Q2 2022 Loandepot Inc Earnings Call
Good afternoon, and welcome everyone to loan depots second quarter 2022 conference call. All lines have been placed on mute to prevent any background noise. If you would like to ask a question during the call simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question.
Press Star one again I would now like to turn the call over to Gary Hart or Daily Senior Vice President Investor Relations. Please go ahead.
Good afternoon, everyone and thank you for joining our call on Gearhart or daily Investor Relations Officer at home Depot.
Today, we will discuss loan depot second quarter 2022 results.
Before we begin I would like to remind everyone that this conference call may include forward looking statements regarding the Companys operating and financial performance and 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.
Nation volume pull through weighted gain on sale margin and expenses.
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 <unk> low depot dot com under the events and.
And presentations tab.
On today's call, we have loan depot, President and Chief Executive Officer, Frank Martell, and Chief Financial Officer, Patrick Flanagan to provide an overview of our quarter as well as our financial and operational results outlook and to answer your questions.
We're also joined by our Chief Capital Market's Officer, Jeff degree and L. D on mortgage President Jeff Walsh to help address any questions you might have after our prepared remarks, and with that I'll turn things over to Frank to get to start right.
Thank you Chiara thank.
Thank you all for joining us on today's call.
Look forward to sharing my perspective on market conditions, our results and the company's vision 2025 plan.
Our second quarter results reflect some large call out items, which Pat will elaborate on shortly as well as the challenging market environment that continues in our industry, which resulted in declines in our mortgage volumes and profit margins.
As we discussed a few weeks ago during our public announcement of our vision 2025 planned like other mortgage companies, we scaled our organization during 2020 in 2021 to meet the demands of unprecedented mortgage volumes, especially refinancing transactions.
After two years of record breaking volumes the market has contracted sharply and up roughly so far this year.
We anticipate market conditions will remain challenging over the short to medium term.
With mortgage originations are projected to decline by roughly 50% in 2022 from 2021, including an accelerated decline in the second half of 2022.
At this point, we expect to see further declines in volumes in 2023.
Despite this environment and formed by our vision 2025 plan. We continue to believe loan depot is positioned for long long term success built on the support of a strong balance sheet and ample liquidity.
Our recently announced the vision 2025 plan is designed to address current and anticipated market conditions achieve run rate profitability exiting 2022 and position the company for long term value creation.
The four primary strategic pillars vision 2025, our first raising our focus on purchase transactions, while serving increasingly diverse communities across the country.
As the company pivots to increasingly purchase purpose driven origination organization, we expect to increase our focus on addressing persistent gaps and equitable housing while advancing the goal of growing our share of lending for purchase transactions and maintaining responsible management of credit risk.
Second meaningful meaningfully progress, our previously announced growth generating initiatives, including launching additional HELOC product later, this year and continuing to leverage our investment in our servicing business.
Third centralizing management of loan origination and fulfillment, increasing operating leverage and achieving best in class quality and service levels.
And fourth aggressively right sizing our cost structure for current and expected mortgage origination volumes.
Over the past several months, we have taken aggressive actions to realize the goals outlined in our vision 2025 program.
We've made substantial progress in a number of critical areas, including.
One pivoting our origination organization toward a unified and purpose driven unit second reducing organizational layers and increasing management spans to create operating efficiencies third centralizing our operations compliant and support efforts.
Fourth cutting third party and facilities related spending.
Fifth reducing staffing levels and.
In a few minutes Pat will provide additional detail on our progress resetting our cost structure.
Importantly, I believe the progress we've made over the past several months clearly support the achievement of our goal of achieving run rate operating profitability exiting 2022.
Earlier, I mentioned pivoting, our originations business to a unified and purpose driven organization.
When the mangle. The vision 2025 is to delight our customers during one of the most important financial transactions of his or her lifetime.
To meet this goal we want to provide our superior standard of customer service throughout the homeownership journey from marketing to underwriting and closing to providing ancillary and complementary products and services to servicing alone for installation.
Working through third party mortgage brokers makes it more difficult for us to control the customer experience and adds a layer of expense that reduced our profitability.
Therefore, as part of the vision 2025 plan, we have initiated the exit of our wholesale business channel.
This will enable us to further reduce expenses consolidate operations and better meet our goals of becoming a purpose driven organization with direct customer engagement throughout the entire lending process.
In summary, despite challenging market conditions, we remain laser focused on aggressively implementing vision 2025, and we expect to exit 2022, achieving run rate operating profitability.
As we look ahead to 2023 and beyond I believe loan depot is well positioned to succeed through leveraging and expanding our unique lending and servicing solutions driving first quartile cost productivity and process efficiency and harnessing the collective energy and innovative spirit of our Companys dedicated team.
With that I'll now turn the call over to Pat Flanagan, who will take you through our financial results in more detail.
Thanks, Frank and good afternoon, everyone. During the second quarter loan origination volume was 16 billion a decrease of 26% from the first quarter of 2022.
This was within the guidance, we issued last quarter between 13, and 18 billion volume during that period consisted of $10 billion of purchased loan origination and $6 billion of refinance originations primarily cash out refinances are strategy to emphasize less interest rate sensitive mortgage products has resulted in an increase in the proportion of purchased <unk>.
Transactions from 30% a year ago to 59% in the second quarter as well as increasing cash outs and purchase transactions from 59% to 95% during the same period.
Our pull through weighted rate lock volume of $12 billion for the second quarter resulted in quarterly total revenue of $309 million, which represented a 20 or 39% decrease from the first quarter rate lock volume came in at the low end of our guidance, we issued last quarter of $12 billion to $22 billion.
The decrease in revenue as a result of significant margin compression driven by increasing volatile interest rates and market adjustments as the industry continues to shed capacity our pull through weighted gain on sale margin for the first quarter came in at 150 basis points, which is below the guidance we provided for the second quarter.
An increase in provision for repurchase loss reserve also impacted our revenue and gain on sale margin our provision for repurchase reserves increased to $82 million during the second quarter from $13 million. During the first quarter. The increase was mainly driven by rapidly increasing interest rates, which negatively impacted the fair value of loans.
Subject to repurchase that were originated in prior periods at lower interest rates.
Adjusting for the $69 million increase in the provision for repurchase loss reserve our pull through weighted gain on sale margin would have been 205 basis points or near the higher end of our guidance for the quarter.
Turning now to our servicing portfolio customer retention remains one of our primary areas of focus by controlling the entire customer experience and retaining data in our in house platform, we improve our operating efficiency by capturing additional revenue opportunities and leveraging our marketing and customer acquisition expenses across multiple products and services.
Our preliminary organic recapture rate remained strong at 72% for the 12 months ended June 32022.
The unpaid principal balance of our servicing portfolio increased to 155 billion as of June 32022, compared to 153 billion as of March 31 2022.
This increase was primarily due to net additions to the portfolio offset somewhat by the sale of 4 billion in unpaid balances during the quarter.
As of the end of the second quarter, we serviced 87% of our portfolio in house compared to 67% at the end of the first quarter and we're on track to bring all of our agency and Ginnie Mae servicing in house before the end of the year by leveraging our in house infrastructure for this highly scalable business, we've reduced our quarterly cost of servicing.
From two four basis points of unpaid balance in the first quarter to two basis points in the second.
Reflecting the net growth in the portfolio servicing fee income increased from $111 million in the first quarter of 2022 to 117 in the second quarter of 2022.
We hedge our servicing portfolio. So we do not record the full impact of the increase in fair value in a rising interest rate environment 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 and we adjust our hedge positions in reaction to <unk>.
<unk> interest rate environments.
During our vision 2025 call in July we discussed our market outlook for the remainder of 2022, we continue to forecast the market will come in below an annualized two trillion dollars.
A significant component of this plan is to align our expense base with lower origination volume and create efficiencies. We believe will result in improved operating leverage and financial performance over time.
Looking ahead to the third quarter and assuming no material changes in the interest rates or the competitive landscape. We expect both pull through weighted rate lock volume and origination volume, but between six five and 11 5 billion, reflecting the current interest rate environment weighing on demand, we expect third quarter pull through weighted gain on sale margin.
The increase from the second quarter margin to between 175, and 225 basis points, reflecting ongoing competitive pressures.
Our total expenses for the second quarter of 2022 decreased by $88 million or 8% from the prior quarter, driven primarily by lower personnel expenses, including both salaries and volume based commissions and lower marketing expenses.
The second quarter included charges of $41 million for goodwill impairments $6 million of real estate and other intangible asset impairment 4 million of severance benefits and $3 million of consulting and other professional expenses related to vision 2025.
Net of these items and the 60, new $69 $2 million increase in the provision of purchase loss reserves, our adjusted second quarter pretax loss would have been $130 million.
We continue to aggressively reduce our cost structure to return to run rate profitability by the end of 2022, we reduced our head count from approximately 11300 at year end 2021 to approximately 8500 at the end of the second quarter and expect to end the third quarter with our head count below our previously stated year.
Our end goal of 6500, we plan to achieve our cost reduction goal by further reducing management spans consolidating redundant operational functions, reducing marketing expenditures real estate costs and other third party charges. We also continue to evaluate all aspects of our business for potential additional expense reduction.
As the market continues to evolve.
As a reminder, we expect to recognize additional charges during the second half of 2022 as part of our vision 2025 plan, including severance and benefits related charges currently anticipated between approximately 25% and 28 million charges related to the exit of real estate now approximately $6 million to $8 million.
And approximately $7 million to $9 million of outside service costs approximately 75% of these expenses will be recognized in the third quarter with the remainder expected in the fourth quarter of the year.
The plan is being executed against the backdrop of a strong balance sheet with $1 $2 billion of tangible equity ample liquidity with over $950 million of unrestricted cash and equivalents and what we believe are excellent relationships and the support of our financing partners the agencies and other investors with that we're ready to.
Turn it back to the operator for questions and answers operator.
At this time, if you'd like to ask a question simply press star followed by the number one on your telephone keypad. Our first question will come from the line of James Faucette with Morgan Stanley . Please go ahead.
Thanks, Yeah. This is sandy BD on for James.
Exiting the wholesale channel and mindful of your outlook just on gain on sale margins. How are you thinking about the cadence and they only provide quarterly guidance here, but the cadence of margins over the coming quarters.
We will exiting that channel provides some support or upward pressure.
But really how are you thinking about that.
So we think net.
Net of the adjustments for.
For the provision increases as we as we mentioned.
Margins are expected to be higher in the third quarter within the range that we talked about and exiting the wholesale business actually provide some upward lift to margins.
Got it. Thank you and then just one one follow up.
You walked through the cost structure any areas, where you're leaning in or maintaining investments that you'd like to call out.
I'm thinking technology and a few other things.
Anything to flag there.
No I think I think really if you look at the $3 75 to 400 million full.
Full year run rate cost savings about.
65% of those are going to be in the in the people area with a balance being a blend of other other third party infrastructure related as well there will be some investments that we will make that will offset some of that debt reduction.
Primarily around our customer facing organization some of our tools, our quality systems as well so there'll be a few offsets.
But in general it breaks down roughly two thirds.
<unk> and one third other.
Got it thank you guys.
Your next question will come from the line of Doug Harper with Credit Suisse. Please go ahead.
Okay.
Thanks.
Just on your.
Commentary that you expect to be breakeven by the end of this year.
What.
What are you what are you expecting on the revenue side. There you know how much contribution from.
Home equity are you expecting.
Or is it mainly on the cost side that gets you back to breakeven.
Yes, I think that the primary focus is adjusting our cost structure to the market forecast that.
I think both Pat and I talked to talked about I think.
<unk> is a very modest because we are launching it later in the year is a very modest contributor.
Really really de Minimis frankly.
And then just to make sure I understand.
The volume guidance in the context of exiting wholesale I guess, one when do you expect to kind of stop funding volumes and how much of kind of the <unk>.
<unk> volume guide is from wholesale.
Hi.
The plan is to fund out the remaining wholesale pipeline, which is approximately $1 billion.
And have the entire pipeline wrapped up by the end of October .
This year.
Got it great makes sense. Thank you.
Your next question will come from the line of Trevor Cranston with JMP Securities. Please go ahead.
Alright. Thanks.
A follow up on the question about.
The plan to exit 2022.
Being profitable.
Can you comment on what's kind of baked into that.
Projection in terms of.
Where you need to see volume and gain on sale levels does it kind of stair.
Steady.
From what you are expecting in the third quarter or is there any.
Improved digital on baked into the expectation to get back to profitability.
Yes, I think broadly speaking of course, we're looking at a market that looks more like.
In the low to trillions.
For the year, so that implies.
A slowdown the biggest slowdown through the second half of the year.
And then.
As I mentioned in my prepared remarks here, we're looking at a decline into 2023. So I think it's important to recognize that our plans incorporate a run rate that will.
Allow us to overcome that expected downdraft as well.
I think if you look at 'twenty favorable.
We're kind of thinking in line with most of the other.
Externally available MBA.
<unk> forecasts that are out there with us a bit more conservative applied conservatism applied on our part as far as the.
And as far as gain on sale margins.
The plan that we've been talking about the vision 2025 plan ending the year with run rate profitability assumes at the fourth quarter gain on sale margins should be relatively consistent with the guidance we provided for Q3.
Okay got it.
And then you mentioned the.
The impact of higher rates on the.
The repurchase provision in the second quarter.
When you when you look at how rates have moved so far in the third quarter.
If they were to stay relatively steady from here would it be reasonable to expect.
Some of that.
The provision to come back in <unk>, just based on our rates.
Well.
We thank for that.
The provision levels are adequate for what we see in the future. We think that over time as as rates continue to rise at a slower pace or remain stable that that gap will come back in.
The provision.
We'll look similar to historic levels. So this was an anomaly.
Around that the differential between the rate when the loans were originated and the rate there.
S market rates, when we repurchase stock.
Also reflective of just dislocation in private label.
From credit spread perspective as well.
Sure that makes sense.
Okay. Thank you.
Your next question will come from the line of Kevin Barker with Piper Sandler. Please go ahead.
Thank you and thank you for taking my questions.
How much of Opex or operating I'm, sorry, operating expenses will decline.
From the exit in the broker channel and is fully embedded in your guidance.
<unk> $375 million to $400 million of expenses.
Yes, Kevin it's included as part of the overall run rate.
Productions.
For the $3 75 to 400.
Okay, and then how much is coming from directly from the exited the broker channel you're able to provide Edward.
No. We don't we don't provide that level of specificity.
Okay.
And then.
In regards to the expenses how much is already embedded within the second quarter operating expenses, excluding the goodwill impairment.
Can you can you will you see embedded can you just define what that youre talking about there is a clear.
How much of the $375 million to $400 million of expense saves.
You laid out.
It has already been achieved as of the second quarter.
With that $520 million of operating expenses that you reported excluding the $41 million of goodwill impairment.
So in terms of the $3 $75 million to $400 million of expense reduction so thats really not not.
Goodwill is not.
And that number just to be clear so.
We've identified substantially all of that and have action plans against all of that.
There is still a bit to solve for but essentially I would say that we're well.
We're very close to identifying the entire target.
And actually we have action plans in a lot of a substantial amount well over half of that has actually.
Been action or is in the process of being action.
As of today.
A significant portion will be realized in Q3.
A significant amount of head count reductions where July and August .
<unk>.
And there's a couple of months of severance expense of trails as a result of those terminations.
Okay. So when we think about the move in operating expenses from $606 million in the first quarter that 520 in the second quarter.
How much of that is due.
Two the expense saving initiatives you put in place versus production declines as another way to look at is like how much more do we should we expect.
But we had.
Yes, head count declines of.
It was about 25% reduction in <unk> in the quarter, we had a 40% reduction in the quarter quarter over quarter from marketing expense, 15% was personnel related.
And then 8%.
Was volume based on Commission plan.
So there is adjusted expenses were 17% lower quarter over quarter. So.
Yes.
We didn't break it out that way.
Because we were we were projecting the volume decline into the model. So I don't have it sort of segregated against vision 2025, and volume decline. It was all it was all intermingled into.
Getting to the appropriate level of expenses.
Okay. Thank.
Thank you again, taking my questions.
Your next question will come from the line of Stephen Sheldon with William Blair. Please go ahead.
Hey, Tim This is Pat Mcinally on for Stephen today.
So my first one.
Top of funnel trends have you been seeing as mortgage rates have pulled back a little bit in recent weeks. Just curious are you seeing any more organic truck traffic at all as it has happened.
Not to a material degree.
Okay and then how.
How do you think about your ability to gain market share in this.
Declining originations market or is this really more about positioning yourself to.
Stabilized cost structure and gain market share once volumes really do stabilize.
Yes.
Not going to chase market share. So we are very focused on pivoting to a purpose driven.
Affordable lending underserved lending model, it's going to take some time for us to get there.
We're very laser focused on <unk>.
Cash flow.
<unk> ability.
Certainly we have areas that we think we're a strong and from a market position standpoint.
But in terms of in general trying to drive share in this environment is not something we're trying to do.
So it's a much more of a focus on trying to get to.
The tour toward a model whereby we are our estimate with our.
Customers.
Throughout the lifecycle of their transactions.
So youre going to see a lot more focus on our talk track around that that kind of mantra.
But we're not we're not chasing share in volume at the expense of.
Liquidity and profitability.
Yes and strategy frankly.
Okay.
Okay.
That's helpful. Thank you.
Your next question will come from the line of Mark Devries with Barclays. Please go ahead.
Yes couple of questions about the exit of wholesale one is just a point of clarification are you just getting out of the broker business or you also exiting the work with the Jv's.
Now this is <unk>.
Simply related to wholesale and non delegated correspondent.
Business channel and the partnership channel, we had always separated those two.
Entities joint venture still being a big part of our focus with new builder.
In affordable housing and such and wholesale and non delegated correspondent is what is being wound up currently.
And Frank could you just talk a little bit more about the decision to exit as opposed to.
Just attempt to take out some of the cost and try and continue to run those businesses.
Yes look I think we want to stand for something so when we talk about purchase driven I think the demographic shifts in housing and mortgage are such that we think the futures around serving.
A broader constituency and particularly the diversity of the.
The millennial.
And the subsequent generations there so.
That implies a lot of investment in certain areas over time to be able to do that.
So we're definitely looking at the demographics of the long term view and trying to make sure that we service those markets.
The solutions to service those markets and delight the customers.
Yes, My view is some of this.
We have we've had four go to market channels.
We want to we want to go to one kind of.
And frankly, we've operated OS and somewhat.
Separate ways to some degree so we are trying to go to a unified back office, where we have.
Our unified operational group.
And the support support around that and then it really free up the team to look at the market Holistically.
And serve the end markets that we want to serve which which is is that purpose driven lending.
It's going to take us a little bit side to get there, but I think the exit of wholesale like I talked about is really around trying to get more intimate with the customers set and not go through intermediary is not that we.
We wouldn't do.
Do some of that if it serve the strategy, but but.
And certainly we're simplifying our organization.
And the process got it makes sense and then just one question about the guidance for <unk> pretty wide range on the two the two origination.
Ranges.
What kind of gets you to the high end in what scenario gets you to the low end of those ranges.
I think yes.
They're the same dollar range as we've previously given we understand the context is.
Is wider because of just the shrinking market. So I think it really is dependent on on market conditions.
In the near term so it is.
It's a it's a very fast moving.
Market.
Part of that range is how well our JV do in completing inventory by year end.
And so the volatility is what makes us need to give a wide range.
Okay got it thank you.
Our next question will come from the line of Kevin Barker with Piper Sandler. Please go ahead, hey, Thanks, I just wanted to clarify and follow up some of the questions about the gain on sale margin in this quarter given the decline.
You broke up a little bit on the call. So I just wanted to clarify some of those.
Was this related specifically to repurchase liability or was it due to loans and pipeline.
That we are unable to be sold or the market moves quickly against here how should we think about the decline in gain on sale margins this quarter.
Yes.
It's almost entirely in.
Repurchase activity and the market price differential.
The increase in interest rates.
Okay.
Okay.
Okay, and so the repurchase liability is that related to the.
Your pipeline from the second quarter or is this loans over a long period of time that that's related to.
The loans.
Loans that were sold in whole loan over over the last 12 months.
That come back for Rep and warrant.
Yes.
Violations.
Performance related issues.
Okay and there were.
There were it was.
3% loans repurchase in the 6% world right. So yes.
A differential of almost 300 basis points.
And on top of that new yield requirements by by purchasers of.
<unk>.
These types of loans.
Okay Alright.
Thank you for taking my questions I appreciate it.
Our next question will come from the line of Kyle Joseph with Jefferies. Please go ahead.
Hey, good afternoon, Thanks for taking my questions and sorry, if you covered this hopped on a little late but.
Just one follow up would be on <unk> guidance and kind of the intermediate term outlook going into the end of the fourth quarter to quarter in terms of breakeven can you give us a sense for that cadence and magnitude of that of MSR sales.
So.
We.
Are trying to accelerate the cost cutting and expense savings into the third quarter too.
So we can preserve most of the balance sheet and.
And have to sell less MSR is to cover operating losses, we get.
<unk>, a $18 6 billion MSR sale in July .
That was in the $6 30, the June 30 quarter end marks reflected the value of that MSR sale. So the market was still robust in the second quarter. So we can rely on MSR sales that we have to but our focus is to shrink operating losses and eliminate the cash burn from operating losses as quickly as possible.
<unk>.
And then.
We will continue to adjust the mix of both the amount of servicing we sell at the time of origination.
And couple that with any other bulk sales should we need to to bolster liquidity, but the goal is to two.
To try.
Try to minimize the amount of of MSR sales going forward.
Got it very helpful. Thanks for taking my question.
I will now turn the conference back over to management for any closing remarks.
Okay. Thank you Regina.
Look thanks, Thanks, everybody again for joining us and for some very good questions. We appreciate that.
I just want to close by reiterating our vision 2025 plan is.
Is having its intended effect.
We have we've made a tremendous amount of progress both structurally and from an operational point of view.
And I think those are the actions needed to achieve our targeted $375 million to $400 million.
Annualized expense savings target going into 2023.
I think we're on our way to achieving that and to hit run rate profitability exiting this year, which has been the goal.
As Pat mentioned, we have we have strong liquidity.
And we want to preserve that and so we want to do that without without selling MSR as a possible. So that is definitely the goal and we're making progress there. We do have an eye on the lower volume scenario anticipated for 'twenty three.
And making sure Thats incorporated in our planning. So we do have 123 as well I think importantly, looking forward.
From a business point of view I think I am excited about our strategic pivot to a purchase a purpose driven organization.
We have a number of new digital solutions that we think including the HELOC solution, which we think will be innovative and differentiate the company in the marketplace and I think importantly, we also have a best in class servicing operation, which we think we can leverage for growth as well. So those are those are good growth asps.
It's not just cost cutting but there is growth until then our plan.
And look on behalf of Pat and the rest of the team I want to thank everybody and we look forward to continuing to keep you all apprised on our drive to enhance both short term and long term shareholder value.
Ladies and gentlemen that will conclude today's call. Thank you all for joining you may now disconnect.
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