Q3 2022 Guild Holdings Co Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Gilt Holdings Company third 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 today.

I would now like to turn the conference over to Michael Kim Investor Relations. Please go ahead Michael.

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 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 to the corresponding 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, Marianne Mcgarry, President Terry Schmid.

Now I'd like to turn the call over to Maryann Mcgarry.

Ann.

Thank you Michael.

Afternoon, everyone and thank you for joining us.

Today I'm joined by our President Kari Smith, and our Chief operating Officer, David Nailing, Our Chief Financial Officer, Andrew Kramer is out on maternity leave and I'm excited to announce she recently welcomed twins to her growing family.

Market dynamics across the industry remain challenging during the third quarter.

Mortgage rates continue to trend higher and inventories remains limited as a result, industrywide origination volumes remained under pressure with ongoing overcapacity issues and a shifting competitive dynamics weighing on profitability trends across the industry.

However, Gil delivered strong financial performance for the quarter, which we believe reinforces the benefits of our differentiated and decentralized business model across cycles, and a shifting competitive backdrops.

We generated compelling sequential quarter crowd.

GAAP net income.

Adjusted net income and earnings per share for the third quarter, while maintaining strong profitability despite quarter over quarter declines in originations and gain on sale margins, reflecting ongoing macro headwinds.

On a GAAP basis, we grew both net income and earnings per share by 33% on a sequential quarter basis, while posting a return on equity north of 25% for the third quarter.

Even after excluding fair value changes related to MSR and contingent liabilities adjusted net income and adjusted earnings per share came in at 24 million.

And 40 cents per share respectively for the third quarter of this year.

Both 74% higher compared to second quarter results.

We believe our tenured management team.

Strong culture retail infrastructure in local markets across the country long term strategic focus and consistent execution enable us to drive sustainable profits through market downturns.

Because of our long term expertise and experience across cycles, we've been able to manage successfully through recent market shifts and delivered adjusted return on equity of nearly 8% for the third quarter of this year and during the trailing 12 months ended September 30th two.

<unk> thousand 22.

Gilts business model is different.

From a distribution perspective, our scale enabled and nationwide retail platform Leverages in house loan officers, who build and maintain strong relationships with customers and referral partners and local markets.

Focusing on talent, our product mix technology, and servicing capability resonate with recruits to that point, we remain well ahead of our goals as it relates to net new hirings of loan officers, thus far this year.

Furthermore, skilled as a leader in the purchase market in the third quarter, 91% of our originated loans for purchase mortgages up from 84% in the prior quarter and meaningfully above 81% for the industry. According to estimates for the mortgage Bankers Association.

Sure.

We believe buyers are waiting on the sidelines because of current volatility and affordability challenges and are looking for a return to stable markets.

As we manage through this dislocation in the market, we see opportunity and remain focused on serving first time homebuyers and underserved markets.

Turning to our balance sheet, we maintain healthy leverage ratios and ample liquidity to continue to fund our business and invest for growth either organically or by capitalizing on accretive M&A opportunities.

We believe our long and successful acquisition track record is attractive to smaller firms dealing with ongoing revenue pressures shifting competitive dynamics and diminishing profitability.

Our differentiated business model and consistent profitability across cycles position us to be selective and financially disciplined when evaluating potential acquisition opportunities.

Meantime, we remain focused on returning excess capital to shareholders through ongoing share repurchases.

In summary I.

I am very proud of the results we delivered in the third quarter and what has been a challenging environment for the industry.

Looking ahead I'm excited about our growth opportunity as we capitalized on the dislocation in the market given our balanced business model and a strong and liquid balance sheet.

So with that I'd like to turn it over to our President Terry Schmidt.

Terry.

Thanks, Maryann as is our standard practice my comments on our financial results, we will focus on sequential quarter comparisons for the third quarter of 2022, we generated $4 4 billion of total in house loan originations, representing a 24% sequential decline from $5 seven.

<unk> billion in the second quarter, while disappointed with the quarterly dip in volumes on an absolute basis, our sequential drop was more constructive when viewed on a relative basis as industry volumes were down 29% quarter over quarter. According to the latest estimates from the mortgage bankers Association.

Net revenue totaled 261 million compared to 288 million in the prior quarter, while net income totaled $77 million or $1.26 per diluted share. Despite the sequential decline in originations and revenue adjusted earnings and profitability.

<unk> meaningful meaningfully improved in the third quarter relative to the prior quarter.

Adjusted net income and adjusted earnings per share totaled $24 million 40 per share respectful, respectively. While adjusted EBITDA totaled 33 million in comparison second core adjusted net income adjusted earnings per share and adjusted EBITDA were <unk> 14.

<unk> 23 per share and $22 million respectively.

Our estimated effective tax rate was six 8% for the third quarter compared to 25, 3% in the prior quarter. The decrease in our tax rate for the most recent quarter was primarily due to the effect of a permanent tax benefits related to a previous acquisition, we expect our tax rate to remain close to the 20.

2% year to date in the near term.

Adjusted figures for the third quarter excluded a $61 $4 million favorable change in fair value of Msr's compared to a $46 9 million markup in the prior quarter with a variance largely a function of the interest rate backdrop, while these point to point adjustments in isolation.

<unk> are noncash in nature higher rates typically result in slower prepayments and longer holding periods, which prolong related cash flows over time.

Focusing on our origination segment our gain on sale margin came in at 354 basis points on $4 4 billion of total funded originations for the third quarter compared to 363 basis points on $5 7 billion of funded originations in the second quarter our gain on.

Sale margin on pull through adjusted lock volume was 349 basis points versus 357 basis points in the prior quarter.

Pull through adjusted lock volume totaled $4 4 billion in the third quarter compared to $5 8 billion in the prior quarter consistent with declining origination volumes across the industry.

For our servicing segment, we generated $97 million of net income in the third quarter up from 64 million in the prior quarter with the increase primarily reflecting more favorable MSR valuation adjustments.

Higher servicing fees on continued growth in unpaid principle balances and lower operating expenses.

In addition, we booked a $3 $4 million reversal of the provision for foreclosure losses in the third quarter compared to a $1 $8 million provision in the prior quarter. The reversal reflected our expectation expectations for fewer loans moving from forbearance to foreclosure and lower than anticipated average.

Losses.

The unpaid principal balance of our servicing portfolio, consisting primarily of MSR sourced through our retail channel was up two 5% quarter over quarter to $77 7 billion.

And we retain servicing rights for nearly 89% of total loans sold in the most recent quarter boding well for ongoing growth in servicing fees, while reinforcing the synergies the synergies with our originations business.

Furthermore, we believe our focus on customer service and client engagement enhances client retention with our purchase recapture rate holding steady at 28% for the third quarter.

I want to spend a moment here discussing our differentiated servicing business.

Our servicing model creates economies of scale, which have driven our cost to service lower our servicing portfolio growth supports loan originations increases our Gulf ongoing cash flow and allows for MSR borrowing flexibility as origination growth opportunities arise.

Due to our balanced business model and financial discipline, we remain in a strong cash position with low leverage as I will discuss further.

A key driver of our sequential quarter step up in adjusted net income and adjusted EBITDA was our ongoing efforts to flex our expense base as market conditions dictate.

Through the third quarter, we have realized approximately 75 million of annualized expense savings, primarily linked to staff reductions and related compensation.

We continue to focus on optimizing profitability as macro headwinds persist with near term expense levels somewhat dependent on volume trends.

Importantly, our boots on the ground infrastructure provides insights into local market dynamics, which we factor in when right sizing expense levels by region.

That said, we remain cognizant of the need to further balance reductions with the risk of loan officer attrition should branch and sales support functions fall below key thresholds.

We also continue to invest in the business, even during down cycles to position ourselves for accelerating and sustainable growth over the long term.

Next our strong and liquid balance sheet remains a key differentiating factor, particularly during periods of market dislocation.

As of September 30th cash and cash equivalents, excluding funds to pay down our warehouse lines totaled $162 2 million, while warehouse lines of credit totaled $2 6 billion with unused capacity of $1 8 billion.

Our leverage ratio, which we define as total debt, including funding divided by tangible stockholders equity declined 2.9 times as of September 30th 2022, compared to 1.3 times at June 32022, and two nine times as of Sept.

Timber 30 of 2021.

Okay.

Stepping back ongoing macro headwinds continued to drive a flight to quality with guild, well positioned to capitalize on an upturn in consolidation across the industry given the strength of our balance sheet. Moreover, we maintain a strong long term track record of enhancing growth and shareholder value via accrue.

M&A transactions.

Beyond and expanding M&A opportunity set we remain focused on creating shareholder value.

We repurchased approximately 139000 shares at an average stock price of $11 13 per share during the third quarter. We continue to believe buying back stock at levels meaningfully below book value is an attractive use of capital.

Book value per share ended the quarter at $20 81 sense, while we grew tangible book value per share by 8% on a sequential basis to $17.38.

Turning to our quarter to date update we generated $1 1 billion of loan originations and $1 1 billion of pull through adjusted locked volume in October .

From a gain on sale margin perspective, we anticipate further softness in the fourth quarter, reflecting excess capacity heightened competition and limited inventories.

We continue to experience intense competition in the mortgage market and we expect this competition will continue to put pressure on gain on sale margins and profitability.

And with that we'll open up the call for questions operator.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad.

If youre using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

And our first question will come from Don <unk> with Wells Fargo. Please go ahead.

Marianne certainly good to see the profitability this quarter relative to what we're seeing around the sector can you talk a little bit about your sort of thoughts on the timing of acquisitions.

Or is that kind of a near term or more intermediate term and then also how are you thinking about gain on sale margin pressure you look a little further out past Q4, I mean do you think that's right.

You see a path towards higher margin. So as you get into next year.

Hum.

Hi, Don E. Four acquisitions, yes, we think that's a great opportunity right now and think that are leaving get stronger in the fourth quarter.

Quarter of 2020 for 2023 and.

So we're very excited about our opportunity.

And as far as gain on sale you know, we can't give forward looking projections, but I feel.

The market continues to be very volatile and you know, we're just going to manage accordingly, and as the market stabilizes and the M. B a is predicting that that will happen in the second half of next year, you might see a little bit more consistency than.

You know we can all.

You know be there'll be a lot better for borrowers sitting on the sideline waiting to see what's happening.

Got it thank you.

Yeah.

Yeah. This is Terry I think on the gain on sale question.

We track to the MBA and every quarter.

<unk> volume has gone down as far as their projections and and so if the volume goes down that we likely would see some type of compression is historically, what we've seen but to Mary Anne's point at some point things should start normalizing.

Again, if you have a question. Please press star then one to join the queue.

Okay.

Our next question here will come from Rick Shane with J P. Morgan. Please go ahead.

Thanks for taking my question and I Hope Amber slips maybe congratulations.

No.

The question was asked about gain on sale and then obviously I realize you're not in a position to provide absolute guidance, but.

I am curious given that so much of the erosion of gain on sale is.

A function of competition in supply demand.

Rick.

<unk>.

Stablish seeing equilibrium.

I'm curious if you think that purchase gain on sale is more stable.

Does the relationship driven nature of that and the fact that the customers probably.

A little bit less price sensitive.

So this I do.

Yeah, I would say traditionally that historically, that's been the case for our model.

And that stickiness with the customer and your.

Your referral partners and they're more concerned about fulfillment and getting the transaction done then.

They're not quite as sensitive related.

To price.

But Rick there still remains pressure and with overcapacity in the market, there's still a lot of.

Pressure on the gain on sale and competition I think we win alone more often.

But you know, we we are experiencing that pressure and we have to be competitive.

Got it okay. Thank you and then.

But asked a little bit about acquisitions and I'm curious.

Hum.

Presumably your currency and platform is more attractive.

In the current environment and there probably are.

More opportunities for acquisition.

Given how rapidly the market is shrinking how do you how do you approach that.

Is the your willingness.

Pricing much more conservative today, then theoretically what it was at the beginning of the year.

Given the imbalances in the risks of expanding the platform now.

Yeah, I would say that's true just when when we're looking at acquisitions and modeling out where.

We're looking at a discounted cash flow model typically and in today's environment of course, the cash flows are going to be.

Much thinner and so I would say, yes were being.

A little bit more cautious on pricing.

Got it and is the phone ringing a bit more.

[laughter] it.

Is it's been been ringing you know quite quite a lot.

[laughter].

Fair enough okay. Thank you.

Mhm.

And our next question will come from Kyle Joseph with Jefferies. Please go ahead.

Hey, good afternoon, and thanks for taking.

Taking my questions.

You guys referenced that you guys were able to take share in that your originations declined less than the industry how much how big of an opportunity is there to continue taking share as we continue to see capacity removed from the market.

As we look into 'twenty three.

Marianne do you want to answer that or David.

Yeah.

Okay.

Okay.

Sure. This is David I can answer that so in regards to the sequential decline from Q2 to Q3, we saw a 24% decline versus the MBA average.

At closer to 29%. So we did pick up market share on a go forward basis in a purchase environment. We're typically able to continue to pick up market share in this type of an environment given.

Our focus on purchase business and our traditional history in particular, focusing on first time, homebuyers, which we see as a large opportunity.

We do believe as Maryann Antares, both alluded to there is still a lot of capacity in the market that continues to need to be right sized and for us we're going to make sure that as we move forward that we are not making unfavorable short term economic gains for the sake of market share, but instead focused.

On long term sustained purchase growth, where we can traditionally outperformed the industry.

Yeah.

Got it very helpful. And then just a follow up for me on the road.

Provision reversal, obviously, that's a sign of a very healthy portfolio, but as you know.

Thinking about your servicing.

Servicing book and kind of the broader.

Economy, and a lot of macro uncertainty out there what's kind of the outlook in terms for foreclosures going forward.

Well I think that well the foreclosures and our performance.

Right.

It's been.

We think it's reasonable what we have in our reserve and.

We arent seeing any sign today.

And the increase in hardship as a matter of fact, you know many other ports in the economy are showing that the economy underlying economy is it's still strong.

Okay.

Got it.

Sorry.

So that was just.

So that's good for our portfolio.

Yes actually.

Some reversal on our provision.

We we thought that we would with loans getting out of forbearance and going into foreclosure, we expected that number to be higher and it just isn't coming to fruition just that they cut the homeowners that have you have had any issues there they're able to dispose.

<unk> of their property you know in other ways, rather than foreclosure with the equity that you know selling their property for example, and so we're just not seeing the.

The issues that we thought that we would see so the outlook.

On that side of the business looks pretty favorable.

And I would add that the loss mitigation efforts are so much better than they were 10 years ago. So many more opportunities than it helps borrowers stay in their homes and it really especially after this pandemic and help them. So many borrowers maintain homeownership.

Understood that makes sense and is somewhat related to hear too. Thanks, a lot for answering my questions.

Youre welcome.

Again, if you have a question. Please press star then one to join the queue.

And with no remaining questions. We will conclude our question and answer session I would like to turn the conference back over to Marianne Mcgarry for any closing remarks.

Yeah.

Well. Thank you for joining us today have a great evening and we look forward to updating you on our next call.

Thank you.

Yeah.

Okay.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.