Good afternoon. Thank you for attending today's Finance of America First-Quarter 2022 earnings call. My name is Hanna, 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, I would now like to pass the conference over to our host, Michael Fant, Senior Vice President of 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 Johan Gericke, 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 maybe 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, filed with the SEC on March 15, 2022. As such, risks factors may be amended, an 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 Chief Executive Officer, Patty Cook. Patty.

Thanks Michael, and good afternoon everyone. Thank you for joining us for our first-quarter 2022 earnings 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 $0.20 in adjusted earnings per share. Our specialty finance and service business or SF&S, continued to perform well, generating $0.25 in adjusted earnings per share in line with guidance. Our mortgage origination segment, however, was not immune to the impact of rising rates and recorded an adjusted loss of roughly $10 million for the quarter or negative $0.05 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 initiatives. We have substantially reduced run rate expenses in the mortgage business, continued to invest in SF&S to drive growth, particularly in our reverse…

Thank you Patty, and good afternoon everyone. As Patty mentioned, we faced several macro headwinds for 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 numbers, I want to touch briefly on the impact that market volatility had 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 in the portfolio management segment, whereas the revenue impacts on newly originated assets are reflected in irrespective origination segment. 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, we generated substantial hedge gains, which resulted in the growth in our cash balances. These hedge gains offset most of the decline in values, and as a result, the net impact of rising rates on the underlying assets and liabilities was minimal. However, we are unable to efficiently hedge the balance sheet against movement in investor spread, which increased due to the aforementioned market volatility. This resulted in substantial negative fair value marks, as 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 widened spreads have not impacted liquidity, as these are non-cash. And we continue to see demand for our private label securitizations, albeit at a higher cost. It is also important to note that we adjusted spreads through the lifetime of the underlying…

Thanks, Johan. Before we take your 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 SF&S. For mortgage, we expect conditions to remain challenging and forecast revenue between $125 million and $145 million, and adjusted net income margin between 0% and 2%. For specialty finance and services, we expect revenue between $195 million 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 reverse 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 of America is dedicated to it's 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 products, 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, helpful. With that, let's open the call for questions.

If you would like to ask a question, please. If for any reason you would like to remove that question, . Again, to ask a question, as a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. The first question is from the line of Doug Harter with Finance of America please proceed.

Thanks. has talked about the expectation for reverse margins to improve in the second-half of the quarter. Have you started to see that improve already or is that all that expectation all still to come?

I would say that if you look in spreads, they certainly stabilized. And I think that that bode well for the market. It's hard to predict if things would stay volatile. But given the level of spread to now and what we're seeing currently, it's our expectation that things are stable to improving.

Okay.

Let me just add a little bit to that also, Douglas. The loans that we have originated that we haven't sold, we have a sense of what those marks can be, and we can also see, as Patty said, this -- if spreads stay where they are, we can also see where our production is coming in, and what the coupons for those are, and so we have high sense of what we think we can mark them at. 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 March.

And Douglas, just to clarify -- go ahead. I was just going to say to clarify my comment -- go ahead, Douglas, I'll be quiet.

Just to be clear, you don't need spreads to prove MBS reverse HECM spreads to improve from here for that comment to be true if they stay stable, that that comment would be true that the sale margin would improve?

Yes. And that's where I was going. I should have -- I could have been -- have said it a little better. It's the volatility in the spread that hard for us, to keep up with it. Once spread's stabilize, you don't have that volatility to manage and your margins return.

Makes sense And I guess a similar question about -- it does. And a similar question about commercial, I guess, how would you expect those margins to trend?

I think it's similar. I think assuming that some of the volatility in the capital market settles down, we would expect spread there to settle down and therefore our margins return to something more normal. Johan, would you add anything?

Yeah, no that's right, Patty. Obviously margins on commercial a little bit thinner than margins on reverse assets. And it's going to be a similar pattern. April will be a little softer, we'll see a pick up in May. And if margins -- if spreads stay where they are today, we'll see another pickup in June, just as we work through the assets we've originated within the inventory today.

Great. Thank you guys.

Thank you, Mr. Harter. The next question is from the line of Stephen Laws with Raymond James, please proceed.

Hi. Good afternoon. To follow-up, I guess on Douglas's to comment just to make sure I understand it clearly. When you look at commercial and reverse, I asked to clear the pipeline in Q2, do you think you can get back to that 19% to 21% adjusted EBITDA margin when we look at the second-half of this year for the SF&S segment?

Johan?

Yes.

Generally, we -- go ahead.

Yes. So we -- if you just do the peer difference between the Q1 guidance for margin as adjusted net income margin and you see the guidance for Q2 it's like two-thirds of the number. So there is essentially the equivalent of one month worth of margin that's not there. And so as I said, there will be a step functions if margins spread 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 reverse, but be able to get pretty close in Q2.

Great thanks Johan. And to switch size of the forward business, I appreciate the Page 8, I believe it was on suppler and about the cost focus. But can you talk about outlook from here? It looks like about 600 in headcounts down about 600 employees. Is there more opportunity to reduce fixed income by further reducing our fixed costs by further reducing headcount. Are there other expenses? Ways to squeeze expenses out, kind of thinking about what leverage you have left to pull with refi volumes, likely continuing to go down in order to make the forward business remain profitable outside of what you cited which is growing market share I guess in the non-QM business really focused more on what can be done on the expense side of the equation to ensure profitability there.

We're monitoring volume in mortgages diligently, and with volumes at this level, if they were to decline further, there would certainly be more headcount reduction, but I think for us equally as important, we are really taking a ruthless look at efficiencies across the business one. If we -- as we've talked before, we managed these businesses in a bit of a high-low, and that creates redundancies. So just like we'll keep our headcount aligned with the volume we see coming through the channel, we will continue to look across the businesses like we did last quarter and wholesale and consumer direct to drive additional efficiency.

Thanks, Patty. And lastly, Johan, if spreads go back to where they were three months ago, are you going to reverse these marks and do a fair value gain or how will you treat evaluation from the balance sheets?

In practice, that would be the case, Stephen. If spreads go back to where they were at the end of the year, we would update the model assumptions again and the marks 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 spreads widen, you can argue that's the most conservative position you can take, but yes, if they go back to where they were, we would reverse those marks.

Great. Appreciate your time this afternoon, thank you.

Sure.

Give us your 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 the balance between acquisitions, internal investments, and the potential for capital return via buybacks?

Johan, you want to take that?

Yes. So I think the important note that we made when we spoke about the increase in cash balances, is that we're going to use that to deliver the balance sheet. We are going to payback some of the secured debt that will take a meaningful amount out of the cash. It's not only prudent, but obviously when prices decline, it's the right thing 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, to maintain liquidity. And I think quite honestly, at an earnings multiple of whatever it is two, an acquisition will be diluted most likely. So I don't see any substantial acquisitions on the horizon.

Okay, that's helpful. Switching to a different topic. You've mentioned that there's an opportunity to leverage your loan officers and your broker network 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 have things have been trending in terms of the number of broker relationships you have and the number of products that they're selling?

So we can update you on -- we can get the data on brokers, but the statistics, if you look at the number of loans per broker or number of loans per LO that are non-mortgage, it's incredibly small, I think in our mortgage channel, it's what, like a half a loan per person. What we're seeing now, which is a soft statement, but nonetheless important, is because of the decline in refinance volume. Our LOs, just like the brokers, are looking for something else to sell. So we have their intention today in a way we didn't a couple of months ago, and I am confident we can convert that into more volume. Johan, we might want to consider some sort of statistics that could show the ongoing success of our effort.

Yes, Patty, it's still a nascent effort 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 Investor Presentation that wasn't filed, but is on the website on Page 11, and that'll give you 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 the home improvement and ultimately to use a reverse loan to help fund 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 and our organizational structure to drive this forward.

That's very helpful. Thank you.

Thank you, Mr. Falset. There are no additional questions waiting at this time. So I will turn the call over to Patty Cook for any additional remarks.

Once again, I want to thank you for your attention and focus on Finance of America. Thank you for joining our call. Have good day.

That concludes today's call. Thank you for your participation. You may now disconnect your lines.