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spk02: Greetings, and welcome to the Akron Financial Corporation Preliminary First Quarter Earnings and Business Update Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. Deco Axler-Rillian. Thank you, sir. You may begin.
spk03: Good morning, and thank you for joining us for Akron's preliminary first quarter 2021 earnings and business update call. Please note that our preliminary first quarter 2021 earnings release and slide presentation are available on our website. Speaking on the call will be Akron's Chief Executive Officer, Glenn Messina, and Chief Financial Officer, June Campbell. As a reminder, the presentation or comments today may contain forward-looking statements made pursuant to the safe harbor provisions of the federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are, to different degrees, uncertain. You should bear this uncertainty in mind when considering such statements and should not place undue reliance on such statements. Forward-looking statements involve assumptions, risks, and uncertainties, including the risks and uncertainties described in our SEC filings, including our Form 10-K for the year ended December 31, 2020, and our current and quarterly reports since such date. In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again. Our forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. In addition, the presentation or our comments contain references to non-GAAP financial measures, such as adjusted pre-tax income and adjusted expenses, among others. We believe these non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition and an alternate way to view certain aspects of our business that is instructive. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company's reported results under accounting principles generally accepted in the United States. The reconciliation of the non-GAAP measures used in this presentation to their most directly comparable GAAP measures may be found in the press release in the appendix to the investor presentation available on our website. Finally, this presentation and our comments refer to our preliminary first quarter financial results. These statements are based on currently available information and reflect our current estimates and assessments. The company has not finished its first quarter financial closing procedures. There can be no assurance that actual results will not differ from our current estimates and assessments, including as a result of first quarter financial closing procedures and any such differences could be material. The company expects to release final first quarter 2021 results in early May. Now, I will turn the call over to Glenn Messina.
spk04: Thanks, Dico. Good morning, everyone. Thanks for joining the call today. Let's get started on page three. Look, we're off to a terrific start. It's been a really busy first quarter. I'm really proud of the team for the results they've delivered. We reported our gap net income per share of 98 cents and positive adjusted pre-tax income. June will take us through our first quarter financial results in a moment. We delivered really strong originations growth, $14 billion in total servicing additions for the quarter, plus we executed bulk purchase letters of intent for roughly $68 billion in MSR-UPB. Given our progress in the first quarter, we're increasing our target for total servicing additions to up to $150 billion, and that obviously includes MAV as well. Our first quarter servicing additions and our bulk LOIs total over 50% of our revised target. So again, off to a really good start. We're excited about our transactions we announced with Texas Capital Bank. They'll help us accelerate our growth trajectory and provide about 25% of the targeted servicing you could be for MAF with the bulk servicing portion of that transaction. Regarding MAV, we received all state approvals necessary to close, as well as approval from Freddie Mac. We're targeting to commence funding of servicing in MAV in the second quarter and accelerating MAV growth into the third quarter. We closed the first tranche of the Oak Tree notes also in the first quarter and executed the refinancing of our corporate debt. 100% of our corporate debt is now due after 2025. We believe this significantly de-risks the balance sheet. As discussed last quarter, with these actions complete, we are targeting incremental MSR financing of certainly over $500 million to support our growth. And based on our conversations to date, we do expect that the results will show that we can reduce the average spread of MSR financing by roughly 170 basis points. Lastly, the final judgment has been entered in the CFPB litigation. and the case ordered closed following the court's grant of summary judgment in favor of Auckland. Any further action is dependent on the CFPB's appellate filing. As we said before, we believe we have meritorious defenses to the CFPB allegations, and we intend to defend ourselves vigorously. You know, look, it was a great quarter. Really excited about the momentum we have, and our team is executing with focus and speed on all fronts. Turning to page four, today we're a balanced mortgage originator and servicer with two primary business units. Our multi-channel, multi-product originations business helps balance earnings through market cycles and drives growth of our servicing portfolio. Our enterprise sales strategy has been successful in delivering robust growth and we've got opportunities to expand the market we serve. Our servicing business operates with a four-pillar portfolio diversification strategy and delivers really strong operational and cost performance as compared to independent benchmarks from Moody's and the NBA. Over the past two years, we've built a low-cost, technology-enabled, scalable platform that we believe is positioned to deliver strong financial performance as we grow our portfolio. Our strategy is to drive balance and diversification, relentlessly pursue cost competitiveness, deliver best-in-class operating performance, and leading client, investor, and consumer satisfaction. You know, our clients and investors are our primary path to grow our business. We are largely a third-party originator, but ultimately our ability to serve our consumers and how will we serve them and demonstrate that we are a socially conscious and responsible company is critical to our reputation, customer retention, and overall success. To this end, we are committed to serving the communities where we live and work, reaching out to help consumers in need. and promoting a culture that values inclusiveness and diversity. We believe our success is built off a foundation of meeting customer expectations, acting with speed and decisiveness, maintaining an engaged workforce, a strong culture of integrity and transparency, and a relentless commitment to technology. Moving on to slide five, maybe a little bit about the market and competitive environment. So, look, it's been a dynamic first quarter so far in 2021 with interest rates rising more swiftly than industry estimates at the beginning of the quarter. The average of the current industry forecast from Fannie Mae, Freddie Mac, and the NBA are really not materially different in terms of total origination volume from the average of the forecast at the beginning of the quarter. However, the split between purchase and refi has changed. Obviously, refinancing volume is lower than previous estimates and purchase volume is higher than previous estimates. You know, look, interest rates are still relatively low compared to historical levels. And, you know, with millennials maturing as homebuyers, it is driving a surge in home purchases. And we've all heard about the fact that there's a home shortage, housing shortage, supply shortage across the country. You know, in terms of the rain environment, rising rates are driving higher values for MSRs, but reduced refinancing volume levels are impacting forward origination margins and increasing competition. We did expect margins would compress. We are seeing that. So margins are contracting consistent with expectations relative to interest rate levels, you know, perhaps a bit more swiftly than anticipated. June will cover our margin performance in a moment. You know, market dynamics are driving M&A and increased activity in the bulk MSR market. Certainly, we were the beneficiaries of that in the first quarter. We do expect M&A-related activity is likely to continue. We also expect the robust bulk market to continue. And we do expect that there's probably going to be more top talent available for us to recruit as we continue to build out our originations platform. You know, forbearance levels in genies and private securities remain high, roughly 1.6 million borrowers in forbearance. And again, about 30% of those forbearance plans are now seasoned over 12 months. We continue to expect at least 25% of borrowers remaining on forbearance plans will require loss mitigation. And we are ready to serve those consumers. Lastly, we continue to see, you know, great strength in the reverse mortgage market. We think it's a great long-term opportunity for the company. Our platform performed really well in the first quarter as industry volume levels and margins there remain relatively high. Moving on to slide six, you know, we outlined last quarter for 2021 we're driving five operating objectives with purpose and focus and speed to deliver on our growth and profitability goals. Our team is making strong progress and executing well against these objectives based on our execution in the first quarter. You know what we're seeing from industry forecast and assuming we achieve successful execution of our plans for the balance of the year, we believe we are on track to achieve our profitability goals for 2021. Let's get into our performance to get some of these objectives. So let's move to slide seven. As we disclosed last week, we're pleased with the transactions we announced with Texas Capital Bank to acquire the correspondent lending business. and approximately $14 billion in bulk MSRs. Their correspondent business has a proven track record, really high-quality operations. We're excited to welcome their members of their team into the PHH family. Based on fourth quarter 2020 volume levels, you know our acquisition of the TCB correspondent platform roughly doubles our standalone correspondent volume and accelerates our entry into the high-margin best efforts market. The $14 billion MSR portfolio is high-quality agency servicing for about 60,000 customers. We were familiar with this portfolio. If you recall, we announced in the fourth quarter of 2020 we had entered into a subservicing agreement with an expected volume of $13 billion in UPB. This previously announced subservicing agreement was restructured as the $14 billion MSR transaction we're talking about here with TCB. We do ultimately expect to fund the TC portfolio, TCB portfolio, into MAF once MAF is implemented. So this portfolio will remain a subservice portfolio and we'll have portfolio recapture opportunities on it going forward as well. You know, look, I can't thank Texas Capital Bank enough for trusting their team in our hands going forward. TCB is a great strategic partner for Auckland and I want to thank them for their collaboration and partnership. in completing these two important agreements. We are targeting to close these transactions in the second quarter. And look, I really believe this transaction is a great deal for us. It's a great way for us to grow our business and accelerate entry into higher margin segments in the correspondent channel. We are constantly monitoring the market, looking for opportunities like this to further expand our breadth of capabilities and reach. Moving on to page eight, a little bit about our origination objectives. Again, the team delivered really strong results during the first quarter. We're executing well on all dimensions of our growth plans. So we said total servicing additions for the quarter were $14 billion, all in cash IRs on our NSRs are consistent with our expectations, roughly 14% before leverage and hedge costs. We executed the bulk LOIs for $68 billion in servicing additions. That does include the TCB transaction we just discussed. The bulk LOIs, as typical, are generally subject to various conditions, closing conditions, including negotiation of purchase agreements, customer approvals, expanding our MSR financing. Given the strength of our bulk market, we are focused on optimizing origination margins in our flow originations channels. As June will share in a moment, despite market margins compressing as expected, our average origination margins actually increased due to mix shift due to higher volume in our retention and direct-to-consumer channels. We did grow our total client base, correspondent and flow customers, to 378 approved sellers in the first quarter with the expected addition of TCB clients. Here's another area where we're increasing our year-end seller target to over 600. We're also focused on expanding our addressable market. Today we serve roughly 60% of the correspondent market. Today we generally focus almost exclusively on GSE mandatory delivery segment. Our plans, as we just mentioned, are to expand into best efforts. and non-delegated jumbo and non-QM market segments, which comprise roughly 40% of the correspondent market. These plans are on track and actually perhaps a little bit ahead with the TCB transaction. In addition, we did receive our approval to participate in the Ginnie Mae flow co-issue program called the Ginnie Mae PIT program. So we're excited to get that started and launched. We'll be launching that in the second quarter. So here again, excited about the momentum our team has. The Originations team is executing well on all fronts. Our actions to expand our new products, new services, and client base really helps us achieve our growth and profitability objectives. Turning to page nine, an update on the ReCAPTCHA platform. Again, the team here delivered continued performance improvement in the first quarter. Funded loans, dollar volume and unit volume increased 32% and 31% respectively over the fourth quarter. Our recapture rate is up about 3.4 percentage points to about 20% as compared to the fourth quarter. A lot of this was due to our actions to increase sales and operating capacity. As we talked about last year, we were largely capacity constrained. Staffing levels increased by 16%. as well as we benefited from improved productivity levels from the new hires we put in place during the second half of 2020. So as they mature in position, they get more confident and comfortable, and productivity goes up. We are continuing to evaluate staffing levels given the recent increase in interest rates, but as well we've got to balance that against the bulk LOIs we just executed. As of now, we are continuing to add staff in anticipation of the bulk MSR boardings in the second quarter as they represent recapture eligible populations for us. Moving to slide 10, a little bit of an update here on our servicing platform. So here to achieve our cost and operating objectives, we are laser focused on building out our digital servicing platform. We believe there are substantial opportunities to utilize technology to further improve our cost position, operating execution, and customer experience. We're driving four elements of our technology platform, those being infrastructure, applications, data, and automation. Our infrastructure is 100% cloud-based, resulting in a scalable, location-agnostic technology foundation for our business. This has enabled our remote workforce model and has, quote, variableized, if that's a word, our infrastructure capacity. You know, from an application perspective, we've modernized our telephony and core business applications supporting origination, servicing, capital markets, and many of our support functions. And we're investing in creating streamlined interfaces for our customers and employees to drive user efficiency and improve engagement and satisfaction. You've probably seen recent press releases from us about our mobile app and website. So, again, continuing to invest to improve the experience and engagement. Data is at the core of everything we do. We are focused on automating data ingestion through optical character recognition, controlling the integrity of our data through automated rules engines, and improving the utilization of our data through predictive analytics. One of the more exciting areas in our technology journey, our technology roadmap, is around robotic process automation. We are pursuing an aggressive automation agenda. We've developed our own robotics center of excellence, as well as a lean process reengineering team who partners up with them and our operating teams. They've helped automate over 100 processes across our business platform, which is really exciting for us, and helps build an efficient platform as we continue to scale it up. You know, we're expanding our robotics and lean tools across the business, as well as leveraging voice recognition technology to power voice and chat bots and automated voice-related QC activities. You know, we currently have over 75 projects underway across our business to drive further development of our digital servicing platform and generally to digitize our business model end-to-end. You know, our technology efforts are helping to reduce operating costs. You've seen that in the past and again here. You know, servicing costs are down about 8.5% in the first quarter versus the full year average for 2020. And operating execution for our servicing team, particularly in our call center, continues to outperform industry average performance as measured by the NBA. And we are taking or making solid progress against our NPS net promoter score improvement goals. So again, great operating execution here by our servicing and technology teams. Moving on to page 11, you know, our actions to expand servicing revenues generally are on track or tracking with expectations. You know, we've built the foundation necessary for the execution of our Ginnie Mae EBO objectives. You know, modifications thus far are on track with our estimates, despite extending forbearance relief for borrowers. You know, we believe we're on track, you know, right now for the full year estimates. As well, we're continuing to prepare for executing our call rights transactions in the second half of 2021. We've brought in the necessary third parties to assist in our evaluation. We continue to optimize the population to make sure we're getting the right targeted economics. And again, here I think we're on track with our estimates for call rights. With that, I'll turn it over now to June to run through our financial performance for the quarter. Thank you, Glenn.
spk01: Please turn to slide 13. We reported $9 million of net income in the first quarter. This is our sixth consecutive quarter of positive adjusted pre-tax income. The revenue increase was due to higher servicing fees on $14 billion or 16% higher average UPV service and gain on sale in our higher margin direct to consumer channel, which I'll cover on the next page. MSR valuation adjustment increase was driven primarily by gains on opportunistic bulk purchases in the last quarter that did not repeat this quarter. Operating expense is primarily impacted by maintaining capacity for both the new bulk volume boarding and during foreclosure moratorium and expectation of borrower need. Adjusted pre-tax income is $7 million, $9 million lower than prior quarter as higher MSR valuation adjustments and higher operating expenses offset higher revenue. Q1 notables include $21 million in favorable net MSR valuation assumption updates due to 74 basis point increase in the blended rates. This was offset in part by costs associated with our corporate debt refinancing. Equity increased to $440 million from $9 million in GAAP net income and $16 million in issuance of common stock warrants. Book value per share increased to $51. Please turn to slide 14. On the left side of the slide, you can see that our total volume was down $1.2 billion, excluding the non-recurring $15 billion in bulk purchase in Q4. Volume increases in direct-to-consumer and correspondent channels were offset by reduced purchase volume through agency cash window and flow channels. As Glenn mentioned, we're focused on balancing volume and pre-tax income across all of our origination channels. As a result, we chose to limit our volume in our co-issue channels. A mixed shift to the higher margin direct-to-consumer channel from third-party originated channels drove the increase in weighted average margin from 56 to 67 basis points. Adjusted pre-tax income is $37 million. Higher originated volume in higher margin channels was partly offset by investment in the platform to expand operating capacity in our consumer direct channel. On the right side of the slide, our quarter end total servicing UPB decreased by roughly $9 billion. Owned servicing UPB increased $2 billion to $99 billion and was favorable to Q4. This is offset by a decrease in the interim subservicing due to our clients selling their portfolios and expected NRZ runoff. Average servicing UPP over the quarter was up approximately $14 billion to 16%, driving higher servicing revenues as I mentioned above. Servicing pre-tax loss was largely driven by higher operating expenses consistent with our plan to build sufficient capacity to support the new approximately 260,000 loans expected to transfer to our servicing platform in the second and third quarter and support borrowers who we expect will be exiting forbearance in the fourth quarter. Please turn to slide 15. As previously disclosed, we restructured our corporate debt, extending maturities beyond 2025. This has resulted in Moody's and S&P Ratings Outlook upgrade to stable and significant diversification of our investor base. The details will be available in our 10Q. In addition to the corporate debt, we've made significant progress to improve our MSR facility terms and conditions. You can see on the right side of the slide, completed actions include increasing our existing MSR financing facilities by $100 million to a total of $350 million and increasing the effective advance rate by 16% from the fourth quarter of 2020. In addition, the weighted average spread on existing facilities reduced by 125 basis points with further reduction expected as we add new facilities to support recent bulk purchases. On the bottom side of the slide, we have several actions in process, including being in the final stages of adding approximately $400 million in new facilities to support growth, and we expect to achieve further reductions in the weighted average interest rate spread by an additional 45 basis points for a total of 170 basis points. And we continue to increase our MSR financing capacity together with MADS financing to support the addition of MSR relating to our bulk purchase activity and planned activity for the balance of the year. Please turn to slide 16. On the top half of the page, you'll see our liquidity position supports our planned investment and purchases and growth in originations. We ended the quarter with $276 million of cash and available borrowing capacity. The MSR facility increase I mentioned was effective in April and provided an additional $62 million in available borrowing capacity. Including this amount, our available liquidity was $338 million. We've continued cash management discipline to drive lower borrowing and interest expense during the quarter. On the bottom half of the page, our servicing advances continue to track favorably the forecast as a result of higher prepayments and more forbearance plans performing. Please turn to slide 17. You can see on the left that both the total number of forbearance plans and the forbearance plans where we have the ultimate responsibility to advance continues to decline. There continues to be a significant difference between total forbearance plans and the amount where we have ultimate responsibility to advance. That's the benefit of our strategy to maintain a mix of owned servicing and subservicing. Forbearance levels in our owned portfolio continue to compare favorably to other non-bank servicers. Our expectation continues to be roughly 75% of borrowers on forbearance will reinstate and roughly 25% will need some form of loss mitigation assistance. We believe consumers that have Ginnie Mae and PLS loans are likely to need the most assistance when they run out of forbearance options and we stand ready to assist these consumers. Please turn to slide 18. We expect to generate positive gap earnings in 2021 with low to mid-teen after-tax ROE by mid-2021. This assumes a stable interest rate environment and no adverse changes in market conditions or the legal and regulatory environment. This is a roadmap page to achieve these results broken down by our operating objectives and the originations, servicing, and corporate segments. A few key updates from the roadmap we showed you last quarter. and originations, we increased the expected number of correspondent lending and flow channel sellers from 415 Q4 to 600 plus as a result of the Texas Capital Bank transaction. This results in an expected increase in the average quarterly volume target from $10 billion to $12 billion. And going forward, we expect to achieve revenue margin of 70 basis points for growth and higher margin channels and products, such as Consumer Direct, Best Efforts, Reverse, and Ginnie Mae. On servicing, the bulk transactions replenish our servicing portfolio, resulting in an increase in our expected owned MSR UPB to $160 billion from $115 billion. And servicing and subservicing guidance for the year reduced simply due to the interim subservicing reduction resulting from client portfolio sales in the first quarter. Please let me know if you'd like to discuss this in more detail, and we can schedule a follow-up call. Now I'll turn it back over to Glenn.
spk04: Thanks, June. Let's turn to slide 19. Again, really proud of the team. Great results here for the first quarter. We're executing the straightforward objectives of growth, cost leadership, and operational excellence to drive improved value for our shareholders. Our alliance with Oak Tree is providing capital for growth and revenue diversification. We've de-risked our balance sheet by extending our debt maturities, allowing us to access the necessary asset-based financing at lower costs to support our growth objectives. Our rich nations business is delivering solid progress against our objectives. We've increased our target for total servicing additions to up to $150 billion, including MAP, and roughly 50% of that is either funded to date or under LOI. Servicing is delivering strong operating performance as compared to independent benchmarks and we're executing a robust and comprehensive technology plan to further improve our performance and competitive position. Our diverse capabilities and origination and servicing we believe align well with market opportunities and we're expanding our products and services to serve a larger portion of our target markets. Based on our execution in the first quarter, industry forecast, and assuming successful execution of our plans for the balance of the year, we believe we are on track to achieve our profitability goals for 2021. I'd like to thank the entire Aquin Global business team and our board of directors for their hard work and commitment to our success and everything they've done thus far to position our business for success. Latonya, with that, let's open up the call for questions.
spk02: Thank you. At this time, we will conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one to ask a question at this time. One moment while we poll for questions.
spk00: Once again, ladies and gentlemen, that's star one to ask a question at this time.
spk02: At this time, I would like to turn the call back over to Mr. Glenn Messina for closing comments.
spk04: Thank you, LaTanya. So, shareholders and constituents who've joined the call, thank you for your support and confidence in management's execution. Again, we're executing well. and against our objectives, and look forward to talking to you on our next business update call. Thank you very much.
spk02: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation, and have a great day.
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