Guild Holdings Company

Good afternoon, ladies and gentlemen, and welcome to the Guild Holdings Company third 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 will be recorded today. 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 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 and 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 and President Terry Schmidt. 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. Today, I'm joined by our President, Terry Schmidt, and our Chief Operating Officer, David Nalin. Our Chief Financial Officer, Amber Kramer, is out on maternity leave, and I'm excited to announce she recently welcomed twins to her growing family. Market dynamics across the industry remained challenging during the third quarter. Mortgage rates continued to trend higher, and inventories remained limited. As a result, industry-wide origination volumes remained under pressure, with ongoing overcapacity issues and shifting competitive dynamics weighing on profitability trends across the industry. However, Guild delivered strong financial performance for the quarter, which we believe reinforces the benefits of our differentiated and decentralized business model across cycles and shifting competitive backdrops. we generated compelling sequential quarter growth in gap net income, adjusted net income, and earnings per share for the third quarter, while maintaining strong profitability despite quarter-over-quarter declines in originations and gain-on-sale margins reflecting ongoing macro headwinds. On a gap basis, we grew both net income and earnings per share by 33% on a sequential quarter basis, while posting a return on equity north of 25% for the third quarter. Even after excluding fair value changes related to MSRs and contingent liabilities, adjusted net income and adjusted earnings per share came in at $24 million and 40 cents per share, respectively, for the third quarter of this year. both 74% higher compared to second quarter results. We believe our tenured management team, strong culture, retail infrastructure in local markets across the country, long-term strategic focus, and consistent execution enable us to drive sustainable profits through market downturns. Because of our long-term expertise and experience across cycles, We've been able to manage successfully through recent market shifts and delivered adjusted return on equity of nearly 8% for the third quarter of this year and during the trailing 12 months ended September 30th, 2022. Guild's business model is different. From a distribution perspective, our scale-enabled and nationwide retail platform leverages in-house loan officers who build and maintain strong relationships with customers and referral partners in local markets. Focusing on talent, our product mix, technology, and servicing capability resonate with recruits. To that point, we remain well ahead of our goals as it relates to net new hirings of loan officers thus far this year. Furthermore, GILDA is a leader in the purchase market. In the third quarter, 91% of our originated loans were purchase mortgages, up from 84% in the prior quarter, and meaningfully above 81% for the industry according to estimates from the Mortgage Bankers Association. We believe buyers are waiting on the sidelines because of current volatility and affordability challenges and are looking for a return to stable markets. As we manage through this dislocation in the market, we see opportunity and remain focused on serving first-time homebuyers and underserved markets. Turning to our balance sheet, we maintain healthy leverage ratios and ample liquidity to continue to fund our business and invest for growth, either organically or by capitalizing on accretive M&A opportunities. We believe our long and successful acquisition track record is attractive to smaller firms dealing with ongoing revenue pressures, shifting competitive dynamics, and diminishing profitability. Our differentiated business model and consistent profitability across cycles position us to be selective and financially disciplined when evaluating potential acquisition opportunities. In the meantime, we remain focused on returning excess capital to shareholders through ongoing share repurchases. In summary, I am very proud of the results we delivered in the third quarter in what has been a challenging environment for the industry. Looking ahead, I'm excited about our growth opportunity as we capitalize on the dislocation in the market given our balanced business model and strong and liquid balance sheet. So with that, I'd like to turn it over to our president, Terri Schmidt. Terri?

Thanks, Mary Ann. As is our standard practice, my comments on our financial results will focus on sequential quarter comparisons. For the third quarter of 2022, we generated $4.4 billion of total in-house loan originations, representing a 24% sequential decline from $5.7 billion in the second quarter. While disappointed with the quarterly dip in volumes on an absolute basis, our sequential drop was more constructive when viewed on a relative basis as industry volumes were down 29%, quarter over quarter, according to the latest estimates from the Mortgage Bankers Association. Net revenue totaled $261 million compared to $288 million in the prior quarter. while net income totaled $77 million, or $1.26 per diluted share. Despite the sequential decline in originations and revenue, adjusted earnings and profitability meaningfully improved in the third quarter relative to the prior quarter. Adjusted net income and adjusted earnings per share totaled $24 million and $0.40 per share respectively, while adjusted EBITDA totaled 33 million. In comparison, second quarter adjusted net income, adjusted earnings per share, and adjusted EBITDA were 14 million, 23 cents per share, and 22 million respectively. Our estimated effective tax rate was 6.8% for the third quarter compared to 25.3% in the prior quarter. The decrease in our tax rate for the most recent quarter was primarily due to the effect of a permanent tax benefits related to a previous acquisition. We expect our tax rate to remain close to the 22% year-to-date in the near term. Adjusted figures for the third quarter excluded a $61.4 million favorable change in fair value of MSRs compared to a $46.9 million markup in the prior quarter, with the variance largely a function of the interest rate backdrop. While these point-to-point adjustments in isolation are non-cash in nature, higher rates typically result in slower prepayments and longer holding periods, which prolong related cash flows over time. Focusing on our origination segment, our gain-on-sale margin came in at 354 basis points on $4.4 billion of total funded originations for the third quarter compared to 363 basis points on 5.7 billion of funded originations in the second quarter. Our gain on sale margin on pull-through adjusted locked volume was 349 basis points versus 357 basis points in the prior quarter. Pull-through adjusted locked volume totaled 4.4 billion in the third quarter compared to 5.8 billion in the prior quarter consistent with declining origination volumes across the industry. For our servicing segment, we generated $97 million of net income in the third quarter, up from $64 million in the prior quarter, with the increase primarily reflecting more favorable MSR valuation adjustments, higher servicing fees on continued growth in unpaid principal balances, and lower operating expenses. In addition, we booked a $3.4 million reversal of the provision for foreclosure losses in the third quarter, compared to a $1.8 million provision in the prior quarter. The reversal reflected our expectations for fewer loans moving from forbearance to foreclosure and lower than anticipated average losses. The unpaid principal balance of our servicing portfolio, consisting primarily of MSRs sourced through our retail channel, was up 2.5% quarter over quarter to $77.7 billion. and we retain servicing rights for nearly 89% of total loans sold in the most recent quarter, voting well for ongoing growth in servicing fees while reinforcing the synergies with our Originations business. Furthermore, we believe our focus on customer service and client engagement enhances client retention with our purchase recapture rate holding steady at 28% for the third quarter. I want to spend a moment here discussing our differentiated servicing business. Our servicing model creates economies of scale which have driven our cost to service lower. Our servicing portfolio growth supports loan originations, increases our ongoing cash flow, and allows for MSR borrowing flexibility as origination growth opportunities arise. Due to our balanced business model and financial discipline, we remain in a strong cash position with low leverage, as I will discuss further. A key driver of our sequential quarter step-up in adjusted net income and adjusted EBITDA was our ongoing efforts to flex our expense base as market conditions dictate. Through the third quarter, we have realized approximately $75 million of annualized expense savings primarily linked to staff reductions and related compensation. We continue to focus on optimizing profitability as macro headwinds persist with near-term expense levels somewhat dependent on volume trends. Importantly, our boots-on-the-ground infrastructure provides insights into local market dynamics which we factor in when right-sizing expense levels by region. That said, we remain cognizant of the need to further balance reductions with the risk of loan officer attrition should branch and sales support functions fall below key thresholds. We also continue to invest in the business, even during down cycles, to position ourselves for accelerating and sustainable growth over the long term. Next, our strong and liquid balance sheet remains a key differentiating factor, particularly during periods of market dislocation. As of September 30th, cash and cash equivalents excluding funds to pay down our warehouse lines totaled $162.2 million, while warehouse lines of credit totaled $2.6 billion with unused capacity of $1.8 billion. Our leverage ratio, which we define as total debt, including funding divided by tangible stockholders' equity, declined 2.9 times as of September 30, 2022, compared to 1.3 times at June 30, 2022, and 2.9 times as of September 30, 2021. Stepping back, ongoing macro headwinds continued to drive a flight to quality. with Guild well-positioned to capitalize on an upturn in consolidation across the industry, giving the strength of our balance sheet. Moreover, we maintain a strong long-term track record of enhancing growth and shareholder value via accretive M&A transactions. Beyond an expanding M&A opportunity set, we remain focused on creating shareholder value. We repurchased approximately 139,000 shares at an average stock price of $11.13 per share during the third quarter. We continue to believe buying back stock at levels meaningful below book value is an attractive use of capital. Book value per share ended the quarter at $20.81, while we grew tangible book value per share by 8% on a sequential basis to $17.38. Turning to our quarter-to-date update, we generated $1.1 billion of loan originations and $1.1 billion of pull-through adjusted locked volume in October. From a gain-on-sale margin perspective, we anticipate further softness in the fourth quarter reflecting excess capacity, heightened competition, and limited inventories. We continue to experience intense competition in the mortgage market, and we expect this competition will continue to put pressure on gain-on-sale margins and profitability. And with that, we'll open up the call for questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. And our first question will come from Don Fandetti with Wells Fargo. Please go ahead.

Marianne, certainly good to see the profitability of this quarter relative to what we're seeing around the sector. Can you talk a little bit about your sort of thoughts on the timing of acquisitions Is that kind of a near term or more of an intermediate term? And then also, how are you thinking about gain on sale margins as you look a little further out past Q4? I mean, do you think there's a – do you see a path towards higher margins as you get into next year?

Hi, Don. For acquisitions, yes, we think it's a great opportunity. right now and think that it'll even get stronger in the fourth quarter of 2024, 2023. And so we're very excited about our opportunity. And as far as gain on sale, you know, we can't give forward-looking projections, but I feel the market continues to be very volatile. And You know, we're just going to manage accordingly. And as the market stabilizes and the NBA is predicting that that will happen in the second half of next year, you might see a little bit more consistency. Then, you know, we can all, you know, it'll be a lot better for borrowers sitting on the sideline waiting to see what's happening.

Thank you.

Yeah, this is Terry. I think on the gain on sale question, you know, we track to the NBA, and every quarter the volume has gone down as far as their projections. And so if the volume goes down, we likely would see some type of compression is historically what we've seen. But to Mary Ann's point, at some point things should start normalizing.

Again.

If you have a question, please press star then one to join the queue. Our next question here will come from Rick Shane with JP Morgan. Please go ahead.

Thanks for taking my question and I hope Amber's listening and congratulations. You know, the question was asked about gain on sale and obviously I realize you're not in a position to provide absolute guidance, but I am curious given that so much of the erosion of gain on sale is a function of competition and supply-demand reestablishing equilibrium. I'm curious if you think that purchase gain on sale is more stable because of the relationship-driven nature of that and the fact that the customer is probably a little bit less price sensitive.

I do. Yeah, I would say traditionally that historically that's been the case for our model and that stickiness with the customer and your referral partners, they're more concerned about fulfillment and getting the transaction done than, you know, they're not quite as sensitive related to price.

But Rick, there still remains pressure and with over capacity in the market, there's still a lot of pressure on the gain on sale and competition. I think we win the loan more often, but we are experiencing that pressure and we have to be competitive.

Got it, okay, thank you. Donna had asked a little bit about acquisitions, and I'm curious. Presumably, your currency and platform is more attractive in the current environment, and there probably are more opportunities for acquisition given how rapidly the market is shrinking. How do you approach that? Is your... willingness in pricing much more conservative today than theoretically what it was at the beginning of the year, given the imbalances and the risks of expanding the platform now?

I would say that's true. Just when we're looking at acquisitions and modeling out, we're looking at a discounted cash flow model typically. And, you know, in today's environment, of course, the cash flows are going to be much thinner. And so I would say, yes, we're being a little bit more cautious on pricing.

Got it. And is the phone ringing a bit more?

It is. It's been ringing, you know, quite a lot.

Fair enough, okay, thank you.

And our next question will come from Kyle Joseph with Jefferies. Please go ahead.

Hey, good afternoon and thanks for having me on and taking my questions. You guys referenced that you guys were able to take share and that your originations declined less than the industry. How big of an opportunity is there to continue taking shares as we continue to see capacity removed from the market as we look into 23?

Marianne, do you want to answer that or David?

Sure. This is David. I can answer that. So in regards to the sequential decline from Q2 to Q3, we saw a 24% decline versus the MBA average at closer to 29%. So we did pick up market share. On a go-forward basis in a purchase environment, we're typically able to continue to pick up market share in this type of an environment, given our focus on purchase business and our traditional history here. in particular, focusing on first-time homebuyers, which we see as a large opportunity. We do believe, as Marianne and Terry have both alluded to, there is still a lot of capacity in the market that continues to need to be right-sized. And for us, we're going to make sure that as we move forward, that we are not making unfavorable short-term economic gains for the sake of market share, but instead focused on long-term sustained growth. purchase growth where we can traditionally outperform the industry.

Got it. Very helpful. And then just a follow-up for me, you know, on the provision reversal, obviously that's a sign of a very healthy portfolio. But as you, you know, think about your servicing book and kind of the broader, you economy and a lot of macro uncertainty out there. What's kind of the outlook in terms for foreclosures going forward?

Well, I think that, well, the foreclosures and our performance, you know, has been, you know, we think it's reasonable what we have in our reserve. And we aren't seeing any sign today of an increase in hardship. As a matter of fact, many of the reports in the economy are showing that the underlying economy is still strong.

Got it. Helpful.

Oh, sorry. So that's good for our portfolio.

Yeah, we actually took some reversal on our provision we thought that we would, with loans getting out of forbearance and going into foreclosure, we expected that number to be higher and it just isn't coming to fruition. Just the homeowners that have had any issues, they're able to dispose of their property in other ways rather than foreclosure with the equity that, selling their property, for example. And so we're just not seeing the issues that we thought that we would see. So the outlook on that side of the business looks pretty favorable.

And I would add that the loss mitigation efforts are so much better than they were 10 years ago. So many more opportunities, and it helps borrowers stay in their homes. And it really, especially after this pandemic, it helped so many borrowers maintain homeownership.

Understood. That makes sense and is somewhat relieving to hear, too. Thanks a lot for answering my questions.

You're welcome.

Again, if you have a question, please press star then 1 to join the queue.

And with no remaining questions, we will conclude our question and answer session. I would like to turn the conference back over to Mary Ann McGarry for any closing remarks.

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

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.