Guild pany(GHLD) - 2021 Q4 - Annual Report

Part I Business Overview Guild Holdings Company operates as a mortgage company with integrated origination and servicing segments, focusing on relationship-based lending and strategic growth - Guild is a long-operating mortgage company (since 1960) with a business model centered on a personalized, relationship-based approach to loan origination and in-house servicing[22][23] Key Business Metrics (2020-2021) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Retail Origination Volume | $35.7 billion | $34.3 billion | | Total Origination Volume | $36.9 billion | $35.3 billion | | Servicing Portfolio (UPB) | $70.9 billion | $60.0 billion | | Customers Serviced | Over 300,000 | Not specified | | Portfolio Recapture Rate | 58% | 60% | - The business is structured into two complementary segments: Origination and Servicing; the Origination segment generates revenue from gain-on-sale and fees, with a retail channel accounting for approximately 97% of its volume, while the Servicing segment generates recurring revenue and client recapture opportunities[26][28][29] - Growth strategies include expanding into new markets through organic growth and acquisitions (e.g., the 2021 acquisition of RMS), and growing retail originations through portfolio recapture[24][41][43] - The company utilizes a proprietary, internally-developed technology platform that includes tools like MyKey (LOS), Guild360 (sales platform), and MyMortgage (consumer interface) to drive productivity and client engagement[45][50] Risk Factors The company faces significant risks including market dependence, interest rate sensitivity, regulatory compliance, operational vulnerabilities, and internal control weaknesses - The business is highly dependent on the secondary home loan market, particularly selling loans to GSEs (Fannie Mae, Freddie Mac) and Ginnie Mae, where disruptions could be detrimental[73][76] - Changes in interest rates directly affect profitability, and hedging strategies may not fully mitigate this risk[77][78] - The COVID-19 pandemic has adversely affected servicing operations due to forbearance programs and could impact future liquidity and operations[87][88][89] - The company is subject to a complex and evolving legal and regulatory framework, with non-compliance potentially leading to severe penalties[121][122] - A material weakness in internal control over financial reporting was identified as of December 31, 2021, related to insufficient experienced personnel and ineffective risk assessment[152][153] - The company is a "controlled company" as MCMI holds approximately 95% of combined voting power, allowing control over stockholder actions and exemptions from certain NYSE governance requirements[132][133] Unresolved Staff Comments The company has no unresolved staff comments from the SEC - None[162] Properties The company operates from a leased principal executive office in San Diego and numerous leased branch and satellite offices nationwide - The company's principal executive office is located in San Diego, California[163] - Guild operates from approximately 260 branch offices and 157 satellite offices throughout the U.S., all of which are leased[163] Legal Proceedings The company is involved in routine legal and regulatory proceedings, none of which are expected to materially impact its financial condition - The company is subject to routine legal and regulatory proceedings but does not expect any to have a material adverse effect on its business[164] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[166] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on the NYSE, while Class B stock is not publicly traded; the company paid special cash dividends in 2021 - The company's Class A common stock is traded on the New York Stock Exchange under the symbol "GHLD"[168] - In 2021, the company declared and paid two special cash dividends totaling $2.00 per share to holders of both Class A and Class B common stock[170] - As of March 7, 2022, there were 20,723,912 shares of Class A common stock and 40,333,019 shares of Class B common stock outstanding[169] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Net income declined in 2021 due to compressed origination margins, despite growth in total origination volume and the servicing portfolio, with improved delinquency rates Financial Performance Summary (2020 vs. 2021) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Income | $283.8 million | $370.6 million | | Adjusted Net Income (Non-GAAP) | $258.5 million | $523.8 million | | Adjusted EBITDA (Non-GAAP) | $366.2 million | $714.3 million | | Total Origination Volume | $36.9 billion | $35.3 billion | | Servicing Portfolio (UPB) | $70.9 billion | $60.0 billion | - The primary driver for the decrease in net income was a 19.6% (98 basis points) decline in gain-on-sale margins on originated loans, reflecting increased price competition[185][236] - On July 1, 2021, the company completed its acquisition of Residential Mortgage Services Holdings, Inc. (RMS) for approximately $185.8 million in cash and 996,644 shares of Class A common stock, expanding its presence in the Northeast[193] - The 60-plus day delinquency rate in the servicing portfolio decreased to 1.9% as of December 31, 2021, from 3.5% as of December 31, 2020, indicating improvement from COVID-19 related forbearances[195] Results of Operations Net revenue decreased by 2.8% and net income by 23.4% in 2021, primarily due to lower origination margins, partially offset by increased servicing fees Consolidated Statement of Operations Summary | ($ in thousands) | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Net revenue | $1,576,310 | $1,622,047 | (2.8)% | | Loan origination fees and gain on sale of loans, net | $1,480,516 | $1,759,871 | (15.9)% | | Loan servicing and other fees | $194,759 | $160,237 | 21.5% | | Valuation adjustment of MSRs | $(101,572) | $(296,307) | (65.7)% | | Total expenses | $1,189,379 | $1,127,977 | 5.4% | | Salaries, incentive compensation and benefits | $1,019,790 | $953,758 | 6.9% | | Net income | $283,782 | $370,577 | (23.4)% | - The decrease in 'Loan origination fees and gain on sale of loans, net' was primarily due to a $322.2 million negative swing in the fair value adjustment to MLHS and IRLCs, reflecting lower gain-on-sale margins (402 bps in 2021 vs. 500 bps in 2020)[240][243] - Loan servicing and other fees increased by 21.5% due to a 19.8% increase in the average servicing portfolio UPB[245][248] - Salaries expense increased by 26.6% due to the RMS acquisition and increased headcount, while benefits expense decreased 7.4% due to a change in the valuation of a deferred compensation plan[256] Segment Results Origination segment net income declined due to margin compression, while the Servicing segment significantly improved, turning a loss into profit due to reduced MSR valuation adjustments Origination Segment Performance | ($ in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net revenue | $1,485,043 | $1,767,535 | | Total expenses | $1,092,289 | $1,002,198 | | Net income | $392,754 | $765,337 | Servicing Segment Performance | ($ in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net revenue | $97,466 | $(137,651) | | Valuation adjustment of MSRs | $(101,572) | $(296,307) | | Total expenses | $41,839 | $46,346 | | Net income (loss) | $55,627 | $(183,997) | Liquidity, Capital Resources and Cash Flows The company's liquidity is supported by operating cash flows and debt facilities, with significant improvement in operating cash flow in 2021 - The company funds substantially all mortgage loans through borrowings under loan funding facilities, which are then repaid with proceeds from loan sales[280][281] Debt Facilities Summary (as of Dec 31, 2021) | Facility Type | Total Facility Size | Outstanding Balance | | :--- | :--- | :--- | | Warehouse Lines of Credit | ~$3.5 billion | ~$1.9 billion | | MSR Notes Payable | $440.0 million | $250.0 million | Cash Flow Summary | ($ in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from operating activities | $680,459 | $(468,041) | | Net cash used in investing activities | $(104,660) | $(18,025) | | Net cash (used in) from financing activities | $(667,312) | $718,964 | Critical Accounting Estimates Critical accounting estimates involve fair value measurements of complex Level 3 assets like MSRs and IRLCs, relying on significant unobservable inputs and third-party assistance - Critical accounting estimates relate to the fair value of MLHS, MSRs, IRLCs, forward delivery commitments, and contingent liabilities from acquisitions[309] - MSRs are Level 3 assets valued using a model with unobservable inputs such as prepayment speeds, discount rates, and servicing costs; their fair value was $675.3 million at year-end 2021[317][442] - IRLCs are also Level 3 assets, with the pull-through rate being the most significant unobservable input; their fair value was $22.1 million at year-end 2021[319][321] - The company uses third-party specialists to assist in determining the fair value of MSRs and contingent consideration from acquisitions[314][326] Quantitative and Qualitative Disclosures About Market Risk The company is exempt from providing quantitative and qualitative disclosures about market risk as a smaller reporting company - The company is not required to provide this information as it qualifies as a smaller reporting company[328] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and auditor reports, including an adverse opinion on internal controls due to material weaknesses Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on financial statements but an adverse opinion on internal controls due to material weaknesses, highlighting MSR valuation and RMS acquisition accounting as critical audit matters - The auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements for the years ended December 31, 2021 and 2020[330] - KPMG issued an adverse opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2021[346] - Material weaknesses were identified related to an insufficient complement of experienced personnel, an ineffective risk assessment, and resulting ineffective IT general controls and monitoring controls[348] - Critical Audit Matters highlighted were the fair value of Mortgage Servicing Rights (MSRs) and the initial fair value measurement of contingent consideration and the referral network intangible from the RMS acquisition[335][338] Consolidated Financial Statements Consolidated financial statements show a decrease in total assets and net income in 2021, while stockholders' equity and cash from operations increased Consolidated Balance Sheet Summary (As of Dec 31) | ($ in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total Assets | $4,383,204 | $4,818,087 | | Mortgage loans held for sale | $2,204,216 | $2,368,777 | | Mortgage servicing rights, net | $675,340 | $446,998 | | Total Liabilities | $3,463,191 | $4,082,095 | | Warehouse lines of credit | $1,927,478 | $2,143,443 | | Total Stockholders' Equity | $920,013 | $735,992 | Consolidated Statement of Income Summary (Year Ended Dec 31) | ($ in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net Revenue | $1,576,310 | $1,622,047 | | Total Expenses | $1,189,379 | $1,127,977 | | Net Income | $283,782 | $370,577 | | Diluted EPS | $4.67 | $6.17 | Notes to Consolidated Financial Statements Notes provide detailed disclosures on accounting policies, fair value measurements, debt, acquisitions, and segment performance, confirming compliance with minimum net worth requirements - The acquisition of RMS on July 1, 2021, involved total consideration of approximately $265.0 million, resulting in $112.3 million of goodwill and $45.0 million of identifiable intangible assets (Note 3)[453][455][457] - MSRs are valued at fair value (Level 3), with key unobservable inputs being discount rate (avg. 9.9%), prepayment rate (avg. 13.6%), and cost to service (avg. $91.4/loan) for 2021 (Note 7)[472] - The company is subject to minimum net worth, capital, and liquidity requirements from agencies like Fannie Mae, Freddie Mac, and Ginnie Mae, and was in compliance with all such covenants as of December 31, 2021 (Note 19)[527][530] - The company has two reportable segments: Origination and Servicing; the Origination segment generated $392.8 million in net income, while the Servicing segment generated $55.6 million in net income for 2021 (Note 21)[537] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None[539] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2021, due to material weaknesses in personnel and risk assessment, with a remediation plan underway - Management concluded that the company's disclosure controls and procedures were not effective as of December 31, 2021[541] - Material weaknesses were identified due to: 1) an insufficient complement of personnel with requisite experience in control design and operation, and 2) an ineffective risk assessment, including for fraud[544] - These root causes led to ineffective IT general controls (user access, change management) and ineffective monitoring and evaluation of information used in controls[544] - A remediation plan is in progress, focusing on hiring finance and IT resources, enhancing risk assessment, and redesigning and implementing controls[549] Other Information The company reports no other information for this item - None[552] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[553] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Stockholders[555] Executive Compensation Executive compensation information is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Stockholders[556] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Stockholders[557] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Stockholders[558] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2022 Proxy Statement; KPMG LLP is the auditor - Information is incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Stockholders[559] - The company's independent registered public accounting firm is KPMG LLP[559] Part IV Exhibits and Financial Statement Schedules This section provides an index of financial statements, schedules, and exhibits filed with the Annual Report on Form 10-K - This section contains the index of exhibits filed with the Form 10-K[562] Form 10-K Summary The company reports no information for this item - None[566]