Finance of America Companies Inc.

Good afternoon. Thank you for attending today's Finance of America first quarter 2022 earnings call. My name is Hannah and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Michael Fant, Senior Vice President of Finance with Finance of America. Please go ahead.

Thank you and good afternoon everyone and welcome to Finance of America's first quarter earnings call. With me today are Patty Cook, Chief Executive Officer, and Johann Gehrig, Chief Financial Officer. As a reminder, this call is being recorded and you can find the earnings release and presentation on our investor relations website at www.financeofamerica.com. In addition, we will refer to certain non-GAAP financial measures on this call. You can find reconciliations of non-GAAP to GAAP financial measures to the extent available without unreasonable effort, discussed on today's call in our earnings press release and presentation on the investor relations page of our website. Also, I would like to remind everyone that comments on this conference call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the company's expected operating and financial performance for future periods. These statements are based on the company's current expectations and are subject to the safe harbor statement for forward-looking statements that you will find in today's earnings release. 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, including those that are described in the risk factors section of Finance of America's annual report on Form 10-K. The year ended December 31, 2021. filed with the SEC on March 15, 2022, as such risk factors may be amended and updated in our subsequent filings with the SEC. We are not undertaking any commitment to update these statements if conditions change. Please note, these are interim period financials and are unaudited. Now, I would like to turn the call over to Finance of America's Chief Executive Officer, Patty Cook. Patty?

Thanks, Michael, and good afternoon, everyone. Thank you for joining us for our first quarter 2022 learnings call. This call marks our first full year of reporting earnings as a public company, and I am pleased to provide you with an update on the business. I am proud of our team's execution in what can only be described as a volatile quarter for our business and the industry as a whole. The devastating war in Ukraine and rapidly rising inflation resulted in the fastest increase in interest rates we have seen in decades. This puts tremendous pressure on pricing and volumes in the industry. In addition, credit spreads widened on most financial assets as investors perceived increased risk in the market. While we are hedged against rising interest rates, we cannot efficiently hedge our balance sheet against widening spreads. And as a result, we incurred significant fair value adjustments as we updated model assumptions. Johan will cover this in more detail. The fair value adjustments resulted in a headline loss. However, we generated adjusted net income of $37 million in Q1, or 20 cents in adjusted earnings per share. Our specialty finance and service business, or SF&F, continued to perform well. generating 25 cents in adjusted earnings per share in line with guidance our mortgage origination segment however was not immune to the impacts of rising rates and recorded an adjusted loss of roughly 10 million dollars per quarter or negative five cents in adjusted earnings per share the mortgage origination segment was impacted by both lower than expected volume and a decline in non-agency pricing as many originators liquidated assets. Despite the market volatility, we continue to execute on our strategic initiative. We have substantially reduced run rate expenses in the mortgage business, continue to invest in SF&S to drive growth, particularly in our reverse business, and lastly, We are making progress on our efforts to build a customer-centric organization to unlock the inherent value in our franchise and grow lifetime household value. It is during cycles like this that our diversified business model allows us to generate adjusted net income despite significant headwinds in the mortgage sector. We don't expect interest rates to return to the level seen earlier in the year, and are prepared to operate the company in this higher rate environment. First, let's start with our mortgage business. As I mentioned earlier, this segment generated an adjusted loss of $9.5 million for the quarter, which included an adjusted loss of $1.6 million for our home improvement business. Overall, mortgage volumes were weaker than expected, as the rapidly rising rates resulted in a steep decline in refinance volumes. Refinance as a percentage of overall volume fell to 45%. This does not fully capture the impact of the roughly 50 basis point increase in the 10 year during March. And as a result, we expect that percentage to be much lower in Q2. Our strong retail distribution channel is ideally suited to the purchase market, and as a result, we saw purchase volumes increase 4% year over year. Demand for our non-agency products remained strong and increased 8% year over year. We have worked very hard on our customer experience and are pleased that these efforts have paid off. Recently, we were recognized as the number one mortgage company in customer satisfaction for the jumbo division in 2021 by experience.com. Our non-QM product, Flex, fills an important gap in the market. And despite the current volatility impacting margins to that product, we believe over the long term that this will be an important driver of growth in our mortgage business. We are working across operations and distribution channels to align the organization and streamline our operating model. For example, we have consolidated our wholesale channels in mortgage and commercial, which obviously drives efficiency, but more importantly, enhances the cross-sell opportunity of commercial products through the mortgage broker network. In addition, we also consolidated our consumer direct channels into a single operation. As a result, we have lowered our fixed and variable cost components and will continue to do so as we eliminate waste, reduce duplicate efforts, and consolidate infrastructure. We continue to believe there is a substantial opportunity to sell non-mortgage products through our mortgage channels. and our focus on this opportunity. I want to also touch briefly on our home improvement business that is included in the mortgage origination segment. This business won't be a significant profit driver in the short term, but it brings some exciting capabilities to the table. The technology platform we acquired as part of this business is modern, scalable, and we constantly hear from our customers that it is one of the best in the industry. Not only has this helped us win new business, we added 150 new contractors to the platform in Q1, but it also gives us tremendous flexibility to add new products. Interestingly, the average age of a home improvement customer is 54 years, which allows us to introduce our reverse products and give borrowers another option to use the equity in their homes. This business can become a highly effective customer acquisition channel at a zero cost of acquisition once the business reaches breakeven, which we expect to happen later this year or early next. Our second strategic priority is continued investment in specialty finance and services, or SF&X, comprised of predominantly reverse, commercial, and lender services. Reverse volumes continue to grow at a strong pace, and Q1 set yet another record origination quarter. In fact, March was our highest origination month ever. Our reverse pipeline has never been bigger, driven by strong home price appreciation over the past couple years, as well as continued investments in processing capacity. Margins declined more than expected, as wider spreads impacted capital markets' execution. Needless to say, we managed this very closely to ensure we maintain margins in this volatile market, but expect margins to remain pressured in the first part of Q2 as we clear out inventory. We believe Finance America has a leading reverse mortgage platform in an industry with structural tailwinds. The older population in the US will continue to grow and recent home price appreciation has increased the addressable market substantially. These factors represent customers with an effective opportunity to tap into their home equity to fund their retirement and lifestyle. We continue to invest in education and advertising to position a reverse mortgage as an efficient tool for seniors to monetize the equity in their homes. Our commercial business originated $573 million in funded volume this quarter, a growth of 68% compared to Q1 of 2021. Like our reverse business, margins were negatively impacted by a widening of spreads. We expect margins to remain pressured in the first half of Q2 as we liquidate inventory. Despite a modest operating loss for the quarter, we believe this business will be driven by favorable long-term dynamics, a combination of the aging housing stock, strong household formation, and the large millennial first-time homebuyer demographic that prefers updated or new homes. Our Lending Services business is working hard to diversify its income stream to help offset the loss in business from a pullback in the refinance market. March was an encouraging month as we saw revenues pick up after slowing earlier in the year. This was partly driven by an increase in foreclosure volumes to help offset the drop in refinances. We expect to switch away from refinance-driven revenue to continue in Q2 as several of our exciting new products enter the market. We saw substantial activity on our MSR advisory business, and our appraisal management products are gaining traction. We also continue to deepen existing customer relationships and added 300 new third-party customers in the quarter. Lastly, our third strategic priority is focusing on investing in technology, data, and our operating models. to capture the lifetime household value inherent in the Finance of America business. In Q1, Finance of America continued to pursue a centralized, customer-first approach that will create seamless experiences and remove friction from their journeys. As mentioned earlier, we consolidated our respective wholesale and consumer direct channels to create a more consistent experience across our products. We have also begun to lay the foundation for a unified view of all of our customers across all of the segments. This will enable Finance America to offer our customers solutions that meet their needs and deepen household relationships. By centralizing data at an enterprise level, we can identify and provide the best products for our customers, depending on their stage in life. This is a long-term commitment, and we look forward to sharing major milestones along the way. And finally, before I turn things over to Johan, I want to quickly highlight some exciting news. In a commitment to transparency and progress around sustainability practices, I am pleased to note that Finance America published its inaugural ESG report on April 18th. This report lays out our ESG roadmap and details the work we are doing to support every pillar of ESG as a business today. We hope you will take a moment to review this new report and look forward to your thoughts and feedback. I will now pass the call to Johan to discuss the financial results.