Good morning ladies and gentlemen, and welcome to the Guild Holdings Company First Quarter 2021 Earnings Conference Call. At this time all participants are in a 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 Michael Kim, Investor Relations. Please go ahead, Michael..

Thank you, and good morning, 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. These statements are based on the company's current expectations.

Actual results for future periods, they 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 risk factors in Guild's Form 10-K and 10-Q and 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 where appropriate to the corresponding GAAP measures can be found in today's earnings release filed with the SEC, as well as on Guild Investor Relations website.

Participating in the call today, our Chief Executive Officer, Mary Ann McGarry; President, Terry Schmidt, and Chief Operating Officer, David Neylan. Now I'd like to turn the call over to Mary Ann McGarry.

Mary Ann?.

Thanks, Michael. And good morning, everyone. We've got a fair amount to cover today with our earnings and the acquisition we announced this morning. And we want to make sure to leave plenty of time to address questions. So, let's get started.

Terry and I will walk through highlights from our first quarter results, and then we'll turn our attention to our acquisition of residential mortgage services, or RMS for short. We posted a presentation on our website and we'll be referencing during our prepared remarks. So, starting on slide 3.

Key highlights for the first quarter included strong growth in originations with funded volumes up 70% year-over-year. In turn, our net revenue more than tripled, while our net income and adjusted net income were up strongly versus the prior year quarter.

We believe our results reinforce our differentiated business model focused on purchase lending, which has generated more consistent origination volumes and higher returns versus refinancing activity across interest rate cycles.

Furthermore, our expanding geographic footprint, both through acquisitions and organic growth remains a key competitive advantage when it comes to driving profitable growth and shareholder value. We are growing our business and existing MSA's and entering new markets by recruiting loan officers to our platform.

Over the last five years, 80% of Guild's production has come from loan officers that are still with Guild. This approach results in our high retention rates, and our ongoing coaching programs and system enhancements drive improving productivity for our existing loan officers.

Technology continues to reshape the mortgage industry, and we believe our proprietary platform will increasingly add value. Our data analytics help us optimize prospecting, while our digital capabilities provide clients with a full suite of production and fulfillment services. And we focus on optimizing the servicing portfolio and client retention.

Originating loan officers maintain relationships, which drives repeat business. And our data reinforces the efficacy of our model with our refinance recapture rate remaining strong at 69% for the quarter. So, with that, I'd like to turn it over to our President, Terry Schmidt.

Terry?.

Thanks, Mary Ann. We're pleased to again report strong financial results for Guild Holdings Company. For the first quarter of 2021, we generated $9.8 billion of loan originations representing 70% growth year-over-year.

Net revenue totaled $526 million up more than 200% from $170 million in the first quarter of 2020, while net income totaled to $161 million, or $2.67 per diluted share.

Adjusted net income, which excludes the change in fair value of MSRs due to model inputs and assumptions, acquisition related contingent liabilities and stock-based compensation was at a 4% year-over-year to $106 million primarily driven by the strong growth in origination volumes.

And we generated adjusted earnings per share of $1.77 for the quarter. Starting with our Origination segment, volume growth over the year ago quarter remained strong.

Pull through adjusted locked volume totaled $9.3 billion in the first quarter, with 37% of closed loan origination volume from purchase business compared to the Mortgage Bankers Association average of 29%.

Gain on sale margins on originations increased by 9% year-over-year to 457 basis points, while the margin on pull-through adjusted locked volume grew 61% year-over-year to 480 basis points. Segment net revenue grew 86% year-over-year to $448 million primarily driven by higher loan origination fees and gain on sale of loans.

Putting it all together, the origination segment net income increased to $160 million for the quarter, up 133% year-over-year from $69 million. Turning to our Servicing business, our unpaid principal balance grew 25% year-over-year to $63 billion as of March 31, 2021.

Following suit, total loan servicing and other fees increased by 17% year-over-year to $45 million for the first quarter of 2021 with net income attributed to the servicing segment totaling $67 million, compared to a loss of $79 million in the prior year quarter, largely reflecting a favorable turnaround in MSR fair value adjustments.

Importantly, we retained servicing rights for 94% of total loan sold in the first quarter of 2021 further reinforcing our symbiotic business model that drives sustainable growth across a variety of market and interest rate backdrops.

Our balance sheet remains strong and highly liquid with $315 million of cash and cash equivalents, excluding funds used to pay down our warehouse lines as well as $2.1 billion of warehouse lines of credit with unused capacity of $1 billion as of March 31, 2021. We remain focused on capital allocation to drive long term value for our shareholders.

In addition to funding originations, ongoing reinvestment in the business, and the RMS acquisition, the Board of Directors declared a special cash dividend of $1 per share payable on or about May 28, 2021 to our Class A and Class B common stockholders of record on May 21, 2021.

While we are not providing forward-looking guidance, we did want to provide an update on the second quarter. To that point, for April 2021, our loan origination volume was $2.8 billion and total pull through adjusted locked volume was approximately $2.5 billion.

And looking ahead, as many others in the industry have communicated, we do anticipate several macro factors to challenge near-term growth prospects for the mortgage industry more broadly. From a volume perspective, refinance activity likely continues to soften as interest rates rise. Turning now to profitability.

Gain on sale margins will likely normalize as supply and demand trends converge and competition remains intense. We are not immune to these macro headwinds, which we expect will impact near term trends across origination volumes, gain on sale margins, revenue and earnings.

That said, we remain confident in delivering sustainable and profitable growth across cycles, reinforced by our 60-year track record, reflecting our differentiated purchase focus business model and scale enabled retail distribution platform combined with our proprietary technology stack.

More specifically, industry origination volumes are expected to increasingly favor purchase volumes as interest rate cycles turn. Moreover, our purchase business is different and that we compete on service, not price and leverage our long-standing relationships with existing referral partners and past clients.

Finally, the retail channel has historically driven higher gain on sale margins relative to the wholesale and correspondent channels. So now, let me turn it back to Mary Ann to discuss our exciting residential mortgage services acquisition.

Mary Ann?.

Thanks, Terry. We're pleased to announce the acquisition of residential mortgage services. We think this transaction is compelling from a strategic and financial perspective and represents a very attractive use of capital. Terry and I will provide some of the transaction highlights.

Let me start by emphasizing, this is a powerful combination that will be accretive to earnings with RMS increasingly leveraging Guild's scale, technology, and in-house platform to accelerate growth in originations market share, and profitability as we move forward.

The upfront purchase price equates to 3.25 times estimated 2021 earnings, which we believe is an attractive valuation multiple. The upfront consideration will consist of 91% cash and 9% stock. In addition, the transaction structure includes an earnout component to align our interest.

More specifically, the consideration includes the three-year earn out that is capped at 50% of RMS's pretax production segment earnings subject to minimum profitability hurdles. This transaction is expected to close in the third quarter of 2021. And RMS's management team and key personnel will continue to run their business.

Turning to Slide 9, let me walk through the transaction highlights. First, RMS's impressive leading position in the Northeast will extend and complement our geographic footprint into key markets, thereby meaningfully enhancing our prospects for growth.

By leveraging Guild's in-house servicing capabilities, technology and expertise, RMS will be better positioned to extend the length of client relationship and capture repeat business. Second, RMS's business mix is highly aligned and mirrors Guild's, in terms of their focus on purchase business through the retail channel.

Since 2010, purchase origination volumes as a percentage of total originations have averaged 69% at Guild and 70% for RMS, or 22% and 23% higher than the broader market respectfully. We believe this position us well to continue to generate durable volume and consistent margins post close.

Similarities in strategy and a client centric approach will allow us to provide clients with a consistent experience across the United States and efficiently integrate RMS. Third, as I mentioned earlier, the transaction is very compelling from a financial standpoint.

We are leveraging our strong and liquid balance sheet and we expect the transaction to be accretive to 2021 earnings per share. Fourth, the deal represents a great opportunity to invest excess cash to generate an attractive return on capital.

There's a strong culture alignment with both teams dedicated to supporting local communities and building trusted client relations. Our similar values will enable Guild to efficiently integrate RMS and provide clients with a memorable customer experience across the United States.

Next, we expect to generate enhanced gain on sale margins for RMS and realize expense synergies over time, further strengthening our proven M&A track record. And finally, this is our seventh successful acquisitions since 2008, reinforcing our proven and disciplined M&A strategy. Turning to Slide 10.

RMS is an independent retail lender with a strong presence in the Northeast. Founded in 1991, the company has offices across 14 New England and Mid-Atlantic states. And it's the number one purchase lender in Maine and New Hampshire, led by President and CEO, James Seeley RMS maintains a strong and tenured management team.

While 2020 was a banner year for RMS, with $8.5 billion of originations and more than $100 million of net income, even more impressive is the company's strong and consistent growth and business mix over time.

Origination volumes have compounded at an annual growth rate of 26%, while purchase loans have accounted for 70% of total origination volumes over the last 10 years, as shown in the Appendix. So, in summary, [Indiscernible] we expect servicing teams.

As a result, we're even more confident in being able to deliver profitable growth across cycles and drive long term value for shareholders. So, with that, I will pass it back over to Terry to discuss the business and financial benefits in greater detail..

Thank you, Mary Ann. I want to spend some time walking through the strategic and financial attributes for this transaction on Slide 11. At a high level, RMS fits well into our disciplined acquisition strategy, given the firm's strong presence in local markets, purchase orientation and cultural alignment.

More specifically, RMS brings immediate scale to a new region with strong potential upside for growth under Guild's leadership, and there is a great deal of consistency across our two firms as it relates to business mixes, distribution channel focus, marketing strategies and corporate cultures.

We believe these similarities will facilitate a smooth integration process, ongoing excellence in customer service and sustainable origination volumes, margins, and earnings even as the interest rate backdrop shifts.

From a financial standpoint, we expect acquisition to be highly creative from an earnings perspective, as we anticipate driving synergies over time reflecting our proven execution capabilities and operational expertise.

Even as RMS already maintains attractive ROEs on a standalone basis, so the transaction opens up a sizeable and previously untapped market for us with strong potential upside for growth. And you can see the strong and consistent growth RMS has generated over the last 10 years on Slide 18 in the Appendix.

Moving over to Slide 12, maps out our geographic reach before and after the RMS acquisition. As clearly demonstrated, the acquisition of RMS further enhances our nationwide presence and provides a strong foothold in the Northeast.

Through the transaction, we will add 250 loan officers in approximately 70 branch locations, bringing our total loan officer counts to more than 1350 across 270 retail branches. On Slide 13, we lay out how adding RMS in the mix leverages our core competencies and enhances our competitive positioning and growth prospects.

As mentioned earlier RMS's business mix is strongly aligned consistent with the Guild's footprint given its purchase focus retail strategy. Proforma for the acquisition, Guild with RMS combined generated $42 billion of retail channel originations last year, ranking 7th amongst non-bank lenders in 2020, as shown on the chart on the bottom left.

And looking at the five-year period ended December 31, 2020 purchase loans accounting for 72% of RMS's origination volumes, bringing our proforma mix to 66% or 15 percentage points above the overall market at 51%.

In essence, we are doubling down on the purchase market with the retail channel which we believe will drive more consistent earnings and more attractive gain on sale margins across interest rate cycles. We have a history of growing through targeted acquisitions with a disciplined strategy and proven track record as shown on Slide 14.

More broadly, we look to partner with management teams that share our values and commitment to innovation, creativity and collaboration. We continue to focus on companies that maintain strong positions in local markets with clearly defined approaches to driving sustainable growth.

We prioritize incorporating meaningful earnouts as a key component of transaction structures to align interests and maintain attractive return on investment.

And post-acquisitions, while we implement integration plans to optimize operational efficiencies, we also allow them to continue executing on strategies that have driven historical growth and made them successful. Another key component of our strategy is driving strong growth in realizing meaningful synergies post-acquisition.

Looking back across the six transactions completed over the last 12 years, origination volumes for acquired companies increased by averages of 29% and 37% in the second and third years, following each transaction closing. Finally Slide 15 shows the timeline for the seven acquisitions we have made since 2008.

While the transactions have varied in terms of sizes, footprints and contributions, we've been able to consistently enhance growth post-acquisition. Drivers include increasing market share and volumes, enhancing gain on sale margins, leveraging Guild's proprietary technology platform to improve efficiencies, and realize expense synergies.

Looking ahead, we expect to continue to leverage our public currency and strong brand to further accelerate growth with ample balance sheet capacity to capitalize on incremental M&A opportunities should they arise. Before we take questions, we wanted to wish Amber, our CFO and her new baby well.

So, with that, I will turn it back to the operator to open up the call for questions.

Operator?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. First question comes from Don Fandetti with Wells Fargo. Please go ahead..

Hi. Good morning. So, looks like gain on sale margin held up pretty well in Q1 in March. I was wondering if you could talk a little bit about the near-term outlook in April. And going forward a gain on top adjusted mark volumes, a lot of peers have talked about significant interaction in that margin..

Sure, I can take that question. This is Terry. Yeah, we are following the industry as far as getting caught up with capacity and seeing that the industry is just, the margins are tightening, getting back to normalized levels.

So historically, we outside of refinance periods, we've averaged about 380 basis points in gain on sale and expect that, that type of trend is we're starting to see that similar to our historical levels..

Got it.

And then on the dividend, the dollar special dividend is that's going to be the sort of plan going forward that we'll see special rather than a quarterly ongoing dividend?.

Mary Ann?.

Yes..

Okay. All right. Thank you..

Thanks, Don..

The next question comes from Rick Shane with JP Morgan. Please go ahead..

Thank you for taking my question. And Dan really hit upon it, in terms of what you see in terms of normalization gain on sale.

Two things to explore just a little bit further, as we reach equilibrium, just like we saw a period of gain on sale that exceeded historical norms, where do you think we could --where historically have you seen a trough during the periods where equilibrium is resetting and supply actually exceeds demand?.

We're not giving forward guidance on gain on sale. However, I would say that historically, the low was probably about 50 basis points below the 380 mark. But on average, again, we've overtime been extremely consistent at the 380 mark..

Got it. And I appreciate both that, that is not guidance and also your willingness to provide some context, both are helpful.

As that shifts, should we think about the composition of gain on sale, shifting a little bit in terms of mix of cash and MSR cap as well?.

I would say that would be the case. Because as rates rise, the value of the MSR goes up. So, and we're already seeing that our MSR value, because of the rate increasing the prepayment speeds slowing down, the values are starting to increase. So, it will change somewhat to be a little bit higher weighted on the MSR side..

Got it.

And then last question, when we think about that cash mix, and we think about your commission expense, can you reach a level where the cash gain on sale is below commission? Or is it going to - or sort of do you just reach a point of breakeven? How should we think about that just from a cash flow perspective?.

Historically, we've never reached that point..

Okay, great. Thank you, guys very much, and congratulations to Amber..

Thank you..

The next question comes from Trevor Cranston with JMP Securities. Please go ahead..

Hi, thanks.

So, on the RMS acquisition, first, just a point of clarification, when you mentioned the purchase price and the company's tangible book value, is the expected purchase price just equal to tangible book value? Or is there any sort of premium to book built into that?.

There is a $80 million premium - cash premium that we're paying about book, tangible book..

Okay, I got you.

And then initially how much of their book or how much how large their servicing portfolio is, that will be coming over as part of the acquisition?.

Sure, they have a $700 million approximate servicing portfolio, so it's very small. So, we really looked at this transaction as a multiple of earnings. Because their balance sheet is really mostly short-term inventory related, and the entire balance sheet outside of the MSR will probably turn in 90 days. So, it's really an earnings play..

Okay, that makes sense. And I guess, as you laid out the sort of similarities in the companies and why it was an attractive target for you guys to go after.

And as you mentioned the synergies you expect to be able to realize over time, I guess has RMS historically been a company that's been able to recapture on service? Or has that not really been something they focus on? And is that, a part of the synergy that you guys think come through for the combined company over time is bringing the recapture expertise you guys have to the business that they've been doing? Thanks..

Trevor, this is Mary Ann, I can answer that. We see as they have a strong purchase hold and since they don't have a portfolio, they don't recapture like we have and don't have - we see that as a synergy going forward.

But they have such strong customer relationships that they did do a fair amount of refinance transactions, just from their own CRM and building relationships. But we see that as a very positive synergy going forward.

And with our platform and technology and ability to stay connected with our customers through the life of the loan, we feel that they will benefit from our technology and CRM platform..

Yeah, to add to Mary Ann's point, their business model has been primarily to sell on a service release basis. And or sell the servicing on a flow basis. So, their servicing was so small, just when there was some liquidity issues back in March, they started retaining some volume, but their long-term plan has been to service release.

So, they are super, super excited to be at Guild to be able to get that, to drive that life of life of loan and customer for life concept. And that they just feel like that's such a huge part of growing their business going forward. So, we're really excited..

Okay, that makes a lot of sense. Thanks for the comments..

[Operator Instructions]. The next questioner is Giuliano Bologna with Compass Point. Please go ahead..

Good morning, and congratulations on a great and productive quarter with the dividend and the acquisition. I guess starting off with a little bit more of housekeeping types of questions.

I'd be curious how much cash is currently being used to pay down the warehouse lines, and also the MSR lines, just to get a sense of kind of what your total liquidity is? And then, similar kind of cleanup topic is, if there's any Ginnie Mae EBO contribution in the period?.

Sure. So, our cash at the end of Q1 was $315 million and our buy down on the warehouse side was $131 million. So, if you add that our total cash is about $426 million, and then we actually paid down our MSR financing at the end of the year. And so, our MSR is leveraged at about 30%. So, we've got a lot of capacity there to borrow.

So, we're in still very good shape from a cash perspective. And we feel like we have a lot of different levers to get to liquidity if we needed it. And so, we're we feel very comfortable where we're at..

That sounds very good. Then switching over to kind of the acquisition for quickly. Obviously, they've been selling our service release basis, the majority of their production volume, historically. I would be curious from a margin perspective, obviously, there's some margin impacts of that. And I'm curious if there's margin outside opportunities.

I realize it's not necessarily - it's hard to necessarily say exactly where that is going forward. Because the forward numbers will change.

But is there an opportunity for Guild to increase margins just by having the ability to maintain retain servicing, and then also there are opportunities on the back end with recapture also earning out the MSRs et cetera? So those are different factors that can come into play here..

Yes, yes, we believe there is a good opportunity to improve the execution on the secondary side, and by retaining the servicing. So, in the past, we've been able to increase improve the execution by 20- 25 basis points at a minimum with past acquisitions. And we believe that we'll be able to do that as well with going forward with RMS..

That's something and I think, historically, I think, going back Guild's for the past decade or so has been cash flow positive on origination going out of pretax basis, and that there's some taxes also on that around selling some servicing release.

I'm kind of curious how RMS and if they're in a similar position - if they would be in a similar position if they shifted over to your kind of mix of service and retain versus release?.

Yeah, we believe that in over time, they will mirror Guild's performance and their business mix is very, very comparable to Guild's. And we believe that they will eventually when we're fully integrated look like Guild and everything else we have..

Yeah, to Mary Ann's point, you got to keep in mind that this is a big transaction and it's going to take us we feel through the end of the year to completely integrate them onto our platform.

So, once they're completely on our platform, then we're going to experience - they will experience that the gain on sale margins based on Guild's execution and retaining, but it will take through the end of the year to transition..

Okay great.

And then just a very quick click on, if there's any Ginnie Mae or Ginnie Mae EBO contribution in the quarter, if there was did you see that recurring?.

Ginnie Mae contribution? You mean,.

From some of the early buyouts? If you're,.

Yes, there has been. I've got to get that number for you. I can respond but I'll have to look at the number but yes, there has been and it is increasing. We were we bought a decent amount of loans for us, the decent amount of loans, we did early buyouts this first quarter. So, it is yeah, it is growing..

But it's not a material..

Yeah, here it is. I found it. It was about [ph] $1.8 million for Q1 and compared to Q1 of 2020 it was a $1 million..

That's great and very helpful. I really appreciate the time and congratulations to Amber. I'll jump back in queue now..

This concludes the question-and-answer session. I would like to turn the conference back over to Mary Ann McGarry, the CEO for any closing remarks..

Well, thank you everyone for your time and interest. And we look forward to continuing to discuss our progress on future calls. Thank you..

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day..