Guild Holdings Company

And welcome to the Guild Holdings Company fourth quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Nikki Sachs, Investor Relations. Please go ahead.

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 debt measures can be found in our earnings release furnished today with the SEC and are also available on GILD's Investor Relations website. Now, I'd like to turn the call over to Chief Executive Officer Marianne McGarry. Marianne?

Thank you. Good afternoon, everyone, and thank you for joining us. Today, I'm joined by our President, Terry Schmidt, and Chief Financial Officer, Amber Kramer. Our Chief Operating Officer, David Nayland, will join us for Q&A after our prepared remarks. The fourth quarter marked Guild's second year anniversary as a publicly listed company, and I am proud of what we've accomplished in that short time. Notably, for 2022, we produced another year of profitability as we leveraged our product mix, technology, servicing capabilities, and broad network of local loan officers across the country. We also continued to execute on our objective of strategically growing Guild's platform to capture more of the purchase mortgage market through both new product rollouts and compelling acquisitions. Supported by a strong balance sheet and liquidity, we have continued to invest in our business to enhance our leading position in the purchase mortgage business. Even as the industry faces headwinds amid rising rates and still limited inventories, we are demonstrating the benefits of our differentiated strategy, which focuses on the purchase mortgage market and is strengthened by targeted acquisitions. This approach has enabled us to grow the platform and to do so in a profitable manner, while positioning Gill to not only manage through this volatile market, but to accelerate our growth as the market normalizes. Where the year ended December 31, 2022, GAAP net income was $329 million, or $5.39 per share, a 15% increase from the prior year. Adjusted net income and adjusted earnings per share came in at $70 million and $1.15 per share, respectively. Our return on equity was over 30%. An adjusted return on equity was above 6% as we delivered positive returns for the year, outperforming lower industry-wide origination volumes and margins. Origination volume was 19 billion for the year, and while down from the prior year, we maintained a healthy gain-on-sale margin of 368 basis points. Part of our resilience is our concentration on purchase mortgages, including targeting the first-time buyer and diverse markets. For the year, we realized 81% of our closed loan origination volume from purchase business, compared to the Mortgage Bankers Association estimate of 70%. This favorable differential persisted as the year progressed and industry-wide refinancings declined dramatically. In the fourth quarter, 93% of our closed loan origination volume was derived from purchased business, compared to the Mortgage Bankers Association estimate of 83%. An additional key differentiator is our relationship-based strategy. This approach of creating clients for life has proven throughout our history to generate value by encouraging relationships our existing clients to return to us for later transactions. This approach has been effective by providing us additional opportunities to earn origination and servicing fee income. Even as originations have temporarily slowed industry-wide, we are continuing to be a meaningful presence in the markets we serve by conducting home ownership events, realtor events, and building trust through education with prospective first-time home buyers. Being able to offer customers an array of products which support individual needs is critical for us in our efforts to gain market share. By building close relationships with our customers, we better understand their needs and continue to expand our product offering to address those needs. As Terry will elaborate, We have introduced a number of new products which specifically support the first-time homebuyer and provide creative options for affordable lending. This approach is being recognized by industry publications where we have been awarded best of rankings, including Forbes and Money Magazine, where Guild was named as the top first-time homebuyer lender. We believe our industry is seeing a long-term trend toward consolidation around companies like Guild that can scale and that have regulatory and operational expertise. As part of our ongoing growth initiative, in the fourth quarter and subsequent to year end, we acquired two mortgage companies. With these additions, we have now completed three acquisitions since our public listing and numerous since 2008. We are very thoughtful and strategic in our approach to acquisitions, as we add companies with similar philosophies of being in the communities and neighborhoods we serve, while seeking to grow share in key markets. Importantly, I am proud of how efficiently we have onboarded these acquisitions. Our pipeline of attractive opportunities continues to grow, and while we remain disciplined, we believe the current environment provides a compelling window for external growth. As we have demonstrated, we are committed to delivering positive returns for our shareholders over the long term. And it is because of our differentiated model that we believe we can continue to do so. Our model is built around a retail strategy which focuses on servicing the loans that we originate. By focusing on the purchase business, we see more consistency across interest rate cycles. are more durable and sustainable in all market cycles. Additionally, we will continue to make prudent capital allocation decisions which position GILD to create shareholder value through investments in our business and new products, share repurchases, and external growth initiatives. While we are confident we are in a relatively favorable position as the industry looks for stabilization, there will continue to be some near-term pressure, particularly on gain-on-sale margins from rising interest rates and limited inventory. Given our profitability and cash generation, we are positioned to capitalize on the current environment to further scale our business so we can reaccelerate our growth as the market turns. Specifically, we believe our long and successful acquisition record is attractive to smaller firms trying to address ongoing revenue pressures, shifting competitive dynamics, and diminishing profitability. Broader market disruptions are driving a flight to quality, and Guild should be a net beneficiary given our long and successful history through market cycles. With that, I'd like to turn it over to our president, Terry Schmidt. Terry? Terry?

Thank you, Mary Ann. One of Guild's goals is to leverage our scalable platform, extend our geographic reach across the country, and increase our share in key markets. The two acquisitions Mary Ann mentioned both demonstrate the successful execution of our plan to grow both in existing markets and by entering new ones through selective acquisitions. In December, we acquired Atlanta Mortgage, a Wisconsin-based independent lender serving borrowers in 27 states. This acquisition has deepened our presence in the Midwest, and we increased our purchase market share to fifth in Wisconsin. In February, we added legacy mortgage to the Guild platform, increasing our presence in the Southwest with the addition of their operations in the high-growth states of Arizona, Colorado, Texas, and New Mexico, where Guild now has the number two share of purchase mortgages. What drew us to both of these companies is their strong management teams, employee-oriented cultures, and their dedication to customer service and building realtor and builder relationships at the local level, all of which align very closely with Guild's approach. We have a growing pipeline of opportunities, and given the scalability of our platform, we can create meaningful value as we integrate acquisitions and further leverage our cost structure. Looking ahead, we believe we can continue to realize attractive growth through M&A, particularly as we anticipate ongoing dislocation in the market. To help drive our purchase business, over the past year we have rolled out more than 175 new products to support the array of customers we serve, ranging from multiple buy-down programs that include our payment protection program allowing the borrower to refinance in the future with no lender fees to down payment assistance for the underserved and first time homeowners. A few highlights include a product which is aimed to help offset some of the current inflationary pressures for the borrower where we offer a lender paid buy down with a no cost refinance option if rates should decline. A 321 Home Plus, depending on the borrower's income levels, the borrower is eligible for a 97% LTV and a $2,000 Home Depot gift card and up to $2,500 in down payment assistance. Our Lock Now and Sell program, which allows sellers to lock in rates that they can pass on to their buyers. And our Green Smart Advantage, which allows borrowers to purchase a home and finance eligible energy-efficient improvements, preventing unexpected financial surprise during the first few years of home ownership. These are just a few of our new products which meet the broad needs of different customers. Another element of our organic growth is the repeat customer business that we are able to achieve. Our servicing platform, along with our focus on customer service, supports strong recapture rates. For the fourth quarter of 2022, our purchase recapture was 25%. Furthermore, we retained servicing rights for 89% of the total loans sold in the fourth quarter of 2022. All of these investments, both acquisitions and those which support organic growth, further strengthen our platform and we believe should position Guild for profitable growth over the long term. I'll now turn the call over to our Chief Financial Officer, Amber, 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 fourth quarter of 2022, we generated $3 billion of total in-house loan originations compared to $4.4 billion in the third quarter. Net revenue totaled $134 million compared to $261 million in the prior quarter, and we generated a net loss of $15 million, or $0.25 per diluted share. Adjusted net loss of $133,000 was less than a penny per share, while adjusted EBITDA totaled a positive $2 million for the fourth quarter. The adjusted figures for the fourth quarter exclude a $17 million negative change in fair value of MSRs compared to a $61 million markup in the prior quarter, with the differential largely attributable to an increase in discount rates partially offset with CPRs declining. Focusing on our origination segment, our gain on sale margin came in at 331 basis points on $3 billion of total funded originations for the fourth quarter, down from 354 basis points on 4.4 billion of funded originations in the third quarter. Our gain on sale margin on pull-through adjusted locked volume was 351 basis points compared to 349 basis points in the prior quarter. Pull-through adjusted locked volume totaled 2.8 billion in the fourth quarter compared to 4.4 billion in the prior quarter, primarily reflecting a more challenging macro backdrop. While Guild and the broader industry have both seen increased pressure on gain on sale, we remain confident in Guild's relative positioning given our balanced business model, which focuses on retail originations and servicing of the loans we originate, resulting in more durable and sustainable performance across market cycles. We believe we are starting to see some stabilization as excess capacity has contracted. but anticipate continued pressure in the near term and further improvement will depend on market rates and spread trends as well as broader inventory levels. For our servicing segment, we generated 22 million of net income in the fourth quarter versus 97 million in the prior quarter due primarily to adjustments to the fair value of the company's MSRs. In light of current market conditions, we have strived to optimize our expense structure given the large variable component. We have realized approximately $100 million of cost savings on an annualized basis, primarily through headcount reductions, and we will continue to manage the business as market dynamics evolve. Importantly, we maintain the flexibility to continue to invest for growth and implement further cost savings as needed. Our balance sheet remains strong and our assets consist primarily of high-quality loans and MSRs. Turning to liquidity, as of December 31st, cash and cash equivalents totaled $138 million, while unutilized loan funding capacity was $1.6 billion, and the unutilized mortgage servicing rights line of credit totaled $215 million, based on total committed amounts and borrowing base limitations. Our leverage ratio, defined as total secured debt, including funding divided by tangible stockholders' equity, was 0.8 times. We continue to focus on the best way to efficiently 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. During the fourth quarter, we repurchased approximately 263,000 shares at an average stock price of $10.14 per share. Book value per share ended the quarter at $20.51, while tangible book value per share was $17.06. 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. As we start 2023, we have generated $1.6 billion of loan originations and $1.9 billion of pull-through adjusted lock volume in January and February. For January, our approximate gain on sale margin is 377 basis points on pull-through adjusted lock volume, which includes a slight pickup from the fourth quarter due to timing differences of sales and pull-through adjusted lock volumes quarter over quarter. We anticipate the current more challenging market conditions to continue through the first half of 2023. As we progress through this cycle, Guild will focus on seeking out additional opportunities, including potential acquisitions, which should position us to accelerate our growth over time as market conditions improve. We have a well-positioned balance sheet, which will support the growth of our platform, and as supply continues to moderate, we anticipate being a beneficiary of purchase activity. And with that, we'll open up the call for questions. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Don Sandity with Wells Fargo. Please go ahead.

Yes, just wanted to clarify on the gain on sale. Do you expect Q1 to be up quarter-by-quarter on pull-through locked? I mean, you're running at 377 versus 351. I know there's some one-timers, but do you think you're going to be down or up quarter-by-quarter?

Overall you were expecting that we had the 377 in January. We're not going to provide guidance on the fourth quarter. There continues to be pressure in Q1 and in Q4 we did have a one-time adjustment that brought our gain on sale down slightly which is due to our loan loss reserve adjustment and that was about 15 basis points. So we have to take that into account as well but continued pressure on the margins is still holding and and we're seeing that across the board.

Okay, thank you. And then on the locked volume, the $1.9 billion, I think you said, Jan, Feb, does that include your new acquisitions or does that exclude them?

That would include them. Atlanta came in in December and started funding with us. We've integrated all of them fully onto our platform. and then Legacy was in February.

Got it. Okay. Thanks a lot.

The next question comes from Rick Shane with JPMorgan.

Please go ahead.

Thanks for taking my question. Two things. One, on the 1.9 billion of rate box volume, I just want to make sure I understand that that is through the end of February, correct? Correct. And when we think about normal seasonality, particularly for purchase mortgage, my sense is it kind of slows November, December, January, and starts to pick up as we move through the spring, probably starting in the month of March. Are you seeing normal seasonality at this point?

We would expect the normal purchase seasonality overall. Inventories are still low, so we have to take that into account that we wouldn't see the pickup overall. But that is happening more than we have in the past couple years because we're having the normal mortgage seasonality cycle.

Got it. Okay. Thank you.

And then when we think about the model, one of the places where there's probably more variability than we can explain is on the G&A side. Should we think of the 17.9 that you reported in the fourth quarter as a reasonable run rate on what is largely a fixed cost

The 17.9 you're referring to, what number?

GNA.

Just overall for the company?

Yes.

Yeah, so I mean there is, so I think that overall that we would, you know, breaking out the segments is important because so much of our origination segment is variable. as in line with volume. And so you can see that quarter over quarter in our overall expenses in the origination segment. And we have cut, as I had mentioned, we cut about $100 million in annualized fixed expenses, and that's really truly from fixed costs, not costs related to just volume dropping, which is about, if we look at fourth quarter expenses, about 40% of our fixed expense costs in the origination segment specifically. But I think separating those two out because the origination segment is more variable versus the servicing is important. And we're continuing to monitor our costs as we go into Q1 with volumes changing as well.

Got it. And I'm more assuming that the variable nature of the expense structure goes through the salary and commission line as opposed to the G&A. And I think that's what I'm either not understanding or confusing.

Yeah, there is some that is variable in there. In the prior quarters, besides these last two quarters, we have had the fair value adjustment for the contingent liability in there overall, which we didn't have in this quarter. So I would think that the majority of the G&A, you know, call it It's probably 75% fixed.

Okay. That's very helpful.

The next question comes from Kyle Joseph with Jefferies. Please go ahead.

Hey, good afternoon. Thanks for taking my questions. You guys highlighted two recent acquisitions. Just hoping to get any sort of color there in terms of evaluations or size and then give us a sense for your acquisition pipeline from here and if there's any sort of target geographies or anything.

Yeah, this is Terry. Those two acquisitions were kind of have followed in line with the past acquisitions that we've done. and they were both asset transactions. And I can say that as far as any type of premium, that because of just the market dynamics that we're seeing right now and the stress on all production platforms, that that premium that we've paid in the past is lighter than it has been in the past. But very similar to the transactions that we've historically done.

And this is Mary Ann. The pipeline looks good. There's a lot of interest for a lot of production companies to find out options. And so we're very pleased with the opportunities that we see ahead of us.

Go ahead, thanks. And then just, you know, year to date, can you give us a sense for how the MSR mark has trended? I don't need an exact number, but just how it's trended so far this year.

Well, we haven't provided any information on the MSR valuations, but you would, just as rates change, the MSR valuation is going to align with those based on increasing or decreasing.

Okay, got it. And then just eye level, you guys are a lot closer than I am, but can you give an overall sense of where you think the, you know, supply and demand of the industry are at this point? Obviously, supply was chasing demand down. Are we, you know, close to approaching a sort of an equilibrium there?

I would say... We still are... Yeah, we're closer, but it's still... There's still... more supply out there then there's there's it's just there's there's not enough inventory out there so there's too many people chasing too many lenders chasing loans still but I can say that according to the MLS NMLS at year-end there was about 20% of the loan officers in this industry that did not that let their licenses expire. So I think it's, it's happening as far as that equilibrium, you know, right sizing, but we're not there yet.

And the NBA is, is projecting a drop in, uh, purchase volume next year, um, or the whole trillion market cap one six to one four. Uh, but there is still a lot of demand, a lot of buyers wanting, um, you know, a home, and we have a lot of pre-approvals, and they're just waiting for the market to normalize. And so there's some trepidation with the volatility, as well as not as many sellers are putting their houses on the market. Again, you know, low inventories. But that all could be seasonality as well. So we'll see as we go into the spring, as Rick mentioned. So, you know, meanwhile, there's great opportunity.

Yeah, got it. Thanks very much for answering my questions.

Again, if you have a question, please press star, then want to be joined into the queue. As we have no questions, this concludes our question and answer session. I would like to turn the conference back over to Mary Ann McGarry for any closing remarks.

Thank you, everyone, for joining us today, and have a great evening. We look forward to updating you on our next call.

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