Finance of America Companies Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter ended June 30, 2021. The quarter’s results cover the Successor period from April 1 through June 30, following the April 1 business combination. Q2 2020 is a Predecessor period, so reported comparisons are affected by acquisition accounting and are not fully like-for-like. Dollar figures below are in U.S. dollars.
Business context
Finance of America is a diversified mortgage originator and servicer, with residential, reverse and commercial lending businesses, portfolio management, and lender services. It became publicly traded on April 5, 2021 under ticker FOA, using an UP-C structure; Continuing Unitholders retained a 68.7% economic interest in FoA Equity at closing.
Financial performance and position
| Metric | Q2 2021 | Comparable Q2 2020 |
|---|---|---|
| Total revenue | $389.1 million | $465.5 million |
| Total expenses | $400.8 million | $318.7 million |
| Pre-tax income (loss) | $(13.7) million | $146.7 million |
| Net income (loss) | $(14.8) million | $146.3 million |
| Net income attributable to controlling interest | $2.3 million | $148.3 million |
- Revenue fell 16.4% year over year as lower gain-on-sale revenue from mortgage loans outweighed gains in reverse and commercial lending and lender-services fees. Expenses rose 25.7%, including higher compensation, business-combination-related costs and growth-related expenses.
- Q2 basic EPS was $0.04; diluted EPS was a loss of $0.05. The different results reflect the UP-C structure and diluted-share calculation.
- Mortgage origination volume was $6.93 billion versus $7.58 billion in Q2 2020; reported mortgage origination margin was 2.8% versus 4.4%. Management cited higher interest rates and competitive margin pressure.
- Reverse mortgage originations increased to $1.01 billion from $769.3 million; commercial originations increased to $400.5 million from $14.3 million. Lender Services revenue was $81.1 million versus $44.3 million.
- Net interest margin, as defined in the filing across relevant loan and funding components, was $40.0 million versus $68.6 million.
- At June 30, assets were $22.23 billion, liabilities $19.85 billion and equity $2.38 billion. Cash and cash equivalents were $157.3 million, with a further $354.4 million of restricted cash. Balance-sheet comparisons with 2020 are substantially affected by the business combination and fair-value step-up.
- Reported debt included $3.41 billion of other financing lines of credit, $10.17 billion of HMBS-related obligations, $5.43 billion of nonrecourse debt and $353.7 million of notes payable. The $350 million senior unsecured notes bear 7.875% interest and mature in November 2025. The filing reports total debt obligations of approximately $19.4 billion under its debt summary.
- Q2 operating cash flow was $(9.7) million, investing cash flow $(337.9) million and financing cash flow $232.4 million. Cash and restricted cash together decreased $115.1 million during the quarter.
Material changes, outlook and risks
- The April business combination created a new accounting basis, including $1.30 billion of goodwill and $704.2 million of net intangible assets. Management states the purchase-price allocation remained provisional. The company also acquired Renovate America assets and operations and Parkside Lending during 2021.
- Q2 included $38.6 million of one-time initial and accelerated RSU compensation expense, plus $10.6 million of additional ongoing RSU expense and $12.8 million of amortization associated with the business combination.
- Management provided no specific financial guidance in the supplied filing text. It described the diversified platform and investor distribution channels as supporting resilience, while noting that interest rates, housing activity and origination margins affect performance.
- COVID-19 impacts remained uncertain; 551 serviced clients, or 0.57% of the serviced portfolio, were in pandemic-related forbearance at June 30. The company also had approximately $2.4 billion of unfunded HECM borrower commitments.
- Material risks include interest-rate and secondary-market volatility, reliance on warehouse and other funding, fair-value estimates using significant unobservable inputs, reverse-mortgage collateral and servicing exposures, and possible expiration or nonrenewal of credit facilities. Certain facilities had near-term maturities; subsequent amendments extended the July 2021 $200 million facility to July 2022 and the August 2021 $300 million facility to September 2021.
- FAM received a waiver for specified FNMA tangible-net-worth covenant violations related to the business combination; the company reported compliance with other financial covenants or receipt of waivers as of June 30. Four coordinated California PAGA lawsuits were in discovery; the company said outcomes could not be determined, and reported no other matters with probable or reasonably possible estimable losses.
- The filing reports that disclosure controls were effective at a reasonable-assurance level and that management believed the previously identified warrant-accounting material weakness had been remediated, subject to continued testing.
Investor verification checklist
- Review the Q2 results alongside the business-combination pro forma figures and distinguish Successor from Predecessor reporting; reported periods are not fully comparable.
- Assess whether lower mortgage margins and origination activity, alongside growth in reverse, commercial and lender-services operations, are sustainable.
- Verify liquidity, borrowing capacity, facility maturities and covenant-waiver status, including the funding needs from unfunded HECM commitments.
- Examine sensitivity of earnings and equity to Level 3 fair-value assumptions, acquisition accounting, goodwill and intangible-asset valuations, and TRA obligations.
- Track COVID-related delinquencies and forbearance, servicing and repurchase exposures, litigation developments, and continued testing of remediated controls.