GHLD - NYSE

Good afternoon, ladies and gentlemen, and welcome to the Guild Holdings Company’s Third Quarter 2023 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. 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 Guild'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, 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. 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 to discuss our third quarter results and strategic update. I am joined by our President, David Neylan, as well as our Chief Financial Officer, Amber Kramer. In the third quarter, we continue to adhere to the strategy we have consistently communicated with our focus on the retail purchase market and dedication to customer service, along with continuing to gain market share to position Guild for accelerated growth when the cycle turns. The ongoing industry headwinds in the mortgage market have been well publicized with high rates and prolonged limited housing inventory. The Federal Reserve aggressively raised the Fed funds rate during 2022 by 425 basis points and further raised it by an additional 100 basis points through July of 2023. Rates have remained unchanged ever since, but future rate changes are uncertain. According to the MBA, existing home sales in Q3 were down an estimated 16% from the prior year, and many homeowners with mortgage rates well below the current rates are choosing not to sell. This lack of supply, coupled with the increase in mortgage rates continues to put a strain on home buying affordability and overall activity. This led to an industry-wide sequential pullback in originations in the third quarter. Our results similarly reflect these challenges, and we anticipate ongoing muted demand in the near term. However, with this backdrop, Guild has maintained its proven approach centered on providing a personalized mortgage borrowing experience delivered by our knowledgeable loan officers and supported by our diverse product offerings. We are a retail distributed growth company, and we leverage our relationship-based loan sourcing strategy to execute on our mission of delivering the promise of homeownership. Furthermore, we are innovative and continue to develop products that not only contribute to the options we have for our customers, but also allows us to expand our outreach in communities we serve. Our customer relationships are a competitive advantage with our focus on the client life cycle starting at origination and extending through servicing. This focus not only allows us to generate more reliable income, it enables us to build an ongoing asset. We are not about a single transaction. We are about building relationships and being the lender of choice for our customers for all future transactions. We have built a brand in the industry that attracts like-minded companies and loan originators. In this challenging environment, we believe there continues to be consolidation in both M&A and organic originations with Guild increasing market share. We are confident in Guild standing as one of the industry's dominant retail mortgage companies. We have continued to invest in our people and our platform to both drive market share in the near term and to be positioned to accelerate growth when this cycle turns. We are well capitalized and remain confident that we have the right platform, products and people to allow us to deliver on our strategy. Now I'd like to turn it over to Dave Neylan. David?

Thank you, Terry. In the third quarter, we delivered total in-house loan originations of $4.3 billion as expected, slightly down from the $4.5 billion in the second quarter. We anticipate we will see continued pressure on originations in the coming quarters. However, on a relative basis, we benefit from our focus on the purchase mortgage market. In the third quarter, we originated 94% of our closed loan origination volume from purchase business compared to the Mortgage Bankers Association estimate of 82% for the industry. In addition to our organic growth objectives, we have selectively pursued external opportunities to expand the business. As previously disclosed, in the third quarter, we acquired First Centennial Mortgage a privately held residential mortgage lender headquartered in Illinois with branches predominantly located in the Midwest. They have a similar culture and platform to Guild, focused 100% on retail, local sales and operational fulfillment and their customer-centric business approach closely aligns with ours. This marked our third external transaction year-to-date. These opportunities exemplify our growth strategy and allow us to achieve several of our strategic objectives that include expanding our presence in existing markets and seamlessly entering new ones. This has allowed us to grow our market share and importantly, as we keep emphasizing, have positioned us for potential accelerated growth as the market returns. As Terry already touched on, the entire industry faces ongoing pressures. However, we remain confident that Guild's strategy that we have always adhered to is the one that will again prove to be successful in this cycle. We will continue to seek to expand our market share. We will selectively pursue adding good companies who share our approach and values, along with organic recruiting and providing our customers with products and service that they have come to expect from Guild. As Amber will discuss, we have prioritized maintaining our balance sheet strength and liquidity, which should allow us to effectively execute on this strategy. I'll 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 third quarter of 2023, we generated $4.3 billion of total in-house loan originations compared to $4.5 billion in the second quarter. Net revenue totaled $257 million compared to $237 million in the prior quarter, and we generated net income of $54 million compared to $37 million in the second quarter. On a per share basis, our net income was $0.88 per diluted share. Adjusted net income was $29 million or $0.48 per share, and adjusted EBITDA was $44 million. Focusing on our Origination segment, our gain-on-sale margin came in at 377 basis points compared to 310 basis points in the second quarter on funded originations. Gain-on-sale margins on pull-through adjusted loss volume increased 75 basis points quarter-over-quarter to 389 basis points and total pull-through adjusted loss volume was $4.1 billion compared to $4.4 billion in the prior quarter. During the three months ended September 30, 2023, we changed certain of our assumptions through enhancements to the models, using the valuation of our interest rate lock commitments and mortgage loans held for sale which resulted in a $17.4 million increase to gain on sale of loans. For our Servicing segment, we reported net income of $84 million compared to $89 million in the second quarter, with a 2% quarter-over-quarter increase in the unpaid balance of our servicing portfolio to $84 billion. The reduction in net income was due to a lower change in fair value due to valuation assumptions of $38.2 million in Q3 compared to $43.8 million in Q2. 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 September 30, cash and cash equivalents totaled $114 million, while unutilized loan funding capacity increased to $1 billion, and unutilized mortgage servicing rights line of credit was $336 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 1.0x. Book value per share at the end of the quarter was $20.96, while the tangible book value per share was $17.46. We continue to focus on optimizing our deployment of capital while managing through uncertain times with financial prudency and efficiency. 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. This includes the acquisition we completed during the quarter. In addition, during the third quarter, we repurchased approximately 87,000 shares at an average stock price of $11.74 per share. In October, we generated $1.3 billion of loan originations and $1.3 billion of pull-through adjusted lock volume. Industry mortgage rates have ticked up again maintaining the current more challenging market conditions as well as entering the seasonally slower fourth quarter. We continue to focus on gaining market 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. We anticipate continued pressure in the near term and remain confident in our balanced business model, which we believe results in more durable and sustainable performance across market cycles. And with that, we'll open up the call for questions. Operator?

We will now begin the question-and-answer session. [Operator Instructions] At this time, we will take our first question, which will come from Kyle Joseph with Jefferies. Please go ahead.

Hey. Good afternoon, guys. Thanks for taking my questions. Just first on the recovery on margins in the quarter. Just can you give us a sense for anything that drove that and your expectations for that going forward?

Yes. So as we noted in the release in the prepared remarks, we did have a $17.4 million increase to gain on sale in Q3 and that's not reflective of our organic higher gain-on-sale margin in basis points. That was due to us looking at our assumptions for estimates and doing a valuation change in regards to that model enhancement, if you will. And so we really think about gain-on-sale margins on originations in the future to reflect our operating performance rather than this model enhancement that we made in Q3. And I would say, if you look at the quarters prior to this, that the last five or six quarters, we are really hovering around that 330 basis points on originations, and we aren't seeing anything different that would shift that pending no other changes in the market.

Got you. And then I don't know if I could really parse it out in your results, but just talk about the opportunity that you guys are seeing in reverse and how that trended in the quarter.

Yes. And our reverse volume is overall immaterial to our overall volume, and it is in the KPIs that we're showing on the release and it's about $30 million in the quarter of originations. So we think that there's a lot more potential to roll it out throughout our retail group and are continuing to grow that area.

Got it. And then last one for me, just your perspective on the NAR announcement a couple of weeks ago and all the noise around that and any sort of potential risks or opportunities you see as a result of that? I know it's early stages.

Yes. We are very aware of this outcome in Missouri. There are various thoughts right now going around the marketplace, whether it's related to real estate or the lending side. And there really isn't any consensus that we've come to consider at this point. We do anticipate that there's going to be some sort of change and this industry is always evolving. We expect this may be another development that we'll need to adjust to. However, we've been through changing environments before and managed through them. This is no different. So we're just getting a lot of filters out in anticipation of some kind of change, and we'll certainly adapt accordingly, like we always have.

Got it. Thanks very much for answering my questions.

And our next question will come from Rick Shane with JPMorgan. Please go ahead.

Thanks, everybody for taking my questions. So Amber, you talked about the $17.4 million and that really puts the sort of economic gain on sale for the third quarter at about 3.3. Was the – it appears that the true-up was related to MSR but didn't actually go through the MSR fair value mark. Is that the right way to see things? Can you describe to us a little bit better what happened?

Sure. It's not related to the MSR mark. So it's – we had an assumption change of how the servicing value was incorporated into the fair value at time of lock and loans held for sale. And so it's running through the fair value mark on the gain on sale line. When we reassess our accounting estimates each quarter based on the available information and prevailing industry practices for valuation of similar types of assets. And based on that assessment, we determined to enhance our valuation model with assumption change. So that's where it sits. It's not related to the MSR in terms of the like impairment or recapture that you would see in the Servicing segment.

Got it. Okay. But it was – this is obviously – we know this because you didn't suddenly find $17.4 million of cash. So this was capitalization presumably of the MSR. So – and that's – I assume the line item within the balance sheet where we see that. So when we look at the numbers, it looks like you retained – the other thing that's happening, and this may be related to the acquisitions, your retention rate on Servicing, has historically been targeted in the 90s. When you made acquisitions, it's dropped as you brought platforms that were sellers – net sellers of MSR on and you've reworked their relationships. But this quarter was actually pretty much the lowest we've seen at 80% retained. Is that related to acquisition? Or is that related to the comment that we heard about enhancing liquidity on the balance sheet?

Really neither. It's just we look at the – how we value the servicing asset and what a service released correspondent would pay us for that asset. And we were in an environment this last quarter where the pricing was pretty aggressive. And so we took advantage of that, and that is basically all that happened.

Got it. Okay. That makes sense. And presumably, that environment is persisting. I guess the one thing that I would anecdotally say contravenes that a little bit is that we've heard from bulk purchasers of MSR that because there is so much dislocation amongst the originators that it's actually a very compelling time for them to be buying an MSR, they find it particularly attractive from a rate perspective.

I agree with your point, Rick, that is correct. But I think you've still got these correspondents that have capacity issues and are being pretty aggressive at getting cash, just getting additional loans to fill the cost to originate these loans. So we still are – we're still as an industry shedding the capacity and so that's really more of the driver in my opinion.

Okay. Got it. Thank you guys very much.

[Operator Instructions] Our next question will come from Don Fandetti with Wells Fargo. Please go ahead.

It sounds like the Q4 gain on sale margin would be in the 330 range, but that's still well below your historical in the high 3s. Do you see that trending up as we move into 2024? Is there enough capacity coming out of the industry or volume so low that you think that's kind of the range that we should be looking for?

We don't provide guidance going forward, but I will say that we're not seeing any changes occurring right now. I think volume is just going into a very seasonally slow fourth quarter on top of these inventory issues, we're not going to see any changes. And at this point, we don't know when the market will turn in 2024. We're hoping that it's at some point within the year, but it's hard to say.

Got it. And where are you in the acquisition cycle? Are you still seeing opportunities to where you think there could be more deals into 2024?

Our pipeline is still very strong. It seem like things slowed down a little bit in the summer months, but it's picking up again. So we do anticipate that we'll still be in the market to do additional acquisitions going forward and very similar to what we've done this year. It's pretty active still.

Okay. Thank you.

And our next question will come from Trevor Cranston with JMP Securities. Please go ahead.

All right. Thanks. Follow up to the last question about the acquisition opportunities. Can you maybe talk about what kind of opportunities you're finding to grow the business away from acquisitions, whether it be through adding employees from other companies that might not be in quite a stronger position as you guys or how you're seeing growth opportunities away from the acquisition side? Thanks.

Sure. Outside of acquisitions, we're always focused on organically growing as well and bringing in originators. And that, too, is more active than it's been – our pipeline is larger than it's been all year. And we hired a new recruitment manager, and he's doing a fantastic job. And I think it's just that the brand that we've built in the industry, everybody understands that this is what we do, whether it's acquisitions or organic and to date, our organic goal, we've actually met the goal for the year, and we still have two months left. So there still is quite a bit of opportunity there as well. So we're going both fronts.

Okay. Great. Appreciate the comment. Thank you.

And our next question will be a follow-up from Rick Shane with JPMorgan. Please go ahead. Rick, your line is open.

Sorry about that. I apologize. I should have asked this before and if it's disclosed anywhere, and I've missed it, I apologize. Should we assume that the pretax operating income on the $17.4 million adjustment is essentially 100%?

I mean it would flow through the income statement and apply the same – the same tax figure that our overall financials have.

Right. But there are no operating expenses or amortization or any.

Correct.

Okay. Got it.

Yes. And Rick, just to be clear, because of one of the comments you said, so the increase relates just to the fair value estimates driven by the enhancements to the model. So for the loans that are in our locked pipeline and held-for-sale inventory in the third quarter, when these loans are sold, this fair value-related gain will be offset at the time of sale. So I just want to make sure that's clear because you were talking about liquidity on the MSR, and it's not in there, it's really sitting in the loans held for sale on the balance sheet.

Got it. Okay. And so the way to think of this is not that you changed the assumptions which you would run through the fair value, but you literally just changed the model and said, okay, wait a second, the way we're enhancing the way we're doing this. And even if we had done the – if we were to do this retroactively and run the model, the numbers would have simply been different in the past.

It's just a model enhancement. And so it's just the servicing value and how it's incorporated into the fair value at the time of lock in the loans held for sale. And then like I said, it offsets the time of sale. So it's really just a balance sheet impact at the end of Q3 from that perspective.

Okay. Terrific. Thank you guys.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Terry Schmidt for any closing remarks.

Just wanted to say thank you for being on the call, and we'll just keep executing on our strategy, and we'll talk next quarter. Thank you.