Guild Holdings Company

Good afternoon, ladies and gentlemen, and welcome to the Guild Holdings Company second quarter 2021 earnings conference call. At this time, all participants are in listen-only mode, and later we will be conducting a question and answer session, and instructions will be provided at that time. As a reminder, this call is being recorded, and I will now like to turn the conference over to Mr. Kim, Michael Kim, rather, 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 GILs 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, and Chief Financial Officer Amber Elwell. Now, I'd like to turn the call over to Mary Ann McGarry. Mary Ann?

Thank you, Michael. Good afternoon, everyone, and thank you for joining us. Before we discuss second quarter results, I wanted to thank all Guild employees for their hard work. Our people are at the heart of Guild and drive our continued success. I am proud that Guild was named as one of the best mortgage companies to work for in 2021 by National Mortgage News. I am joined by our president, Terry Schmidt, who will discuss how GILD is strategically positioned for growth. Our Chief Financial Officer, Amber Elwell, will review our financial results for the second quarter, and then we will be joined by our Chief Operating Officer, David Nayland, for Q&A. I wanted to start by providing some perspective on the market. Margins have increasingly compressed due in part to rising competitive pressures. It is anticipated that these market dynamics will continue through the balance of the year as forecasted by the MBA. This dynamic led to lower gain on sale margins in the second quarter. Yet Guild was able to produce results slightly above pre-COVID levels. We remain confident that we will continue to deliver sustainable and profitable growth across market cycles as we've successfully been doing for 60 years. We're purchase-focused and service-oriented with a servicing division we can scale. We provide a personalized and individualized experience where clients return to us and refer Guild to others. We can adapt and compete effectively against many different businesses and models. For example, in June, We were named as one of the best online lenders by Mortgage Professional America. Year after year, because of our business model and our ability to adjust, we maintain durable volume and consistent returns that are less sensitive to various market cycles compared to our peers. Another key to our success is servicing. Our portfolio has scaled from $2.5 billion of unpaid principal balance in 2007 to $66 billion as of June 30th, with loan servicing fees rising 26% year-over-year to $48 million in the second quarter. Our servicing platform is important to client retention. We retain servicing rights of 92% of total loans sold in the second quarter. As interest rates rise, servicing functions as a natural hedge to originations with favorable valuation adjustments to the MSR asset. In the second quarter, total funded originations were $8.2 billion, while purchase mortgage originations were $4.9 billion, up 34% on a sequential basis. We generated adjusted net income of $52 million and adjusted earnings per share of 87 cents for the second quarter. Year-to-date volumes were up strongly compared to the first half of 2020, showing the strength of our differentiated platform compared to most peers. So with that, I'd like to turn it over to our president, Terri Schmidt. Terri?

Thank you, Marianne. As mentioned, I'm going to discuss in greater detail how GILD is strategically positioned for growth and provide an update on our previously announced acquisition of residential mortgage services. One of the many attributes that differentiates GILD from our peers is our primary focus on the retail channel, which accounted for 97% of our total originations in the second quarter. Our retail footprint includes approximately 1,069 loan officers across 34 states that maintain strong relationships with and source loans through an established referral network of realtors, builders, past clients, and other partners. With the closing of the accretive acquisition of Residential Mortgage Services, or RMS, we will start the third quarter with a local presence in 11 additional states by adding approximately 250 loan officers. Additionally, according to Inside Mortgage Finance, the combined volume for 2020 would have ranked the companies combined at number seven for non-bank originators. We'll also continue to leverage our robust technology platform and coaching programs to drive higher loan officer productivity and higher recapture rates, which held strong at 55% for the second quarter. As Marianne alluded to earlier, our originations mix has historically skewed heavily in favor of purchase volumes, which has driven more consistent growth over time. In contrast, refinancing volumes across the industry are typically much more volatile and more dependent on cyclical interest rates and spreads. Moreover, while the refinance business is largely commoditized, we compete on service and offer competitive pricing at the local level, as we leverage our long-standing relationships with existing clients. We remain focused on continuing to expand our footprint organically by recruiting new loan officers to our platform as well as through acquisitions. Our strategy has proven to be scalable as we have further penetrated many of our existing markets and expanded our presence into new markets across the United States. We believe that we are well positioned to continue to capture market share given our well-recognized brand, proprietary technology platform, and differentiated focus on the purchase market. Identifying, executing, and integrating complementary acquisitions remains part of our DNA. I'll now turn over the call to our Chief Financial Officer, Amber Elwell, to discuss the financials in more detail. Amber?

Thank you, Terri. For the second quarter of 2021, we generated $8.2 billion of loan originations versus $8.8 billion in the year-ago quarter. Net revenue totaled $294 million compared to $435 million in the second quarter of 2020, while net income totaled $9 million or 15 cents per diluted share. Excluding the change in fair value of MSRs due to model inputs and assumptions, acquisition-related contingent liabilities, and stock-based compensation, adjusted net income totaled $52 million or 87 cents per share for the second quarter. Year-over-year declines were mostly a function of lower origination fees and gain on sale of loans, consistent with reduced volumes and margin compression. For the first half of 2021, total loan originations came in at 17.9 billion, or up 23% year-over-year. Net revenue totals 820 million, up 36% versus the first half of 2020, while net income increased 54% to $170 million, or $2.81 per diluted share. Starting with our origination segment for the second quarter, pull-through adjusted lock volume totaled $8 billion in the second quarter, with 59% of closed loan origination volume for purchase business compared to the Mortgage Bankers Association average of 44%. Gain on sale margins on originations came in at 405 basis points for the quarter, while the margin on pull-through adjusted locked volume equated to 415 basis points. Turning to our servicing business, our unpaid principal balance grew 24% year over year to $66 billion as of June 30th, 2021, with total loan servicing and other fees increasing by 26% year over year to $48 million for the second quarter of 2021. The segment reported a net loss of $49 million for the quarter. largely reflecting MSR fair value adjustment compared to a loss of $69 million in the second quarter of 2020. Our balance sheet remains strong and highly liquid with $322 million of cash and cash equivalents, excluding funds to use to pay down our warehouse line, as well as $3.1 billion of warehouse lines of credit with unused capacity of $1.2 billion as of June 30th, 2021. This is after paying a $1 per share dividend during the second quarter. On July 1st, we closed the RMS acquisition and paid part of the consideration with $150 million of cash. We remain focused on maximizing long-term shareholder value when evaluating capital allocation strategies, including funding originations, ongoing reinvestment in the business, as well as potentially capitalizing on further acquisition opportunities and returning capital to shareholders. While we are not providing forward-looking guidance, we did want to provide some perspective on the current environment more broadly, as well as an update on quarter-to-date volumes. More specifically, the NBA forecasts overall volume in the third quarter to decline around 21% on a sequential basis. Focusing on the purchase market, our applications were up 12% quarter-over-quarter, while total applications were down 12% as refinances subside. For July, we generated 2.6 billion of loan originations with total pull-through adjusted locked volume of approximately 2.9 billion. Furthermore, ongoing margin headwinds include tighter spreads and intense competitive dynamics. As we've discussed in the past, we anticipate further margin compression in the back half of the year with the full year gain on sale margin for 2021 expected to be consistent with our long-term historical average of approximately 380 basis points. And with that, we'll open up the call for questions. Operator?

Thank you. We'll now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Our first question is from Rick Shane with JP Morgan. Please go ahead.

Thanks, guys, for taking my questions. And Amber, welcome back. I hope everybody is well. Just one quick question for me. When we look at the gain on sale, what is the mix currently between cash gain and capitalization of the MSR?

The cash or the MSR is about 85, 90 basis points right now. It's dropped a little bit, and then the remainder would be cash. Got it.

Okay, thank you. And then I guess I will ask one other question. A peer company reported recently, and they talked about some GSE changes during the quarter and how that impacted their capital markets execution. Is that anything that we should see in your numbers, or what do you think is different?

I can answer that. This is Terri. Yeah, we did have some impact when the GSEs announced the change and the cap on non-owner and second homes, but we were able to pivot very quickly. Because of our size, we were able to get some private capital investors to fill that void. So we haven't really lost a beat, and it's not really overly material. It's not material to our overall gain on sale numbers.

Got it. Okay. Thank you very much.

Mm-hmm.

Our next question is from Trevor Cranston with JMP Securities. Please go ahead.

All right. Thanks. You guys mentioned in the remarks with respect to the RMS acquisition, I think you said that you expect it to be accretive in the second half of this year. I was wondering if you could maybe specify a little more near term if you think it'll be accretive in the third quarter. And also maybe if you could just provide any color you can around, you know, the financial results and the profitability of RMS for the second quarter that just closed. Thanks.

Overall. Go ahead. Yeah, I can take that. And Teri, if you want to jump in. I mean, we can't talk about forward looking. on RMS, you can look at the purchase price at 3.25 estimated 2021 earnings overall. We would expect overall accretion due to them being profitable historically and running, you know, their high purchase and run very similar to us in terms of gain on sale. And so that would continue, although they would see the same drops that we would see. So combined, you would see that same impact to their business as ours. From an integration perspective, we're working through them coming on over the next few months. And so we don't expect any issues in terms of funding as they go through the integration that would change any of the regular practices in terms of net income.

And like Guild, RMS is purchase-focused, and they're very strong when they purchase business.

And they run about 25% of our overall volume just as a proxy.

That's been very consistent. Yes. Their gain on sale is a little bit lower than ours, but also it's been pretty consistent as well. So the drop that we experienced is very similar to the drop that they've experienced.

Okay. That's helpful. And then just one other question. You know, the refi recapture rate is still fairly strong this quarter, but I guess slightly lower than where it had been running. Was there – Anything in particular that we should be aware of to think about, you know, why that might have dipped or is that just maybe some sort of quarter-to-quarter noise and why it was a little bit lower than where it had been the prior course?

Well, our purchase percentage increased.

This is David. I can speak to that. We did see a slight drop, but I think that's really more based on a quarter fluctuation basis. There is certainly some pressure in the refi market from a gain-on-sale compression standpoint, but our ability to navigate through that in the different market cycles with our focus on customers for life and our high retention numbers allowed us to continue to outperform the market, and we don't expect that to change.

Okay. Got it. Appreciate the comments. Thank you.

Once again, if you have a question, please press star then 1. Our next question is from Don Sande with Wells Fargo. Please go ahead.

Amber, can you talk a little bit about the gain on sale guidance? Obviously, it implies a pretty meaningful decline in the back half, which is happening industry-wide. But can you talk about where maybe gain on sale was in June and give us a little sense on whether or not you know, in the guidance, there's a big drop and then more moderate declines as you progress through the back half of the year?

Yeah, overall, it is, as you said, competitive in nature in the industry, and so we're seeing that continual decline throughout. And based on what we're seeing, we would just – see that it would drop below our average for the year where we run around 380, and that would be gradual over time. And some of the, you know, the competitive nature that's affected the refinance business is, you know, affecting some of those, the margins. And so that's, you know, we're adjusting accordingly and we're competitively priced in our local markets. But we would see that drop. drop below, you know, we talked about last quarter being a trough below our average, that we would get below that average number to get to that 380 consistent for the year.

Got it. And, you know, strategically, now that you have a very strong presence in the Northeast, what's next if you were to look at additional acquisitions? How would you sort of think about that?

We're always looking at opportunity, both organically and inorganically. So we're just continuing to focus on growth and when we find the right either partner in an acquisition or a originator branch, that's our goal, to grow market share. with people that are purchase-focused and have similar values and model as we do.

Okay, so no particular market where you feel like you need to build out capacity?

Not really. I mean, we like to be in local communities where we can capture people you know, a good market share, so we want to be in the top five. And if we're not in the top five and there's a good cultural fit, whether it's organic or acquisition, we're going to take the opportunity to look at it. Yep.

Thank you. This concludes the question and answer session. I would like to turn the conference back over to Marianne McGarry for any closing remarks.

Well, thank you everyone for joining us today. Have a great rest of the summer and stay healthy and we look forward to updating you on our next call. Goodbye.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.