
lower interest rates for the six months ended June 30, 2021 compared to the six
months ended June 30, 2020 .
Interest Expense
Three Months Ended June 30,
($ in thousands) 2021 2020 $ Change % Change
Interest expense, funding facilities $ (7,148) $ (7,431) $ 283 (3.8) %
Interest expense, other financing (1,970) (2,445) 475 (19.4) %
Bank servicing charges (2,784) (1,990) (794) 39.9 %
Payoff interest expense (2,281) (2,598) 317 (12.2) %
Miscellaneous interest expense (26) (44) 18 (40.9) %
Total interest expense $ (14,209) $ (14,508) $ 299 (2.1) %
Six Months Ended
June 30,
($ in thousands) 2021 2020 $ Change % Change
Interest expense, funding facilities $ (15,540) $ (14,429) $ (1,111) 7.7 %
Interest expense, other financing (3,568) (4,797) 1,229 (25.6) %
Bank servicing charges (5,901) (3,654) (2,247) 61.5 %
Payoff interest expense (5,655) (4,475) (1,180) 26.4 %
Miscellaneous interest expense (56) (87) 31 (35.6) %
Total interest expense $ (30,720) $ (27,442) $ (3,278) 11.9 %
45-------------------------------------------------------------------------------- Table of Contents Bank servicing changes for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 increased due to increases to certain warehouse lines of credit facilities in late 2020. Bank servicing charges and collateral handling fees increased due to increased origination volume for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . Additionally, we increased some of our warehouse lines of credit facilities to support the increase in origination volume, which led to increases in bank servicing charges. Payoff interest expense increased due to increased payoff volume of$1.8 billion or 21.4% for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . When a client pays off their loan with us, the client pays interest only up until the date of payoff. As a seller-servicer, however, for loans sold through Agency MBS we are required to remit the full month of interest to the investors who purchase the loans we originate, even though the client will not pay a full month of interest for that month. 46
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Summary of Expenses
Three Months Ended June 30,
($ in thousands) 2021 2020 $ Change % Change
Salaries, incentive compensation and
benefits $ 232,563 $ 229,885 $ 2,678 1.2 %
General and administrative 31,794 25,967 5,827 22.4 %
Occupancy, equipment and communication 14,662 13,882 780 5.6 %
Depreciation and amortization 1,608 1,806 (198) (11.0) %
Provision for foreclosure losses (442) (64) (378) (590.6) %
Total expenses $ 280,185 $ 271,476 $ 8,709 3.2 %
Six Months Ended
June 30,
($ in thousands) 2021 2020 $ Change % Change
Salaries, incentive compensation and
benefits $ 499,287 $ 377,898 $ 121,389 32.1 %
General and administrative 58,701 48,192 10,509 21.8 %
Occupancy, equipment and communication 29,494 27,200 2,294 8.4 %
Depreciation and amortization 3,262 3,693 (431) (11.7) %
Provision for foreclosure losses 2,019 1,860 159 8.5 %
Total expenses $ 592,763 $ 458,843 $ 133,920 29.2 %
Salaries, Incentive Compensation and Benefits
Three Months Ended June 30,
($ in thousands) 2021 2020 $ Change % Change
Incentive compensation $ 125,565 $ 132,252 $ (6,687) (5.1) %
Salaries 81,581 63,957 17,624 27.6 %
Benefits 25,417 33,676 (8,259) (24.5) %
Total salaries, incentive compensation and
benefits expense $ 232,563 $ 229,885 $ 2,678 1.2 %
Six Months Ended
June 30,
($ in thousands) 2021 2020 $ Change % Change
Incentive compensation $ 276,533 $ 210,710 $ 65,823 31.2 %
Salaries 165,291 117,068 48,223 41.2 %
Benefits 57,463 50,120 7,343 14.7 %
Total salaries, incentive compensation and
benefits expense $ 499,287 $ 377,898 $ 121,389 32.1 %
Incentive compensation expense decreased during the three months ended June 30,
2021 due to a decrease in variable incentive compensation paid to sales teams.
This compensation is based on origination volume which decreased 7.3% during the
three months ended June 30, 2021 .
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Conversely, incentive compensation expense increased during the six months ended
June 30, 2021 due to an increase in origination volume of 23.2% during the same
period. Incentive compensation is also based on management of operating
expenses, which improved during the six months ended June 30, 2021 and resulted
in increased compensation earned.
Salaries expense increased for the three and six months ended June 30, 2021
compared to the same periods in 2020, primarily because we hired additional
permanent and temporary employees throughout 2020 and we paid increased variable
bonus and overtime to support the increase in our origination and servicing
volumes during the period.
Benefits expense decreased for the three months ended June 30, 2021 primarily
due to a decrease in the fair value of the deferred compensation plan for
certain executive employees of the Company. Benefits expense increased for the
six months ended June 30, 2021 primarily due to an increase in employment taxes
due to increased personnel expenses.
General and Administrative
Three Months Ended June 30,
($ in thousands) 2021 2020 $ Change % Change
Contingent liability fair value adjustment $ 6,494 $ 11,018 $ (4,524) (41.1) %
Professional fees 17,706 6,815 10,891 159.8 %
Advertising and promotions 4,060 4,622 (562) (12.2) %
Office supplies, travel and entertainment 2,093 1,981 112 5.7 %
Miscellaneous 1,441 1,531 (90) (5.9) %
Total general and administrative expense $ 31,794 $ 25,967 $ 5,827 22.4 %
Six Months Ended
June 30,
($ in thousands) 2021 2020 $ Change % Change
Contingent liability fair value adjustment $ 13,114 $ 20,025 $ (6,911) (34.5) %
Professional fees 30,468 12,192 18,276 149.9 %
Advertising and promotions 8,152 8,839 (687) (7.8) %
Office supplies, travel and entertainment 4,552 4,488 64 1.4 %
Miscellaneous 2,415 2,648
(233) (8.8) %
Total general and administrative expense
The decrease to the contingent liability fair value adjustment for the three and six months endedJune 30, 2021 compared to the same periods in 2020 was due to the completion of the earn-out period for two of our acquisitions in 2020. Professional fees increased primarily due to an increase of$1.8 million and$6.5 million in third-party fees and business taxes to support the growth in our origination volume during the three and six months endedJune 30, 2021 , respectively, and$4.5 million in costs incurred during the three months endedJune 30, 2021 in connection with the acquisition of RMS. Additionally, corporate liability insurance expenses increased$1.4 million and$2.6 million for the three and six months endedJune 30, 2021 , respectively, related to becoming a public company. We also incurred additional legal, accounting, and other costs related to becoming a public company. 48 -------------------------------------------------------------------------------- Table of Contents Occupancy, Equipment and Communication Three Months Ended June 30, ($ in thousands) 2021 2020 $ Change % Change Occupancy$ 8,563 $ 8,339 $ 224 2.7 % Equipment 2,187 1,608 579 36.0 % Communication 3,912 3,935 (23) (0.6) % Total occupancy, equipment and communication expense$ 14,662 $ 13,882 $ 780 5.6 % Six Months Ended June 30, ($ in thousands) 2021 2020 $ Change % Change Occupancy$ 16,912 $ 16,524 $ 388 2.3 % Equipment 4,402 3,240 1,162 35.9 % Communication 8,180 7,436 744 10.0 % Total occupancy, equipment and communication expense$ 29,494 $ 27,200 $ 2,294 8.4 % Occupancy costs generally consist of fixed costs and remain consistent except for the typical increase in building rental expense each year, which is usually aligned with inflation, and except for any increases associated with new acquisitions, expansion into new territories and entry into new material building leases. During the three and six months endedJune 30, 2021 , equipment expense increased due to the leasing of additional hardware and software licenses as well as the needs of a remote working environment because of COVID-19-related restrictive measures. Provision for Foreclosure Losses Although we have experienced a decrease in overall foreclosure starts and sales due to the CARES Act's foreclosure moratorium and the federal government's subsequent extension of its mortgage forbearance programs, once the moratorium has ended we anticipate an increase in the time needed to complete a foreclosure due to expected delays throughout the foreclosure process, which in turn increases our estimated per-loan losses. Although our reserves increased for the six months endedJune 30, 2021 , they decreased for the three months endedJune 30, 2021 due to decreases in delinquency rates of loans in our servicing portfolio. We continue to monitor foreclosure reserves and potential losses regularly to assess if further changes are needed. 49
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Segment Results for the Three and Six Months EndedJune 30, 2021 and 2020 Our operations are comprised of two distinct but related reportable segments that we refer to as our origination and servicing segments. We operate our origination segment from approximately 200 office locations. Our licensed sales professionals and support staff cultivate deep relationships with our referral partners and clients and provide a customized approach to the loan transaction, whether it is a purchase or a refinance. Although our origination and servicing segments are separated for this presentation, management sees the two segments as intricately related and interdependent. We believe that our servicing segment provides a steady stream of revenue to support our origination segment and that, more importantly, our servicing segment positions us to build longstanding client relationships that drive repeat and referral business back to the origination segment to recapture our clients' future mortgage transactions. In particular, the growth of our servicing segment is dependent on the continued growth of our origination volume because our servicing portfolio consists primarily of originated MSRs. We measure the performance of our segments primarily based on their net income (loss). See below for an overview and discussion of each of our segments' results for the three and six months endedJune 30, 2021 and 2020. These results do not include unallocated corporate costs. Origination Three Months Ended June 30, Six Months Ended June 30, ($ and units in thousands) 2021 2020 2021 2020 Total in-house originations$ 8,173,153 $
8,814,629
27 31 62 52
Loan origination fees and gain on
sale, net $ 329,157 $ 491,657 $ 773,954 $ 730,459
Interest income 3,655 4,214 6,501 6,434
Other income, net 32 12 32 17
Net revenue 332,844 495,883 780,487 736,910
Salaries, incentive compensation
and benefits 215,061 205,427 465,876 345,433
Occupancy, equipment and
communication 12,758 12,184 25,931 23,563
Production technology 6,685 4,648 12,984 9,370
General and administrative 18,471 17,845 34,810 32,647
Depreciation and amortization 1,096 1,153 1,989 2,438
Total expenses 254,071 241,257 541,590 413,451
Net income allocated to
origination $ 78,773 $
254,626
The decrease in the origination segment's net income for the three months endedJune 30, 2021 compared toJune 30, 2020 was primarily driven by decreased revenue earned from loan origination fees and gain on sale of loans, net of$162.5 million or 33.1% for the same time period. The decrease in gain on sale of loans was primarily driven by the decrease in loan sales of$129.7 million or 1.5% for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 , combined with the decrease in gain on sale margins of 155 basis points or 27.8% for the same time period. The decrease in the origination segment's net income for the six months endedJune 30, 2021 compared toJune 30, 2020 was also driven by an increase in salaries, incentive compensation and benefits as described further below. Additionally, while lower interest rates contributed to the increase in loan sales of$4.1 billion during the six months endedJune 30, 2021 compared to the same period in 2020, gain on sale margins decreased 70 basis points or 14.0% for the same time period. Capacity constraints in the mortgage origination market in 2020 led to higher gain on sale margins in 2020. 50 -------------------------------------------------------------------------------- Table of Contents Salaries, incentive compensation and benefits expense increased for the three and six months endedJune 30, 2021 compared to the same periods in 2020 due to increased variable incentive compensation paid to our origination teams and our hiring of additional employees throughout 2020 to support the increase in our origination volume. Production technology expense increased for the three and six months endedJune 30, 2021 compared to the same periods in 2020 due to a continued investment in our technology resources. Servicing Three Months Ended June 30, Six Months Ended June 30, ($ and units in thousands) 2021 2020 2021 2020 UPB of servicing portfolio (period end)$ 65,670,291 $
52,794,328
287 249 287 249
Loan servicing and other fees $ 47,652 $ 37,778 $ 92,851 $ 76,310
Loan origination fees and gain
on sale, net 1,602 1,775 3,393 2,834
Other income, net 18 2 40 3
Total revenue 49,272 39,555 96,284 79,147
Valuation adjustment of MSRs (84,789) (96,161) (49,046) (204,810)
Interest (expense) income (1,637) (2,645) (4,498) (2,608)
Net revenue (37,154) (59,251) 42,740 (128,271)
Salaries, incentive compensation
and benefits 7,075 6,390 14,288 12,076
Occupancy, equipment and
communication 1,026 848 2,134 1,651
General and administrative 1,744 240 1,509 288
Servicing technology 2,071 1,745 4,162 3,453
Provision for foreclosure losses (442) (64) 2,019 1,860
Depreciation and amortization 222 155 412 311
Total expenses 11,696 9,314 24,524 19,639
Net income (loss) allocated to
servicing $ (48,850) $
(68,565)
For the three months endedJune 30, 2021 there was a decrease to the net loss allocated to the servicing segment and for the six months endedJune 30, 2021 there was an increase to net income allocated to the servicing segment, as compared to the same time periods in 2020. This was primarily driven by valuation adjustments of our MSRs. For the three months endedJune 30, 2021 we recorded an$84.8 million downward adjustment to the fair value of our MSRs, compared to a$96.2 million downward adjustment for the three months endedJune 30, 2020 . For the six months endedJune 30, 2021 we recorded a$49.0 million downward adjustment, compared to a$204.8 million downward adjustment for the same time period in 2020. The fair value of our MSRs generally declines as interest rates decline and prepayments increase; conversely the fair value generally increases as interest rates increase and prepayments decrease. The valuation adjustments related to MSRs also include losses related to loan prepayments. During the three and six months endedJune 30, 2020 , interest rates declined, which contributed to higher valuation losses as compared to the three and six months endedJune 30, 2021 when there was minimal movement in interest rates. However, the increase in value from slightly higher interest rates was more than offset by loan prepayments due to an increase in cash-out refinancing during the three and six months endedJune 30, 2021 . The fair value of our mortgage servicing rights asset was 88 basis points of our servicing portfolio atJune 30, 2021 compared to 64 basis points atJune 30, 2020 . Although loan servicing and other fees increased, servicing and ancillary fee income have been below their historical averages due to the inability to collect late charges and servicing fees for 51 -------------------------------------------------------------------------------- Table of Contents customers who have elected to accept forbearance relief under the CARES Act. The increase in loan servicing and other fees was partially offset by an increase in interest expense due to an increase in payoff interest expense because of higher loan prepayments for this time period. Salaries, incentive compensation and benefits increased for the three and six months endedJune 30, 2021 compared to the same periods in 2020 due to our hiring of additional employees throughout 2020 to support the increase in our servicing volume and those clients electing to accept forbearance relief under the CARES Act. Servicing technology expense increased for the three and six months endedJune 30, 2021 compared to the same periods in 2020 due to a continued investment in our technology resources. Liquidity, Capital Resources and Cash Flows Historically, our primary sources of liquidity have included: •cash flows from our operations, including: •sale of whole loans into the secondary market; •loan origination fees; •servicing fee income; and •interest income on MLHS; •borrowings on warehouse lines of credit to originate mortgage loans; and •borrowings on our MSR notes payable. Historically, our primary uses of funds have included: •cash flows from our operations, including but not limited to: •origination of MLHS; •payment of interest expense; and •payment of operating expenses; •repayments on warehouse lines of credit; •distributions to shareholders; and •acquisitions of other mortgage businesses. We are also subject to contingencies which may have a significant effect on the use of our cash. We believe that our cash flows from operations and other available sources of liquidity will be sufficient to fund our operations for the next 12 months. In order to originate and aggregate loans for sale into the secondary market, we use our own working capital and borrow or obtain money on a short-term basis, primarily through committed and uncommitted loan funding facilities that we have established with large national and global banks. Our loan funding facilities are primarily in the form of master repurchase agreements, which we refer to as "warehouse lines of credit." Loans financed under these facilities are generally financed at approximately 97% to 98% of the principal balance of the loan (although certain types of loans are financed at lower percentages of the principal balance of the loan), which requires us to fund the balance from cash generated from our operations. Once closed, the underlying residential mortgage loan that is held for sale is pledged as collateral for the borrowing or advance that was made under these loan funding facilities. In most cases, the loans will remain in one of the loan funding facilities for only a short time, generally less than one month, until the loans are pooled and sold. During the time the loans are held for sale, we earn interest income from the borrower on the underlying mortgage loan. This income is partially offset by the interest and fees we must pay under the loan funding facilities. When we sell a pool of loans in the secondary market, the proceeds received from the sale of the loans are used to pay back the amounts we owe on the loan funding facilities. We rely on the cash generated from the sale of loans to fund future loans and repay borrowings under our loan 52 -------------------------------------------------------------------------------- Table of Contents funding facilities. Delays or failures to sell loans in the secondary market could have an adverse effect on our liquidity position. As discussed in Note 9, Warehouse Lines of Credit to the condensed consolidated financial statements included in Part I, Item 1, as ofJune 30, 2021 , we had nine different loan funding facilities in different amounts and with various maturities. As ofJune 30, 2021 , the aggregate available amount under our loan facilities was approximately$3.1 billion , with combined outstanding balances of approximately$1.9 billion . As discussed in Note 10, Notes Payable to the condensed consolidated financial statements included in Part I, Item 1, as ofJune 30, 2021 , we had three different MSR notes payable in different amounts with different maturities. As ofJune 30, 2021 , the aggregate available amount under our MSR notes payable was$440.0 million , with combined outstanding balances of$165.0 million and unutilized capacity of$149.6 million , based on total committed amounts and our borrowing base limitations. The borrowing capacity under our MSR notes payable is restricted by the valuation of our servicing portfolio. The amount of financing advanced on each individual loan under our loan funding facilities is determined by agreed upon advance rates but may be less than the stated rate due to fluctuations in the market value of the mortgage loans securing the financings. If the lenders providing the funds under our loan funding facilities determine that the value of the loans serving as collateral for our borrowings under those facilities has decreased, they can initiate a margin call to require us to provide additional collateral or reduce the amount outstanding with respect to those loans. Our inability or unwillingness to satisfy such a request could result in the termination of the related facilities and a potential default under our other loan funding facilities. In addition, a large unanticipated margin call could have a material adverse effect on our liquidity. The amount owed and outstanding under our loan funding facilities fluctuates significantly based on our origination volume, the amount of time it takes us to sell the loans we originate and the amount of loans we are self-funding with cash. We may from time to time post surplus cash as additional collateral to buy-down the effective interest rates of certain loan funding facilities or to self-fund a portion of our loan originations. As ofJune 30, 2021 , we had posted$58.4 million in cash as additional collateral. We have the ability to draw back this additional collateral at any time unless a margin call has been made or a default has occurred under the relevant facilities. We have an early buyout facility that allows us to purchase certain delinquent GNMA loans that we service and finance them on the facility until the loan is cured or subsequently sold. The capacity of this uncommitted facility is$75.0 million and, atJune 30, 2021 , the outstanding balance on the facility was$43.1 million . Our loan funding facilities and MSR notes payable generally require us to comply with certain operating and financial covenants and the availability of funds under these facilities are subject to, among other conditions, our continued compliance with these covenants. These financial covenants include, but are not limited to, maintaining a certain (i) minimum tangible net worth, (ii) minimum liquidity and (iii) a maximum ratio of total liabilities or total debt to tangible net worth and satisfying certain pre-tax net income requirements. A breach of these covenants could result in an event of default under our funding facilities, which would allow the related lenders to pursue certain remedies. In addition, each of these facilities includes cross default or cross acceleration provisions that could result in all of our funding facilities terminating if an event of default or acceleration of maturity occurs under any one of them. We believe we were in compliance with all of these covenants as ofJune 30, 2021 . 53 -------------------------------------------------------------------------------- Table of Contents Our debt obligations are summarized below by facility as ofJune 30, 2021 : Facility Outstanding Total Facility Maturity ($ in thousands) Indebtedness Size Date Warehouse lines of credit$ 246,639 800,000 January 2022 152,254 250,000 September 2021 445,947 500,000 February 2022 118,922 200,000 (1) June 2022 278,544 300,000 September 2021 413,790 500,000 (2) July 2021 89,340 200,000 (3) April 2022 96,805 250,000 (4) N/A Early buyout facility 43,081 75,000 (5) March 2025 MSR notes payable 100,000 175,000 (6) March 2024 45,000 200,000 (7) June 2022 20,000 65,000 July 2022 ___________________________ (1)This facility matured inJune 2021 and was subsequently amended with a maturity date ofJune 2022 . (2)Amounts drawn on the MSR notes payable with this lender reduce the facility size available under the warehouse line of credit with this lender by an equal and offsetting amount. Subsequent toJune 30, 2021 , this facility was amended with a maturity date ofJuly 2022 . (3)This facility matured inJune 2021 and was subsequently amended with a maturity date ofApril 2022 . (4)This facility's maturity date is 30 days from written notice by either the financial institution or the Company. (5)Each buyout transaction carries a maximum term of four years from the date of repurchase. (6)Facility provides for committed amount of$125.0 million , which can be increased up to$175.0 million . (7)Facility provides for committed amount of$135.0 million , which can be increased up to$200.0 million . The investors to whom we sell mortgage loans we originate in the secondary market require us to abide by certain operating and financial covenants. These covenants include maintaining (i) a certain minimum net worth, (ii) a certain minimum liquidity, (iii) a certain minimum of total liquid assets, (iv) a certain maximum ratio of adjusted net worth to total assets and (v) fidelity bond and mortgage servicing errors and omissions coverage. A breach of these covenants could result in an event of default and could disallow us to continue selling mortgage loans to one or all of these investors in the secondary market which, in turn, could have a significant impact on our liquidity and results of operations. We believe we were in compliance with all of these covenants as ofJune 30, 2021 . When we sell loans in the secondary market, we have the option to sell them service released or service retained. The decision whether to sell a loan that we originated service released or service retained is based on factors such as execution and price, liquidity needs and the desire to retain the related client relationship. When we sell a loan service retained, we continue to act as the servicer for the life of the loan. We rely on income from loan servicing and other fees over the life of the loan to generate cash. Certain investors have different rules for the servicer to follow should a loan go into default. As the servicer, we may be legally obligated to make cash payments to the investor who purchased the loan, should the borrower discontinue making payments on the loan. This could have a negative impact to our cash and liquidity; however, we may be able to use other borrower prepayments to cover delinquencies. Should delinquencies significantly increase, or prepayments significantly decrease, we could be forced to use our own cash or borrow on other types of financing in order to make the required monthly payments to the investors who have purchased loans from us. We may also be contractually required to repurchase or indemnify loans with origination defects. 54 -------------------------------------------------------------------------------- Table of Contents Cash Flows Our cash flows are summarized below: Six Months Ended June 30, ($ in thousands) 2021 2020 Net cash provided by (used in) operating activities$ 290,882 $ (283,928) Net cash used in investing activities (1,981) (15,649) Net cash (used in) provided by financing activities (302,018) 341,304 Net (decrease) increase in cash, cash equivalents and restricted cash$ (13,117) $ 41,727 Operating activities Our cash flows from operating activities are primarily influenced by changes in the levels of inventory of loans held for sale, as shown below: Six Months Ended June 30, ($ in thousands) 2021 2020 Loans held for sale$ 214,787 $ (477,679) Other operating sources 76,095 193,751
Net cash provided by (used in) operating activities
Cash provided by loans held for sale increased due to a larger increase in proceeds on sale and payments from mortgage loans held for sale compared to cash used for origination of mortgage loans held for sale. The decrease in cash provided by other operating sources was primarily due to increases in valuation adjustments of mortgage servicing rights. Investing activities Our investing activities primarily consist of purchases of property and equipment and acquisitions. Cash used in investing activities decreased for the six months endedJune 30, 2021 compared to the same period in 2020, which was primarily due to less cash used for purchases of property and equipment and$12.0 million used for certain payments made toGuild Mortgage Company LLC's former parent entity during the six months endedJune 30, 2020 , prior to our restructuring and initial public offering. Financing activities Our cash flows from financing activities are primarily influenced by changes in the levels of warehouse lines of credit used to fund loan originations, which were consistent with the increase in loan origination volume. Six Months Ended June 30, ($ in thousands) 2021 2020 Warehouse lines of credit$ (260,263) $ 386,104 Other financing sources (41,755) (44,800)
Net cash (used in) provided by financing activities
The decrease in cash provided by warehouse lines of credit was primarily due to higher net repayments on our warehouse lines of credit. Cash used in other financing sources decreased for the six months endedJune 30, 2021 compared to the same period in 2020, which was primarily driven by net borrowings of$19.3 million during the six months endedJune 30, 2021 compared to net repayments of$30.0 million for the six months endedJune 30, 2020 on our MSR notes payable and the payment of$60.0 million in cash dividends duringMay 2021 . 55
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Table of Contents Contractual Obligations Except as disclosed in Note 13 - Commitments and Contingencies included in Part 1, Item 1 of this Form 10-Q, there have been no significant changes from our 2020 Annual Report on Form 10-K in our contractual obligations and commitments.
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