UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | |
| |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2022
OR
For the transition period from to
Commission File Number: 001-35000
Walker & &Dunlop, Inc.
(Exact (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) |
|
|
75017272 Wisconsin Avenue, Suite 1200E1300
Bethesda, Maryland20814
(301) (301) 215-5500
(Address of principal executive offices and registrant’sregistrant’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:
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“large accelerated filer,” “accelerated” “accelerated filer,” “smaller” “smaller reporting company,”” and “emerging“emerging growth company”company” in Rule 12b-2 of the Exchange Act.
Large Smaller |
| Accelerated
Emerging |
| Non-accelerated Filer ☐ |
|
|
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,April 28, 2022, there were 31,064,54533,130,194 total shares of common stock outstanding.
Walker && Dunlop, Inc.
Form 10-Q
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PART I
FINANCIAL INFORMATION
Walker && Dunlop, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
| ||
Assets |
| (unaudited) |
|
|
|
| |
Cash and cash equivalents |
| $ | 85,363 |
| $ | 118,756 |
|
Restricted cash |
|
| 17,179 |
|
| 9,861 |
|
Pledged securities, at fair value |
|
| 95,102 |
|
| 84,850 |
|
Loans held for sale, at fair value |
|
| 3,275,761 |
|
| 1,858,358 |
|
Loans held for investment, net |
|
| 152,050 |
|
| 220,377 |
|
Servicing fees and other receivables, net |
|
| 34,476 |
|
| 29,459 |
|
Derivative assets |
|
| 43,853 |
|
| 61,824 |
|
Mortgage servicing rights |
|
| 587,909 |
|
| 521,930 |
|
Goodwill and other intangible assets |
|
| 124,571 |
|
| 97,372 |
|
Other assets |
|
| 84,196 |
|
| 49,645 |
|
Total assets |
| $ | 4,500,460 |
| $ | 3,052,432 |
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Accounts payable and other liabilities |
| $ | 255,785 |
| $ | 232,231 |
|
Performance deposits from borrowers |
|
| 16,575 |
|
| 10,480 |
|
Derivative liabilities |
|
| 175 |
|
| 4,396 |
|
Guaranty obligation, net of accumulated amortization |
|
| 38,300 |
|
| 32,292 |
|
Allowance for risk-sharing obligations |
|
| 3,769 |
|
| 3,613 |
|
Warehouse notes payable |
|
| 3,305,589 |
|
| 1,990,183 |
|
Note payable |
|
| 163,935 |
|
| 164,163 |
|
Total liabilities |
| $ | 3,784,128 |
| $ | 2,437,358 |
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
Preferred shares, Authorized 50,000, none issued. |
| $ | — |
| $ | — |
|
Common stock, $0.01 par value. Authorized 200,000; issued and outstanding 29,949 shares at September 30, 2017 and 29,551 shares at December 31, 2016 |
|
| 299 |
|
| 296 |
|
Additional paid-in capital |
|
| 226,098 |
|
| 228,889 |
|
Retained earnings |
|
| 484,963 |
|
| 381,031 |
|
Total stockholders’ equity |
| $ | 711,360 |
| $ | 610,216 |
|
Noncontrolling interests |
|
| 4,972 |
|
| 4,858 |
|
Total equity |
| $ | 716,332 |
| $ | 615,074 |
|
Commitments and contingencies (NOTE 10) |
|
| — |
|
| — |
|
Total liabilities and equity |
| $ | 4,500,460 |
| $ | 3,052,432 |
|
|
|
|
|
|
|
|
|
March 31, 2022 | December 31, 2021 | ||||||
Assets |
| ||||||
Cash and cash equivalents | $ | 141,375 | $ | 305,635 | |||
Restricted cash |
| 41,584 |
| 42,812 | |||
Pledged securities, at fair value |
| 148,647 |
| 148,996 | |||
Loans held for sale, at fair value |
| 703,629 |
| 1,811,586 | |||
Loans held for investment, net |
| 216,620 |
| 269,125 | |||
Mortgage servicing rights |
| 976,554 |
| 953,845 | |||
Goodwill | 908,744 | 698,635 | |||||
Other intangible assets |
| 211,405 |
| 183,904 | |||
Derivative assets |
| 112,023 |
| 37,364 | |||
Receivables, net |
| 249,305 |
| 212,019 | |||
Committed investments in tax credit equity | 223,771 | 177,322 | |||||
Other assets |
| 405,974 |
| 364,746 | |||
Total assets | $ | 4,339,631 | $ | 5,205,989 | |||
Liabilities | |||||||
Warehouse notes payable | $ | 924,280 | $ | 1,941,572 | |||
Notes payable |
| 726,555 |
| 740,174 | |||
Allowance for risk-sharing obligations |
| 53,244 |
| 62,636 | |||
Derivative liabilities |
| 12,400 |
| 6,403 | |||
Commitments to fund investments in tax credit equity | 206,605 | 162,747 | |||||
Other liabilities | 779,376 | 714,250 | |||||
Total liabilities | $ | 2,702,460 | $ | 3,627,782 | |||
Stockholders' Equity | |||||||
Preferred stock (authorized 50,000 shares; NaN issued) | $ | $ | |||||
Common stock ($0.01 par value; authorized 200,000 shares; and 32,398 shares at March 31, 2022 and 32,049 shares at December 31, 2021) |
| 324 |
| 320 | |||
Additional paid-in capital ("APIC") |
| 387,009 |
| 393,022 | |||
Accumulated other comprehensive income ("AOCI") | 1,588 | 2,558 | |||||
Retained earnings |
| 1,205,384 |
| 1,154,252 | |||
Total stockholders’ equity | $ | 1,594,305 | $ | 1,550,152 | |||
Noncontrolling interests |
| 42,866 |
| 28,055 | |||
Total equity | $ | 1,637,171 | $ | 1,578,207 | |||
Commitments and contingencies (NOTES 2 and 9) |
|
| |||||
Total liabilities and equity | $ | 4,339,631 | $ | 5,205,989 |
See accompanying notes to condensed consolidated financial statements.
23
Walker && Dunlop, Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended |
| For the nine months ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains from mortgage banking activities |
| $ | 111,304 |
| $ | 100,630 |
| $ | 309,912 |
| $ | 249,406 |
|
Servicing fees |
|
| 44,900 |
|
| 37,134 |
|
| 129,639 |
|
| 101,554 |
|
Net warehouse interest income |
|
| 5,358 |
|
| 5,614 |
|
| 17,778 |
|
| 15,925 |
|
Escrow earnings and other interest income |
|
| 5,804 |
|
| 2,630 |
|
| 13,610 |
|
| 6,225 |
|
Other |
|
| 12,370 |
|
| 8,778 |
|
| 33,716 |
|
| 23,775 |
|
Total revenues |
| $ | 179,736 |
| $ | 154,786 |
| $ | 504,655 |
| $ | 396,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel |
| $ | 78,469 |
| $ | 64,377 |
| $ | 198,157 |
| $ | 154,365 |
|
Amortization and depreciation |
|
| 32,343 |
|
| 29,244 |
|
| 97,541 |
|
| 80,824 |
|
Provision (benefit) for credit losses |
|
| 9 |
|
| 283 |
|
| (216) |
|
| 166 |
|
Interest expense on corporate debt |
|
| 2,555 |
|
| 2,485 |
|
| 7,401 |
|
| 7,419 |
|
Other operating expenses |
|
| 11,664 |
|
| 9,685 |
|
| 34,871 |
|
| 29,511 |
|
Total expenses |
| $ | 125,040 |
| $ | 106,074 |
| $ | 337,754 |
| $ | 272,285 |
|
Income from operations |
| $ | 54,696 |
| $ | 48,712 |
| $ | 166,901 |
| $ | 124,600 |
|
Income tax expense |
|
| 19,988 |
|
| 18,851 |
|
| 54,621 |
|
| 47,295 |
|
Net income before noncontrolling interests |
| $ | 34,708 |
| $ | 29,861 |
| $ | 112,280 |
| $ | 77,305 |
|
Less: net income from noncontrolling interests |
|
| 330 |
|
| 233 |
|
| 114 |
|
| 198 |
|
Walker & Dunlop net income |
| $ | 34,378 |
| $ | 29,628 |
| $ | 112,166 |
| $ | 77,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
| $ | 1.14 |
| $ | 1.01 |
| $ | 3.74 |
| $ | 2.62 |
|
Diluted earnings per share |
| $ | 1.06 |
| $ | 0.96 |
| $ | 3.49 |
| $ | 2.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
| 30,085 |
|
| 29,374 |
|
| 30,009 |
|
| 29,417 |
|
Diluted weighted average shares outstanding |
|
| 32,312 |
|
| 30,793 |
|
| 32,170 |
|
| 30,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended | |||||||
March 31, | |||||||
| 2022 |
| 2021 |
| |||
Revenues | |||||||
Loan origination and debt brokerage fees, net | $ | 82,310 | $ | 75,879 | |||
Fair value of expected net cash flows from servicing, net | 52,730 | 57,935 | |||||
Servicing fees |
| 72,681 |
| 65,978 | |||
Property sales broker fees | 23,398 | 9,042 | |||||
Net warehouse interest income |
| 4,773 |
| 4,555 | |||
Escrow earnings and other interest income |
| 1,803 |
| 2,117 | |||
Other revenues |
| 81,749 |
| 8,782 | |||
Total revenues | $ | 319,444 | $ | 224,288 | |||
Expenses | |||||||
Personnel | $ | 144,181 | $ | 96,215 | |||
Amortization and depreciation | 56,152 | 46,871 | |||||
Provision (benefit) for credit losses |
| (9,498) |
| (11,320) | |||
Interest expense on corporate debt |
| 6,405 |
| 1,765 | |||
Other operating expenses |
| 32,214 |
| 17,587 | |||
Total expenses | $ | 229,454 | $ | 151,118 | |||
Income from operations | $ | 89,990 | $ | 73,170 | |||
Income tax expense |
| 19,460 |
| 15,118 | |||
Net income before noncontrolling interests | $ | 70,530 | $ | 58,052 | |||
Less: net income (loss) from noncontrolling interests |
| (679) |
| — | |||
Walker & Dunlop net income | $ | 71,209 | $ | 58,052 | |||
Net change in unrealized gains (losses) on pledged available-for-sale securities, net of taxes | (970) | (158) | |||||
Walker & Dunlop comprehensive income | $ | 70,239 | $ | 57,894 | |||
Basic earnings per share (NOTE 10) | $ | 2.14 | $ | 1.82 | |||
Diluted earnings per share (NOTE 10) | $ | 2.12 | $ | 1.79 | |||
Basic weighted-average shares outstanding |
| 32,219 |
| 30,823 | |||
Diluted weighted-average shares outstanding | 32,617 |
| 31,276 |
See accompanying notes to condensed consolidated financial statements.
34
Walker && Dunlop, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
(In thousands, except per share data)
(Unaudited)
For the three months ended March 31, 2022 | |||||||||||||||||||||
Stockholders' Equity | |||||||||||||||||||||
Common Stock | Retained | Noncontrolling | Total Stockholders' | ||||||||||||||||||
| Shares |
| Amount |
| APIC |
| AOCI |
| Earnings |
| Interests |
| Equity |
| |||||||
Balance at December 31, 2021 | 32,049 | $ | 320 | $ | 393,022 | $ | 2,558 | $ | 1,154,252 | $ | 28,055 | $ | 1,578,207 | ||||||||
Walker & Dunlop net income | — | — | — | — | 71,209 | — | 71,209 | ||||||||||||||
Net income (loss) from noncontrolling interests | — | — | — | — | — | (679) | (679) | ||||||||||||||
Other comprehensive income (loss), net of tax | — | — | — | (970) | — | — | (970) | ||||||||||||||
Stock-based compensation - equity classified | — | — | 10,812 | — | — | — | 10,812 | ||||||||||||||
Issuance of common stock in connection with equity compensation plans | 544 | 5 | 15,526 | — | — | — | 15,531 | ||||||||||||||
Repurchase and retirement of common stock | (195) | (1) | (27,048) | — | — | — | (27,049) | ||||||||||||||
Noncontrolling interests added due to new consolidations | — | — | (5,303) | — | — | 15,490 | 10,187 | ||||||||||||||
Cash dividends paid ($0.60 per common share) | — | — | — | — | (20,077) | — | (20,077) | ||||||||||||||
Balance at March 31, 2022 | 32,398 | $ | 324 | $ | 387,009 | $ | 1,588 | $ | 1,205,384 | $ | 42,866 | $ | 1,637,171 | ||||||||
For the three months ended March 31, 2021 | ||||||||||||||||||
Stockholders' Equity | ||||||||||||||||||
Common Stock | Retained | Total Stockholders' | ||||||||||||||||
| Shares |
| Amount |
| APIC |
| AOCI |
| Earnings |
| Equity | |||||||
Balance at December 31, 2020 | 30,678 | $ | 307 | $ | 241,004 | $ | 1,968 | $ | 952,943 | $ | 1,196,222 | |||||||
Walker & Dunlop net income | — | — | — | — | 58,052 | 58,052 | ||||||||||||
Other comprehensive income (loss), net of tax | — | — | — | (158) | — | (158) | ||||||||||||
Stock-based compensation - equity classified | — | — | 7,836 | — | — | 7,836 | ||||||||||||
Issuance of common stock in connection with equity compensation plans | 430 | 4 | 12,602 | — | — | 12,606 | ||||||||||||
Repurchase and retirement of common stock | (131) | (1) | (13,373) | — | — | (13,374) | ||||||||||||
Cash dividends paid ($0.50 per common share) | — | — | — | — | (16,052) | (16,052) | ||||||||||||
Balance at March 31, 2021 | 30,977 | $ | 310 | $ | 248,069 | $ | 1,810 | $ | 994,943 | $ | 1,245,132 |
See accompanying notes to condensed consolidated financial statements.
5
Walker & Dunlop, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
| |
|
| 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 |
|
|
|
|
|
|
|
|
|
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) |
|
|
|
|
|
|
|
|
|
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) |
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
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 |
|
For the three months ended March 31, |
| ||||||
| 2022 |
| 2021 |
| |||
Cash flows from operating activities | |||||||
Net income before noncontrolling interests | $ | 70,530 | $ | 58,052 | |||
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 |
| (52,730) |
| (57,935) | |||
Change in the fair value of premiums and origination fees |
| 2,883 |
| 21,562 | |||
Amortization and depreciation |
| 56,152 |
| 46,871 | |||
Provision (benefit) for credit losses |
| (9,498) |
| (11,320) | |||
Gain from revaluation of previously held equity-method investment | (39,641) | — | |||||
Originations of loans held for sale | (3,185,019) | (3,577,153) | |||||
Proceeds from transfers of loans held for sale | 4,198,206 | 4,917,187 | |||||
Other operating activities, net | (68,955) | (81,572) | |||||
Net cash provided by (used in) operating activities | $ | 971,928 | $ | 1,315,692 | |||
Cash flows from investing activities | |||||||
Capital expenditures | $ | (11,790) | $ | (1,794) | |||
Purchases of equity-method investments | (5,941) | (1,124) | |||||
Purchases of pledged available-for-sale ("AFS") securities | (7,010) | (2,000) | |||||
Proceeds from prepayment and sale of pledged AFS securities | 1,672 | 20,884 | |||||
Investments in joint ventures | (5,040) | (18,445) | |||||
Distributions from joint ventures | 9,241 | 11,419 | |||||
Acquisitions, net of cash received | (78,465) | (7,506) | |||||
Originations of loans held for investment |
| (107) |
| (33,750) | |||
Principal collected on loans held for investment |
| 53,000 |
| 113,495 | |||
Net cash provided by (used in) investing activities | $ | (44,440) | $ | 81,179 | |||
Cash flows from financing activities | |||||||
Borrowings (repayments) of warehouse notes payable, net | $ | (1,006,545) | $ | (1,400,704) | |||
Borrowings of interim warehouse notes payable |
| — |
| 25,313 | |||
Repayments of interim warehouse notes payable |
| (11,200) |
| (29,534) | |||
Repayments of notes payable |
| (13,759) |
| (745) | |||
Proceeds from issuance of common stock |
| 153 |
| 12,606 | |||
Repurchase of common stock |
| (27,049) |
| (13,374) | |||
Cash dividends paid | (20,077) | (16,052) | |||||
Payment of contingent consideration | (17,612) | — | |||||
Debt issuance costs |
| (567) |
| (769) | |||
Net cash provided by (used in) financing activities | $ | (1,096,656) | $ | (1,423,259) | |||
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents (NOTE 2) | $ | (169,168) | $ | (26,388) | |||
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period |
| 393,180 |
| 358,002 | |||
Total of cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period | $ | 224,012 | $ | 331,614 | |||
Supplemental Disclosure of Cash Flow Information: | |||||||
Cash paid to third parties for interest | $ | 13,037 | $ | 9,621 | |||
Cash paid for income taxes | 1,290 | — |
See accompanying notes to condensed consolidated financial statements.
46
NOTE 1—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”“we,” “us,” “our,” “Walker & Dunlop” and the “Company”“Company” mean the Walker && Dunlop consolidated companies. The statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”(“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’sCompany’s Annual Report on Form 10-K for the year ended December 31, 2016 (“20162021 (“2021 Form 10-K”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 nine months ended September 30, 2017March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 20172022 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 with a particular focus on the affordable housing sector through low-income housing tax credit (“LIHTC”) syndication, 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”Mae”), the Federal Home Loan Mortgage Corporation (“(“Freddie Mac”” and, together with Fannie Mae, the “GSEs”“GSEs”), the Government National Mortgage Association (“(“Ginnie Mae”Mae”), and the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (together with Ginnie Mae, “HUD”“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.
The Company also offersprovides a proprietary loan program offering interimvariety of commercial real estate debt and equity solutions through its principal lending and investing products. Interim loans (the “Interim Program”).
During the second quarter of 2017,on multifamily properties are offered (i) through the Company formedand recorded on the Company’s balance sheet (the “Interim Loan Program”) and (ii) through a joint venture with an affiliate of one ofBlackstone Mortgage Trust, Inc., in which the world’s largest owners of commercial real estate to originate, 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 in the joint venture and is responsible for underwriting, servicing, and asset-managing the loans originated by the joint venture. The joint venture funds its operations using a combination of equity contributions from the partners and third-party credit facilities. The Company expects that substantially all loans satisfying the criteria for the (the “Interim Program will be originated by the joint venture going forward; however, the Company may opportunistically originate loans held for investment through the Interim Program in the future. During the third quarter of 2017, the Company sold certain loans from its portfolio of interim loans with an unpaid principal balance of $119.8 million to the joint venture at par. The Company does not expect to sell additional loans held for 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.JV”).
NOTE 2—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 holds a variable interest in a VIE and has a controlling financial interest and therefore is considered the primary beneficiary, the Company consolidates the entity. In instances where the Company holds a variable interest in a VIE but is not the primary beneficiary, the Company uses the equity-method of accounting.
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 methodCondensed Consolidated Balance Sheets and the portion of accounting.net income not attributable to Walker & Dunlop, Inc. as Net income (loss) from noncontrolling interests in the Condensed Consolidated Statements of Income.
Subsequent Events——The Company has evaluated the effects of all events that have occurred subsequent to September 30, 2017. There have been no material events that would require recognition in the condensed consolidated financial statements.March 31, 2022. The Company has made certain disclosures in the notes to the condensed consolidated financial statements of events that have occurred subsequent to September 30, 2017. NoMarch
7
31, 2022. 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 accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, including the allowance for risk-sharing obligations, capitalized mortgage servicing rights, asset management fee receivable related to LIHTC funds, derivative instruments, estimation of contingent consideration for business combinations, estimation of the fair value of the Apprise joint venture (as discussed in NOTE 7), and the disclosure of contingent assets and liabilities. Actual results may vary from these estimates.
ComprehensiveCo-broker Fees—Co-broker fees, which are netted against Loan origination and debt brokerage fees, net in the Condensed Consolidated Statements of Income,—For were $5.9 million and $5.3 million for the three and nine months ended September 30, 2017March 31, 2022 and 2016, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying condensed consolidated financial statements.2021, respectively.
5
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”“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 September 30, 2017, March 31, 2022, Loans held for investment, net consisted of seven10 loans with an aggregate $152.8$221.6 million of unpaid principal balance less $0.6$0.9 million of net unamortized deferred fees and costs and $0.1$4.1 million of allowance for loan losses. As of December 31, 2016, 2021, Loans held for investment, net consisted of 12 loans with an aggregate $222.3$274.5 million of unpaid principal balance less $1.5$1.2 million of net unamortized deferred fees and costs and $0.4$4.2 million of allowance for loan losses.
NoneThe Company assesses the credit quality of the 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 as of both March 31, 2022 and December 31, 2021. The loss rate for the remaining period until maturity was 6 basis points and 9 basis points as of March 31, 2022 and December 31, 2021, respectively.
NaN loan held for investment with an unpaid principal balance of $14.7 million was delinquent impaired, orand on non-accrual status as of September 30, 2017 orMarch 31, 2022 and December 31, 2016. Additionally, we have2021. The Company had $3.7 million in collateral-based reserves for this loan as of both March 31, 2022 and December 31, 2021 and has not recorded any interest related to this loan since it went on non-accrual status. All other loans were current as of March 31, 2022 and December 31, 2021. The amortized cost basis of loans that were current as of March 31, 2022 and December 31, 2021 was $206.0 million and $258.6 million, respectively. As of March 31, 2022, $178.6 million and $28.3 million of the loans that were current were originated in 2021 and 2019, respectively. Other than the defaulted loan noted above, the Company has 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 nine months ended September 30, 2017March 31, 2022 and 2016:2021:
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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 |
|
8
For the three months ended | |||||||
March 31, | |||||||
Components of Provision (Benefit) for Credit Losses (in thousands) |
| 2022 |
| 2021 |
| ||
Provision (benefit) for loan losses | $ | (106) | $ | (587) | |||
Provision (benefit) for risk-sharing obligations |
| (9,392) |
| (10,733) | |||
Provision (benefit) for credit losses | $ | (9,498) | $ | (11,320) | |||
Net Warehouse Interest Income—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’sCompany’s own cash. The Company also fully funds a small number of loans held for sale or loans held for investment with its own cash. Warehouse interest expense is incurred on borrowings used to fund loans solely while they are held for sale or for investment. Warehouse interest income and expense are earned or incurred on loans held for sale after a loan is closed and before a loan is sold. Warehouse interest income and expense are earned or incurred on loans held for investment after a loan is closed and before a loan is repaid. IncludedThe Company had a portfolio of participating interests in loans held for investment that was accounted for as a secured borrowing and paid off in the second quarter of 2021. The Company recognized Net warehouse interest income on the unpaid principal balance of the loans and secured borrowing for the three and nine months ended September 30, 2017 and 2016 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 |
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Warehouse interest expense - loans held for investment |
|
| (1,342) |
|
| (1,379) |
|
| (5,019) |
|
| (3,826) |
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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 duringMarch 31, 2021. Included in Net warehouse interest income for the ninethree months ended September 30, 2017March 31, 2022 and 2016, respectively.2021 are the following components:
For the three months ended | |||||||
March 31, | |||||||
Components of Net Warehouse Interest Income (in thousands) |
| 2022 |
| 2021 |
| ||
Warehouse interest income - loans held for sale | $ | 8,863 | $ | 9,118 | |||
Warehouse interest expense - loans held for sale |
| (5,333) |
| (6,659) | |||
Net warehouse interest income - loans held for sale | $ | 3,530 | $ | 2,459 | |||
Warehouse interest income - loans held for investment | $ | 2,350 | $ | 3,228 | |||
Warehouse interest expense - loans held for investment |
| (1,107) |
| (1,132) | |||
Warehouse interest income - secured borrowings | — | 865 | |||||
Warehouse interest expense - secured borrowings | — | (865) | |||||
Net warehouse interest income - loans held for investment | $ | 1,243 | $ | 2,096 | |||
Total net warehouse interest income | $ | 4,773 | $ | 4,555 | |||
Statement of Cash Flows——For presentation in the Condensed Consolidated Statements of Cash Flows, the Company considers Pledged securities, at fair valuepledged cash and cash equivalents (as detailed in NOTE 9) to be restricted cash and restricted cash equivalents. The following table presents a reconciliation of the total of cash, cash
6
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, 2017March 31, 2022 and 20162021 and December 31, 20162021 and 2015.2020.
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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—
March 31, | December 31, | |||||||||||
(in thousands) | 2022 |
| 2021 |
| 2021 |
| 2020 |
| ||||
Cash and cash equivalents | $ | 141,375 | $ | 277,277 | $ | 305,635 | $ | 321,097 | ||||
Restricted cash | 41,584 | 14,805 | 42,812 | 19,432 | ||||||||
Pledged cash and cash equivalents (NOTE 9) |
| 41,053 |
| 39,532 |
| 44,733 |
| 17,473 | ||||
Total cash, cash equivalents, restricted cash, and restricted cash equivalents | $ | 224,012 | $ | 331,614 | $ | 393,180 | $ | 358,002 |
Income Taxes—The following table presentsCompany records the accounting pronouncements that the Financial Accounting Standards Board (“FASB”) has issuedrealizable excess tax benefits from stock-based compensation as a reduction to income tax expense. The realizable excess tax benefits were $4.9 million and that have the potential to impact the Company but have not yet been adopted by the Company.
7
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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$4.1 million for the periodthree months ended March 31, 2017 (“Q1 2017 10-Q”).2022 and 2021, respectively.
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
9
Gains from mortgage banking activities consistedContracts with Customers—A majority of the Company’s revenues are derived from the following activitysources, 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. Substantially all of 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 substantially all of the threeCompany’s contracts with customers is not complicated and nine months ended September 30, 2017 and 2016:
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| 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 |
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is generally completed in a short period of time. The origination fees shown infollowing table presents information about the table are net of co-broker fees of $4.5 million and $13.2 millionCompany’s contracts with customers for the three months ended September 30, 2017March 31, 2022 and 2016, respectively,2021:
For the three months ended | ||||||||
March 31, | ||||||||
Description (in thousands) |
| 2022 |
| 2021 |
| Statement of income line item | ||
Certain loan origination fees | $ | 37,365 | $ | 23,901 | Loan origination and debt brokerage fees, net | |||
Property sales broker fees | 23,398 | 9,042 | Property sales broker fees | |||||
Investment management fees, application fees, subscription revenues, other revenues from LIHTC operations, and other |
| 28,305 |
| 6,250 | Other revenues | |||
Total revenues derived from contracts with customers | $ | 89,068 | $ | 39,193 | ||||
Litigation—In the ordinary course of business, the Company may be party to various claims and $14.7 millionlitigation, none of which the Company believes is material. The Company cannot predict the outcome of any pending litigation and $29.8 million formay be subject to consequences that could include fines, penalties, and other costs, and the nine months ended September 30, 2017Company’s reputation and 2016, respectively.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.
9
the Company’s 2021 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 March 31, 2022.
Reclassifications—TheCompany has made certain immaterial reclassifications to prior-year balances to conform to current-year presentation.
NOTE 4—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. rights (“MSRs are amortized using the interest method over the period that servicing income is expected to be received.
The fair values”) was $1.3 billion as of the MSRs at September 30, 2017both March 31, 2022 and December 31, 2016 were $773.9 million and $669.4 million, respectively.2021. 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:sensitivities related to the discount rate:
The impact of a 100-basis point increase in the discount rate at September 30, 2017 isMarch 31, 2022 would be a decrease in the fair value of $24.6 million.$39.1 million to the MSRs outstanding as of March 31, 2022.
The impact of a 200-basis point increase in the discount rate at September 30, 2017 isMarch 31, 2022 would be a decrease in the fair value of $47.6 million.$75.6 million to the MSRs outstanding as of March 31, 2022.
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.
10
Activity related to capitalized MSRs for the three and nine months ended September 30, 2017March 31, 2022 and 2016 is shown in the table below:2021 follows:
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| 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 |
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Additions, following the sale of loan |
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| 48,174 |
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| 60,955 |
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| 165,748 |
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| 124,982 |
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Purchases |
|
| — |
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| — |
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| — |
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| 42,705 |
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Amortization |
|
| (30,174) |
|
| (26,074) |
|
| (88,398) |
|
| (72,030) |
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Pre-payments and write-offs |
|
| (3,250) |
|
| (6,296) |
|
| (11,371) |
|
| (11,327) |
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Ending balance |
| $ | 587,909 |
| $ | 496,678 |
| $ | 587,909 |
| $ | 496,678 |
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For the three months ended |
| ||||||
March 31, |
| ||||||
Roll Forward of MSRs (in thousands) |
| 2022 |
| 2021 |
| ||
Beginning balance | $ | 953,845 | $ | 862,813 | |||
Additions, following the sale of loan |
| 76,854 |
| 96,640 | |||
Amortization |
| (46,357) |
| (42,552) | |||
Pre-payments and write-offs |
| (7,788) |
| (7,017) | |||
Ending balance | $ | 976,554 | $ | 909,884 |
The following tables summarizetable summarizes the components of thegross value, accumulated amortization, and net carrying value of the Company’s acquired and originatedCompany’s MSRs as of September 30, 2017March 31, 2022 and December 31, 2016:2021:
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| 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) | March 31, 2022 | December 31, 2021 | ||||
Gross value | $ | 1,598,350 | $ | 1,548,870 | ||
Accumulated amortization |
| (621,796) |
| (595,025) | ||
Net carrying value | $ | 976,554 | $ | 953,845 |
10
The expected amortization of MSRs recordedshown in the Condensed Consolidated Balance Sheet as of September 30, 2017March 31, 2022 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 |
|
|
|
|
|
|
|
|
|
|
|
|
| Expected | ||
(in thousands) | Amortization | ||
Nine Months Ending December 31, | |||
2022 | $ | 135,495 | |
Year Ending December 31, | |||
2023 | $ | 171,194 | |
2024 |
| 152,155 | |
2025 |
| 129,694 | |
2026 |
| 109,489 | |
2027 |
| 92,535 | |
Thereafter | 185,992 | ||
Total | $ | 976,554 |
NOTE 5—4—GUARANTY OBLIGATION AND ALLOWANCE FOR RISK-SHARING OBLIGATIONS
When a loan is sold under the Fannie Mae Delegated Underwriting and Servicing TM (“DUS”)DUS program, the Company typically agrees to guarantee a portion of the ultimate loss incurred on the loan should the borrower fail to perform. The compensation for this risk is a component of the servicing fee on the loan. The guaranty is in force while the loan is outstanding. The Company does not provide a guaranty for any other loan product it sells or brokers.
The guaranty obligation is presented as a component of Other liabilities on the Condensed Consolidated Balance Sheets. Activity related to the guaranty obligation for the three and nine months ended September 30, 2017March 31, 2022 and 20162021 is presented in the following table:
For the three months ended |
| ||||||
March 31, |
| ||||||
Roll Forward of Guaranty Obligation (in thousands) |
| 2022 |
| 2021 |
| ||
Beginning balance | $ | 47,378 | $ | 52,306 | |||
Additions, following the sale of loan |
| 1,551 |
| 1,721 | |||
Amortization and write-offs |
| (2,439) |
| (2,191) | |||
Ending balance | $ | 46,490 | $ | 51,836 |
11
Substantially all loans sold under the Fannie Mae DUS program contain partial or full risk-sharing guaranties that are based on the credit performance of the loan. The Company records an estimate of the loss reserve for CECL for all loans in its Fannie Mae at-risk servicing portfolio and presents this loss reserve as Allowance for risk-sharing obligations on the Condensed Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended |
| For the nine months ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(in thousands) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Beginning balance |
| $ | 36,492 |
| $ | 28,406 |
| $ | 32,292 |
| $ | 27,570 |
|
Additions, following the sale of loan |
|
| 3,596 |
|
| 4,039 |
|
| 11,332 |
|
| 7,727 |
|
Amortization |
|
| (1,776) |
|
| (1,682) |
|
| (5,242) |
|
| (4,431) |
|
Other |
|
| (12) |
|
| 175 |
|
| (82) |
|
| 72 |
|
Ending balance |
| $ | 38,300 |
| $ | 30,938 |
| $ | 38,300 |
| $ | 30,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity related to the allowance for risk-sharing obligations for the three and nine months ended September 30, 2017March 31, 2022 and 2016 is shown2021 follows:
For the three months ended |
| ||||||
March 31, |
| ||||||
Roll Forward of Allowance for Risk-Sharing Obligations (in thousands) |
| 2022 |
| 2021 |
| ||
Beginning balance | $ | 62,636 | $ | 75,313 | |||
Provision (benefit) for risk-sharing obligations |
| (9,392) |
| (10,733) | |||
Write-offs |
| — |
| — | |||
Ending balance | $ | 53,244 | $ | 64,580 |
During the first quarter of 2022, the Company updated its historical loss rate factor calculation to the current 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 allowance for risk-sharing obligations. When a loan for which the Company has a risk-sharing obligation is removed from the watch list, the loan’s reserve is transferred from the allowancebenefit for risk-sharing obligations back tofor the guaranty obligation,three months ended March 31, 2022 seen above. The loss rates for the forecast period and the amortizationreversion period did not change from December 31, 2021. During the first quarter of 2021, reported and forecasted unemployment rates significantly improved compared to December 31, 2020. In response to improving unemployment statistics and the expected continued overall health of the remaining balance overmultifamily market, the remaining estimated life is resumed. This net transferCompany reduced the loss rate for the forecast period to 4 basis points as of the unamortized balanceMarch 31, 2021 from 6 basis points as of the guaranty obligation from a noncontingent classification to a contingent classification (and vice versa) is presentedDecember 31, 2020, resulting in the guaranty obligation and allowancebenefit for risk-sharing obligations tables abovefor the three months ended March 31, 2021 as ‘Other.’seen above.
11
The Allowancecalculated CECL reserve for risk-sharing obligationsthe Company’s $49.7 billion at-risk Fannie Mae servicing portfolio as of September 30, 2017 is based primarily on the Company’s collective assessmentMarch 31, 2022 was $42.5 million compared to $52.3 million as of December 31, 2021. 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 September 30, 2017. During the third quarter of 2017, Hurricanes Harvey and Irma made landfall in the United States, causing substantial damageMarch 31, 2022 was 7.4 years compared 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 obligations7.5 years as of September 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.December 31, 2021.
NaN loans had aggregate collateral-based reserves of $10.8 million and $10.3 million as of March 31, 2022 and December 31, 2021, respectively.
As of September 30, 2017,March 31, 2022 and 2021, the maximum quantifiable contingent liability associated with the Company’s guaranteesCompany’s guaranties for the at-risk loans serviced under the Fannie Mae DUS agreement was $5.4 billion.$10.2 billion and $9.3 billion, respectively. This maximum quantifiable contingent liability relates to the at-risk loans serviced for Fannie Mae at the specific point in time indicated. 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$116.3 billion as of September 30, 2017March 31, 2022 compared to $63.1$115.7 billion as of December 31, 2016.2021.
As of March 31, 2022 and December 31, 2021, custodial escrow accounts relating to loans serviced by the Company totaled $2.5 billion and $3.7 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.
12
NOTE 7—6—WAREHOUSE NOTES PAYABLE
At September 30, 2017,As of March 31, 2022, to provide financing to borrowers under the Company has arranged for warehouse lines of credit. In support of the Agencies’Agencies’ programs, the Company has committed and uncommitted warehouse lines of credit in the amount of $4.8$3.8 billion with certain national banks and a $1.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency“Agency Warehouse Facilities”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 March 31, 2022, the Company has arranged for warehouse lines of credit in the amount of $0.4$0.5 billion with certain national banks to assist in funding loans held for investment under the Interim Loan Program (“(“Interim Warehouse Facilities”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 September 30, 2017 are shownMarch 31, 2022 follow:
March 31, 2022 |
| ||||||||||||||
(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 | $ | 49,860 |
| Adjusted Term SOFR plus 1.30% | |||||
Agency Warehouse Facility #2 |
| 700,000 |
| 300,000 |
| 1,000,000 |
| 46,647 | 30-day LIBOR plus 1.30% | ||||||
Agency Warehouse Facility #3 |
| 600,000 |
| 265,000 |
| 865,000 |
| 274,690 |
| 30-day LIBOR plus 1.30% | |||||
Agency Warehouse Facility #4 | 350,000 | — | 350,000 | 128,298 | 30-day LIBOR plus 1.30% | ||||||||||
Agency Warehouse Facility #5 | — | 1,000,000 | 1,000,000 | 135,453 | Adjusted Term SOFR plus 1.45% | ||||||||||
Agency Warehouse Facility #6 | 150,000 | 50,000 | 200,000 | 24,800 | 30-day LIBOR plus 1.30% | ||||||||||
Total National Bank Agency Warehouse Facilities | $ | 2,225,000 | $ | 1,615,000 | $ | 3,840,000 | $ | 659,748 | |||||||
Fannie Mae repurchase agreement, uncommitted line and open maturity |
| — |
| 1,500,000 |
| 1,500,000 |
| 91,330 |
| ||||||
Total Agency Warehouse Facilities | $ | 2,225,000 | $ | 3,115,000 | $ | 5,340,000 | $ | 751,078 | |||||||
Interim Warehouse Facility #1 | $ | 135,000 | $ | — | $ | 135,000 | $ | — |
| 30-day LIBOR plus 1.90% | |||||
Interim Warehouse Facility #2 |
| 100,000 |
| — |
| 100,000 |
| — |
| Adjusted Term SOFR plus 1.35% to 1.85% | |||||
Interim Warehouse Facility #3 |
| 200,000 |
| — |
| 200,000 |
| 141,809 |
| 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 | $ | 454,810 | $ | — | $ | 454,810 | $ | 161,619 | |||||||
Alliant Warehouse Facility | $ | 30,000 | $ | — | $ | 30,000 | $ | 12,005 | Daily LIBOR plus 3.00% | ||||||
Debt issuance costs |
| — |
| — |
| — |
| (422) | |||||||
Total warehouse facilities | $ | 2,709,810 | $ | 3,115,000 | $ | 5,824,810 | $ | 924,280 |
(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 any applicable interest rate floors. |
During 2022, the following amendments to the Warehouse Facilities were executed in the table below:normal course of business to support the growth of the Company’s business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| 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 and the Fannie Mae repurchase agreement are used to fund loans held for sale, while Interim Warehouse Facilities are used to partially fund loans held for investment.
12
During the fourthsecond quarter of 2017,2022, the Company executed the 13th amendment to the warehousean amended and restated agreement related to Agency Warehouse Facility #1#2 that extended the maturity date to November 30, 2017. No other material modifications have been made to the agreement during 2017.
During the third quarter of 2017, the Company executed the Second AmendedApril 13, 2023 and Restated Warehousing Credit and Security Agreement (the “Second Amended Agreement”) related to Agency Warehouse Facility #2. The Second Amended Agreement removed one of the lenders under the prior agreement, which reduced the maximum committed borrowing capacity of Agency Warehouse Facility #2 to $500.0 million. It also extended the maturity date to September 10, 2018 and reducedtransitioned the interest rate to the 30-day London Interbank Offered Rate (“LIBOR”) plus 130 basis points. In addition 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. No other material modifications have been made to the agreement during 2017.
During the second quarter of 2017, the Company executed the seventh amendment to the warehouse agreement related to Agency Warehouse Facility #3. The amendment reduced the interest rate tofrom 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 reduced the interest rate to 30-day LIBORAdjusted Term SOFR plus 130 basis points. No other material modifications have been made to the agreement during 2017.
2022.
During the thirdfirst quarter of 2017,2022, the Company executed a warehousingan amended and security agreement that established Agency Warehouse Facility #6. The warehouse facility has a $250.0 million maximum committed borrowing capacity, provides us with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans, and matures September 18, 2018. The borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 135 basis points. In addition to the committed borrowing capacity, the agreement provides $250.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility.
During the second quarter of 2017, the Company executed the seventh amendment to the credit and securityrestated agreement related to Interim Warehouse Facility #1#2 that extended the maturity date to April 30, 2018.December 13, 2023 and transitioned the interest rate from 30-day LIBOR floor to Adjusted Term SOFR plus 135 to 185 basis points. No other material modifications have been made to the agreement during 2017.2022.
13
During the second quarter of 2017,2022, the Company exercised its optionexecuted an amendment related to extendthe Alliant Warehouse Facility that extended the maturity date to July 31, 2022. Additionally, the amendment transitioned the interest rate from Daily LIBOR plus 300 basis points to Adjusted Daily SOFR plus 300 basis points, with a SOFR floor of Interim Warehouse Facility #3 to May 19, 2018.150 basis points. No other material modifications have been made to the agreement during 2017.2022.
AsDuring the first quarter of 2022, an Agency Warehouse Facility with a result of$150.0 million maximum committed borrowing capacity expired according to its terms. The Company believes that the aforementioned amendments6 remaining committed and new agreements,uncommitted credit facilities from nation banks, the uncommitted credit facility from Fannie Mae, and the Company has increased its aggregate’s corporate cash provide the Company with sufficient borrowing capacity including temporary increases, from $4.0 billion at December 31, 2016 to $6.6 billion at September 30, 2017.
conduct is Agency lending operations without this facility.
The warehouse notes payable are subject to various financial covenants, all of which the Company was in compliance with as of March 31, 2022. Interest on the current period end.
13
NOTE 8—7—GOODWILL AND OTHER INTANGIBLE ASSETS
Activity related toGoodwill and Acquisition Activities
A summary of the Company’s goodwill for the ninethree months ended September 30, 2017March 31, 2022 and 20162021 follows:
|
|
|
|
|
|
|
| |||||||
|
| Nine Months Ended September 30, |
| |||||||||||
(in thousands) |
| 2017 |
| 2016 |
| |||||||||
For the three months ended | ||||||||||||||
March 31, | ||||||||||||||
Roll Forward of Goodwill (in thousands) |
| 2022 |
| 2021 |
| |||||||||
Beginning balance |
| $ | 96,420 |
| $ | 90,338 |
| $ | 698,635 | $ | 248,958 | |||
Additions from acquisitions |
|
| 27,347 |
|
| — |
|
| 213,874 |
| 12,231 | |||
Measurement-period adjustments | (3,765) | — | ||||||||||||
Impairment |
|
| — |
|
| — |
|
| — |
| — | |||
Ending balance |
| $ | 123,767 |
| $ | 90,338 |
| $ | 908,744 | $ | 261,189 | |||
|
|
|
|
|
|
|
| |||||||
The addition to goodwill from acquisitions during the nine months ended September 30, 20172022 shown in the table above during the three months ended March 31, 2022 relates to the Company’s February 28, 2022 acquisition of 100% of the equity interests of GeoPhy B.V. (“GeoPhy”), a Netherlands-based commercial real-estate technology company. As part of the acquisition, the Company also obtained GeoPhy’s 50% interest in the Company’s appraisal joint venture, Apprise. The Company now owns 100% of Apprise and consolidates its balances and its operating results post acquisition. Prior to the acquisition, the Company accounted for its investment in Apprise under the equity method. The fair value of the consideration was $212.0 million and consisted of $87.6 million of cash, $5.4 million of forgiveness of a receivable the Company had with the joint venture (non-cash activity not reflected in the Condensed Consolidated Statements of Cash Flows), and $119.0 million of contingent consideration.
GeoPhy’s data analytics and development capabilities are expected to dramatically accelerate the growth of the Company’s lending, brokerage, and appraisal operations. The GeoPhy acquisition is also expected to allow the Company to meet its goal of $5 billion of annual small balance lending volume and appraisal revenue of $75 million by 2025 as part of the Company’s overall growth targets. A significant portion of the value associated with the GeoPhy acquisition was related to the assembled workforces with their combined expertise in information technology, data science, and commercial real estate. The Company believes that the combination of GeoPhy’s personnel, appraisal technology platform, and the future development of technology to accelerate growth in the origination of small balance commercial loans, along with Walker & Dunlop’s financial resources will (i) drive a significant increase in the identification and retention of borrowers in the small-balance segment of the multifamily market and (ii) continue to drive significant growth in appraisal revenues over the next five years.
The contingent consideration noted above is contingent on achieving certain Apprise revenue and productivity milestones and small balance loan volume and revenue milestones over a four-year period. The maximum earnout included as part of the GeoPhy acquisition is $205.0 million. The Company estimated that $182.5 million, or 89%, of the maximum earnout is achievable based on management forecasts. The discounted balance of $119.0 million is 58% of the maximum earnout amount. The Company estimated the fair value of this contingent consideration using a Monte Carlo simulation. The discount rate used for the valuation of the contingent consideration was 17.0% for the
14
Apprise portion of the earnout and 14.5% for the small-balance portion of the earnout. The discount rates reflect the additional risk inherent in the Apprise estimates as it is still in the startup stage of its development.
The calculation of goodwill of $213.9 million included the fair value of the consideration transferred of $212.0 million and the acquisition-date fair value of the Company’s previously-held equity-method investment in Apprise of $58.5 million. The book value of the Company equity-method investment in Apprise prior to the acquisition date was $18.9 million, resulting in a $39.6 million gain from remeasuring to fair value. The gain is included as a component of Other revenues in the Condensed Consolidated Statements of Income. The Company used a discounted cash flow model to estimate the acquisition-date fair value of Apprise, with the discount rate and management’s forecast of future revenues and cash flows as the most-significant inputs for the estimate. The discount rate used was 17.0%, and a control premium was not included in the estimate.
The Company expects a large portion of the goodwill to be tax deductible, with the tax-deductible amount of goodwill related to the contingent consideration to be determined once the cash payments to settle the contingent consideration are made. The goodwill resulting from the GeoPhy acquisition was allocated to the Company’s Capital Markets reportable segment. The other assets primarily consisted of technology intangible assets of $31.0 million and deferred tax assets of $9.4 million. The technology intangible assets will be amortized over a
period. Immaterial liabilities were assumed. The operations of GeoPhy have since been merged into the Company’s existing operations. The financial results since the GeoPhy acquisition were immaterial. The revenues and earnings of Walker & Dunlop for the three months ended March 31, 2022 as if the GeoPhy acquisition had occurred as of January 1, 2021 would not be materially different from the amounts presented in the Condensed Consolidated Statements of Income.As of March 31, 2022, the amounts recorded for the GeoPhy acquisition were provisional as the Company had not completed the purchase accounting for the GeoPhy acquisition.
The immaterial measurement-period adjustments above relate to the Company’s acquisition of Alliant Capital Limited (“Alliant”), an immaterial acquisition completed in December of 2021 as more fully described in the Company’s 2021 Form 10-K. The Company has not completed the purchase accounting for the Alliant acquisition as the working capital adjustments have not been agreed upon. The Company expects the accounting to be completed in the second quarter of 2022.
As discussed in NOTE 11 below, the Company transitioned to segment reporting during the first quarter of 20172022. The following table shows goodwill by reportable segments as more fully disclosedof March 31, 2022. As the Company did not have segment reporting as of December 31, 2021, all of the goodwill balances were allocated to the Company’s 1 reportable segment as of December 31, 2021. As noted above, the additions in the Company’s Q1 2017 10-Q. Asfirst quarter of September 30, 2017,2022 were allocated to Capital Markets and the Company has fully amortized all materialmeasurement-period adjustments relate to Servicing & Asset Management.
As of March 31, | |||
Goodwill by Reportable Segment (in thousands) | 2022 | ||
Capital Markets | $ | 449,992 | |
Servicing & Asset Management | 458,752 | ||
Corporate | — | ||
Ending balance | $ | 908,744 |
Other Intangible Assets
Activity related to other intangible assets obtainedfor the three months ended March 31, 2022 and 2021 follows:
For the three months ended | ||||||
March 31, | ||||||
Roll Forward of Other Intangible Assets (in thousands) |
| 2022 |
| 2021 | ||
Beginning balance | $ | 183,904 | $ | 1,880 | ||
Additions from acquisitions | 31,000 | 504 | ||||
Amortization | (3,499) | (667) | ||||
Ending balance | $ | 211,405 | $ | 1,717 |
15
The following table summarizes the gross value, accumulated amortization, and net carrying value of the Company’s other intangible assets as of March 31, 2022 and December 31, 2021:
As of March 31, | ||||||
Components of Other Intangible Assets (in thousands) | 2022 | 2021 | ||||
Gross value | $ | 220,682 | $ | 189,682 | ||
Accumulated amortization |
| (9,277) |
| (5,778) | ||
Net carrying value | $ | 211,405 | $ | 183,904 |
The expected amortization of other intangible assets shown in the Condensed Consolidated Balance Sheet as of March 31, 2022 is shown in the table below. Actual amortization may vary from acquisitions.these estimates.
| Expected | ||
(in thousands) | Amortization | ||
Nine Months Ending December 31, | |||
2022 | $ | 13,496 | |
Year Ending December 31, | |||
2023 | $ | 16,246 | |
2024 |
| 16,246 | |
2025 |
| 16,206 | |
2026 |
| 16,206 | |
2027 |
| 16,206 | |
Thereafter | 116,799 | ||
Total | $ | 211,405 |
Contingent Consideration Liabilities
A summary of the Company’s contingent consideration liabilities, which are included in Otherliabilities in the Condensed Consolidated Balance Sheets, as of and for the three months ended March 31, 2022 and 2021 follows:
For the three months ended | |||||||
March 31, | |||||||
Roll Forward of Contingent Consideration Liabilities (in thousands) |
| 2022 |
| 2021 | |||
Beginning balance | $ | 125,808 | $ | 28,829 | |||
Additions | 119,000 | 5,229 | |||||
Accretion and revaluation | 359 | 430 | |||||
Payments | (26,438) | — | |||||
Ending balance | $ | 218,729 | $ | 34,488 |
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, (ii) the purchase of noncontrolling interests in 2020 that was fully earned as of December 31, 2021 and paid in 2022, (iii) the Alliant acquisition, and (iv) the GeoPhy acquisition. 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 Monte Carlo simulation.
The contingent consideration for the GeoPhy acquisition is non-cash and thus not reflected in the amount of cash consideration paid on the Condensed Consolidated Statements of Cash Flows.
16
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'sentity'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 |
| Level 2 |
| Level 3 |
The Company'sCompany'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'sCompany's MSRs do not trade in an active, open market with readily observable prices. While sales of multifamily MSRs do occur, precise terms and conditions vary with each transaction and are not readily available. Accordingly, the estimated fair value of the Company’sCompany’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. 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 |
14
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. |
| Loans Held for Sale |
| Pledged Securities |
● | Contingent Consideration Liabilities—Contingent consideration liabilities from acquisitions are initially recognized at fair value at acquisition and subsequently remeasured based on the change in probability of achievement of the performance objectives and |
17
fair value accretion. The Company determines the fair value of each contingent consideration liability based on a probability of achievement, which incorporates management estimates. As a result, the Company classifies these liabilities as Level 3. |
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2017,March 31, 2022 and December 31, 2016,2021, 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 |
| ||||||||
March 31, 2022 | |||||||||||||
Assets | |||||||||||||
Loans held for sale | $ | — | $ | 703,629 | $ | — | $ | 703,629 | |||||
Pledged securities |
| 41,053 |
| 107,594 |
| — |
| 148,647 | |||||
Derivative assets |
| — |
| — |
| 112,023 |
| 112,023 | |||||
Total | $ | 41,053 | $ | 811,223 | $ | 112,023 | $ | 964,299 | |||||
Liabilities | |||||||||||||
Derivative liabilities | $ | — | $ | — | $ | 12,400 | $ | 12,400 | |||||
Contingent consideration liabilities | — | — | 218,729 | 218,729 | |||||||||
Total | $ | — | $ | — | $ | 231,129 | $ | 231,129 | |||||
December 31, 2021 | |||||||||||||
Assets | |||||||||||||
Loans held for sale | $ | — | $ | 1,811,586 | $ | — | $ | 1,811,586 | |||||
Pledged securities |
| 44,733 |
| 104,263 |
| — |
| 148,996 | |||||
Derivative assets |
| — |
| — |
| 37,364 |
| 37,364 | |||||
Total | $ | 44,733 | $ | 1,915,849 | $ | 37,364 | $ | 1,997,946 | |||||
Liabilities | |||||||||||||
Derivative liabilities | $ | — | $ | — | $ | 6,403 | $ | 6,403 | |||||
Contingent consideration liabilities | — | — | 125,808 | 125,808 | |||||||||
Total | $ | — | $ | — | $ | 132,211 | $ | 132,211 |
There were no0 transfers between any of the levels within the fair value hierarchy during the ninethree months ended September 30, 2017.
15
March 31, 2022.
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 nine months ended September 30, 2017March 31, 2022 and 2016:2021:
For the three months ended | ||||||
March 31, | ||||||
Derivative Assets and Liabilities, net (in thousands) |
| 2022 |
| 2021 | ||
Beginning balance | $ | 30,961 | $ | 44,720 | ||
Settlements |
| (66,378) |
| (129,655) | ||
Realized gains recorded in earnings(1) |
| 35,417 |
| 84,935 | ||
Unrealized gains (losses) recorded in earnings(1) |
| 99,623 |
| 48,880 | ||
Ending balance | $ | 99,623 | $ | 48,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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) |
| Realized and unrealized gains (losses) from derivatives are recognized in |
18
The following table presents information about significant unobservable inputs used in the recurring measurement of the fair value of the Company’sCompany’s Level 3 assets and liabilities as of September 30, 2017:March 31, 2022:
Quantitative Information about Level 3 Fair Value Measurements | |||||||||||
(in thousands) |
| Fair Value |
| Valuation Technique |
| Unobservable Input (1) |
| Input Range (1) |
| Weighted Average (3) | |
Derivative assets | $ | 112,023 |
| Discounted cash flow |
| Counterparty credit risk |
| — | — | ||
Derivative liabilities | $ | 12,400 |
| Discounted cash flow |
| Counterparty credit risk |
| — | — | ||
Contingent consideration liabilities | $ | 218,729 | Various(2) | Probability of earn-out achievement | 88% - 100% | 90% |
|
|
|
|
|
|
|
|
|
| ||
|
| 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) |
| Significant increases in this input may lead to significantly lower fair value measurements. |
(2) | Primary valuation technique used was a Monte Carlo simulation analysis. |
(3) | Contingent consideration weighted based on maximum gross earn-out amount. |
The carrying amounts and the fair values of the Company'sCompany's financial instruments as of September 30, 2017March 31, 2022 and December 31, 20162021 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 |
|
16
March 31, 2022 | December 31, 2021 |
| |||||||||||
| Carrying |
| Fair |
| Carrying |
| Fair |
| |||||
(in thousands) | Amount | Value | Amount | Value |
| ||||||||
Financial Assets: | |||||||||||||
Cash and cash equivalents | $ | 141,375 | $ | 141,375 | $ | 305,635 | $ | 305,635 | |||||
Restricted cash |
| 41,584 |
| 41,584 |
| 42,812 |
| 42,812 | |||||
Pledged securities |
| 148,647 |
| 148,647 |
| 148,996 |
| 148,996 | |||||
Loans held for sale |
| 703,629 |
| 703,629 |
| 1,811,586 |
| 1,811,586 | |||||
Loans held for investment, net |
| 216,620 |
| 217,932 |
| 269,125 |
| 270,826 | |||||
Derivative assets |
| 112,023 |
| 112,023 |
| 37,364 |
| 37,364 | |||||
Total financial assets | $ | 1,363,878 | $ | 1,365,190 | $ | 2,615,518 | $ | 2,617,219 | |||||
Financial Liabilities: | |||||||||||||
Derivative liabilities | $ | 12,400 | $ | 12,400 | $ | 6,403 | $ | 6,403 | |||||
Contingent consideration liabilities | 218,729 | 218,729 | 125,808 | 125,808 | |||||||||
Warehouse notes payable |
| 924,280 |
| 924,702 |
| 1,941,572 |
| 1,942,448 | |||||
Notes payable |
| 726,555 |
| 731,416 |
| 740,174 |
| 745,175 | |||||
Total financial liabilities | $ | 1,881,964 | $ | 1,887,247 | $ | 2,813,957 | $ | 2,819,834 |
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:March 31, 2022 and December 31, 2021.
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
19
Contingent Consideration Liability—Consists of the loan, which is threeestimated fair values of expected future earn-out payments related to acquisitions completed over the past several years, or less, andincluding 2022. The earn-out liabilities are valued using discounteda Monte Carlo simulation analysis. The fair value of the contingent consideration liabilities incorporates unobservable inputs, such as the probability of earn-out achievement, volatility rates, and discount rate, to determine the expected earn-out cash flow models that incorporate primarily observable inputs from market participantsflows. The probability of the earn-out achievement is based on management’s estimate of the expected future performance and also credit-related adjustments, if applicable (Level 3). Asother financial metrics of September 30, 2017 and December 31, 2016, no credit-related adjustments were required.each of the acquired entities, which are subject to significant uncertainty.
Derivative Instruments——Consist of interest rate lock commitments and forward sale agreements. These instruments are valued using discounted cash flow models developed based on changes in the U.S. Treasury rate and other observable market data. The value is determined after considering the potential impact of collateralization, adjusted to reflect nonperformance risk of both the counterparty and the Company.
Warehouse Notes Payable—Consist of borrowings outstanding under warehouse line agreements. The borrowing rates on the warehouse lines are based upon 30-day LIBOR plus a margin. The unpaid principal balance of warehouse notes payable approximates fair value because of the short maturity of these instruments and the monthly resetting of the index rate to prevailing market rates (Level 2).
Note Payable—Consists of borrowings outstanding under a term note agreement. The borrowing rate on the note payable is based upon 30-day LIBOR plus an applicable margin. The Company estimates the fair value by discounting the future cash flows at market rates (Level 2).
Fair Value of Derivative Instruments and Loans Held for Sale——In the normal course of business, the Company enters into contractual commitments to originate and sell multifamily mortgage loans at fixed prices with fixed expiration dates. The commitments become effective when the borrowers "lock-in""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""lock-in" of rates by the borrower and the sale date of the loan to an investor.
To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the Company's policy is to 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.
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'sCompany's rate lock commitments to borrowers and loans held for sale and the related input levels includes, as applicable:
| the estimated gain |
| the expected net cash flows associated with servicing the loan, net of any guaranty obligations retained |
| the effects of interest rate movements between the date of the rate lock and the balance sheet date (Level 2); and |
| the nonperformance risk of both the counterparty and the Company (Level 3; 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
17
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’sCompany'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’sCompany’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’sCompany’s counterparties has historically not been significantminimal (Level 3).
20
The following table presents the components of fair value and other relevant information associated with the Company’sCompany’s derivative instruments and loans held for sale as of September 30, 2017March 31, 2022 and December 31, 2016.2021:
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| To Loans |
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(in thousands) |
| Amount |
| on Sale |
| Movement |
| Adjustment |
| Assets |
| Liabilities |
| Held for Sale |
| Amount | on Sale | Movement | Adjustment | Assets | Liabilities | Held for Sale |
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September 30, 2017 |
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March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
Rate lock commitments |
| $ | 688,375 |
| $ | 19,292 |
| $ | (4,987) |
| $ | 14,305 |
| $ | 14,305 |
| $ | — |
| $ | — |
| $ | 1,179,917 | $ | 36,930 | $ | (10,360) | $ | 26,570 | $ | 33,564 | $ | (6,994) | $ | — | ||||||||
Forward sale contracts |
|
| 3,963,275 |
|
| — |
|
| 29,373 |
|
| 29,373 |
|
| 29,548 |
|
| (175) |
|
| — |
|
| 1,932,125 |
| — |
| 73,053 |
| 73,053 |
| 78,459 | (5,406) |
| — | |||||||||
Loans held for sale |
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| 3,274,900 |
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| 25,247 |
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| (24,386) |
|
| 861 |
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| — |
|
| — |
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| 861 |
|
| 752,208 |
| 14,114 |
| (62,693) |
| (48,579) |
| — |
| — |
| (48,579) | ||||||||
Total |
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| $ | 44,539 |
| $ | — |
| $ | 44,539 |
| $ | 43,853 |
| $ | (175) |
| $ | 861 |
| $ | 51,044 | $ | — | $ | 51,044 | $ | 112,023 | $ | (12,400) | $ | (48,579) | ||||||||||
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December 31, 2016 |
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December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
Rate lock commitments |
| $ | 395,462 |
| $ | 15,844 |
| $ | (2,275) |
| $ | 13,569 |
| $ | 14,482 |
| $ | (913) |
| $ | — |
| $ | 1,115,829 | $ | 29,837 | $ | (4,604) | $ | 25,233 | $ | 26,526 | $ | (1,293) | $ | — | ||||||||
Forward sale contracts |
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| 2,248,385 |
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| — |
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| 43,859 |
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| 43,859 |
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| 47,342 |
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| (3,483) |
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| — |
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| 2,881,224 |
| — |
| 5,728 |
| 5,728 |
| 10,838 | (5,110) |
| — | |||||||||
Loans held for sale |
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| 1,852,923 |
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| 47,019 |
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| (41,584) |
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| 5,435 |
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| — |
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| — |
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| 5,435 |
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| 1,765,395 |
| 47,315 |
| (1,124) |
| 46,191 |
| — |
| — |
| 46,191 | ||||||||
Total |
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| $ | 62,863 |
| $ | — |
| $ | 62,863 |
| $ | 61,824 |
| $ | (4,396) |
| $ | 5,435 |
| $ | 77,152 | $ | — | $ | 77,152 | $ | 37,364 | $ | (6,403) | $ | 46,191 |
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 March 31, 2022. The majority of the loans for which the Company has risk sharing are Tier 2 loans.
The Company is in compliance with the September 30, 2017March 31, 2022 collateral requirements as outlined above. As of September 30, 2017,March 31, 2022, reserve requirements for the DUS loan portfolio will require the Company to fund $61.3$68.2 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’sCompany’s available cash.
18
Fannie Mae has established benchmark standards for capital adequacy and reserves the right to terminate the Company'sCompany's servicing authority for all or some of the portfolio if, at any time, it determines that the Company'sCompany'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 September 30, 2017.March 31, 2022. The net worth requirement is derived primarily from unpaid principal balances on Fannie Mae loans and the level of risk sharing. At September 30, 2017,March 31, 2022, the minimum net worth requirement was $145.7$261.2 million, and the Company'sCompany's net worth, as defined in the requirements, was $634.5$704.8 million, as measured at our wholly owned operating subsidiary, Walker && Dunlop, LLC. As of September 30, 2017,March 31, 2022, the Company was required to maintain at least $28.6$51.8 million of liquid assets to meet operational liquidity requirements for Fannie Mae, Freddie Mac, HUD, and Ginnie Mae,. As of September 30, 2017, and the Company had operational liquidity, as defined in the requirements, of $145.1$98.6 million, as of March 31, 2022, as measured at our wholly owned operating subsidiary, Walker && Dunlop, LLC.LLC.
Litigation—In the ordinary course21
Pledged Securities, at Fair Value—Pledged securities, at fair value consisted of the following balances as of March 31, 2022 and 2021 and December 31, 2021 and 2020:
March 31, | December 31, | |||||||||||
Pledged Securities (in thousands) | 2022 |
| 2021 |
| 2021 |
| 2020 |
| ||||
Restricted cash | $ | 4,099 | $ | 24,578 | $ | 3,779 | $ | 4,954 | ||||
Money market funds | 36,954 | 14,954 | 40,954 | 12,519 | ||||||||
Total pledged cash and cash equivalents | $ | 41,053 | $ | 39,532 | $ | 44,733 | $ | 17,473 | ||||
Agency MBS |
| 107,594 | 100,038 |
| 104,263 |
| 119,763 | |||||
Total pledged securities, at fair value | $ | 148,647 | $ | 139,570 | $ | 148,996 | $ | 137,236 |
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
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 whose fair value is less than the carrying value, 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 March 31, 2022 and December 31, 2021:
Fair Value and Amortized Cost of Agency MBS (in thousands) | March 31, 2022 |
| December 31, 2021 |
| ||
Fair value | $ | 107,594 | $ | 104,263 | ||
Amortized cost | 105,484 | 100,847 | ||||
Total gains for securities with net gains in AOCI | 2,743 | 3,636 | ||||
Total losses for securities with net losses in AOCI |
| (633) |
| (220) | ||
Fair value of securities with unrealized losses |
| 38,964 |
| 4,757 |
An immaterial amount 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.
March 31, 2022 | ||||||
Detail of Agency MBS Maturities (in thousands) | Fair Value |
| Amortized Cost |
| ||
Within one year | $ | — | $ | — | ||
After one year through five years | 2,253 | 2,248 | ||||
After five years through ten years | 78,112 | 77,631 | ||||
After ten years |
| 27,229 | 25,605 | |||
Total | $ | 107,594 | $ | 105,484 | ||
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.
22
The following table presents the calculation of basic and diluted earnings per shareEPS for the three and nine months ended September 30, 2017March 31, 2022 and 2016:2021 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.
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| For the three months ended |
| For the nine months ended |
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| September 30, |
| September 30, |
| ||||
(in thousands) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
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Weighted average number of shares outstanding used to calculate basic earnings per share |
| 30,085 |
| 29,374 |
| 30,009 |
| 29,417 |
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Dilutive securities |
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Unvested restricted shares and restricted share units |
| 1,404 |
| 1,068 |
| 1,394 |
| 1,024 |
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Stock options |
| 823 |
| 351 |
| 767 |
| 302 |
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Weighted average number of shares and share equivalents outstanding used to calculate diluted earnings per share |
| 32,312 |
| 30,793 |
| 32,170 |
| 30,743 |
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For the three months ended March 31, |
| |||||
EPS Calculations (in thousands, except per share amounts) | 2022 | 2021 |
| |||
Calculation of basic EPS | ||||||
Walker & Dunlop net income | $ | 71,209 | $ | 58,052 | ||
Less: dividends and undistributed earnings allocated to participating securities |
| 2,172 |
| 1,967 | ||
Net income applicable to common stockholders | $ | 69,037 | $ | 56,085 | ||
Weighted-average basic shares outstanding | 32,219 | 30,823 | ||||
Basic EPS | $ | 2.14 | $ | 1.82 | ||
Calculation of diluted EPS | ||||||
Net income applicable to common stockholders | $ | 69,037 | $ | 56,085 | ||
Add: reallocation of dividends and undistributed earnings based on assumed conversion | 19 | 20 | ||||
Net income allocated to common stockholders | $ | 69,056 | $ | 56,105 | ||
Weighted-average basic shares outstanding | 32,219 | 30,823 | ||||
Add: weighted-average diluted non-participating securities | 398 | 453 | ||||
Weighted-average diluted shares outstanding | 32,617 | 31,276 | ||||
Diluted EPS | $ | 2.12 | $ | 1.79 |
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 sharesAn 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-stock method for the three months ended March 31, 2022 and March 31, 2021, respectively, 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’sCompany’s shares of common stock during the periods presented).presented.
The following non-cash transactions did not impact the amount of cash paid on the Condensed Consolidated Statements of Cash Flows. For the three months ended March 31, 2022, the Company issued shares of common stock totaling $6.6 million to settle compensation liabilities. During the three months ended March 31, 2022, the operating agreement of 1 of the Company’s joint ventures changed. The Company reconsidered its consolidation conclusion based on this change and concluded that the joint venture should be consolidated, resulting in a $5.3 million reduction in APIC and $15.5 million of noncontrolling interests consolidated as shown on the Consolidated Statements of Changes in Equity. The consolidation also resulted in a $35.0 million increase in Receivables, net, a $21.3 million reduction in Other assets, and a $3.6 million increase in Other liabilities. $8.8 million of the payments settling contingent consideration liabilities included in NOTE 7 for the three months ended March 31, 2022 were from the issuance of the Company’s common stock.
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|
|
| For the three months ended |
| For the nine months ended |
| ||||
|
| September 30, |
| September 30, |
| ||||
(in thousands) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
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Average options |
| 113 |
| 207 |
| 94 |
| 172 |
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Average restricted shares |
| 3 |
| — |
| 5 |
| 211 |
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19
NOTE 12—TOTAL EQUITY
A summaryDirectors approved a stock repurchase program that permits the repurchase of changes in total equity is presented below:
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| Paid-In |
| Retained |
| Noncontrolling |
| Total |
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(in thousands) |
| Shares |
| Amount |
| Capital |
| Earnings |
| Interests |
| Equity |
| |||||
Balance at December 31, 2016 |
| 29,551 |
| $ | 296 |
| $ | 228,889 |
| $ | 381,031 |
| $ | 4,858 |
| $ | 615,074 |
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Walker & Dunlop net income |
| — |
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| — |
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| — |
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| 112,166 |
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| — |
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| 112,166 |
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Net income from noncontrolling interests |
| — |
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| — |
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| — |
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| — |
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| 114 |
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| 114 |
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Stock-based compensation - equity classified |
| — |
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| — |
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| 14,948 |
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| — |
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| — |
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| 14,948 |
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Issuance of common stock in connection with equity compensation plans |
| 1,077 |
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| 10 |
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| 2,877 |
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| — |
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| — |
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| 2,887 |
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Repurchase and retirement of common stock |
| (679) |
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| (7) |
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| (20,622) |
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| (8,234) |
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| — |
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| (28,863) |
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Other |
| — |
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| — |
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| 6 |
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| — |
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| — |
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| 6 |
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Balance at September 30, 2017 |
| 29,949 |
| $ | 299 |
| $ | 226,098 |
| $ | 484,963 |
| $ | 4,972 |
| $ | 716,332 |
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up to $75.0 million of the Company’s common stock over a 12-month period beginning on February 13, 2022. During the first quarter of 2017, the Company’s Board of Directors authorized2022, the Company todid 0t repurchase up to $75.0 million of its common stock over a 12-month period. During 2017, the Company has repurchased 228 thousandany shares of its common stock under the share repurchase program at a weighted average priceprogram. As of $47.07 per share and immediately retiredMarch 31, 2022, 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 2022 share repurchase program.
In February 2022, our Board of Directors declared a dividend of $0.60 per share for the first quarter of 2022, which the Company paid during the first quarter of 2022. On May 4, 2022, the Company’s Board of Directors declared a dividend of $0.60 per share for the second quarter of 2022. The dividend will be paid on June 3, 2022 to all holders of record of the Company’s restricted and unrestricted common stock as of September 30, 2017.May 19, 2022.
The Company’s Note Payable (“Term Loan”) contains direct restrictions to the amount of dividends the Company may pay, and the warehouse debt facilities and agreements with the Agencies contain minimum equity, liquidity, and other capital requirements that indirectly restrict the amount of dividends the Company may pay. The Company does not believe that these restrictions currently limit the amount of dividends the Company can pay for the foreseeable future.
2023
NOTE 11—SEGMENTS
In the first quarter of 2022, as a result of the Company’s growth and recent acquisitions, the Company’s chief operating decision maker began making decisions and assessing performance based on the following 3 operating segments. The operating segments are determined based on the product or service provided and reflect the manner in which management is currently evaluating the Company’s financial information.
(i) | Capital Markets (“CM”)—CM provides a comprehensive range of commercial real estate finance products to our customers, including Agency lending, debt brokerage, property sales, and appraisal and valuation services. The Company’s long-established relationships with the Agencies and institutional investors enable CM to offer a broad range of loan products and services to the Company’s customers, including first mortgage, second trust, supplemental, construction, mezzanine, preferred equity, and small-balance loans. CM provides property sales services to owners and developers of multifamily properties and commercial real estate and multifamily property appraisals for various investors. |
As part of Agency lending, CM temporarily funds the loans it originates (loans held for sale) before selling them to the Agencies and earns net interest income on the spread between the interest income on the loans and the warehouse interest expense. For Agency loans, CM recognizes the fair value of expected net cash flows from servicing, which represents the right to receive future servicing fees. CM also earns fees for origination of loans for both Agency lending and debt brokerage and fees for property sales and appraisals. Direct internal, including compensation, and external costs that are specific to CM are included within the results of this operating segments.
(ii) | Servicing & Asset Management (“SAM”)—SAM’s activities include: (i) servicing and asset-managing the portfolio of loans the Company (a) originates and sells to the Agencies, (b) brokers to certain life insurance companies, and (c) originates through its principal lending and investing activities, (ii) managing third-party capital invested in tax credit equity funds focused on the affordable housing sector and other commercial real estate, and (iii) real estate-related investment banking and advisory services, include housing market research. |
SAM earns revenue through (i) fees for servicing the loans in the Company’s servicing portfolio, (ii) asset management fees for managing third-party capital invested in funds, primarily LIHTC tax credit funds, (iii) subscription revenue for its housing market research, and (iv) net interest income on the spread between the interest income on the loans and the warehouse interest expense for loans held for investment. Direct internal, including compensation, and external costs that are specific to SAM are included within the results of this operating segment.
(iii) | Corporate—The Corporate segment consists primarily of the Company’s treasury operations and other corporate-level activities. The Company’s treasury activities include monitoring and managing liquidity and funding requirements, including corporate debt. Other corporate-level activities include strategic equity-method investments, information technology, legal, human resources, marketing, accounting, internal audit, and various other corporate groups (“support functions”). The Company does not allocate costs from these support functions to the CM or SAM segments in presenting segment operating results, other than income tax expense which is allocated proportionally based on income from operations at each segment. |
24
The following table provides a summary and reconciliation of each segment’s results for the three months ended March 31, 2022 and 2021 and total assets as of March 31, 2022 and 2021.
As of and for the three months ended March 31, 2022 | ||||||||||||
Segment Results and Total Assets | Servicing & | |||||||||||
(in thousands) | Capital | Asset | ||||||||||
Markets | Management | Corporate | Consolidated | |||||||||
Revenues | ||||||||||||
Loan origination and debt brokerage fees, net | $ | 81,823 | $ | 487 | $ | — | $ | 82,310 | ||||
Fair value of expected net cash flows from servicing, net | 52,730 | — | — | 52,730 | ||||||||
Servicing fees | — | 72,681 | — | 72,681 | ||||||||
Property sales broker fees | 23,398 | — | — | 23,398 | ||||||||
Net warehouse interest income, loans held for sale | 3,530 | — | — | 3,530 | ||||||||
Net warehouse interest income, loans held for investment | — | 1,243 | — | 1,243 | ||||||||
Escrow earnings and other interest income | — | 1,758 | 45 | 1,803 | ||||||||
Other revenues | 2,763 | 34,897 | 44,089 | 81,749 | ||||||||
Total revenues | $ | 164,244 | $ | 111,066 | $ | 44,134 | $ | 319,444 | ||||
Expenses | ||||||||||||
Personnel | $ | 98,726 | $ | 18,638 | $ | 26,817 | $ | 144,181 | ||||
Amortization and depreciation | — | 54,931 | 1,221 | 56,152 | ||||||||
Provision (benefit) for credit losses |
| — |
| (9,498) |
| — |
| (9,498) | ||||
Interest expense on corporate debt |
| — |
| — |
| 6,405 |
| 6,405 | ||||
Other operating expenses |
| 6,111 |
| 6,119 |
| 19,984 |
| 32,214 | ||||
Total expenses | $ | 104,837 | $ | 70,190 | $ | 54,427 | $ | 229,454 | ||||
Income from operations | $ | 59,407 | $ | 40,876 | $ | (10,293) | $ | 89,990 | ||||
Income tax expense |
| 12,847 | 8,839 | (2,226) |
| 19,460 | ||||||
Net income before noncontrolling interests | $ | 46,560 | $ | 32,037 | $ | (8,067) | $ | 70,530 | ||||
Less: net income (loss) from noncontrolling interests |
| — |
| (679) |
| — |
| (679) | ||||
Walker & Dunlop net income | $ | 46,560 | $ | 32,716 | $ | (8,067) | $ | 71,209 | ||||
Total assets | $ | 1,398,272 | $ | 2,573,112 | $ | 368,247 | $ | 4,339,631 |
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As of and for the three months ended March 31, 2021 | ||||||||||||
Segment Results and Total Assets | Servicing & | |||||||||||
(in thousands) | Capital | Asset | ||||||||||
Markets | Management | Corporate | Consolidated | |||||||||
Revenues | ||||||||||||
Loan origination and debt brokerage fees, net | $ | 75,295 | $ | 584 | $ | — | $ | 75,879 | ||||
Fair value of expected net cash flows from servicing, net | 57,935 | — | — | 57,935 | ||||||||
Servicing fees | — | 65,978 | — | 65,978 | ||||||||
Property sales broker fees | 9,042 | — | — | 9,042 | ||||||||
Net warehouse interest income, loans held for sale | 2,459 | — | — | 2,459 | ||||||||
Net warehouse interest income, loans held for investment | — | 2,096 | — | 2,096 | ||||||||
Escrow earnings and other interest income | — | 1,999 | 118 | 2,117 | ||||||||
Other revenues | 2,560 | 7,508 | (1,286) | 8,782 | ||||||||
Total revenues | $ | 147,291 | $ | 78,165 | $ | (1,168) | $ | 224,288 | ||||
Expenses | ||||||||||||
Personnel | $ | 72,635 | $ | 7,111 | $ | 16,469 | $ | 96,215 | ||||
Amortization and depreciation | 521 | 45,378 | 972 | 46,871 | ||||||||
Provision (benefit) for credit losses |
| — |
| (11,320) |
| — |
| (11,320) | ||||
Interest expense on corporate debt |
| — |
| — |
| 1,765 |
| 1,765 | ||||
Other operating expenses |
| 3,402 |
| 2,253 |
| 11,932 |
| 17,587 | ||||
Total expenses | $ | 76,558 | $ | 43,422 | $ | 31,138 | $ | 151,118 | ||||
Income from operations | $ | 70,733 | $ | 34,743 | $ | (32,306) | $ | 73,170 | ||||
Income tax expense |
| 14,615 | 7,178 | (6,675) |
| 15,118 | ||||||
Net income before noncontrolling interests | $ | 56,118 | $ | 27,565 | $ | (25,631) | $ | 58,052 | ||||
Less: net income (loss) from noncontrolling interests |
| — |
| — |
| — |
| — | ||||
Walker & Dunlop net income | $ | 56,118 | $ | 27,565 | $ | (25,631) | $ | 58,052 | ||||
Total assets | $ | 1,394,741 | $ | 1,402,627 | $ | 406,597 | $ | 3,203,965 |
NOTE 12—VARIABLE INTEREST ENTITIES
The Company, through its subsidiary Alliant, provides alternative investment management services through the syndication of tax credit funds and the joint development of affordable housing projects. To facilitate the syndication and development of affordable housing projects, the Company is involved with the acquisition and/or formation of limited partnerships and joint ventures with investors, property developers, and property managers that are VIEs. The Company’s continuing involvement in the VIEs usually includes either serving as the manager of the VIE (as is the case in the tax credit funds) or as a majority investor in the VIE with a third-party property developer or property manager serving as the manager of the VIE.
A detailed discussion of the Company’s accounting policies regarding the consolidation of VIEs and significant transactions involving VIEs is included in NOTE 2 and NOTE 17 of the Company’s 2021 Form 10-K.
During the first quarter of 2022, the operating agreement of one of the Company’s joint ventures changed, resulting in the Company gaining the power to direct the activities that most significantly impact the economic performance of the joint venture; previously, the Company only held rights to receive the significant economic benefits of the joint venture. The Company reassessed its consolidation conclusion and determined that it was the primary beneficiary and as a result consolidated the joint venture as of as March 31, 2022. As of March 31, 2022 and December 31, 2021, the assets and liabilities of the consolidated tax credit funds were immaterial.
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The table below presents the assets and liabilities of the Company’s consolidated joint development VIEs included in the Condensed Consolidated Balance Sheets:
Consolidated VIEs (in thousands): |
| March 31, 2022 |
| December 31, 2021 | ||
Assets: | ||||||
Cash and cash equivalents | $ | 321 | $ | — | ||
Restricted cash | 849 | — | ||||
Receivables, net | 35,675 | — | ||||
Other Assets | 59,283 | 54,880 | ||||
Total assets of consolidated VIEs | $ | 96,128 | $ | 54,880 | ||
Liabilities: | ||||||
Other liabilities | $ | 40,778 | $ | 36,480 | ||
Total liabilities of consolidated VIEs | $ | 40,778 | $ | 36,480 | ||
The table below presents the carrying value and classification of the Company’s interests in nonconsolidated VIEs included in the Condensed Consolidated Balance Sheets:
Nonconsolidated VIEs (in thousands): | March 31, 2022 |
| December 31, 2021 | |||
Assets | ||||||
Committed investments in tax credit equity | $ | 223,771 | $ | 177,322 | ||
Other assets: Equity-method investments | 54,335 | 74,997 | ||||
Total interests in nonconsolidated VIEs | $ | 278,106 | $ | 252,319 | ||
Liabilities | ||||||
Commitments to fund investments in tax credit equity | 206,605 | 162,747 | ||||
Total commitments to fund nonconsolidated VIEs | $ | 206,605 | $ | 162,747 | ||
Maximum exposure to losses(1)(2) | $ | 278,106 | $ | 252,319 | ||
(1) | Maximum exposure determined as Total interests in nonconsolidated VIEs. The maximum exposure for the Company’s investments in tax credit equity is limited to the carrying value of its investment, as there are no funding obligations or other commitments related to the nonconsolidated VIEs other than the amounts presented in the table above. |
(2) | Based on historical experience and the underlying expected cash flows from the underlying investment, the maximum exposure of loss is not representative of the actual loss, if any, that the Company may incur. |
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Item 2. ��Management's 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”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”“Forward-Looking Statements” and “Risk Factors” elsewhere“Risk Factors” in this Form 10-Q and in theour Annual Report on Form 10-K for the year ended December 31, 2016 (“20162021 (“2021 Form 10-K”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 &“Company,” “Walker & Dunlop,” “we,” “us”” “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,”“may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential”“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:
| the future of the Federal National Mortgage Association |
| the general volatility and global economic disruption caused by the ongoing impacts of the COVID-19 pandemic and its potential impact on our business operations, financial results and cash flows and liquidity; |
● | changes to and trends in the interest rate environment and its impact on our business; |
| our growth |
| our projected financial condition, liquidity, and results of operations; |
| our ability to obtain and maintain warehouse and other loan funding arrangements; |
| 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, policies, and |
| our ability to comply with the laws, rules, and regulations applicable to |
| our ability to successfully integrate Alliant’s and GeoPhy’s (each as defined below) employees and operations; |
● | trends in the commercial real estate finance market, |
| general volatility of the capital markets and the market price of our common stock; |
● | our and our service providers’ ability to prevent, detect, and mitigate cybersecurity risks; and |
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| other risks and uncertainties associated with our business described in our |
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“Risk Factors.””
Business
BusinessOverview
We are a leading commercial real estate (i) services, (ii) finance, and (iii) technology company in the United States. Through strategic investments in people, brand, and technology, we have built a diversified suite of commercial real estate services to meet the needs of our customers. Our services include (i) multifamily lending, property sales, appraisal, valuation, and research, (ii) commercial real estate debt brokerage and advisory, (iii) investment management, and (iv) affordable housing lending, development, and investment. We leverage our technological resources and investments to (i) provide an enhanced experience for our customers, (ii) identify refinancing and other financial opportunities for new and existing customers, and (iii) drive efficiencies in our internal processes. We believe our people, brand, and technology provide us with a competitive advantage, as evidenced by 61% of refinancing volumes in the quarter being new loans to us and 19% of total transaction volumes coming from new customers.
We are one of the leadinglargest lenders to multifamily properties and commercial real estate services and finance companies in the United States, with a primary focus on multifamily lending.country. We originate, sell, broker, and service a range of multifamily and other commercial real estate financing products, and provide multifamily investment sales brokerage services. Our clients are owners and developers of commercial real estate across the country. We originate and sellincluding loans through the programs of Fannie Mae and Freddie Mac (the “GSEs”), and the GSEsFederal Housing Administration, a division of the U.S. Department of Housing and Urban Development (together with Ginnie Mae, “HUD”) (collectively, the “Agencies”“Agencies”), with which we have long-established
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relationships.. We retain servicing rights and asset management responsibilities on substantially all loans that we originate throughfor the Agencies’Agencies’ programs. We are approved as a Fannie Mae Delegated Underwritingbroker, and Servicing™ ("DUS") lender nationally, a Freddie Mac Multifamily Approved Seller/Servicer for Conventional Loans (“Freddie Mac seller/servicer”) in 23 states and the District of Columbia, a Freddie Mac Approved Seller/Servicer for Seniors Housing and Targeted Affordable Housing nationwide, a HUD Multifamily Accelerated Processing lender nationally, a HUD LEAN lender nationally, and a Ginnie Mae issuer. We also brokeroccasionally 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 serviceprovide multifamily property sales brokerage and appraisal and valuation services and engage in commercial real estate investment management activities, including a focus on the affordable housing sector through low-income housing tax credit (“LIHTC”) syndication. We engage in the development and preservation of affordable housing projects through joint ventures with real estate developers and the management of funds focused on affordable housing. 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 of the housing market. Our clients are owners and developers of multifamily properties and other commercial real estate assets across the country, some of whom are the largest owners and developers in the industry. We also underwrite, service, and asset-manage shorter term loans on commercial real estate. Most of these shorter-term interim loans are closed through a joint venture or through separate accounts managed by our investment management subsidiary, Walker & Dunlop Investment Partners, Inc. (“WDIP”). Some of these interim loans are closed and retained by us through our Interim Program JV or Interim Loan Program (as defined below in Principal Lending and Investing). We are a leader in commercial real estate technology, developing and acquiring technology resources that (i) provide innovative solutions and a better experience for whichour customers and (ii) allow us to reach a broader customer base.
On February 28, 2022, we actacquired GeoPhy B.V. (“GeoPhy”), a leading commercial real estate technology company based in the Netherlands. We plan to use GeoPhy’s data analytics and technology development capabilities to accelerate the growth of our small balance lending platform and our technology-enabled appraisal and valuation platform, Apprise.
Walker & Dunlop, Inc. is a holding company. We conduct the majority of our operations through Walker & Dunlop, LLC, our operating company.
Segments
In the first quarter of 2022, as a result of the Company’s growth and recent acquisitions, our chief operating decision maker began making decisions and assessing performance based on the following three operating segments: (i) Capital Markets (“CM”), (ii) Servicing & Asset Management (“SAM”), and (iii) Corporate. The operating segments are determined based on the product or service provided and reflect the
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manner in which management is currently evaluating the Company’s financial information. The CM and SAM segments and related services are described in the following paragraphs.
The Corporate segment consists primarily of our treasury operations and other corporate-level activities. Our treasury operations include monitoring and managing our liquidity and funding, including our corporate debt. The major other corporate-level functions include our strategic equity-method investments, information technology, legal, human resources, marketing, accounting, internal audit, and various other corporate groups.
Capital Markets
Capital Markets provides a comprehensive range of commercial real estate finance products to our customers, including Agency lending, debt brokerage, property sales, and appraisal and valuation services. Our long-established relationships with the Agencies and institutional investors enable us to offer a broad range of loan broker.products and services to our customers. We provide property sales services to owners and developers of multifamily properties and commercial real estate and multifamily property appraisals for various investors. The primary services within CM are described below.
Agency Lending
We fund loans forare one the leading lenders with the Agencies, generally through warehouse facility financings,where we originate and sell them to investorsthe Agencies multifamily, manufactured housing communities, student housing, affordable housing, seniors housing and small balance multifamily loans. For additional information on our Agency Lending services, refer to Item 1. Business 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.our 2021 Form 10-K.
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) netthe sale of the loan are used to pay off the warehouse interest income we earn whilefacility borrowing. The sale of the loan is held for sale through one of our warehouse facilities, (ii)typically completed within 60 days after the loan is closed. We earn net warehouse interest income from loans held for investmentsale while they are outstanding equal to the difference between the note rate on the loan and (iii)the cost of borrowing of the warehouse facility.
Our loan commitments and loans held for sale are currently not exposed to unhedged interest rate risk during the loan commitment, closing, and delivery process. The sale or placement of each loan to an investor is negotiated at the same time we establish the coupon rate for the loan. We also seek to mitigate the risk of a loan not closing by collecting good faith deposits from the borrower. 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.
As part of our overall growth strategy, we are focused on significantly growing and investing in our small-balance multifamily lending platform, which involves a high volume of transactions with smaller loan balances. In support of this product, we acquired a company named TapCap during the second quarter of 2021. TapCap has 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. As noted above, during the first quarter of 2022, we acquired GeoPhy, a leading commercial real estate technology company based in the Netherlands, to support our small-balance lending platform in data analytics and to further advance our technology development capabilities in this area.
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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 origination fee for placing the loan.
Property Sales
We offer property sales commissionsbrokerage services to owners and developers of multifamily properties that are seeking to sell these properties through our subsidiary Walker & Dunlop Investment Sales, LLC (“WDIS”). Through these 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 properties.assets on behalf of our clients, and we often are able to provide financing to the purchaser of the properties through our Agency or debt brokerage teams. Our property sales services are offered in 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 and Valuation Services
We offer multifamily appraisal and valuation services though our subsidiary Apprise by Walker & Dunlop (“Apprise”). Apprise leverages technology and data science to dramatically improve the consistency, transparency, and speed of multifamily property appraisals in the U.S. through the licensing of our technology and leveraging of our expertise in the commercial real estate industry. Prior to the GeoPhy acquisition, we owned a 50% interest in Apprise and accounted for the interest as an equity-method investment. Apprise’s operations continue to rapidly grow, with significant increases in the volume of appraisal reports generated and a client list that includes several national commercial real estate lenders.
Servicing & Asset Management
Servicing & Asset Management focuses on (i) servicing and asset-managing the portfolio of loans we originate and sell to the Agencies, we service for certain life insurance companies, and we originate through our principal lending and investing activities, (ii) managing of third-party capital invested in funds focused on the affordable housing sector and other commercial real estate, and (iii) real estate-related investment banking and advisory services, including housing market research. We earn servicing fees for overseeing the loans in our servicing portfolio and asset management fees for the capital invested in our funds. Additionally, we earn subscription fees for our housing related research, and we earn revenue through net interest income on the loans and the warehouse interest expense for loans held for investment. The primary services within SAM are described below.
Loan Servicing
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 any such payments.
forbearance. 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 currently not exposedeligible to unhedged interest rate risk duringassign a loan to HUD once it is in default for 30 days. If the loan commitment, closing, and delivery processis not brought current, or the loan otherwise defaults, we are not reimbursed for our Agency activities. 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 knownadvances until such time as a pair off fee, in the event we fail to deliverassign the loan to HUD or work out a payment modification for the investor. To protect us against such pair off fees,borrower. For loans in default, we require a deposit frommay repurchase those loans out of the borrowerGinnie Mae security, at rate lock that is typically more than the potential pair off fee. The deposit is returned to the borrower only oncewhich time our advance requirements cease and we may then modify and resell the loan is closed. Any potential loss from a catastrophic change in the property condition whileor assign the loan is heldback to
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HUD and be reimbursed for sale using warehouse facility financing is mitigated through property insurance equal to replacement cost.our advances. We are also protected contractually from an investor’s failurenot obligated to purchasemake advances on 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 ongoingunder the Freddie Mac Optigo® program and our bank and life insurance company 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.agreements.
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 $300 million, in orderwhich equates to limit oura maximum loss exposure on any oneper loan to $12.0of $60 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 $300 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 $300 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.
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the transaction. The full risk-sharing limit prior to June 30, 2021 was less than $300 million. Accordingly, loans originated prior to then may have been 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. For 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 transactions are substantially lower than the servicing fees we earn on Agency loans.
We havePrincipal 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 interim loan program offeringaffiliate 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”JV” or the “joint venture”“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.
Affordable Housing and Other Commercial Real Estate-related Investment Management Services
We provide affordable housing investment management services through our subsidiary, Alliant Capital, Ltd and its affiliates (“Alliant”). Alliant is one of the largest tax credit syndicators and affordable housing developers in the future. DuringU.S. and provides alternative investment management services focused on the third quarteraffordable housing sector through LIHTC syndication, development of 2017,affordable housing projects through joint ventures, and affordable housing preservation fund management. Our affordable housing investment management services works with our developer clients to identify properties that will generate LIHTCs and meet our affordable investors’ needs, and forms limited partnership funds (“LIHTC funds”) with third-party investors that invest in the limited partnership interests in these properties. Alliant serves as the general partner of these LIHTC funds, and it receives fees, such as asset management fees, and a portion of refinance and disposition proceeds as compensation for its work as the general partner of the fund. Additionally, Alliant earns a syndication fee from the LIHTC funds for the identification, organization, and acquisition of affordable housing projects that generate LIHTCs.
We invest, as the managing or non-managing member of joint ventures, with developers of affordable housing projects that generate LIHTCs. These joint ventures earn developer fees, operating cash and sale / refinance proceeds from the properties they develop, and we sold $119.8 millionreceive the portion of loans from our interim loan portfolio tothe economic benefits commensurate with its investment in the joint venture at par. We do not expect to sell additional loans held for investment to the joint venture.
Through Walker & Dunlop Investment Sales, LLC (“WDIS”), we offer investment sales brokerage services to owners and developers of multifamily properties that are seeking to sell these properties. Through our investment sales 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 our experienced transaction professionals. Our investment sales services are offered primarilyventures. Additionally, Alliant also invests with third-party investors (either in the eastern United States, with a particular focus in the southeastern United States. Our goal is to add other investment sales brokerage talent,fund or joint-venture structure) with the goal of expandingpreserving affordability on multifamily properties coming out of the LIHTC 15-year compliance period or on which market forces are likely to keep the properties affordable. Through these brokerage services nationally.preservation funds,
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Alliant may receive acquisition and asset management fees and will receive a portion of the operating cash and capital appreciation upon sale through a promote structure.
Under certain limited circumstances,Through our subsidiary, WDIP and its subsidiaries, we may makefunction as the operator of a private commercial real estate investment adviser focused on the management of debt, preferred equity, and mezzanine 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 first quarter of 2017, we completed the purchase of certain assets and assumption of certain liabilities of Deerwood Real Estate Capital, LLC (“Deerwood”), a regional commercial mortgage banking company based in the greater New York City area. Prior to the acquisition, Deerwood engaged inmiddle-market commercial real estate loan brokerage services acrossfunds. WDIP’s current assets under management (“AUM”) of $1.3 billion primarily consist of five sources: Fund III, Fund IV, Fund V, and Fund VI (collectively, the United States,“Funds”), and separate accounts managed for life insurance companies. AUM for the Funds and for the separate accounts consists of both unfunded commitments and funded investments. Unfunded commitments are highest during the fundraising and investment phases. WDIP receives management fees based on both unfunded commitments and funded investments. Additionally, with respect to the Funds, WDIP receives a primary focuspercentage of the return above the fund return hurdle rate specified in the Greater New York City area. The acquisition expands our network of loan originatorsfund agreements.
Housing Market Research and provides further diversificationReal Estate Investment Banking Services
We own a 75% interest in a subsidiary doing business as Zelman & Associates (“Zelman”). Zelman is a nationally recognized housing market research and investment banking firm that will enhance the information we provide to our loan origination platform.clients and increase our access to high-quality market insight in many areas of the housing market, including construction trends, demographics, mortgage finance, and real estate technology and services. Zelman generates revenues through the sale of its housing market research data and related publications to 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 PoliciesEstimates
Our condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”(“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. We believeassumptions and the use of different judgments and assumptions may have a material impact on our results. The following critical accounting estimates involve significant estimation uncertainty that may have or are reasonably likely to have a material impact on our financial condition or results of operations. Additional information about our critical accounting estimates and other significant accounting policies representare discussed in NOTE 2 of the areas where more significant judgments and estimates are used in the preparation of our condensed consolidated financial statements.statements in our 2021 Form 10-K.
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Mortgage Servicing Rights (“MSRs”(“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 10-15%8-14% during 2022 and 2021 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. The estimated net cash flows also include cash flows related to the future earnings on the escrow accounts associated with servicing the loans that are based on an escrow earnings rate assumption. We include a servicing cost assumption to account for our expected costs to service a loan. The servicing cost assumption has not had a material impact on the estimate. 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-significantsignificant assumption –that most significantly impacts the estimate – the discount rate. Additionally, weWe do not expect to see muchsignificant volatility in the assumptions for
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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’sportfolio’s estimated life at purchase (and thus included as a component of the portfolio’sportfolio’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 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 likelihoodloss reserve for the current expected credit losses (“CECL”) for all loans in our Fannie Mae at-risk servicing portfolio using the weighted-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 based on loss rates form a historical period that we believe is similar. We revert to the historical loss rate over a one-year period on a straight-line basis. Over the past couple of repayment byyears, the borrower or key principal(s),loss rate used in the risk characteristicsforecast period has been updated to reflect our expectations of the loan,economic conditions. Changes in the loan’s risk rating, historical loss experience, adverse situations affecting individual loans,rate used in the estimated disposition valueforecast period have materially impacted the estimate in the past.
One of the underlying collateral, andkey components of a WARM calculation is the level of risk sharing. Historically, initial loss recognition occursrunoff rate, which is the expected rate at or before a loan becomes 60 days delinquent. We regularly monitor the allowance on all applicablewhich loans and update loss estimates as current information is received. Provision (benefit) for credit losses in the Condensed Consolidated Statementscurrent portfolio will amortize and prepay in the future based on our historical prepayment and amortization experience. We group loans by similar origination dates (vintage) and contractual maturity terms for purposes of Income reflectscalculating the income statementrunoff 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 estimate.
The weighted-average annual loss rate is calculated using a rolling 10-year look-back period, utilizing the average portfolio balance and settled losses for each year. A 10-year period is used as we believe that this period of changestime includes sufficiently different economic conditions to bothgenerate a reasonable estimate of expected results in the allowance for risk-sharing obligationsfuture, given the relatively long-term nature of the current portfolio. As the weighted-average annual loss rate utilizes a rolling 10-year look-back period, the loss rate used in the estimate will change as loss data from earlier periods in the look-back period continue to fall off and allowance for loan losses.as new loss data are added. For example, in the first quarter of 2022, loss data from earlier periods in the look-back period fell off and were replaced with more recent loss data, resulting in the weighted-average annual loss rate changing from 1.8 basis points to 1.2 basis points. Changes in our expectations and forecasts have materially impacted, and in the future may materially impact, the estimate.
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
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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 warranted. We believe the level of Allowance for Risk-Sharing Obligation is appropriate based on our expectations of future market conditions; however, changes in one or more of the judgments or assumptions used above could have a significant impact on the estimate.
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Contingent Consideration Liabilities. The Company typically includes an earnout as part of the consideration paid for acquisitions to align the long-term interests of the acquiree with the Company. These earnouts contain milestones for achievement, which typically are revenue, revenue-like, or productivity measurements. If the milestone is achieved, the acquiree is paid the additional consideration. Upon acquisition, the Company is required to estimate the fair value of the earnout and include that fair value measurement as a component of the total consideration paid in the calculation of goodwill. The fair value of the earnout is recorded as a contingent consideration liability and included within Other liabilities in the Condensed Consolidated Balance Sheets. We are also required to continue to record the contingent consideration at fair value at each reporting period.
The determination of the fair value of contingent consideration liabilities requires significant management judgment and unobservable inputs to (i) determine forecasts and scenarios of future revenues, net cash flows and certain other performance metrics, (ii) assign a probability of achievement for the forecasts and scenarios, and (iii) select a discount rate. A Monte Carlo simulation analysis is used to determine many iterations of potential fair values. The average of these iterations is then used to determine the estimated fair value. We typically obtain the assistance of third-party valuation specialists to assist with the fair value estimation. The probability of the earn-out achievement is based on management’s estimate of the expected future performance and other financial metrics of each of the acquired entities, which are subject to significant uncertainty. On occasion, we may also use a probability weighted estimated return model to (i) provide an additional data point for a Monte Carlo simulation and (ii) to calculate the fair value of contingent consideration for immaterial acquisitions.
Over the past two quarters, we have made two large acquisitions that included significant portions of contingent consideration. The aggregate fair value of our contingent consideration liabilities as of March 31, 2022 was $218.7 million. This fair value represents management’s best estimate of the discounted cash payments that will be made in the future for all of our contingent consideration arrangements. The maximum remaining undiscounted earnout payments as of March 31, 2022 was $323.8 million. Historically, all of the contingent consideration arrangements have paid out at the maximum achievable amount. We are uncertain whether such athis trend will continue in the future.
In addition Additionally, the earnouts completed in the past have involved substantially smaller amounts of contingent consideration as compared to the specific reserves discussed above,two recent acquisitions.
Goodwill. As of March 31, 2022 and December 31, 2021, we also recordreported goodwill of $908.7 million and $698.6 million, respectively. Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is assigned to the segment to which the acquisition relates. Goodwill is recognized as an allowanceasset and is reviewed for risk-sharing obligations related to all risk-sharing loans on our watch list (“general reserves”). Such loans are not probableimpairment annually in the fourth quarter. Between the annual evaluation time, we will perform an evaluation of foreclosure but are probable of loss as the characteristics of these loansrecoverability when events and circumstances indicate that that it is probablemore-likely-than not that these loansthe fair value of a reporting unit is below its carrying value. Impairment testing requires an assessment of qualitative factors to determine if there are indicators of potential impairment, followed by, if necessary, an assessment of quantitative factors. These factors include, some losses even thoughbut not limited to, whether there has been a significant or adverse change in the loss cannot be attributedbusiness climate that could affect the value of an asset and/or significant or adverse changes in cash flow projections or earnings forecasts. These assessments require management to a specific loan. For allmake judgements, assumptions, and estimates about projected cash flows, discount rates and other risk-sharing loans not on our watch list,factors. As of March 31, 2022, we continue to carry a guaranty obligation. We calculate the general reserves based on a migration analysis of the loans onbelieve our historical watch lists, adjusted for qualitative factors. When we place 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 loangoodwill 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 classification 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.not impaired.
Overview of Current Business Environment
The fundamentals of the commercial and multifamily real estate market remain strong. Multifamily occupancy rates and effective rents continue to remain at historical highs based upon strong, rental market demand while delinquencyparticularly multifamily. Over the past two years, multifamily property fundamentals showed strength, with multifamily occupancy 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 commercialnew leases, and multifamily mortgage debt outstanding continuedretention rates at record highs. According to grow in the second quarter of 2017, reaching $3.1 trillion by the end of the second quarter of 2017, an increase of 1.6% from the first quarter of 2017. Multifamily mortgage debt outstanding rose to $1.2 trillion, an increase of 1.8% from the first quarter of 2017. The majority of this growth in multifamily mortgage debt outstanding was related to Agency lending. The MBA also recently reported that multifamily loan originations during the second quarter of 2017 increased 21% from the second quarter of 2016 and 25% from the first quarter of 2017.
The increase in rental housing demand and gaps in housing production have led to continued steady rising rents in multifamily properties in most markets. The positive performance has boosted the value of many multifamily properties towards the high end of historical ranges. However, during the second quarter of 2017, the pace of multifamily rent growth slowed 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.analytics, occupancy rates have increased to 97.6% as of March 2022, compared to 95.8% as of December 2019, prior to the start of the pandemic. Additionally, the levelcontinued demand combined with limited supply of multifamily properties under construction is atunits drove rental rates higher for both new leases and renewals, with rent growth increasing by 15.2% year over year as of March 2022. Higher occupancy rates coupled with limited supply and rent growth indicate a nearly 40-year high, which has ledrobust and healthy multifamily market.
Macroeconomic conditions impacting multifamily markets have stabilized in the first quarter of 2022, with the national unemployment rate falling to pre-pandemic lows of 3.6% as of both March 2022 and December 2019. The low unemployment rate coupled with higher inflation rates seen during 2021 and into the first quarter of 2022 resulted in the Federal Reserve increasing its target Federal Funds Rate by 0.25% with a target range of 0.25% to 0.50% and an acceleration of the reduction of its holdings in Treasury securities and Agency mortgage-backed securities (“Agency MBS”). Both of these actions by the Federal Reserve have resulted in an increase in national vacancylong-term mortgage interest rates, of 40which form the basis points from the third quarter of 2016, as reported by Reis, as newly constructed multifamily properties continue to come online. We believe that the market demand for multifamily housing in the upcoming quarters will absorb most of the capacity created by these properties currently under construction and that vacancy rates will remain at historic lows, makingour lending.
Our Agency multifamily properties an attractive investment option.
In addition 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 borrowersdebt financing operations 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. We expect the multifamily market to experience record origination volumes in 2017 due to the underlying strength of the multifamily market as labor markets are strong and demand increases from new household formation. Competition for lending on commercial and multifamily real estate among commercial real estate services firms, banks, life insurance companies, and the GSEs remains fierce.
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The Federal Reserve has raised its targeted Fed Funds Rate by 75 basis pointsremained 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
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the Agencies, and we believe our market leadership positions us well to continue gaining market share and remain a significant lender with the Agencies for the foreseeable future. We expect strength in our Agency operations to continue despite the return of other capital sources.
The FHFA establishes loan origination caps for both Fannie Mae and Freddie Mac andeach year. In October 2021, the GSEs remain the most significant providers of capital to the multifamily market. The Federal Housing Finance Agency (“FHFA”) 2017 GSE Scorecard (“2017 Scorecard”)FHFA established Fannie Mae’sMae’s and Freddie Mac’s 2017Mac’s 2022 loan origination caps at $36.5$78 billion each for market-rate apartments (“2017 Caps”). Affordable housing loans, loans to smallall multifamily properties, green,business. In the first quarter of 2022, Fannie Mae and manufactured housing rental community loans continueFreddie Mac had multifamily origination volumes of $16.0 billion and $14.9 billion, respectively, down 25.6% and up 6.4%, respectively, from the first quarter of 2021.
As part FHFA’s 2022 loan origination caps, at least 50% of the GSEs’ multifamily business is required to be excludedtargeted towards affordable housing. Additionally, in 2021 the FHFA raised the GSEs’ combined LIHTC investment cap to $1.7 billion, up 70% from the 2017 Caps. Additionally, the definitionprevious cap of the$1.0 billion. We intend to leverage our affordable loan exclusion continuesdebt financing and our newly acquired LIHTC syndication platforms to encompass affordable housing in high-create additional growth opportunities for our debt financing, property sales, 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 FHFALIHTC syndication platforms.
Our debt financing operations 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 billionHUD fell during the first nine monthsquarter of 2017 compared to $79.9 billion2022, as we had strong HUD originations during the first nine monthsquarter of 2016; however, we do not expect the 2017 Caps to adversely impact2021. HUD loan volumes accounted for 4% of our fourth quarter 2017 GSE loan origination volume. As seen from our GSE loan originationtotal debt financing volumes for the nine monthsquarter ended September 30, 2017, we believe our market leadership with the GSEs positions usMarch 31, 2022, compared to be a significant lender with the GSEs8% for the foreseeable future. quarter ended March 31, 2021. The decline in HUD debt financing volumes as a percentage of our total debt financing volumes was driven by a combination of higher HUD debt financing volumes in the first quarter of 2021 and growth in our other debt financing products.
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 first quarter of 2022, servicing fees were up 10% compared to the same quarter in 2021, due to the future.continued growth in our Agency servicing portfolio. 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
Our multifamily property sales volumes continued to grow significantly in 2022, as (i) the FHFA will impose stricter limitations on GSE multifamily production volume beyond 2017.
Weacquisitions market continues to be very active during the year and (ii) we continue to growleverage the expanded the number of property sales brokers and the geographical reach of our capital markets platform to take advantage ofproperty sales platform. Long term, we believe 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 and 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 HUDfundamentals will continue to be positive for multifamily property sales. Over the last several years, and throughout the pandemic, household formation and a meaningful supplierdearth of capitalsupply of entry-level single-family homes led to our borrowers. We remain committedstrong demand for rental housing in most geographic areas. Consequently, the fundamentals of the multifamily property sales market were strong prior to the HUDpandemic, and, when combined with high occupancy and rent growth and rising real-estate prices, it is our expectation that market demand for 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 borrowersproperty sales will continue to seek higher returns by identifyinggrow as this asset class remains an attractive investment option.
Our debt brokerage platform continued its growth from 2021, with brokered volume increasing during the first quarter of 2022. The increase in volume in 2022 reflects the continued demand from private capital providers, with activity focused not only on multifamily but also on other commercial real estate assets such as office and acquiring the transitional properties that the Interim Program and Interim Program JV are designedretail. We expect non-multifamily debt financing volumes to address. continue to recover over time as other commercial real estate asset classes stabilize post-pandemic.
We createdentered into 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 cost of capital and desire for short-term, high-yield commercial real estate investments. WeFor the quarter ended March 31, 2022, we originated $189.6$86.3 million of interimInterim Program JV loans, compared to $144.5 million of originations for the same period last year. In 2020, we had few originations of 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.
Finally,Interim Program JV continue to perform 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
26
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 obligationsagreed. 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.
Consolidated Results of Operations
FollowingThe following is a discussion of our consolidated results of operations for the three and nine months ended September 30, 2017March 31, 2022 and 2016.2021. 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.
36
SUPPLEMENTAL OPERATING DATA
CONSOLIDATED
For the three months ended | |||||||
March 31, | |||||||
(dollars in thousands; except per share data) |
| 2022 |
| 2021 | |||
Transaction Volume: | |||||||
Total Debt Financing Volume | $ | 9,135,017 | $ | 7,826,869 | |||
Property Sales Volume |
| 3,531,690 |
| 1,395,760 | |||
Total Transaction Volume | $ | 12,666,707 | $ | 9,222,629 | |||
Key Performance Metrics: | |||||||
Operating margin | 28 | % | 33 | % | |||
Return on equity | 19 | 19 | |||||
Walker & Dunlop net income | $ | 71,209 | $ | 58,052 | |||
Adjusted EBITDA(1) | 62,636 | 60,667 | |||||
Diluted EPS | 2.12 | 1.79 | |||||
Key Expense Metrics (as a percentage of total revenues): | |||||||
Personnel expenses | 45 | % | 43 | % | |||
Other operating expenses | 10 | 8 | |||||
As of March 31, | |||||||
Managed Portfolio: |
| 2022 |
| 2021 | |||
Total Servicing Portfolio | $ | 116,257,265 | $ | 109,867,270 | |||
Assets under management | 16,687,112 | 1,836,086 | |||||
Total Managed Portfolio | $ | 132,944,377 | $ | 111,703,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||
|
| September 30, |
|
| September 30, |
| ||||||||
(dollars in thousands) |
| 2017 |
| 2016 |
|
| 2017 |
| 2016 |
| ||||
Transaction Volume: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Origination Volume by Product Type |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae |
| $ | 1,389,451 |
| $ | 1,565,915 |
|
| $ | 5,467,228 |
| $ | 4,727,563 |
|
Freddie Mac |
|
| 4,040,985 |
|
| 1,296,045 |
|
|
| 6,315,369 |
|
| 3,002,305 |
|
Ginnie Mae - HUD |
|
| 263,714 |
|
| 382,602 |
|
|
| 874,727 |
|
| 618,737 |
|
Brokered (1) |
|
| 1,893,047 |
|
| 922,969 |
|
|
| 5,172,263 |
|
| 2,884,392 |
|
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 |
|
Total Transaction Volume |
| $ | 8,549,532 |
| $ | 5,032,238 |
|
| $ | 19,593,664 |
| $ | 13,037,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Performance Metrics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
| 30 | % |
| 31 | % |
|
| 33 | % |
| 31 | % |
Return on equity |
|
| 20 |
|
| 22 |
|
|
| 23 |
|
| 20 |
|
Walker & Dunlop net income |
| $ | 34,378 |
| $ | 29,628 |
|
| $ | 112,166 |
| $ | 77,107 |
|
Adjusted EBITDA (2) |
|
| 45,000 |
|
| 36,227 |
|
|
| 146,293 |
|
| 95,734 |
|
Diluted EPS |
|
| 1.06 |
|
| 0.96 |
|
|
| 3.49 |
|
| 2.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Expense Metrics (as a percentage of total revenues): |
|
|
|
|
|
|
|
| ||||||
Personnel expenses |
|
| 44 | % |
| 42 | % |
|
| 39 | % |
| 39 | % |
Other operating expenses |
|
| 6 |
|
| 6 |
|
|
| 7 |
|
| 7 |
|
|
|
|
|
|
|
|
|
| ||||||
Key Revenue Metrics (as a percentage of loan origination volume): |
|
|
|
|
|
|
|
| ||||||
Origination related fees |
|
| 0.79 | % |
| 1.23 | % |
|
| 0.94 | % |
| 1.06 | % |
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 |
|
SUPPLEMENTAL OPERATING DATA - continued
|
|
|
|
|
|
|
|
|
| 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) |
|
|
| This is a non-GAAP financial measure. For more information on adjusted EBITDA, refer to the section below titled |
|
|
37
The following tables presenttable presents a period-to-period comparison of our financial results for the three and nine months ended September 30, 2017March 31, 2022 and 2016.2021.
FINANCIAL RESULTS –– THREE MONTHS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended |
|
|
|
|
|
| |||||
|
| September 30, |
| Dollar |
| Percentage |
|
| |||||
(dollars in thousands) |
| 2017 |
| 2016 |
| Change |
| Change |
|
| |||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains from mortgage banking activities |
| $ | 111,304 |
| $ | 100,630 |
| $ | 10,674 |
| 11 | % |
|
Servicing fees |
|
| 44,900 |
|
| 37,134 |
|
| 7,766 |
| 21 |
|
|
Net warehouse interest income |
|
| 5,358 |
|
| 5,614 |
|
| (256) |
| (5) |
|
|
Escrow earnings and other interest income |
|
| 5,804 |
|
| 2,630 |
|
| 3,174 |
| 121 |
|
|
Other |
|
| 12,370 |
|
| 8,778 |
|
| 3,592 |
| 41 |
|
|
Total revenues |
| $ | 179,736 |
| $ | 154,786 |
| $ | 24,950 |
| 16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel |
| $ | 78,469 |
| $ | 64,377 |
| $ | 14,092 |
| 22 | % |
|
Amortization and depreciation |
|
| 32,343 |
|
| 29,244 |
|
| 3,099 |
| 11 |
|
|
Provision for credit losses |
|
| 9 |
|
| 283 |
|
| (274) |
| (97) |
|
|
Interest expense on corporate debt |
|
| 2,555 |
|
| 2,485 |
|
| 70 |
| 3 |
|
|
Other operating expenses |
|
| 11,664 |
|
| 9,685 |
|
| 1,979 |
| 20 |
|
|
Total expenses |
| $ | 125,040 |
| $ | 106,074 |
| $ | 18,966 |
| 18 |
|
|
Income from operations |
|
| 54,696 |
|
| 48,712 |
|
| 5,984 |
| 12 |
|
|
Income tax expense |
|
| 19,988 |
|
| 18,851 |
|
| 1,137 |
| 6 |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED
For the three months ended |
| ||||||||||||
March 31, | Dollar | Percentage |
| ||||||||||
(dollars in thousands) |
| 2022 |
| 2021 |
| Change |
| Change |
| ||||
Revenues | |||||||||||||
Loan origination and debt brokerage fees, net | $ | 82,310 | $ | 75,879 | $ | 6,431 | 8 | % | |||||
Fair value of expected net cash flows from servicing, net | 52,730 | 57,935 | (5,205) | (9) | |||||||||
Servicing fees |
| 72,681 |
| 65,978 |
| 6,703 | 10 | ||||||
Property sales broker fees | 23,398 | 9,042 | 14,356 | 159 | |||||||||
Net warehouse interest income |
| 4,773 |
| 4,555 |
| 218 | 5 | ||||||
Escrow earnings and other interest income |
| 1,803 |
| 2,117 |
| (314) | (15) | ||||||
Other revenues |
| 81,749 |
| 8,782 |
| 72,967 | 831 | ||||||
Total revenues | $ | 319,444 | $ | 224,288 | $ | 95,156 | 42 | ||||||
Expenses | |||||||||||||
Personnel | $ | 144,181 | $ | 96,215 | $ | 47,966 | 50 | % | |||||
Amortization and depreciation |
| 56,152 |
| 46,871 |
| 9,281 | 20 | ||||||
Provision (benefit) for credit losses |
| (9,498) |
| (11,320) |
| 1,822 | (16) | ||||||
Interest expense on corporate debt |
| 6,405 |
| 1,765 |
| 4,640 | 263 | ||||||
Other operating expenses |
| 32,214 |
| 17,587 |
| 14,627 | 83 | ||||||
Total expenses | $ | 229,454 | $ | 151,118 | $ | 78,336 | 52 | ||||||
Income from operations | $ | 89,990 | $ | 73,170 | $ | 16,820 | 23 | ||||||
Income tax expense |
| 19,460 |
| 15,118 |
| 4,342 | 29 | ||||||
Net income before noncontrolling interests | $ | 70,530 | $ | 58,052 | $ | 12,478 | 21 | ||||||
Less: net income (loss) from noncontrolling interests |
| (679) |
| — |
| (679) |
| N/A | |||||
Walker & Dunlop net income | $ | 71,209 | $ | 58,052 | $ | 13,157 | 23 |
28
FINANCIAL RESULTS – NINE MONTHS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the nine months ended |
|
|
|
|
|
| |||||
|
| September 30, |
| Dollar |
| Percentage |
|
| |||||
(dollars in thousands) |
| 2017 |
| 2016 |
| Change |
| Change |
|
| |||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains from mortgage banking activities |
| $ | 309,912 |
| $ | 249,406 |
| $ | 60,506 |
| 24 | % |
|
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 |
|
| 33,716 |
|
| 23,775 |
|
| 9,941 |
| 42 |
|
|
Total revenues |
| $ | 504,655 |
| $ | 396,885 |
| $ | 107,770 |
| 27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel |
| $ | 198,157 |
| $ | 154,365 |
| $ | 43,792 |
| 28 | % |
|
Amortization and depreciation |
|
| 97,541 |
|
| 80,824 |
|
| 16,717 |
| 21 |
|
|
Provision (benefit) for credit losses |
|
| (216) |
|
| 166 |
|
| (382) |
| (230) |
|
|
Interest expense on corporate debt |
|
| 7,401 |
|
| 7,419 |
|
| (18) |
| (0) |
|
|
Other operating expenses |
|
| 34,871 |
|
| 29,511 |
|
| 5,360 |
| 18 |
|
|
Total expenses |
| $ | 337,754 |
| $ | 272,285 |
| $ | 65,469 |
| 24 |
|
|
Income from operations |
|
| 166,901 |
|
| 124,600 |
|
| 42,301 |
| 34 |
|
|
Income tax expense |
|
| 54,621 |
|
| 47,295 |
|
| 7,326 |
| 15 |
|
|
Net income before noncontrolling interests |
| $ | 112,280 |
| $ | 77,305 |
| $ | 34,975 |
| 45 |
|
|
Less: net income from noncontrolling interests |
|
| 114 |
|
| 198 |
|
| (84) |
| (42) |
|
|
Walker & Dunlop net income |
| $ | 112,166 |
| $ | 77,107 |
| $ | 35,059 |
| 45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overview
Overview
For bothOther revenues for the three and nine months ended September 30, 2017,March 31, 2022 primarily consisted of the increasesfollowing: (i) $39.6 million of Apprise revaluation gain (as defined below), (ii) $12.7 million of investment management fees, (iii) $9.8 million of prepayment and application fees, and (iv) $4.5 million of research subscription fees. Other revenues for the three months ended March 31, 2021 primarily consisted of $5.5 million of prepayment and application fees and $2.7 million of investment management fees.
The increase in revenues werewas primarily attributable todriven by increases in gains from mortgage banking activities and servicing fees. The increases in gains from mortgage banking activities were largely related to the substantial increase in loan origination volume. The increases inand debt brokerage fees, net (“origination fees”), servicing fees, were mainly dueproperty sales broker fees, and other revenues, partially offset by a decrease in the fair value of expected net cash flows from servicing, net (“MSR Income”). The increase in origination fees was primarily related to increasesan overall increase in debt financing volume, particularly in our Fannie Mae and brokered debt financing volumes. Servicing fees increased largely from an increase in the average servicing portfolio. Ourportfolio outstanding. The increase in property sales broker fees was a result of a substantial increase in property sales volume. Other revenues also benefittedincreased primarily as a result of increases in: (i) a one-time gain from the revaluation of our previously held equity-method investment in Apprise (“Apprise revaluation gain”), (ii) prepayment fees, and (iii) asset management and research subscription fees from our subsidiaries acquired in the second half of 2021. MSR Income decreased due to a decrease in the MSR Rate (defined below in the discussion of our capital markets segment results) resulting from a change in the transaction mix and a decrease in the profitability of our Fannie Mae and HUD products.
The increase in expenses was due to a decrease in the benefit for credit losses and 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.all other expense categories. The increasesincrease in personnel expenses werewas primarily thea result of increased (i)increases in commission costs due to an increase in origination fees, (ii) salaries expense due to rises 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, amortization and depreciation expense increased as the average MSR balances increased period over period.
Revenues
Gains from Mortgage Banking Activities. The following tables provide additional information that helps explain changes in gains from mortgage banking activities period over period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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) | % |
|
|
|
|
|
|
|
|
|
|
|
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 offsetproperty sales brokers fees and salaries and benefits costs driven by decreases in the origination fee rate and the Agency MSR rate.
For the three months ended September 30, 2017, the decrease in the origination fee rate was principally due to the increase in brokered loan origination volume as a percentage of total loan origination volume and the origination of a $1.9 billion portfolio of Freddie Mac loans, the largest transaction in the Company’s history with no comparable activity in 2016. We receive lower origination fees on brokered loans than we do for Agency loans. Additionally, we generally receive lower origination fee rates on large Agency portfolio transactions than we do on typical Agency transactions. The decrease 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 volume 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 principally due to the increase in brokered loan origination volume as 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 wasaverage headcount. Amortization and depreciation expense increased 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.
See the “Overview of Business Environment” section above for a detailed discussion of the factors driving the increases in loan origination volumes.
Servicing Fees. For both the three and nine months ended September 30, 2017, the increases were primarily attributable to increases in the average servicing portfolio from 2016 to 2017 as shown below due to new loan originations and relatively few payoffs. Additionally,
30
the servicing portfolio’s weighted average servicing fee increased as shown below due to an increase in the Fannie Mae servicing portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 Warehouseaverage MSR balance. Interest Income. For the nine months ended September 30, 2017, the increase was primarily related to a $3.0 million increase 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 wasexpense on corporate debt increased due to increases in the average outstanding balance and net spread period over period as shown below. The decrease in net warehouse interest income from loans held for sale is primarily attributable to a decrease in the net spread of loans held for sale in 2017 compared to 2016 as shown below. The decrease in the net spread was a result of a greater increase in the short-term interest rates on which our borrowings are based than in the long-term interest rates on which the majority of our loans held for sale are based. If 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 most 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. This decrease in net warehouse interest income from LHFI is expected to be partially offset by our portion of the net income generated by the Interim Program JV.
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 | % |
|
|
|
Escrow Earnings and Other Interest Income. For both the three and nine months ended September 30, 2017, the increases were due to increases in both the average balances of escrow accounts and the average earnings rates 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 increases 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. The 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 attributable 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.
31
Expenses
Personnel. For the three months ended September 30, 2017, the increase was principally the result of higher loan originator commission costs and increased salaries and bonus expenses. Commission costs increased substantially 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 the increase in the average headcount.
For the nine months ended September 30, 2017, the increase was largely the result of higher commission costs and increased salaries expense, bonus expense, and stock compensation expense. Commission costs increased substantially 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 growthsize of the Company to support our expanding operations. The increase in bonus expense is due to the Company’s improved financial performance year over yeardebt outstanding and the increase inassumption of Alliant’s note payable the average headcount. Finally, stock compensation expensefourth quarter of 2021. Other operating expenses increased largely as a result of performance-based stock awards. The(i) the overall growth of the Company over the past year, (ii) an increase in travel and entertainment costs associated with these awards increasedcompared to 2021 when our travel and entertainment
38
expenses were depressed due to the Company’s improved financial performance year over year.
Amortizationon-going effects of the pandemic, and Depreciation. For both the three and nine months ended September 30, 2017, the increases were primarily attributable to loan origination activity and the resulting growth(iii) acquisition related costs. The decrease 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. Over the past 12 months, we have added $91.2 million of MSRs, net of write offsbenefit for credit losses was due to prepayment.a lower reduction to one of the loss rates used to calculate our CECL reserves.
Income Tax Expense. For the three months ended September 30, 2017, theThe increase isin income tax expense relates primarily related to the change23% increase in income from operations period over period, partially offset by an increase in excess tax benefits from share-based payments that reduced income tax expense by an additional $0.3 million and a decrease70-basis point increase in the estimated annual effective tax rate.
For the nine months ended September 30, 2017, the substantial decreaserate, partially offset by a $0.8 million increase in the effective income tax rate was related torealizable excess tax benefits and a decrease in thebenefits.
We do not expect our annual 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 number of shares that vested in 2017, reducing the effective tax rate significantly. The increase into differ significantly from the number26.9% rate estimated for the three months ended March 31, 2022. Accordingly, we expect an estimated effective tax rate of shares that vested was largely attributable 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 lessbetween approximately 26.5% and 27.5% for the remainder of 2017 than it wasthe year. The effective tax rate increased year over year from 20.7% in 2021 to 21.6% in 2022 due to the factors noted above.
A discussion of the financial results for the first nine months of 2017.our segments is included further below.
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 Alliant’s note payable, and amortization and depreciation, adjusted for provision (benefit) for credit losses net of write-offs, stock-based incentive compensation charges, the fair value of expected net cash flows from servicing, net, and non-cash revenues such as gains attributable to MSRs and unrealized gains and lossesthe gain from commercial mortgage backed securities (“CMBS”) activities.revaluation of a previously held equity-method investment. 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’smanagement’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:
| the ability to make more meaningful period-to-period comparisons of our |
| the ability to better identify trends in our underlying business and perform related trend analyses; and |
32
| 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.income on both a consolidated and segment basis.Adjusted EBITDA is calculatedreconciled to net income as follows.follows:
39
ADJUSTED FINANCIAL METRIC RECONCILIATION TO GAAP
CONSOLIDATED
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended | |||||||
March 31, | |||||||
(in thousands) |
| 2022 |
| 2021 |
| ||
Reconciliation of Walker & Dunlop Net Income to Adjusted EBITDA | |||||||
Walker & Dunlop Net Income | $ | 71,209 | $ | 58,052 | |||
Income tax expense |
| 19,460 |
| 15,118 | |||
Interest expense on corporate debt |
| 6,405 |
| 1,765 | |||
Amortization and depreciation |
| 56,152 |
| 46,871 | |||
Provision (benefit) for credit losses |
| (9,498) |
| (11,320) | |||
Net write-offs |
| — |
| — | |||
Share-based compensation expense |
| 11,279 |
| 8,116 | |||
Gain from revaluation of previously held equity-method investment | (39,641) | — | |||||
Fair value of expected net cash flows from servicing, net |
| (52,730) |
| (57,935) | |||
Adjusted EBITDA | $ | 62,636 | $ | 60,667 | |||
The following tables presenttable presents a period-to-period comparison of the components of adjusted EBITDA for the three and nine months ended September 30, 2017 and 2016
ADJUSTED EBITDA – THREE MONTHS
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended |
|
|
|
|
|
| ||||
| September 30, |
| Dollar |
| Percentage |
| |||||
(dollars in thousands) | 2017 |
| 2016 |
| Change |
| Change |
| |||
Origination fees | $ | 60,523 |
| $ | 53,663 |
| $ | 6,860 |
| 13 | % |
Servicing fees |
| 44,900 |
|
| 37,134 |
|
| 7,766 |
| 21 |
|
Net warehouse interest income |
| 5,358 |
|
| 5,614 |
|
| (256) |
| (5) |
|
Escrow earnings and other interest income |
| 5,804 |
|
| 2,630 |
|
| 3,174 |
| 121 |
|
Other revenues |
| 12,040 |
|
| 8,545 |
|
| 3,495 |
| 41 |
|
Personnel |
| (71,961) |
|
| (59,107) |
|
| (12,854) |
| 22 |
|
Net write-offs |
| — |
|
| (2,567) |
|
| 2,567 |
| (100) |
|
Other operating expenses |
| (11,664) |
|
| (9,685) |
|
| (1,979) |
| 20 |
|
Adjusted EBITDA | $ | 45,000 |
| $ | 36,227 |
| $ | 8,773 |
| 24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
33
ADJUSTED EBITDA – NINE MONTHS
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
See the tables above for the components of the change in adjusted EBITDA for the three and nine months ended September 30, 2017. For the three months ended September 30, 2017, the increaseMarch 31, 2022 and 2021.
ADJUSTED EBITDA – THREE MONTHS
CONSOLIDATED
For the three months ended |
| ||||||||||
March 31, | Dollar | Percentage |
| ||||||||
(dollars in thousands) | 2022 |
| 2021 |
| Change |
| Change |
| |||
Loan origination and debt brokerage fees, net | $ | 82,310 | $ | 75,879 | $ | 6,431 | 8 | % | |||
Servicing fees |
| 72,681 |
| 65,978 |
| 6,703 | 10 | ||||
Property sales broker fees | 23,398 | 9,042 | 14,356 | 159 | |||||||
Net warehouse interest income |
| 4,773 |
| 4,555 |
| 218 | 5 | ||||
Escrow earnings and other interest income |
| 1,803 |
| 2,117 |
| (314) | (15) | ||||
Other revenues |
| 42,787 |
| 8,782 |
| 34,005 | 387 | ||||
Personnel |
| (132,902) |
| (88,099) |
| (44,803) | 51 | ||||
Net write-offs |
| — |
| — |
| — | N/A | ||||
Other operating expenses |
| (32,214) |
| (17,587) |
| (14,627) | 83 | ||||
Adjusted EBITDA | $ | 62,636 | $ | 60,667 | $ | 1,969 | 3 |
Loan origination and debt brokerage fees, net increased due to increases in origination fees was largely related to the increaseoverall debt financing volumes, particularly in loan origination volume period over period.our Fannie Mae and brokered debt financing volumes. Servicing fees increased due to an increasegrowth in the average servicing portfolio period over period as a result of new loan originations. Escrow earnings and other interest incomeperiod. Property sales broker fees increased as a result of increasesthe increase in the average escrow balance outstanding and the average earnings rate following the increases in short-term interest rates over the past year.property sales volumes. Other revenues increased primarily due to an increase in investment sales placementasset management and research subscription fees and prepayment fee income.generated from our acquired subsidiaries in the second half of 2021. The increaseincreases 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 growth 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 revenuesyear, increased primarily due to an increase in investment sales placement feestravel and prepayment fee income. The increase in personnel expense was primarily due to (i)entertainment costs, and 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.acquisition related costs.
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, research subscription fees, investment banking advisory 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.
40
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, purchases of equity-method investments, and the fundingpurchase of preferred equity investments.available-for-sale (“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.closings, both for loans held for sale and loans held for investment. 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
34
debt and cash flows from operationson hand to fund acquisitions,large acquisitions. Additionally, we repurchase shares, pay cash dividends, make long-term debt principal payments, and fundrepay short-term borrowings on a portionregular basis. We issue stock primarily for exercise of loans heldstock options (cash inflow) and for investment.acquisitions (non-cash transactions).
We currently do not pay dividends on our common stock and have never paid a dividend.
NineThree Months Ended September 30, 2017March 31, 2022 Compared to NineThree Months Ended September 30, 2016March 31, 2021
The following table presents a period-to-period comparison of the significant components of cash flows for the ninethree months ended September 30, 2017March 31, 2022 and 2016. Certain prior-year balances have been adjusted for the adoption2021.
41
SIGNIFICANT COMPONENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| For the nine months ended September 30, |
| Dollar |
| Percentage |
| |||||||||||||||||
For the three months ended March 31, | Dollar | Percentage |
| |||||||||||||||||||||
(dollars in thousands) |
| 2017 |
| 2016 |
| Change |
| Change |
|
| 2022 |
| 2021 |
| Change |
| Change |
| ||||||
Net cash provided by (used in) operating activities |
| $ | (1,328,432) |
| $ | 1,300,257 |
| $ | (2,628,689) |
| (202) | % | $ | 971,928 | $ | 1,315,692 | $ | (343,764) | (26) | % | ||||
Net cash provided by (used in) investing activities |
|
| 27,406 |
|
| (92,260) |
|
| 119,666 |
| (130) |
|
| (44,440) |
| 81,179 |
| (125,619) | (155) | |||||
Net cash provided by (used in) financing activities |
|
| 1,285,203 |
|
| (1,242,291) |
|
| 2,527,494 |
| (203) |
|
| (1,096,656) |
| (1,423,259) |
| 326,603 | (23) | |||||
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") | 224,012 | 331,614 | (107,602) | (32) | ||||||||||||||||||||
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) | % | $ | 1,013,187 | $ | 1,340,034 | $ | (326,847) | (24) | % | ||||
Net cash provided by (used in) operating activities, excluding loan origination activity |
|
| 93,545 |
|
| 61,829 |
|
| 31,716 |
| 51 |
| (41,259) | (24,342) | (16,917) | 69 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
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 | $ | (7,010) | $ | (2,000) | $ | (5,010) | 251 | % | ||||||||||||||||
Proceeds from the prepayment/sale of pledged AFS securities | 1,672 | 20,884 | (19,212) | (92) | ||||||||||||||||||||
Purchase of equity-method investments | (5,941) | (1,124) | (4,817) | 429 | ||||||||||||||||||||
Acquisitions, net of cash received |
|
| (15,000) |
|
| — |
|
| (15,000) |
| N/A |
| (78,465) | (7,506) | (70,959) | 945 | ||||||||
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 |
| ||||||||||||
Capital expenditures | (11,790) | (1,794) | (9,996) | 557 | ||||||||||||||||||||
Net payoff of (investment in) loans held for investment |
| $ | 69,549 |
| $ | (31,138) |
| $ | 100,687 |
| (323) |
| 52,893 | 79,745 | (26,852) | (34) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net distributions from (investments in) joint ventures | 4,201 | (7,026) | 11,227 | 160 | ||||||||||||||||||||
Cash flows from (used in) financing activities | ||||||||||||||||||||||||
Borrowings (repayments) of warehouse notes payable, net |
| $ | 1,360,969 |
| $ | (1,239,677) |
| $ | 2,600,646 |
| (210) | % | $ | (1,006,545) | $ | (1,400,704) | $ | 394,159 | (28) | % | ||||
Borrowings of interim warehouse notes payable |
|
| 128,661 |
|
| 148,478 |
|
| (19,817) |
| (13) |
|
| — |
| 25,313 |
| (25,313) | (100) | |||||
Repayments of interim warehouse notes payable |
|
| (175,934) |
|
| (138,898) |
|
| (37,036) |
| 27 |
|
| (11,200) |
| (29,534) |
| 18,334 | (62) | |||||
Repayments of notes payable | (13,759) | (745) | (13,014) | 1,747 | ||||||||||||||||||||
Payment of contingent consideration | (17,612) | — | (17,612) | N/A | ||||||||||||||||||||
Repurchase of common stock |
|
| (28,863) |
|
| (12,374) |
|
| (16,489) |
| 133 |
| (27,049) | (13,374) | (13,675) | 102 | ||||||||
Cash dividends paid | (20,077) | (16,052) | (4,025) | 25 |
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 decrease in cash flows from operationsreceived in loan origination activities is primarily attributable to the use of $1.4a net decrease in sales (net cash received) outpacing originations by $1.0 billion for the funding of loan originations, net of sales of loans to third parties during 2017in 2022 compared to the receipt$1.3 billion in 2021. Our Agency debt financing activity decreased in 2021, which resulted in a lower loan held for sale balance as of $1.2 billion for the funding of loan originations, net of salesDecember 31, 2021 compared to third parties during 2016.December 31, 2020 resulting in fewer loans transferred in 2022 compared to 2021. Excluding cash used for the origination and sale of loans, cash flows used in operating activities were $41.3 million in 2022, up from $24.3 million in 2021. The increase is primarily the result of a $39.6 million reduction for the Apprise revaluation gain in 2022 with no comparable activity in 2021, partially offset by a $12.6 million lower use for other operating activities, net, cash provided by operations was $93.5and a $12.5 million during 2017 compared to net cash provided by operations of $61.8 million during 2016. The significant components of the change included an increase of $35.0 million in net income before noncontrolling interests, an increase of $16.7 millioninterest. The significant decrease in Total cash over the adjustmentpast year is largely attributable 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,acquisition activity, 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 reductionan increase in our long-term debt.
The change in cash flows provided by investing activities in 2021 to cash relatedused in investing activities in 2022 was due 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.
The(i) an increase in the cash provided by (used in) investing activities is primarily attributableused in acquisitions due to decreasesan increase in the net investmentsize of the acquisition 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
35
cash used to invest in the Interim Program JV. The net payoff of loans held for investment during 2017 was $69.5 million2022 compared to net investment2021, (ii) a decrease 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(iii), a decrease in cash flows from financing activities), with the other $22.2 million funded usingpayoff of pledged AFS securities, which is unpredictable, (iv) an increase in capital expenditures due to the build out of our new corporate cash. Ofheadquarters, (v) an increase in the $31.1 millionpurchase of equity-method investments as capital calls for capital commitments increased year over year, and (vi) an increase in the purchase of AFS securities, partially offset by a reduction in the net investment in joint ventures. In the first quarter of 2021, we had one small acquisition compared to the GeoPhy acquisition, which was substantially larger, resulting in an increase in cash used for acquisitions. Net payoff of 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 milliondecreased as the Company did not execute any acquisitions during the first nine months of 2016. Cash paid to investthere were fewer payoffs in the Interim Program JV increased by $6.2 million as the Interim Program JV began operations2022 than in the third quarter of 2017. Lastly, cash paid for2021. Our purchases of mortgage servicing rights decreased by $42.7 millionAFS securities increased in 2022 as we did not purchase any mortgage servicing rightsreinvested the funds from the payoff of AFS securities late in 2017.2021.
The substantial changedecrease in cash providedused by (used in) financing activitiesactivity was primarily attributable to the significant changea decrease in net warehouse borrowings period to period,repayments, partially offset by increases in (i) the net repayment of interim warehouse notes payables, (ii) repayments of notes payable, (iii) repurchase of common stock, (iv)
42
dividends paid, and (v) cash payments of contingent consideration liabilities. The decrease in the net repayment in warehouse notes payable was due to the aforementioned decrease in cash received from loan origination activity. The increase in net cash repayments of interim warehouse notes payable and cash usedwas primarily due to repurchase and retire sharesa reduction in borrowings. The increase in repayments of our common stock. The change in net borrowings (repayments) of warehouse borrowings during 2017notes payable was due to the quarterly paydowns of a largenote payable at our subsidiary, Alliant. The Alliant note payable requires much more significant paydowns than our corporate debt. The increase in cash paid for repurchases of common stock was related to significant vesting events in our various share-based compensation plans. Cash dividends paid increased largely as a result of the increase in our dividend to $0.60 per share in 2022 compared to $0.50 per share in 2021.
Segment Results
The Company is managed based on our three operating segments: (i) Capital Markets, (ii) Servicing & Asset Management, and (iii) Corporate. The segment results below are intended to present each of the operating segments on a stand-alone basis.
Capital Markets
SUPPLEMENTAL OPERATING DATA
CAPITAL MARKETS
For the three months ended | |||||||
March 31, | |||||||
(in thousands; except per share data) |
| 2022 |
| 2021 | |||
Transaction Volume: | |||||||
Components of Debt Financing Volume | |||||||
Fannie Mae | $ | 1,998,374 | $ | 1,533,024 | |||
Freddie Mac |
| 987,849 |
| 1,012,720 | |||
Ginnie Mae ̶ HUD |
| 391,693 |
| 622,133 | |||
Brokered(1) |
| 5,643,081 |
| 4,302,492 | |||
Total Debt Financing Volume | $ | 9,020,997 | $ | 7,470,369 | |||
Property Sales Volume | 3,531,690 | 1,395,760 | |||||
Total Transaction Volume | $ | 12,552,687 | $ | 8,866,129 | |||
Key Performance Metrics: | |||||||
Operating Margin | 36 | % | 48 | % | |||
Adjusted EBITDA(2) | $ | 11,256 | $ | 17,131 | |||
Key Revenue Metrics (as a percentage of debt financing volume): | |||||||
Origination related fees(3) | 0.90 | % | 1.02 | % | |||
MSR income(4) | 0.58 | 0.78 | |||||
MSR income, as a percentage of Agency debt financing volume(4) | 1.56 | 1.83 |
(1) | Brokered transactions for life insurance companies, commercial banks, and other capital sources. |
(2) | This is a non-GAAP financial measure. For more information on adjusted EBITDA, refer to the section below titled “Non-GAAP Financial Measures”. |
(3) | 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. |
(4) | 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. |
43
FINANCIAL RESULTS – THREE MONTHS
CAPITAL MARKETS
For the three months ended |
| |||||||||||
March 31, | Dollar | Percentage |
| |||||||||
(dollars in thousands) |
| 2022 |
| 2021 |
| Change |
| Change |
| |||
Revenues | ||||||||||||
Loan origination and debt brokerage fees, net | $ | 81,823 | $ | 75,295 | $ | 6,528 | 9 | % | ||||
Fair value of expected net cash flows from servicing, net | 52,730 | 57,935 | (5,205) | (9) | ||||||||
Property sales broker fees | 23,398 | 9,042 | 14,356 | 159 | ||||||||
Net warehouse interest income, loans held for sale |
| 3,530 |
| 2,459 |
| 1,071 | 44 | |||||
Other revenues |
| 2,763 |
| 2,560 |
| 203 | 8 | |||||
Total revenues | $ | 164,244 | $ | 147,291 | $ | 16,953 | 12 | |||||
Expenses | ||||||||||||
Personnel | $ | 98,726 | $ | 72,635 | $ | 26,091 | 36 | % | ||||
Amortization and depreciation |
| — |
| 521 |
| (521) | (100) | |||||
Other operating expenses |
| 6,111 |
| 3,402 |
| 2,709 | 80 | |||||
Total expenses | $ | 104,837 | $ | 76,558 | $ | 28,279 | 37 | |||||
Income from operations | $ | 59,407 | $ | 70,733 | $ | (11,326) | (16) | |||||
Income tax expense |
| 12,847 |
| 14,615 |
| (1,768) | (12) | |||||
Net income | $ | 46,560 | $ | 56,118 | $ | (9,558) | (17) |
Revenues
Loan origination and debt brokerage fees, net (“origination fees”) and Fair value of expected net cash flows from servicing, net (“MSR Income”). The following tables provide additional information that helps explain changes in origination fees and MSR Income period over period:
For the three months ended | ||||||
March 31, | ||||||
Debt Financing Volume by Product Type | 2022 | 2021 | ||||
Fannie Mae | 22 | % | 21 | % | ||
Freddie Mac | 11 | 14 | ||||
Ginnie Mae ̶ HUD | 4 | 8 | ||||
Brokered | 63 | 57 |
For the three months ended | ||||||
March 31, | ||||||
Mortgage Banking Details (basis points) | 2022 | 2021 | ||||
Origination Fee Rate (1) | 90 | 102 | ||||
Basis Point Change | (12) | |||||
Percentage Change | (12) | % | ||||
MSR Rate (2) | 58 | 78 | ||||
Basis Point Change | (20) | |||||
Percentage Change | (26) | % | ||||
Agency MSR Rate (3) | 156 | 183 | ||||
Basis Point Change | (27) | |||||
Percentage Change | (15) | % |
(1) | Loan origination and debt brokerage fees, net as a percentage of total mortgage banking volume. |
(2) | MSR Income as a percentage of total debt financing volume, excluding the income and debt financing volume from principal lending and investing. |
(3) | MSR Income as a percentage of Agency debt financing volume. |
The increase in origination fees was driven by the increase in overall debt financing volume, particularly the substantial growth in our Fannie Mae and brokered debt financing volume, which grew by 30% and 31%, respectively, from 2021. The increase in origination fees due
44
to the increase in volume was partially offset by a decrease in the origination fee rate resulting from the shift in transaction mix from 43% Agency loans in 2021 to 37% Agency loans in 2022, and specifically from lower HUD volumes in the first quarter of 2022 as compared to the first quarter of 2021. We typically earn higher origination fees on Agency loans than brokered loans.
The decrease in MSR Income was primarily a result of a decrease in the MSR Rate due to the aforementioned change in transaction mix and a decline in the Agency MSR Rate, partially offset by a 7% percent increase in Agency debt financing volume. The decrease in Agency MSR rate was the result of the significant decline in HUD debt financing volume as HUD loans have the highest MSR margins of all our products. Additionally, the weighted-average servicing fee for our Fannie Mae debt financing volume decreased 25% year over year.
See the “Overview of Current Business Environment” section above for a detailed discussion of the factors driving the changes in debt financing volumes.
Property sales broker fees. The increase in property sales broker fees was driven by significant increases in the property sales volumes 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.
Net Warehouse Interest Income, loans held for sale. The increase in net warehouse interest income was primarily due to the increase in the unpaid principalnet spread shown below, as the short-term interest rates upon which we incur interest expense increased at a slower rate than the mortgage rates upon which we earn interest income. The increase in net warehouse interest income was partially offset by a lower average balance of loans held for sale funded by Agency Warehouse Facilities (as defined below)outstanding in 2022 compared to 2021.
For the three months ended | |||||
March 31, | |||||
Net Warehouse Interest Income Details (dollars in thousands) | 2022 | 2021 | |||
Average LHFS Outstanding Balance | $ | 1,145,882 | $ | 1,503,204 | |
Dollar Change | $ | (357,322) | |||
Percentage Change | (24) | % | |||
LHFS Net Spread (basis points) | 123 | 65 | |||
Basis Point Change | 58 | ||||
Percentage Change | 89 | % |
Expenses
Personnel. The increase was primarily the result of (i) a $15.7 million increase in commission costs due to higher origination fees and property sales broker fees, (ii) a $4.5 million increase in salaries and benefits due to a higher average headcount to support our growth efforts, and (iii) a $5.0 million increase in the accrual for subjective bonuses due to the increase in average headcount and the Company’s financial performance.
Other Operating Expenses. The increase primarily stemmed from December 31, 2016a $2.3 million increase in travel and entertainment costs associated with the growth of the Company and increased travel costs as our bankers and brokers attended more in person meetings compared to September 30, 2017. During 2017, the unpaid principal balancefirst quarter of 2021.
Income Tax Expense. Income tax expense is determined at a consolidated corporate level and allocated to each segment proportionally based on each segment’s income from operations.
Non-GAAP Financial Measures
A reconciliation of adjusted EBITDA for our CM segment is presented below. Our segment level adjusted EBITDA represents the segment portion of consolidated adjusted EBITDA. A detailed description and reconciliation of consolidated adjusted EBITDA is provided above in our Consolidated Results of Operations—Non-GAAP Financial Measures. CM adjusted EBITDA is reconciled to net income as follows:
45
ADJUSTED FINANCIAL METRIC RECONCILIATION TO GAAP
CAPITAL MARKETS
For the three months ended | ||||||
March 31, | ||||||
(in thousands) |
| 2022 |
| 2021 | ||
Reconciliation of Net Income to Adjusted EBITDA | ||||||
Net Income | $ | 46,560 | $ | 56,118 | ||
Income tax expense |
| 12,847 |
| 14,615 | ||
Amortization and depreciation | — | 521 | ||||
Share-based compensation expense | 4,579 | 3,812 | ||||
Fair value of expected net cash flows from servicing, net |
| (52,730) |
| (57,935) | ||
Adjusted EBITDA | $ | 11,256 | $ | 17,131 |
ADJUSTED EBITDA – THREE MONTHS
CAPITAL MARKETS
For the three months ended |
| ||||||||||
March 31, | Dollar | Percentage |
| ||||||||
(dollars in thousands) | 2022 |
| 2021 |
| Change |
| Change |
| |||
Loan origination and debt brokerage fees, net | $ | 81,823 | $ | 75,295 | $ | 6,528 | 9 | % | |||
Property sales broker fees | 23,398 | 9,042 | 14,356 | 159 | |||||||
Net warehouse interest income, loans held for sale |
| 3,530 |
| 2,459 |
| 1,071 | 44 | ||||
Other revenues |
| 2,763 |
| 2,560 |
| 203 | 8 | ||||
Personnel |
| (94,147) |
| (68,823) |
| (25,324) | 37 | ||||
Other operating expenses |
| (6,111) |
| (3,402) |
| (2,709) | 80 | ||||
Adjusted EBITDA | $ | 11,256 | $ | 17,131 | $ | (5,875) | (34) |
Loan origination and debt brokerage fees, net increased due to increases in overall debt financing volumes. Property sales broker fees increased as a result of the significant increases in property sales volumes. Net warehouse interest income, 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 principallyprimarily due to a decrease in originations of loans held for investment and an increase in payoffs of loans held for investment year over year. The increase in share repurchase activity was principally related to an increase in the repurchasenet spread, partially offset by a decrease in the average balance outstanding. The increases in personnel expense were primarily due to increased (i) commission costs due to the increases in total transaction volumes, (ii) salaries and benefits resulting from increases in average headcount from strategic acquisitions and hiring initiatives, and (iii) accrual for subjective bonuses due to the increase in the average headcount and the Company’s financial performance. Other operating expenses increased as a result of sharesthe increased travel and marketing costs.
46
Servicing & Asset Management
SUPPLEMENTAL OPERATING DATA
SERVICING & ASSET MANAGEMENT
(dollars in thousands) | As of March 31, | ||||||
Managed Portfolio: |
| 2022 |
| 2021 |
| ||
Components of Servicing Portfolio | |||||||
Fannie Mae | $ | 54,000,550 | $ | 50,113,076 | |||
Freddie Mac |
| 36,965,185 |
| 37,695,462 | |||
Ginnie Mae - HUD |
| 9,954,262 |
| 9,754,667 | |||
Brokered (1) |
| 15,115,619 |
| 12,090,825 | |||
Principal Lending and Investing (2) |
| 221,649 |
| 213,240 | |||
Total Servicing Portfolio | $ | 116,257,265 | $ | 109,867,270 | |||
Assets under management | 16,687,112 | 1,836,086 | |||||
Total Managed Portfolio | $ | 132,944,377 | $ | 111,703,356 | |||
For the three months ended | |||||||
March 31, | |||||||
Key Volume and Performance Metrics: | 2022 | 2021 | |||||
Principal Lending and Investing Origination Volume(3) | $ | 114,020 | $ | 178,250 | |||
Adjusted EBITDA(4) | 87,773 | 69,419 | |||||
Operating Margin | 37 | % | 44 | % | |||
As of March 31, | |||||||
Key Servicing Portfolio Metrics: | 2022 |
| 2021 | ||||
Custodial escrow account balance (in billions) | $ | 2.5 | $ | 2.5 | |||
Weighted-average servicing fee rate (basis points) | 25.0 | 24.3 | |||||
Weighted-average remaining servicing portfolio term (years) | 9.1 | 9.2 | |||||
As of March 31, | |||||||
Components of assets under management (in thousands) | 2022 | 2021 | |||||
Alliant(5) | |||||||
Syndication | $ | 13,928,089 | $ | — | |||
Real Estate Investment | 557,475 | — | |||||
Total Alliant assets under management | $ | 14,485,564 | $ | — | |||
WDIP | |||||||
Funds | $ | 609,717 | $ | 670,872 | |||
Separate accounts | 661,535 | 504,215 | |||||
Total WDIP assets under management | $ | 1,271,252 | $ | 1,175,087 | |||
Interim Program JV Managed Loans(6) | $ | 930,296 | $ | 660,999 | |||
Total assets under management | $ | 16,687,112 | $ | 1,836,086 | |||
(1) | Brokered loans serviced primarily for life insurance companies. |
(2) | Consists of interim loans not managed for the Interim Program JV. |
(3) | For the three months ended March 31, 2022, includes $86.3 million from the Interim Program JV and $27.7 million from WDIP separate accounts. For the three months ended March 31, 2021, includes $144.5 million from the Interim Program JV and $33.8 million from the Interim Loan Program. |
47
(4) | This is a non-GAAP financial measure. For more information on adjusted EBITDA, refer to the section below titled “Non-GAAP Financial Measures”. |
(5) | Alliant assets under management were acquired in December 2021. |
(6) | As of March 31, 2022, only comprised of Interim Program JV managed loans. As of March 31, 2021, includes $587.7 million of Interim Program JV managed loans and $73.3 million of loans serviced directly for the Interim Program JV partner. |
FINANCIAL RESULTS – THREE MONTHS
SERVICING & ASSET MANAGEMENT
For the three months ended |
| |||||||||||
March 31, | Dollar | Percentage |
| |||||||||
(dollars in thousands) |
| 2022 |
| 2021 |
| Change |
| Change |
| |||
Revenues | ||||||||||||
Loan origination and debt brokerage fees, net | $ | 487 | $ | 584 | $ | (97) | (17) | % | ||||
Servicing fees | 72,681 | $ | 65,978 | 6,703 | 10 | |||||||
Net warehouse interest income, loans held for investment |
| 1,243 |
| 2,096 |
| (853) | (41) | |||||
Escrow earnings and other interest income |
| 1,758 |
| 1,999 |
| (241) | (12) | |||||
Other revenues |
| 34,897 |
| 7,508 |
| 27,389 | 365 | |||||
Total revenues | $ | 111,066 | $ | 78,165 | $ | 32,901 | 42 | |||||
Expenses | ||||||||||||
Personnel | $ | 18,638 | $ | 7,111 | $ | 11,527 | 162 | % | ||||
Amortization and depreciation |
| 54,931 |
| 45,378 |
| 9,553 | 21 | |||||
Provision (benefit) for credit losses | (9,498) | (11,320) | 1,822 | (16) | ||||||||
Other operating expenses |
| 6,119 |
| 2,253 |
| 3,866 | 172 | |||||
Total expenses | $ | 70,190 | $ | 43,422 | $ | 26,768 | 62 | |||||
Income from operations | $ | 40,876 | $ | 34,743 | $ | 6,133 | 18 | |||||
Income tax expense |
| 8,839 |
| 7,178 |
| 1,661 | 23 | |||||
Income before noncontrolling interests | $ | 32,037 | $ | 27,565 | $ | 4,472 | 16 | |||||
Less: net income (loss) from noncontrolling interests |
| (679) |
| — |
| (679) |
| N/A | ||||
Net income | $ | 32,716 | $ | 27,565 | $ | 5,151 | 19 |
Revenues
Servicing Fees. The increase was primarily attributable to settle employee tax obligations for restrictedan increase in the average servicing portfolio period over period as shown below, primarily due to a $3.9 billion net increase in Fannie Mae serviced loans and performance-based share awards alonga $3.0 billion net increase in brokered loans serviced over the past year, coupled with an increase in the servicing portfolio’s average servicing fee rate as shown below. The increase in the average servicing fee is the result of the large volume of Fannie Mae debt financing volume over the past year.
For the three months ended | ||||||
March 31, | ||||||
Servicing Fees Details (dollars in thousands) | 2022 | 2021 | ||||
Average Servicing Portfolio | $ | 116,137,461 | $ | 108,568,268 | ||
Dollar Change | 7,569,193 | |||||
Percentage Change | 7 | % | ||||
Average Servicing Fee (basis points) | 24.9 | 24.2 | ||||
Basis Point Change | 0.8 | |||||
Percentage Change | 3 | % |
Other Revenues. The increase was primarily attributable to: (i) an $18.5 million increase in asset management fees and other Alliant revenues, (ii) a $4.1 million increase in research subscription fees, and (iii) a $5.0 million increase in prepayment penalties. The increase in asset management fees and other Alliant revenues was driven by our Alliant LIHTC operations, and the research subscription fees increase was driven by Zelman, both of which were acquired in the second half of 2021. The increase in prepayment fees was due to a substantial increase in the volume of loans that prepaid year over year due to anticipated changes in the interest rate environment.
48
Expenses
Personnel. The increase was the result of an $11.4 million increase in salaries and benefits due to growth in headcount as a result of strategic acquisitions that occurred during the second half of 2021.
Amortization and Depreciation. The increase was primarily attributed to loan origination activity and the resulting growth in the average MSR balance. Over the past 12 months, we have added $66.7 million of MSRs, net of amortization and write offs due to prepayment. Additionally, we had a $3.3 million increase in amortization of intangible assets from our strategic investments in 2021.
Provision (Benefit) for Credit Losses. The benefit for credit losses for first quarter of 2022 was primarily attributable to the update in our historical loss rate factor that is based on a 10-year rolling period. The historical loss rate decreased to 1.2 basis points as of March 31, 2022 compared to 1.8 basis points as of December 31, 2021. In response to improving unemployment statistics and the expected continued overall health of the multifamily market, we adjusted the loss rate for the forecast period downwards to four basis points as of March 31, 2021 from six basis points as of December 31, 2020, resulting in the benefit for risk-sharing obligations for the first quarter of 2021.
Other Operating Expenses. The increase primarily stemmed from a $2.5 million increase in office and other expenses and a $1.2 million increase in professional fees to support growth in our operations.
Income Tax Expense. Income tax expense is determined at a consolidated corporate level and allocated to each segment proportional-ly based on each segment’s income from operations.
Non-GAAP Financial Measures
A reconciliation of adjusted EBITDA for our SAM segment is presented below. Our segment level adjusted EBITDA represents the segment portion of consolidated adjusted EBITDA. A detailed description and reconciliation of consolidated adjusted EBITDA is provided above in our Consolidated Results of Operations—Non-GAAP Financial Measures. SAM adjusted EBITDA is reconciled to net income as follows:
ADJUSTED FINANCIAL METRIC RECONCILIATION TO GAAP
SERVICING & ASSET MANAGEMENT
For the three months ended | ||||||
March 31, | ||||||
(in thousands) |
| 2022 |
| 2021 | ||
Reconciliation of Net Income to Adjusted EBITDA | ||||||
Net Income | $ | 32,716 | $ | 27,565 | ||
Income tax expense |
| 8,839 |
| 7,178 | ||
Amortization and depreciation |
| 54,931 |
| 45,378 | ||
Provision (benefit) for credit losses | (9,498) | (11,320) | ||||
Net write-offs | — | — | ||||
Share-based compensation expense |
| 785 |
| 618 | ||
Adjusted EBITDA | $ | 87,773 | $ | 69,419 |
49
ADJUSTED EBITDA – THREE MONTHS
SERVICING & ASSET MANAGEMENT
For the three months ended | ||||||||||
March 31, | Dollar | Percentage | ||||||||
(dollars in thousands) | 2022 |
| 2021 |
| Change |
| Change | |||
Loan origination and debt brokerage fees, net | $ | 487 | $ | 584 | $ | (97) | (17) | |||
Servicing fees |
| 72,681 |
| 65,978 |
| 6,703 | 10 | |||
Net warehouse interest income, loans held for investment |
| 1,243 |
| 2,096 |
| (853) | (41) | |||
Escrow earnings and other interest income |
| 1,758 |
| 1,999 |
| (241) | (12) | |||
Other revenues |
| 35,576 |
| 7,508 |
| 28,068 | 374 | |||
Personnel |
| (17,853) |
| (6,493) |
| (11,360) | 175 | |||
Net write-offs | — | — | — | N/A | ||||||
Other operating expenses |
| (6,119) |
| (2,253) |
| (3,866) | 172 | |||
Adjusted EBITDA | $ | 87,773 | $ | 69,419 | $ | 18,354 | 26 |
Servicing fees increased due to growth in the average servicing portfolio period over period as a result of loan originations and relatively few payoffs in the quarter. Other revenues increased primarily due to the addition of asset management and other fees and research subscription fees resulting from our acquisitions in the second of half of 2021 and an increase in prepayment penalties. Personnel and Other operating expenses increased due to growth in headcount and operations from the aforementioned acquisitions.
Corporate
FINANCIAL RESULTS – THREE MONTHS
CORPORATE
For the three months ended |
| |||||||||||
March 31, | Dollar | Percentage |
| |||||||||
(dollars in thousands) |
| 2022 |
| 2021 |
| Change |
| Change |
| |||
Revenues | ||||||||||||
Other interest income | $ | 45 | $ | 118 | $ | (73) | (62) | % | ||||
Other revenues |
| 44,089 |
| (1,286) |
| 45,375 | (3,528) | |||||
Total revenues | $ | 44,134 | $ | (1,168) | $ | 45,302 | (3,879) | |||||
Expenses | ||||||||||||
Personnel | $ | 26,817 | $ | 16,469 | $ | 10,348 | 63 | % | ||||
Amortization and depreciation |
| 1,221 |
| 972 |
| 249 | 26 | |||||
Interest expense on corporate debt |
| 6,405 |
| 1,765 |
| 4,640 | 263 | |||||
Other operating expenses |
| 19,984 |
| 11,932 |
| 8,052 | 67 | |||||
Total expenses | $ | 54,427 | $ | 31,138 | $ | 23,289 | 75 | |||||
Income from operations | $ | (10,293) | $ | (32,306) | $ | 22,013 | (68) | |||||
Income tax expense |
| (2,226) |
| (6,675) |
| 4,449 | (67) | |||||
Net income | $ | (8,067) | $ | (25,631) | $ | 17,564 | (69) | |||||
Adjusted EBITDA | $ | (36,393) | $ | (25,883) | $ | (10,510) | 41 | % | ||||
50
Revenues
Other Revenues. The increase was primarily due to the $39.6 million Apprise revaluation gain. As part of our acquisition of GeoPhy, we acquired the other 50% interest in Apprise. The revaluation of our existing 50% ownership interest with a carrying value of $18.9 million to a fair value of $58.5 million resulted in a $39.6 million gain. The remaining increase was due to a $6.0 million increase in income from our other equity-method investments.
Expenses
Personnel. The increase was primarily the Company’s stock,result of a $8.2 million increase in salaries and benefits and in the accrual for subjective bonuses due to the increase in average headcount and the Company’s financial performance and a $2.2 million increase in stock-based compensation expense due to higher stock-based compensation expense associated with our performance share plans due to the Company’s financial performance.
Interest expense on corporate debt. The increase was driven by an increase of slightly more than 100% in the size of our corporate debt during the fourth quarter of 2021 and an increase in interest expense related to a note payable at our subsidiary, Alliant, which we assumed in the fourth quarter of 2021.
Other Operating Expenses. The increase was primarily due to: (i) a $5.3 million increase in professional fees largely due to increases in legal and other professional fees related to our acquisitions and growth of the Company, (ii) a $1.2 million increase in office expenses related to the growth of the company and acquired offices, and (iii) a $1.1 million increase in travel and entertainment costs attributable to the growth of the Company and as travel and entertainment costs in 2021 were depressed due to the pandemic.
Non-GAAP Financial Measures
A reconciliation of adjusted EBITDA for our Corporate segment is presented below. Our segment level adjusted EBITDA represents the segment portion of consolidated adjusted EBITDA. A detailed description and reconciliation of consolidated adjusted EBITDA is provided above in our Consolidated Results of Operations—Non-GAAP Financial Measures. Corporate adjusted EBITDA is reconciled to net income as follows:
ADJUSTED FINANCIAL METRIC RECONCILIATION TO GAAP
CORPORATE
For the three months ended | ||||||
March 31, | ||||||
(in thousands) |
| 2022 |
| 2021 | ||
Reconciliation of Net Income to Adjusted EBITDA | ||||||
Net Income | $ | (8,067) | $ | (25,631) | ||
Income tax expense |
| (2,226) |
| (6,675) | ||
Interest expense on corporate debt |
| 6,405 |
| 1,765 | ||
Amortization and depreciation |
| 1,221 |
| 972 | ||
Share-based compensation expense |
| 5,915 |
| 3,686 | ||
Gain from revaluation of previously held equity-method investment | (39,641) | — | ||||
Adjusted EBITDA | $ | (36,393) | $ | (25,883) |
51
The following table presents a period-to-period comparison of the components of Corporate adjusted EBITDA for the three months ended March 31, 2022 and 2021.
ADJUSTED EBITDA – THREE MONTHS
CORPORATE
For the three months ended | ||||||||||
March 31, | Dollar | Percentage | ||||||||
(dollars in thousands) | 2022 |
| 2021 |
| Change |
| Change | |||
Other interest income |
| 45 |
| 118 |
| (73) | (62) | |||
Other revenues |
| 4,448 |
| (1,286) |
| 5,734 | (446) | |||
Personnel |
| (20,902) |
| (12,783) |
| (8,119) | 64 | |||
Other operating expenses |
| (19,984) |
| (11,932) |
| (8,052) | 67 | |||
Adjusted EBITDA | $ | (36,393) | $ | (25,883) | $ | (10,510) | 41 |
Other revenues increased the taxable compensationprimarily due to employees upon vesting. No performance-based awards vested during 2016our equity method investments generating income in 2022 compared to 0.6 million shares during 2017. Additionally, we repurchased 0.2 million shareslosses in 2021. The increase in personnel expense were primarily due to increased salaries and benefits resulting from increases in average headcount and the Company’s financial performance. Other operating expenses increased as a result of our own stock under a repurchase program as more fully discussed below in the “Usesoverall growth of Liquidity, Cashthe Company over the past year and Cash Equivalents” section.from increased professional costs associated with acquisitions.
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, our appraisal JV, and other equity-method investments; (v) fund investments in properties to be syndicated to LIHTC investment funds that we will asset-manage;(vi) make payments related to earnouts from acquisitions, (vii) meet working capital needs to support our day-to-day operations, including debt service payments, joint venture development partnerships contributions, 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;taxes,; and (vi)(viii) meet working capital 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 September 30, 2017 requirements.requirements as of March 31, 2022. The net worth requirement is derived primarily from unpaid balances on Fannie Mae loans and the level of risk-sharing. At September 30, 2017,As of March 31, 2022, the minimum net worth requirement was $145.7$261.2 million, and our net worth as defined in the requirements, was $634.5$704.8 million, as measured at our wholly owned operating subsidiary, Walker && Dunlop, LLC. As of September 30, 2017,March 31, 2022, we were required to maintain at least $28.6$51.8 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 September 30, 2017,March 31, 2022, we had operational liquidity as defined in the requirements, of $145.1$98.6 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 $0.60 per share for the first quarter of 2022, which is 20% higher than the quarterly dividend paid in entities controlled by certainthe first quarter of 2021. On May 4, 2022, the Company’s Board of Directors declared a dividend of $0.60 per share for the second quarter of 2022. The dividend will be paid on June 3, 2022 to all holders of record of our borrowers that will assist those borrowers to acquirerestricted and reposition properties. The termsunrestricted common stock as of such investments are negotiated with each investment. As of September 30, 2017,May 19, 2022.
Over the past three years, we have funded $41.2returned $188.3 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 5.50.5 million shares of our common stock from large stockholdersunder share repurchase programs for an aggregatea cost of $82.3$30.5 million and cash dividend payments of $157.8 million. Additionally, we have invested $93.3$834.9 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 September 30, 2017,March 31, 2022, we used corporate cashdid not fully fund any such loans. We continually seek opportunities to fund Agency loans held for sale with an unpaid principal balancecomplete additional acquisitions if we believe the economics are favorable.
52
In February 2022, our Board of Directors authorized us toapproved a stock repurchase program that permits the repurchase of up to $75.0 million of shares of our common stock over a 12-month period endingbeginning February 10, 2018. We13, 2022. Through March 31, 2022 we have not repurchased 228 thousandany shares under the 2022 repurchase program and have $75.0 million of our stock with an aggregate cost of $10.8
36
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.loan and cash held in collection accounts to be used to fund the repayment of the Alliant note payable. 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 September 30, 2017,March 31, 2022, we held substantially all of our restricted liquidity in money market funds holding U.S. TreasuriesAgency MBS in the aggregate amount of $91.0$107.6 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 September 30, 2017March 31, 2022 collateral requirements as outlined above. As of September 30, 2017,March 31, 2022, reserve requirements for the March 31, 2022 DUS loan portfolio will require us to fund $61.3$68.2 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 September 30, 2017.March 31, 2022.
Sources of Liquidity: Warehouse Facilities and Notes Payable
The following table provides information related to ourWarehouse Facilities
We utilize a combination of warehouse facilities as of September 30, 2017.
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|
| 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 |
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Agency Warehouse Facilities
At September 30, 2017,and notes payable to provide financingfunding for our operations. We utilize warehouse facilities to borrowers under the Agencies’ programs, we have six committedfund our Agency Lending, Interim Loan Program, and uncommitted
37
warehouse lines of credit in the amount of $4.8 billion with certain national banks and a $1.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency Warehouse Facilities”). Five of these facilities are revolving commitments we expect to renew annually (consistent with industry practice), one we expect to renew every 18 months, and the other facility is provided on an uncommitted basis without a specific maturity date.LIHTC operations. Our ability to originate Agency mortgage loans intended to be sold under an Agency executionand loans held for investments depends upon our ability to secure and maintain these types of short-term financing agreements on acceptable terms.
Agency Warehouse Facility #1
We have For a warehousing credit and security agreement with a national bank for a $425.0 million committed warehouse line. 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%detailed description of the loan balance, and borrowings under this line bear interest at the 30-day London Interbank Offered Rate (“LIBOR”) plus 140 basis points. During the fourth quarterterms of 2017, we executed the 13th amendment to theeach warehouse agreement that extendedincluding the maturity dateaffirmative and negative covenants, refer to November 30, 2017. No other material modifications have been made to the agreement during 2017.
Agency Warehouse Facility #2
We have a warehousing credit and security agreement with a national bank for a $2.6 billion 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. 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 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, we 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, 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. No other material modifications have been made to the agreement during 2017.
Agency Warehouse Facility #3
We have a warehousing 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. 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 125 basis points. During the second quarter of 2017, we executed the seventh amendment to the warehouse agreement. The amendment reduced the interest rate to the 30-day LIBOR plus 125 basis points, extended the maturity date to April 30, 2018, and increased the permanent borrowing capacity to $480.0 million. During the third quarter of 2017, we 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.
Agency Warehouse Facility #4
We have a warehousing credit and security agreement with a national bank for a $350.0 million committed warehouse line. 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 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
38
the warehouse agreement bear interest at a rate of 30-day LIBOR plus 180 basis points. No material modifications have been made to the agreement during 2017.
Agency Warehouse Facility #6
During the third quarter of 2017, we executed a warehousing and security agreement that established Agency Warehouse Facility #6. The warehouse facility has a $250.0 million maximum committed borrowing capacity, provides us with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans, and matures September 18, 2018. The borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 135 basis points. In addition to the committed borrowing capacity, the agreement provides $250.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility.
Uncommitted Agency Warehouse Facility
We have a $1.5 billion uncommitted facility with Fannie Mae under its As Soon As Pooled 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. 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 Program, we have three warehouse facilities with certain national banksNOTE 6 in the aggregate amount of $0.4 billion as of September 30, 2017 (“Interim Warehouse Facilities”). Consistent with industry practice, two of these facilities are revolving commitments we expect to renew annually and one is a revolving commitment we expect to renew every two years. Our ability to originate loans held for investment depends uponconsolidated financial statements in our ability to secure and maintain these types of short-term financings on acceptable terms.2021 Form 10-K, updated in NOTE 6 in the condensed consolidated financial statements in this Form 10-Q.
Interim Warehouse Facility #1Notes Payable
We have an $85.0 million committed warehouse line agreement that 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, we executed the seventh amendment to the credit and security agreement that extended the maturity date to April 30, 2018. No other material modifications have been made to the agreement during 2017.
Interim Warehouse Facility #2
We have a $200.0 million committed warehouse line agreement that is scheduled to mature on December 13, 2017. 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. All borrowings bear interest at 30-day LIBOR plus 200 basis points. The lender retains a first priority security interest in all mortgages funded by such advances on a cross-collateralized basis. Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the credit agreement. No material modifications have been made to the agreement during 2017.
Interim Warehouse Facility #3
We have a $75.0 million repurchase agreement that 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. The borrowings under the agreement bear interest at a rate of 30-day LIBOR plus 200 basis points to 250 basis points (“the spread”). 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. During the second quarter of 2017, we exercised our option to extend the maturity date to May 19, 2018. No other material modifications have been made to the agreement during 2017.
39
As a result of the aforementioned amendments and new agreements, we have increased our aggregate borrowing capacity, including temporary increases, from $4.0 billion at December 31, 2016 to $6.6 billion at September 30, 2017.
The Agency and Interim Warehouse Facility agreements above contain cross-default provisions, such that if a default occurs under any of those debt agreements, generally the lenders under our other Agency and Interim debt agreements could also declare a default. We were in compliance with all covenants as of September 30, 2017.
We believe that the combination of our capital and warehouse facilities is adequate to meet our loan origination needs.
Debt Obligations
We have a senior secured term loan credit agreement (the “Term Loan Agreement”“Credit Agreement”). The Term Loan Agreement that provides for a $175.0$600 million term loan that was issued at a discount of 1.0% (the “Term Loan”). 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.
We are obligated to repay the aggregate outstanding principal amount of the “Term Loan in consecutive quarterly installments equal to $0.3 million on the last business day”) that bears interest at Adjusted Term SOFR plus 225 basis points with a floor of each quarter. The Term Loan also requires other prepayments in certain circumstances pursuant to the terms50 basis points and has a stated maturity date of the Term Loan Agreement. The final principal installment of the Term Loan is required to be paid in full on December 20, 2020 (or,16, 2028 (or, if earlier, the date of acceleration of the Term Loan pursuant to the termsterm of the Term Loan Agreement) and will be in an amount equal to the aggregate outstanding principal of the Term Loan on such date (together with all accrued interest thereon).
At 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 LoanCredit Agreement). If suchAt any time, we may also elect to request one or more incremental term loan commitments not to exceed the lesser of $230 million and 100% of trailing four-quarter Consolidated Corporate Leverage Ratio is greater than 2.50Adjusted EBITDA, provided that total indebtedness would not cause the leverage ratio 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 equalexceed 3.00 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 Loan 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 a Guarantee and Collateral Agreement entered into on December 20, 2013 among the Loan Parties and the Agent. 1.00. As of September 30, 2017,March 31, 2022, the
53
outstanding principal balance of the Term Loan was $166.5$598.5 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 September 30, 2017,March 31, 2022, we were in compliance with all such covenants.covenants related to the Credit Agreement.
40
We have a note payable through our wholly owned subsidiary Alliant, which has an outstanding balance of $132.9 million as of March 31, 2022 and bears interest at a fixed rate of 4.75%. The note has a stated maturity of January 15, 2035 and requires quarterly payments of principal, interest, and other required priority items shortly after the beginning of each quarter as further detailed in “Notes Payable – Alliant Note Payable” in NOTE 6 in the consolidated financial statements in our 2021 Form 10-K. There have no changes to the terms of the note during 2022.
Credit Quality and Allowance for Risk-Sharing Obligations
The following table sets forth certain information useful in evaluating our credit performance.
| March 31, | ||||||
(dollars in thousands) |
| 2022 |
| 2021 |
| ||
Key Credit Metrics | |||||||
Risk-sharing servicing portfolio: | |||||||
Fannie Mae Full Risk | $ | 46,194,756 | $ | 41,152,790 | |||
Fannie Mae Modified Risk |
| 7,794,710 |
| 8,941,234 | |||
Freddie Mac Modified Risk |
| 23,715 |
| 37,006 | |||
Total risk-sharing servicing portfolio | $ | 54,013,181 | $ | 50,131,030 | |||
Non-risk-sharing servicing portfolio: | |||||||
Fannie Mae No Risk | $ | 11,084 | $ | 19,052 | |||
Freddie Mac No Risk |
| 36,941,470 |
| 37,658,456 | |||
GNMA - HUD No Risk |
| 9,954,262 |
| 9,754,667 | |||
Brokered |
| 15,115,619 |
| 12,090,825 | |||
Total non-risk-sharing servicing portfolio | $ | 62,022,435 | $ | 59,523,000 | |||
Total loans serviced for others | $ | 116,035,616 | $ | 109,654,030 | |||
Interim loans (full risk) servicing portfolio |
| 221,649 |
| 213,240 | |||
Total servicing portfolio unpaid principal balance | $ | 116,257,265 | $ | 109,867,270 | |||
Interim Program JV Managed Loans (1) | 930,296 | 660,999 | |||||
At risk servicing portfolio (2) | $ | 50,176,521 | $ | 45,796,952 | |||
Maximum exposure to at risk portfolio (3) |
| 10,178,454 |
| 9,304,440 | |||
Defaulted loans |
| 78,659 |
| 48,481 | |||
Defaulted loans as a percentage of the at-risk portfolio | 0.16 | % | 0.11 | % | |||
Allowance for risk-sharing as a percentage of the at-risk portfolio | 0.11 | 0.14 | |||||
Allowance for risk-sharing as a percentage of maximum exposure | 0.52 | 0.69 |
|
|
|
|
|
|
|
|
|
| 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 |
|
(2) |
|
|
54
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) |
| 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. |
|
|
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
41
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”(“UPB”) of the loan.
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 on the watch list.loans.
The allowancecalculated CECL reserve for the Company’s $49.7 billion at-risk Fannie Mae servicing portfolio as of March 31, 2022 was $42.5 million compared to $52.3 million as of December 31, 2021. The significant decrease in the CECL reserve was principally related to a reduction in our historical loss factor.
As of March 31, 2022, three at-risk loans with an aggregate UPB of $78.7 million were in default compared to two loans with an aggregated UPB of $48.5 million as of March 31, 2021. The collateral-based reserve on defaulted loans was $10.8 million and $7.6 million as of March 31, 2022 and March 31, 2021, respectively. We had a benefit for risk-sharing obligations has been primarilyof $9.4 million for Fannie Mae loans with full risk-sharing. The amount of 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 September 30, 2017 and 2016 the provisionMarch 31, 2022 compared to a benefit for risk-sharing obligations was $74 thousand and $453 thousand, respectively. As there is currently only one defaulted loan inof $10.7 million for the at risk servicing portfolio, the Allowance for risk-sharing obligations as of September 30, 2017 is based primarily on our collective assessment of the probability of loss related to the loans on the watch list as of September 30, 2017. The Allowance for risk-sharing obligations as of September 30, 2016 was based entirely on our collective assessment of the probability of loss related to the loans on the watch list as of September 30, 2016.three months ended March 31, 2021.
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.
42
New/Recent Accounting Pronouncements
SeeAs seen in NOTE 2 toin the condensed consolidated 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 processMarch 31, 2022.
55
Item 3. Quantitative and Qualitative DisclosureDisclosures 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 30-day LIBOR. 30-day LIBOR as of September 30, 2017March 31, 2022 and 20162021 was 12345 basis points and 5311 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) |
|
As of March 31, | |||||||
Change in annual escrow earnings due to: (in thousands) |
| 2022 |
| 2021 |
| ||
100 basis point increase in 30-day LIBOR | $ | 24,807 | $ | 25,292 | |||
100 basis point decrease in 30-day LIBOR(1) |
| (4,543) |
| (2,594) |
The borrowing cost of our warehouse facilities used to fund loans held for sale, and loans held for investment, and investments in tax credit equity is based on LIBOR.LIBOR or Adjusted Term Secured Overnight Financing Rate (“SOFR”). The base SOFR was 29 basis points as of March 31, 2022. 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 or Adjusted Term SOFR, 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 March 31, | |||||||
Change in annual net warehouse interest income due to: (in thousands) |
| 2022 |
| 2021 | |||
100 basis point increase in SOFR or 30-day LIBOR | $ | (8,929) | $ | (8,744) | |||
100 basis point decrease in SOFR or 30-day LIBOR (1)(2) |
| 3,295 |
| 540 |
|
|
|
|
|
|
|
|
|
| As of September 30, |
| ||||
Change in annual net warehouse interest income due to (in thousands): |
| 2017 |
| 2016 |
| ||
100 basis point increase in 30-day LIBOR |
| $ | (9,765) |
| $ | (6,702) |
|
100 basis point decrease in 30-day LIBOR (1) |
|
| 9,765 |
|
| 3,534 |
|
All of our corporate debtOur Term Loan is based on Adjusted Term SOFR as of March 31, 2022. In December 2021, we fully paid the prior $300 million term loan agreement, which was based on interest at 30-day LIBOR and entered into a $600 million note payable with an interest based Adjusted Term SOFR and a 30-day LIBORSOFR floor of 10050 basis points. The following table shows the impact on our annual net warehouse interest incomeearnings due to a 100-basis point increase and decrease in SOFR or 30-day LIBOR as of March 31, 2022 and March 31, 2021, respectively, based on our notecurrent and previous notes payable balance outstanding at each period end. The Alliant note payable is fixed-rate debt; therefore, there is no impact to our earnings related to this debt when interest rates change.
As of March 31, | |||||||
Change in annual income from operations due to: (in thousands) |
| 2022 |
| 2021 | |||
100 basis point increase in SOFR or 30-day LIBOR | $ | (4,728) | $ | (2,940) | |||
100 basis point decrease in SOFR or 30-day LIBOR (1)(2)(3) |
| — |
| 327 |
|
|
|
|
|
|
|
|
|
| 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 |
(2) | The |
(3) |
|
43
Market Value Risk
The fair value of our MSRs is subject to marketmarket-value risk. A 100-basis point increase or decrease in the weighted average discount rate would decrease or increase, respectively, the fair value of our MSRs by approximately $24.6$39.1 million as of September 30, 2017,March 31, 2022 compared to $19.4 $36.0
56
million as of September 30, 2016.March 31, 2021. 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 September 30, 2017March 31, 2022 and 2016, 87%March 31, 2021, 85% of the servicing fees are protected from the risk of prepayment through make-whole requirements;prepayment provisions; given this significant level of prepayment protection, we do not hedge our servicing portfolio for prepayment risk.
London Interbank Offered Rate (“LIBOR”) Transition
In the first quarter of 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”) on or before June 30, 2023. With respect to the loans we underwrite and service, we have been working closely with the GSEs on this matter through our participation on subcommittees and advisory councils. 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. We have also updated our debt agreements with warehouse facility providers to include fallback language governing the transition and have already transitioned our Term Loan and three of our warehouse facilities to SOFR, and a fourth warehouse facility in the second quarter of 2022.
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’sCommission’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 March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We acquired Alliant on December 16, 2021 and GeoPhy on February 28, 2022. We have integrated the accounting processes and internal controls over financial reporting for Alliant and its affiliates into our internal control over financial reporting environment. The operations of GeoPhy are immaterial.
OTHER INFORMATION
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.
We have included in Part I, Item 1A of our 20162021 Form 10-K descriptions of certain risks and uncertainties that could affect our business, future performance, or financial condition (the “Risk Factors”“Risk Factors”). There have been no material changes from the disclosures provided in the 20162021 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’sCompany’s stock.
57
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’sCompany’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 September 30, 2017,March 31, 2022, we purchased 10195 thousand shares to satisfy grantee tax withholding obligations on share-vesting events. Additionally, we announced a share repurchase program in During the first quarter of 2017. The repurchase program authorized by our2022, 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
44
over a 12-month period endingbeginning on February 10, 2018.13, 2022. During the quarter ended March 31, 2022 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 September 30, 2017.March 31, 2022. The following table provides information regarding common stock repurchases for the quarter ended September 30, 2017:March 31, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
| 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 | |||||||
January 1-31, 2022 | 5,985 | 138.18 | — | 75,000,000 | |||||||
February 1-28, 2022 | 156,391 | 139.75 | — | 75,000,000 | |||||||
March 1-31, 2022 | 33,055 | 131.32 | — | 75,000,000 | |||||||
1st Quarter | 195,431 | $ | 138.28 | — |
On January 31, 2022, we issued 66,667 shares (the “Shares”) of our common stock as earnout consideration for our purchase of the noncontrolling interest from one of the members of WDIS in August 2020. The Shares are prohibited from being transferred until January 31, 2023. The issuance of the Shares was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), in reliance on Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
58
45
4.5 | ||
4.6 | ||
| ||
| ||
| ||
| ||
31.1 | * | |
31.2 | * | |
32 | ** | |
| 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 | * | Inline XBRL |
| * |
|
|
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| * | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| * | Inline XBRL Taxonomy Extension Label Linkbase Document |
| * | 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 Quarterly Report on 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 or the Exchange Act, except as expressly set forth by specific reference in
4659
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.
| Walker & Dunlop, Inc. |
|
| |||
Date: | By: | /s/ William M. Walker | ||||
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| William M. Walker | ||||
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| Chairman and Chief Executive Officer | ||||
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Date: | By: | /s/ Stephen P. Theobald | ||||
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| Stephen P. Theobald | ||||
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| Executive Vice President and Chief Financial Officer |
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