Guild Holdings Company

Good morning, ladies and gentlemen, and welcome to the Guild Holdings Company first quarter 2022 earnings conference call. At this time, all participants are on 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 will now like to turn the conference over to Michael Kemp, Investor Relations. Please go ahead, sir.

Thank you, and good morning, 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 the section titled Risk Factors in Guilds 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 Guild'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 morning, 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. For the first quarter of 2022, our financial results reinforced the benefits of our differentiated and balanced business model. Origination volumes and gain-on-sale margins compressed compared to prior quarters, consistent with broader industry trends. Adjusted net income and earnings per share came in at 32 million and 53 cents, respectively, for the first quarter of this year. Our servicing platform, which Terry will discuss in further detail, acted as a hedge with strong growth in servicing fees as well as sizable gains in the underlying value of the MSR asset on the balance sheet. Focusing on our originations business, we believe that we remain well positioned to gain market share over time given our unique purchase-focused model and retail infrastructure with loan officers in communities throughout the United States. However, Near-term purchase market share trends have been impacted by limited inventories, rising interest rates, and increased competition. We have been through many economic cycles over decades and believe we have demonstrated our ability to sustain profitability during challenging market conditions. Despite near-term pressures, we are confident that our purchase model will enable us to effectively navigate the current cycle. We have remained fiscally responsible and believe our platform, infrastructure, product breadth, and compensation structures will drive sustainable purchase market share gains over time, particularly as industry volumes continue to shift in favor of purchase activity. Purchase loans accounted for 66% of our mortgage volumes in the first quarter of 2022, up from 62% for the fourth quarter of 2021. Industry-wide, purchase loans accounted for an estimated 55% of overall mortgage volumes in the first quarter of 2022, according to the Mortgage Bankers Association. Beyond our attractive value proposition with loan officers, we are focused on continuing to leverage Guild's scale, brand, team, and platform to proactively capitalize on opportunities to gain share during the current cycle. The mortgage industry remains highly fragmented, with some smaller players lacking the scale and resources to adapt to shifting competitive dynamics. In contrast, we have built a leading retail distribution platform with a strong management team that has a proven track record of successfully navigating through changing mortgage cycles. Innovation is part of our identity, with continued product development a key differentiating factor during mortgage market downturns. As an example, we worked with investors and the Home Depot to introduce Green Smart Advantage, a new program designed to help homebuyers save on utility costs and manage multiple payments by bundling the cost new energy efficient appliances into mortgage loans. Green Smart Advantage reduces upfront costs and ongoing utility expenses for homebuyers and consolidates related payments. while promoting the purchase of more sustainable appliances. As mentioned, we believe our value proposition shines through particularly during down cycles, with our focus on customer service, relationship building, and product development increasingly resonating with prospective loan officers. As a result, we have shown that we are adept to adding to our team in an accretive way during market dislocations, and our ongoing recruiting efforts are off to a strong start this year. While it takes time for incoming loan officers to build volume, we expect that our expanding retail footprint will drive incremental growth over time. Additionally, our longer-term retention rates remain strong. As of the end of 2021, 79% of origination volume over the trailing five-year period was sourced from loan officers that are still with Guild today. Finally, we maintain ample capacity to fund strategic acquisitions should they arise. We have a strong track record of successfully sourcing, acquiring, and integrating complementary businesses. with persistent macro headwinds likely resulting in increased opportunities as seller expectations normalize. In summary, we remain focused on delivering consistent and profitable growth across interest rate cycles. We have generated a 40.4% adjusted return on equity over the last five years, including a 12.5% adjusted return on equity, and a 81.2% return on equity for the first quarter of 2022, even as origination volumes and gain-on-sale margins softened. All of our accomplishments can be directly tied to the hard work and dedication of our more than 5,000 employees, so I want to thank each of them for their continued service every day. So with that, I'd like to turn it over to our president, Terri Schmidt. Terri?

Thank you, Mary Ann. I wanted to spend a few minutes going through a bit of a deeper dive on our servicing segment, which enhances our diversification and growth across cycles while mitigating the volatility of our financials. First quarter results really reinforced the efficacy of our balanced business model. While origination volumes and related revenue were down quarter over quarter, gap income, net income, was up 393%, largely a function of strong gains related to the MSR fair value adjustments and high unpaid principal balance and related servicing fees. Despite declining origination volumes, the UPB of our servicing portfolio, consisting primarily of MSRs sourced through our retail channel, was up 3% quarter over quarter to $73.3 billion, driving strong growth in servicing fees and related earnings contribution. We also retained servicing rights for 89% of total loans sold in the first quarter of 2022, up from 80% in the fourth quarter of 2021. with higher retention rates supporting ongoing growth in UPB levels and related fees. In addition, the strength of our servicing platform, along with our unwavering focus on customer service and relationships, supports higher client retention and recapture rates. For the first quarter of 2022, our purchase recapture rate was 29.2%, while our refinance recapture rate came in at 55%. Going forward, assuming interest rates continue to trend higher, slower prepayment speeds will likely persist, thereby driving further measured markups in the underlying value of our MSR assets on our balance sheet. Stepping back, we remain to focus on maintaining clients for life by delivering a best-in-class customer experience. In turn, we believe our differentiated client-first strategy optimizes lifetime value and and drives sustainable financial performance across all market conditions. Just yesterday, our board approved a share repurchase program that allows the company to purchase up to $20 million of Guild's Class A common stock. This share repurchase program reflects our strong balance sheet and our commitment to return value to our shareholders. 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. Before I get into our results, a note on our financial reporting. Starting this quarter, we will be discussing quarterly comparisons on a sequential basis. For the first quarter of 2022, we generated $6.1 billion of total in-house loan originations compared to $8.8 billion in the fourth quarter of 2021. Net revenue totaled $482 million compared to $343 million in the prior quarter, while net income totaled $208 million or $3.38 per diluted share. Adjusted net income totaled $32 million or $0.53 per share, while adjusted EBITDA totaled $47 million for the first quarter. Focusing on our expenses, we maintain a variable cost base which flexes with cyclical trends in origination volumes, gain-on-sale margins, and revenue. Furthermore, we remain focused on maintaining optimal staffing levels. As is typical for the mortgage industry during declining volume cycles, we are in the process of curtailing excess capacity in our retail workforce with an ongoing focus on maintaining strong profitability across cycles. Turning to non-GAAP results, adjusted figures for the first quarter excluded a $209.5 million favorable change in fair value of MSRs due to higher interest rates, as well as a $28.9 million change in fair value of contingent liabilities due to acquisitions, which was again reflected as a benefit to G&A expense. As you may recall, we recorded a similar contingent liability markdown in the fourth quarter, primarily related to the earn out component of our acquisition of RMS, reflecting softer volume and gain on sale margin trends, which continued in the first quarter. Focusing on our origination segment, our gain on sale margin came in at 400 basis points on 6.1 billion of total funded originations for the first quarter, up from 347 basis points on 8.8 billion of funded originations in the fourth quarter of 2021. was an increase primarily due to timing of loan sales versus originations. Our gain on sale margin on pull-through adjusted locked volume was 334 basis points compared to 394 basis points in the prior quarter. The sequential decline was due to softer locked volumes at lower margins, reflective of continued margin pressure. Pull-through adjusted locked volume totaled $7.3 billion in the first quarter, down 7% quarter-over-quarter due to rising rates through the quarter and unfavorable seasonality. Turning to our servicing segment, we generated $227 million of net income in the first quarter, up from $27 million in the prior quarter. Much of the quarter-over-quarter growth was driven by rising MSR valuations, with overall servicing valuation increasing to 128 basis points at a 4.4 multiple as interest rates increase and CPRs decline. For the first quarter of 2022, we recorded a $209.5 million gain related to MSR fair value adjustments compared to $16.8 million for the prior quarter. This is in addition to higher servicing fees on strong growth and unprincipled balances, which contributes to additional cash flow. Next, our balance sheet remains strong and liquid. As of March 31st, cash and cash equivalents excluding funds used to pay down our warehouse lines totaled $244 million, while warehouse lines of credit totaled $3.1 billion, with unused capacity of $1.9 billion. From a valuation perspective, book value per share was $18.50 as of the end of the first quarter, up 23% quarter-over-quarter, while we grew tangible book value per share by 30% on a sequential basis to $15.02. Turning to capital management, our balanced business model that is capital light and creates stronger cash flow generation compared to loan origination channels outside of retail puts us in a strong position to continue to fund in originations and reinvest in the business. Moreover, we maintain excess liquidity to capitalize on strategic M&A opportunities that complement our organic growth should they arise. Finally, we generated $2 billion of loan originations and $2.1 billion of pull-through adjusted locked volume in April. Given the month just ended, we are still in the process of finalizing our gain-on-sale margin calculation for April at the moment. At a high level, near-term margin trends likely remain challenging, with the margin on locked volume in the first quarter more indicative of the trajectory in the short term. Having said that, we believe we remain well-positioned to continue to outperform the industry from a gain-on-sale margin perspective, given our unique retail and purchase-focused originations model and disciplined pricing strategies. 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 Rick Shane with J.P. Morgan. Please proceed with your question.

Hey, guys. Thanks for taking my questions this morning. Just to... When you look at your purchase volume, do you have any sense of what is the mix between first-time homebuyers and, you know, seasoned homebuyers?

It's lower than it is. This is Marianne. Hi. Historically, we've had more first-time homebuyers in this period, but You know, the cash buyers are so prevalent, it's driving first-time home buyers down a little. But I believe that, you know, people are working or investors are working on more affordable products to deliver to the market. So there is some focus on trying to get that back to where it was.

Got it. So what we're basically seeing right now is some of the excess liquidity in the overall market driving a mixed shift in terms of how people are purchasing homes.

Yes. And I want to clarify that the cash buyers today are up, but it's still overall a very low number. It's more that the price of homes have just risen significantly. to a higher sales price.

Got it. Okay. And second, when you think about the MSR evaluation for the first quarter, and I apologize if you mentioned this specifically, but what is the CPR assumption and what is your view on where prepayment speeds can go longer term? Because we've heard As recently as yesterday, some MBS investors talking about speeds in the single digits.

The CPR that's modeled is 9.2. So it's very low, lower than we talked about in the last earnings call. And we don't think it can go much lower just because of, you know, natural paying off and that would happen with the cycle. So we are in the single digits now, but think that this is the, you know, about the lowest that it could go from what we've seen historically. I know we're in some unprecedented times, but compared to our experience.

A lot depends. I would say, you know, a lot depends on and inflation and where rates go as well, as you know.

I think we're all probably tired of unprecedented times at this point. It seems like it's all we live in. Yes. That's it for me. Thank you, guys.

Our next question comes from the line of Paul Fandetti with Wells Fargo. Please proceed with your question.

Hi, Amber, I was wondering if you could talk a little bit more about the gain on sale trends in April. Just to clarify, do you think that, is your sense that they'll be lower than what you saw in Q1?

We're not providing guidance overall in Q2, but based on Q1 and what we saw of the trend in Q1, it did go down within the quarter. So I think if you look at the the margin on pull-through lock adjusted volume, that's the best indicator of the continued margin pressure. And we're just not seeing from a competitive pricing standpoint that we're necessarily near the bottom.

Okay. So you think, obviously, you know, it's hard to tell, but you think that the gain on sale margin could continue to trend lower in the near term over the next several months or so?

Yes, I think that that's possible. The key is that the companies are all, you know, across the industry are shedding the excess capacity. So that, you know, started in Q1, it's continuing in Q2. And until we right size and the market stabilize, that continued pressure is going to continue.

Got it. And then how do you balance, I mean, you know, your history, you've had a great track record of opportunistic acquisitions. How do you balance that with just buying back stock just given, you know, where the share price is today versus tangible bond?

This is Terry. I'll answer that. We're still, you know, our capital allocation plan is, you know, still in line with the past with the exception of this stock repurchase announcement. Obviously, with the way the stock is stressed right now as far as pricing, it just makes a lot of sense for shareholders And so we thought it was a smart thing to do and the right thing to do. But on the M&A side, we still are actively, you know, looking at M&A. And we think that, you know, there's going to continue to be a lot more opportunity with the stresses in the industry right now. And so we're still out there and we still intend to, you know, allocate capital there.

Great. Thank you.

Our next question comes from the line of Trevor Cranston with JMP Securities. Please proceed with your question.

Thanks. Good morning. In terms of the first quarter origination numbers and maybe the April numbers also, can you say how much of the mix was specifically cash out refis and You know, looking forward from here, given how much of the outstanding mortgage market is below current market rates, can you maybe give us some context historically, you know, what the highest the purchase mix has ever been in Guild's experience and kind of how high you think the purchase mix could get over the next couple of quarters? Thanks.

This is Amber. I'll start and anyone can jump in. What we're seeing in rate term versus cash out is that that rate term is less than 10%, running 8%, 9% right now. And so it's definitely shifted toward the cash out refi of the 25% or so of refis with the rates increasing so much. We've been in the 80% to 85% purchase overall. The MBA is forecasting about a 72% purchase for the year, and we typically do, you know, run higher than the MBA by a few percentage points, at least up to 10% overall.

Gotcha. Okay, that's helpful. And then follow up on the question on gain on sale margins. You mentioned that it sort of trended downward throughout the first quarter. Are you able to say what the pull-through adjusted margin was, say, in March relative to January, just to kind of get a sense of what the trend was like?

We don't provide the information within the quarter, but it did drop dramatically because the rate changes really happened in mid-January, early February. So as locks were coming in the second half of the quarter, it was significantly down. which you can see if you look at our pull-through adjusted lock volume gain on sale margin in Q4 versus Q1 shows a 60 basis point drop. So we saw that throughout the first quarter overall.

Okay, got it. I appreciate the comments. Thank you.

As a reminder, it is star one to ask your questions. There are no further questions in the queue. I'd like to hand the call back to Ms. McGarry for closing remarks.

Thank you for joining us today and have a great day 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.