Finance of America panies (FOA) - 2024 Q2 - Quarterly Report

PART I - Financial Information Financial Statements Unaudited Q2 2024 financial statements report a net loss of $5.1 million, a significant improvement, with total assets increasing to $28.0 billion Note 1. Organization and Description of Business The company transformed into a modern retirement solutions platform, discontinuing segments and acquiring AAG assets for reverse mortgage growth - The company transformed its business to focus on being a modern retirement solutions platform, which included discontinuing the Mortgage Originations, Commercial Originations, and Lender Services segments[31] - On March 31, 2023, the company acquired a majority of the assets from American Advisors Group (AAG/Bloom), including reverse mortgage loans and servicing rights, to enhance its Retirement Solutions segment[35] Note 2. Summary of Significant Accounting Policies Accounting policies detail changes in financial statement presentation for fair value gains/losses and retroactive adjustments for a 1-for-10 reverse stock split - The company changed its Condensed Consolidated Statements of Operations presentation to disaggregate previously reported net fair value gains/losses into more detailed components, including interest income, interest expense, net origination gains, and various fair value changes. Prior periods have been recast for comparability[39][41][43] - A 1-for-10 reverse stock split was completed on July 25, 2024. All share and per-share data in the report have been retroactively adjusted to reflect this split[36] Note 4. Discontinued Operations Discontinued operations resulted in a net loss of $4.7 million for H1 2024, a significant improvement from the prior year - The company's transformation included the wind-down of the Mortgage Originations segment and the sale of the Commercial Originations and Lender Services segments, which are now reported as discontinued operations[56] Net Loss from Discontinued Operations (in millions) | Period | 2024 | 2023 | | :--- | :--- | :--- | | Three Months Ended June 30 | $(0.2) | $(1.9) | | Six Months Ended June 30 | $(4.7) | $(42.7) | Note 6. Fair Value Fair value measurement methodologies are detailed, with the majority of financial instruments classified as Level 3, relying on significant unobservable inputs - The majority of the company's financial assets and liabilities are measured at fair value using Level 3 inputs, which are unobservable and significant to the valuation[73][74][75] Fair Value of Assets and Liabilities (June 30, 2024, in millions) | Category | Total Fair Value | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $27,335.1 | $0.0 | $1.2 | $27,333.9 | | Total Liabilities | $26,036.6 | $0.1 | $0.0 | $26,036.5 | Note 11. Other Financing Lines of Credit As of June 30, 2024, the company had $1.56 billion in financing capacity with $1.07 billion outstanding, and was in compliance with all related financial covenants Other Financing Lines of Credit (June 30, 2024, in millions) | Metric | Amount | | :--- | :--- | | Total Capacity | $1,557.8 | | Outstanding Borrowings | $1,073.8 | - The weighted average interest rate on these lines was 6.74% as of June 30, 2024, down from 6.90% at year-end 2023[121] - The company was in compliance with all of its financial covenants related to required liquidity reserves, debt service coverage ratio, tangible net worth amounts, and required profitability as of June 30, 2024[121] Note 17. Business Segment Reporting The company's Retirement Solutions and Portfolio Management segments showed improved Q2 2024 performance, with the latter achieving pre-tax income Segment Net Income (Loss) Before Taxes (in millions) | Segment | Q2 2024 | Q2 2023 | Six Months 2024 | Six Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Retirement Solutions | $(1.7) | $(18.0) | $(5.6) | $(27.2) | | Portfolio Management | $21.5 | $(168.1) | $36.0 | $(69.0) | Condensed Consolidated Statement of Financial Condition Highlights (in billions) | Account | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $27.97 | $27.11 | | Loans held for investment, subject to HMBS related obligations | $18.20 | $17.55 | | Loans held for investment, subject to nonrecourse debt | $8.42 | $8.27 | | Total Liabilities | $27.72 | $26.84 | | HMBS related obligations | $17.98 | $17.35 | | Nonrecourse debt | $8.05 | $7.90 | | Total Equity | $0.25 | $0.27 | Condensed Consolidated Statement of Operations Highlights (in millions) | Metric | Q2 2024 | Q2 2023 | Six Months 2024 | Six Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $79.0 | $(111.9) | $153.7 | $29.0 | | Net Loss | $(5.1) | $(222.5) | $(25.4) | $(207.9) | | Diluted Net Loss Per Share | $(0.30) | $(9.05) | $(1.06) | $(10.04) | Condensed Consolidated Statement of Cash Flows Highlights (Six Months Ended June 30, in millions) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(236.2) | $115.7 | | Net cash provided by (used in) investing activities | $200.3 | $(46.3) | | Net cash provided by financing activities | $57.8 | $1.1 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, strategic shifts, and liquidity, highlighting a significantly reduced net loss of $3.8 million in Q2 2024 - The company has shifted its focus to a streamlined retirement solutions business, exiting traditional mortgage, commercial lending, and lender services[169] - The acquisition of AAG assets on March 31, 2023, has been a key factor in expanding the company's distribution channels and loan volume[169][173] - The company's results are significantly affected by prevailing interest rates, housing market trends, and demographic shifts impacting the senior homeowner market[179] Results of Operations Operating results for Q2 2024 show a net loss of $3.8 million, a $220.1 million improvement, driven by fair value changes and expense reductions - For Q2 2024 vs. Q2 2023, net loss from continuing operations before income taxes decreased by $220.1 million (98.3%) to $(3.8) million[200] - The improvement was primarily driven by a $193.9 million positive change in "Net fair value changes on loans and related obligations" due to market interest rate and yield volatility[200] - Total expenses decreased by $25.0 million (22.7%) in Q2 2024 compared to Q2 2023, due to reduced headcount and continued cost-cutting measures[200] Segment Results Segment performance in Q2 2024 shows Retirement Solutions narrowing its pre-tax loss to $1.7 million and Portfolio Management achieving a $21.5 million pre-tax profit Retirement Solutions Key Metrics (Q2 2024 vs Q2 2023, in millions) | Metric | Q2 2024 | Q2 2023 | | :--- | :--- | :--- | | Reverse mortgage loan origination volume | $446.6 | $397.6 | | Net origination gains | $40.3 | $32.9 | | Total expenses | $48.8 | $58.8 | Portfolio Management Key Metrics (Q2 2024 vs Q2 2023, in millions) | Metric | Q2 2024 | Q2 2023 | | :--- | :--- | :--- | | Total revenues | $41.3 | $(145.8) | | Net fair value changes on loans and related obligations | $(25.5) | $(212.0) | | Net Income (Loss) Before Taxes | $21.5 | $(168.1) | Non-GAAP Financial Measures Non-GAAP measures show significant Q2 2024 improvement, with Adjusted EBITDA turning positive at $8.7 million and Adjusted Net Loss improving to $1.1 million Reconciliation to GAAP (in millions) | Metric | Q2 2024 | Q2 2023 | Six Months 2024 | Six Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Net loss from continuing operations | $(4.9) | $(220.6) | $(20.7) | $(165.1) | | Adjusted Net Loss | $(1.1) | $(26.5) | $(8.6) | $(41.7) | | Adjusted EBITDA | $8.7 | $(25.5) | $7.6 | $(37.9) | Liquidity and Capital Resources As of June 30, 2024, the company's liquidity is supported by $27.5 billion in debt and credit lines, with full compliance with Ginnie Mae and lender covenants - Total debt obligations were approximately $27.5 billion as of June 30, 2024[258] - The company has $1.0 billion in reverse mortgage warehouse line of credit capacity with $0.6 billion drawn as of June 30, 2024[259] - The company was in compliance with Ginnie Mae's net worth and liquidity requirements as of June 30, 2024, having received a waiver for the minimum leverage ratio requirement[257] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with a 25 basis point increase potentially leading to a $60.1 million net decrease in fair value - The company's primary market risk is interest rate risk, impacting loan origination, financing costs, and asset valuations[278][279] Interest Rate Sensitivity Analysis (Impact of 25 bps change, in millions) | Impact on Fair Value | Down 25 bps | Up 25 bps | | :--- | :--- | :--- | | Increase (decrease) in assets | $153.2 | $(154.2) | | Increase (decrease) in liabilities | $86.8 | $(94.1) | | Net Impact | $66.4 | $(60.1) | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2024, with no material changes to internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of June 30, 2024[284] - No material changes were made to internal control over financial reporting during the quarter ended June 30, 2024[285] PART II - Other Information Legal Proceedings Legal proceedings, including PAGA lawsuits, are detailed in Note 13, with management not expecting a material adverse effect - Information on legal proceedings is detailed in Note 13 of the financial statements[287] - The company is defending three coordinated representative lawsuits under the California Private Attorneys General Act (PAGA), but does not currently believe they will have a material adverse effect[129] Risk Factors No material changes to risk factors from the 2023 Form 10-K are reported, directing investors to that filing for comprehensive details - There are no material changes from the risk factors disclosed in the 2023 Form 10-K[288] Other Required Disclosures This section confirms no unregistered equity sales or senior security defaults, notes mine safety is inapplicable, and includes a Section 13(r) disclosure - No unregistered sales of equity securities or defaults upon senior securities occurred during the period[289] - A disclosure pursuant to Section 13(r) of the Exchange Act, related to activities of an affiliate, is included as Exhibit 99.1[290]