Finance of America Companies Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021. The company completed its business combination and became publicly traded on April 1, 2021. Accordingly, the filing presents a “Successor” accounting basis after that date; comparisons with the “Predecessor” are not fully like-for-like because acquisition accounting reset asset and liability values. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where indicated.
Business context
Finance of America is a diversified mortgage and specialty-finance platform. Its businesses originate residential, reverse, and commercial-property loans; provide lender and title services; and manage, sell, and securitize mortgage assets. The company reported five operating segments plus Corporate and Other. Its business combination created an UP-C structure in which public shareholders held about 31.3% of the economic interest at closing, with continuing unitholders retaining the balance.
Financial performance and position
| Metric | Q3 2021 | Comparable Q3 2020 |
|---|---|---|
| Total revenue | $456.5 million | $607.3 million |
| Expenses | $411.9 million | $362.4 million |
| Income before taxes | $54.6 million | $242.4 million |
| Net income | $50.1 million | $241.6 million |
| Net income attributable to controlling interest | $21.4 million | $246.3 million |
| Basic / diluted EPS | $0.36 / $0.22 | Not presented for Predecessor period |
| Adjusted net income (non-GAAP) | $74.6 million | $173.1 million |
| Adjusted EBITDA (non-GAAP) | $110.3 million | $235.7 million |
- Revenue declined 24.8% year over year, while expenses rose 13.7%; pretax income fell 77.5%. The filing attributes the decline principally to weaker mortgage-originations revenue and higher post-combination costs.
- Mortgage Originations: Q3 loan origination volume was $7.38 billion, versus $8.45 billion a year earlier. Net rate-lock volume was $7.68 billion versus $9.29 billion, and origination margin, including servicing margin, was 2.61% versus 4.39%.
- Reverse Originations: Q3 new reverse-mortgage originations were $1.16 billion, up from $626.7 million; segment revenue was $110.4 million versus $48.6 million.
- Commercial Originations: Q3 loan originations were $447.3 million versus $89.9 million; segment revenue was $27.9 million versus $4.7 million.
- Lender Services revenue increased to $87.5 million from $53.2 million. Portfolio Management revenue decreased to $10.4 million from $41.9 million, including higher fair-value losses on portfolio assets.
- Net interest margin, including interest on loans and related financing, was $31.3 million in Q3 versus $12.5 million a year earlier. This is a company-defined presentation spanning interest items reported in different income-statement lines.
Balance sheet at September 30, 2021: Total assets were $22.67 billion, total liabilities $20.24 billion, and total equity $2.43 billion. Cash and cash equivalents were $191.7 million, with restricted cash of $325.2 million. Major obligations included $10.22 billion of HMBS-related obligations, $5.83 billion of nonrecourse debt, $3.33 billion of other financing lines of credit, and $353.6 million of notes payable. The company reported $6.31 billion of total capacity across its other financing lines of credit, subject to asset eligibility, covenants, and other facility terms. The $350 million senior unsecured notes bear 7.875% interest and mature in November 2025.
Cash flow: For the six months from April 1 to September 30, 2021 (Successor), operating cash flow was negative $72.6 million, investing cash flow was negative $710.1 million, and financing cash flow was positive $672.8 million. Cash and restricted cash ended that period at $517.0 million, down from $626.8 million at its beginning. The cash-flow statement does not provide a stand-alone Q3 cash-flow total in the supplied filing text.
Material changes and unusual items
- Q3 mortgage-loan sale and related income fell $197.8 million year over year, which management linked to lower origination volume and margins amid higher interest rates and competition. Q3 mortgage originations margin was 2.61%, compared with 4.39%.
- Reverse and commercial lending grew substantially, and fee income increased $26.4 million year over year, supported by originations and lender-services activity.
- Expenses included ongoing equity compensation and acquisition-related amortization. The company reported $10.6 million of Q3 equity-based compensation and $13.5 million of intangible amortization. The Successor six-month period also included $38.6 million of one-time initial and accelerated RSU expense.
- The April 2021 business combination produced provisional goodwill of approximately $1.27 billion; goodwill stood at $1.30 billion at quarter-end and net intangible assets at $692.7 million. Management said the share price was below book value but concluded no impairment trigger had occurred; it planned its annual goodwill test as of October 1, 2021.
- In April 2021, the company redeemed certain securitized notes, including $175.3 million of commercial notes and reverse-mortgage notes with principal balances of $294.2 million and $239.8 million, respectively.
Liquidity, outlook, and risks
- Management stated that operating cash flows and existing facilities provided adequate resources for anticipated ongoing cash needs, and expected to renew maturing facilities or obtain replacement capacity. This is management’s assessment, not a guarantee of availability.
- As a mortgage lender and servicer, the company is exposed to changes in interest rates, mortgage-market liquidity, loan volumes, fair values, prepayments, credit losses, and financing costs. Much of its mortgage and related-obligation portfolio is measured using Level 3 fair-value inputs and management assumptions.
- Borrowing facilities contain net-worth, liquidity, leverage, and profitability covenants. FAM received a waiver from Fannie Mae for specified 2021 tangible-net-worth covenant violations; the company reported compliance with other financial covenants as of September 30.
- Substantial borrower funding obligations remain, including approximately $2.5 billion of undrawn HECM commitments. The company also faces HMBS repurchase and servicing obligations and mortgage-sale representations and warranties.
- The tax receivable agreements generally entitle former owners to 85% of specified realized tax benefits. The recorded projected TRA liability was $35.1 million, and management expects future payments to be substantial; payments are not conditioned on continued ownership by the TRA parties.
- COVID-19 effects remained uncertain. About 0.40% of serviced residential mortgage units and 0.42% of unpaid principal balance were in COVID-related forbearance at quarter-end. Management anticipated the work-from-home environment would continue until at least January 2022.
- Four coordinated California PAGA representative lawsuits were in discovery. The company said the outcome could not be determined and reported no matters for which it could estimate probable or reasonably possible losses or a reasonable loss range.
- No specific earnings or revenue guidance was provided in the supplied filing text. The filing cautions that actual results may differ materially from forward-looking statements.
Investor verification priorities
- Confirm the basis and comparability of Successor versus Predecessor periods, and distinguish GAAP results from management’s non-GAAP adjusted measures.
- Assess whether mortgage origination margins and volume, reverse and commercial growth, and lender-services revenue trends persisted after Q3.
- Review facility capacity, maturity extensions, collateral and eligibility requirements, covenant headroom, and the impact of the FAM waiver.
- Evaluate liquidity against HECM draw commitments, servicing advances, HMBS obligations, and other secured borrowing needs.
- Check the annual goodwill impairment test and subsequent valuation changes, given the large goodwill and intangible balances and share price below book value.
- Monitor fair-value assumptions, interest-rate sensitivity, and the extent to which reported earnings depend on noncash fair-value gains or losses.
- Review future TRA payments, litigation developments, and any updates to COVID-related borrower forbearance or servicing exposure.