Q2 2023 loanDepot Inc Earnings Call
[music].
Good afternoon.
And welcome to lung depot second quarter 2023 earnings call. All participants have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time some of the Flash star followed by the number one on your telephone keypad, if you'd like to withdraw your question press.
Star One again, thank you I'd like now to turn the call over to.
Gary Hart, our daily Senior Vice President Investor Relations. Please go ahead.
Good afternoon, everyone and thank you for joining loan depot 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 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 a 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.
My gratitude to Pat Flanagan for his leadership and commitment to low depot.
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 represented objected marker of our progress on the strategic imperatives, we laid out in our vision 2025 plant.
As you May recall vision, 2025, which was announced in July of 2022.
As four pillars.
Pillar one focuses on transforming our originations business to drive purchase money transactions with an expanded emphasis on purpose driven lending.
There are two calls for aggressively right sizing our cost structure in line with current and anticipated market conditions as well as internally set targets to achieve first quartile operating performance.
Pillar three 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.
And finally pillar four 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.
Or 31% sequentially from the first quarter fuelled primarily by higher purchase transaction volumes and gain on sale margins.
<unk> 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 nonrecurring 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 <unk>, 46% sequential reduction in our Q2 net loss.
This fall is 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 were also focused on the other pillars of vision 2025, including our strategy to expand purchase purpose driven lending that supports first time homebuyers and diverse communities.
During 2022 loan depot ranked as the country's third largest mortgage lender for all minorities.
In addition to ranking third overall for all minorities low depot is also the number three lenders serving Hispanics the.
The number four lender serving African Americans the number four lender survey Native Americans and the number six lenders serving Asian Americans.
As we all know homeownership as the bedrock of the American Dream and plays a vital role in helping to build strong and stable communities.
Further deepening our support for a diverse and first time homebuyers.
As 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 everyday 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 on pillar four of our vision 2025 plan, we continue to make significant strides towards optimizing our organization structure.
During Q2, we promoted Darrin Griller as our Chief Accounting Officer, and Alex 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 <unk> digital division under <unk> 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 low depot 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 tangible results of our continued focus on the four pillars of our vision 2025 strategic plan.
With over $700 million.
And 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'll now turn the call over to David who will take us through the financial results in more detail.
Thanks, Frank and good afternoon, everyone. It's a pleasure to join this very talented team and loan depot.
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 consists of $4 6 billion in purchase loan originations and $1 7 billion and 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.
The rate lock volume also came in within guidance, we issued last quarter of $5 5 billion to $7 5 billion.
The increase in revenue is primarily 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 to 280 basis points.
Our higher gain on sale margin was primarily due to wider profit margins on a 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 2000 $23 million 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.
<unk> and a gain of $7 7 million.
This transaction allows us to monetize a portion of our of the asset while maintaining our direct servicing relationship with those customers.
We hedge our servicing portfolio. So we do not recur recorded the full impact of the changes in fair value and the results of our operations.
We believe this strategy protect 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 interest rate environment.
We believe our servicing portfolio is well protected against potential rising defaults.
As of June 30, the weighted average FICO was 736, the weighted average coupon was three 3% and a weighted average LTV at origination was 71%. These.
These characteristics contribute 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 2023 market size of one five 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.
Yeah.
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 <unk>.
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. This in 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 five and $7 billion.
We expect pull through weighted rate lock volume of between five 5% and seven 5 billion.
And we expect our third quarter pull through weighted gain on sale margin to be between 245 and 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 impacted loan margins.
Yeah.
Going forward, we expect to continue to reduce expenses and narrow our losses.
Collecting decreasing personnel related costs due to lower head count and 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 reduced our costs.
Accordingly, 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.
Yes.
Okay.
At this time I would like to remind everyone in order to ask a question Press Star then the number one 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.
Oh thanks.
I believe you guys extended or refinanced one of your MSR line.
In the second quarter.
Can you talk about kind of the updated terms on that and what your MSR line maturities look like now.
Yeah, Hi, 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 proprietary negotiated deals.
Okay.
I guess do you have a sense of what what any near term maturities are or just in general they all kind of was there any change in advance rates.
You know kind of a <unk> extension.
Yes, well those will be issued in our 10-Q, the more specifics on that but 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.
Okay.
Yeah.
And then I guess.
At this point how are you thinking about.
Kind of additional MSR sale.
Uh huh.
Or youre kind of retaining and growing that portfolio kind of what is the outlook for that.
Yeah. This is Frank.
We look at the servicing portfolio is an important asset for the company and an important base of earnings for the company and so we have not been in the market selling.
A lot of assets to off the portfolio.
And if.
If we do contemplate that it'll be it'll be more targeted and and opportunistic but in general we would.
We've held our servicing book.
Quite steady and we'd like to we'd like to do that and and grow that portfolio. As we go forward as part of the company's strategy.
Okay, and then last one for me what would be kind of the target level of cash that you would look to have them to feel comfortable running the business.
Yeah. This is David again, we continue to be focused on maintaining a.
A very strong liquidity position as we drew down.
Are some balances and put on the balance sheet of 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, but for the time being we're expecting to keep excess liquidity in the balance sheet.
Great. Thank you.
Yeah.
Our next question comes from the line of Coyote Joseph from Jefferies <unk> Co. Please go ahead.
Okay. Good.
Afternoon. Thanks for taking my questions just looking at your guidance it looks like you expect.
Our volumes are in <unk> 'twenty, two but as you mentioned on a on a lower head count can you give a sense for where the productivity gains are coming from.
Yeah, and I don't know, if we've talked about physical better on head count, but yes, we do look at the the market.
You know kind of being in line.
And in the third quarter as it was in the second quarter I think we're continuing to invest in productivity and operating leverage gains.
What has gone into our.
And to the technology area as well as process redesign.
Which is part of vision 2025, so it will continue to see.
That type of a gain in terms of our ability to be more productive per loan generated.
In addition, obviously we are we have been reducing head count and we expect that to continue.
Given the market uncertainty and but we expect that to be funded largely through productivity gains through the through both process and technology platforms and as you may recall, we had a couple of.
Pretty large investments that were making despite the choppiness of the market and our and our <unk> platform and in our in our underwriting areas as well that we think will add significant product activity gains when they come online in 2024.
Okay.
Yeah got it and then you know it.
And kind of the better origination outlook, and obviously that factors into your expanding our expense outlook.
Are there anymore is there any more wood to chop in terms of expenses and which kind of line items with SBS specifically.
Yes, I think Dave Dave talked about in his prepared remarks, I think we look at we look at.
Corporate overhead obviously.
Some of the G&A areas marketing.
And really you know in both in the operational part of the company as well as our sales as we get more productive and we improve our tools.
And our base platform. So I think it's pretty broad based.
Obviously, we have to react to very uncertain market, but we have to react to that and.
And address address challenges as they come along but I think by and large we have.
Most of those reduction programs in flight.
And our our ought to expect that the trends youre seeing in the second quarter versus the first quarter to continue.
For the third quarter and beyond.
Yeah.
Great. Thanks, very much for answering my questions.
Okay.
Your next question comes from Kevin Barker from Piper Sandler Kevin. Please go ahead.
Alright, Thanks for taking my questions. So on the follow up on some of the questions from Doug regarding your MSR.
Yes.
As a percent of your overall equity, it's roughly two and a half time switches.
About twice 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.
Or another way to think about it is there do you think about your MSR relative to your origination channel.
Or manager to a certain size relative to how much you think you could produce a within the origination channel.
Yes, I'll, let Jeff to Gary to answer, but you know obviously one of our advantages. We believe as you know we have a very effective recapture mechanism off of our servicing portfolio, which is <unk>.
Very meaningful for the economics of the company.
Yeah as it relates to target sizes et cetera, you know as I mentioned earlier, 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.
As you.
So it kind of varies depending on the quarterly conditions were faced with the market.
But in general we've been able to hold the portfolio steady.
And as I said I think that's something that we want to we want to actually expand it a bit as we go forward, but again, we have to we have to pace it with the market conditions, which are.
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.
For the balance of this year certainly.
Okay.
So Jeff Great wanted to add anything Chris to answer this.
Michael My answer.
That's very good I think covered it well I mean, you can see the portfolio has been pretty steady at this level and that's by design and we continue to refine.
The composition of the portfolio, so that it works well with the origination platform and what we're trying to achieve overall with with touching our customers and providing.
Incremental products or refinance opportunities to them.
Okay, Great and then.
In addition to the efficiency strategies.
<unk>.
Structurally or to drive.
Better margins.
Particularly around.
How are you.
Yes, condensate loan officers or how you think about.
The structural.
The impact or the structural <unk>.
Compensation that you look at the loan officers, particularly on the direct to consumer or even the call Center operations.
In order to really drive higher margins.
Within the direct to consumer channel.
Yes. This is Jeff Walsh.
Evaluating the compensation as a percentage of total revenue and try to maintain kind of responsible percentage there.
We also shift our business focus.
Away from unprofitable.
Our markets and products.
Shifted more into the government space and some other type of products said that yield more and a higher percentage of revenue against commission, but commissions are largely industry driven in.
Influenced by the industry as a whole, but I think we do a pretty good job of managing.
Like say, a responsible percentage of compensation to overall revenue.
Okay.
Okay, great. Thanks for taking my questions.
Okay.
At this time I'd like to remind everyone in order to ask a question press card than a number one on your telephone keypad.
There are no more questions I'll turn the call back over to Frank Martell for closing remarks.
Yeah. Thanks, Thanks, everybody for joining us today and as some some really good questions.
I think that the the.
The company delivered in a very tough market in the second quarter.
And I really appreciate the efforts of the entire team to do that.
I also wanted to thank our stakeholders for their support could do without you guys and we look forward to continuing to progress and and deliver more value for our customers. Our team members partners and our shareholders as we go forward so with that thanks everybody.
Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
Thanks, everybody.
Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.