Guild Holdings Company

Good afternoon, ladies and gentlemen, and welcome to the Guild Holdings Company second quarter 2022 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 is being recorded, and I would now like to turn the conference over to Michael Kim of 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 and industry trends. 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 GILDS 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. Despite higher interest rates, excess capacity, and limited inventories, I am pleased we were once again able to deliver solid financial results for the second quarter of 2022. Adjusted net income and adjusted earnings per share came in at 14 million and 23 cents per share, respectively, for the second quarter of this year, compared to 32 million and 53 cents per share for the prior quarter. Much of the sequential declines in revenue and income can be tied to lower origination volumes and margins consistent with broader industry trends. From our perspective, as cycles turn, near-term challenges present longer-term opportunities, and our tenured management team maintains a proven track record of generating consistent financial performance over market cycles. We believe our differentiated, purchase-focused business model positions us well going forward, as refinancing volumes continued to fade. In the second quarter, purchase loans accounted for 84% of our total origination volumes, compared to 66% in the prior quarter and an estimated 70% for the mortgage industry, according to the Mortgage Bankers Association. We remain focused on product development to stay in front of shifting market trends. Last quarter, we discussed our new Green Smart Advantage product in partnership with the Home Depot. The program is designed to help homebuyers save on utility costs and manage multiple payments by bundling the costs of new energy-efficient appliances into mortgage loans. This quarter, we introduced Cash Pass, a new program to help homebuyers compete with all cash offers in today's competitive housing market. GILD's Cash Pass program allows homebuyers to write a cash offer and be more competitive against other all-cash bids or multiple offers. In July, we introduced Complete Rate, a new program that provides a more inclusive path to homeownership based on residual income analysis and rent payment history, an alternative to the traditional FICO credit score. As indicated by our operating history during many market cycles, we right-sized the business to align costs with volume trends while capitalizing on market dislocations. Through the first half of this year, we realized approximately $40 million of cost savings primarily through headcount reductions on an annualized basis, and we will continue to manage the business as market dynamics evolve. our strong and liquid balance sheet remains a key differentiating factor. We maintain favorable leverage ratios and healthy liquidity levels to fund growth despite market conditions. Pursuant to our share repurchase program, we recently returned excess capital to shareholders by repurchasing approximately 142,000 shares in May and June at an average stock price of $10.18 per share. We believe we remain well positioned to capitalize on M&A opportunities. The mortgage industry remains highly fragmented, and we believe smaller firms are finding it increasingly difficult to maintain profitability in the face of lower revenue, shifting competitive dynamics, and overcapacity. Broader market disruptions are driving a flight to quality with individual salespeople and teams, as well as companies increasingly attracted to Guild's differentiated, purchase-focused business model, along with our successful acquisition track record. In addition to our ongoing organic recruiting efforts, which are tracking ahead of expectations, we are increasingly benefiting from a flight to stability. The number of inbound calls we are receiving from individual loan officers and teams continues to trend higher, especially as competitors exit the business. While it will take time for incoming loan officers to build volume, we see the current market as presenting opportunities to add talent as we continue to generate profitable growth across market cycles. I am confident in our growth prospects as we increasingly leverage our existing capabilities and balance sheet as well as broaden the platform. So with that, I'd like to turn it over to our president, Terry Schmidt. Terry?

Thanks, Mary Ann. As I've discussed on prior calls, our scale-enabled servicing business acts as a natural hedge to our origination segment during periods of rising interest rates. and is an increasingly important growth driver for revenue and cash flow. Focusing on the second quarter, we booked $47 million of favorable valuation adjustments of MSRs compared to $209 million in the prior quarter. It's important to understand these adjustments are non-cash in nature, though higher rates typically drive slower prepayments and longer holding periods, thereby extending recurring cash flows over time. The unpaid principal balance of our servicing portfolio, consisting primarily of MSRs sourced through our retail channel, was up 4% quarter over quarter to $75.9 billion, driving growth in related servicing fees. The strength of our scale-driven servicing platform, along with our focus on customer service and relationships, not only supports our client retention rates, but also supports growth in the servicing channels contribution to net operating income and positive cash flow. We retained servicing rights for 89% of total loans sold in the second quarter of 2022 with strong retention driving ongoing growth in UPB levels and related fees. In addition, our servicing platform, along with our focus on customer service, supports strong recapture rates. For the second quarter of 2022, our purchase recapture rate was 28.7%. Turning to gain on sale margins, I wanted to touch on some of the moving parts in the second quarter. As Amber will discuss in greater detail next, our gain on sale margins on pull-through adjusted lock volume was 357 basis points for the second quarter compared to 334 basis points in the first quarter. Looking ahead, we expect gain-on-sale margins to stabilize in the second half of this year, assuming excess capacity continues to contract, thereby driving more favorable pricing dynamics over time. Having said that, a sustainable step up in gain-on-sale margins will be dependent upon market rate and spread trends, as well as broader inventory levels. 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. As is our standard practice, my comments will focus on sequential quarter comparisons. For the second quarter of 2022, we generated $5.7 billion of total in-house loan originations compared to $6.1 billion in the first quarter. Net revenue totaled $288 million, compared to $482 million in the prior quarter, while net income totaled $58 million, or 95 cents per diluted share. Adjusted net income totaled $14 million, or 23 cents per share, while adjusted EBITDA totaled $22 million for the second quarter. Turning to non-GAAP results, adjusted figures for the second quarter excluded a $46.9 million favorable change in fair value of MSRs compared to a $209.5 million markup in the prior quarter, with the differential largely attributable to an evolving rate backdrop. In addition, we booked a $16.5 million change in fair value of contingent liabilities due to acquisitions, which was reflected as a benefit to G&A expense, compared to $28.9 million in the first quarter of 2022. Focusing on our origination segment, our gain on sale margin came in at 363 basis points on $5.7 billion of total funded originations for the second quarter, down from 400 basis points on $6.1 billion of funded originations in the first quarter. Our gain on sale margin on pull-through adjusted lock volume was 357 basis points compared to 334 basis points in the prior quarter. Pull-through adjusted locked volume totaled $5.8 billion in the second quarter compared to $7.3 billion in the prior quarter, primarily reflecting a more challenging macro backdrop. For our servicing segment, we generated $64 million of net income in the second quarter versus $227 million in the prior quarter, with the quarter-over-quarter decline mostly a function of less favorable MSR valuation adjustments. That was partially offset by higher servicing fees on continued growth and unpaid principal balances. At a high level, we maintain a variable cost base, which we believe we can optimize as market conditions dictate. As Marianne mentioned, we have realized approximately $40 million of annualized expense savings through the first half of the year, which is primarily a result of staff reductions and their associated total compensation. Importantly, we maintain the flexibility to continue to invest for growth and implement further cost savings as needed. Looking ahead, expense levels in the second half of the year will be partially dependent on volume trends, and we will provide updates on our progress, if appropriate, as we move forward. Our balance sheet remains strong and our assets consist primarily of high-quality loans and MSRs. Turning to liquidity, as of June 30th, cash and cash equivalents excluding funds to pay down our warehouse lines totaled $249 million, while warehouse lines of credit totaled $2.7 billion with unused capacity of $1.6 billion. Our leverage ratio, which we define as total debt including funding divided by tangible stockholders' equity, was 1.3 times as of June 30th, 2022, compared to 1.4 times at March 31st, 2022, and 3.1 times as of December 31st, 2021. We continue to focus on the best way to deploy capital while managing through uncertain times with financial prudency. Our strong balance sheet and liquidity enables us to invest in the business and strategically deploy capital in a disciplined manner to drive growth and shareholder value over time. As Marianne mentioned earlier, From early May to the end of June, we repurchased approximately 142,000 shares at an average stock price of $10.18 per share. Book value per share was $19.49 as of the end of the second quarter, while we grew tangible book value per share by 7% on a sequential basis to $16.04. In addition, our capital position and differentiated business model facilitates capitalizing on strategic M&A opportunities that complement our organic growth should they arise, as we have done successfully throughout our firm's history. We generated $1.5 billion of loan originations and $1.5 billion of pull-through adjusted lock volume in July. Given the month just ended, we are still in the process of finalizing our gain-on-sale margin calculation for July at the moment. As Terry mentioned, we forecast margins to stabilize in the second half of the year, assuming supply and demand and balances normalize, though it will take time for more favorable market dynamics to flow through gain-on-sale revenue. And with that, we'll open the call up for questions. Operator?

Thank you. At this time, we'll 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 queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing any star keys. One moment while we poll for questions. Our first question comes from the line of Don Fandetti with Wells Fargo. Please proceed with your question.

Yes, can you talk a little bit about your gain on sale expectations over the next several quarters? Are you sort of implying that under certain scenarios, maybe that could increase from the Q2 357?

Thanks, Don, for your question. Obviously, we don't provide guidance on gain on sale going forward. What we're referring to is seeing that there's a possibility with the changes that are happening with excess capacity being reduced that they would stabilize. But definitely not saying at this point anything about gain on sale increasing from where it is. But with the changes that are happening in the market right now, that will take a few quarters still to pass through gain on sale. We do think that there's stabilization, as we said, is supply and demand. start to align going forward.

Got it. And then on capital management, do you think it makes more sense to buy back stock versus making an acquisition? How do you balance that?

We look at all of our options. We definitely want to invest back in the business and increase shareholder value, so we're constantly looking at what our options are to invest back in the business, from recruiting, M&A, and while doing so, because we're in a strong capital position, we have the ability to increase shareholder value by repurchasing shares as well.

Thank you.

And our next question comes from the line of Rick Shane with JP Morgan. Please proceed with your question.

Thanks, everyone, for taking my questions this afternoon. Amber, and I'm going to follow up on Don's question about gain on sale. When you say stabilize, that just suggests that it's going to be at some level for a period of time. Can you at least put that in context? Is it stable in the context of Second quarter gain on sale, is that where you see it stabilizing? Stabilizing without any context kind of confuses us.

Sure. There was significant market volatility in Q1, as we know, and in prior years. And in Q2, we saw the drop quarter over quarter. And so from where we are now, that would be stabilization going forward is what I would say. And again, that's dependent on you know, market dynamics, how fast excess capacity is shedding. But we believe from, you know, what we're seeing that from where we are now, that that could, you know, stabilize in the coming quarters.

Okay. That's helpful context just to sort of set a level. And it actually dovetails into my next question, which is that if we think back historically in periods where capacity came out of the industry. And we think about 2006 to 2008. And then we think about 2008 to 2010. It feels, it seems like in hindsight, 2006 to 2008 capacity reduction was somewhat gradual and delayed because rates were moving slowly higher. And then obviously there was a huge dislocation with the GFC. Are you seeing that capacity is coming out faster this time because of the severity of the movement in rates, which really doesn't have any recent sort of analog?

I can speak to what we're seeing now, and then Marianne or Terry, if you want to talk about 2006, 2008. I think with everything... The rates dropping so quickly in the beginning of the year, there was some reaction to the market. Everybody's playing catch up in the industry as a whole. In that sense, it would be slower. I think because of the excess capital from the two years prior that people have, they can hold on. and possibly keep additional staff while getting additional volume because they have the excess capital to spend. And that's elongating the process of the excess capacity coming out of the market.

Yeah, this is Terry. I mean, in 2008 and 2009, the shift of just the product and volume the type of business that mortgage companies were doing. There was so much Alt-A that had so quickly dried up. But at the same time, if you were already securitizing with the GSEs and with Jenny Mae, the margins were going up quite rapidly. So we're in such a different marketplace where most of the products are the GSEs and the Jenny Mae product. And and just the rate movement going up so fast, I think everybody, if you compare it to what was happening in 2018 and 19, I think companies are actually moving faster to make change than they were then.

This is Mary Ann, and I would just add that back in 2008, time period, there was a lot more companies that were very levered. They didn't have a lot of cash to help them sustain through the volatility, where I think in 2020 and 2021, there was a lot of equity built up throughout the industry. And so I think they have a lot more in for patients through the volatility this time around.

Okay. That's helpful context, and I appreciate it. Thank you.

Thank you. And as a reminder, if you'd like to ask a question, please press star 1. A confirmation tone will indicate that your line is in the queue. Our next question comes from the line of Trevor Cranston with JMP Securities. Please proceed with your questions.

Hi, thanks. I missed the details you provided on the new loan product that you'd rolled out in July. So I was wondering if you could just briefly summarize that again and say if that's a GSE eligible product or if it's something that would have a different outlet. And then the second part of that question, if you could maybe talk about kind of other product areas you might be evaluating going forward if you guys are looking at anything like Secondly, in products or just any color there would be helpful.

Thanks. Sure. I think you're referring to the Complete Rate Program, and that we recently rolled out, and it's kind of an alternative to the traditional FICO score and creates a path for homeownership for predominantly, I mean, for first-time homebuyers and the underserved, and yes, it's GSE eligible. And we are also constantly looking at new programs and talking to investors and being creative to bring to the market something that will help homeownership throughout and for all types of homebuyers, whether it's first-time homebuyers or jumbo homebuyers. homebuyers so the other thing is that to answer your question about HELOCs yes we're looking at HELOCs and seconds and outlets for that just another note on complete rate it is eligible for FHA VA and rural housing it's not eligible for Fannie and Freddie

And it's just a different review, not using FICO to qualify the borrower, but using a residual income analysis and reviewing their payment history, their rent payment history. And I would say we're probably more focused outside of the HELOCs and the SECs, we're more focused on trying to figure out programs that help the underserved and the first-time homebuyer. And we've got a lot of thoughts about that, and we're working hard to bring out some additional products there.

Okay, got it. That's helpful.

And then on the expense side of things, you know, you guys mentioned that you're trying to use your relative position of strength and remaining profitable as an opportunity to, you know, gain market share and hire some talented people. But as you look at the overall company, you know, are there any areas where you guys have identified that, you know, could be potential for kind of saving costs as volumes come down and margins remain tight in the near term?

Yes, so what we had referred to on the call in our prepared remarks was we've, in the first half of the year, we have annualized savings of about $40 million, primarily from staff reduction. So we look at internal metrics and measure to that, and that would be aligned with where volume is, the volume that we're originating and what we're seeing coming down the pipe. And that's with, because of our cost structure, It's primarily from a, on the staffing side, because we don't have large fixed costs other than staffing, and so we're always monitoring our internal metrics and looking at that and aligning that with volume, and that's where that cost savings is coming from.

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

Thank you. At this time, we have reached the end of the question and answer session. And I would now like to turn the call back over to Mary Ann McGarry for any closing remarks.

Well, thank you, everyone, for joining us today. Have a great evening, and we look forward to updating you on the next call. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.