Q3 2023 Finance Of America Co Inc Earnings Call

Hello, and welcome to the Finance of America third quarter 2023 earnings call.

They have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

I'd like to ask a question during this time simply press star one on your telephone keypad.

Like to withdraw your question again press the Star one I'll now turn the conference over to Michael <unk> Senior Vice President of Finance. Please go ahead.

Okay.

Thank you and good afternoon, everyone and welcome to the finance of America's third quarter earnings call with me today are Graham Fleming, Chief Executive Officer, and interim Chief Financial Officer, and Christian cheaper President of Finance for America.

As a reminder, this call is being recorded and you can find the earnings release and presentation on our Investor Relations website at Www Dot Finance of America Dot 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 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 regarding the company's expected operating and financial performance for future periods may be forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

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 todays 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 Americas Annual report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 16 2023.

Yeah.

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 today will be we will be discussing interim period financials that are unaudited.

Now I would like to turn the call over to <unk> financials, Americas, Chief Executive Officer, and interim Chief Financial Officer Graham.

Graham.

Yes, Thank you Michael.

Good afternoon, everyone and thank you for joining us before we begin I would like to acknowledge Joe <unk> departure from financings America effective October 13th we appreciate your arms work during his tenure and we wish him well in his future endeavors. Looking ahead, we're excited from that angle to become financings Americas, Chief Financial Officer effective November 15th.

Matt is a seasoned financial leader with deep reverse mortgage industry experience and will play an important role supporting our goal of offering modern retirement solutions that utilize home equity for older homeowners. We look forward to introducing matter everyone. After you officially starts of CFO. Later this month to begin I would like to briefly review our top.

<unk> financial results for the quarter and the macro trends affecting them I will then turn things over to Christian to share. Some important operational update followed by a review of the financials for Michael.

Financer America continues to lead the way and helping homeowners 55 and older benefit from their growing home equity and remains the preeminent provider of modern retirement solutions focused on the whole along this path. There were several key strategic actions taken during the quarter as we continued to focus our vision towards their retirement.

Space first we completed the sale of our title insurance business. During the first few days of the quarter in September we completed two additional transactions to further refine our focus these were the sale of the operational assets of our home improvement platform and the transition of our offshore fulfillment services team.

Understanding our commitment to building a modern retirement solutions platform. We saw this as a unique opportunity to advance our goals.

On a continuing operations basis, we recorded GAAP net loss of 172 million or <unk> 74 per basic share in the third quarter, driven primarily by the negative impact of rates and spreads on.

On an adjusted basis, we recognized a net loss of $25 million or <unk> 11 per fully diluted share as we absorbed additional loss from the home improvement platform and downward pressure on margins balance.

Balance sheet write downs make up a significant portion of the GAAP net loss due to fair value adjustments and interest rate increases impacting the portfolio.

Amid a challenging macro environment, we are focused on executing against what's in our control.

With this.

Focus we have identified core operating initiatives, which will enhance revenue and improve expenses within our operating segments and will also streamline our corporate overhead.

As laid out on slide three of the supplemental presentation.

America is focused on a number of items to enhance revenue we are looking to expand our product suite.

Modernize the customer experience and optimize our marketing opportunity to lead conversion.

To improve expenses, we are planning to consolidate our technology lower our cost to produce and efficiently scale our marketing.

Finally to rationalize corporate we will continue to streamline our enterprise functions and simplify our structure to more appropriately align with our go forward operational strategy.

I will now turn things over to Christian for an update on our operations the integration with AEG and the work we've been doing to enhance our products and sales channels.

Thanks, Graham and good afternoon, everyone I'm happy to share that our integration of Aig's retail platform <unk> is on track team morale is high and everyone is excited to come under one umbrella and begin offering the full array of products of the combined company as.

As we've said before we believe a substantial opportunity exists to offer our proprietary products through our direct to consumer Division AG. These products are already the leading suite of available options in the wholesale sector within our industry and from many gaps not addressed it through the traditional <unk> product we've already seen in.

The increase in volumes following our acquisition, which gives us confidence in the opportunity for greater penetration as we move things forward.

We continue the integration the final significant hurdle is the consolidation of our technology stack, which includes migrating to a single loan origination system.

This migration is projected to start in December and should largely be completed by the end of Q1 2024, while we know this will temporarily slow some of our operations. There are many workflow and expense efficiencies to be gained post consolidation.

As it relates to production, while rising rates put downward pressure on loan to value levels. There has been no degradation in inbound inquiries from our borrowers these borrowers need alternate ways to access their equity and the broader market dynamics have created an increased appeal of our home safe second lien product we will be.

Better able to serve those borrowers go forward through two main avenues.

<unk> is expanding its product to the full sales team within the AEG call Center, which is scheduled to occur this month and second by making the product available and the loan origination system used by the majority of industry originators that do business with us through our wholesale division.

Second help Tom on our 55 and older access their home equity through a second lien without impacting their low first rate mortgage and without adding a new monthly mortgage payments. This is the first product of its kind and was built to provide access to equity to the many people not being served by the existing options in the market today.

Given that homeowners in our demographic hold more than 12 trillion dollars in home equity extending the product through these channels is a strategic step to unlocking more of this market to remind everyone <unk> direct to consumer channel reaches more than 20 million consumers annually via targeted marketing and advertising and has long been the leader in.

Submission volume.

We're very excited with how these efforts are progressing the final technology consolidation occurring over the next two quarters will enable us to focus on increasing our market penetration through the optimization of the marketing and sales platform and expanding product suite and a modernized digital customer experience over to you.

Michael.

Thank you Kristen I'll start by providing a brief overview of our financial results before I dive into specifics on the quarter.

Turning to the operating results the company recognized a GAAP net loss of $172 million or 74 per basic share in the third quarter.

Adjusted basis, we recognized a net loss of $25 million or <unk> 11 per share.

First and foremost we increased volumes in the third quarter.

And our reverse business, we originated $470 million in loan volumes up 18% from $397 million in the second quarter. This was primarily due to the successful integration of the AMG retail platform.

During the quarter, we maintained over 37% share of the heck am reverse market.

While the increased volume provided upward pressure on revenue the topline ultimately came in relatively flat due to reduced margins our margins fell from nine 2% to seven 8% quarter over quarter due to several factors, including 10 year treasuries rising 74 basis points.

If margins had held constant to the second quarter our growth in volume would have equated to an $8 million increase in revenue.

As shown on slide four of the supplemental presentation, our core operating segments continued to execute against our strategic plan during the quarter.

The divestiture of our home improvement in offshore fulfillment operations are not considered material from a GAAP perspective, and as such do not qualify as discontinued operations.

When these business line results are excluded from our quarterly reporting our retirement solutions and portfolio management businesses recognized adjusted net income for the quarter of just above breakeven.

While adding when adding in corporate overhead finance of America would've recognized adjusted net loss of $19 million for Q3 or approximately eight of earnings per share in line with what we discussed on our Q2 call even with this reduction in margin.

Additionally, we continue to focus on reducing our cost base as planned and are making solid progress.

Since the peak in early 2022, we have achieved approximately $80 million in annualized savings or the baseline of our $80 million to $100 million goal.

In the third quarter, we saw a reduction in corporate expense of 17% compared to Q2.

Our success is a result of further reductions in overall corporate spin and the right sizing of our corporate structure. We are pleased with our progress to date and are on track to identify additional savings in the fourth quarter and beyond.

With that let me hand, it back to Greg for closing remarks. Thank.

Thank you Michael overall this was another busy quarter with several macro headwinds beyond our control, but we remain focused on ensuring our long term success and sticking to our strategy as we have been without these headwinds. The company is the ability to generate enterprise value via earnings from our core operation or increase to the fair value of our assets.

Should rates and spreads improve we're seeing real traction across our business, improving our top and bottom lines, leveraging the AEG channel and taking real steps, becoming better partners for our customers by providing them with a tailored retirement solutions they need.

Before we open the call to questions I do want to take a moment and send our deepest sympathies to the friends and family of Patty Cook <unk>.

<unk> is an extraordinary leader fans of America, but more importantly, she was a wonderful woman in front for impact on finance of America, and all of Us will never be forgotten.

With that we'll now open the call for questions.

Thank you.

I have a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue simply press Star One again one moment. Please for your first question.

Your first question comes from the line of Stephen Laws of Raymond James Your line is open.

Hi, good afternoon.

I guess, maybe bigger picture Graham is as you look out and there's some things are out of your control here near term and you're working on expense reductions.

No, but when you look out what do you think the <unk>.

<unk> net income kind of run rate earnings power of the platform.

Is that something you think will be achieved more through volume growth or expense reductions or kind of whats.

The mix of those two things that are going to kind of drive us to this targeted adjusted net income number.

Sure. Thanks, Thanks Steven.

So first of all right I think we outlined in our presentation, we probably got eight or nine things in front of us for the next two quarters.

We're looking to accomplish by the end of Q1 of 'twenty for us.

With that we'll be able to.

Complete the transformation, alright, and the pivot and the integration of AEG right. So we think that will get us to our cost structure.

Optimized for where we're at today.

What we have.

<unk> said in the past is at $300 million a month of roughly 900, Brian We think we can achieve that 40.

And we do believe that that is still an appropriate level of volume.

We're.

460, a month right, where we have some way to get to that 300, but we do believe.

Based upon the marketing that we've been doing in A&D inbound phone calls that we're getting from the customers that they're really there is a meaningful demand for the product.

It's why we rolled out a second product because with the increase in rates ltvs to the consumer we're coming down right people still need to access the equity. So we've had no and we're fully confident that the marketing will drive the leads and ultimately when we integrate the seconds and digitization and the consolidation of the POS right the volume will fall.

No.

Great and then.

Kind of.

Maybe the next quarter or two on a volume standpoint, I think I've heard during our prepared remarks that.

Some of the technology consolidation may.

Plus the hiccup in near term volume.

Any seasonality also around year end, but can you give us an idea of what's your next near term volume expectations are.

Okay.

Yes, I think.

I'll answer that were similar I would say similar 5% to 10% of where we were in Q3 and I think Steven it's primarily driven from the seasonality.

Issue right, we do have.

We have had strong submissions, we do have a strong pipeline right. It's just a little unclear as you come through November December January as you know, there's going to be a little seasonality in play here, but I.

I would from what I see today.

I'd project volumes in Q4, and Q1 to be similar or slightly above what we saw in Q3.

Great and my final question Graham kind of bigger picture second quarter ROE was that a lot of fair value marks run through the revenue line.

How core do you view portfolio management to the bigger platform is that is that a business segment that could be sold or they or possibly other accounting.

Measures you could look at to reduce the volatility of income statement or are those fair value marks just something we've got to got to live with for better for worse.

So the fair value at the end of on our Jumbo residuals was under $40 million at the end of the quarter right. So we've had so there's two things at play here right one.

As we have to make adjustments to the fair value Youre also impairing the GAAP earnings right. Because you don't have a yield on the residual to recognize as well Stephen So not only do you have the right down right, but then Youre also you've got a lower residual.

That you are recognizing the yield on so.

Now when we can have this conversation right I would call it maybe the.

The top of rates Zim, Bryan and hopefully we do see an entity as fair value marks running through the or at least a negative fair value marks running through the through the P&L going forward.

Got it I appreciate the comments this afternoon Graham Thank you. Thanks.

Thanks Steven.

There are no further questions at this time I will now turn the call over to Greg Fleming.

Thank you everybody for joining the call.

As you can see we're making tremendous strides towards our strategic initiatives and we look forward to updating everybody on our next call towards the end of Q1 'twenty four thank you everybody and have a good evening.

This concludes today's conference call you may now disconnect.

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