Q1 2022 Finance of America Companies Inc Earnings Call
Sure.
The mortgage origination segment was impacted by both lower than expected volume and a decline in non agency pricing as many originators liquidate it at that.
Despite the market volatility we continue to execute on our strategic initiatives, we have substantially reduced run rate expenses in the mortgage business.
<unk> to invest and that's helping us to drive growth, particularly in our reverse business.
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 values.
It is during cycles like that that our diversified business model allows us to generate adjusted net income despite significant headwinds in the mortgage sector. We.
We don't expect interest rates to return to the levels 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 nine and a half million dollars for the quarter, which included an adjusted loss of one 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.
As a result, we saw purchase volumes increased 4% year over year.
Demand for our non agency products remained strong and increased 8% year over year.
We have worked very hard in 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 Dot com.
Our non QM product flex fills an important gap in the market and despite the current volatility impacting margins for 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 drive sufficient efficiency, but more importantly enhances the cross sell opportunity of commercial product to the mortgage broker network.
In addition, we also consolidated our two consumer direct channels into a single operation.
As a result, we have lowered our fixed and variable cost components and we'll continue to do so as we eliminate waste reduce duplicate effort and consolidate infrastructure.
We continue to believe there is substantial there is a substantial opportunity to sell non mortgage products through our mortgage channel and our focus on this opportunity.
I wanted 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 bring some exciting capabilities to the table.
Technology platform, we acquired as part of the business is modern scalable and we constantly hear from our customers that is one of the best in the industry.
Not only has this helped us win new business.
Had it at 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 customers 54 years, which allows us to introduce our first product.
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 assessing it comprised.
Comprised of predominantly reverse commercial and lender services.
Reverse volumes continue to grow at a strong pace in Q1 set yet another record origination quarter.
In fact March was our highest origination month ever.
A reverse pipeline has never been bigger driven by strong home price appreciation over the past couple of years as well as continued investments in processing it.
The same capacity.
Margins declined more than expected as wider spreads impacted capital markets execution.
Needless to say, we manage 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 in America.
Leading reverse mortgage platform in an industry with a structural tailwind.
The older population in the U S will continue to grow and recent home price appreciation has increased the addressable market substantially.
These factors represent customers with an effective opportunity and 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 funded volume quarter.
Growth and 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 straw.
<unk> household formation and the large millennials and first time homebuyer demographics that preferred is updated for new homes.
Our lender 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 refinancing.
We expect the switch away from refinance driven revenue to continue in Q2 at 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 model to capture the lifetime lifetime household value inherent in it finance North America business.
In Q1 Finance America continued to pursue a centralized.
Customer first approach that will create seamless experiences and remove friction from their journey.
As mentioned earlier, we consolidated our respective wholesale and consumer direct channels to create a more consistent experience across our product.
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 for America to offer our customers solutions that meet their needs and deepen household relationship.
Centralizing data at an enterprise level, we can identify and provide the best products for our customers depending on their stage in like.
This is a long term commitment and we look forward to sharing major milestone along the way.
And finally before I turn things over to Johan I want to quickly highlight some exciting news.
The commitment to transparency and progress around sustainability practices I am pleased to note that finance to America published its inaugural ESG report on April 18th.
This report lays out our ESG roadmap and details of the work we are doing to support every pillar of V. F G 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.
Thank you Patty and good afternoon, everyone.
As Patti mentioned, we faced several macro headwinds this quarter, which had a direct impact on our results.
Despite these challenges we remain committed to our business strategy and delivering for our customers.
Before I dive into the number I want to touch briefly on the impact market volatility has on the business.
We printed a headline loss for the first quarter entirely due to negative fair value marks on the balance sheet.
As a reminder, we account for fair value marks on the balance sheet and the portfolio management segment, whereas the revenue impact on newly originated assets.
Afflicted and irrespective origination segments.
If we look at the fair value marks on the balance sheet.
We hedged the balance sheet against rising interest rates using a combination of mortgage MSR assets and swaps.
Given the rise in interest rates regenerate that substantial hedge gains which resulted in the growth in our cash balances.
These hedge gains offset most of the decline in revenues and as a result, the net.
A rising rates on the underlying assets and liabilities was minimal.
However, we are unable to efficiently hits the balance sheet against movements of investors group.
Which increased due to the aforementioned market volatility.
This resulted in a substantial negative fair value marks.
We updated our modeled assumptions to account for wider spreads.
It is unclear where the spreads will return to prior levels.
However, it is important to note that the fair value marks due to widen spreads have not impacted liquidity.
These are noncash and we continued to see demand for our private label securitization, albeit at a higher cost.
It is also important to note that we adjusted spreads through the lifetime of the underlying assets and liabilities.
Rather than earning spreads to me.
Turning to the results.
The company generated adjusted net income of 37 million and fully diluted adjusted earnings per share of 20 cents meet.
Meeting, our Q1 is different as guidance of 25%.
Missing the low end of our mortgage Alka life Sciences.
I will discuss revenue and other financial impact in more detail when I cover the individual segments in a moment.
Cash balances increased by 86 million in Q1.
Mostly due to the hedge gains I mentioned earlier.
<unk> balances balances stayed flat as we executed a bulk MSR sale in Q1 that offset both new production and positive MSR fair value marks.
Tangible equity decreased by 37 million predominantly due to the impact of fair value marks from wider spreads.
Turning to our individual reporting segments.
Revenue in mortgage originations decreased by 28% relative to the fourth quarter due to the decline in rate lock volume and gain on sale margins. As a result, we recorded a nine and a half million dollar adjusted net loss.
Gain on sale margins were negatively impacted by a substantial widening of spreads for non agency product and.
Lots of assets and the market as originators liquidated inventories.
Our originations segment saw 12% quarter over quarter growth in funded volumes shaping.
Setting yet another quarterly funded volume record however.
However, widening spreads had a substantial negative impact on margins, despite repricing of the pipeline and increasing rates multiple times.
As a result revenue of $108 million was down 5% relative to the last quarter, but up.
57% compared to Q1 last year.
The reverse origination segment generated pretax income of $68 million.
51% from Q1 of 2021.
Our current pipeline and reverse remains elevated driven by strong demand for the product.
Similar to what happened in the universe.
Commercial originations segment were significantly impacted by market volatility this quarter.
We were essentially flat compared to Q4, 2021 and up 68% compared to the same period last year.
Margins decreased despite repricing the pipeline multiple times through the quarter as widening spreads impacted secondary market execution.
As Patti mentioned, we expect an improvement in the second half of Q2, once we clear out the current inventory or.
Our pipeline remains strong and March 2022 was our highest firming months ever.
Linda services revenue was down 8% quarter over quarter.
Lower refinance volumes impacted our title agency and underwriting businesses.
We saw strong growth in advisory income given active trading and MSR assets.
We have several new products, reaching commercialization phase and over time, we believe these will offset the decline in revenue from lower refinance volumes.
Finally.
Looking at our portfolio management segment pre tax income was negatively impacted by fair value marks on our assets.
As I mentioned earlier this was mostly driven by wider spreads we cannot efficiently hedge against these.
These marks are noncash and reflect the lifetime mark at current spread levels.
I E. We do not revert spreads to me.
In closing this quarter tested the strength of our model as we navigate the rapidly changing market conditions.
Extra finance businesses in this first quarter earnings guidance and the company generated $37 million and adjusted net income or adjusted earnings per diluted share of.
<unk>.
With that let me now hand, it back to Patti for closing remarks.
Thanks Johan.
Before we take questions I want to provide a glimpse of what we see for the second quarter.
Similar to Q1, you will see that we divide our guidance into two parts mortgage and assessing it.
For mortgage we expect conditions to remain challenging and forecast revenue between 125 and $145 million and adjusted net income margin between zero and 2%.
For specialty finance and services, we expect revenue between 195 and $215 million and adjusted net income margins between 12 and 14%.
The quarter over quarter decrease is driven by lower margins as we clear out inventory and reverts in commercial.
In addition, we have lowered projected revenue from lenders services due to the steep decline in refinance volumes over time, we expect this decline to be replaced by new products and third party customer growth.
In closing finance in America, and dedicated to its unique business model of mortgage and specialty finance and services.
We believe the fundamentals are solid and we are positioned to continue growing the business as we navigate a changing environment.
Our distribution channels extensive suite of product and large customer reach give us a distinct advantage.
As we execute our three strategic priorities, we remain focused on delivering the best experience for our customers as we build lifetime household values.
With that let's open the call for questions.
Yeah.
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Yeah.
The first question is from the line of Doug Harter with Finance of America. Please proceed.
Thanks.
<unk> talked about the expectation for reverse margins to improve in the second half of the quarter have.
Have you started to see that improvement already or.
Is that or is that expectation still to come.
I would say that if you look at spreads certainly.
Stabilized and I think that that bodes well for the market.
It's hard to predict if things were to stay volatile, but given the level of spreads now and what we're seeing currently it's our expectation that things are stable to improving.
Yeah.
Hey.
Let me just add a little bit to that also does the.
The loans that we have originated that we haven't sold.
A sense of what those marks can be.
And we can also see as Prady said if rates stay where they are we can also see where our production is coming in and what the coupons are those on so we have high.
A high sense of what we think we can market them there.
As we alluded to it's going to be.
A little soft in April and then we expect that to pick up as we clear out.
The production from from March.
So.
Hi.
Oh go ahead.
I was just wondering refine Michael's comment.
Go ahead, Doug I'll be quiet.
Just to be clear you don't need spreads to M prove.
Prove.
MBS reverse spreads to improve from here for that comment to be true if they stay stable.
Comment would be true.
Zero margin would improve.
Yes.
That's where I was going I should have.
I could have been set at a little better it's the volatility in spreads.
<unk>.
Hard for us right to keep up with it one spread stabilize.
You don't have that volatility to manage and your margins.
Return.
It makes sense and then I guess, a similar question about.
It does and a similar question about commercial I guess, how would you expect.
Those those margins to trend.
Okay.
I think it's similar right I think assuming that some of the volatility in the capital market settles down we would expect spread to settle down and therefore, our margins return to something more normal.
Johan would you add anything.
Yes, no that's right.
Obviously margins on commercial a little bit sooner than the margins on <unk>.
Diverse assets.
And it's going to be a similar pattern.
It will be a little softer we will see pick up in in.
In may and if margins stay where they are today, we will see another pickup in June just as we work through that.
Since we've originated.
You know where the inventory today.
Great. Thank you guys.
Thank you Mr harder.
The next question is from the line of Stephen laws with Raymond James. Please proceed.
Hi, good afternoon.
Follow up I guess on Doug's comment just to make sure I understand it clearly when you look at commercial and reverse after you clear the pipeline in Q2 do you think you can get back to that 19% to 21% adjusted EBITDA margin.
Second half of this year.
So first segment.
Johan.
Yes, I mean generally we.
Right.
Yes, so we.
If you look at if you just do the pure math.
Between the Q1 guidance and margin adjusted net income margin and you see the guidance for <unk>.
For Q2, it's like two thirds of the number I saw there is essentially the equivalent of one month's worth of margin that's not there.
And so as I said there'll be a step function.
If margins excuse me spreads stay where they are today I think we can get very close we may be a little below.
The margins we saw in commercial late last year and a little bit below what we saw late last year on a diverse but be able to get pretty close.
In Q2.
Great. Thanks, Sean in the switch sides.
Forward business.
I appreciate that.
Page eight I believe it was in the supplement about the cost.
But can you talk about outlook from here it looks like about 600 head count is down about 600 employees is there more opportunity to reduce fixed income by further reducing our fixed costs by further reducing head count.
Are there other expenses other ways to squeeze expenses all kind of.
Thinking about what levers you have left to pull.
With refi volumes likely continuing to go down.
In order to make.
The forward business remained profitable you know outside of what.
What you cited which is growing market share I guess in the non QM business really focus more on what can be done on the expense side of the equation to ensure profitability there.
Yeah, I mean, we're monitoring volumes.
And mortgage is diligently and with.
With volumes at this level if they were to decline further there would certainly be more head count reduction, but I think for us equally as important we are really taking a ruthless look at efficiencies across the business.
Right if we are at.
We've talked before we manage these businesses in a bit of a silo and that creates redundancy piece. So just like we will keep our head count aligned with the volume we see coming through that channel. We will continue to look across the businesses like we did last quarter in wholesale and consumer.
Direct to drive additional efficiency.
Thanks, Patty and lastly, Johan if it spreads to go back to say, where they were three months ago, where you're going to reverse these marks and do a fair value gain or how will you treat.
Valuations on our balance sheet.
Yes.
In practice that will be the case, even if rates go back to where they were at the end of the year, we would update the model assumptions again and the markets would go in the opposite direction.
And as I mentioned, we don't do a mean reversion, we basically keep spreads at the absolute level through the life of the assets and liabilities.
When when spreads widen you can argue that's the most conservative position you can take but yes, if they go back to where they work.
With us.
Great I appreciate your time assumption. Thank you.
Sure.
Thank you Mr laws.
The next question is from the line of James Faucette with Morgan Stanley . Please proceed.
Hi, This is Blake matter on the line for James.
First off I'm wondering how do you think about capital allocation, particularly given current share prices.
Strategically where do you currently stand in terms of that.
Balance between acquisitions, and internal investments and the potential for capital return buybacks.
Johan you want to take that.
Yeah.
So I think the important note that we made when we spoke about the increase in cash balances.
We're going to use that to delever the balance sheet.
We're going to pay back some of the secured debt that will take a meaningful.
Amounts out of the cash is not only prudent but.
But obviously when asset prices decline you know it's there.
I think to do for our lenders.
We're going to be really cautious about distributing cash whether it's through dividends or share buybacks or anything like that we believe when there's volatility like this.
It's critically important to maintain cash and maintain liquidity.
And I think quite honestly.
Earnings multiple of whatever it is two.
And acquisition will be dilutive most likely.
So I don't see.
Any any substantial acquisitions on the horizon.
Okay. That's helpful.
Switching to a different topic, you've mentioned that there is an opportunity to leverage your loan officers in your broker to cross sell reverse mortgages commercial loans and other products is there anything you can share in terms of progress on that front and how things have been trending in terms of the number of broken broker relationships you have and the number of.
But they are selling.
So we can update you on we can get the data on brokers, but his statistics. If you look at the number of loans per broker or number of loans per L. O.
Our non mortgage it's incredibly small I think in our mortgage channel, it's what like a half loan per person.
What we're seeing now which is a soft statement, but nonetheless important is because of the decline in refinance volumes are at lows just like the brokers are looking for something else itself. So we have their intention today in a way we didnt a couple of months ago and I am confident we can convert.
Mary Beth into more volume.
Johan we might want to consider some sort of statistics that could show the ongoing success of our efforts.
Yes, I mean.
It's it's it's.
It's still a nascent efforts we track those statistics.
It'll take a little bit of time, obviously for those to move meaningfully.
But it is an effort that's underway and as we make progress against that those are statistics, we will share.
We have a snippet in the.
And the Investor presentation.
That wasn't filed but is on the website on page 11.
And then I will give you a good indication of just the power of our product set and how we can help our customers through the life of their financial journey.
Whether it's to refinance into home improvement and ultimately to use a reverse loan.
From their retirement and lower their payments.
And so that whole.
Operating model is going to become a lot more pronounced as we make investments in our technology.
Our organizational structure to drive this forward.
Okay.
Okay. That's very helpful. Thank you.
Thank you Mr Foster.
There are no additional questions waiting at this time, so I'll turn the call over to Patty Cook for any additional remarks.
Okay.
Once again I want to thank you for your attention and focus on finance the America.
Thank you for joining our call.
Good day.
That concludes today's call. Thank you for your participation you may now disconnect your lines.
Okay.
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