UNITED STATES
Washington, D.C. 20549
FORM 10-Q
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(Mark One) | |
(Mark One)☒
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172021
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-35000
Walker&Dunlop, Inc.
(Exact name of registrant as specified in its charter)
Maryland | | 80-0629925 |
(State or other jurisdiction of | | (I.R.S. Employer Identification No.) |
incorporation or organization) | | |
7501 Wisconsin Avenue, Suite 1200E
Bethesda, Maryland20814
(301) (301) 215-5500
(Address of principal executive offices and registrant’s telephone number, including
area code)
Not Applicable
(Former name, former address, and former fiscal year if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, $0.01 Par Value Per Share | | WD | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer Accelerated Filer ☒ Smaller reporting company Reporting Company ☐ | | Accelerated filer Filer ☐
Emerging growth company Growth Company ☐ | | Non-accelerated Filer ☐ | | Non-accelerated filer ☐
(Do not check if a smaller reporting company)
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 1, 2017,July 29, 2021, there were 31,064,54531,821,841 total shares of common stock outstanding.
Walker & Dunlop, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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| | For the nine months ended September 30, | |
| | 2017 | | 2016 | |
Cash flows from operating activities | | | | | | | |
Net income before noncontrolling interests | | $ | 112,280 | | $ | 77,305 | |
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 | | | (140,985) | | | (127,724) | |
Change in the fair value of premiums and origination fees | | | 4,547 | | | (17,728) | |
Amortization and depreciation | | | 97,541 | | | 80,824 | |
Provision (benefit) for credit losses | | | (216) | | | 166 | |
Other operating activities, net | | | (1,401,599) | | | 1,287,414 | |
Net cash provided by (used in) operating activities | | $ | (1,328,432) | | $ | 1,300,257 | |
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Cash flows from investing activities | | | | | | | |
Capital expenditures | | $ | (4,638) | | $ | (1,821) | |
Funding of preferred equity investments | | | (16,321) | | | (15,538) | |
Capital invested in Interim Program JV | | | (6,184) | | | — | |
Net cash paid to increase ownership interest in a previously held equity-method investment | | | — | | | (1,058) | |
Acquisitions, net of cash received | | | (15,000) | | | — | |
Purchase of mortgage servicing rights | | | — | | | (42,705) | |
Originations of loans held for investment | | | (167,680) | | | (218,958) | |
Principal collected on loans held for investment upon payoff | | | 117,479 | | | 187,820 | |
Principal collected on loans held for investment upon formation of Interim Program JV | | | 119,750 | | | — | |
Net cash provided by (used in) investing activities | | $ | 27,406 | | $ | (92,260) | |
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Cash flows from financing activities | | | | | | | |
Borrowings (repayments) of warehouse notes payable, net | | $ | 1,360,969 | | $ | (1,239,677) | |
Borrowings of interim warehouse notes payable | | | 128,661 | | | 148,478 | |
Repayments of interim warehouse notes payable | | | (175,934) | | | (138,898) | |
Repayments of note payable | | | (828) | | | (829) | |
Proceeds from issuance of common stock | | | 2,887 | | | 3,439 | |
Repurchase of common stock | | | (28,863) | | | (12,374) | |
Debt issuance costs | | | (1,689) | | | (2,425) | |
Distributions to noncontrolling interests | | | — | | | (5) | |
Net cash provided by (used in) financing activities | | $ | 1,285,203 | | $ | (1,242,291) | |
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Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents (NOTE 2) | | $ | (15,823) | | $ | (34,294) | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period | | | 213,467 | | | 214,484 | |
Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period | | $ | 197,644 | | $ | 180,190 | |
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Supplemental Disclosure of Cash Flow Information: | | | | | | | |
Cash paid to third parties for interest | | $ | 34,286 | | $ | 28,592 | |
Cash paid for income taxes | | | 38,707 | | | 23,061 | |
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| | For the six months ended June 30, | |
| | 2021 | | 2020 | |
Cash flows from operating activities | | | | | | | |
Net income before noncontrolling interests | | $ | 114,110 | | $ | 109,664 | |
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 | | | (119,784) | | | (158,369) | |
Change in the fair value of premiums and origination fees | | | 9,047 | | | (25,459) | |
Amortization and depreciation | | | 95,381 | | | 82,079 | |
Provision (benefit) for credit losses | | | (15,646) | | | 28,546 | |
Originations of loans held for sale | | | (7,293,128) | | | (10,281,562) | |
Proceeds from transfers of loans held for sale | | | 8,024,903 | | | 9,381,412 | |
Other operating activities, net | | | (55,541) | | | 41,046 | |
Net cash provided by (used in) operating activities | | $ | 759,342 | | $ | (822,643) | |
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Cash flows from investing activities | | | | | | | |
Capital expenditures | | $ | (3,800) | | $ | (1,539) | |
Purchases of equity-method investments | | | (3,248) | | | (850) | |
Purchases of pledged available-for-sale ("AFS") securities | | | (2,000) | | | (14,155) | |
Proceeds from prepayment and sale of pledged AFS securities | | | 22,092 | | | 4,739 | |
Investments in joint ventures | | | (38,805) | | | (17,160) | |
Distributions from joint ventures | | | 22,113 | | | 10,690 | |
Acquisitions, net of cash received | | | (10,507) | | | (46,784) | |
Originations of loans held for investment | | | (116,087) | | | — | |
Principal collected on loans held for investment | | | 205,653 | | | 139,030 | |
Net cash provided by (used in) investing activities | | $ | 75,411 | | $ | 73,971 | |
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Cash flows from financing activities | | | | | | | |
Borrowings (repayments) of warehouse notes payable, net | | $ | (744,281) | | $ | 1,009,302 | |
Borrowings of interim warehouse notes payable | | | 84,766 | | | 33,127 | |
Repayments of interim warehouse notes payable | | | (34,174) | | | (84,959) | |
Repayments of note payable | | | (1,490) | | | (1,489) | |
Repayment of secured borrowings | | | (73,312) | | | — | |
Proceeds from issuance of common stock | | | 13,137 | | | 6,565 | |
Repurchase of common stock | | | (14,190) | | | (27,142) | |
Purchase of noncontrolling interests | | | — | | | (5,216) | |
Cash dividends paid | | | (32,122) | | | (22,641) | |
Payment of contingent consideration | | | — | | | (1,641) | |
Debt issuance costs | | | (1,333) | | | (1,932) | |
Net cash provided by (used in) financing activities | | $ | (802,999) | | $ | 903,974 | |
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Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents (NOTE 2) | | $ | 31,754 | | $ | 155,302 | |
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period | | | 358,002 | | | 136,566 | |
Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period | | $ | 389,756 | | $ | 291,868 | |
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Supplemental Disclosure of Cash Flow Information: | | | | | | | |
Cash paid to third parties for interest | | $ | 16,708 | | $ | 24,237 | |
Cash paid for income taxes | | | 26,723 | | | 1,479 | |
See accompanying notes to condensed consolidated financial statements.
NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION
These financial statements represent the condensed 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. The statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they domay not include all of thecertain financial statement disclosures and other information and footnotes required by GAAP for completeannual financial statements. Because theThe accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162020 (“20162020 Form 10-K”). In the opinion of management, all adjustments (consisting only of normal recurring accruals except as otherwise noted herein) considered necessary for a fair presentation of the results for the Company in the interim periods presented have been included. Results of operations for the three and ninesix months ended SeptemberJune 30, 20172021 are not necessarily indicative of the results that may be expected for the year ending December 31, 20172021 or thereafter.
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 and valuation services, engages in commercial real estate investment management activities, provides housing market research, and delivers real estate-related investment banking and advisory 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”), 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, and preferred and joint venture equity on commercial real estate properties. Interim loans on multifamily properties are offered (i) through the Company and recorded on the Company’s balance sheet (the “Interim Loan Program”).
During the second quarter of 2017, the Company formed 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, hold, and finance loans that previously met the criteria of the Interim Program. The Interim Program JV assumes full risk of loss while the loans it originates are outstanding. The Company holds a 15% ownership interest (the “Interim Program JV”). Interim loans on all commercial real estate property types are also offered through separate accounts managed by the Company’s subsidiary, Walker & Dunlop Investment Partners, Inc. (“WDIP”). Preferred and joint venture equity on commercial real estate properties are offered through funds managed by WDIP.
The Company brokers the sale of multifamily properties through its wholly owned subsidiary, Walker & Dunlop Investment Sales, LLC (“WDIS”). In some cases, the Company also provides the debt financing for the property sale.
The Company has a joint venture, branded as “Apprise by Walker & Dunlop,” with an international technology services company to offer automated multifamily valuation and appraisal services (the “Appraisal JV”). The Appraisal JV leverages technology and data science to dramatically improve the consistency, transparency, and speed of multifamily appraisals in the joint ventureU.S. through the licensing of the partner’s technology and is responsible for underwriting, servicing, and asset-managingleveraging of the loans originated byCompany’s expertise in the joint venture. The joint venture funds its operations using a combination of equity contributions from the partners and third-party credit facilities.commercial real estate industry. The Company expects that substantially all loans satisfyingowns a 50% interest in the criteriaAppraisal JV and accounts for the Interim Program will be originated byinterest as an equity-method investment. The operations of the joint venture going forward; however,Appraisal JV for the Company may opportunistically originate loans held for investment through the Interim Program in the future. three and six months ended June 30, 2021 and 2020 were immaterial.
During the third quarter of 2017,2021, the Company soldclosed on the acquisition of certain loans from its portfolioassets and the assumption of interim loans with an unpaid principal balancecertain liabilities of $119.8 million to the joint venture at par. The Company does not expect to sell additional loans held forZelman Holdings, LLC (“Zelman”) through a 75% interest in a newly formed entity, WDIB, LLC (“WDIB”). WDIB will provide housing market research and real estate-related investment to the joint venture. The Company does not consolidate the activities of the joint venture; therefore, it accounts for the activities associated with its ownership interest using the equity method.banking and advisory services.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation—The condensed consolidated financial statements include the accounts of Walker & Dunlop, Inc., its wholly owned subsidiaries, and its majority owned subsidiaries. All intercompany balances and transactions have beenare eliminated in consolidation. WhenThe Company consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or the 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 have control over the entity or 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 (loss) from noncontrolling interests in the income statement.
Subsequent Events—The Company has evaluated the effects of all events that have occurred subsequent to SeptemberJune 30, 2017. There have been no material events that would require recognition in the condensed consolidated financial statements.2021. The Company has made certain disclosures in the notes to the condensed consolidated financial statements of events that have occurred subsequent to SeptemberJune 30, 2017. No2021. There have been no other material subsequent events have occurred that would require disclosure.recognition in the condensed consolidated financial statements.
Use of Estimates—The preparation of condensed consolidated financial statements in conformityaccordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, including allowance for risk-sharing obligations, capitalized mortgage servicing rights, derivative instruments, and the disclosure of contingent liabilities. Actual results may vary from these estimates.
Comprehensive Income—ForDerivative Assets and Liabilities—Loan commitments that meet the definition of a derivative are recorded at fair value on the Condensed 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 Condensed Consolidated Statements of Income. The estimated fair value of loan commitments includes (i) the fair value of loan origination fees and premiums on the anticipated sale of the loan, net of co-broker fees (included in Derivative assets in the Condensed Consolidated Balance Sheets and as a component of Loan origination and debt brokerage fees, net in the Condensed Consolidated Statements of Income), (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 Condensed Consolidated Balance Sheets and in Fair value of expected net cash flows from servicing, net in the Condensed Consolidated Statements of Income), 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 Condensed Consolidated Statements of Income. The co-broker fees for the three and nine months ended SeptemberJune 30, 20172021 and 2016, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in2020 were $3.6 million and $7.9 million, respectively and $8.9 million and $15.3 million for the accompanying condensed consolidated financial statements.six months ended June 30, 2021 and 2020, respectively.
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 adjustable-rate, interest-only, multifamily loans with similar risk characteristics. 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.
As of SeptemberJune 30, 2017, 2021, Loans held for investment, net consisted of seven9 loans with an aggregate $152.8$276.7 million of unpaid principal balance less $0.6$0.5 million of net unamortized deferred fees and costs and $0.1$4.2 million of allowance for loan losses. As of December 31, 2016, 2020, Loans held for investment, net consisted of 1218 loans with an aggregate $222.3$366.3 million of unpaid principal balance less $1.5$1.1 million of net unamortized deferred fees and costs and $0.4$4.8 million of allowance for loan losses.
NoneDuring the third quarter of 2018, the Company transferred a portfolio of participating interests in loans held for investment to a third party that was paid off in the second quarter of 2021. The Company accounted for the transfer as a secured borrowing, with the aggregate unpaid principal balance of the loans of $81.5 million presented as a component of Loans held for investment, net on the Condensed Consolidated Balance Sheets as of December 31, 2020, and the secured borrowing of $73.3 million presented within Other liabilities on the Condensed Consolidated Balance Sheets as of December 31, 2020.
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 and records an allowance for these loans as necessary. The allowance for loan losses is estimated collectively for loans with
similar characteristics. The collective allowance is based on the same methodology that the Company uses to estimate its allowance for risk-sharing obligations under the Current Expected Credit Losses (“CECL”) standard for at-risk Fannie Mae Delegated Underwriting and Servicing (“DUS”) loans (with the exception of a reversion period) because the nature of the underlying collateral is the same, and the loans have similar characteristics, except they are significantly shorter in maturity. The reasonable and supportable forecast period used for the CECL allowance for loans held for investment is one year.
The loss rate for the forecast period was 15 basis points and 36 basis points as of June 30, 2021 and December 31, 2020, respectively. The loss rate for the remaining period until maturity was 9 basis points as of both June 30, 2021 and December 31, 2020.
NaN loan held for investment with an unpaid principal balance of $14.7 million that was originated in 2017 was delinquent impaired, orand on non-accrual status as of SeptemberJune 30, 2017 or2021 and December 31, 2016. Additionally, we have2020. The Company had a $3.7 million reserve for this loan based on its collateral fair value as of June 30, 2021 and December 31, 2020 and has not recorded any interest related to this loan since it went on non-accrual status in 2019. All other loans were current as of June 30, 2021 and December 31, 2020. The amortized cost basis of loans that were current as of June 30, 2021 and December 31, 2020 was $261.5 million and $350.5 million, respectively. As of June 30, 2021, $77.4 million, $46.1 million, and $138.5 million of the loans that were current were originated in 2021, 2020, and 2019, respectively. 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. The allowances for loan losses recorded as of September 30, 2017 and December 31, 2016 were based on the Company’s collective assessment of the portfolio.investment.
Provision (Benefit) for Credit Losses—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 Condensed Consolidated Statements of Income. NOTE 54 contains additional discussion related to the allowance for risk-sharing obligations. Provision (benefit) for credit losses consisted of the following activity for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016:2020:
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| | For the three months ended | | For the nine months ended | |
| | September 30, | | September 30, | |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | |
Benefit for loan losses | | $ | (100) | | $ | (49) | | $ | (290) | | $ | (287) | |
Provision for risk-sharing obligations | | | 109 | | | 332 | | | 74 | | | 453 | |
Provision (benefit) for credit losses | | $ | 9 | | $ | 283 | | $ | (216) | | $ | 166 | |
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| | For the three months ended | | For the six months ended | |
| | June 30, | | June 30, | |
Components of Provision (Benefit) for Credit Losses (in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | |
Provision (benefit) for loan losses | | $ | (75) | | $ | (178) | | $ | (662) | | $ | 928 | |
Provision (benefit) for risk-sharing obligations | | | (4,251) | | | 5,081 | | | (14,984) | | | 27,618 | |
Provision (benefit) for credit losses | | $ | (4,326) | | $ | 4,903 | | $ | (15,646) | | $ | 28,546 | |
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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. Substantially all loans that are held for sale are 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 sale or investment not funded with matched borrowings is financed with the Company’s own cash. The Company also occasionally 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.Included in Net warehouse interest income for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020 are the following components:
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| | For the three months ended | | For the nine months ended | |
| | September 30, | | September 30, | |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | |
Warehouse interest income - loans held for sale | | $ | 15,263 | | $ | 11,507 | | $ | 36,616 | | $ | 32,328 | |
Warehouse interest expense - loans held for sale | | | (11,776) | | | (8,032) | | | (27,024) | | | (21,548) | |
Net warehouse interest income - loans held for sale | | $ | 3,487 | | $ | 3,475 | | $ | 9,592 | | $ | 10,780 | |
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Warehouse interest income - loans held for investment | | $ | 3,213 | | $ | 3,518 | | $ | 13,205 | | $ | 8,971 | |
Warehouse interest expense - loans held for investment | | | (1,342) | | | (1,379) | | | (5,019) | | | (3,826) | |
Net warehouse interest income - loans held for investment | | $ | 1,871 | | $ | 2,139 | | $ | 8,186 | | $ | 5,145 | |
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Total net warehouse interest income | | $ | 5,358 | | $ | 5,614 | | $ | 17,778 | | $ | 15,925 | |
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Income Taxes—The Company records the excess tax benefits from stock compensation as a reduction to income tax expense. The Company recorded excess tax benefits of $0.3 million and an immaterial amount during the three months ended September 30, 2017 and 2016, respectively, and $9.1 million and $0.5 million during the nine months ended September 30, 2017 and 2016, respectively.
Statement of Cash Flows—For presentation in the Condensed Consolidated Statements of Cash Flows, the Company considers Pledged securities, at fair value to be 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 Condensed Consolidated Statements of Cash Flows to the related captions in the Condensed Consolidated Balance Sheets as of September 30, 2017 and 2016 and December 31, 2016 and 2015.
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| September 30, | | December 31, | |
(in thousands) | 2017 | | 2016 | | 2016 | | 2015 | |
Cash and cash equivalents | $ | 85,363 | | $ | 83,887 | | $ | 118,756 | | $ | 136,988 | |
Restricted cash | | 17,179 | | | 14,370 | | | 9,861 | | | 5,306 | |
Pledged securities, at fair value (restricted cash equivalents) | | 95,102 | | | 81,933 | | | 84,850 | | | 72,190 | |
Total cash, cash equivalents, restricted cash, and restricted cash equivalents | $ | 197,644 | | $ | 180,190 | | $ | 213,467 | | $ | 214,484 | |
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Recently Announced Accounting Pronouncements—The following table presents the accounting pronouncements that the Financial Accounting Standards Board (“FASB”) has issued and that have the potential to impact the Company but have not yet been adopted by the Company.
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Standard
| Issue Date
| Description
| Effective Date
| Expected Financial Statement Impact
|
Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
| Q2 2016
| 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.
| January 1, 2020 (early adoption permitted January 1, 2019)
| The Company is in the preliminary stages of implementation and 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. The magnitude of the impacts will not be known until closer to the adoption date.
|
ASU 2016-02, Leases (Topic 842)
| Q1 2016
| ASU 2016-02 represents a significant reform to the accounting for leases. Lessees initially recognize 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, lease incentives received and the lessee’s initial direct costs. Lessees generally recognize lease expense for these leases on a straight-line basis, which is similar to what they do today. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements.
| January 1, 2019 (early adoption is permitted)
| The Company is in the preliminary stages of implementation and is still in the process of determining the significance of the impact ASU 2016-02 will have on its financial statements. The Company will adopt ASU 2016-02 when required in 2019.
|
ASU 2016-01, Financial Instruments – Overall – Recognition and Measurement of Financial Assets and Financial Liabilities
| Q1 2016
| 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. ASU 2016-01 generally requires a cumulative-effect adjustment to opening retained earnings as of the beginning of the period of adoption.
| January 1, 2018 (early adoption permitted for certain parts)
| The Company does not believe that ASU 2016-01 will have a material impact on its reported financial results.
|
| | | | |
Standard
| Issue Date
| Description
| Effective Date
| Expected Financial Statement Impact
|
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
| Q2 2014
| 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.
| January 1, 2018 (early adoption permitted January 1, 2017)
| The Company completed its analysis of ASU 2014-09 and concluded that it will not have a material impact on the amount or timing of revenue the Company records under its current revenue recognition practices. Additionally, the Company believes that this ASU will not impact the presentation of the Company's financial statements or require significant additional footnote disclosures.
|
There are no other accounting pronouncements previously issued by the FASB but not yet effective or not yet adopted by the Company that have the potential to materially impact the Company’s condensed consolidated financial statements.
There have been no material changes to the accounting policies discussed in NOTE 2 of the Company’s 2016 Form 10-K other than the changes made pursuant to the adoption of ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment and ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business as disclosed in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2017 (“Q1 2017 10-Q”).
Reclassifications—The Company has made certain immaterial reclassifications to prior-year balances to conform to current-year presentation, including an adjustment relating to the presentation of cash flows associated with restricted cash and restricted cash equivalents for the adoption of a new accounting standard during the fourth quarter of 2016 as more fully described in NOTE 2 of the 2016 Form 10-K.
| | | | | | | | | | | | | |
| | For the three months ended | | For the six months ended | |
| | June 30, | | June 30, | |
Components of Net Warehouse Interest Income (in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | |
Warehouse interest income - loans held for sale | | $ | 7,863 | | $ | 17,098 | | $ | 16,981 | | $ | 24,501 | |
Warehouse interest expense - loans held for sale | | | (4,979) | | | (10,785) | | | (11,638) | | | (16,695) | |
Net warehouse interest income - loans held for sale | | $ | 2,884 | | $ | 6,313 | | $ | 5,343 | | $ | 7,806 | |
| | | | | | | | | | | | | |
Warehouse interest income - loans held for investment | | $ | 2,962 | | $ | 4,763 | | $ | 6,190 | | $ | 11,068 | |
Warehouse interest expense - loans held for investment | | | (1,216) | | | (1,675) | | | (2,348) | | | (3,978) | |
Warehouse interest income - secured borrowings | | | 883 | | | 849 | | | 1,748 | | | 1,695 | |
Warehouse interest expense - secured borrowings | | | (883) | | | (849) | | | (1,748) | | | (1,695) | |
Net warehouse interest income - loans held for investment | | $ | 1,746 | | $ | 3,088 | | $ | 3,842 | | $ | 7,090 | |
| | | | | | | | | | | | | |
Total net warehouse interest income | | $ | 4,630 | | $ | 9,401 | | $ | 9,185 | | $ | 14,896 | |
| | | | | | | | | | | | | |
Statement of Cash Flows—For presentation in the Condensed Consolidated Statements of Cash Flows, the Company considers pledged cash and cash equivalents (as detailed in NOTE 3—GAINS FROM MORTGAGE BANKING ACTIVITIES
Gains from mortgage banking activities consisted9) to be restricted cash and restricted cash equivalents. The following table presents a reconciliation of the following activity for the threetotal cash, cash equivalents, restricted cash, and nine months ended September 30, 2017 and 2016:
| | | | | | | | | | | |
| For the three months ended | | For the nine months ended |
| September 30, | | September 30, |
(in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Contractual loan origination related fees, net | $ | 60,523 | | $ | 52,401 | | $ | 168,927 | | $ | 121,682 |
Fair value of expected net cash flows from servicing recognized at commitment | | 53,614 | | | 50,964 | | | 150,608 | | | 135,971 |
Fair value of expected guaranty obligation recognized at commitment | | (2,833) | | | (2,735) | | | (9,623) | | | (8,247) |
Total gains from mortgage banking activities | $ | 111,304 | | $ | 100,630 | | $ | 309,912 | | $ | 249,406 |
| | | | | | | | | | | |
The origination fees shownrestricted cash equivalents as presented in the table are netCondensed Consolidated Statements of co-broker feesCash Flows to the related captions in the Condensed Consolidated Balance Sheets as of $4.5June 30, 2021 and 2020 and December 31, 2020 and 2019.
| | | | | | | | | | | | |
| June 30, | | December 31, | |
(in thousands) | 2021 | | 2020 | | 2020 | | 2019 | |
Cash and cash equivalents | $ | 326,518 | | $ | 275,202 | | $ | 321,097 | | $ | 120,685 | |
Restricted cash | | 15,842 | | | 10,894 | | | 19,432 | | | 8,677 | |
Pledged cash and cash equivalents (NOTE 9) | | 47,396 | | | 5,772 | | | 17,473 | | | 7,204 | |
Total cash, cash equivalents, restricted cash, and restricted cash equivalents | $ | 389,756 | | $ | 291,868 | | $ | 358,002 | | $ | 136,566 | |
Income Taxes—The Company records the realizable excess tax benefits from stock compensation as a reduction to income tax expense. The realizable excess tax benefits were $1.2 million and $13.2$0.1 million for the three months ended SeptemberJune 30, 20172021 and 2016,2020, respectively, and $14.7$5.2 million and $29.8$3.1 million during the six months ended June 30, 2021 and 2020, respectively.
Contracts with Customers—A majority 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 nineCompany’s contracts with customers is not complicated and is generally completed in a short period of time. The following table presents information about the Company’s contracts with customers for the three and six months ended SeptemberJune 30, 20172021 and 2016, respectively.2020:
| | | | | | | | | | | | | | |
| | For the three months ended | | For the six months ended | | |
| | June 30, | | June 30, | | |
Description (in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | | Statement of income line item |
Certain loan origination fees | | $ | 43,222 | | $ | 8,689 | | $ | 67,123 | | $ | 30,037 | | Loan origination and debt brokerage fees, net |
Property sales broker fees | | | 22,454 | | | 3,561 | | | 31,496 | | | 13,173 | | Property sales broker fees |
Investment management fees, application fees, and other | | | 7,928 | | | 4,649 | | | 14,178 | | | 10,101 | | Other revenues |
Total revenues derived from contracts with customers | | $ | 73,604 | | $ | 16,899 | | $ | 112,797 | | $ | 53,311 | | |
| | | | | | | | | | | | | | |
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 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.
Recently Adopted and Recently Announced Accounting Pronouncements—There have been no material changes to the accounting policies discussed in NOTE 4—2 of the Company’s 2020 Form 10-K. There are no recently announced but not yet effective accounting pronouncements that are expected to have a material impact to the Company as of June 30, 2021.
Reclassifications—TheCompany has made certain immaterial reclassifications to prior-year balances to conform to current-year presentations.
NOTE 3—MORTGAGE SERVICING RIGHTS
Mortgage Servicing Rights (“MSRs”) represent the carrying value of the servicing rights retained by the Company for mortgage loans originated and sold. The initial capitalized amount is equal to the estimated fair value of the expected net cash flows associated with themortgage servicing rights. MSRs are amortized using the interest method over the period that servicing income is expected to be received.
The fair valuesrights (“MSRs”) as of the MSRs at SeptemberJune 30, 20172021 and December 31, 2016 were $773.9 million2020 was $1.2 billion and $669.4 million,$1.1 billion, respectively. The Company uses a discounted static cash flow valuation approach, and the key economic assumption is the discount rate. For example, see the following sensitivities:
The impact of a 100-basis100-basis point increase in the discount rate at SeptemberJune 30, 2017 is2021 would be a decrease in the fair value of $24.6 million.$36.9 million to the MSRs outstanding as of June 30, 2021.
The impact of a 200-basis200-basis point increase in the discount rate at SeptemberJune 30, 2017 is2021 would be a decrease in the fair value of $47.6 million.$71.4 million to the MSRs outstanding as June 30, 2021.
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 for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016 is shown in the table below:2020 follows:
| | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended | |
| | September 30, | | September 30, | |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | |
Beginning balance | | $ | 573,159 | | $ | 468,093 | | $ | 521,930 | | $ | 412,348 | |
Additions, following the sale of loan | | | 48,174 | | | 60,955 | | | 165,748 | | | 124,982 | |
Purchases | | | — | | | — | | | — | | | 42,705 | |
Amortization | | | (30,174) | | | (26,074) | | | (88,398) | | | (72,030) | |
Pre-payments and write-offs | | | (3,250) | | | (6,296) | | | (11,371) | | | (11,327) | |
Ending balance | | $ | 587,909 | | $ | 496,678 | | $ | 587,909 | | $ | 496,678 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | For the three months ended | | For the six months ended | |
| | June 30, | | June 30, | |
Roll Forward of MSRs (in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | |
Beginning balance | | $ | 909,884 | | $ | 722,486 | | $ | 862,813 | | $ | 718,799 | |
Additions, following the sale of loan | | | 57,300 | | | 99,589 | | | 153,940 | | | 143,803 | |
Amortization | | | (43,914) | | | (36,706) | | | (86,466) | | | (71,924) | |
Pre-payments and write-offs | | | (7,751) | | | (7,100) | | | (14,768) | | | (12,409) | |
Ending balance | | $ | 915,519 | | $ | 778,269 | | $ | 915,519 | | $ | 778,269 | |
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 SeptemberJune 30, 20172021 and December 31, 2016:2020:
| | | | | | | | | | |
| | As of September 30, 2017 | |
| | Gross | | Accumulated | | Net | |
(in thousands) | | carrying value | | amortization | | carrying value | |
Acquired MSRs | | $ | 175,934 | | $ | (117,861) | | $ | 58,073 | |
Originated MSRs | | | 760,795 | | | (230,959) | | | 529,836 | |
Total | | $ | 936,729 | | $ | (348,820) | | $ | 587,909 | |
| | | | | | | | | | |
| | 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 | |
| | | | | | | | | | |
| | | | | | |
Components of MSRs (in thousands) | | June 30, 2021 | | December 31, 2020 |
Gross Value | | $ | 1,492,694 | | $ | 1,394,901 |
Accumulated amortization | | | (577,175) | | | (532,088) |
Net carrying value | | $ | 915,519 | | $ | 862,813 |
The expected amortization of MSRs recordedheld in the Condensed Consolidated Balance Sheet as of SeptemberJune 30, 20172021 is shown in the table below. Actual amortization may vary from these estimates.
| | | | | | | | | | |
| | Originated MSRs | | Acquired MSRs | | Total MSRs | |
(in thousands) | | Amortization | | Amortization | | Amortization | |
Three Months Ending December 31, | | | | | | | | | | |
2017 | | $ | 26,528 | | $ | 3,065 | | $ | 29,593 | |
Year Ending December 31, | | | | | | | | | | |
2018 | | $ | 98,640 | | $ | 11,310 | | $ | 109,950 | |
2019 | | | 84,761 | | | 10,119 | | | 94,880 | |
2020 | | | 76,136 | | | 8,536 | | | 84,672 | |
2021 | | | 66,589 | | | 6,821 | | | 73,410 | |
2022 | | | 53,579 | | | 4,918 | | | 58,497 | |
Thereafter | | | 123,603 | | | 13,304 | | | 136,907 | |
Total | | $ | 529,836 | | $ | 58,073 | | $ | 587,909 | |
| | | | | | | | | | |
11
As a result of the onset of the pandemic and the resulting forecasts for significant unemployment rates during 2020, the Company’s loss rate for the forecast period was 7 basis points as of June 30, 2020, resulting in the following table:
| | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended | |
| | September 30, | | September 30, | |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | |
Beginning balance | | $ | 3,648 | | $ | 5,810 | | $ | 3,613 | | $ | 5,586 | |
Provision for risk-sharing obligations | | | 109 | | | 332 | | | 74 | | | 453 | |
Write-offs | | | — | | | (2,567) | | | — | | | (2,567) | |
Other | | | 12 | | | (175) | | | 82 | | | (72) | |
Ending balance | | $ | 3,769 | | $ | 3,400 | | $ | 3,769 | | $ | 3,400 | |
| | | | | | | | | | | | | |
When the Company places a loan for which it has a risk-sharing obligation on its watch list, the Company transfers the remaining unamortized balance of the guaranty obligation to the allowancesubstantial provision for risk-sharing obligations. When a loanobligations for which the Company has a risk-sharing obligation is removed from the watch list, the loan’s reserve is transferred fromsix months ended June 30, 2020 and an increase in the allowance for risk-sharing obligations backas of June 30, 2020 as seen above. During the first half of 2021, economic conditions began to the guaranty obligation,improve significantly, with reported and forecast unemployment rates significantly better compared to both December 31, 2020 and June 30, 2020. In response to improving unemployment statistics and the amortizationexpected continued overall health of the remaining balance overmultifamily market, the remaining estimated life is resumed. This net transferCompany adjusted the loss rate for the forecast period from 6 basis points as of the unamortized balanceDecember 31, 2020 to 4 basis points as of the guaranty obligation from a noncontingent classification to a contingent classification (and vice versa) is presentedMarch 31, 2021 and 3 basis points as of June 30, 2021. These decreases in the guaranty obligation and allowanceloss rate resulted in the benefits for risk-sharing obligations tables above as ‘Other.’seen above. For the remaining expected life of the portfolio, the Company reverted over a one-year period on a straight-line basis to a historical loss rate of 2 basis points for all periods shown in the roll forward above.
The Allowancecalculated CECL reserve for risk-sharing obligationsthe Company’s $45.9 billion at-risk Fannie Mae servicing portfolio as of SeptemberJune 30, 2017 is based primarily on the Company’s collective assessment2021 was $52.8 million compared to $67.0 million as of December 31, 2020. The weighted-average remaining life of the probability of loss related to the loans on the watch listat-risk Fannie Mae servicing portfolio as of SeptemberJune 30, 2017. During the third quarter2021 was 7.5 years. The at-risk Fannie Mae servicing portfolio does not include at-risk loans held for sale.
NaN loans that defaulted in 2019 had aggregate collateral-based reserves of 2017, Hurricanes Harvey$7.6 million and Irma made landfall in the United States, causing substantial damage to the affected areas. Located within the affected areas are multiple properties collateralizing loans for which the Company has risk-sharing obligations. Based on its preliminary assessment of these properties, the Company believes that few, if any, of these properties incurred significant damage, and those that did have adequate insurance coverage. Additionally, the Company has not experienced an increase in late payments from risk-sharing loans collateralized by properties in the affected areas. Accordingly, based on information currently available, these natural disasters did not have a material impact on the Allowance for risk-sharing obligations$8.3 million as of SeptemberJune 30, 2017. Additionally, the Company does not believe that these natural disasters will have a material impact on its Allowance for risk-sharing obligations in the future.2021 and December 31, 2020, respectively.
As of SeptemberJune 30, 2017,2021, the maximum quantifiable contingent liability associated with the Company’s guarantees for the at-risk loans serviced under the Fannie Mae DUS agreement was $5.4$9.5 billion. The maximum quantifiable contingent liability is not representative of the actual loss the Company would incur. The Company would be 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 were determined to be without value at the time of settlement.
NOTE 6—5—SERVICING
The total unpaid principal balance of loans the Company’sCompany was servicing portfoliofor various institutional investors was $70.3$112.3 billion as of SeptemberJune 30, 20172021 compared to $63.1$107.2 billion as of December 31, 2016.2020.
As of June 30, 2021 and December 31, 2020, custodial escrow accounts relating to loans serviced by the Company totaled $3.0 billion and $3.1 billion, respectively. These amounts are not included in the Condensed Consolidated Balance Sheets as such amounts are not Company assets; however, the Company is entitled to earn interest income on these escrow balances, presented as a component of Escrow earnings and other interest income in the Condensed 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.
NOTE 7—6—WAREHOUSE NOTES PAYABLE
At SeptemberAs of June 30, 2017,2021, to provide financing to borrowers the Company has arranged for warehouse lines of credit. In support ofunder the Agencies’ programs, the Company has committed and uncommitted warehouse lines of credit in the amount of $4.8$3.9 billion with certain national banks and a $1.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency Warehouse Facilities”). TheIn support of these Agency Warehouse Facilities, the Company has pledged substantially all of its loans held for sale againstunder the Agency Warehouse Facilities.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, as of June 30, 2021, the Company has arranged for warehouse lines of credit in the amount of $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.
The maximum amount and outstanding borrowings under the warehouseWarehouse notes payable at SeptemberJune 30, 2017 are shown in2021 follows:
| | | | | | | | | | | | | | | |
| | June 30, 2021 | | | |
(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 | | $ | 347,747 | | 30-day LIBOR plus 1.30% | |
Agency Warehouse Facility #2 | | | 700,000 | | | 300,000 | | | 1,000,000 | | | 390,370 | | 30-day LIBOR plus 1.30% | |
Agency Warehouse Facility #3 | | | 600,000 | | | 265,000 | | | 865,000 | | | 125,951 | | 30-day LIBOR plus 1.30% | |
Agency Warehouse Facility #4 | | | 350,000 | | | — | | | 350,000 | | | 246,769 | | 30-day LIBOR plus 1.30% | |
Agency Warehouse Facility #5 | | | — | | | 1,000,000 | | | 1,000,000 | | | 276,874 | | 30-day LIBOR plus 1.45% | |
Agency Warehouse Facility #6 | | | 150,000 | | | 100,000 | | | 250,000 | | | 70,913 | | 30-day LIBOR plus 1.40% | |
Total National Bank Agency Warehouse Facilities | | $ | 2,225,000 | | $ | 1,665,000 | | $ | 3,890,000 | | $ | 1,458,624 | | | |
Fannie Mae repurchase agreement, uncommitted line and open maturity | | | — | | | 1,500,000 | | | 1,500,000 | | | 180,953 | | | |
Total Agency Warehouse Facilities | | $ | 2,225,000 | | $ | 3,165,000 | | $ | 5,390,000 | | $ | 1,639,577 | | | |
| | | | | | | | | | | | | | | |
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% to 2.00% | |
Interim Warehouse Facility #3 | | | 75,000 | | | 75,000 | | | 150,000 | | | 59,453 | | 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 | | $ | 184,835 | | | |
Debt issuance costs | | | — | | | — | | | — | | | (430) | | | |
Total warehouse facilities | | $ | 2,554,810 | | $ | 3,240,000 | | $ | 5,794,810 | | $ | 1,823,982 | | | |
| (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. |
The following amendments to the table below:
| | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | | |
(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 | | $ | 190,054 | | 30-day LIBOR plus 1.40% | |
Agency Warehouse Facility #2 | | | 500,000 | | | — | | | 2,066,000 | | | 2,566,000 | | | 2,228,837 | | 30-day LIBOR plus 1.30% | |
Agency Warehouse Facility #3 | | | 480,000 | | | — | | | 400,000 | | | 880,000 | | | 424,714 | | 30-day LIBOR plus 1.25% | |
Agency Warehouse Facility #4 | | | 350,000 | | | — | | | — | | | 350,000 | | | 285,170 | | 30-day LIBOR plus 1.40% | |
Agency Warehouse Facility #5 | | | 30,000 | | | — | | | — | | | 30,000 | | | 5,797 | | 30-day LIBOR plus 1.80% | |
Agency Warehouse Facility #6 | | | 250,000 | | | 250,000 | | | — | | | 500,000 | | | — | | 30-day LIBOR plus 1.35% | |
Fannie Mae repurchase agreement, uncommitted line and open maturity | | | — | | | 1,500,000 | | | — | | | 1,500,000 | | | 75,391 | | 30-day LIBOR plus 1.15% | |
Total Agency Warehouse Facilities | | $ | 2,035,000 | | $ | 1,750,000 | | $ | 2,466,000 | | $ | 6,251,000 | | $ | 3,209,963 | | | |
| | | | | | | | | | | | | | | | | | |
Interim Warehouse Facility #1 | | $ | 85,000 | | $ | — | | $ | — | | $ | 85,000 | | $ | 43,440 | | 30-day LIBOR plus 1.90% | |
Interim Warehouse Facility #2 | | | 200,000 | | | — | | | — | | | 200,000 | | | 23,272 | | 30-day LIBOR plus 2.00% | |
Interim Warehouse Facility #3 | | | 75,000 | | | — | | | — | | | 75,000 | | | 29,132 | | 30-day LIBOR plus 2.00% to 2.50% | |
Total Interim Warehouse Facilities | | $ | 360,000 | | $ | — | | $ | — | | $ | 360,000 | | $ | 95,844 | | | |
Debt issuance costs | | | — | | | — | | | — | | | — | | | (218) | | | |
Total warehouse facilities | | $ | 2,395,000 | | $ | 1,750,000 | | $ | 2,466,000 | | $ | 6,611,000 | | $ | 3,305,589 | | | |
| | | | | | | | | | | | | | | | | | |
1 Agency Warehouse Facilities andwere executed in the Fannie Mae repurchase agreement are usednormal course of business to fund loans held for sale, while Interim Warehouse Facilities are used to partially fund loans held for investment.support the growth of the Company’s Agency business.
During the fourthsecond quarter of 2017,2021, the Company executed the 13than amendment to the warehouse agreement related to Agency Warehouse Facility #1 that decreased the borrowing rate to 30-day London Interbank Offered Rate (“LIBOR”) plus 130 basis points from 30-day LIBOR plus 140 basis points and decreased the 30-day LIBOR floor to 0 from 25 basis points.
During the second quarter of 2021, the Company executed amendments to the agreement related to Agency Warehouse Facility #2 that extended the maturity date to November 30, 2017. April 14, 2022 and decreased the borrowing rate to 30-day LIBOR plus 130 basis points from 30-day LIBOR plus 140 basis points. No other material modifications have been made to the agreement during 2017.2021.
During the thirdsecond quarter of 2017,2021, the Company executed amendments to the Second Amended and Restated Warehousing Credit and Security Agreement (the “Second Amended Agreement”)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#3 that extended the maturity date to September 10, 2018 and reducedMay 14, 2022, increased the interestborrowing rate to the 30-day London Interbank Offered Rate (“LIBOR”)LIBOR plus 130 basis points. In additionpoints from 30-day LIBOR plus 115 basis points, and decreased the 30-day LIBOR floor to the committed borrowing capacity, the Second Amended Agreement provides $300.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility. Concurrent with the execution of the Second Amended Agreement, the Company executed a new, separate warehousing credit agreement with one of the lenders under the prior facility, which is referred to as Agency Warehouse Facility #6 and is more fully described below. Also during the third quarter of 2017, the Company executed the first amendment to the Second Amended Agreement that provides a temporary increase of $2.1 billion to fund a specific portfolio of loans. The temporary increase expires the sooner of the sale of the portfolio of loans, or February 28, 2018. The uncommitted borrowing capacity is reduced to zero while the temporary increase is outstanding.0 basis points from 50 basis points. No other material modifications have been made to the agreement during 2017.
2021.
During the second quarter of 2017,2021, the Company executed the seventhan amendment to the warehouse agreement related to Agency Warehouse Facility #3. The amendment reduced the interest rate to 30-day LIBOR plus 125 basis points, extended the maturity date to April 30, 2018, and increased the permanent committed borrowing capacity to $480.0 million. During the third quarter of 2017, the Company executed the eighth amendment to the warehouse agreement that provided for a temporary increase to the borrowing capacity of $400.0 million that expires January 30, 2018. No other material modifications have been made to the agreement during 2017.
During the fourth quarter of 2017, the Company executed the third amendment to the warehouse agreement related to Agency Warehouse Facility #4 that extended the maturity date to October 5, 2018 and reducedJune 22, 2022, decreased the interestborrowing rate to 30-day LIBOR plus 130 basis points from 30-day LIBOR plus 140 basis points, and decreased the 30-day LIBOR floor to 5 basis points from 25 basis points. No other material modifications have been made to the agreement during 2017.
2021.
During the thirdfirst quarter of 2017,2021, the Company executed a warehousing and securityan agreement that establishedto establish Agency Warehouse Facility #6. The warehouse facility has a $250.0$150.0 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. TheMarch 5, 2022. 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 135140 basis points with a 30-day LIBOR floor of 25 basis points. In addition to the committed borrowing capacity, the agreement provides $250.0$100.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed
facility.
The facility agreement requires the Company’s compliance with the same financial covenants as provided in the facility agreement for Agency Warehouse Facility #1, as described in the Company’s 2020 Form 10-K. No material modifications have been made to the agreement during 2021.
During the second quarter of 2017,2021, the Company executed the seventh amendmentamendments to the credit and security agreement related to Interim Warehouse Facility #1 that extended the maturity date to April 30, 2018.May 14, 2022 and decreased the 30-day LIBOR floor to 0 basis points from 50 basis points. No other material modifications have been made to the agreement during 2017.
During the second quarter of 2017, the Company exercised its option to extend the maturity date of Interim Warehouse Facility #3 to May 19, 2018. No other material modifications have been made to the agreement during 2017.
As a result of the aforementioned amendments and new agreements, the Company has increased its aggregate borrowing capacity, including temporary increases, from $4.0 billion at December 31, 2016 to $6.6 billion at September 30, 2017.
2021.
The warehouse notes payable are subject to various financial covenants, all of which the Company was in compliance with as of June 30, 2021.
Interest on the current period end.
NOTE 8—7—GOODWILL AND OTHER INTANGIBLE ASSETS
Activity related toA summary of the Company’s goodwill for the ninesix months ended SeptemberJune 30, 20172021 and 20162020 is as follows:
| | | | | | | | |
| | Nine Months Ended September 30, | | |
(in thousands) | | 2017 | | 2016 | | |
| | | | | | | | |
| | | For the six months ended | |
| | | June 30, | |
Roll Forward of Goodwill (in thousands) | | | 2021 | | 2020 | |
Beginning balance | | $ | 96,420 | | $ | 90,338 | | | $ | 248,958 | | $ | 180,424 | |
Additions from acquisitions | | | 27,347 | | | — | | | | 17,507 | | | 68,534 | |
Impairment | | | — | | | — | | | | — | | | — | |
Ending balance | | $ | 123,767 | | $ | 90,338 | | | $ | 266,465 | | $ | 248,958 | |
| | | | | | | | |
| | | | | | | | |
The additionimmaterial additions to goodwill from acquisitions during the nine months ended September 30, 20172021 shown in the table above relatesduring the six months ended June 30, 2021 relate to an immaterial1 acquisition completed duringin each of the first and second quarters of 2021. The activity in the first quarter of 2017 as more fully disclosed2021 was from the purchase of certain assets and the assumption of certain liabilities from an investment sales brokerage company, for an aggregate consideration of $12.7 million, which consisted of $7.5 million of cash and $5.2 million of contingent consideration. The activity in the second quarter of 2021 was from the purchase of certain assets and the assumption of certain liabilities from a company with a technology platform that streamlines and accelerates the quoting, processing, and underwriting of small-balance multifamily loans while providing the borrower with a web-based, user-friendly interface. The acquisition is part of the Company’s Q1 2017 10-Q. overall strategy to significantly increase its small-balance lending volumes using technology. The aggregate consideration paid was $5.3 million, which includes $3.0 million of cash and $2.3 million of contingent consideration. The Company completed the purchase accounting for both acquisitions.
During the third quarter of 2021, the Company acquired a controlling interest in Zelman, which specializes in housing market research and real estate-related investment banking and advisory services for $53.6 million of cash and $5.3 million of the Company’s common stock, subject to subsequent working capital adjustments. The Company has not completed the accounting for the acquisition as of the issuance date of these financial statements. Therefore, disclosures relating to the goodwill recognized and the fair value of the assets acquired and liabilities assumed could not be presented.
As of SeptemberJune 30, 2017,2021 and December 31, 2020, the remaining balance of intangible assets from acquisitions totaled $1.6 million and $1.9 million, respectively. As of June 30, 2021, the weighted-average period over which the Company has fully amortized all materialexpects these intangible assets obtained from acquisitions.to be amortized is 3.7 years.
A summary of the Company’s contingent consideration liabilities, which is included in Otherliabilities in the Condensed Consolidated Balance Sheets, as of and for the six months ended June 30, 2021 and 2020 follows:
| | | | | | | |
| | For the six months ended | |
| | June 30, | |
Roll Forward of Contingent Consideration Liabilities (in thousands) | | 2021 | | 2020 | |
Beginning balance | | $ | 28,829 | | $ | 5,752 | |
Additions | | | 7,504 | | | 17,649 | |
Accretion | | | 906 | | | 497 | |
Payments | | | — | | | (5,800) | |
Ending balance | | $ | 37,239 | | $ | 18,098 | |
The contingent consideration liabilities above relate to (i) acquisitions of debt brokerage companies and an investment sales brokerage company completed over the past several years, including 2021, (ii) the purchase of noncontrolling interests in 2020 and (iii) the aforementioned technology company acquired in 2021. The contingent consideration for each of the acquisitions may be earned over various lengths of time after each acquisition, with a maximum earn-out period of five years, provided certain revenue targets and other metrics have been met. The last of the earn-out periods related to the contingent consideration ends in the first quarter of 2026. In each case, the Company estimated the initial fair value of the contingent consideration using a probability-based, discounted cash flow model.
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 Condensed Consolidated Statements of Cash Flows.
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, discount rates, volatilities, prepayment speeds, earnings rates, credit risks,risk, 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, delinquency status, late charges, other ancillaryestimated revenue from escrow accounts, 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 wouldparticipants consider in valuing an MSR asset.
assets. During the first quarter of 2021, the Company reduced the discount rate and escrow earnings rate assumptions for its capitalized MSRs based on market participant data. MSRs are carried at the lower of amortized cost or fair value (measured at the portfolio level).value.
A description of the valuation methodologies used for assets and liabilities measured at fair value, on a recurring basis, 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 on a recurring basis:
| ·
● | | Derivative Instruments—The derivative instruments used by the Companypositions consist of interest rate lock commitments with borrowers 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 |
applicable 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. hierarchy. |
| ·
● | | Loans Held for Sale—LoansAll loans held for sale presented in the Condensed 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 pricesinputs 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. 2. |
| ·
● | | Pledged Securities—The 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. |
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of SeptemberJune 30, 2017,2021 and December 31, 2016,2020, 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 | |
(in thousands) | | (Level 1) | | (Level 2) | | (Level 3) | | Period End | |
September 30, 2017 | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | |
Loans held for sale | | $ | — | | $ | 3,275,761 | | $ | — | | $ | 3,275,761 | |
Pledged securities | | | 95,102 | | | — | | | — | | | 95,102 | |
Derivative assets | | | — | | | — | | | 43,853 | | | 43,853 | |
Total | | $ | 95,102 | | $ | 3,275,761 | | $ | 43,853 | | $ | 3,414,716 | |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative liabilities | | $ | — | | $ | — | | $ | 175 | | $ | 175 | |
Total | | $ | — | | $ | — | | $ | 175 | | $ | 175 | |
| | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | |
Loans held for sale | | $ | — | | $ | 1,858,358 | | $ | — | | $ | 1,858,358 | |
Pledged securities | | | 84,850 | | | — | | | — | | | 84,850 | |
Derivative assets | | | — | | | — | | | 61,824 | | | 61,824 | |
Total | | $ | 84,850 | | $ | 1,858,358 | | $ | 61,824 | | $ | 2,005,032 | |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative liabilities | | $ | — | | $ | — | | $ | 4,396 | | $ | 4,396 | |
Total | | $ | — | | $ | — | | $ | 4,396 | | $ | 4,396 | |
| | | | | | | | | | | | | |
| | | | | | | | Balance as of | |
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Period End | |
June 30, 2021 | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | |
Loans held for sale | | $ | — | | $ | 1,718,444 | | $ | — | | $ | 1,718,444 | |
Pledged securities | | | 47,396 | | | 99,152 | | | — | | | 146,548 | |
Derivative assets | | | — | | | — | | | 36,751 | | | 36,751 | |
Total | | $ | 47,396 | | $ | 1,817,596 | | $ | 36,751 | | $ | 1,901,743 | |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative liabilities | | $ | — | | $ | — | | $ | 30,411 | | $ | 30,411 | |
Total | | $ | — | | $ | — | | $ | 30,411 | | $ | 30,411 | |
| | | | | | | | | | | | | |
December 31, 2020 | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | |
Loans held for sale | | $ | — | | $ | 2,449,198 | | $ | — | | $ | 2,449,198 | |
Pledged securities | | | 17,473 | | | 119,763 | | | — | | | 137,236 | |
Derivative assets | | | — | | | — | | | 49,786 | | | 49,786 | |
Total | | $ | 17,473 | | $ | 2,568,961 | | $ | 49,786 | | $ | 2,636,220 | |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | |
Derivative liabilities | | $ | — | | $ | — | | $ | 5,066 | | $ | 5,066 | |
Total | | $ | — | | $ | — | | $ | 5,066 | | $ | 5,066 | |
There were no0 transfers between any of the levels within the fair value hierarchy during the ninesix months ended SeptemberJune 30, 2017.
2021.
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 for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016:2020:
| | | | | | | | | | | | | |
| | Level 3 Fair Value Measurements: | |
| | Derivative Instruments | |
| | For the three months ended | | For the six months ended | |
| | June 30, | | June 30, | |
Derivative Assets and Liabilities, net (in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | |
Beginning balance | | $ | 48,880 | | $ | (14,390) | | $ | 44,720 | | $ | 15,532 | |
Settlements | | | (211,771) | | | (140,540) | | | (341,515) | | | (314,835) | |
Realized gains recorded in earnings(1) | | | 162,891 | | | 154,930 | | | 296,795 | | | 299,303 | |
Unrealized gains (losses) recorded in earnings(1) | | | 6,340 | | | 13,346 | | | 6,340 | | | 13,346 | |
Ending balance | | $ | 6,340 | | $ | 13,346 | | $ | 6,340 | | $ | 13,346 | |
| | | | | | | | | | | | | |
| | Fair Value Measurements | |
| | Using Significant Unobservable Inputs: | |
| | Derivative Instruments | |
| | For the three months ended | | For the nine months ended | |
| | September 30, | | September 30, | |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | |
Derivative assets and liabilities, net | | | | | | | | | | | | | |
Beginning balance | | $ | 24,491 | | $ | 600 | | $ | 57,428 | | $ | 10,345 | |
Settlements | | | (92,117) | | | (71,250) | | | (323,662) | | | (229,178) | |
Realized gains recorded in earnings (1) | | | 67,626 | | | 70,650 | | | 266,234 | | | 218,833 | |
Unrealized gains recorded in earnings (1) | | | 43,678 | | | 31,156 | | | 43,678 | | | 31,156 | |
Ending balance | | $ | 43,678 | | $ | 31,156 | | $ | 43,678 | | $ | 31,156 | |
| | | | | | | | | | | | | |
| (1) | (1)
| | Realized and unrealized gains (losses) 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 Condensed 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 SeptemberJune 30, 2017:2021:
| | | | | | | | | | |
| | Quantitative Information about Level 3 Fair Value Measurements | |
(in thousands) | | Fair Value | | Valuation Technique | | Unobservable Input (1) | | Input Value (1) | |
Derivative assets | | $ | 36,751 | | Discounted cash flow | | Counterparty credit risk | | — | |
Derivative liabilities | | $ | 30,411 | | 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 | | $ | 43,853 | | Discounted cash flow | | Counterparty credit risk | | — | |
Derivative liabilities | | $ | 175 | | 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 SeptemberJune 30, 20172021 and December 31, 20162020 are presented below:
| | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | |
| | Carrying | | Fair | | Carrying | | Fair | |
(in thousands) | | Amount | | Value | | Amount | | Value | |
Financial assets: | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 85,363 | | $ | 85,363 | | $ | 118,756 | | $ | 118,756 | |
Restricted cash | | | 17,179 | | | 17,179 | | | 9,861 | | | 9,861 | |
Pledged securities | | | 95,102 | | | 95,102 | | | 84,850 | | | 84,850 | |
Loans held for sale | | | 3,275,761 | | | 3,275,761 | | | 1,858,358 | | | 1,858,358 | |
Loans held for investment, net | | | 152,050 | | | 152,764 | | | 220,377 | | | 222,313 | |
Derivative assets | | | 43,853 | | | 43,853 | | | 61,824 | | | 61,824 | |
Total financial assets | | $ | 3,669,308 | | $ | 3,670,022 | | $ | 2,354,026 | | $ | 2,355,962 | |
| | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | |
Derivative liabilities | | $ | 175 | | $ | 175 | | $ | 4,396 | | $ | 4,396 | |
Warehouse notes payable | | | 3,305,589 | | | 3,305,807 | | | 1,990,183 | | | 1,992,111 | |
Note payable | | | 163,935 | | | 166,499 | | | 164,163 | | | 167,327 | |
Total financial liabilities | | $ | 3,469,699 | | $ | 3,472,481 | | $ | 2,158,742 | | $ | 2,163,834 | |
| | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 | |
| | Carrying | | Fair | | Carrying | | Fair | |
(in thousands) | | Amount | | Value | | Amount | | Value | |
Financial Assets: | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 326,518 | | $ | 326,518 | | $ | 321,097 | | $ | 321,097 | |
Restricted cash | | | 15,842 | | | 15,842 | | | 19,432 | | | 19,432 | |
Pledged securities | | | 146,548 | | | 146,548 | | | 137,236 | | | 137,236 | |
Loans held for sale | | | 1,718,444 | | | 1,718,444 | | | 2,449,198 | | | 2,449,198 | |
Loans held for investment, net | | | 272,033 | | | 273,021 | | | 360,402 | | | 362,586 | |
Derivative assets | | | 36,751 | | | 36,751 | | | 49,786 | | | 49,786 | |
Total financial assets | | $ | 2,516,136 | | $ | 2,517,124 | | $ | 3,337,151 | | $ | 3,339,335 | |
| | | | | | | | | | | | | |
Financial Liabilities: | | | | | | | | | | | | | |
Derivative liabilities | | $ | 30,411 | | $ | 30,411 | | $ | 5,066 | | $ | 5,066 | |
Secured borrowings | | | — | | | — | | | 73,314 | | | 73,314 | |
Warehouse notes payable | | | 1,823,982 | | | 1,824,413 | | | 2,517,156 | | | 2,518,101 | |
Note payable | | | 290,498 | | | 293,284 | | | 291,593 | | | 294,773 | |
Total financial liabilities | | $ | 2,144,891 | | $ | 2,148,108 | | $ | 2,887,129 | | $ | 2,891,254 | |
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:June 30, 2021 and 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).
Pledged Securities—Consist of cash, highly liquid investments in money market accounts invested in government securities, and investments in government guaranteedAgency debt securities. InvestmentsThe investments of the money market funds typically have maturities of 90 days or less and are valued 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 thea mortgage loan is funded and are valued using discounted cash flow models that incorporate observable inputsprices from market participants.
Loans Held for 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 September 30, 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.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.investor.
To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the Company's policy is to enterCompany enters 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.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 Condensed 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:applicable:
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● | | the estimated gain fromof the expected loan sale to the investor (Level 2); |
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● | | the expected net cash flows associated with servicing the loan, net of any guaranty obligations retained (Level(Level 2); |
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● | | the effects of interest rate movements between the date of the rate lock and the balance sheet date (Level 2); and |
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● | | the nonperformance risk of both the counterparty and the Company (Level 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 sale (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).
Thethe fair value of the Company's derivative instruments and loans held forfuture servicing, net at loan sale considers the effects of the market price movement of the same type of security due to interest rate movements between the trade date and the balance sheet date. (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 or loan origination date and the balance sheet date by the notional loan commitment amount of the derivative instruments or loans held for sale (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 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).
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 SeptemberJune 30, 20172021 and December 31, 2016.2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Adjustment Components | | Balance Sheet Location | | |
| | | | | | | | | | | | | | | | | | | | Fair Value | | |
| | Notional or | | Estimated | | | | | Total | | | | | | | | Adjustment | | |
| | Principal | | Gain | | Interest Rate | | Fair Value | | Derivative | | Derivative | | To Loans | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 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 | | | Amount | | on Sale | | Movement | | Adjustment | | Assets | | Liabilities | | Held for Sale | |
September 30, 2017 | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2021 | | | | | | | | | | | | | | | | | | | | | | | |
Rate lock commitments | | $ | 688,375 | | $ | 19,292 | | $ | (4,987) | | $ | 14,305 | | $ | 14,305 | | $ | — | | $ | — | | | $ | 816,038 | | $ | 27,913 | | $ | 7,958 | | $ | 35,871 | | $ | 36,202 | | $ | (331) | | $ | — | |
Forward sale contracts | | | 3,963,275 | | | — | | | 29,373 | | | 29,373 | | | 29,548 | | | (175) | | | — | | | | 2,470,432 | | | — | | | (29,531) | | | (29,531) | | | 549 | | | (30,080) | | | — | |
Loans held for sale | | | 3,274,900 | | | 25,247 | | | (24,386) | | | 861 | | | — | | | — | | | 861 | | | | 1,654,394 | | | 42,477 | | | 21,573 | | | 64,050 | | | — | | | — | | | 64,050 | |
Total | | | | | $ | 44,539 | | $ | — | | $ | 44,539 | | $ | 43,853 | | $ | (175) | | $ | 861 | | | | | | $ | 70,390 | | $ | — | | $ | 70,390 | | $ | 36,751 | | $ | (30,411) | | $ | 64,050 | |
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | |
Rate lock commitments | | $ | 395,462 | | $ | 15,844 | | $ | (2,275) | | $ | 13,569 | | $ | 14,482 | | $ | (913) | | $ | — | | | $ | 1,374,784 | | $ | 45,581 | | $ | (1,697) | | $ | 43,884 | | $ | 43,895 | | $ | (11) | | $ | — | |
Forward sale contracts | | | 2,248,385 | | | — | | | 43,859 | | | 43,859 | | | 47,342 | | | (3,483) | | | — | | | | 3,760,953 | | | — | | | 836 | | | 836 | | | 5,891 | | | (5,055) | | | — | |
Loans held for sale | | | 1,852,923 | | | 47,019 | | | (41,584) | | | 5,435 | | | — | | | — | | | 5,435 | | | | 2,386,169 | | | 62,167 | | | 861 | | | 63,028 | | | — | | | — | | | 63,028 | |
Total | | | | | $ | 62,863 | | $ | — | | $ | 62,863 | | $ | 61,824 | | $ | (4,396) | | $ | 5,435 | | | | | | $ | 107,748 | | $ | — | | $ | 107,748 | | $ | 49,786 | | $ | (5,066) | | $ | 63,028 | |
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 Condensed 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 mortgage-backed securities (“Agency MBS”) are discounted 4% for purposes of calculating compliance with the restricted liquidity requirements. As of September 30, 2017,seen below, the Company held substantially allthe majority of its restricted liquiditypledged securities in money market funds holding U.S. Treasuries. Additionally, substantially allAgency MBS as of June 30, 2021. The majority of the loans for which the Company has risk sharing are Tier 2 loans.
The Company is in compliance with the SeptemberJune 30, 20172021 collateral requirements as outlined above. As of SeptemberJune 30, 2017,2021, reserve requirements for the DUS loan portfolio will require the Company to fund $61.3$66.9 million in additional restricted liquidity over the next 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 SeptemberJune 30, 2017.2021. The net worth requirement is derived primarily from unpaid principal balances on Fannie Mae loans and the level of risk sharing. At SeptemberJune 30, 2017,2021, the minimum net worth requirement was $145.7$245.4 million, and the Company's net worth, as defined in the requirements, was $634.5 million,$1.1 billion, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC. As of SeptemberJune 30, 2017,2021, the Company was required to maintain at least $28.6 million
Table of liquid assets to meet operational liquidity requirements for Fannie Mae, Freddie Mac, HUD, and Ginnie Mae. As of September 30, 2017, the Company had operational liquidity, as defined in the requirements, of $145.1 million, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC.Contents
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 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.
Company was required to maintain at least $48.7 million of liquid assets to meet operational liquidity requirements for Fannie Mae, Freddie Mac, HUD, and Ginnie Mae, and the Company had operational liquidity, as defined in the requirements, of $359.3 million as of June 30, 2021, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC.
Pledged Securities, at Fair Value—Pledged securities, at fair value consisted of the following balances as of June 30, 2021 and 2020 and December 31, 2020 and 2019:
| | | | | | | | | | | | |
| June 30, | | December 31, | |
Pledged Securities (in thousands) | 2021 | | 2020 | | 2020 | | 2019 | |
Restricted cash | $ | 7,442 | | $ | 1,768 | | $ | 4,954 | | $ | 2,150 | |
Money market funds | | 39,954 | | | 4,004 | | | 12,519 | | | 5,054 | |
Total pledged cash and cash equivalents | $ | 47,396 | | $ | 5,772 | | $ | 17,473 | | $ | 7,204 | |
Agency MBS | | 99,152 | | | 122,524 | | | 119,763 | | | 114,563 | |
Total pledged securities, at fair value | $ | 146,548 | | $ | 128,296 | | $ | 137,236 | | $ | 121,767 | |
The information in the preceding table is presented to reconcile beginning and ending cash, cash equivalents, restricted cash, and restricted cash equivalents in the Condensed Consolidated Statements of Cash Flows as more fully discussed in NOTE 11—EARNINGS PER SHARE
2.The Company’s investments included within Pledged securities, at fair value consist primarily of money market funds and Agency debt securities. The investments in Agency debt securities consist of multifamily Agency MBS and are all accounted for as AFS securities. When the fair value of Agency MBS is 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. The following table provides additional information related to the Agency MBS as of June 30, 2021 and December 31, 2020:
| | | | | | |
Fair Value and Amortized Cost of Agency MBS (in thousands) | June 30, 2021 | | December 31, 2020 | |
Fair value | $ | 99,152 | | $ | 119,763 | |
Amortized cost | | 95,710 | | | 117,136 | |
Total gains for securities with net gains in AOCI | | 3,572 | | | 2,669 | |
Total losses for securities with net losses in AOCI | | (130) | | | (42) | |
Fair value of securities with unrealized losses | | 2,204 | | | 12,267 | |
None of the pledged securities has been in a continuous unrealized loss position for more than 12 months.
The following weighted average sharestable 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.
| | | | | | |
| June 30, 2021 | |
Detail of Agency MBS Maturities (in thousands) | Fair Value | | Amortized Cost | |
Within one year | $ | — | | $ | — | |
After one year through five years | | 6,820 | | | 6,792 | |
After five years through ten years | | 64,196 | | | 63,407 | |
After ten years | | 28,136 | | | 25,511 | |
Total | $ | 99,152 | | $ | 95,710 | |
| | | | | | |
NOTE 10—EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY
Earnings per share equivalents are used(“EPS”) is calculated under the two-class method. The two-class method allocates all earnings (distributed and undistributed) to calculateeach 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 earnings per shareEPS for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016:2020 under the two-class method. Participating securities were included in the calculation of diluted EPS using the two-class method, as this computation was more dilutive than the treasury-stock method.
| | | | | | | | | |
| | For the three months ended | | For the nine months ended | |
| | September 30, | | September 30, | |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | |
Weighted average number of shares outstanding used to calculate basic earnings per share | | 30,085 | | 29,374 | | 30,009 | | 29,417 | |
| | | | | | | | | |
Dilutive securities | | | | | | | | | |
Unvested restricted shares and restricted share units | | 1,404 | | 1,068 | | 1,394 | | 1,024 | |
Stock options | | 823 | | 351 | | 767 | | 302 | |
Weighted average number of shares and share equivalents outstanding used to calculate diluted earnings per share | | 32,312 | | 30,793 | | 32,170 | | 30,743 | |
| | | | | | | | | |
| | | | | | | | | | | | |
| For the three months ended June 30, | | For the six months ended June 30, | |
EPS Calculations (in thousands, except per share amounts) | 2021 | | 2020 | | 2021 | | 2020 | |
Calculation of basic EPS | | | | | | | | | | | | |
Walker & Dunlop net income | $ | 56,058 | | $ | 62,059 | | $ | 114,110 | | $ | 109,888 | |
Less: dividends and undistributed earnings allocated to participating securities | | 1,831 | | | 1,873 | | | 3,798 | | | 3,392 | |
Net income applicable to common stockholders | $ | 54,227 | | $ | 60,186 | | $ | 110,312 | | $ | 106,496 | |
Weighted-average basic shares outstanding | | 31,019 | | | 30,352 | | | 30,922 | | | 30,288 | |
Basic EPS | $ | 1.75 | | $ | 1.98 | | $ | 3.57 | | $ | 3.52 | |
| | | | | | | | | | | | |
Calculation of diluted EPS | | | | | | | | | | | | |
Net income applicable to common stockholders | $ | 54,227 | | $ | 60,186 | | $ | 110,312 | | $ | 106,496 | |
Add: reallocation of dividends and undistributed earnings based on assumed conversion | | 14 | | | 25 | | | 34 | | | 57 | |
Net income allocated to common stockholders | $ | 54,241 | | $ | 60,211 | | $ | 110,346 | | $ | 106,553 | |
Weighted-average basic shares outstanding | | 31,019 | | | 30,352 | | | 30,922 | | | 30,288 | |
Add: weighted-average diluted non-participating securities | | 351 | | | 508 | | | 400 | | | 672 | |
Weighted-average diluted shares outstanding | | 31,370 | | | 30,860 | | | 31,322 | | | 30,960 | |
Diluted EPS | $ | 1.73 | | $ | 1.95 | | $ | 3.52 | | $ | 3.44 | |
The assumed proceeds used for calculating the dilutive impact of restricted stock awards under the treasurytreasury-stock method includes the unrecognized compensation costs associated with the awards. The following table presents any average outstanding options to purchase sharesFor the three and six months ended June 30, 2021, an immaterial number 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 three and six months ended June 30, 2020, 537 thousand average restricted shares and an immaterial number of average restricted shares, respectively, were excluded. These average restricted shares were excluded from the computation of diluted earnings per share under the treasury method because the effect would have been anti-dilutive, (the exercise price of the options oras 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).presented.
| | | | | | | | | |
| | For the three months ended | | For the nine months ended | |
| | September 30, | | September 30, | |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | |
Average options | | 113 | | 207 | | 94 | | 172 | |
Average restricted shares | | 3 | | — | | 5 | | 211 | |
NOTE 12—TOTAL EQUITY
A summary of changes in total equity is presented below:
| | | | | | | | | | | | | | | | | | |
| | | | Stockholders' Equity | | | | | | |
| | | | | | | Additional | | | | | | | | | | |
| | Common Stock | | Paid-In | | Retained | | Noncontrolling | | Total | |
(in thousands) | | Shares | | Amount | | Capital | | Earnings | | Interests | | Equity | |
Balance at December 31, 2016 | | 29,551 | | $ | 296 | | $ | 228,889 | | $ | 381,031 | | $ | 4,858 | | $ | 615,074 | |
Walker & Dunlop net income | | — | | | — | | | — | | | 112,166 | | | — | | | 112,166 | |
Net income from noncontrolling interests | | — | | | — | | | — | | | — | | | 114 | | | 114 | |
Stock-based compensation - equity classified | | — | | | — | | | 14,948 | | | — | | | — | | | 14,948 | |
Issuance of common stock in connection with equity compensation plans | | 1,077 | | | 10 | | | 2,877 | | | — | | | — | | | 2,887 | |
Repurchase and retirement of common stock | | (679) | | | (7) | | | (20,622) | | | (8,234) | | | — | | | (28,863) | |
Other | | — | | | — | | | 6 | | | — | | | — | | | 6 | |
Balance at September 30, 2017 | | 29,949 | | $ | 299 | | $ | 226,098 | | $ | 484,963 | | $ | 4,972 | | $ | 716,332 | |
During the first quarter of 2017, theThe Company’s Board of Directors authorizedapproved a stock repurchase program that permits the Company to repurchase of up to $75.0 million of itsthe Company’s common stock over a 12-month period. period beginning on February 12, 2021. During 2017,the first and second quarters of 2021, the Company has repurchased 228 thousanddid 0t repurchase any shares of its common stock under the share repurchase program at a weighted average priceprogram. As of $47.07 per share and immediately retiredJune 30, 2021, the shares, reducing stockholders’ equity by $10.8 million. The Company had $64.2$75.0 million of authorized share repurchase capacity remaining under the 2021 share repurchase program.
During each of the first and second quarters of 2021, the Company paid a dividend of $0.50 per share. On August 4, 2021, the Company’s Board of Directors declared a dividend of $0.50 per share for the third quarter of 2021. The dividend will be paid on September 3, 2021 to all holders of record of the Company’s restricted and unrestricted common stock as of September 30, 2017.August 19, 2021.
The Company’s Note payable (“Term Loan”) contains direct restrictions on 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. The Company does not believe that these restrictions currently limit the amount of dividends the Company can pay for the foreseeable future.
Item 2. ��Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the historical financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q (“Form 10-Q”). The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those expressed or contemplated in those forward-looking statements as a result of certain factors, including those set forth under the headings “Forward-Looking Statements” and “Risk Factors” elsewhere in this Form 10-Q and in theour Annual Report on Form 10-K for the year ended December 31, 20162020 (“20162020 Form 10-K”).
Forward-Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q of Walker & Dunlop, Inc. and subsidiaries (the “Company,” “Walker & Dunlop,” “we,” or “us”), may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans, or intentions.
The forward-looking statements contained in this Form 10-Q reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions, and changes in circumstances that may cause actual results to differ significantly from those expressed or contemplated in any forward-looking statement. Statements regarding the following subjects, among others, may be forward-looking:
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● | | the future of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac,” and together with Fannie Mae, the “GSEs”), including their existence, relationship to the U.S. federal government, origination capacities, and their impact on our business; |
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● | | changes to and trends in the interest rate environment and its impact on our business; |
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● | | our growth strategy, which includes a focus on building direct access to capital we control; strategy; |
| ·
● | | our projected financial condition, liquidity, and results of operations; |
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● | | our ability to obtain and maintain warehouse and other loan funding arrangements; |
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● | our ability to make future dividend payments or repurchase shares of our common stock; |
| ● | availability of and our ability to attract and retain qualified personnel and our ability to develop and retain relationships with borrowers, key principals, and lenders; |
| ·
● | | degree and nature of our competition; |
| ·
● | | changes in governmental regulations and policies, tax laws and rates, and similar matters and the impact of such regulations, policies, and actions; |
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● | | our ability to comply with the laws, rules, and regulations applicable to us; us, including additional regulatory requirements for broker-dealer and other financial services firms that became applicable to us upon our acquisition of Zelman (as defined below); |
| ·
● | | trends in the commercial real estate finance market, interest rates, commercial real estate values, the credit and capital markets, or the general economy; economy, including demand for multifamily housing and rent growth; |
| ·
● | | general volatility of the capital markets and the market price of our common stock; |
| ● | our ability to prevent, detect, and mitigate cybersecurity risks; and |
| ·
● | | other risks and uncertainties associated with our business described in our 20162020 Form 10-K and our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the Securities and Exchange Commission. |
While forward-looking statements reflect our good faithgood-faith projections, assumptions, and expectations, they are not guarantees of future results. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by applicable law. For a further discussion of these and other factors that could cause future results to differ materially from those expressed or contemplated in any forward-looking statements, see “Risk Factors.”
Business
We are one of the leading commercial real estate services and finance companies in the United States, with a primary focus on multifamily lending.lending, debt brokerage, and property sales. We were the largest lender to multifamily properties and the fourth largest overall commercial real estate lender in the country in 2020. We leverage our technological resources and investments to (i) provide an enhanced experience for our customers, (ii) identify refinancing and other financial opportunities for our existing customers, and (iii) identify potential new customers. We believe our people, brand, and technology provide us with a competitive advantage, as evidenced by the fact that 55% of refinancing volumes in the quarter were new loans to us and 22% of total transaction volumes were from new customers.
We have been in business for more than 80 years; a Fannie Mae Delegated Underwriting and Servicing™ ("DUS") lender since 1988, when the DUS program began; a lender with 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”) since acquiring a HUD license in 2009; and a Freddie Mac Multifamily approved seller/servicer for Conventional Loans. We originate, sell, broker, and service a range of multifamily and other commercial real estate financing products, and provide multifamily investmentproperty sales brokerage services. and appraisal services, and engage in commercial real estate investment management activities. We provide housing market research and real estate-related investment banking and advisory services, which provides our clients and us with market insight into many areas in the single-family and multifamily markets. Our clients are owners and developers of multifamily properties and other commercial real estate assets across the country.country, some of whom are the largest owners and developers in the industry. We originate and sell multifamily loans through the programs of the GSEsFannie Mae, Freddie Mac, and HUD (collectively, the “Agencies”), with which we have long-established
relationships.. We retain servicing rights and asset management responsibilities on substantially all loans that we originate throughfor the Agencies’ programs. We are approved as a Fannie Mae Delegated Underwriting and Servicing™ ("DUS")DUS lender nationally, aan approved Freddie Mac Multifamily ApprovedOptigo® Seller/Servicer for Conventional Loans (“Freddie Mac seller/servicer”lender”) in 23 states and the District of Columbia, a Freddie Mac Approved Seller/Servicernationally for Conventional, Seniors Housing, and Targeted Affordable Housing, nationwide,and small balance loans, a HUD Multifamily Accelerated Processing (“MAP”) lender nationally, a HUD Section 232 LEAN (“LEAN”) lender nationally, and a Ginnie Mae issuer. We also broker, and occasionally service, loans for a number ofmany life insurance companies, commercial banks, and other institutional investors, in which cases we do not fund the loan but rather act as a loan broker. We also underwrite, service, someand asset-manage interim loans. Most of these interim loans are closed through a joint venture or through separate accounts managed by our investment management subsidiary, Walker & Dunlop Investment Partners, Inc. (“WDIP”). Those interim loans not closed by the joint venture or WDIP are originated by us and presented on our balance sheet as loans held for which we act asinvestment.
Walker & Dunlop, Inc. is a loan broker.holding company. We conduct the majority of our operations through Walker & Dunlop, LLC, our operating company.
We fund loans for the Agencies, generally through warehouse facility financings,Agency Lending and sell them to investors in accordance with the related loan sale commitment, which we obtain prior to rate lock. Proceeds from the sale of the loan are used to pay off the warehouse borrowing. The sale of the loan is typically completed within 60 days after the loan is closed.Loan Servicing
We recognize gainsloan origination and debt brokerage fees, net and the fair value of expected net cash flows from mortgage banking activitiesservicing, net from our lending with the Agencies when we commit to both originate a loan with a borrower and sell that loan to an investor. The gainsloan origination and debt brokerage fees, net and the fair value of expected net cash flows from mortgage banking activitiesservicing, net for these transactions reflect the fair value attributable to loan origination fees, premiums on the sale of loans, net of any co-broker fees, and the fair value of the expected net cash flows associated with servicing the loans, net of any guaranty obligations retained.
We also generate revenuegenerally fund our Agency loan products through warehouse facility financing and sell them to investors in accordance with the related loan sale commitment, which we obtain concurrent with rate lock. Proceeds from (i)the sale of the loan are used to pay off the warehouse borrowing. The sale of the loan is typically completed within 60 days after the loan is closed. We earn net warehouse interest income we earn while the loan isfrom
loans held for sale through one of our warehouse facilities, (ii) net warehouse interest income from loans held for investment while they are outstanding equal to the difference between the note rate on the loan and (iii) sales commissions for brokering the salecost of multifamily properties.borrowing of the warehouse facility.
We retain servicing rights and asset management responsibilities on substantially all of the loansour Agency loan products that we originate and sell and generate cash revenues from the fees we receive for servicing the loans, from the interest income on escrow deposits held on behalf of borrowers, and from other ancillary fees relating to servicing the loans. Servicing fees, which are based on servicing fee rates set at the time an investor agrees to purchase the loan and on the unpaid principal balance of the loan, are generally paid monthly for the duration of the loan. Our Fannie Mae and Freddie Mac servicing arrangements generally provide for prepayment feesprotection to us in the event of a voluntary prepayment. For loans serviced outside of Fannie Mae and Freddie Mac, we typically do not sharehave similar prepayment protections. For most loans we service under the Fannie Mae DUS program, we are required to advance the principal and interest payments and guarantee fees for four months should a borrower cease making payments under the terms of their loan, including while that loan is in anyforbearance. After advancing for four months, we may request reimbursement by Fannie Mae for the principal and interest advances, and Fannie Mae will reimburse us for these advances within 60 days of the request. Under the Ginnie Mae program, we are obligated to advance the principal and interest payments and guarantee fees until the HUD loan is brought current, fully paid or assigned to HUD. We are 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, we are not reimbursed for our advances until such payments.time as we assign the loan to HUD or work out a payment modification for the borrower. For loans in default, we may repurchase those loans out of the Ginnie Mae security, at which time our advance requirements cease and we may then modify and resell the loan or assign the loan back to HUD, at which time we will be reimbursed for our advances. Under the Freddie Mac Optigo® program, and our bank and life insurance company servicing agreements, we are not obligated to make advances on the loans we service.
WeOur loan commitments and loans held for sale are currently not exposed to unhedged interest rate risk during the loan commitment, closing, and delivery process for our Agency activities.process. The sale or placement of each loan to an investor is negotiated prior to establishing the coupon rate for the loan. We also seek to mitigate the risk of a loan not closing. We have agreements in place with the Agencies that specify the cost of a failed loan delivery also known as a pair off fee, in the event we fail to deliver the loan to the investor. To protect us against such pair off fees,risk, we require a deposit from the borrower at rate lock that is typically more than the potential pair off fee.cost of non-delivery. The deposit is returned to the borrower only once the loan is closed. Any potential loss from a catastrophic change in the property condition while the loan is held for sale using warehouse facility financing is mitigated through property insurance equal to replacement cost. We are also protected contractually from an investor’s failure to purchase the loan. We have experienced an immaterial number of failed deliveries in our history and have incurred immaterial losses on such failed deliveries.
In cases where we do not fund the loan, we act as a loan broker and retain the right to service some of the loans. Our loan originators who focus on loan brokerage are engaged by borrowers to work with a variety of institutional lenders to find the most appropriate loan instrument for the borrowers' needs. These loans are then funded directly by the institutional lender, and we receive an origination fee for placing the loan, and for those brokered loans we service, we collect ongoing servicing fees while those loans remain in our servicing portfolio. The servicing fees we typically earn on brokered loan transactions are substantially lower than the servicing fees we earn for servicing Agency loans.
We have risk-sharing obligations on substantially all loans we originate under the Fannie Mae DUS program. When a Fannie Mae DUS loan is subject to full risk-sharing, we absorb losses on the first 5% of the unpaid principal balance of a loan at the time of loss settlement, and above 5% we share a percentage of the loss with Fannie Mae, with our maximum loss capped at 20% of the original unpaid principal balance of the loan (subject to doubling or tripling if the loan does not meet specific underwriting criteria or if the loan defaults within 12 months of its sale to Fannie Mae). We may, however, request modified risk-sharing at the time of origination, which reduces our potential risk-sharing losses from the levels described above. We occasionally request modified risk-sharing based on the size of the loan. We may also request modified risk-sharing on large transactions if we do not believe that we are being fully compensated for the risks of the transactions or to manage overall risk levels. Our current credit management policy is to cap each loan balance subject to full risk-sharing at $60.0 million. Accordingly, we generally electis currently limited to use modified risk-sharing for loans of more than $60.0up to $250 million, in orderwhich equates to limit oura maximum loss exposure on any oneper loan to $12.0of $50 million (such exposure would occur in the event that the underlying collateral is determined to be completely without value at the time of loss). However,For loans in excess of $250 million, we receive modified risk-sharing. We also may request modified risk-sharing at the time of origination on occasion elect to originate a loan with full risk sharing even whenloans below $250 million, which reduces our potential risk-sharing losses from the loan balance is greater than $60.0 millionlevels described above if we do not believe that we are being fully compensated for the loan characteristics support such an approach.
the transaction. The full risk-sharing limit in prior years was less than $250 million. Accordingly, loans originated in prior years may be subject to modified risk-sharing at much lower levels.
Our servicing fees for risk-sharing loans include compensation for the risk-sharing obligations and are larger than the servicing fees we would receive from Fannie Mae for loans with no risk-sharing obligations. We receive a lower servicing fee for modified risk-sharing than for full risk-sharing.
We haveAs part of our overall growth strategy, we are focused on significantly growing and investing in our small-balance lending business, which involves a high volume of transactions with smaller loan balances. In support of this business, we acquired a company with a technology platform that streamlines and accelerates the quoting, processing, and underwriting of small-balance, multifamily loans. Additionally, the technology platform provides the borrower with a web-based, user-friendly interface, enhancing the borrower’s experience during the origination process.
Debt Brokerage
Our mortgage bankers who focus on debt brokerage are engaged by borrowers to work with a variety of institutional lenders to find the most appropriate loan instrument for the borrowers' needs. These loans are then funded directly by the institutional lender, and we receive an interimorigination fee for placing the loan. For those brokered loans we also service, we collect ongoing servicing fees while those loans remain in our servicing portfolio. The servicing fees we typically earn on brokered loan program offeringtransactions are substantially lower than the servicing fees we earn for servicing loans with the Agencies.
Principal Lending and Investing
Our “Interim Program” is composed of the loans held by the Interim Program JV and the Interim Loan Program as described below. Through a joint venture with an affiliate of Blackstone Mortgage Trust, Inc., we offer short-term senior secured debt financing products that provide floating-rate, interest-only loans for terms of generally up to three years to experienced borrowers seeking to acquire or reposition multifamily properties that do not currently qualify for permanent financing (the “Interim Program”). We underwrite and originate all loans held for investment closed through the Interim Program and assume the full risk of loss on the loans while they are outstanding. In addition, we service and asset-manage loans originated through the Interim Program, with the ultimate goal of providing permanent Agency financing on the properties. We have not experienced any delinquencies or charged off any loans originated under the Interim Program, which began operations in 2012. As of September 30, 2017, we had seven loans held for investment under the Interim Program with an aggregate outstanding unpaid principal balance of $152.8 million.
During the second quarter of 2017, we formed a joint venture with an affiliate of one of the world’s largest owners of commercial real estate to originate, hold, and finance loans that previously met the criteria of the Interim Program (the “Interim Program JV” or the “joint venture”). The Interim Program JV assumes full riskjoint venture funds its operations using a combination of loss while the loans it originates are outstanding.equity contributions from its owners and third-party credit facilities. We hold a 15% ownership interest in the Interim Program JV and are responsible for sourcing, underwriting, servicing, and asset-managing the loans originated by the joint venture. The joint venture funds its operations usingInterim Program JV assumes full risk of loss while the loans it originates are outstanding, while we assume risk commensurate with our 15% ownership interest.
Using a combination of equity contributions from its ownersour own capital and third-party credit facilities. We expectwarehouse debt financing, we offer interim loans that substantially all loans satisfyingdo not meet the criteria forof the Interim Program will be originated by the joint venture going forward; however, we may opportunistically originateJV (the “Interim Loan Program”). We underwrite, service, and asset-manage all loans held for investmentexecuted through the Interim Loan Program. We originate and hold these Interim Loan Program loans for investment, which are included on our balance sheet, and during the time that these loans are outstanding, we assume the full risk of loss. The ultimate goal of the Interim Loan Program is to provide permanent Agency financing on these transitional properties.
WDIP and its subsidiaries function as the operator of a private commercial real estate investment adviser focused on the management of debt, preferred equity, and mezzanine equity investments in middle-market commercial real estate funds. The activities of WDIP, a wholly owned subsidiary of the Company, are part of our strategy to grow and diversify our operations by growing our investment management platform. WDIP’s current assets under management (“AUM”) of $1.2 billion primarily consist of five sources: Fund III, Fund IV, Fund V, and Fund VI (collectively, the “Funds”), and separate accounts managed for life insurance companies. AUM for the Funds consists of both unfunded commitments and funded investments and AUM for the separate accounts consist entirely of funded investments. Unfunded commitments are highest during the fund raising and investment phases. WDIP receives management fees based on both unfunded commitments and funded investments. Additionally, with respect to the Funds, WDIP receives a percentage of the return above the fund return hurdle rate specified in the future. During the third quarter of 2017, we sold $119.8 million of loans from our interim loan portfolio to the joint venture at par. fund agreements.
Property Sales
We do not expect to sell additional loans held for investment to the joint venture.
Through Walker & Dunlop Investment Sales, LLC (“WDIS”), we offer investmentproperty sales brokerage services to owners and developers of multifamily properties that are seeking to sell these properties.properties through our subsidiary Walker & Dunlop Investment Sales, LLC (“WDIS”). Through our investmentthese property sales brokerage services, we seek to maximize proceeds and certainty of closure for our clients using our knowledge of the commercial real estate and capital markets and relying on our experienced transaction professionals. We receive a sales commission for brokering the sale of these multifamily assets on behalf of our clients, and we often times are able to provide financing to the purchaser of the properties through our Agency or debt brokerage teams. Our investmentproperty sales services are offered primarilyin various regions throughout the United States. We have increased the number of property sales brokers and the geographical reach of our investment sales platform over the past several years through hiring and acquisitions and intend to continue this expansion in support of our growth strategy.
Appraisal Services
We have a joint venture branded Apprise by Walker & Dunlop with an international technology services company to offer automated multifamily appraisal services (“Appraisal JV”). The Appraisal JV leverages technology and data science to dramatically improve the consistency, transparency, and speed of multifamily property appraisals in the eastern United States, with a particular focusU.S. through the licensing of our partner’s technology and leveraging of our expertise in the southeastern United States. Our goal iscommercial real estate industry. We own a 50% interest in the Appraisal JV and account for the interest as an equity-method investment. While the operations of the Appraisal JV for the quarter ended June 30, 2021 were immaterial, the Appraisal JV’s
operations continue to add other investment sales brokerage talent,rapidly grow with significant increases in the goalvolume of expanding these brokerage services nationally.appraisal reports generated and a client list that includes several national commercial real estate lenders.
Housing Market Research and Real Estate Investment Banking Services
Under certain limited circumstances, we may make preferred equity investments in entities controlled by certain of our borrowers that will assist those borrowers to acquire and reposition properties. The terms of such investments are negotiated with each investment. As of September 30, 2017, we have funded $41.2 million of such investments. We expect these preferred equity investments to be repaid to us within the next two years.
During the firstthird quarter of 2017,2021, we completedclosed on the purchaseacquisition of certain assets and the assumption of certain liabilities of Deerwood Real Estate Capital,Zelman Holdings, LLC (“Deerwood”Zelman”), through a regional commercial75% interest in a newly formed entity, WDIB, LLC (“WDIB”). Zelman is a nationally recognized housing market research and investment banking firm that will enhance the information we provide to our clients and increase our access to high-quality market insight in many areas of the single-family and multifamily markets, including construction trends, demographics, mortgage banking company based in the greater New York City area. Prior to the acquisition, Deerwood engaged in commercialfinance, and real estate loan brokerage services acrosstechnology and services. Zelman generates revenues through the United States, with a primary focus in the Greater New York City area. The acquisition expands our networksale of loan originatorsits housing market research data and provides further diversificationrelated publications to our loan origination platform.banks, investment banks and other financial institutions, and through its offering of real estate-related investment banking and advisory services.
Basis of Presentation
The accompanying condensed consolidated financial statements include all of the accounts of the Company and its wholly owned subsidiaries, and all intercompany transactions have been eliminated. Additionally, we consolidate the activities of WDIS and present the portion of WDIS that we do not control as Noncontrolling interests in the Condensed Consolidated Balance Sheets and Net income from noncontrolling interests in the Condensed Consolidated Statements of Income.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which requirerequires management to make estimates based on certain judgments and assumptions that are inherently uncertain and affect reported amounts. The estimates and assumptions are based on historical experience and other factors management believes to be reasonable. Actual results may differ from those estimates and assumptions.assumptions and the use of different judgments and assumptions may have a material impact on our results. We believe the following critical accounting policiesestimates represent the areas where more significant judgments and estimates are used in the preparation of our condensed consolidated financial statements. Additional information about our critical accounting estimates and other significant accounting policies are discussed in NOTE 2 of the consolidated financial statements in our 2020 Form 10-K.
Mortgage Servicing Rights (“MSRs”).MSRs are recorded at fair value at loan sale or upon purchase. The fair value of MSRs acquired through a stand-alone servicing portfolio purchase is equal to the purchase price paid. The fair value at loan sale (“OMSR”) is based on estimates of expected net cash flows associated with the servicing rights and takes into consideration an estimate of loan prepayment. Initially, the fair value amount is included as a component of the derivative asset fair value at the loan commitment date. The estimated net cash flows from servicing, which includes assumptions for discount rate, escrow earnings, prepayment speed, and servicing costs, are discounted at a rate that reflects the credit and liquidity risk of the MSROMSR over the estimated life of the underlying loan. The discount rates used throughout the periods presented for all MSRs recognized at loan saleOMSRs were between 8-14% and 10-15% for both the three and six months ended June 30, 2021 and 2020, respectively, and varied based on the loan type. The life of the underlying loan is estimated giving consideration to the prepayment provisions in the loan.loan and assumptions about loan behaviors around those provisions. Our model for OMSRs assumes no prepayment prior to the expiration of the prepayment provisions and full prepayment of the loan at or near the point wherewhen the prepayment provisions have expired. We record an individual MSROMSR asset (or liability) for each loan at loan sale. For purchasedThe fair value of MSRs acquired through a stand-alone servicing portfolios,portfolio purchase (“PMSR”) is equal to the purchase price paid. For PMSRs, we record and amortize a portfolio-level MSR asset based on the estimated remaining life of the portfolio using the prepayment characteristics of the portfolio. We have had only one stand-alone servicing portfolio purchase, which occurred in the second quarter of 2016.
The assumptions used to estimate the fair value of MSRs at loan salecapitalized OMSRs are based on internal modelsdeveloped internally and are periodically compared to assumptions used by other market participants. Due to the relatively few transactions in the multifamily MSR market and the lack of significant changes in assumptions by market participants, we have experienced littlelimited volatility in the assumptions we use during the periods presented,historically, including the most-significant assumption – the discount rate. Additionally, weWe do not expect to see muchsignificant volatility in the assumptions for the foreseeable future. ManagementWe actively monitorsmonitor the assumptions used and makesmake adjustments to those assumptions when market conditions change, or other factors indicate such adjustments are warranted. We carry originatedDuring the first quarter of 2021, we reduced the discount rate and purchased MSRs at the lower of amortized cost or fair value and evaluate the carrying valueescrow earnings rate assumptions for impairment quarterly. We test for impairment on the purchased stand-alone servicing portfolio separately from our other MSRs. The MSRs from both stand-alone portfolio purchases and from loans sales are tested for impairment at the portfolio level.OMSRs. We engage a third party to assist in determining an estimated fair value of our existing and outstanding MSRs on at least a semi-annual basis.
Gains from mortgage banking activities income is recognized when we record a derivative asset upon the simultaneous commitments to originate a loan with a borrower and sell the loan to an investor. The commitment asset related to the loan origination is recognized at fair value, which reflects Changes in our discount rate assumptions may materially impact the fair value of the contractual loan origination related fees and sale premiums, net of any co-broker fees, and the estimated fair valueMSRs (NOTE 3 of the expected net cash flows associated withcondensed consolidated financial statements details the servicingportfolio-level impact of the loan, net of the estimated net future cash flows associated with any risk-sharing obligations (the “servicing component of the commitment asset”). Upon loan sale, we derecognize the servicing component of the commitment asset and recognize an MSR. All MSRs are amortized into expense over the estimated life of the loan and presented as a component of Amortization and depreciationchange in the Condensed Consolidated Statements of Income.discount rate).
All MSRs are amortized using the interest method over the period that servicing income is expected to be received. For MSRs recognized at loan sale, the individual loan-level MSR is written off through a charge to Amortization and depreciation when a loan prepays, defaults, or is probable of default. 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 at purchase (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, we prospectively adjust the estimated life of the portfolio (and thus future amortization) to approximate the actual pattern observed. We have not adjustedmade adjustments to the estimated life of our one purchased stand-alone servicing portfolio asPMSRs in the past when the actual prepayment experience has notof prepayments differed materially from the expected prepayment experience.estimated prepayments.
Allowance for Risk-sharingRisk-Sharing Obligations. The allowance This reserve liability (referred to as “allowance”) for risk-sharing obligations relates to our at riskFannie Mae at-risk servicing portfolio and is presented as a separate liability within the Condensed Consolidated Balance Sheets. The amount of this allowance considerson our assessmentbalance sheets. We record an estimate of the likelihood of repayment byloss reserve for the borrower or key principal(s),current expected credit losses (“CECL”) for all loans in our Fannie Mae at-risk servicing portfolio using the risk characteristicsweighted-average remaining maturity method (“WARM”). WARM uses an average annual loss 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 loss rate is applied to the estimated unpaid principal balance 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. We currently use one year for our reasonable and supportable forecast period (“forecast period”) as we believe forecasts beyond one year are inherently less reliable. During the forecast period, we apply an adjusted loss factor associated with a similar historical period. We revert to the historical loss rate over a one-year period on a straight-line basis.
One of the key components of a WARM calculation is the runoff rate, which is the expected rate at which loans in the current portfolio will amortize and prepay in the future. We group loans by similar origination dates (vintage) and contractual maturity terms for purposes of calculating the runoff rate. We originate 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 runoff rates applied to each vintage and contractual maturity term is determined using historical data; however, changes in prepayment and amortization behavior may significantly impact the loan’s risk rating, historicalestimate.
The weighted-average annual loss experience, adverse situations affecting individual loans,rate is calculated using a 10-year look-back period, utilizing the estimated disposition valueaverage portfolio balance and settled losses for each year. A 10-year period is used as we believe that 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 underlying collateral,current portfolio. Changes in our expectations and forecasts may materially impact the level of risk sharing. Historically, initial loss recognition occurs at or before a loan becomes 60 days delinquent. estimate.
We regularly monitor the allowance on all applicable loans and update loss estimates as current information is received. Provision (benefit) for credit losses in the Condensed Consolidated Statements of Income reflects the income statement impact of changes to both the allowance for risk-sharing obligations and allowance for loan losses.
We perform a quarterly evaluation of all ofevaluate our risk-sharing loans on a quarterly basis to determine whether a loss is probable. Our process for identifying which risk-sharingthere are loans may bethat are probable of loss consists of an assessment of severaldefault. Specifically, we assess a loan’s qualitative and quantitative risk factors, includingsuch as payment status, property financial performance, local real estate market conditions, loan-to-value ratio, debt-service-coverage ratio, and property condition. When we believe a loan is determined to be probable of foreclosure or when a loan is in foreclosure, we record an allowance for that loan (a “specific reserve”). The specific reserve isdefault based on these factors, we remove the estimate ofloan from the WARM calculation and individually assess the loan for potential credit loss. This assessment requires certain judgments and assumptions to be made regarding the property fair value less sellingvalues and property preservation costs and considers the loss-sharing requirements detailed below in the “Credit Quality and Allowance for Risk-Sharing Obligations” section. The estimate of property fair value at initial recognition of the allowance for risk-sharing obligations is based on appraisals, broker opinions of
value, or net operating income and market capitalization rates, whichever we believe is the best estimate of the net disposition value. The allowance for risk-sharing obligations for such loans is updated as any additional information is received until the loss is settled with Fannie Mae. The settlement with Fannie Mae is based on theother factors, that may differ significantly from actual sales price of the property less selling and property preservation costs and considers the Fannie Mae loss-sharing requirements.results. Loss settlement with Fannie Mae has historically concluded within 18 to 36 months after foreclosure. Historically, the initial specificcollateral-based reserves have not varied significantly from the final settlement.
We actively monitor the judgments and assumptions used in our Allowance for Risk-Sharing Obligation estimate and make adjustments to those assumptions when market conditions change, or when other factors indicate such adjustments are uncertain whether such a trend will continue inwarranted. We believe the future.
In addition to the specific reserves discussed above, we also record an allowancelevel of Allowance for risk-sharing obligations related to all risk-sharing loansRisk-Sharing Obligation is appropriate based on our watch list (“general reserves”). Such loans are not probableexpectations of foreclosure but are probable of loss as the characteristics of these loans indicate that it 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, we continue to carry a guaranty obligation. We calculate the general reserves based on a migration analysisfuture market conditions; however, changes in one or more of the loans on our historical watch lists, adjusted for qualitative factors. When we placejudgments or assumptions used above could have a risk-sharing loan on our watch list, we cease to amortize the guaranty obligation and transfer the remaining unamortized balance of the guaranty obligation to the general reserves. If a risk-sharing loan is subsequently removed from our watch list due to improved financial performance, we transfer the unamortized balance of the guaranty obligation back to the guaranty obligation classificationsignificant impact on the balance sheet and amortize the remaining unamortized balance evenly over the remaining estimated life. 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 Allowance for risk-sharing obligations as of September 30, 2017 is based primarily on general reserves related to the loans on the watch list as of September 30, 2017.estimate.
Overview of Current Business Environment
The fundamentalsEntering 2021, the pandemic continued to impact macroeconomic conditions with U.S. unemployment rates at elevated levels but significantly improved compared to the middle of the commercial2020. Congress passed three pandemic stimulus packages to provide funding for government programs directly supporting households and multifamily real estate market remain strong. Multifamily occupancy rates and effective rentsbusinesses. Specifically, as it relates to our business, a total of $47 billion in renter assistance was funded, which enabled many renters to continue to remain at historical highs based upon strong rental market demand while delinquency rates remain at historic lows, all of which aid loan performance and loan origination volumes due to their importance to the cash flows of the underlying properties. Additionally, the single-family home ownership level remains at historical lows while new household formation grows, resulting in increased demand for multifamily housing. The Mortgage Bankers Association (“MBA”) recently reported that the amount of commercial and multifamily mortgage debt outstanding continued to grow inmeet monthly obligations. In the second quarter of 2017, reaching $3.1 trillion by2021, vaccination programs across the U.S. accelerated and became widely available to the public, resulting in most jurisdictions eliminating or significantly curtailing economic restrictions. With the lifting of economic restrictions, macroeconomic conditions are recovering quickly with the reported unemployment rate falling to 5.9% as of June 2021 from 6.7% as of December 2020. Although vaccines and vaccination programs are widely available to the public and cases remain relatively low compared to the height of the pandemic, cases have begun to rise in July 2021 primarily due to new variants, and there is still uncertainty around the end of the second quarterpandemic and the ongoing economic recovery.
To support the economic recovery, the Federal Reserve set the Federal Funds Rate at a target of 2017, an increase0% to 0.25% at the beginning of 1.6% fromthe pandemic and has maintained that rate through the first quartersix months of 2017. Multifamily2021. The Federal Reserve also indicated in its June 2021 meeting that it intends to keep rates at these low levels as the economy continues to recover and until the economy reaches what it believes is full employment.
This action by the Federal Reserve, along with the Federal Reserve’s short-term commitment to continue buying Treasury securities and Agency mortgage-backed securities (“Agency MBS”) in amounts necessary to support the smooth functioning of capital markets, has enabled Agency securities to continue trading uninterrupted with little to no change in the credit spreads that drive pricing of Agency MBS and has contributed to very low long-term mortgage debt outstanding roseinterest rates, which form the basis for most of our lending.
The Agencies responded to $1.2 trillion, an increasethe pandemic by offering loan forbearance to borrowers for up to 180 days, provided a borrower is able to show that a property is experiencing a financial hardship as a direct result of 1.8% from the first quarterpandemic. Under the loan forbearance plan, borrowers will repay the forborne payments over a 12- to 24-month period without penalties. For borrowers under the loan forbearance plan, the Agencies also require the borrowers to halt eviction of 2017. The majoritytenants living in the financed assets and provide tenants flexibility in repayment of this growth in multifamily mortgage debt outstanding was related to Agency lending. The MBA also recently reported that multifamily loan originations duringdelinquent rent. In the second quarter of 2017 increased 21% from2021, the second quarterAgencies extended this program through September 2021. The creation of 2016the loan forbearance program may have a direct impact on some borrowers’ ability to make monthly debt service payments, and 25% fromin turn, may impact the first quarterCompany’s obligation to advance funds to bondholders under our servicing agreements with Fannie Mae and HUD. We do not have advance obligations with respect to our Freddie Mac or life insurance servicing agreements. To date, very few of 2017.
Theour multifamily borrowers have requested loan forbearance, and our outstanding advances were immaterial under our Fannie Mae and HUD servicing agreements at June 30, 2021. Declining rent collections and a borrower’s inability to make all required payments once the forbearance period is over could lead to an increase in rental housing demanddelinquencies and gapslosses beyond what we have experienced since the great financial crisis of 2007-2010, although we have not experienced this to date and our current expectation is for credit conditions to continue improving over time as broad-based economic growth accelerates in housing productiona post-pandemic environment.
Multifamily property fundamentals prior to the pandemic were strong and have led to continued steady rising rents in multifamily properties in most markets. The positive performance has boostedmaintained this strength through the value of many multifamily properties towardspandemic and the high end of historical ranges. However,ongoing recovery with only minor disruptions during the second quarter of 2017, the pace of multifamily rent growth slowedpandemic. According to the lowest rate in six years. This slower rate of multifamily rent growth continued into the third quarter of 2017, as effective rents grew 0.9% from the second quarter of 2017, as reported by Reis,RealPage, a provider of commercial real estate data and analytics. Additionally,analytics, occupancy rates have increased to 96.5% as of June 2021, compared to 95.8% as of December 2019, prior to the levelstart of the pandemic. Rent growth in the second quarter of 2021 improved to an annualized growth rate of 6.3%.
Our multifamily properties under construction is atproperty sales volumes grew significantly year over year in the second quarter of 2021, as (i) the multifamily acquisitions market was very active during the quarter, (ii) we have expanded the number of property sales brokers and the geographical reach of our property sales platform, and (iii) our volume in the second quarter of 2020 was unusually low due to the pandemic. Long term, we believe the market fundamentals will continue to be positive for multifamily property sales. Over the last several years, and in the months leading up to the pandemic, household formation and a nearly 40-year high, which hasdearth of supply of entry-level single-family homes led to an increasestrong demand for rental housing in national vacancy ratesmost geographic areas. Consequently, the fundamentals of 40 basis points from the third quarter of 2016, as reported by Reis, as newly constructed multifamily properties continueproperty sales market were strong prior to come online. We believethe pandemic, and when coupled with the economic recovery and rising real-estate prices, it is our expectation that the market demand for multifamily housing in the upcoming quartersproperty sales will absorb most of the capacity created by these properties currently under construction and that vacancy ratescontinue to grow as this asset class will remain at historic lows, making multifamily properties an attractive investment option.
In additionOur debt brokerage platform continued its strong growth into the second quarter of 2021, with brokered volume increasing significantly during the year. The increase in volume reflects the continued demand from private capital providers, with activity focused not only on multifamily but other commercial real estate assets such as office and retail. Additionally, our debt brokerage volume in the second quarter of 2020 was unusually low due to the improved property fundamentals, for the last several years, the U.S. commercial and multifamily mortgage market has experienced historically low interest rates, leading many borrowers to seek refinancing prior to the scheduled maturity date of their loans. As borrowers have sought to take advantage of the interest rate environment and improved property fundamentals, the number of lenders and amount of capital available to lend have increased. According to the Mortgage Bankers Association, commercial and multifamily loan maturities are expected to remain at elevated levels through the end of 2017. All of these factors have benefited our origination volumes over the past several years.pandemic. We expect the multifamily marketnon-multifamily debt financing volumes to experience record origination volumes in 2017 duecontinue to the underlying strength of the multifamily marketrecover over time as labor markets are strong and demand increases from new household formation. Competition for lending on commercial and multifamily real estate amongother commercial real estate services firms, banks, life insurance companies, and the GSEs remains fierce.asset classes stabilize post-pandemic.
The Federal Reserve has raised its targeted Fed Funds Rate by 75 basis pointsOur Agency multifamily debt financing operations have remained very active over the past year. We have not experienced a significant decline in origination volume or profitability as long-term mortgage interest rates have remained at historically low levels as the yield curve has flattened throughout most of 2017. Reis recently reported that in spite of these recent interest-rate increases and slowing rent growth, multifamily cap rates decreased 30 basis points to 5.7% during the second quarter of 2017 from 6.0% in the fourth quarter of 2016. We cannot be certain that these trends will continue as the number, timing, and magnitude of any future increases by the Federal Reserve, taken together with previous interest rate increases and combined with other macroeconomic factors, may have a different effect on the commercial real estate market.
We are a market-leading originator with Fannie Maethe Agencies, and Freddie Mac, and the GSEs remain the most significant providers of capital to the multifamily market. The Federal Housing Finance Agency (“FHFA”) 2017 GSE Scorecard (“2017 Scorecard”) established Fannie Mae’s and Freddie Mac’s 2017 loan origination caps at $36.5 billion each for market-rate apartments (“2017 Caps”). Affordable housing loans, loans to small multifamily properties, green, and manufactured housing rental community loans continue to be excluded from the 2017 Caps. Additionally, the definition of the affordable loan exclusion continues to encompass affordable housing in high- and very-high cost markets and to allow for an exclusion from the 2017 Caps for the pro-rata portion of any loan on a multifamily property that includes affordable units. The 2017 Scorecard provides the FHFA with the flexibility to review the estimated size of the multifamily loan origination market on a quarterly basis and proactively adjust the 2017 Caps upward should the market be larger than expected in 2017, which has not occurred in 2017 but did happen twice in 2016. The 2017 Scorecard also provides exclusions for loans to properties located in underserved markets including rural, small multifamily, and senior assisted living and for loans to finance energy or water efficiency improvements.
Our GSE loan origination volume for the nine months ended September 30, 2017 increased 52% over the same period in 2016 as demand for multifamily lending remained strong as borrowers continue to focus on locking in interest rates ahead of a potential rising interest rate environment. We expect the GSEs to maintain their historical market share in a multifamily market that is projected by Freddie Mac to be $290.0 billion in 2017. The GSEs reported a combined loan origination volume of $92.6 billion during the first nine months of 2017 compared to $79.9 billion during the first nine months of 2016; however, we do not expect the 2017 Caps to adversely impact our fourth quarter 2017 GSE loan origination volume. As seen from our GSE loan origination volumes for the nine months ended September 30, 2017, we believe our market leadership with the GSEs positions us to be a significant lender with the GSEsAgencies for the foreseeable future.
The Federal Housing Finance Agency (“FHFA”) establishes loan origination caps for both Fannie Mae and Freddie Mac each year. In November 2020, FHFA established Fannie Mae’s and Freddie Mac’s 2021 loan origination caps at $70 billion each for all multifamily business. During the three months ended June 30, 2021, Fannie Mae and Freddie Mac had multifamily origination volumes of $10.9 billion and $13.1 billion, respectively, down 44.1% and 35.5%, respectively, from the same period in 2020. During the six months ended June 30, 2021, Fannie Mae and Freddie Mac had multifamily origination volumes of $32.4 billion and $27.1 billion, respectively, down 3.9% and 10.6% from the first half of 2020, respectively, leaving a combined $80.5 billion of available lending capacity for the remainder of the year. GSE lending volume slowed in the first half of 2021, as the GSEs’ pricing on multifamily debt has been less competitive as other capital sources reenter the market, and as the GSEs manage their originations under their lending caps. With a combined $80.5 billion or 58% of available lending capacity remaining, we expect the GSEs’ lending to accelerate in the second half of 2021.
Our debt financing operations with HUD remained strong during the first half of 2021, with HUD loan volumes increasing 5% and 30% for the three and six months ended June 30, 2021, respectively, as compared to the same periods in 2020. The increase in HUD debt financing volumes was driven by continued strong demand for HUD’s multifamily lending product, which provides borrowers with favorable economics on long-term, fully amortizing debt.
We expect strength in our Agency operations to continue despite the return of other capital sources. An additional positive factor influencing multifamily financing volumes is the historically low interest rate environment, which is incentivizing some borrowers to refinance their properties in spite of the prepayment penalty fees they may incur. We continue to seek additional resources and scale to our Agency lending platform.
Our originations with the GSEsAgencies are some of our most profitable executions as they provide significant non-cash gains from mortgage servicing rights, andMSRs that turn into significant cash revenue streams from future servicing fees. During the three and six months ended June 30, 2021, servicing fees are up 21% and 20%, respectively, over the same periods last year due to the record amount of MSRs we generated in the future.2020. A decline in our GSEAgency originations would negatively impact our financial results as our non-cash revenues would decrease disproportionately with loan originationdebt financing volume and future servicing fee revenue would be constrained or decline. We do not know whether the FHFA will impose stricter limitations on GSE multifamily production volume beyond 2017.
We continue to grow our capital markets platform to take advantage of the ongoing wave of loan maturities and gain greater access to capital, deal flow, and borrower relationships. The apparent appetite for debt funding within the broader commercial real estate market, along with the additions of brokered loan originators over the past several years, has resulted in significant growth in our brokered originations, as evidenced by the 89% year-over-year growth in brokered originations from the first nine months of 2016 to the first nine months of 2017. Our outlook for our capital markets platform is positive as we expect continued growth in non-bank commercial and multifamily markets in the near future.
Over the last few years, HUD has reduced the cost of borrowing, making HUD loans more competitive and returning them to relevance for our core multifamily borrowers in 2016 andentered into 2017, as evidenced by a 41% increase in HUD loan originations from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. HUD remains a strong source of capital for new construction loans and healthcare facilities. We expect that HUD will continue to be a meaningful supplier of capital to our borrowers. We remain committed to the HUD multifamily business, adding resources and scale to our HUD lending platform, particularly in the area of seniors housing and skilled nursing, where HUD remains a dominant provider of capital in the current business environment.
Many of our borrowers continue to seek higher returns by identifying and acquiring the transitional properties that the Interim Program and Interim Program JV are designed to address. We created the Interim Program JV to both increase the overall capital available to the opportunitytransitional multifamily properties and to dramatically expand our capacity to originate new interimInterim Program loans. The demand for transitional lending has brought increased competition from lenders, specifically banks, mortgage REITs,real estate investment trusts, and life insurance companies. All are actively pursuing transitional properties by leveraging their low costFor the second quarter of capital and desire for short-term, high-yield commercial real estate investments. We2021, we originated $189.6$206.5 million of interimInterim Program JV loans, compared to no originations in the second quarter of 2020. In the second quarter of 2020, we did not originate any new Interim Program loans as a result of the pandemic. Except for one loan that defaulted in early 2019, the loans in the first nine months of 2017 compared to $235.0 millionour portfolio and in the first nine months of 2016.Interim Program JV continue to perform as agreed.
Finally, as we have stated, multifamily property values are at near historic highs on the back of positive fundamentals across the industry. As a result, we saw increased activity within the investment sales business throughout 2016. However, we experienced a decline in our investment sales volume year over year during the first half of 2017 due to a year-over-year decline of 16% in multifamily investment
sales transactions in the broader market. The investment sales market improved during the third quarter of 2017, with a 5% year-over-year increase in multifamily investment sales transactions. This improvement in the overall market, along with the additions we have made to our investment sales team over the past year, resulted in a 19% increase in our investment sales volume from the third quarter of 2016 to the third quarter of 2017. We continue our efforts to expand our investment sales platform more broadly across the United States and to increase the size of our investment sales team to capture what we believe will be strong multifamily investment sales activity over the coming quarters.
During the third quarter of 2017, Hurricanes Harvey and Irma made landfall in the United States, causing substantial damage to the affected areas. Although we have operations in affected areas, none of our operating assets was materially affected by the natural disasters. Located within the affected areas are multiple properties collateralizing loans for which we have risk-sharing obligations. Based on our preliminary assessment of these properties, we believe that few, if any, of these properties incurred significant damage, and those that did have adequate insurance coverage. Additionally, we have not experienced an increase in late payments from risk-sharing loans collateralized by properties in the affected areas. Accordingly, based on information currently available, we do not believe that these natural disasters will have a material impact on the Allowance for risk-sharing obligations. The damage in the affected areas continues to be assessed. The impact to borrowers from such natural disasters may not be known by the Company for months after the occurrence of the disaster; therefore, over the coming months, we may experience an increase in late payments or defaults of loans for which we have risk-sharing obligations that are collateralized by properties in the affected areas.
Results of Operations
FollowingThe following is a discussion of our results of operations for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016.2020. The financial results are not necessarily indicative of future results. Our quarterly results have fluctuated in the past and are expected to fluctuate in the future, reflecting the interest-rate environment, the volume of transactions, business acquisitions, regulatory actions, industry trends, and general economic conditions. Please refer to theThe table below which provides supplemental data regarding our financial performance.
SUPPLEMENTAL OPERATING DATA
| | | | | | | | | | | | | | | |
| | For the three months ended | | | For the nine months ended | | |
| | September 30, | | | September 30, | | |
| | | | | | | | | | | | | | | |
| | | For the three months ended | | For the six months ended | | | |
| | | June 30, | | June 30, | | | |
(dollars in thousands) | | 2017 | | 2016 | | | 2017 | | 2016 | | | 2021 | | 2020 | | 2021 | | 2020 | | |
Transaction Volume: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loan Origination Volume by Product Type | | | | | | | | | | | | | | | |
Components of Debt Financing Volume | | | | | | | | | | | | | | | |
Fannie Mae | | $ | 1,389,451 | | $ | 1,565,915 | | | $ | 5,467,228 | | $ | 4,727,563 | | | $ | 1,911,976 | | $ | 2,762,299 | | $ | 3,445,000 | | $ | 6,933,790 | | | |
Freddie Mac | | | 4,040,985 | | | 1,296,045 | | | | 6,315,369 | | | 3,002,305 | | | | 1,003,319 | | | 1,769,280 | | | 2,016,039 | | | 2,767,076 | | | |
Ginnie Mae - HUD | | | 263,714 | | | 382,602 | | | | 874,727 | | | 618,737 | | |
Ginnie Mae ̶ HUD | | | | 672,574 | | | 640,150 | | | 1,294,707 | | | 994,837 | | | |
Brokered (1) | | | 1,893,047 | | | 922,969 | | | | 5,172,263 | | | 2,884,392 | | | | 6,280,578 | | | 1,495,500 | | | 10,583,070 | | | 5,489,385 | | | |
Interim Loans | | | 26,375 | | | 76,475 | | | | 189,562 | | | 235,040 | | |
Total Loan Origination Volume | | $ | 7,613,572 | | $ | 4,244,006 | | | $ | 18,019,149 | | $ | 11,468,037 | | |
Investment Sales Volume | | | 935,960 | | | 788,232 | | | | 1,574,515 | | | 1,569,177 | | |
Principal Lending and Investing(2) | | | | 318,237 | | | 14,091 | | | 496,487 | | | 122,041 | | | |
Total Debt Financing Volume | | | $ | 10,186,684 | | $ | 6,681,320 | | $ | 17,835,303 | | $ | 16,307,129 | | | |
Property Sales Volume | | | | 3,341,532 | | | 446,684 | | | 4,737,292 | | | 2,177,301 | | | |
Total Transaction Volume | | $ | 8,549,532 | | $ | 5,032,238 | | | $ | 19,593,664 | | $ | 13,037,214 | | | $ | 13,528,216 | | $ | 7,128,004 | | $ | 22,572,595 | | $ | 18,484,430 | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Key Performance Metrics: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating margin | | | 30 | % | | 31 | % | | | 33 | % | | 31 | % | | | 26 | % | | 33 | % | | 29 | % | | 30 | % | |
Return on equity | | | 20 | | | 22 | | | | 23 | | | 20 | | | | 18 | | | 23 | | | 19 | | | 21 | | |
Walker & Dunlop net income | | $ | 34,378 | | $ | 29,628 | | | $ | 112,166 | | $ | 77,107 | | | $ | 56,058 | | $ | 62,059 | | $ | 114,110 | | $ | 109,888 | | |
Adjusted EBITDA (2)(3) | | | 45,000 | | | 36,227 | | | | 146,293 | | | 95,734 | | | | 66,514 | | | 48,394 | | | 127,181 | | | 112,522 | | |
Diluted EPS | | | 1.06 | | | 0.96 | | | | 3.49 | | | 2.51 | | | | 1.73 | | | 1.95 | | | 3.52 | | | 3.44 | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Key Expense Metrics (as a percentage of total revenues): | Key Expense Metrics (as a percentage of total revenues): | | | | | | | | | | | | | | | | | | | | | | |
Personnel expenses | | | 44 | % | | 42 | % | | | 39 | % | | 39 | % | | | 50 | % | | 42 | % | | 47 | % | | 40 | % | |
Other operating expenses | | | 6 | | | 6 | | | | 7 | | | 7 | | | | 7 | | | 5 | | | 7 | | | 6 | | |
| | | | | | | | | |
Key Revenue Metrics (as a percentage of loan origination volume): | | | | | | | | | |
| | | | | | | | | | | | | | | |
Key Revenue Metrics (as a percentage of debt financing volume): | | | | | | | | | | | | | | | |
Origination related fees | | | 0.79 | % | | 1.23 | % | | | 0.94 | % | | 1.06 | % | | | 1.07 | % | | 1.17 | % | | 1.04 | % | | 0.95 | % | |
Gains attributable to MSRs | | | 0.67 | | | 1.14 | | | | 0.78 | | | 1.11 | | |
Gains attributable to MSRs, as a percentage of Agency loan origination volume (3) | | | 0.89 | | | 1.49 | | | | 1.11 | | | 1.53 | | |
MSR income(5) | | | | 0.63 | | | 1.36 | | | 0.69 | | | 0.98 | | |
MSR income, as a percentage of Agency debt financing volume(6) | | | | 1.72 | | | 1.75 | | | 1.77 | | | 1.48 | | |
| | | | | | | |
(dollars in thousands) | | As of June 30, | |
Managed Portfolio: | | 2021 | | 2020 | |
Components of Servicing Portfolio | | | | | | | |
Fannie Mae | | $ | 51,077,660 | | $ | 45,160,004 | |
Freddie Mac | | | 37,887,969 | | | 33,222,090 | |
Ginnie Mae - HUD | | | 9,904,246 | | | 9,749,888 | |
Brokered (7) | | | 13,129,969 | | | 11,519,629 | |
Principal Lending and Investing (8) | | | 276,738 | | | 336,473 | |
Total Servicing Portfolio | | $ | 112,276,582 | | $ | 99,988,084 | |
Assets under management (9) | | | 1,801,577 | | | 1,884,673 | |
Total Managed Portfolio | | $ | 114,078,159 | | $ | 101,872,757 | |
SUPPLEMENTAL OPERATING DATA - continued-continued
| | | | | | |
| | As of June 30, |
Key Servicing Portfolio Metrics (end of period): | | 2021 | | 2020 |
Custodial escrow account balance (in billions) | | $ | 3.0 | | $ | 2.3 |
Weighted-average servicing fee rate (basis points) | | | 24.5 | | | 23.3 |
Weighted-average remaining servicing portfolio term (years) | | | 9.2 | | | 9.5 |
The following tables present WDIP’s AUM as of June 30, 2021 and 2020:
| | | | | | | | | | |
| | | | | | | | | | |
| | As of June 30, 2021 | |
| | Unfunded | | Funded | | | | |
Components of WDIP assets under management (in thousands) | | Commitments | | Investments | | Total | |
Fund III | | $ | 37,781 | | $ | 83,471 | | $ | 121,252 | |
Fund IV | | | 88,827 | | | 111,616 | | | 200,443 | |
Fund V | | | 232,560 | | | 39,256 | | | 271,816 | |
Fund VI | | | 27,655 | | | — | | | 27,655 | |
Separate accounts | | | — | | | 550,879 | | | 550,879 | |
Total assets under management | | $ | 386,823 | | $ | 785,222 | | $ | 1,172,045 | |
| | | | | | | | | | |
| | | | | | | | | |
| | As of June 30, 2020 |
| | Unfunded | | Funded | | | |
Components of WDIP assets under management (in thousands) | | Commitments | | Investments | | Total |
Fund III | | $ | 79,267 | | $ | 100,059 | | $ | 179,326 |
Fund IV | | | 165,294 | | | 141,087 | | | 306,381 |
Fund V | | | 194,753 | | | 7,342 | | | 202,095 |
Separate accounts | | | — | | | 501,604 | | | 501,604 |
Total assets under management | | $ | 439,314 | | $ | 750,092 | | $ | 1,189,406 |
| | | | | | | | | |
| | | | | | | |
| | As of September 30, | |
Servicing Portfolio by Product: | | 2017 | | 2016 | |
Fannie Mae | | $ | 30,005,596 | | $ | 25,875,684 | |
Freddie Mac | | | 25,930,819 | | | 19,702,477 | |
Ginnie Mae - HUD | | | 8,878,899 | | | 9,254,830 | |
Brokered (1) | | | 5,170,479 | | | 4,024,490 | |
Interim Loans | | | 298,889 | | | 264,508 | |
Total Servicing Portfolio | | $ | 70,284,682 | | $ | 59,121,989 | |
| | | | | | | |
Key Servicing Metrics (end of period): | | | | | | | |
Weighted-average servicing fee rate (basis points) | | | 25.7 | | | 25.6 | |
Weighted-average remaining term (years) | | | 9.9 | | | 10.5 | |
| (1) | (1)
| | Brokered transactions for commercial mortgage backed securities, life insurance companies, commercial banks, and other capital sources. |
| (2) | (2)
For the three months ended June 30, 2021, includes $206.5 million from the Interim Program JV, $95.7 million from the Interim Loan Program, and $16.0 million from WDIP separate accounts. For the six months ended June 30, 2021, includes $351.0 million from the Interim Program JV, $129.5 million from the Interim Loan Program and $16.0 million from WDIP separate accounts. For the three months ended June 30, 2020, includes $14.1 million from WDIP separate accounts. For the six months ended June 30, 2020, includes $86.2 million from the Interim Program JV and $35.8 million from WDIP separate accounts. |
| (3) | | This is a non-GAAP financial measure. For more information on adjusted EBITDA, refer to the section below titled “Non-GAAP Financial Measures.” |
| (4) | (3)
Excludes the income and debt financing volume from Principal Lending and Investing. |
| (5) | The fair value of the expected net cash flows associated with the servicing of the loan, net of any guaranty obligations retained. Excludes the income and debt financing volume from Principal Lending and Investing. |
| (6) | The fair value of the expected net cash flows associated with the servicing of the loan, net of any guaranty obligations retained, as a percentage of Agency volume. |
| (7) | Brokered loans serviced primarily for life insurance companies. |
| (8) | Consists of interim loans not managed for the Interim Program JV. |
| (9) | As of June 30, 2021, includes $629.5 million of Interim Program JV managed loans and WDIP assets under management of $1.2 billion. As of June 30, 2020, includes $624.1 million of Interim Program JV managed loans, $71.1 million of loans serviced directly for the Interim Program JV partner, and WDIP assets under management of $1.2 billion. |
The following tables present a period-to-period comparison of our financial results for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016.2020.
FINANCIAL RESULTS – THREE MONTHS
| | | | | | | | | | | | | |
| | For the three months ended | | | | | | | |
| | September 30, | | Dollar | | Percentage | | | |
| | | | | | | | | | | | | | |
| | | For the three months ended | | | | | | |
| | | June 30, | | Dollar | | Percentage | | |
(dollars in thousands) | | 2017 | | 2016 | | Change | | Change | | | | 2021 | | 2020 | | Change | | Change | | |
Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains from mortgage banking activities | | $ | 111,304 | | $ | 100,630 | | $ | 10,674 | | 11 | % | | |
Loan origination and debt brokerage fees, net | | | $ | 107,472 | | $ | 77,907 | | $ | 29,565 | | 38 | % | |
Fair value of expected net cash flows from servicing, net | | | | 61,849 | | | 90,369 | | | (28,520) | | (32) | | |
Servicing fees | | | 44,900 | | | 37,134 | | | 7,766 | | 21 | | | | | 69,052 | | | 56,862 | | | 12,190 | | 21 | | |
Property sales broker fees | | | | 22,454 | | | 3,561 | | | 18,893 | | 531 | | |
Net warehouse interest income | | | 5,358 | | | 5,614 | | | (256) | | (5) | | | | | 4,630 | | | 9,401 | | | (4,771) | | (51) | | |
Escrow earnings and other interest income | | | 5,804 | | | 2,630 | | | 3,174 | | 121 | | | | | 1,823 | | | 2,671 | | | (848) | | (32) | | |
Other | | | 12,370 | | | 8,778 | | | 3,592 | | 41 | | | |
Other revenues | | | | 14,131 | | | 12,054 | | | 2,077 | | 17 | | |
Total revenues | | $ | 179,736 | | $ | 154,786 | | $ | 24,950 | | 16 | | | | $ | 281,411 | | $ | 252,825 | | $ | 28,586 | | 11 | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | |
Personnel | | $ | 78,469 | | $ | 64,377 | | $ | 14,092 | | 22 | % | | | $ | 141,421 | | $ | 106,920 | | $ | 34,501 | | 32 | % | |
Amortization and depreciation | | | 32,343 | | | 29,244 | | | 3,099 | | 11 | | | | | 48,510 | | | 42,317 | | | 6,193 | | 15 | | |
Provision for credit losses | | | 9 | | | 283 | | | (274) | | (97) | | | |
Provision (benefit) for credit losses | | | | (4,326) | | | 4,903 | | | (9,229) | | (188) | | |
Interest expense on corporate debt | | | 2,555 | | | 2,485 | | | 70 | | 3 | | | | | 1,760 | | | 2,078 | | | (318) | | (15) | | |
Other operating expenses | | | 11,664 | | | 9,685 | | | 1,979 | | 20 | | | | | 19,748 | | | 13,069 | | | 6,679 | | 51 | | |
Total expenses | | $ | 125,040 | | $ | 106,074 | | $ | 18,966 | | 18 | | | | $ | 207,113 | | $ | 169,287 | | $ | 37,826 | | 22 | | |
Income from operations | | | 54,696 | | | 48,712 | | | 5,984 | | 12 | | | | $ | 74,298 | | $ | 83,538 | | $ | (9,240) | | (11) | | |
Income tax expense | | | 19,988 | | | 18,851 | | | 1,137 | | 6 | | | | | 18,240 | | | 21,479 | | | (3,239) | | (15) | | |
Net income before noncontrolling interests | | $ | 34,708 | | $ | 29,861 | | $ | 4,847 | | 16 | | | |
Less: net income from noncontrolling interests | | | 330 | | | 233 | | | 97 | | 42 | | | |
Walker & Dunlop net income | | $ | 34,378 | | $ | 29,628 | | $ | 4,750 | | 16 | | | |
| | | | | | | | | | | | | |
Net income | | | $ | 56,058 | | $ | 62,059 | | $ | (6,001) | | (10) | | |
FINANCIAL RESULTS – NINESIX MONTHS
| | | | | | | | | | | | | | |
| | For the nine months ended | | | | | | | |
| | September 30, | | Dollar | | Percentage | | | |
| | | | | | | | | | | | | | |
| | | For the six months ended | | | | | | |
| | | June 30, | | Dollar | | Percentage | | |
(dollars in thousands) | | 2017 | | 2016 | | Change | | Change | | | | 2021 | | 2020 | | Change | | Change | | |
Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains from mortgage banking activities | | $ | 309,912 | | $ | 249,406 | | $ | 60,506 | | 24 | % | | |
Loan origination and debt brokerage fees, net | | | $ | 183,351 | | $ | 154,280 | | $ | 29,071 | | 19 | % | |
Fair value of expected net cash flows from servicing, net | | | | 119,784 | | | 158,369 | | | (38,585) | | (24) | | |
Servicing fees | | | 129,639 | | | 101,554 | | | 28,085 | | 28 | | | | | 135,030 | | | 112,296 | | | 22,734 | | 20 | | |
Property sales broker fees | | | | 31,496 | | | 13,173 | | | 18,323 | | 139 | | |
Net warehouse interest income | | | 17,778 | | | 15,925 | | | 1,853 | | 12 | | | | | 9,185 | | | 14,896 | | | (5,711) | | (38) | | |
Escrow earnings and other interest income | | | 13,610 | | | 6,225 | | | 7,385 | | 119 | | | | | 3,940 | | | 13,414 | | | (9,474) | | (71) | | |
Other | | | 33,716 | | | 23,775 | | | 9,941 | | 42 | | | |
Other revenues | | | | 22,913 | | | 20,554 | | | 2,359 | | 11 | | |
Total revenues | | $ | 504,655 | | $ | 396,885 | | $ | 107,770 | | 27 | | | | $ | 505,699 | | $ | 486,982 | | $ | 18,717 | | 4 | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | |
Personnel | | $ | 198,157 | | $ | 154,365 | | $ | 43,792 | | 28 | % | | | $ | 237,636 | | $ | 196,445 | | $ | 41,191 | | 21 | % | |
Amortization and depreciation | | | 97,541 | | | 80,824 | | | 16,717 | | 21 | | | | | 95,381 | | | 82,079 | | | 13,302 | | 16 | | |
Provision (benefit) for credit losses | | | (216) | | | 166 | | | (382) | | (230) | | | | | (15,646) | | | 28,546 | | | (44,192) | | (155) | | |
Interest expense on corporate debt | | | 7,401 | | | 7,419 | | | (18) | | (0) | | | | | 3,525 | | | 4,938 | | | (1,413) | | (29) | | |
Other operating expenses | | | 34,871 | | | 29,511 | | | 5,360 | | 18 | | | | | 37,335 | | | 31,159 | | | 6,176 | | 20 | | |
Total expenses | | $ | 337,754 | | $ | 272,285 | | $ | 65,469 | | 24 | | | | $ | 358,231 | | $ | 343,167 | | $ | 15,064 | | 4 | | |
Income from operations | | | 166,901 | | | 124,600 | | | 42,301 | | 34 | | | | $ | 147,468 | | $ | 143,815 | | $ | 3,653 | | 3 | | |
Income tax expense | | | 54,621 | | | 47,295 | | | 7,326 | | 15 | | | | | 33,358 | | | 34,151 | | | (793) | | (2) | | |
Net income before noncontrolling interests | | $ | 112,280 | | $ | 77,305 | | $ | 34,975 | | 45 | | | | $ | 114,110 | | $ | 109,664 | | $ | 4,446 | | 4 | | |
Less: net income from noncontrolling interests | | | 114 | | | 198 | | | (84) | | (42) | | | |
Less: net loss from noncontrolling interests | | | | — | | | (224) | | | 224 | | (100) | | |
Walker & Dunlop net income | | $ | 112,166 | | $ | 77,107 | | $ | 35,059 | | 45 | | | | $ | 114,110 | | $ | 109,888 | | $ | 4,222 | | 4 | | |
| | | | | | | | | | | | | | |
Overview
For both the three and nineThree months ended SeptemberJune 30, 2017, the2021 compared to three months ended June 30, 2020
The increase in revenues was driven by increases in revenues wereloan origination and debt brokerage fees, net (“origination fees”), servicing fees, and property sales broker fees, partially offset by decreases in fair value of expected net cash flows from servicing, net (“MSR Income”) and net warehouse interest income. The increase in origination fees was primarily related to an overall increase in debt financing volume, particularly in our brokered debt financing volume. Servicing fees increased largely from an increase in the average servicing portfolio outstanding. The increase in property sales broker fees was a result of an increase in property sales volume. MSR Income decreased as a result of a decrease in Agency debt financing volume. Net warehouse interest income decreased primarily due to a decrease in the average balance outstanding for both loans held for sale (“LHFS”) and loans held for investment (“LHFI”).
The increase in expenses was largely attributable to increases in gains from mortgage banking activitiespersonnel expenses, amortization and servicing fees.depreciation, and other operating expenses, partially offset by a change in provision (benefit) for credit losses. The increases in gains from mortgage banking activities were largely related to the substantial increase in loan origination volume. The increases in servicing fees were mainly due to increases in the average servicing portfolio. Our revenues also benefitted from the increases in short-term interest rates over the past 12 months, which increased our escrow interest earnings when compared to the same periods last year. The increases inpersonnel expenses werewas primarily thea result of increased (i)an increase in commission costs due to an increase in origination fees, (ii)total transaction volume and salaries expense due to risesand benefits costs driven by an increase in average headcount, and (iii) bonus expense due to the Company’s strong financial performance and the rises in average headcount. Headcount increased due to acquisition activity and hiring to support the growth of our business. Additionally, amortizationAmortization and depreciation expense increased asdue to an increase in the average MSR balance. Other operating expenses increased largely as a result of the overall growth of the Company over the past year. The change to a benefit for credit losses in 2021 from a provision for credit losses in 2020 was driven by improvements in the forecasted unemployment rate, resulting in a decrease in our CECL reserves.
Six months ended June 30, 2021 compared to six months ended June 30, 2020
The increase in revenues was driven by increases in origination fees, servicing fees, and property sales broker fees, partially offset by decreases in MSR Income, net warehouse interest income, and escrow earnings and other interest income. The increase in origination fees was primarily related to an overall increase in debt financing volume, particularly in our brokered and HUD loan origination volumes. Servicing fees increased largely from an increase in the average servicing portfolio outstanding. The increase in property sales broker fees was a result of
the increase in property sales volume. MSR Income decreased as a result of a decrease in Agency debt financing volume. Net warehouse interest income decreased due to decreases in the average balances and net spreads for both LHFS and LHFI. Escrow earnings and other interest income decreased largely due to a substantial decrease in the average earnings rate.
The increase in expenses was mainly driven by increases in personnel expenses, amortization and depreciation, and other operating expenses, partially offset by a change in provision (benefit) for credit losses. The increase in personnel expenses was primarily a result of an increase in commission costs due to an increase in total transaction volume and salaries and benefits costs due primarily to an increase in the average headcount. Amortization and depreciation expense increased perioddue to an increase in the average MSR balance. Other operating expenses increased as a result of the overall growth of the Company over period.the past year. The change to a benefit for credit losses in 2021 from a provision for credit losses in 2020 was driven by improvements in the forecasted unemployment rate, resulting in a decrease in our CECL reserve.
Revenues
GainsLoan origination and debt brokerage fees, net and Fair value of expected net cash flows from Mortgage Banking Activities. servicing, net. The following tables provide additional information that helps explain changes in gains from mortgage banking activitiesorigination fees and MSR Income period over period:
| | | | | | | | | | | | |
| | For the three months ended | | | For the six months ended | |
| | June 30, | | | June 30, | |
Debt Financing Volume by Product Type | | 2021 | | | 2020 | | | 2021 | | | 2020 | |
Fannie Mae | | 19 | % | | 41 | % | | 19 | % | | 43 | % |
Freddie Mac | | 10 | | | 26 | | | 11 | | | 17 | |
Ginnie Mae ̶ HUD | | 7 | | | 10 | | | 7 | | | 6 | |
Brokered | | 61 | | | 23 | | | 60 | | | 33 | |
Principal Lending and Investing | | 3 | | | — | | | 3 | | | 1 | |
| | | | | | | | | | | | |
| For the three months ended | | For the six months ended | |
| June 30, | | June 30, | |
Mortgage Banking Details (dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 | |
Origination Fees | $ | 107,472 | | $ | 77,907 | | $ | 183,351 | | $ | 154,280 | |
Dollar Change | $ | 29,565 | | | | | $ | 29,071 | | | | |
Percentage Change | | 38 | % | | | | | 19 | | | | |
MSR Income (1) | $ | 61,849 | | $ | 90,369 | | $ | 119,784 | | $ | 158,369 | |
Dollar Change | $ | (28,520) | | | | | $ | (38,585) | | | | |
Percentage Change | | (32) | % | | | | | (24) | | | | |
Origination Fee Rate (2) (basis points) | | 107 | | | 117 | | | 104 | | | 95 | |
Basis Point Change | | (10) | | | | | | 9 | | | | |
Percentage Change | | (9) | % | | | | | 9 | | | | |
MSR Rate (3) (basis points) | | 63 | | | 136 | | | 69 | | | 98 | |
Basis Point Change | | (73) | | | | | | (29) | | | | |
Percentage Change | | (54) | % | | | | | (30) | | | | |
Agency MSR Rate (4) (basis points) | | 172 | | | 175 | | | 177 | | | 148 | |
Basis Point Change | | (3) | | | | | | 29 | | | | |
Percentage Change | | (2) | % | | | | | 20 | | | | |
| | | | | | | | | | | | |
| | Loan Origination Volume by Product Type | |
| | For the three months ended | | | For the nine months ended | |
| | September 30, | | | September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Fannie Mae | | 18 | % | | 37 | % | | 30 | % | | 41 | % |
Freddie Mac | | 53 | | | 31 | | | 35 | | | 26 | |
Ginnie Mae - HUD | | 3 | | | 9 | | | 5 | | | 5 | |
Brokered | | 26 | | | 21 | | | 29 | | | 26 | |
Interim Loans (1) | | - | | | 2 | | | 1 | | | 2 | |
| (1) | (1)
| | Interim loan origination volume as a percentage of total loan origination volume for the three months ended September 30, 2017 was less than 1%.
|
| | | | | | | | | | | | |
| Gains from Mortgage Banking Activities Detail | |
| For the three months ended | | For the nine months ended | |
| September 30, | | September 30, | |
(dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 | |
Origination Fees | $ | 60,523 | | $ | 52,401 | | $ | 168,927 | | $ | 121,682 | |
Dollar Change | $ | 8,122 | | | | | $ | 47,245 | | | | |
Percentage Change | | 15 | % | | | | | 39 | % | | | |
MSR Income (1) | $ | 50,781 | | $ | 48,229 | | $ | 140,985 | | $ | 127,724 | |
Dollar Change | $ | 2,552 | | | | | $ | 13,261 | | | | |
Percentage Change | | 5 | % | | | | | 10 | % | | | |
Origination Fee Rate (2) (basis points) | | 79 | | | 123 | | | 94 | | | 106 | |
Basis Point Change | | (44) | | | | | | (12) | | | | |
Percentage Change | | (36) | % | | | | | (11) | % | | | |
MSR Rate (3) (basis points) | | 67 | | | 114 | | | 78 | | | 111 | |
Basis Point Change | | (47) | | | | | | (33) | | | | |
Percentage Change | | (41) | % | | | | | (30) | % | | | |
Agency MSR Rate (4) (basis points) | | 89 | | | 149 | | | 111 | | | 153 | |
Basis Point Change | | (60) | | | | | | (42) | | | | |
Percentage Change | | (40) | % | | | | | (27) | % | | | |
| (1)
| | The fair value of the expected net cash flows associated with the servicing of the loan, net of any guaranty obligations retained. |
| (2) | (2)
| | Origination fees as a percentage of total loan origination volume. mortgage banking volume. |
| (3) | (3)
| | MSR incomeIncome as a percentage of total loan originationdebt financing volume,. excluding the income and debt financing volume from principal lending and investing. |
| (4) | (4)
| | MSR incomeIncome as a percentage of Agency loan origination volume. debt financing volume. |
Gains from mortgage banking activities reflect the fair value of loan origination fees, the fair value of loan premiums, net of any co-broker fees, and MSR income. For both the three and nine months ended September 30, 2017, the increases in origination fees and MSR income were largely attributable to the substantial increases in loan origination volume, partially offset by decreases in the origination fee rate and the Agency MSR rate.
For the three months ended SeptemberJune 30, 2017,2021, the increase in origination fees was driven by the significant increase in overall debt financing volume, particularly by substantial growth in our brokered debt financing volume, which grew by 320% from the three months ended June 30, 2020. The increase in origination fees due to the increase in volume was partially offset by a decrease in the origination fee rate was principally dueresulting from the shift in transaction mix from 77% Agency loans in 2020 to 36% Agency loans in 2021. We typically earn higher origination fees on Agency loans than brokered loans.
MSR Income decreased for the three months ended June 30, 2021, primarily as a result of a 36% decrease in Agency debt financing volume.
For the six months ended June 30, 2021, the increase in origination fees was driven by the significant increase in overall debt financing, driven by the growth in our brokered loan originationdebt financing volume as a percentage of total loan origination volume andnoted above, which grew by 93% from the six months ended June 30, 2020. Additionally, the origination fee rate increased from 2020 to 2021 as during the first quarter of 2020, we originated a $1.9$2.1 billion portfolio of Freddie MacFannie Mae loans the largest transaction in the Company’s historythat had a very low origination fee rate, with no comparable activity in 2016. We receive lower origination fees on brokered loans than we do2021.
MSR Income declined for the six months ended June 30, 2021, as a result of a 44% decrease in Agency loans. Additionally, we generally receive lower origination fee rates on large Agency portfolio transactions than we do on typical Agency transactions. The decreasedebt financing volumes partially offset by an increase in the Agency MSR rate was primarily attributable to the increase in Freddie Mac loan origination volume coupled with the decrease in Fannie Mae loan origination volume and a 100% increase in floating-rate loan origination volume. Freddie Mac loan origination volume as a percentage of total loan origination volumeRate. The Agency MSR Rate increased significantly from 2016 to 2017 as seen in the table above. Additionally, Freddie Mac loan origination volume as a percentage of Agency loan origination volume increased from 40% during 2016 to 71% during 2017. We record relatively less MSR income on floating-rate loan originations as their estimated life is substantially shorter than fixed-rate loan originations. We record less MSR income on Freddie Mac loans as their servicing fees are less than other Agency products.
For the nine months ended September 30, 2017, the decrease in the origination fee rate was principallyyear over year due to the increase in brokered loan origination volume aslarge portfolio discussed above, which had a percentage of total loan origination volume and an increase in the number of portfolio transactions from 2016 to 2017, including the aforementioned origination of a $1.9 billion portfolio of Freddie Mac loans in the third quarter of 2017. The decrease in the Agency MSR rate was primarily attributable to the increase in Freddie Mac loan origination volume as a percentage of Agency loan origination volume and a 68% increase in floating-rate loan origination volume. Freddie Mac loan origination volume as a percentage of total loan origination volume increased from 2016 to 2017 as seen in the table above. Additionally, Freddie Mac loan origination volume as a percentage of Agency loan origination volume increased from 36% during 2016 to 50% during 2017.very low servicing fee.
See the “Overview of Current Business Environment” section above for a detailed discussion of the factors driving the increaseschanges in loan origination volumes.debt financing volumes.
Servicing Fees. For both the three and ninesix months ended SeptemberJune 30, 2017,2021, the increases wereincrease was primarily attributable to increases in the average servicing portfolio from 2016 to 2017period over period as shown below primarily due to newhigher loan originations and relatively few payoffs. Additionally,
payoffs over the last 12 months, coupled with increases in the servicing portfolio’s weighted average servicing fee increasedrates as shown below due to anbelow. The increases in the average servicing fee are the result of the large volume of Fannie Mae debt financing volume with high servicing fees over the past year.
| | | | | | | | | | | | |
| For the three months ended | | For the six months ended | |
| June 30, | | June 30, | |
Servicing Fees Details (dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 | |
Average Servicing Portfolio | $ | 110,949,226 | | $ | 97,997,335 | | $ | 109,736,658 | | $ | 96,132,240 | |
Dollar Change | | 12,951,891 | | | | | | 13,604,418 | | | | |
Percentage Change | | 13 | % | | | | | 14 | % | | | |
Average Servicing Fee (basis points) | | 24.4 | | | 23.2 | | | 24.3 | | | 23.2 | |
Basis Point Change | | 1.2 | | | | | | 1.1 | | | | |
Percentage Change | | 5.2 | % | | | | | 4.7 | % | | | |
Property sales broker fees. For the three and six months ended June 30, 2021, the increase in property sales broker fees was driven by significant increases in the Fannie Mae servicing portfolio.property sales volume year over year. See the “Overview of Current Business Environment” section above for a detailed discussion of the factors driving the changes in property sales volumes.
| | | | | | | | | | | | |
| Servicing Fees Details | |
| For the three months ended | | For the nine months ended | |
| September 30, | | September 30, | |
(dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 | |
Average Servicing Portfolio | $ | 67,685,503 | | $ | 58,181,130 | | $ | 65,438,795 | | $ | 53,820,305 | |
Dollar Change | $ | 9,504,373 | | | | | $ | 11,618,490 | | | | |
Percentage Change | | 16 | % | | | | | 22 | % | | | |
Average Servicing Fee (basis points) | | 26.3 | | | 25.3 | | | 26.3 | | | 25.1 | |
Basis Point Change | | 1.0 | | | | | | 1.2 | | | | |
Percentage Change | | 4 | % | | | | | 5 | % | | | |
Net Warehouse Interest Income. For the ninethree and six months ended SeptemberJune 30, 2017,2021, the increase was primarily related to a $3.0 million increasedecreases in net warehouse interest income were the result of decreases in net warehouse interest income from loans held for investment (“LHFI”), partially offset by a decrease in net warehouse interest income from loans held for sale (“LHFS”) of $1.2 million. The increase in net warehouse interest income from loans held for investment was due to increases in the average outstanding balanceboth LHFS and net spread period over period as shown below. LHFI. The decrease in net warehouse interest income from loans heldLHFS for sale is primarily attributablethe three months ended June 30, 2021 was due to a 59% decrease in the net spreadaverage outstanding balance due to the lower volume of Agency loans held for sale in 2017 compared to 2016 as shown below. The decrease2021 than 2020, partially offset by a 12% increase in the net spread was a result of a greater increase inspreads, as the short-term interest rates onupon which our borrowings are basedwe incur interest expense decreased at a faster rate than in the long-termmortgage rates upon which we earn interest rates on whichincome. For the majority of our loans held for sale are based. Ifsix months ended June 30, 2021, the yield curve continues to flatten following future increases in short-term rates, a tightening of the net spread may continue. We expect to see a decrease in net warehouse interest income from LHFI going forward as mostLHFS was due to a 25% decrease in the average outstanding balance due to the lower volume of our future Interim Program loan originations are expected to be completed by the Interim Program JV, reducing the balance of LHFI as the existing portfolio matures. ThisAgency loans in 2021 than 2020, coupled with a 9% decrease in net warehousespreads, as the mortgage rates upon which we earn interest income increased at a slower rate than the short-term interest rates upon which we incur interest expense.
The decrease in interest income from LHFI is expectedfor the three and six months ended June 30, 2021 was primarily due to be partially offset by our portion ofdecreases in the average outstanding balance coupled with decreases in the net income generated byspread. The average outstanding balance decreased for the Interim Program JV.three and six months ended June 30, 2021 due to low origination activity during the year ended December 31, 2020, as the market for interim loans was interrupted due to the pandemic. The payoffs we had in 2020 were not fully replaced with new originations, resulting in a lower starting balance in 2021 than in 2020. We have seen an increase in our interim loan volume in 2021, particularly during the second quarter. The decreases in net spreads for the three and six months ended June 30, 2021 were the result of having a larger balance of LHFI funded with corporate cash in 2020 than 2021.
| | | | | | | | | | | | |
| Net Warehouse Interest Income Details | |
| For the three months ended | | For the nine months ended | |
| September 30, | | September 30, | |
(dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 | |
Average LHFS Outstanding Balance | $ | 1,633,976 | | $ | 1,366,356 | | $ | 1,289,861 | | $ | 1,212,304 | |
Dollar Change | $ | 267,620 | | | | | $ | 77,557 | | | | |
Percentage Change | | 20 | % | | | | | 6 | % | | | |
LHFS Net Spread (basis points) | | 85 | | | 102 | | | 99 | | | 119 | |
Basis Point Change | | (17) | | | | | | (20) | | | | |
Percentage Change | | (17) | % | | | | | (17) | % | | | |
Average LHFI Outstanding Balance | $ | 192,244 | | $ | 240,431 | | $ | 254,421 | | $ | 214,608 | |
Dollar Change | $ | (48,187) | | | | | $ | 39,813 | | | | |
Percentage Change | | (20) | % | | | | | 19 | % | | | |
LHFI Net Spread (basis points) | | 389 | | | 356 | | | 429 | | | 320 | |
Basis Point Change | | 33 | | | | | | 109 | | | | |
Percentage Change | | 9 | % | | | | | 34 | % | | | |
36
| | | | | | | | | | | | |
| For the three months ended | | For the six months ended | |
| June 30, | | June 30, | |
Net Warehouse Interest Income Details (dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 | |
Average LHFS Outstanding Balance | $ | 1,057,876 | | $ | 2,599,844 | | $ | 1,288,592 | | $ | 1,716,444 | |
Dollar Change | $ | (1,541,968) | | | | | $ | (427,852) | | | | |
Percentage Change | | (59) | % | | | | | (25) | % | | | |
LHFS Net Spread (basis points) | | 109 | | | 97 | | | 83 | | | 91 | |
Basis Point Change | | 12 | | | | | | (8) | | | | |
Percentage Change | | 12 | % | | | | | (9) | % | | | |
Average LHFI Outstanding Balance | $ | 262,309 | | $ | 362,345 | | $ | 280,171 | | $ | 401,532 | |
Dollar Change | $ | (100,036) | | | | | $ | (121,361) | | | | |
Percentage Change | | (28) | % | | | | | (30) | % | | | |
LHFI Net Spread (basis points) | | 266 | | | 341 | | | 274 | | | 353 | |
Basis Point Change | | (75) | | | | | | (79) | | | | |
Percentage Change | | (22) | % | | | | | (22) | % | | | |
Escrow Earnings and Other Interest Income. For both the three and ninesix months ended SeptemberJune 30, 2017, the increases were2021, the decrease was primarily due to increasesa significant decrease in both the average balances ofearnings rate on our escrow accounts and the average earnings ratesresulting from 2016 to 2017. The increases in the average balances were due to the increases in the average servicing portfolio. The increases in the average earnings rates were due to the increasesa decrease in short-term interest rates over the past 12 months as discussed above in the “Overview of Business Environment” section.
Other Revenues. For both the three and nine months ended September 30, 2017, the increases were primarily attributable to increases in investment sales placement fees and prepayment fee income from 2016 to 2017. Thebroader market, slightly offset by an increase in investment sales placement fees for the three-month period was largely driven by the increase in investment sales volume period over period. The increase in investment sales placement fees for the year-to-date period was principally attributableaverage balance of escrow accounts due to an increase in the average placement fee. The increases in prepayment fee income were due to increases in the payoff of prepayment-protected loans.servicing portfolio.
Expenses
Expenses
Personnel. For the three months ended SeptemberJune 30, 2017, the2021, the increase was principallyprimarily the result of higher loan originatora $27.4 million increase in commission costs due to higher origination fees and increasedproperty sales revenues, a $5.4 million increase in salaries and bonus expenses. Commission costs increased substantiallybenefits due to the large increase in origination fee income. Salaries expense increased due to a rise in average headcount from 521 in 2016 to 609 in 2017 as a result of acquisitions and organic growth of the Company to support our expanding operations. The increase in bonus expense is due to the Company’s improved financial performance year over year and thean increase in the average headcount.headcount to support our growth efforts, and a $2.2 million increase in stock compensation expense. The average headcount increased from 860 in 2020 to 1027 in 2021. Stock compensation increased due to higher expense associated with a stock grant provided to the vast majority of our non-executive employee base in the fourth quarter of 2020.
For the ninesix months ended SeptemberJune 30, 2017, the2021, the increase was largelyprimarily the result of highera $24.9 million increase in commission costs due to higher origination fees and increasedproperty sales revenues, an $11.5 million increase in salaries expense, bonus expense, and benefits due to an increase in average headcount to support our growth efforts, and a $4.9 million increase in stock compensation expense. Commission costsThe average headcount increased substantiallyfrom 848 for the first six months of 2020 to 999 for the first six months of 2021. Stock compensation increased due to higher expense associated with our performance share plans and a stock grant provided to the vast majority of our non-executive employee base in the fourth quarter of 2020. The expense for our performance share plans was unusually low during 2020 due to the large increase in origination fee income. Salaries expense increased due to a rise in average headcount from 511 in 2016 to 591 in 2017 as a result of acquisitions and organic growth of the Company to support our expanding operations. The increase in bonus expense is due to the Company’s improved financial performance year over year and the increase in the average headcount. Finally, stock compensation expense increased largely as a result of performance-based stock awards. The costsuncertainty associated with these awards increased due to the Company’s improved financial performance year over year.pandemic.
Amortization and Depreciation. For both the three and ninesix months ended SeptemberJune 30, 2017, the increases were2021, the increase was primarily attributableattributed to loan origination activity and the resulting growth in the average MSR balances during the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016.balance. Over the past 12 months, we have added $91.2$137.2 million of MSRs, net of amortization and write offs due to prepayment.
Income Tax Expense. Provision (Benefit) for Credit Losses.For the three months ended SeptemberJune 30, 2017,2021, the change in the provision (benefit) for credit losses was due to improvements in the forecasted unemployment rate and sustained strength in occupancy and other multifamily operating fundamentals. We lowered our forecast-period loss rate for our June 30, 2021 CECL reserve calculation to three basis points from four basis points as of March 31, 2021, resulting in a benefit for credit losses for the three months ended June 30, 2021. For the three months ended June 30, 2020, the provision for credit losses was primarily attributable to the increase is primarily relatedin our at-risk Fannie Mae servicing portfolio and the resulting increase in the CECL reserve as we did not change the forecasted loss rate from March 31, 2020 to June 30, 2020.
For the six months ended June 30, 2021, the change in the provision (benefit) for credit losses was due to the changeimprovements in the forecasted unemployment rate and sustained strength in multifamily operating fundamentals noted above. In the first half of 2020, we increased our forecasted loss rate for our June 30, 2020 CECL reserve calculation to seven basis points from one basis point upon implementation at January 1, 2020 as a result of the expected negative economic impacts of the pandemic, which resulted in a significant provision expense for the six months ended June 30, 2020. With the economic improvements noted above, we lowered our forecast-period loss rate for our June 30, 2021 CECL reserve calculation to three basis points from six basis points at December 31, 2020, resulting in a significant benefit for credit losses in 2021.
We have not experienced any defaults and minimal delinquencies in our at-risk servicing portfolio since the onset of the pandemic.
Other Operating Expenses. The increase for the three months ended June 30, 2021 primarily stemmed from increased professional fees due to our growth initiatives, travel costs as our bankers and brokers resumed traveling for in person meetings, and other expenses.
The increase for the six months ended June 30, 2021 was largely attributable to increased technology costs and growth efforts, professional fees due to our growth initiatives, and other operating expenses.
Income Tax Expense. For the three months ended June 30, 2021, the decrease in income tax expense relates primarily to the 11% decrease in income from operations periodand a $1.1 million increase in realizable excess tax benefits recognized year over period,year due to a substantial increase in the price at which restricted stock vested and options were exercised.
For the six months ended June 30, 2021, the decrease in income tax expense relates primarily to a $2.0 million increase in realizable excess tax benefits recognized year over year due to a substantial increase in the number of shares of restricted stock vested and options exercised and an increase in the price at which these awards vested or were exercised, partially offset by anthe 3% increase in income from operations.
We do not expect our annual estimated effective tax rate to differ significantly from the 26.2% rate estimated for the three months ended June 30, 2021 as we do not have significant permanent differences. Accordingly, we expect an estimated effective tax rate of between approximately 25.5% and 26.5% for the remainder of the year. The effective tax rate decreased slightly year over year from 23.7% in 2020 to 22.6% in 2021 due to the increase in realizable excess tax benefits, from share-based payments that reduced incomepartially offset by a slightly higher estimated annual effective tax expense by an additional $0.3 million and a decreaserate in 2021 compared to 2020. The increase in the estimated annual effective tax rate.
For the nine months ended September 30, 2017, the substantial decrease in the effective income tax rate was related to excess tax benefits and a decrease in the estimated annual effective tax rate. Excess tax benefits recognized during the nine months ended September 30, 2016 reduced income tax expense by $0.5 million compared to $9.1 million during the same period in 2017. The reduction to income tax expense due to excess tax benefits in 2017 was substantially larger as a result of the significant increase in our stock price over the past year and an increase in the numbervalue of executive restricted and performance shares that vested in 2017, reducing the effective tax rate significantly. The increase in the number of shares that vested was largely attributable2021 compared to a performance share plan that vested in the first quarter of 2017 as we achieved each of the performance targets at or near the high end of the payout range. The performance share plan vesting was the first of its kind in the Company’s history. No other performance share plans are scheduled to vest in 2017 or 2018. We expect the reduction to income taxes related to excess tax benefits to be substantially less for the remainder of 2017 than it was for the first nine months of 2017.2020.
Non-GAAP Financial Measures
To supplement our financial statements presented in accordance with GAAP, we use adjusted EBITDA, a non-GAAP financial measure. The presentation of adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. When analyzing our operating performance, readers should use adjusted EBITDA in addition to, and not as an alternative for, net income. Adjusted EBITDA represents net income before income taxes, interest expense on our term loan facility, and amortization and depreciation, adjusted for provision (benefit) for credit losses net of write-offs, stock-based incentive compensation charges, and non-cash revenues such as gains attributable to MSRs and unrealized gains and lossesthe fair value of expected net cash flows from commercial mortgage backed securities (“CMBS”) activities.servicing, net. Because not all companies use identical calculations, our presentation of adjusted EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, adjusted EBITDA is not intended to be a measure of free cash flow for our management’s discretionary use, as it does not reflect certain cash requirements such as tax and debt service payments. The amounts shown for adjusted EBITDA may also differ from the amounts calculated under similarly titled definitions in our debt instruments, which are further adjusted to reflect certain other cash and non-cash charges that are used to determine compliance with financial covenants.
We use adjusted EBITDA to evaluate the operating performance of our business, for comparison with forecasts and strategic plans, and for benchmarking performance externally against competitors. We believe that adjusted EBITDA,this non-GAAP measure, when read in conjunction with our GAAP financials, provides useful information to investors by offering:
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● | | the ability to make more meaningful period-to-period comparisons of our on-goingongoing operating results; |
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● | | the ability to better identify trends in our underlying business and perform related trend analyses; and |
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● | | a better understanding of how management plans and measures our underlying business. |
We believe that adjusted EBITDA has limitations in that it does not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that adjusted EBITDA should only be used to evaluate our results of operations in conjunction with net income.Adjusted EBITDA is calculatedreconciled to net income as follows.follows:
ADJUSTED FINANCIAL METRIC RECONCILIATION TO GAAP
| | | | | | | | | | | | | |
| | For the three months ended | | For the six months ended | |
| | June 30, | | June 30, | |
(in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | |
Reconciliation of Walker & Dunlop Net Income to Adjusted EBITDA | | | | | | | | | | |
Walker & Dunlop Net Income | | $ | 56,058 | | $ | 62,059 | | $ | 114,110 | | $ | 109,888 | |
Income tax expense | | | 18,240 | | | 21,479 | | | 33,358 | | | 34,151 | |
Interest expense on corporate debt | | | 1,760 | | | 2,078 | | | 3,525 | | | 4,938 | |
Amortization and depreciation | | | 48,510 | | | 42,317 | | | 95,381 | | | 82,079 | |
Provision (benefit) for credit losses | | | (4,326) | | | 4,903 | | | (15,646) | | | 28,546 | |
Net write-offs | | | — | | | — | | | — | | | — | |
Stock compensation expense | | | 8,121 | | | 5,927 | | | 16,237 | | | 11,289 | |
Fair value of expected net cash flows from servicing, net | | | (61,849) | | | (90,369) | | | (119,784) | | | (158,369) | |
Adjusted EBITDA | | $ | 66,514 | | $ | 48,394 | | $ | 127,181 | | $ | 112,522 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended | |
| | September 30, | | September 30, | |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | |
Reconciliation of Walker & Dunlop Net Income to Adjusted EBITDA | | | | | | | | | | | | | |
Walker & Dunlop Net Income | | $ | 34,378 | | $ | 29,628 | | $ | 112,166 | | $ | 77,107 | |
Income tax expense | | | 19,988 | | | 18,851 | | | 54,621 | | | 47,295 | |
Interest expense on corporate debt | | | 2,555 | | | 2,485 | | | 7,401 | | | 7,419 | |
Amortization and depreciation | | | 32,343 | | | 29,244 | | | 97,541 | | | 80,824 | |
Provision (benefit) for credit losses | | | 9 | | | 283 | | | (216) | | | 166 | |
Net write-offs | | | — | | | (2,567) | | | — | | | (2,567) | |
Stock compensation expense | | | 6,508 | | | 5,270 | | | 15,765 | | | 12,784 | |
Gains attributable to mortgage servicing rights (1) | | | (50,781) | | | (48,229) | | | (140,985) | | | (127,724) | |
Unrealized (gains) losses from proprietary CMBS mortgage banking activities | | | — | | | 1,262 | | | — | | | 430 | |
Adjusted EBITDA | | $ | 45,000 | | $ | 36,227 | | $ | 146,293 | | $ | 95,734 | |
| | | | | | | | | | | | | |
| (1)
| | Represents the fair value of the expected net cash flows from servicing recognized at commitment, net of any expected guaranty obligation.
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The following tables presenttable presents a period-to-period comparison of the components of adjusted EBITDA for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020.
ADJUSTED EBITDA – THREE MONTHS
| | | | | | | | | | | | |
| For the three months ended | | | | | | | |
| September 30, | | Dollar | | Percentage | | |
| | | | | | | | | | | | |
| | For the three months ended | | | | | | |
| | June 30, | | Dollar | | Percentage | |
(dollars in thousands) | 2017 | | 2016 | | Change | | Change | | 2021 | | 2020 | | Change | | Change | |
Origination fees | $ | 60,523 | | $ | 53,663 | | $ | 6,860 | | 13 | % | $ | 107,472 | | $ | 77,907 | | $ | 29,565 | | 38 | % |
Servicing fees | | 44,900 | | | 37,134 | | | 7,766 | | 21 | | | 69,052 | | | 56,862 | | | 12,190 | | 21 | |
Property sales broker fees | | | 22,454 | | | 3,561 | | | 18,893 | | 531 | |
Net warehouse interest income | | 5,358 | | | 5,614 | | | (256) | | (5) | | | 4,630 | | | 9,401 | | | (4,771) | | (51) | |
Escrow earnings and other interest income | | 5,804 | | | 2,630 | | | 3,174 | | 121 | | | 1,823 | | | 2,671 | | | (848) | | (32) | |
Other revenues | | 12,040 | | | 8,545 | | | 3,495 | | 41 | | | 14,131 | | | 12,054 | | | 2,077 | | 17 | |
Personnel | | (71,961) | | | (59,107) | | | (12,854) | | 22 | | | (133,300) | | | (100,993) | | | (32,307) | | 32 | |
Net write-offs | | — | | | (2,567) | | | 2,567 | | (100) | | | — | | | — | | | — | | N/A | |
Other operating expenses | | (11,664) | | | (9,685) | | | (1,979) | | 20 | | | (19,748) | | | (13,069) | | | (6,679) | | 51 | |
Adjusted EBITDA | $ | 45,000 | | $ | 36,227 | | $ | 8,773 | | 24 | | $ | 66,514 | | $ | 48,394 | | $ | 18,120 | | 37 | |
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ADJUSTED EBITDA – NINESIX MONTHS
| | | | | | | | | | | |
| For the six months ended | | | | | | |
| June 30, | | Dollar | | Percentage | |
(dollars in thousands) | 2021 | | 2020 | | Change | | Change | |
Origination fees | $ | 183,351 | | $ | 154,280 | | $ | 29,071 | | 19 | % |
Servicing fees | | 135,030 | | | 112,296 | | | 22,734 | | 20 | |
Property sales broker fees | | 31,496 | | | 13,173 | | | 18,323 | | 139 | |
Net warehouse interest income | | 9,185 | | | 14,896 | | | (5,711) | | (38) | |
Escrow earnings and other interest income | | 3,940 | | | 13,414 | | | (9,474) | | (71) | |
Other revenues | | 22,913 | | | 20,778 | | | 2,135 | | 10 | |
Personnel | | (221,399) | | | (185,156) | | | (36,243) | | 20 | |
Net write-offs | | — | | | — | | | — | | N/A | |
Other operating expenses | | (37,335) | | | (31,159) | | | (6,176) | | 20 | |
Adjusted EBITDA | $ | 127,181 | | $ | 112,522 | | $ | 14,659 | | 13 | |
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| | | | | | | | | | | |
| For the nine months ended | | | | | | |
| September 30, | | Dollar | | Percentage | |
(dollars in thousands) | 2017 | | 2016 | | Change | | Change | |
Origination fees | $ | 168,927 | | $ | 122,112 | | $ | 46,815 | | 38 | % |
Servicing fees | | 129,639 | | | 101,554 | | | 28,085 | | 28 | |
Net warehouse interest income | | 17,778 | | | 15,925 | | | 1,853 | | 12 | |
Escrow earnings and other interest income | | 13,610 | | | 6,225 | | | 7,385 | | 119 | |
Other revenues | | 33,602 | | | 23,577 | | | 10,025 | | 43 | |
Personnel | | (182,392) | | | (141,581) | | | (40,811) | | 29 | |
Net write-offs | | — | | | (2,567) | | | 2,567 | | (100) | |
Other operating expenses | | (34,871) | | | (29,511) | | | (5,360) | | 18 | |
Adjusted EBITDA | $ | 146,293 | | $ | 95,734 | | $ | 50,559 | | 53 | |
| | | | | | | | | | | |
39
Three and six months ended June 30, 2021 compared to three and ninesix months ended SeptemberJune 30, 2017. For the three months ended September 30, 2017, the increase2020
Origination fees increased due to significant increases in origination fees was largely related to the increase in loan origination volume period over period.overall debt financing volumes. Servicing fees increased due to an increaseincreases in the average servicing portfolio period over period as a result of newthe substantial loan originations.originations and relatively few payoffs over the last 12 months and increases in the average servicing fee. Property sales broker fees increased as a result of the increases in property sales volumes. Net warehouse interest income decreased primarily due to decreases in the average outstanding balances. Escrow earnings and other interest income increaseddecreased primarily as a result of increasesdeclines in the average escrow balance outstanding and the average earnings rate following therates. The increases in short-term interest rates over the past year. Other revenues increased primarily due to an increase in investment sales placement fees and prepayment fee income. The increase in personnel expense waswere primarily due to (i) increased commission costs due to the increase in origination fees, (ii) increased salaries expense due to a rise in headcount, and (iii) increased bonus expense due to the Company’s improved financial performance and rise in headcount. We settled the risk-sharing losses on one loan in the third quarter of 2016, while we have settled no risk-sharing losses in 2017.
For the nine months ended September 30, 2017, the increase in origination fees was largely related to the increase in loan origination volume period over period. Servicing fees increased due to an increase in the average servicing portfolio period over period as a result of new loan originations. Net warehouse interest income increased largely due to increases in thetotal transaction volumes and salaries and benefits resulting from increases in average outstanding balance and net spread of loans held for investment. Escrow earnings and other interest incomeheadcount. Other operating expenses increased as a result of increases in the average escrow balance outstanding andoverall growth of the average earnings rate following the increases in short-term interest ratesCompany over the past year. Other revenues increased primarily due to an increase in investment sales placement fees and prepayment fee income. The increase in personnel expense was primarily due to (i) increased commission costs due to the increase in origination fees, (ii) increased salaries expense due to a rise in headcount, (iii) increased bonus expense due to the Company’s improved financial performance and rise in headcount. We settled the risk-sharing losses on one loan in the third quarter of 2016, while we have settled no risk-sharing losses in 2017.
Financial Condition
Cash Flows from Operating Activities
Our cash flows from operationsoperating activities are generated from loan sales, servicing fees, escrow earnings, net warehouse interest income, property sales broker fees, and other income, net of loan originations and operating costs. Our cash flows from operations are impacted by the fees generated by our loan originations, the timing of loan closings, and the period of time loans are held for sale in the warehouse loan facility prior to delivery to the investor.
Cash FlowFlows from Investing Activities
We usually lease facilities and equipment for our operations. However, when necessary and cost effective, we invest cash in property, plant, and equipment. Our cash flows from investing activities also include the funding and repayment of loans held for investment, contributions to and distributions from joint ventures, and the fundingpurchase of preferred equity investments.AFS securities pledged to Fannie Mae. We opportunistically invest cash for acquisitions and MSR portfolio purchases.
Cash FlowFlows from Financing Activities
We use our warehouse loan facilities and, when necessary, our corporate cash to fund loan closings. We believe that our current warehouse loan facilities are adequate to meet our increasing loan origination needs. Historically, we have used a combination of long-term
debt and cash flows from operations to fund acquisitions, repurchase shares, pay cash dividends, and fund a portion of loans held for investment.
We currently do not pay dividends on our common stock and have never paid a dividend.
NineSix Months Ended SeptemberJune 30, 20172021 Compared to NineSix Months Ended SeptemberJune 30, 20162020
The following table presents a period-to-period comparison of the significant components of cash flows for the ninesix months ended SeptemberJune 30, 20172021 and 2016. Certain prior-year balances have been adjusted for the adoption2020.
SIGNIFICANT COMPONENTS OF CASH FLOWS
| | | | | | | | | | | | | |
| | For the nine months ended September 30, | | Dollar | | Percentage | | |
| | | | | | | | | | | | | |
| | | For the six months ended June 30, | | Dollar | | Percentage | |
(dollars in thousands) | | 2017 | | 2016 | | Change | | Change | | | 2021 | | 2020 | | Change | | Change | |
Net cash provided by (used in) operating activities | | $ | (1,328,432) | | $ | 1,300,257 | | $ | (2,628,689) | | (202) | % | | $ | 759,342 | | $ | (822,643) | | $ | 1,581,985 | | (192) | % |
Net cash provided by (used in) investing activities | | | 27,406 | | | (92,260) | | | 119,666 | | (130) | | | | 75,411 | | | 73,971 | | | 1,440 | | 2 | |
Net cash provided by (used in) financing activities | | | 1,285,203 | | | (1,242,291) | | | 2,527,494 | | (203) | | | | (802,999) | | | 903,974 | | | (1,706,973) | | (189) | |
Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period | | | 197,644 | | | 180,190 | | | 17,454 | | 10 | | |
| | | | | | | | | | | | | |
Cash flows from operating activities | | | | | | | | | | | | | |
Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period ("Total cash") | | | | 389,756 | | | 291,868 | | | 97,888 | | 34 | |
| | | | | | | | | | | | | |
Cash flows from (used in) operating activities | | | | | | | | | | | | | |
Net receipt (use) of cash for loan origination activity | | $ | (1,421,977) | | $ | 1,238,428 | | $ | (2,660,405) | | (215) | % | | $ | 731,775 | | $ | (900,150) | | $ | 1,631,925 | | (181) | % |
Net cash provided by (used in) operating activities, excluding loan origination activity | | | 93,545 | | | 61,829 | | | 31,716 | | 51 | | | | 27,567 | | | 77,507 | | | (49,940) | | (64) | |
| | | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | | |
Funding of preferred equity investments | | $ | (16,321) | | $ | (15,538) | | $ | (783) | | 5 | % | |
Capital invested in Interim Program JV | | | (6,184) | | | — | | | (6,184) | | N/A | | |
| | | | | | | | | | | | | |
Cash flows from (used in) investing activities | | | | | | | | | | | | | |
Purchases of pledged AFS securities | | | $ | (2,000) | | $ | (14,155) | | $ | 12,155 | | (86) | % |
Proceeds from the prepayment/sale of pledged AFS securities | | | | 22,092 | | | 4,739 | | | 17,353 | | 366 | |
Acquisitions, net of cash received | | | (15,000) | | | — | | | (15,000) | | N/A | | | | (10,507) | | | (46,784) | | | 36,277 | | (78) | |
Purchase of mortgage servicing rights | | | — | | | (42,705) | | | 42,705 | | (100) | | |
| | | | | | | | | | | | | |
Originations of loans held for investment | | | (167,680) | | | (218,958) | | | 51,278 | | (23) | | |
Total principal collected on loans held for investment | | | 237,229 | | | 187,820 | | | 49,409 | | 26 | | |
Net payoff of (investment in) loans held for investment | | $ | 69,549 | | $ | (31,138) | | $ | 100,687 | | (323) | | | | 89,566 | | | 139,030 | | | (49,464) | | (36) | |
| | | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | | |
Net distributions from (investments in) joint ventures | | | $ | (16,692) | | $ | (6,470) | | $ | (10,222) | | 158 | % |
| | | | | | | | | | | | | |
Cash flows from (used in) financing activities | | | | | | | | | | | | | |
Borrowings (repayments) of warehouse notes payable, net | | $ | 1,360,969 | | $ | (1,239,677) | | $ | 2,600,646 | | (210) | % | | $ | (744,281) | | $ | 1,009,302 | | $ | (1,753,583) | | (174) | % |
Borrowings of interim warehouse notes payable | | | 128,661 | | | 148,478 | | | (19,817) | | (13) | | | | 84,766 | | | 33,127 | | | 51,639 | | 156 | |
Repayments of interim warehouse notes payable | | | (175,934) | | | (138,898) | | | (37,036) | | 27 | | | | (34,174) | | | (84,959) | | | 50,785 | | (60) | |
Repurchase of common stock | | | (28,863) | | | (12,374) | | | (16,489) | | 133 | | | | (14,190) | | | (27,142) | | | 12,952 | | (48) | |
Repayment of secured borrowings | | | | (73,312) | | | — | | | (73,312) | | N/A | |
Cash dividends paid | | | | (32,122) | | | (22,641) | | | (9,481) | | 42 | |
ChangesThe change in cash flows from operations wereoperating activities was driven primarily by loans acquiredoriginated and sold. Such loans are held for short periods of time, generally less than 60 days, and impact cash flows presented as of a point in time. The decreaseincrease in cash flows from operationsreceived in loan origination activities is primarily attributable to the use of $1.4 billion for the funding of loan originations, net of sales of loans to third partiesheld for sale outpacing originations by $731.8 million during 2017the first half of 2021 (net receipt of cash) compared to originations outpacing sales of loans held for sale by $900.2 million during the receiptfirst half of $1.2 billion for2020 (net use of cash). Our Agency debt financing activity decreased year over year, which resulted in less cash used in originations during the fundingfirst six months of loan originations, net of sales to third parties during 2016.2021. Excluding cash received or used for the origination and sale of loans, net cash flows provided by operations were $27.6 million in 2021, down from $77.5 million in 2020. The decrease was $93.5 million during 2017 comparedlargely due to net cash provided by operations of $61.8 million during 2016. The significant components of the change included an increase in cash used to pay down other liabilities of $35.0$82.1 million, in net income before noncontrolling interests, an increase of $16.7partially offset by a $34.5 million change in the adjustment to net income for amortization and depreciation, and a greater increase to net income related to the change in the fair value of premiums and origination fees of $22.3 million, partially offset by a greater reduction to net income related to gains attributable to future servicing rights of $13.3 million during 2017, a greater reduction to cash related to accounts payable and other liabilities of $20.7 million, and a greater use of cash for performance deposits from borrowers of $2.7 million.fees.
The increaseslight change in cash provided by (used in) investing activities is primarily attributable to decreasesan increase in the net investmentcash provided by prepayment and sale of pledged AFS securities, a decrease in loans held for investment and cash used for the purchase of mortgage servicing rights, partially offset by increases in net cash used for acquisitions, and
cash used to invest in the Interim Program JV. The net payoff of loans held for investment during 2017 was $69.5 million compared to net investment in loans held for investment of $31.1 million during 2016. Of the $69.5 million of the net payoff of loans held for investment during 2017, $47.3 million was funded using interim warehouse borrowings (included in cash flows from financing activities), with the other $22.2 million funded using corporate cash. Of the $31.1 million of the net investment in loans held for investment during 2016, $9.6 million was funded using interim warehouse borrowings, with the remaining $21.5 million funded using corporate cash. Net cash paid for acquisitions increased by $15.0 million as the Company did not execute any acquisitions during the first nine months of 2016. Cash paid to invest in the Interim Program JV increased by $6.2 million as the Interim Program JV began operations in the third quarter of 2017. Lastly, cash paid for purchases of mortgage servicing rights decreased by $42.7 million as we did not purchase any mortgage servicing rights in 2017.
The substantial change in cash provided by (used in) financing activities was primarily attributable to the significant change in net warehouse borrowings period to period, partially offset by increases in net repayments of interim warehouse notes payable and cash used to repurchase and retire shares of our common stock. The change in net borrowings (repayments) of warehouse borrowings during 2017 was due to a large increase in the unpaid principal balance of loans held for sale funded by Agency Warehouse Facilities (as defined below) from December 31, 2016 to September 30, 2017. During 2017, the unpaid principal balance of loans held for sale funded by Agency Warehouse Facilities increased $1.4 billion from their December 31, 2016 balance compared to a decrease of $1.2 billion during the same period in 2016. The change in net borrowings of interim warehouse notes payable was principally due to a decrease in originationspurchases of AFS securities, almost entirely offset by a decrease in net payoff of loans held for investment and an increase in net investment in joint ventures.
The change to cash used in financing activities from cash provided by financing activity was primarily attributable to the change to net warehouse repayments in 2021 from net warehouse borrowings in 2020, the repayment of our secured borrowings, and an increase in cash dividends paid, partially offset by net borrowings of interim warehouse notes payable and a decrease in cash paid for stock repurchases. The change to net repayments of warehouse notes payable during 2021 was largely due to the increase in net cash received for loan origination activity, resulting in net repayments of the related warehouse notes payables. The repayment of secured borrowings was the result of the secured borrowing being paid off in the second quarter of 2021, a unique transaction. Cash dividends paid increased as a result of the increase in our dividend to $0.50 per share in 2021 compared to $0.36 per share in 2020. Net repayments of interim warehouse notes payable in 2020 changed to net borrowings of interim warehouse notes payable in 2021 due to a decrease in net payoffs of loans held for investment year over year.mentioned above. The increasedecrease in share repurchase activitycash paid for repurchases of common stock was principally related to an increaserepurchases under approved stock repurchase programs. In 2021, we did not repurchase any shares under approved repurchase programs, while in the repurchase2020 we repurchased $10.2 million of shares to settle employee tax obligations for restricted and performance-based share awards along with a substantial increase in the fair valueunder such programs.
Liquidity and Capital Resources
Uses of Liquidity, Cash and Cash Equivalents
Our significant recurring cash flow requirements consist of (i) short-term liquidity necessary to (i) fund loans held for sale; (ii) liquidity necessary to fund loans held for investment under the Interim Loan Program; (iii) liquidity necessary to fund our preferred equity investments;pay cash dividends; (iv) liquidity necessary to fund our portion of the equity necessary for the operations of the Interim Program JV;JV, the Appraisal JV, and other equity-method investments; (v) meet working capital needs to support our day-to-day operations, including debt service payments, servicing advances consisting of principal and interest advances for Fannie Mae or HUD loans that become delinquent, advances on insurance and tax payments if the escrow funds are insufficient, and payments for salaries, commissions, and income taxes; and (vi) meet working capital needs to satisfy collateral requirements for our Fannie Mae DUS risk-sharing obligations and to meet the operational liquidity requirements of Fannie Mae, Freddie Mac, HUD, Ginnie Mae, and our warehouse facility lenders.
Fannie Mae has established benchmark standards for capital adequacy and reserves the right to terminate our servicing authority for all or some of the portfolio if, at any time, it determines that our financial condition is not adequate to support our obligations under the DUS agreement. We are required to maintain acceptable net worth as defined in the standards, and we satisfied the Septemberrequirements as of June 30, 2017 requirements.2021. The net worth requirement is derived primarily from unpaid balances on Fannie Mae loans and the level of risk-sharing. At SeptemberAs of June 30, 2017,2021, the minimum net worth requirement was $145.7$245.4 million, and our net worth as defined in the requirements, was $634.5 million,$1.1 billion, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC. As of SeptemberJune 30, 2017,2021, we were required to maintain at least $28.6$48.7 million of liquid assets to meet our operational liquidity requirements for Fannie Mae, Freddie Mac, HUD, Ginnie Mae and our warehouse facility lenders. As of SeptemberJune 30, 2017,2021, we had operational liquidity as defined in the requirements, of $145.1$359.3 million, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC.
As noted previously, under certain limited circumstances, we may make preferred equity investmentsWe paid a cash dividend of $0.50 per share in entities controlled by certaineach of the first and second quarters of 2021, which is 39% higher than the quarterly dividend paid in each of the first and second quarters of 2020. On August 4, 2021, our borrowers thatBoard of Directors declared a dividend of $0.50 per share for the third quarter of 2021. The dividend will assist those borrowersbe paid on September 3, 2021 to acquireall holders of record of the Company’s restricted and reposition properties. The termsunrestricted common stock as of such investments are negotiated with each investment. As of September 30, 2017,August 19, 2021.
Over the past three years, we have funded $41.2returned $206.6 million to investors in the form of such investments. We expect these preferred equity investments to be repaid to us within the next two years.
We currently retain all future earnings for the operation and expansionrepurchase of our business and therefore do not pay cash dividends on our common stock. Since the beginning of 2014, we have repurchased 5.51.6 million shares of our common stock from large stockholdersunder share repurchase programs for an aggregatea cost of $82.3$76.1 million and cash dividend payments of $130.5 million. Additionally, we have invested $93.3$120.3 million of cash in acquisitions and the purchase of mortgage servicing rights, and funded $41.2 million of preferred equity investments.acquisitions. On occasion, we may use cash to fully fund Agencysome loans held for investment or loans held for sale instead of using our warehouse line.lines. As of SeptemberJune 30, 2017,2021, we used corporate cash to fully fund Agency loans held for saleinvestment with an unpaid principal balance of $64.3$14.7 million and loans held for sale of $14.2 million. DuringWe continually seek opportunities to complete additional acquisitions if we believe the first quarter of 2017,economics are favorable.
In February 2021, our Board of Directors authorized us toapproved a stock repurchase program that permits the repurchase of up to $75.0$75 million of shares of our common stock over a 12-month period endingbeginning February 10, 2018. We12, 2021. Through June 30, 2021 we have not repurchased 228 thousandany shares under the 2021 repurchase program and have $75.0 million of our stock with an aggregate cost of $10.8
millionremaining capacity under thisthat program.
Historically, our cash flows from operations and warehouse facilities have been sufficient to enable us to meet our short-term liquidity needs and other funding requirements. We believe that cash flows from operations will continue to be sufficient for us to meet our current obligations for the foreseeable future.
Restricted Cash and Pledged Securities
Restricted cash consists primarily of good faith deposits held on behalf of borrowers between the time we enter into a loan commitment with the borrower and the borrower closesinvestor purchases the loan. We are generally required to share the risk of any losses associated with loans sold under the Fannie Mae DUS program.program, our only off-balance sheet arrangement. We are required to secure this obligation by assigning collateral to Fannie Mae. We meet this obligation by assigning pledged securities to Fannie Mae. 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 collateral 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. Collateral held in the form of money market funds holding U.S. Treasuries is discounted 5%, and Agency MBS are discounted 4% for purposes of calculating compliance with the collateral requirements. As of SeptemberJune 30, 2017,2021, we held substantially all of our restricted liquidity in money market funds holding U.S. TreasuriesAgency MBS in the aggregate amount of $91.0$99.2 million. Additionally, substantially allthe majority of the loans for which we have risk sharingrisk-sharing are Tier 2 loans. We fund any growth in our Fannie Mae required operational liquidity and collateral requirements from our working capital.
We are in compliance with the SeptemberJune 30, 20172021 collateral requirements as outlined above. As of SeptemberJune 30, 2017,2021, reserve requirements for the June 30, 2021 DUS loan portfolio will require us to fund $61.3$66.9 million in additional restricted liquidity over the next 48 months, assuming no further principal paydowns, prepayments, or defaults within our at riskat-risk portfolio. Fannie Mae periodically reassesseshas assessed the DUS Capital Standards in the past and may make changes to these standards in the future. We generate sufficient cash flowflows from our operations to meet these capital standards and do not expect any future changes to have a material impact on our future operations; however, any future changes to collateral requirements may adversely impact our available cash.
Under the provisions of the DUS agreement, we must also maintain a certain level of liquid assets referred to as the operational and unrestricted portions of the required reserves each year. We satisfied these requirements as of SeptemberJune 30, 2017.2021.
Sources of Liquidity: Warehouse Facilities
The following table provides information related to our warehouse facilities as of SeptemberJune 30, 2017.2021.
| | | | | | | | | | | | | | |
| | June 30, 2021 | | |
(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 | | $ | 347,747 | | 30-day LIBOR plus 1.30% |
Agency Warehouse Facility #2 | | | 700,000 | | | 300,000 | | | 1,000,000 | | | 390,370 | | 30-day LIBOR plus 1.30% |
Agency Warehouse Facility #3 | | | 600,000 | | | 265,000 | | | 865,000 | | | 125,951 | | 30-day LIBOR plus 1.30% |
Agency Warehouse Facility #4 | | | 350,000 | | | — | | | 350,000 | | | 246,769 | | 30-day LIBOR plus 1.30% |
Agency Warehouse Facility #5 | | | — | | | 1,000,000 | | | 1,000,000 | | | 276,874 | | 30-day LIBOR plus 1.45% |
Agency Warehouse Facility #6 | | | 150,000 | | $ | 100,000 | | $ | 250,000 | | $ | 70,913 | | 30-day LIBOR plus 1.40% |
Total National Bank Agency Warehouse Facilities | | | 2,225,000 | | | 1,665,000 | | | 3,890,000 | | | 1,458,624 | | |
Fannie Mae repurchase agreement, uncommitted line and open maturity | | $ | — | | $ | 1,500,000 | | $ | 1,500,000 | | $ | 180,953 | | |
Total Agency Warehouse Facilities | | | 2,225,000 | | | 3,165,000 | | | 5,390,000 | | | 1,639,577 | | |
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% to 2.00% |
Interim Warehouse Facility #3 | | | 75,000 | | | 75,000 | | | 150,000 | | | 59,453 | | 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 | | | 184,835 | | |
Total warehouse facilities | | $ | 2,554,810 | | $ | 3,240,000 | | $ | 5,794,810 | | $ | 1,824,412 | | |
| | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | |
(dollars in thousands) | | Committed | | Uncommitted | | Temporary | | Total Facility | | Outstanding | | |
Facility | | Amount | | Amount | | Increase | | Capacity | | Balance | | Interest rate |
Agency Warehouse Facility #1 | | $ | 425,000 | | $ | — | | $ | — | | $ | 425,000 | | $ | 190,054 | | 30-day LIBOR plus 1.40% |
Agency Warehouse Facility #2 | | | 500,000 | | | — | | | 2,066,000 | | | 2,566,000 | | | 2,228,837 | | 30-day LIBOR plus 1.30% |
Agency Warehouse Facility #3 | | | 480,000 | | | — | | | 400,000 | | | 880,000 | | | 424,714 | | 30-day LIBOR plus 1.25% |
Agency Warehouse Facility #4 | | | 350,000 | | | — | | | — | | | 350,000 | | | 285,170 | | 30-day LIBOR plus 1.40% |
Agency Warehouse Facility #5 | | | 30,000 | | | — | | | — | | | 30,000 | | | 5,797 | | 30-day LIBOR plus 1.80% |
Agency Warehouse Facility #6 | | | 250,000 | | | 250,000 | | | — | | | 500,000 | | | — | | 30-day LIBOR plus 1.35% |
Fannie Mae repurchase agreement, uncommitted line and open maturity | | | — | | | 1,500,000 | | | — | | | 1,500,000 | | | 75,391 | | 30-day LIBOR plus 1.15% |
Total Agency Warehouse Facilities | | $ | 2,035,000 | | $ | 1,750,000 | | $ | 2,466,000 | | $ | 6,251,000 | | $ | 3,209,963 | | |
| | | | | | | | | | | | | | | | | |
Interim Warehouse Facility #1 | | $ | 85,000 | | $ | — | | $ | — | | $ | 85,000 | | $ | 43,440 | | 30-day LIBOR plus 1.90% |
Interim Warehouse Facility #2 | | | 200,000 | | | — | | | — | | | 200,000 | | | 23,272 | | 30-day LIBOR plus 2.00% |
Interim Warehouse Facility #3 | | | 75,000 | | | — | | | — | | | 75,000 | | | 29,132 | | 30-day LIBOR plus 2.00% to 2.50% |
Total Interim Warehouse Facilities | | $ | 360,000 | | $ | — | | $ | — | | $ | 360,000 | | $ | 95,844 | | |
Total warehouse facilities | | $ | 2,395,000 | | $ | 1,750,000 | | $ | 2,466,000 | | $ | 6,611,000 | | $ | 3,305,807 | | |
| | | | | | | | | | | | | | | | | |
| (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. |
Agency Warehouse Facilities
At SeptemberAs of June 30, 2017, to provide financing to borrowers under the Agencies’ programs,2021, we havehad six committed and uncommitted
warehouse lines of credit in the aggregate amount of $4.8$3.9 billion with certain national banks and a $1.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency Warehouse Facilities”). Five that we use to fund substantially all of theseour loan originations. The six warehouse facilities are revolving commitments we expect to renew annually (consistent with industry practice), one we expect to renew every 18 months, and the otherFannie Mae facility is provided on an uncommitted basis without a specific maturity date. Our ability to originate mortgage loans intended to be sold under an Agency execution depends upon our ability to secure and maintain these types of short-term financing agreements on acceptable terms.
Agency Warehouse Facility #1#1:
We have a warehousing credit and security agreement with a national bank for a $425.0 million committed warehouse line.line that is scheduled to mature on October 25, 2021. The warehousing credit and security agreement provides us 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 130 basis points. During the second quarter of 2021, we executed an amendment that decreased the borrowing rate to 30-day LIBOR plus 130 basis points from 30-day LIBOR plus 140 basis points and decreased the 30-day LIBOR floor to zero from 25 basis points. During the fourth quarter of 2017, we executed the 13th amendment to the warehouse agreement that extended the maturity date to November 30, 2017. No other material modifications have been made to the agreement during 2017.in 2021.
Agency Warehouse Facility #2#2:
We have a warehousing credit and security agreement with a national bank for a $2.6 billion$700.0 million committed warehouse line. The total commitment amount of $2.6 billion as of September 30, 2017 consists of a base committed amount of $500.0 million and a temporary increase of $2.1 billion, as more fully described below. line that is scheduled to mature on April 14, 2022. The committed warehouse facility provides us 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, we executed the Second Amended and Restated Warehousing Credit and Security Agreement (the “Second Amended Agreement”). The Second Amended Agreement removed one of the lenders under the prior agreement, which reduced the maximum committed borrowing capacity to $500.0 million. It also extended the maturity date to September 10, 2018 and reduced the interest rate to the 30-day LIBOR plus 130 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 withfacility. During the executionsecond quarter of the Second Amended Agreement,2021, we executed a new, separate warehousing credit agreement with one ofamendments that extended the lenders undermaturity date thereunder until April 14, 2022 and decreased the prior facility, which is referredborrowing rate to as Agency Warehouse Facility #6 and is more fully described below. Also during the third quarter of 2017, we executed the first amendment to the Second Amended Agreement that provides a temporary increase of $2.1 billion to fund a specific portfolio of loans. The temporary increase expires the sooner of the sale of the portfolio of loans, or February 28, 2018. The uncommitted borrowing capacity is reduced to zero while the temporary increase is outstanding.30-day LIBOR plus 130 basis points from 30-day LIBOR plus 140 basis points. No other material modifications have been made to the agreement during 2017.2021.
Agency Warehouse Facility #3#3:
We have a warehousing$600.0 million committed warehouse credit and security agreement with a national bank for a $880.0 million committed warehouse line. The total commitment amount of $880.0 million as of September 30, 2017 consists of a base committed amount of $480.0 million and a temporary increase of $400.0 million, as more fully described below. that is scheduled to mature on May 14, 2022. The committed warehouse facility provides us 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 125130 basis points. During the second quarter of 2017,2021, we executed the seventh amendment to the warehouse agreement. The amendment reduced the interest rate to the 30-day LIBOR plus 125 basis points,amendments that extended the maturity date to April 30, 2018, andMay 14, 2022 for the committed borrowing capacity. Additionally, the amendments increased the permanent borrowing capacityrate to $480.0 million. During30-day LIBOR plus 130 basis points from 30-day LIBOR plus 115 basis points and decreased the third quarter of 2017, we executed the eighth amendment30-day LIBOR floor to the warehouse agreement that provided for a temporary increase to the borrowing capacity of $400.0 million that expires January 30, 2018.zero basis points from 50 basis points. No other material modifications have been made to the agreement during 2017.2021.
Agency Warehouse Facility #4#4:
We have a warehousing$350.0 million committed warehouse credit and security agreement with a national bank that is scheduled to mature on June 22, 2022. The warehouse facility provides us with the ability to fund Fannie Mae, Freddie Mac, HUD, FHA, and defaulted 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 the borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 130 basis points. During the second quarter of 2021, we executed an amendment that extended the maturity date thereunder until June 22, 2022, decreased the borrowing rate to 30-day LIBOR plus 130 basis points from 30-day LIBOR plus 140 basis points, and decreased the 30-day LIBOR floor to five basis points from 25 basis points. No other material modifications have been made to the agreement during 2021.
Agency Warehouse Facility #5:
We have a master repurchase agreement with a national bank for a $350.0 million committed warehouse line.$1.0 billion uncommitted advance credit facility that is scheduled to mature on August 23, 2021. The committed warehouse facility provides us 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 this line bear interest at 30-day LIBOR plus 130 basis points. During the fourth quarter of 2017, we executed the third amendment to the warehouse agreement that extended the maturity date to October 5, 2018 and reduced the interest rate to 30-day LIBOR plus 130 basis points. No other material modifications have been made to the agreement during 2017.
Agency Warehouse Facility #5
We have a $30.0 million committed warehouse credit and security agreement with a national bank that is scheduled to mature in January 2018. The committed warehouse facility provides us with the ability to fund defaulted HUD and FHA loans. The borrowings under
the warehouserepurchase agreement bear interest at a rate of 30-day LIBOR plus 180145 basis points. No material modifications have been made to the agreement during 2017.2021.
Agency Warehouse Facility #6#6:
During the thirdfirst quarter of 2017,2021, we executedentered into an agreement with a warehousing and security agreement that establishednational bank to establish Agency Warehouse Facility #6. The warehouse facility has a $250.0$150.0 million maximum committed borrowing capacity and provides us with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans under the facility. Advances are made at 100% of the loan balance, and matures September 18, 2018. Thethe borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 135140 basis points. In addition to the committed borrowing capacity, theThe agreement also provides $250.0$100.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility. No material modifications were made to the agreement during 2021.
The negative and financial covenants of the warehouse agreement substantially conform to those of the warehouse agreement for Agency Warehouse Facility #1, as described in our 2020 Form 10-K.
Uncommitted Agency Warehouse FacilityFacility:
We have a $1.5 billion uncommitted facility with Fannie Mae under its As Soon As PooledASAP 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 30-day LIBOR plus 115 basis points, with a minimum 30-day LIBOR rate of 35 basis points.balance. There is no expiration date for this facility. No changes have been made to the uncommitted facility during 2017. The uncommitted facility has no specific negative or financial covenants.
Interim Warehouse Facilities
To assist in funding loans held for investment under the Interim Loan Program, we have threefour warehouse facilities with certain national banks in the aggregate amount of $0.4 billion$404.8 million as of SeptemberJune 30, 20172021 (“Interim Warehouse Facilities”). Consistent with industry practice, twothree of these facilities are revolving commitments we expect to renew annually or bi-annually, and one is a revolving commitment we expectthat matures according to renew every two years.the maturity date of the underlying loan it finances. Our ability to originate loans held for investment depends upon our ability to secure and maintain these types of short-term financings on acceptable terms.
Interim Warehouse Facility #1#1:
We have an $85.0a $135.0 million committed warehouse line agreement that is scheduled to mature on May 14, 2022. The facility provides us 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. During the second quarter of 2017,2021, we executed the seventh amendment to the credit and security agreementamendments that extended the maturity date to April 30, 2018. May 14, 2022 and decreased the 30-day LIBOR floor to zero basis points from 50 basis points. No other material modifications have been made to the agreement during 2017.2021.
Interim Warehouse Facility #2
#2:
We have a $200.0$100.0 million committed warehouse line agreement that is scheduled to mature on December 13, 2017.2021. The agreement provides us 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 165 to 200 basis points.points (“the spread”). The spread varies according to the type of asset the borrowing finances. 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. No material modifications have been made to the agreement during 2017.2021.
Interim Warehouse Facility #3#3:
We have a $75.0 million repurchase agreement with a national bank that is scheduled to mature on December 20, 2021. The agreement provides us 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. The borrowings under the agreement bear interest at a rate of 30-day LIBOR plus 200175 to 325 basis points to 250 basis points (“the spread”).points. The spread varies according to the type of asset the borrowing finances. 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. Duringagreement. In addition to the second quartercommitted borrowing capacity, the agreement provides $75.0 million of 2017, we exercised our option to extenduncommitted borrowing capacity that bears interest at the maturity date to May 19, 2018.same rate as the committed facility. No other material modifications have been made to the agreement during 2017.2021.
Interim Warehouse Facility #4:
As a result450 basis points. Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the aforementioned amendmentsrefinancing of an underlying mortgage or the maturity of an advance under the credit agreement. The committed warehouse loan and new agreements, we have increased our aggregate borrowing capacity, including temporary increases, from $4.0 billion at December 31, 2016security agreement has only two financial covenants, both of which are similar to $6.6 billion at September 30, 2017.
The Agency andthe other Interim Warehouse FacilityFacilities. We may request additional capacity under the agreement to fund specific loans. No material modifications have been made to the agreement during 2021.
The warehouse agreements above contain cross-default provisions, such that if a default occurs under any of those debtour warehouse agreements, generally the lenders under our other Agency and Interim debtwarehouse agreements could also declare a default. WeAs of June 30, 2021, we were in compliance with all covenants as of September 30, 2017.our warehouse line covenants.
We believe that the combination of our capital and warehouse facilities is adequate to meet our loan origination needs.
Debt ObligationsNote Payable
We haveOn November 7, 2018, we entered into a senior secured term loan credit agreement (the “Credit Agreement”) that amended and restated our prior credit agreement and provided for a $300.0 million term loan (the “Term Loan Agreement”Loan”). The Term Loan Agreement provides for a $175.0 million term loan that was issued at a 0.5% discount, has a stated maturity date of 1.0% (the “Term Loan”).November 7, 2025, and bears interest at 30-day LIBOR plus 200 basis points. At any time, we may also elect to request the establishment of one or more incremental term loan commitments to make up to three additional term loans (any such additional term loan, an “Incremental Term Loan”) in an aggregate principal amount for all such Incremental Term Loans 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.
We are obligated to repay the aggregate outstanding principal amount of the Term Loan in consecutive quarterly installments equal to $0.3$0.7 million on the last business day of each quarter.of March, June, September, and December. The Term Loan also requires certain other prepayments in certain circumstances pursuant to the terms of the Term LoanCredit Agreement. The final principal installment of the Term Loan is required to be paid in full on December 20, 2020November 7, 2025 (or, if earlier, the date of acceleration of the Term Loan pursuant to the terms of the Term LoanCredit 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 our election, the Term Loan will bear interest at either (i) the “Base Rate” plus an applicable margin or (ii) the 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 administrative agent’s “prime rate,” (b) the federal funds rate plus 0.50% and (c) LIBOR for an interest period of one month plus 1%. In each case, the applicable margin is determined by our Consolidated Corporate Leverage Ratio (as defined in the Term Loan Agreement). If such Consolidated Corporate Leverage Ratio is greater than 2.50 to 1.00, the applicable margin will be 4.50% for LIBOR Rate loans and 3.50% for Base Rate loans, and if such Consolidated Corporate Leverage Ratio is less than or equal to 2.50 to 1.00, the applicable margin will be 4.25% for LIBOR Rate loans and 3.25% for Base Rate loans. The applicable margin is 4.25% for LIBOR Rate loans and 3.25% for Base Rate loans as of September 30, 2017.
Our obligations 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 Wells Fargo Bank, National Association, as administrative agent (the “Guarantee and Collateral Agreement”). Subject to certain exceptions and qualifications contained in the Agent.Credit 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 Credit Agreement) by the Company in accordance with the terms of the Credit Agreement, to guarantee the obligations of the Company under the Credit Agreement and become a party to the 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 Credit Agreement are met. As of SeptemberJune 30, 2017,2021, the outstanding unpaid principal balance of the Term Loan was $166.5$293.3 million.
The Term Loannote payable and the warehouse facilities are senior obligations of the Company. The Term Loan Agreement contains affirmative and negative covenants, including financial covenants. As of SeptemberJune 30, 2017,2021, we were in compliance with all such covenants.
covenants related to the Credit Agreement.
Credit Quality and Allowance for Risk-Sharing Obligations
The following table sets forth certain information useful in evaluating our credit performance.
| | | | | | | |
| | June 30, | |
(dollars in thousands) | | 2021 | | 2020 | |
Key Credit Metrics | | | | | | | |
Risk-sharing servicing portfolio: | | | | | | | |
Fannie Mae Full Risk | | $ | 42,444,569 | | $ | 35,707,326 | |
Fannie Mae Modified Risk | | | 8,617,020 | | | 9,411,097 | |
Freddie Mac Modified Risk | | | 36,894 | | | 52,696 | |
Total risk-sharing servicing portfolio | | $ | 51,098,483 | | $ | 45,171,119 | |
| | | | | | | |
Non-risk-sharing servicing portfolio: | | | | | | | |
Fannie Mae No Risk | | $ | 16,071 | | $ | 41,581 | |
Freddie Mac No Risk | | | 37,851,075 | | | 33,169,394 | |
GNMA - HUD No Risk | | | 9,904,246 | | | 9,749,888 | |
Brokered | | | 13,129,969 | | | 11,519,629 | |
Total non-risk-sharing servicing portfolio | | $ | 60,901,361 | | $ | 54,480,492 | |
Total loans serviced for others | | $ | 111,999,844 | | $ | 99,651,611 | |
Interim loans (full risk) servicing portfolio | | | 276,738 | | | 336,473 | |
Total servicing portfolio unpaid principal balance | | $ | 112,276,582 | | $ | 99,988,084 | |
| | | | | | | |
Interim Program JV Managed Loans (1) | | | 629,532 | | | 695,267 | |
| | | | | | | |
At risk servicing portfolio (2) | | $ | 46,866,767 | | $ | 40,640,024 | |
Maximum exposure to at risk portfolio (3) | | | 9,517,609 | | | 8,266,261 | |
Defaulted loans | | | 48,481 | | | 48,481 | |
| | | | | | | |
Defaulted loans as a percentage of the at-risk portfolio | | | 0.10 | % | | 0.12 | % |
Allowance for risk-sharing as a percentage of the at-risk portfolio | | | 0.13 | | | 0.17 | |
Allowance for risk-sharing as a percentage of maximum exposure | | | 0.63 | | | 0.84 | |
| | | | | | | |
| | September 30, | |
(dollars in thousands) | | 2017 | | 2016 | |
Key Credit Metrics | | | | | | | |
Risk-sharing servicing portfolio: | | | | | | | |
Fannie Mae Full Risk | | $ | 22,966,583 | | $ | 19,411,757 | |
Fannie Mae Modified Risk | | | 6,858,310 | | | 5,784,275 | |
Freddie Mac Modified Risk | | | 53,217 | | | 53,377 | |
Interim Program JV Modified Risk (1) | | | 146,125 | | | — | |
Total risk-sharing servicing portfolio | | $ | 30,024,235 | | $ | 25,249,409 | |
| | | | | | | |
Non-risk-sharing servicing portfolio: | | | | | | | |
Fannie Mae No Risk | | $ | 180,703 | | $ | 679,652 | |
Freddie Mac No Risk | | | 25,877,602 | | | 19,649,100 | |
GNMA - HUD No Risk | | | 8,878,899 | | | 9,254,830 | |
Brokered | | | 5,170,479 | | | 4,024,490 | |
Total non-risk-sharing servicing portfolio | | $ | 40,107,683 | | $ | 33,608,072 | |
Total loans serviced for others | | $ | 70,131,918 | | $ | 58,857,481 | |
Interim loans (full risk) servicing portfolio | | | 152,764 | | | 264,508 | |
Total servicing portfolio unpaid principal balance | | $ | 70,284,682 | | $ | 59,121,989 | |
| | | | | | | |
At risk servicing portfolio (2) | | $ | 26,556,339 | | $ | 22,384,966 | |
Maximum exposure to at risk portfolio (3) | | | 5,420,386 | | | 4,602,118 | |
60+ day delinquencies, within at risk portfolio (4) | | | 5,962 | | | — | |
Specifically identified at risk loan balances associated with allowance for risk-sharing obligations | | | 5,962 | | | — | |
| | | | | | | |
60+ day delinquencies as a percentage of the at risk portfolio | | | 0.02 | % | | 0.00 | % |
Allowance for risk-sharing as a percentage of the at risk portfolio | | | 0.01 | | | 0.02 | |
Allowance for risk-sharing as a percentage of the specifically identified at risk loan balances | | | 63.22 | | | N/A | |
Allowance for risk-sharing as a percentage of maximum exposure | | | 0.07 | | | 0.07 | |
Allowance for risk-sharing and guaranty obligation as a percentage of maximum exposure | | | 0.78 | | | 0.75 | |
| (1) | (1)
| | As of June 30, 2021, this balance consists entirely of Interim Program JV managed loans. As of June 30, 2020, this balance consists of $71.1 million of loans serviced directly for the Interim Program JV partner and $624.1 million of Interim Program JV managed loans. We indirectly share in a portion of the risk of loss associated with theseInterim Program JV managed loans through our 15% equity ownership in the Interim Program JV. We have no exposure to risk of loss for the loans serviced directly for the Interim Program JV partner. The balance of this line is included as a component of assets under management in the Supplemental Operating Data table above. |
| (2) | (2)
| | At riskAt-risk servicing portfolio is defined as the balance of Fannie Mae DUS loans subject to the risk-sharing formula described below, as well as a small number of Freddie Mac loans on which we share in the risk of loss. Use of the at riskat-risk portfolio provides for comparability of the full risk-sharing and modified risk-sharing loans because the provision and allowance for risk-sharing obligations are based on the at riskat-risk balances of the associated loans. Accordingly, we have presented the key statistics as a percentage of the at riskat-risk portfolio.
|
For example, a $15 million loan with 50% risk-sharing has the same potential risk exposure as a $7.5 million loan with full DUS risk sharing. Accordingly, if the $15 million loan with 50% risk-sharing were to default, we would view the overall loss as a percentage of the at riskat-risk balance, or $7.5 million, to ensure comparability between all risk-sharing obligations. To date, substantially all of the risk-sharing obligations that we have settled have been from full risk-sharing loans.
| (3) | (3)
| | Represents the maximum loss we would incur under our risk-sharing obligations if all of the loans we service, for which we retain some risk of loss, were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement. The maximum exposure is not representative of the actual loss we would incur. |
| (4)
| | Includes loans that are not 60+ days delinquent but have defaulted.
|
Fannie Mae DUS risk-sharing obligations are based on a tiered formula and represent substantially all of our risk-sharing activities. The risk-sharing tiers and the amount of the risk-sharing obligations we absorb under full risk-sharing are provided below. Except as described
in the following paragraph, the maximum amount of risk-sharing obligations we absorb at the time of default is generally 20% of the origination unpaid principal balance (“UPB”) of the loan.
| | | |
Risk-Sharing Losses | | | |
Risk-Sharing Losses
| | Percentage Absorbed by Us | |
First 5% of UPB at the time of loss settlement | | 100% | |
Next 20% of UPB at the time of loss settlement | | 25% | |
Losses above 25% of UPB at the time of loss settlement | | 10% | |
Maximum loss | | 20% of origination UPB | |
Fannie Mae can double or triple our risk-sharing obligation if the loan does not meet specific underwriting criteria or if a loan defaults within 12 months of its sale to Fannie Mae. We may request modified risk-sharing at the time of origination, which reduces our potential risk-sharing obligation from the levels described above.
We use several techniques to manage our risk exposure under the Fannie Mae DUS risk-sharing program. These techniques include maintaining a strong underwriting and approval process, evaluating and modifying our underwriting criteria given the underlying multifamily housing market fundamentals, limiting our geographic market and borrower exposures, and electing the modified risk-sharing option under the Fannie Mae DUS program.
We may request modified risk-sharing based on such factors as the sizeThe “Business” section of “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains a discussion of the loan, market conditions and loan pricing. Our current credit management policy is to cap the loan balance subject to full risk-sharing at $60.0 million. Accordingly,caps we currently elect to use modified risk-sharing for loans of more than $60.0 million in order to limit our maximum loss on any loan to $12.0 million (such exposure would occur in the event that the underlying collateral is determined to be completely without value at the time of loss). However, we occasionally elect to originate a loanhave with full risk sharing even when the loan balance is greater than $60.0 million if we believe the loan characteristics support such an approach.Fannie Mae.
We regularly monitor the credit quality of all loans for which we have a risk-sharing obligation. Loans with indicators of underperforming credit are placed on a watch lists,list, assigned a numerical risk rating based on our assessment of the relative credit weakness, and subjected to additional evaluation or loss mitigation. Indicators of underperforming credit include poor financial performance, poor physical condition, poor management, and delinquency. A specificcollateral-based reserve is recorded when it is probable that a risk-sharing loan will foreclose or has foreclosed, and a general reserve is recorded for other risk-sharing loans on the watch list,estimated credit losses and a guaranty obligation isare recorded for all other risk-sharing loans that are not onloans.
As a result of the watch list.
Theonset of the pandemic and the resulting forecasts for significant unemployment rates for the remainder of 2020, we adjusted the loss rate for the forecast period CECL reserve, resulting in a total allowance for risk-sharing obligation of $69.2 million as of June 30, 2020, or 17 basis points of the at-risk balance. During the second quarter of 2021, economic conditions began to improve significantly, with reported unemployment rates and forecasts for future unemployment rates at improved rates compared to both December 31, 2020 and June 30, 2020. In response to the improving unemployment statistics, we adjusted the loss rate for the forecast period downwards as of June 30, 2021, resulting in a $15.0 million benefit for risk-sharing obligations and a decrease in the allowance for risk-sharing obligations has been primarily for Fannie Maeto $60.3 million as of June 30, 2021 from $75.3 million as of December 31, 2020, or 13 basis points and 17 basis points of the at-risk balance as of June 30, 2021 and December 31, 2020, respectively.
As of June 30, 2021, and 2020, two loans with full risk-sharing. The amountan aggregate UPB of $48.5 million in our at-risk portfolio were in default. We had a benefit for risk-sharing obligations of $4.3 million for the provision considers our assessment of the likelihood of payment by the borrower, the value of the underlying collateral and the level of risk-sharing. Historically, the loss recognition occurs at or before the loan becoming 60 days delinquent. Our estimates of value are determined considering broker opinions, appraisals, and other sources of market value information relevant to the underlying property and collateral. Risk-sharing obligations are written off against the allowance at final settlement with Fannie Mae.
For the ninethree months ended SeptemberJune 30, 2017 and 2016 the2021 compared to a provision for risk-sharing obligations of $5.1 million for the three months ended June 30, 2020. For the three months ended June 30, 2021, the benefit for risk-sharing obligations was $74 thousand and $453 thousand, respectively. As there is currently only one defaulted loanthe result of a decrease in the at riskCECL reserve due to improved unemployment forecasts. For the three months ended June 30, 2020, the provision was entirely the result of an increase in the balance of the at-risk servicing portfolio, the Allowanceportfolio. We had a benefit for risk-sharing obligations as of September$15.0 million for the six months ended June 30, 2017 is based primarily on our collective assessment2021 compared to a provision for risk-sharing obligations of $27.6 million for the six months ended June 30, 2020. For the six months ended June 30, 2021, the majority of the probability of loss related to the loans on the watch list as of September 30, 2017. The Allowancebenefit for risk-sharing obligations as was the result of Septembera decrease in the CECL reserve due to improved unemployment forecasts. For the six months ended June 30, 2016 was based entirely on our collective assessment2020, the majority of the probabilityprovision was the result of loss related toan increase in the loans onforecasted losses resulting from the watch list as of September 30, 2016.pandemic.
We have never been required to repurchase a loan.
Off-Balance Sheet Arrangements
Other than the risk-sharing obligations under the Fannie Mae DUS Program disclosed previously in this Quarterly Report on Form 10-Q, we do not have any off-balance-sheet arrangements.
New/Recent Accounting Pronouncements
SeeAs seen in NOTE 2 toin the financial statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, for a table that presents thethere are no accounting pronouncements that the Financial Accounting Standards Board has issued and that have the potential to impact us but have not yet been adopted by us. Although we do not believe anyus as of the accounting pronouncements listed in that table will have a significant impact on our business activities or compliance with our debt covenants, we are still in the processJune 30, 2021.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk
For loans held for sale to the Agencies,Fannie Mae, Freddie Mac, and HUD, we are not currently exposed to unhedged interest rate risk during the loan commitment, closing, and delivery processes. The sale or placement of each loan to an investor is negotiated prior to closing on the loan with the borrower, and the sale or placement is typically effectuated within 60 days of closing. The coupon rate for the loan is set at the same time we establish the interest rate with the investor.
Some of our assets and liabilities are subject to changes in interest rates. Earnings from escrows are generally based ontrack LIBOR. 30-day LIBOR as of SeptemberJune 30, 20172021 and 20162020 was 12310 basis points and 5316 basis points, respectively. The following table shows the impact on our annual escrow earnings due to a 100-basis point increase and decrease in 30-day LIBOR based on our escrow balances outstanding at each period end. A portion of these changes in earnings as a result of a 100-basis point increase in the 30-day LIBOR would be delayed several months due to the negotiated nature of some of our escrow arrangements.
| | | | | | | |
| | As of September 30, | |
Change in annual escrow earnings due to (in thousands): | | 2017 | | 2016 | |
100 basis point increase in 30-day LIBOR | | $ | 17,856 | | $ | 16,734 | |
100 basis point decrease in 30-day LIBOR (1) | | | (17,856) | | | (8,413) | |
| | | | | | | |
(in thousands) | | As of June 30, | |
Change in annual escrow earnings due to: | | 2021 | | 2020 | |
100 basis point increase in 30-day LIBOR | | $ | 30,204 | | $ | 22,939 | |
100 basis point decrease in 30-day LIBOR(1) | | | (2,996) | | | (3,269) | |
The borrowing cost of our warehouse facilities used to fund loans held for sale and loans held for investment is based on LIBOR. The interest income on our loans held for investment is based on LIBOR. The LIBOR reset date for loans held for investment is the same date as the LIBOR reset date for the corresponding warehouse facility. The following table shows the impact on our annual net warehouse interest income due to a 100-basis point increase and decrease in 30-day LIBOR, based on our warehouse borrowings outstanding at each period end. The changes shown below do not reflect the assumption that there is a corresponding 100-basis pointan increase or decrease in the interest rate earned on our loans held for sale.
| | | | | | | | |
| | As of September 30, | | |
Change in annual net warehouse interest income due to (in thousands): | | 2017 | | 2016 | | |
| | | | | | | | |
(in thousands) | | | As of June 30, | |
Change in annual net warehouse interest income due to: | | | 2021 | | 2020 | |
100 basis point increase in 30-day LIBOR | | $ | (9,765) | | $ | (6,702) | | | $ | (15,928) | | $ | (15,377) | |
100 basis point decrease in 30-day LIBOR (1) | | | 9,765 | | | 3,534 | | | | 1,147 | | | 1,864 | |
All of our corporate debt is based on 30-day LIBOR, with a 30-day LIBOR floor of 100 basis points.LIBOR. The following table shows the impact on our annual net warehouse interest incomeearnings due to a 100-basis point increase and decrease in 30-day LIBOR based on our note payable balance outstanding at each period end.
| | | | | | | |
(in thousands) | | As of June 30, | |
Change in annual income from operations due to: | | 2021 | | 2020 | |
100 basis point increase in 30-day LIBOR | | $ | (2,933) | | $ | (2,963) | |
100 basis point decrease in 30-day LIBOR (1) | | | 295 | | | 474 | |
| | | | | | | |
| | As of September 30, | |
Change in annual corporate debt interest expense due to (in thousands): | | 2017 | | 2016 | |
100 basis point increase in 30-day LIBOR (2) | | $ | (1,665) | | $ | (884) | |
100 basis point decrease in 30-day LIBOR (3) | | | 383 | | | — | |
| (1) | | The decrease in 2016 wasis limited to zerothe 30-day LIBOR rate as of period end as 30-day LIBOR was less than 100 basis points. points. |
| (2)
| | The increase in 2016 was 53 basis points due to the 30-day LIBOR floor.
|
| (3)
| | There was no impact in 2016 as 30-day LIBOR at the time was less than the 30-day LIBOR floor. The decrease in 2017 was 23 basis points due to the 30-day LIBOR floor.
|
2021, the United Kingdom’s Financial Conduct Authority, the regulator for the administration of LIBOR, announced specific dates for its intention to stop publishing LIBOR rates, including the 30-day LIBOR (our primary reference rate) which is scheduled for June 30, 2023. It is expected that legacy LIBOR-based loans will transition to Secured Overnight Financing Rate (“SOFR”) before June 30, 2023. We continue to monitor our LIBOR exposure, review legal contracts and assess fallback language impacts, engage with our clients and other stakeholders, and monitor developments associated with LIBOR alternatives.
Market Value Risk
The fair value of our MSRs is subject to market risk. A 100-basis point increase or decrease in the weighted averageweighted-average discount rate would decrease or increase, respectively, the fair value of our MSRs by approximately $24.6 $36.9 million as of SeptemberJune 30, 2017,2021, compared to $19.4$28.6 million as of SeptemberJune 30, 2016.2020. Our Fannie Mae and Freddie Mac servicing arrangementsengagements provide for make-whole paymentsprepayment fees in the event of a voluntary
prepayment prior to the expiration of the prepayment protection period. Our servicing contracts with institutional investors and HUD do not require payment of a make-whole amount.them to provide us with prepayment fees. As of SeptemberJune 30, 2017 and 2016, 87%2021, 89% of the servicing fees are protected from the risk of prepayment through make-whole requirements; givenprepayment provisions compared to 87% as of June 30, 2020. Given this significant level of prepayment protection, we do not hedge our servicing portfolio for prepayment risk.
Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.
Based on that evaluation, the principal executive officer and principal financial officer concluded that the design and operation of these disclosure controls and procedures as of the end of the period covered by this report were effective to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, we may be party to various claims and litigation, none of which we believe is material. We cannot predict the outcome of any pending litigation and may be subject to consequences that could include fines, penalties and other costs, and our reputation and business may be impacted. Our management believes that any liability that could be imposed on us in connection with the disposition of any pending lawsuits would not have a material adverse effect on our business, results of operations, liquidity, or financial condition.
Item 1A. Risk Factors
We have included in Part I, Item 1A of our 20162020 Form 10-K descriptions of certain risks and uncertainties that could affect our business, future performance, or financial condition (the “Risk Factors”). ThereExcept as described below, there have been no material changes from the disclosures provided in the 20162020 Form 10-K with respect to the Risk Factors. Investors should consider the Risk Factors prior to making an investment decision with respect to the Company’s stock.
If we fail to comply with laws, regulations and market standards regarding the privacy, use, and security of customer information, or if we are the target of a successful cyber-attack, we may be subject to legal and regulatory actions and our reputation would be harmed.
We receive, maintain, and store non-public personal information of some of our customers. The technology and other controls and processes designed to secure our customer information and to prevent, detect, and remedy any unauthorized access to that information were designed to obtain reasonable, not absolute, assurance that such information is secure and that any unauthorized access is identified and addressed appropriately. We, and our service providers, are regularly subject to cyberattacks that are increasingly sophisticated, that are often designed to evade detection, and/or that seek to damage or disrupt our network and other information systems. Certain of these cyberattacks have resulted in unauthorized access by third parties to information that we receive, maintain and store in the course of our business. Although these cyberattacks have not resulted in material financial impacts or disruptions or our business, given the accelerating scope and frequency of cyberattacks, there can be no assurance that the incidents we have experienced or any future incident will not materially impact our security, operations and financial results. Future cyberattacks could result in a loss of data, operational disruptions, and even lost business and goodwill.
Additionally, we could incur significant costs associated with the recovery from a cyberattack, and these costs may exceed, or the events to which they relate, may be excluded from, coverage under, our cyber insurance.
If customer information is inappropriately accessed and used by a third party or an employee for illegal purposes, such as identity theft, we may be responsible to the affected applicant or borrower for any losses he or she may have incurred as a result of misappropriation. In such an instance, we may be liable to a governmental authority for fines or penalties, or subject to litigation, associated with a lapse in the integrity and security of our customers' information. Additionally, if we are the target of a successful cyber-attack, we may experience reputational harm that could impact our standing with our customers and adversely impact our financial results.
We regularly update our existing information technology systems and install new technologies when deemed necessary and regularly provide employee awareness training around phishing, malware, and other cyber risks and physical security to address the risk of cyber-attacks and other security breaches. However, such preventative measures may not be sufficient to prevent, detect or deflect future cyber-attacks or a breach of information, including customer information. Additionally, most of our employees have worked remotely since March of 2020 and some portion of our work force will continue to do so for the foreseeable future. While we have designed our controls and processes to operate in a remote working environment, there is a heightened risk such controls and processes may not detect or prevent unauthorized access to our information systems.
Risks Related to Our Acquisition of Zelman
As a registered broker-dealer, Zelman is subject to extensive regulation that exposes us to a variety of risks associated with the securities industry, for which we have not been previously exposed.
Broker-dealer and other financial services firms are subject to extensive regulatory requirements under federal and state laws and regulations and self-regulatory organization (“SRO”) rules. Zelman is registered with the SEC as a broker-dealer under the Exchange Act and in the states in which Zelman conducts securities business and is a member of the Financial Industry Regulatory Authority (“FINRA”) and other SROs. Zelman is subject to regulation, examination and disciplinary action by the SEC, FINRA and state securities regulators, as well as other governmental authorities and SROs with which Zelman is registered or licensed or of which Zelman is a member.
The regulations applicable to broker-dealers depend in part on the nature of the business conducted by the broker-dealer, and generally cover all aspects of the securities business, including, among other things, sales practices, fee arrangements, disclosures to clients, capital adequacy, use and safekeeping of clients’ funds and securities, recordkeeping and reporting and the qualification and conduct of officers, employees and independent contractors. As part of this regulatory scheme, broker-dealers are subject to regular and special examinations by the SEC and FINRA intended to determine their compliance with securities laws, regulations and rules. Following an examination’s conclusion, a broker-dealer may receive a deficiency letter identifying potential compliance or supervisory weaknesses or rule violations which the firm must address.
The SEC, FINRA and other governmental authorities and SROs may bring enforcement proceedings against firms and place other limitations on firms subject to their jurisdiction, as well as their officers, directors, employees and independent contractors, whether arising out of an examination or otherwise, for violations of the securities laws, regulations and rules. Sanctions can include cease-and-desist orders, censures, fines, civil monetary penalties and disgorgement, limitations on a firm’s business activities, suspension, revocation of FINRA membership or expulsion of the firm from the securities industry. Criminal actions are referred to the appropriate criminal law enforcement agency. Similarly, the attorneys general of each state could bring legal action to ensure compliance with state securities laws, and regulatory agencies in foreign countries have similar authority. Any such proceeding against Zelman, or any of its associated persons, could harm our reputation, cause us to lose clients or fail to gain new clients and have a material adverse effect on our business.
Additionally, our acquisition of Zelman may invite increased scrutiny from the SEC, FINRA and other governmental authorities into the other financial services which we provide, particularly our debt brokerage and property sales services. While we believe that we are in compliance with all relevant securities laws, regulations and rules, these regulatory organizations may choose to investigate our business practices outside of those of our broker-dealer subsidiary. Such investigations, whether or not they result in enforcement proceedings or criminal actions, could harm our reputation, cause us to lose clients or fail to gain new clients and materially and adversely affect us.
Financial services firms are also subject to rules and regulations relating to the prevention and detection of money laundering. The USA PATRIOT Act of 2001 (the “PATRIOT Act”) mandates that financial institutions, including broker-dealers and investment advisers, establish
and implement anti-money laundering (“AML”) programs reasonably designed to achieve compliance with the Bank Secrecy Act of 1970 and the rules thereunder. Financial services firms must maintain AML policies, procedures and controls, designate an AML compliance officer to oversee the firm’s AML program, implement appropriate employee training and provide for annual independent testing of the program. Any failure to comply with AML requirements could subject us to disciplinary sanctions and other penalties.
Our ability to comply with applicable laws, rules and regulations will be largely dependent on our establishment and maintenance of compliance, supervision, recordkeeping and reporting and audit systems and procedures, as well as our ability to attract and retain qualified compliance, audit and risk management personnel. While we will adopt policies and procedures we believe are reasonably designed to comply with applicable laws, rules and regulations, these systems and procedures may not be fully effective, and there can be no assurance that regulators or third parties will not raise material issues with respect to our past or future compliance with applicable regulations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Under the 20152020 Equity Incentive Plan, subject to the Company’s approval, grantees have the option of electing to satisfy minimum tax withholding obligations at the time of vesting or exercise by allowing usthe Company to withhold and purchase at the prevailing market price the shares of stock otherwise issuable to the grantee. During the quarter ended SeptemberJune 30, 2017,2021, we purchased 10eight thousand shares to satisfy grantee tax withholding obligations on share-vesting events. Additionally, we announced a share repurchase program inDuring the first quarter of 2017. The repurchase program authorized by our2021, the Company’s Board of Directors approved a stock repurchase program that permits us tothe repurchase of up to $75.0 million of shares of ourthe Company’s common stock
over a 12-month period endingbeginning on February 10, 2018.12, 2021. During the quarter ended June 30, 2021 we did not repurchase any shares under this share repurchase program. The Company had $64.2$75.0 million of authorized share repurchase capacity remaining as of SeptemberJune 30, 2017.2021. The following table provides information regarding common stock repurchases for the quarter ended SeptemberJune 30, 2017:2021:
| | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | Total Number of | | Approximate | |
| | | | | | | Shares Purchased as | | Dollar Value | |
| | Total Number | | Average | | Part of Publicly | | of Shares that May | |
| | of Shares | | Price Paid | | Announced Plans | | Yet Be Purchased Under | |
Period | | Purchased | | per Share | | or Programs | | the Plans or Programs | |
July 1-31, 2017 | | 10,487 | | | 48.83 | | — | | | 75,000,000 | |
August 1-31, 2017 | | 188,419 | | | 47.18 | | 188,419 | | | 66,105,030 | |
September 1-30, 2017 | | 40,000 | | | 46.59 | | 40,000 | | | 64,240,362 | |
Total | | 238,906 | | $ | 47.15 | | 228,419 | | $ | 64,240,362 | |
| | | | | | | | | | | |
| | | | | | Total Number of | | Approximate | |
| | | | | | | Shares Purchased as | | Dollar Value | |
| | Total Number | | Average | | Part of Publicly | | of Shares that May | |
| | of Shares | | Price Paid | | Announced Plans | | Yet Be Purchased Under | |
Period | | Purchased | | per Share | | or Programs | | the Plans or Programs | |
April 1-30, 2021 | | 2,872 | | $ | 105.28 | | — | | $ | 75,000 | |
May 1-31, 2021 | | 2,675 | | | 110.98 | | — | | | 75,000 | |
June 1-30, 2021 | | 1,988 | | | 101.83 | | — | | | 75,000 | |
2nd Quarter | | 7,535 | | $ | 106.39 | | — | | $ | 75,000 | |
| | | | | | | | | | | |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits:
2.1 | | Contribution Agreement, dated as of October 29, 2010, by and among Mallory Walker, Howard W. Smith, William M. Walker, Taylor Walker, Richard C. Warner, Donna Mighty, Michael Yavinsky, Edward B. Hermes, Deborah A. Wilson and Walker & Dunlop, Inc. (incorporated by reference to Exhibit 2.1 to Amendment No. 4 to the Company’s Registration Statement on Form S-1 (File No. 333-168535) filed on December 1, 2010) |
2.2 | | Contribution Agreement, dated as of October 29, 2010, between Column Guaranteed LLC and Walker & Dunlop, Inc. (incorporated by reference to Exhibit 2.2 to Amendment No. 4 to the Company’s Registration Statement on Form S-1 (File No. 333-168535) filed on December 1, 2010) |
2.3 | | Amendment No. 1 to Contribution Agreement, dated as of December 13, 2010, by and between Walker & Dunlop, Inc. and Column Guaranteed LLC (incorporated by reference to Exhibit 2.3 to Amendment No. 6 to the Company’s Registration Statement on Form S-1 (File No. 333-168535) filed on December 13, 2010) |
2.4 | | Purchase Agreement, dated June 7, 2012, by and among Walker & Dunlop, Inc., Walker & Dunlop, LLC, CW Financial Services LLC and CWCapital LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K/A filed on June 15, 2012) |
3.1 | | Articles of Amendment and Restatement of Walker & Dunlop, Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 4 to the Company’s Registration Statement on Form S-1 (File No. 333-168535) filed on December 1, 2010) |
3.2 | | Amended and Restated Bylaws of Walker & Dunlop, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on February 21, 2017)November 8, 2018) |
4.1 | | Specimen Common Stock Certificate of Walker & Dunlop, Inc. (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-168535) filed on September 30, 2010) |
4.2 | | Registration Rights Agreement, dated December 20, 2010, by and among Walker & Dunlop, Inc. and Mallory Walker, Taylor Walker, William M. Walker, Howard W. Smith, III, Richard C. Warner, Donna Mighty, Michael Yavinsky, Ted Hermes, Deborah A. Wilson and Column Guaranteed LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 27, 2010) |
4.3 | | Stockholders Agreement, dated December 20, 2010, by and among William M. Walker, Mallory Walker, Column Guaranteed LLC and Walker & Dunlop, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 27, 2010) |
4.4 | | Piggy-Back Registration Rights Agreement, dated June 7, 2012, by and among Column Guaranteed, LLC, William M. Walker, Mallory Walker, Howard W. Smith, III, Deborah A. Wilson, Richard C. Warner, CW Financial Services LLC and Walker & Dunlop, Inc. (incorporated by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012 filed on August 9, 2012) |
4.5 | | Voting Agreement, dated as of June 7, 2012, by and among Walker & Dunlop, Inc., Walker & Dunlop, LLC, Mallory Walker, William M. Walker, Richard Warner, Deborah Wilson, Richard M. Lucas, and Howard W. Smith, III, and CW Financial Services LLC (incorporated by reference to Annex C of the Company’s proxy statement filed on July 26, 2012) |
4.6 | | Voting Agreement, dated as of June 7, 2012, by and among Walker & Dunlop, Inc., Walker & Dunlop, LLC, Column Guaranteed, LLC and CW Financial Services LLC (incorporated by reference to Annex D of the Company’s proxy statement filed on July 26, 2012) |
10.1 | | EighthNinth Amendment to Warehousing Credit and Security Agreement, dated as of August 9, 2017, by and between Walker & Dunlop, LLC, as Borrower, the various financial institutions and other Persons parties thereto, as Lenders, and TD Bank, N.A., as Credit Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 9, 2017).
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10.2
| | Second Amended and Restated Warehousing Credit and Security Agreement, dated as of September 11, 2017,April 15, 2021, by and among Walker & Dunlop, LLC, Walker & Dunlop, Inc. and PNC Bank, National Association, as Lender (incorporated(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 13, 2017)April 20, 2021). |
10.310.2
| | Second Amended and Restated Guaranty and Suretyship Agreement, dated as of September 11, 2017, by Walker Dunlop, Inc. in favor of PNC Bank, National Association, as Lender (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 13, 2017).
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10.4
| | FirstTenth Amendment to Second Amended and Restated Warehousing Credit and Security Agreement, dated as of September 15, 2017,June 8, 2021, by and among Walker & Dunlop, LLC, Walker & Dunlop, Inc. and PNC Bank, National Association, as Lender (incorporated(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 20, 2017)June 11, 2021).
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31.1 | * | Certification of Walker & Dunlop, Inc.'s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | * | Certification of Walker & Dunlop, Inc.'s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32 | ** | Certification of Walker & Dunlop, Inc.'s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.1101.INS
| | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | * | XBRL Instance Document
|
101.2
| *
| Inline XBRL Taxonomy Extension Schema Document |
101.3101.CAL
| * | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.4101.DEF
| * | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.5101.LAB
| * | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.6101.PRE
| * | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained an Exhibit 101) |
†: Denotes a management contract or compensation plan, contract, or arrangement.
*: Filed herewith.
**: Furnished herewith.
Information in this Form 10-Q furnished herewith shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such a filing.
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | Walker & Dunlop, Inc | | |
Date: November 8, 2017August 5, 2021 | | By: | /s/ William M. Walker |
| | | William M. Walker |
| | | Chairman and Chief Executive Officer |
| | | |
| | | |
Date: November 8, 2017August 5, 2021 | | By: | /s/ Stephen P. Theobald |
| | | Stephen P. Theobald |
| | | Executive Vice President and Chief Financial Officer and Treasurer |