Q3 2024 loanDepot Inc Earnings Call
Good afternoon and welcome to the Londy Post, third quarter 2024 earnings call. All Lions have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session if you like to ask a question during this time, press star, follow by the number one on your telephone keypad.
If you want to withdraw your question, press star 1. I'll now let turn today's call over to Gerhard Erdelji, seeing a vice president, investor relations. Please go ahead.
Gerhard Erdelji: Thank you. Good afternoon everyone and thank you for joining our third quarter 2020 for 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.
Gerhard Erdelji: 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 factor's section of our findings with the SEC.
Gerhard Erdelji: Our presentation today contains certain non-GAAP financial measures that we believe provide additional insight into analyzing and benchmarking the performance and value of our business
Gerhard Erdelji: A webcast and a transcript of this call will be posted on our website after the conclusion of this call.
Gerhard Erdelji: On today's call, we have Loan Depot President and Chief Executive Officer Frank Martell and Chief Financial Officer Dave 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 Chief Investment Officer Jeff DeGurian and LDI Mortgage President Jeff Walsh to help address any questions you might have after our prepared remarks.
Speaker Change: With that, I'll turn things over to Frank to get us started. Frank?
Frank Martell: Thank you Gerhard. I appreciate everyone taking the time to join us on the call today.
Frank Martell: Loan Depot returned to profitability in the third quarter through the successful implementation of our Vision 2025 strategic program.
Speaker Change: Our results were driven by higher origination volumes, margin expansion, and the benefit of our process improvement and cost productivity programs.
Speaker Change: As our shareholders know well, we announced Vision 2025 in July of 2022 in response to one of the most abrupt and significant contractions in housing and mortgage volumes in a generation.
Speaker Change: Over the past three years, Vision 2025 has been our battle plan to both deal with the realities of a significantly smaller market and position the company for long-term success.
Speaker Change: Achieving Vision 2025 was truly a team effort as we navigated turbulent market conditions over the past three years.
Before I talk about our new strategic plan, it's worth noting some of the key accomplishments of our Vision 2025 plan, which had four strategic pillars.
Speaker Change: Pillar 1 focused on transforming the company's origination business and driving purchase transactions with an expanded emphasis on purpose-driven lending and first-time homebuyers.
Speaker Change: Over the past three years, we've added new products to address affordability issues.
Speaker Change: grew our VA lending operation, expanded our business footprint with homebuilders, and enhanced our mellow home offerings.
Speaker Change: Pillar 2 centered on investing in profitable growth-generating initiatives and launching innovative new solutions that form the foundation of a lifecycle relationship with first-time homebuyers and owners.
Speaker Change: In this area we launched a portfolio of home equity products including a home equity line of credit and a standalone second mortgage loan.
Speaker Change: We also introduced our next-generation MellowNow digital underwriting engine and brought our servicing business in-house.
Speaker Change: So our three centered on reducing complexity and simplifying our organizational structure with an emphasis on client engagement, quality, automation, and operating leverage.
Speaker Change: Over the past couple years, we have revamped our compensation programs to drive revenues and best-in-class quality, while supporting the recruitment training.
Speaker Change: and retention of the best available health.
Speaker Change: We also reduced the number of organizational and management layers and eliminated unnecessarily silos in many parts of our organization.
Speaker Change: And finally, pillar number four focused on aligning Loan Depot's cost structure with market realities while simultaneously investing in our long-term goal of becoming the lowest cost, highest quality producer.
Speaker Change: From the second quarter of 2022 to the end of the third quarter of 2024, we reduced annualized non-volume expenses by over $730 million while achieving top quartile loan quality production.
Speaker Change: Achieving the objectives outlined in Vision 2025 has been instrumental in successfully navigating this historic downturn in the mortgage market.
Speaker Change: We successfully reset the organization for the realities of the current market, but it's important to understand that Vision 2025 was far more than just a cost-cutting exercise.
Speaker Change: We created new operational capabilities and made significant and strategic investments in our people, our products, and our technology platforms that are intended to position the company for differentiated market leadership as the housing market recovers.
Speaker Change: As we look forward to a healthier and more normalized housing market, it is now time for the company to look forward.
Speaker Change: to a new horizon and focus on capitalizing on our many opportunities to offer a differentiated value proposition to our stakeholders.
Speaker Change: To this end, I am pleased to announce the launch of Project North Star.
Speaker Change: Our new strategic blueprint for the next three years.
Speaker Change: Project North Star builds on the foundational imperatives of Vision 2025, including our focus on durable revenue growth,
Speaker Change: positive operating leverage, best-in-class productivity, and investments in platforms and solutions that support and ultimately transform our customers homeownership journey.
Speaker Change: The five strategic pillars of Project North Star are as follows.
Speaker Change: Color number one.
Speaker Change: on First Time Homebuyers.
Speaker Change: Supporting those clients to the life cycle of their home ownership journey.
Speaker Change: To do this, we plan to develop and launch a unique AI-powered relationship management and engagement platform that allows our customers to optimize their home buying, selling, equity optimization, and home management experiences.
Speaker Change: Pillar 2 focuses on growing our purchase
Speaker Change: mortgage reach and capabilities through an expanded geographic footprint and partnerships with key industry participants including realtors and builders.
Speaker Change: Pillar 3 focuses on continuing to invest in and scale our servicing portfolio and maintain best-in-class recapture rates.
Speaker Change: Pillar 4 focuses on building out our low-touch, automated, data-driven mortgage loan processing workflow to drive operating leverage, quality, and to substantially drive turn times down.
Speaker Change: In this term, we will support a superior customer experience and ultimately higher revenue as we deliver a consistent.
Speaker Change: Durable margins and profitability.
Speaker Change: And finally, Pillar 5 is about becoming the mortgage industry's employer of choice.
Speaker Change: successfully recruiting, developing, and retaining the best talent available.
Speaker Change: We will continue to simplify our organization, reduce management layers, and eliminate unnecessary silos to increase innovation and ownership throughout the enterprise.
Speaker Change: We embark on Project North Star confident in the talent and resilience of the 4,500-plus members of Team Lone Depot.
Speaker Change: We believe our team.
Speaker Change: coupled with our unique multi-channel platform provides the key ingredients needed to become the go-to lending partner for increasingly diverse communities homeowners.
Speaker Change: including first-time homebuyers and support those clients throughout the lifecycle of their home ownership journey.
Speaker Change: I will wrap up my prepared remarks today with a few observations on the current outlook for the housing and mortgage markets.
Speaker Change: Over the past couple years, the housing market has experienced challenges that have resulted in the lowest volume of existing and overall home sales since 1995.
Speaker Change: The factors that contribute to the lowered home sales, including the persistent lack of housing stock, fueled by chronic underbuilding,
Speaker Change: The hangover from ultra-low mortgage rates in 2020 and 2021 and an affordability crisis impacting many first-time homebuyers can only be addressed through a concerted public-private cooperation.
Speaker Change: The NBA forecast for 2025 assumes a progressive moderation of mortgage rates as well as more homes for sale.
Speaker Change: Based on this and other internal market intelligence, we believe there is an increasing possibility for an upward trend in housing transactions and mortgage market activities.
Speaker Change: led initially by growing household formation trends and supported by demand for home equity linked mortgage products for home improvement, debt consolidation or personal liquidity management.
Speaker Change: With the successful completion of Vision 2025 and an exciting new plan ahead in terms of Project North Star, we believe Loan Depot is well positioned to capitalize on improving market conditions in 2025 and beyond.
Speaker Change: In closing, I'd like to thank every member of Team Loan Depot as well as our other key stakeholders for their ongoing support.
Speaker Change: Working together toward a common purpose, you have demonstrated your tenacity, commitment, and resilience in the face of significant adversity, all the while delivering important positive changes and forward momentum for the company.
Speaker Change: With that, I'll now turn the call over to Dave who will take us through the financial results in more detail.
Dave Hayes: Thanks, Frank, and good afternoon, everyone.
Dave Hayes: We are pleased that the successful completion of the strategic objectives of Vision 2025 has delivered the company's first profitable course since the beginning of the market downturn in the first quarter of 2022.
Speaker Change: The third quarter served as validation of our strategy as we saw a modest improvement in the mortgage market, which when coupled with the company's positive operating leverage fueled our return to profitability.
Speaker Change: Now as we embark on Project North Star, we transition to a company posture that focuses on consistent profitability and shareholder returns by growing stable revenue sources and investing in processes that will result in positive operating leverage.
Speaker Change: We reported adjusted net income of $7 million in the third quarter, compared to an adjusted net loss of $29 million in the third quarter of 2023, due primarily to higher adjusted revenues from higher volume and gain on sale margins.
Speaker Change: During the third quarter, pull-through weighted rate lock volume was 6.7 billion dollars, which represented a 19 percent increase from the prior year's volume of 5.8 billion dollars.
Speaker Change: and reflected the impact of lower rates for a portion of the quarter.
Speaker Change: Great block volume came in on the high end of the guidance we issued last quarter of $5 billion to $7 billion and contributed to adjusted total revenue of $320 million compared to $261 million in the third quarter of 2023.
Speaker Change: Our multi-channel strategy has proven successful in the third quarter by delivering higher year-over-year volume of purchase originations in a supply-constrained market.
Speaker Change: and a meaningful increase in refinance originations, particularly during the period in the third quarter where long-term interest rates fell.
Speaker Change: Our pull-through weighted gain on sale margin for the third quarter came in at 329 basis points, above our guidance of 280 to 300 basis points, and compared to 293 basis points in the prior year.
Speaker Change: Our higher gain-on-sale margin primarily benefited from a channel mix away from JV toward our other channels and wider overall margins across our primary product set.
Speaker Change: Our loan origination volume was $6.7 billion for the quarter, an increase of 9% from the prior year's volume of $6.1 billion.
Speaker Change: This was also near the high end of the guidance we issued last quarter of between $5 billion and $7 billion.
Speaker Change: Servicing fee income increased from 121 million dollars in the third quarter of 2023 to 124 million dollars in the third quarter of 2024 due in part to higher earnings credits on custodial balances from higher interest rates and higher custodial balances.
Speaker Change: We hedge our servicing portfolio, so we do not record the full impact of the changes in fare value in the results of the operations.
Speaker Change: We believe this strategy protects against volatility in our earnings and liquidity.
Speaker Change: Our strategy for hedging the servicing portfolio is dynamic and we adjust our hedge positions in reaction to changing interest rate environments.
Speaker Change: Our total expenses for the third quarter of 2024 increased by $6 million or 2% from the prior year quarter.
Speaker Change: Our third-quarter expenses reflect a net benefit of $19 million, primarily associated with the expected insurance proceeds related to the settlement of class action litigation connected to the first-quarter cybersecurity incident.
Speaker Change: Restructuring-related and impairment charges total $2 million, down slightly from the third quarter of 2023.
Speaker Change: Excluding the impact of the insurance benefit, restructuring and asset impairment charges,
Speaker Change: The increase in our expenses were primarily related to higher commissions, direct origination expenses, marketing, and overtime-related
Speaker Change: to our increased volumes during the quarter, as well as higher salary-related expenses reflecting an increase in headcount as we build capacity for our expectations of higher volumes going forward, offset somewhat by our ongoing productivity initiatives.
Speaker Change: Looking ahead to the fourth quarter, we expect pull-through weighted lock volume of between $5.5 billion and $7.5 billion, and origination volume of between $6 billion and $8 billion.
Speaker Change: Volume guidance reflects the seasonal decrease in purchase activity and the impact of funding the higher volume loans locked during the third quarter that remained in our pipeline.
Speaker Change: We expect our fourth quarter pull-through weighted gain on sale margin to be between 285 and 305 basis points.
Speaker Change: We also expect fourth quarter to be negatively impacted by lower servicing revenue related to the second quarter MSR sales.
Speaker Change: As well as the absence of the one-time insurance benefit previously discussed and higher volume related expenses from closings of loans locked during the third quarter.
Speaker Change: Our cost reset, focus on creating positive operating leverage, and balance sheet management activities have significantly reduced our risk profile and charted a path towards profitability while allowing us to maintain a strong liquidity position.
Speaker Change: We ended the quarter with 483 million dollars in cash.
Speaker Change: Most notably, our third quarter results demonstrate that Loan Depot can quickly accrue the benefits of a higher market volume.
Speaker Change: As we look toward 2025,
Speaker Change: We anticipate continued market challenges.
Speaker Change: But we believe the implementation of Project North Star will allow us to capture the benefit of higher market volumes while we continue to capitalize on our ongoing investments and operational efficiency to achieve sustainable profitability in a wide variety of operating environments.
Speaker Change: With that, we're ready to turn it back to the operator for Q&A. Operator?
Speaker Change: At this time, if you would like to ask a question, press star 1 on your telephone keypad. If your question has been answered and you would like to remove yourself from the queue, press star 1 again. We'll pause for just a moment to compile the Q&A roster.
Speaker Change: Your first question is from the line of John Davis with Raymond James.
Speaker Change: Hey guys, thanks for taking the question. This is Taylor on for JD. Maybe just to start with non-volume related expenses and kind of hearing our expectations going forward. So you obviously had the benefit from the cyber insurance recovery this quarter, but excluding that, how should we think about the non-volume expense base going forward? Just any additional plans to hire or any additional investments? I just want to make sure we have our expectations properly set.
Speaker Change: Yeah, hi, this is David Hayes. I think from that perspective, clearly our volume-related expenses will fluctuate as originations fluctuate.
Speaker Change: We typically characterize those volume-related expenses as commissions and DOE, but I think you should also think about marketing expense, which is highly tied to volumes, especially in the direct channel.
Speaker Change: We've continued to be very productive or you know
Speaker Change: focus on productivity initiatives on the non-volume related expenses, so we'd expect those to work themselves down over the course of
Speaker Change: We are investing in revenue-generating initiatives, specifically staffing around our loan officers and our ops team members as well, so we're sort of building capacity up as we expect the eventual recovery of the mortgage market.
Speaker Change: The other thing to consider as we go on a go-forward basis, we do see inflationary costs.
Speaker Change: from vendor spend. We saw some of that come into effect in 23 to 24 from some of our key vendors and we would expect similar levels of activity going into 25. Those are yet to be determined.
Speaker Change: So I was just curious if you could elaborate a bit more on that, you know, what geographies are you looking to expand into?
Speaker Change: On the partnership side, Noah, are you mostly focused on expanding current partnerships or adding new ones? Thanks.
Speaker Change: Yeah, hi, this is Chuck Walsh.
Chuck Walsh: Geographically, you know, there's a lot of markets in this country where we have opportunity to fill in with our in-market retail team, which we're doing organically.
Speaker Change: So focused kind of in the south and southeast and kind of the opportunistic markets now, but there are plenty of markets for us to expand to across the US.
Speaker Change: Got it. Thanks, guys.
Speaker Change: Your next question is from the line of Doug Carter with UBS.
Speaker Change: Thank you.
Doug Carter: Thanks, hoping you could just expand one of your closing comments. You said you would look to have sustainable profitability in 25, you know, under a range of scenarios. One just kind of wanted to make sure that I heard that right. And if you could just expand on that comment a little bit.
Speaker Change: Sure, Doug. Hey, this is Frank Martell, and thanks for doing the call. So, look, I think if you look at the third quarter, as David said, the uptick in volume, which primarily benefited our direct channel,
Speaker Change: was modest in volume, but it proved what revenue it would take to make money in the company.
Doug Carter: We get to that, and we feel pretty good about our chances of making money. It is a fluid situation with rates, but I think that we believe fundamentally that there's pent-up volume. Certainly home equity...
Speaker Change: has been an area of a lot of upside for us and we expect refi to lead the way actually in next year and that's consistent with the forecast that NBA's put out.
Speaker Change: So we're hopeful that there's no disruption in the market that would knock that forecast off. But if we're making two, three trillion market, we feel pretty good about our chances.
Speaker Change: So, if we do get volume, we expect to try to drive some operating leverage as well. So, we're pretty well positioned for a 2-3 market as we sit right now, and we look forward to that playing out.
Speaker Change: next year.
Speaker Change: Thank you. Bye.
Speaker Change: Got it. And as part of Project North Star, you talked about growing the servicing portfolio, you know, would that be through more retention of it? And, you know, kind of how do you think about the, you know, the financing of those MSRs slash cash consumption of retaining more MSRs?
Speaker Change: Hey Doug, this is Jeff DeGurian. You know, the growth of the portfolio I think is going to come as the market opportunity presents itself, you know, to the extent that, you know, we can continue on this path that we've been on and add to the portfolio organically. We'll do that and we'll also, you know, opportunistically look at, you know, opportunities to acquire MSRs if something attractive is there. I think
Speaker Change: We'll figure that out over the next several quarters where the best place to attack that growth is. And in terms of financing it, you know, the lines that we have to finance it are.
Speaker Change: you know are out there and we'll lever that the asset to the extent that you know we need the cash to grow grow the origination business continue to take profitable share
Speaker Change: Okay, thank you.
Speaker Change: As a reminder, if you would like to ask a question, press star 1 on your telephone keypad. Your next question is from the line of Derrick Somers with Jefferies.
Derrick Somers: Hey, good afternoon everyone. I was just wondering if you could touch on kind of the LO recruiting environment, what kind of traffic you're seeing there?
Speaker Change: Yes, thanks. This is Jeff again. We're Jeff Walsh. We're seeing positive traction in organic recruitment of loan originators both in in-market retail and direct lending.
Speaker Change: It's still a competitive market where we see offers, multiple offers made to higher-end, higher-producing lawn originators.
Speaker Change: Got it, thanks. And then just on the kind of Smith-Douglas partnership and maybe the Builder JBs as a whole, you know, any kind of incremental color there would be helpful or these partnerships serve through the direct channel, kind of how does the expense base kind of compare to a kind of in-market origination or, you know, just anything incremental would be helpful.
Speaker Change: Yeah, our joint venture business is its own channel. It's run separately.
Speaker Change: We're really excited about this new venture with Smith Douglas. They're a great, great group over there with a really compelling growth story.
Speaker Change: And the business model is different than in-market retail, as they're typically set up as kind of a broker JB model or a banker JB model, where we're obviously sharing in the profitability of the entity.
Speaker Change: But it is a very, very positive business for us because it's...
Speaker Change: It's predictable, and obviously Newbuild has been a really bright spot in the market over the last couple of years versus what we're seeing in resale. So we really like that business and would like to do as much of it as we can.
Speaker Change: At this time, there are no further questions. I will now hand today's call back over to Frank Martell for any closing remarks.
Frank Martell: Thanks, Tameka.
Frank Martell: Look, on behalf of Dave, Gerhard, Jeff Walsh, and Jeff DeGurian, you know, and the rest of our team, I really want to thank everybody for your, for joining us for the call today. It's exciting times at Loan Depot.
Frank Martell: I'm really proud of the dedication, resiliency, and accomplishments of the team here. Completing Vision 2025 represents a very significant accomplishment for the company. And importantly, you know, we look forward with optimism regarding market leadership and taking share in the market as we focus on realizing the potential, the full potential of Project Northstar in the coming three years.
Speaker Change: you know at Lone Depot we have a saying we believe it that home means everything and our growing team of professionals delivers a complete suite of services.
Speaker Change: that we think will fuel the American dream as we go forward. So thanks again everybody and appreciate your time.
Speaker Change: Thank you.
Speaker Change: This concludes today's call. Thank you for joining. You may now disconnect your lines.
Speaker Change: [music]
Speaker Change: Steve Perez, Gilbert Lutzer, Michael Martell, and David Hayes Cut off the stomach in the end.. in order to have the inside of the whale. Cut off the stomach in the end.. in order to have the inside of the whale. Cut off the stomach in the end.. in order to have the inside of the whale.