Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
The following is a summary of the weighted average discount rate and prepayment speed assumptions used to determine the fair value of MSRs as well as the expected life of the loans in the servicing portfolio:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Discount rate | 9.5 | % | | 9.5 | % |
Prepayment speeds | 7.1 | % | | 8.7 | % |
Life (in years) | 7.97 | | 7.25 |
The key assumptions used to estimate the fair value of MSRs are prepayment speeds and the discount rate. Increases in prepayment speeds generally have an adverse effect on the value of MSRs as the underlying loans prepay faster. In a declining interest rate environment, the fair value of MSRs generally decreases as prepayments increase and therefore, the estimated life of the MSRs and related cash flows decrease. Decreases in prepayment speeds generally have a positive effect on the value of MSRs as the underlying loans prepay less frequently. In a rising interest rate environment, the fair value of MSRs generally increases as prepayments decrease and therefore, the estimated life of the MSRs and related cash flows increase. Increases in the discount rate result in a lower MSRs value and decreases in the discount rate result in a higher MSRs value. MSRs uncertainties are hypothetical and do not always have a direct correlation with each assumption. Changes in one assumption may result in changes to another assumption, which might magnify or counteract the uncertainties.
The following table stresses the discount rate and prepayment speeds at two different data points:
| | | | | | | | | | | | | | | | | | | | | | | |
| Discount Rate | | Prepayment Speeds |
| 100 BPS Adverse Change | | 200 BPS Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
March 31, 2022 | | | | | | | |
Mortgage servicing rights | $ | (281,487) | | | $ | (529,914) | | | $ | (218,374) | | | $ | (416,199) | |
December 31, 2021 | | | | | | | |
Mortgage servicing rights | $ | (232,658) | | | $ | (435,181) | | | $ | (198,153) | | | $ | (372,018) | |
4. Mortgage Loans Held for Sale
The Company sells substantially all of its originated mortgage loans into the secondary market. The Company may retain the right to service some of these loans upon sale through ownership of servicing rights. A reconciliation of the changes in mortgage loans held for sale to the amounts presented on the Condensed Consolidated Statements of Cash Flows is below:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
Balance at the beginning of period | | $ | 19,323,568 | | | $ | 22,865,106 | |
Disbursements of mortgage loans held for sale | | 54,173,353 | | | 104,103,499 | |
Proceeds from sales of mortgage loans held for sale (1) | | (63,180,565) | | | (110,276,266) | |
Gain on sale of mortgage loans excluding fair value of other financial instruments, net (2) | | 368,788 | | | 2,133,105 | |
| | | | |
Balance at the end of period | | $ | 10,685,144 | | | $ | 18,825,444 | |
(1) The proceeds from sales of loans held for sale on the Condensed Consolidated Statements of Cash Flows includes amounts related to the sale of consumer loans.
(2) The Gain on sale of loans excluding fair value of MSRs, net on the Condensed Consolidated Statements of Cash Flows includes amounts related to the sale of consumer loans, interest rate lock commitments, forward commitments, and provisions for investor reserves.
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
Credit Risk
The Company is subject to credit risk associated with mortgage loans that it purchases and originates during the period of time prior to the sale of these loans. The Company considers credit risk and losses associated with these loans to be insignificant as it holds the loans for a short period of time, which for the three months ended March 31, 2022 is, on average, approximately 21 days from the date of borrowing, and the market for these loans continues to be highly liquid. The Company is also subject to credit risk associated with mortgage loans it has repurchased as a result of breaches of representations and warranties during the period of time between repurchase and resale.
5. Borrowings
The Company maintains various funding facilities and other non-funding debt as shown in the tables below. Interest rates typically have two main components – a base rate most commonly LIBOR or SOFR, which is sometimes subject to a minimum floor plus a spread. Some facilities have a commitment fee, which can range from 0.0% to 0.5% per year. The commitment fee charged by lenders is calculated based on the committed line amount multiplied by a negotiated rate. The Company is required to maintain certain covenants, including minimum tangible net worth, minimum liquidity, maximum total debt or liabilities to net worth ratio, pretax net income requirements, and other customary debt covenants, as defined in the agreements. The Company was in compliance with all covenants as of March 31, 2022.
The amount owed and outstanding on the Company’s loan funding facilities fluctuates based on its origination volume, the amount of time it takes the Company to sell the loans it originates, and the Company’s ability to use its cash to self-fund loans. In addition to self-funding, the Company may from time to time use surplus cash to “buy-down” the effective interest rate of certain loan funding facilities or to self-fund a portion of our loan originations. As of March 31, 2022, $2,292,172 of the Company’s cash was used to buy-down our funding facilities and self-fund, $200,000 of which are buy-down funds that are included in Cash and cash equivalents on the Condensed Consolidated Balance Sheets and $2,092,172 of which is discretionary self-funding that reduces Cash and cash equivalents on the Condensed Consolidated Balance Sheets. The Company has the right to withdraw the $200,000 at any time, unless a margin call has been made or a default has occurred under the relevant facilities. The Company has an estimated $2,092,172 of discretionary self-funded loans, of which a portion can be transferred to a warehouse line or the early buy out line, provided that such loans meet the eligibility criteria to be placed on such lines. The remaining portion will be funded in normal course over a short period of time, generally less than one month. A large unanticipated margin call could also have a material adverse effect on the Company’s liquidity.
The terms of the Senior Notes restrict our ability and the ability of our subsidiary guarantors among other things to: (1) merge, consolidate or sell, transfer or lease assets, and; (2) create liens on assets.
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
Funding Facilities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Facility Type | | Collateral | | Maturity | | Line Amount | | Committed Line Amount | | Outstanding Balance as of March 31, 2022 | | Outstanding Balance as of December 31, 2021 |
MRA funding: | | | | | | | | | | |
1) Master Repurchase Agreement (1)(9) | | Mortgage loans held for sale (8) | | 10/20/2023 | | $ | 2,000,000 | | | $ | 100,000 | | | $ | 246,476 | | | $ | 249,119 | |
2) Master Repurchase Agreement (9) | | Mortgage loans held for sale (8) | | 12/1/2022 | | 1,500,000 | | | 250,000 | | | 576,521 | | | 1,328,727 | |
3) Master Repurchase Agreement (9) | | Mortgage loans held for sale (8) | | 4/21/2023 | | 2,250,000 | | | 500,000 | | | 527,655 | | | 1,714,806 | |
4) Master Repurchase Agreement (2)(9) | | Mortgage loans held for sale (8) | | 1/26/2023 | | 2,000,000 | | | 1,200,000 | | | 1,252,325 | | | 1,479,128 | |
5) Master Repurchase Agreement (3)(9) | | Mortgage loans held for sale (8) | | 4/20/2023 | | 3,000,000 | | | 500,000 | | | 585,523 | | | 2,264,954 | |
6) Master Repurchase Agreement (4)(9) | | Mortgage loans held for sale (8) | | 9/22/2023 | | 2,000,000 | | | 500,000 | | | 225,067 | | | 498,335 | |
7) Master Repurchase Agreement (5)(9) | | Mortgage loans held for sale (8) | | 9/15/2023 | | 1,200,000 | | | 500,000 | | | 167,104 | | | 542,846 | |
8) Master Repurchase Agreement (9) | | Mortgage loans held for sale (8) | | 6/10/2022 | | 500,000 | | | — | | | — | | | — | |
9) Master Repurchase Agreement (9) | | Mortgage loans held for sale (8) | | 9/22/2023 | | 1,250,000 | | | 250,000 | | | 243,482 | | | 539,257 | |
10) Master Repurchase Agreement (9) | | Mortgage loans held for sale (8) | | 8/16/2023 | | 750,000 | | | 100,000 | | | 89,124 | | | 616,165 | |
11) Master Repurchase Agreement (9) | | Mortgage loans held for sale (8) | | 12/16/2022 | | 1,000,000 | | | 250,000 | | | 223,372 | | | 253,389 | |
| | | | | | $ | 17,450,000 | | | $ | 4,150,000 | | | $ | 4,136,649 | | | $ | 9,486,726 | |
Early Funding: | | | | | | | | | | | | |
12) Early Funding Facility (6)(9) | | Mortgage loans held for sale (8) | | (6) | | $ | 4,000,000 | | | $ | — | | | $ | 1,328,175 | | | $ | 2,071,154 | |
13) Early Funding Facility (7)(9) | | Mortgage loans held for sale (8) | | (7) | | 3,000,000 | | | — | | | 1,004,783 | | | 1,193,712 | |
| | | | | | 7,000,000 | | | — | | | 2,332,958 | | | 3,264,866 | |
| | | | | | | | | | | | |
Total | | | | | | $ | 24,450,000 | | | $ | 4,150,000 | | | $ | 6,469,607 | | | $ | 12,751,592 | |
(1) Subsequent to March 31, 2022, this facility was amended to decrease the total facility size to $1,000,000.
(2) This facility has a 12-month initial term, which can be extended for 3-months at each subsequent 3-month anniversary from the initial start date. Subsequent to March 31, 2022, this facility was amended to decrease the committed amount to $1,100,000 and was extended to April 26, 2023.
(3) Subsequent to March 31, 2022, this facility was amended to decrease the total facility size to $2,000,000 with $250,000 committed and was extended to May 4, 2024.
(4) Subsequent to March 31, 2022, this facility was amended to decrease the committed amount to $250,000.
(5) Subsequent to March 31, 2022, this facility was amended to decrease the total facility size to $900,000 with $250,000 committed.
(6) This facility is an evergreen agreement with no stated termination or expiration date. This agreement can be terminated by either party upon written notice.
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
(7) This facility has an overall line size of $3,000,000, which is reviewed every 90 days. This facility is an evergreen agreement with no stated termination or expiration date. This agreement can be terminated by either party upon written notice.
(8) The Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase. These borrowing facilities are secured by mortgage loans held for sale at fair value as the first priority security interest.
(9) The interest rates charged by lenders on the funding facilities included the applicable base rate plus a spread ranging from 1.00% to 1.85% for the three months ended March 31, 2022, and the applicable base rate plus a spread ranging from 1.00% to 2.25% for the year ended December 31, 2021.
Other Financing Facilities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Facility Type | | Collateral | | Maturity | | Line Amount | | Committed Line Amount | | Outstanding Balance March 31, 2022 | | Outstanding Balance December 31, 2021 |
Line of Credit Financing Facilities | | | | | | | | | | | | |
1) Unsecured line of credit (1) | | — | | 7/27/2025 | | $ | 2,000,000 | | | $ | — | | | $ | — | | | $ | — | |
2) Unsecured line of credit (1) | | — | | 7/31/2025 | | 100,000 | | | — | | | — | | | — | |
3) Revolving credit facility (3) | | — | | 8/10/2024 | | 1,000,000 | | | 1,000,000 | | | — | | | — | |
4) MSR line of credit (3) | | MSRs | | 10/20/2023 | | 200,000 | | | — | | | — | | | — | |
5) MSR line of credit (2)(3) | | MSRs | | (2) | | — | | | — | | | — | | | 75,000 | |
| | | | | | $ | 3,300,000 | | | $ | 1,000,000 | | | $ | — | | | $ | 75,000 | |
Early Buyout Financing Facility | | | | | | | | | | | | |
6) Early buy out facility (3) | | Loans/ Advances | | 3/13/2024 | | $ | 2,600,000 | | | $ | — | | | $ | 1,698,167 | | | $ | 1,896,784 | |
(1) Refer to Note 6, Transactions with Related Parties for additional details regarding this unsecured line of credit.
(2) This facility was voluntarily paid off and terminated in March 2022.
(3) The interest rates charged by lenders on the other funding facilities included the applicable base rate, plus a spread ranging from 1.45% to 4.00% for the three months ended March 31, 2022, and the applicable base rate plus a spread ranging from 1.45% to 4.00% for the year ended December 31, 2021.
Unsecured Senior Notes
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Facility Type | | Maturity | | Interest Rate | | Outstanding Principal March 31, 2022 | | Outstanding Principal December 31, 2021 |
Unsecured Senior Notes (1) | | 10/15/2026 | | 2.875 | % | | $ | 1,150,000 | | | $ | 1,150,000 | |
Unsecured Senior Notes (2) | | 1/15/2028 | | 5.250 | % | | 61,985 | | | 61,985 | |
Unsecured Senior Notes (3) | | 3/1/2029 | | 3.625 | % | | 750,000 | | | 750,000 | |
Unsecured Senior Notes (4) | | 3/1/2031 | | 3.875 | % | | 1,250,000 | | | 1,250,000 | |
Unsecured Senior Notes (5) | | 10/15/2033 | | 4.000 | % | | 850,000 | | | 850,000 | |
Total Senior Notes | | | | | | $ | 4,061,985 | | | $ | 4,061,985 | |
| | | | | | | | |
Weighted Average Interest Rate | | | | | | 3.59 | % | | 3.59 | % |
(1) The 2026 Senior Notes are unsecured obligation notes with no asset required to pledge for this borrowing. Unamortized debt issuance costs are presented net against the Senior Notes reducing the $1,150,000 carrying amount on the Condensed Consolidated Balance Sheets by $10,282 and $10,854 as of March 31, 2022 and December 31, 2021, respectively.
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
(2) The 2028 Senior Notes are unsecured obligation notes with no asset required to pledge for this borrowing. Unamortized debt issuance costs and discounts are presented net against the Senior Notes reducing the $61,985 carrying amount on the Condensed Consolidated Balance Sheets by $412 and $343 as of March 31, 2022, respectively, and $430 and $358, as of December 31, 2021, respectively.
(3) The 2029 Senior Notes are unsecured obligation notes with no asset required to pledge for this borrowing. Unamortized debt issuance costs are presented net against the Senior Notes reducing the $750,000 carrying amount on the Condensed Consolidated Balance Sheets by $6,937 and $7,188 as of March 31, 2022 and December 31, 2021, respectively.
(4) The 2031 Senior Notes are unsecured obligation notes with no asset required to pledge for this borrowing. Unamortized debt issuance costs are presented net against the Senior Notes reducing the $1,250,000 carrying amount on the Condensed Consolidated Balance Sheets by $12,057 and $12,395 as of March 31, 2022 and December 31, 2021, respectively.
(5) The 2033 Senior Notes are unsecured obligation notes with no asset required to pledge for this borrowing. Unamortized debt issuance costs are presented net against the Senior Notes reducing the $850,000 carrying amount on the Condensed Consolidated Balance Sheets by $8,093 and $8,269 as of March 31, 2022 and December 31, 2021, respectively.
Refer to Note 2, Fair Value Measurements for information pertaining to the fair value of the Company’s debt as of March 31, 2022 and December 31, 2021.
6. Transactions with Related Parties
The Company has entered into various transactions and agreements with RHI, its subsidiaries, certain other affiliates and related parties (collectively, “Related Parties”). These transactions include providing financing and services as well as obtaining financing and services from these Related Parties.
Financing Arrangements
On June 9, 2017, Rocket Mortgage and RHI entered into an unsecured line of credit, as further amended and restated on September 16, 2021 (“RHI Line of Credit”), pursuant to which Rocket Mortgage has a borrowing capacity of $2,000,000. The RHI Line of Credit matures on July 27, 2025. Borrowings under the line of credit bear interest at a rate per annum of one month LIBOR plus 1.25%, or the applicable successor benchmark should LIBOR be discontinued. The line of credit is uncommitted and RHI has sole discretion over advances. The RHI Line of Credit also contains negative covenants which restrict the ability of the Company to incur debt and create liens on certain assets. It also requires Rocket Mortgage to maintain a quarterly consolidated net income before taxes if adjusted tangible net worth meets certain requirements. As of March 31, 2022 and December 31, 2021, there were no outstanding principal amounts due to RHI pursuant to the RHI Line of Credit. In the three months ended March 31, 2022 and March 31, 2021, Rocket Mortgage repaid an aggregate of $762 and $1,000,487, respectively, under the RHI Line of Credit. As of March 31, 2022 and March 31, 2021, the total amount of interest paid under the line was $762 and $487, respectively, with outstanding interest due to RHI of zero and $357, respectively.
RHI and ATI are parties to a surplus debenture, effective as of December 28, 2015, and as further amended and restated on December 31, 2019 (the “RHI/ATI Debenture”), pursuant to which ATI is indebted to RHI for an aggregate principal amount of $21,500. The RHI/ATI Debenture matures on December 31, 2030. Interest under the RHI/ATI Debenture accrues at an annual rate of 8%. Principal and interest under the RHI/ATI Debenture are due and payable quarterly, in each case subject to ATI achieving a certain amount of surplus and payments of all interest before principal payments begin. Any unpaid amounts of principal and interest shall be due and payable upon the maturity of the RHI/ATI Debenture. During the three months ended March 31, 2022, and March 31, 2021, ATI repaid an aggregate of $250 and $250, respectively, under the RHI/ATI Debenture. In the three months ended March 31, 2022 and March 31, 2021, the total amount of interest accrued under the RHI/ATI Debenture was $424 and $424, respectively.
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
On July 31, 2020, Holdings and RHI entered into an agreement for an uncommitted, unsecured revolving line of credit ("RHI 2nd Line of Credit’’), which will provide for financing from RHI to the Company of up to $100,000. The RHI 2nd Line of Credit matures on July 31, 2025. Borrowings under the line of credit will bear interest at a rate per annum of one month LIBOR plus 1.25%, or the applicable successor benchmark should LIBOR be discontinued. The negative covenants of the line of credit restrict the ability of the Company to incur debt and create liens on certain assets. The line of credit also contains customary events of default. As of March 31, 2022 and December 31, 2021 there were no draws on the RHI 2nd Line of Credit and no amounts outstanding.
The amounts receivable from and payable to Related Parties consisted of the following as of:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Principal | | Interest Rate | | Principal | | Interest Rate |
Included in Notes receivable and due from affiliates on the Condensed Consolidated Balance Sheets | | | | | | | |
Affiliated receivables and other notes | $ | 10,796 | | | — | % | | $ | 9,753 | | | — | % |
Notes receivable and due from affiliates | $ | 10,796 | | | | | $ | 9,753 | | | |
| | | | | | | |
Included in Notes payable and due to affiliates on the Condensed Consolidated Balance Sheets | | | | | | | |
RHI/ATI Debenture | $ | 21,500 | | | 8.00 | % | | $ | 21,500 | | | 8.00 | % |
Affiliated payables | 8,156 | | | — | % | | 12,150 | | | — | % |
Notes payable and due to affiliates | $ | 29,656 | | | | | $ | 33,650 | | | |
Services, Products and Other Transactions
We have entered into transactions and agreements to provide certain services to Related Parties. We recognized revenue of $3,017 and $3,729 for the three months ended March 31, 2022 and 2021 for the performance of these services, which was included in Other income. We have also entered into transactions and agreements to purchase certain services, products and other transactions from Related Parties. We incurred expenses of $38,994 and $33,191 for the three months ended March 31, 2022 and 2021, respectively, for these products, services and other transactions, which are included in General and administrative expenses.
The Company has also entered into a Tax Receivable Agreement with RHI and our Chairman as described further in Note 8, Income Taxes. The Company has also guaranteed the debt of a related party as described further in Note 10, Commitments, Contingencies, and Guarantees.
Promotional Sponsorships
The Company incurred marketing and advertising costs related to the Rocket Mortgage Field House Naming Rights Contract and other promotional sponsorships, which are related parties. The company incurred expenses of $2,477 and $2,335 for the three months ended March 31, 2022 and 2021, respectively, related to these arrangements.
Lease Transactions with Related Parties
The Company is a party to lease agreements for certain offices, including our headquarters in Detroit, with various affiliates of Bedrock Management Services LLC (“Bedrock”), a related party, and other related parties of the Company. The Company incurred expenses of $19,253 and $17,629 for the three months ended March 31, 2022 and 2021, respectively related to these arrangements.
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
7. Other Assets
Other assets consist of the following:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Goodwill and other intangible assets | $ | 1,286,146 | | | $ | 1,296,926 | |
Mortgage production related receivables | 329,399 | | | 393,513 | |
Disbursement funds advanced | 189,598 | | | 27,493 | |
Prepaid expenses | 109,683 | | | 141,512 | |
Non-production-related receivables | 101,377 | | | 114,557 | |
| | | |
Other real estate owned | 581 | | | 492 | |
| | | |
Other | 135,492 | | | 141,321 | |
Total other assets | $ | 2,152,276 | | | $ | 2,115,814 | |
8. Income Taxes
The Company has income tax expense of $25,849 on Income before income taxes of $1,062,457 for the three months ended March 31, 2022. The Company has income tax expense of $65,832 on Income before income taxes of $2,843,170 for the three months ended March 31, 2021.
The Company’s income tax expense varies from the expense that would be expected based on statutory rates due principally to its organizational structure. Several subsidiaries of Holdings, such as Rocket Mortgage, Amrock and other subsidiaries, are single member LLC entities. As single member LLCs of Holdings, all taxable income or loss generated by these subsidiaries will pass through and be included in the income or loss of Holdings. A provision for state income taxes is required for certain jurisdictions that tax single member LLCs as regarded entities. Other subsidiaries of Holdings, such as Amrock Title Insurance Co., LMB Mortgage Services and others, are treated as C Corporations and will separately file and pay taxes apart from Holdings in various jurisdictions including U.S. federal, state, local and Canada.
As part of the IPO, Rocket Companies acquired a portion of the units of Holdings, which is treated as a partnership for U.S. federal tax purposes and in most applicable jurisdictions for state and local income tax purposes. The remaining portion of Holdings is owned by RHI and our Chairman ("LLC Members"). As a partnership, Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Holdings after Rocket Companies acquisition of its portion of Holdings is passed through and included in the taxable income or loss of its members, including Rocket Companies, in accordance with the terms of the operating agreement of Holdings (the "Holdings Operating Agreement"). Rocket Companies is a C Corporation and is subject to U.S. federal, state, and local income taxes with respect to its allocable share of any taxable income of Holdings.
Tax Receivable Agreement
The Company expects to obtain an increase in its share of the tax basis in the net assets of Holdings when Holdings Units are redeemed from or exchanged by the LLC Members. The Company intends to treat any redemptions and exchanges of Holdings Units as direct purchases of Holdings Units for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that the Company would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
In connection with the reorganization completed prior to our IPO in 2020, the Company entered into a Tax Receivable Agreement with the LLC Members that will obligate the Company to make payments to the LLC Members generally equal to 90% of the applicable cash tax savings that the Company actually realizes or in some cases is deemed to realize as a result of the tax attributes generated by (i) certain increases in our allocable share of the tax basis in Holdings’ assets resulting from (a) the purchases of Holdings Units (along with the corresponding shares of our Class D common stock or Class C common stock) from the LLC Members (or their transferees of Holdings Units or other assignees) using the net proceeds from our initial public offering or in any future offering, (b) exchanges by the LLC Members (or their transferees of Holdings Units or other assignees) of Holdings Units (along with the corresponding shares of our Class D common stock or Class C common stock) for cash or shares of our Class B common stock or Class A common stock, as applicable, or (c) payments under the Tax Receivable Agreement; (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the Tax Receivable Agreement and (iii) disproportionate allocations (if any) of tax benefits to Holdings as a result of section 704(c) of the Code that relate to the reorganization transactions. The Company will retain the benefit of the remaining 10% of these tax savings.
On March 31, 2021, the Company exchanged 20,200,000 shares of Class A common stock for the equivalent number of shares of Class D common stock and Holdings Units with RHI, which resulted in an increase in the tax basis of assets of Holdings that is subject to the provisions of the Tax Receivable Agreement. The Company recorded an increase in its deferred tax asset on investment in partnership of $123,587, an increase in the valuation allowance of $3,146, and an increase in the Tax receivable agreement liability of $119,456 with the net offsetting amount of $985 recorded to Additional Paid-in Capital in the Change in controlling interest of investment, net in the Condensed Consolidated Statements of Changes in Equity.
A payment of $40,721 was made to the LLC Members pursuant to the Tax Receivable Agreement during the three months ended March 31, 2022.
The amounts payable under the Tax Receivable Agreement will vary depending upon a number of factors, including the amount, character, and timing of the taxable income of Rocket Companies in the future. Any such changes in these factors or changes in the Company’s determination of the need for a valuation allowance related to the tax benefits acquired under the Tax Receivable Agreement could adjust the Tax receivable agreement liability recognized and recorded within earnings in future periods.
Tax Distributions
The holders of Holdings’ Units, including Rocket Companies Inc., incur U.S. federal, state and local income taxes on their share of any taxable income of Holdings. The Holdings Operating Agreement provides for pro rata cash distributions (“tax distributions”) to the holders of the Holdings Units in an amount generally calculated to provide each holder of Holdings Units with sufficient cash to cover its tax liability in respect of the Holdings Units. In general, these tax distributions are computed based on Holdings’ estimated taxable income, multiplied by an assumed tax rate as set forth in the Holdings Operating Agreement.
For the three months ended March 31, 2022, Holdings paid tax distributions totaling $160,629 to holders of Holdings Units other than Rocket Companies. For the three months ended March 31, 2021, Holdings paid tax distributions totaling $200,150 to holders of Holdings Units other than Rocket Companies.
9. Derivative Financial Instruments
The Company enters into interest rate lock commitments ("IRLCs"), forward commitments to sell mortgage loans and forward commitments to purchase loans, which are considered derivative financial instruments. These items are accounted for as free-standing derivatives and are included in the Condensed Consolidated Balance Sheets at fair value. The Company treats all of its derivative instruments as economic hedges; therefore, none of its derivative instruments qualify for designation as accounting hedges. Changes in the fair value of the IRLCs and forward commitments to sell mortgage loans are recorded in current period earnings and are included in Gain on sale of loans, net in the Condensed Consolidated Statements of Income and Comprehensive Income. Forward commitments to purchase mortgage loans are recognized in current period earnings and are included in Gain on sale of loans, net in the Condensed Consolidated Statements of Income and Comprehensive Income.
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
The Company enters into IRLCs to fund residential mortgage loans with its potential borrowers. These commitments are binding agreements to lend funds to these potential borrowers at specified interest rates within specified periods of time.
The fair value of IRLCs is derived from the fair value of similar mortgage loans or bonds, which is based on observable market data. Changes to the fair value of IRLCs are recognized based on changes in interest rates, changes in the probability that the commitment will be exercised, and the passage of time. The expected net future cash flows related to the associated servicing of the loan are included in the fair value measurement of rate locks.
IRLCs and uncommitted mortgage loans held for sale expose the Company to the risk that the value of the mortgage loans held and mortgage loans underlying the commitments may decline due to increases in mortgage interest rates during the life of the commitments. To protect against this risk, the Company uses forward loan sale commitments to economically hedge the risk of potential changes in the value of the loans. These derivative instruments are recorded at fair value. The Company expects that the changes in fair value of these derivative financial instruments will either fully or partially offset the changes in fair value of the IRLCs and uncommitted mortgage loans held for sale. The changes in the fair value of these derivatives are recorded in Gain on sale of loans, net.
MSRs assets (including the MSRs value associated with outstanding IRLCs) that the Company plans to sell expose the Company to the risk that the value of the MSRs asset may decline due to decreases in mortgage interest rates prior to the sale of these assets. To protect against this risk, the Company uses forward loan purchase commitments to economically hedge the risk of potential changes in the value of MSRs assets that have been identified for sale. These derivative instruments are recorded at fair value. The Company expects that the changes in fair value of these derivative financial instruments will either fully or partially offset the changes in fair value of the MSRs assets the Company intends to sell. The changes in fair value of these derivatives are recorded in the Change in fair value of MSRs.
Forward commitments include To-Be-Announced ("TBA") mortgage-backed securities that have been aggregated at the counterparty level for presentation and disclosure purposes. Counterparty agreements contain a legal right to offset amounts due to and from the same counterparty under legally enforceable master netting agreements to settle with the same counterparty, on a net basis, as well as the right to obtain cash collateral. Forward commitments also include commitments to sell loans to counterparties and to purchase loans from counterparties at determined prices.
The Company uses forward commitments in hedging the interest rate risk exposure on its fixed and adjustable rate commitments. Utilization of forward commitments involves some degree of basis risk. Basis risk is defined as the risk that the hedged instrument’s price does not move in parallel with the increase or decrease in the market price of the hedged financial instrument. The Company calculates an expected hedge ratio to mitigate a portion of this risk. The Company’s derivative instruments are not designated as accounting hedging instruments, and therefore, changes in fair value are recorded in current period earnings. Hedging gains and losses are included in Gain on sale of loans, net in the Condensed Consolidated Statements of Income and Comprehensive Income.
Net hedging gains and losses were as follows:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Hedging gains (1) | | $ | 1,533,145 | | | $ | 1,642,280 | | | | | |
(1) Includes the change in fair value related to derivatives economically hedging MSRs identified for sale.
Refer to Note 2, Fair Value Measurements, for additional information on the fair value of derivative financial instruments.
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
Notional and Fair Value
The notional and fair values of derivative financial instruments not designated as hedging instruments were as follows:
| | | | | | | | | | | | | | | | | |
| Notional Value | | Derivative Asset | | Derivative Liability |
Balance at March 31, 2022: | | | | | |
IRLCs, net of loan funding probability (1) | $ | 16,445,558 | | | $ | 213,210 | | | $ | — | |
Forward commitments (2) | $ | 22,671,123 | | | $ | 667,908 | | | $ | 34,126 | |
| | | | | |
Balance at December 31, 2021: | | | | | |
IRLCs, net of loan funding probability (1) | $ | 21,194,326 | | | $ | 538,861 | | | $ | — | |
Forward commitments (2) | $ | 36,476,871 | | | $ | 17,337 | | | $ | 19,911 | |
(1) IRLCs are also discussed in Note 10, Commitments, Contingencies, and Guarantees.
(2) Includes the fair value and net notional value related to derivatives economically hedging MSRs identified for sale.
Counterparty agreements for forward commitments contain master netting agreements. The table below presents the gross amounts of recognized assets and liabilities subject to master netting agreements. The Company had zero and $137 of cash pledged to counterparties related to these forward commitments at March 31, 2022 and December 31, 2021, respectively, classified in Other assets in the Condensed Consolidated Balance Sheets. As of March 31, 2022 and December 31, 2021, there was $487,448 and $22,826, respectively, cash on our Condensed Consolidated Balance Sheets from the respective counterparties. Margins received by the Company are classified in Other liabilities in the Condensed Consolidated Balance Sheets.
| | | | | | | | | | | | | | | | | |
| Gross Amount of Recognized Assets or Liabilities | | Gross Amounts Offset in the Condensed Consolidated Balance Sheets | | Net Amounts Presented in the Condensed Consolidated Balance Sheets |
Offsetting of Derivative Assets | | | | | |
Balance at March 31, 2022: | | | | | |
Forward commitments | $ | 1,012,358 | | | $ | (344,450) | | | $ | 667,908 | |
Balance at December 31, 2021: | | | | | |
Forward commitments | $ | 50,225 | | | $ | (32,888) | | | $ | 17,337 | |
| | | | | |
Offsetting of Derivative Liabilities | | | | | |
Balance at March 31, 2022: | | | | | |
Forward commitments | $ | (51,074) | | | $ | 16,948 | | | $ | (34,126) | |
Balance at December 31, 2021: | | | | | |
Forward commitments | $ | (54,922) | | | $ | 35,011 | | | $ | (19,911) | |
Counterparty Credit Risk
Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in accordance with the terms of the contract, which exceeds the value of existing collateral, if any. The Company attempts to limit its credit risk by dealing with creditworthy counterparties and obtaining collateral where appropriate.
The Company is exposed to credit loss in the event of contractual nonperformance by its trading counterparties and counterparties to its various over-the-counter derivative financial instruments noted in the above Notional and Fair Value discussion. The Company manages this credit risk by selecting only counterparties that it believes to be financially strong, spreading the credit risk among many such counterparties, placing contractual limits on the amount of unsecured credit extended to any single counterparty, and entering into netting agreements with the counterparties as appropriate.
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
Certain counterparties have master netting agreements. The master netting agreements contain a legal right to offset amounts due to and from the same counterparty. Derivative assets in the Condensed Consolidated Balance Sheets represent derivative contracts in a gain position, net of loss positions with the same counterparty and, therefore, also represent the Company’s maximum counterparty credit risk. The Company incurred no credit losses due to nonperformance of any of its counterparties during the three months ended March 31, 2022 and 2021.
10. Commitments, Contingencies, and Guarantees
Interest Rate Lock Commitments
IRLCs are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each client’s creditworthiness on a case-by-case basis.
The number of days from the date of the IRLC to expiration of fixed and variable rate lock commitments outstanding at March 31, 2022 and December 31, 2021 was approximately 45 days and 43 days on average, respectively.
The UPB of IRLCs was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Fixed Rate | | Variable Rate | | Fixed Rate | | Variable Rate |
IRLCs | $ | 20,391,277 | | | $ | 1,076,203 | | | $ | 25,937,777 | | | $ | 1,239,762 | |
Commitments to Sell Mortgage Loans
In the ordinary course of business, the Company enters into contracts to sell existing mortgage loans held for sale into the secondary market at specified future dates. The amount of commitments to sell existing loans at March 31, 2022 and December 31, 2021 was $2,122,874 and $2,243,381, respectively.
Commitments to Sell Loans with Servicing Released
In the ordinary course of business, the Company enters into contracts to sell the MSRs of certain newly originated loans on a servicing released basis. In the event that a forward commitment is not filled and there has been an unfavorable market shift from the date of commitment to the date of settlement, the Company is contractually obligated to pay a pair-off fee on the undelivered balance. There were $241,223 and $333,594 of loans committed to be sold servicing released at March 31, 2022 and December 31, 2021, respectively.
Investor Reserves
The following presents the activity in the investor reserves:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Balance at beginning of period | $ | 78,888 | | | $ | 87,191 | | | | | |
Provision for investor reserves | 2,386 | | | 5,347 | | | | | |
Premium recapture and (indemnification losses paid) | (515) | | | 1,399 | | | | | |
Balance at end of period | $ | 80,759 | | | $ | 93,937 | | | | | |
The maximum exposure under the Company’s representations and warranties would be the outstanding principal balance and any premium received on all loans ever sold by the Company, less (i) loans that have already been paid in full by the mortgagee, (ii) loans that have defaulted without a breach of representations and warranties, (iii) loans that have been indemnified via settlement or make-whole, or (iv) loans that have been repurchased. Additionally, the Company may receive relief of certain representation and warranty obligations on loans sold to Fannie Mae or Freddie Mac on or after January 1, 2013 if Fannie Mae or Freddie Mac satisfactorily concludes a quality control loan file review or if the borrower meets certain acceptable payment history requirements within 12 or 36 months after the loan is sold to Fannie Mae or Freddie Mac.
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
Property Taxes, Insurance, and Principal and Interest Payable
As a service to its clients, the Company administers escrow deposits representing undisbursed amounts received for payment of property taxes, insurance and principal, and interest on mortgage loans held for sale. Cash held by the Company for property taxes and insurance was $4,400,289 and $3,682,366, and for principal and interest was $6,511,100 and $8,370,326 at March 31, 2022 and December 31, 2021, respectively. These amounts are not considered assets of the Company and, therefore, are excluded from the Condensed Consolidated Balance Sheets. The Company remains contingently liable for the disposition of these deposits.
Guarantees
As of March 31, 2022 and December 31, 2021, the Company guaranteed the debt of a related party consisting of three separate guarantees totaling $4,789 and $5,216, respectively. As of March 31, 2022 and December 31, 2021, the Company did not record a liability on the Condensed Consolidated Balance Sheets for these guarantees because it was not probable that the Company would be required to make payments under these guarantees.
Trademark License
The Company has entered into an agreement with Intuit that, among other things, is expected to give the Company full ownership of the “Quicken Loans” brand by mid-2022 in exchange for certain agreements, subject to the satisfaction of certain conditions. Additionally, we have fulfilled our payment obligations pertaining to the trademark licensing agreement with Intuit in 2021 and no further expenses are expected.
Tax Receivable Agreement
As indicated in Note 8, Income Taxes, the Company is party to a Tax Receivable Agreement.
Legal
Rocket Companies, through its subsidiaries, engages in, among other things, mortgage lending, title and settlement services, and other financial technology services. Rocket Companies and its subsidiaries operate in highly regulated industries and are routinely subject to various legal and administrative proceedings concerning matters that arise in the normal and ordinary course of business, including inquiries, complaints, subpoenas, audits, examinations, investigations and potential enforcement actions from regulatory agencies and state attorney generals; state and federal lawsuits and putative class actions; and other litigation. Periodically, we assess our potential liabilities and contingencies in connection with outstanding legal and administrative proceedings utilizing the latest information available. While it is not possible to predict the outcome of any of these matters, based on our assessment of the facts and circumstances, we do not believe any of these matters, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flows. However, actual outcomes may differ from those expected and could have a material effect on our financial position, results of operations, or cash flows in a future period. Rocket Companies accrues for losses when they are probable to occur and such losses are reasonably estimable. Legal costs are expensed as they are incurred.
As of March 31, 2022 and December 31, 2021, the Company had reserves related to potential damages in connection with any legal proceedings of $15,000. The ultimate outcome of these or other actions or proceedings, including any monetary awards against us, is uncertain and there can be no assurance as to the amount of any such potential awards. Rocket Companies will incur defense costs and other expenses in connection with the lawsuits. Plus, if a judgment for money that exceeds specified thresholds is rendered against us and we fail to timely pay, discharge, bond or obtain a stay of execution of such judgment, it is possible that we could be deemed in default of loan funding facilities and other agreements governing indebtedness. If the final resolution of any such litigation is unfavorable in one or more of these actions, it could have a material adverse effect on our business, liquidity, financial condition, cash flows and results of operations.
11. Minimum Net Worth Requirements
Certain secondary market investors and state regulators require the Company to maintain minimum net worth and capital requirements. To the extent that these requirements are not met, secondary market investors and/or the state regulators may utilize a range of remedies including sanctions, and/or suspension or termination of selling and servicing agreements, which may prohibit the Company from originating, securitizing or servicing these specific types of mortgage loans.
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
Rocket Mortgage is subject to the following minimum net worth, minimum capital ratio and minimum liquidity requirements established by the Federal Housing Finance Agency (“FHFA”) for Fannie Mae and Freddie Mac Seller/Servicers, and Ginnie Mae for single family issuers. Furthermore, refer to Note 5, Borrowings for additional information regarding compliance with all covenant requirements.
Minimum Net Worth
The minimum net worth requirement for Fannie Mae and Freddie Mac is defined as follows:
• Base of $2,500 plus 25 basis points of outstanding UPB for total loans serviced.
• Adjusted/Tangible Net Worth is defined as total equity less goodwill, intangible assets, affiliate receivables and certain pledged assets.
The minimum net worth requirement for Ginnie Mae is defined as follows:
• Base of $2,500 plus 35 basis points of the Ginnie Mae total single-family effective outstanding obligations.
• Adjusted/Tangible Net Worth is defined as total equity less goodwill, intangible assets, affiliate receivables and certain pledged assets. Effective for fiscal year 2020, under the Ginnie Mae MBS Guide, the issuers will no longer be permitted to include deferred tax assets when computing the minimum net worth requirements.
Minimum Capital Ratio
• For Fannie Mae, Freddie Mac and Ginnie Mae, the Company is also required to hold a ratio of Adjusted/Tangible Net Worth to Total Assets greater than 6%.
Minimum Liquidity
The minimum liquidity requirement for Fannie Mae and Freddie Mac is defined as follows:
• 3.5 basis points of total Agency servicing.
• Incremental 200 basis points of total nonperforming Agency, measured as 90+ delinquencies, servicing in excess of 6% of the total Agency servicing UPB.
• Allowable assets for liquidity may include cash and cash equivalents (unrestricted) and available for sale or held for trading investment grade securities (e.g., Agency MBS, Obligations of GSEs, US Treasury Obligations).
The minimum liquidity requirement for Ginnie Mae is defined as follows:
• Maintain liquid assets equal to the greater of $1,000 or 10 basis points of our outstanding single-family MBS.
The most restrictive of the minimum net worth and capital requirements require the Company to maintain a minimum adjusted net worth balance of $1,349,382 and $1,794,783 as of March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022 and December 31, 2021, the Company was in compliance with this requirement.
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
12. Segments
The Company’s Chief Executive Officer, who has been identified as its Chief Operating Decision Maker (“CODM”), has evaluated how the Company views and measures its performance. ASC 280, Segment Reporting establishes the standards for reporting information about segments in financial statements. In applying the criteria set forth in that guidance, the Company has determined that it has two reportable segments — Direct to Consumer and Partner Network. The key factors used to identify these reportable segments are the organization and alignment of the Company’s internal operations and the nature of its marketing channels, which drive client acquisition into the mortgage platform. This determination reflects how its CODM monitors performance, allocates capital and makes strategic and operational decisions. The Company’s segments are described as follows:
Direct to Consumer
In the Direct to Consumer segment, clients have the ability to interact with Rocket Mortgage online and/or with the Company’s mortgage bankers. The Company markets to potential clients in this segment through various brand campaigns and performance marketing channels. The Direct to Consumer segment derives revenue from originating, closing, selling and servicing predominantly agency-conforming loans, which are pooled and sold to the secondary market. The segment also includes title insurance, appraisals and settlement services complementing the Company’s end-to-end mortgage origination experience. Servicing activities are fully allocated to the Direct to Consumer segment and are viewed as an extension of the client experience. Servicing enables Rocket Mortgage to establish and maintain long term relationships with our clients, through multiple touchpoints at regular engagement intervals.
Revenues in the Direct to Consumer segment are generated primarily from the gain on sale of loans, which includes loan origination fees, revenues from sales of loans into the secondary market, as well as the fair value of originated MSRs and hedging gains and losses. Loan servicing income consists of the contractual fees earned for servicing loans and other ancillary servicing fees, as well as changes in the fair value of MSRs due to changes in valuation assumptions and realization of cash flows.
Partner Network
The Rocket Professional platform supports our Partner Network segment, where we leverage our superior client service and widely recognized brand to grow marketing and influencer relationships, and our mortgage broker partnerships through Rocket Pro TPO. Our marketing partnerships consist of well-known consumer-focused companies that find value in our award-winning client experience and want to offer their clients mortgage solutions with our trusted, widely recognized brand. These organizations connect their clients directly to us through marketing channels and a referral process. Our influencer partnerships are typically with companies that employ licensed mortgage professionals that find value in our client experience, technology and efficient mortgage process, where mortgages may not be their primary offering. We also enable clients to start the mortgage process through the Rocket platform in the way that works best for them, including through a local mortgage broker.
Revenues in the Partner Network segment are generated primarily from the gain on sale of loans, which includes loan origination fees, revenues from sales of loans into the secondary market, as well as the fair value of originated MSRs and hedging gains and losses.
Other Information About Our Segments
The Company measures the performance of the segments primarily on a contribution margin basis. The accounting policies applied by our segments are the same as those described in Note 1, Business, Basis of Presentation and Accounting Policies and the decrease in MSRs due to valuation assumptions is consistent with the changes described in Note 3, Mortgage Servicing Rights. Directly attributable expenses include Salaries, commissions and team member benefits, General and administrative expenses and Other expenses, such as servicing costs and origination costs.
The Company does not allocate assets to its reportable segments as they are not included in the review performed by the CODM for purposes of assessing segment performance and allocating resources. The balance sheet is managed on a consolidated basis and is not used in the context of segment reporting.
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
The Company also reports an “All Other” category that includes operations from Rocket Homes, Rock Connections, Rocket Auto, Core Digital Media, Rocket Loans, Truebill and includes professional service fee revenues from related parties. These operations are neither significant individually nor in aggregate and therefore do not constitute a reportable segment.
Key operating data for our business segments for the periods ended:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2022 | | Direct to Consumer | | Partner Network | | Segments Total | | All Other | | Total |
Revenues | | | | | | | | | | |
Gain on sale | | $ | 1,217,103 | | | $ | 258,056 | | $ | 1,475,159 | | | $ | 8,627 | | | $ | 1,483,786 | |
Interest income | | 57,601 | | | 32,168 | | 89,769 | | | 771 | | | 90,540 | |
Interest expense on funding facilities | | (26,727) | | | (14,969) | | (41,696) | | | — | | | (41,696) | |
Servicing fee income | | 365,499 | | | — | | | 365,499 | | | 715 | | | 366,214 | |
Changes in fair value of MSRs | | 454,380 | | | — | | | 454,380 | | | — | | | 454,380 | |
Other income | | 167,027 | | | 16,477 | | 183,504 | | | 133,868 | | | 317,372 | |
Total U.S. GAAP Revenue, net | | 2,234,883 | | | 291,732 | | | 2,526,615 | | | 143,981 | | | 2,670,596 | |
Less: Increase in MSRs due to valuation assumptions (net of hedges) | | (739,217) | | | — | | (739,217) | | | — | | | (739,217) | |
Adjusted revenue | | 1,495,666 | | | 291,732 | | | 1,787,398 | | | 143,981 | | | 1,931,379 | |
Directly attributable expenses | | 869,210 | | | 120,034 | | | 989,244 | | | 118,872 | | | 1,108,116 | |
Contribution margin | | $ | 626,456 | | | $ | 171,698 | | | $ | 798,154 | | | $ | 25,109 | | | $ | 823,263 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2021 | | Direct to Consumer | | Partner Network | | Segments Total | | All Other | | Total |
Revenues | | | | | | | | | | |
Gain on sale | | $ | 2,863,600 | | | $ | 684,428 | | $ | 3,548,028 | | | $ | 4,414 | | | $ | 3,552,442 | |
Interest income | | 58,668 | | | 36,061 | | 94,729 | | | 516 | | | 95,245 | |
Interest expense on funding facilities | | (42,006) | | | (25,818) | | (67,824) | | | (20) | | | (67,844) | |
Servicing fee income | | 291,652 | | | — | | | 291,652 | | | 709 | | | 292,361 | |
Changes in fair value of MSRs | | 200,555 | | | — | | | 200,555 | | | — | | | 200,555 | |
Other income | | 304,912 | | | 27,778 | | 332,690 | | | 133,422 | | | 466,112 | |
Total U.S. GAAP Revenue, net | | 3,677,381 | | | 722,449 | | | 4,399,830 | | | 139,041 | | | 4,538,871 | |
Less: Increase in MSRs due to valuation assumptions (net of hedges) | | (499,084) | | | — | | (499,084) | | | — | | | (499,084) | |
Adjusted revenue | | 3,178,297 | | | 722,449 | | | 3,900,746 | | | 139,041 | | | 4,039,787 | |
Directly attributable expenses | | 973,129 | | | 179,777 | | | 1,152,906 | | | 65,067 | | | 1,217,973 | |
Contribution margin | | $ | 2,205,168 | | | $ | 542,672 | | | $ | 2,747,840 | | | $ | 73,974 | | | $ | 2,821,814 | |
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
The following table represents a reconciliation of segment contribution margin to consolidated U.S. GAAP income before taxes for the three months ended:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Contribution margin, excluding change in MSRs due to valuation assumptions | $ | 823,263 | | | $ | 2,821,814 | | | | | |
Increase in MSRs due to valuation assumptions (net of hedges) | 739,217 | | | 499,084 | | | | | |
Contribution margin, including change in MSRs due to valuation assumptions | 1,562,480 | | | 3,320,898 | | | | | |
Less expenses not allocated to segments: | | | | | | | |
Salaries, commissions and team member benefits | 244,044 | | | 230,094 | | | | | |
General and administrative expenses | 192,457 | | | 194,494 | | | | | |
Depreciation and amortization | 21,042 | | | 15,304 | | | | | |
Interest and amortization expense on non-funding debt | 38,664 | | | 35,571 | | | | | |
Other expenses | 3,816 | | | 2,265 | | | | | |
Income before income taxes | $ | 1,062,457 | | | $ | 2,843,170 | | | | | |
13. Non-controlling Interests
The non-controlling interest balance represents the economic interest in Holdings held by our Chairman and RHI. The following table summarizes the ownership of Holdings Units in Holdings as of March 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Holdings Units | | Ownership Percentage | | Holdings Units | | Ownership Percentage |
Rocket Companies, Inc.'s ownership of Holdings Units | 119,627,004 | | | 6.08 | % | | 126,437,703 | | | 6.40 | % |
Holdings Units held by our Chairman | 1,101,822 | | | 0.05 | % | | 1,101,822 | | | 0.06 | % |
Holdings Units held by RHI | 1,847,777,661 | | | 93.87 | % | | 1,847,777,661 | | | 93.54 | % |
Balance at end of period | 1,968,506,487 | | | 100.00 | % | | 1,975,317,186 | | | 100.00 | % |
The non-controlling interest holders have the right to exchange Holdings Units, together with a corresponding number of shares of our Class D common stock or Class C common stock (together referred to as “Paired Interests”), for, at our option, (i) shares of our Class B common stock or Class A common stock or (ii) cash from a substantially concurrent public offering or private sale (based on the price of our Class A common stock). As such, future exchanges of Paired Interests by non-controlling interest holders will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in-capital when Holdings has positive or negative net assets, respectively. As of March 31, 2022, our Chairman has not exchanged any Paired Interests.
On March 31, 2021, the Company exchanged 20,200,000 shares of Class A common stock for the equivalent number of Class D Common stock and Holdings Units with RHI. This transaction resulted in an increase of Rocket Companies' controlling interest and a corresponding decrease of non-controlling interest of approximately 1%.
As of March 31, 2022, Rocket Companies has repurchased 22,458,660 shares of Class A common stock under the Share Repurchase Program authorized in November 2020.
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
14. Share-based Compensation
The Company has the 2020 Omnibus Incentive Plan under which restricted stock units and stock options are granted to team members and directors of the Company and its affiliates. The fair value of the share-based awards is estimated on the date of grant based on the market price of the underlying common stock and is amortized on a straight-line basis over the related requisite service periods.
During the three months ended March 31, 2022, the Company granted approximately 21,300,000 restricted stock units with an estimated future expense of $281,600. These awards generally vest annually over a three-year period or quarterly over an accelerated four-year period, subject to the grantee’s employment or service with the Company through each applicable vesting date.
The Company has an employee stock purchase plan, also referred to as the Team Member Stock Purchase Plan ("TMSPP"), under which eligible team members may direct the Company to withhold up to 15% of their gross pay to purchase shares of common stock at a price equal to 85% of the closing market price on the exercise date. The TMSPP is a liability classified compensatory plan and the Company recognizes compensation expense over the offering period based on the fair value of the purchase discount. During the three months ended March 31, 2022 and 2021, there were 1,018,875 and zero shares, respectively, purchased by team members through the TMSPP.
Additionally, we are allocated costs associated with awards granted by Rock Holdings, Inc. (“RHI”) in the years prior to the reorganization and IPO and certain of our subsidiaries have individual compensation plans that include equity awards and stock appreciation rights.
The components of share-based compensation expense included in Salaries, commissions and team member benefits on the Condensed Consolidated Statements of Income and Comprehensive Income is as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Rocket Companies, Inc. sponsored plans | | | | | | | |
Restricted stock units | $ | 42,492 | | | $ | 27,601 | | | | | |
Stock options | 9,576 | | | 10,035 | | | | | |
Team Member Stock Purchase Plan | 2,098 | | | 2,923 | | | | | |
Subtotal Rocket Companies, Inc. sponsored plans | $ | 54,166 | | | $ | 40,559 | | | | | |
RHI restricted stock units | 12,775 | | | 1,372 | | | | | |
Subsidiary plans | 169 | | | 52 | | | | | |
Total share-based compensation expense | $ | 67,110 | | | $ | 41,983 | | | | | |
15. Earnings Per Share
The Company applies the two-class method for calculating and presenting earnings per share by separately presenting earnings per share for Class A common stock and Class B common stock. In applying the two-class method, the Company allocates undistributed earnings equally on a per share basis between Class A and Class B common stock. According to the Company’s certificate of incorporation, the holders of the Class A and Class B common stock are entitled to participate in earnings equally on a per-share basis, as if all shares of common stock were of a single class, and in dividends as may be declared by the board of directors. Holders of the Class A and Class B common stock also have equal priority in liquidation. Shares of Class C and Class D common stock do not participate in earnings of Rocket Companies, Inc. As a result, the shares of Class C and Class D common stock are not considered participating securities and are not included in the weighted-average shares outstanding for purposes of earnings per share. Restricted stock units awarded as part of the Company’s compensation program are included in the weighted-average Class A shares outstanding in the calculation of basic earnings per share ("EPS") once the units are fully vested.
Rocket Companies, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(In Thousands, Except Shares and Per Share Amounts)
Basic earnings per share of Class A common stock is computed by dividing Net income attributable to Rocket Companies by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing Net income attributable to Rocket Companies by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities. There was no Class B common stock outstanding as of March 31, 2022 or 2021, respectively. See Note 13, Non-controlling Interests for a description of Paired Interests and their potential impact on Class A and Class B share ownership.
The following table sets forth the calculation of the basic and diluted earnings per share for the period:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Net income | $ | 1,036,608 | | | $ | 2,777,338 | | | | | |
Net income attributable to non-controlling interest | (982,896) | | | (2,653,636) | | | | | |
Net income attributable to Rocket Companies | 53,712 | | | 123,702 | | | | | |
Add: Reallocation of Net income attributable to vested, undelivered stock awards | 32 | | | 80 | | | | | |
Net income attributable to common shareholders | $ | 53,744 | | | $ | 123,782 | | | | | |
| | | | | | | |
Numerator: | | | | | | | |
Net income attributable to Class A common shareholders - basic | $ | 53,744 | | | $ | 123,782 | | | | | |
Add: Reallocation of net income attributable to dilutive impact of pro-forma conversion of Class D shares to Class A shares (1) | 744,379 | | | — | | | | | |
Add: Reallocation of net income attributable to dilutive impact of share-based compensation awards (2) | 1,418 | | | 6,349 | | | | | |
Net income attributable to Class A common shareholders - diluted | $ | 799,541 | | | $ | 130,131 | | | | | |
Denominator: | | | | | | | |
Weighted average shares of Class A common stock outstanding - basic | 122,691,728 | | 115,673,524 | | | | |
Add: Dilutive impact of conversion of Class D shares to Class A shares | 1,848,879,483 | | — | | | | |
Add: Dilutive impact of share-based compensation awards (3) | 3,807,921 | | 6,338,392 | | | | |
Weighted average shares of Class A common stock outstanding - diluted | 1,975,379,132 | | 122,011,916 | | | | |
| | | | | | | |
Earnings per share of Class A common stock outstanding - basic | $ | 0.44 | | | $ | 1.07 | | | | | |
Earnings per share of Class A common stock outstanding - diluted | $ | 0.40 | | | $ | 1.07 | | | | | |
(1) Net income calculated using the estimated annual effective tax rate of Rocket Companies, Inc.
(2) Reallocation of net income attributable to dilutive impact of share-based compensation awards for the three months ended March 31, 2022 and 2021 comprised of $1,356 and $5,889 related to restricted stock units, zero and $422 related to stock options and $62 and $38 related to TMSPP.
(3) Dilutive impact of share-based compensation awards for the three months ended March 31, 2022 and 2021 comprised of 3,640,391 and 5,879,491 related to restricted stock units, zero and 421,267 related to stock options and 167,530 and 37,634 related to TMSPP.
For the period from January 1, 2022 to March 31, 2022, 23,941,259 stock options, each weighted for the portion of the period for which they were outstanding, were excluded from the computation of diluted earnings per share as the effect was determined to be anti-dilutive.
For the period from January 1, 2021 to March 31, 2021, 1,868,855,039 Holdings Units, each weighted for the portion of the period for which they were outstanding, together with a corresponding number of shares of our Class D common stock, were exchangeable, at our option, for shares of our Class A common stock. After evaluating the potential dilutive effect under the if-converted method, the outstanding Holdings Units for the assumed exchange of non-controlling interests were determined to be anti-dilutive and thus were excluded from the computation of diluted earnings per share.