Guild Holdings Company

Good afternoon, ladies and gentlemen, and welcome to the Guild Holdings Company third quarter 2021 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 Marianne McGarry, President Terry Schmidt, and Chief Financial Officer Amber Kramer. Now, I'd like to turn the call over to Marianne McGarry. Marianne?

Thank you, Michael. Good afternoon, everyone, and thank you for joining us. As I've done in prior calls, I wanted to start by recognizing all Guild employees for their continued dedication and hard work. Their ambition, energy, and determination drive our continued success. As always, I'm joined by our President, Terry Schmidt, and our Chief Financial Officer, Amber Kramer, our Chief Operating Officer, David Nalen will join us for Q&A after our prepared remarks. I'm extremely pleased with our strong results for the third quarter. Key financial highlights included $10 billion of total funded originations, up 23% from the $8.2 billion in the second quarter, and still strong gain-on-sale margins. Through the first nine months of 2021, Year-to-date volumes continued to track meaningfully ahead of 2020 levels, reinforcing the strength and sustainability of our differentiated platform. Turning to our financial results, we generated adjusted net income of $77 million and adjusted earnings per share of $1.27 for the quarter. We remain well positioned as the mix of mortgage volumes continues to shift away from refinances in favor of purchase loans. Refinancing volumes across the industry are typically more volatile and are mostly a function of cyclical interest rates and spreads. Moreover, the refinance business is largely commoditized. In contrast, we compete on service and expertise at the local level, which has driven more consistent growth for Guild across market cycles. Our differentiated, purchase-focused business model separates us from the other lenders by providing a personalized and individualized experience to homebuyers. In fact, purchase loans accounted for 61% of our mortgage volumes in the third quarter compared to just 47% for the industry, according to the Mortgage Bankers Association. And our market share within purchase lending increased in the third quarter of this year compared to the fourth quarter of 2020, according to data from CoreLogic. Focusing within the purchase channel, we believe we are well-positioned to continue to capture market share given our well-recognized brand, proprietary technology platform, and long-standing relationships with existing clients. Clients return to us and refer Gill to others year after year, which drives durable volumes and consistent returns across market cycles. and our recently closed acquisition of Residential Mortgage Services, or RMS, further enhances our purchase platform and geographic footprint. The next generation continues to want to buy homes, with growth in the numbers of young people reaching age 31, the average age when they change from renting to owning. We continue to be well-positioned for this growing market because of our focus on first-time home buyers and our growing number of loan officers and branches across the United States, with over 1,200 loan officers across 42 states after the RMS acquisition. Our loan officers in communities leverage their relationships across a network of realtors, builders, and other partners to tap into a recurring stream of loans with 97% of our business in the retail channel. Finally, from a financial perspective, we have managed through all kinds of market cycles and consistently delivered strong returns. Through the first three quarters of 2021, we generated a 38.5% return on equity. So with that, I'd like to turn it over to our president, Terry Schmidt. Terry?

Thank you, Mary Ann. I wanted to discuss in greater depth how our balanced originations and servicing model differentiates GILD and positions us for long-term sustainable growth, both from a diversification perspective as well as by providing synergies across our business channels. Starting with our originations business, Volumes across the industry likely remain under pressure in the near term, reflecting changing mortgage rates and limited inventory. More favorably, as Marianne discussed, our purchase-focused approach positions us well with respect to long-term, durable demographic trends and a constructive government agenda. Another key component of our business model is our scale-enabled servicing segment. Our underlying servicing portfolio consists primarily of MSRs originated through our retail channel. To that point, we retained servicing rights for 86% of total loans sold year-to-date through September, reinforcing that complementary nature of our two businesses. In addition, our servicing platform allows us to build long-standing client relationships that drive repeat and referral business back to our origination segment to recapture our client's next mortgage transaction. During the nine months ended September 30th, 2021, we generated a 30% purchase recapture rate and a 63% refinance recapture rate compared to 26% and 66% respectively for the nine months ended September 30th, 2020. The 30% purchase recapture rate is a new record for Guild. We were able to achieve this by continuing to develop predictive analytics and pushing that information back to the originating loan officer to reconnect with their client. This, again, speaks to the strength of our platform, local brand presence, and strong relationships. We remain focused on increasingly leveraging our existing servicing client base as well as our proprietary technology to recapture more purchase business. In summary, we believe that maintaining both an origination segment and a servicing segment provides us with a more balanced model and therefore more sustainable earnings power across interest rate cycles. Assuming interest rates rise, our servicing business functions as a natural hedge to our origination segment, creating a longer duration of servicing cash flows resulting in favorable valuation adjustments to our MSR assets. I'll now turn the call over to our Chief Financial Officer, Amber Kramer, to discuss the financials in more detail. Amber?

Thank you, Terri. For the third quarter of 2021, we generated $10 billion of loan originations, consistent with the volume delivered in the year-ago quarter. Net revenue totaled $413 million compared to $564 million in the third quarter of 2020, while net income totaled $72 million or $117 per diluted share. Year-over-year declines were mostly a function of lower gain-on-sale of loans. Adjusted net income totaled $77 million or $127 per share for the third quarter, while adjusted EBITDA totaled $108 million for the third quarter. Turning to year-to-date results, total loan originations came in at $28 billion for the first three quarters of 2021, up 14% year-over-year. Net revenue totaled $1.2 billion, up 6% versus the first three quarters of 2020, while net income totaled $242 million, or $399 per diluted share. and we generated $236 million of adjusted net income and $328 million of adjusted EBITDA for the nine months ended September 30, 2021. Starting with our origination segment for the third quarter, toll-through adjusted lock volume totaled $10.4 billion, while we generated $10.0 billion of total funded origination. Based on closed loans, 61% of origination volume was purchased business, up 2% quarter over quarter, and well above the Mortgage Bankers Association estimated average of 47%. Gain on sale margins on originations came in at 396 basis points for the quarter, while the margin on pull-through adjusted locked volume was 381 basis points. Turning to our servicing business, our unpaid principal balance grew 20% year over year to $68 billion as of September 30, 2021, with total loan servicing and other fees increasing by 25% year-over-year to $50 million for the third quarter of 2021. The segment reported net income of $10 million for the quarter, a reversal from a loss of $12 million in the third quarter of 2020, reflecting higher fees, less negative MSR fair value adjustments, and lower expenses primarily due to reductions in our foreclosure loss reserve in 2021 as more homeowners exited forbearance plans and avoided foreclosure. For the third quarter of 2021, the loss related to the fair value of our MSRs was $35.5 million compared to $41 million for the same quarter in 2020, due primarily to slower prepayment speeds. We remain focused on continuing to leverage our strong and liquid balance sheet to maximize long-term shareholder value. As of the end of the third quarter, we maintained $303 million of cash and cash equivalents, excluding funds used to pay down our warehouse lines, as well as $3.6 billion of warehouse lines of credit with unused capacity of $1.7 billion. The sequential quarterly decline in our cash balance was largely a function of the $186 million upfront payment related to the RMS acquisition, which closed on July 1st. Looking ahead, capital allocation priorities include funding originations and reinvesting in the business, and a continued focus on growing shareholder value. In addition, we have built out our footprint through a series of complimentary and highly accretive acquisitions, and we remain focused on capitalizing on further opportunities that fit our strategic, geographic, and financial criteria. In conjunction with a strong liquidity position, the Board of Directors of GILD declared a special cash dividend of $1 per share for its Class A and Class B common stock, which will be paid on or about December 8, 2021, to the stockholders on record on November 22, 2021. To wrap up, I'd like to provide some perspective on gain-on-sale margins and intra-quarter origination volumes. Macro headwinds around interest rates and capacity constraints have eased to some degree as reflected by the relative stability of our gain-on-sale margin, which came in at 396 basis points for the third quarter compared to 405 basis points for the second quarter. It's important to note our gain-on-sale margins remain well above the industry, reflecting our differentiated retail distribution platform, purchase focus, and disciplined pricing approach. And while our margins remain influenced by market demand and capacity trends, we aren't motivated by short-term market share gains at the expense of unfavorable economics. We remain focused on generating sustainable growth over the long run. Turning to volumes for October, our loan originations totaled $3.1 billion, and total pull-through adjusted lock volume was approximately $3 billion. And with that, we'll open up the call for questions. Operator?

Before we jump to Q&A, I'd like to share an exciting announcement reported today. Guild Mortgage was ranked number one by J.D. Power in overall customer satisfaction for originations. We are really pleased with the results of our performance. So now we'll open up the call for questions. Operator?

Thank you, Mary Ann. At this time, we will 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. Our first question comes from the line of Trevor Cranston with JMP Securities. You may proceed with your question.

Hi, thanks, and congratulations on a strong quarter. A couple of questions related to the servicing portfolio. I guess, number one, do you guys have handy the prepayment speed on the portfolio in 3Q? just generally as you look forward over the next couple of quarters, can you provide any commentary on sort of how much room you think there is for speeds to come down further as refinancing presumably continues to burn out? Thanks.

Sure. Thanks, Trevor, for your question. The prepayment speed on our portfolio in Q3 is at 14.2 on the CPR for MSRs. And so as Obviously, as rates are going up, we're going to continue to see that decline, although it should reach somewhat of a steady state overall. And NBA has refinances dropping down 67% into next year, so that would impact it overall. I don't know where the bottom is, and I don't know, Terry, you've obviously been doing this for a long time. Do you know where we've been historically in a market like this through rate cycle changes?

Yeah, I would say that the lowest we've seen in the last several years is an 11% prepayment speed. Yeah.

Okay, gotcha. That's really helpful. So one more thing on the servicing book. It looked like the percent of loans you retained servicing on this quarter dipped a little bit from where it had been. I was just curious if there's any particular – uh, reason why the, uh, percentage of loans you retain servicing on crop this quarter in particular.

Yes. Great question, Trevor. Um, that's really a function of the acquisition. They were selling a hundred percent service release. So as we incorporate them into our numbers, it would bring ours down. If we looked at guilds specifically, we were still around 90% and w what we're service releasing is still primarily jumbos and bonds, which, um, both of which we're seeing increased slightly. and some non-owner occupied, but overall still at 90%. And we would expect as RMS funds on our platform that they will retain in the same percentage that we would.

Okay. That makes a lot of sense. Gotcha. And then on the special dividend declaration, can you share any thoughts or commentary around You know, why the decision was made to pay a special dividend, maybe as opposed to setting a regular quarterly. And also just any thoughts you guys had around, you know, why you felt like this was a good time to pay your dividend as opposed to maybe retaining capital in case any other acquisition opportunities come along.

Well, as you can see by our cash position, we're in a strong cash position. We review with the board where we believe our cash will end up at the end of the year. Our priority is investing in the business, funding originations, and any acquisition and originating opportunities. That's always going to take priority. When we look at that in our cash balance, we felt that the special dividend made sense as a return of capital to shareholders. And At this time, we're not looking at doing any kind of recurring dividend. We're always assessing what our needs are short-term and long-term, and we'll make decisions based on that and where the opportunities are. We definitely want to be poised for anything that comes up in terms of acquisitions and recruiting and make sure that we stay in a strong financial position to be able to capitalize on that.

Okay, great. That's helpful. Thank you.

Our next question comes from the line of Rick Shane with JP Morgan. You may proceed with your question.

Hey, everybody. Thanks for taking my questions, and I guess it's MSR day. First question is, of the 396 points, or call it 397 million in revenue, how much of that was cash being on sale, and how much of that was capitalization of MSRs that were sold?

So our loans that we added for MSRs was $82 million in non-cash. So they're coming on about 100 basis points right now.

Got it. Okay. That's pretty close to what I was getting. So when I look at the – and were there any sales besides originated loans during the quarter? No.

No.

Okay. So can we walk through the UPB? So UPB started the quarter at $65.7 billion. You had $10 billion of originations. Net after you retained 72%, you retained about $7.3 billion. That implies if you go from 65% to $68 billion in UPB that there was payoffs and amortizations of about $7.7 or $7.8 billion. I guess my question is twofold. One is the CPR decided of 14%. Would that be assumed CPR for valuing the MSR or the actual amortization during the quarter?

That was the CPR in the MSR model. And we would have, you know, runoff and then normal runoff in terms of refinances and then, you know, if there's payoffs or foreclosures, that would be included in there. I'd have to walk through the number overall. That seems a little high, and I'm not sure if it has to do with RMS and how they're playing into that overall. Got it.

We had loan prepayments of $5.5 billion, and we sold $2.7 billion of service released. And it is assumed, yeah, prepayment rate. Yep. Got it.

So what was the actual prepayment speed during the quarter?

Amber, do you have that? If you don't, we can always get back to you. Yeah, I'll get that for you.

Loan prepaid, yeah. Yeah, we can get that for you. But it definitely was higher than 14%.

Okay, yeah, I'm thinking it's in the 30s maybe. And, again, you're using $5 billion of amortization. I'm getting a slightly different number. But is it likely in the high 30s, low 40s?

We'll have to get that for you.

Okay. That's it for me. Thank you, guys.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. You may press star 2 if you would like to remove your question from the queue. Our next question comes from the line of Don Fandetti with Wells Fargo. You may proceed with your question.

Amber, can you talk a little bit about gain on sale expectations for the fourth quarter? I know, you know, in the press release, there was some comments about competition, but can you sort of quantify what you're seeing? And also Q3 just came in a lot better. I know there was some concern last quarter from investors just in terms of the sort of guide. What, what changed? I mean, obviously it's good to see conservatism and numbers coming in better, but you know, can you talk about what, what happened?

Yeah, it did come in better than we expected in Q3. And, you know, there were some market fluctuations that were unexpected. We don't provide guidance going forward. We still think that we're going to get to 2019 levels around the 380 basis points and, you know, starting to see that at the end of Q3 as well if that provides any direction for you. Okay.

And so what was it that sort of came in so much better in the third quarter, just trying to better understand how that moves that much? Is it just competitive dynamics?

Well, rates didn't rise as much as they were expected to. And, you know, there's just the demand was strong. So it didn't seem to push the rates. It didn't seem to push our competition. our gain on sale margin down pricing.

Got it. Okay. Well, like I said, I mean, it's great to see the estimates conservative. I was just curious what sort of drove it, but thank you.

Our next question comes from the line of Rick Shane with JP Morgan. You may proceed with your question.

Hey, guys. I owe you a clarification. I dialed into your $5 billion roughly amortization number, which gets to a 30% CPR, and since I sort of incorrectly walked through that logic on the call, I felt I owed everybody a clearer number.

Thank you, Rick.

At this time, we have reached the end of the question and answer session, and I'd like to turn the call back over to Mary Ann for any closing remarks.

Well, thank you for joining us today, and Have a great holiday season. Stay healthy, and we look forward to updating you on our next call. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you very much for joining, and have a great day.