Guild Holdings Company (GHLD) Q4 2021 Earnings Call Transcript

Guild Holdings Company (GHLD -0.44%)
Q4 2021 Earnings Call
Mar 10, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to Guild Holdings Company's fourth quarter 2021 earnings conference call. [Operator instructions] 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.

Michael Kim -- Investor Relations

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 finance performance for future periods, including the expected market for purchased 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 Guild's 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 Guild's investor relations website. Participating in the call today are Chief Executive Officer Mary Ann McGarry, President Terry Schmidt, and Chief Financial Officer Amber Kramer.

Now I'd like to turn the call over to Mary Ann McGarry. Mary Ann? 

Mary Ann McGarry -- Chief Executive Officer

Thank you, Michael. Good afternoon, everyone, and thank you for joining us. As always, I'm joined by our president, Terry Schmidt; and our chief financial officer, Amber Kramer. Our chief operating officer, David Neylan, will join us for Q&A after our prepared remarks.

I'm proud of the results Guild 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 through the course of the year, but we maintained higher margins relative to those typically generated in the wholesale or correspondent channel, in part driven by our focused 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 $0.37 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 cycles. Stepping back, our consistent growth across cycles can be linked to two key differentiating factors for Guild.

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 higher interest rates compounding the value of the MSR assets on our balance sheet, all else equal. Second, our originations business is unique. While some of our peers have recently started shifting focus to purchase business as refinance activity flows and industry volumes increasingly shift in favor of purchase loans.

We have been building the requisite scale, relationships, and expertise in purchase over the last 60-plus years. What we are is a purchase-focused mortgage provider. 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, purchased 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 in purchase volumes through 2023, and Guild has historically captured market share during periods of rising interest rates. Furthermore, unlike more commoditized refinancing lending, all purchase 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 personalized and customized experience to home buyers. And the efficacy of our client service was recently validated by our J.D. Power award for Highest in Customer Satisfaction in its 2021 study. This focus on customer service has resulted in more consistent volume across market cycles while enhancing 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. While selecting a mortgage provider, our clients place a premium on the relationships and trust built with our loan officers over time.

Our loan officer's expertise translates into putting clients in the right product. We also stand to benefit from powerful demographic trends that will drive strong growth in purchase loans for years to come. Approximately 70 million millennials, aged 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 demographic.

These tailwinds align well with our long-standing focus on 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 backdrop. Finally, I want to thank all of our more than 5,000 employees for their continued hard work and dedication. It is their efforts 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?

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Trevor Cranston with JMP Securities. Please proceed with your question. 

Trevor Cranston -- JMP Securities -- Analyst

Hey, thanks. Good afternoon I guess the first question on the update you guys just gave for the first quarter. I think you said that gain on sale on a pull-through adjusted basis was 357 basis points for the quarter. And you're looking at the historical gain on sale numbers on Slide 8, that's obviously sort of lower where they have been in recent history.

Can you guys maybe just comment on kind of what you're seeing in the competitive landscape? And if you think that margins could be kind of below where they had historically bottomed out for some period of time and what you believe is driving that? Thanks.

Amber Kramer -- Chief Financial Officer

Sure. Thanks, Trevor. This is Amber. So as you can see, 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 we look at local discipline pricing approach and want to remain competitive. Typically, we have a longer gain on sale cycle, so some other companies might be discussing stabilization. As we saw last year, we were on the back end of when gain on sale was dropping. So we're still seeing that decrease overall.

We think that there's going to be continued pressure on margins, but now starting to see some of these companies' final shed some excess capacity will help, but the natural volume drop, and the competitive nature and the volatility of the market is pushing those down right now.

Trevor Cranston -- JMP Securities -- Analyst

OK. Got you. 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 for volumes and margins.

I was curious, can you remind me what goes into the valuation of the goodwill that's on the balance sheet and if future changes in the outlook for volumes and margins could potentially have an impact on the carrying value of the goodwill at some point?

Amber Kramer -- Chief Financial Officer

Sure. I mean, we do an overall impairment analysis as per our requirements. And so we would look at overall, the expectation of the asset of the goodwill. And there was no change to goodwill overall.

And based on what we know now, we can't predict the future. But the liability and the earnout was specific to the volume and the gain on sale, but we don't see any impact to the goodwill based on our analysis that we've run.

Trevor Cranston -- JMP Securities -- Analyst

OK. Got you. Appreciate the comments. Thank you.

Operator

Our next question comes from the line of Rick Shane with J.P. Morgan. Please proceed with your question.

Rick Shane -- J.P. Morgan -- Analyst

Good afternoon, everybody Thanks for taking my question. So if we look at the run rate on the lock volume for the first quarter and basically sort of the quarter 13 weeks long, we're about 10 weeks in, and then we compare that to some of the addressable market estimates. It looks like you are suggesting market share is declining in the first quarter. Is that what you think you're seeing in the market? And if so, what's driving that given the shifts that we're seeing?

Amber Kramer -- Chief Financial Officer

Yes. So overall, our pull-through adjusted lock volume through February was at $4.5 billion. And we're getting into more normal seasonality, where heavier purchase. This is a lower purchase -- the seasonality of purchase business is lower also in the winter.

So there is 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.

Rick Shane -- J.P. Morgan -- Analyst

Got it. OK. So that -- so there is actually a seasonality to your market share given the origination mix.

Amber Kramer -- Chief Financial Officer

Yes.

Rick Shane -- J.P. Morgan -- Analyst

And do you think that as competition -- as supply and demand is a little bit out of balance in terms of purchase during the first quarter that, that further pressures gain on sale at the other elements that we're looking at. And the reason I ask is, as we think about modeling it through the 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?

Amber Kramer -- Chief Financial Officer

Yeah. I mean, the part of being in the purchase-focused business is that we're not as susceptible for the refi rate changes. But overall, I think just as capacity is shed, there's going to be less pressure on margins longer term. I mean, that all else equal because 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 changing of the environment and what refi versus purchase makes overall.

Rick Shane -- J.P. Morgan -- Analyst

Got it. And then I apologize for asking one more question. But specifically, what were the material weaknesses within the accounting framework, just so we understand that better?

Amber Kramer -- Chief Financial Officer

Well, first of all, I just want to make everyone understand there's no impact to the financial statements, everything that we presented in the past in our K that we'll file and what we're presenting here, no impact. And we do have the remediation plan is in place. And there was mostly just implementation of stocks overall and a lot related just purely to documentation. So controls were in place but not document properly according to stocks and which is why we haven't had any issues with our financial statements and the accuracy of them in the past.

Rick Shane -- J.P. Morgan -- Analyst

Got it. Thanks for the clarification. 

Operator

Our next question comes from the line of Giuliano Bologna with Compass Point. Please proceed with your question.

Giuliano Bologna -- Compass Point -- Analyst

Thank you. I guess starting off, one of the areas I was curious was thinking about capital. Obviously, I can see the reported cash number on the liquidity side. Is there a rough sense of how much you're buying down your warehouse lines and how much cash was contributing into the warehouse loans to bring them down?

Amber Kramer -- Chief Financial Officer

Yeah. It was about $45 million, so you would gross cash by that to get to the total number. And that's consistent with where we were prior quarter as well.

Giuliano Bologna -- Compass Point -- Analyst

That's fair. And I guess thinking kind of forward, I'd be curious if you're seeing any shift in the market environment from an M&A perspective. Obviously, as we're going through a normalization process and as margins kind of come back to close to normalized levels and the [Inaudible] I'm curious if you're seeing increased activity from potential platform for sale and then from there what your appetite is and what type of platforms do look from an M&A perspective?

Terry Schmidt -- President

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 Guild's platform. So nothing's changed as far as what we're looking for.

And yes, there -- we're seeing things starting to get more active, and we are very interested.

Mary Ann McGarry -- Chief Executive Officer

And this is Mary Ann. And just to add to that, historically, 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 wouldn't expect anything different.

Giuliano Bologna -- Compass Point -- Analyst

That makes sense. And then related to that topic, I'd be curious if you think about -- you obviously paid special dividends in 2021. Thinking about capital return. Is there any change to the thought process on capital return? And then kind of a follow-on to that is if there's any appetite for share repurchases as part of that equation [Inaudible] closer to tangible book value?

Amber Kramer -- Chief Financial Officer

Right now, there's no change to what we've done in the past. We're constantly assessing our liquidity and 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 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.

Giuliano Bologna -- Compass Point -- Analyst

Sounds good. Thanks for answering my questions. I'll get back in the queue.

Operator

We have a follow-up question from the line of Rick Shane from J.P. Morgan. Please proceed with your question.

Rick Shane -- J.P. Morgan -- Analyst

I didn't expect to get in that quickly, but thank you. So if we look at the gain on sale of 347, can you just what this aggregate, how much is cash gain on sale versus how much is capitalization of MSR, so we can understand that trend as well?

Amber Kramer -- Chief Financial Officer

Yes. So for our total gain on sale, it's 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.

Rick Shane -- J.P. Morgan -- Analyst

Got it. And were there any -- you had disclosed that about 80% of the volume was subservicing retained. Were there any portfolio sales during the quarter as well?

Amber Kramer -- Chief Financial Officer

No. We didn't have our overall portfolio that we should show on the [Inaudible] not included. We did get rid of our subservicing portfolios, but that's immaterial and only a footnote. So we're not in the business of selling our MSRs and we want to support our client for life strategy.

So we'll hang on to those. Overall from a 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.

Rick Shane -- J.P. Morgan -- Analyst

Perfect. Very helpful. Thank you, guys.

Terry Schmidt -- President

Just to clarify that question, Rick, is when we were onboarding RMS, they -- we were service releasing the majority of their product. But now that they are fully boarded onto Guild's platform, we're retaining more of the servicing. So the goal was still to retain. Yes.

Operator

That is all the questions that are in queue. I'd like to hand the call back to management for closing remarks.

Mary Ann McGarry -- Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 37 minutes

Call participants:

Michael Kim -- Investor Relations

Mary Ann McGarry -- Chief Executive Officer

Trevor Cranston -- JMP Securities -- Analyst

Amber Kramer -- Chief Financial Officer

Rick Shane -- J.P. Morgan -- Analyst

Giuliano Bologna -- Compass Point -- Analyst

Terry Schmidt -- President

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