Guild Holdings Company

Good afternoon, ladies and gentlemen, and welcome to the Guild Holdings Company first quarter 2023 earnings conference call. At this time, all participants are in 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 conference over to 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 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 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 Mary Ann McGarry. Mary Ann?

Thank you, Nikki. 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 Nalen, will join us for Q&A after our prepared remarks. Our first quarter results were in line with our expectations. In the first quarter, we generated $2.7 billion of total in-house loan originations compared to $3 billion in the fourth quarter of 2022. While these results reflect a challenging backdrop of rising rates and limited inventories, we continue to gain market share as we execute on our growth plan. Our origination volume from purchased business was 92%, compared to the Mortgage Bankers Association estimate of 80%. Additionally, our model is built on long-term relationships in communities. By focusing on purchase business, we see more consistency across interest rate cycles and believe our earnings are more durable and sustainable in all market cycles. Our servicing platform, along with our focus on customer service, also supports strong recapture rates. For the first quarter of 2023, Our purchase recapture rate was 24%, and we retained servicing rights for 87% of total loans sold in the first quarter of 2023, with strong retention driving ongoing growth in unpaid balance levels and related fees. We are pleased to see an uptick in volume in April, and while we can't control the constraints on the housing supply, we have taken steps to position Guild to continue to grow market share. During the quarter and subsequently, we have been effectively executing on our growth strategy. With the recent acquisitions and organic expansion that Terry will discuss, we are further building our foundation to drive growth, and we anticipate gaining additional market share as the acquisitions are fully integrated and continue to ramp. We have a differentiated platform, and our acquisitions and product offerings further bolster our position. As we continue to integrate our recent acquisitions, we expect to realize enhanced productivity. In addition, our pipeline of attractive opportunities continues to grow, and while we will remain disciplined, we believe the current environment provides a compelling window for external growth. Before turning the call over to Terri, I want to take a moment to comment on our previously disclosed management succession, which will be effective on July 1st. It has been an incredible journey for GILD, and I could not be more proud of what we have accomplished and the foundation we have created to deliver ongoing growth and shareholder value. GILD is a company with a strong culture. technology platform, and talented people. Since our management buyout in 2007, we have delivered tremendous growth and consistent returns due to our balanced business model, our focus on customer relationships, and offering creative product solutions to our customers' financing needs. We believe our combination of strong performance, Culture and longevity is unique. I will remain on the board of directors and I'm very confident in the team that will be leading the company day to day with Terry Schmidt's promotion to CEO and David Nayland as president and COO. Terry and I have worked together for almost four decades and David has been with us since before the management buyout in 2007. As a result, I am certain the transition will be seamless. And I want to thank the entire Guild team for their hard work and commitment to executing on our mission of delivering the promise of home in neighborhoods and communities across the United States. Terri?

Thank you, Mary Ann. I will start by expressing my gratitude to you for your vision leadership, and partnership over the years. You have established a culture that has been foundational to our success. Where we are today certainly exceeded any expectation I had when we completed the management buyout more than 15 years ago, and I'm even more excited about the ongoing opportunity as we continue to leverage our incredible platform. Broader market disruptions are driving a flight to quality, and Guild should be a net beneficiary given our long and successful history through numerous market cycles beginning in 1960. 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. During the first quarter and subsequently, we completed two acquisitions and added a new district of loan officers. As previously disclosed 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 according to CoreLogic data. In April, we also added Cherry Creek Mortgage to our retail network. Cherry Creek is another example of a synergistic acquisition bringing a complementary business to Guild. Cherry Creek has a similar experience to Guild, with a 36-year history of successfully managing through multiple cycles and focusing on its retail strategy and customer relationships. With 68 branches in 45 states, our acquisition of Cherry Creek provides immediate additional scale. Furthermore, Cherry Creek has a strong reverse mortgage leadership team that has been in the industry for many years. We believe having the ability to securitize and service reverse mortgages will continue to strengthen our product offerings and help us serve more customers. By integrating reverse mortgages into our traditional platform, We now offer our retail team the opportunity to have a more comprehensive offering for their customers, from products focused on the underserved and first-time homeowners, now through to reverse mortgages, aligning with our customers for life strategy. In April, we also organically grew our footprint with the addition of a new district made up of 40 new Guild employees and eight branch offices in California to serve home buyers throughout the region. This group's production was an estimated 350 million in 2022, and we are excited they have joined our team. Following this addition, Guild has approximately 1,360 loan officers across more than 300 branches serving customers in 49 states. As Marianne mentioned, we are laser-focused on leveraging Guild's platform and network of loan officers to continue to grow market share and to continue to position ourselves to accelerate growth as the market normalizes. In the first quarter, we grew market share as we captured a higher percentage of the total industry origination volume than we did in the fourth quarter. We are encouraged by the recent uptick in volume for April, but do anticipate there will be ongoing macro pressures in the near term. We believe our balanced business model of originations and servicing provides the stability to manage through this uncertainty, while our disciplined balance sheet management and liquidity should continue to allow us to take advantage of opportunities as they arise and drive 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 first quarter of 2023, we generated $2.7 billion of total in-house loan originations compared to $3 billion in the fourth quarter. Net revenue totaled $104 million compared to $134 million in the prior quarter, and we generated a net loss of $37 million or $0.61 per diluted share. Adjusted net loss was $2.5 million or $0.04 a share while adjusted EBITDA was a positive $1.1 million. The adjusted figures for the fourth quarter exclude a $44 million negative change in fair value of MSRs due to valuation assumptions compared to a $17 million charge in the prior quarter. Focusing on our origination segment, our gain on sale margin came in at 343 basis points, up from 331 basis points in the fourth quarter. Pull-through adjusted lock volume totaled $3.3 billion in the first quarter, compared to $2.8 billion in the prior quarter, and we are pleased with the uptick. Our gain on sale margin on pull-through adjusted lock volume was 284 basis points, compared to 351 basis points in the prior quarter. The increase in pull-through adjusted volume, up 21% over originations, creates a negative timing impact for gain on sale on pull-through adjusted volume and is not indicative of future expected gain on sale margins. While Guild and the broader industry have both seen continued 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. We believe this focus results in more durable and sustainable performance across market cycles. We are starting to see some stabilization as excess capacity is contracted, but anticipate continued pressure in the near term and further improvement will depend on market rate and spread trends as well as broader inventory levels. For our servicing segment, we reported a $300,000 net loss in the first quarter versus $22 million of earnings in the prior quarter, due primarily to $55 million of downward fair value adjustments to the company's mortgage servicing rights due to slight rate decreases. Our balance sheet remains strong and provides us with the flexibility to continue to invest in our growth in a disciplined manner, and our assets consist primarily of high-quality loans and MSRs. Turning to liquidity, as of March 31st, cash and cash equivalents totaled $148 million, while unutilized loan funding capacity was $1.2 billion. and the unutilized mortgage servicing rights line of credit totaled $205 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 0.9 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 first quarter, we repurchased approximately 50,000 shares at an average stock price of $11.26 per share. Book value per share at the end of the quarter was $19.93, while tangible book value per share was $16.43. 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. In April, we have generated $1.3 billion of loan originations and $1.3 billion of pull-through adjusted lock volume. As we noted last quarter, we anticipate the current, more challenging market conditions to continue through the first half of 2023. As we progress through this cycle, Gill 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?

We will now begin the question and answer session. To ask a question, you may press star then when you telephone keypad. If you're using a speakerphone, please stick up your handset before pressing the keys. To withdraw your question, please press star then too.

At this time, we will pause momentarily to assemble our roster. Our first question will come from Don Fandetti with Wells Fargo.

You may now go ahead.

Hi. Congratulations to Marianne and Terry and David. Amber, I guess the question on the gain on sale, the pull-through lock, I mean, definitely looked lower than we were expecting, and I think in January it provided a number much higher. Can you talk about the accounting and why that is low and what you're thinking for April and seeing?

Sure. So as I noted, the originations and therefore sales is up 21% over the pull-through adjusted lock volume. So there's a timing difference of the execution we get at time of sale that's not considered. And you can see that historically in Q1 numbers going backwards. It's typical in this first quarter as we start to get an uptick in volume. And we don't provide guidance, but I will say that you can see from Q4 to Q1, if you exclude the adjustment for the loan loss that I talked about on last earnings call in Q4, we're pretty much flat quarter over quarter going into Q1. And that's really what we're continuing to see, just not much change. And so... I think, as we noted, there's some stabilization, but we're not seeing that pick up quite yet. But I would really focus more on the gain on sale and originations versus the gain on sale on the pull-through adjusted lock volume because of that timing difference.

Okay. And this G&A, can you talk a little bit about the run rate there? I know you've had two acquisitions sort of flowing through.

Yeah, overall, since we had the acquisitions in Q1, there is a slight impact in that, and you would have some ramp-up as their volume is brought on. And we're continuing to monitor just overall cost as looking at volume and making changes accordingly. And no big changes other than that. About 80% of our clients personnel costs are, you know, are variable. So the other fixed cost is just what we're picking up on the acquisitions and then the run rate of volume will ramp up over time too.

Got it. Thanks. Our next question comes from Kyle Joseph with Jefferies.

You may now go ahead.

Hey, good afternoon. Thanks for taking my question. Just regarding Cherry Creek and then the California team you guys acquired, can you give us any sense when those are expected to close and impacts on your leverage profile? And then follow-up to that would be capacity for M&A going forward. I know you guys have been very active in the space.

Sure, I'll answer that. On Cherry Creek, we closed on April 3rd. So it has officially closed. And the California group, they onboarded about a month ago. And the volume, about $350 million for the California group. And last year, Cherry Creek funded about $2.5 billion. Okay.

And Kyle, I can answer the question just in terms of our leverage profile. It's not going to swing anything. We have a strong balance sheet overall, and so it's going to really keep us, we're going to be in the same position. We're just increasing our market share, our volume, and then overall that'll just flow to the bottom line in terms of revenue. And we, as you can see, have a strong balance sheet with the ability to borrow significantly more. and we're planning to use that capital for organic growth and acquisitions, and we think that there's still opportunities out there and are keeping our strong balance sheet positions to be able to capitalize on those opportunities.

Yeah, we still have a very active pipeline, and we're going to keep executing on our strategy this year.

Yeah, no, that makes a lot of sense in the world. And then, you know, not surprisingly, as we think about the origination business versus kind of the UPB, obviously UPB has grown as originations have come down. How do you guys think about balancing that, potentially selling MSRs in this environment? And just any thoughts in terms of like potentially hedging that gap?

We think about our servicing portfolio and our originations as a natural hedge, which really is what you're seeing right now overall with our adjusted net income about break-even. And we do look at our risk profile on our portfolio itself to ensure that we're in a strong position as where originations are compared to our portfolio and where the whack is. We have a strong asset on our servicing portfolio with a low whack, and so we don't believe that there's risk. And our strategy has been clients for life, and we have strong recapture programs to continue to add to our portfolio. which is a great value proposition for loan officers as well. And because we've managed our balance sheet so well, we don't need the cash to sell MSRs. And so right now we don't have any plans to do so.

Yeah, the note rate's only 3.7% on the coupon on the portfolio. And to Amber's point, we manage to how the current par rate is to the coupon stack And we're looking at if we've got definitely a smaller group that may be a year from now refinanceable. But all of that, since we've built all this through our retail channel, we've got the boots on the ground, the loan officers that can recapture that refinance if it's the right time to recapture it. We've been really successful at that. And so that's really... been the way we've hedged and we plan to keep continue to do so but the nice thing is we have options right we can we can sell the MSR if we needed to in the future we can borrow against it so and we can service release more products we've got multiple outlets that we can you know tap into if we needed to change our strategy but we're sticking with the strategy we've had so far

Got it. That's it for me. Thanks a lot for answering my questions.

Our next question will come from Giuliano Bologna with Compass Point. You may now go ahead.

Congratulations on the continued strong execution. And one thing I'd be curious about, and I realize that you kind of touched on this already, is the impact of some of the acquisitions on operating expenses and also gain on sale margin. I'd be curious if there's a way to think about the impact during 1Q and also some potential impacts related to the acquisitions that are in the process of closing during 1Q and even beyond 1Q over the next few quarters.

The impact is minimal. I think generally speaking, if you look at our adjusted net income at negative $2.5 million, we'd be about break-even without the acquisition. So you can see from the revenue and the expenses, it's not a huge impact materially on the expense side. And the gain on sale, what I said earlier with gain on sale overall being flat is what we're seeing. There's no change to that.

I would say that the way we look at this is when we're acquiring these companies is we expect that by month six that they're starting to turn a profit. And between month 12 and 18, we've recouped any type of net expense that we've had. And so that's what we expect on these acquisitions as well, if that kind of helps.

That's very helpful.

And then thinking about the strategy going forward, Joe's obviously done an incredible job expanding through M&A and expanding geographies within the US. I'd be curious if there are any large markets that are still kind of left on top at this point, or are you looking to fill in some markets where you have, you might be under-penetrated from a market share perspective?

Yeah, there's some states that we still don't have very much, and a lot of states that we don't have, we're not in the top five. So any area where, any state where we're not in the top five outside of New York, we are interested in expanding. So we've got a lot in the Midwest. There's so much opportunity in the South and the Southeast that we'd love to continue to expand there as well.

That's great. Thank you very much, and I will jump back in with you.

Again, if you have a question, please press star then 1. Our next question will come from Brian Violino with Wedbush Securities. You may now go ahead.

Thanks for taking my question. Just a quick one on the reverse mortgage business specifically. I guess, can you kind of just frame what that opportunity looks like? You know, what got you interested in getting into reverse mortgage? And, you know, I guess, is there any sort of ramp up time associated with getting that expanded out to your existing branches?

Yeah, last year, we've, the last 10 years, we've wanted to get into reverse and we've just there's been a lot of other, just operationally other areas that we've continued to focus on. But this opportunity with Cherry Creek came to us and they've been in the business. They've got some executives that have been in the industry for 20 plus years, have a great reputation. Last year they did about $250 million and you know we think we can expand that dramatically I would say we're looking at Q probably Q end of Q2 Q3 to start expanding it in our own retail footprint and but they're already growing without our retail footprint so we believe that there's a lot of opportunity there

Yeah, I would add, this is Mary Ann, that what we see in our vision for reverse mortgages, with such a low weighted average coupon in our portfolio, that this product will become more in demand as you have an aging population. And this way they can tap into their equity and stay in their home, which is what we want, is to help people stay in their homes as well as you know, provide homeownership. So, you know, that's going to be another outlet, an outlet, another lever we can pull for our customers. And we think there's a good future, strong future ahead with reverse mortgages.

Great. Thank you.

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, and we look forward to updating you on our next call.

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