Good afternoon, and welcome to loanDepot's Second Quarter 2023 Earnings Call. [Operator Instructions]. I would like now to turn the call over to Gerhard Erdelji, Senior Vice President, Investor Relations. Please go ahead.

Good afternoon, everyone. Thank you for joining loanDepot's 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 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. A webcast and a transcript of this call will be posted on the company's Investor Relations website at investor.laondepot.com under the Events & Presentations tab. On today's call, we have loanDepot President and Chief Executive Officer, Frank Martell; and Chief Financial Officer, David Hayes, to provide an overview of our quarter as well as our financial and operational results, outlook and to answer your question. We are also joined by our Chief Investment Officer, Jeff DerGurahian; and LDI 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 us started. Frank?

Thank you, Gerhard, and thank you all for joining us today. I look forward to sharing my perspective on market conditions and our results. Before I begin, I'd like to welcome David Hayes to the call. David brings a strong track record of financial and business leadership as well as deep mortgage industry knowledge to loanDepot. I know David well and look forward to partnering with him as we continue to execute our Vision 2025 plan. I also want to take this opportunity to express my gratitude to Pat Flanagan for his leadership and commitment to loanDepot. 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 for 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 represent an objective marker of our progress on the strategic imperatives we laid out in our Vision 2025 plan. As you may recall, Vision 2025, which was announced in July of 2022, has four pillars. Pillar 1 focuses on transforming our originations business to drive purchase money transactions with an expanded emphasis on purpose-driven lending. Pillar 2 calls for aggressively rightsizing our cost structure in line with current and anticipated market conditions as well as internally set targets to achieve first quartile operating performance. Pillar 3 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 4 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…

Thanks, Frank, and good afternoon, everyone. It's a pleasure to join this very talented team at loanDepot. 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 consisted of $4.6 billion in purchase loan originations and $1.7 billion in 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. 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 a 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 basis points to 280 basis points. Our higher gain on sale margin was primarily due to wider profit margins on our 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 and $142 billion quarter-over-quarter. Servicing fee income decreased slightly from $119 million in the first quarter of 2023 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, resulting in a gain of $7.7 million. This transaction allowed us to monetize a portion of the asset while maintaining our direct servicing…

[Operator Instructions] Your first question comes from Doug Harter from Credit Suisse.

I think -- I believe you guys extended or refinanced one of your MSR lines, during the second quarter. Can you talk about kind of the updated terms on that and what your MSR line maturities look like now?

Yes. 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 any near-term maturities are, or just in general, kind of -- was there any change in advance rates kind of in that 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 through the third quarter.

Okay. And then I guess, at this point, how are you thinking about kind of additional MSR sales you're kind of retaining and growing that portfolio, kind of what is the outlook for that?

Yes, this is Frank. We look at the servicing portfolio as 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 of the portfolio. And if we do contemplating that, it will be more targeted and opportunistic. But in general, we would -- we've held the servicing book quite steady. And we would like to do that and grow that portfolio as we go forward as part of the company's strategy.

And then last one for me. What would be kind of the target level of cash that you would look to hold to feel comfortable running the business?

Yes. This is David again. We continue to be focused on maintaining a very strong liquidity position. As you know, we drew down some balances and put on the balance sheet to have 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.

Our next question comes from the line of Kyle Joseph from Jefferies.

Just looking at your guidance, it looks like you expect similar volumes in 3Q '22, but as you mentioned on a lower head count. Can you give us a sense for where the productivity gains are coming from?

Yes. And I don't know if we've talked about specific on headcount, but we do look at the market kind of being in line in the third quarter as it was in the second quarter. I think we're continuing to invest in productivity and operating leverage gains. A lot has gone into our technology area as well as process redesign, which is part of Vision 2025. So we'll 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 headcount. We expect that to continue given the market uncertainty and -- but we expect that to be largely through productivity gains through the -- through both process and technology platforms. As you may recall, we had a couple of pretty large investments that we're making despite the choppiness of the market in our LOS platform and in our underwriting areas as well that we think will add significant productivity gains when they come online in 2024.

Yes. Got it. And then with kind of the better origination outlook, just -- and obviously, that factors into your expense outlook, but there are there any more -- is there any more wood to chop in terms of expenses and which kind of line items would those be in specifically?

Yes. I think Dave talked about in his prepared remarks, I think we look at corporate overhead. Obviously, some of the G&A areas, marketing, and really in both in the operational part of the company as well as 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 a very uncertain market, but we have to react to that and address challenges as they come along. But I think, by and large, we have most of those reduction programs in flight and our -- I would expect that the trends you're seeing in the second quarter versus the first quarter to continue into the third quarter and beyond.

Your next question comes from Kevin Barker from Piper Sandler.

Just want to follow up on some of the questions from Doug regarding the MSR. I noticed it's -- as a percent of your overall equity, it's roughly 2.5x, which is 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 -- and another way to other thing about it is, is there -- do you think about your MSR relative to your origination channel or manage it to a certain size relative to how much do you think you can produce within the origination channel.

Yes, I'll let Jeff DerGurahian answer. But obviously, 1 of our advantages, we believe, is we have a very effective recapture mechanism off of our servicing portfolio, which is very meaningful for the economics of the company. As it relates to target sizes, et cetera, 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 is kind of varies depending on the quarterly conditions we're faced with of 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 actually expanded a bit as we go forward. But again, 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. So Jeff, I don't know if you want to add than to answer this to my answer.

Frank, I think you 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 touching our customers and providing incremental products or refinance opportunities to them.

Okay. Great. And then in addition to the efficiency strategies, have you done anything structurally to drive maybe better margins particularly around how you compensate loan officers or how you think about the structural impact or the structural compensation you look at for lasers, particularly on the direct-to-consumer or even the call center operations in order to like really drive higher margins within the direct-to-consumer channel?

Yes, this is Jeff Walsh. I mean we're always evaluating the compensation as a percentage of the total revenue and try to maintain kind of a responsible percentage there. We also shift our business focus away from unprofitable markets and products shifted more into the government space and some other type of products that yield more and a higher percentage of revenue against commission, but commissions are largely industry driven and 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.

[Operator Instructions] There are no more questions. I'll turn the call back over to Frank Martell for closing remarks.

Yes. Thanks, everybody, for joining us today and some really good questions. I think that 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 want to thank our stakeholders for their support. I couldn't do without you guys. And we look forward to continuing to progress 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.