| | By: | /s/ William M. Walker | | | William M. Walker | | | Chairman and Chief Executive Officer | | Date: | February 23, 201825, 2021 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. | | | | Signature | | Title | | Date | | | | | | /s/ William M. Walker | | Chairman and Chief Executive | | February 23, 201825, 2021 | William M. Walker | | Officer (Principal Executive Officer) | | | | | | | | | | | | | | | | | | /s/ Alan J. Bowers | | Director | | February 23, 201825, 2021 | Alan J. Bowers | | | | | | | | | | | | | | | | | | | | /s/ Cynthia A. HallenbeckEllen D. Levy | | Director | | February 23, 201825, 2021 | Cynthia A. HallenbeckEllen D. Levy
| | | | | | | | | | | | | | | | | | | | /s/ Michael D. Malone | | Director | | February 23, 201825, 2021 | Michael D. Malone | | | | | | | | | | | | | | | | | | | | /s/ John Rice | | Director | | February 23, 201825, 2021 | John Rice | | | | | | | | | | | | | | | | | | | | /s/ Dana L. Schmaltz | | Director | | February 23, 201825, 2021 | Dana L. Schmaltz | | | | | | | | | | | | | | | | | | | | /s/ Howard W. Smith, III | | President and Director | | February 23, 201825, 2021 | Howard W. Smith, III | | | | |
| | | | /s/ Michael J. Warren | | Director | | February 23, 201825, 2021 | Michael J. Warren | | | | |
| | | | /s/ Stephen P. Theobald | | Executive Vice President and Chief Financial | | February 23, 201825, 2021 | Stephen P. Theobald | | Officer (Principal Financial Officer and Principal Accounting Officer) | | |
INDEX TO THE FINANCIAL STATEMENTS CONTENTS CONTENTS
| | | PAGE | ReportReports of Independent Registered Public Accounting Firm
| | F-2 | Consolidated Financial Statements of Walker & Dunlop, Inc. and SubsidiariesSubsidiaries:: | | | | Consolidated Balance Sheets as of December 31, 20172020 and 20162019 | | F-4F-5
| | Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2017, 2016,2020, 2019, and 20152018 | | F-5F-6
| | Consolidated Statements of Changes in Equity for the Years Ended December 31, 2017, 2016,2020, 2019, and 20152018 | | F-6F-7
| | Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016,2020, 2019, and 20152018 | | F-7F-8 – F-8
| | Notes to the Consolidated Financial Statements | | F-9F-10
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors and Stockholders
Walker & Dunlop, Inc. and subsidiaries::
OpinionsOpinion on the ConsolidatedFinancial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Walker & Dunlop, Inc. and subsidiaries (the “Company”)Company) as of December 31, 20172020 and 2016,2019, the related consolidated statements of income and comprehensive income, changes in equity, and cash flows for each of the years in the three-yearthree year period ended December 31, 2017,2020, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles. Also We also have audited, in our opinion,accordance with the standards of the Public Company maintained, in all material respects, effectiveAccounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basis for Opinion
TheCommission, and our report dated February 25, 2021 expressed an unqualified opinion on the effectiveness of the Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting,reporting.
Change in Accounting Principle As discussed in Notes 2 and 4 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of estimated loss for its assessmentallowance for risk sharing obligations as of January 1, 2020 due to the adoption of ASC Topic 326, Financial Instruments – Credit Losses. Basis for Opinion These consolidated financial statements are the responsibility of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.Company’s management. Our responsibility is to express an opinion on the Company’sthese consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. fraud. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Initial Valuation of Mortgage Servicing Rights As discussed in Notes 2 and 3 to the consolidated financial statements, the fair value of expected net cash flows from servicing, net presented on the consolidated statements of income and comprehensive income amounted to $358 million for the year ended December 31, 2020. At the loan commitment date, the fair value of expected net cash flows from servicing (the initial fair value of servicing rights) is recognized as a derivative asset on the consolidated balance sheets and reclassified as capitalized mortgage servicing rights at the loan sale date. The measurement of the fair value of servicing rights requires certain assumptions, including the estimated life of the loan, discount rate, escrow earnings rate and servicing cost. The estimated net cash flows are discounted at a rate that reflects the credit and liquidity risk over the estimated life of the underlying loan (DCF method). The estimated life of the loan includes consideration of the prepayment provisions. The estimated earnings rate on escrow accounts associated with servicing the loan increases estimated future cash flows, and the estimated future cost to service the loan decreases estimated future cash flows. We identified the assessment of the initial fair value of servicing rights as a critical audit matter. The assessment involved significant measurement and valuation uncertainty requiring complex auditor judgment. It also required specialized skills and knowledge because of the level of judgment and limited publicly available transactional and market participant data. Our assessment encompassed the evaluation of the DCF method, and the significant assumptions used in estimating the net cash flows for determining the initial fair value of servicing rights, which included the discount rate, escrow earnings rate and servicing costs. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the initial fair value of servicing rights, including controls over the: (1) governance and development of the DCF method, (2) identification and determination of the significant assumptions used in estimating the net cash flows, and (3) preparation and measurement of the fair value of servicing rights for each loan. We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the Company’s DCF method for compliance with U.S. generally accepted accounting principles, and evaluating the significant assumptions (discount rate, escrow earnings rate, and servicing cost). The evaluation of these assumptions included comparing them against ranges that were developed using industry market survey data for comparable entities and loans. We performed sensitivity analyses over the significant assumptions to assess their impact on the Company’s determination of the initial fair value of servicing rights. Allowance for Risk-Sharing Obligations—Reasonable and Supportable Forecast Period Loss Factor As discussed in Notes 2 and 4 to the consolidated financial statements, the Company’s allowance for risk-sharing obligations was $75.3 million at December 31, 2020. The Company estimates a liability for its risk-sharing obligations for the partial guarantee of the credit performance of loans under the Fannie Mae DUS program. The Company uses the weighted-average remaining maturity method (WARM) to estimate expected losses for the life of the risk-sharing obligations. In addition, the Company applies a loss factor estimated over a one-year reasonable and supportable economic forecast period (the forecast period), and then reverts, over one year, to a weighted average historical loss rate for the remaining estimated life of the loan. The Company’s loss factor estimated over the forecast period uses forecasts of unemployment rates, historically a highly correlated indicator for multifamily occupancy rates and property net operating income levels, to assess what macroeconomic and multifamily market conditions are expected to be like over the coming year. We identified the assessment of the loss factor estimated over the forecast period as a critical audit matter. The assessment involved specialized skills and knowledge because of the significant evaluation and measurement uncertainty and required complex and subjective auditor judgment. Specifically, the loss factor estimated over the forecast period is determined by comparing actual loss factors experienced during a selected historical period with unemployment levels and economic conditions similar to the conditions expected to persist during the forecast period. The loss factor is sensitive to estimated unemployment levels, such that changes in that assumption could cause variation in expected losses. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s methodology used in the development of the forecast period, including the determination of the loss factor estimated over that period. We involved credit risk professionals with specialized skills and knowledge who assisted in evaluating (1) the Company’s methodology used to develop the forecast period for compliance with U.S. generally accepted accounting principles and (2) the determined loss factor, including comparing the Company’s evaluation of forecasted unemployment levels and economic conditions to publicly available economic forecast data. We have served as the Company’s auditor since 2007. McLean, Virginia
February 25, 2021 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors
Walker & Dunlop, Inc.: Opinion on Internal Control Over Financial Reporting We have audited Walker & Dunlop, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income and comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 25, 2021 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our auditsaudit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinions.opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We have served as the Company’s auditor since 2007.
McLean, Virginia February 23, 201825, 2021 Walker & Dunlop, Inc. and Subsidiaries Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data) | | | | | | | | | | December 31, | | Assets | | 2017 | | 2016 | | Cash and cash equivalents | | $ | 191,218 | | $ | 118,756 | | Restricted cash | | | 6,677 | | | 9,861 | | Pledged securities, at fair value | | | 97,859 | | | 84,850 | | Loans held for sale, at fair value | | | 951,829 | | | 1,858,358 | | Loans held for investment, net | | | 66,510 | | | 220,377 | | Servicing fees and other receivables, net | | | 41,693 | | | 29,459 | | Derivative assets | | | 10,357 | | | 61,824 | | Mortgage servicing rights | | | 634,756 | | | 521,930 | | Goodwill and other intangible assets | | | 124,543 | | | 97,372 | | Other assets | | | 82,985 | | | 49,645 | | Total assets | | $ | 2,208,427 | | $ | 3,052,432 | | | | | | | | | | Liabilities | | | | | | | | Accounts payable and other liabilities | | $ | 130,479 | | $ | 93,211 | | Performance deposits from borrowers | | | 6,461 | | | 10,480 | | Derivative liabilities | | | 1,850 | | | 4,396 | | Guaranty obligation, net of accumulated amortization | | | 41,187 | | | 32,292 | | Allowance for risk-sharing obligations | | | 3,783 | | | 3,613 | | Deferred tax liabilities, net | | | 108,059 | | | 139,020 | | Warehouse notes payable | | | 937,769 | | | 1,990,183 | | Note payable | | | 163,858 | | | 164,163 | | Total liabilities | | $ | 1,393,446 | | $ | 2,437,358 | | | | | | | | | | Equity | | | | | | | | Preferred shares, 50,000 authorized, none issued. | | $ | — | | $ | — | | Common stock, $0.01 par value. Authorized 200,000; issued and outstanding 30,016 shares at December 31, 2017 and 29,551 shares at December 31, 2016 | | | 300 | | | 296 | | Additional paid-in capital | | | 229,173 | | | 228,889 | | Retained earnings | | | 579,943 | | | 381,031 | | Total stockholders’ equity | | $ | 809,416 | | $ | 610,216 | | Noncontrolling interests | | | 5,565 | | | 4,858 | | Total equity | | $ | 814,981 | | $ | 615,074 | | Commitments and contingencies (NOTE 10) | | | — | | | — | | Total liabilities and equity | | $ | 2,208,427 | | $ | 3,052,432 | | | | | | | | | |
| | | | | | | | | | December 31, | | Assets | | 2020 | | | 2019 | | Cash and cash equivalents | | $ | 321,097 | | $ | 120,685 | | Restricted cash | | | 19,432 | | | 8,677 | | Pledged securities, at fair value | | | 137,236 | | | 121,767 | | Loans held for sale, at fair value | | | 2,449,198 | | | 787,035 | | Loans held for investment, net | | | 360,402 | | | 543,542 | | Mortgage servicing rights | | | 862,813 | | | 718,799 | | Goodwill and other intangible assets | | | 250,838 | | | 182,959 | | Derivative assets | | | 49,786 | | | 15,568 | | Receivables, net | | | 65,735 | | | 52,146 | | Other assets | | | 134,438 | | | 124,021 | | Total assets | | $ | 4,650,975 | | $ | 2,675,199 | | | | | | | | | | Liabilities | | | | | | | | Warehouse notes payable | | $ | 2,517,156 | | $ | 906,128 | | Note payable | | | 291,593 | | | 293,964 | | Guaranty obligation, net | | | 52,306 | | | 54,695 | | Allowance for risk-sharing obligations | | | 75,313 | | | 11,471 | | Deferred tax liabilities, net | | | 185,658 | | | 146,811 | | Derivative liabilities | | | 5,066 | | | 36 | | Performance deposits from borrowers | | | 14,468 | | | 7,996 | | Other liabilities | | | 313,193 | | | 211,813 | | Total liabilities | | $ | 3,454,753 | | $ | 1,632,914 | | | | | | | | | | Equity | | | | | | | | Preferred stock (50,000 shares authorized; NaN issued) | | $ | — | | $ | — | | Common stock ($0.01 par value; authorized 200,000 shares; issued and outstanding 30,678 shares at December 31, 2020 and 30,035 shares at December 31, 2019) | | | 307 | | | 300 | | Additional paid-in capital ("APIC") | | | 241,004 | | | 237,877 | | Accumulated other comprehensive income ("AOCI") | | | 1,968 | | | 737 | | Retained earnings | | | 952,943 | | | 796,775 | | Total stockholders’ equity | | $ | 1,196,222 | | $ | 1,035,689 | | Noncontrolling interests | | | — | | | 6,596 | | Total equity | | $ | 1,196,222 | | $ | 1,042,285 | | Commitments and contingencies (NOTES 2 and 9) | | | — | | | — | | Total liabilities and equity | | $ | 4,650,975 | | $ | 2,675,199 | |
See accompanying notes to consolidated financial statements. Walker & Dunlop, Inc. and Subsidiaries Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share data) | | For the year ended December 31, | | | | 2017 | | 2016 | | 2015 | | Revenues | | | | | | | | | | | Gains from mortgage banking activities | | $ | 439,370 | | $ | 367,185 | | $ | 290,466 | | Servicing fees | | | 176,352 | | | 140,924 | | | 114,757 | | Net warehouse interest income, loans held for sale | | | 15,077 | | | 16,245 | | | 14,541 | | Net warehouse interest income, loans held for investment | | | 9,390 | | | 7,482 | | | 9,419 | | Escrow earnings and other interest income | | | 20,396 | | | 9,168 | | | 4,473 | | Other | | | 51,272 | | | 34,272 | | | 34,542 | | Total revenues | | $ | 711,857 | | $ | 575,276 | | $ | 468,198 | | | | | | | | | | | | | Expenses | | | | | | | | | | | Personnel | | $ | 289,277 | | $ | 227,491 | | $ | 184,590 | | Amortization and depreciation | | | 131,246 | | | 111,427 | | | 98,173 | | Provision (benefit) for credit losses | | | (243) | | | (612) | | | 1,644 | | Interest expense on corporate debt | | | 9,745 | | | 9,851 | | | 9,918 | | Other operating expenses | | | 48,171 | | | 41,338 | | | 38,507 | | Total expenses | | $ | 478,196 | | $ | 389,495 | | $ | 332,832 | | Income from operations | | $ | 233,661 | | $ | 185,781 | | $ | 135,366 | | Income tax expense | | | 21,827 | | | 71,470 | | | 52,771 | | Net income before noncontrolling interests | | $ | 211,834 | | $ | 114,311 | | $ | 82,595 | | Less: net income from noncontrolling interests | | | 707 | | | 414 | | | 467 | | Walker & Dunlop net income | | $ | 211,127 | | $ | 113,897 | | $ | 82,128 | | | | | | | | | | | | | Basic earnings per share | | $ | 7.03 | | $ | 3.87 | | $ | 2.76 | | Diluted earnings per share | | $ | 6.56 | | $ | 3.65 | | $ | 2.65 | | | | | | | | | | | | | Basic weighted average shares outstanding | | | 30,014 | | | 29,432 | | | 29,754 | | Diluted weighted average shares outstanding | | | 32,205 | | | 31,172 | | | 30,949 | | | | | | | | | | | | |
| | | | | | | | | | | | | 2020 | | 2019 | | 2018 | | Revenues | | | | | | | | | | | Loan origination and debt brokerage fees, net | | $ | 359,061 | | $ | 258,471 | | $ | 234,681 | | Fair value of expected net cash flows from servicing, net | | | 358,000 | | | 180,766 | | | 172,401 | | Servicing fees | | | 235,801 | | | 214,550 | | | 200,230 | | Net warehouse interest income, loans held for sale | | | 17,936 | | | 1,917 | | | 5,993 | | Net warehouse interest income, loans held for investment | | | 11,390 | | | 23,782 | | | 8,038 | | Escrow earnings and other interest income | | | 18,255 | | | 56,835 | | | 42,985 | | Other revenues | | | 83,264 | | | 80,898 | | | 60,918 | | Total revenues | | $ | 1,083,707 | | $ | 817,219 | | $ | 725,246 | | | | | | | | | | | | | Expenses | | | | | | | | | | | Personnel | | $ | 468,819 | | $ | 346,168 | | $ | 297,303 | | Amortization and depreciation | | | 169,011 | | | 152,472 | | | 142,134 | | Provision for credit losses | | | 37,479 | | | 7,273 | | | 808 | | Interest expense on corporate debt | | | 8,550 | | | 14,359 | | | 10,130 | | Other operating expenses | | | 69,582 | | | 66,596 | | | 62,021 | | Total expenses | | $ | 753,441 | | $ | 586,868 | | $ | 512,396 | | Income from operations | | $ | 330,266 | | $ | 230,351 | | $ | 212,850 | | Income tax expense | | | 84,313 | | | 57,121 | | | 51,908 | | Net income before noncontrolling interests | | $ | 245,953 | | $ | 173,230 | | $ | 160,942 | | Less: net loss from noncontrolling interests | | | (224) | | | (143) | | | (497) | | Walker & Dunlop net income | | $ | 246,177 | | $ | 173,373 | | $ | 161,439 | | Net change in unrealized gains and losses on pledged available-for-sale securities, net of taxes | | | 1,231 | | | 812 | | | (168) | | Walker & Dunlop comprehensive income | | $ | 247,408 | | $ | 174,185 | | $ | 161,271 | | | | | | | | | | | | | Basic earnings per share (NOTE 11) | | $ | 7.85 | | $ | 5.61 | | $ | 5.15 | | Diluted earnings per share (NOTE 11) | | $ | 7.69 | | $ | 5.45 | | $ | 4.96 | | | | | | | | | | | | | Basic weighted-average shares outstanding | | | 30,444 | | | 29,913 | | | 30,202 | | Diluted weighted-average shares outstanding | | | 31,083 | | | 30,815 | | | 31,384 | |
See accompanying notes to consolidated financial statements. Walker & Dunlop, Inc. and Subsidiaries Consolidated Statements of Changes in Equity
(Inin thousands) | | | | | | | | | | | | | | | | | | | | | | | Stockholders' Equity | | | | | | | | | | | | | | Additional | | | | | | | | | | | | | Common Stock | | Paid-In | | Retained | | Noncontrolling | | Total | | | | Shares | | Amount | | Capital | | Earnings | | Interests | | Equity | | Balance at December 31, 2014 | | 31,822 | | $ | 318 | | $ | 224,164 | | $ | 208,969 | | $ | — | | $ | 433,451 | | Walker & Dunlop net income | | — | | | — | | | — | | | 82,128 | | | — | | | 82,128 | | Net income from noncontrolling interests | | — | | | — | | | — | | | — | | | 467 | | | 467 | | Stock-based compensation—equity classified | | — | | | — | | | 13,428 | | | — | | | — | | | 13,428 | | Issuance of common stock in connection with equity compensation plans | | 815 | | | 8 | | | 5,653 | | | — | | | — | | | 5,661 | | Issuance of unvested restricted common stock in connection with acquisitions | | — | | | — | | | 1,892 | | | — | | | — | | | 1,892 | | Repurchase and retirement of common stock (NOTE 12) | | (3,171) | | | (31) | | | (31,163) | | | (19,067) | | | — | | | (50,261) | | Tax benefit from vesting of restricted shares | | — | | | — | | | 1,410 | | | — | | | — | | | 1,410 | | Noncontrolling interests acquired | | — | | | — | | | — | | | — | | | 4,339 | | | 4,339 | | Other | | — | | | — | | | 191 | | | — | | | (357) | | | (166) | | Balance at December 31, 2015 | | 29,466 | | $ | 295 | | $ | 215,575 | | $ | 272,030 | | $ | 4,449 | | $ | 492,349 | | Cumulative effect from change in accounting for stock compensation | | — | | | — | | | 135 | | | (120) | | | — | | | 15 | | Walker & Dunlop net income | | — | | | — | | | — | | | 113,897 | | | — | | | 113,897 | | Net income from noncontrolling interests | | — | | | — | | | — | | | — | | | 414 | | | 414 | | Stock-based compensation—equity classified | | — | | | — | | | 17,616 | | | — | | | — | | | 17,616 | | Issuance of common stock in connection with equity compensation plans | | 645 | | | 6 | | | 3,759 | | | — | | | — | | | 3,765 | | Repurchase and retirement of common stock (NOTE 12) | | (560) | | | (5) | | | (8,112) | | | (4,776) | | | — | | | (12,893) | | Other | | — | | | — | | | (84) | | | — | | | (5) | | | (89) | | Balance at December 31, 2016 | | 29,551 | | $ | 296 | | $ | 228,889 | | $ | 381,031 | | $ | 4,858 | | $ | 615,074 | | Walker & Dunlop net income | | — | | | — | | | — | | | 211,127 | | | — | | | 211,127 | | Net income from noncontrolling interests | | — | | | — | | | — | | | — | | | 707 | | | 707 | | Stock-based compensation—equity classified | | — | | | — | | | 19,973 | | | — | | | — | | | 19,973 | | Issuance of common stock in connection with equity compensation plans | | 1,272 | | | 12 | | | 3,001 | | | — | | | — | | | 3,013 | | Repurchase and retirement of common stock (NOTE 12) | | (807) | | | (8) | | | (22,676) | | | (12,215) | | | — | | | (34,899) | | Other | | — | | | — | | | (14) | | | — | | | — | | | (14) | | Balance at December 31, 2017 | | 30,016 | | $ | 300 | | $ | 229,173 | | $ | 579,943 | | $ | 5,565 | | $ | 814,981 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Stockholders' Equity | | | | | | | | | | Common Stock | | | | | | Retained | | Noncontrolling | | Total | | | | Shares | | Amount | | APIC | | AOCI | | Earnings | | Interests | | Equity | | Balance at December 31, 2017 | | 30,016 | | $ | 300 | | $ | 229,080 | | $ | 93 | | $ | 579,943 | | $ | 5,565 | | $ | 814,981 | | Walker & Dunlop net income | | — | | | — | | | — | | | — | | | 161,439 | | | — | | | 161,439 | | Net loss from noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | (497) | | | (497) | | Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | (168) | | | — | | | — | | | (168) | | Stock-based compensation - equity classified | | — | | | — | | | 22,765 | | | — | | | — | | | — | | | 22,765 | | Issuance of common stock in connection with equity compensation plans | | 958 | | | 10 | | | 8,939 | | | — | | | — | | | — | | | 8,949 | | Repurchase and retirement of common stock (NOTE 11) | | (1,477) | | | (15) | | | (25,632) | | | — | | | (43,185) | | | — | | | (68,832) | | Cash dividends paid ($1.00 per common share) | | — | | | — | | | — | | | — | | | (31,445) | | | — | | | (31,445) | | Balance at December 31, 2018 | | 29,497 | | $ | 295 | | $ | 235,152 | | $ | (75) | | $ | 666,752 | | $ | 5,068 | | $ | 907,192 | | Cumulative-effect adjustment for adoption of ASU 2016-02, net of tax | | — | | | — | | | — | | | — | | | (1,002) | | | — | | | (1,002) | | Walker & Dunlop net income | | — | | | — | | | — | | | — | | | 173,373 | | | — | | | 173,373 | | Net loss from noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | (143) | | | (143) | | Contributions from noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | 1,671 | | | 1,671 | | Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | 812 | | | — | | | — | | | 812 | | Stock-based compensation - equity classified | | — | | | — | | | 22,819 | | | — | | | — | | | — | | | 22,819 | | Issuance of common stock in connection with equity compensation plans | | 1,118 | | | 11 | | | 5,500 | | | — | | | — | | | — | | | 5,511 | | Repurchase and retirement of common stock (NOTE 11) | | (580) | | | (6) | | | (25,594) | | | — | | | (5,076) | | | — | | | (30,676) | | Cash dividends paid ($1.20 per common share) | | — | | | — | | | — | | | — | | | (37,272) | | | — | | | (37,272) | | Balance at December 31, 2019 | | 30,035 | | $ | 300 | | $ | 237,877 | | $ | 737 | | $ | 796,775 | | $ | 6,596 | | $ | 1,042,285 | | Cumulative-effect adjustment for adoption of ASU 2016-13, net of tax | | — | | | — | | | — | | | — | | | (23,678) | | | — | | | (23,678) | | Walker & Dunlop net income | | — | | | — | | | — | | | — | | | 246,177 | | | — | | | 246,177 | | Net loss from noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | (224) | | | (224) | | Contributions from noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | 675 | | | 675 | | Purchase of noncontrolling interests | | — | | | — | | | (24,090) | | | — | | | — | | | (7,047) | | | (31,137) | | Other comprehensive income (loss), net of tax | | — | | | — | | | — | | | 1,231 | | | — | | | — | | | 1,231 | | Stock-based compensation - equity classified | | — | | | — | | | 27,090 | | | — | | | — | | | — | | | 27,090 | | Issuance of common stock in connection with equity compensation plans | | 1,414 | | | 14 | | | 24,913 | | | — | | | — | | | — | | | 24,927 | | Repurchase and retirement of common stock (NOTE 11) | | (771) | | | (7) | | | (24,786) | | | — | | | (20,981) | | | — | | | (45,774) | | Cash dividends paid ($1.44 per common share) | | — | | | — | | | — | | | — | | | (45,350) | | | — | | | (45,350) | | Balance at December 31, 2020 | | 30,678 | | $ | 307 | | $ | 241,004 | | $ | 1,968 | | $ | 952,943 | | $ | — | | $ | 1,196,222 | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements. Walker & Dunlop, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) | | | | | | | | | | | | | For the year ended December 31, | | | | 2020 | | 2019 | | 2018 | | Cash flows from operating activities | | | | | | | | | | | Net income before noncontrolling interests | | $ | 245,953 | | $ | 173,230 | | $ | 160,942 | | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | Gains attributable to the fair value of future servicing rights, net of guaranty obligation | | | (358,000) | | | (180,766) | | | (172,401) | | Change in the fair value of premiums and origination fees (NOTE 2) | | | (32,981) | | | 6,041 | | | (5,037) | | Amortization and depreciation | | | 169,011 | | | 152,472 | | | 142,134 | | Stock compensation-equity and liability classified | | | 28,319 | | | 24,075 | | | 23,959 | | Provision for credit losses | | | 37,479 | | | 7,273 | | | 808 | | Deferred tax expense | | | 47,165 | | | 22,012 | | | 17,483 | | Amortization of deferred loan fees and costs | | | (1,723) | | | (6,587) | | | (1,742) | | Amortization of debt issuance costs and debt discount | | | 4,652 | | | 5,451 | | | 7,509 | | Origination fees received from loans held for investment | | | 786 | | | 2,553 | | | 3,968 | | Proceeds from transfers of loans held for sale | | | (22,828,602) | | | (15,746,949) | | | (15,153,003) | | Sales of loans to third parties | | | 21,216,975 | | | 16,007,910 | | | 15,050,932 | | Cash paid for cloud computing implementation costs | | | (1,199) | | | (6,194) | | | — | | Changes in: | | | | | | | | | | | Receivables, net | | | (19,264) | | | (2,298) | | | (4,532) | | Other assets | | | 2,205 | | | (20,924) | | | (6,861) | | Other liabilities | | | 71,382 | | | 2,601 | | | (13,957) | | Performance deposits from borrowers | | | 6,472 | | | (12,339) | | | 13,874 | | Net cash provided by (used in) operating activities | | $ | (1,411,370) | | $ | 427,561 | | $ | 64,076 | | | | | | | | | | | | | Cash flows from investing activities | | | | | | | | | | | Capital expenditures | | $ | (2,983) | | $ | (4,711) | | $ | (4,722) | | Purchases of equity-method investments | | | (1,682) | | | (923) | | | — | | Proceeds from the sale of equity-method investments | | | — | | | — | | | 4,993 | | Purchases of pledged available-for-sale ("AFS") securities | | | (24,883) | | | (30,611) | | | (98,442) | | Proceeds from prepayment of pledged AFS securities | | | 19,635 | | | 22,756 | | | — | | Funding of preferred equity investments | | | — | | | — | | | (41,100) | | Proceeds from the payoff of preferred equity investments | | | — | | | — | | | 82,819 | | Distributions from (investments in) joint ventures, net | | | (8,462) | | | (15,944) | | | (4,137) | | Acquisitions, net of cash received | | | (46,784) | | | (7,180) | | | (53,249) | | Purchase of mortgage servicing rights | | | — | | | — | | | (1,814) | | Originations of loans held for investment | | | (199,153) | | | (362,924) | | | (597,889) | | Principal collected on loans held for investment | | | 379,491 | | | 319,832 | | | 161,303 | | Net cash provided by (used in) investing activities | | $ | 115,179 | | $ | (79,705) | | $ | (552,238) | | | | | | | | | | | | | Cash flows from financing activities | | | | | | | | | | | Borrowings (repayments) of warehouse notes payable, net | | $ | 1,718,470 | | $ | (367,864) | | $ | 139,298 | | Borrowings of interim warehouse notes payable | | | 60,770 | | | 179,765 | | | 145,043 | | Repayments of interim warehouse notes payable | | | (167,960) | | | (67,871) | | | (61,050) | | Repayments of note payable | | | (2,977) | | | (2,250) | | | (166,223) | | Borrowings of note payable | | | — | | | — | | | 298,500 | | Secured borrowings | | | 2,766 | | | — | | | 70,052 | | Proceeds from issuance of common stock | | | 14,021 | | | 5,511 | | | 8,949 | | Repurchase of common stock | | | (45,774) | | | (30,676) | | | (68,832) | | Purchase of noncontrolling interests | | | (10,400) | | | — | | | — | | Cash dividends paid | | | (45,350) | | | (37,272) | | | (31,445) | | Payment of contingent consideration | | | (1,641) | | | (6,450) | | | (5,150) | | Debt issuance costs | | | (4,298) | | | (4,531) | | | (7,312) | | Net cash provided by (used in) financing activities | | $ | 1,517,627 | | $ | (331,638) | | $ | 321,830 | | | | | | | | | | | | | Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents (NOTE 2) | | $ | 221,436 | | $ | 16,218 | | $ | (166,332) | | Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period | | | 136,566 | | | 120,348 | | | 286,680 | | Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period | | $ | 358,002 | | $ | 136,566 | | $ | 120,348 | | | | | | | | | | | | |
| | | | | | | | | | | | | For the year ended December 31, | | | | 2017 | | 2016 | | 2015 | | Cash flows from operating activities | | | | | | | | | | | Net income before noncontrolling interests | | $ | 211,834 | | $ | 114,311 | | $ | 82,595 | | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | Gains attributable to the fair value of future servicing rights, net of guaranty obligation | | | (193,886) | | | (192,825) | | | (133,631) | | Change in the fair value of premiums and origination fees (NOTE 2) | | | 5,781 | | | (10,796) | | | 1,959 | | Amortization and depreciation | | | 131,246 | | | 111,427 | | | 98,173 | | Stock compensation-equity and liability classified | | | 21,134 | | | 18,477 | | | 14,084 | | Provision (benefit) for credit losses | | | (243) | | | (612) | | | 1,644 | | Deferred tax expense (benefit) | | | (30,961) | | | 37,595 | | | 16,919 | | Originations of loans held for sale | | | (17,018,424) | | | (12,040,559) | | | (12,111,553) | | Sales of loans to third parties | | | 17,937,915 | | | 12,697,209 | | | 10,688,356 | | Amortization of deferred loan fees and costs | | | (2,298) | | | (1,578) | | | (1,775) | | Amortization of debt issuance costs and debt discount | | | 4,886 | | | 5,581 | | | 3,756 | | Origination fees received from loans held for investment | | | 1,109 | | | 2,104 | | | 1,429 | | Tax shortfall (benefit) from vesting of equity awards | | | — | | | — | | | (1,410) | | Cash paid to settle risk-sharing obligations | | | — | | | (1,613) | | | (795) | | Changes in: | | | | | | | | | | | Servicing fees and other receivables | | | (12,234) | | | (5,744) | | | (623) | | Other assets | | | (7,064) | | | (1,014) | | | 2,974 | | Accounts payable and other liabilities | | | 22,866 | | | 22,035 | | | 7,739 | | Performance deposits from borrowers | | | (4,019) | | | 5,368 | | | (8,556) | | Net cash provided by (used in) operating activities | | $ | 1,067,642 | | $ | 759,366 | | $ | (1,338,715) | | | | | | | | | | | | | Cash flows from investing activities | | | | | | | | | | | Capital expenditures | | $ | (5,207) | | $ | (2,478) | | $ | (1,413) | | Purchase of equity-method investments | | | — | | | — | | | (5,000) | | Funding of preferred equity investments | | | (16,884) | | | (24,835) | | | — | | Capital invested in Interim Program JV | | | (6,342) | | | — | | | — | | Net cash paid to increase ownership interest in a previously held equity-method investment | | | — | | | (1,058) | | | — | | Acquisitions, net of cash received | | | (15,000) | | | (6,350) | | | (12,767) | | Purchase of mortgage servicing rights | | | (7,781) | | | (43,097) | | | — | | Originations of loans held for investment | | | (183,916) | | | (414,763) | | | (180,375) | | Principal collected on loans held for investment upon payoff | | | 219,516 | | | 425,820 | | | 172,323 | | Transfer of loans held for investment upon formation of Interim Program JV | | | 119,750 | | | — | | | — | | Net cash provided by (used in) investing activities | | $ | 104,136 | | $ | (66,761) | | $ | (27,232) | | | | | | | | | | | | | Cash flows from financing activities | | | | | | | | | | | Borrowings (repayments) of warehouse notes payable, net | | $ | (955,040) | | $ | (649,845) | | $ | 1,423,911 | | Borrowings of interim warehouse notes payable | | | 140,341 | | | 325,828 | | | 137,397 | | Repayments of interim warehouse notes payable | | | (237,912) | | | (355,738) | | | (125,542) | | Repayments of note payable | | | (1,104) | | | (1,104) | | | (4,819) | | Proceeds from issuance of common stock | | | 3,013 | | | 3,765 | | | 7,553 | |
Table of Contents Walker & Dunlop, Inc. and Subsidiaries Consolidated Statements of Cash Flows (CONTINUED) (In thousands) Repurchase of common stock | | | (34,899) | | | (12,893) | | | (50,261) | | Debt issuance costs | | | (3,890) | | | (3,630) | | | (4,145) | | Distributions to noncontrolling interests | | | — | | | (5) | | | — | | Tax benefit from vesting of equity awards | | | — | | | — | | | 1,410 | | Net cash provided by (used in) financing activities | | $ | (1,089,491) | | $ | (693,622) | | $ | 1,385,504 | | | | | | | | | | | | | Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents (NOTE 2) | | $ | 82,287 | | $ | (1,017) | | $ | 19,557 | | Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period | | | 213,467 | | | 214,484 | | | 194,927 | | Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period | | $ | 295,754 | | $ | 213,467 | | $ | 214,484 | | | | | | | | | | | | | Supplemental Disclosure of Cash Flow Information: | | | | | | | | | | | Cash paid to third parties for interest | | $ | 56,267 | | $ | 39,311 | | $ | 32,854 | | Cash paid for income taxes | | | 45,524 | | | 34,432 | | | 34,832 | |
Supplemental Disclosure of Cash Flow Information: | | | | | | | | | | | Cash paid to third parties for interest | | $ | 45,944 | | $ | 63,564 | | $ | 56,430 | | Cash paid for income taxes | | | 29,708 | | | 39,908 | | | 45,728 | |
See accompanying notes to consolidated financial statements.statements Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements NOTE 1—ORGANIZATION ORGANIZATION
These financial statements represent the consolidated financial position and results of operations of Walker & Dunlop, Inc. and its subsidiaries. Unless the context otherwise requires, references to “we,” “us,” “our,” “Walker & Dunlop” and the “Company” mean the Walker & Dunlop consolidated companies. companies. Walker & Dunlop, Inc. is a holding company and conducts the majority of its operations through Walker & Dunlop, LLC, the operating company. Walker & Dunlop is one of the leading commercial real estate services and finance companies in the United States. The Company originates, sells, and services a range of multifamily and other commercial real estate debt and equity financing products, and provides multifamily investmentproperty sales brokerage services, and engages in commercial real estate investment management activities. Through its mortgage bankers and property sales brokers, the Company offers its customers agency lending, debt brokerage, and principal lending and investing products and multifamily property sales services. The Through its agency lending products, the Company originates and sells loans pursuant to the programs of the Federal National Mortgage Association (“Fannie Mae”) and, the Federal Home Loan Mortgage Corporation (“Freddie Mac,”Mac” and, together with Fannie Mae, the “GSEs”), the Government National Mortgage Association (“Ginnie Mae”), and the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (together with Ginnie Mae, “HUD”). Through its debt brokerage products, the Company brokers, and in some cases services, loans for various life insurance companies, commercial banks, commercial mortgage-backed securities issuers, and other institutional investors, in which cases the Company does not fund the loan. The Company also offersprovides a proprietary loan program offeringvariety of commercial real estate debt and equity solutions through its principal lending and investing products, including interim loans (the “Interim Program”). During the second quarter of 2017,and preferred equity on commercial real estate properties. Interim loans on multifamily properties are offered (i) through the Company formedand recorded on the Company’s balance sheet (the “Interim Loan Program”) and (ii) through a joint venture with an affiliate of one ofBlackstone Mortgage Trust, Inc., in which the world’s largest owners of commercial real estate to originate, finance, and hold loans that previously met the criteria of the Interim Program (the “Interim Program JV”). The Interim Program JV assumes full risk of loss while the loans it originates are outstanding. The Company holds a 15% ownership interest in the joint venture and is responsible for underwriting, servicing, and asset-managing the(the “Interim Program JV”). Interim loans originatedon all commercial real estate property types are also offered through separate accounts managed by the Interim Program JV. The Interim Program JVCompany’s subsidiary, Walker & Dunlop Investment Partners (“WDIP”), formerly known as JCR Capital Investment Corporation. Preferred equity on commercial real estate properties are offered through funds its operations using a combination of equity contributions from the partners and third-party credit facilities. managed by WDIP.
The Company expects that substantially all loans satisfyingbrokers the criteriasale of multifamily properties through its wholly owned subsidiary, Walker & Dunlop Investment Sales (“WDIS”). In some cases, the Company also provides the debt financing for the Interim Program will be originated by the Interim Program JV going forward; however, the Company may opportunistically originate loans held for investment through the Interim Program in the future. During the third quarter of 2017, the Company sold certain loans from its portfolio of interim loans with an unpaid principal balance of $119.8 million to the Interim Program JV at par. The Company does not expect to sell additional loans held for investment to the Interim Program JV. The Company does not consolidate the activities of the Interim Program JV; therefore, it accounts for the activities associated with its ownership interest using the equity method.property sale. NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation—The consolidated financial statements include the accounts of the CompanyWalker & Dunlop, Inc., its wholly owned subsidiaries, and all of its consolidated entities.majority owned subsidiaries. All intercompany balances and transactions have been eliminated. Wheneliminated in consolidation. The Company consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or voting interest model. The Company is required to first apply the VIE model to determine whether it holds a variable interest in an entity, and if so, whether the entity is a VIE. If the Company determines it does not hold a variable interest in a VIE, it then applies the voting interest model. Under the voting interest model, the Company consolidates an entity when it holds a majority voting interest in an entity. If the Company does not have a majority voting interest but has significant influence, over operating and financial decisions forit uses the equity method of accounting. In instances where the Company owns less than 100% of the equity interests of an entity but does not ownowns a majority of the voting interests or has control over an entity, the Company accounts for the investment usingportion of equity not attributable to Walker & Dunlop, Inc. as Noncontrolling interests on the equity methodbalance sheet and the portion of accounting. net income not attributable to Walker & Dunlop, Inc. as Net income from noncontrolling interests in the income statement. Subsequent Events—The Company has evaluated the effects of all events that have occurred subsequent to December 31, 2017.2020. There have been no material events that would require recognition in the consolidated financial statements. The Company has made certain disclosures in the notes to the consolidated financial statements of events that have occurred subsequent to December 31, 2017. No other material subsequent events have occurred that would require disclosure. Use of Estimates—The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, including guaranty obligations, allowance for risk-sharing obligations, capitalized mortgage servicing rights, derivative instruments, and the disclosure of contingent assets and liabilities. Actual results may vary from these estimates. COVID-19—In January 2020, the first cases of a novel strain of the coronavirus known as Coronavirus Disease 2019 (“COVID-19”) were reported in the U.S., and in March 2020, the World Health Organization recognized the virus as a global pandemic. In the months since, Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements Gains from Mortgage Banking Activitiesthe COVID-19 pandemic has caused significant global economic disruption as a result of the measures taken by countries and Mortgage Servicing Rights—Gains from mortgage banking activities income is recognized whenlocal municipalities to contain the spread of the virus (the “COVID-19 Crisis” or the “Crisis”). In the U.S., the only country in which the Company records a derivative asset uponoperates, federal, state and local authorities have taken actions to contain the commitment to originate a loan with a borrower and sell the loan to an investor. This commitment asset is recognized at fair value, which reflects the fair valuespread of the contractual loan origination related fees and sale premiums, net of any co-broker fees,virus while simultaneously providing substantial liquidity to Americans, domestic businesses, and the estimated fair valuefinancial markets in an effort to mitigate the adverse financial impact of the expected netvirus.
The COVID-19 Crisis has had an immaterial impact on the Company’s operations, its cash flows, associated withand the servicingamount and availability of its liquidity. The Company has made adjustments to its estimate of expected credit losses under both the Fannie Mae Delegated Underwriting and ServicingTM (“DUS”) program and the loans originated and held by the Company as a result of the loan, netCrisis. Transfers of the estimated net future cash flows associated with any guaranty obligations retained. For loans the Company brokers, gains from mortgage banking activities are recognized when the loan is closed and represent the origination fee earned by the Company. The co-broker fees for the years ended December 31, 2017, 2016, and 2015 were $19.3 million, $35.8 million, and $18.0 million, respectively. TransferFinancial Assets—Transfers of financial assets isare reported as a salesales when (a)(i) the transferor surrenders control over those assets, (b)(ii) the transferred financial assets have been legally isolated from the Company’s creditors, (c)(iii) the transferred assets can be pledged or exchanged by the transferee, and (d)(iv) consideration other than beneficial interests in the transferred assets is received in exchange. The transferor is considered to have surrendered control over transferred assets if, and only if, certain conditions are met. The Company determined that all loans sold during the periods presented met these specific conditions and accounted for all transfers of loans held for sale as completed sales.sales, except as otherwise noted.
Derivative Assets and Liabilities—Loan commitments that meet the definition of a derivative are recorded at fair value on the Consolidated Balance Sheets upon the executions of the commitments to originate a loan with a borrower and to sell the loan to an investor, with a corresponding amount recognized as revenue on the Consolidated Statements of Income. The estimated fair value of loan commitments includes (i) the fair value of loan origination fees and premiums on anticipated sale of the loan, net of co-broker fees (included in Derivative assets in the Consolidated Balance Sheets and as a component of Loan origination and debt brokerage fees, net in the Consolidated Income Statements), (ii) the fair value of the expected net cash flows associated with the servicing of the loan, net of any estimated net future cash flows associated with the guarantee obligation (included in Derivative assets in the Consolidated Balance Sheets and in Fair value of expected net cash flows from servicing, net in the Consolidated Income Statements), and (iii) the effects of interest rate movements between the trade date and balance sheet date. Loan commitments are generally derivative assets but can become derivative liabilities if the effects of the interest rate movement between the trade date and the balance sheet date are greater than the combination of (i) and (ii) above. Forward sale commitments that meet the definition of a derivative are recorded as either derivative assets or derivative liabilities depending on the effects of the interest rate movements between the trade date and the balance sheet date. Adjustments to the fair value are reflected as a component of income within Loan origination and debt brokerage fees, net in the Consolidated Statements of Income. The co-broker fees for the years ended December 31, 2020, 2019, and 2018 were $33.1 million, $20.6 million and $22.8 million, respectively. Mortgage Servicing Rights—When a loan is sold and the Company retains the right to service the loan, the aforementioned derivative asset is reclassified and initially recognizescapitalized as an individual originated mortgage servicing right (“MSR”OMSR”) for the loan sold at fair value. The initial capitalized amount is equal to the estimated fair value of the expected net cash flows associated with servicing the loans, net of the expected net cash flows associated with any guaranty obligations. The following describes the principal assumptions used in estimating the fair value of capitalized MSRs:OMSRs. Discount rateRate—Depending upon loan type, the discount rate used is management's best estimate of market discount rates. The rates used for loans sold were between 10% toand 15% for each of the periods presented and varied based on loan type. Estimated Life—The estimated life of the MSRsOMSRs is derived based upon the stated yield maintenance and/orterm of the prepayment protection termprovisions of the underlying loan and may be reduced by 6six to 12 months based upon the expiration or reduction of various types ofthe prepayment provisions and/or lockout provisions prior to thatthe stated maturity date. The Company’s model for originated MSRsOMSRs assumes no prepayment while the prepayment provisions have not expired and full prepayment of the loan at or near the point where the prepayment provisions have expired. The Company’s historical experience is that the prepayment provisions typically do not provide a significant deterrent to a borrower’s paying off the loan within 6six to 12 months of the expiration of the prepayment provisions. Escrow Earnings—The estimated earnings rate on escrow accounts associated with the servicing of the loans for the life of the OMSR is added to the estimated future cash flows. Servicing Cost—The estimated future cost to service the loan for the estimated life of the MSROMSR is subtracted from the estimated future cash flows. Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements The assumptions used to estimate the fair value of MSRscapitalized OMSRs at loan sale are based on internal models and are compared to assumptions used by other market participants periodically. When such comparisons indicate that these assumptions have changed significantly, the Company adjusts its assumptions accordingly. For example, during the year ended December 31, 2020, the Company adjusted the escrow earnings rate assumptions twice based on changes observed from other market participants. Subsequent to the initial measurement date, MSRsOMSRs are amortized using the interest method over the period that servicing income is expected to be received and presented as a component of Amortization and depreciation in the Consolidated Statements of Income. For MSRs recognized at loan sale, theThe individual loan-level MSROMSR is written off through a charge to Amortization and depreciation when a loan prepays, defaults, or is probable of default. We evaluateThe Company evaluates all MSRs for impairment quarterly. The Company tests for impairment onpredominant risk characteristic affecting the purchased stand-alone servicingOMSRs is prepayment risk, and we do not believe there is sufficient variation within the portfolio separately from the Company’s other MSRs. The MSRs from both stand-alone portfolio purchases and from loan sales are tested forto warrant stratification. Therefore, we assess OMSR impairment at the portfolio level. The Company engages a third party to assist in determining an estimated fair value of our existing and outstanding MSRs on at least a semi-annual basis. The Company tests for impairment on purchased stand-alone servicing portfolios (“PMSRs”) separately from the Company’s OMSRs. The fair value of MSRs acquired through a stand-alone servicing portfolio purchasePMSRs is equal to the purchase price paid. For purchased stand-alone servicing portfolios, we recordPMSRs, the Company records a portfolio-level MSR asset and determinedetermines the estimated Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
life of the portfolio based on the prepayment characteristics of the portfolio. WeThe Company subsequently amortizeamortizes such MSRsPMSRs and testtests for impairment quarterly as discussed in more detail above. For MSRs related to purchased stand-alone servicing portfolios,PMSRs, a constant rate of prepayments and defaults is included in the determination of the portfolio’s estimated life (and thus included as a component of the portfolio’s amortization). Accordingly, prepayments and defaults of individual MSRsloans do not change the level of amortization expense recorded for the portfolio unless the pattern of actual prepayments and defaults varies significantly from the estimated pattern. When such a significant difference in the pattern of estimated and actual prepayments and defaults occurs, wethe Company prospectively adjustadjusts the estimated life of the portfolio (and thus future amortization) to approximate the actual pattern observed. The Company made adjustments to the estimated life of 2 of its PMSRs during 2020 as the actual experience of prepayments differed materially from the estimated prepayments. Guaranty Obligation, and Allowance for Risk-sharing Obligations—net—When a loan is sold under the Fannie Mae DUS program, the Company undertakes an obligation to partially guarantee the performance of the loan. Upon loan sale, a liability for the fair value of the obligation undertaken in issuing the guaranty is recognized and presented as Guaranty obligation, net of accumulated amortization on the Consolidated Balance Sheets. The recognized guaranty obligation is the greater of the fair value of the Company’s obligation to stand ready to perform, including credit risk, over the term of the guaranty (the noncontingent guaranty) and the fair value of the Company’s obligation to make future payments should those triggering events or conditions occur (contingent guaranty).guaranty. Historically, the fair value of the contingent guaranty at inception has been de minimis; therefore, the fair value of the noncontingent guaranty has been recognized. In determining the fair value of the guaranty obligation, the Company considers the risk profile of the collateral, historical loss experience, and various market indicators. Generally, the estimated fair value of the guaranty obligation is based on the present value of the cash flows expected to be paid under the guaranty over the estimated life of the loan (historically three to five basis points per year) discounted using a 12-15 percent discount rate. The discount rate used is consistent with what is used for the calculation of the MSRmortgage servicing right for each loan. The estimated life of the guaranty obligation is the estimated period over which the Company believes it will be required to stand ready under the guaranty. Subsequent to the initial measurement date, the liability is amortized over the life of the guaranty period using the straight-line method as a component of and reduction to Amortization and depreciation in the Consolidated Statements of Income.
Recently Adopted and Recently Announced Accounting Pronouncements—In the second quarter of 2016, Accounting Standards Update 2016-13 (“ASU 2016-13”), Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments was issued. ASU 2016-13 (the “Standard”) represents a significant change to the incurred loss model previously used to account for credit losses. The Standard requires an entity to estimate the credit losses expected over the life of the credit exposure upon initial recognition of that exposure. The expected credit losses consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Exposures with similar risk characteristics are required to be grouped together when estimating expected credit losses. The initial estimate and subsequent changes to the estimated credit losses are required to be reported in current earnings in the income statement and through an allowance on the balance sheet. ASU 2016-13 is applicable to financial assets subject to credit losses and measured at amortized cost and certain off-balance-sheet credit exposures. The Standard modified the way the Company estimates its allowance for risk-sharing obligations and its allowance for loan losses and the way it assesses impairment on its pledged AFS securities. ASU 2016-13 requires modified retrospective application to all outstanding, in-scope instruments, with a cumulative-effect adjustment recorded to opening retained earnings as of the beginning of the period of adoption. Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements The Company adopted the Standard as required on January 1, 2020. The Company recognized an increase of $31.6 million in Allowance for Risk-Sharing Obligations with a cumulative-effect adjustment, net of tax, recorded to opening retained earnings of $23.7 million and deferred tax assets of $7.9 million. The adjustment to the allowance for loan losses for the Company’s loans held for investment was immaterial. There was no impact to AFS securities because the portfolio consists of agency-backed securities that inherently have an immaterial risk of loss. Prior to the adoption of the Standard discussed above, the Company recognized credit losses on risk-sharing loans and loans held for investment under the incurred loss model by identifying loans that may be probable of loss based on an assessment of several qualitative and quantitative factors. Initial loss recognition historically occurred at or before a loan became 60 days delinquent (“specific reserve”). In addition to the specific reserve, the Company recorded an allowance for credit losses on risk-sharing loans on the Company’s watch list that were not probable of foreclosure, but probable of loss as the characteristics of these loans indicated that these loans are probable of losses even though the loss could not be attributed to a specific loan (“general reserve”). Lastly, for loans sold under Fannie Mae’s DUS program, the Company typically agreed to guarantee a portion of the ultimate loss incurred should a borrower fail to perform (“Guarantee Obligation”). The Company recorded a Guaranty Obligation liability to account for the Company’s obligations related to the Fannie Mae DUS guarantee. When the Company placed a risk-sharing loan on its watch list, it transferred the remaining unamortized balance of the guaranty obligation to the general reserves. If a risk-sharing loan was subsequently removed from the watch list due to improved financial performance, the Company transferred the unamortized balance of the guaranty obligation back to the guaranty obligation classification on the balance sheet and amortized the remaining unamortized balance evenly over the remaining estimated life. For each loan for which the Company had a risk-sharing obligation, it recorded one of the following liabilities associated with that loan as discussed above: guaranty obligation, general reserve, or specific reserve. Although the liability type may have changed over the life of the loan, at any particular point in time, only one such liability was associated with a loan for which the Company had a risk-sharing obligation. For risk-sharing loans, the Company recorded a liability to Allowance for Risk-Sharing Obligations for the estimated risk-sharing loss through a charge to the provision for risk-sharing obligations, which is a component of Provision (benefit) for credit lossesin the Consolidated Statements of Income unless,for both the specific and general reserves. For the Guarantee Obligation, the Company recorded a liability to Guaranty Obligation, net on the Consolidated Balance Sheets and included the charge to the Consolidated Statements of Income as discussed more fully below,a reduction in Fair value of expected net cash flows from servicing, net. For loans held for investment, the Company recorded an allowance for loan losses and a charge to provision for loan losses, which is a component of Provision (benefit) for credit losses. There were no other accounting pronouncements issued during 2020 that have the potential to impact the Company’s consolidated financial statements. Allowance for Risk-Sharing Obligations—Substantially all loans sold under the Fannie Mae DUS program contain partial or full risk-sharing guaranties that are based on the performance of the loan defaults, or management determinesserviced in the at-risk servicing portfolio. The Company records an estimate of the loss reserve for the current expected credit losses (“CECL”) for all loans in our Fannie Mae at-risk servicing portfolio and presents this loss reserve as Allowance for Risk-Sharing Obligations on the Consolidated Balance Sheets. Overall Current Expected Credit Losses Approach The Company uses the weighted-average remaining maturity method (“WARM”) for calculating its allowance for risk-sharing obligations, the Company’s liability for the off-balance-sheet credit exposure associated with the Fannie Mae at-risk DUS loans. WARM uses an average annual charge-off rate that contains loss content over multiple vintages and loan terms and is used as a foundation for estimating the CECL reserve. The average annual charge-off rate is applied to the unpaid principal balance (“UPB”) over the contractual term, adjusted for estimated prepayments and amortization to arrive at the CECL reserve for the entire current portfolio as described further below. The Company maximizes the use of historical internal data because the Company has extensive historical data servicing Fannie Mae DUS loans from which to calculate historical loss rates and principal paydown by loan term type for its exposure to credit loss on its homogeneous portfolio of Fannie Mae DUS multifamily loans. Additionally, the Company believes its properties, loss history, and underwriting standards are not similar to public data such as loss histories for loans originated for collateralized mortgage-backed securities conduits. Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements Runoff Rate One of the key inputs into a WARM calculation is the runoff rate, which is the expected rate at which loans in the current portfolio will prepay and amortize in the future. As the loans the Company originates have different original lives and run off over different periods, the Company groups loans by similar origination dates (vintage) and contractual maturity terms for purposes of calculating the runoff rate. The Company originates loans under the DUS program with various terms generally ranging from several years to 15 years; each of these various loan terms has a different runoff rate. The Company uses its historical runoff rate for each of the different loan term pools as a proxy for the expected runoff rate. The Company believes that borrower behavior and macroeconomic conditions will not deviate significantly from historical performance over the approximately ten-year period in which the Company has compiled the actual loss data. The ten-year period captures the various cycles of industry performance and provides a period that is long enough to capture sufficient observations of runoff history. In addition, due to the prepayment protection provisions for Fannie Mae DUS loans, the Company has not seen significant volatility in historical prepayment rates due to changes in interest rates and would not expect this to change materially in future periods. The historical annual runoff rate is calculated for each year of a loan’s life for each vintage in the portfolio and aggregated with the calculated runoff rate for each comparable year in every vintage. For example, the annual runoff rate for the first year of loans originated in 2010 is aggregated with the annual runoff rate for the first year of loans originated in 2011, 2012, and so on to calculate the average annual runoff rate for the first year of a loan. This average runoff calculation is performed for each year of a loan’s life for each of the various loan terms to create a matrix of historical average annual runoffs by year for the entire portfolio. The Company segments its current portfolio of at-risk DUS loans outstanding by original loan term type and years remaining and then applies the appropriate historical average runoff rates to calculate the expected remaining balance at the end of each reporting period in the future. For example, for a loan with an original ten-year term and seven years remaining, the Company applies the historical average annual runoff rate for a ten-year loan for year four to arrive at the estimated remaining UPB one year from the current period, the historical average runoff rate for year five to arrive at the estimated remaining UPB two years from the current period, and so on up to the loan’s risk profilematurity date. CECL Reserve Calculation Once the Company has calculated the estimated outstanding UPB for each future year until maturity for each loan term type, the Company then applies the average annual charge-off rate (as further described below) to each future year’s estimated UPB. The Company then aggregates the allowance calculated for each year within each loan term type and for all different maturity years to arrive at the CECL reserve for the portfolio. The weighted-average annual charge-off rate is suchcalculated using a ten-year look-back period, utilizing the average portfolio balance and settled losses for each year. A ten-year period is used as the Company believes that amortization should cease.this period of time includes sufficiently different economic conditions to generate a reasonable estimate of expected results in the future, given the relatively long-term nature of the current portfolio. This approach captures the adverse impact of the years following the great financial crisis of 2007-2010 because multifamily commercial loans have a lag period from the time of initial distress indications through the timing of loss settlement. The same loss rate is utilized across each loan term type as the Company has not observed any historical or industry-published data to indicate there is any difference in the occurrence probability or loss severity for a loan based on its loan origination term. Reasonable and Supportable Forecast Period The Company currently uses one year for its reasonable and supportable forecast period (the “forecast period”). The Company uses a forecast of unemployment rates, historically a highly correlated indicator for multifamily occupancy rates, to assess what macroeconomic and multifamily market conditions are expected to be like over the coming year. The Company then associates the forecasted conditions with a similar historical period over the past ten years, which could be one or several years, and uses the Company’s average loss rate for that historical period as a basis for the loss rate used for the forecast period. The Company reverts to a historical loss rate over a one-year period utilizing a method similar to straight-line basis. For all remaining years until maturity, the Company uses the weighted-average annual charge-off rate as described above to estimate losses. The average loss rate from a historical period used for the forecast period may be adjusted as necessary if the forecasted macroeconomic and industry conditions differ materially from the historical period. Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements Identification of Specific Reserves for Defaulted Loans The Company monitors the performance of each risk-sharing loan for events or conditions which may signal a potential default. OurThe Company’s process for identifying which risk-sharing loans may be probable of lossdefault consists of an assessment of several qualitative and quantitative factors, including payment status, property financial performance, local real estate market conditions, loan-to-value ratio, debt-service-coverage ratio (“DSCR”), property condition, and property condition. Historically, initial loss recognition occurs atfinancial strength of the borrower or before a loan becomes 60 days delinquent.key principal(s). In instances where payment under the guaranty on a specific loan is determined to be probable and estimable (as the loan is probable of foreclosure or in foreclosure)has foreclosed), the Company records a liability forseparately measures the estimated allowance forexpected loss through an assessment of the underlying fair value of the asset, disposition costs, and the risk-sharing (apercentage (the “specific reserve”) through a charge to the provision for risk-sharing obligations, which is a component of Provision (benefit) for credit losses in the Consolidated Statements of Income, along with a write-off ofIncome. These loans are removed from the WARM calculation described above, and the associated loan-specific MSR.mortgage servicing right and guaranty obligation are written off. The expected loss on the risk-sharing obligation is dependent on the fair value of the underlying property as the loans are collateral dependent. Historically, initial recognition of a specific reserve occurs at or before a loan becomes 60 days delinquent. The amount of the allowancespecific reserve considers the Company’s assessment of the likelihood of repayment by the borrower or key principal(s), the risk characteristics of the loan, the loan’s risk rating, historical loss experience, adverse situations affecting individual loans, the estimated disposition value of the underlying collateral, and the level of risk sharing. The estimate of property fair value at initial recognition of the allowance for risk-sharing obligationsspecific reserve is based on appraisals, broker opinions of value, or net operating income and market capitalization rates, depending on the facts and circumstances associated with the loan.We The Company regularly monitormonitors the specific reserves on all applicable loans and updateupdates loss estimates as current information is received. The settlement with Fannie Mae is based on the actual sales price of the property and selling and property preservation costs and considers the Fannie Mae loss-sharing requirements. In addition to the specific reserves discussed above,loss the Company also records an allowance for risk-sharing obligations related to risk-sharing loans on its watch list (“general reserves”). Such loans are not probableabsorbs at the time of foreclosure but are probable of loss as the characteristics of these loans indicate that itdefault is probable that these loans include some losses even though the loss cannot be attributed to a specific loan. For all other risk-sharing loans not on our watch list, the Company continues to carry a guaranty obligation. The Company calculates the general reserves based on a migration analysisgenerally 20% of the loans on its historical watch lists, adjusted for qualitative factors. When the Company places a risk-sharing loan on its watch list, the Company transfers the remaining unamortized balanceorigination UPB of the guaranty obligation to the general reserves. The Company recognizes a provision for risk-sharing obligations to the extent the calculated general reserve exceeds the remaining unamortized guaranty obligation. If a risk-sharing loan is subsequently removed from the watch list due to improved financial performance or other factors, the Company transfers the unamortized balance of the guaranty obligation back to the guaranty obligation classification on the balance sheet and amortizes the remaining unamortized balance evenly over the remaining estimated life.loan.
For each loan for which we have a risk-sharing obligation, we record one of the following liabilities associated with that loan as discussed above: guaranty obligation, general reserve, or specific reserve. Although the liability type may change over the life of the loan, at any particular point in time, only one such liability is associated with a loan for which we have a risk-sharing obligation. The total of the specific reserves and general reserves is presented as Allowance for risk-sharing obligations in the Consolidated Balance Sheets.
Loans Held for Investment, net—Loans held for investment are multifamily loans originated by the Company through the Interim Loan Program for properties that currently do not qualify for permanent GSE or HUD (collectively, the “Agencies”) financing. These loans have terms of up to three years and are all interest-only, multifamily loans with similar risk characteristics and no geographic concentration. The loans are carried at their unpaid principal balances, adjusted for net unamortized loan fees and costs, and net of any allowance for loan losses. Interest income is accrued based on the actual coupon rate, adjusted for the level-yield amortization of net deferred fees and costs, and is recognized as revenue when earned and deemed collectible. As of December 31, 2017, 2020, Loans held for investment, net consisted of 518 loans with an aggregate $67.0$366.3 million of unpaid principal balance less $0.4$1.1 million of net unamortized deferred fees and costs and $0.1$4.8 million of allowance for loan losses. As of December 31, 2016, 2019, Loans held for investment, net consisted of 1222 loans with an aggregate $222.3$546.6 million of unpaid principal balance less $1.5$2.0 million of net unamortized deferred fees and costs and $0.4$1.1 million of allowance for loan losses.losses During the third quarter of 2018, the Company transferred a portfolio of participating interests in loans held for investment to a third party that is scheduled to mature in the third quarter of 2021. The Company accounted for the transfer as a secured borrowing. The aggregate unpaid principal balance of the loans of $81.5 million and $78.3 million is presented as a component of Loans held for investment, net in the Consolidated Balance Sheets as of December 31, 2020 and December 31, 2019, respectively, and the secured borrowing of $73.3 million and $70.5 million is included within Other liabilities in the Consolidated Balance Sheets as of December 31, 2020 and 2019, respectively. The Company does not have credit risk related to the $73.3 million of loans that were transferred. The Company assesses the credit quality of loans held for investment in the same manner as it does for the loans in the Fannie Mae at-risk portfolio as described above and records an allowance for loan losses is the Company’s estimate of credit losses inherent in the loan portfolio at the balance sheet date.these loans as necessary. The allowance for loan losses is estimated collectively for loans with similar characteristics and for which there is no evidence of impairment.characteristics. The collective allowance is based on recent historical loss probabilitythe same methodology that the Company uses to estimate its CECL reserves for at-risk Fannie Mae DUS loans as described above (with the exception of a reversion period) because the nature of the underlying collateral is the same, and historical loss rates incurredthe loans have similar characteristics, except they are significantly shorter in our risk-sharing portfolio, adjusted as neededmaturity. The reasonable and supportable forecast period used for current market conditions. We use the loss experience from our risk-sharing portfolio as a proxyCECL allowance for losses incurred in our loans held for investment portfolio since (i) we have not experienced any actual losses related to our loans heldis one year. The loss rate for investment to datethe forecast period was 36 basis points and (ii) the loans in the loans-held-for-investment portfolio have similar characteristics to loans held in the risk-sharing portfolio. The allowance for loan losses recorded9 basis points as of December 31, 20172020 and January 1, 2020, respectively. The loss rate for the remaining period until maturity was 9 basis points as of both December 31, 2016 is based on the Company’s collective assessment of the portfolio.2020 and January 1, 2020. None of the loansNaN loan held for investment with an unpaid principal balance of $14.7 million was delinquent impaired, orand on non-accrual status as of December 31, 2017 or2020. The Company had $3.7 million and $0.6 million in specific reserves for this loan as of December 31, 2016. Additionally, we have2020 and 2019, respectively, and has not recorded any interest related to this loan since it went on non-accrual status. All other loans were current as of December 31, 2020 and 2019. The amortized cost basis of loans that were current as of December 31, 2020 and 2019 was $350.5 million and $529.9 million,
Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements respectively. As of December 31, 2020, $81.5 million of the loans that were current were originated in 2018, while $152.3 million were originated in 2019, and $117.8 million were originated in 2020. Prior to 2019, the Company had not experienced any delinquencies related to these loans or charged off any loan held for investment since the inception of the Interim Program in 2012.investment. Provision (Benefit) for Credit Losses—The Company records the income statement impact of the changes in the allowance for loan losses and the allowance for risk-sharing obligations within Provision (benefit) for credit losses in the Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Consolidated Statements of Income. NOTE 4 contains additional discussion related to the allowance for risk-sharing obligations. Provision (benefit) for credit losses consisted of the following activity for the years ended December 31, 2017, 2016,2020, 2019, and 2015:2018: | | | | | | | | | | | (in thousands) | | 2017 | | 2016 | | 2015 | | Benefit for loan losses | | $ | (294) | | $ | (467) | | $ | (36) | | Provision (benefit) for risk-sharing obligations | | | 51 | | | (145) | | | 1,680 | | Provision (benefit) for credit losses | | $ | (243) | | $ | (612) | | $ | 1,644 | |
| | | | | | | | | | | Components of Provision for Credit Losses (in thousands) | | 2020 | | 2019 | | 2018 | | Provision for loan losses | | $ | 3,739 | | $ | 875 | | $ | 128 | | Provision for risk-sharing obligations | | | 33,740 | | | 6,398 | | | 680 | | Provision for credit losses | | $ | 37,479 | | $ | 7,273 | | $ | 808 | | | | | | | | | | | | |
Business Combinations—The Company accounts for business combinations using the acquisition method of accounting, under which the purchase price of the acquisition is allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. The Company recognizes identifiable assets acquired and liabilities (both specific and contingent) assumed at their fair values at the acquisition date. Furthermore, acquisition-related costs, such as due diligence, legal and accounting fees, are not capitalized or applied in determining the fair value of the acquired assets. The excess of the purchase price over the assets acquired, identifiable intangible assets and liabilities assumed is recognized as goodwill. During the measurement period, the Company records adjustments to the assets acquired and liabilities assumed with corresponding adjustments to goodwill in the reporting period in which the adjustment is identified. After the measurement period, which could be up to one year after the transaction date, subsequent adjustments are recorded to the Company’s Consolidated Statements of Income. Goodwill—The Company evaluates goodwill for impairment annually. In addition to the annual impairment evaluation, the Company evaluates at least quarterly whether events or circumstances have occurred in the period subsequent to the annual impairment testing which indicate that it is more likely than not an impairment loss has occurred. The Company currently has only one1 reporting unit; therefore, all goodwill is allocated to that one1 reporting unit. The Company performs its impairment testing annually as of October 1. The annual impairment analysis begins by comparingFor the 2020 assessment, the Company performed a qualitative assessment and also considered the comparison of the Company’s market capitalization to its net assets. IfBased on the market capitalization exceeds2020 qualitative assessment performed, the net asset value, further analysis isCompany did not required, and goodwill is not considered impaired. As of the date of our latest annualobserve any events or circumstances indicating an impairment test, October 1, 2017, the Company’s market capitalization exceeded its net asset value by $937.9 million, or 131.8%.in goodwill. As of December 31, 2017,2020, there have been no events subsequent to that analysis that are indicative of an impairment loss. Derivative Assets and Liabilities—Certain loan commitments and forward sales commitments meet the definition of a derivative and are recorded at fair value in the Consolidated Balance Sheets. The estimated fair value of loan commitments includes the fair value of loan origination fees and premiums on anticipated sale of the loan, net of co-broker fees, and the fair value of the expected net cash flows associated with the servicing of the loan, net of any estimated net future cash flows associated with the risk-sharing obligation. The estimated fair value of forward sale commitments includes the effects of interest rate movements between the trade date and balance sheet date. Adjustments to the fair value are reflected as a component of income within Gains on mortgage banking in the Consolidated Statements of Income.
Loans Held for Sale—Loans held for sale represent originated loans that are generally transferred or sold within 60 days from the date that a mortgage loan is funded. The Company initially measureselects to measure all originated loans at fair value. Subsequent to initial measurement, the Company measures all mortgage loans at fair value, unless the Company documents at the time the loan is originated that it will measure the specific loan at the lower of cost or fair value for the life of the loan. Electing to use fair value allows a better offset of the change in fair value of the loan and the change in fair value of the derivative instruments used as economic hedges. During the period prior to its sale, interest income on a loan held for sale is calculated in accordance with the terms of the individual loan. There were no0 loans held for sale that were valued at the lower of cost or fair value or on a non-accrual status at December 31, 20172020 and 2016.2019. Share-Based Payment—The Company recognizes compensation costs for all share-based payment awards made to employees and directors, including restricted stock, restricted stock units, and employee stock options based on the grant date fair value. Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Restricted stock awards are granted without cost to the Company’s officers, employees, and non-employee directors, for which the fair value of the award wasis calculated as the fair value of the Company’s common stock on the date of grant. Stock option awards arewere granted to executive officers in the past, with an exercise price equal to the closing price of the Company’s common stock on the date of the grant, and arewere granted with a ten-year exercise period, vesting ratably over three years dependent solely on continued employment. To estimate the grant-date fair value of stock options, the Company usesused the Black-Scholes pricing model. The Black-Scholes model estimates the per share fair value of an option on its date of grant based on the following inputs: the option’s exercise price, the price of the underlying stock on the date of the grant, the estimated option life, the estimated dividend yield, a “risk-free” interest rate, and the expected volatility. For each of the years presented,option awards, the Company used the simplified method to estimate the expected term of the options as the Company did not have sufficient historical exercise data to provide a reasonable basis for estimating the expected term. The Company has historically used an estimated dividend yield of zero0 as the Company’s stock options arewere not dividend eligible and at the time of grant there was no expectation that the Company would pay a dividend. For the “risk-free” rate, the Company usesused a U.S. Treasury Note due in a number of years equal to the option’s Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements expected term. For all years presented in the Consolidated Statements of Income,option awards, the expected volatility was calculated based on the Company’s historical common stock volatility. The Company issues new shares from the pool of authorized but not yet issued shares when an employee exercises stock options. The Company did not grant any stock option awards in 2018, 2019, or 2020 and does not expect to issue stock options for the foreseeable future. Generally, the Company’s stock option and restricted stock awards for its officers and employees vest ratably over a three-year period based solely on continued employment. Restricted stock awards for non-employee directors fully vest after one year. Some of the Company’s restricted stock awards vest over a period of up to eight years. In 2014, 2016, and 2017, theThe Company has offered a performance share plan (“PSP”) over the past several years for the Company’s executives and certain other members of senior management. The performance period for each PSP is three full calendar years beginning on January 1 of the first year of the performance period.grant year. Participants in the PSP receive restricted stock units (“RSUs”) on the grant date for the PSP in an amount equal to achievement of all performance targets at a maximum level. If the performance targets are met at the end of the performance period and the participant remains employed by the Company, the participant fully vests in the RSUs, which immediately convert to unrestricted shares of common stock. If the performance targets are not met at the maximum level, the participant generally forfeits a portion of the RSUs. If the participant is no longer employed by the Company, the participant forfeits all of the RSUs. The performance targets for all the 2014 PSP are based on meeting adjusted diluted earnings per share and total revenues goals. The performance targets forPSPs issued by the 2016 and 2017 PSPsCompany are based on meeting diluted earnings per share, return on equity, and total revenues goals. The Company records compensation expense for the PSP based on the grant-date fair value in an amount proportionate to the service time rendered by the participant when it is probable thatand the expected achievement level of the goals will be met.goals.
Compensation expense for restricted shares and stock options is adjusted for actual forfeitures and is recognized on a straight-line basis, for each separately vesting portion of the award as if the award were in substance multiple awards, over the requisite service period of the award. Share-based compensation is recognized within the income statement as Personnel, the same expense line as the cash compensation paid to the respective employees. Net Warehouse Interest Income—The Company presents warehouse interest income net of warehouse interest expense. Warehouse interest income is the interest earned from loans held for sale and loans held for investment. For the periods presented in the Consolidated Balance Sheets, all loans that were held for sale were financed with matched borrowings under our warehouse facilities incurred to fundGenerally, a specific loan held for sale. Asubstantial portion of allthe Company’s loans that are held for investment is financed with matched borrowings under ourone of its warehouse facilities. The remaining portion of loans held for investment not funded with matched borrowings is financed with the Company’s own cash. The Company also fully funds a small number of loans held for sale or loans held for investment with its own cash. Warehouse interest expense is incurred on borrowings used to fund loans solely while they are held for sale or for investment. Warehouse interest income and expense are earned or incurred on loans held for sale after a loan is closed and before a loan is sold. Warehouse interest income and expense are earned or incurred on loans held for investment after a loan is closed and before a loan is repaid. Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Included in Net warehouse interest income for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 are the following components: | | | | | | | | | | | | | | | | | | | | | | For the year ended December 31, | (in thousands) | | 2017 | | 2016 | | 2015 | Warehouse interest income - loans held for sale | | $ | 61,298 | | $ | 47,523 | | $ | 37,675 | Warehouse interest expense - loans held for sale | | | (46,221) | | | (31,278) | | | (23,134) | Net warehouse interest income - loans held for sale | | $ | 15,077 | | $ | 16,245 | | $ | 14,541 | | | | | | | | | | | Warehouse interest income - loans held for investment | | $ | 15,218 | | $ | 12,808 | | $ | 15,456 | Warehouse interest expense - loans held for investment | | | (5,828) | | | (5,326) | | | (6,037) | Net warehouse interest income - loans held for investment | | $ | 9,390 | | $ | 7,482 | | $ | 9,419 |
| | | | | | | | | | | | | | | | | | | | | | For the year ended December 31, | Components of Net Warehouse Interest Income (in thousands) | | 2020 | | 2019 | | 2018 | Warehouse interest income - loans held for sale | | $ | 53,090 | | $ | 48,211 | | $ | 55,609 | Warehouse interest expense - loans held for sale | | | (35,154) | | | (46,294) | | | (49,616) | Net warehouse interest income - loans held for sale | | $ | 17,936 | | $ | 1,917 | | $ | 5,993 | | | | | | | | | | | Warehouse interest income - loans held for investment | | $ | 17,741 | | $ | 32,059 | | $ | 11,197 | Warehouse interest expense - loans held for investment | | | (6,351) | | | (8,277) | | | (3,159) | Warehouse interest income - secured borrowings | | | 3,449 | | | 3,549 | | | 1,852 | Warehouse interest expense - secured borrowings | | | (3,449) | | | (3,549) | | | (1,852) | Net warehouse interest income - loans held for investment | | $ | 11,390 | | $ | 23,782 | | $ | 8,038 |
Statement of Cash Flows—The Company records the fair value of premiums and origination fees as a component of the fair value of derivatives when aderivative assets on the loan intended to be sold is rate lockedcommitment date and records the related income within Gains from mortgage banking activitiesLoan origination and debt brokerage fees, net within the Consolidated Statements of Income. The cash for the origination fee is received upon closing of the loan, and the cash for the premium is received upon loan sale, resulting in a timing mismatch of the recognition of income and the receipt of cash in a given period when the derivative or loan held for sale remains outstanding at period end. The Company accounts for this mismatch by recording an adjustment called Change in the fair value of premiums and origination fees within the Consolidated Statements of Cash Flows. The amount of the adjustment reflects a reduction to cash provided by or used in operations for the amount of income recognized upon rate lock (i.e., non-cash income) for derivatives and loans held for sale outstanding at period end Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements and an increase to cash provided by or used in operations for cash received upon loan origination or sale for derivatives and loans held for sale that were outstanding at prior period end. When income recognized upon rate lock is greater than cash received upon loan origination or sale, the adjustment is a negative amount. When income recognized upon rate lock is less than cash received upon loan origination or loan sale, the adjustment is a positive amount. For presentation in the Consolidated Statements of Cash Flows, the Company considers Pledged securities, at fair valuepledged cash and cash equivalents (as detailed in NOTE 9) to be restricted cash and restricted cash equivalents. The following table presents a reconciliation of the total of cash, cash equivalents, restricted cash, and restricted cash equivalents as presented in the Consolidated Statements of Cash Flows to the related captions in the Consolidated Balance Sheets as of December 31, 2017, 2016, 2015,2020, 2019, 2018, and 2014.2017. | | | | | | | | | | | | | | | December 31, | | | | | | | | | | | | | | | | | | | December 31, | | (in thousands) | 2017 | | 2016 | | 2015 | | 2014 | | 2020 | | 2019 | | 2018 | | 2017 | | Cash and cash equivalents | $ | 191,218 | | $ | 118,756 | | $ | 136,988 | | $ | 113,354 | | $ | 321,097 | | $ | 120,685 | | $ | 90,058 | | $ | 191,218 | | Restricted cash | | 6,677 | | | 9,861 | | | 5,306 | | | 13,854 | | | 19,432 | | | 8,677 | | | 20,821 | | | 6,677 | | Pledged securities, at fair value (restricted cash equivalents) | | 97,859 | | | 84,850 | | | 72,190 | | | 67,719 | | | Pledged cash and cash equivalents (NOTE 9) | | | 17,473 | | | 7,204 | | | 9,469 | | | 88,785 | | Total cash, cash equivalents, restricted cash, and restricted cash equivalents | $ | 295,754 | | $ | 213,467 | | $ | 214,484 | | $ | 194,927 | | $ | 358,002 | | $ | 136,566 | | $ | 120,348 | | $ | 286,680 | | | | | | | | | | | | | | | |
Income Taxes—The Company files income tax returns in the applicable U.S. federal, state, and local jurisdictions and generally is subject to examination by the respective jurisdictions for three years from the filing of a tax return. The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Deferred tax assets are recognized only to the extent that it is more likely than not that they will be realizable based on consideration of available evidence, including future reversals of existing taxable temporary differences, projected future taxable income, and tax planning strategies. The Company had no accrualsan immaterial accrual for uncertain tax uncertaintiespositions as of December 31, 20172020 and 2016. Comprehensive Income—For the years ended0 accrual as of December 31, 2017, 2016, and 2015, comprehensive income equaled Net income before noncontrolling interests; therefore, a separate statement of comprehensive income is not included in the accompanying consolidated financial statements.2019.
Pledged Securities—As collateral against its Fannie Mae risk-sharing obligations (NOTES 5(NOTES 4 and 10)9), certain securities have been pledged to the benefit of Fannie Mae to secure the Company's risk-sharing obligations. TheSubstantially all of the balance of securities pledged against Fannie Mae risk-sharing obligations and included as a component of Pledged securities, at fair value within the Consolidated Balance Sheets as of December 31, 20172020 and 20162019 was $95.7 millionpledged against Fannie Mae risk-sharing obligations. The Company’s investments included within Pledged securities, at fair value consist primarily of money market funds and $80.5 million, respectively.Agency debt securities. The investments in Agency debt securities consist of multifamily Agency mortgage-backed securities (“Agency MBS”) and are all accounted for as available-for-sale (“AFS”) securities. When the fair value of AFS Agency MBS are lower than the carrying value, the Company assesses whether an allowance for credit losses is necessary. The Company does not record an allowance for credit losses for its AFS securities, including those whose fair value is less than amortized cost, when the AFS securities are issued by the GSEs. The contractual cash flows of these AFS securities are guaranteed by the GSEs, which are government-sponsored enterprises under the conservatorship of the Federal Housing Finance Agency. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of these securities. The Company does not intend to sell any of the Agency MBS, nor does the Company believe that it is more likely than not that it would be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. Contracts with Customers—A majority all of the Company’s revenues are derived from the following sources, all of which are excluded from the accounting provisions applicable to contracts with customers: (i) financial instruments, (ii) transfers and servicing, (iii) derivative transactions, and (iv) investments in debt securities/equity-method investments. The remaining portion of revenues is derived from contracts with customers. The Company’s contracts with customers do not require significant judgment or material estimates that affect the determination of the transaction price (including the assessment of variable consideration), the allocation of the transaction price to performance obligations, and the determination of the timing of the satisfaction of performance obligations. Additionally, the earnings process for the Company’s contracts with customers is not complicated and is generally completed in a short period of time. The Company has pledged an immaterial amount of cash as collateral against its risk-sharing obligations with Fannie Mae and Freddie Mac. The pledged securitieshad 0 contract assets or liabilities as of December 31, 20172020 and 2016 consist primarily2019. The following table presents information about the Company’s contracts with customers for presentation in the Consolidated Statements of Cash Flows.years ended December 31, 2020, 2019, and 2018: | | | | | | | | | | | | Description (in thousands) | | 2020 | | 2019 | | 2018 | | Statement of income line item | Certain loan origination fees | | $ | 64,528 | | $ | 75,599 | | $ | 59,877 | | Loan origination and debt brokerage fees, net | Property sales broker fees, investment management fees, application fees, and other | | | 61,107 | | | 51,885 | | | 35,837 | | Other revenues | Total revenues derived from contracts with customers | | $ | 125,635 | | $ | 127,484 | | $ | 95,714 | | | | | | | | | | | | | | |
Cash and Cash Equivalents—The term cash and cash equivalents, as used in the accompanying consolidated financial statements, includes currency on hand, demand deposits with financial institutions, and short-term, highly liquid investments purchased with an original maturity of three months or less. The Company had no0 cash equivalents as of December 31, 20172020 and 2016.2019. Restricted Cash—Restricted cash represents primarily good faith deposits from borrowers. The Company records a corresponding liability for these good faith deposits from borrowers within Performance deposits from borrowers within in the Consolidated Balance Sheets. Servicing Fees and Other Receivables, Net—Servicing fees and other receivables,Receivables, net represents amounts currently due to the Company pursuant to contractual servicing agreements, investor good faith deposits held in escrow by others, general accounts receivable, and advances of principal and interest payments and tax and insurance escrow amounts if the borrower is delinquent in making loan payments, to the extent such amounts are determined to be reimbursable and recoverable. Substantially all of our receivables are expected to be collected within a short period of time and are with counterparties with high credit quality (such as the Agencies). Additionally, the Company has not experienced any credit losses related to these receivables. Consequently, the Company has not recorded an allowance for credit losses associated with its receivables as of December 31, 2020 and 2019.
Concentrations of Credit Risk—Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, loans held for sale, and derivative financial instruments. The Company places the cash and temporary investments with high-credit-quality financial institutions and believes no significant credit risk exists. The counterparties to the loans held for sale and funding commitments are owners of residential multifamily properties located throughout the United States. Mortgage loans are generally transferred or sold within 60 days from the date that a mortgage loan is funded. There is no material residual counterparty risk with respect to the Company's funding commitments as each potential borrower must make a non-refundable good faith deposit when the funding commitment is executed. The counterparty to the forward sale is Fannie Mae, Freddie Mac, or a broker-dealer that has been determined to be a credit-worthy counterparty by us and our warehouse lenders. There is a risk that the purchase price agreed to by the investor will be reduced in the event of a late delivery. The risk for non-delivery of a loan primarily results from the risk that a borrower does not close on the funding commitment in a timely manner. This risk is generally mitigated by the non-refundable good faith deposit. Recently Adopted Accounting PronouncementsLeases—In the first quarternormal course of 2017, Accounting Standards Update 2017-04 (“ASU 2017-04”), Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, was
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Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
issued. ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating the requirement to calculate the implied fair value of a reporting unit’s goodwill. ASU 2017-04 is effective forbusiness, the Company on January 1, 2020, with early adoption permitted.enters into lease arrangements for all of its office space. All such lease arrangements are accounted for as operating leases. The Company prospectively adopted ASU 2017-04 in the first quarter of 2017. There was no impact to the Company as the Company was not required to measure a goodwill impairment charge.
In the first quarter of 2017, Accounting Standards Update 2017-01 (“ASU 2017-01”), Business Combinations (Topic 805): Clarifying the Definition of a Business, was issued. ASU 2017-01 changed the definition of a business in an effort to assist entities with evaluating whether a set of transferred assets and activities is a business. ASU 2017-01 is effective for the Company on January 1, 2018, with early adoption permitted. The Company prospectively adopted ASU 2017-01 in the first quarter of 2017 with no current impact to the Company.
In the second quarter of 2014, Accounting Standards Update 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606) was issued. ASU 2014-09 represents a comprehensive reform of many of the revenue recognition requirements in GAAP. The guidance in the ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and supersedes or amends much of the industry-specific revenue recognition guidance found throughout the Accounting Standards Codification. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU creates a five-step process for achieving the core principle: 1) identifying the contract with the customer, 2) identifying the performance obligations in the contract, 3) determining the transaction price, 4) allocating the transaction price to the performance obligations, and 5) recognizing revenue when an entity has completed the performance obligations. The ASU also requires additional disclosures that allow users of the financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows resulting from contracts with customers. The guidance permits the use of the full retrospective or modified retrospective transition methods.
The Company adopted ASU 2014-09 in the first quarter of 2018 without a material impact to the Company. Substantially all of the Company’s revenue streams are related to loans, derivatives, financial instruments, and transfers and servicing, all of which are outside the scope of the new standard. The Company has also concluded that ASU 2014-09 will not have a significant impact on the Company’s disclosures related to revenue recognition.
In the first quarter of 2016, Accounting Standards Update 2016-01 (“ASU 2016-01”), Financial Instruments – Overall – Recognition and Measurement of Financial Assets and Financial Liabilities was issued. The guidance requires that unconsolidated equity investments not accounted for under the equity method be recorded at fair value, with changes in fair value recorded through net income. The accounting principles that permitted available-for-sale classification with unrealized holding gains and losses recorded in other comprehensive income for equity securities will no longer be applicable. The guidance is not applicable to debt securities and loans and requires minor changes to the disclosure and presentation of financial instruments. The Company adopted ASU 2016-01 in the first quarter of 2018 with no impact to the Company’s reported financial results.
Recently Announced Accounting Pronouncements—In the first quarter of 2016, Accounting Standards Update 2016-02 (“ASU 2016-02”), Leases (Topic 842) was issued. ASU 2016-02 represents a significant reform to the accounting for leases. Lessees initially recognizerecognizes a lease liability for the obligation to make lease payments and a right-of-use (“ROU”) asset for the right to use the underlying asset for the lease term. The lease liability is measured at the present value of the lease payments over the lease term. The ROU asset is measured at the lease liability amount, adjusted for lease prepayments, accrued rent, lease incentives received, and the lessee’s initial direct costs. LesseesLease expense is generally recognize lease expense for these leasesrecognized on a straight-line basis which is similar to what theyover the term of the lease.
These operating leases do today. ASU 2016-02 requires additional disclosures and is effective fornot provide an implicit discount rate; therefore, the Company January 1, 2019. It also requires entitiesuses the incremental borrowing rate of its note payable at lease commencement to use a modified retrospective approach for leases that existcalculate lease liabilities as the terms on this debt most closely resemble the terms on the Company’s largest leases. The Company’s lease agreements often include options to extend or are entered into afterterminate the beginninglease. Single lease cost related to these lease agreements is recognized on the straight-line basis over the term of the earliest comparative periodlease, which includes options to extend when it is reasonably certain that such options will be exercised and the Company knows what the lease payments will be during the optional periods. Litigation—In the ordinary course of business, the Company may be party to various claims and litigation, none of which the Company believes is material. The Company cannot predict the outcome of any pending litigation and may be subject to consequences that could include fines, penalties, and other costs, and the Company’s reputation and business may be impacted. The Company believes that any liability that could be imposed on the Company in the financial statements with a cumulative-effect adjustment to retained earnings recorded at the earliest comparative period. The Financial Accounting Standards Board (“FASB”) recently issued a proposed update to ASU 2016-02 that would provide companiesconnection with the option todisposition of any pending lawsuits would not have a material adverse effect on its Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements apply a practical expedient that allows adoption of the provisions of ASU 2016-02 prospectively with a cumulative-effect adjustment recorded to retained earnings upon the date of adoption.
The Company intends to adopt the standard when required on January 1, 2019 and to elect the available practical expedients, including the proposed practical expedient discussed in the previous paragraph, if approved by the FASB. The Company has completed its analysis of the new standard and has begun to adapt our accounting systems for adoption. The Company expects to have its accounting systems ready in time for the adoption next year. The Company is also in the process of analyzing the disclosures that will be required for the new standard. We expect ASU 2016-02 to have an impact on the Consolidated Balance Sheets as quantified below when we recognize ROU assets and the corresponding lease liability. We expect an immaterial impact on the Consolidated Statements of Income. There will be no change to the classification of the Company’s leases, which are all currently classified as operating leases. Based on the Company’s leases as of December 31, 2017, the Company estimates it would record ROU assets of approximately $26.6 million as of December 31, 2017 with a corresponding balance of lease liabilities. The Company expects that the ROU asset and lease liability balances recorded upon adoption will not differ materially from this estimate.
In the second quarter of 2016, Accounting Standards Update 2016-13 (“ASU 2016-13”), Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments was issued. ASU 2016-13 ("the Standard") represents a significant change to the incurred loss model currently used to account for credit losses. The Standard requires an entity to estimate the credit losses expected over the life of the credit exposure upon initial recognition of that exposure. The expected credit losses consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Exposures with similar risk characteristics are required to be grouped together when estimating expected credit losses. The initial estimate and subsequent changes to the estimated credit losses are required to be reported in current earnings in the income statement and through an allowance in the balance sheet. ASU 2016-13 is applicable to financial assets subject to credit losses and measured at amortized cost and certain off-balance-sheet credit exposures. The Standard will modify the way the Company estimates its allowance for risk-sharing obligations and its allowance for loan losses. ASU 2016-13 requires modified retrospective application to all outstanding, in-scope instruments, with a cumulative-effect adjustment recorded to opening retained earnings as of the beginning of the period of adoption.
The Company plans on adopting ASU 2016-13 when the standard is required to be adopted, January 1, 2020. The Company is in the preliminary stages of implementation as it is still in the process of determining the significance of the impact the Standard will have on its financial statements and the timing of when it will adopt ASU 2016-13. The Company expects its allowance for risk-sharing obligations to increase when ASU 2016-13 is adopted.
There were no other accounting pronouncements issued during 2018 or 2017 that have the potential to impact the Company’s consolidated financial statements.
Reclassifications—The Company has made certain immaterial reclassifications to prior-year balances to conform to current-year presentation.
NOTE 3—GAINS FROM MORTGAGE BANKING ACTIVITIES
Gains from mortgage banking activities consist of the following activity for each of the years ended December 31, 2017, 2016, and 2015:
| | | | | | | | | | | For the year ended December 31, | | (in thousands) | 2017 | | 2016 | | 2015 | | Contractual loan origination related fees, net | $ | 245,484 | | $ | 174,360 | | $ | 156,835 | | Fair value of expected net cash flows from servicing recognized at commitment | | 207,662 | | | 205,311 | | | 142,420 | | Fair value of expected guaranty obligation recognized at commitment | | (13,776) | | | (12,486) | | | (8,789) | | Total gains from mortgage banking activities | $ | 439,370 | | $ | 367,185 | | $ | 290,466 | |
NOTE 4—3—MORTGAGE SERVICING RIGHTS The fair value of MSRs at December 31, 20172020 and December 31, 20162019 was $834.5$1.1 billion and $910.5 million,and $669.4 million, respectively. The Company uses a discounted static cash flow valuation approach, and the key economic assumption is the discount rate. See the following sensitivities related to the discount rate: The impact of a 100-basis point increase in the discount rate at December 31, 2017 is2020 would be a decrease in the fair value of $26.3$34.6 million to the MSRs outstanding as of December 31, 2017.2020. The impact of a 200-basis point increase in the discount rate at December 31, 2017 is2020 would be a decrease in the fair value of $50.8$67.1 million to the MSRs outstanding as of December 31, 2017.2020. These sensitivities are hypothetical and should be used with caution. These estimates do not include interplay among assumptions and are estimated as a portfolio rather than individual assets. Activity related to capitalized MSRs (net of accumulated amortization) for the year ended December 31, 20172020 and 20162019 follows: | | | | | | | | | | | For the year ended December 31, | | | (in thousands) | | 2017 | | 2016 | | | | | | | | | | | | | | | For the year ended December 31, | | Roll Forward of MSRs (in thousands) | | | 2020 | | 2019 | | Beginning balance | | $ | 521,930 | | $ | 412,348 | | | $ | 718,799 | | $ | 670,146 | | Additions, following the sale of loan | | | 239,503 | | | 181,032 | | | | 321,225 | | | 206,885 | | Purchases | | | 7,781 | | | 43,097 | | | Amortization | | | (119,599) | | | (99,417) | | | | (149,888) | | | (137,792) | | Pre-payments and write-offs | | | (14,859) | | | (15,130) | | | | (27,323) | | | (20,440) | | Ending balance | | $ | 634,756 | | $ | 521,930 | | | $ | 862,813 | | $ | 718,799 | |
As shown in the table above, during 2016 and 2017, the Company purchased MSRs. In both years, the servicing rights acquired were for HUD loans. The servicing portfolio acquired in 2016 consisted of approximately $3.6 billion of unpaid principal balance and had a weighted average estimated remaining life of 10.9 years. The servicing portfolio acquired in 2017 consisted of approximately $0.6 billion of unpaid principal balance and had a weighted average estimated remaining life of 10.7 years.
The following tables summarizetable summarizes the components of thegross value, accumulated amortization, and net carrying value of the Company’s acquired and originated MSRs as of December 31, 20172020 and 2016: | | | | | | | | | | | | | As of December 31, 2017 | | | | Gross | | Accumulated | | Net | | (in thousands) | | carrying value | | amortization | | carrying value | | Acquired MSRs | | $ | 183,715 | | $ | (121,643) | | $ | 62,072 | | Originated MSRs | | | 820,137 | | | (247,453) | | | 572,684 | | Total | | $ | 1,003,852 | | $ | (369,096) | | $ | 634,756 | |
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Walker & Dunlop, Inc. and Subsidiaries
| | | | | | | Components of MSRs (in thousands) | | December 31, 2020 | | December 31, 2019 | Gross Value | | $ | 1,394,901 | | $ | 1,201,542 | Accumulated amortization | | | (532,088) | | | (482,743) | Net carrying value | | $ | 862,813 | | $ | 718,799 |
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | As of December 31, 2016 | | | | Gross | | Accumulated | | Net | | (in thousands) | | carrying value | | amortization | | carrying value | | Acquired MSRs | | $ | 175,934 | | $ | (104,264) | | $ | 71,670 | | Originated MSRs | | | 642,030 | | | (191,770) | | | 450,260 | | Total | | $ | 817,964 | | $ | (296,034) | | $ | 521,930 | | | | | | | | | | | | |
The expected amortization of MSRs recordedheld in the Consolidated Balance Sheet as of December 31, 20172020 is shown in the table below. Actual amortization may vary from these estimates. | | | | | | | | | | | | | | Originated MSRs | | Acquired MSRs | | Total MSRs | | | | | | | | | | Expected | (in thousands) | | Amortization | | Amortization | | Amortization | | | Amortization | Year Ending December 31, | | | | | | | | | | | | | 2018 | | $ | 107,258 | | $ | 11,828 | | $ | 119,086 | | | 2019 | | | 93,265 | | | 10,694 | | | 103,959 | | | 2020 | | | 82,695 | | | 9,183 | | | 91,878 | | | 2021 | | | 72,138 | | | 7,512 | | | 79,650 | | | $ | 155,181 | 2022 | | | 59,073 | | | 5,662 | | | 64,735 | | | | 142,147 | 2023 | | | | 127,808 | 2024 | | | | 110,147 | 2025 | | | | 91,425 | Thereafter | | | 158,255 | | | 17,193 | | | 175,448 | | | | 236,105 | Total | | $ | 572,684 | | $ | 62,072 | | $ | 634,756 | | | $ | 862,813 | | | | | | | | | | | | |
The Company recorded write-offs of MSRsOMSRs related to loans that were repaid prior to the expected maturity and loans that defaulted. These write-offs are included as a component of Amortization and depreciation in the accompanying Consolidated Statements of Income and the MSR roll forward shown above and as a component of Amortization and depreciation in the Consolidated Statements of Income and relate to MSRs recognized at loan saleOMSRs only. Prepayment fees totaling $17.3$22.0 million, $10.6$26.8 million, and $15.0$18.9 million were collected for 2017, 2016,2020, 2019, and 2015,2018, respectively, and are included as a component of Otherrevenues in the Consolidated Statements of Income. Escrow earnings totaling $14.9 million, $51.4 million, and $38.2 million were earned for the years ended December 31, 2020, 2019, Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements and 2018, respectively, and are included as a component of Escrow earnings and other interest income in the Consolidated Statements of Income.All other ancillary servicing fees were immaterial for the periods presented. Management reviews the capitalized MSRs for temporary impairment quarterly by comparing the aggregate carrying value of the MSR portfolio to the aggregate estimated fair value of the portfolio. Additionally, MSRs related to Fannie Mae loans where the Company has risk-sharing obligations are assessed for permanent impairment on an asset-by-asset basis, considering factors such as debt service coverage ratio, property location, loan-to-value ratio, and property type. Except for defaulted or prepaid loans, no temporary or permanent impairment was recognized for the years ended December 31, 2017, 2016,2020, 2019, and 2015.2018. TheAs of December 31, 2020, the weighted average remaining life of the aggregate MSR portfolio is 7.4was 7.7 years.
NOTE 5—4—GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS When a loan is sold under the Fannie Mae DUS program, the Company typically agrees to guarantee a portion of the ultimate loss incurred on the loan should the borrower fail to perform. The compensation for this risk is a component of the servicing fee on the loan. NoThe guaranty is providedin force while the loan is outstanding. The Company does not provide a guaranty for loans sold under the Freddie Macany other loan product it sells or HUD loan programs. Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notesbrokers. Activity related to Consolidated Financial Statements
A summary of the Company’s guaranty obligation for the noncontingent portion of the guaranty obligation as of and for the years ended December 31, 20172020 and 2016 follows:2019 is presented in the following table:
| | | | | | | | | | | For the year ended December 31, | | | (in thousands) | | 2017 | | 2016 | | | | | | | | | | | | | | | For the year ended December 31, | | Roll Forward of Guaranty Obligation (in thousands) | | | 2020 | | 2019 | | Beginning balance | | $ | 32,292 | | $ | 27,570 | | | $ | 54,695 | | $ | 46,870 | | Additions, following the sale of loan | | | 16,039 | | | 10,597 | | | | 5,755 | | | 17,939 | | Amortization | | | (7,025) | | | (5,946) | | | | (9,612) | | | (9,663) | | Other | | | (119) | | | 71 | | | | 1,468 | | | (451) | | Ending balance | | $ | 41,187 | | $ | 32,292 | | | $ | 52,306 | | $ | 54,695 | | | | | | | | | | |
A summary of
Activity related to the Company’s allowance for risk-sharing obligations for the contingent portion of the guaranty obligation as of and for the years ended December 31, 20172020 and 20162019 follows: | | | | | | | | | | | For the year ended December 31, | | | (in thousands) | | 2017 | | 2016 | | | | | | | | | | | | | | | For the year ended December 31, | | Roll Forward of Allowance for Risk-sharing Obligations (in thousands) | | | 2020 | | 2019 | | Beginning balance | | $ | 3,613 | | $ | 5,586 | | | $ | 11,471 | | $ | 4,622 | | Provision (benefit) for risk-sharing obligations | | | 51 | | | (145) | | | Adjustment related to adoption of CECL | | | | 31,570 | | | — | | Provision for risk-sharing obligations | | | | 33,740 | | | 6,398 | | Write-offs | | | — | | | (1,757) | | | | — | | | — | | Other | | | 119 | | | (71) | | | | (1,468) | | | 451 | | Ending balance | | $ | 3,783 | | $ | 3,613 | | | $ | 75,313 | | $ | 11,471 | | | | | | | | | | |
When
On January 1, 2020, the Company places a loan for which it has a risk-sharing obligationrecognized the CECL transition adjustment based on its watch list, the Company ceases to amortize the guaranty obligation and transfers the remaining unamortized balance of the guaranty obligation to the allowance for risk-sharing obligations. When a loan for which the Company has a risk-sharing obligation is removed from the watch list, the loan’s reserve is transferred from the allowance for risk-sharing obligations to the guaranty obligation, and the amortization of the remaining balance over the remaining estimated life is resumed. This net transfer of the unamortized balance of the guaranty obligation from a noncontingent classification to a contingent classification (and vice versa) is presented in the guaranty obligation and allowance for risk-sharing obligations tables above as “Other.” The Allowance for risk-sharing obligations as of December 31, 2017 is based principally on the Company’s collective assessment of the probability of loss relatedmultifamily market and the macroeconomic environment at that time and concluded that the projections for the coming year were for continued strong performance similar to the loans onperformance over the watch list aspast few years. The Company’s losses have been de minimis over the past few years. Considering that the Company’s historical loss rate consisted of December 31, 2017.both strong and weak multifamily and macroeconomic periods, the Company concluded it was appropriate to adjust the loss rate for the forecast period to below the weighted average historical loss rate. The write-offsloss rate applied for the forecast period in the table aboveWARM CECL calculation was 1 basis point, which approximated the average of the actual loss rate for the year ended December 31, 2016 are netpast two years as these conditions were expected to prevail over the course of $0.8 millionthe forecast period. The Company reverted to the actual historical loss rate of recoveries. The net benefit2 basis points for risk-sharing obligationsall remaining years in the calculation and did not use a reversion period since the difference between the loss rate used for the year ended December 31, 2016 isforecast period and the result of the aforementioned recoveries.actual historical loss rate was immaterial.
During the third quarter of 2017, Hurricanes Harvey and Irma made landfallConditions changed significantly beginning in the United States, causing substantial damageMarch 2020 due to the affected areas. Located withinCrisis across the affected areas are multiple properties collateralizing loans forworld, which the Company has risk-sharing obligations. Based on its current assessment of these properties, the Company believes that few, if any, of these properties incurred significant damage,reversed macroeconomic conditions from sustained strength to global economic contraction, causing unemployment rates to rise sharply and those that did have adequate insurance coverage. Additionally,a recession to ensue.
Although the Company has not experienced an increase in late payments from risk-sharing loans collateralized by propertiesany defaults and minimal forbearance requests since the outset of the Crisis, the Company believes there is inherent uncertainty in the affected areas. Accordingly, based on information currently available, these natural disasters did not have a material impact onmacroeconomic environment created by the Allowance for risk-sharing obligationsspread of the Crisis across the world as of December 31, 2017. Additionally,2020. This uncertainty leads to elevated risk and near-term elevated unemployment levels and lower consumer incomes, which would lead to an adverse impact on multifamily occupancy rates and property cash flows, increasing the likelihood of delinquencies, loan defaults, and Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements risk-sharing losses. The Company believes that the potential impacts due to the Crisis during the forecast period are expected to be generally consistent with the final year of the great financial crisis of 2007-2010 (the “last recession”). The loss rate resulting from the final year of the last recession totaled six basis points. Accordingly, the Company used a loss rate of 6 basis points for the forecast period and reverted over a one-year period to 2 basis points for the remaining expected life of the portfolio. The calculated CECL reserve for the Company’s $42.8 billion at-risk Fannie Mae servicing portfolio as of December 31, 2020 was $67.0 million compared to $34.7 million as of the CECL adoption date on January 1, 2020. The significant increase in the CECL reserve was principally related to the forecasted impacts of the Crisis. The weighted-average remaining life of the at-risk Fannie Mae servicing portfolio as of December 31, 2020 was 7.7 years. NaN loans that defaulted in 2019 had aggregate specific reserves of $8.3 million as of December 31, 2020 and $6.9 million as of December 31, 2019 as the risk-sharing losses have not been settled with Fannie Mae. The properties related to these 2 loans were both off-campus student living facilities in the same city. The Company does not believe that these natural disasters will have a material impact on its Allowance for risk-sharing obligations any additional at-risk loans related to student living facilities in the future.this city. As of December 31, 20172020 and 2016,2019, the maximum quantifiable contingent liability associated with the Company’s guarantees under the Fannie Mae DUS agreement was $5.7$9.0 billion and $4.9$7.5 billion, respectively. This maximum quantifiable contingent liability relates to the at riskat-risk loans serviced for Fannie Mae at the specific point in time indicated. The term and the amount of the liability vary with the origination and payoff activity of the at risk portfolio. The maximum quantifiable contingent liability is not representative of the actual loss the Company would incur. The Company would be Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
liable for this amount only if all of the loans it services for Fannie Mae, for which the Company retains some risk of loss, were to default and all of the collateral underlying these loans waswere determined to be without value at the time of settlement. NOTE 5—SERVICING NOTE 6—SERVICING
The total unpaid principal balance of loans the Company was servicing for various institutional investors was $74.5$107.2 billion as of December 31, 20172020 compared to $63.1$93.2 billion as of December 31, 2016. The December 31, 2017 balance includes the unamortized portion of the addition of $0.6 billion related to purchase activity as more fully discussed in NOTE 4.2019. As of December 31, 20172020 and 2016,2019, custodial escrow accounts relating to loans serviced by the Company totaled $2.0$3.1 billion and $1.6$2.6 billion, respectively. These amounts are not included in the accompanying consolidated balance sheetsConsolidated Balance Sheets as such amounts are not Company assets.assets; however, the Company is entitled to earn interest income on these escrow balances, presented as Escrow earnings and other interest income in the Consolidated Statements of Income. Certain cash deposits at other financial institutions exceed the Federal Deposit Insurance Corporation insured limits. The Company places these deposits with financial institutions that meet the requirements of the Agencies and where it believes the risk of loss to be minimal. For most loans the Company services under the Fannie Mae DUS program, the Company is required to advance the principal and interest payments and guarantee fees for up to four months should a borrower cease making payments under the terms of their loan, including while that loan is in forbearance. After advancing for four months, the Company requests reimbursement from Fannie Mae for the principal and interest advances, and Fannie Mae will reimburse the Company within 60 days of the request. As of December 31, 2020 and 2019, the Company had an immaterial balance of outstanding advances related to loans in our Fannie Mae portfolio. For loans the Company services under the Ginnie Mae (“HUD”) program, the Company is obligated to advance the principal and interest payments and guarantee fees until the HUD loan is brought current, fully paid, or assigned to HUD. The Company is eligible to assign a loan to HUD once it is in default for 30 days. If the loan is not brought current, or the loan otherwise defaults, the Company is not reimbursed for its advances until such time as the Company assigns the loan to HUD or works out a payment modification for the borrower. For loans in default, the Company may repurchase those loans out of the Ginnie Mae security, at which time the Company’s advance requirements cease and the Company may then modify and resell the loan or assign the loan back to HUD, at which time the Company will be reimbursed for its advances. As of December 31, 2020 and 2019, the Company had an immaterial balance of outstanding advances for loans in its HUD portfolio. The Company is not obligated to make advances on any of the other loans the Company services in its portfolio, including loans serviced under the Freddie Mac Optigo program. Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements As of December 31, 2020 and 2019, the Company had $9.3 million and $2.1 million of aggregate outstanding principal and interest and tax and escrow advances, respectively. These advances were included as a component of Receivables, net in the Consolidated Balance Sheets. NOTE 7—6—DEBT At December 31, 2017,2020, to provide financing to borrowers under the Agencies’ programs, the Company has committed and uncommitted warehouse lines of credit in the amount of $3.3$3.6 billion with certain national banks and a $1.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency Warehouse Facilities”). In support of these Agency Warehouse Facilities, the Company has pledged substantially all of its loans held for sale under the Company's approved programs. The Company’s ability to originate mortgage loans for sale depends upon its ability to secure and maintain these types of short-term financings on acceptable terms. Additionally, at December 31, 2017,2020, the Company has arranged for warehouse lines of credit in the amount of $0.3$0.4 billion with certain national banks to assist in funding loans held for investment under the Interim Loan Program (“Interim Warehouse Facilities”). The Company has pledged substantially all of its loans held for investment against these Interim Warehouse Facilities. The Company’s ability to originate loans held for investment depends upon its ability to secure and maintain these types of short-term financings on acceptable terms. Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The maximum amount and outstanding borrowings under the warehouseWarehouse notes payable at December 31, 20172020 and 2016 follow: | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | | | (dollars in thousands) | | Committed | | Uncommitted | | Temporary | | Total Facility | | Outstanding | | | | Facility1 | | Amount | | Amount | | Increase | | Capacity | | Balance | | Interest rate | | Agency Warehouse Facility #1 | | $ | 425,000 | | $ | 300,000 | | $ | — | | $ | 725,000 | | $ | 100,188 | | 30-day LIBOR plus 1.30% | | Agency Warehouse Facility #2 | | | 500,000 | | | 300,000 | | | — | | | 800,000 | | | 346,291 | | 30-day LIBOR plus 1.30% | | Agency Warehouse Facility #3 | | | 480,000 | | | — | | | 400,000 | | | 880,000 | | | 44,619 | | 30-day LIBOR plus 1.25% | | Agency Warehouse Facility #4 | | | 350,000 | | | — | | | — | | | 350,000 | | | 129,787 | | 30-day LIBOR plus 1.30% | | Agency Warehouse Facility #5 | | | 30,000 | | | — | | | — | | | 30,000 | | | 19,057 | | 30-day LIBOR plus 1.80% | | Agency Warehouse Facility #6 | | | 250,000 | | | 250,000 | | | — | | | 500,000 | | | 130,859 | | 30-day LIBOR plus 1.35% | | Fannie Mae repurchase agreement, uncommitted line and open maturity | | | — | | | 1,500,000 | | | — | | | 1,500,000 | | | 123,153 | | 30-day LIBOR plus 1.15% | | Total Agency Warehouse Facilities | | $ | 2,035,000 | | $ | 2,350,000 | | $ | 400,000 | | $ | 4,785,000 | | $ | 893,954 | | | | | | | | | | | | | | | | | | | | | | | Interim Warehouse Facility #1 | | $ | 85,000 | | $ | — | | $ | — | | $ | 85,000 | | $ | 10,290 | | 30-day LIBOR plus 1.90% | | Interim Warehouse Facility #2 | | | 100,000 | | | — | | | — | | | 100,000 | | | 24,662 | | 30-day LIBOR plus 2.00% | | Interim Warehouse Facility #3 | | | 75,000 | | | — | | | — | | | 75,000 | | | 10,594 | | 30-day LIBOR plus 2.00% to 2.50% | | Total Interim Warehouse Facilities | | $ | 260,000 | | $ | — | | $ | — | | $ | 260,000 | | $ | 45,546 | | | | Debt issuance costs | | | — | | | — | | | — | | | — | | | (1,731) | | | | Total warehouse facilities | | $ | 2,295,000 | | $ | 2,350,000 | | $ | 400,000 | | $ | 5,045,000 | | $ | 937,769 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | December 31, 2016 | | | | (dollars in thousands) | | Committed | | Uncommitted | | Temporary | | Total Facility | | Outstanding | | | | Facility1 | | Amount | | Amount | | Increase | | Capacity | | Balance | | Interest rate | | Agency Warehouse Facility #1 | | $ | 425,000 | | $ | — | | $ | — | | $ | 425,000 | | $ | 109,087 | | 30-day LIBOR plus 1.40% | | Agency Warehouse Facility #2 | | | 650,000 | | | — | | | — | | | 650,000 | | | 274,181 | | 30-day LIBOR plus 1.40% | | Agency Warehouse Facility #3 | | | 280,000 | | | — | | | 400,000 | | | 680,000 | | | 320,801 | | 30-day LIBOR plus 1.35% | | Agency Warehouse Facility #4 | | | 350,000 | | | — | | | — | | | 350,000 | | | 186,869 | | 30-day LIBOR plus 1.40% | | Agency Warehouse Facility #5 | | | 30,000 | | | — | | | — | | | 30,000 | | | 14,551 | | 30-day LIBOR plus 1.80% | | Fannie Mae repurchase agreement, uncommitted line and open maturity | | | — | | | 1,500,000 | | | — | | | 1,500,000 | | | 943,505 | | 30-day LIBOR plus 1.15% | | Total agency warehouse facilities | | $ | 1,735,000 | | $ | 1,500,000 | | $ | 400,000 | | $ | 3,635,000 | | $ | 1,848,994 | | | | | | | | | | | | | | | | | | | | | | | Interim Warehouse Facility #1 | | $ | 85,000 | | $ | — | | $ | — | | $ | 85,000 | | $ | 36,916 | | 30-day LIBOR plus 1.90% | | Interim Warehouse Facility #2 | | | 200,000 | | | — | | | — | | | 200,000 | | | 70,196 | | 30-day LIBOR plus 2.00% | | Interim Warehouse Facility #3 | | | 75,000 | | | — | | | — | | | 75,000 | | | 36,005 | | 30-day LIBOR plus 2.00% to 2.50% | | Total interim warehouse facilities | | $ | 360,000 | | $ | — | | $ | — | | $ | 360,000 | | $ | 143,117 | | | | Debt issuance costs | | | — | | | — | | | — | | | — | | | (1,928) | | | | Total warehouse facilities | | $ | 2,095,000 | | $ | 1,500,000 | | $ | 400,000 | | $ | 3,995,000 | | $ | 1,990,183 | | | |
1 Agency Warehouse Facilities and the Fannie Mae repurchase agreement2019 are used to fund loans held for sale, while Interim Warehouse Facilities are used to partially fund loans held for investment.as follows:
| | | | | | | | | | | | | | | | | | December 31, 2020 | | | | (dollars in thousands) | | Committed | | Uncommitted | | Total Facility | | Outstanding | | | | Facility(1) | | Amount | | Amount | | Capacity | | Balance | | Interest rate(2) | | Agency Warehouse Facility #1 | | $ | 425,000 | | $ | — | | $ | 425,000 | | $ | 83,336 | | 30-day LIBOR plus 1.40% | | Agency Warehouse Facility #2 | | | 700,000 | | | 300,000 | | | 1,000,000 | | | 460,388 | | 30-day LIBOR plus 1.40% | | Agency Warehouse Facility #3 | | | 600,000 | | | 265,000 | | | 865,000 | | | 410,546 | | 30-day LIBOR plus 1.15% | | Agency Warehouse Facility #4 | | | 350,000 | | | — | | | 350,000 | | | 181,996 | | 30-day LIBOR plus 1.40% | | Agency Warehouse Facility #5 | | | — | | | 1,000,000 | | | 1,000,000 | | | 522,507 | | 30-day LIBOR plus 1.45% | | Total National Bank Agency Warehouse Facilities | | $ | 2,075,000 | | $ | 1,565,000 | | $ | 3,640,000 | | $ | 1,658,773 | | | | Fannie Mae repurchase agreement, uncommitted line and open maturity | | | — | | | 1,500,000 | | | 1,500,000 | | | 725,085 | | | �� | Total Agency Warehouse Facilities | | $ | 2,075,000 | | $ | 3,065,000 | | $ | 5,140,000 | | $ | 2,383,858 | | | | | | | | | | | | | | | | | | | | Interim Warehouse Facility #1 | | $ | 135,000 | | $ | — | | $ | 135,000 | | $ | 71,572 | | 30-day LIBOR plus 1.90% | | Interim Warehouse Facility #2 | | | 100,000 | | | — | | | 100,000 | | | 34,000 | | 30-day LIBOR plus 1.65% | | Interim Warehouse Facility #3 | | | 75,000 | | | 75,000 | | | 150,000 | | | 8,861 | | 30-day LIBOR plus 1.75% to 3.25% | | Interim Warehouse Facility #4 | | | 19,810 | | | — | | | 19,810 | | | 19,810 | | 30-day LIBOR plus 3.00% | | Total National Bank Interim Warehouse Facilities | | $ | 329,810 | | $ | 75,000 | | $ | 404,810 | | $ | 134,243 | | | | Debt issuance costs | | | — | | | — | | | — | | | (945) | | | | Total warehouse facilities | | $ | 2,404,810 | | $ | 3,140,000 | | $ | 5,544,810 | | $ | 2,517,156 | | | |
Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements | | | | | | | | | | | | | | | | | | December 31, 2019 | | | | (dollars in thousands) | | Committed | | Uncommitted | | Total Facility | | Outstanding | | | | Facility(1) | | Amount | | Amount | | Capacity | | Balance | | Interest rate(2) | | Agency Warehouse Facility #1 | | $ | 350,000 | | $ | 200,000 | | $ | 550,000 | | $ | 148,877 | | 30-day LIBOR plus 1.15% | | Agency Warehouse Facility #2 | | | 500,000 | | | 300,000 | | | 800,000 | | | 15,291 | | 30-day LIBOR plus 1.15% | | Agency Warehouse Facility #3 | | | 500,000 | | | 265,000 | | | 765,000 | | | 35,510 | | 30-day LIBOR plus 1.15% | | Agency Warehouse Facility #4 | | | 350,000 | | | — | | | 350,000 | | | 258,045 | | 30-day LIBOR plus 1.15% | | Agency Warehouse Facility #5 | | | — | | | 500,000 | | | 500,000 | | | 60,751 | | 30-day LIBOR plus 1.15% | | Agency Warehouse Facility #6 | | | 250,000 | | | 100,000 | | | 350,000 | | | 14,930 | | 30-day LIBOR plus 1.15% | | Total National Bank Agency Warehouse Facilities | | $ | 1,950,000 | | $ | 1,365,000 | | $ | 3,315,000 | | $ | 533,404 | | | | Fannie Mae repurchase agreement, uncommitted line and open maturity | | | — | | | 1,500,000 | | | 1,500,000 | | | 131,984 | | | | Total agency warehouse facilities | | $ | 1,950,000 | | $ | 2,865,000 | | $ | 4,815,000 | | $ | 665,388 | | | | | | | | | | | | | | | | | | | | Interim Warehouse Facility #1 | | $ | 135,000 | | $ | — | | $ | 135,000 | | $ | 98,086 | | 30-day LIBOR plus 1.90% | | Interim Warehouse Facility #2 | | | 100,000 | | | — | | | 100,000 | | | 49,256 | | 30-day LIBOR plus 1.65% | | Interim Warehouse Facility #3 | | | 75,000 | | | 75,000 | | | 150,000 | | | 65,991 | | 30-day LIBOR plus 1.90% to 2.50% | | Interim Warehouse Facility #4 | | | 100,000 | | | — | | | 100,000 | | | 28,100 | | 30-day LIBOR plus 1.75% | | Total interim warehouse facilities | | $ | 410,000 | | $ | 75,000 | | $ | 485,000 | | $ | 241,433 | | | | Debt issuance costs | | | — | | | — | | | — | | | (693) | | | | Total warehouse facilities | | $ | 2,360,000 | | $ | 2,940,000 | | $ | 5,300,000 | | $ | 906,128 | | | |
| (1) | Agency Warehouse Facilities, including the Fannie Mae repurchase agreement are used to fund loans held for sale, while Interim Warehouse Facilities are used to fund loans held for investment. |
| (2) | Interest rate presented does not include the effect of interest rate floors. |
30-day LIBOR was 1.56%0.14% and 1.76% as of December 31, 20172020 and 0.77% as of December 31, 2016.2019, respectively. Interest expense under the warehouse notes payable for the years ended December 31, 2017, 2016,2020, 2019, and 20152018 aggregated to $52.0$45.0 million, $36.6$58.1 million, and $29.2$54.6 million, respectively. Included in interest expense in 2017, 2016,2020, 2019, and 20152018 are the amortization of facility fees totaling $4.6$4.1 million,, $5.5 $4.9 million, and $4.5$5.0 million, respectively. The warehouse notes payable are subject to various financial covenants, and the Company was in compliance with all such covenants at December 31, 2017.2020. Warehouse Facilities Agency Warehouse Facilities The following section provides a summary of the key terms related to each of the Agency Warehouse Facilities. During the first quarter of 2020, an Agency warehouse line with a $350.0 million aggregate committed and uncommitted borrowing capacity expired according to its terms. The Company believes that the 5 remaining committed and uncommitted credit facilities from national banks and the uncommitted credit facility from Fannie Mae provide the Company with sufficient borrowing capacity to conduct its Agency lending operations. Agency Warehouse Facility #1:#1: The Company has a warehousing credit and security agreement with a national bank for a $425.0 million committed warehouse line that is scheduled to mature on October 29, 2018.25, 2021. The agreement provides the Company with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans. Advances are made at 100% of the loan balance and borrowings under this line bear interest at the 30-day London Interbank Offered Rate (“LIBOR”) plus 130140 basis points. In addition to the committed borrowing capacity, the agreement provides $300.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility. The agreement contains certain affirmative and negative covenants that are binding on the Company’s operating subsidiary, Walker & Dunlop, LLC (which are in some cases subject to exceptions), including, but not limited to, restrictions on its ability to assume, guarantee, or become contingently liable for the obligation of another person, to undertake certain fundamental changes such as reorganizations, mergers, amendments to the Company’s certificate of formation or operating agreement, liquidations, dissolutions or dispositions or acquisitions of assets or businesses, to cease to be directly or indirectly wholly owned by the Company, to pay any subordinated debt in advance of its stated maturity or to take any action that would cause Walker & Dunlop, LLC to lose Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements all or any part of its status as an eligible lender, seller, servicer or issuer or any license or approval required for it to engage in the business of originating, acquiring, or servicing mortgage loans. In addition, the agreement requires compliance with certain financial covenants, which are measured for the Company and its subsidiaries on a consolidated basis, as follows: | ·
● | | tangible net worth of the Company of not less than (i) $200.0 million plus (ii) 75% of the net proceeds of any equity issuances by the Company or any of its subsidiaries after the closing date, date; |
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● | | compliance with the applicable net worth and liquidity requirements of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, and HUD, HUD; |
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● | | liquid assets of the Company of not less than $15.0 million, million; |
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● | | maintenance of aggregate unpaid principal amount of all mortgage loans comprising the Company’s consolidated servicing portfolio of not less than $20.0 billion or (ii) all Fannie Mae DUS mortgage loans comprising the Company’s consolidated servicing portfolio of not less than $10.0 billion, exclusive in both cases of mortgage loans which are 60 or more days past due or are otherwise in default or have been transferred to Fannie Mae for resolution, resolution; |
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● | | aggregate unpaid principal amount of Fannie Mae DUS mortgage loans within the Company’s consolidated servicing portfolio which are 60 or more days past due or otherwise in default not to exceed 3.5% of the aggregate unpaid principal balance of all Fannie Mae DUS mortgage loans within the Company’s consolidated servicing portfolio,portfolio; and |
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● | | maximum indebtedness (excluding warehouse lines) to tangible net worth of 2.25 to 1.0. 1.00 (the “leverage ratio”). |
Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The agreement contains customary events of default, which are in some cases subject to certain exceptions, thresholds, notice requirements, and grace periods. During the second quarter of 2020, the Company executed a modification agreement to the warehouse agreement that created a $100.0 million sublimit within the overall committed capacity to fund COVID-19 forbearance advances under the Fannie Mae DUS program. Borrowings under the agreement are collateralized by Fannie Mae’s commitment to repay the advances and are funded at 90% of the principal and interest advanced and bear interest at 30-day LIBOR plus 175 basis points with an interest-rate floor of 25 basis points. The Company had 0 borrowings related to the COVID-19 forbearances as of December 31, 2020. During the fourth quarter of 2017, 2020, the Company executed the Amendedfifth amendment to the warehouse and Restated Warehousing Credit and Security Agreementsecurity agreement that extended the maturity date to October 29, 2018, reduced25, 2021 and increased the interestcommitted borrowing capacity to $425.0 million. Additionally, the amendment increased the borrowing rate to 30-day LIBOR plus 130140 basis points from 30-day LIBOR plus 115 basis points and provides $300.0did not include an extension of the $200.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility. Company allowed the uncommitted capacity to expire. No other material modifications were made to the agreement during 2017.in 2020. Agency Warehouse Facility #2: The Company has a warehousing credit and security agreement with a national bank for a $500.0$700.0 million committed warehouse line that is scheduled to mature on September 10, 2018.7, 2021. The committed warehouse facility provides the Company with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans.Advances are made at 100% of the loan balance, and borrowings under this line bear interest at 30-day LIBOR plus 130 basis points. During the third quarter of 2017, the Company executed the Second Amended and Restated Warehousing Credit and Security Agreement (the “Second Amended Agreement”) related to Agency Warehouse Facility #2. The Second Amended Agreement removed one of the lenders under the prior agreement, which reduced the maximum committed borrowing capacity of Agency Warehouse Facility #2 to $500.0 million. It also extended the maturity date to September 10, 2018 and reduced the interest rate to 30-day LIBOR plus 130140 basis points. In addition to the committed borrowing capacity, the Second Amended Agreementagreement provides $300.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility. Concurrent withDuring the executionthird quarter of the Second Amended Agreement,2020, the Company executed a new, separate warehousing creditthe sixth amendment to the warehouse agreement with one ofthat extended the lenders undermaturity date thereunder until September 7, 2021, increased the prior facility, which is referredcommitted borrowing capacity to as Agency Warehouse Facility #6 and is more fully described below.$700.0 million. Additionally, the amendment increased the borrowing rate to 30-day LIBOR plus 140 basis points from 30-day LIBOR plus 115 basis points. No other material modifications were made to the agreement during 2017.2020. The negative and financial covenants of the amended and restated warehouse agreement conform to those of the warehouse agreement for Agency Warehouse Facility #1, described above, with the exception of the leverage ratio covenant, which is not included in the warehouse agreement for Agency Warehouse Facility #2. Agency Warehouse Facility #3:#3: The Company has an $880.0a $600.0 million committed warehouse credit and security agreement with a national bank that is scheduled to mature on April 30, 2018. The total commitment amount of $880.0 million as of December 31, 2017 consists of a base committed amount of $480.0 million and a temporary increase of $400.0 million, as more fully described below.2021. The committed warehouse facility provides the Company with the ability to fund Fannie Mae, Freddie Mac, HUD and FHA loans. Advances are made at 100% of the loan balance, and the borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 125115 basis points. In addition to the committed borrowing capacity, the agreement provides $265.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility. During the second quarter of 2017,2020, the Company executed the seventh11th amendment to the credit and securitywarehouse agreement that increased the committed amountrelated to $480.0 million, decreased the interest rate to 30-day LIBOR plus 125 basis points, andthis facility that extended the maturity date to April 30, 2018. Additionally, during2021 for the committed borrowing Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements capacity and added $265.0 million in uncommitted borrowing capacity that bears interest at the same rate and has the same maturity date as the committed facility. The amendment also added a 30-day LIBOR floor of 50 basis points. During the third quarter of 2017,2020, the Company executed the eighth12th amendment to the credit and securitywarehouse agreement that provided a temporary increase of $400.0 million toincreased the maximumcommitted borrowing capacity that expired in January 2018, at which time the maximum borrowing capacity returned to $480.0 million.$600.0 million. No other material modifications were made to the agreement during 2017.2020. The negative and financial covenants of the warehouse agreement conform to those of the warehouse agreement for Agency Warehouse Facility #1, described above. Agency Warehouse Facility #4:#4: The Company has a $350.0 million committed warehouse credit and security agreement with a national bank that is scheduled to mature on October 5, 2018.7, 2021. The committed warehouse facility provides the Company with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans and has a sublimit of $75.0 million to fund defaulted HUD and FHA loans. Advances are made at 100% of the loan balance, and thethe borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 130140 basis points. During the fourth quarter of Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2017, 2020, the Company executed the third amendment to the warehouse loan and security agreement that extendedextends the maturity date of the facilitywarehouse agreement to October 5, 2018 and reduced7, 2021, increased the interestborrowing capacity of the defaulted FHA sublimit to $75.0 million, increased the borrowing rate to 30-day LIBOR plus 130140 basis points from 30-day LIBOR plus 115 basis points, and added a 30-day LIBOR floor of 25 basis points. No other material modifications were made to the agreement during 2017.2020.
The negative and financial covenants of the warehouse agreement conform to those of the warehouse agreement for Agency Warehouse Facility #1, described above, with the exception of the leverage ratio covenant, which is not included in the warehouse agreement for Agency Warehouse Facility #4. Agency Warehouse Facility #5: #5: The Company has a $30.0 million committed warehouse credit and securitymaster repurchase agreement with a national bank for a $1.0 billion uncommitted advance credit facility that is scheduled to mature on July 12, 2019.August 23, 2021. The committed warehouse facility provides usthe Company with the ability to fund defaultedFannie Mae, Freddie Mac, HUD, and FHA loans. TheAdvances are made at 100% of the loan balance, and the borrowings under the warehouserepurchase agreement bear interest at a rate of 30-day LIBOR plus 180145 basis points. No material modifications were made to the agreement in 2017. During the firstthird quarter of 2018,2020, the Company executed the first amendment to the warehouse credit and security agreement that extendedincreased the maturity dateuncommitted borrowing capacity to July 12, 2019. The amendment also provides$1.0 billion and increased the Companyborrowing rate to 30-day LIBOR plus 145 basis points from 30-day LIBOR plus 115 basis points and added a financial covenant related to debt service coverage ratio, as defined, that is similar to the unilateral optionCompany’s other warehouse lines. No other material modifications were made to extend the agreement for one additional year.during 2020. The negative and financial covenants of the warehouserepurchase agreement conform to those of the warehouse agreement for Agency Warehouse Facility #1, described above, with the exception of the leveragea four-quarter rolling EBITDA, as defined, to total debt service ratio covenant, whichof 2.75 to 1.00 that is not included in the warehouse agreement forapplicable to Agency Warehouse Facility #5.#5. Agency Warehouse Facility #6:
During the third quarter of 2017, we executed a warehousing and security agreement that established Agency Warehouse Facility #6. The warehouse facility has a $250.0 million maximum committed borrowing capacity, provides us with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans, and matures September 18, 2018. Advances are made at 100% of the loan balance, and the borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 135 basis points. In addition to the committed borrowing capacity, the agreement provides $250.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility.
The negative and financial covenants of the warehouse agreement conform to those of the warehouse agreement for Agency Warehouse Facility #1, described above, with the exception of the leverage ratio covenant, which is not included in the warehouse agreement for Agency Warehouse Facility #6.
Uncommitted Agency Warehouse Facility: The Company has a $1.5 billion uncommitted facility with Fannie Mae under its ASAP funding program. After approval of certain loan documents, Fannie Mae will fund loans after closing, and the advances are used to repay the primary warehouse line. Fannie Mae will advance 99% of the loan balance, and borrowings under this program bear interest at LIBOR plus 115 basis points, with a minimum LIBOR rate of 35 basis points.balance. There is no expiration date for this facility. No changes were made to the uncommitted facility during 2017.The uncommitted facility has no specific negative or financial covenants. During the first quarter of 2018, the Company executed a warehousing and security agreement to establish another Agency warehouse facility. The warehouse facility has a committed $250.0 million maximum borrowing amount and is scheduled to mature on February 2, 2019. The Company can fund Fannie Mae, Freddie Mac, HUD, and FHA loans under the facility. Advances are made at 100% of the loan balance, and the borrowings under the warehouse agreement bear interest at a rate of LIBOR plus 130 basis points. The agreement provides $100.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility. This new agreement has the same financial covenants as Agency Warehouse Facility #1.
Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Interim Warehouse Facilities The following section provides a summary of the key terms related to each of the Interim Warehouse Facilities. Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements Interim Warehouse Facility #1: The Company has an $85.0a $135.0 million committed warehouse line agreement that is scheduled to mature on April 30, 2018.2021. The facility provides the Company with the ability to fund first mortgage loans on multifamily real estate properties for periods of up to three years, using available cash in combination with advances under the facility. Borrowings under the facility are full recourse to the Company and bear interest at 30-day LIBOR plus 190 basis points. Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the credit agreement. agreement. During the second quarter of 2017,2020, the Company executed the seventh11th amendment to the credit and security agreement that extended the maturity date to April 30, 2018.2021 and added a 30-day LIBOR floor of 50 basis points. No other material modifications were made to the agreement during 2017.2020. The facility agreement requires the Company’s compliance with the same financial covenants as Agency Warehouse Facility #1, described above, and also includes the following additional financial covenant: | ·
| | minimum rolling four-quarter EBITDA, as defined, to total debt service ratio of 2.00 to 1.0
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minimum rolling four-quarter EBITDA, as defined, to total debt service ratio of 2.00 to 1.00 that is applicable to Interim Warehouse Facility #1. Interim Warehouse Facility #2: The Company has a $100.0 million committed warehouse line agreement that is scheduled to mature on December 13, 2019. 2021. The agreement provides the Company with the ability to fund first mortgage loans on multifamily real estate properties for periods of up to three years, using available cash in combination with advances under the facility. Borrowings under the facility are full recourse to the Company. All borrowings originally bear interest at 30-day LIBOR plus 200165 basis points. The lender retains a first priority security interest in all mortgages funded by such advances on a cross-collateralized basis. Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the credit agreement. During the fourth quarter of 2017, the Company executed the fourth amendment to the agreement that extended the maturity date to December 13, 2019 and reduced the maximum borrowing capacity to $100.0 million. The Company requested the reduction in the maximum borrowing capacity due to the formation of the Interim Program JV, which reduced the Company’s need to fund loans under the Interim Program. No other material modifications were made to the agreement during 2017.2020. The credit agreement as amended and restated, requires the borrower and the Company to abide by the same financial covenants as Agency Warehouse Facility #1, described above, with the exception of the leverage ratio covenant, which is not included in the warehouse agreement for Interim Warehouse Facility #2. Additionally, Interim Warehouse Facility #2 has the following additional financial covenants: | ·
● | | rolling four-quarter EBITDA, as defined, of not less than $35.0 million and |
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● | | debt service coverage ratio, as defined, of not less than 2.75 to 1.0 1.00. |
Interim Warehouse Facility #3: The Company has a $75.0 million repurchase agreement with a national bank that is scheduled to mature on May 19, 2018. December 20, 2021. The agreement provides the Company with the ability to fund first mortgage loans on multifamily real estate properties for periods of up to three years, using available cash in combination with advances under the facility. facility. Borrowings under the facility are full recourse to the Company.The borrowings under the agreement bear interest at a rate of 30-day LIBOR plus 2.00%175 to 2.50%325 basis points (“the spread”). The spread varies according to the type of asset the borrowing finances. Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the credit agreement. During the second quarter of 2017, theagreement. The Company exercised its option to extend the maturity date ofallowed the repurchase agreement to mature on May 19, 2018.18, 2020. During the fourth quarter of 2020, the Company executed the fifth amendment to the repurchase agreement which renewed the facility with the previous $75.0 million committed and $75.0 million uncommitted borrowing capacity with a maturity date of December 20, 2021. Additionally, the amendment updated the spread to 30-day LIBOR plus 175 to 325 basis points from 30-day LIBOR plus 190 to 250 basis points depending on the type of asset. No other material modifications were made to the agreement during 2017.2020. The Repurchase Agreementrepurchase agreement requires the borrower and the Company to abide by the following financial covenants: | ·
● | | tangible net worth of the Company of not less than (i) $200.0 million plus (ii) 75% of the net proceeds of any equity issuances by the Company or any of its subsidiaries after the closing date, date; |
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● | | liquid assets of the Company of not less than $15.0 million, million; |
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● | | leverage ratio, as defined, of not more than 3.0 to 1.0,1.0; and |
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● | | debt service coverage ratio, as defined, of not less than 2.75 to 1.0. 1.00. |
Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements Interim Warehouse Facility #4: During the first quarter of 2020, the Company executed a loan and security agreement to establish Interim Warehouse Facility #4. The $19.8 million committed warehouse loan and security agreement with a national bank funds one specific loan. The agreement provides for a maturity date to coincide with the maturity date for the underlying loan. Borrowings under the facility are full recourse and bear interest at 30-day LIBOR plus 300 basis points, with a floor of 450 basis points. Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the credit agreement. The committed warehouse loan and security agreement has only two financial covenants, both of which are similar to the other Interim Warehouse Facilities. We may request additional capacity under the agreement to fund specific loans. No material modifications were made to the agreement in 2020. The facility agreement has only two financial covenants: | ● | tangible net worth of the Company of not less than (i) $200.0 million plus (ii) 75% of the net proceeds of any equity issuances by the Company or any of its subsidiaries after the closing date; and |
| ● | liquid assets of the Company of not less than $15.0 million; |
During the second quarter of 2020, we allowed an interim warehouse facility that had a committed borrowing capacity of $100 million with 0 outstanding borrowings to expire according to its terms. We believe that the four remaining committed and uncommitted interim credit facilities from national banks and our corporate cash provide us with sufficient borrowing capacity to conduct our Interim Loan Program lending operations. The warehouse agreements contain cross-default provisions, such that if a default occurs under any of the Company’s warehouse agreements, generally the lenders under the other warehouse agreements could also declare a default. As of December 31, 2017,2020, the Company was in compliance with all of its warehouse line covenants. Interest on the Company’s warehouse notes payable and note payable are based on 30-day LIBOR. As a result of the expected transition from LIBOR, the Company has updated its debt agreements to include fallback language to govern the transition from 30-day LIBOR to an alternative reference rate. Note Payable On December 20, 2013,November 7, 2018, the Company entered into a $175.0 million senior secured term loan credit agreement (the “Term Loan“Credit Agreement”) that amended and restated the Company’s prior credit agreement and provided for a $300.0 million term loan (the “Term Loan”). The Term Loan was issued at a 0.5% discount, has a stated maturity date of 1.0%.November 7, 2025, and bears interest at 30-day LIBOR plus 200 basis points. At any time, the Company may also elect to request the establishment of one1 or more incremental term loan commitments to make up to three additional term loans in an aggregate principal amount not to exceed $60.0 million.$150.0 million, provided that the total indebtedness would not cause the leverage ratio (as defined in the Credit Agreement) to exceed 2.00 to 1.00. The Company used $165.4 million of the Term Loan proceeds to repay in full the prior term loan. In connection with the repayment of the prior term loan, the Company recognized a $2.1 million loss on extinguishment of debt related to unamortized debt issuance costs and unamortized debt discount, which is included in Other operating expenses in the Consolidated Statements of Income for the year ended December 31, 2018. The Company is obligated to repay the aggregate outstanding principal amount of the term loan in consecutive quarterly installments equal to $0.7 million on the last business day of each of March, June, September, and December. The term loan also requires certain mandatoryother prepayments in certain circumstances pursuant to the terms of the Term Loan Agreement. In April of 2015, the Company made a mandatory prepayment of $3.6 million. In connection with the mandatory prepayment, the Company’s quarterly principal installments were reduced to $0.3 million from $0.4 million, beginning with the June 30, 2015 principal payment. The final principal installment of the term loan is required to be paid in full on the maturity date of December 20, 2020November 7, 2025 (or, if earlier, the date of acceleration of the term loan pursuant to the terms of the Term Loan Agreement) and will be in an amount equal to the aggregate outstanding principal of the term loan on such date (together with all accrued interest thereon). At the Company’s election, the term loan will bear interest at either (i) the “Base Rate” plus an applicable margin or (ii) the London Interbank Offered Rate (“LIBOR Rate”) plus an applicable margin, subject to adjustment if an event of default under the Term Loan Agreement has occurred and is continuing with a minimum LIBOR Rate of 1.0%. The “Base Rate” means the highest of (a) the Agent’s “prime rate,” (b) the federal funds rate plus 0.50% and (c) LIBOR for an interest period of one month plus 1%. During the fourthsecond quarter of 2017, the Company2020, we executed the second amendment to Term Loanthe Credit Agreement that reducedto amend the applicable margin from 4.25%definition of Permitted Subsidiary Collateral to 3.00% for LIBOR Rate loansinclude principal and from 3.25%interest forbearance advances funded by the sublimit created under Agency Warehouse Facility #1. No other material modifications were made to 2.00% for Base Rate loans asthe agreement in 2020.
The obligations of the Company under the Term LoanCredit Agreement are guaranteed by Walker & Dunlop Multifamily, Inc.; Walker & Dunlop, LLC; Walker & Dunlop Capital, LLC; and W&D BE, Inc., each of which is a direct or indirect wholly owned subsidiary of the Company (together with the Company, the “Loan Parties”), pursuant to athe Amended and Restated Guarantee and Collateral Agreement entered into on December 20, 2013November 7, 2018 among the Loan Parties and the AgentWells Fargo Bank, National Association, as administrative agent (the “Guarantee and Collateral Agreement”). Subject to certain exceptions and qualifications contained in the Term LoanCredit Agreement, the Company is required to cause any newly created or acquired subsidiary, unless such subsidiary has been designated as an Excluded Subsidiary (as defined in the Term LoanCredit Agreement) by the Company in accordance with the terms of the Term LoanCredit Agreement, to guarantee the obligations of the Company under the Term LoanCredit Agreement and become a party to the Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Guarantee and Collateral Agreement. The Company may designate a newly created or acquired subsidiary as an Excluded Subsidiary so long as certain conditions and requirements provided for in the Term LoanCredit Agreement are met. The Term LoanCredit Agreement contains certain affirmative and negative covenants that are binding on the Loan Parties, including, but not limited to, restrictions (subject to specified exceptions and qualifications) on the ability of the Loan Parties to incur indebtedness, to create liens on their property, to make investments, to merge, consolidate or enter into any similar combination, or enter into any asset disposition of all or substantially all assets, or liquidate, wind-up or dissolve, to make asset dispositions, to declare or pay dividends or make related distributions, to enter into certain transactions with affiliates, to enter into any negative pledges or other restrictive agreements, to engage in any business other than the business of the Loan Parties as of the date of the Term LoanCredit Agreement and business activities reasonably related or ancillary thereto, to amend certain material contracts or to enter into any sale leaseback arrangements. In addition, the Term Loan The Credit Agreement contains only 1 financial covenant, which requires the Company not to abide by certain financial covenants calculated forpermit its asset coverage ratio (as defined in the Company and its subsidiaries on a consolidated basis as follows:Credit Agreement) to be less than 1.50 to 1.00.
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| | As of the last day of any fiscal quarter, permit the Consolidated Corporate Leverage Ratio (as defined in the Term Loan Agreement) to be less than 4.25 to 1.00.
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| | As of the last day of any fiscal quarter, permit the Consolidated Corporate Interest Coverage Ratio (as defined in the Term Loan Agreement) to be less than 2.75 to 1.00.
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| | As of the last day of any fiscal quarter, permit the Asset Coverage Ratio (as defined in the Term Loan Agreement) to be less than 1.50 to 1.00.
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The Term LoanCredit Agreement contains customary events of default (which are in some cases subject to certain exceptions, thresholds, notice requirements and grace periods), including, but not limited to, non-payment of principal or interest or other amounts, misrepresentations, failure to perform or observe covenants, cross-defaults with certain other indebtedness or material agreements, certain change in control events, voluntary or involuntary bankruptcy proceedings, failure of the Term Loan AgreementCredit Agreements or other loan documents to be valid and binding, and certain ERISA events and judgments. As of December 31, 2017,2020, the Company was in compliance with all covenants related to the Term LoanCredit Agreement. The following table shows the components of the note payable as of December 31, 20172020 and 2016:2019: | | | | | | | | | | | | | | | | | | | | | | (in thousands, unless otherwise specified) | | December 31, | | | | | December 31, | | | | Component | | 2017 | | 2016 | | Interest rate and repayments | | | 2020 | | 2019 | | Interest rate and repayments | | Unpaid principal balance | | $ | 166,223 | | $ | 167,327 | | Interest rate varies - see above for further details; | | | $ | 294,773 | | $ | 297,750 | | Interest rate varies - see above for further details; | | Unamortized debt discount | | | (738) | | | (987) | | quarterly principal payments of $0.3 million | | | | (1,026) | | | (1,245) | | Quarterly principal payments of $0.8 million | | Unamortized debt issuance costs | | | (1,627) | | | (2,177) | | | | | | (2,154) | | | (2,541) | | | | Carrying balance | | $ | 163,858 | | $ | 164,163 | | | | | $ | 291,593 | | $ | 293,964 | | | | | | | | | | | | | | |
The scheduled maturities, as of December 31, 2017,2020, for the aggregate of the warehouse notes payable and the note payable isare shown below. The warehouse notes payable obligations are incurred in support of the related loans held for sale and loans held for investment. Amounts advanced under the warehouse notes payable for loans held for sale are included in the subsequent year as the amounts are usually drawn and repaid within 60 days. The amounts included below related to the note payable include only the quarterly and final principal payments required by the related credit agreement (i.e., Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
the non-contingent payments) and do not include any principal payments that are contingent upon Company cash flow, as defined in the credit agreement (i.e., the contingent payments). The maturities below are in thousands. | | | | | Year Ending December 31, | | Maturities | | 2021 | | $ | 2,442,228 | | 2022 | | | 81,828 | | 2023 | | | 2,978 | | 2024 | | | 2,978 | | 2025 | | | 282,862 | | Thereafter | | | — | | Total | | $ | 2,812,874 | |
| | | | | Year Ending December 31, | | Maturities | | 2018 | | $ | 930,314 | | 2019 | | | 11,394 | | 2020 | | | 164,015 | | 2021 | | | — | | 2022 | | | — | | Thereafter | | | — | | Total | | $ | 1,105,723 | |
All of the debt instruments, including the warehouse facilities, are senior obligations of the Company. All warehouse notes payable balances associated with loans held for sale and outstanding as of December 31, 20172020 were or are expected to be repaid in 2018.2021. Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements NOTE 8—7—GOODWILL AND OTHER INTANGIBLE ASSETS A summary of the Company’s goodwill as of and for the year ended December 31, 20172020 and 20162019 follows: | | | | | | | | | | | Years Ended December 31, | | | (in thousands) | | 2017 | | 2016 | | | | | | | | | | | | | | | For the year ended December 31, | | Roll Forward of Goodwill (in thousands) | | | 2020 | | 2019 | | Beginning balance | | $ | 96,420 | | $ | 90,338 | | | $ | 180,424 | | $ | 173,904 | | Additions from acquisitions | | | 27,347 | | | 6,082 | | | | 68,534 | | | 6,520 | | Impairment | | | — | | | — | | | | 0 | | | 0 | | Ending balance | | $ | 123,767 | | $ | 96,420 | | | $ | 248,958 | | $ | 180,424 | |
The additionadditions from acquisitions during 20172020 shown in the table above relatesrelate to an immaterial acquisition completed during the first quarterpurchases of 2017. The Company purchased certain assets and assumedthe assumption of certain liabilities from 3 debt brokerage companies for aggregate consideration of Deerwood Real Estate Capital, LLC (“Deerwood”), a regional commercial mortgage banking company based in the greater New York City area, for $28.2$69.4 million, in total consideration, which consisted of $15.0$46.8 million of cash, consideration$5.0 million of the Company’s stock, and $13.2$17.6 million of contingent consideration. The contingent consideration may be earned over the three-yeareither a four-year period or five-year period after the closing of each acquisition, based on achievement ofprovided certain revenue targets. targets have been met. The Company determined the fair value of the contingent consideration using a probability-based, discounted cash flow estimate for the revenue targets (Level 3). Prior to the acquisition, Deerwood engaged in commercial real estate loan brokerage services across the United States, with a primary focusacquired businesses operate in the GreaterColumbus, Ohio and New York City area. The acquisition expandsmetropolitan areas. These acquisitions expand the Company’s network of loan originators and providesgeographical reach and provide further diversification to its loan origination platform.
Substantially all of the value associated with Deerwoodthe acquisitions was related to itsthe assembled workforceworkforces and commercial lending platform, resulting in substantially all of the goodwill shown above.consideration being allocated to goodwill. The Company expects all of goodwill to be tax deductible, with the tax-deductible amount of goodwill related to the contingent consideration to be determined once the cash payments to settle the contingent consideration are made. The other assets acquired included immaterial balances related to mortgage pipeline intangible assets and other assets.the liabilities assumed were immaterial. The operations of Deerwoodthese 3 companies have since been merged into the Company’s existing operations. The goodwill resulting from the acquisition of Deerwoodacquisitions is allocated to the Company’s onesingle reporting unit. During 2017,The Company has completed the Company recorded an immaterial amount of accretion expenseaccounting for all acquisitions completed in 2020. For all acquisitions completed in 2020, total revenues and income from operations since the acquisition and the pro-forma incremental revenues and earnings related to the Deerwood contingent consideration and did not make any cash payments. acquired entities as if the acquisitions had occurred as of January 1, 2019 are immaterial.
As of December 31, 2017,2020 and December 31, 2019, the balance of intangible assets acquired from acquisitions totaled $1.9 million and $2.5 million, respectively. As of December 31, 2020, the weighted-average period over which the Company has fully amortized all materialexpects the intangible assets obtained from acquisitions.to be amortized is 4.0 years. A summary of the Company’s contingent consideration, which is included in Other liabilities, as of and for the years ended December 31, 2020 and 2019 follows: | | | | | | | | | | For the year ended December 31, | | Roll Forward of Contingent Consideration Liabilities (in thousands) | | 2020 | | 2019 | | Beginning balance | | $ | 5,752 | | $ | 11,630 | | Additions | | | 27,645 | | | — | | Accretion | | | 1,232 | | | 572 | | Payments | | | (5,800) | | | (6,450) | | Ending balance | | $ | 28,829 | | $ | 5,752 | |
The contingent consideration above relates to (i) acquisitions of debt brokerage companies completed in 2017 and 2020 and (ii) the purchase of noncontrolling interests. The last of the 5 earn-out periods related to the acquisition-related contingent consideration ends in the second quarter of 2025. During 2020, the Company purchased the remaining noncontrolling interest of WDIS. The purchase consideration included $10.0 million of contingent consideration to be earned and paid over a three-year period ending December 31, 2023, provided certain revenue targets have been met. The Company estimated the fair value of the contingent consideration using a probability-based, discounted cash flow estimate for the revenue targets (Level 3). The contingent consideration included for the acquisitions and purchase of noncontrolling interests is non-cash and thus not reflected in the amount of cash consideration paid on the Consolidated Statements of Cash Flows. Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements NOTE 9—8—FAIR VALUE MEASUREMENTS The Company uses valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach to measure assets and liabilities that are measured at fair value. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, accounting standards establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: | ·
● | | Level 1—Financial assets and liabilities whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. |
| ·
● | | Level 2—Financial assets and liabilities whose values are based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. |
| ·
● | | Level 3—Financial assets and liabilities whose values are based on inputs that are both unobservable and significant to the overall valuation. |
The Company's MSRs are measured at fair value at inception, and thereafter on a nonrecurring basis. That is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example,measurement when there is evidence of impairment)impairment and for disclosure purposes (NOTE 3). The Company's MSRs do not trade in an active, open market with readily observable prices. While sales of multifamily MSRs do occur on occasion, precise terms and conditions vary with each transaction and are not readily available. Accordingly, the estimated fair value of the Company’s MSRs was developed using discounted cash flow models that calculate the present value of estimated future net servicing income. The model considers contractually specified servicing fees, prepayment assumptions, estimated revenue from escrow accounts, delinquency rates, late charges, other ancillary revenue, costs to service, and other economic factors. The Company periodically reassesses and adjusts, when necessary, the underlying inputs and assumptions used in the model to reflect observable market conditions and assumptions that a market participant would consider in valuing an MSR asset. MSRs are carried at the lower of amortized cost or fair value. A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company's assets and liabilities carried at fair value: | ·
● | | Derivative Instruments—The derivative positions consist of interest rate lock commitments and forward sale agreements. Theseagreements to the Agencies. The fair value of these instruments are valuedis estimated using a discounted cash flow model developed based on changes in the U.S. Treasury rate and other observable market data. The value was determined after considering the potential impact of collateralization, adjusted to reflect nonperformance risk of both the counterparty and the Company, and are classified within Level 3 of the valuation hierarchy. |
| ·
● | | Loans Held for Sale—LoansAll loans held for sale presented in the Consolidated Balance Sheets are reported at fair value. The Company determines the fair value of the loans held for sale using discounted cash flow models that incorporate quoted observable inputs from market participants.participants such as changes in the U.S. Treasury rate. Therefore, the Company classifies these loans held for sale as Level 2. |
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Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| ·
● | | Pledged Securities—Pledged securitiesInvestments in money market funds are valued using quoted market prices from recent trades. Therefore, the Company classifies this portion of pledged securities as Level 1. The Company determines the fair value of its AFS investments in Agency debt securities using discounted cash flows that incorporate observable inputs from market participants and then compares the fair value to broker estimates of fair value. Consequently, the Company classifies this portion of pledged securities as Level 2. |
Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 20172020 and 2016,2019, segregated by the level of the valuation inputs within the fair value hierarchy used to measure fair value: | | | | | | | | | | | | | | | | | Quoted Prices in | | Significant | | Significant | | | | | | | | Active Markets | | Other | | Other | | | | | | | | For Identical | | Observable | | Unobservable | | | | | | | | Assets | | Inputs | | Inputs | | Balance as of | | | | | | | | | | | | | | | | | | | | | Quoted Prices in | | Significant | | Significant | | | | | | | | Active Markets | | Other | | Other | | | | | | | | For Identical | | Observable | | Unobservable | | | | | | | | Assets | | Inputs | | Inputs | | Balance as of | | (in thousands) | | (Level 1) | | (Level 2) | | (Level 3) | | Period End | | | (Level 1) | | (Level 2) | | (Level 3) | | Period End | | December 31, 2017 | | | | | | | | | | | | | | | December 31, 2020 | | | | | | | | | | | | | | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans held for sale | | $ | — | | $ | 951,829 | | $ | — | | $ | 951,829 | | | $ | — | | $ | 2,449,198 | | $ | — | | $ | 2,449,198 | | Pledged securities | | | 97,859 | | | — | | | — | | | 97,859 | | | | 17,473 | | | 119,763 | | | — | | | 137,236 | | Derivative assets | | | — | | | — | | | 10,357 | | | 10,357 | | | | — | | | — | | | 49,786 | | | 49,786 | | Total | | $ | 97,859 | | $ | 951,829 | | $ | 10,357 | | $ | 1,060,045 | | | $ | 17,473 | | $ | 2,568,961 | | $ | 49,786 | | $ | 2,636,220 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative liabilities | | $ | — | | $ | — | | $ | 1,850 | | $ | 1,850 | | | $ | — | | $ | — | | $ | 5,066 | | $ | 5,066 | | Total | | $ | — | | $ | — | | $ | 1,850 | | $ | 1,850 | | | $ | — | | $ | — | | $ | 5,066 | | $ | 5,066 | | | | | | | | | | | | | | | | | December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | | | | | | | | | | | | | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans held for sale | | $ | — | | $ | 1,858,358 | | $ | — | | $ | 1,858,358 | | | $ | — | | $ | 787,035 | | $ | — | | $ | 787,035 | | Pledged securities | | | 84,850 | | | — | | | — | | | 84,850 | | | | 7,204 | | | 114,563 | | | — | | | 121,767 | | Derivative assets | | | — | | | — | | | 61,824 | | | 61,824 | | | | — | | | — | | | 15,568 | | | 15,568 | | Total | | $ | 84,850 | | $ | 1,858,358 | | $ | 61,824 | | $ | 2,005,032 | | | $ | 7,204 | | $ | 901,598 | | $ | 15,568 | | $ | 924,370 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative liabilities | | $ | — | | $ | — | | $ | 4,396 | | $ | 4,396 | | | $ | — | | $ | — | | $ | 36 | | $ | 36 | | Total | | $ | — | | $ | — | | $ | 4,396 | | $ | 4,396 | | | $ | — | | $ | — | | $ | 36 | | $ | 36 | |
There were no0 transfers between any of the levels within the fair value hierarchy during the yearsyear ended December 31, 2017 and 2016. 2020. Derivative instruments (Level 3) are outstanding for short periods of time (generally less than 60 days). A roll forward of derivative instruments is presented below:below for the years ended December 31, 2020 and 2019: | | | | | | | | Fair Value Measurements | | | | | Using Significant | | | | | Unobservable Inputs: | | | | | Derivative Instruments | | | | | | | | | | | | Fair Value Measurements | | | | | Using Significant | | | | | Unobservable Inputs: | | | | | Derivative Instruments | | (in thousands) | | December 31, 2017 | | | December 31, 2020 | | Derivative assets and liabilities, net | | | | | | | | | Beginning balance December 31, 2016 | | $ | 57,428 | | | Beginning balance December 31, 2019 | | | $ | 15,532 | | Settlements | | | (488,291) | | | | (687,874) | | Realized gains recorded in earnings (1) | | | 430,863 | | | | 672,342 | | Unrealized gains recorded in earnings (1) | | | 8,507 | | | | 44,720 | | Ending balance December 31, 2017 | | $ | 8,507 | | | Ending balance December 31, 2020 | | | $ | 44,720 | |
Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements | | | | | | | Fair Value Measurements | | | | Using Significant | | | | Unobservable Inputs: | | | | Derivative Instruments | | (in thousands) | | December 31, 2019 | | Derivative assets and liabilities, net | | | | | Beginning balance December 31, 2018 | | $ | 2,839 | | Settlements | | | (426,544) | | Realized gains (losses) recorded in earnings (1) | | | 423,705 | | Unrealized gains (losses) recorded in earnings (1) | | | 15,532 | | Ending balance December 31, 2019 | | $ | 15,532 | |
| | | | | | | Fair Value Measurements | | | | Using Significant | | | | Unobservable Inputs: | | | | Derivative Instruments | | (in thousands) | | December 31, 2016 | | Derivative assets and liabilities, net | | | | | Beginning balance December 31, 2015 | | $ | 10,345 | | Settlements | | | (320,102) | | Realized gains (losses) recorded in earnings (1) | | | 309,757 | | Unrealized gains (losses) recorded in earnings (1) | | | 57,428 | | Ending balance December 31, 2016 | | $ | 57,428 | |
| (1) | (1)
| | Realized and unrealized gains from derivatives are recognized in GainsLoan origination and debt brokerage fees, net and Fair value of expected net cash flows from mortgage banking activitiesservicing, net in the Consolidated Statements of Income. |
The following table presents information about significant unobservable inputs used in the recurring measurement of the fair value of the Company’s Level 3 assets and liabilities as of December 31, 2017:2020: | | | | | | | | | | | | | Quantitative Information about Level 3 Measurements | | (in thousands) | | Fair Value | | Valuation Technique | | Unobservable Input (1) | | Input Value (1) | | Derivative assets | | $ | 49,786 | | Discounted cash flow | | Counterparty credit risk | | — | | Derivative liabilities | | $ | 5,066 | | Discounted cash flow | | Counterparty credit risk | | — | |
| | | | | | | | | | | | | Quantitative Information about Level 3 Measurements | | (in thousands) | | Fair Value | | Valuation Technique | | Unobservable Input (1) | | Input Value (1) | | Derivative assets | | $ | 10,357 | | Discounted cash flow | | Counterparty credit risk | | — | | Derivative liabilities | | $ | 1,850 | | Discounted cash flow | | Counterparty credit risk | | — | |
| (1) | (1)
| | Significant increases in this input may lead to significantly lower fair value measurements. |
The carrying amounts and the fair values of the Company's financial instruments as of December 31, 20172020 and December 31, 20162019 are presented below: | | | | | | | | | | | | | | | | December 31, 2017 | | December 31, 2016 | | | | Carrying | | Fair | | Carrying | | Fair | | (in thousands) | | Amount | | Value | | Amount | | Value | | Financial assets: | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 191,218 | | $ | 191,218 | | $ | 118,756 | | $ | 118,756 | | Restricted cash | | | 6,677 | | | 6,677 | | | 9,861 | | | 9,861 | | Pledged securities | | | 97,859 | | | 97,859 | | | 84,850 | | | 84,850 | | Loans held for sale | | | 951,829 | | | 951,829 | | | 1,858,358 | | | 1,858,358 | | Loans held for investment, net | | | 66,510 | | | 66,963 | | | 220,377 | | | 222,313 | | Derivative assets | | | 10,357 | | | 10,357 | | | 61,824 | | | 61,824 | | Total financial assets | | $ | 1,324,450 | | $ | 1,324,903 | | $ | 2,354,026 | | $ | 2,355,962 | | | | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | | | Derivative liabilities | | $ | 1,850 | | $ | 1,850 | | $ | 4,396 | | $ | 4,396 | | Warehouse notes payable | | | 937,769 | | | 939,500 | | | 1,990,183 | | | 1,992,111 | | Note payable | | | 163,858 | | | 166,223 | | | 164,163 | | | 167,327 | | Total financial liabilities | | $ | 1,103,477 | | $ | 1,107,573 | | $ | 2,158,742 | | $ | 2,163,834 | |
| | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | | | Carrying | | Fair | | Carrying | | Fair | | (in thousands) | | Amount | | Value | | Amount | | Value | | Financial assets: | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 321,097 | | $ | 321,097 | | $ | 120,685 | | $ | 120,685 | | Restricted cash | | | 19,432 | | | 19,432 | | | 8,677 | | | 8,677 | | Pledged securities | | | 137,236 | | | 137,236 | | | 121,767 | | | 121,767 | | Loans held for sale | | | 2,449,198 | | | 2,449,198 | | | 787,035 | | | 787,035 | | Loans held for investment, net | | | 360,402 | | | 362,586 | | | 543,542 | | | 546,033 | | Derivative assets | | | 49,786 | | | 49,786 | | | 15,568 | | | 15,568 | | Total financial assets | | $ | 3,337,151 | | $ | 3,339,335 | | $ | 1,597,274 | | $ | 1,599,765 | | | | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | | | Derivative liabilities | | $ | 5,066 | | $ | 5,066 | | $ | 36 | | $ | 36 | | Secured borrowings | | | 73,314 | | | 73,314 | | | 70,548 | | | 70,548 | | Warehouse notes payable | | | 2,517,156 | | | 2,518,101 | | | 906,128 | | | 906,821 | | Note payable | | | 291,593 | | | 294,773 | | | 293,964 | | | 297,750 | | Total financial liabilities | | $ | 2,887,129 | | $ | 2,891,254 | | $ | 1,270,676 | | $ | 1,275,155 | |
The following methods and assumptions were used to estimate thefor recurring fair value measurements as of each class of financial instruments for which it is practicable to estimate that value:December 31, 2020: Cash and Cash Equivalents and Restricted Cash—The carrying amounts approximate fair value because of the short maturity of these instruments (Level 1). Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Pledged Securities—Consist of cash, highly liquid investments in money market accounts invested in government securities, and investments in government guaranteedAgency debt securities. Substantially allThe investments of the money market funds typically have maturities of 90 days or less and are valued Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements using quoted market prices from recent trades. The fair value of the Agency debt securities incorporates the contractual cash flows of the security discounted at market-rate, risk-adjusted yields. Loans Held For Sale—Consist of originated loans that are generally transferred or sold within 60 days from the date that a mortgage loan is funded and are valued using discounted cash flow models that incorporate observable prices from market participants. Loans HeldFor Investment—Consist of originated interim loans which the Company expects to hold for investment for the term of the loan, which is three years or less, and are valued using discounted cash flow models that incorporate primarily observable inputs from market participants and also credit-related adjustments, if applicable (Level 3). As of December 31, 2017 and December 31, 2016, no credit-related adjustments were required.
Derivative Instruments—Consist of interest rate lock commitments and forward sale agreements. These instruments are valued using discounted cash flow models developed based on changes in the U.S. Treasury rate and other observable market data. The value is determined after considering the potential impact of collateralization, adjusted to reflect nonperformance risk of both the counterparty and the Company. Warehouse Notes Payable—Consist of borrowings outstanding under warehouse line agreements. The borrowing rates on the warehouse lines are based upon 30-day LIBOR plus a margin. The unpaid principal balance of warehouse notes payable approximates fair value because of the short maturity of these instruments and the monthly resetting of the index rate to prevailing market rates (Level 2).
Note Payable—Consists of borrowings outstanding under a term note agreement. The borrowing rate on the note payable is based upon 30-day LIBOR plus an applicable margin. The Company estimates the fair value by discounting the future cash flows at market rates (Level 2).
Fair Value of Derivative Instruments and Loans Held for Sale—In the normal course of business, the Company enters into contractual commitments to originate and sell multifamily mortgage loans at fixed prices with fixed expiration dates. The commitments become effective when the borrowers "lock-in" a specified interest rate within time frames established by the Company. All mortgagors are evaluated for creditworthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the "lock-in" of rates by the borrower and the sale date of the loan to an investor. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the Company's policy is to enterenters into a sale commitment with the investor simultaneoussimultaneously with the rate lock commitment with the borrower. The sale contract with the investor locks in an interest rate and price for the sale of the loan. The terms of the contract with the investor and the rate lock with the borrower are matched in substantially all respects, with the objective of eliminating interest rate risk to the extent practical. Sale commitments with the investors have an expiration date that is longer than our related commitments to the borrower to allow, among other things, for the closing of the loan and processing of paperwork to deliver the loan into the sale commitment. Both the rate lock commitments to borrowers and the forward sale contracts to buyers are undesignated derivatives and, accordingly, are marked to fair value through Gains on mortgage banking activitiesLoan origination and debt brokerage fees, net in the Consolidated Statements of Income. The fair value of the Company's rate lock commitments to borrowers and loans held for sale and the related input levels includes, as applicable: | ·
● | | the estimated gain of the expected loan sale to the investor (Level 2); |
| ·
● | | the expected net cash flows associated with servicing the loan, net of any guaranty obligations retained (Level 2); |
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Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| ·
● | | the effects of interest rate movements between the date of the rate lock and the balance sheet date (Level 2); and |
| ·
● | | the nonperformance risk of both the counterparty and the Company (Level 3)3; derivative instruments only). |
The estimated gain considers the origination fees the Company expects to collect upon loan closing (derivative instruments only) and premiums the Company expects to receive upon sale of the loan (Level 2). The fair value of the expected net cash flows associated with servicing the loan is calculated pursuant to the valuation techniques applicable to the fair value of future servicing, net at loan sale (Level 2). To calculate the effects of interest rate movements, the Company uses applicable published U.S. Treasury prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount (Level 2). The fair value of the Company's forward sales contracts to investors considers effects of interest rate movements between the trade date and the balance sheet date (Level 2). The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value. The estimated gain considers the amount that the Company has discounted the price to the borrower from par for competitive reasons, if at all, and the expected net cash flows from servicing to be received upon sale of the loan (Level 2). The fair value of the expected net cash flows associated with servicing the loan is calculated pursuant to the valuation techniques applicable to MSRs (Level 2).
To calculate the effects of interest rate movements, the Company uses applicable published U.S. Treasury prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount (Level 2).
The fair value of the Company's forward sales contracts to investors considers the market price movement of the same type of security between the trade date and the balance sheet date (Level 2). The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.
The fair value of the Company’s interest rate lock commitments and forward sales contracts is adjusted to reflect the risk that the agreement will not be fulfilled. The Company’s exposure to nonperformance in interest rate lock commitments and forward sale contracts is represented by the contractual amount of those instruments. Given the credit quality of our counterparties and the short duration of interest rate lock commitments and forward sale contracts, the risk of nonperformance by the Company’s counterparties has historically not been significantminimal (Level 3). Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table presents the components of fair value and other relevant information associated with the Company’s derivative instruments and loans held for sale as of December 31, 20172020 and 2016. | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value Adjustment Components | | Balance Sheet Location | | | | | | | | | | | | | | | | | | | | | | Fair Value | | | | Notional or | | Estimated | | | | | Total | | | | | | | | Adjustment | | | | Principal | | Gain | | Interest Rate | | Fair Value | | Derivative | | Derivative | | To Loans | | (in thousands) | | Amount | | on Sale | | Movement | | Adjustment | | Assets | | Liabilities | | Held for Sale | | December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | Rate lock commitments | | $ | 241,760 | | $ | 7,587 | | $ | (678) | | $ | 6,909 | | $ | 6,909 | | $ | — | | $ | — | | Forward sale contracts | | | 1,175,192 | | | — | | | 1,598 | | | 1,598 | | | 3,448 | | | (1,850) | | | — | | Loans held for sale | | | 933,432 | | | 19,317 | | | (920) | | | 18,397 | | | — | | | — | | | 18,397 | | Total | | | | | $ | 26,904 | | $ | — | | $ | 26,904 | | $ | 10,357 | | $ | (1,850) | | $ | 18,397 | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | �� | Rate lock commitments | | $ | 395,462 | | $ | 15,844 | | $ | (2,275) | | $ | 13,569 | | $ | 14,482 | | $ | (913) | | $ | — | | Forward sale contracts | | | 2,248,385 | | | — | | | 43,859 | | | 43,859 | | | 47,342 | | | (3,483) | | | — | | Loans held for sale | | | 1,852,923 | | | 47,019 | | | (41,584) | | | 5,435 | | | — | | | — | | | 5,435 | | Total | | | | | $ | 62,863 | | $ | — | | $ | 62,863 | | $ | 61,824 | | $ | (4,396) | | $ | 5,435 | |
Table of Contents2019.
Walker & Dunlop, Inc. and Subsidiaries
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value Adjustment Components | | Balance Sheet Location | | | | | | | | | | | | | | | | | | | | | | Fair Value | | | | Notional or | | Estimated | | | | | Total | | | | | | | | Adjustment | | | | Principal | | Gain | | Interest Rate | | Fair Value | | Derivative | | Derivative | | to Loans | | (in thousands) | | Amount | | on Sale | | Movement | | Adjustment | | Assets | | Liabilities | | Held for Sale | | December 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | Rate lock commitments | | $ | 1,374,784 | | $ | 45,581 | | $ | (1,697) | | $ | 43,884 | | $ | 43,895 | | $ | (11) | | $ | — | | Forward sale contracts | | | 3,760,953 | | | — | | | 836 | | | 836 | | | 5,891 | | | (5,055) | | | — | | Loans held for sale | | | 2,386,169 | | | 62,167 | | | 861 | | | 63,028 | | | — | | | — | | | 63,028 | | Total | | | | | $ | 107,748 | | $ | — | | $ | 107,748 | | $ | 49,786 | | $ | (5,066) | | $ | 63,028 | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | Rate lock commitments | | $ | 511,114 | | $ | 12,199 | | $ | (1,975) | | $ | 10,224 | | $ | 10,247 | | $ | (23) | | $ | — | | Forward sale contracts | | | 1,285,656 | | | — | | | 5,308 | | | 5,308 | | | 5,321 | | | (13) | | | — | | Loans held for sale | | | 774,542 | | | 15,826 | | | (3,333) | | | 12,493 | | | — | | | — | | | 12,493 | | Total | | | | | $ | 28,025 | | $ | — | | $ | 28,025 | | $ | 15,568 | | $ | (36) | | $ | 12,493 | |
Notes to Consolidated Financial Statements
NOTE 10—LITIGATION,9—FANNIE MAE COMMITMENTS AND CONTINGENCIESPLEDGED SECURITIES Fannie Mae DUS Related Commitments—Commitments for the origination and subsequent sale and delivery of loans to Fannie Mae represent those mortgage loan transactions where the borrower has locked an interest rate and scheduled closing and the Company has entered into a mandatory delivery commitment to sell the loan to Fannie Mae. As discussed in NOTE 9,8, the Company accounts for these commitments as derivatives recorded at fair value. The Company is generally required to share the risk of any losses associated with loans sold under the Fannie Mae DUS program. The Company is required to secure these obligations by assigning restricted cash balances and securities to Fannie Mae.Mae, which are classified as Pledged securities, at fair value on the Consolidated Balance Sheets. The amount of collateral required by Fannie Mae is a formulaic calculation at the loan level and considers the balance of the loan, the risk level of the loan, the age of the loan, and the level of risk-sharing. Fannie Mae requires restricted liquidity for Tier 2 loans of 75 basis points, which is funded over a 48-month period that begins upon delivery of the loan to Fannie Mae. Restricted liquidityPledged securities held in the form of money market funds holding U.S. Treasuries isare discounted 5%, and Agency MBS are discounted 4% for purposes of calculating compliance with the restricted liquidity requirements. As seen below, the Company held substantially all of its pledged securities in Agency MBS as of December 31, 2017, the Company held the2020. The majority of its restricted liquidity in money market funds holding U.S. Treasuries. Additionally, substantially all of the loans for which the Company has risk sharing are Tier 2 loans. The Company is in compliance with the December 31, 20172020 collateral requirements as outlined above. As of December 31, 2017,2020, reserve requirements for the December 31, 20172020 DUS loan portfolio will require the Company to fund $67.2$65.0 million in additional restricted liquidity over the next 48 months,48-months, assuming no further principal paydowns, prepayments, or defaults within the at riskat-risk portfolio. Fannie Mae periodically reassesseshas in the past reassessed the DUS Capital Standards and may make changes to these standards in the future. The Company generates sufficient cash flow from its operations to meet these capital standards and does not expect any future changes to have a material impact on its future operations; however, any future changesincreases to collateral requirements may adversely impact the Company’s available cash. Fannie Mae has established benchmark standards for capital adequacy and reserves the right to terminate the Company's servicing authority for all or some of the portfolio if at any time it determines that the Company's financial condition is not adequate to support its obligations under the DUS agreement. The Company is required to maintain acceptable net worth as defined in the agreement, and the Company satisfied the requirements as of December 31, 2017.2020. The net worth requirement is derived primarily from unpaid balances on Fannie Mae loans and the level of risk sharing. At December 31, 2017,2020, the net worth requirement was $155.8$228.0 million, and the Company's net worth was $725.9$991.1 million, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC. As of December 31, 2017,2020, the Company was required to maintain at least $30.7$45.2 million of liquid assets to meet operational liquidity requirements for Fannie Mae, Freddie Mac, HUD, and Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements Ginnie Mae. As of December 31, 2017, theMae. The Company had operational liquidity of $238.6$370.0 million,, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC.LLC. LitigationPledged Securities—In the ordinary course of business, the Company may be party to various claims and litigation, none of which the Company believes is material. The Company cannot predict the outcome of any pending litigation and may be subject to consequences that could include fines, penalties, and other costs, and the Company’s reputation and business may be impacted. The Company believes that any liability that could be imposed on the Company in connection with the disposition of any pending lawsuits would not have a material adverse effect on its business, results of operations, liquidity, or financial condition.
Lease Commitments—In the normal course of business, the Company enters into lease arrangements for all of its office space. All such lease arrangements are accounted for as operating leases. Rent expense related to these lease agreements is recognized on the straight-line basis over the termPledged securities, at fair value consisted of the lease. Rent expense was $7.1 million, $6.4 million, and $5.9 million for the years ended December 31, 2017, 2016, and 2015, respectively.
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Notes to Consolidated Financial Statements
Minimum cash basis operating lease commitments follow (in thousands):
| | | | | Year Ending December 31, | | | | 2018 | | $ | 6,054 | | 2019 | | | 5,860 | | 2020 | | | 5,436 | | 2021 | | | 4,904 | | 2022 | | | 4,498 | | Thereafter | | | 3,267 | | Total | | $ | 30,019 | |
NOTE 11—SHARE-BASED PAYMENT
Asfollowing balances as of December 31, 2017,2020, 2019, 2018, and 2017:
| | | | | | | | | | | | | | December 31, | | Pledged Securities (in thousands) | 2020 | | 2019 | | 2018 | | 2017 | | Restricted cash | $ | 4,954 | | $ | 2,150 | | $ | 3,029 | | $ | 2,201 | | Money market funds | | 12,519 | | | 5,054 | | | 6,440 | | | 86,584 | | Total pledged cash and cash equivalents | $ | 17,473 | | $ | 7,204 | | $ | 9,469 | | $ | 88,785 | | Agency MBS | | 119,763 | | | 114,563 | | | 106,862 | | | 9,074 | | Total pledged securities, at fair value | $ | 137,236 | | $ | 121,767 | | $ | 116,331 | | $ | 97,859 | |
The information in the preceding table is presented to reconcile beginning and ending cash, cash equivalents, restricted cash, and restricted cash equivalents in the Consolidated Statements of Cash Flows as more fully discussed in NOTE 2. The following table provides additional information related to the AFS Agency MBS as of December 31, 2020 and 2019: | | | | | | | Fair Value and Amortized Cost of Agency MBS (in thousands) | December 31, 2020 | | December 31, 2019 | | Fair value | $ | 119,763 | | $ | 114,563 | | Amortized cost | | 117,136 | | | 113,580 | | Total gains for securities with net gains in AOCI | | 2,669 | | | 1,145 | | Total losses for securities with net losses in AOCI | | (42) | | | (162) | | Fair value of securities with unrealized losses | | 12,267 | | | 66,526 | |
NaN of the pledged securities has been in a continuous unrealized loss position for more than 12-months. The following table provides contractual maturity information related to Agency MBS. The money market funds invest in short-term Federal Government and Agency debt securities and have no stated maturity date. | | | | | | | | December 31, 2020 | | Detail of Agency MBS Maturities (in thousands) | Fair Value | | Amortized Cost | | Within one year | $ | — | | $ | — | | After one year through five years | | 9,477 | | | 9,474 | | After five years through ten years | | 82,278 | | | 81,469 | | After ten years | | 28,008 | | | 26,193 | | Total | $ | 119,763 | | $ | 117,136 | | | | | | | | |
NOTE 10—SHARE-BASED PAYMENT During 2020, the Company registered 2 million shares under the 2020 Equity Incentive Plan, which constitutes an amendment to and restatement of the 2015 Equity Incentive Plan. As a result of the registration, there were 8.5are 10.5 million shares of stock authorized for issuance under the 2020 Equity Incentive Plan (and predecessor plans) to directors, officers, and employees under the 2015 Equity Incentive Plan. employees. At December 31, 2017, 2.12020, 2.2 million shares remain available for grant under the 20152020 Equity Incentive Plan. During 2017, 2016, and 2015,Under the 2020 Equity Incentive Plan (and predecessor plans), the Company granted stock options to executive officers underin the 2015 Equity Incentive Planpast and restricted shares to executive officers, employees, and non-employee directors during 2020, 2019, and 2018, all without cost to the grantee. During 2017, 2016,For each of the three years ended December 31, 2020, 2019, and 2015,2018, the Company also granted 0.3 million 0.5 million, and zero RSUs respectively, to the executive officers and certain other employees in connection with PSPs (“performance awards”). The Company granted the RSUs at the maximum performance thresholds for each metric each year. As of December 31, 2017, all of2020, the RSUs issued in connection with the 20162020, 2019, and 20172018 PSPs are unvested and outstanding.
Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements The performance period for the 20142017 PSP concluded on December 31, 2016.2019. The two3 performance goals related to the 20142017 PSP were met at varying levels. Accordingly, 0.60.2 million shares related to the 20142017 PSP vested in the first quarter of 2017.2020. As of December 31, 2017,2020, the Company concluded that the three3 performance targets related to the 20162019 PSP and the 20172020 PSP were probable of achievement at varying levels and 2 performance targets related to the 2018 PSP were probable of achievement at various levels. As of December 31, 2016,2019, the Company concluded that the three3 performance targets related to the 20162017 PSP and 2019 PSP were probable of achievement at varying levels.levels and 1 performance target related to the 2018 PSP was probable of achievement at the target level. The following table summarizes stock compensation expense for the years ended December 31, 2017, 2016,2020, 2019, and 2015:2018: | | | | | | | | | | | | | | | | | | | | | | | | | | | For the year ended December 31, | | Components of stock compensation expense (in thousands) | | 2017 | | 2016 | | 2015 | | | 2020 | | 2019 | | 2018 | | Restricted shares | | $ | 12,336 | | $ | 10,272 | | $ | 8,214 | | | $ | 18,924 | | $ | 17,818 | | $ | 14,741 | | Stock options | | | 1,570 | | | 1,768 | | | 1,957 | | | | 71 | | | 625 | | | 1,124 | | 2014 PSP | | | 766 | | | 3,625 | | | 3,913 | | | 2016 PSP | | | 4,728 | | | 2,812 | | | — | | | 2017 PSP | | | 1,734 | | | — | | | — | | | PSP "RSUs" | | | | 9,324 | | | 5,632 | | | 8,094 | | Total stock compensation expense | | $ | 21,134 | | $ | 18,477 | | $ | 14,084 | | | $ | 28,319 | | $ | 24,075 | | $ | 23,959 | | | | | | | | | | | | | | | | | | | | | | | | | | Excess tax benefit recognized | | $ | 9,545 | | $ | 631 | | $ | 1,410 | | | $ | 7,273 | | $ | 4,632 | | $ | 6,848 | | | | | | | | | | | | | | | | | | | | | | | | | |
The amounts attributable to restricted shares amounts in the table above include both equity-classified awards granted in restricted shares and liability-classified awards to be granted in restricted shares. The excess tax benefits recognized in 2017 and 2016above reduced income tax expense, while the excess tax benefit recognized in 2015 was recorded directly to equity with no impact on income tax expense. Table of Contents
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Notes to Consolidated Financial Statements
The following table summarizes restricted share activity for the year ended December 31, 2017:2020: | | | | | | | | | | | | Weighted- | | | | | | | Average | | | | | | | Grant-date | | | Restricted Shares | | Shares | | Fair Value | | | Nonvested at January 1, 2017 | | 1,481,483 | | $ | 20.71 | | | | | | | | | | | | | | | | Weighted- | | | | | | | Average | | | | | | | Grant-date | | Restricted Shares Activity | | | Shares | | Fair Value | | Nonvested at January 1, 2020 | | | 1,085,376 | | $ | 48.39 | | Granted | | 385,379 | | | 41.15 | | | 548,045 | | | 74.75 | | Vested | | (507,442) | | | 20.08 | | | (459,409) | | | 44.62 | | Forfeited | | (14,897) | | | 27.67 | | | (51,398) | | | 56.81 | | Nonvested at December 31, 2017 | | 1,344,523 | | $ | 26.68 | | | Nonvested at December 31, 2020 | | | 1,122,614 | | $ | 62.41 | |
The fair value of restricted share awards granted during 20172020 was estimated using the closing price on the date of grant. The weighted average grant date fair values of restricted shares granted in 20162019 and 20152018 were $21.51$48.39 per share and $21.03$52.25 per share, respectively. The fair values of the restricted shares that vested during the years ended December 31, 2017, 2016,2020, 2019, and 20152018 were $21.2$30.4 million, $10.3$30.5 million, and $9.6$29.6 million, respectively. As of December 31, 2017,2020, the total unrecognized compensation cost for outstanding restricted shares was $18.9$43.5 million. As of December 31, 2017,2020, the weighted-average period over which this unrecognized compensation cost will be recognized is 2.42.8 years. Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table summarizes activity related to performance awards for the year ended December 31, 2017:2020: | | | | | | | | | | | | Weighted- | | | | | | | Average | | | | | | | Grant-date | | | Restricted Share Units | | Share Units | | Fair Value | | | Nonvested at January 1, 2017 | | 1,164,791 | | $ | 19.61 | | | | | | | | | | | | | | | | Weighted- | | | | | | | Average | | | | | | | Grant-date | | Restricted Share Units Activity | | | Share Units | | Fair Value | | Nonvested at January 1, 2020 | | | 890,049 | | $ | 47.87 | | Granted | | 335,991 | | | 41.79 | | | 269,779 | | | 50.26 | | Vested | | (579,589) | | | 16.07 | | | (222,273) | | | 41.79 | | Forfeited | | (59,875) | | | 16.07 | | | (137,434) | | | 44.22 | | Nonvested at December 31, 2017 | | 861,318 | | $ | 30.89 | | | | | | | | | | | Cancelled | | | (29,628) | | | 67.13 | | Nonvested at December 31, 2020 | | | 770,493 | | $ | 50.37 | |
The fair value of performance awards granted during 20172020 was estimated using the closing price on the date of grant. The weighted average grant date fair values of performance awards granted in 2016 was $23.922019 and 2018 were $52.84 per share. There were no performance shares granted in 2015.share and $49.72 per share, respectively. The fair value of the performance awards that vested during the yearyears ended December 31, 20172020 and 2019 was $23.1 million.$17.5 million and $26.6 million, respectively. There were no0 performance awards that vested during the yearsyear ended December 31, 2016 and 2015.2018. As of December 31, 2017,2020, the total unrecognized compensation cost for outstanding performance awards was $10.0$13.7 million. As of December 31, 2017,2020, the weighted-average period over which this unrecognized compensation cost will be recognized is 1.61.9 years. The unrecognized compensation cost is based on the achievement levels that are probable as of December 31, 2017.2020. Table of Contents
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Notes to Consolidated Financial Statements
The following table summarizes stock options activity for the year ended December 31, 2017:2020: | | | | | | | | | | | | | | | | | | | | Weighted- | | | | | | | | | | Weighted- | | Average | | Aggregate | | | | | | | Average | | Remaining | | Intrinsic | | | | | | | Exercise | | Contract Life | | Value | | | Stock Options | | Options | | Price | | (Years) | | (in thousands) | | | Outstanding at January 1, 2017 | | 1,295,375 | | $ | 16.97 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted- | | | | | | | | | | Weighted- | | Average | | Aggregate | | | | | | | Average | | Remaining | | Intrinsic | | | | | | | Exercise | | Contract Life | | Value | | Stock Options Activity | | | Options | | Price | | (Years) | | (in thousands) | | Outstanding at January 1, 2020 | | | 983,082 | | $ | 19.72 | | | | | | | Granted | | 112,731 | | | 39.82 | | | | | | | | — | | | — | | | | | | | Exercised | | (11,400) | | | 46.98 | | | | | | | | (521,742) | | | 17.26 | | | | | | | Forfeited | | — | | | — | | | | | | | | — | | | — | | | | | | | Expired | | — | | | — | | | | | | | | — | | | — | | | | | | | Outstanding at December 31, 2017 | | 1,396,706 | | $ | 18.85 | | 6.3 | | $ | 40,018 | | | | | | | | | | | | | | | | Exercisable at December 31, 2017 | | 1,061,465 | | $ | 16.59 | | 5.7 | | $ | 32,812 | | | Outstanding at December 31, 2020 | | | 461,340 | | $ | 22.51 | | 4.4 | | $ | 32,069 | | | | | | | | | | | | | | | Exercisable at December 31, 2020 | | | 461,340 | | $ | 22.51 | | 4.4 | | $ | 32,069 | |
The total intrinsic value of the stock options exercised during the years ended December 31, 2017, 2016,2020, 2019, and 20152018 was $0.4$21.6 million, $0.2$2.7 million, and $2.6$13.5 million, respectively. We received no0 cash from the exercise of options for each of the years ended December 31, 2017, 2016,2020, 2019, and 2015.2018. NOTE 11—EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY AsEarnings per share (“EPS”) is calculated under the two-class method. The two-class method allocates all earnings (distributed and undistributed) to each class of common stock and participating securities based on their respective rights to receive dividends. The Company grants share-based awards to various employees and nonemployee directors under the 2020 Equity Incentive Plan that entitle recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. These unvested awards meet the definition of participating securities.
The following table presents the calculation of basic and diluted EPS for the years ended December 31, 2017,2020, 2019, and 2018 under the total unrecognized compensation cost for outstanding options was $1.8 million. Astwo-class method. Participating securities were included in the calculation of December 31, 2017, the weighted-average period over which the unrecognized compensation cost will be recognized is 1.8 years. The fair value of stock option awards granted during 2017, 2016, and 2015 were estimated on the grant datediluted EPS using the Black-Scholes option pricing model, based ontwo-class method, as this computation was more dilutive than the following inputs:treasury-stock method.
| | | | | | | | | | | | | 2017 | | 2016 | | 2015 | | Estimated option life | | | 6.00 years | | | 6.00 years | | | 6.00 years | | Risk free interest rate | | | 2.04 | % | | 1.31 | % | | 1.68 | % | Expected volatility | | | 35.34 | % | | 34.42 | % | | 33.48 | % | Expected dividend rate | | | 0.00 | % | | 0.00 | % | | 0.00 | % | Strike price | | $ | 39.82 | | $ | 20.40 | | $ | 16.72 | | Weighted average grant date fair value per share of options granted | | $ | 14.98 | | $ | 7.21 | | $ | 5.90 | |
Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements | | | | | | | | | | | | | For the years ended December 31, | | EPS Calculations (in thousands, except per share amounts) | | 2020 | | 2019 | | 2018 | | Calculation of basic EPS | | | | | | | | | | | Walker & Dunlop net income | | $ | 246,177 | | $ | 173,373 | | $ | 161,439 | | Less: dividends and undistributed earnings allocated to participating securities | | | 7,337 | | | 5,649 | | �� | 5,790 | | Net income applicable to common stockholders | | $ | 238,840 | | $ | 167,724 | | $ | 155,649 | | Weighted-average basic shares outstanding | | | 30,444 | | | 29,913 | | | 30,202 | | Basic EPS | | $ | 7.85 | | $ | 5.61 | | $ | 5.15 | | | | | | | | | | | | | Calculation of diluted EPS | | | | | | | | | | | Net income applicable to common stockholders | | $ | 238,840 | | $ | 167,724 | | $ | 155,649 | | Add: reallocation of dividends and undistributed earnings based on assumed conversion | | | 120 | | | 126 | | | 170 | | Net income allocated to common stockholders | | $ | 238,960 | | $ | 167,850 | | $ | 155,819 | | Weighted-average basic shares outstanding | | | 30,444 | | | 29,913 | | | 30,202 | | Add: weighted-average diluted non-participating securities | | | 639 | | | 902 | | | 1,182 | | Weighted-average diluted shares outstanding | | | 31,083 | | | 30,815 | | | 31,384 | | Diluted EPS | | $ | 7.69 | | $ | 5.45 | | $ | 4.96 | |
NOTE 12—EARNINGS PER SHARE
The following weighted average shares and share equivalents are used to calculate basic and diluted earnings per share for years ended December 31, 2017, 2016, and 2015:
| | | | | | | | | For the year ended December 31, | (in thousands) | | 2017 | | 2016 | | 2015 | Weighted average number of shares outstanding used to calculate basic earnings per share | | 30,014 | | 29,432 | | 29,754 | | | | | | | | Dilutive securities | | | | | | | Unvested restricted shares and restricted share units | | 1,406 | | 1,403 | | 952 | Stock options | | 785 | | 337 | | 243 | Weighted average number of shares and share equivalents outstanding used to calculate diluted earnings per share | | 32,205 | | 31,172 | | 30,949 | | | | | | | |
The assumed proceeds used for calculating the dilutive impact of restricted stock awards under the treasury method includes the unrecognized compensation costs associated with the awards. The following table presents anyAn immaterial number of average outstanding options to purchase shares of common stock and average restricted shares that were not included inexcluded from the computation of diluted earnings per share under the treasury method for the years ended December 31, 2020, 2019, and 2018 because the effect would have been anti-dilutive (the exercise price of the options or the grant date market price of the restricted shares was greater than the average market price of the Company’s shares during the periods presented). | | | | | | | | | | For the year ended December 31, | | (in thousands) | | 2017 | | 2016 | | 2015 | | Average options | | 99 | | 181 | | — | | Average restricted shares | | 6 | | 181 | | 14 | |
Under the 20152020 Equity Incentive Plan (and predecessor plans), subject to the Company’s approval, grantees have the option of electing to satisfy tax withholding obligations at the time of vesting or exercise by allowing the Company to withhold and purchase the shares of stock otherwise issuable to the grantee. For the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, the Company repurchased and retired 0.2 million, 0.2 million,179 thousand, 200 thousand, and 0.2 million200 thousand restricted shares at a weighted average market price of $41.21, $22.74,$66.38, $54.02, and $20.11,$51.86, upon grantee vesting, respectively. For the yearyears ended December 31, 2017,2020 and 2019, the Company repurchased and retired 0.3 million99 thousand and 200 thousand restricted share units at a weighted average market price of $39.82.$78.79 and $54.49, respectively. The Company did not0t repurchase any restricted share units during the yearsyear ended December 31, 2016 and 2015.2018. In the first quarter of 2015, the Company repurchased 3.0 million shares of its common stock from one of its largest stockholders at the time at a price of $15.60 per share, which was below the quoted price at the time, and immediately retired the shares, reducing stockholders’ equity by $46.8 million.Stock Repurchase Programs
During 2016, the Company repurchased 0.4 million shares of its common stock under a share repurchase program at a weighted average price of $23.11 per share and immediately retired the shares, reducing stockholders’ equity by $9.2 million.
In February 2017, the Company’s Board of Directors approved a stock repurchase program that permits the repurchase of up to $75.0 million of shares of our common stock over a 12-month period beginning on February 10, 2017. During 2017, the Company repurchased 0.3 million shares of its common stock under the share repurchase program at a weighted average price of $47.10 per share and immediately retired the shares, reducing stockholders’ equity by $16.0 million. The Company had $59.0 million of authorized share repurchase capacity remaining as of December 31, 2017. In February 2018,2021, the Company’s Board of Directors approved a new stock repurchase program that permits the repurchase of up to $50.0$75.0 million of shares of ourthe Company’s common stock over a 12-month period beginning on February 9, 2018.12, 2021.
In February 2020, the Company’s Board of Directors authorized the Company to repurchase up to $50.0 million of its common stock over a 12-month period beginning on February 11, 2020. In 2020, the Company repurchased 459 thousand shares of its common stock under the share repurchase program at a weighted average price of $56.77 per share and immediately retired the shares, reducing stockholders’ equity by $26.1 million. The Company had $23.9 million of authorized share repurchase capacity remaining under the 2020 share repurchase program as of December 31, 2020. In 2019, the Company repurchased 135 thousand shares of its common stock under a share repurchase program at a weighted average price of $48.52 per share and immediately retired the shares, reducing stockholders’ equity by $6.6 million. In 2018, the Company repurchased 1.2 million shares of its common stock under a share repurchase program at a weighted average price of $45.64 per share and immediately retired the shares, reducing stockholders’ equity by $57.0 million. Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements Dividends In February 2018, the Company’s2021, our Board of Directors declared a dividend of $0.25$0.50 per share for the first quarter of 2018.2021. The dividend will be paid March 7, 201811, 2021 to all holders of record of our restricted and unrestricted common stock and restricted stock units as of February 23, 2018. This dividend represents the first such payment of dividends since the Company’s initial public offering in December 2010. The Company expects this dividend to be an insignificant portion of the Company’s net income for the year ended December 31, 2017, retained earnings as of December 31, 2017, and cash and cash equivalents as of December 31, 2017.22, 2021. The Term Loan contains direct restrictions to the amount of dividends the Company may pay, and the warehouse debt facilities and agreements with the Agencies contain minimum equity, liquidity, and other capital requirements that indirectly restrict the amount of dividends the Company may pay.pay. The Company does not believe that these restrictions currently limit the amount of dividends the Company can pay for the foreseeable future. Other Equity-Related Transactions As disclosed in NOTE 13—7, the Company issued $5.0 million of Company stock in connection with acquisitions in 2020, a non-cash transaction. In 2020, the Company purchased the noncontrolling interests held by the 2 member of WDIS for an aggregate consideration of $32.0 million, which consisted of $10.4 million in cash, a $5.7 million reduction in receivables (a non-cash transaction), $5.9 million in Company stock (a non-cash transaction), and $10.0 million of contingent consideration (a non-cash transaction). The $32.0 million aggregated purchase price resulted in reductions to APIC of $24.1 million for the excess of the purchase price over the noncontrolling interest balance. As a result of the transactions, the Company recorded Net income (loss) from noncontrolling interests only for the first quarter of 2020 on the Consolidated Statements of Income. During 2019, the Company made an advance to 1 of the noncontrolling interest holders in the amount of $1.7 million to allow the noncontrolling interest holder to make a required contribution to WDIS. As this was a non-cash transaction, the amounts are not presented in the Consolidated Statements of Cash Flows. NOTE 12—INCOME TAXES Income Tax Expense The Company calculates its provision for federal and state income taxes based on current tax law. The reported tax provision differs from the amounts currently receivable or payable because some income and expense items are recognized in different time periods for financial reporting purposes than for income tax purposes. The following is a summary of income tax expense for the years ended December 31, 2017, 2016,2020, 2019, and 2015:2018: | | | | | | | | | | | | | | For the year ended December 31, | | | (in thousands) | | 2017 | | 2016 | | 2015 | | | | | | | | | | | | | | | | | | For the year ended December 31, | | Components of Income Tax Expense (in thousands) | | | 2020 | | 2019 | | 2018 | | Current | | | | | | | | | | | | | | | | | | | | | Federal | | $ | 45,726 | | $ | 28,699 | | $ | 29,117 | | | $ | 26,854 | | $ | 28,150 | | $ | 26,850 | | State | | | 7,062 | | | 5,176 | | | 5,325 | | | | 10,294 | | | 6,959 | | | 7,575 | | Total current expense | | $ | 52,788 | | $ | 33,875 | | $ | 34,442 | | | $ | 37,148 | | $ | 35,109 | | $ | 34,425 | | | | | | | | | | | | | | | | | | | | | | | | | | Deferred | | | | | | | | | | | | | | | | | | | | | Federal | | $ | 25,055 | | $ | 32,159 | | $ | 14,571 | | | $ | 37,354 | | $ | 17,484 | | $ | 13,964 | | State | | | 2,297 | | | 5,436 | | | 2,348 | | | | 9,811 | | | 4,528 | | | 3,519 | | Revaluation of deferred tax liabilities, net | | | (58,313) | | | — | | | — | | | Total deferred expense (benefit) | | $ | (30,961) | | $ | 37,595 | | $ | 16,919 | | | | | | | | | | | | | | | Items credited directly to stockholders' equity | | | | | | | | | | | | Federal | | $ | — | | $ | — | | $ | 1,218 | | | State | | | — | | | — | | | 192 | | | Total credits to stockholders' equity | | $ | — | | $ | — | | $ | 1,410 | | | Income tax expense | | $ | 21,827 | | $ | 71,470 | | $ | 52,771 | | | Total deferred expense | | | $ | 47,165 | | $ | 22,012 | | $ | 17,483 | | Total income tax expense | | | $ | 84,313 | | $ | 57,121 | | $ | 51,908 | |
In 2016, the Company adopted a new accounting standard that requires excess tax benefits from stock compensation to be recorded as a reduction to income tax expense instead of being recorded directly to equity. Excess tax benefits recognized for the years ended December 31, 20172020, 2019, and 20162018 reduced income tax expense by $9.5$7.3 million, $4.6 million, and $0.6$6.8 million, respectively. In the reconciliation of income tax expense presented below, the reduction of income tax expense from excess tax benefits recognized is included as a component of the “Other” line item.
Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements In December 2017, the Tax Cuts and Jobs Act (“Tax Reform”) was enacted. The Tax Reform significantly reducedchanged the Federal incomerules related to the deductibility of executive compensation under the provisions of Section 162(m) of the Internal Revenue Code (“162(m)”). Tax Reform also contains provisions for determining whether compensation agreements executed prior to Tax Reform follow the 162(m) guidance prior or subsequent to Tax Reform. During 2018, the Treasury Department issued initial guidance for determining, among other things, whether a compensation agreement in place prior to Tax Reform follows the 162(m) guidance prior or subsequent to Tax Reform. Based on the information available as of December 31, 2020, 2019 and 2018, the Company believed that it may be more likely than not these compensation agreements will follow the guidance subsequent to Tax Reform, resulting in no tax rate from 35.0% to 21.0%. GAAP requires an entity to accountdeductibility for the impactbook expense associated with these compensation agreements. Accordingly, as of a tax law change Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
in the period of enactment. Accordingly,December 31, 2018, the Company revalued itsrecorded a 100% valuation allowance on the associated deferred tax assets, andresulting in a $2.8 million charge to deferred tax liabilities usingexpense for the new Federal incomeyear ended December 31, 2018, which increased the effective tax rate of 21.0%, which isby 1.3%. During the rate atyear ended December 31, 2020 and 2019, performance awards for executives for which the Company expects the deferred assets and liabilities to reverse in the future. Deferred tax assets decreased as the future benefit from these assets will be less thanhad previously expected, resulting in an increase to deferred tax expense. Deferred tax liabilities also decreased as the future payment of taxes from these liabilities will be less than previously expected,recorded a valuation allowance vested, resulting in a decrease to in deferred tax expense. Asassets and the Company had more deferred tax liabilities than deferred tax assets asreversal of December 31, 2017, the impactcorresponding valuation allowance of Tax Reform on deferred tax expense was an overall significant decrease in deferred tax expense as shown above.$1.0 and $1.8 million, respectively.
AThe following table presents a reconciliation of the statutory federal tax expense to the income tax expense in the accompanying statementsConsolidated Statements of income follows:Income:
| | | | | | | | | | | | | | For the year ended December 31, | | | | | | | | | | | | | | | | | | For the year ended December 31, | | (in thousands) | | 2017 | | 2016 | | 2015 | | | 2020 | | 2019 | | 2018 | | Statutory federal expense (35%) | | $ | 81,781 | | $ | 65,023 | | $ | 47,378 | | | Statutory federal expense | | | $ | 69,356 | | $ | 48,374 | | $ | 44,699 | | Statutory state income tax expense, net of federal tax benefit | | | 7,594 | | | 6,714 | | | 4,611 | | | | 13,828 | | | 9,281 | | | 8,744 | | Revaluation of deferred tax liabilities, net | | | (58,313) | | | — | | | — | | | Other | | | (9,235) | | | (267) | | | 782 | | | | 1,129 | | | (534) | | | (1,535) | | Income tax expense | | $ | 21,827 | | $ | 71,470 | | $ | 52,771 | | | $ | 84,313 | | $ | 57,121 | | $ | 51,908 | |
Deferred Tax Assets/Liabilities The tax effects of temporary differences between reported earnings and taxable earnings consisted of the following: following: | | | | | | | | | | As of December 31, | | Components of Deferred Tax Liabilities, Net (in thousands) | | 2020 | | 2019 | | Deferred Tax Assets | | | | | | | | Compensation related | | $ | 8,760 | | $ | 8,227 | | Credit losses | | | 20,163 | | | 3,133 | | Valuation allowance | | | — | | | (1,049) | | Total deferred tax assets | | $ | 28,923 | | $ | 10,311 | | | | | | | | | | Deferred Tax Liabilities | | | | | | | | Mark-to-market of derivatives and loans held for sale | | $ | (22,367) | | $ | (5,396) | | Mortgage servicing rights related | | | (180,129) | | | (139,115) | | Acquisition related (1) | | | (9,594) | | | (7,292) | | Depreciation | | | (2,267) | | | (1,812) | | Other | | | (224) | | | (3,507) | | Total deferred tax liabilities | | $ | (214,581) | | $ | (157,122) | | Deferred tax liabilities, net | | $ | (185,658) | | $ | (146,811) | |
| | | | | | | | | | As of December 31, | | (in thousands) | | 2017 | | 2016 | | Deferred Tax Assets | | | | | | | | Compensation related | | $ | 14,320 | | $ | 17,341 | | Credit losses | | | 959 | | | 1,269 | | Other | | | 149 | | | 407 | | Total deferred tax assets | | $ | 15,428 | | $ | 19,017 | | | | | | | | | | Deferred Tax Liabilities | | | | | | | | Mark-to-market of derivatives and loans held for sale | | $ | (4,389) | | $ | (19,934) | | Mortgage servicing rights related | | | (115,239) | | | (135,519) | | Acquisition related (1) | | | (2,323) | | | (722) | | Depreciation | | | (1,536) | | | (1,862) | | Total deferred tax liabilities | | $ | (123,487) | | $ | (158,037) | | Deferred tax liabilities, net | | $ | (108,059) | | $ | (139,020) | |
| (1) | (1)
| | Acquisition-related deferred tax liabilities consist of book-to-tax differences associated with basis step ups related to the amortization of goodwill recorded from acquisitions acquisition-related costs capitalized for tax purposes, and book-to-tax differences in intangible asset amortization. |
The Company believes it is more likely than not that it will generate sufficient taxable income in future periods to realize the deferred tax assets, even after consideration of Tax Reform. The significant decrease inassets. During the deferred tax liabilities, net shown above is related toyear ended December 31, 2020, the revaluation of the Company’sCompany recognized deferred tax assets of $9.0 million in conjunction with the adoption of CECL and the purchase of noncontrolling interests, which are not included as a component of deferred tax liabilities from the enactment of Tax Reform.expense. Table of Contents
Walker & Dunlop, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Tax Uncertainties The Company periodically assesses its liabilities and contingencies for all periods open to examination by tax authorities based on the Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements latest available information. Where the Company believes it is more likely than not that a tax position will not be sustained, management records its best estimate of the resulting tax liability, including interest and penalties, in the consolidated financial statements. As of December 31, 2017,2020, based on all known facts and circumstances and current tax law, management believes that there are no material tax positions for which it is reasonably possible that the unrecognized tax benefits will significantlymaterially increase or decrease over the next 12 months, producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition, or cash flows. NOTE 14—13—SEGMENTS
The Company is one of the leading commercial real estate services and finance companies in the United States, with a primary focus on multifamily lending. The Company originates a range of multifamily and other commercial real estate loans that are sold to the Agencies or placed with institutional investors. The Company also services nearly all of the loans it sells to the Agencies and some of the loans that it places with institutional investors. Substantially all of the Company’s operations involve the delivery and servicing of loan products for its customers. Management makes operating decisions and assesses performance based on an ongoing review of these integrated operations, which constitute the Company's only operating segment for financial reporting purposes. The Company evaluates the performance of its business and allocates resources based on a single-segment concept. NoAs of December 31, 2020 and 2019, no one borrower/key principal accountsaccounted for more than 3% and 4%, respectively, of our total risk-sharing loan portfolio. An analysis of the product concentrations and geographic dispersion that impact the Company’s servicing revenue is shown in the following tables. This information is based on the distribution of the loans serviced for others. The principal balance of the loans serviced for others, by product, as of December 31, 2017, 2016,2020, 2019, and 20152018 follows: | | | | | | | | | | | | | As of December 31, | | (in thousands) | | 2017 | | 2016 | | 2015 | | Fannie Mae | | $ | 32,075,617 | | $ | 27,728,164 | | $ | 22,915,088 | | Freddie Mac | | | 26,782,581 | | | 20,688,410 | | | 17,810,007 | | Ginnie Mae-HUD | | | 9,640,312 | | | 9,155,794 | | | 5,657,809 | | Life insurance companies and other | | | 5,993,656 | | | 5,508,786 | | | 3,829,360 | | Total | | $ | 74,492,166 | | $ | 63,081,154 | | $ | 50,212,264 | |
| | | | | | | | | | | | | As of December 31, | | Components of Loan Servicing Portfolio (in thousands) | | 2020 | | 2019 | | 2018 | | Fannie Mae | | $ | 48,818,185 | | $ | 40,049,095 | | $ | 35,983,178 | | Freddie Mac | | | 37,072,587 | | | 32,583,842 | | | 30,350,724 | | Ginnie Mae-HUD | | | 9,606,506 | | | 9,972,989 | | | 9,944,222 | | Life insurance companies and other | | | 11,714,694 | | | 10,619,243 | | | 9,411,138 | | Total | | $ | 107,211,972 | | $ | 93,225,169 | | $ | 85,689,262 | |
The percentage of unpaid principal balance of the loans serviced for others as of December 31, 2017, 2016,2020, 2019, and 20152018 by geographical area is as shown in the following table. No other state accounted for more than 5% of the unpaid principal balance and related servicing revenues in any of the years presented. The Company does not have any operations outside of the United States. | | | | | | | | | | | Percent of Total UPB as of December 31, | | | | | 2017 | | 2016 | | 2015 | | | | | | | | | | | | | | | Percent of Total UPB as of December 31, | | Loan Servicing Portfolio Concentration by State | | | 2020 | | 2019 | | 2018 | | California | | 18.4 | % | 17.2 | % | 16.1 | % | | 16.2 | % | 16.2 | % | 16.3 | % | Florida | | 9.4 | | 8.2 | | 8.4 | | | 10.4 | | 9.4 | | 9.0 | | Texas | | 9.2 | | 8.5 | | 7.9 | | | 8.8 | | 9.3 | | 9.7 | | Wisconsin | | 4.5 | | 5.0 | | 4.9 | | | Georgia | | | 5.9 | | 5.8 | | 6.1 | | All other states | | 58.5 | | 61.1 | | 62.7 | | | 58.7 | | 59.3 | | 58.9 | | Total | | 100.0 | % | 100.0 | % | 100.0 | % | | 100.0 | % | 100.0 | % | 100.0 | % | | | | | | | | | |
Table of Contents Walker & Dunlop, Inc. and Subsidiaries Notes to Consolidated Financial Statements NOTE 14—LEASES Right-of-use (“ROU”) assets and lease liabilities associated with the Company’s operating leases are recorded as Other assets and Other liabilities, respectively, in the Consolidated Balance Sheet. As of December 31, 2020, our leases have terms varying in duration, with the longest term ending in 2027. The following table presents information about the Company’s lease arrangements: | | | | | | | | | | For year ended December 31, | Operating Lease Arrangements (dollars in thousands) | | 2020 | | 2019 | Operating Leases | | | | | | | | Right-of-use assets | | $ | 17,405 | | $ | 22,307 | | Lease Liabilities | | | 22,579 | | | 28,156 | | Weighted-average remaining lease term | | | 3.2 years | | | 3.7 years | | Weighted-average discount rate | | | 4.6% | | | 4.7% | | | | | | | | | | Operating Lease Expenses | | | | | | | | Single lease costs (1) | | $ | 8,856 | | $ | 7,593 | | Cash paid for amounts included in the measurement of lease liabilities | | | 8,833 | | | 8,218 | | Right-of-use assets obtained in exchange for new lease obligations | | | 1,488 | | | 3,013 | |
| (1) | Rent expense was $8.1 million for the year ended December 31, 2018. |
Maturities of lease liabilities as of December 31, 2020 are presented below (in thousands): | | | | | | Year Ending December 31, | | | | | | 2021 | | $ | 8,662 | | | 2022 | | | 7,975 | | | 2023 | | | 6,390 | | | 2024 | | | 606 | | | Thereafter | | | 279 | | | Total lease payments | | $ | 23,912 | | | Less imputed interest | | | (1,333) | | | Total | | $ | 22,579 | | |
NOTE 15—OTHER OPERATING EXPENSES The following table is a summary of the major components of other operating expenses for the years ended December 31, 2017, 2016,2020, 2019, and 2015.2018. | | | | | | | | | | | | | For the year ended December 31, | | Components of Other Operating Expenses (in thousands) | | 2020 | | 2019 | | 2018 | | Professional fees | | $ | 18,345 | | $ | 20,896 | | $ | 16,365 | | Travel and entertainment | | | 4,685 | | | 10,759 | | | 10,003 | | Rent (1) | | | 10,486 | | | 9,136 | | | 8,107 | | Marketing and preferred broker | | | 9,139 | | | 8,534 | | | 7,951 | | Office expenses | | | 17,360 | | | 9,972 | | | 8,028 | | All other | | | 9,567 | | | 7,299 | | | 11,567 | | Total | | $ | 69,582 | | $ | 66,596 | | $ | 62,021 | |
| | | | | | | | | | | | | For the year ended December 31, | | (in thousands) | | 2017 | | 2016 | | 2015 | | Professional fees | | $ | 12,154 | | $ | 12,089 | | $ | 10,936 | | Travel and entertainment | | | 8,038 | | | 7,004 | | | 6,461 | | Rent | | | 7,057 | | | 6,404 | | | 5,943 | | Marketing and preferred broker | | | 7,819 | | | 5,607 | | | 4,599 | | Office expenses | | | 6,776 | | | 4,539 | | | 4,103 | | All other | | | 6,327 | | | 5,695 | | | 6,465 | | Total | | $ | 48,171 | | $ | 41,338 | | $ | 38,507 | |
| (1) | 2020 and 2019 includes single lease cost and other related expenses (common-area maintenance and other miscellaneous charges). 2018 includes rent expense and other related expenses (common-area maintenance and other miscellaneous charges). |
NOTE 16—QUARTERLY RESULTS (UNAUDITED)
The following tables set forth unaudited selected financial data and operating information on a quarterly basis as of and for the years ended December 31, 2017 and 2016. As noted previously, the Company’s financial results for the fourth quarter of 2017 reflect the impacts of the Tax Reform, which significantly reduced the Company’s income tax expense with a corresponding increase to Walker & Dunlop net income and impacts the comparison of the fourth quarter of 2017 to the fourth quarter of 2016.
| | | | | | | | | | | | | | | | As of and for the year ended December 31, 2017 | | (in thousands, except per share data) | | 4th Quarter | | 3rd Quarter | | 2nd Quarter | | 1st Quarter | | Gains from mortgage banking activities | | $ | 129,458 | | $ | 111,304 | | $ | 102,176 | | $ | 96,432 | | Servicing fees | | | 46,713 | | | 44,900 | | | 43,214 | | | 41,525 | | Total revenues | | | 207,202 | | | 179,736 | | | 166,407 | | | 158,512 | | Personnel | | | 91,120 | | | 78,469 | | | 63,516 | | | 56,172 | | Amortization and depreciation | | | 33,705 | | | 32,343 | | | 32,860 | | | 32,338 | | Total expenses | | | 140,442 | | | 125,040 | | | 110,325 | | | 102,389 | | Income from operations | | | 66,760 | | | 54,696 | | | 56,082 | | | 56,123 | | Walker & Dunlop net income | | | 98,961 | | | 34,378 | | | 34,567 | | | 43,221 | | Diluted earnings per share | | $ | 3.06 | | $ | 1.06 | | $ | 1.08 | | $ | 1.35 | | Total transaction volume | | $ | 8,312,167 | | $ | 8,549,532 | | $ | 6,031,636 | | $ | 5,012,496 | | Servicing portfolio | | $ | 74,492,166 | | $ | 70,284,682 | | $ | 66,290,754 | | $ | 64,384,024 | |
| | | | | | | | | | | | | | | | As of and for the year ended December 31, 2016 | | (in thousands, except per share data) | | 4th Quarter | | 3rd Quarter | | 2nd Quarter | | 1st Quarter | | Gains from mortgage banking activities | | $ | 117,779 | | $ | 100,630 | | $ | 102,453 | | $ | 46,323 | | Servicing fees | | | 39,370 | | | 37,134 | | | 32,771 | | | 31,649 | | Total revenues | | | 178,391 | | | 154,786 | | | 147,858 | | | 94,241 | | Personnel | | | 73,126 | | | 64,377 | | | 55,758 | | | 34,230 | | Amortization and depreciation | | | 30,603 | | | 29,244 | | | 26,425 | | | 25,155 | | Total expenses | | | 117,210 | | | 106,074 | | | 96,152 | | | 70,059 | | Income from operations | | | 61,181 | | | 48,712 | | | 51,706 | | | 24,182 | | Walker & Dunlop net income | | | 36,790 | | | 29,628 | | | 32,021 | | | 15,458 | | Diluted earnings per share | | $ | 1.16 | | $ | 0.96 | | $ | 1.05 | | $ | 0.50 | | Total transaction volume | | $ | 6,260,898 | | $ | 5,032,238 | | $ | 5,389,276 | | $ | 2,615,700 | | Servicing portfolio | | $ | 63,081,154 | | $ | 59,121,989 | | $ | 57,321,824 | | $ | 51,040,752 | |
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