loanDepot - Q2 2023

Transcript

Operator (participant)

Good afternoon, welcome to loanDepot's Second Quarter 2023 Earnings Call. All participants have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, followed by one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. I would like now to turn the call over to Gerhard Erdelji, Senior Vice President, Investor Relations. Please go ahead.

Gerhard Erdelji (SVP of Investor Relations)

Good afternoon, everyone, thank you for joining loanDepot's second quarter 2023 earnings call. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements regarding the company's operating and financial performance in future periods. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, guidance to our pull-through weighted rate lock volume, origination volume, pull-through weighted gain on sale margin, and expense trends. These statements are based on the company's current expectations and available information. Actual results for future periods may differ materially from these forward-looking statements due to risks or other factors that are described in the Risk Factors section of our filings with the SEC.

A webcast and a transcript of this call will be posted on the company's investor relations website at investors.loandepot.com under the Events and Presentations tab. On today's call, we have loanDepot President and Chief Executive Officer, Frank Martell, and Chief Financial Officer, David Hayes, to provide an overview of our quarter, as well as our financial and operational results, outlook, and to answer your questions. We are also joined by our Chief Investment Officer, Jeff DerGurahian, and LDI Mortgage President, Jeff Walsh, to help address any questions you might have after our prepared remarks. With that, I'll turn things over to Frank to get us started. Frank?

Frank Martell (President and CEO)

Thank you, Gerhard, and thank you all for joining us today. I look forward to sharing my perspective on market conditions and our results. Before I begin, I'd like to welcome David Hayes to the call. David brings a strong track record of financial and business leadership, as well as deep mortgage industry knowledge to loanDepot. I know David well and look forward to partnering with him as we continue to execute our Vision 2025 plan. I also want to take this opportunity to express my gratitude to Pat Flanagan for his leadership and commitment to loanDepot. Pat helped shepherd the company from private to public ownership, and most recently, he helped the company address the critical challenges arising from the dramatic market downturn last year. We wish Pat the very best in his future endeavors.

Despite the historic downturn in the housing market, I believe that our second quarter and first half results represent an objective marker of our progress on the strategic imperatives we laid out in our Vision 2025 plan. As you may recall, Vision 2025, which was announced in July of 2022, has four pillars. Pillar 1 focuses on transforming our originations business to drive purchase money transactions with an expanded emphasis on purpose-driven lending. Pillar 2 calls for aggressively rightsizing our cost structure in line with current and anticipated market conditions, as well as internally set targets to achieve first quartile operating performance. Pillar 3 covers investing in profitable growth, generating initiatives and critical business operating platforms and processes to support operating leverage and best-in-class quality and delivery. Finally, Pillar 4 relates to optimizing our organization structure.

The second quarter was our second consecutive quarter of strong sequential top-line growth and margin expansion. At the same time, we continue to aggressively drive cost productivity and operating leverage. Our second quarter 2023 revenues were up $64 million or 31% sequentially from the first quarter, fueled primarily by higher purchase transaction volumes and gain on sale margins. Purchase transactions accounted for approximately 73% of all originations in Q2. During the second quarter, our costs increased by $16 million or 5%. This growth was primarily driven by variable expenses associated with higher origination volumes. In a moment, David will go through our operating results, including our volume-related expenses, Vision 2025 program costs, and legal accruals attributable to the settlement of certain legacy litigation.

If these expenses were to be excluded due to their non-recurring nature, this would result in a 4% quarter-over-quarter reduction in our core operating expenses. Profitable growth, together with our laser focus on productivity and operating leverage, accounted for a $42 million or 46% sequential reduction in our Q2 net loss. This follows a $66 million reduction in our sequential quarterly net loss in the first quarter. While we continue to work on resetting our cost structure to align with generation low unit volumes, we are also focused on the other Pillars of Vision 2025, including our strategy to expand purpose-driven lending that supports first-time home buyers and diverse communities. During 2022, loanDepot ranked as the country's third largest mortgage lender for all minorities.

In addition to ranking third overall for all minorities, loanDepot is also the number three lender serving Hispanics, the number four lender serving African Americans, the number four lender serving Native Americans, and the number six lender serving Asian Americans. As we all know, homeownership is the bedrock of the American dream and plays a vital role in helping to build strong and stable communities. Further deepening our support for diverse and first-time homebuyers is a critical component of our Vision 2025. As a purpose-driven lender, our team is passionate about making homeownership accessible and achievable for more families. Through our products, our people, and our digital tools, we're working hard every day to create a more inclusive and sustainable path to homeownership.

Our HELOC product, which provides our customers with a powerful option for achieving their financial goals, also demonstrated consistent growth with strong customer adoption during the quarter. Finally, as outlined in Pillar 4 of our Vision 2025 plan, we continue to make significant strides towards optimizing our organization structure. During Q2, we promoted Darren Graeler as our Chief Accounting Officer and Alec Hanson as our Chief Marketing Officer. We also recruited talented executives, including David as our Chief Financial Officer and Melanie Graper as our Chief Human Resources Officer. Finally, we consolidated our LDI Digital division under LDI Mortgage President, Jeff Walsh. Our entire leadership team is energized and committed to continuing to deliver improved financial performance and superior value for our customers and our shareholders. I want to conclude my prepared remarks today by thanking Team loanDepot and our other key stakeholders for their support.

Our markets remain challenging, no doubt, but I believe this is also a very important period of positive change and forward momentum for the company. I believe we're seeing the positive and tangible results of our continued focus on the four pillars of our Vision 2025 strategic plan. With over $700 million in cash on hand, ongoing operating efficiency initiatives, and consistently growing revenues exiting the first half, we believe we are increasingly well-positioned to navigate through the present market downturn and emerge as a stronger and more valuable company. With that, I will now turn the call over to David, who will take us through the financial results in more detail.

David Hayes (CFO)

Thanks, Frank, and good afternoon, everyone. It's a pleasure to join this very talented team at loanDepot. During the second quarter, loan origination volume was $6.3 billion, an increase of 27% from the first quarter of 2023. This was at the high end of the guidance we issued last quarter, which was between $4.5 billion and $6.5 billion. Second quarter volume consisted of $4.6 billion in purchase loan originations and $1.7 billion in refinance loan originations, primarily cash-out refinances. Our pull-through weighted rate lock volume of $6.1 billion for the second quarter contributed to total revenue of $272 million, which represented a 31% increase from the first quarter.

Rate lock volume also came in within guidance we issued last quarter of $5.5 billion-$7.5 billion. The increase in revenue is primarily a result of higher loan origination income from an increase in pull-through weighted rate lock volume and higher gain on sale margins. Our pull-through weighted gain on sale margin for the second quarter came in at 285 basis points, above the guidance we provided of 240-280 basis points. Our higher gain on sale margin was primarily due to wider profit margins on our production, a shift in mix favoring more profitable FHA loans, and a lower provision for loan losses. Turning now to our servicing portfolio. The unpaid principal balance of our servicing portfolio remained relatively consistent at $142 billion quarter-over-quarter.

Servicing fee income decreased slightly from $119 million in the first quarter of 2023 to $118 million in the second quarter of 2023. During the quarter, we sold excess agency servicing rights related to unpaid principal balances totaling $14 billion, resulting in a gain of $7.7 million. This transaction allowed us to monetize a portion of the asset while maintaining our direct servicing relationship with those customers. We hedge our servicing portfolio, we do not record the full impact of the changes in fair value and the results of our operations. We believe this strategy protects against volatility in our earnings and liquidity. Our strategy for hedging the servicing portfolio is dynamic. We adjust our hedge positions in reaction to changing industry environments.

We believe our servicing portfolio is well protected against potential rising defaults. As of June 30th, the weighted average FICO was 736, the weighted average coupon was 3.3%, and the weighted average LTV at origination was 71%. These characteristics contributed to a low delinquency rate, with only 70 basis points of the portfolio more than 90 days past due at quarter end, and should generate reliable, ongoing revenue during these uncertain economic times. A major component of our Vision 2025 plan is to align our expense base with our expectations for a 2023 market size of $1.5 trillion and create efficiencies to improve operating leverage and financial performance over time. Our total expenses for the second quarter of 2023 increased by $16 million or 5% from the prior quarter.

This was driven primarily by higher volume-based commissions, Vision 2025 related expenses, and legal expenses. Our volume-related expenses, consisting of commissions and direct origination expenses, increased by $13 million, reflecting higher originations. Vision 2025 related charges totaled $7 million, including a $5 million- including $5 million of personnel-related expenses and $2 million of lease and other asset impairment charges. Vision 2025 expenses incurred in the first quarter of 2023 totaled $3 million. During the second quarter, we accrued $8 million of legal expenses related to the settlement of legacy litigation. Excluding volume-related expenses, Vision 2025 related charges, and a litigation settlement accrual, our adjusting operating expenses decreased by $10 million compared to the first quarter, reflecting the ongoing benefits of our efficiency improvements.

Looking ahead to the third quarter volumes and margins, we expect origination volume of between $5 billion-$7 billion. We expect pull-through weighted rate lock volume of between $5.5 billion-$7.5 billion, and we expect our third quarter pull-through weighted gain on sale margin to be between 245-285 basis points. The reduction in our gain on sale margin guidance for the third quarter primarily reflects increased interest rates subsequent to the end of the second quarter, which adversely will impact loan margins. Going forward, we expect to continue to reduce expenses and narrow our losses, reflecting decreasing personnel-related costs due to lower headcount, G&A, and other corporate expenses. As we move forward in the second half of 2023, we plan to continue maintaining a strong liquidity position and aggressively reduce our costs.

Importantly, we're also investing in critical operating platforms, which we will expect to deliver higher levels of automation and operating leverage, and position us for additional growth and margin expansion in 2024. With that, we're ready to turn it back to the operator for Q&A. Operator?

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press star, then 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Doug Harter from Credit Suisse. Please go ahead.

Doug Harter (Director)

Thanks. I believe you guys extended or refinanced one of your MSR lines during the second quarter. Can you talk about kind of the updated terms on that and what your MSR line maturities look like now?

David Hayes (CFO)

Yeah, this is David Hayes. We did renew one of our MSR lines, but we don't disclose the specifics of that on the call. Those are, you know, proprietary negotiated deals.

Doug Harter (Director)

Okay. I, I guess, do you have a sense of what, what any near-term maturities are, or just in general, you know, kind of, was there any change in advance rates, you know, kind of, in that extension?

David Hayes (CFO)

Yeah. Well, those will be issued in our 10-Q, the more specifics on that. We did renew the line. We did expand some capacity. We renewed all lines that were in the quarter, and we don't see any concerns about upcoming renewals for the third quarter.

Doug Harter (Director)

Okay. Then, you know, I guess at, at this point, how are you thinking about, you know, kind of additional MSR sales versus, you know, kind of retaining and growing that, that portfolio? You know, kind of what is the outlook for that?

Frank Martell (President and CEO)

Yeah, this is Frank. We, we you know, we, we look at the servicing portfolio as an important asset for the company and an important base of earnings for the company. So, you know, we have not been in the market selling a lot of assets off the portfolio. You know, if we do contemplating that, it'll be, it'll be more targeted and opportunistic. In general, you know, we would, you know, we've held the servicing book, you know, quite steady, and we would like to do that and, and, and grow that portfolio as we go forward as part of the company's strategy.

Doug Harter (Director)

Okay. Then last one from me. What would be kind of the, the target level of cash that you would look to hold to, to feel comfortable running the business?

David Hayes (CFO)

Yeah, this is David again. We, we continue to be focused on maintaining, you know, a very strong liquidity position. As you know, we drew down our, our some balances and put on the balance sheet to have a fortress balance sheet last year to navigate through these challenging markets. We do have target liquidity goals of maintaining at least 5% of our assets and liquidity. For the time being, we're, we're expecting to keep excess liquidity in the balance sheet.

Doug Harter (Director)

Great. Thank you.

Operator (participant)

Our next question comes from the line of Kyle Joseph from Jefferies. Kyle, please go ahead.

Kyle Joseph (Analyst)

Hey, good afternoon. Thanks for taking my questions. Just looking at your guidance, it looks like you expect similar volumes in 3Q 2022, but, you know, as you mentioned on a, on a lower headcount, can you just give a sense for where the productivity gains are coming from?

Frank Martell (President and CEO)

Yeah, I don't know if we talked about specifically about it on headcount, but yeah, we, we do look at the, the market, you know, kind of being in line, in the third quarter as it was in the second quarter. I think, you know, we're continuing to invest in productivity and operating leverage gains. A lot has gone into our, into the technology area as well as process redesign, which is part of Vision 2025. We'll, we'll continue to see that type of a gain in terms of our ability to be more productive per loan generated.

You know, in addition, obviously, we have been reducing headcount, and we expect that to continue, given the market uncertainty. We expect that to be funded largely through productivity gains through both process and technology platforms. As you may recall, we had a couple of, pretty large, you know, investments that we're making despite the choppiness of the market in our LOS platform and in our, and our underwriting areas as well, that we think will add significant productivity gains when they come online in 2024.

Kyle Joseph (Analyst)

Yeah. Got it. You know, with kind of the better origination outlook, just, and obviously, that factors into your expense outlook, but, you know, is there any more wood to chop in terms of expenses, and which kind of line items would those be in specifically?

Frank Martell (President and CEO)

Yeah, I think David, David talked about it in his prepared remarks. I think we, we look at, we look at, you know, corporate overhead, obviously, you know, some of the G&A areas, marketing, and really, you know, in both in the operational part of the company as well as, as sales, as we get more productive and, and we, you know, improve our tools, and our, and our base platform. I, I think it's pretty broad-based. You know, obviously, we have to react. It's a very uncertain market, but, you know, we have to react to that and, and, and address, address challenges as they come along.

I think by and large, we have most of those reduction programs in flight, and I'd expect that, you know, the trends you're seeing in the second quarter versus the first quarter to continue into the third quarter and beyond.

Kyle Joseph (Analyst)

Great. Thanks very much for answering my questions.

Operator (participant)

Your next question comes from Kevin Barker from Piper Sandler. Kevin, please go ahead.

Kevin Barker (Managing Director)

All right. Thanks for taking my questions. I want to follow up on some of the questions from Doug Harter regarding the MSR. I noticed it's as a percent of your overall equity, it's roughly 2.5x, which is about 2x as high as it was pre-2022. Is there any target that you have regarding the size of the MSR relative to your equity base? Another way to think about it is, do you think about your MSR relative to your origination channel or manage it to a certain size relative to how much you think you can produce within the origination channel? Thank you.

Frank Martell (President and CEO)

Yeah. I'll let Jeff DerGurahian answer. You know, obviously, one of our advantages, we believe is, you know, we have a very effective recapture mechanism off of our servicing portfolio, which is, you know, very meaningful for, for the economics of the company. You know, as it relates to target sizes, et cetera, you know, as I mentioned earlier, we, we, we want to, we want to build the servicing book intelligently as we go forward. And so, we're kind of managing to that overall strategy. The pace in which we do that is, you know, kind of varies depending on the quarterly conditions we're faced with of the market. But in general, you know, we've been able to hold the portfolio steady.

As I said, I think that's something that we want to actually expand it a bit as we go forward. Again, we have to, we have to pace it with the market conditions, which are, you know, needless to say, pretty fluid right now, with the rate environment we're dealing with and trying to figure out where that's all going, you know, for the balance of this year, certainly. Jeff, I don't know if you want to add anything to answer this, to my answer.

Jeff DerGurahian (Chief Investment Officer)

Yeah, Frank, I think you covered it well. I mean, we're you can see the portfolio is, has been pretty steady at this level. That's by design. We continue just to refine, you know, the composition of the portfolio so that it works well with the origination platform and what we're trying to achieve overall with touching our customers and providing incremental products or refinance opportunities to them.

Kevin Barker (Managing Director)

Okay, great. Then, in addition to the efficiency strategies, have you done anything structurally or to drive, you know, maybe better margins, particularly around how you, you know, compensate loan officers? Or how you think about the structural impact or the structural compensation that you look at for loan officers, particularly on the direct-to-consumer or even the call center operations, in order to, like, really drive higher margins within the direct-to-consumer channel? Thank you.

Frank Martell (President and CEO)

Walsh. I mean, we're always evaluating, you know, the compensation as a percentage of the total revenue and try to maintain kind of a responsible percentage there. You know, we also shift our business focus away from unprofitable, you know, markets and products, shifted more into, you know, the government space and some other type of products that yield more and a higher percentage of revenue against commission. But commissions are, you know, largely industry-driven and influenced by the industry as a whole. But I think we do a pretty good job of managing, you know, like, say, a responsible percentage of compensation to overall revenue.

Kevin Barker (Managing Director)

Okay, great. Thanks for taking my questions.

Operator (participant)

At this time, I'd like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. There are no more questions. I'll turn the call back over to Frank Martell for closing remarks.

Frank Martell (President and CEO)

Yeah. Thanks, thanks, everybody, for joining us today, some, some really good questions. You know, I think that the, the company delivered in a very tough market in the second quarter. I really appreciate the, the efforts of the entire team to do that. You know, I also want to just thank our stakeholders for their support. Couldn't do it without you guys, and, but we look forward to continue to progress and deliver more value for our customers, our team members, partners, and our shareholders as we go forward. With that, thanks, everybody.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Frank Martell (President and CEO)

With that, thanks, everybody.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.