Guild Company - Earnings Call - Q3 2020

Transcript

Speaker 0

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 will be recorded. I would now like to turn the conference over to Michael Kim, Investor Relations.

Please go ahead,

Speaker 1

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. 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 Risk Factors in Guild's IPO registration statement and prospectus filed with the U. S.

Securities and Exchange Commission. Participating in the call today are Chief Executive Officer, Mary Anne McGarry President, Terri Schmidt Chief Financial Officer, Amber Elwell and Chief Operating Officer, David Nalen. Now I'd like to turn the call over to Guild's Chief Executive Officer, Mary Anne McGarry. Mary Anne?

Speaker 2

Thanks, Michael, and good afternoon, everyone. I'd like to thank all of Guild's employees for their continuing hard work and dedication throughout the year and during our transition to a public company. I'd also like to thank all of our clients for continuing to trust us to help them with their financing needs. And I'd like to thank and welcome all of our new shareholders. We look forward to continuing to build relationships with all of you.

As our first earnings conference call as a public company, we thought it would be helpful to provide an overview of our business and how we are differentiated. Teri will discuss our growth strategy and Amber will provide financial details on the quarter. We will then be joined by our Chief Operating Officer, David Nalen and take some questions. Guild is a leading mortgage banking company that has originated and serviced residential mortgage loans since 1960. We are focused on the purchase market.

Over the last five years ending December 2019, over 70% of our origination volume was in purchased business. Purchased business provides durable volume and consistent returns. Our focus on purchased business has allowed us to generate a consistent track record of profitability through many market and interest rate cycles. We also utilize a scalable, sales centric and growth oriented platform that leverages our strong reputation, team and technology. We've created a personalized client experience from the time a loan officer takes an application through the time when a loan pays off and we have an opportunity to capture their next transaction.

We've built a high trust relationship model where our local presence matters. Our strong reputation in the neighborhoods and communities we serve helps to set us apart. Our servicing segment generates a recurring stream of cash flow, but we see it as more than just an asset. We view servicing as an extension of our origination teams. Turning to some financial highlights for the quarter, we reported GAAP net income of $182,000,000 and as we generated record originations of $10,000,000,000 representing growth of 41% over the prior year's quarter level, reinforcing the strength of our differentiated business model and strategy.

Looking ahead, we believe Guild is well positioned to continue its success. We expect to continue to focus our platform on the purchase market. We are looking forward to continuing to grow our business and to enhancing shareholder value. So with that, I'd like to turn it over to our President, Teri Schmidt. Teri?

Speaker 3

Thanks, Mary Anne. I'm going to discuss our growth strategy and why we believe we can build on our past success with our proven scalable and repeatable model. First, we remain focused on organically growing our business in existing MSAs and getting into new MSAs by recruiting new loan officers to our platform. Second, we expect to continue to use our technology to not only increase productivity, but also to recruit additional loan officers. And third, we remain focused on expanding our footprint through targeted and accretive acquisitions.

Stepping back, we operate in a large market with macro trends that continue to support robust mortgage growth. The Federal Reserve continues to signal that it expects interest rates to remain low through 2022. Furthermore, the mortgage market is highly fragmented. In 2019, the top 10 lenders in the retail channel captured just 24% of total originations, which provides a great opportunity to continue to capture market share. Focusing on our organic growth strategy, in 02/2007, our retail business operated in only seven states and today we operate in 31 states.

We started our growth in the Western States and then we moved into the South and we plan to expand in new territories as we broaden our footprint nationally. We also believe there's an opportunity to continue to penetrate new and existing MSAs. As an illustrative example, if we were able to capture an additional 1% of market share in the states where we currently operate an in state retail location, we could add roughly $16,000,000,000 in volume annually. Moreover, we believe we can further enhance growth as we add new loan officers and increase the productivity of our existing loan officers. Our organic growth in loan officer headcount has averaged 7% since 02/2007, excluding our acquisitions.

And we've been very successful at retaining our loan officers with 71% of our overall volume for the past five years being generated from loan officers that are still with us today. Second, our technology platform is a proprietary end to end solution that enables everything from prospecting to production fulfillment, servicing and client retention all located on one system. Our platform enables us to generate strong scale, quality, operational efficiency and most importantly a seamless client experience. We can provide additional point of sale experience to our clients with online applications, automatic verifications, statuses, alerts and electronic closings. This is helpful in terms times of favorable interest rate environments, particularly as we think about refinances or if a client prefers to engage with us in this manner.

This flexibility in our approach allows customers as they prefer. However, our differentiation really lies in our focus on purchase business that on average has generated higher and more consistent returns where the expertise of our loan officers locally helps us to deliver a personalized home buying experience. Finally, in terms of our acquisition strategy, we look for business owners who are good cultural fit, leaders who want to stay in the business and have a good foothold in their marketplace and can leverage our platform to accelerate growth. We enhance their gain on sale margins using scale opportunities and the sophistication of our secondary marketing group and also seek to reduce their back office expenses. The success of our acquisitions is proven.

Origination volumes for the businesses we've acquired increased 2937% on average in the second and third years post transaction. Past acquisitions including an earn out component designed to minimize upfront cash payment, increase alignment with the sellers and ensure attractive returns on investment. Looking ahead, we believe our business remains poised to capture incremental growth in the coming years given the attributes of our multifaceted platform and our proven approach. I'd like to now turn to our Chief Financial Officer, Amber Elwell to discuss the financials in more detail. Amber?

Speaker 4

Thanks, Teri. As a reminder, we completed our IPO in October 2020 and we were not public in the 2020. As Mary Anne mentioned, we generated very strong results for the third quarter including total loan origination of $10,000,000,000 up 41% compared to the 2019. Net revenues of $564,000,000 representing 159% growth year over year. GAAP net income increased from prior year to $182,000,000 Adjusted net income more than doubled to $195,000,000 year over year.

This represents net income adjusted to exclude the change in fair value of MSRs due to model inputs and assumptions and contingent liabilities due to acquisitions. And lastly, EBITDA more than tripled to $267,000,000 We're continuing to stay focused on purchase business while capitalizing on elevated refinance volumes and expanding margins. Our purchase originations represented 50% of our total origination volume in Q3. We have direct access to consumers through our established relationships and referral networks and are selling service not price. As a result of this and because we don't pay an intermediary to capture the loan, we've generated higher and more consistent gain on sale margins.

Our gain on sale margins on originations increased to five sixty two basis points, a 48% increase year over year. Our pull through adjusted loss volume increased 54% to $11,600,000,000 from the prior year with gain on sale on pull through adjusted lock volume at four eighty nine basis points, which is up 36% for the same time period. On the servicing side, the majority of our in house servicing portfolio which totaled $56,400,000,000 at the end of the quarter has grown organically through our retail channel. We believe that this is an important distinction. With most of our production coming for retail, we already have established relationships in place with our clients by the time they enter our servicing segment.

This is why we believe the relationship between the client and loan officer is important to preserve for future transactions, particularly new purchase loans. It creates a stickiness between the client, loan officer and the company. Total loan servicing and other fees increased by 10% year over year to $40,000,000 for the third quarter driven by the rise in the underlying servicing portfolio. We expect servicing fee income will continue to be impacted by clients electing to accept forbearance relief under the CARES Act. Due primarily to the forbearance associated with the CARES Act, our sixty plus day delinquency rate on our servicing portfolio increased to three point six percent as of 09/30/2020, up from 1.3% a year ago.

Our forbearance requests were at 4.3% of our overall portfolio as of September 30, which favorably compares to the MBA's industry data of 6.8% for the same period. In terms of our MSRs, the fair value declined by $41,000,000 to a value of $392,000,000 during the third quarter reflecting lower interest rates and higher prepayments. At the same time for September date, we had a refinance recapture of over 60%. Turning to our balance sheet, we maintain ample liquidity with $252,000,000 of cash and cash equivalents excluding funds used to pay down our warehouse lines as well as $2,900,000,000 of warehouse lines of credit with unused capacity of $1,100,000,000 Our business is capital light because we originate and sell the loans we service. This in turn leads to high ROEs with an adjusted ROE at 130.5% for the third quarter.

Looking ahead, we believe we are well positioned to continue to generate profitable growth across market cycles reflecting our unique positioning, existing scale and infrastructure and strong relationships. And with that, we'll go ahead and open up the call for questions. Operator?

Speaker 0

Thank you. Our first question comes from Don Fandetti with Wells Fargo. Please proceed with your question.

Speaker 1

Hi, good evening. I wanted to see, Amber, what your thoughts are in terms of Q4 for gain on sale margins and also funded loan originations?

Speaker 4

We are not providing guidance for Q4. We do have our pull through adjusted lock volume in the Q and the earnings release at $11,600,000,000 Overall, in terms of margins, again, providing guidance, I would look through to the gain on sale basis points for that, which has increased in Q3 year to date is $4.36 on pull through adjusted locked volume. Overall, the industry is the MBA forecast is expecting and forecasting volume to drop about 2.5%. So they are now thinking that the refi business will expand and continue really into Q4 and Q1. And that just the overall supply and demand of that, you can take that into account when you're thinking about gain on sale margins and what will happen over the next few months.

Speaker 5

Okay. So the guidance there.

Speaker 1

I guess for Q3, it seemed like if I look at the production segment, the expenses as a percentage of funded originations was a little bit higher Q over Q. Did that come in line with your expectation in terms of comp and also G and A? Or was it a little higher?

Speaker 4

It was a little bit higher than original expectations. Our sales related compensation as people have hit higher tiers with those high volume, all of our sales people are tiered. Those high volume numbers that we're hitting, they're hitting higher amounts. I think the key is that overall our expenses quarter over quarter to last year and year to date in basis points are still lower than last year. So we're still getting scale as we grow.

But because of that, those higher tiers and the sales compensation, it is it was a little bit higher than original expectations.

Speaker 6

Okay. Thank you.

Speaker 0

Thank you. Our next question comes from Rick Shane with JPMorgan. Please proceed with your question.

Speaker 5

Hey guys, thanks for taking my question this afternoon. Look, you talked a little bit about the strength of the mortgage market and you also talked about the long term expansion strategy. I am curious as you see your competitor firms try to scale up business, what is happening with retention? Are you seeing any turnover in your employee base? Are you actually finding that originators want to join Guild at this point?

Speaker 2

I can handle that. Well, we are not seeing a pickup in turnover at this time. And our platform is very attractive to retain and recruit new talent. So I can turn it over to David and he can tell you more about our platform and why we believe it why it helps us retain our talent. They're just more successful and more productive under our technology platform that we have.

So David, would you like to expand on that?

Speaker 7

Sure. Thanks, Mary Anne. We are not seeing a reduction on our side. We believe that we have built a better mousetrap to attract and retain loan officer talent through a combination of our proprietary technology tools that we provide them, our differentiated approach to recapture and also our commitment to help them grow their business, particularly through programs like our internally developed coaching program that we call Elevate. In fact, we have seen a tremendous amount of success in retained loan officer talent.

Over the last five years, 71% of the production that we have produced has been by loan officers that are still with the company today. So even in today's market, we're seeing loan officers hit new records. Our value proposition is helping them to continue to grow. And we're seeing increased productivity through our loan officers and we're continuing to see them outperform industry standards. And so we're really seeing a good success in retaining our loan officers and continuing to work to grow our sales force.

Speaker 5

Great. That's very helpful. Thank you. And then my second question and last question is for Amber. Just curious in terms of the servicing portfolio, were there any sales or purchases of MSRs during the quarter?

We can see what was retained, but just want to make sure we understand all the moving parts there.

Speaker 4

No, there was not.

Speaker 2

Great. Okay. Thank you guys very much. You're welcome.

Speaker 0

Thank you. Our next question comes from Giuliano Bologna with Compass Point. Please proceed with your question.

Speaker 6

Thanks for taking my questions. And congratulations on your first quarter as a public company. I guess jumping in on the origination side, it'd be interesting to get your input now that we're a little more than two thirds of the way through the quarter. And I realize I'm not looking for a full quarter outlook. I'm kind of curious how the initial part of the quarter is kind of shaped up versus your original expectations.

And if you're seeing any kind of trends in terms of fundings, obviously, fundings can get a little bit move around Thanksgiving, Christmas, etcetera. So I'm just kind curious how the initial part of the quarter is trending on that side.

Speaker 4

Again, we can't provide guidance on the fourth quarter in totality. I would point to the NDA forecast and their expectations of the fourth quarter only dropping 2.5 from Q3.

Speaker 6

That makes sense. And then on a slightly different kind of angle, when I think about how the servicing and the amortization rate, especially in the fourth quarter, if we see kind of a pickup in if volumes are not down that much, the purchase obviously most likely come down in the fourth quarter, should we expect a little bit of a pickup in the amortization rate in the fourth quarter?

Speaker 4

In terms of, how many loans are running off, paying off?

Speaker 6

That's right. Kind of from a UPB and from $80 effective.

Speaker 4

Sure. So, the MBA, is forecasting, the refis, to go up slightly in q four. So I would use that as a proxy. So in Q3, they were have a 50% purchase. In Q4, were 48.

We were running I'm sorry, Gild is at 50. And so, I think using that as a proxy for, what's going happen in Q4 for the servicing portfolio is the best bet, and what would happen with the refis. We are continuing to recapture about 60% of the portfolio and feeding that back into originations and continue to focus on that going forward.

Speaker 6

That's great. Thank you for taking my questions and I'll jump back in the queue. Thank you.

Speaker 0

Thank you. Our next question comes from Trevor Cranston with JMP Securities. Please proceed with your question.

Speaker 6

Hi, thanks.

Speaker 1

First question is around the acquisition landscape. Can you guys maybe provide some color in terms of what you guys are seeing out there in terms of if there are maybe more companies who are potentially looking to sell or be acquired at this point relative to what we might have seen like over the last couple of years? Any color you could provide around that would be helpful.

Speaker 2

Well, we always have a list of companies that we talk to and are always ready for any opportunities that arise so that we negotiate a transaction. But I can turn it over to Teri to tell you more about our strategy going forward and what we expect.

Speaker 3

Thanks, Mary Anne. Sure. I would say that based on the many years that we've been in business, what we typically see is that when the purchase market starts becoming stronger, refis kind of start subsiding, volumes kind of contract a little bit, typically those sellers that were maybe on the fence, They really want to just kind of get a sense of what's out there. And so the appetite traditionally has increased for acquisitions. And so, based on our past, that would be we would see something similar going forward.

Speaker 8

Got it. Okay. That's helpful.

Speaker 1

And then a question on the servicing side. I guess first, can you say how much of the servicing portfolio at this point is Ginnie Mae? And then also, I was curious if there's any meaningful amount of early buyouts activity in 3Q and how are you thinking about that going forward?

Speaker 4

We are not doing a heavy amount of early buyouts. We've really haven't changed our stance on the early buyouts. Want to we're looking at overall what's going happen with the forbearances. We still have that as an option with our early buyout line, but we did not do any, in Q3 that aren't related to our regular modifications that we would do in the normal course of business. And we still have capacity on our early buyout line to do about $45,000,000 of that.

And overall, Jenny May is consistent with what in our portfolio. It's about 35% of our overall portfolio in servicing.

Speaker 1

Okay. That helps. Thank you.

Speaker 0

Thank you. Our final question comes from Derek Hewitt with Bank of America. Please proceed with your question.

Speaker 8

Good afternoon, everyone. Circling back to the earlier M and A question, kind of over the near term, will the focus be on gaining share in those in the existing markets in the 31 states organically or could we see significant growth through M and

Speaker 5

A in the near term?

Speaker 2

Well, we're always looking to grow in our market share and organically as we will grow market share we expect to as well as through additional increased productivity with our technology platform and our loan officers and opportunistic acquisitions. Teri, would you like to expand on that at all?

Speaker 3

Sure. As I think we said earlier, we typically on the organic side grow we've averaged about 7% growth every year. And we've got some a good amount of we've kind of taken a more of a geographic footprint to where we've kind of centralized our recruiting division, which we think we're going to have some even better success there. And but as Mary Anne said, we're always looking at growing organically, backfilling our existing offices, getting loan officers that we know we can take them to the next level in their career. And we've been very successful at doing that with mid tier loan officers.

And then we're always being opportunistic as far as acquisitions. We are always interested within our existing 31 states as well as getting into new territory.

Speaker 8

Okay. Thank you. And then my last question is just given the focus on the retail channel, is there any interest in entering either the wholesale or correspondent channels at this point?

Speaker 2

Not at this point. We have a little bit in correspondent, but we aren't focused on growing that. We're focused on growing our retail channel and gaining market share. And I would just add that back to the M and A that typically, historically, whenever there's been any market dislocation, that's when we've been able to take advantage of that market and grow. And we've grown the most during that and we've grown 14 times in our market share since 02/2007.

And we've grown this year in market share. So we're definitely focused on gaining market share with all the three components I mentioned earlier.

Speaker 8

Okay. Thank you.

Speaker 2

You're welcome.

Speaker 0

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for any closing remarks.

Speaker 2

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

Speaker 0

Ladies and gentlemen, this concludes today's webcast. You may now disconnect your lines at this time. Thank you for your participation and have a great day.