Guild trims payroll as origination, servicing earnings dive

Dwindling originations and thinning margins slashed profits at Guild Mortgage’s parent company by 72% in the second quarter, prompting the firm to undertake sizable layoffs.

Guild Holdings, owner of the San Diego-based lender and servicer, reported net income of $58.3 million in the second quarter, a drop from the first quarter’s $208 million, according to Thursday’s earnings report. The firm’s $266.3 million in net income year-to-date exceeds last year’s $169.5 million revenue through the year’s first six months, a performance propped up by its strong first quarter in 2022.

Gain on sale margin fell to 363 basis points in the second quarter, a 9% decline from 400 bps in the first three months of the year. The gain on sale margin on pull-through adjusted locked volume rose slightly to 357 basis points from 334 bps in the first quarter. 

The margins could stabilize in the second half of the year, executives suggested in a conference call Thursday. Mary Ann McGarry, Guild CEO and director, clarified the margins would be dependent on market rate and spread trends and continued contraction. Analysts questioned the margin assessment during the conference call.

“That’s dependent on market dynamics, how fast excess capacity is shutting,” said Amber Kramer, Guild senior vice president and chief financial officer. “But we believe from what we’re seeing from where we are now, that could stabilize in the coming quarters.”

The company laid off an unspecified number of employees in the first half of the year that will save it $40 million on an annualized basis, executives revealed. A Guild representative didn’t respond to a follow-up request regarding the number of impacted employees. The $40 million figure represents one of the larger workforce reduction-related savings among the industry’s cycle of layoffs as volume declines.

Despite the cuts, executives said the company is benefitting from a “flight to stability” as smaller competitors confront lower revenues and bloated staffing levels following a record run of mortgage activity last year.

“The number of inbound calls we are receiving from individual loan officers and teams continues to trend higher especially as competitors exit the business,” McGarry said. 

Executives didn’t mention the firm’s ongoing legal battles with CrossCountry Mortgage, in which the competitors have traded allegations of poaching.

Purchases were 84% of Guild’s originations in the second quarter, up from 66% the prior three months. The loan volume totaled $5.7 billion, down 6% from last quarter’s $6.1 billion.

Guild reported $25.6 million in origination net income, a 60% drop from the first quarter’s $63.4 million profit. Through the first six months of 2022, origination net income topped $89.1 million; it totaled $238.9 million over the first half of 2021, a 63% decline.

Servicing net income didn’t fare any better, as Guild reported $63.9 million in the second quarter, a 72% freefall from $226.8 million in the first quarter. The business, which many lenders consider to be a natural hedge to falling origination income, was impacted by less favorable mortgage servicing rights adjustments, Kramer said.

Even with the weaker results, company leaders were still bullish on Guild’s servicing business.

“Higher rates drive slower prepayments and longer holding periods thereby extending recurring cash flows over time,” said Terry Schmidt, president and director. 

The servicer retained servicing rights for 89% of the total loans it sold in the second quarter, and the unpaid principal balance of its portfolio rose 4% from the prior quarter to $75.9 billion.

Guild’s adjusted net income fell 57% from the first quarter to $13.9 million. Net revenue totaled $287.5 million in the second quarter, down from last quarter’s $481.8 million. Also falling was the firm’s adjusted earnings per share of $0.23 in the second quarter compared to $0.53 in the previous quarter, a 53% change.

The firm followed through on its stock-buyback plan, repurchasing approximately 142,000 shares in May and June at an average stock price of $10.18 per share, while $18.6 million remains on the $20 million repurchase authorization.

The news prompted slight optimism from investors, who pushed GHLD’s stock price from $11.98 at the market’s close Thursday evening to $12.78 at its opening Friday after the conference call. However, the stock fell to $11.60 by midday.

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