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loanDepot (NYSE: LDI)
Q3 2024 Earnings Call
Nov 05, 2024, 5:00 p.m. ET

loanDepot Sees Profitability in Q3 2024 Amid Market Challenges

Overview of the Call

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks

Operator

Good afternoon, and welcome to loanDepot’s third quarter 2024 earnings call. All lines have been muted to ensure clear communication. Following the speakers’ remarks, we will have a question-and-answer session. [Operator instructions] Now, I would like to introduce Gerhard Erdelji, Senior Vice President of Investor Relations.

Please go ahead.

Gerhard Erdelji — Senior Vice President, Investor Relations

Thank you. Good afternoon, everyone, and thank you for joining our third quarter 2024 earnings call. Before we begin, I want to remind you that this conference call may include forward-looking statements about the company’s operating and financial future. Statements outside of historical facts could be considered forward-looking, including our estimates regarding loan volume and margins.

These projections are based on current expectations. Actual future results may vary significantly, influenced by risks detailed in our SEC filings. Today’s presentation includes non-GAAP financial measures, offering further insights into our performance. For specific reconciliations to GAAP measures, please refer to today’s earnings release available on our investor website.

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A webcast and transcript from this call will be posted on our website afterward. On today’s call, we have loanDepot’s President and CEO Frank Martell and CFO Dave Hayes. They will provide insights into our quarterly performance and projections. Joining them are CIO Jeff DerGurahian and LDI Mortgage President Jeff Walsh for the Q&A session. Frank, please go ahead.

Frank Martell — President and Chief Executive Officer

Thank you, Gerhard. I appreciate everyone’s attention today. loanDepot found profitability in the third quarter, credited to our Vision 2025 strategic plan. This success came from increased loan volume, improved margins, and enhanced operational efficiency through cost productivity initiatives.

As our shareholders know, we introduced Vision 2025 in July 2022 in response to a sharp decline in housing and mortgage volumes, one of the worst downturns seen in decades. Over these three years, this plan guided us through market turbulence and prepared us for future success. Achieving the objectives of Vision 2025 was truly a collective effort, and I want to highlight some key achievements across its four strategic pillars.

The first pillar focused on transforming loanDepot’s origination business by promoting purchase transactions and catering to first-time homebuyers. We’ve launched new products tackling affordability issues, expanded our VA lending operations, and enhanced partnerships with homebuilders.

The second pillar involved investing in growth initiatives that offer innovative solutions for first-time homebuyers and homeowners. This includes a range of home equity products and our next-generation mellowNow digital underwriting engine.

Pillar three emphasized simplifying operations to improve customer engagement and operational efficiency. We revised our compensation programs to attract and retain top talent and streamlined various organizational layers.

Lastly, pillar four was about aligning our cost structure with current market conditions while prioritizing long-term efficiency as a leading producer in quality outputs. Since the second quarter of 2022 through the third quarter of 2024, we have managed to cut non-volume expenses by over $730 million while maintaining high loan quality.

All accomplishments in the Vision 2025 framework have helped us weather this significant mortgage market downturn. Significantly, the plan included more than financial cuts; it fostered new operational capabilities, targeted investments in our workforce and technology, and positioned loanDepot for effective leadership as the housing market recovers. We look forward to a more normalized market.

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loanDepot Launches Project North Star: A Strategic Vision for Growth

In light of recent challenges in the housing market, loanDepot is setting its sights on new opportunities to enhance value for its stakeholders.

Introducing Project North Star

Today marks the announcement of Project North Star, a three-year strategic plan designed to build on the foundations of Vision 2025. This initiative aims for sustainable revenue growth, improved productivity, and innovative solutions that enhance customers’ experiences in homeownership. The five primary pillars of Project North Star include:

• Pillar 1: Establishing loanDepot as the preferred lending partner for first-time homebuyers, guiding them through their homeownership journey.
• Pillar 2: Expanding our reach in purchase mortgages through new geographic markets and partnerships with real estate professionals.
• Pillar 3: Investing in our servicing portfolio to maintain high recapture rates.
• Pillar 4: Developing a low-touch, automated mortgage processing workflow that enhances efficiency and quality.
• Pillar 5: Fostering a workplace that attracts and retains top talent, simplifying our organizational structure to boost innovation.

Project North Star is built on the strength and dedication of more than 4,500 loanDepot team members who are committed to transforming how diverse communities approach homeownership.

Market Insights: A Look Ahead

The housing market has seen its lowest sales volume since 1995, driven by factors such as limited housing supply and the lingering effects of extremely low mortgage rates in 2020 and 2021. Subsequently, affordability issues have impacted many prospective first-time buyers. Addressing these challenges will require coordinated efforts between public and private sectors.

Looking ahead, the Mortgage Bankers Association projects that mortgage market volumes will rise to $2.3 trillion in 2025, up from $1.8 trillion expected in 2024. This forecast hinges on the anticipated moderation of mortgage rates and an increase in available homes. With trends indicating household formation growth and demand for home equity products such as home improvement loans, loanDepot is poised to benefit from improved market conditions.

Financial Performance Overview

David Hayes, Chief Financial Officer, reported on loanDepot’s financial success during the third quarter. The company achieved its first profitable quarter since early 2022, with an adjusted net income of $7 million compared to a net loss of $29 million a year earlier. Increased revenues from higher volume and sales margins fueled this turnaround.

Third-quarter rate lock volume reached $6.7 billion, a 19% increase from $5.8 billion the previous year, reflecting lower interest rates during part of the quarter. This performance aligns with the company’s guidance of $5 billion to $7 billion and contributed to total adjusted revenues of $320 million, up from $261 million in the previous year.

Our multichannel strategy generated a notable rise in purchase and refinance originations, particularly following interest rate declines. The gain on sale margin was at 329 basis points, above the expected range of 280 to 300 basis points, showcasing the efficacy of our diversified channel mix.

The company also reported a slight increase in servicing fee income, rising from $121 million to $124 million due to better earnings from custodial balances influenced by rising interest rates.

Looking Forward with Resolve

Despite a 2% increase in total expenses attributed to higher commissions and marketing costs, loanDepot is well-equipped to adapt. We implemented a dynamic hedging strategy for our servicing portfolio to mitigate earnings volatility. Furthermore, successful adjustments to our operational structure reflect our commitment to maintaining momentum.

As Project North Star unfolds, we stand optimistic about the future, bolstered by the dedication and entrepreneurial spirit of our team members. Thanks to all at loanDepot and our stakeholders for your unwavering support. I now pass the discussion to Dave to delve deeper into our financial results.

loanDepot Eyes Market Growth Amid Financial Adjustments

Restructuring Costs and Future Projections

During the recent quarterly report, loanDepot disclosed that restructuring-related and impairment charges amounted to $2 million, showing a slight decrease from the third quarter of 2023. When excluding the impact of an insurance benefit, the rise in expenses was attributed primarily to increased commissions, direct origination costs, marketing efforts, and overtime wages. This uptick in expenses coincided with the company’s efforts to expand its workforce in anticipation of higher volumes in the future, despite some offset from ongoing productivity initiatives.

Looking forward to the fourth quarter, the company anticipates a weighted lock volume between $5.5 billion and $7.5 billion, with origination volume projected to be between $6 billion and $8 billion. This forecast accounts for the typical seasonal dip in purchase activity, as well as funding for higher volume loans from the third quarter that remain in the pipeline. Additionally, loanDepot expects the fourth quarter’s gain on sale margin to range between 285 and 305 basis points.

Financial Challenges Ahead

The fourth quarter may additionally be impacted by decreased servicing revenue linked to second-quarter MSR sales and the absence of the one-time insurance benefit mentioned earlier. Higher expenses related to closing loans locked during the third quarter are also expected. Despite these challenges, loanDepot’s cost reset initiatives, which aim to improve operating efficiency, have notably mitigated risks and paved the way towards future profitability while ensuring a robust liquidity position.

Ending the quarter with $483 million in cash, loanDepot showcased its ability to adapt to fluctuating market conditions quickly. CEO Frank Martell noted that as the company prepares for 2025, it expects to navigate ongoing market challenges, yet remains optimistic about its Project North Star initiative aimed at leveraging potential high market volumes and achieving sustainable profitability across varying operational scenarios.

Q&A Session with Analysts

Operator

[Operator instructions] We’ll take a moment to gather the Q&A roster. Your first question comes from John Davis at Raymond James.

Unknown speaker — — Analyst

Hi, thank you for taking my question. This is Taylor in for JD. To start, I want to ask about non-volume-related expenses moving forward. The benefit from cyber insurance this quarter was notable.

Aside from that, how should we approach expectations around non-volume expenses in the future? Any plans for hiring or additional investments? I want to set proper expectations.

David Hayes — Chief Financial Officer

Thanks for the question, Taylor. It’s clear that our volume-related expenses will vary directly with origination levels. Typically, these expenses consist of commissions and direct origination expenses. However, marketing costs are also tied closely to overall volumes, especially in our direct channel. We have been actively working to enhance productivity and expect the non-volume-related expenses to decline as we progress through this year and into the next. Our focus includes investing in revenue-generating roles, especially for loan officers and operational team members, as we brace for a potential recovery in the mortgage market. Do note that inflation-related costs from key vendors have begun to affect us, and we expect similar trends headed into 2025.

Unknown speaker — — Analyst

Thanks for that clarification. Moving on to Project North Star, you mentioned geographic expansion and new partnerships. Can you elaborate on which markets you’re considering and whether you plan to expand on existing partnerships or form new ones?

Jeff Walsh — President

Absolutely. We see several potential markets across the U.S. where our retail team can expand. We’re also actively pursuing growth in our joint venture sector, including new collaborations with builders like Smith Douglas. Our main focus right now is in the South and Southeast regions, though various other markets also present expansion opportunities.

Unknown speaker — — Analyst

Thank you for the insights.

Operator

Your next question comes from Doug Harter with UBS.

Douglas Harter — Analyst

Thanks for taking my question. I wanted to delve deeper into your closing remarks about sustainable profitability in 2025 under various scenarios. I just want to confirm that I understood that correctly.

Frank Martell — President and Chief Executive Officer

Yes, Doug, you heard correctly. Observing our third-quarter performance and the corresponding volume benefits, particularly in our direct channel, has given us insight into the revenue necessary for profitability. As we look towards 2025, with forecasts indicating a recovery, we are confident in our ability to generate profit. While market conditions can fluctuate, we see significant potential for home equity and refinance activities next year, aligning with existing forecasts. Maintaining a strong focus on managing fixed costs and driving automation will further enhance our position to capitalize on impending market volume.

Douglas Harter — Analyst

That makes sense. Regarding Project North Star, how do you plan to grow the servicing portfolio? Will this involve retaining more, and what are your thoughts on financing the additional MSRs and potential cash consumption?

Jeff DerGurahian — Chief Capital Markets Officer

Hi Doug, the growth of the servicing portfolio will largely depend on market opportunities. We aim to organically expand our portfolio while also considering strategic acquisitions as favorable situations arise.

loanDepot Discusses Growth Strategies in Latest Earnings Call

Company leaders share insights into recruitment efforts and joint ventures as they aim for market leadership.

Douglas Harter — Analyst

Look at opportunities to acquire MSRs if something attractive comes along.

We will determine the best strategies for growth in the upcoming quarters. Regarding our financing options, we have the necessary lines available, and we plan to leverage our assets to support the growth of our origination business and continue capturing profitable market share.

Operator

[Operator instructions] Your next question comes from Derek Sommers with Jeffries.

Derek Sommers — Analyst

Good afternoon, everyone. Could you provide some details on the current recruiting environment and the level of traffic you’re experiencing?

Jeff Walsh — President

Thanks, Derek. This is Jeff Walsh responding. We’re observing positive growth in the recruitment of loan originators, both in retail markets and direct lending. It remains a competitive landscape where we are often making multiple offers to attract high-performing loan originators. Although it’s competitive, I’m pleased to say that we’ve successfully brought in many talented individuals in the last quarter, and we will maintain that strategy for organic growth.

Derek Sommers — Analyst

Understood, thanks. Now regarding the Smith Douglas partnership and your builder joint ventures, could you provide some additional insights on that front?

Jeff Walsh — President

Certainly. Our joint venture business operates as a distinct channel. We are enthusiastic about our new partnership with Smith Douglas, a reputable group with a strong growth potential. This business model differs from traditional in-market retail. These ventures typically follow a broker or banker joint venture model, allowing us to share in the profits. This segment has proven very beneficial for us since it offers predictable outcomes. Moreover, the new construction sector has been a bright spot compared to the resale market over the prior years. We are eager to expand our activities in this area.

Operator

Currently, there are no further questions. I will now hand the call back to Frank Martell for closing remarks.

Frank Martell — President and Chief Executive Officer

Thank you, Tamika. On behalf of Dave, Gerhard, Jeff Walsh, Jeff DerGurahian, and the entire team, I want to express our gratitude for joining us today. Exciting times lie ahead for loanDepot, and I’m proud of the dedication and resilience of our team. Completing Vision 2025 marks a significant milestone for the company.

We look forward with optimism towards gaining market leadership as we aim to realize the full potential of Project North Star over the next three years. At loanDepot, we believe that home means everything, and our expanding team offers a comprehensive suite of services to help fulfill the American dream. Thank you once more for your time.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Gerhard Erdelji — Senior Vice President, Investor Relations

Frank Martell — President and Chief Executive Officer

David Hayes — Chief Financial Officer

Jeff Walsh — President

Douglas Harter — Analyst

Derek Sommers — Analyst

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