loanDepot, Inc.

Good afternoon and welcome to Long Depot's third quarter 2024 earnings call. All lines 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 would like to ask a question during this time, press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one. I would now like to turn today's call over to Gerhard Erdely, Senior Vice President Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining our third quarter 2024 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. 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 and facilitating company to company operating performance comparisons. For more details on these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP measures, please refer to today's earnings release, which is available on our website at .loandepot.com. A webcast and a transcript of this call will be posted on our website after the conclusion of this call. On today's call, we have Loan Depot President and Chief Executive Officer Frank Martel 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 DeGurion 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?

Thank you, Gerhard. I appreciate everyone taking the time to join us on the call today. Loan Depot returned to profitability in the third quarter through the successful implementation of our Vision 2025 strategic program. Our results were driven by higher origination volumes, margin expansion, and the benefit of our process improvement and cost productivity programs. 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. 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. 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 has four strategic pillars. Pillar one focused on transforming the company's origination business and driving purchase transactions with an expanded emphasis on purpose driven lending and first time home buyers. Over the past three years, we've added new products to address affordability issues, grew our VA lending operation, expanded our business footprint with home builders, and enhance our mellow home offerings. Pillar two centered on investing in profitable growth generating initiatives and launching innovative new solutions that form the foundation of a life cycle relationship with first time home buyers and owners. In this area, we launched a portfolio of home equity products, including a home equity line of credit and a standalone second mortgage loan. We also introduced our next generation MellowNow digital underwriting engine and brought our service and business in-house. Pillar three centered on reducing complexity and simplifying our organizational structure with an emphasis on client engagement, quality, automation, and operating leverage. Over the past couple years, we have revamped our compensation programs to drive revenues and best in class quality while supporting recruitment, training, and retention of the best available talent. We also reduced the number of organizational and management layers and eliminated unnecessarily silos in many parts of our organization. And finally, pillar number four focused on aligning loan defaults cost structure with market realities while simultaneously investing in our long-term goal of becoming the lowest cost, highest quality producer. From the second quarter of 2022, the end of the third quarter 2024, we reduced annualized non-volume expenses by over $730 million while achieving top quartile loan quality production. Achieving the objectives outlined in Vision 2025 has been instrumental in successfully navigating this historic downturn in the mortgage market. 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. 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. As we look forward to a healthier and more normalized housing market, it is now time for the company to look forward to a new horizon and focus on capitalizing on our many opportunities to offer differentiated value proposition to our stakeholders. To this end, I'm pleased to announce the launch of Project NorthStar, our new strategic blueprint for the next three years. Project NorthStar builds on the foundational imperatives of Vision 2025, including our focus on durable revenue growth, positive operating leverage, -in-class productivity, and investments in platforms and solutions that support and ultimately transform our customers' homeownership journey. The five strategic pillars of Project NorthStar are as follows. Pillar number one, to become the leading partner, the lending partner of choice for homeowners with an emphasis on first-time home buyers, supporting those clients to the life cycle of their homeownership journey. 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. Pillar two focuses on growing our purchase, mortgage reach, and capabilities through an expanded geographic footprint and partnerships with key industry participants, including realtors and builders. Pillar three focuses on continuing to invest in and scale our servicing portfolio and maintain -in-class recapture rates. Pillar four 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. In this turn, we will support a superior customer experience and ultimately higher revenue as we deliver a consistent, durable margins and profitability. And finally, Pillar five is about becoming the mortgage industry's employer of choice, successfully recruiting, developing, and retaining the best talent available. We will continue to simplify our organization, reduce management layers, and eliminate unnecessary silos to increase innovation and ownership throughout the enterprise. We embark on Project Northstar confident in the talent and resilience of the ,500-plus members of Team Lone Depot. We believe our team, coupled with our unique multi-channel platform, provides the key ingredients needed to become the go-to lending partner for increasingly diverse community homeowners, including first-time home buyers, and support those clients throughout the lifecycle of their homeownership journey. I will wrap up my prepared remarks today with a few observations on the current outlook of housing and mortgage markets. 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. The factors that contributed to the lower home sales, including the persistent lack of housing stock, fueled by chronic underbuilding, the hangover for ultra-low mortgage rates in 2020 and 2021, and an affordability crisis impacting many first-time home buyers, can only be addressed through a concerted public-private cooperation. Despite these challenges looking forward, the Mortgage Bankers Association recently forecast 2025 mortgage market volumes at $2.3 trillion, which is up from a forecast of $1.8 trillion for 2024. The MBA forecast for 2025 assumes a progressive moderation of mortgage rates as well as more homes for sale. Based on this and other internal market intelligence, we believe there's an increasing possibility for an upward trend in housing transactions and mortgage market activities, 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. 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. In closing, I'd like to thank every member of Team Loan Depot, as well as our other key stakeholders for their ongoing support. 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. With that, I'll now turn the call over to Dave, who will take us through the financial results in more detail.

Thanks, Frank, and good afternoon, everyone. We are pleased that the successful completion of the strategic objectives of Vision 2025 has delivered the company's first profitable quarter since the beginning of the market downturn in the first quarter of 2022. 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. 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. 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. During the third quarter, pull through weighted rate lock volume was $6.7 billion, which represented a 19% increase from the prior year's volume of $5.8 billion and reflected the impact of lower rates for a portion of the quarter. Rate lock volume came in on the high end of the guidance we issued last quarter of $5 million to $7 billion and contributed to adjusted total revenue of $320 million, compared to $261 million in the third quarter of 2023. Our multi-channel strategy has proven successful in the third quarter by delivering higher -over-year volume of purchase originations and a supply-constrained market, and a meaningful increase in refinance originations, particularly during the period in the third quarter where long-term interest rates fell. 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. 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. 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. This was also near the high end of the guidance we issued last quarter of between $5 billion and $7 billion. Servicing fee income increased from $121 million in the third quarter of 2023 to $124 million in the third quarter of 2024, due in part to higher earnings credits on custodial balances from higher interest rates and higher custodial balances. We hedge our servicing portfolio, so we do not record the full impact of the changes in fair value in the results of the operations. We believe the strategy protects against volatility earnings and liquidity. Our strategy for hedging the servicing portfolio is dynamic, and we adjust our hedge positions in reaction to changing interest rate environments. Our total expenses for the third quarter of 2024 increased by $6 million, or 2% from the prior year quarter. The primary drivers of the increase were higher commission, direct origination expenses, marketing, and overtime, reflecting the increase in volume. 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. Restructuring related and impairment charges totaled $2 million, down slightly from the third quarter of 2023. Excluding the impact of the insurance benefit, restructuring and asset impairment charges, the increase in our expenses were primarily related to higher commissions, direct origination expenses, marketing, and overtime related expenses to our decreased volumes during the quarter, as well as higher salary related expenses, reflecting an increase in headcount as we build capacity for expectations of higher volumes going forward, offset somewhat by our ongoing productivity initiatives. 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. 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. We expect our fourth quarter pull through weighted gain on sale margin to be between 285 and 305 basis points. We also expect fourth quarter to be negatively impacted by lower servicing revenue related to the second quarter MSR sales, 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. Our cost reset focus on creating positive operating leverage and balance sheet management activities have significantly reduced our risk profile and charted the path towards profitability while allowing us to maintain a strong liquidity position. We ended the quarter with $483 million in cash. Most notably, our third quarter results demonstrate that loan depot can quickly accrue the benefits of a higher market volume. As we look toward 2025, we anticipate continued market challenges, 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 and a wide variety of operating environments. With that, we're ready to turn it back to the operator for Q&A. Operator?

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