GHLD - NYSE

Good afternoon, ladies and gentlemen, and welcome to the Guild Holdings Company Second Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call is being 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 and other factors that are described in greater detail under the section titled Risk Factors in our Form 10-K and 10-Q and in other reports filed with the US 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 Guild's Investor Relations website. And now, I'd like to turn the call over to Chief Executive Officer, Terry Schmidt. Terry?

Thank you. Good afternoon, everyone, and thank you for joining us. I am very pleased to be conducting my first earnings call as CEO and to be joined by our President and COO David Neylan as well as our Chief Financial Officer, Amber Kramer. Our second quarter results were in line with our expectations as we accelerated production with total in-house loan origination of $4.5 billion, up from $2.7 billion in the first quarter. These results reflected our continued strategy to grow market share as we further scale our platform. We are achieving this through the successful execution of our organic and external growth strategy. Broader industry challenges persist due to higher interest rates and limited home inventory, which is putting pressure on production volume and industry margins. However, the Guild brand within the mortgage industry is stronger than it's ever been and we believe we are well-positioned given several factors that have historically helped us to achieve our long-term targets. From an organic growth perspective, we benefit from our focus on the purchase market. In the second quarter, we originated 94% of our closed loan origination volume from purchase business compared to the Mortgage Bankers Association estimate of 80% for the industry. Guild also continues to provide innovative new products to meet the needs of even more buyers. No matter what is happening in the housing market, we want to get people into homes and help keep them there. Additionally, key to our organic growth is continuing to expand our network of loan officers and their referral partners. All of these attributes combined have contributed to our continued share gains as evidenced in the quarter-over-quarter origination volume increase of 66% compared to the industry estimated at 39% according to the July MBA forecast. In terms of non-organic growth, Guild continues to grow both in existing markets and by entering new ones with selective acquisitions and team expansions. We have focused on integrating our three most recent transactions, which are beginning to ramp up on the Guild platform and should begin to contribute toward higher originations in the upcoming quarters. The other distinctive element of Guild's model is our in-house servicing platform, which serves two key purposes. First, it provides for a balanced business model, which delivers recurring cash flow through cycles. And second, it positions us to extend the client lifecycle. Guild is continuing to grow our servicing channel and we retain mortgage servicing rights for 84% of the total loans sold in the second quarter of 2023. This provides both reliable fee income as well as continued interaction with our customers supporting our strong recapture rate. We have also prioritized maintaining a strong balance sheet and liquidity position, which supports our ongoing pursuit of additional growth opportunities. Guild has engaged in several opportunistic acquisitions in the recent years, which has grown our reputation as a valued business partner. And we believe the continued muted origination environment will create additional opportunities for us to add smaller businesses to the Guild platform. Furthermore, beyond supporting our growth initiatives, our strong balance sheet enabled the recent decision by the Board of Directors to return capital to shareholders in the form of a special dividend. The Board believes this is another tool to create and return value to shareholders in addition to share repurchases and selective acquisitions. Although, the market continues to face many of the same pressures we have been discussing for several quarters related to rising rates and tight home inventories, I remain encouraged by our continued progress and our ability to gain market share. We are confident in our positioning given the factors that I discussed and believe that as the market continues to stabilize, we will once again realize accelerated growth on top of the market share gains we have been producing in 2023. I'll now turn the call over to our President and COO, David Neylan. David?

As Terry mentioned, we have continued to effectively navigate the current environment, while we also continue to elevate the Guild brand. We remain focused on providing products for our loan officers to meet the needs of even more buyers, including those aimed at removing barriers to home ownership. For example, we rolled out the 1% down payment advantage program in June. This product requires the borrower to bring in only 1% down payment as an alternative to the traditional 3% required for conventional programs. Such programs make home ownership more attainable in today's housing market and allows Guild's loan officers to create deep relationships with customers by helping to find a solution for them during an otherwise challenging environment. We were also recently recognized as a top guaranteed rural housing lender being the second largest originator of USDA loans nationally. These loans provide special financing opportunities to homebuyers who live in or would like to purchase a primary residence in rural areas as defined by USDA. Additionally our reverse mortgage business which we meaningfully expanded through our recent acquisition of Cherry Creek Mortgage is now fully operational. Importantly, it is now being rolled out across the entire Guild platform and enables our retail team the opportunity to have a more comprehensive offering for their customers. This includes being able to provide products focused on underserved and first-time homeowners through to reverse mortgages, aligning well with our Customer for Life strategy. With regard to our servicing business, we believe our balanced business model provides stability through market cycles. Having an in-house platform with customer service agents that are Guild employees is what makes the difference and sets us apart. We are continuing to successfully leverage Guild's platform and network of loan officers to continue to grow market share and position the business to accelerate growth as the market normalizes. We have a pipeline of potential growth prospects, which continues to expand as we continue to prove Guild to be a desirable partner. The current environment is creating additional opportunities marked by a flight to quality and with Guild's rising reputation we are a beneficiary. We will remain disciplined in our approach, but are encouraged by the prospects for securing future growth opportunities, which should allow us to continue to expand our share and scale our business to drive earnings growth. I will now turn the call over to our Chief Financial Officer, Amber to discuss the financials in more detail. Amber?

Thank you, David. As is our standard practice, my comments will focus on sequential quarter comparisons. For the second quarter of 2023, we generated $4.5 billion of total in-house loan originations compared to $2.7 billion in the first quarter and we are pleased with the uptick. Net revenue totaled $237 million compared to $104 million in the prior quarter and we generated net income of $37 million compared to a net loss of $37 million in the first quarter. On a per share basis, our net income was $0.61 per diluted share. Adjusted net income was $9 million or $0.15 per share and adjusted EBITDA was $17 million. Focusing on our origination segment, our gain on sale margin came in at 310 basis points compared to 343 basis points in the first quarter. Pull-through adjusted lock volume totaled $4.4 billion in the second quarter compared to $3.3 billion in the prior quarter. Our gain on sale margin on pull-through adjusted lock volume was 314 basis points compared to 284 basis points in the prior quarter. The gain on sale margins are in line with the market competition and reflects the current environment. 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 seeing some stabilization as excess capacity has 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 net income of $89 million, up from the $300,000 net loss in the first quarter with a 3% quarter-over-quarter increase in the unpaid balance of our servicing portfolio to $82 billion. 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 June 30 cash and cash equivalents totaled $106 million while unutilized loan funding capacity was $900 million. And the unutilized mortgage servicing rights line of credit remained at $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 1.1 times. Book value per share at the end of the quarter was $20.52, while tangible net book value per share was $17.01. 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 second quarter, we repurchased approximately 52,000 shares at an average stock price of $10.58 per share. As Terry mentioned our Board of Directors declared a special dividend. The dividend of $0.50 per share will be paid to shareholders of record on August 23, 2023 and payable on September seven 2023. In July, we have generated $1.5 billion of loan originations and approximately $1.5 billion of pull-through adjusted lock volume. Industry mortgage rates have picked up again maintaining the current more challenging market conditions. We continue to focus on gaining share through serving potential homebuyers with products and services that meet their needs as well as selective acquisitions. 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. [Operator Instructions] Our first question comes from Derek Sommers of Jefferies.

Hi. Good afternoon, everyone. Just kind of given the activity and acquisitions you guys have made since going public was wondering if you could provide an update on where your geographic mix has been trending in the past quarter.

Well we increased our market share in Wisconsin and we're in the top five market share in Wisconsin and -- but Cherry Creek is really our biggest volume increase and we're in the top three or four in Colorado for Cherry Creek now. And the last one in New Mexico we're number 2 in New Mexico. But those -- the Wisconsin and Mexico haven't been overall the market share nationally it hasn't changed in a national percentage but in those specific locations we're gaining some good strong market share.

Got it. Thanks. And then just on regards to the special dividend. You guys have been running kind of on a non-funding debt to equity ratio of about 0.1 times. With the dividend is there any meaningful change in the leverage target moving forward?

We're constantly assessing our current and forecasted cash position. And we are currently as you mentioned leveraged very low and do have the ability to borrow on our MSR for additional cash needs for dividend growth et cetera. We see this dividend as a distribution of accumulated earnings over the last couple years. And so we'll look at our total cash position see where we are and it might change slightly given the dividend that we're doing in September.

Okay. Got it. That's all for me. It's a great quarter.

Thank you.

The next question comes from Melissa Wedel of JPMorgan.

Good afternoon. Thanks for taking my questions today. I'm on for Rick. Just wanted to follow up on your comments about significant share being driven by purchase volumes. Right now that certainly makes sense. So it seems like we're looking at ever higher mortgage rates since the back half of the year. Can you help us sort of square the circle on how you're thinking about the purchase market over the next six to 18 months? And how you're positioned for that but also what you're looking for in terms of the shift in that market mix into next year as potentially rates come off, or do you have a different view on that? Thank you.

I mean we're really seeing that the purchase market because of the inventory issues it's still going to be very tight for the near future. And I would say through next year, the industry we're short over four million units to be at a healthy real estate environment as far as real estate transactions. So it's going to take several years to get that balance back. And so we're just going to keep focusing on how can we capture more of that purchase business by adding additional nichey-type products that are really designed to get that first-time home buyer into a home. And so we're just going to keep working on our strategy and we've continued to stay above the purchase industry. And for the MBA we're well above that and have continued to be and plan to keep executing in that direction.

Yes. And I think it's important to mention as well that we're very focused with our M&A activity and our growth on similar companies that are really excelling in purchase business as well. So we're able to grow meaningful market share just both internally through recruitment, but also through some of the M&A activity because they're very focused like we have been on the purchase business. And we'll continue to do that.

You just answered my follow-up question. Thank you.

Thank you.

The next question comes from Giuliano Bologna of Compass Point.

Congrats on another good quarter operationally. One thing I would be curious about getting your perspective on if you've obviously done a number of acquisitions back to back here. And you obviously mentioned the integration of those transactions. I would be curious where you stand on acquisitions? Are you looking for much smaller tuck-ins or midsized acquisitions that have a little more integration and execution around them at this point, or would you want to want to hold off temporarily while you digest the last transactions?

We're still actively pursuing acquisitions. And the Cherry Creek we took on 500 -- onboarded 500 employees in the first day they came on board. And they're in pretty good within 45 days they're almost going full speed. So it's every one of these we've gotten better at integrating them. So, we're comfortable continuing to work towards adding more of these types of acquisitions. And really the size is it matters more about what value add is it going to be to the company rather than the size. So are they a really big purchase shop? What kind of products do they do? What footprint are they in? And more importantly culture, does the culture fit?

That sounds good. And then thinking about -- you obviously are paying a special dividend this quarter. From a capital allocation perspective, I would be curious when you think about capital return versus transactions. I realize the transactions are not the most capital intensive but I'd be curious to get a sense of your kind of -- your framework for capital allocation in the near term given that there's a lot of M&A opportunities?

When we're looking at our cash position, we're always looking at our operational cash needs returning shareholder value and having enough capital to invest in growth while investing in our business as well. And then as I mentioned we do see this dividend as a distribution of accumulated earnings over the last couple years and as you know we haven't done a dividend since 2021. So, because of our strong balance sheet and our low leverage we have the ability to do both and we believe that both create long-term shareholder value.

That's great. Thank you so much and I will jump back in the queue.

Thank you. [Operator Instructions] The next question comes from Brian Violino of Wedbush Securities.

Hi. Thanks for taking my question. Just on the you had pretty strong origination growth sequentially. Just wondering if you have the breakout of how much of that was organic versus incremental originations that came from the acquisitions?

Amber do you have that number? I know--

No, we don't publish that anywhere but we did the Cherry Creek acquisition in the beginning of April and so there was some ramp-up associated with that. But other than that it's both -- there's seasonality partly. It's acquisitions partly. And just our recruiting as well has also -- we've been recruiting heavily since the beginning of the year so that's adding volume.

Okay. Thanks. And then just on -- I know you brought on the California team the 40-member team earlier this year. Is there a pipeline of not necessarily bringing on new mortgage companies but also new teams as well?

Yes. We do have a pipeline of both.

Okay. Thanks.

Thank you. [Operator Instructions] It appears we have no further questions in the queue. I will now turn the call over to Terry Schmidt for closing remarks.

Thanks everybody for joining us today. We're very pleased with our second quarter results and we'll just keep executing on our growth strategy. And we're looking forward to updating you on our next quarter call. Thank you.