Guild Holdings Company

Good afternoon, ladies and gentlemen, and welcome to Guild Holding Company's fourth 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 call 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, including the expected market for purchase loans and anticipated volumes and margins for the first quarter of 2022. 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 the section titled Risk Factors in GILD's Form 10-K and 10-Q and in 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 to the corresponding GAAP measures can be found in our earnings release filed today with the SEC and are also available 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 Kramer. 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. 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 am proud of the results skilled was able to deliver during the fourth quarter and full year of 2021. We originated nearly $9 billion of mortgage loans in the fourth quarter, bringing our full year total to approximately $37 billion, up 5% compared to 2020. Consistent with industry trends, our gain-on-sale margins softened through the course of the year, but we maintained higher margins relative to those typically generated in the wholesale or correspondent channels, in part driven by our focused product and distribution strategies. Turning to our financial results, we generated adjusted net income of $22 million for the fourth quarter of 2021 and $259 million for the full year. Adjusted earnings per share came in at $0.37 and $4.27 for the fourth quarter and full year, respectively. And we delivered an adjusted return on equity ratio of 31% for the 2021. underlining the resiliency of our return profile across cycles. Stepping back, our consistent growth across cycles can be linked to two key differentiating factors for Guild. First, we have built a scale-enabled and balanced business. While rising interest rates represent a macro headwind for origination volumes and gain on sale margins across the industry, our servicing business provides recurring revenue and cash flow, with higher interest rates compounding the value of the MSR assets on our balance sheet, all else equal. Second, our originations business is unique. While some of our peers have recently started shifting focus to purchase business as refinance activity flows and industry volumes increasingly shift in favor of purchase loans. We have been building the requisite scale, relationships, and expertise in purchase over the last 60 plus years. What we are is a purchase-focused mortgage provider. Purchase loans accounted for 62% of our mortgage volumes in the fourth quarter, well above the 44% figure for the fourth quarter of 2020. From an industry perspective, Purchase loans accounted for an estimated 47% of overall mortgage volumes in the fourth quarter of 2021, according to the Mortgage Bankers Association. Looking ahead, we're not immune to macro headwinds around rising interest rates and inventory limitations. That said, the MBA is forecasting steady growth in purchase volumes through 2023. and Guild has historically captured market share during periods of rising interest rates. Furthermore, unlike more commoditized refinancing lending, all purchase business isn't the same. Our durable competitive advantages include our product mix, brand equity, proprietary technology stack, and exceptional client service. We compete on service by providing a personalized, and customized experience to home buyers. And the efficacy of our client service was recently validated by our J.D. Power Award for highest in customer satisfaction in its 2021 study. This focus on customer service has resulted in more consistent volume across market cycles while enhancing referral and retention rates. Turning to distribution, our retail-focused platform remains a key differentiating factor. We have local infrastructure and boots on the ground, which engenders strong relationships and superior client service, which has expanded across the country following the acquisition of residential mortgage services. When selecting a mortgage provider, our clients place a premium on the relationships and trust built with our loan officers over time. Our loan officer's expertise translates into putting clients in the right product. We also stand to benefit from powerful demographic trends that will drive strong growth in purchase loans for years to come. Approximately 70 million millennials age 20 to 34 are increasingly reaching the age when individuals typically transition from renting to owning. Millennial homeownership rates still lag comparable data for Generation X and the Baby Boomers generation, which we believe provides an opportunity for us to tap into the market for this demographic. These tailwinds align well with our longstanding focus on underserved and first-time homebuyers with our established retail loan officer network. For all these reasons and more, I am more confident than ever that Guild remains well-positioned to drive sustainable and profitable growth across various market backdrops. Finally, I want to thank all of our more than 5,000 employees for their continued hard work and dedication. It is their efforts every day that help us win new clients and maintain strong relationships with our existing clients. which in turn drives consistent and durable growth. So with that, I'd like to turn it over to our President, Terry Schmidt. Terry?

Thanks, Mary Ann. As Mary Ann alluded to earlier, our balanced business model enhances and smooths our growth across cycles. Focusing on our servicing business, we delivered strong growth in unpaid principal balance and related revenue and earning contributions during the fourth quarter and full year of 2021, which partially offset some of the declines in our origination revenue and thereby served as a natural hedge. As a reminder, our underlying servicing portfolio consists primarily of MSRs originated through our retail channel. In 2021, we retained servicing rights for 84% of total loans sold, and our unpaid principal balance grew 18% in 2021 to $71 billion. driving a 22% increase in total servicing fees for the year. Now stepping back, rising interest rates bode well for our servicing business as prepayment speeds slow, thereby supporting the level of unpaid principal balances. Furthermore, higher rates lift the underlying value of our MSR assets on balance sheet by extending the duration of servicing cash flows with the markups running through the income statement. Finally, our servicing platform strengthens client retention and recapture rates. During the year ended December 31, 2021, our purchase recapture rate increased by 6.4% to 32%, while our refinance recapture stayed relatively consistent at 63%. Much of the step up in purchase recapture reflects the improving efficacy of our platform, technology, and analytics, combined with the strong relationships our loan officers maintain with existing clientele. So, we remain focused on increasingly leveraging the synergies and diversification across our originations and servicing businesses to enhance our growth while mitigating the volatility of our revenue and earnings in the short run and over time. 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 fourth quarter of 2021, we generated 8.8 billion of total in-house loan originations compared to 10.6 billion in the prior year quarter. Net revenue totaled 343 million compared to 454 million in the fourth quarter of 2020, while net income totaled 42 million or 69 cents per diluted share. Year-over-year declines were mostly a function of low origination volumes and tighter gain-on-sale margins. Adjusted net income totaled $22 million, or $0.37 per share, while adjusted EBITDA totaled $39 million for the fourth quarter. Aside from a $16.8 million favorable change in fair values of MSR due to higher interest rates during the quarter, adjusted figures also excluded a $13.6 million change in fair value of contingent liabilities due to acquisitions primarily related to RMS. This was reflected as a benefit to G&A expense on the income statement. That markdown of our contingent liability or earn out reflected softer volume and gain on sale margin trends at RMS, consistent with broader industry trends. Turning to our results for the full year 2021, Total loan originations came in at $36.9 billion, up 5% year-over-year. Net revenue totaled $1.6 billion, just shy of the level in 2020, while net income totaled $284 million, or $467 per diluted share. We generated $259 million of adjusted net income and $366 million of adjusted EBITDA for the year ended December 31, 2021. Our financial results reinforce the resiliency of our financial model as we have remained profitable through mortgage cycles. Our variable cost base flexes in conjunction with cyclical trends and origination volumes, gain on sale margins, and revenue. Focusing on our origination segment for the fourth quarter, our gain on sale margin came in at 347 basis points on $8.8 billion of total funded originations, down from 436 basis points on $10.6 billion of funded originations in the prior year quarter. Our gain on sale margin on pull-through adjusted lock volume was 394 basis points for the fourth quarter, up from 381 basis points in the third quarter, with the step-up versus our funded margin primarily reflective of unfavorable fair value marks due to a reduction in locked volume at lower margins. Pull-through adjusted locked volume totaled $7.8 billion in the fourth quarter, down 25% quarter-over-quarter due to rising rates through the quarter and moving towards normalized seasonality. For context, it's important to understand how our gain-on-sell margins differ from others and the industry more broadly. While markets, rates, and capacity trends undoubtedly directionally impact profitability, we maintain higher gain-on-sale margins versus most publicly traded peers, reflecting our retail-focused originations model and disciplined pricing. Our purchase-focused approach means we are less susceptible to volatile refinancing volumes, and our margins are less vulnerable to shifting channel mix dynamics. We source nearly 100% of our volumes via our retail loan officers. We believe our retail loan officers are better equipped with our platform to pivot when market dynamics shift. Turning to our servicing segment, we generated net income of $27 million in the fourth quarter, a reversal from a loss of $25 million in the fourth quarter of 2020, reflecting higher fees, a favorable inflection in MSR fair value changes due to valuation assumptions, and lower expenses primarily due to a lower provision for foreclosure losses in 2021. For the fourth quarter of 2021, we booked a $16.8 million gain related to MSR fair value adjustments compared to $11 million loss for the same quarter in 2020, primarily reflecting slower prepayment speeds. Next, we maintain a strong and liquid balance sheet. As of the end of 2021, cash and cash equivalents excluding funds used to pay down our warehouse lines totaled $243 million, while warehouse lines of credit totaled $3.5 billion, with unused capacity of $1.5 billion. Importantly, our book value per share was north of $15 as of December 31, 2021, while our tangible book value per share was $11.53. Looking ahead, our capital light business model and strong cash flow generation enhances capital allocation, optionality, and flexibility. While we remain focused on funding originations and reinvesting in the business, we maintain ample excess cash to capitalize on strategically and financially compelling M&A opportunities as we have done in the past, most recently with the RMS acquisition. As is our standard practice, I'd like to provide some insights on gain on sale margins and intra-quarter origination volumes. We expect volumes and margins will both be adversely impacted by seasonal trends in the first quarter of 2022. We delivered $3.9 billion of loan originations through the first two months of 2022, with total year-to-date pull-through adjusted lock volume of approximately $4.5 billion. Our estimated gain on sale through the first two months of 2022 was 415 basis points on funded volume and 357 basis points on pull-through adjusted loss volume. Finally, we plan on filing our annual report on Form 10-K for the year ended December 31, 2021 in the next few days. In connection with the preparation for our first year of SOX compliance, Certain internal control deficiencies were identified that represented a material weakness that required corrective and remedial actions. We are constantly reviewing our internal controls over financial reporting, and as part of our 404 assessment, we identified gaps in our controls. Based on these gaps, we evaluated their impact and concluded there is no impact on our financial statements. A remediation plan is in place. And with that, we'll open up the call for questions. Operator?

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate 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 key. Our first question comes from the line of Trevor Cranston with JMP Securities. Please proceed with your question.

Hey, thanks. Good afternoon. I guess the first question, you know, on the update you guys just gave for the first quarter, I think you said the gain on sale on a pull-through adjusted basis was 357 basis points for the quarter. And, you know, looking at the historical gain on sale numbers on slide eight, that's obviously sort of lower where they have been in recent history. Can you guys maybe just comment on kind of what you're seeing in the competitive landscape and if you think that margins could be kind of below where they had historically bottomed out for some period of time and what you believe is driving that? Thanks.

Sure. Thanks, Trevor. This is Amber. Yeah, as you can see, the basis points on full-through adjusted lock volume is lower than the fourth quarter, and we are seeing competitive pressures on margin, obviously, and we look at a local discipline pricing approach and want to remain competitive. Typically, we have a longer gain on sale cycle, so some other companies might be discussing stabilization. As we saw last year, we were on the back end of when gain on sale was dropping, so we're still seeing that decrease overall. We think that there's going to be continued pressure on margins, but now starting to see some of these companies finally shed some excess capacity will help. But the natural volume drop and the competitive nature and the volatility of the market is pushing those down right now.

Okay. Gotcha. That makes sense. And you mentioned the impact on adjusted EPS from a change in the contingent consideration in the fourth quarter, which was related to the outlook for volumes and margins. I was curious, can you remind me what goes into the valuation of the goodwill that's on the balance sheet and if, you know, future changes in, you know, the outlook for volumes and margins could potentially have an impact on the carrying value of the goodwill at some point?

Sure. I mean, we do an overall impairment analysis as, you know, per our requirements, and so we would look at overall the expectation of the the asset of the Goodwill, and there was no change to Goodwill overall, and based on what we know now, we can't predict the future, but the liability and the earn-out was specific to the volume and the gain on sale, but we don't see any impact to the Goodwill based on our analysis that we've run.

Okay. Gotcha. I appreciate the comment. Thank you.

Our next question comes from the line of Rick Shane with JP. Chris, you have your question.

Good afternoon, everybody, and thanks for taking my question. So if we look at the run rate on the lock volume for the first quarter and basically sort of the quarter's 13 weeks long, we're about 10 weeks in, and then we compare that to some of the addressable market estimates, It looks like you are suggesting market share is declining in the first quarter. Is that what you think you're seeing in the market? And if so, what's driving that given the shifts that we're seeing?

So, yeah, so overall our pull through adjusted lock volume through February was that $4.5 billion. And, right, you know, we're getting into more – normal seasonality we're having your purchase this is a lower purchase you know the seasonality of purchase business is lower also in in the winter so there's going to be some impact for that and there is some inventory constraints overall so where some people might be looking at refi specifically and not as much focused on purchase that would affect that number overall

Got it. Okay, so there is actually a seasonality to your market share given the origination mix.

Yes.

And do you think that as competition, as supply and demand is a little bit out of balance in terms of purchase during the first quarter, that that further pressures gain on sale? Is that the other element that we're looking at? And the reason I ask is If we think about modeling it through the rest of the year, we can think about seasonality in terms of market share. Should we think about seasonality in terms of gain on sale as well?

Yeah, I mean, the part of being in the purchase-focused business is that we're not as susceptible for the refi rate changes. But overall, I think just as capacity is shed, there's going to be less demand less pressure on margins longer term. I mean, that, you know, all else equal because, you know, we don't know what's going to happen in the market. I don't think it's necessarily a direct correlation to the purchase seasonality business. I think it's some other, you know, changing of the environment and what, you know, refi purchase mix overall.

Got it. And then I apologize for asking one more question. Specifically, what were the material weaknesses within the accounting framework, just so we understand that better?

First of all, I just want to make sure everyone understands there's no impact to the financial statements. Everything that we presented in the past in our K that we'll file and what we're presenting here, no impact. We do have the remediation plan is in place. There was mostly just implementation of SOX overall and a lot related just purely to documentation. So controls were in place but not documented properly according to SOX and which is why we haven't had any issues with our financial statements and the accuracy of them in the past.

Got it. Okay. Thank you for the clarification.

Our next question comes from the line of Gugliano Blagna with Compass Point. Please proceed with your question.

Thank you. I guess starting off, one of the areas I was curious was the U.S. capital. Obviously, I can see the reported cash number on the liquidity side. Is there a rough sense of how much you're buying down your warehouse lines and how much cash you're contributing into those warehouse lines to effectively bring them down?

Yeah, it's about $45 million, so you would gross cash up by that to get to the total number. And that's consistent with where we were prior quarter as well.

That's great. And I guess thinking kind of forward, I'd be curious if you're seeing any shift in the market environment from an M&A perspective, obviously, as we're going through a normalization process and as margins kind of come back. closer to normalized levels and as the industry as a whole stabilizes, I'm curious if you're seeing increased activity from potential platforms for sale and then from there, what your appetite is and what type of platform do you look at from an M&A perspective?

Sure, I can answer that. This is Terry. We are seeing more activity. It's just starting up and so we're thinking that the pipeline will continue to grow over the next nine months. We're still kind of focused on retail businesses. We like businesses that have a decent market share in their area and where they've got good leadership that want to stay. we can take them to the next level under Guild's platform. Nothing's changed as far as what we're looking for. Yes, we're seeing things starting to get more active, and we are very interested.

This is Mary Ann.

Just to add to that, historically, When we've been in a rising interest rate market and the shift from a refinance-dominant market to a purchase, we always see opportunities. So I wouldn't expect anything different.

That makes sense. And then related to that topic, I'd be curious as you think about, you obviously paid special dividends in 2021. Thinking about capital returns, Is there any change to the thought process on capital return? And then they kind of fall onto that as if there's any appetite for share repurchases as part of that equation closer to tangible book value.

Right now, there's no change to what we've done in the past. We're constantly assessing our liquidity and investing back in the business, looking at M&A opportunities as well. maintain a strong balance sheet and want to be in a good position, especially with the compressed margins that we're seeing. So we'll continue to monitor our liquidity and then, you know, assess quarterly with the board as we always have. If we believe that we don't have financial opportunities to invest in, then we would decide at that time if we would return capital to shareholders.

Sounds good. Thank you for answering my questions, and I'll jump back in with you.

We have a follow-up question from the line of Rick Shane from J.P. Morgan. Please proceed with your question.

Wow, I didn't expect to get in that quickly, but thank you. So if we look at the gain on sale of 347, can you just for us disaggregate how much is cash gain on sale versus how much is capitalization of the MSR so we can understand that trend as well?

Yes. So for our total gain on sale, it's about 70% that we're getting in cash. The rest is gain on sale. So we're coming in, our cap rates are coming in around still around 100 basis points. And then the rest would be cash.

Got it. And were there any, you had disclosed that about 80% of the volume was sold servicing retained. Were there any portfolio sales during the quarter as well?

No, we didn't have our overall portfolio that we show on the roll forward not include. We did get rid of our subservicing portfolios, but that's immaterial and only a footnote. So, We're not in the business of selling our MSRs, and we want to support our client for life strategy, so we'll hang on to those. Overall, from a retained perspective, we also are still slightly impacted by RMS selling 100% service released as part of fourth quarter, so if we exclude that, we were still around the 89% service retained.

Very helpful. Thank you, guys.

Go ahead. I'm sorry.

Just to clarify that question, Rick, is when we were onboarding RMS, we were service releasing the majority of their product, but now that they are fully boarded onto Guild's platform, we're retaining more of the servicing. So the goal was still to retain. Yes.

That is all the questions that are in queue. I'd like to hand the call back to management for closing remarks.

Well, thank you for joining us today, and have a great evening, and we look forward to updating you on our next call.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.