Finance of America Companies Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unless stated otherwise, amounts are in U.S. dollars. The comparison is against the predecessor period ended March 31, 2021; results are not fully comparable because the April 2021 business combination changed the accounting basis and corporate structure.
Business context
Finance of America is a diversified mortgage and specialty-lending platform, with mortgage, reverse-mortgage and commercial originations, lender services, and portfolio management businesses. Effective January 1, 2022, Finance of America Commercial merged into Finance of America Mortgage, with the latter as the surviving subsidiary.
Financial results and key metrics
| Metric | Q1 2022 | Comparable 2021 period |
|---|---|---|
| Total revenue | $267.4 million | $507.7 million |
| Net loss | $64.0 million | Net income of $124.3 million |
| Net loss attributable to controlling interest | $8.5 million | Net income of $119.9 million |
| Basic / diluted loss per share | $(0.14) / $(0.30) | Not presented |
| Operating cash flow | $323.7 million | $118.0 million |
| Investing cash flow | $(600.1) million | $(312.0) million |
| Financing cash flow | $355.5 million | $307.7 million |
Management-reported non-GAAP adjusted net income was $37.3 million and adjusted EBITDA was $59.8 million, versus $106.8 million and $154.2 million, respectively. These measures exclude specified items and should not be viewed as substitutes for GAAP results or cash flow.
Mortgage Originations’ volume was $5.1 billion, down from $8.4 billion; its reported origination margin, including servicing margin, declined to 2.11% from 3.41%. Reverse mortgage originations rose to $1.47 billion from $0.77 billion. Consolidated net fair-value gains on loans and related obligations fell to $10.4 million from $76.7 million.
At March 31, 2022, total assets were $22.08 billion, total liabilities $21.05 billion, and equity $1.03 billion. Cash and cash equivalents were $226.8 million; restricted cash was $316.0 million. Major funding obligations included $10.55 billion of HMBS-related obligations, $6.32 billion of nonrecourse debt, $3.19 billion of other financing lines of credit, and $353.2 million of notes payable. The $350 million senior unsecured notes bear 7.875% interest and mature in November 2025. Reported debt obligations in the MD&A are approximately $17.4 billion; the filing does not provide a directly comparable single total encompassing every financing category above.
Material changes and management commentary
- Revenue fell 47% year over year, chiefly as mortgage-loan sale income declined with lower production and margins. Net rate-lock volume was $5.3 billion versus $8.4 billion; management cited rate volatility and competitive pressure.
- Fair-value losses from changes in market inputs or model assumptions were $137.7 million, compared with $29.6 million in the prior-year period, primarily reflecting higher discount-rate and market-yield assumptions. Derivative and related-obligation gains partly offset loan valuation losses.
- Management attributed improved operating cash flow mainly to loan-sale proceeds net of originations and cash received from hedge margin deposits. Cash and restricted cash increased $79.2 million during the quarter.
- Management stated that operating cash flow, portfolio financing and existing facilities provide resources for anticipated ongoing needs, and expected facility renewals. This depends on continued access to financing and compliance with facility terms.
- The Federal Reserve began raising rates in March 2022; the filing highlights rate increases, market-spread volatility, inflation, the Russia-Ukraine conflict and continuing COVID-19 effects as risks to loan volumes, funding costs, fair values and liquidity. No specific company earnings guidance is provided.
Liquidity, risks and unusual items
- The company reported compliance with liquidity and net-worth covenants at March 31, 2022, but obtained waivers or amendments for certain profitability covenants. Credit facilities are collateralized and subject to asset-eligibility tests, margin calls, covenants and refinancing risk.
- Unfunded borrower commitments for agency and non-agency reverse mortgages were approximately $2.8 billion, in addition to $10.3 million for fix-and-flip loans. These may require funding before securitization.
- Fair-value estimates rely substantially on Level 3, unobservable inputs, making reported asset and liability values sensitive to assumptions. Reverse mortgage and other mortgage-related assets and obligations are particularly significant.
- Disclosure controls and procedures were deemed ineffective because material weaknesses remained in accounting for complex equity and financial instruments and in income-tax accounting for significant or unusual transactions. Management said the statements were fairly presented and remediation efforts were ongoing.
- The company reported four coordinated California PAGA representative lawsuits, stayed pending a U.S. Supreme Court ruling. It could not estimate a loss range; it reported no other matters considered probable or reasonably possible with estimable losses.
- Approximately 0.25% of units and 0.27% of unpaid principal balance in the residential servicing portfolio were in COVID-related forbearance at quarter-end.
Important facts for investors to verify
- Whether mortgage production and sale margins stabilize as rates rise, and whether reverse-origination growth can offset weakness in traditional mortgage lending.
- How fair-value marks, assumptions and hedges affect reported earnings and the carrying value of the substantial mortgage portfolio.
- Available borrowing capacity after collateral, eligibility and covenant restrictions, including facility renewal and margin-call exposure.
- Progress remediating the disclosed material weaknesses and whether controls are later tested and declared effective.
- Potential cash needs from reverse-loan advances, repurchase obligations, litigation and Tax Receivable Agreement payments.