Q4 2021 Guild Holdings Co Earnings Call
Good afternoon, ladies and gentlemen, and welcome to Gild, holding company's fourth 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 with instructions to follow at that time as.
As a reminder, this call will be recorded I would now like to turn the call over to Michael Kim Investor Relations. Please go ahead Michael.
You and good afternoon, everyone.
We began 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.
Clothing, the expected market for purchase loans and anticipated volumes and margins for the first quarter of 2022.
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 <unk>.
<unk> 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 filed today with the SEC and are also available on guilds Investor Relations website.
Participating in the call today are Chief Executive Officer Maryann Mcgarry.
Didn't Terry Schmid.
Chief Financial Officer Amber Kramer.
Now I'd like to turn the call over to Marianne Mcgarry.
Ann.
Thank you Michael.
Good afternoon, everyone and thank you for joining us.
As always I'm joined by our President Terry Smith, and our Chief Financial Officer, Andrew Kramer.
Our Chief operating officer, David Neyland will join us for Q&A after our prepared remarks.
I'm proud of the result skilled was able to deliver during the fourth quarter and full year of 2021 .
We originated nearly 9 billion of mortgage loans in the fourth quarter, bringing our full year total to approximately 37 billion up 5% compared to 2020.
Consistent with industry trends, our gain on sale margins softened during the course of the year.
But we maintained higher margins relative to those typically generated in the wholesale or a correspondent channel.
In part driven by our focus product and distribution strategies.
Turning to our financial results, we generated adjusted net income of 22 million for the fourth quarter of 2021 and 259 million for the full year.
Adjusted earnings per share came in at 37 cents and $4.27 for the fourth quarter and full year respectively.
And we delivered an adjusted return on equity ratio of 31% for the 2021 underlining the resiliency of our return profile across cycle.
Stepping back our consistent growth across cycles can be linked to two key differentiating factors for Guild fares.
First we have built a scale enabled and balanced business.
While rising interest rates represent a macro headwind for origination volumes and gain on sale margins across the industry. Our servicing business provides recurring revenue and cash flow with.
With higher interest rates compounding the value of the MSR assets on our balance sheet all else equal.
Second our originations business's unique well some of our peers have recently started shifting focus to purchase business as refinance activity slows and industry volumes increasingly shift in favor of purchased loans.
We have been building the requisite scale relationships and expertise in purchase over the last 60 plus years.
What we are is they purchased focused mortgage provider perched.
Purchased loans accounted for 62% of our mortgage volumes in the fourth quarter, well above the 44% figure for the fourth quarter of 2020.
From an industry perspective purchase loans accounted for an estimated 47% of overall mortgage volumes in the fourth quarter of 2021 according to the mortgage bankers Association.
Looking ahead, we're not immune to macro headwinds around rising interest rates and inventory limitations.
That said the MBA is forecasting steady growth and purchase volume through 2023 and.
And Guild has historically captured market share during periods of rising interest rates.
Furthermore.
Unlike more commoditized refinancing lending all purchased business isn't the same.
Our durable competitive advantages include our product mix brand equity proprietary technology stack and exceptional client service.
We compete on service by providing a personalised and customized experience to homebuyers.
And the efficacy of our client service was recently validated by our J D Power award for highest in customer satisfaction, and it's 2021 study.
This focus on customer service has resulted in more consistent volume across market cycles, while enhancing referral and retention rates.
Turning to distribution, our retail focused platform remains a key differentiating factor.
We have local infrastructure and boots on the ground, which engender strong relationships and superior client service.
Which has expanded across the country following the acquisition of residential mortgage services.
When selecting a mortgage provider our clients place a premium on the relationships and trust built with our loan officers overtime.
Our loan officers expertise translates into putting clients in the right product.
We also stand to benefit from powerful demographic trends that will drive strong growth in purchased loans for years to come.
Approximately 70 million millennials age 20 to 34 are increasingly reaching the age when individuals typically transition from renting to owning.
Millennial homeownership rates still lag comparable data for generation X and the baby Boomers generation, which we believe provides an opportunity for us to tap into the market for this demographic. These.
These tail winds align well with our long standing focus on the underserved and first time homebuyers with our established retail loan officer network.
For all these reasons and more I am more confident than ever that guild remains well positioned to drive sustainable and profitable growth across various market backdrops.
Finally, I want to thank all of our more than 5000 employees for their continued hard work and dedication.
It is their effort.
Every day that help us win new clients and maintain strong relationships with our existing clients.
Which in turn drives consistent and durable growth.
So with that I'd like to turn it over to our President Terry Schmidt.
Terry.
Thanks, Marianne is Marianne alluded to earlier, our balanced business model enhances and smoothed our growth across cycles.
Focusing on our servicing business, we delivered strong growth in unpaid principal balance and related revenue and earning contributions during the fourth quarter and full year of 'twenty, 'twenty, one, which partially offset some of the declines in our origination revenue and thereby served as a natural hedge.
As a reminder, our underlying servicing portfolio consist primarily of MSR is originated through our retail channel in 2020 . One we retained servicing rights for 84% of total loans sold and our unpaid principle balance grew 18% in 2021 to 71 billion driving a 22 per se.
The increase in total servicing fees for the year.
Now stepping back rising interest rates bode well for our servicing business as prepayment speeds slow, thereby supporting the level of unpaid principal balances. Furthermore, higher rates lift the underlying value of our MSR assets on balance sheet by extending the duration of servicing cash.
[noise] flows with the markups running through the income statement.
Finally, our servicing platform strengthens client retention and recapture rates during the year ended December 31, 2021 our purchase recapture rate increased by six 4% to 32%, while our refinanced recapture stayed relatively consistent at 63%.
Much of the step up in purchase recapture reflects the improving efficacy of our platform technology and analytics combined with the strong relationships our loan officers maintain with existing clientele.
So we remain focused on increasingly leveraging the synergies and diversification across our originations and servicing businesses to enhance our growth while mitigating the volatility of our revenue and earnings in the short run and over time.
I'll now turn the call over to our Chief Financial Officer, Amber Kramer to discuss the financials in more detail Amber.
Thank you Terry for.
For the fourth quarter of 2021, we generated $8 8 billion of total in house loan originations compared to $10 6 billion in the prior year quarter net.
Net revenue totaled 343 million compared to 454 million in the fourth quarter of 2020, while net income totaled $42 million or 69 cents per diluted share.
Year over year declines were mostly a function of lower origination volumes and tighter gain on sale margin.
<unk> net income totaled 22 million or <unk> 37 per share while adjusted EBITDA totaled 39 million for the fourth quarter.
Aside from a $16 8 million favorite favorable change in fair values at MSR due to higher interest rates during the quarter.
Adjusted figures also excluded a $13 $6 million change in fair value of contingent liabilities due to acquisition primarily related to Rms.
This was reflected as a benefit to G&A expense on the income statement.
That markdown of our contingent liability or earn out reflected softer volume and gain on sale margin trends at RMS consistent with broader industry trends.
Turning to our results for the full year 2021 total loan originations came in at $36 9 billion up 5% year over year.
Net revenue totaled 1.6 billion just shy of the level in 2020, while net income totaled 284 million or $4 67 per diluted share.
We generated 259 million of adjusted net income and 366 million of adjusted EBITDA for the year ended December 31, 2021 .
Our financial results reinforce the resiliency of our financial model as we remain profitable through mortgage cycles, our variable cost base flexes in conjunction with cyclical trends in origination volumes gain on sale margins and revenue.
Focusing on our origination segment for the fourth quarter, our gain on sale margin came in at 347 basis points, an $8 8 billion of total funded originations down from 436 basis points on $10 6 billion of funded originations in the prior year quarter, our gain on sale margin on pull through adjusted lock volume.
It was 394 basis points for the fourth quarter up from 381 basis points in the third quarter with the step up versus our funding margin primarily reflective of unfavorable fair value marks due to a reduction in locked volume at lower margins.
We'll do adjusted lock volume totaled $7 8 billion in the fourth quarter down 25% quarter over quarter due to rising rates through the quarter and moving towards normalized seasonality.
For context, it's important to understand how our gain on sale margins differ from others in the industry more broadly.
While market rates and capacity trends undoubtedly directionally impact profitability, we maintained higher gain on sale margins versus most publicly traded peers, reflecting our retail focused originations model and disciplined pricing.
Our purchase focused approach means we are less susceptible to volatile refinancing volumes and our margins are less vulnerable to shifting channel mix dynamics.
We sourced nearly 100% of our volumes via our retail loan officers. We believe our retail loan officers are better equipped with our platform to pivot when market dynamics shift.
Turning to our servicing segment, we generated net income of 27 million in the fourth quarter, a reversal from a loss of $25 million in the fourth quarter of 2020, reflecting higher fees.
Favourable inflection in MSR fair value changes due to valuation assumptions and lower expenses, primarily due to a lower provision for foreclosure losses in 2021.
For the fourth quarter of 2021, we booked a $16 8 million gain related to the MSR fair value adjustments compared to $11 million loss for the same quarter in 2020, primarily reflecting slower prepayment speeds.
Next we maintain a strong and liquid balance sheet as of the end of 2021 cash and cash equivalents, excluding funds used to pay down our warehouse lines totaled $243 million, while warehouse lines of credit totaled $3 5 billion was unused capacity of $1 5 billion.
Importantly, our book value per share was north of $15 as of December 31, 2021 while our tangible book value per share was $11.53.
Looking ahead, our capital light business model and strong cash flow generation enhances capital allocation optionality and flexibility, while we remain focused on funding originations and reinvesting in the business, we maintained ample excess cash to capitalize on strategically and financially compelling M&A opportunities.
As we have done in the past most recently with the RMS acquisition.
As is our standard practice I'd like to provide some insights on gain on sale margins and intra quarter origination volumes, we expect volumes and margins will both be adversely impacted by seasonal trends in the first quarter of 2022.
We delivered $3 9 billion of loan originations through the first two months of 2022 with total year to date pull through adjusted lock volume of approximately $4 5 billion.
Our estimated gain on sales through the first two months of 2022 was 415 basis points unfunded volume and 357 basis points on pull through adjusted locked volume.
Finally, we plan on filing our annual report on Form 10-K for the year ended December 31st 2021 in the next few days and connection with the preparation for our first year of Sox compliance certain internal control deficiencies were identified at that represented a material weakness that require corrective and remedial actions.
We are constantly reviewing our internal controls controls over financial reporting and as part of our four O. Four assessment, we identified gaps in our controls based on these gaps we evaluated their impact and concluded there is no impact on our financial statements. Our remediation plan is in place and with that we'll open up the call for questions operator.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from a Q4 participants using speaker equipment it may be necessary.
To pick up your handset before pressing the star key.
Our first question comes from the line of Trevor Cranston with JMP Securities. Please proceed with your question.
Hi, Thanks, good afternoon.
I guess the first question.
On the update you guys just gave for the first quarter.
I think you said the gain on sale and kind of pull through adjusted basis.
357 basis points for the quarter.
Looking at the historical gain on sale numbers on slide eight that's obviously sort of lower where they have been.
In recent history.
And maybe just comment on kind of what youre seeing in the competitive landscape.
Do you think that margins could be kind of below where they had historically bought some for some period of time.
And what you believe is driving that thanks.
Sure. Thanks, Trevor this is the number so yeah.
Yeah as you can see the the basis points on pull through adjusted lock volume is lower than the fourth quarter and we are seeing competitive pressures on margin, obviously and you know we look at our local disciplined pricing approach and you know want to remain competitive.
Typically we have a longer gain on sale a cycle. So you know some other companies might be discussing state stabilization as we saw last year. We were on the backend of win gain on sale. It was dropping so we're we're still seeing that decrease overall, we think that theres going to be continued pressure on margins.
But now starting to see some of these companies finally shed some excess capacity will help them, but they're the natural volume drop and the competitive nature and the volatility of the market is is pushing those down right now.
Okay Gotcha that makes sense.
And you mentioned the impact on adjusted EPS from a change in the contingent consideration in the fourth quarter.
Which was related to the outlook or volumes and margins.
I'm curious can.
Can you remind me what goes into the evaluation of the goodwill that's on the balance sheet.
Future changes in the outlook.
Look for volumes and margins could potentially have an impact on the.
Carrying value of the goodwill and so forth.
Sure I mean, we do an overall impairment analysis as you know.
Our requirements and so we would we would look at overall the expectation of the the asset of the goodwill and there was no no change to goodwill overall and based on what we know now we can't predict the future but.
The the liability and the earn out was specific to the the volume and the gain on sale, but we don't see any impact to the goodwill.
Based on our analysis that we run.
Okay got you I appreciate the kind of thing.
Yeah.
Our next question comes from the line of Rick Shane with JP.
Proceed with your question.
Good afternoon, everybody and thanks for taking my question.
If we look at the run rate on the lock volume for the first quarter on basically sort of the quarters 13 weeks long or about 10 weeks in.
And then we compare that to some of the addressable market estimates.
Looks like you are suggesting work its chair is declining in the first quarter.
Is that what you think youre seeing in the market and if so what's driving that.
Given the shifts that we're seeing.
Yeah.
Yeah. So overall, our pull through adjusted lock volume through February was about four and a half billion and right I you know we're getting into more.
Normal seasonality, where it heavier purchase this is a lower purchase them you know the seasonality of purchase business.
Lower also in in the winter so there's going to be some impact for that and there is some inventory constraints overall, so where some people might be looking at refi, specifically and not as much focused on purchase that would affect that number overall.
Got it okay. So that so there is actually a seasonality to your market share given the the origination mix.
Yes.
And do you think that as competition is supply and demand is a little bit out of balance in terms of purchased during the first quarter that that further pressures gain on sale is that the other element that we're looking at them and the reason I ask is do we think about modeling it through the <unk>.
Rest of the year, we can think about seasonality in terms of market share should we think about seasonality in terms of gain on sale as well.
Yes.
Yeah, I mean, the part of being in the purchase focused businesses that we're not as susceptible for the for the refi rate changes, but overall I think just as capacity has shed theres going to be less.
Less pressure on margins longer term I mean that you know all else equal because you know we don't know what's going to happen in the market I don't think it's necessarily a direct correlation to the purchase seasonality business I think it's some other you know changing of the environment and what.
Refi versus purchase mix overall.
And then.
I apologize for asking one more question, but.
Specifically what were the material weaknesses with it.
The accounting framework, just so we understand that better.
Well first of all I just want to make sure everyone understands there is no impact to the financial statements everything that we that we presented in the past and in our K that we'll file in what we're presenting here no impact them and we do have the remediation plan is in place and.
There was mostly just implementation of Sox overall and a lot related just purely the documentation. So controls were in place, but not documented properly. According to Sox and which is why we haven't had any issues with our financial statements and the accuracy of them in the past.
Got it okay. Thank you for the clarification.
Yeah.
Our next question comes from the line of a Galliano Blackman with Compass point. Please proceed with your question.
Thank you.
Starting off with here is I was curious was.
Thank you our comparable.
So you're starting to reported cash number and liquidity side is there a rough sense of how much Uh huh.
How much youre borrowing down your warehouse lines and how much cash from.
Patrick contributing in two of our farms directly bring them down.
Yeah, it's about $45 million. So we would you would gross cash up by that to get to the total number.
Okay.
That's consistent with where we were prior quarter as well.
And I guess.
Please come forward.
I'd be curious if youre seeing any shift in the market environment from an M&A perspective.
I'm sorry.
We're going through a normalization process from Morgan so they'll come back.
Yeah, well closer to normalized levels.
The answer is all stabilized and I'm curious if you're seeing increased.
Increased activity from.
Carphone for sale.
And then from there what your appetite is right.
What type of platforms.
Awesome.
From an M&A perspective.
Sure I can answer that this is Terry we are seeing more activity, it's just starting up and so we're.
Thinking that the pipeline will continue to grow over the next nine months and we're still kind of focused on retail businesses.
We like businesses that have a decent market share in their area and where they've got good leadership that want to stay and we can take them to the next level under guilds platform. So nothing's changed as far as what we're looking for and <unk>.
Yes, there we were seeing things I'm starting to to get more active and we are very interested.
And he has this maryanne and just to add to that is storage.
When we've been in a rising interest rate market and the shift from a refinance dominant market to a purchase we always see opportunities so I.
I wouldn't expect anything different.
That makes sense and then yeah.
Related to that topic.
So if you think about.
Okay.
Hum.
Thank you our capital return.
Is there any change to the thought process on capital return.
Then they kind of are.
A follow on to that is yes.
Is there any appetite for share repurchases.
Part of that equation.
No no sugar up closer to tangible.
Tangible book value.
Right now there's no change to what we've done in the past we're constantly assessing our liquidity and are investing back in the business looking at M&A opportunities as well and we.
Maintain a strong balance sheet and want to be in a good position, especially with the compressed margins that we're seeing so we'll continue to monitor our liquidity and then you know assess quarterly with the board as we always have if we believe that we don't have financial.
Opportunities to invest in then we would decide at that time, if we would return capital to shareholders.
That sounds good. Thank you for answering my questions and I'll jump back in the queue.
Yeah.
We have a follow up question from the line of Rick Shane from Jpmorgan. Please proceed with your question.
Oh, I didn't expect to get them out quickly, but thank you.
So if we look at the gain on sale of 347 can you just just for us just aggregate.
How much cash gain on sale versus how much is capitalization of your MSR. So we can understand that trend as well.
Yes.
Yes, so for a total gain on sale its about.
70%.
That we're getting.
In cash.
The rest is gain on sale. So we're coming in our cap rates are coming in around still around 100.
Basis points.
And then the rest would be.
Cash.
Got it and were there any.
You had disclosed that about 80% of.
The volume was sold servicing.
And were there any portfolio sales during the quarter as well.
No we didn't have our overall portfolio that we show on the.
Roll forward not include we did get rid of our sub servicing portfolios, but that's immaterial in and only a footnote I'm so I'm.
We're not in the business of selling or M. S. Ours, and you know we want to support our client for life strategy strategy. So we'll hang on to those overall from our retained perspective. We also are still slightly impacted by RMS selling 100% service released as part of fourth quarter. So if we.
Exclude that we were still around the 89% service retained.
Perfect.
Helpful. Thank you guys.
Okay.
Okay.
Oh go ahead I'm sorry.
Just to clarify that question Rick is when we were Onboarding RMS. They were we were we were service releasing the majority of their product, but now that they are fully boarded onto guilds platform, we're retaining more of the servicing.
So the goal is still to retain yes.
Yes.
Yeah.
That is all the questions that are in queue I would like to hand, the call back to management for closing remarks.
Well, thank you for joining us today and have a great evening and we look forward to updating you on our next call.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Yeah.