Guild pany(GHLD) - 2021 Q1 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Statements This statement cautions that forward-looking statements are inherently uncertain, and actual results may differ materially Forward-Looking Statements Overview This overview clarifies that forward-looking statements are based on uncertain expectations, and actual results may differ materially - Forward-looking statements are based on current expectations, estimates, and projections about the industry, management's beliefs, and certain assumptions, many of which are inherently uncertain and beyond control[10] - Actual results may prove to be materially different from the results expressed or implied by the forward-looking statements[10] Important Factors Affecting Future Results This section identifies key factors, including macroeconomic conditions and market disruptions, that could materially affect future results - Key risk factors include changes in macro-economic conditions, U.S. residential real estate market conditions (including interest rates and COVID-19 effects), and disruptions in the secondary home loan market[11] - Risks also stem from changes in government-sponsored entities (FNMA, FHLMC, GNMA, FHA, USDA, VA), failure to maintain technological infrastructure, and inability to attract and retain qualified personnel[11] - Other significant factors include inaccuracies in fair value estimates (e.g., MSRs), costs of potential litigation, cybersecurity breaches, and non-compliance with complex industry laws and regulations[11][15] PART I - FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements and detailed notes on accounting policies and financial instruments Condensed Consolidated Balance Sheets The Condensed Consolidated Balance Sheets show the company's financial position as of March 31, 2021, compared to December 31, 2020, indicating an increase in total assets and stockholders' equity, while total liabilities decreased Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2021 | December 31, 2020 | Change | % Change | | :-------------------------------- | :------------- | :---------------- | :----- | :------- | | Total assets | $4,877,917 | $4,818,087 | $59,830 | 1.2% | | Total liabilities | $3,979,689 | $4,082,095 | $(102,406)| (2.5%) | | Total stockholders' equity | $898,228 | $735,992 | $162,236 | 22.0% | | Mortgage servicing rights, net | $586,717 | $446,998 | $139,719 | 31.3% | | Warehouse lines of credit | $2,071,333 | $2,143,443 | $(72,110)| (3.4%) | Condensed Consolidated Statements of Income (Loss) The Condensed Consolidated Statements of Income (Loss) show a significant turnaround from a net loss in Q1 2020 to a substantial net income in Q1 2021, driven by increased net revenue and improved valuation of mortgage servicing rights Condensed Consolidated Statements of Income (Loss) Highlights (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | % Change | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----- | :------- | | Net revenue | $526,187 | $170,200 | $355,987 | 209.2% | | Total expenses | $312,578 | $187,367 | $125,211 | 66.8% | | Income (loss) before income tax | $213,609 | $(17,167) | $230,776 | NM | | Net income (loss) | $160,604 | $(12,986) | $173,590 | NM | | Basic EPS | $2.68 | N/A | N/A | N/A | - Loan origination fees and gain on sale of loans, net, increased significantly from $239,861 thousand in Q1 2020 to $446,589 thousand in Q1 2021[21] - Valuation adjustment of mortgage servicing rights swung from a loss of $(108,649) thousand in Q1 2020 to a gain of $35,743 thousand in Q1 2021[21] Condensed Consolidated Statements of Changes in Stockholders' Equity The Condensed Consolidated Statements of Changes in Stockholders' Equity show an increase in total stockholders' equity from $735,992 thousand at December 31, 2020, to $898,228 thousand at March 31, 2021, primarily due to net income and stock-based compensation Changes in Stockholders' Equity (in thousands) | Metric | Balance at Dec 31, 2020 | Stock-based compensation | Net income | Balance at Mar 31, 2021 | | :----------------------- | :---------------------- | :----------------------- | :--------- | :---------------------- | | Additional Paid-In Capital | $18,035 | $1,632 | — | $19,667 | | Retained Earnings | $717,357 | — | $160,604 | $877,961 | | Total Stockholders' Equity | $735,992 | $1,632 | $160,604 | $898,228 | Condensed Consolidated Statements of Cash Flows The Condensed Consolidated Statements of Cash Flows indicate a shift from net cash used in operating activities in Q1 2020 to net cash provided in Q1 2021, while financing activities shifted from providing to using cash, resulting in an overall decrease in cash, cash equivalents, and restricted cash Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $34,349 | $(231,206) | | Net cash used in investing activities | $(667) | $(14,393) | | Net cash (used in) provided by financing activities | $(53,354) | $262,712 | | (Decrease) increase in cash, cash equivalents and restricted cash | $(19,672) | $17,113 | | Cash, cash equivalents and restricted cash, end of period | $319,961 | $123,848 | Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, fair value measurements, financial instruments, commitments, contingencies, and segment reporting NOTE 1 - Business, Basis of Presentation, and Accounting Policies This note outlines the company's mortgage business, basis of financial statement presentation, accounting policies, and COVID-19 impact monitoring - Guild Holdings Company's core business involves originating, selling, and servicing residential mortgage loans within the United States[29] - The company adopted ASU 2018-15 on January 1, 2021, for cloud computing arrangements, which did not materially impact financial statements[37] - Escrow and fiduciary funds, totaling $1.7 billion at March 31, 2021, are maintained in segregated bank accounts and excluded from the balance sheets[36] NOTE 2 - Fair Value Measurements This note details fair value measurements, categorizing assets and liabilities into a three-level hierarchy based on input observability - Fair value measurements are categorized into Level One (quoted prices in active markets), Level Two (observable inputs other than quoted prices), and Level Three (unobservable inputs reflecting management's assumptions)[38][41] - Interest Rate Lock Commitments (IRLCs) and Mortgage Servicing Rights (MSRs) are classified as Level Three due to significant unobservable inputs, such as pull-through rates for IRLCs and prepayment estimates/discount rates for MSRs[43][47] Assets and Liabilities Measured at Fair Value (March 31, 2021, in thousands) | Description | Level 1 | Level 2 | Level 3 | Total | | :-------------------------------- | :------ | :------ | :------ | :------ | | Assets: | | | | | | Trading securities | $91 | — | — | $91 | | Derivative (Forward delivery commitments) | — | $97,060 | — | $97,060 | | Derivative (Interest rate lock commitments) | — | — | $38,009 | $38,009 | | Mortgage loans held for sale | — | $2,345,927 | — | $2,345,927 | | Mortgage servicing rights | — | — | $586,717 | $586,717 | | Total assets at fair value | $91 | $2,442,987 | $624,726 | $3,067,804 | | Liabilities: | | | | | | Contingent liabilities due to acquisitions | — | — | $16,568 | $16,568 | | Total liabilities at fair value | — | — | $16,568 | $16,568 | NOTE 3 - Accounts and Interest Receivable Accounts and interest receivable decreased from $43,390 thousand at December 31, 2020, to $38,227 thousand at March 31, 2021. The company maintains a foreclosure loss reserve, which increased to $13,350 thousand at March 31, 2021 Accounts and Interest Receivable (in thousands) | Category | March 31, 2021 | December 31, 2020 | | :-------------------------- | :------------- | :---------------- | | Trust advances | $34,268 | $36,241 | | Foreclosure advances, net | $3,379 | $2,894 | | Receivables related to loan sales | $1,620 | $2,707 | | Other | $(1,040) | $1,548 | | Total accounts and interest receivable | $38,227 | $43,390 | Foreclosure Loss Reserve Activity (in thousands) | Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Balance — beginning of period | $12,402 | $7,869 | | Utilization of foreclosure reserve | $(1,514) | $(800) | | Provision charged to operations | $2,462 | $1,924 | | Balance — end of period | $13,350 | $8,993 | NOTE 4 - Other Assets Other assets slightly decreased from $150,275 thousand at December 31, 2020, to $148,300 thousand at March 31, 2021. Property and equipment, net, also saw a decrease, with depreciation and amortization expense of $1.7 million for Q1 2021 Other Assets (in thousands) | Category | March 31, 2021 | December 31, 2020 | | :-------------------------- | :------------- | :---------------- | | Prepaid expenses | $15,831 | $16,652 | | Company owned life insurance | $34,174 | $29,910 | | Property and equipment, net | $13,786 | $14,773 | | Right-of-use assets | $83,222 | $87,508 | | Real estate owned | $1,196 | $1,354 | | Trading securities | $91 | $78 | | Total other assets | $148,300 | $150,275 | - Depreciation and amortization expense for property and equipment was $1.7 million for the three months ended March 31, 2021, down from $1.9 million in the prior year period[58] NOTE 5 - Derivative Financial Instruments This note explains the company's use of derivative instruments to hedge interest rate risk, showing increased hedging gains and shifts in fair values - Net unrealized hedging gains increased by 41.9% to $43,001 thousand for the three months ended March 31, 2021, compared to $30,290 thousand in the prior year[60] Notional and Fair Value of Derivative Financial Instruments (in thousands) | Instrument | Notional Value (Mar 31, 2021) | Derivative Asset (Mar 31, 2021) | Derivative Liability (Dec 31, 2020) | | :------------------ | :---------------------------- | :------------------------------ | :------------------------------ | | IRLCs | $4,021,335 | $38,009 | — | | Forward commitments | $4,396,480 | $97,060 | $38,270 | - The weighted average loan funding probability ('pull-through') for IRLCs increased from 87.8% at December 31, 2020, to 92.2% at March 31, 2021[63] NOTE 6 - Mortgage Servicing Rights MSRs significantly increased due to originations and positive valuation adjustments from model input changes, including a decreased prepayment rate Mortgage Servicing Rights Activity (in thousands) | Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Balance — beginning of period | $446,998 | $418,402 | | MSRs originated | $103,976 | $42,461 | | Changes in fair value: Due to collection/realization of cash flows | $(44,862) | $(22,510) | | Changes in fair value: Due to changes in valuation model inputs or assumptions | $80,605 | $(86,139) | | Balance — end of period | $586,717 | $352,214 | MSR Valuation Assumptions | Unobservable Input | March 31, 2021 (Weighted Average) | December 31, 2020 (Weighted Average) | | :------------------ | :-------------------------------- | :----------------------------------- | | Discount rate | 10.0% | 10.0% | | Prepayment rate | 13.1% | 18.2% | | Cost to service (per loan) | $91.6 | $92.5 | - The unpaid principal balance of mortgage loans serviced increased by 25.5% to $63.6 billion at March 31, 2021, from $50.1 billion at March 31, 2020[67] NOTE 7 - Mortgage Loans Held for Sale Mortgage Loans Held for Sale (MLHS) slightly decreased to $2,345,927 thousand at March 31, 2021, from $2,368,777 thousand at the beginning of the period. Originations significantly increased, but were largely offset by proceeds from sales Mortgage Loans Held for Sale Activity (in thousands) | Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Balance at the beginning of period | $2,368,777 | $1,504,842 | | Origination of mortgage loans held for sale | $9,815,270 | $5,620,167 | | Proceeds on sale of payments from mortgage loans held for sale | $(10,131,643) | $(5,561,492) | | Gain on sale of mortgage loans excluding fair value of other financial instruments, net | $355,157 | $170,948 | | Valuation adjustment of mortgage loans held for sale | $(61,634) | $31,025 | | Balance at the end of period | $2,345,927 | $1,765,490 | NOTE 8 - Investor Reserves Investor reserves increased slightly to $14,877 thousand at March 31, 2021, from $14,535 thousand at the beginning of the period, reflecting provisions for potential losses from loan repurchases and indemnifications Investor Reserves Activity (in thousands) | Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Balance — beginning of period | $14,535 | $16,521 | | Benefit from investor reserves | $(2,006) | $(768) | | Provision for investor reserves charged to operations | $2,348 | $2,151 | | Balance — end of period | $14,877 | $17,904 | NOTE 9 - Warehouse Lines of Credit Warehouse lines of credit decreased, with the company maintaining multiple collateralized facilities and remaining in compliance with all debt covenants Warehouse Lines of Credit (in thousands) | Facility Description | Maturity (Mar 31, 2021) | March 31, 2021 | December 31, 2020 | | :------------------------------------------ | :---------------------- | :------------- | :---------------- | | $800 million master repurchase facility | January 2022 | $353,809 | $442,593 | | $250 million master repurchase facility | September 2021 | $169,473 | $148,011 | | $500 million master repurchase facility | February 2022 | $424,687 | $541,074 | | $200 million master repurchase facility | May 2021 | $171,491 | $187,214 | | $300 million master repurchase facility | September 2021 | $223,600 | $232,272 | | $500 million master repurchase facility | July 2021 | $417,250 | $464,355 | | $200 million master repurchase facility | April 2021 | $136,116 | $104,880 | | $250 million master repurchase facility | N/A | $154,616 | — | | $75 million master repurchase facility | March 2024 | $22,439 | $25,185 | | Net warehouse lines of credit | | $2,071,333 | $2,143,443 | - The weighted average interest rate for warehouse lines of credit decreased from 2.52% at December 31, 2020, to 2.44% at March 31, 2021[75] - The company had cash balances of $131.1 million in warehouse buy down accounts at March 31, 2021, up from $15.6 million at December 31, 2020[75] NOTE 10 - Notes Payable Notes payable, primarily revolving and term notes collateralized by MSRs, increased to $165,000 thousand at March 31, 2021, from $145,750 thousand at December 31, 2020. The company amended a term note in March 2021, increasing its commitment - The company has a $135.0 million revolving note (expandable to $200.0 million) collateralized by GNMA MSRs, with $45.0 million outstanding at March 31, 2021[79] - Another revolving note of up to $65.0 million, collateralized by FHLMC MSRs, had $20.0 million outstanding at March 31, 2021[80] - A term note, collateralized by FNMA MSRs, was amended in March 2021 to a $125.0 million commitment (expandable to $175.0 million), with $100.0 million outstanding at March 31, 2021[81] NOTE 11 - Earnings Per Share Basic and diluted earnings per share for Class A and Class B Common Stock were $2.68 and $2.67, respectively, for the three months ended March 31, 2021. EPS information is not presented for periods prior to the IPO in October 2020 Earnings Per Share (Three Months Ended March 31, 2021) | Metric | Amount | | :------------------------------------------ | :------- | | Net income available for Class A and Class B Common Stock | $160,604 | | Weighted-average shares outstanding - basic | 60,000 | | Weighted-average shares outstanding - diluted | 60,211 | | Basic earnings per share | $2.68 | | Diluted earnings per share | $2.67 | - The company has two classes of common stock, Class A (traded on NYSE: GHLD) and Class B, with identical preferences except for voting rights (Class A: one vote/share, Class B: ten votes/share)[87][89] NOTE 12 - Stock-Based Compensation Stock-based compensation expense recognized for the three months ended March 31, 2021, was $1.6 million, with approximately $18.9 million of unrecognized compensation costs remaining - Stock-based compensation expense was $1.6 million for the three months ended March 31, 2021[91] - Unrecognized compensation costs related to non-vested restricted stock units totaled approximately $18.9 million as of March 31, 2021, expected to be recognized over the next 3.4 years[92] NOTE 13 - Commitments and Contingencies The company holds significant credit and derivative commitments and faces routine lawsuits, but expects no material adverse effects - Total commitments to originate loans were approximately $4.0 billion at March 31, 2021, a decrease from $5.2 billion at December 31, 2020[93] - Total commitments related to derivative instruments (forward loan sales, mandatory delivery, options, futures contracts) were approximately $4.4 billion at March 31, 2021, down from $5.5 billion at December 31, 2020[94] - The company is involved in various lawsuits but does not expect them to have a material adverse effect on its financial position or results of operations[95] NOTE 14 - Minimum Net Worth Requirements The company adheres to minimum net worth, capital, and liquidity requirements from regulators and investors, and was in compliance as of December 31, 2020 - Minimum net worth for Fannie Mae and Freddie Mac is $2,500 plus 25 basis points of outstanding UPB for total loans serviced[98] - Minimum net worth for Ginnie Mae is $2,500 plus 35 basis points of the issuer's total single-family effective outstanding obligations[99] - The company must maintain a ratio of Adjusted/Tangible Net Worth to Total Assets greater than 6% for Fannie Mae, Freddie Mac, and Ginnie Mae[98] - As of December 31, 2020, the company was in compliance with the most restrictive minimum adjusted net worth requirement of $78,064 thousand[101] NOTE 15 - Segments The company operates in two interdependent segments, Origination and Servicing, with servicing supporting origination through client relationships - The company has two reportable segments: Origination and Servicing[102] - The Origination segment is responsible for loan origination, acquisition, and sale activities, employing a relationship-based sourcing strategy[103] - The Servicing segment provides a steady cash flow and builds client relationships, driving repeat business back to the origination segment[104] Net Income (Loss) by Segment (in thousands) | Segment | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------- | :-------------------------------- | :-------------------------------- | | Origination | $160,124 | $68,833 | | Servicing | $67,066 | $(79,345) | | All Other | $(66,586) | $(2,474) | | Total | $160,604 | $(12,986) | NOTE 16 - Subsequent Events Subsequent events include an agreement to acquire Residential Mortgage Services, Inc. for $196.7 million and a declared special cash dividend of $1.00 per share - On May 10, 2021, the company agreed to acquire Residential Mortgage Services, Inc. for approximately $196.7 million, to be financed with cash and Class A common shares[108] - The acquisition is expected to close in the third quarter of 2021[108] - On May 6, 2021, a special cash dividend of $1.00 per share on Class A and Class B common stock was declared, payable on May 28, 2021[109] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition and results, covering growth, COVID-19 impact, KPIs, non-GAAP measures, and liquidity Business and Executive Overview This overview describes Guild Holdings Company as a growth-oriented mortgage company focused on a relationship-based loan sourcing strategy and personalized borrower experience - The company is a growth-oriented mortgage company with a relationship-based loan sourcing strategy, aiming to deliver home ownership across the U.S[113] - Its business model emphasizes a personalized mortgage-borrowing experience supported by knowledgeable loan officers and diverse product offerings[113] Executive Summary of Results of Operations for Periods Presented The company achieved significant revenue and net income growth in Q1 2021, driven by increased origination volume and higher profit margins on loan sales - Net income for Q1 2021 was $160.6 million, a significant improvement from a $13.0 million loss in Q1 2020[116] - Adjusted Net Income increased to $106.4 million in Q1 2021 from $57.9 million in Q1 2020[116] - Adjusted EBITDA grew to $144.3 million in Q1 2021 from $82.0 million in Q1 2020[116] - Loan origination volume increased by 70% to $9.8 billion in Q1 2021 from $5.8 billion in Q1 2020, driven by decreased interest rates[116] - The servicing portfolio's UPB grew by 25.5% to $62.9 billion as of March 31, 2021, from $50.1 billion as of March 31, 2020[116] - Gain on sale margins increased by 39 basis points (9.3%) in Q1 2021 compared to Q1 2020[117] - The company's overall recapture rate for Q1 2021 was 65%, up from 58% in Q1 2020, indicating success in retaining existing borrowers[121] Recent Developments Recent developments include the ongoing COVID-19 impact on servicing, leading to increased delinquencies, and enhanced liquidity through a new loan funding facility COVID-19 Pandemic The COVID-19 pandemic negatively impacted servicing with increased delinquencies and forbearance, though the company's rate remains below industry average - The 60-plus day delinquency rate on the servicing portfolio was 3.1% as of March 31, 2021, compared to 3.5% as of December 31, 2020, and below the U.S. mortgage market average of 5.0%[123] - Approximately 2.7% of loans in the servicing portfolio had elected forbearance as of April 30, 2021, lower than the industry average of 4.5%[124] - Increased delinquency rates and forbearance programs are expected to reduce servicing income and increase servicing expenses, requiring the company to finance substantial advances[123] Increased Liquidity To support increased loan origination volume, the company added a new $250.0 million loan funding facility in Q1 2021, bringing the aggregate available amount under its loan facilities to approximately $3.1 billion - One additional loan funding facility with a total size of $250.0 million was added in Q1 2021[128] - As of March 31, 2021, the aggregate available amount under loan facilities was approximately $3.1 billion[128] Description of Certain Components of Financial Data This section outlines the primary components of the company's revenue, including loan origination and servicing fees, and expenses such as salaries and administrative costs Our Components of Revenue Revenue primarily stems from loan origination fees, gain on sale of loans, servicing fees, MSR valuation adjustments, and net interest income - Loan origination fees and gain on sale of loans, net, include net proceeds from loan sales, client fees, fair value of MSRs at sale, changes in fair value of IRLCs and MLHS, and changes in fair value of forward commitments[132] - Loan servicing and other fees consist of contractual servicing fees, other ancillary fees (e.g., late fees), and impound interest[134] - Valuation adjustment of mortgage servicing rights reflects periodic reevaluation of MSR fair value due to changes in model inputs or assumptions and cash flow collections[134] Our Components of Expenses Expenses include salaries, incentive compensation, general and administrative costs, occupancy, depreciation, and provision for foreclosure losses - Salaries, incentive compensation and benefits include payroll, incentive compensation (variable based on origination volume), and employee benefits[138] - General and administrative expenses cover professional services, office expenses, liability insurance, and adjustments to the fair value of contingent liabilities due to acquisitions ('earn-out payments')[139] - Provision for foreclosure losses is incurred on government loans for unreimbursed interest and foreclosure costs, reserved based on historical loss experience and loan-specific issues[142] Key Performance Indicators Management reviews key performance indicators such as origination volume, gain on sale margins, servicing portfolio UPB, MSR multiple, and delinquency rates Key Performance Indicators (in thousands, except percentages) | Indicator | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | % Change | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :----- | :------- | | Total in-house origination ($) | $9,768,037 | $5,744,246 | $4,023,791 | 70.0% | | Total originations ($) | $9,781,352 | $5,771,306 | $4,010,046 | 69.5% | | Gain on sale margin (bps) | 457 | 418 | 39 | 9.3% | | UPB (period end) ($) | $62,891,262 | $50,117,988 | $12,773,274 | 25.5% | | MSR multiple (period end) | 3.2 | 2.1 | 1.1 | 52.4% | | Loan delinquency rate 60-plus days (period end) | 3.1% | 1.4% | 1.7% | 121.4% | - The 30-year conventional conforming par rate decreased from 3.5% in Q1 2020 to 2.9% in Q1 2021[146] Non-GAAP Financial Measures The company uses non-GAAP measures like Adjusted Net Income and Adjusted EBITDA to supplement GAAP results, excluding non-cash fair value adjustments - Adjusted Net Income excludes changes in fair value measurements related to MSRs, contingent liabilities due to acquisitions, and stock-based compensation, with an implied tax effect[150] - Adjusted EBITDA excludes interest (excluding net warehouse interest and payoff interest), taxes, depreciation, amortization, and the same fair value adjustments and stock-based compensation as Adjusted Net Income[151] Reconciliation of Net Income (Loss) to Adjusted Net Income (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net income (loss) | $160,604 | $(12,986) | | Change in fair value of MSRs due to model inputs and assumptions | $(80,605) | $86,139 | | Change in fair value of contingent liabilities due to acquisitions | $6,620 | $9,007 | | Stock-based compensation | $1,632 | — | | Tax impact of adjustments | $18,161 | $(24,262) | | Adjusted Net Income | $106,412 | $57,898 | Reconciliation of Net Income (Loss) to Adjusted EBITDA (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net income (loss) | $160,604 | $(12,986) | | Interest expense on non-funding debt | $1,397 | $2,162 | | Income tax expense (benefit) | $53,005 | $(4,181) | | Depreciation and amortization | $1,654 | $1,887 | | Change in fair value of MSRs due to model inputs and assumptions | $(80,605) | $86,139 | | Change in fair value of contingent liabilities due to acquisitions | $6,620 | $9,007 | | Stock-based compensation | $1,632 | — | | Adjusted EBITDA | $144,307 | $82,028 | Results of Operations for the Three Months Ended March 31, 2021 and 2020 The company saw significant net revenue growth and a swing from net loss to net income in Q1 2021, driven by increased loan origination and MSR valuation Consolidated Statement of Operations Highlights (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :------- | :------- | | Net revenue | $526,187 | $170,200 | $355,987 | 209.2% | | Total expenses | $312,578 | $187,367 | $125,211 | 66.8% | | Income before income tax expense (benefit) | $213,609 | $(17,167) | $230,776 | NM | | Net income (loss) | $160,604 | $(12,986) | $173,590 | NM | Revenue Revenue substantially increased, driven by loan origination fees, gain on sale of loans, and a positive MSR valuation adjustment Revenue Components (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :------- | :------- | | Loan origination fees and gain on sale of loans, net | $446,589 | $239,861 | $206,728 | 86.2% | | Loan servicing and other fees | $45,199 | $38,532 | $6,667 | 17.3% | | Valuation adjustment of mortgage servicing rights | $35,743 | $(108,649) | $144,392 | 132.9% | | Interest income | $15,098 | $13,001 | $2,097 | 16.1% | | Interest expense | $(16,511) | $(12,934) | $(3,577) | 27.7% | Loan Origination Fees and Gain on Sale of Loans, Net Loan origination fees and gain on sale of loans, net, increased by 86.2% due to higher origination volume and improved gain on sale margins Loan Origination Fees and Gain on Sale of Loans, Net (in thousands) | Component | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :------- | :------- | | Gain on sale of loans | $324,375 | $159,222 | $165,153 | 103.7% | | Loan origination fees | $26,828 | $15,599 | $11,229 | 72.0% | | Fair value of originated MSRs | $99,464 | $38,623 | $60,841 | 157.5% | | Fair value adjustment to MLHS and IRLCs | $(137,060) | $79,611 | $(216,671)| NM | | Changes in fair value of forward commitments | $135,330 | $(51,043) | $186,373 | NM | | Provision for investor reserves | $(2,348) | $(2,151) | $(197) | 9.2% | Loan Origination Volume by Type (in thousands) | Loan Type | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | % Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Conventional conforming | $6,689,951 | $3,519,178 | $3,170,773 | 90.1% | | Government | $2,542,427 | $1,695,002 | $847,425 | 50.0% | | State housing | $315,946 | $350,612 | $(34,666)| (9.9%) | | Non-agency | $219,713 | $179,454 | $40,259 | 22.4% | | Total in-house originations | $9,768,037 | $5,744,246 | $4,023,791 | 70.0% | - The percentage of service retained loans increased to 94.2% in Q1 2021 from 72.4% in Q1 2020, contributing to the increase in fair value of originated MSRs[163][164] Loan Servicing and Other Fees Loan servicing and other fees increased by 17.3% due to a larger servicing portfolio UPB, despite some dampening from forbearance clients Loan Servicing and Other Fees (in thousands) | Component | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :------- | :------- | | Servicing fee income | $43,856 | $37,076 | $6,780 | 18.3% | | Other ancillary fees | $1,271 | $1,653 | $(382) | (23.1%) | | Loan modification fees | $435 | $199 | $236 | 118.6% | | Interest on impound accounts | $(363) | $(396) | $33 | (8.3%) | | Total servicing fees | $45,199 | $38,532 | $6,667 | 17.3% | - The average UPB of the servicing portfolio increased by 23.5% to $61,430,458 thousand in Q1 2021[168] - Weighted average prepayment speed decreased from 23.8% in Q1 2020 to 13.7% in Q1 2021[168] Valuation Adjustment of Mortgage Servicing Rights MSR valuation adjustment swung from a loss to a gain, driven by increased average 30-year mortgage rates and decreased prepayment speed MSR Valuation Adjustment (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :------- | :------- | | MSR valuation adjustment | $35,743 | $(108,649) | $144,392 | 132.9% | - Average 30-year mortgage rates increased by 10 basis points in Q1 2021, while they decreased by 20 basis points in Q1 2020[172] - The weighted average prepayment speed decreased from 23.8% in Q1 2020 to 13.7% in Q1 2021[172] Interest Income Interest income increased by 16.1% to $15,098 thousand, mainly driven by higher interest income from funding, despite a decrease in the weighted average note rate of originated loans Interest Income (in thousands) | Component | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :------- | :------- | | Interest income, funding | $12,690 | $9,919 | $2,771 | 27.9% | | Interest income earnings credit | $713 | $2,076 | $(1,363) | (65.7%) | | Wire transfer fees | $1,695 | $1,006 | $689 | 68.5% | | Total interest income | $15,098 | $13,001 | $2,097 | 16.1% | - The weighted average note rate of originated loans decreased from 3.7% in Q1 2020 to 2.8% in Q1 2021[173] Interest Expense Interest expense increased by 27.7% due to higher payoff interest expense from increased loan payoff volume and bank servicing charges Interest Expense (in thousands) | Component | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :------- | :------- | | Interest expense, funding facilities | $(8,392) | $(6,998) | $(1,394) | 19.9% | | Interest expense, other financing | $(1,598) | $(2,352) | $754 | (32.1%) | | Bank servicing charges | $(3,117) | $(1,664) | $(1,453) | 87.3% | | Payoff interest expense | $(3,374) | $(1,877) | $(1,497) | 79.8% | | Miscellaneous interest expense | $(30) | $(43) | $13 | (30.2%) | | Total interest expense | $(16,511) | $(12,934) | $(3,577) | 27.7% | - Payoff interest expense increased due to an 88.1% increase in loan payoff volume[174] - Warehouse lines of credit costs decreased due to a 0.9% decrease in LIBOR rates[175] Summary of Expenses Total expenses increased by 66.8%, primarily due to higher salaries, incentive compensation, and benefits driven by increased origination volume Summary of Expenses (in thousands) | Expense Category | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :------- | :------- | | Salaries, incentive compensation and benefits | $266,724 | $148,013 | $118,711 | 80.2% | | General and administrative | $26,906 | $22,225 | $4,681 | 21.1% | | Occupancy, equipment and communication | $14,832 | $13,318 | $1,514 | 11.4% | | Depreciation and amortization | $1,654 | $1,887 | $(233) | (12.3%) | | Provision for foreclosure losses | $2,462 | $1,924 | $538 | 28.0% | | Total expenses | $312,578 | $187,367 | $125,211 | 66.8% | Salaries, Incentive Compensation and Benefits Salaries, incentive compensation, and benefits increased by 80.2%, driven by higher incentive compensation from increased origination volume and additional hires Salaries, Incentive Compensation and Benefits (in thousands) | Component | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :------- | :------- | | Incentive compensation | $150,968 | $78,458 | $72,510 | 92.4% | | Salaries | $83,710 | $53,111 | $30,599 | 57.6% | | Benefits | $32,046 | $16,444 | $15,602 | 94.9% | | Total salaries, incentive compensation and benefits expense | $266,724 | $148,013 | $118,711 | 80.2% | - Benefits expense increased by $6.1 million due to higher employment taxes and a $3.5 million increase in the fair value of the deferred compensation plan[180] General and Administrative General and administrative expenses increased by 21.1%, mainly due to higher professional fees supporting origination growth and public company costs General and Administrative (in thousands) | Component | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :------- | :------- | | Contingent liability fair value adjustment | $6,620 | $9,007 | $(2,387) | (26.5%) | | Professional fees | $12,762 | $5,377 | $7,385 | 137.3% | | Advertising and promotions | $4,092 | $4,217 | $(125) | (3.0%) | | Office supplies, travel and entertainment | $2,459 | $2,507 | $(48) | (1.9%) | | Miscellaneous | $973 | $1,117 | $(144) | (12.9%) | | Total general and administrative expense | $26,906 | $22,225 | $4,681 | 21.1% | - Professional fees increased by $4.7 million due to third-party fees, business taxes, and costs related to becoming a public company[182] Occupancy, Equipment and Communication Occupancy, equipment, and communication expenses increased by 11.4% to $14,832 thousand, driven by higher equipment and communication costs to support a remote working environment due to COVID-19 Occupancy, Equipment and Communication (in thousands) | Component | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | $ Change | % Change | | :-------------------------- | :-------------------------------- | :-------------------------------- | :------- | :------- | | Occupancy | $8,349 | $8,185 | $164 | 2.0% | | Equipment | $2,215 | $1,632 | $583 | 35.7% | | Communication | $4,268 | $3,501 | $767 | 21.9% | | Total occupancy, equipment and communication expense | $14,832 | $13,318 | $1,514 | 11.4% | - Equipment and communication expenses increased due to the needs of a remote working environment caused by COVID-19[183] Provision for Foreclosure Losses Provision for foreclosure losses increased by 28.0% due to higher significant delinquencies and anticipated longer foreclosure times, despite fewer foreclosure starts - Provision for foreclosure losses increased to $2,462 thousand in Q1 2021 from $1,924 thousand in Q1 2020[177] - The increase is due to higher significant delinquencies and expected delays/backlogs in the foreclosure process, leading to increased estimated per-loan losses[184] Summary Results by Segment for the Three Months Ended March 31, 2021 and 2020 The company's interdependent Origination and Servicing segments showed increased net income, with Servicing swinging to profit due to MSR valuation changes - Management views the origination and servicing segments as intricately related and interdependent, with servicing supporting origination through client relationships[185] Origination The Origination segment's net income significantly increased, driven by an 86.3% rise in loan origination fees and gain on sale, net, and higher loan sales volume Origination Segment Performance (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Total in-house originations | $9,768,037 | $5,744,246 | | Loan origination fees and gain on sale, net | $444,797 | $238,802 | | Net revenue | $447,643 | $241,027 | | Salaries, incentive compensation and benefits | $250,815 | $140,006 | | Net income allocated to origination | $160,124 | $68,833 | - Loan origination fees and gain on sale, net, increased by $205.6 million (86.3%) in Q1 2021[188] - Gain on sale margins increased by 39 basis points (9.3%) and on pull-through adjusted locked volume by 180 basis points (60.4%)[188] Servicing The Servicing segment swung to a net income of $67,066 thousand, primarily due to a $35.7 million MSR fair value gain, despite higher interest expense Servicing Segment Performance (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | UPB of servicing portfolio (period end) | $62,891,262 | $50,117,988 | | Loan servicing and other fees | $45,199 | $38,532 | | Valuation adjustment of MSRs | $35,743 | $(108,649) | | Net revenue | $79,895 | $(69,020) | | Salaries, incentive compensation and benefits | $7,213 | $5,686 | | Net income (loss) allocated to servicing | $67,066 | $(79,345) | - The increase in MSR fair value was driven by a 10 basis point increase in average 30-year mortgage rates and a decrease in prepayment speeds[190] - Salaries, incentive compensation, and benefits increased due to hiring additional employees to support increased servicing volume and clients in forbearance[192] Liquidity, Capital Resources and Cash Flows The company's liquidity, sourced from operations and various credit facilities, is deemed sufficient for the next 12 months, with all debt covenants in compliance - Primary liquidity sources include cash flows from operations (loan sales, origination fees, servicing income, interest income), borrowings on warehouse lines of credit, and MSR notes payable[194] - As of March 31, 2021, the aggregate available amount under loan funding facilities was approximately $3.1 billion, with combined outstanding balances of $2.1 billion[198] - As of March 31, 2021, the aggregate available amount under MSR notes payable was $440.0 million, with combined outstanding balances of $165.0 million[199] - The company believes it was in compliance with all debt covenants as of March 31, 2021, and December 31, 2020[203][205] Cash Flows Operating cash flows turned positive in Q1 2021, investing activities used less cash, and financing activities shifted to a net cash outflow Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $34,349 | $(231,206) | | Net cash used in investing activities | $(667) | $(14,393) | | Net cash (used in) provided by financing activities | $(53,354) | $262,712 | Operating activities Net cash from operating activities turned positive in Q1 2021, driven by increased proceeds from loan sales relative to originations Cash Flows from Operating Activities (in thousands) | Component | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Loans held for sale | $22,850 | $(260,648) | | Other operating sources | $11,499 | $29,442 | | Net cash provided by (used in) operating activities | $34,349 | $(231,206) | - Cash provided by loans held for sale increased due to higher proceeds on sale and payments from mortgage loans held for sale relative to originations[210] Investing activities Net cash used in investing activities decreased due to fewer property and equipment purchases and the absence of a prior-year affiliate payment - Cash used in investing activities decreased primarily due to less cash used for purchases of property and equipment[211] - The prior year period included a $12.0 million payment made on behalf of an affiliate[211] Financing activities Net cash used in financing activities shifted to an outflow, driven by higher net repayments on warehouse lines of credit Cash Flows from Financing Activities (in thousands) | Component | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Warehouse lines of credit | $(72,103) | $304,815 | | Other financing sources | $18,749 | $(42,103) | | Net cash (used in) provided by financing activities | $(53,354) | $262,712 | - The decrease in cash from warehouse lines of credit was due to higher net repayments[214] - Cash from other financing sources increased due to net borrowings of $19.3 million on MSR notes payable in Q1 2021, compared to net repayments of $30.0 million in Q1 2020[214] Contractual Obligations There have been no significant changes to the company's contractual obligations and commitments since its 2020 Annual Report on Form 10-K, as disclosed in Note 13 - No significant changes to contractual obligations and commitments since the 2020 Annual Report on Form 10-K[216] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Guild Holdings Company is not required to provide quantitative and qualitative disclosures about market risk in this report - The company is not required to provide quantitative and qualitative disclosures about market risk as it is a smaller reporting company[217] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of March 31, 2021, with internal control over financial reporting to be evaluated post-2021 Annual Report - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2021[218] - Evaluation of internal control over financial reporting is not required until after the filing of the 2021 Annual Report on Form 10-K[220] PART II - OTHER INFORMATION This part contains other information not included in the financial statements, such as legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings The company is involved in various legal and regulatory proceedings in the ordinary course of business but does not anticipate any material adverse effect on its business, results of operations, or financial condition - The company is routinely subject to various examinations and legal/regulatory proceedings[223] - Management does not expect current legal or regulatory proceedings to have a material adverse effect on the company's business, results of operations, or financial condition[223] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2020 Annual Report on Form 10-K - No material changes to the risk factors disclosed in the 2020 Annual Report on Form 10-K[224] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report, including the Amended and Restated Certificate of Incorporation and Bylaws, CEO and CFO certifications, and Inline XBRL documents - Exhibits include the Amended and Restated Certificate of Incorporation and Bylaws, CEO and CFO certifications (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act), and Inline XBRL documents[227] Signatures The Quarterly Report is signed on behalf of Guild Holdings Company by its Chief Executive Officer, Mary Ann McGarry, and Chief Financial Officer, Desiree A. Elwell, on May 11, 2021 - The Quarterly Report was signed by Mary Ann McGarry, Chief Executive Officer, and Desiree A. Elwell, Chief Financial Officer, on May 11, 2021[233]