Guild Company - Q4 2023

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, and welcome to the Guild Holdings Company Q4 2023 Earnings Conference Call. At this time, all participants are on 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 would now like to turn the conference over to Investor Relations. Please go ahead.

Amber Kramer (CFO)

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 in Guild's most recently filed Form 10-Q and in other reports subsequently 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 furnished today with the SEC and are also available on Guild's Investor Relations website.

I'd now like to turn the call over to Chief Executive Officer Terry Schmidt. Terry?

Terry Schmidt (CEO)

Good afternoon, everyone, and thank you for joining us to discuss our Q4 and full-year results and a strategic update. I am joined by our President, David Neylan, as well as our Chief Financial Officer, Amber Kramer. Throughout 2023 in the Q4, we have remained consistent with our strategy to grow market share by being a lender of choice in the communities we serve across the country. I am proud of our achievements throughout the year as we grew our market share, delivered full-year positive adjusted net income, and executed on attractive acquisitions. We accomplished this amidst the macro headwinds that we and others in the industry have been discussing, including elevated interest rates and tight housing inventory.

For the full year 2023, we generated $15 billion of in-house originations, 93% of which were from purchase business, and we generated a net loss of $39 million and adjusted net income of $48 million. By being disciplined and focusing on maintaining a robust capital position, we have successfully completed complementary and compelling acquisitions and team additions, which position us for accelerated growth when the cycle turns. Including the post-year announcement of our acquisition of Academy Mortgage, which David will discuss, we have completed five transactions over the past year and a half. Each of these transactions helps us to further our strategic growth of growing market share by adding new geographies, loan officers, products, and enhanced relationships, which support our focus on the purchase market. These transactions have helped to lift Guild to become the eighth largest non-bank retail mortgage lender.

In addition, according to the MLS data, we have increased our number of licensed individuals by 34% since just prior to the first of these transactions in November of 2022. This illustrates our success at growing and retaining our sales teams and positioning them to take full advantage of the next cycle in the housing market. We've also continued to enhance our product depth with the addition of reverse mortgages and builder products, among others, which in turn enhance relationships with key partners such as builders. All of this growth has been facilitated by our consistent focus on execution, and we are confident it will continue to distinguish Guild in the marketplace and allow us to create meaningful value for our stockholders over time. The market conditions were challenging throughout the year with higher interest rates and limited home inventory. Despite this backdrop, we continue to grow our market share.

We prioritize being integrated members of the communities we serve, and the foundation of our approach is our relationship-based loan sourcing strategy and being able to provide our customers with innovative products that serve their needs. While we anticipate the current headwinds will continue through much of 2024, we are encouraged by our market share growth and disciplined approach, which should deliver results when sentiment improves and the rate environment eases. Today, more than ever, we are confident in our model and that the platform that we have established. This includes our focus on purchase mortgage originations as well as our strategy of retaining our servicing, allowing us to generate more reliable cash flow. Maintaining our customer relationship, that supports our customer-for-life philosophy, positions us to be the lender of choice for our customers for future transactions.

Furthermore, we continue to view the current environment as an opportunity to be even better positioned as the cycle turns. We have maintained a disciplined approach to capital management, as demonstrated by our year-end leverage ratio of 1.3x, which allows us to selectively pursue growth opportunities. We have built a brand with a stellar reputation, and in fact, in the 2023 MortgageCX Best in Class Awards by the STRATMOR Group, Guild had the most overall winners in the large independent mortgage bankers category, with six of the top 10 loan officers working for Guild. By maintaining our reputation for integrity and service, we are able to continue to attract loan officers, potential M&A prospects, and customers. We are proud of our ability to continue to execute on our plan, expand our platform, and create value for our stockholders.

Now I'd like to turn the call over to David Neylan. David?

David Neylan (President)

Thank you, Terry. In the Q4, we delivered total in-house loan originations of $3.5 billion compared to $4.3 billion in the Q3, reflecting both market headwinds and seasonality. We anticipate we will see continued pressure on originations in the coming quarters aligned with higher rates and limited housing supply. However, on a relative basis, we benefit from our focus on the purchase mortgage market. In the Q4, we originated 93% of our closed loan origination volume from purchase business compared to the mortgage bankers' estimate of 81% for the industry for the same period. As Terry mentioned, subsequent to quarter end, we acquired the retail lending assets of Academy Mortgage Corporation, a privately held Utah-based lender that is licensed to operate in 49 states and Washington, D.C.

Academy boasts approximately 200 branches and more than 1,000 employees who have transitioned to Guild, including more than 600 licensed mortgage originators. The addition of Academy Mortgage represents a 25% increase to origination volume based on results through the Q3 of 2023, according to data from Inside Mortgage Finance publications. Just like the other transactions we have completed in the previous several quarters, we pursued a combination with Academy due to their close alignment to our culture, values, and approach of having local sales and fulfillment that supports our customers-for-life strategy. Additionally, we are encouraged by our ability to attract organic talent and M&A opportunities over the past several quarters and that we are being recognized as a partner of choice as the platform for local retail mortgage originators seeking long-term growth and stability.

We have continued to pursue our goal of facilitating homeownership in the communities that we serve, and to that end, throughout the year, we introduce a number of new products that make sustainable homeownership attainable, including rate buydown programs, down payment assistance, and options for no lender fee refinancing. The entire industry faces ongoing pressure. However, we remain confident that Guild's balanced business model and strategy that we have always adhered to is one that will again prove to be successful in this cycle and will allow us to continue to increase our market share and deliver attractive earnings growth over time. I will now turn the call over to our Chief Financial Officer, Amber Kramer, to discuss the financials in more detail. Amber?

Amber Kramer (CFO)

Thank you, David. As is our standard practice, my comments will focus on sequential quarter comparisons. For the Q4 of 2023, we generated $3.5 billion of total in-house loan originations compared to $4.3 billion in the Q3. Net revenue totaled $57 million compared to $257 million in the prior quarter, which generated a net loss of $93 million compared to net income of $54 million in the Q3. The 2023 results were negatively impacted by fair value adjustments with respect to the company's MSRs. Adjusted net income was $13 million or $0.20 per diluted share, and Adjusted EBITDA was $13.2 million. For the full year 2023, we generated $15 billion of total in-house loan originations compared to $19.1 billion in 2022.

Net revenue totaled $0.7 billion compared to $1.2 billion in the prior year, which generated a net loss of $39 million compared to a net income of $329 million in the prior year. Adjusted net income was $48 million, and adjusted EBITDA was $75 million for the full year 2023. Focusing on our origination segment, our gain-on-sale margins came in at 330 basis points compared to 377 basis points in the Q3 on funded originations. Gain-on-sale margins on pull-through adjusted locked volume was 347 basis points compared to 389 basis points in the prior quarter, and total pull-through adjusted locked volume was $3.3 billion compared to $4.1 billion in the prior quarter. For our servicing segment, our portfolio grew to $85 billion. We reported net loss of $72 million compared to net income of $84 million in the Q3.

The loss was due to a non-cash downward valuation adjustment of MSRs of $122 million, reflecting the interest rate decline we saw in the Q4. Our servicing portfolio continues to be a valuable source for ongoing cash flow, future opportunities for loan recapture, and it reinforces our customer-for-life strategy. Our balance sheet remains strong and provides us with the flexibility to continue to invest in our growth. Turning to liquidity, as of December 31st, cash and cash equivalents totaled $120 million, while unutilized loan funding capacity was $1 billion, and the unutilized mortgage servicing rights lines of credit was $336 million based on total committed amounts and borrowing base limitations. Our leverage ratio, defined as total secured debt including fundings, divided by tangible stockholders' equity, was 1.3x. Book value per share at the end of the quarter was $19.36, while tangible net book value per share was $15.90.

We believe we are well positioned to manage through the current more challenging operating environment while allowing us to create additional value. In addition, during the Q4, we repurchased approximately 98,000 shares at an average stock price of $11.69 per share. On March 7th, 2024, our board of directors extended the share repurchase program to May 5th, 2025. As of December 31st, 2023, there were $11.2 million remaining under the original $20 million share repurchase authorization. In the first two months of 2024, we generated $2.2 billion of loan originations and $2.6 billion of pull-through adjusted locked volume. We closed on the acquisition of Academy Mortgage at the end of February, and consistent with the experience of prior acquisitions, we anticipate a short-term earnings impact as loan originators integrate into our pipeline and production volume starts to ramp up on the Guild platform.

We anticipate continued pressure on origination volume and gain-on-sale margins. However, we remain confident in our balanced business model, which we believe results in more durable and sustainable performance across market cycles. With that, we'll open up the call for questions. Operator?

Operator (participant)

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please 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 questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from the line of Don Fandetti with Wells Fargo. Please proceed with your question.

Don Fandetti (Analyst)

Hi. Good evening. Amber, can you talk a little bit about gain-on-sale margins for Q1? It sounds like there's continued pressure there. And then secondarily, just any comments around the competitive environment?

Amber Kramer (CFO)

Sure. Thanks, Don. We don't provide guidance going forward. We've continued to see gain-on-sale really stabilize with no change, and we're not seeing anything that is moving that up or down. And so where we've been in this pressured environment over the last year and a half, I think, is going to hold until we see some changes in housing inventory capacity opening up and Fed rate moves.

Don Fandetti (Analyst)

Can you just comment a little bit on what you're seeing just competitively in general? Also, do you think you have the opportunity to make more acquisitions?

Amber Kramer (CFO)

Yeah. Things are still competitive, and I think there's still some excess capacity in our industry. But our growth strategy is working. We're still seeing a lot of activity on the M&A front as well as the organic growth front. There's owners that are looking for another home with a company that's a little bit larger, can offer more to their employees. And same thing with loan originators. They're looking for stability and a company that's growing and investing in their future. So we feel like there's still opportunity out there, and our strategy's working. If you look at the Q4 of 2023, you compare that to the Q4 of 2022 for originations in the industry, the industry was down about 2.4%. Guild increased by about 18%. So overall, we're about 20% ahead of the industry, and so we believe that our strategy is working.

Don Fandetti (Analyst)

Thank you.

Operator (participant)

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

Rick Shane (Managing Director)

Thanks for taking my questions, everybody. Just one quick thing. Amber, given the questions we've chatted about in the past, this isn't going to be a surprise. The percentage of MSR that was retained this quarter was down to 77%. I'm curious if that is related to any existing contracts related to acquisitions and that you will gravitate back towards your historical target of 90%. I'm curious, particularly because you've made such a large acquisition entering 2024, if there's any distortion related to forward sales on MSRs that we should be aware of.

Amber Kramer (CFO)

Thanks, Rick. Overall, the percentage of service retained versus released is going to be driven mostly just by profitability and execution. Some of the aggregators are paying up for it, and we're seeing that pickup there. We'll take that opportunity and capitalize on it to pick up the extra basis points and gain on sale. The acquisitions, they don't impact it. The last acquisition that we had will take some time to ramp up, so they're not in any of our volume numbers anyway. I think the other big part of this is a lot of the reason acquisitions come to Guild is because of our customer-for-life strategy. So we continue to focus on that and balance that out with looking at execution and profitability.

Rick Shane (Managing Director)

Got it. And in the context of that customer-for-life, are you selling when you're selling service released, are you selling to purchasers who aren't necessarily seeking recapture business because they have a different intent with the MSR? It's an edge for them and not necessarily a potential future pipeline?

Terry Schmidt (CEO)

Not necessarily. We're just looking at the execution as far as pricing. If there's a correspondent out there, correspondent lender that is aggressively pricing to where we can't justify, for example, the value of their servicing, for example, then we're going to take advantage of that price and execute through the correspondent on a service-released basis.

David Neylan (President)

Got it. And on those service released sales, sorry, I'm parsing my language here. On those service released sales, do you see it as a jump ball going forward if you're selling to a lender who's seeking recapture? Are there any covenants preventing you, given your knowledge and, frankly, close relationship with the borrower, to be able to recapture, refi as that becomes a bigger part of the market? I'm trying to understand if there's an opportunity cost that you're giving up by selling the MSR service released.

Terry Schmidt (CEO)

Understood.

Amber Kramer (CFO)

Yeah. I think one important part of this is that we have a really strong CRM, and we are in close contact with our borrowers and the realtors. So just because we're selling them service released doesn't necessarily mean that we're losing touch with that borrower overall. I think that's an important part of this.

David Neylan (President)

Got it. Okay. I misspoke when I said sell the MSR service released, sell the loan service released. I want to correct myself on that. Okay. That's very helpful, guys. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Eric Hagen with BTIG. Please proceed with your question.

Eric Hagen (Managing Director)

Hey, thanks. Good afternoon. Hope we're well. Hey, did you say how much you paid for Academy in that acquisition? And is there a good way to think about the expenses going forward following the onboarding of that platform?

Amber Kramer (CFO)

We did not say what we paid for the acquisition. We'll file our 10-K in the next couple of days, and you'll see in our subsequent event what the purchase price was. But that's not public information at this time. As far as the expenses going forward, it would fall into our normal expense structure over time, although the acquisition takes time to ramp up, usually 90-ish days plus to get onto our system. They come on as employees on day one, and they integrate onto our platform, and then we'll start closing their loans within 90 days. You do have an impact, as I mentioned in my remarks, to near-term earnings from a cost structure perspective.

Don Fandetti (Analyst)

Right. Yep. That's helpful.

Terry Schmidt (CEO)

Historically, we used to show a profit on these types of acquisitions within four to six months. But with the margins being much thinner than they have been in the last year and a half, two years, we're shooting for within 12 months to start showing profitability on these acquisitions.

Don Fandetti (Analyst)

That's helpful. Thank you so much. Hey, can you share how conventional mortgage rates are comparing to FHA right now and what you're seeing in terms of any changes in borrower credit quality between the two channels? And even in which channel you could potentially be more active or aggressive in if rates were to fall?

Terry Schmidt (CEO)

David, do you want to take that question?

David Neylan (President)

Sure. Credit quality for our borrowers continues to remain high. We continue to see in both the conventional and the government side that borrower standards are high, underwriting standards continue to remain high. There is a bit of a narrowing in the gap in terms of pricing, but we really continue to see options for both, particularly first-time homebuyers and down payment assistance programs being able to close the gap here a little bit. So it remains competitive in both. We've got a ton of experience in operating in both areas, and we have different areas of the country where some of that business shifts a little bit based on the geography. But again, we're seeing high credit quality standards, good underwriting, good collateral, and good performance as well. Great. Thank you guys so much.

Operator (participant)

Thank you. As a reminder, if anyone has any questions, you may press star one on your telephone keypad to join the question-and-answer queue. Our final question comes from the line of Derek Sommers with Jefferies. Please proceed with your question.

Derek Sommers (Analyst)

Hi. Good afternoon. Just as we're moving into 2024 and some of the origination headwinds persist, how are you guys feeling about the balance and aggregate between your origination segment and servicing segment?

Terry Schmidt (CEO)

I mean, each quarter, our origination segment we continue to get our cost in order. Even though we're still adding via acquisitions and organic growth, we're still cutting our expenses. So we feel good about that. It's all going in the right direction. And of course, on the servicing side, I mean, it's solid. Our cash flows are really solid. I know we had an impairment this last quarter, but in reality, our prepayments and our payoffs have continued to go down. So we feel like, from the cash flow perspective, the value of our servicing is still very strong, and we feel like that model of having originations and servicing still works well for us.

Derek Sommers (Analyst)

Got it. And then kind of some of the data we track shows home inventory starting to loosen slightly, at least compared to the past couple of years. Does that reflect kind of what you're hearing from the field?

Terry Schmidt (CEO)

Yes. Yes. There has been some relief. There still isn't enough inventory to create, I think the demand is still so high compared to the inventory. I mean, it looks like the inventory year-over-year is about 20% higher than it was. And we're seeing some price cuts in markets, more price cuts than we have in the past. So it's going in the right direction. But I think because we've continued to work on our growth strategy, as this keeps getting better and starts turning, we're going to be in a great position and benefit greatly from it.

Derek Sommers (Analyst)

Got it. Thank you. That's all from me.

Operator (participant)

Thank you. We have reached the end of the question-and-answer session. I'll now turn the call over to management for closing remarks.

Terry Schmidt (CEO)

Thank you, everyone. We're just going to keep doing what we do and executing on our strategy, and we look forward to giving you an update next quarter. Thank you.

Operator (participant)

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