Q1 2022 Guild Holdings Co Earnings Call
Good afternoon, good morning, ladies and gentlemen, and welcome to the gilt Holdings company first quarter 2022 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'd now like to turn the conference over to Michael Kim Investor Relations. Please go ahead Sir.
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 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 and guilds Form 10-K, and 10-Q and then.
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.
Responding GAAP measures can be found in our earnings release filed today with the SEC and are also available on <unk> Investor Relations website.
Participating in the call today are Chief Executive Officer, Barry I'm, Mcgarry, President, Terry Smith, and Chief Financial Officer Amber Kramer.
Now I'd like to turn the call over to Maryann Mcgarry.
I am.
Thank you Michael.
Everyone and thank you for joining us as always I'm joined by our President Terry Schmid, and our Chief Financial Officer Amber Kramer.
Our Chief operating officer, David Neyland will join us for Q&A after our prepared remarks.
For the first quarter of 2020 to our financial results reinforced the benefits of our differentiated and balanced business model.
Origination volumes and gain on sale margins compressed compared to prior quarters consistent with broader industry trends.
Adjusted net income and earnings per share came in at 32 million and 53 cents respectively.
For the first quarter of this year.
Our servicing platform, which Terry will discuss in further detail acted as a hedge with strong growth in servicing fees as well as sizable gains and the underlying value of the MSR asset on the balance sheet.
Yeah.
Focusing on our originations business, we believe that we remain well positioned to gain market share over time, given our unique purchased focused model and retail infrastructure with a loan officers in communities throughout the United States.
However, near term purchase market share trends have been impacted by limited inventories rising interest rates and increased competition.
We have been through many economic cycles cycles over decades, and believe we have demonstrated our ability to sustain profitability during challenging market conditions.
Despite near term pressures, we are confident that our purchase model will enable us to effectively navigate the current cycle.
We have remained fiscally responsible and believe our platform infrastructure product breadth and compensation structures will drive sustainable purchase market share gains over time.
Particularly as the industry volumes continue to shift in favor of purchase activity.
Purchase loans accounted for 66% of our mortgage volumes in the first quarter of 2022.
Up from 62% for the fourth quarter of 2021 inch.
Industry wide purchase loans accounted for an estimated 55% of overall mortgage volumes in the first quarter of 2022. According to the mortgage bankers Association.
Beyond our attractive value proposition with loan officers, we are focused on continuing to leverage killed scale brand team and platform to proactively capitalize on opportunities to gain share during the current cycle.
The mortgage industry remains highly fragmented with some smaller players lacking the scale and resources to adapt to shifting competitive dynamics.
In contrast, we have built a leading retail distribution platform with a strong management team that has a proven track record of successfully navigating through changing mortgage cycles.
Innovation is part of our identity with continued product development, a key differentiating factor during mortgage market downturns.
As an example, we worked with investors and the home depot to introduce Green Smart advantage, a new program designed to help the homebuyers save on utility costs and manage multiple payments by bundling the cost new energy efficient appliances.
And two mortgage loans.
Smart advantage reduces upfront costs and ongoing utility expenses for homebuyers and consolidates related payments, while promoting the purchase of more sustainable appliances.
As mentioned, we believe our value proposition shines through particularly during down cycles with our focus on customer service relationship building and product development increasingly resonating with prospective loan officers.
As a result, we have shown that we are adept to adding to our team in an accretive way during market dislocations and our ongoing recruiting efforts are off to a strong start this year, while it takes time for incoming loan officers to build volume we expect that our.
Expanding retail footprint will drive incremental growth over time.
Additionally, our longer term retention rates remained strong as at the end of 2021, 79% of origination volume over the trailing five year period was sourced from loan officers that are still with guilt today.
Finally.
We maintain ample capacity to fund strategic acquisitions should they arise.
We have a strong track record of successfully sourcing acquiring and integrating complementary businesses with persistent macro headwinds likely resulting in increased opportunities as seller expectations normal life.
In summary, we remain focused on delivering consistent and profitable growth across the interest rate cycles.
We have generated a 44% adjusted return on equity over the last five years, including a 12.5% adjusted return on equity.
And 81.2% return on equity for the first quarter of 2022, even as origination volumes and gain on sale margins softened.
All of our accomplishments can be directly tied to the hard work and dedication of our more than 5000 employees. So I want to thank each of them for their continued service every day.
So with that I'd like to turn it over to our President Terry Schmidt.
Terry.
Thank you Maryann I wanted to spend a few minutes going through a bit of a deeper dive on our servicing segment, which enhances our diversification and growth across cycles, while mitigating the volatile volatility of our financial's first quarter results really reinforces the efficacy of our balanced business.
Model, while origination volumes and related revenue were down quarter over quarter. GAAP income net income was up 393% largely a function of strong gains related to the MSR fair value adjustments and high unpaid principal balance and related servicing fees.
Despite declining origination volumes the <unk> of our servicing portfolio, consisting primarily of MSR sourced through our retail channel was up 3% quarter over quarter to $73 3 billion driving strong growth in servicing fees and related earnings contribution.
We also retain servicing rights for 89% of total loans sold in the first quarter of 2022 up from 80% in the fourth quarter of 2021 with higher retention rates supporting ongoing growth in U P b levels and related fees.
In addition, the strength of our servicing platform along with our unwavering focus on customer service and relationships supports higher client retention and recapture rates for the first quarter of 2022, our purchase recapture rate was 29, 2%, while our refinanced recapture rate came in.
At 55%.
Going forward, assuming interest rates continued to trend higher slower prepayments speeds will likely persist, thereby driving further measured markets and the underlying value of our MSR assets on our balance sheet.
Stepping back we remain focused on maintaining clients for life by delivering a best in class customer experience.
In turn we believe our differentiated client first strategy Optimizes lifetime value and drive sustainable financial performance across all market conditions.
Just yesterday, our board approved a share repurchase program that allows the company to purchase up to $20 million.
Guilds class a common stock.
This share repurchase program reflects our strong balance sheet and our commitment to return value to our shareholders.
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 before I get into our results I noted in our financial reporting starting this quarter, we will be discussing quarterly comparisons on a sequential basis for the first quarter of 2022, we generated $6 1 billion of total in house loan originations compared to $8 8 billion in the fourth quarter of 2020.
One net revenue totaled $482 million compared to $343 million in the prior quarter, while net income totaled $208 million or $3.38 per diluted share. Adjusted net income totaled 32 million or <unk> 53 cents per share while adjusted EBITDA totaled 47.
For the first quarter.
Focusing on our expenses, we maintain a variable cost base, which flexes with the cyclical trends in origination volumes gain on sale margins and revenue.
Furthermore, we remain focused on maintaining optimal staffing levels.
As is typical for the mortgage industry during declining volume cycle. We are in the process of curtailing excess capacity in our retail workforce with an ongoing focus on maintaining strong profitability across cycles.
Turning to non-GAAP results adjusted figures for the first quarter excluded $209 5 million dollar favorable change in fair value of Msr's due to higher interest rates as well as the $28 9 million dollar change in fair value of contingent liabilities due to acquisition, which was again reflected.
As a benefit to G&A expense.
As you May recall, we recorded a similar contingent liability marked down in the fourth quarter.
Primarily related to the earn out component of our acquisition of RMS, reflecting softer volume and gain on sale margin trend, which continued in the first quarter.
Focusing on our origination segment our gain on sale margin came in at 400 basis points on $6 1 billion of total funded originations for the first quarter up from 347 basis points, an $8 8 billion of funded originations in the fourth quarter of 2021 with the increase primarily due to timing of loan.
<unk> sells versus originations.
Our gain on sale margin on pull through adjusted locked volume was 334 basis points compared to 394 basis points in the prior quarter.
The sequential decline was due to softer lock volumes at lower margin reflective of continued margin pressure.
Pull through adjusted lock volume totaled $7 3 billion in the first quarter down 7% quarter over quarter due to rising rates through the quarter and unfavorable seasonality.
Turning to our servicing segment, we generated 227 million of net income in the first quarter up from $27 million in the prior quarter.
Much of the quarter over quarter growth was driven by rising MSR valuation with overall servicing valuation increasing to 128 basis points at a four by $4 four multiple as interest rates increase in CPR decline.
For the first quarter of 2022, we recorded a $209 5 million dollar gain related to MSR fair value adjustments compared to $16 8 million for the prior quarter.
This is in addition to higher servicing fees on strong growth in unpaid principal balances, which contributes to additional cash flow.
Next our balance sheet remains strong and liquid as of March 31st cash and cash equivalents, excluding funds used to pay down our warehouse lines totaled 244 million well warehouse lines of credit totaled $3 1 billion with unused capacity of $1 9 billion.
From a valuation perspective book value per share was $18.50 as of the end of the first quarter up.
23% quarter over quarter, while we grew tangible book value per share by 30% on a sequential basis to $15 in Tucson.
Turning to capital management, our balanced business model that is capital light and create stronger cash flow generation compared to loan origination channels outside of retail puts us in a strong position to continue to fund and originations and reinvest in the business.
Moreover, we maintain excess liquidity to capitalize on strategic M&A opportunities that complement our organic growth should they arise.
Finally, we generated 2 billion of loan originations and $2 1 billion of pull through adjusted lock volume in April .
Given the month just ended we are still in the process of finalizing our gain on sale margin calculation for April at the moment at a high level near term margin trends likely remain challenging with the margin on lock volume in the first quarter more indicative of the trajectory in the short term.
Having said that we believe we remain well positioned to continue to outperform the industry from a gain on sale margin perspective, given our unique retail and purchased focused originations model and disciplined pricing strategies.
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.
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Our first question comes from the line of Rick Shane with J P. Morgan. Please proceed with your question.
Hey, guys. Thanks for taking my questions. This morning.
To when you look at your purchases.
Volume do you have any sense.
What is the mix between first time homebuyers and.
No.
Season, one buyers.
It's slower than it has this is Marianne high.
Historically, we've had more first time homebuyers in this period, but you know there.
The cash buyers are so prevalent it's driving first time homebuyers are down a little but I believe that you know people are working or investors are working on them more affordable products to deliver to the market. So there.
Some focus on trying to get that back to where it was.
Got it so what we're basically seeing right now is some of the excess liquidity.
And the overall market driving a mix shift in terms of.
How people are purchasing homes.
Yes.
And I wanted to clarify that the cash cash buyers today are up but it's still overall a very low number.
Yeah.
It's more that the price of homes or are have just risen to a higher sales price.
Yeah.
Got it okay.
Shocking.
When you think about the MSR valuation.
For the first quarter.
And I apologize if you mentioned it specifically, but what is the CPR assumption and what is your view on where prepayment speeds can go.
Longer term because we've heard.
As recently as yesterday.
MBS investors talking about speeds in the in the single digits.
Or the C. P. R. That's modeled is nine point too.
It's very low lower than we talked about in the last earnings call.
And we don't think it can go much lower just because of you know natural paying off and that would happen with the cycle. So we are in the single digits now, but think that this is the you know about the lowest that it could go from what we've seen historically I know, we're in some unprecedented times, but compared to our experience.
Yes.
A lot different.
<unk>.
Let's say you've got you know a lot depends on an inflation in and where rates go as well.
As you know.
But I think we're all probably tired of unprecedented times at this point.
We live in yes.
That's it for me Thank you guys.
Yes.
Our next question comes from the line of Paul <unk> with Wells Fargo. Please proceed with your question.
Hi, Edward.
Just wondering if you could talk a little bit more about the gain on sale trends in April .
Just to clarify do you think that is your sense that there will be lower.
Then what you saw in Q1.
Oh, we're not providing guidance overall in Q2, but.
Based on Q1, and what we saw the trend in Q1. It did go down with them within the quarter. So I think if you look at the.
The margin on pull through lock adjusted volume that's the best indicator of the continued margin pressure and where we're just not seeing.
From a competitive pricing standpoint that we're necessarily near the bottom.
Okay. So you think.
Obviously.
But do you think that the.
Gain on sale margin could continue to trend lower.
In the near term.
Several months or so.
Yes, I think that that's possible. The key is that the companies are all you know across the industry are shedding the excess capacity. So that you know started in Q1, it's continuing in Q2 and until we right size and the markets stabilize that continued pressure is going to.
<unk>.
Got it and then how do you balance.
I mean your history, you've had a great.
Track record of opportunistic acquisitions, how do you balance that with just buying back stock just given where the share prices today versus tangible book.
This is Terry I'll answer that.
We're still you know our capital allocation plan is you know still.
In line with the past with the exception of this stock repurchase repurchase announcement I'm, obviously with the the way the stock has stressed right now as far as pricing. It just makes a lot of sense for shareholders and so we thought it was a smart thing to do and the right thing to do but on the M&A side.
We still are actively you know looking at M&A and we think that you know, there's there's going to continue to be a lot more opportunity with the stresses in the in the industry right now and so we were still out there and we still intend to you know allocate capital.
There.
Great. Thank you.
Yeah.
Our next question comes from the line of Trevor Cranston with JMP Securities. Please proceed with your question.
Hi, Thanks, good morning.
Yeah.
In terms of the first.
First quarter origination members, maybe maybe the April numbers also.
Can you say how much of the mix specifically.
Cash out Refis and.
Looking forward from your.
Given how much of the outstanding mortgage market is below current market rates.
Can you maybe give us some context historically, what the highest the purchase mix has ever been.
<unk> experience in Karnataka.
How do you think the purchase mix.
Could get over the next couple of quarters. Thanks.
Yeah.
This is amber I'll start and anyone can jump in the what we're seeing in rate term versus cash out is at that rate term is.
Less than 10% running eight 9% right now and so it's definitely shifted toward that cash out refi of the you know the.
25% or so of of Refis with the rates increasing so much we've been in the 80% to 85% purchase overall the MBA is forecasting about a 72% purchased for the year and we typically do.
One higher than the M B a buy.
Few percentage points at Liza up to 10% overall.
Got you Okay. That's helpful.
And then a follow up on the question on gain on sale margins.
You mentioned that sort of trended downward.
Throughout the first quarter.
Are you able to say you know what.
The what the pull through adjusted margin was lets.
Let's say in March relative to.
January just to kind of get a sense for what the.
Good luck.
We don't provide the information within the quarter, but it did drop dramatically because the rate change is really happened in you know mid January early February so as locks were coming in the second half of the quarter It was significantly down.
As you can see if you look at our you know for our pull through adjusted lock volume gain on sale margin in Q4 versus Q1 shows a 60 basis point drop so that you know you we saw that throughout the first quarter overall.
Okay got it I appreciate the color. Thank you.
As a reminder, it is star one to ask your question.
There are no further questions in the queue I'd like to hand, the call back to Mr. Mcgarry for closing remarks.
Yeah.
Thank you for joining us today and have a great day, 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.
Okay.