Finance of America Companies Inc.

Good afternoon. My name is Chelsea and I will be your conference operator today. At this time, I would like to welcome everyone to the Finance of America 2022 Second Quarter Earnings Call and Webcast. All participant lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If you need to ask further questions, you may re-enter the queue. Lastly, if you should require operator assistance, please press star zero. Thank you, and I will now turn the call over to Michael Fant, Senior Vice President of Finance with Finance of America. Sir, please go ahead.

Thank you, and good afternoon, everyone, and welcome to Finance of America's second quarter 2022 earnings call. With me today are Graham Fleming, President and Interim Chief Executive Officer, and Johan 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 metrics on this call. You can find reconciliations of non-GAAP to GAAP financial metrics 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 for the year ended December 31, 2021. originally 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 taking 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 President and Interim Chief Executive Officer, Graham Fleming. Graham?

Thanks, Michael. Good afternoon, everyone, and thank you for joining us on our second quarter 22 earnings call. I am pleased to be here and to be serving as FOA's interim CEO. Since joining the company back in 2013, I've witnessed the evolution of this business and believe there is more opportunity ahead. Finance of America exists to help our customers use equity to thrive and discover pathways to achieve lasting financial freedom. Before we start with an update on the business, I want to mention how proud I am of the team's resilience and unwavering commitment to our customers. Despite current market conditions, I am confident we will meet our challenges head-on while continuing to build for tomorrow. Given the negative impact of rates and spreads on our business, we recorded a net loss of $168 million, or $0.70 per fully diluted share for the second quarter. The impact on earnings fell into two categories, operating losses and balance sheet write-downs. The write-downs on the balance sheet were a result of negative fair value marks due to spread widening, and should spreads return to the mean, we would recoup these losses. Johan will discuss these write-downs in greater detail in a few moments. On an adjusted basis, excluding fair value marks and other items, the company generated an adjusted net loss of $22 million. The loss was caused by the rapid increase in rates and widening of spreads and is almost entirely attributable to our mortgage origination segment due to the precipitous drop-off in refinance volumes. To combat the operating pressures on our business, we are prudently managing costs across the company and continue to implement expense initiatives to right-size the business as we expect current volume levels to persist into the second half of the year. We reduced our workforce in mortgage originations to match capacity with current market demand. taking out roughly 35% in costs on a run rate basis, equating to over $100 million annualized. These reductions will be realized over the remainder of the year. Since the beginning of the year, we have reduced overall company headcount and expenses by roughly 20%. In reverse and commercial originations, rates and spreads increased at such a rapid pace that we could not reprice loans in the pipeline at the same velocity with which the market moved. In addition, funded loans deteriorated in value between the time of funding and eventual sale or securitization. As a result, we saw a substantial decline in margins for those two businesses. In order to combat this margin compression, we repriced loans and raised coupons several times. And yet, despite these increases, we saw record origination volumes in reverse and another strong quarter from commercial. As the capital markets stabilize, we expect margins in these businesses to return closer to historical averages, and we will take any additional actions necessary to improve profitability. To summarize, we believe the long-term fundamentals underlying our businesses remain sound and will allow Finance of America to generate returns in line with expectations. Finance of America was built to strategically deliver a wide range of products to customers at all stages of life, under a variety of economic conditions. We are focused on executing against our three strategic priorities to set FOA up for long-term success. And these are, one, optimizing our mortgage business. Two, investing in a reverse commercial lender services and capital markets capabilities that collectively form SF&S and separate us from other lenders in the category. And three, leveraging our technology data and operating model to transform from a product to customer-centric company. I want to underscore that we remain steadfast in executing against these priorities despite the current cyclical headwinds and not because of them. Our vision for FOA is bringing our entire industry-leading suite of products and services to consumers in more compelling ways. We are going to turn their experiences with us from one-time transactions into lifelong journeys. First, let's start with optimizing our mortgage business. Overall, mortgage volumes decreased as the rapid rise in rates led to a steep decline in refinance volumes. As I discussed earlier, we are optimizing our cost structure through reductions in headcount and other cost management efforts. We have moved out of the consumer direct channel that was heavily reliant on refinance leads and are actively rightsizing each of our branches. As the purchase market continues to become a larger part of origination volume, our distributed retail business remains poised to take advantage of this shift. Currently, purchase originations comprise roughly 85% of our volume. We also believe there remains substantial opportunity to sell non-mortgage products through our mortgage channel and are focused on building out this opportunity. Our home improvement business, which is included in our mortgage origination segment, continues to see steady improvement. In June and July, home improvement saw its highest funding month ever, putting it on pace to achieve operational break even later this summer. We believe home improvement can become a very effective customer acquisition channel at essentially zero cost. This is an exciting development as we think about the various cross-sell opportunities that exist within this business. With the average age of a home improvement customer being roughly 52 years old, there is an opportunity to sell additional products like reverse, offering borrowers yet another option to leverage the equity in their homes. Our second strategic priority is to invest in specialty finance and services businesses, comprised primarily of reverse, commercial, and lender services. Reverse origination volumes of $1.58 billion in Q2 set yet another quarterly funding record. and was roughly $100 million above the first quarter. This growth is attributable primarily to market penetration in first-time reverse customers. As a result, we have seen a decrease in prepayment rates as production shifts from refinance to new volume. Last month, Finance of America Reverse published its inaugural Home Equity Punch List research study, which found that despite having the most equity in their homes, older Americans are also the least likely cohort to consider using their home equity as part of financial planning. These results underscore not only the massive market opportunity, but also the need for greater consumer education and awareness to fuel product adoption. We are actively working on a strategic partnership to unlock a new origination channel that will target reverse as an efficient financial planning tool, and we are very excited about the prospect of growing this over time. In our commercial segment, we originated 540 million in funded volume in the second quarter, a slight decline from Q1. Due to product rate increases, we do expect to see lower volumes in Q3. However, we continue to add new products that appeal to our customers and have maintained a robust pipeline. In addition, early in Q3, we took actions to reduce the quarterly expense run rate by roughly 25% and expect the segment to show improved profitability for the quarter. It's important to note that our commercial customers are seasoned and sophisticated with over 50% of our borrowers since the beginning of 2021, completing 10 plus transactions. The quality of our customers stand out as a key advantage to our commercial portfolio. In our lender services business, we continue to introduce new products to diversify our income stream and offset the pullback in the refinance market. In particular, MSR advisory had a record core as customers are actively trading assets. We also continue to build on our existing customer relationships, adding new third-party customers in Q2 and expect these relationships to add incremental revenue over time. Finally, turning to our third strategic priority, we continue to invest in technology, data, and our operating models to capture the inherent household value in the respective FOA businesses. As a customer-centric organization, we can benefit from efficiencies in marketing and streamline technology on the backend, providing a digital, mobile-first experience that offers seamless capabilities between each of our offerings. This will help us unlock lifetime household value across our entire customer base. I will elaborate more on our plans and goals towards these objectives over the coming quarters. Looking ahead, we will continue to navigate evolving macro conditions including further deleveraging the balance sheet and managing our expenses. We believe that our retail distribution model is well positioned to capture purchase volume, and in addition, we see massive tailwinds for both our reverse and commercial businesses over the long term. All these factors leave us well positioned for future growth. I will now pass the call to Johan to discuss the financial results. Johan?