Guild Holdings Company

Good

afternoon, ladies and gentlemen, and welcome to the Guild Holdings Company Third Quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a -and-answer session with instructions to follow at that time. As a reminder, this call will be recorded. I will now 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 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. Preliminary results for any portion of a quarter may not be indicative of full quarter results and are subject to management and auditor customary review procedures. 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 Guild's most recently filed annual report on Form 10-K and in other reports subsequently filed with the U.S. Securities and Exchange Commission. Additionally, today's remarks will refer to certain non-GAP financial measures. Reconciliation of non-GAP financial measures to the corresponding GAP measures can be found in our earnings release, furnished today with the SEC and also available on Guild's investor relations website. I'd now like to turn the call over to Chief Executive Officer Terry Schmidt. Terry?

Good afternoon, everyone. Thank you for joining us to discuss our third quarter results and strategic updates. With me today is David Nalen, our president, and Amber Kramer, our CFO. We are pleased not only with our third quarter results and the momentum we're building, but also with the benefits we continue to see from the successful execution of our strategy to invest in market share through the downturn. Guild is very well positioned for better than industry growth as the market normalizes. Let me start by highlighting our third quarter performance, which reflects the strength of our retail model and the sustainable positive trajectory of our business. We delivered adjusted net income of $31.7 million, as well as achieving profitability in our origination segment, which demonstrates the favorable operating leverage in our business. With $6.9 billion of originations in the quarter, we generated strong growth, up 6% sequentially from the second quarter and up 59% from the prior year. This performance demonstrates the strength of our retail origination business as we deliver positive results from the successful integration of our acquisitions and robust organic recruiting. We also experienced an increase in pull-through adjusted lock volume, in part due to rate declines in the third quarter. Additionally, our balanced business model with a focus on purchase market originations, coupled with our strategy of retaining servicing rights, allows us to generate more reliable cash flow. Looking at our growth outlook, there are several reasons we are optimistic about our prospects. First and foremost, and a clear differentiator for GILD, is the realization of the growth platform we've been building through our acquisitions and organic recruiting. We expect to see the ongoing benefit of our leadership in the retail origination business, regardless of the rate environment. While the industry will see the benefits of a more favorable rate environment over time, GILD should see enhanced growth and continue to gain share as we also tap into the increasing production of our new loan officers, who we expect to do even more business with the benefit of GILD's leading product and technology offerings. We are also continuing to pursue growth and remain focused on achieving profitable long-term market share gains. While we will be opportunistic with prospective acquisitions, organic recruiting remains robust and reflects the strong GILD story resonating within the industry. With the demonstrated strength of our platform and positive brand in the industry, we are attracting many quality team members. In summary, we're confident in our strategy and our ability to capitalize on market opportunities as they arise. Our investments in market share during the downturn are positioning us for strong performance as the market improves. With that, I'd like to turn the call over to David for more details on our near-term outlook and positioning. David?

Thank you, Terri. Our strong origination's performance and profitability demonstrate the benefit of our consistent strategic focus on the retail purchase business and building customers for life through our retained servicing strategy. Our competitive advantage lies in our customer relationships and community engagements which allow us to deliver on our mission of the promise of home ownership in neighborhoods and communities across the country. We continue to put resources and additional talent towards this goal. We are excited to have recently hired Nora Guerra, who came from Freddie Mac, where she focused on national affordable lending. She will be developing and expanding our programs, policies, and initiatives directed toward attainable home ownership. We've also piloted an outreach program focusing on underserved communities in and around St. Louis with great results. Alongside Nora's initiatives, we intend to begin rolling out this program in select markets across the country to serve more home buyers of the future. With regard to our longer-term outlook, we've identified a considerable portion of our loan that could benefit from new financing opportunities as rates decrease over time with approximately a quarter of our unpaid balance at rates above 6%. However, as we have demonstrated in prior cycles, we will remain disciplined and won't grow share at the expense of favorable economics. Even with the remaining current uncertainty around rates, we are confident that GILD is well positioned in the current market and we should continue to see the benefits of our balanced business model. We retain a significant amount of our loans for servicing, which provides reliable earnings and opportunities for future business. We have also continued to invest in our technology, which allows our loan officers to maximize the opportunity within our customer portfolio. Importantly, we support our long-term customer relationships that are built on providing the right products and good customer service, which are fundamental to our -for-life strategy. We are proud that our customers recognize this, as demonstrated by our net promoter score of 95.4, and GILD has recently become the most reviewed lender on Zillow with an average 4.97 out of 5 stars. While we anticipate that there will still be some inconsistency in -over-quarter growth until rates further decline and home inventory becomes more available, we are optimistic as we see the realization of the platform enhancements we have made over the past few years. In conclusion, we believe GILD is well positioned to capitalize on market opportunities and continue our growth trajectory. We are excited about the future and remain committed to delivering value to our customers and shareholders. I will now hand over to Amber, who will provide a more detailed financial overview. Amber?

Thank you, David. As is our standard practice, my comments will focus on sequential quarter comparisons. For the third quarter of 2024, we generated $6.9 billion of total loan originations compared to $6.5 billion in the second quarter. Net revenue totaled $159 million compared to $286 million in the prior quarter, which generated a net loss attributable to GILD of $67 million compared to a net income of $38 million in the second quarter. Adjusted net income was $32 million or $0.51 per diluted share and adjusted EBITDA was $46 million. Now turning to our origination segment, we are proud to report that we realized net income of $6 million, marking a profitable quarter for the segment despite the ongoing volatile market conditions. This demonstrates the growth we have made as a business, both through acquisitions and organic recruiting and our ability to capture originations across market environments. Our gain on sale margin in the third quarter came in at 333 basis points compared to 326 basis points in the prior quarter on funded originations. Year to date, the gain on sale margin is 337 basis points, which is in line with our expectations. Gain on sale margins on pull through adjusted lock volume was 321 basis points compared to 315 basis points in the prior quarter. And total pull through adjusted lock volume was $6.9 billion compared to $6.5 billion in the prior quarter. For our servicing segment, our portfolio grew to $91 billion. We reported a net loss of $75 million compared to a net income of $70 million in the second quarter. The loss was primarily due to the downward valuation adjustment of MSRs of $124 million, reflecting the interest rate decline. Our servicing portfolio continues to be a valuable source for ongoing cash flow, future opportunities for loan recapture, and it reinforces our customer for life strategy. Furthermore, our business model, which combines the originations in the servicing segments, provides for a natural hedge over time as rate declines should translate into higher originations, both purchase and refinances. Our balance sheet remains strong and provides us with the flexibility to continue to invest in our growth. Turning to liquidity, as of September 30th, cash and cash equivalents totaled $106 million, while unutilized loan funding capacity was $488 million, and the unutilized mortgage servicing rights lines of credit was $295 million, based on total committed amounts and borrowing-based limitations. Maintaining a well-positioned balance sheet continues to be a key priority for GILD. Our leverage ratio was two times at quarter end, a strong indicator of our prudent financial management. Book value per share at the end of the quarter was $18.85, while tangible net book value per share was $15.14. We are confident in our ability to navigate any market environment while simultaneously making strategic investments to enhance our long-term value proposition. In addition, we continued our efforts to return capital to shareholders. Specifically, during the third quarter, we repurchased approximately 24,000 shares at average stock price of $14.29 per share. As of September 30th, 2024, there was $10.3 million remaining under the original $20 million share repurchase authorization. In October, we generated $2.7 billion of loan originations and $1.6 billion of pull-through adjusted lock volume. While near-term market dynamics suggest that there could be some variability as we close out our performance year to date is encouraging, marked by significant market share growth and a profitable origination segment. Looking forward, we anticipate long-term benefits from our organic expansion, strategic acquisitions, and investments in our platform, all supporting our goal of creating customers for life. However, we acknowledge that while we expect continued growth, the market continues to recover at a slower pace than expected. It will take time for the market to fully recover and for us to achieve the accelerated growth we are confident our platform can deliver over time. And with that, we'll open up the call for questions. Operator?

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one under telephone keypad. A confirmation tone will indicate your line is in the question queue. If at any time you wish to remove your question from the queue, please press star two. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Our first question is from Eric Hagan with BTIG. Please go ahead.

Hey, thanks. Hope all is well. The fair value mark of $124 million in the quarter looks like it was maybe a little bit bigger than we've seen from some of the other servicers. I mean, I'm curious if you were maybe surprised by the size of the mark and what some of the other services are and also just how much has been recovered with rates backing up since the end of September.

Yeah, I'll make a few comments. Amber, you can kind of chime in. The tenure today is at 445. And if you look at where it was at 930, it was at about 380. And we're back to where the tenure was around the 1st of July. So that gives you kind of an idea of the direction that this impairment is going to definitely reverse if it continues at this pace. So Amber, you want to add more?

Yeah, I would just say it's really based on rates, the rate change rate. And we do rate shocks, which you can see in our queue. And it's aligned with that in terms of the change. We had a similar change if you look back at Q4 23. And then I was just going to add what Terry said, which is obviously with the market volatility and the rates changing in October, as of today, and things could change, you are seeing a shift the other way. But we didn't expect the rate change as it happened, but in line with how we look at rate shocks overall.

Got it. Okay, that's helpful color. Mortgage rates obviously backing up here, but how have you seen margins respond since the end of September?

Our margins have been very steady. And we're in the purchase business, and so I think that bodes well as far as the longevity of the margins. And so we've been pretty steady. Yeah,

and I would just add on that. There is in the fourth quarter, there is some market volatility, usually anyways in the fourth quarter, and it is significant. So I think just with the long term locks that we have, you might see some differences in our margins overall. But our base margin at the branch level, as Terry mentioned, is steady.

Got it. That's helpful. Hey, last one. How much of your production came from Academy during the quarter?

We don't disclose specifically what, you know, based on what acquisitions. When we did the Academy acquisition, they were running about 20% of our volume from prior year.

Okay, great. Thank you guys so much.

Our next question is from Derek Summers with Jefferies.

Hey, good afternoon, everyone. Just in terms of how you're thinking about products in the near term, what kind of opportunity do you see in terms of tapping home equity, whether that be through reverse, second-line product, or otherwise?

Yeah, I mean, we have a pretty broad product base. And the reverse, we're seeing that tick up in recent months. So that's going in the right direction. Our second programs have been really successful. So those that have equity, we've got an option there if rates do stay at an elevated level. And then we're really focused on a first-time homebuyer and the homebuyer of the future and really trying to make sure that we have good programs. And I think just having the local presence and participating in a lot of the grant programs that are available, we capture a good share of that market. But we think there's a lot more opportunity, and we're going to keep focusing on that as well.

Got it. And then just in terms of capital allocation in the near term, what are you guys thinking about, just given the moving rates? Are there going to be more of an emphasis on both on M&A? How's organic recruitment trending or just anything that may be missing?

Yeah, on the organic side, we've been really successful and doing very, very well. And the M&A has slowed up a little bit this year. But if rates stay elevated, it probably will start getting a little bit more active next year. But we're continuing to look at both. And as opportunities arise, we're going to be very opportunistic because we have a good capital base to be able to do that. So that's our plan is to continue to do what we've been doing. And when opportunities arise, we're going to make sure that we're taking advantage of it.

Got it. Thanks. That's all for me. Our next question is from Trevor Cranston with Citizens.

Hey, thanks. Did you talk a little bit about how you're thinking about

philosophically potentially hedging the MSR asset, particularly now that rates have moved back up to a higher level? It seems like there isn't necessarily an offsetting benefit on the origination side when rates rally, given how far out of the money a lot of loans are.

Yeah, we have not traditionally hedged and bought a hedge instrument. And our hedge has always been our natural hedge with production. Because we're so focused on retail and purchase business, it's always boated well for us. And just as an example, this last quarter, our origination volume increased 380 million, and the runoff ended up increasing 259 million. So we were still well ahead of tracking the runoff. We felt like as long as our production can outpace the runoff, we've positioned pretty well going forward. So Amber, do you want to add anything to that?

I think the big part of it is that there's a cost to that. And as we just talked about, some of the valuations can go back and forth. There's a cost to the financial hedge. And we believe that from a capital allocation standpoint, using that cash to invest it back into growing our origination segment is a better use of our cash.

Okay, got it. Appreciate the comments. Thank you. Our next question is from Juliana Bologna with CompassPoint.

Well, good reference. Just to address on the

continued execution on the origination side. One thing I'd be curious about, thinking from a K&N's perspective, obviously your locks are down in October just from a trend perspective with rates. I'm curious how you think prepayment speeds will trend in the quarter, during the fourth quarter. Obviously, there could be a little mismatch in terms of the front end of the fourth quarter, where prepayments will be a little higher while your locks are lower. I'm curious if you think the replenishment rate will still be positive in the fourth quarter, if you like to, it might get a

little below the replacement rate.

Yeah, there could be a timing mismatch on that just because of the fundings early in the fourth quarter from the refis and prepayments being high from that. But really, from the origination and servicing hedge, this is a long-term strategy. It's not month to month or quarter to quarter. Over time, what Terry was describing is really where we see that balance and we know it replenishes the production. The servicing runoff, the production replenishes that. I think it's the more long-term focus, even if you have one quarter, that is a little bit of a mismatch on timing.

That's very helpful. And then hopefully a

quick one, but I'm curious how much excess cash you have in your warehouse lines at this point, and then you're just thinking about uses of cash. You're obviously well-capitalized. Would it make sense to focus on more M&A? I'm curious if you think the movement in rates might reactivate some M&A trends in the space, if you think the focus on organic growth is a bit more important at this point.

I think through year end, the organic side is going to be stronger for sure. I do think that if this rate increase continues to prolong, that there will be some more M&A activity and we definitely are got a lot of pockets around the country where we don't have enough of a presence and so there's still a lot of opportunity out there. We plan to take advantage of that if it's available.

And I

would just add in my prepared comments, I had mentioned that our lines of credit on the MSR lines, the excess was $295 million based on our borrowing base limitation, and we're borrowing about 20% right now of our MSR fair value with significant room to borrow more if needed. And we strategically keep low leverage so that we can be prepared to capitalize on any opportunity that comes as well as ensure that we're prepared in any kind of volatile market if anything else comes up that would use and need capital.

That's very helpful. I appreciate it. I will jump back in a minute. Ladies and gentlemen, we have reached

the end of the question and answer session. I would like to turn the call back to Terry Schmidt for a closing remark.

Thank you everyone for supporting us and joining the call and we look forward to speaking next quarter. Have a good night.

Thank you. This concludes today's conference. You may disconnect your lines at this time.