Graham A. Fleming; CEO; Finance Of America Companies Inc.
Johan Gericke; Executive VP & CFO; Finance Of America Companies Inc.
Michael Fant; SVP of Finance; Finance Of America Companies Inc.
Stephen Albert Laws; Research Analyst; Raymond James & Associates, Inc., Research Division
Thank you for standing by. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Finance of America's Second Quarter 2023 Earnings Call. (Operator Instructions) Michael Fant, Senior Vice President of Finance, you may begin your conference.
Thank you, and good afternoon, everyone. And welcome to Finance of America's Second Quarter 2023 Earnings Call. With me today are Graham Fleming, Chief Executive Officer; and Johan Gericke, Chief Financial Officer. As a reminder, this call is being recorded.
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 efforts discussed on today's call in our earnings press release on the Investor Relations page of our website at www.financeofamerica.com.
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 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, 2022, filed with the SEC on March 16, 2023. 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, these are interim period financials and are unaudited.
Now I would like to turn the call over to Finance of America's Chief Executive Officer, Graham Fleming. Graham?
Graham A. Fleming
Yes. Thank you, Michael. Good afternoon, everyone, and thank you for joining us on our second quarter 2023 earnings call. Finance for America continues to lead the way in helping provide older Americans with more choices and flexibility when it comes to meeting the evolving needs of today's modern retirees.
More importantly, Finance of America is now at an exciting inflection point. Over the last several months, we executed a series of strategic actions, including the sale of our title insurance business, the sale of the majority stake of the remaining lender services business, and most importantly, the initial steps in the integration of the AAG platform.
The completion of these transactions marks an important and pivotal step in the execution of our long-term growth strategy designed to help Americans achieve their retirement goals with the use of home equity. Our business is now fully transformed in the leading modern retirement solutions platform, and we believe it is well positioned for long-term success.
For today's call, I'm going to begin by briefly reviewing our financial results for the quarter. I'll then spend time discussing business structure updates and the progress we've made against executing against our strategic priorities. Johan will then discuss our financials in more detail.
Our results this quarter illustrate our commitment to streamlining the organization and making significant investments in our retirement solutions business, which we believe is poised for long-term growth due to demographic tailwinds. However, today's cyclical mortgage market has been significantly impacted by wider spreads and higher interest rates, which place downward pressure on our results due to negative fair value adjustments and reduced volumes.
On a continuing operations basis, we recorded a GAAP net loss of $221 million or $0.91 per basic share in Q2 driven primarily by negative impact of rates and spreads during the quarter. On an adjusted basis, we recognized a loss of $26 million or $0.12 per fully diluted share as the growth in volume in our reverse business does not yet fully offset the increased costs of the expanded operational infrastructure as we integrate the AAG platform.
We continue to manage our business with discipline and focus on our long-term strategic priorities. This includes streamlining our operations to reduce expenses and investing in business lines with the greatest long-term growth potential.
Corporate expenses continue to trend downward, and we expect to see additional savings in the second half of the year as we realign our corporate infrastructure in light of recent activity. As of June 30, we have approximately 80% of the way to our savings target of $80 million to $100 million annually and expect to secure an additional $20 million in annualized savings by the end of the year.
The combined Finance of America and AAG brand now have a commanding market share lead in reverse mortgages with a nearly 40% share of the HECM market year-to-date measured by HMBS issuance. Our acquisition of the AAG platform as a sophisticated marketing engine that has the ability to further raise product awareness and increase the addressable market despite a difficult economic environment and amid a complex integration, we are starting to see positive traction in our pipeline and operational processes.
During the second quarter, Finance of America assisted over 2,300 customers in finding ways to thrive in retirement through the use of a reverse mortgage. Compared to the first quarter, this resulted in a 95% increase in the number of funded loans. This quarter, we funded $447 million in UPB, a 25% increase from the prior quarter as we began the integration of the AAG platform into our business.
Prior to our acquisition of the AAG platform, AAG was the leading originator of HECM loans in the reverse industry. Our HECM volume in Q2 doubled compared to Q1, and we believe a substantial opportunity exists to sell our proprietary Jumbo reverse loans through the AAG platform as well.
We've done significant work to successfully integrate the AAG teams and operations into our existing infrastructure, and we are already seeing the results. Today, the team is unified, morale is high, and we're energized with an opportunity and long-term potential in front of us.
Since the start of the AAG integration, we have onboarded over 400 employees to bolster our retail channel and support our corporate segment while continuing to streamline overhead costs. Many of these resources were temporary as we work through the transitional phase.
Additionally, we onboarded nearly 150 vendors into our ecosystem, the majority of which are marketing vendors engaged to expand and strengthen our advertising and educational reach.
Finally, we are working tirelessly to identify and consolidate redundant vendor engagements and overlapping loan origination systems in an effort to optimize costs and alleviate the reporting and leadership challenges that come from working out of multiple systems.
The AAG brand direct-to-consumer retail channel reaches more than 10 million consumers annually via targeted marketing and advertising. Once fully integrated, the AAG brand and reach will enable us to better serve the growing needs of retirees across the nation.
We're encouraged by the continued strength in submission volumes in the quarter and are optimistic about the rest of 2023. Finance of America's reverse legacy wholesale channel, which has been a market leader for over 10 years, has seen growth in its pipeline since the end of March and it currently stands at its highest level since late 2022. This pipeline growth and increase in submission volume is a positive sign that should drive funded volume growth in the coming months.
We know we have a substantial opportunity to address the retirement gap in America, which we believe we are well positioned to help solve if we can continue to increase awareness of our products and solutions, grow our customer base and innovate new financial solutions centered around the home.
Our goal is to help our existing customers as they harness the power of their home and the different ways it can be used to help obtain a better outcome later in life. This is consistent with macroeconomic trends we've seen for the last few quarters. The U.S. retirement savings gap is approaching $4 trillion, yet senior homeowners have amassed more than $12 trillion in home equity value according to the latest data from [Marmlin].
This is our market opportunity at its core, helping older homeowners use their homes as a superpower to achieve their financial goals. In summary, I'm proud of how our team navigated challenges this quarter while making huge strides in a complex integration. We continue to prudently manage our operations and right-size our expenses while investing in our core business segments where we're seeing prominent signs of growth.
With that, I will pass the call to Johan to discuss the financials.
Thank you, Graham, and good afternoon, everyone. I will provide a brief overview of our financial results before I dive into the specifics on the quarter.
Turning to the operating results. The company recognized a net loss of $221 million or $0.91 per fully diluted share, which was driven primarily by negative fair value adjustments to our portfolio as interest rates and spreads were impacted by the fallout from the bank collapses late in Q1.
On a continuing basis, the company recognized an adjusted net loss of $26 million or $0.12 per fully diluted share. As Graham mentioned, although we have begun to see an increase in funded volumes, these were outpaced in the quarter by the additional operational infrastructure and further investments we made in the acquired AAG platform.
In Retirement Solutions, we funded $447 million in UPB or a 25% increase over the first quarter. We expect to continue to see quarter-over-quarter growth in this business as we fully integrate AAG and fund the increase in submission volume we are already seeing in our pipeline.
Revenue margins increased as the shift towards the AAG retail channel leads to higher margin business. For the quarter, we saw revenue margins increase from 7.3% in Q1 to 9.2% in Q2. This increase is net of a roughly 1.6% drop in HECM revenue margin quarter-over-quarter. Combined with the increased volume, total revenue grew roughly 58% from the prior quarter. This was, however, offset by expenses attributable to the onboarded infrastructure of the AAG platform.
Expenses increased by 65% quarter-over-quarter from $35 million to $59 million. This increase includes transitory costs that were needed to ensure a smooth transition in Q2, and we expect to see those costs decline starting in Q3.
In addition, we invested in headcount and marketing to expand volumes and expect to see this volume growth in Q3 and beyond as we fund the higher pipeline. Our team is focused on creating an efficient and sustainable business model that can operate in all macro environments. We look forward to providing progress updates on this transformation in future periods.
Speaking of transformation, we continue to make strides toward a more streamlined corporate infrastructure. However, this is a time-intensive initiative as we work to complete the ongoing efforts.
With the wind down of our discontinued operations, recent sale transactions completed in the quarter and the sale of the title insurance business that closed on July 3, we are now in a position to further reduce the infrastructure to match our current operations.
Moving to the balance sheet. Total assets declined 1% to $26.5 billion as the combined fair value of our portfolio of assets declined quarter-over-quarter due to rising interest rates and the widening of credit spreads.
Cash balances totaled $56 million as of June 30, down from March 31. Please note that this balance does not yet include the proceeds from the sale of our title insurance business as this transaction was completed during the first week of July.
In conclusion, it was a difficult quarter financially for the company, but we are starting to see key performance indicators trending in a positive direction and we are optimistic for the remainder of 2023.
With that, let me now hand it back to Graham for closing remarks.
Graham A. Fleming
Yes. Thank you, Johan. We remain focused on executing our strategy as we said we would and took actions we believe will best position our business for the long term. Looking ahead to the remainder of 2023, we do not expect to achieve our previous full year guidance of $0.09 to $0.12 adjusted earnings per share. That said, we believe the earnings potential of the company is $0.40 to $0.50 per share once the AAG acquisition is fully integrated and the market stabilizes.
Through our marketing powerhouse and product innovation, we are confident that we can grow our customer base and meet our customers' needs wherever they are in life to serve them with tailored retirement solutions.
And with that, we'll open the call for questions.
Question and Answer Session
(Operator Instructions) Your first question comes from Stephen Laws with Raymond James.
Stephen Albert Laws
A couple of follow-up questions on some of your comments. I guess, first, can you give us an outlook on volume? Up sequentially, maybe a little below what I was looking for. So can you talk about what July volumes look like? And maybe what you think quarterly run rate is going to be as we look at the back half of the year?
Graham A. Fleming
Yes. So we would -- based on what we see currently in our pipeline and with submissions, we'd expect Q3 to be something in the $500 million to $525 million range. And if we continue on this growth trajectory, we would expect Q4 to look like something in the $600 million range.
To a final point on that, Stephen. If you look at the origination volume in the earnings release, the $447 million, I'd say think about $50 million of that is home improvement, the rest is reverse, right?
Stephen Albert Laws
Okay. That's helpful.
Graham A. Fleming
Yes. So the numbers I'm speaking with are just the reverse side -- just reverse volumes.
Stephen Albert Laws
Just reverse on those numbers. Okay. Great. To touch on expenses, I just want to make sure I triangulate the right numbers. Graham, I think you mentioned maybe $20 million more expense reductions. Does that compare to the $59 million number that Johan mentioned and that's what we should look at going to from basically 60 to 40?
No, the $59 million was for the retirement solutions only and the $20 million that Graham is talking is the entire corporate infrastructure for the overall company, Stephen, before allocations, right? And so some of that gets allocated to the retirement solution. Some of it gets allocated to portfolio management. And then a big chunk of it is unallocated and stays behind in the corporate segment.
Stephen Albert Laws
Okay. But I think $20 million can be synergies from here? And over what time frame do you expect that?
Between now and the end of the year, we expect to generate those savings. That, if you look at that -- if you just hit a chalk line today and you get a chalk line at the end of the year and you look at the delta, just on an annualized basis that delta should be $20 million.
Stephen Albert Laws
Great. And one last question. Just do you have a quarter-to-date update on fair value marks? And the cash balance that you referenced does not include the title sale or the remainder of the lender services sales since from quarter end?
It's a little bit early. We're in the market pricing, and so that will dictate where spreads are. So it's a little bit early to give an indication at this point.
(Operator Instructions) There are no further questions at this time. I turn the call back over to Graham Fleming.
Graham A. Fleming
Thank you. I'd like to thank everybody for joining our call. And we'll update everybody at the end of Q3 on our next earnings call. Thank you very much.
This concludes today's conference call. You can now...