Guild Holdings Company

Good afternoon, ladies and gentlemen, and welcome to the Guild Holdings Company fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions to follow at that time. As a reminder, this call will be recorded. I would now like to turn the conference over to Michael Kim, Investor Relations. Please go ahead, Michael.

Thank you, and good afternoon, everyone. Before we begin, I'd like to remind everyone that comments on this conference call may contain certain forward-looking statements regarding the company's expected operating and financial performance for future periods. These statements are based on the company's current expectations. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to a number of risks or other factors that are described in greater detail under risk factors in GILDS Form 10-K and 10-Q and other reports filed with the U.S. Securities and Exchange Commission. Additionally, today's remarks will refer to certain non-GAAP financial measures. Reconciliations of non-GAAP financial measures, where appropriate, to the corresponding GAAP measures can be found in today's earnings release filed with the SEC as well as on GILD's Investor Relations website. Participating in the call today are Chief Executive Officer Mary Ann McGarry, President Terry Schmidt, Chief Financial Officer Amber Elwell, and Chief Operating Officer David Nalen. Now, I'd like to turn the call over to Mary Ann McGarry. Mary Ann?

Thanks, Michael, and good afternoon, everyone. I wanted to start by acknowledging all of GILD's employees for their ongoing efforts and contributions throughout what was a remarkable year. Without their hard work and dedication, we would not have been able to report the levels of growth and success we achieved in 2020. I'd also like to thank all of our clients for their continuing trust and business. GILD is more than just marketing and market share. We build long-term relationships with our clients and drive more sustainable growth across cycles. And finally, we remain focused on driving long-term value for our existing and prospective shareholders. I'm going to spend a few minutes discussing our differentiated platform and how we are prepared to drive consistent growth and profits as the interest rate environment shifts. Terry will walk through how GILD is positioned for sustainable growth. Amber will discuss our financial results for the full year and fourth quarter of 2020. And we will then be joined by Chief Operating Officer David Nayland for Q&A. For 2020, we generated exceptional results across originations, revenue, net income, and adjusted net income, reinforcing the strength and differentiation of our business model. Consistent with other mortgage lending providers, Guild benefited from historically low interest rates, driving record refinance activity across the industry last year. Unlike some peers, we remain well-positioned to continue to deliver sustainable and profitable growth across cycles. reinforced by our 60-year track record. At the core, our business model is focused on purchase lending, which historically has delivered more durable volume and higher returns on average versus refinancing activity across interest rate cycles. For the five-year period from 2016 to 2020, purchase loans accounted for 64% of our total origination. And looking ahead, according to February's forecast, the Mortgage Bankers Association forecasts purchase originations to increase 10% in 2021, while refinancing originations are expected to decline year over year. Next, our origination strategy centers on the retail channel. where borrowers interact directly with our loan officers throughout the client life cycle. It is this personalized and local mortgage borrowing experience that engenders client trust and brand recognition and more favorable unit economics over time. Finally, our scale-enabled servicing business generates a recurring stream of cash flows helps to extend client relationships, and works as a natural hedge during rising interest rate environments. So with that, I'd like to turn it over to our president, Terry Schmidt. Terry?

Thanks, Mary Ann. As Mary Ann mentioned, I'm going to discuss in greater detail how Guild is positioned for growth, as well as some of our key strategic initiatives. To start, I think it's important to highlight our proven track record of growth across different interest rate backdrops. Since 2007, origination volumes have compounded at an annual growth rate of 28%, while our market share has grown by 13 times. And most importantly, GILD has maintained profitability every year since 2008. We operate in a large and fragmented market with the top 10 lenders in the retail channel capturing approximately 22% of total originations in 2020. Within the broader market, we remain well-positioned to continue to gain share with our constant focus on first-time homebuyers. Our digital capabilities combined with our local presence in MSAs with favorable demographic trends complement our strategy. According to the U.S. Census Bureau, around 45 million people will turn 34, the average age of first-time homebuyers, within the next decade. We view our retail-focused distribution approach as a key differentiating factor, particularly in a rising interest rate environment. We have built a scalable, robust infrastructure and a strong reputation while maintaining a local, relationship-driven model that can deliver a personalized client experience. We remain focused on organically growing our business and existing MSAs and entering new markets by recruiting new loan officers to our platform. Through 2020, annual loan officer headcount growth, excluding acquisitions, has averaged 7% since 2007. And we maintain high retention rates, with existing loan officers generating more than 80% of our overall volume in the past five years. through 2020. In addition to adding new loan officers, we can further enhance growth by increasing the productivity of our existing loan officers through our ongoing coaching programs and system enhancements. Next, our scale and technology remain key competitive advantages that enhance operational efficiencies and improve profitability, and we are increasingly leveraging our proprietary end-to-end tech stack in a variety of ways, From a prospecting perspective, we can analyze proprietary data to identify lead generation opportunities. Turning to production and fulfillment, we can provide a digital point of sale experience to our clients with online applications, automatic verification alerts, and electronic closings, allowing us to serve our clients as they prefer. Once on board, our platform is designed to anticipate client activity, which enhances servicing and retention. Refinancing opportunities are delivered back to the loan officer that originated the loan, which improves the client relationship and increases portfolio retention. This is evidenced by our likelihood to recommend score of 94 and our refi portfolio retention of 66% for 2020. Finally, assuming interest rates continue to rise, market dislocations often provide openings to enhance growth organically or through opportunistic acquisitions. Focusing on M&A, we remain committed to expanding our presence in existing MSAs and into new territories through targeted and accretive transactions. And while past is not necessarily prologue, origination volumes for companies that we have acquired increased by nearly 40% on average in the third year following acquisition, as businesses increasingly leveraged our scale-enabled platform to accelerate growth and realize operating efficiencies. I'll now turn the call over to our Chief Financial Officer, Amber Elwell, to discuss the financials in more detail. Amber?

Amber Elwell Thanks, Terry. I'm pleased to, again, report strong financial results for Guild Holdings Company. For the full year 2020, we generated $35.2 billion of loan originations, representing 62% growth year-over-year. Net revenue totaled $1.6 billion, up 128% from $713 million in 2019. Net income totaled $371 million, while adjusted net income, which includes the change in fair value of MSRs due to model inputs and assumptions, acquisition-related contingent liabilities, and stock-based compensation, was up 277% year-over-year to $524 million, primarily driven by strong growth in origination volumes, reflecting our purchase-focused retail channel model and differentiated technology platform. For the year, GAAP EPS totaled $6.18, while we reported adjusted EPS of $8.73 for 2020. We finished 2020 on a particularly strong note, with fourth quarter originations reaching $10.6 billion, an increase of 75% over $6 billion for the year-ago period. Following suit, total net revenues were up 77% year-over-year to $454 million, with adjusted net income up 222% compared to the fourth quarter of 2019. GAAP net income totaled $78 million, while adjusted net income totaled $90 million. For the fourth quarter of 2020, GAAP and adjusted EPS came in at 130 and 149, respectively. Next, I wanted to spend a few minutes walking through gain on sale margins. Based on total origination volumes, our gain on sale margin came in at 436 basis points for the fourth quarter, up 67 basis points compared to the fourth quarter of 2019, but down from 562 basis points in the prior quarter. Our gain on sale margin on pull-through adjusted loss volume was down seven basis points to 482 basis points compared to 489 for the third quarter of 2020. and remained among the highest of our public company peers. The margin compression on a sequential basis largely reflected normalizing spreads as supply and demand trends converge and competition for refinancing activity remains intense. We believe GIL remains well positioned to continue to generate strong gain on sale margins both on an absolute basis and relative to our public company peers in light of several key drivers. The NBA forecast the industry's originations mix to increasingly favor purchase volume as the interest rate cycle turns, voting well for our purchase-focused model. While purchase originations represented 44% of our total origination volume in the fourth quarter of last year, over 64% of our originations were from purchases during 2016 to 2020, as Mary Ann mentioned earlier. And we have a proven track record of profitable growth across interest rate cycles. Second, channel mix matters. Our scale-enabled retail channel enables higher gain-on-sale margins relative to other companies that tap the lower-margin wholesale channel to drive growth. Third, while we have continued to capitalize on outside refi volumes, our refinance business model is different. Given our purchase focus, we are not dependent on refinance activity to drive growth and originations going forward. Moreover, while the refinance business is largely commoditized, we compete on service, not price. and leverage our longstanding relationships with existing clients. Our servicing business is another key differentiating factor that helps us deliver sustainable growth across a variety of market and interest rate backdrops. First, we are a scale-enabled provider with a $60 billion servicing portfolio as of December 30, 2020, up 22% from a year ago. In turn, total loan servicing and other fees increased by 16% year over year to 44 million for the fourth quarter of 2020. Furthermore, most of our growth has come through the retail channel. Clients establish relationships with our loan officers during the origination process, which are further strengthened through servicing activities. So when clients are looking to refinance down the road, our loan officers are well positioned to capture that business. And this is reinforced by a refinance recapture rate, which remains strong at 65% for the fourth quarter. In the near term, we continue to monitor the forbearance impact under the CARES Act. Our forbearance requests represented 3.5% of our overall portfolio as of the end of 2020, compared to 5.5% for the industry based on NBA data. Our balance sheet remains strong and highly liquid. It was $335 million of cash and cash equivalents, excluding funds used to pay down our warehouse line. as well as $2.1 billion of outstanding warehouse lines of credit with unused capacity of $.9 billion as of December 31st, 2020. We are very focused on capital allocation as a team and with our board. Capital allocation priorities include funding originations, ongoing reinvestment in the business, and capitalizing on strategic and accretive M&A opportunities with an overriding focus on optimizing returns on investment and driving long-term value for shareholders. Finally, I wanted to provide an update on the first quarter. As we have previously stated, we don't intend to provide forward-looking guidance. Given the date on which the earnings release fell on the calendar this year, we wanted to share actual loan origination volumes for the first two months of the year. These totaled $6.1 billion for January and February of 2021, exceeding the $5.7 billion we generated in the entire first quarter of 2020. Based on these first two months through February, total pull-through adjusted locked volume was approximately 6.4 billion. This trend has softened a bit more recently, and year-to-date gain on sale margins based on pull-through adjusted locked volume were relatively in line with the fourth quarter of 2020 and ahead of the first quarter of 2020 at 302 basis points. We anticipate an industry refinance volume to pull back and gain on sale margins to normalize as interest rates rise. Long-term, our differentiated purchase-focused business model and strong retail distribution platform, combined with our proprietary technology, position us well to continue to deliver profitable growth regardless of interest rate cycles. And with that, we'll open up the call for questions. Operator?

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from Don Fanderi with Wells Fargo. Please proceed with your question.

Yes, Amber, thanks for the volume numbers for January, February. I might have missed it, but did you say something about gain on sale for JanFab?

Yes, thanks, Don. For gain on sale for January and February, our pull-through adjusted lock volume was $6.4 billion, and gain on sale was relatively in line with fourth quarter 2020 on pull-through adjusted lock volume, which was 482 basis points.

Got it. Okay, thank you. And I guess, you know, one question I have on the expenses is that, you know, if you look at production expenses as a percentage of originations this quarter versus Q3, you know, they went up quite a bit, yet the volumes didn't, you know, move up as much. I mean, can you sort of talk a little bit about that dynamic and how we should think about it going forward?

Sure. The focus really should be on the full year. And you look at our expenses as a percent of revenue. We're at 57% for the full year of 2020 compared to 78% in 2019. And overall, our expenses for the year were at 285 basis points compared to 297 for last year. And our origination segment ended at 218 basis points in total profitability for the year compared to 84 basis points in 2019. So there are some timing differences, but I think focusing on the full year is really the best way to think about it, and it gets some of that, you know, timing difference out from quarter to quarter.

Okay. Thank you.

Thank you. Our next question comes from Rick Shane with JPMorgan. Please proceed with your question.

Thanks, everybody, for taking my questions this afternoon. First, what percentage of the UPB was retained this quarter and what was sold?

On the retained percentage for the quarter was about 95%. Got it.

And the way our model is sort of looking at the numbers, we're seeing a CPR rate on the portfolio of about 50% during the quarter. Does that seem right? Are we in the ballpark there?

On an annualized basis, yes, it was around 48% for payoffs. And the CPR in the model that we're using for the year as of December is 18. Got it.

Okay. And then what drove the increase, the sequential increase in servicing expenses that sort of changed trajectory? Is that one-time or should we see that as a new run rate going forward?

There was some one-time expenses in there from a CARES Act perspective for a foreclosure loss provision. We looked at the moratorium and the rules and regulations changing around that. and the length of foreclosures would be increasing cost. So I would consider that more of a one-time, although our cost of service is a little bit higher just as we've had to prepare for staffing to work through all of the CARES Act forbearances, you know, this year and then continuing into next year.

Got it. And then last question, and I apologize for so many, but Just to sort of try to put a finer point on Don's question, when we think about the timing differential between originations, pull-through adjusted locks, and compensation expense, help us think about that relationship. Is what we saw in terms of the fourth quarter expenses a function of third quarter volume, or is there better alignment than that? Because as we sort of move through the year, that'll help us get the models trued up.

Yeah, good question. I think that the focus really is thinking on a straight line basis for the year more than looking at the quarter to quarter. There's not any trailing expenses that would roll. and it would be aligned. So I think focusing on the full year of where we ended at 2020 for the expenses and looking at 2019 as well. Obviously, everyone knows 2020 was an anomaly year overall with margins and expenses as well. But the full year impact expenses to me is the way to think about it.

Got it. Understood. But certainly, You know, we get that and we appreciate that, but at the same time, people are looking at quarters. So understanding how that correlation is going to be important going forward, especially in an environment where we're likely to see sort of a divergence between locks and fundings and some inflection there as well.

Sure, and we do compensate certain members of our management team based on business performance and growth in both volume and profitability, which resulted in higher payments to some key employees in the fourth quarter. And so when you think about straight-lining it, it takes out that variability, as well as when volumes and overall revenue and profitability goes down, that would shift accordingly.

Got it. Okay, so some of this was year-end true-up related to management compensation. Yes. Okay, that helps. Thank you.

Thank you. Our next question comes from Giuliano Bologna with CompassPoint. Please proceed with your question.

Thank you. Well, thanks for taking my questions. Thinking about your balance sheet for a second, Is there a sense of how much cash you have in your different warehouse lines that are kind of paying down the warehouse lines that's kind of excess liquidity? And just to get a sense of what your general kind of liquidity position is on a pro forma basis.

So at the end of the year, we only had $16 million that was in our warehouse paved down, and the rest of it was sitting in cash. And we were about 33% leveraged on our MSR debt overall. And so the operating cash at $335 million is the majority of our cash with so little in the paydown. And we continue to, you know, make sure that we're focused on maintaining a strong liquidity position as we always have and are poised to handle any changes in the market going forward.

To Amber's point, this is Terry. The third quarter, our MSR outstandings was much higher. What was the number, Amber? It was around 50% of the collateral value, and we bought it down to, you know, 32%, 33%. So that was another change in the cash position.

Yes. Yeah, it was at 52% around the third quarter.

That's great. And I guess pivoting a little bit from there, You obviously have a very large liquidity position. I'm curious how to think about that liquidity position in the sense of, you know, are there any potential acquisition candidates out there that make sense or how does the pipeline look at the moment? And then from there, you know, how do you think about kind of a maximum amount of liquidity or when you might entertain capital return?

Yeah, I can talk about our cash position. Okay, talk about it. Sounds good. Okay, over. Overall, we think about our liquidity in looking at operating reserve and strategic capital. So what do we need to run the business based on bank covenant requirements and then market risk associated with forbearance advances, that sort of thing, margin calls. And then to your point, any strategic capital that we would need for investing back in our and investing in the business is really, that remains our top priority. And as it relates to excess capital beyond these needs, we'll continue to discuss potential capital return options with our board.

And your acquisition question, you know, last year there wasn't a lot of activity just because of the volume that all the, everybody in the industry was handling. But keep in mind that over 50% of the industry is coming and the volume is coming from independent mortgage bankers. So we believe there's still great opportunity. And we're seeing a lot of IMBs that are kind of really thinking maybe it's time to cash in their chips, kind of, sort of speak. So we're seeing activity, more activity. The pipeline of sellers is growing. And, you know, the key is going to be just just getting to the right valuation point. And, you know, we're always good stewards of capital, so we're very careful about price considerations and want to make sure that anything that we're considering will definitely be reasonable.

That's very helpful. Thank you, and I'll jump back into you.

Thank you. Our next question comes from Trevor Cranston with JMP Securities. Please proceed with your question.

Hi, thanks. Couple questions related to the MSR portfolio. To maybe help us think about, you know, prepay speeds, looking forward and the ability to generate refi volume from from recapture. Can you share any, you know, data with respect to the servicing book in terms of, you know, the the overall weighted average coupon or sort of the portion of the servicing book that you would estimate kind of still has a significant incentive to refi, you know, with mortgage rates up around three and a quarter or so?

Sure. I'll start with stats, and then David can jump in on the refi retention. So overall, our weighted average coupon is 3.6 for our portfolio. And And we have, like I said, it's a CCR of 18. So, and then a multiple of 2.7 ending at the end of the year. And then, David, if you want to talk about who's the money based on your analysis.

Sure. Thanks, Amber. So, just a couple of things. In 2020, we actually doubled the amount of closed volume that came from our portfolio from $5 billion in 2019 to nearly 11 billion in 2020. Market conditions were certainly favorable, but also the investment in our technology and the ability to continue to look at the portfolio, anticipate client refinance activity as well as new purchase activity really has positioned us favorably and that's helped to generate our 66% refinance recapture rate for all of 2020. This is an area that we're continuing to invest in. We think that there is good opportunities going forward. As you've indicated, rates are still low. There's strong tailwinds. But we also anticipate being able to identify when the market normalizes opportunity for that repeat purchase activity, whether it's borrowers buying up or buying down. And again, we're well positioned to take advantage of that regardless of the interest rate cycle.

And I would just add, David, this is Mary Ann, I would just add that there's probably going to start to be a little bit more cash out refives because in some markets the inventory is an issue to move up. So I bet there will be a lot more improvements, remodeling. And our customers tend to come back to us.

Yeah, that makes a lot of sense. Okay, I think the rest of my questions have already been addressed, so I'll jump back in the queue. Thank you. Sure.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. Thank you. Our next question comes from Derek Hewitt with Bank of America. Please proceed with your question.

Good afternoon, everyone, and thank you very much for the volume and margin data through February. I think that's very helpful for investors. Most of my questions were already addressed, but could you talk a little bit about the tax rate? It looks like it was in the low 20s during the fourth quarter. What were the moving parts and then should we expect it to kind of normalize back to the mid-20s next year?

Yeah, the 25-ish range is what we would expect for other regulatory changes.

And then what was causing the tax rate for the fourth quarter?

There was a slight adjustment for a deferred tax asset that we needed to put on for the full year. So there's a credit.

All right. Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Okay. Well, thank you, everyone, for your time and interest. And we look forward to continuing to discuss our progress on future calls. So thank you, everyone.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.